Enhancing Economic Integration in South Asia : Issues and Prospects for Closer Monetary Cooperation

Though SAARC has the stated goal of an economic union and a common currency, after a quarter of a century, these remain distant goals as political tensions between India and Pakistan have hindered any real progress on a regional scale. Barriers to trade and factor mobility are high in the region as a whole, though considerable liberalisation has been achieved through various bilateral agreements involving India and some of its neighbours. The conventional economic conditions for a common currency are also currently absent as patterns of shocks are non-synchronised, trade links are weak and factor mobility much constrained. Deeper intraregional economic integration requires much more comprehensive trade and investment liberalisation among member nations. While the political conditions for a single currency are unlikely to emerge in the foreseeable future, steps towards closer monetary cooperation through a South Asian Monetary System - building on the existing SAARCFINANCE network - may provide an institutional framework for enhancing regional integration. However, such cooperation will have to be conceived as a component of a sustainable transitional strategy which commits to a serious programme of deeper trade liberalisation to facilitate greater integration with the rest of the world, and most importantly, with East Asia