The European and the US financial crisis and the subsequent debt crisis, have had a huge impact on the world economy and the financial markets. Being an important part of the overall global economy, the SAARC (South Asian Association for Regional Cooperation) countries have not been immune from the ‘sharp shock’ of the crisis and from the longer-term adjustments being brought about by changes to the global economic order.

So, in face of this unique and perhaps once-a-century type of major crisis, how should SAARC as a group respond?

The SAARC region in its own right is highly diversified, including not only very large economies like India and Pakistan, but also some of the most underdeveloped countries such as Afghanistan and Bhutan. For this very reason, any discussion of the SAARC response to the financial crisis needs to be conducted on a group basis, rather than at an individual level. As South Asia faces up to the financial and debt crisis, which originated in the countries of Europe and the USA, the group must work collectively to meet the following targets:

Adjusting domestic economic development patters:

The innovation of the financial markets and the regulatory innovation always need to go hand in hand. Although Asia in general and South Asia in particular, in comparison to Europe and the USA, have not been very severely impacted by this financial crisis, the individual countries at their levels must engage in self-reflection to adjust and improve their own economic systems and development approaches.

It is necessary to avoid the European and US traps of excessive financial innovation and toothless financial regulation, but at the same time be also mindful of the fact that it is not possible to service the real economy without consistently improving the financial system and keep on producing new relevant financial products.

Further, the South Asian countries must take a realistic view of the ills of the European and US welfare systems. Apart from Japan and South Korea, social welfare generally in Asia is low, however, moving forward the SAARC as a region would do well by taking the lead in socio-economic development by establishing appropriate and effective public welfare systems, albeit with an eye on ensuring their self-sustainability. Care must be taken that these systems are effective rather than wasteful, promote social equality rather than unproductive behaviour, and do not place an unbearable burden on the national exchequer.

On the basis of the lessons learned from the West, the South Asian countries need to adjust their own development patterns. Overall, the countries in the SAARC region can be bracketed as ones with high savings and with a relatively weak domestic demand; the exceptions ironically being the two largest SAARC economies, India and Pakistan.

With regard to the countries with relatively weak domestic demand, barriers to increase in consumption must be brought down and public policy must work to implement an appropriate increase in import levels. With regard to India and Pakistan though, it must be recognised that running the kind of long-term deficits these countries are running is not a sustainable option for developing countries.

Such deficits sooner or later lead to a full-blown financial crisis. Deficit countries must adhere to a policy of basic financial balance, since long-term budget deficits, together with trade deficits, will inevitably bring about macro-economic fluctuations, and set back the economy by years.

Also, these South Asian countries amongst them need to meaningfully strengthen their cooperation, and establish a joint apex institution to coordinate regional trade and investment. The SAARC itself falls in the very large Asian economic zone that is currently in an active mode of promoting economic linkages and trade within the continent and, therefore, it (SAARC) cannot be an exception to this wider Asian dream.

In countries such as China, continued economic development requires natural resources, meaning Chinese investments in Pakistan, Mongolia, Middle East, and even in other nations is in the interests of the entire continent. To keep pace, perhaps, the SAARC would do well to establish its own trade and investment coordination institutions on the lines of intra-EU trade mechanisms and then nurture them incrementally towards its intra-regional goals.

Speaking in a common voice with Asia:

The South Asian nations must speak with a common voice at the international level about the reform of the current international economic and financial structure. Preferably, they should unite with the other Asian countries to establish a common voice to demand that Europe and the US take concrete action to reform their current respective economic impasse at home, and in particular look to resolve the following three longstanding international concerns:

With regard to the coordination of the macroeconomic policy, the IMF should more effectively reflect the voices of Asia. Asia has far fewer voting rights at the IMF than Europe or the USA, a situation which is not very fair.

With regard to international investment, they should further open up their own investment markets and thus attract investment from Asian funds. Investment, as we know is direly needed by them; whereas, Asia has abundant funds.

In order to further liberalise international trade and promote global growth, they should cooperate proactively with Asia for successful culmination of the stalled Doha Round. In the meantime, if SAARC is able to coordinate internally and rally most Asian countries on a common platform, this could prove to be of pivotal significance in promoting the success of the Doha Round negotiations.

To conclude, the current international economic and financial crisis may be a major challenge to the economies within the SAARC, but it also presents a major strategic opportunity for these South Asian countries to - as a group - confront and resolve the external challenges facing them within the overall global economic and financial affairs. To this end, organisations cum platforms such as the SAARC should become a major catalyst and facilitator in such an opportunity.

The writer is an entrepreneur and economic analyst.Email:     kamalmannoo@hotmail.com