With the Indo-Pacific region increasingly gaining recognition for its strategic importance, major countries such as China, Japan, and India are seeking close economic cooperation with South Asian countries. This study focuses on the strategic perspectives and cooperation policies of the major countries in South Asia (Pakistan, Bangladesh, Sri Lanka) under the rapidly changing international political and economic environment, and explores Korea’s future economic cooperation strategies and policies in light of progress in the area of cooperation. Korea’s economic cooperation with South Asian countries is centered on ODA, and trade and investment have been centered on some manufacturing industries, but have recently shown a shrinking trend. While competition between major countries is in full swing in South Asia, it is necessary to establish a new direction for economic cooperation and promote policies in South Asia under a strategic perspective.
China places great importance on South Asia as a strategic point. Geopolitically, bordering a number of South Asian countries, China seeks to contain India’s influence on the region. Economically, China is focusing on the possibility of economic growth based on the high population growth rate of South Asian countries. Accordingly, China is making efforts to expand the market by actively strengthening trade and investment relations with South Asian countries. After signing an FTA with Pakistan, it is also actively entering into FTAs with Bangladesh and Sri Lanka, which combines diplomatic, security and economic purposes. Meanwhile, China has supported infrastructure construction of South Asian countries from early on through loan-oriented large-scale development financing in response to the economic and development demands of the countries. As China’s influence over South Asia increases, concerns are growing in South Asian countries. Pakistan, Bangladesh, and Sri Lanka record large-scale trade imbalances with China, and their debt to China is also large. As a result, promoting cooperative projects that are economical and necessary for the local economic society are gaining momentum.
Japan is expanding economic cooperation with South Asia under strategic consideration of the Indian Ocean region. Japan’s ultimate purpose is to counter China’s influence in South Asia while solidifying Japan’s presence as an alternative cooperation partner. Japan established a “comprehensive partnership” with Bangladesh and Sri Lanka, respectively in 2014 and 2015, strengthening diplomatic relations. Along with the implementation of the Free and Open Indo-Pacific (FOIP) strategy, Japan has expanded its ODA to India, Bangladesh, and Sri Lanka, and South Asia has become Japan’s No. 1 ODA recipient beyond Southeast Asia. In addition, Japan is actively signing FTAs with Bangladesh and Sri Lanka under economic and strategic considerations. Meanwhile, Japan has been very active in promoting projects with neighboring countries in cooperation with India. The joint declaration issued during Prime Minister Kishida’s visit to India in 2022 specified cooperation between Japan and India in the Indo-Pacific region. While Japan has revealed its willingness to check China’s influence in South Asia, it intends to maintain its existing comparative advantage by emphasizing not only physical connectivity, but also human and institutional connectivity. In particular, Japan emphasizes the “high-quality infrastructure investment development cooperation model” to highlight its strengths as an alternative to China.
As coming to power, India’s Modi government has begun to strengthen cooperation in economic and diplomatic relations with neighboring countries in earnest. This is because China’s influence has greatly expanded amid the increasing demand for economic growth support in South Asian countries. The Modi government’s Neighbourhood First Policy aims to expand economic and security links with South Asian countries and presents cooperation tasks in various fields such as economy, technology, transportation, energy, security, and the environment. India is actively supporting infrastructure construction in South Asia using Line of Credit. Currently, India’s share of loans to South Asia has risen to the highest level (about 44% of all loans) compared to other regions. Meanwhile, India is striving to revitalize its regional partners, SAARC and BIMSTEC. India is promoting projects and humanitarian support using its technology through SAARC, and is expanding regional connectivity through 267 projects through BIMSTEC as it seeks to strengthen connectivity between member countries. India is paying more attention to South Asian countries than ever in terms of economy and security, and is active in cooperation with third countries such as Japan.
Korea, as a matter of fact, has never operated economic cooperation strategies or policies for South Asian countries other than India. Although the New Southern Policy has achieved noteworthy results, it has lacked consideration for South Asian countries other than India. While the Korean government announced the Korean version of the Indo-Pacific strategy in November 2022, this paper proposed the direction and tasks of economic cooperation in South Asia, centered on Pakistan, Bangladesh, and Sri Lanka, which have high independent economic and strategic importance.
First, the importance of South Asia’s economic security dimension should be considered. It cannot be overlooked that the most important factor in intensifying competition among major countries in this region is strategic importance. Pakistan, which is located in a geopolitically strategic point connecting Asia and the Middle East, Sri Lanka, which is key to maritime transportation as a gateway to the Indian Ocean, and Bangladesh, which can act as a strategic spot through its location adjacent to Sri Lanka, China, and India and maritime connectivity using the Bay of Bengal, all hold high strategic value for Korea. In particular, it is necessary to establish strategic partnerships with Bangladesh and Sri Lanka and diversify its areas of cooperation with these countries.
Second, it is necessary to actively consider the potential of South Asian countries as markets and production bases. It is a well-known fact that major countries are already paying attention to South Asia, so if Korea neglects economic relations with South Asian countries, it is likely to suffer significant losses in the mid- to long-term. This is because the radius of Japan and India is likely to expand as South Asian countries are expected to diversify their economic cooperation. In particular, it is necessary to push ahead the FTA with Bangladesh by paying attention to its new production base and potential as a market, and to promote the entry of Korean companies to special economic zones of Bangladesh.
Third, support for economic and social problems common to South Asian countries, namely infrastructure improvement, industrial structure diversification, and climate change response, should be strengthened. In the case of Pakistan, it is necessary to communicate Korea’s strength as a partner in industrial development. Pakistan has a very high will to foster its manufacturing sector, and has ample potential as an export and production base in relation to its initatives for industrial development (e.g., Make in Pakistan), low wages, and geographical advantages. Further, cooperation between companies, such as joint investment to support Pakistan’s manufacturing fostering policy, and programs to strengthen industrial capabilities using ODA funds will be effective. In the case of Bangladesh, the proportion of budget expenditure to GDP is scheduled to more than double for water resource development related to climate change response, thus making demand for cooperation very high in this area.
It is necessary to discover large-scale projects with great influence that can visualize Korea’s role throughout the ODA projects in South Asia. In the case of Sri Lanka, which has experienced large controversy over ineffective projects, PPP projects were given attention for efficient financing and project implementation by intensifying management of foreign investment projects even before its official declaration of default. This phenomenon is expected to continue while the size of ODA sources in South Asian countries is on the rise, making it an urgent task to scale up these projects using the PPP method.
Fourth, considering recent moves to expand links between South Asian countries and similarities in demand for diversification of external economic cooperation and areas of cooperation, the timing is ripe for cooperation with India and BIMSTEC. Economic cooperation in South Asia linked to India is already under way by Japan through mechanisms such as the New East Forum, and Japan is closely cooperating with the Indian government. Korea also needs to actively seek its role as a cooperative partner. In particular, it is worth paying attention to the “Master Plan for BIMSTEC Traffic Connectivity.” This master plan consists of 267 projects and is also a comprehensive plan that includes building a soft infrastructure, which is expected to serve as a key platform for regional cooperation. As the Indian government has set development of Northeast region, which is racially and culturally similar to Korea, as a priority and requires to spend more than 10 percent of its federal budget on the development, it is an area worthy for Korea to focus active attention. In addition, as BIMSTEC is promoting cooperative projects related to trade vitalization, investment and tourism promotion, technology cooperation, and energy resource development, the possibility of cooperation with BIMSTEC in various fields should be examined.
Fifth, it is necessary to consider the possibility of cooperation in South Asia with third countries, including China, from the perspective of alignment with Korea’s Indo-Pacific strategy. For example, improving the economy and quality of infrastructure, which is an important task for South Asian countries, is a part that China can also sympathize with. In addition, as Japan’s quality infrastructure model does not exclude China in nominal terms, Korea should take a forward-looking stance on the possibility of cooperation with China and Japan.