Regional Value Chain in South Asia Some Emerging Issues

1. Regional Value Chain in South Asia Some Emerging Issues S. K. Mohanty Senior Fellow, RIS Asian Development Bank RETA 6472 Strategic Partnership for Policy Development and Action to Foster Regional Cooperation in South Asia July 11, 2011 Colombo

2. Trade Environment in South Asia • Low level of trade activities – IRT of South Asia to cross the psychological barrier of 5% • Other regions performed better than South Asia – ASEAN, Mercosur, SACU, Comesa, etc • Growth-inducing sectors in high performing RTAs- Fast growing industrial intermediate sector - Small and growing slow in the region • South Asia has large trade potential – likely to grow with sectoral RVC approach

3. Trade as Driver of Growth • Trade growing faster than production sector globally • There are certain globally dynamic sectors growing faster than others – product composition also changing • Parts and component sector has been the fastest growing sector globally for the last several decades • Trade and production activities in P&C sector - dominated by MNCs

4. Parts and Component Sector • Parts & component sector – mostly machinery and automobile sector • Production and trade activities in P&C sector by MNCs since 50s • Coverage of MNC activities range from conception of a product to its delivery and post-sale services • Trade in P&C was mostly with developed countries, and now tilting towards developing countries • Regional value chain is predominantly emerging in different regions – both horizontal and vertical value chain

5. RTAs, RVC and Surge of IRT • Rising regional trade in RVC sectors– localised in certain geographical space • P&C Sector - Developed and developing countries • Regional leaders in developing countries: ASEAN, Mercosur, SACU, etc, • Fragmentation of production and international division of labour- finer level • Spreading to other sectors: Sectoral coverage- from machinery, automotive to several other sectors- similar experiences • Local firms benefit from their engagement with MNCs • Far reaching consequences- employment, income generation, other linkage effects in the region • Sectoral approach required- policy intervention in several areas- MNCs, FDI, technology transfer, trade facilitation, policies involving reduction of transaction cost, etc

6. RVC as Growth-Inducing Approach to RTAs FTAs – drivers of growth Various schemes of liberalisation in Asia In the context of EAS, alternative group of countries Comprehensive Economic Cooperation – Welfare effects could be up to 5% Fast growth can be achieved with regional value chain – gain may be higher than various schemes of FTA initiatives Regional sectoral approach required – Mercosur (Automotive sector), ASEAN (Several sectors) 5

7. Government Intervention Required • Private initiatives may not be sufficient to drive RVC • Strategies aiming at reduction of transaction cost • Creation of favourable business environment required to spur MNC activities in the region • Congenial policy environment to facilitate FDI flows • Domestic policy restructuring to support RVC operations- labour laws, trade facilitation, business facilitating services, infrastructure, etc. • Re-grouping of countries for sectoral cooperation- regional or sub-regional cooperation

8. RVC Trends in South Asia Low level RVC activities The region is engaged in fragmentation of production in number of sectors Locations of assembly centresoutside the region – limiting the size of IRT emerging consensus at the bilateral, sub-regional and regional level for convergence of trade strategies 7

9. Present Study Launched nine studies to understand different dimensions of RVC in SA Global and regional trends in RVC Mapping of sectors in the regions Initiated multi-country multi-sectoral studies around RVC Country study on SMEs and their operation in industrial clusters Sectors covered- garments & apparel, automobile, leather and processed food sector Similar sectoral studies launched simultaneously in India and one of the South Asian countries for comparative analysis. The empirical studies find evidences of strengthening RVC and suggest strategies to streamline the process in South Asia Further detailed analysis is required in the surveyed sectors 8

10. Relevance of the Study • Rapid economic growth in the region- reduction in the level of poverty- social sector development • Despite of strong trade potential, the region has not been able to capitalize the existing synergies • The RVC could be an appropriate model to foster intra-regional trade by deepening regional process • Attract FDI to promote sectoral activities along with possible transfer of technology to local firms • Local firms to achieve the status of a global player in the production of goods and services • Demand more of foreign trained professionals- encourage ‘reverse brain drain’ in the region • Integration of regional knowledge economy

11. Databases Used • Primary and secondary databases • Using multilateral, regional and country-specific databases • Focus on various sectors including production, trade, investment, policy issues • Sectoral primary survey to examine the potentiality of RPN • Processed survey data may be available to the consultants

12. Coverage of Studies under the Programme Note: Total nine studies commissioned

13. Thank you 12