IOR-ARC Trade and Investment Cooperation

The last a half century has been characterized by a tremendous increase in regional organizations all over the world promoting regional integration. It is now widely accepted that the path to economic prosperity can no longer be anomaly, traveled alone. Globalisation has further enhanced the need for regional groupings. It is in the context that the Indian Ocean Rim-Association for Regional Cooperation (IOR-ARC), initially known as the Indian Ocean Rim Initiative, was established in Mauritius in March 1995 by six countries bordering the Indian Ocean and further extended to 14 member countries in March 1997. The pioneers were Australia, India, Kenya, Mauritius, Singapore, and South Africa. At present, IOR-ARC consists of 19 member states: Australia, Bangladesh, India, Indonesia, Iran, Kenya, Madagascar, Malaysia, Mauritius, Mozambique, Oman, Seychelles, Singapore, South Africa, Sri Lanka, Tanzania, Thailand, United Arab Emirates and Yemen. The five new members, Bangladesh, Iran, Seychelles, Thailand and UAE were admitted at the Council of Ministers Meeting in Maputo, Mozambique, on 30 - 31 March 1999. There are also five dialogue partners of IOR-ARC; namely, France, Japan, United Kingdom, Egypt and China. At present, only the Indian Ocean Tourism Organisation (IOTO) has the observer status. All decisions including granting of Dialogue Partner status and admission of new members are taken by consensus.

The objectives of IOR-ARC are: (i) To promote sustainable growth and balanced development of the region and Member States; (ii) To focus on those areas of economic cooperation which provide maximum opportunities to develop shared interests and reap mutual benefits; and (iii) to promote liberalisation, remove impediments and lower barriers towards a freer and enhanced flow of goods, services, investment, and technology within the Indian Ocean rim.

The IOR-ARC is based on the principles of open regionalism, which is a flexible arrangement that is more member-friendly than other neo-liberal regional arrangements such as preferential trading arrangements, free trade areas, customs unions, common markets, etc. Decisions are made by consensus, and compliance remains without any rigid institutional structure to specify any rules and regulations. IOR-ARC is a unique (tripartite) Association in that it combines officials, business and academics as an integral part of its functioning. The businessmen also meet in parallel in the Indian Ocean rim Business Forum (IORBF). Similarly, the academicians meet in their Indian Ocean Rim Academic Group (IORAG). Both academicians and businessmen have been actively involved in the consideration, formulation and implementation of the projects in the work programmes of IOR-ARC and in the conceptualisation of the initiatives itself.

The Indian Ocean Rim defines a distinctive area in international politics consisting of coastal states bordering the Indian Ocean. It is a region of much diversity whether in culture, race, religion, economic development or strategic interests. The countries vary in the size of their population, economies, trade, technological development and in the composition of their Gross Domestic Product (GDP). A number of sub-regions are evident, for example Southern and Eastern Africa, the Horn of Africa and the Red Sea, South Asia, Southeast Asia, and Australasia. It also includes a number of regional organisations, such as Association for South East Asian Nations (ASEAN); Gulf Cooperation Council (GCC); South Asian Association for Regional cooperation (SAARC) and South African Development Economic Community (SADEC). For many centuries, the countries, economies and people of the Indian Ocean have been bound together in an informal cooperative economic community. Traders, seamen, fishermen, and pilgrims traversed the Indian Ocean and its numerous ports, enabling a vibrant trading network to emerge. This grouping is also serving as a bridgehead between Africa, Asia, and Australasia.

The Indian Ocean is the world’s third largest Ocean. It carries half of the world’s container ships, one third of the bulk cargo traffic, two-thirds of the world’s oil shipments. It is a lifeline of international trade and economy. The region is woven together by trade routes and commands control of the major sea-lanes. The Indian Ocean Rim constitutes between a quarter and a third of the world’s population (close to two billion) which makes it a massive market. It is rich in strategic and precious minerals and metals and other natural resources, valuable marine resources ranging from food fisheries to raw material and energy for industries. It has abundant agricultural wealth in terms of the variety and mass of arable land and has significant human resources and technological capabilities. Many countries of the Rim are becoming globally competitive and are developing new capacities, which can be jointly harnessed through regional co-operation efforts.

In the past few years, many of the countries in the IOR have made improvements in their economic policies, though they may still differ widely with respect to the policy instruments used and the magnitude of reform. These changes include reductions in tariff rates, removal of exchange controls, implementation of market oriented economic policies, and removal of price controls. These have provided an impetus for intra-regional trade co-operation within the region. The evolving economic structures of these Indian Ocean countries should drive much of the future trade growth in the region.

There is a large degree of variation in the levels of economic development among the member countries. While Australia and Singapore rank among the high-income category countries of the world, Malaysia, Mauritius, Oman and South Africa are normally classified as middle-income countries. The IOR-ARC moreover encompasses a number of low-income countries like Mozambique, Kenya, Madagascar, Tanzania, Sri Lanka, and Yemen. Whilst it can be argued and has been well pointed out by G. Gettingby that the concerned countries of the IOR-ARC region are generally not, at the present time, natural trading partners, there are certain areas of common interest that make for trade complementarity. Trade between/among the member country (ies) is generally increasing within the IOR-ARC region. It is also apparent that all members realise the importance of economic and regulatory reform and trade liberalisation and have taken the initial steps to (i) remove impediments to trade and investment and (ii) to enhance complementarities over time for the economic progress of the economies of the region.

Intra IOR-ARC trade

The existence of noticeable degree of complementarities in the economies of the IOR-ARC countries can be seen through the proportion of intra-IOR-ARC trade to the global trade of the member countries of this grouping. The growing importance of intra-IOR-ARC-8 trade IOR-ARC trade (turnover) to global trade increases when the coverage of 8 member countries is extended to the 14 founding member countries and further to the 19 present member countries of the IOR-ARC grouping. This becomes clear from the intra-IOR-ARC-19 trade turnover during the 1990s. Thus, in 1990, intra-IOR-ARC-19 trade turnover (as a grouping) constituted 17.4 percent of this grouping’s global trade (turnover) which increased and reached the 22.02 percent in 1999. This percentage however only marginally declined in 1991 to 17.2 percent.

The picture in this respect varied from country to country among these 19 countries. Between 1990 and 1999, this percentage share increased for the following IOR-ARC-9 countries: Australia (from 1.72 percent to 1.86 percent); for Indonesia (from 1.16 percent to 1.69 percent); for India (from 1.16 percent to 1.69 percent); for Malaysia (from 3.67 percent to 5.38 percent); for Singapore (from 4.67 percent to 5.60 percent); and for Thailand (from 1.84 percent to 2.57 percent) and others. During the same period, the proportion of intra-IOR-ARC-19 trade turnover to collective turnover contribution declined for the following countries: for Mauritius (from 0.15 percent to 0.07 percent); for Mozambique (from 0.04 percent to 0.02 percent); for Iran (from 0.78 percent to 0.47 percent); and UAE (from 1.72 percent to 1.28 percent). This clearly shows the strategic importance of the dynamic IOR-ARC members from the ASEAN economies in influencing the further growth of intra-IOR-ARC growth.

The South East Asian economic crisis of 1997- 99 must have further reduced to some extent the importance intra-IOR-ARC-19 trade as a proportion of their World trade during 1997-99. But with the revival of growth and end of South East Asian economic crisis at the end of 1999, the scenario for resumption of growth in intra-IOR-ARC-19 trade (and in the percentage of intra-IOR-ARC-19 trade to the grouping’s trade with the world) must have improved. This can be verified when the data becomes available.

The proportion of intra-IOR-ARC-19 grouping’s exports to the sum total of exports to the group of these 19 countries had increased significantly from 17.91 percent in 1990 to 22.12 percent in 1997. Similarly on the import side, the proportion of intra-IOR-ARC-19 grouping’s imports as a proportion of their collective imports from the world (despite annual fluctuations) had gone up from 16.82 percent in 1990 to 21.91 percent in 1999. Thus between 1990 and 1999, the group of 19 IOR-ARC countries clearly showed rising degree of market based trade complementarities. These were based on the rising importance of intra-IOR-ARC trade (exports or imports or both) in the world trade of these 19 countries of IOR-ARC.

Investment

We now turn to the examination of the "global" patterns of investment flows (both inflows and outflows) of (private) Foreign Direct Investment (FDI) of all 19 member countries of IOR-ARC. The present statistics (in value and in percentage forms respectively) shows that IOR-ARC countries usually have been able to attract around 10.0 percent of global inflows of FDI. This percentage fell dramatically to mere 3.48 percent in 1999 due to the most adverse effect of the South East Asian economic crisis on the IOR-ARC FDI - magnetic member countries (Indonesia, Malaysia, Singapore and Thailand). For example, Indonesia’s share in attracting global inflows of FDI fell from 1.3 percent in 1995 to mere 0.38 percent in 1999 (i.e. Foreign investors took out their FDI from Indonesia). In value terms, total FDI inflows into all 19 IOR-ARC member countries fell from US$35.4 billion in 1995 to US$30.1 billion in 1999. The value of global FDI inflows in 1995 were estimated at US$ 331.8 billion which had in fact increased to US$865.4 billion in 1999.

Even for a normal year like 1995, except for Australia; Indonesia; Malaysia; and Singapore; no other IOR-ARC member country was able to attract even 1.0 percent of global FDI inflows totalling 331.8 billion in 1995. India appeared to be incrementally doing better in attracting FDI inflows in its post 1991 economic period (especially 1995). However, India has not been able to sustain its relative attractiveness as a destination for global FDI inflows in recent years. Due to deteriorating law and order situation in South Africa, Kenya and Tanzania, FDI inflows to these countries have either been relatively stagnant or actually declined over the 1990s.

The leading source of FDI outflows from the IOR-ARC member countries are: Australia; Malaysia; and Singapore. It should be noted that South Africa, Indonesia, Thailand and to some extent India are emerging as new sources of FDI outflows in the IOR-ARC region. Singapore has been the top most exporter of FDI from the IOR-ARC grouping. FDI outflows from Singapore had risen from the US$652 million in 1980 to a peak level of US$ 6.2 billion in 1995. And despite the South East Asian crisis also affecting Singapore, its FDI outflows were of the order of US$4.0 billion in 1998 (or 0.5 percent of FDI outflows from the world). Australia had relatively phenomenally high FDI outflows of US$ 30.1 billion in 1990. But that was an exceptional year never repeated again. In 1999 when South East Asian economic crisis was at its peak, Australia with US$ 3.6 billion of FDI outflows was number two as a source of FDI outflows from the combined IOR-ARC region in 1999. Malaysia has been the third most significant source of outward FDI from the IOR-ARC-19 countries group. In 1995, FDI outflows from Malaysia peaked at US$ 2.5 billion (down to US$ 1.6 billion in 1999 due to the adverse effects of the South East Asian crisis). South Africa from among the African member countries of IOR-ARC is the only significant source of outward FDI. With the establishment of the post-apartheid new South Africa since 1995, it improved its importance in outward FDI to reach US$ 1.1 billion in 1999.

Since the latter crisis officially ended, at the end of 1999; capital surplus countries of IOR-ARC from the ASEAN grouping can look forward to incrementally resuming their outward FDI. The IOR-ARC countries will have to look more and more to the private companies in all FDI exporting IOR-ARC countries for giving further push to the expansion of intra-IOR-ARC investments.

There is a tremendous scope for absorbing much larger inflows of FDI among most developing and specially the less-developed countries of the IOR-ARC group. The key areas where such inflows can be mutually and profitably absorbed are agriculture and agro-processing especially for exports; setting up small and medium enterprises; tourism; fisheries; labour-intensive manufactures for exports; human resource development, especially for higher education (including science and technology; management; computer education; etc.); and most urgently needed upgrading and expansion of infrastructure (power, telecommunications; ports; airports; railways; roads, etc.). Conscious efforts should be made by the IOR-ARC to encourage expansion of intra-IOR-ARC investment.

Potential for Joint Business in the IOR-ARC: IOR-ARC group has potential to establish trade generating joint ventures in these selected commodities at the 3-Digit SITC group: Lace ribbon, tulle, etc; next highest for Cereals etc and related preparations; Feeding stuff for animals; medicinal and pharmaceutical products.

Tariff & Non-Tariff Barriers

Now we provide a synoptic overview of the prevailing tariff and non-tariff barriers among the countries of the IOR-ARC. The high level these barriers in several IOR-ARC countries for several commodities constrain the further expansion of intra-IOR-ARC trade. The formation of the organization has provided its member states with a vehicle for cooperative action to remove existing impediments to trade and investment within the Indian Ocean region (IOR). There is a need to further liberalise the existing economic and regulatory environment among these countries if intra-regional trade and investment is to increase substantially.

There has been a general trend for lowering the average tariff rate by almost all IOR-ARC countries through 1980-99 period, the average tariff were still quite high in 1999 for India (32.2 percent); Bangladesh (22.2 percent); Thailand (17.1 percent); and Tanzania (16.1 percent). The average tariff rate for the IOR-ARC-19 countries in 1999 (at 14.3 percent) was higher than comparable average (at 11.3 percent) for 129 less developed countries (LDCs) and of course much higher than the average tariff rate (at 4.0 percent) for 23 industrialised countries. Thus, IOR-ARC can further lower average tariff rates as a measure for expanding intra-IOR-ARC trade in future. It is worth mentioning that the share of line, items with international peaks of tariff in 1999 was the highest (at 93.5 percent) for India followed by Tanzania (69.2 percent); Thailand (57.6 percent) and Malaysia (45.9 percent). This also points towards the scope for reducing peak tariff rates and specific tariff rates in line with the global trends towards lowering tariff barriers to trade for expanding trade as a means for accelerating the overall growth rate of the economies of the IOR-ARC countries.

Concluding Remarks

A number of measures are offered with the spirit of maximizing the gains from the opportunities offered by strengthening bilateral and sub-regional trade and economic cooperation in the IOR-ARC region:

• The countries of the region consciously upgrade their political relations with selected countries in the IOR-ARC region. This would involve exchanging visits at the level or Heads of State or Government with a clear objective of strengthening business relations bilaterally, sub-regionally and regionally in the IOR-ARC region;
    

• The countries of the region must reformulate action plans for achieving significant jump in its two-way trade and investment relations and market share with selected IOR-ARC countries.
    

• In a world with a network of fast communications and improved transport and where a country can have several sources of supply for goods and services, consideration of cost, quality, timeless in the delivery of goods, reliability, packaging and image of the product will determine the competitiveness of the product supplied by the member country. Therefore, infrastructure development, use of modern technology, scale economies are extremely important for enhancing trade and investment in the IOR-ARC region. Thus, member countries must improve the competitiveness of the exports and also adopt an aggressive export marketing strategy in the region.
    

• In the region, there should be greater cooperation in the promotion of private sector development. There is need for increase in better market information relating to products, prices, technology and finance mechanism.
    

• There is an urgent need to set up sectorial joint business (SJB) councils within the IOR-ARC group of countries, e.g. pharmaceuticals, tourism, telecommunications and textiles. The focus of these councils will be on the development of specific sectors by promoting trade, scope for foreign investment within the IOR-ARC and technological up gradation. This SJB exercise will promote joint ventures and ultimately promote trade and investment in the region.
    

• IOR-ARC countries must regularly organize the trade fairs, trade exhibitions to bring the awareness of the opportunities for trade and investment within the region with a representation of all the member countries.
    

• Last but not the least, the member countries must carefully plan to buy more goods directly and through sub-contracting from all member countries of the IOR-ARC. This applies with greater force to countries with which member countries have large and growing surplus in its balance of trade. Conscious efforts should be made by IOR-ARC countries to augment export marketing capabilities of such countries to step up their exports. This should also include provision of export market training; FDI (with buy back facilities); and further lowering of tariff barriers. These efforts will help sustain the long-term growth of business partnership among the IOR-ARC member countries.