FDI and regional economic integration in SAARC region: problems and prospects

Regional integration has the potential to promote economic development in member countries irrespective of size and the level of growth. This potential can be exploited only through deeper cooperation. However, there are a number of challenges which restrict this region to tap its potential. As most of SAARC countries are underdeveloped economic integration is much needed for the development of this region. The process of economic integration in South Asia gathered momentum with the implementation of the South Asian Preferential Trade Agreement (SAPTA) in 1995 under the broad framework of the South Asian Association for Regional Cooperation (SAARC). SAPTA has, however, comes to be viewed as an interim platform in the move towards economic integration in South Asia. It is argued that regional integration has the potential to promote FDI flows and economic development of the region. This will pave the way for the most efficient use of the region’s resources through additional economies of scale, value addition, employment and diffusion of technology. Though the regional integration has yet not boosted the SAARC share in world trade, but it has attracted more FDI inflows and its share has been rise in Asia and the world respectively. In 2008 the SAARC share of FDI inflows in Asia was 7.92 percent and 2.89 percent in world. The concept of regionalism and regionalisation is new for the economies of South Asia and there are several factors combine a negative case for a viable free trade agreement in the short-term. The objective of this paper is to analyze the role of regional integration in south Asia in the promotion of region’s trade and attracting FDI. It argues that there is need for deeper integration within the region.