Indian Ocean Region: Present Economic Trends and Future Possibilities

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International Studies

DOI: 10.1177/002088170404100102 2004; 41; 89 International Studies

Gulshan Sachdeva Indian Ocean Region: Present Economic Trends and Future Possibilities

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Indian Ocean Region: PresentEconomic Trends and Future Possibilities

Gulshan Sachdeva

The author is Associate Professor at the School of International Studies, Jawaharlal Nehru Univer-

sity, New Delhi.

This article makes an attempt to analyse the economic dimension of the IndianOcean Region (IOR). After describing the economic heterogeneity of the IOR, itconcentrates on its main economic powers. The objective is also to understandthe present nature of the Indian Ocean Rim Association for Regional Cooperation(IOR-ARC) within increasing regionalism in the IOR and access to economicopportunities created by this arrangement since its formation, paiticularly froman Indian perspective. The article concludes with an assessment of the futureeconomic trends in the region.

The Region

With abundant natural and human resources, surplus recyclable funds and opennavigable waters acting as a strategic link between the Atlantic and Pacific Oceans,the IOR has the potential to emerge as a major centre for future global economicand commercial activities. The Indian Ocean today constitutes one of the mostpromising maritime highways of the world. It carries heavy traffic of petroleumand petroleum products from the oilfields of the Persian Gulf and Indonesia. About40 per cent of the world’s offshore oil production comes from the Indian Ocean.’ I

However, delimiting IOR is still an academic puzzle. The number of ’rim’ statesvaries from twenty-eight to thirty-one (all islands; most littorals), the number ofstates in the ’region’ ranges from thirty-five to forty-seven (including landlockedcountries dependent on the Indian Ocean) and those in the ’community’ could beas many as sixty (including states not dependent on the Indian Ocean).2 In thecontext of the Declaration of Indian Ocean as a Zone of Peace (UN Resolution in

’ Central Intelligence Agency, "The World Fact Book: Indian Ocean," http://www.odci.gov/cia/publications/factbook/print/xo.html.

2 Rahul-Roy Chaudhury, "The Problem (Maritime Security)," Seminar, no. 448 (December)1996.



90

1971), the IOR was defined in 1979 as the Indian Ocean itself, its natural de-

pendencies, its islands and oceanic floors, its littorals and hinterland states, aswell as the aerial space over it. This definition is very broad as it covers the co-

astal states of the Persian Gulf and of the Red Sea as well as landlocked states

which transit to and from the sea.’ Broadly following this definition, this articletakes forty-four states for the analysis. These economies contain about 37 percent of world’s population, about 24 per cent of total surface area and nearly 8 percent of the world economy.4 4

Macroeconomic Profile of the IOR _

Economically, IOR is very heterogeneous with more than forty countries of dif-fering sizes, population, political systems and with uneven rates of growth anddevelopment.’ The region’s ethnic, cultural and religious diversity is also immense.Large intraregional disparities is one of the economic characteristics of the region.Majority of IOR economies, particularly in the Asian and Sub-Saharan belt, fallinto the category of low and middle-income countries. The only exceptions areAustralia, New Zealand and Singapore in the east and Bahrain, Israel, Kuwait,Qatar, the UAE in the north and western parts of the region which are high-incomecountries. Many of the IOR countries like Iraq, Jordan, Madagascar, Myanmar,Pakistan, Somalia, Sudan and Tanzania are highly indebted countries. Some otherslike Kenya, Malaysia, Mozambique, the Philippines, Thailand and Yemen aremoderately indebted. Though countries like India, South Africa and Bangladeshare among the less indebted nations, this burden may create macroeconomic

problems in the future. Tables 1 and 2 depict the World Bank classification ofeconomies of the IOR on the basis of income and indebtedness, respectively.

In terms of population, India is most populous country with more than a billionpeople. Other highly populated countries are Indonesia (210 million), Pakistan(138 million) and Bangladesh (131 million). Many other countries like Egypt,Ethiopia, Iran, Philippines and Thailand have more than 50 million. The rest ofthem have smaller populations. Due to these differences, countries like Egypt,India, Indonesia, Iran, Philippines and Thailand fail to record high per capitaincomes compared to Australia, Malaysia, Mauritius, New Zealand, South Africaand most of the middle east countries. Egypt, India, Indonesia, Iran, and Thailandare the high national income-high population countries. The condition is evenworse in case of the low national income-high population countries like Bangla-desh, Ethiopia, Kenya, Madagascar, Mozambique, Nepal, Sudan and Tanzania.

3 See Christian Bouchard, Emergence of a New Geopolitical Era in the Indian Ocean: Characters,Issues and Limitations of the Indianoceanic Order, mimeo. Paper presented at the InternationalSeminar at Panjab University, Chandigarh, 18-22 November 2002.

4 These calculations are based on World Development Indicators 2002 (Washington, DC: TheWorld Bank, 2002).

5 For details of economic heterogeneity in the region see S.K. Mohanty, "Trade Cooperation inIndian Ocean Rim Countries: Issue and Prospects," RIS Digest, vol. 11, nos 3-4, 1995.



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These are also the countries with comparatively high incidence of poverty (seeTable 3).

Integration of IOR in the Global Economy

Growing importance of trade in IOR economies is one indicator of their increasingglobal integration. Another is increased size and importance of private capitalflows in these economies. Indirectly this also reflects the liberalization of theirfinancial markets. Table 4 presents standard measures of the size of trade and

capital flows relative to the gross domestic product (GDPs) of IOR economies.Trade in goods (exports and imports) in the IOR countries is shown relative totheir total GDP and to &dquo;goods GDP&dquo; (GDP-less services such as retail trade,transport, business services, community, social and personal services and publicadministration). Measuring merchandise trade relative to GDP after deductingvalue added in services in IOR economies provide a better .measure of trade’srelative size than comparing it with their total GDP. This however neglects growingservice components of most goods in these economies. Singapore, Malaysia andother Southeast Asia economies within the IOR are highly integrated with theglobal economy, whereas countries like India and Egypt are least integrated. India,however, has progressed fast in the last ten years towards global integration.

Major Economic Powers in the IOR

Although the IOR is a region of diverse economies, close evaluation of the regionpresents a different story. The major regional economic powers which will shapethe future economic scene in the IOR are Australia, Egypt, India, Indonesia, Iran,Israel, Malaysia, New Zealand, Pakistan, the Philippines, Saudi Arabia, Singapore,South Africa and Thailand. These fourteen economies constitute more than 92

per cent of the regional economy. Similarly these economies account for about95 per cent of regional foreign direct investment (FDI) inflows. In foreign trade,the bigger fourteen economies today constitute about 88 per cent of regional exportsand about 82 per cent of imports (see Table 5). India and Australia are the twobiggest economies in the region. These are followed by Indonesia, Saudi Arabia,South Africa and Thailand. The economic scene in the coming years in the IORwill be dominated by the oil producing countries of the Persian Gulf, mineralsresources (including oil and gas) of Australia, South Africa and Indonesia; indus-trial products from South and Southeast Asia; and information technology andmanagement services from Singapore, India and Israel.

Regional Economic Integration and IOR-ARC

Despite the emergence of rules-based multilateral trading system, the world haswitnessed an unprecedented growth in regional economic arrangements. Today,all but two of the 140 plus members of the World Trade Organization (WTO) are



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Table 5

Major Economies of the Indian Ocean Region

Source: Authors calculations based on data provided in World Development Indicators 2002, TheWorld Bank, 2002; Global Economic Prospects and the Developing Countries 2003, TheWorld Bank, 2003; UNCTAD World Investment Report 2002, Geneva, 2002.

parties to at least one, and some as many as twenty-six regional arrangements.’The analysis of regional economic groupings shows that significant progress hasbeen made in the IOR in regional integration, particularly in the last two decades.’This could be shown by the number of arrangements concluded in the region (seeTable 6). The goals of these agreements are in the forms of free trade agreements(South African Development Community [SADC], Association of South-EastAsian Nations [ASEAN], East African Co-operation [EAC]), or custom unions(Gulf Cooperation Council [GCC], Common Market for Eastern and SouthernAfrica [COMESA], South African Customs Union [SACU]). Many otheragreements have been concluded with the aim of establishing sectoral cooperation,preferential trading arrangements, investment and the trade cooperation andfacilitation, etc. (South Asian Association for Regional Cooperation [SAARC],Commission del’ Ocean Indien [COI], Bangladesh India Myanmar Sri LankaThailand-Economic Cooperation [BIMST-EC]). In fact, almost all countries ofthe IOR are members of one or more regional economic groupings. Focus of

6 Gary P. Sampson and Stephen Woolcock, eds, Regionalism, Multilateralism and EconomicIntegration: The Recent Experience (Tokyo: United Nations University Press, 2003), p. 3.

7 For details see Gwyn Campbell, "The IOR and its Economic Groupings," in Gwyn Campbell,ed., The Indian Ocean Rim: Southern Africa and Regional Cooperation (London: Routledge Curzon,2003), pp. 220-37; Kenneth McPherson, "SAARC and the Indian Ocean," South Asian Survey,vol. 9, no. 2, 2002, pp. 251-61.



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103

some of the groupings in the region is largely economic like the SAARC, BIMST-EC, etc. Others like ASEAN have comprehensive agendas which include economic,political and security issues. Two major issues could be identified from the analysisof regional groupings in the IOR. First, there is tremendous growth of regionalgroupings and second, most of them (except ASEAN) have achieved very modesteconomic results. However, despite little visible economic results, it is more likelythat countries in the region will try further regional integration rather than aban-doning it in favour of overall trade and investment liberalization.

Within the broader context of regional integration, many IOR countries arealso trying to develop economic relationships on the basis of their common factor,the Indian Ocean. For centuries, the Indian Ocean has been a centre for trade and

people-to-people contact. This network of trade and other cultural links has alwaysgiven it a distinct regional identity.’ Therefore, the idea of forming some kind ofgrouping of Indian Ocean countries joining three continents of Australia, Africaand Asia was not very new. Many years ago, India’s first Prime Minister JawaharlalNehru had also referred to the &dquo;commonality&dquo; of the peoples of the Indian Oceanregion. Later the idea was kept alive in one form or another. But it was only in the1990s that concerted effort was made by IOR countries to enhance economiccooperation within the region. The end of the Cold War, South Africa’s return tothe international community and opening of the economies of the region, par-ticularly in South Asia, created a new political and economic environment forcooperation. Changes in the global power structure and sweeping structural reformsof international economic orders facilitated regional dialogue across the IndianOcean.9 The coming into Being of an increasing number of regional blocs elsewherein the world also impelled the nations of this region to look for regional cooperation.

In March 1995, seven countries, viz., Australia, India, Kenya, Mauritius, Oman,Singapore and South Africa met in Mauritius. This was an intergovernmentaleffort to explore possibilities of the Ocean Rim cooperation. Subsequently, inJune 1995 twenty-nine countries met in Perth at a three-day International Forumon the India Ocean Rim (IFIOR). The participants were mainly from the academia,business community and officials in their personal capacity. In November 1995,India’s then Prime Minister P.V. Narasimha Rao also underlined the historicalcontext and contemporary rationale for Indian Ocean-based regional economiccooperation. 10 This also fitted very well within India’s new &dquo;Look-East&dquo; policy.&dquo; I

8 Kenneth McPherson, The Indian Ocean: A History of People and the Sea (New Delhi: OxfordUniversity Press, 1993).

9 For details see Kenneth McPherson, "Indian Ocean Regional Dialogues: An AustralianPerspective," in India Australia: Public Policy Conference 1996 (Perth: Indian Ocean Centre andNew Delhi: Centre for Policy Research, 1996).

10 P.V. Narasimha Rao, "The Making of an Indian Ocean Community," Inaugural address at theConference organized by the Indira Gandhi Memorial Trust, 19 November 1995, Journal of IndianOcean Studies, vol. 3, no. 1, 1995, pp. 1-6.

11 Gulshan Sachdeva and Charan Wadhva, "Indian Perspectives on East Asia," 31 October 2003,http://www.asiapacificresearch.ca/caprn/cisp_project/cisp_wadhwa.pdf.



104

Later, a number of formal and &dquo;informal&dquo; meetings at various places facilitatedthe process of giving the idea of cooperation a concrete shape. Before the launchingof any formal initiative, however, many important issues had to be tackled. Firstand foremost was the question of geographical coverage of the grouping. It wasbroadly agreed that countries having direct outlet to the Indian Ocean basin wouldbe the most likely candidates of the grouping, although the question of hinterlandwas also advocated by a few (particularly South Africa). In this way more thanforty countries from South and South-East Asia, West Asia, Africa and Oceania(Australia and New Zealand) were identified as potential members of the grouping.The second issue was how to organize a regional economic grouping in a hetero-geneous region like the IOR. Some scholars argued that due to vast differences,there could be various circles within the grouping moving with different speeds.The Left Arc of the Ocean Rim (mainly SAARC, West Asia and Africa) couldmove at one pace and Right Arc of the Ocean (countries of ASEAN and Oceania)on a different pace. In addition, there could also be smaller rings of bilateral andsub-regional blocs with their own arrangements and speeds. Another complicationwas that almost all the prospective members were also members of one tradingbloc or another. So it was essential to work out some kind of coordination mech-anism with existing trading and economic blocs. Despite diversities and otherproblems, a certain degree of complementarity in trade structures and the geo-political situation of these countries convinced them about the benefits if theyworked together. 12

Efforts made at various forums resulted in the establishment of IOR-ARC in1997 with seven core members (Australia, India, Kenya, Mauritius, Oman, SouthAfrica and Singapore). With significant complementarities among its members,the case for regional trade and other economic cooperation was clearly establishedin academic discussions. On the basis of trade flows between Australia and otherIOR-ARC countries, some studies concluded that the prospects for market-driveneconomic cooperation within the IOR-ARC were strong due to spillover effect ofthe presence of APEC members.’3 Some other studies by Indian scholars alsoestablished the case for regional economic cooperation. 14 These studies broadlyendorsed &dquo;open regionalism&dquo; as a right policy framework for the IOR-ARC.&dquo;Due to the vastness of the region, it was believed that this grouping had the potential

12 See Gulshan Sachdeva, "Exploring Ocean Rim Co-operation," Financial Express (New Delhi),17 October 1995.

13 See K.P. Kalirajan and Ric Shand, "Evolving Economic Links Within the IOR-ARC," TheIndian Ocean Review (Perth), vol. 10, no. 3, 1997, pp. 1-5.

14 See Charan D. Wadhva, "Trade Cooperation in the Indian Ocean Rim: An Indian Perspective,"in P.V. Rao, ed., Regional Cooperation in Indian Ocean: Trends and Perspective (Hyderabad: Centrefor Area Studies and New Delhi: South Asia Publishers, 2001), pp. 67-92; Rajesh Mehta, "IndianOcean Rim: Economic and Trade Issues," Strategic Analysis, vol. 20, no. 2 (May) 1997, pp. 243-62.

15 Marika Vicziany and John Mckay, "Emerging Prospects in the Indian Ocean Region withReference to the APEC Experience". Paper presented at the workshop on "India and Australia:Economic Linkages, the Indian Ocean OPEC," 24-29 November 1997, New Delhi.



105

to become as important as the European Union (EU), ASEAN and APEC. Underthe influence of academic inputs as well as to reduce complications, the mainfocus of the IOR-ARC was on regional economic cooperation. Positive experiencesof market-driven economic integration in Asia also influenced policy makers toadopt open regionalism in the IOR-ARC. As a result, the emphasis has mainlybeen on regional cooperation rather than on economic integration, which runsthrough stages like preferential trade area, customs union, common market, etc.Economic cooperation, on the other hand, means concerted actions aimed at les-sening discrimination in certain areas of common interest. The key objectives ofIOR-ARC have been to formulate and implement projects for economic cooper-ation related to trade facilitation, promotion of foreign investment, scientific andtechnological exchanges, tourism, human resources and infrastructure.&dquo;&dquo; The mainfocus thus is on economic cooperation and particularly on trade and investment.It is primarily an outward looking forum for economic dialogue and cooperation.Open regionalism as is the case for the IOR-ARC has four components: tradeliberalization, trade and investment facilitation, economic and technical cooper-ation and trade and investment dialogue.

Since its establishment, the membership has grown from seven to fourteen andto nineteen with many dialogue partners. Current members are Australia, Bangla-desh, India, Indonesia, Iran, Kenya, Madagascar, Malaysia, Mauritius, Mozam-bique, Oman, Seychelles, Singapore, South Africa, Sri Lanka, Tanzania, Thailand,the United Arab Emirates, and Yemen. China, Egypt, France, Japan, and the UnitedKingdom are dialogue partners of the IOR-ARC. At present, only the Indian OceanTourism Organisation (IOTO) has observer status. IOR-ARC operates as a tripartiteorganization, bringing together government, business (through the IOR BusinessForum) and the academic communities (through the IOR Academic Group).

Despite careful considerations of IOR-ARC membership, countries with vastlydifferent levels of development (per capita income ranging from less than $250of Mozambique and Madagascar to more than $20,000 of Australia and Singapore)are members of the grouping. There are countries from different continents, withdifferent sizes of populations, different levels of domestic economies and varyingdegrees of openness and integration with the global economy. This is a group thatconsists of countries that are developed, newly-developed, developing, leastdeveloped, oil based, agriculture based, etc. Today it encompasses around 1,700million people and produces goods and services worth US $1,700 billion.Some studies has warned in the very beginning that choice of membership

would have an important bearing on the future of the grouping. Cooperation amongmembers without their growing economies will be difficult. With a diverse rangeof economies, the question of any form of trading arrangement among the membercountries in future will become more problematic. In that case, either some coun-tries in the grouping will move at a different speed leaving others behind or

16 See "Charter of the Indian Ocean Rim Association for Regional Cooperation (IORARC),"First Ministerial Meeting, Mauritius, http://www.iornet.org, 5-7 March 1997.



106

economic cooperation may arrive at dead end with a plethora of cooperation con-ferences and cultural exchanges.&dquo; After a few initial years of euphoria, like manyother groupings in the region, this grouping is also losing its momentum. Theway things have gone in the last few years, it is unlikely that IOR-ARC will beable to make any significant economic contribution to enhance trade in the region,at least in the next decade. It may, however, facilitate broader interaction amongpolicy makers. It seems that it may play a more useful role in facilitating politicaland security understanding in the region rather than economic expansion. However,this may change if IOR-ARC countries convert the grouping into &dquo;selective closeregionalism&dquo; between important countries of the region.

IOR-ARC and India

From the very beginning it was not very clear what objectives India hoped toachieve by associating with the IOR-ARC. If India was looking for purely eco-nomic gains, then the strategy should have been to bring more dynamic economiesin the grouping from the very beginning. The emphasis should have been oneconomic integration as opposed to economic cooperation. In a loose groupinglike IOR-ARC, concrete achievements are very difficult to demonstrate. In theabsence of these factors, it is difficult to sustain interest of policy makers andbusiness people in the grouping. In recent years, there has been more emphasison BIMST-EC than IOR-ARC in the policy circle. From a purely economic pointof view, the experience in the last few years shows that cooperation has not gonebeyond official meetings and a few academic studies. IOR-ARC has not beenable to become the central focus of the external economic policy of any of theimportant countries in the grouping. It would be more useful to assess the tradeimpact among the fourteen members of the IOR-ARC only as the remaining fivecountries have joined very recently. Although there has been significant progressin intra-regional trade and investment in the 1990s,’~ India’s trade data with thethirteen other IOR-ARC countries (presented in Tables 7, 8 and Figures 1, 2) doesnot indicate any clear trend. Out of these thirteen countries, more than 90 per centof India’s trade was with just six countries (Singapore, Malaysia, South Africa,Australia, Indonesia and Sri Lanka). Some studies have also pointed that despitethe increasing number of unilateral liberalization measures and many inter-governmental agreements, there are still a number of obstacles to both trade andFDI flows in the IOR.’9

If India thought that close economic integration within the grouping was notpossible, then it should have been clear from the beginning that this was more of

17 Gulshan Sachdeva, "IOR-ARC: Can the Dream Be Fructified," The Indian Ocean Review

(Perth), vol. 13, no. 2, 1997, p. 6.18 Ric Shand and K.P. Kalirajan, Enhancing Trade and Investment Environment in the Indian

Ocean Region (Canberra: Australia South Asia Research Centre, 2000).19 Ian A. Kerr and Michael Thrope, "Impediments to Trade and Investment in the Indian Ocean

Region," The Indian Ocean Review (Perth), vol. 13, no. 2, 2000, pp. 3-7.



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Figure 1Share of India’s ImportslExports with IOR-ARC (Fourteen Countries)

Figure 2Share of India’s Trade with IOR-ARC (Fourteen Countries) Since its Incepfion



110

a symbolic revival of the past. It is more like the feeling of creating an IndianOcean community. Since most of the countries in the grouping are part of thesouth, this could provide further impetus to south-south cooperation. This mayalso be significant as a strategic partnership in the future. With the Non-AlignedMovement (NAM) having lost much of its relevance, India could again demonstrateits potential and status through a broad ranging organization like the IOR-ARC.In the process, if some economic gains also materialize, one can take advantageof that. India could have perhaps opted for this kind of a wide-ranging, all-inclusiveapproach had Pakistan not been a factor. Within a few years of its launching,IOR-ARC has lost its momentum at least in India. The reasons are wrong selectionof members, lack of any demonstrated achievement and no clear gains in trade.From India’s point of view, it would be advisable if some smaller rings of bilateraland sub-regional blocs are formed within the grouping. Instead of setting thehighly unrealistic objective of &dquo;economic and technical co-operation among de-veloping countries for collective self-reliance&dquo;, it should boldly go for separateeconomic integration with select countries within the larger IOR-ARC.

’

Future Economic Trends in the IOR

The world economy grew at the rate of less than 4 per cent in the 1970s, about 3per cent in the 1980s and about 3 per cent in the 1990s. During the latter period,annual growth rates in the Asian region, particularly in the newly industrializedcountries was very high, touching 7 per cent in the 1990s. Within the IOR also,growth in the Asian region was higher than the global average. West Asia andNorth Africa were slightly above the global average, but the Sub-Saharan regionlagged behind. According to the World Bank forecasts, world economy as a wholewould grow at about 3 per cent between 2003 and 2015. Further, compared todeveloped countries, the Asian region would grow at about 6 per cent per yearduring this period. The gap between Southeast Asia and South Asia would also bevery small. West Asia, North Africa and Sub-Saharan Africa are also expected togrow marginally higher than the global average between 2003 and 2015.2° Thesefindings indicate some shift of global economic power towards the IOR region.The centre of economic activity within the IOR would be still the Asian region(including South Asia).A more or less similar trend is expected in real per capita income. Global real

per capita income is expected to grow at about 2 per cent between 2003 and 2015.However, real per capita income in the Asian region is expected to grow at 5 percent per year during the same period (4 per cent in South Asia and 5.4 in Southeast/East Asia and the Pacific). Due to relatively low growth rates and large populationgrowth, per capita real income in other countries of the IOR region in West Asiaand Sub-Saharan Africa would grow at about 1.5 per cent between 2003 and

20 For details see Global Economic Prospects and the Developing Countries (Washington, D.C.:The World Bank, 2003).



111

2015.21 All these trends clearly indicate that the Asian region of the Indian Oceanwould be economically very active; an increase in the production of goods, servicesand trade would improve living standards and would generate further demand formaritime commerce and port infrastructure.

Inflation forecasts in the IOR over the next fifteen years are between 4 per centand 5.5 per cent annually. These are high compared to the global average of 2 percent a year between 2003 and 2015. 22 This partly reflects the underdevelopednature of many economies of the IOR as well as relatively unstable macroeconomicsituations. In fact, inflation forecast for the South Asian region is highest withinthe IOR. These forecasts are on the basis of fiscal situations of IOR economies.The implication is that some financial trouble in the region cannot be ruled out inthe next decade.

Trade data for the years 1992-2001 shows that compared to global trade growth,many IOR countries had higher export and import growth. Global export growthwas about 7 per cent per year in the 1990s. During this period, all Asian IORcountries (except Pakistan) recorded significantly higher export growth rates. Thegrowth was also high in Ethiopia, Israel, Jordan, Kuwait and Sudan. Similarlyimport growth rates were higher than the global average in all Asian IOR countries(except Indonesia, Thailand and Pakistan). Import growth rates were also high inAustralia, Madagascar, New Zealand and Oman.

Similar to their economic achievements, trade performance was also signifi-cantly better in the Asian part of the IOR. Although export growth in Southeastand South Asia is expected to grow at a slightly lower rate in the next two-threeyears, it is likely that it will regain its earlier rates after 2005.

While looking at the current direction of trade statistics, it is clear that the

major source of exports from the IOR are Southeast Asia and the Pacific, whichaccounts for about 9.1 per cent of total world exports in 2001. Most exports fromthis region are meant for the US, Japan and other high-income countries. Intra-regional trade is also quite significant. South Asia exported just 1.1 per cent ofglobal exports in 2001 and most of its exports went to the US and the EU. Asimilar trend could be seen from West Asia, North Africa and Sub-Saharan Africa.It means the major destination of IOR exports are high-income countries, particu-larly the US and the EU. However, looking at the growth of dollar merchandisetrade by direction during the period 1992-2001, the following interesting trendsare evident (Table 9).

~ Highest trade growth from IOR regions is recorded with Latin America andthe Caribbean countries, particularly from the Southeast and South Asianregion.

~ From all IOR regions, trade has increased very significantly with Southeastand South Asian countries.

21 Ibid.22 Ibid., table A3.3, p. 202.



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~ Compared to many other regions, trade within Asia has grown fast.~ Although major trade from the IOR countries is with high-income importers,

growth in the last ten years was higher with low and middle-incomeimporters.

Conclusions

IOR is a region of more than forty diverse kinds of economies. However, themajor regional economic powers which will shape the future economic scene inthe IOR are Australia, Egypt, India, Indonesia, Iran, Israel, Malaysia, New Zealand,Pakistan, the Philippines, Saudi Arabia, Singapore and South Africa. These fourteeneconomies constitute more than 92 per cent of the regional economy, 95 per centof regional FDI inflows, 88 per cent of regional exports and 82 per cent of imports.Significant progress has been made in the IOR towards economic liberalizationand regional economic integration. Almost all countries of the region are membersof one or more regional economic groupings. In an effort to improve cooperation,a separate grouping of Indian Ocean countries IOR-ARC has been establishedwith 19 members. Although this grouping has great potential, India’s initial ex-perience purely from an economic point of view is not very encouraging. Unlesssome major policy initiatives are taken by India, IOR-ARC in its present shapewill not be able to make a major contribution to enhance trade in the region.

According to the global economic forecasts all regions of the IOR are alsoexpected to grow higher than the global average between 2003 and 2015. Thesetrends would shift global economic power further towards the IOR region. Withinthe IOR, the centre of economic activity is going to be the Southeast and SouthAsian region. Trends in per capita income also clearly indicate that the Asianregion of the IOR would be economically very active where increase in productionof goods, services and trade would improve living standards and also generatefurther demand for maritime commerce and port infrastructure. On the basis of

past trade trends it could be predicted that trade with the Asian region of the IORwould grow fast. Higher trade growth is expected towards low and middle-incomecountries and from Southeast and South Asia very high trade growth is expectedtowards Latin America and Caribbean. All regions of the IOR would trade morewith the Southeast and South Asian region.As a result of this sea bound trade is expected to increase heavily in the Southeast,

South and West Asian regions and in South Africa. In the coming years, there willbe pressure on the governments in the IOR to develop port infrastructure with

greater private sector participation. Maritime interests of the IOR countries willfurther shift away from purely military to economic terms. Due to the hydrocarbonaspect, the flow of maritime trade is going to be of vital strategic interest. Growingtrade may also face increasing challenges from terrorists and pirates. As a result,cooperation will be required, which will be beneficial in enhancing mutual trustand confidence among IOR countries. Under these circumstances, India has a

major responsibility of rejuvenating the IOR-ARC. Since the Asian part of the



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IOR is going to be more dynamic in the coming decade, this will help India instrengthening its economic linkages with East/Southeast Asia and Australia. Thisalso fits very well within its broader &dquo;look east&dquo; policy. If this grouping fails,India will miss a golden opportunity of influencing the most dynamic region inthe coming decade.

November 2003



Indian Ocean Region: Present Economic Trends and Future Possibilities

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