Since its creation in December 1985, the South Asian Association for Regional Cooperation (SAARC) has sought after to boost economic unity between India, Pakistan, Bangladesh, Nepal, Bhutan, Sri Lanka and the Maldives. The organization was designed to improve both the economic and social progress of its member states. Unlike the EU or ASEAN, however, trade between the seven SAARC States has remained limited despite the fact that all are positioned within a close proximity of one another and all are part of the World Trade Organization (WTO).

A growing emphasis on attracting foreign investment and seeking access to new markets in SAARC states indicates that economic progress is central to the future of South Asia. SAARC, however, is likely to play only a limited role in that future because of India’s considerable position of power over the other SAARC states. This imbalance of power within SAARC allows conflicts between India and its neighbors to undermine organizational unity. Clashes between South Asian countries end up jeopardizing the formation and effectiveness of regional trade agreements. They also lead individual SAARC countries to advance their economic interests through bi-lateral agreements, reduce the incentive to connect in multi-laterally.

It seems that SAARC will act more as a forum to encourage regional discussion through conferences and seminars than as an architect for economic policy in South Asia. There are some challenges to the effectiveness of this regional organization. SAARC is structured in a way that often makes regional cooperation difficult. In the case of SAARC, India is the most powerful country in terms of its economic might, military power and international influence. Thus, India’s potential as a regional hegemony gives SAARC a unique dynamic compared to an organization such as ASEAN.

Pakistan was initially hesitant to join SAARC due to fears of SAARC succumbing to Indian hegemony. Indeed, if India does take a prominent role in SAARC, it could further fears that India will use SAARC for hegemonic purposes. While the smaller states in South Asia recognize that they will need India’s help to facilitate faster economic growth, they are reluctant to work with India, fearing that such cooperation will admit Indian dominance in SAARC.

Aside from a few overtures to its neighbors, India has done little to dispel the fears of other South Asian states. The core of these fears is likely derived from the displays of India’s power by New Delhi in the past. Realizing its considerable advantage in military and economic power, India has consistently acted in an - arrogant and uncompromising - manner with its neighbors. Bangladesh is afraid of India exploiting its geographical position to redirect water flows vital to Bangladeshi agricultural production. Nepal and Bhutan are still worried about India’s control over their world trade and transit links as their geographical position will always make them dependent on India. These disputes between India and its neighbors have directly affected SAARC.

The disputes between South Asian states have undermined SAARC efforts to promote regional trade. These disagreements make consensus building and cooperation among SAARC states complicated. Attempting to promote regional cooperation while doing little to resolve regional conflicts makes SAARC mission looks nearly impossible. Moreover, SAARC has no institutional mechanisms or punishments capable of preventing or fully resolving a dispute. Two examples illustrate how conflicts in South Asia have proven detrimental to SAARC.

Indian intervention in Sri Lanka from 1986-1990 can be quoted. The Indian military intervention to suppress an insurgency by The Liberation Tigers of Tamil Eelam made Indo-Sri Lankan relations tense during these four years. Subsequently, the apprehension between India and Sri Lanka was considered a primary reason behind Sri Lanka’s lukewarm support for SAARC into economic and social spheres of its member states until relations improved with India.

A second, more prominent example of a conflict tremendous SAARC progress is the Indo-Pakistani conflict. Pakistan has demanded a resolution to its dispute with India over the Kashmir Valley before discussing trade relations with New Delhi. India has recently attempted to improve its relationship with the rest of South Asia. Under the Gujral Doctrine established by former Indian Prime Minister I.K Gujral, India signed 30 years water sharing treaty with Bangladesh and a trade and transit treaty with Nepal.

India also joined a sub regional group within SAARC comprising of Bangladesh, Bhutan, Nepal and India. Despite political impediments to trade, value of goods smuggled from India to Pakistan via a third party generally totals 250-500 million per year. If trade between the states was opened, Pakistan would receive cheaper imports due to lower transport costs and the absence of payments to a middleman.

SAARC is planning establishment of a South Asian Free Trade Area (SAFTA). However, the agreement to establish this free trade zone will take 10 years of gradual tariff reduction. For a proposal that has already been delayed, it will take some genuine political cooperation for the tariff reduction process to run smoothly.

Comparing with the experience of ASEAN, an organization with a better track record in producing economic coordination among member states than SAARC, creating a free trade zone could become difficult. The ASEAN free trade agreement (AFTA) has been criticized for not producing substantial economic interdependence among the region.

This lack of success results from distrust and protectionism among its member states. If SAFTA is implemented, its success will depend on the resolution of conflicts between South Asian states, something which seems unlikely in the future.