The following are excerpts from the inaugural South Asia University-Regional Centre for Strategic Studies lecture delivered at the RCSS, Colombo on October 26, 2026.There is a peculiar paradox at the heart of South Asia. It is one of the world’s most densely populated regions, with enormous markets, young populations (a median age of 27.8 years), rapidly growing economies, extraordinary cultural connections and some of the world’s busiest trading routes. Its countries share borders, economic spaces and the Indian Ocean. Yet, economically, South Asia behaves as though its countries are separated by unforgiving chasms and oceans.The numbers tell a dispiriting story of a region that trades far too little with itself. Intra-regional trade reportedly accounts for only about 5% of South Asia’s total trade, compared with around 25% in ASEAN and 16% in Africa. The World Bank estimates that South Asian countries trade approximately $23 billion with one another, against an estimated potential of at least $67 billion.The annual gap of roughly $44 billion represents not merely a statistical shortfall, but businesses that never emerge, factories that are never built, supply chains that develop elsewhere and employment opportunities that never materialise.The same research makes an astounding observation: for an Indian company, trading with Brazil can be about 20% cheaper than trading with a neighbouring South Asian country. Brazil is thousands of kilometres away; most South Asian countries are next door. Yet the economic systems of South Asia have made geographical proximity an obstacle rather than an advantage.The problem, therefore, is not a lack of economic potential. It is the failure to turn proximity into prosperity. This brings us to the South Asian Association for Regional Cooperation (SAARC), established in Dhaka in 1985 with the ambitious objective of accelerating the region’s economic and social development. More than four decades later, SAARC has produced declarations, conventions, committees, programmes and agreements. But its overall economic promise remains largely unrealised.Why has South Asia found regional cooperation so much harder than other regions? How did ASEAN and even Africa, despite their greater diversity, develop habits of cooperation despite political differences? And how did Europe turn economic interdependence into an ambitious regional project leading to eventual political union?Above all, why can the political disputes between two countries repeatedly paralyse an organisation representing eight? The answer is not one country’s fault. But neither is responsibility evenly distributed.A regional institution held hostage?SAARC has accomplished some useful work. Its members established the South Asian Preferential Trading Arrangement and subsequently the South Asian Free Trade Area (SAFTA). Agreements covering services, investment and social cooperation followed. The SAARC Development Fund, established in 2010, has approved more than 90 projects across member states. There have been sector-specific achievements and useful institutional building blocks.But the larger question is whether these initiatives have transformed South Asia’s economic relationships. The answer is much less encouraging. SAARC has produced paperwork on institutions, but not economic cooperation on the scale originally imagined. SAFTA has yet to make any significant impact on intra-regional trade.The comparison with ASEAN is particularly revealing. ASEAN is no European Union. Its members have different and even diverging political systems, competing strategic interests and territorial disputes. They have even engaged in combat as recently as a few months ago. Yet they have developed mechanisms to cooperate without first resolving every disagreement.South Asia has too often done the opposite: a bilateral dispute becomes a regional dispute, and a regional meeting becomes hostage to bilateral tensions. Economic initiatives become entangled in security perceptions and in allegations, both well-founded and ill-founded.Europe and Africa offer another lesson. Their integration projects emerged from particular historical experiences, and South Asia may not be able simply to reproduce those projects. But their founding logic remains relevant: economic interdependence and cooperation have incrementally led to political harmony and even ‘union’. Such harmony and union reinforce security by making conflict increasingly costly.South Asia is still struggling to comprehend that logic, let alone embrace it. Here, politics continues to constrain economics, most conspicuously in the relationship between India and Pakistan.Many argue that this rivalry is the central obstacle to SAARC’s progress. The two countries are not simply members of the organisation; they are its dominant powers and are nuclear-armed. Their disagreements have consequences for every other member. A former senior SAARC official himself described the organisation as “moribund” in 2003, citing mutual suspicion and conflict. That diagnosis remains pertinent.Yet blaming everything on one issue involving two countries would be too easy. Pakistan’s resistance to certain forms of regional integration that recognise Indian predominance has impeded progress, as has Indian resistance to Pakistani demands for sovereign equality. Related security concerns and an inability to separate economic normalisation from political disputes have undoubtedly impeded progress too. But India’s own diplomatic establishment has also questioned whether New Delhi has done enough to make regional cooperation work.India’s influence entails responsibilityIndia is overwhelmingly the largest country in South Asia by population, territory, economic weight and military power. Its influence is indispensable to regional integration. But asymmetric influence entails commensurate responsibility as well.A former Indian foreign secretary criticised India’s insufficient investment in regional infrastructure and inadequate provision of market access to smaller neighbours. He warned against being “too much calculative on short-term costs”. He argued that regional cooperation could not succeed if the larger neighbour failed to bring smaller countries along.This is an important corrective to the tendency to view SAARC’s predicament principally through the India-Pakistan prism.India claims deep-seated security issues and concerns relating to Pakistan. But regional integration cannot be built solely on strict reciprocity. The largest economy often has to accept disproportionate initial costs to create a system from which the region as a whole can benefit. India gains from regional stability, connected markets and prosperous neighbours. Better connectivity through Bangladesh can improve access for India’s northeastern states. Regional energy trade can benefit all participants. Neighbours that prosper become larger markets for Indian businesses.Infrastructure investment and market concessions should therefore be viewed not simply as short-term costs, but as strategic investments in a larger regional economic system.India’s size also creates anxieties among its smaller neighbours. Bangladesh, Nepal, Bhutan, Sri Lanka and the Maldives see enormous opportunities in access to the Indian market. But they also have understandable concerns that economic dependence could erode their sovereign and strategic autonomy, and that asymmetry could become political leverage. They want trade with India, but they also want to retain their economic and strategic autonomy in public policymaking.Successful regionalism requires confidence that the largest member will exercise its power predictably and legally. India’s leadership will be judged not merely by the scale of its ambitions, but by whether its neighbours see those ambitions as an opportunity rather than a threat.South Asia should welcome and support India’s rise. But India’s aspirations to global leadership cannot be entirely separated from the condition of its neighbourhood. A leading power must be prepared to shoulder the responsibilities that accompany its influence.Pakistan must change its calculation tooThe same principle applies to Pakistan. It cannot advocate for stronger regional economic cooperation while keeping its economic relationship with India hostage to every political crisis. Its security concerns and disputes with India are real. But so are the economic costs of isolation.Geography suggests that the two countries should trade extensively with each other. Instead, goods travel along longer routes, businesses seek alternative suppliers, consumers pay more and investment opportunities disappear. Pakistan could potentially become an important transit economy connecting South Asia with Afghanistan and Central Asia, but that opportunity depends partly on regional connectivity.The question is not whether India and Pakistan can resolve every political dispute. It is whether they must resolve every dispute before they can cooperate economically. There is a difference between resolving a dispute and managing a relationship.ASEAN provides sophisticated templates for doing that. Regional cooperation need not require agreement on Kashmir or the abandonment of legitimate security concerns. It requires recognising that not every economic question must become an extension of political conflict.The United States and China continue to trade despite profound strategic rivalry. ASEAN and African Union members cooperate despite serious unresolved differences. Political disagreement and economic cooperation need not always be mutually exclusive. South Asia has yet to make that distillation intelligently.The cost of fragmentationThe consequences extend far beyond diplomatic summits and trade statistics. Roads stop at borders. Railways remain disconnected. Customs systems fail to communicate effectively with each other, trucks encounter delays, energy grids remain insufficiently connected and restrictive visa arrangements impede business and professional travel. Tariffs, non-tariff barriers, investment restrictions and inadequate transport infrastructure compound the problem.Signing a free trade agreement is not the same as creating free trade. A tariff reduction means little if a truck cannot cross a border efficiently. A market-access commitment means little if businesses face unpredictable regulations or investors cannot move capital with confidence.The potential gains are substantial. Nepal and Bhutan possess enormous hydropower resources; India has enormous demand; Bangladesh’s energy needs are growing; Sri Lanka has considerable renewable-energy and shipping potential; and Pakistan faces serious energy challenges. A regional electricity market involving Bangladesh, Bhutan, India and Nepal has been estimated to offer capital-cost savings of about $17 billion.Climate change makes cooperation still less optional. Rivers connect countries; the Himalayas feed major river systems; and the monsoon crosses borders. Floods, glacial melt, water scarcity, cyclones, air pollution, food insecurity and pandemics do not stop at customs posts. Regional cooperation is not merely an economic convenience; it is increasingly a developmental and security necessity. The recent disasters in Nepal were a reminder, if one is needed.And then there is the all-important generational question. South Asia is home to one of the world’s largest concentrations of young people. Millions enter the labour market every year, in need of jobs, education, mobility, technology, investment and access to markets.This is a double-edged sword. Get it right, and the region’s youth potential could vindicate the theory that a country must get rich before it gets old. Get it wrong, and a frustrated and radicalised youth population in a region of such extraordinary population density could spell very serious trouble. The first embers of that trouble are already visible in many, if not most, South Asian countries.A regional economy could generate opportunities beyond the reach of individual national markets.Yet the people with the most to gain from integration – the youth – have the least influence over the diplomatic decisions that prevent it.Every cancelled summit reinforces the idea that regional cooperation is optional. Every border closure encourages businesses to look elsewhere. Every delayed agreement weakens confidence.Gradually but inevitably, the region thus normalises non-cooperation.That may be SAARC’s most dangerous legacy: not simply failure, but normalised failure. People begin to assume that South Asian countries cannot cooperate, when the real problem is that their governments have repeatedly failed to give cooperation the political breathing space it needs.Alternatives are useful, but not enoughThe search for alternatives is understandable. BIMSTEC, bringing together Bangladesh, Bhutan, India, Myanmar, Nepal, Sri Lanka and Thailand, offers opportunities for cooperation. The South Asia Subregional Economic Cooperation programme has also supported regional connectivity and development. Where SAARC is blocked, India and its neighbours may be compelled to pursue progress elsewhere. Smaller groups can move ahead on transport, energy, trade and infrastructure rather than waiting indefinitely for consensus among all eight members. Of course this is without Pakistan’s participation.But there are limits to this approach. A South Asia integrated around everything except its two principal rivals would remain a partial solution. Bypassing Pakistan does not eliminate infrastructure bottlenecks, protectionism, weak institutions or political mistrust.Nor can India integrate the region alone.There is also the danger that a proliferation of regional arrangements could dissipate scarce administrative capacity while leaving the fundamental problem unresolved.The more sensible approach is variable geometry: where all eight countries can cooperate. They should; where consensus is impossible, smaller groups should be allowed to move forward without abandoning the wider regional framework. Subregional initiatives should reinforce South Asian regionalism, not become permanent substitutes for it.Nor should smaller countries be treated as spectators in a contest between New Delhi and Islamabad. Bangladesh has major stakes in regional connectivity; Nepal and Bhutan need market access and energy networks; Sri Lanka is an Indian Ocean trading and logistics centre; the Maldives depends heavily on connectivity, tourism and maritime links; Afghanistan, despite its Taliban trouble, plays excellent international cricket in truly border-less fashion, and has an interest in access to South Asian and Central Asian markets.Genuine regionalism must give these countries a stronger institutional voice. Political equality must translate into meaningful economic participation and autonomy. ASEAN have done this judiciously and pragmatically. And they have prospered while SAARC has faltered. Pakistan and India therefore need to recalculate. In particular:Pakistan and India cannot continue to advocate regional cooperation while keeping economic relations with each other hostage to every political crisis.Pakistan’s security concerns and disputes vis-a-vis India and Pakistan’s claim for sovereign equality, are real even if some of it may be debatable.But so are the costs of isolation which Pakistan needs to calculate. So, Pakistan can’t afford to overlook the need to address the cross-border terrorism issue squarely.Pakistan could potentially become a major transit economy connecting South Asia with Afghanistan and Central Asia.Economic cooperation and political disagreement need not always be mutually exclusive. There are many lessons from ASEAN, Africa, Latin America and even Europe.Making cooperation normalSAARC cannot and does not need to become another ASEAN or European Union overnight. That is neither realistic nor necessary. It only needs to make cooperation routine and ‘normal’!Tariffs must be reduced, but non-tariff barriers deserve even greater attention. Trucks, trains, ships and digital services must be able to cross borders more efficiently. Energy grids without ‘kill switches’ need to become genuinely interconnected. Predictable rules must encourage cross-border investment, while business and professional travel should become easier.Institutional mechanisms must also allow projects that grow trade and value-add to continue even when bilateral relations deteriorate. Above all, economic cooperation should be protected from political disputes, at least wherever possible.None of this will be easy. They need to be negotiated. Trustworthy pragmatism is the missing ingredient, and trust cannot be created through declarations and Summit final documents alone.Countries will hesitate to invest in regional infrastructure if political tensions can suddenly destroy the economic calculation. Businesses cannot build reliable supply chains if customs procedures can be disrupted politically. Smaller states will remain cautious if dependence on a dominant neighbour could become political leverage and the bigger neighbour demands ‘strategic loyalty’ and sovereign assets as kick-backs in return for economic partnership.They must learn the ASEAN ‘art of the deal’ to depoliticise economics and economise politics. Trust, in other words, is not sentimental. It is an economic variable.Of course, only an incurable optimist would expect that India and Pakistan will not continue to disagree. But their governments must decide whether every disagreement should be allowed to obstruct the longer-term strategic interests of the wider region led by them. India must recognise that leadership in an asymmetric region involves costs and that these costs cannot be handled only through coercive bilateral means, but must be smartly defrayed through collective regionalism.Pakistan must recognise that isolation carries costs of its own and their new-found outreach Westwards, including the ‘nuclear umbrella’, is a tactical function of the current volatility in West Asia and may not be a lasting strategic phenomenon. Both must accept that cooperation can be pursued without requiring political agreement on everything.Is there a way forward?South Asia should welcome and support India’s rise as the world’s most populous country and largest democracy, with a young population, substantial purchasing power and a middle class comparable in size to, or even larger than, the entire US population. If a democratic India’s ascent is peaceful and rules-based, it is not a threat to be feared, but an opportunity to be seized.India must reciprocate by offering to work with all in SAARC to convert asymmetries into mutually beneficial complementarities through negotiations based on sovereignty and strategic autonomy.Yet India’s aspirations for global leadership in an emerging multipolar order, the clear contours of which are still suffering from birthing pangs, cannot be realised without the confidence and cooperation of its neighbours.As Indian external affairs minister (EAM) S. Jaishankar himself has cogently put, ‘India’s global standing is inseparable from its role in its neighbourhood’. If India is to be recognised as a ‘leading power and not a balancing power’, again the EAM’s words, India must earn that recognition through constructive, rather than power-based, leadership credentials in the subregion.It cannot expect regional acceptance while seeing South Asia solely through the prism of its geopolitical playbook. That is probably why some Indian analysts themselves describe, maybe in partisan fashion, India’s neighbourhood-first policy as a euphemism for neighbourhood-lost.New Delhi must, in particular, rethink the implicit assumption that India can do without SAARC, while SAARC cannot do without India. Such thinking is strategically flawed, even in terms of India’s own interests in assuming subregional leadership and playing a ‘Sherpa’ role. A regional platform for economic cooperation, representing nearly $67 billion in trade, cannot remain hostage indefinitely to the India-Pakistan impasse or to India’s unilateral calculations of its place in the emerging multipolar order.Pakistan, too, must address the security and terrorism concerns obstructing progress through appropriate bilateral or plurilateral mechanisms. India, as the region’s pre-eminent power and potential economic ‘prime mover’, bears the greater responsibility for breaking the deadlock.Within such a ‘neighbourly ecosystem’, all sides must – and can – move beyond mutual suspicion and strategic inertia to secure a fair deal for their respective taxpayers, without imposing unacceptable costs on their broader strategic and geopolitical aspirations.Leadership is measured not by size or ambition alone but by the ability to build trust, common ground, regional institutions and turn national ascendancy into shared prosperity. After all, the raison d’être of smart diplomacy is to build common ground where none seems to exist.H.M.G.S. Palihakkara is a former secretary to the Ministry of Foreign Affairs, Sri Lanka.