Does the role of observer countries in the regional trade agreement matter for intra-regional trade ?

ABSTRACT

This article investigates the effects of trade by observed economies on the intra-regional trade by South Asian Association for Regional Cooperation (SAARC) members using Poison pseudo maximum likelihood estimator (PPML) gravity models with panel data over the period 2008–2014. Eight SAARC members and eight observed countries, including the EU, are analysed in capturing the trade effect of observed economies on intra-regional trade in SAARC. This article provides an empirical measure of observers’ trade, FDI and Official development assistance (ODA) with SAARC if the exports and imports of observers to/from SAARC have positive or negative signs for intra-regional exports and imports. The results show that the exports and imports of observers to SAARC members have positive effects on bilateral exports among the members. The FDI of observers reduces the bilateral intra-imports in SAARC and ODA also has a negative effect on bilateral exports among the members. These results imply that the imports by SAARC members from observer countries increase intra-regional trade in the region. The FDI and ODA increase and decrease intra-regional trade in SAARC, respectively, implying that the policies for both FDI inflow from observers and efficient aid management are needed to increase regional welfare. The study also recommends that trade between SAARC members and its observers help to increase intra-regional trade in SAARC.

KEYWORDS:

• Intra-regional trade
• the role of observers
• regional trade agreement
• SAARC
• trade

JEL CLASSIFICATION:

• F15
• F14

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ There are some studies that show that products produced in the region do not satisfy demand within the region. For example, India – a relatively industrialized country in the region – does not supply capital goods and durable goods to the region because of quality problems (see Kelagama 1994).

² Many studies have shown the negative effects of ODA on GDP and Investment. Lueth and Ruiz-Arranz (2007) show a negative correlation between ODA and GDP. Easterly, Levine and Roodman (2003) also find that aid has a negative effect on growth. Ezemenari, Kebede and Labiri (2008) finds that foreign aids have negative effect on public investment.