Economic Integration in South Asia and Lessons from East Asia of Trade and Investment

South Asia was a well-integrated region within the British Empire during the 19th century and the early 20th century before World War II. In 1947, when Pakistan (which then included Bangladesh) and India became independent, more than half of Pakistan’s imports and nearly two thirds of its exports were traded with India. Similar trade relations existed between India and Sri Lanka, which was settled by immigrants from South India much earlier. Nepal also had a relatively open border with India. After partition, tensions between India and Pakistan increased over the issues of water rights, territory, and currency valuation. In the 1950s and 1960s, all the countries in South Asia pursued import substitution strategies and eschewed export promotion. South Asian economies pursued self-finance and bootstrap development according to the Soviet model and exports were directed at developed countries in Europe and North America. Trade among the South Asian countries diminished dramatically. Eventually, the United States (US) became the most important trading partner of all South Asian economies (US Agency for International Development [USAID] 2005).