Do south-south trade agreements enhance member countries' trade? evaluating implications for development potential in the context of SAARC

Das, Gouranga and Bhattacharya, Swapan K. (2009): Do south-south trade agreements enhance member countries' trade? evaluating implications for development potential in the context of SAARC.

Abstract

The South Asian Association for Regional Cooperation (SAARC) is the least integrated economy in the Asia-Pacific region, whose intraregional trade was only 5.6 per cent in 2006. In order to estimate potential trade of the SAARC Member Countries (SMCs), we have estimated “behind the border” and “beyond the border” constraints, which both appear to be quite significant in all SMCs. Given the level of “beyond the border” constraints, in the absence of full information on all “behind the border” constraints, the combined effect of the latter on actual exports of individual SAARC country is modeled in the gravity equation, which is estimated using the methods suggested in the literature for estimating stochastic frontier production function. Results of the stochastic frontier gravity model show that when FTA among SAARC countries becomes fully operational, smaller members will gain maximum benefits compared to larger members. The paper also analyses the synergy between trade and development goals of the SAARC countries. Since tariffs are not an important barrier in this region, emphasis should be given to liberalization of investment flows, higher technology cooperation, and cooperation in areas of education, literacy, basic health care, gender bias, favorable institutions ensuring good governance, social capital, transparency, transportation costs, infrastructure, to achieve the SAARC development goals (SDGs).

• Item Type: MPRA Paper
• Language: English
• Keywords: SAARC; Development; RTA; PTA: FTA: Stochastic Frontier Analysis; Technology; Cooperation
• Subjects: F - International Economics > F1 - Trade > F13 - Trade Policy ; International Trade Organizations; O - Economic Development, Innovation, Technological Change, and Growth > O2 - Development Planning and Policy > O24 - Trade Policy ; Factor Movement Policy ; Foreign Exchange Policy; R - Urban, Rural, Regional, Real Estate, and Transportation Economics > R1 - General Regional Economics > R11 - Regional Economic Activity: Growth, Development, Environmental Issues, and Changes

References

Aigner, D., Lovell, K. C. A., and Schmidt, P. 1977. “Formulation and estimation of stochastic frontier production function models,” Journal of Econometrics, vol. 6, pp.21-37.

Anderson, James E. 1979. “A Theoretical Foundation for the Gravity equation.” American Economic Review, vol. 69, no. 1 (March), pp. 106-116.

Anderson, J.E., and van Wincoop, E. 2003. “Gravity with Gravitas: A Solution to the Border Puzzle “. American Economic Review, vol. 93, no.1 (March), pp. 170-192.

Arora, V. and A, Vamvakidis (February 2004). How much do trading partners matter for economic growth? IMF Working Paper WP/04/26.

Asher, M., and Sen, R. 2006. ‘The Role of Japan in BIMSTEC’, Lee Kuan Yew School of Public Policy, National University of Singapore, (mimeo).

Baldwin, R. (1994), Towards an Integrated Europe, London: Centre for Economic Policy Research.

Baldwin, R. 1995. “A Domino Theory of Regionalism”, in Richard Baldwin, Pentti Haaparanta, and Jaakko Klander (eds.) Expanding Membership of the European Union, New York: Cambridge University Press.

Barro, R, and Sala-I-Martin, X.1995. Economic Growth. New York: McGraw-Hill.

Bergstrand, J.H. 1985. "The Gravity Equation in International Trade: Some Microeconomic Foundations and Empirical Evidence," Review of Economics and Statistics, Vol. 67, No. 3, pp. 474-481.

Bergstrand, J H (1989): ‘The Generalised Gravity Equation, Monopolistic Competition and the Factor-proportions Theory in International Trade’, Review of Economics and Statistics, 71: 143-153.

Bhagwati, J . 1995. ‘U.S. Trade Policy: The Infatuation with Free Trade Areas’, in Jagdish Bhagwati and Anne Krueger (eds.) The Dangerous Drift to Preferential Trade Agreements, Washington, D.C.: American Enterprise Institute for Public Policy Research.

CSIRD. 2006. Towards BIMSTEC-Japan Comprehensive Economic Cooperation: The Benefits of Moving Together, Centre for Studies in International Relations and Development, London: Anthem Press.

Coelli, T. 1996. A Guide to FRONTIER Version 4.1: A Computer Program for Stochastic Frontier Production and Cost Function Estimation, Centre for Efficiency and Productivity Analysis Working paper 97/07, University or New England, Armidale.

Das, Gouranga G. (December 2007): ‘Who leads and who lags? Technology Diffusion, E-commerce and Trade Facilitation in a model of Northern Hub vis-à-vis Southern Spokes’. Journal of Economic Integration, Vol 22. No 4, pp. 929-972.

Dhar, S., and Panagariya, A. 1996. ‘Is East Asia Less Open than North America and the EEC? No’. Paper presented at the International Economics Association Round Table Conference in International Trade Policy and the Pacific Rim, Sydney, July 15-17.

Drysdale, P. and Garnaut, R. 1982. “Trade Intensities and the Analysis of Bilateral Trade Flows in a Many-Country World: A Survey”, Hitotsubashi Journal of Economics, vol. 22. no. 2, pp.62-84.

Egger, Peter (2000), “ A Note on the Proper Econometric Specification of the Gravity Equation,” Economic Letters, vol.66, 25-31.

Elizondo, R.L. and Krugman, P. 1992, Trade Policy and Third World Metropolis, NBER Working Paper No. 4238, Washington D.C. National Bureau of Economic Research.

Estevaleordal, A., 2006. “The Rise of Regionalism.” Paper presented in the Conference, “The New Regionalism: Progress, Setbacks and Challenges” held at the Inter-American Development Bank, Washington, DC, February 9-10, 2006.

Frankel, JA. 1993. “Is Japan Creating a Yen Bloc in the East Asia and the Pacific?,” in J.A.Frankel and M.Kahler (eds.) Regionalism and Rivalry: Japan and the United States in Ppacific Asia. Chicago: University of Chicago Press.

Garnaut, R.G. (1972), Australian Trade with Southeast Asia : A Study of Resistances to Bilateral Trade Flows, Ph.D. Dissertation, Australian National University.

Gawande, K., and Krishna, P. 2001. The Political Economy of Trade Policy: Empirical Approaches. Working papers, Economics Department. Providence, RI: Brown University.

Kalirajan, K. 1999. “Stochastic Varying Coefficients Gravity Model: An Application in Trade Analysis”. Journal of Applied Statistics, vol. 26, pp. 185-194.

Kalirajan, K. 2007, “Regional Cooperation and Bilateral Trade Flows: An Empirical Measurement of resistance.” The International Trade Journal, Vol. XXI, No. 2, pp.85-107.

Kalirjan, K.P. & Bhattacharya, S.K., (2008), “Free Trade Arrangement between India and Japan: An Exploratory Analysis”, in Raghavendra Jha (Ed), The Indian Economy Sixty Years after Independence, Palgrave.

Kawai, Masahiro (2005), “East Asian Economic Regionalism: Progress and Challenges”, Journal of Asian Economies, vol. 16, Issue 1, February 2005, pp. 29-55.

Levchenko, Andrei A. (2004), “Institutional Quality & International Trade”. IMF Working Paper No. WP/04/23, Washington, DC. IMF.

Meeusen, William. and van den Broeck, Julian. 1977. Efficiency estimation from Cobb-Douglas production function with composed error. International Economic Review, 18 : 435-444.

Muni, S. D. and R. Jetly (2008). “SAARC: The Changing Dimension.” UNU-CRIS Working Paper, W-2008/8. Pp. 1-27.

Newfarmer, R. and Nowak, D.A. 2005. ‘The World Bank in Trade: The New Trade Agenda’ in Richard Newfarmer (ed) Trade, Doha, and Development: A Window into the Issues, The World Bank, Washington, D.C.

Nilsson, L. 2000. “Trade Integration and the EU Economic Membership Criteria”, European Journal of Political Economy, vol.16, no. 4, pp. 807-827.

Panagariya, A. 2000. “Preferential Trade Liberalization: The Traditional Theory and New Developments”, Journal of Economic Literature, vol. 38, no. 2, pp. 287-331.

Panagarya, Arvind (1997), “Preferential Trading and the Myth of Natural Trading Partners”, Japan and the World Economy 9, 471-489.

Pigato, M., Farah, C., Itakura, K., Jun, K., Martin, W., Murrell, K. & Srinivasan, T.G., 1997, South Asia’s Integration into the World Economy, World Bank, Washington D.C.

Plummer, M. 2007, “Best Practices in Regional Trading Agreement: An Application to Asia”, The World Economy, 30(12): 1771-1796.

Rodrik, Dani (2000), Trade Policy as Institutional Reforms, Harvard University, Cambridege, MA, Dept of Economics

Rodrik, Dani. 1998. Why Do More Open Countries Have Large Governments? Journal of Political Economy 106 (5): 758-879.

Sen, R. and Asher, M. 2006. ‘BIMSTEC-Japan Economic Partnership’ in CSIRD (ed.) Towards BIMSTEC-Japan Comprehensive Economic Cooperation: The Benefits of Moving Together, Centre for Studies in International Relations and Development, London: Anthem Press, pp.31-51.

Singh, Nirvikar (2002). Information Technology and India’s Economic Development. University of California Santa Cruz, Economics Department Working Paper Series.

Singh, Nirvikar (2004). Information Technology as an Engine of Broad-based Growth in India. Development and Comp Systems 0412012, Economics Working Paper Archive, Washington University, Seattle.

Singh, A and Singh, R (2009). SAARC Development Goals: Commitments and Achievements. South Asian Network for Social and Agricultural Development (SANSAD). New Delhi.

Tinbergen, J., 1962. “Shaping the World Economy : Suggestions for an International Economic Policy”. New York: The Twentieth Century Fund.

Vaidyanathan, G. (2008). Technology parks in a developing country: the case of India. Journal of Technology Transfer. 33, pp. 285-299.

Wacziarg, R. 1997. Trade, Competition and market Size. Cambridge, MA: Harvard University, Department of Economics. Wakasugi, R. 2007. “Vertical Intra-Industry Trade and Economic Integration in East Asia”, Asian Economic Papers, vol. 6, no. 1, pp. 26-39.

Wilson, J.S., Mann, C.L., and Otsuki, T. 2004. “The Potential Benefit of Trade Facilitation : A Global Perspective”. World Bank Policy Research Working Paper 3224, February. Washington, DC: The World Bank. World Trade Organization, 1995, Regionalism and the World Trading System, WTO, Geneva.

Yamazawa, I. (1970) “Intensity Analysis of World Trade Flow”, Hitotsubashi Journal of Economics, 10, 61-90.