The Limits of Integration in Improving South Asian Security

This chapter addresses economic relations in South Asia, particularly India’s economic interactions with its neighbors and security implications for the region.

MAIN ARGUMENT

• Political conflict, poor physical connectivity, trade barriers, a lack of trade complementarity, and impediments to cross-border investment are primary factors in South Asia’s weak economic integration.
• While having some impact, the new regional trade agreement (SAFTA) will not fundamentally create powerful new interest groups in the immediate future, especially in the critical India-Pakistan case, as long as the military remains the preeminent actor in Pakistan. Trade between India and Pakistan is too insignificant to be a mitigating factor in any India-Pakistan conflict.
• Investments in physical networks encompassing water and energy offer greater security payoffs in South Asia than trade. These networks range from oil and gas pipelines to electricity grids and river water schemes. However, the projects are likely to be realized only if they involve several countries and multilateral financing and guarantees.

POLICY IMPLICATIONS

• Positive security externalities are more likely to arise if economic interactions are either part of cross-border networks of production or the result of large fixed network investments in goods and services where substitution is very difficult.
• Increasing intra-industry and cross-border trade in services are essential to economic growth and economic integration in South Asia. Two specific areas of potential cooperation are energy (pipelines and power grids) and river basin resource sharing and management; U.S. support for such cross-border projects could be quite helpful.
• While the Indo-U.S. nuclear deal potentially offers India an important mechanism to address its burgeoning energy needs, its failure to materialize would sharply increase India’s incentives to secure access to Iran’s sizeable gas supplies.