Factors Influencing Regional Dynamics

and intraregional exports, and the emergence of regional investment pioneers. The subsequent section highlights the relevance of the report for South Asia’s development. Specifically, it sets up the ensuing FDI analysis in the context of the South Asian trading landscape before a formal framework is established in the following chapter. The last section outlines the structure of the report.

Some of the key underlying factors that could affect economic engagement between countries in the region are highlighted in this section. These factors are important for trade, and, given the trade-investment nexus, would be expected to affect FDI and connectivity (see annex 1A and figure 1A.1).

Size asymmetry. The Indian economy accounts for 80 percent of regional output; it is almost nine times the size of Pakistan’s, the next biggest economy. The size asymmetry is reflected in trade flows as well as in bargaining power and negotiating capacity and requires sensitivity to small-economy perspectives.

No high-income economies. Four of the eight countries (Afghanistan, Bangladesh, Bhutan, and Nepal) are classified as least developed (by the United Nations), with one being a fragile economy (Afghanistan). India and Pakistan, the largest economies, graduated from low-income country status only a decade ago.

High natural trade costs. Three of the countries are landlocked (Afghanistan, Bhutan, and Nepal) and rely on transit trade. The North Eastern Region of India is almost landlocked (figure 1A.1) and is connected to mainland India (through West Bengal state) by a narrow pass that is 21–40 kilometers in width and is called the Siliguri Corridor, or the “Chicken’s Neck.” Two high-elevation Himalayan countries (Bhutan and Nepal), with terrain similar to that in some parts of India and Pakistan, also face naturally escalated trade costs.

India’s central location. India shares a land or marine border with all the countries except Afghanistan. The bilateral distance between some country pairs can be substantial.

Shared roots. The region shares many common characteristics of culture, religion, language, peoples, and history, combined with a strong sense of national identity and high diversity in ethnicity and local languages. These features were heightened by migratory patterns under the British Raj and in the aftermath of nation creation. Afghanistan has extraregional connections to Central Asia and the Islamic Republic of Iran.

A trust deficit. Cross-border security and land boundary and political issues at the national and subnational levels, as well as concerns about migration and water sharing, have perpetuated mistrust and hindered trade and economic engagement. Cross-border business activity has not been immune to intergovernmental frictions and issues.