Regional integration in South Asia: Potential and promise

Date of Completion

January 2000


Economics, General|Political Science, International Law and Relations




In their quest for rapid economic growth, a group of South Asian countries Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri-Lanka formed the South Asian Preferential Trading Arrangement (SAPTA) in 1994. This dissertation consists of three different but interrelated essays that analyze the potential of SAPTA to increase intra-regional trade, the underlying factors that have inhibited intra-regional trade flows in South Asia, and the implications of SAPTA to Nepal, a small landlocked country in the region. ^ In an effort to learn whether a lack of complementarity between the exports and imports of countries in the region has precluded any substantial expansion of intra-regional trade, the first essay measures the trade complementarity between the South Asian countries. The results show that even if there is low trade potential between the South Asian countries from the perspective of individual country pairs, there is potential for much greater intra-regional trade from the perspective of overall region. ^ The second essay shows that policy-induced distortions have significantly restricted regional trade flows in South Asia. In particular, the findings indicate that exchange rate liberalization and the removal of non-tariff barriers could significantly increase regional trade flows in South Asia. This study further finds that political and cultural factors have an important influence on regional trade flows in South Asia, and efforts to improve political relations are likely to yield a large payoff in terms of expanded intra-regional trade. ^ The third essay measures the distributional impact of SAPTA on a small landlocked country, Nepal and its large neighboring country, India. The essay develops a theoretical framework to explore the impact of regional integration on industrial location and the resultant welfare effects for each country and in the aggregate. The results show that integration increases wage earnings for workers in both countries, decreases firm profits in the large country but enhances the aggregate welfare of the region. The overall findings of the dissertation suggest that SAPTA can enhance economic growth and total welfare of the region if it successfully eliminates trade as well as political barriers between the South Asian countries. ^