As the SAARC Summit in Islamabad begins, South Asia may be poised for a breakthrough in the process of regional cooperation. It comes against the backdrop of peace overtures between India and Pakistan and prospects that the easing of their bilateral tensions, may release the principal constraint to rapid progress in economic cooperation within SAARC. It may be time to briefly examine the logic of deepening economic cooperation in South Asia and indicate some of the specific initiatives that can be taken during the SAARC Summit.

South Asia stands today at the cusp of history: Between a past darkened by poverty, disease, illiteracy and conflict, and a bright future, when the great potential of its human and natural resources, and the shared humanity of its diverse cultures can be actualized. The global environment provides a historically unprecedented scale of private capital flows, trade opportunities, information and technology, which if utilized can dramatically transform the material conditions of life of the countries of South Asia. Within the globalized economy the emergence of a number of regional economic blocs in the continents of Asia, Africa and America, demonstrates that the economic and social welfare of any country is advanced far more if it interacts within the global economy as part of a regional bloc, rather than individually. An integrated regional economy accelerates economic growth of member countries through the advantages of geographic proximity, economies of scale in production and infrastructure. At the same time member countries enjoy better leverage in dealing with the global system of finance, investment, trade and institutions. A regional bloc also provides a stabilizing cushion to member countries from the destabilizing fluctuations in the global economy.

For South Asian countries, moving towards regional economic integration provides an opportunity for rapidly accelerating economic growth through increased foreign direct investment from rest of the world, lowering energy costs through power trading, improving the quality and connectivity of infrastructure, increased intra-SAARC trade and the negotiation of better terms for common interests with the WTO.

An examination of the economic growth performance of South Asian countries shows that economic growth is far below its potential and still sharply lower than the growth rates prevailing for example in South East Asia. Recent research has shown that much of the difference in the growth performance of South East Asia compared to South Asia is attributable to much higher rates of investment in the former. Apart from this, poorer performance of governance variables in South Asia such as economic regulatory systems, fiscal and judicial systems, are important factors in the relatively poor growth performance of South Asia compared to South East Asia. Lower levels of governance variables leads to increased cost of investment and hence lower economic growth rates for given levels of investment. Increasing investment and accelerating economic growth in South Asia through regional cooperation would therefore play an important role in improving the standard of living of the people in the region. In this context policies should be initiated for facilitating joint venture investment projects, developing infrastructure and increasing the efficiency of investment by providing incentives for technology transfers and firm level R & D associated with foreign direct investment.

A rapid improvement in the material conditions of the people of South Asia requires not only a faster economic growth rate but also a restructuring of growth so as to make it pro poor. This requires providing the institutional basis and economic incentives for changing the composition of investment towards those sectors which generate relatively more employment and which enable increased productivity and incomes of the poor. These sectors include the construction sector, small-scale industries, and milk, fruits, flowers and vegetables and marine fisheries. Regional infrastructure for transportation, technical services and skill development could enable new growth centers at the regional level for the production and export of the goods and services in these sectors. The increased weight of the output of these sectors in total GDP would enable not only a faster economic growth rate for given levels of investment but also a more equitable growth.
The SAARC Summit could make a major contribution to improving the material welfare of the people of South Asia if it could take policy action in the following four fields:

1. Energy Cooperation: Energy cooperation within South Asia means enabling power trading in the region. This calls for establishment of high voltage interconnections between the national grids of the countries of the region. It also means cooperation between India, Pakistan and Bangladesh for transporting gas from Iran, Qatar and Turkmenistan across the South Asian region.
2. Development of Regional Infrastructure: SAARC could accelerate increased investment and economic growth in South Asia, by facilitating private sector joint projects in building a network of motorways, railways at international quality standards through out South Asia. These modern road and rail networks could connect all the major commercial centers, towns and cities of SAARC countries with each other and with the economies of Central Asia, West Asia and East Asia.
3. Restructuring Growth for Poverty Alleviation: The capacity of growth to alleviate poverty can be enhanced by facilitating joint venture projects and regional infrastructure for the production and export of high value added agricultural products which put income into the hands of the poor such as milk, vegetables, fruits, flowers and marine fisheries. At the same time a SAARC Educational Foundation and a SAARC Health Foundation could be established to set up model high schools and model hospitals at international standards in each district in each country of South Asia.
4. A Free Trade Area in South Asia: To hasten liberalization in the process of moving to a free trade area, a combination of negative and inclusive list could be pursued as in the case of the Indo-Lanka Free Trade Agreement and the ASEAN Common Effective Preferential Tariff (CEPT) Scheme. Additionally provisions for compensatory financing for the weaker economies within SAARC could be incorporated into SAFTA to address the issue of revenue loss.

If SAARC could take the specific initiatives indicated above in the fields of Free Trade, Energy Cooperation, Infrastructure, and Poverty Alleviation, then the Islamabad Summit could prove a watershed in the economic history of South Asia.