Prospects of forming an economic zone in South Asia and beyond

by N N TARUN CHAKRAVORTY 24 August 2019

There is a two-way causal relationship between international trade and economic growth i.e. trade stimulates growth and growth also leads to cross-border trade. The concept of regionalism in case of international trade came up and has been advocated by scholars not only for a greater utilization of comparative advantages between countries and achieve gains in terms of lower transaction costs but also for benefiting from each other on various dimensions of growth and development through cooperation and concerted efforts. The inter-links between growth, trade and development become more important for understanding when we examine the viability of forming a regional economic zone in order for all the participating countries to benefit in a reciprocal way.  In particular, an economic union between Bay-of-Bengal and the Andaman Sea (BoBA) rim countries may be a unique pattern while the countries in this area are in close proximity and connected by cheap water communication, which would reduce the cost of trade significantly. Moreover, there is a mix of growth and development patterns in the region, for example, pathways to Bangladesh’s exceptional social and human development achievements despite low per capita income may be a good example for Myanmar, Indonesia, India to follow and success in governance improvement and having high income per capita achieved by Malaysia, Thailand and Singapore may provide good lessons for others.  

According to Adam Smith’s ‘natural order of things’ theory, or in ‘unnatural and retrograde order’, that is, whether trade stimulates growth or growth leads to cross-border trade, whatever way be it, it is imperative that we know the factors that contribute to these two. Further, when Adam Smith links domestic economic development to international trade which is linked with economic growth, it turns out to be important to understand the link between growth and development. These inter-links between growth, trade and development become more important for understanding when we examine the viability of forming a regional economic zone in order for all the participating countries to benefit in a reciprocal way. Whatever the approach be, the aim of the regional policy, is no doubt income redistribution and welfare increase by increasing employment and income. Now, when regional economic cooperation has been emphasized as an important source of competitive advantage in a globalizing political economy and when we consider the formation of regional unions or economic zones of countries tied with geographical proximity, ease of transportation and communication, and featured by diversity of factor endowments, we actually transcend the idea of income redistribution and welfare increase over national boundaries. Income redistribution increases demand for goods of firms located at any corner of all the countries belonging to the region giving rise to a virtuous cycle. 

There are two strands as regards to the importance of territorial proximity in economic association from which benefits would come about: first, as suggested by Michael E. Porter  and Paul Krugman, specialization would give rise to specialized know-how, skills and technological advancement and their exchanges among associated firms in the form of economic externalities would reduce costs and lead to increasing returns to scale. Second, a proximate association makes it possible for countries to draw insight from the character of social, cultural and institutional arrangements of others and helps to develop evolutionary economies tied in proximity and association as a source of knowledge and learning.   

Social inclusion and social empowerment are two important elements of the modern concept of development. ASH Amin, in this light, observes that the principle of learning through social inclusion and social empowerment might stimulate special effort to draw in the minority and the excluded ensuring development for all in the region. For example, the key factors that played an important role in its ‘development surprise’ in Bangladesh has been social inclusion and women empowerment, which was made possible mainly by NGO’s and to some extent by governments through offering health, education and family planning services free or at low costs. A regional culture of social inclusion and social empowerment allow diverse social groups and individuals especially the backward ones to realize their potentials, which in turn encourage economic creativities (AHS Amin 1999). Therefore, the success story of the social development of Bangladesh, that has been achieved by adopting the policy of social inclusion and social empowerment would be easily imitated by other countries in the environment of a regional economic cooperation.   

The success of regional economic union lies in the ability to secure increases in productivity in backward parts comparable to those in the more prosperous ones, achieve self-sustaining growth based on the mobilization of local resources and interdependencies (AHS Amin 1999). Therefore, besides the free flow of labour, capital, technology within the region, countries must learn lessons from each other on how to improve institution and governance key factors for economic growth and how to improve human and social development indicators.

Let’s look at the possible benefits of forming a regional economic union of Bay-of-Bengal and the Andaman Sea rim countries, namely Bangladesh, India, Myanmar, Indonesia, Malaysia, Thailand and Singapore. As has already been hinted, a regional economic cooperation is something beyond a free trade zone or trade agreement. A union like EU sets common practices, rules and goals as regards to fiscal policy, customs, labour, environment, control of criminal activities and so on whereby there takes place free flow of capital, labour and technology.

Beyond the set agreement, in such an environment of economic cooperation countries may learn from each other how to improve governance problems and smooth out procedures and expedite the economic activities, for example, number of documents required for import is 6.2 on average and that in Singapore is only 3 (see the table below). In such a case India may learn how to minimise the burden of procedure in trade from Singapore because in an economic union there will be regular visits of policy makers, experts, politicians between countries and discussions, roundtables and workshops will be held on common issues

Table: Trade scenario of BoBA countries vis-a-vis the Low & middle-income countries and the World

Panel A
  Trade rate Cost: export No. of doc: export No. of doc: import Total export Total import
BGD 1203 3.5 4.7 7 28000000000 36000000000
IND 1332 4 3.3 4.7 5E+11 5.3E+11
IDN 595.2 . 3.1 6.2 2.2E+11 2.1E+11
MYS 450 . 4 4 2.3E+11 2E+11
MMR 670 3.5 . . . .
SGP 460 . 3 3 5.4E+11 4.7E+11
LKA 595 4 7 7 13000000000 19000000000
THA 595 . 5 5 2.7E+11 2.5E+11
BoBA rim countries total 1.801E+12 1.715E+12
BoBA figure as % of the world 8.58 8.2
LMI countries 1759.27 3.8 6.9 7.95 6.3E+12 6.4E+12
World 1529.77 3.8 6 7.13552 2.1E+13 2.1E+13

Source: World Development Indicator (World Bank 2018)

Note: LMI = Low and middle-income 

Likewise, countries like Myanmar, Indonesia, India may learn from Bangladesh how it has managed to achieve human and social development which is exceptional in the same income group of countries. In the table above (panel A) reveals that there are a lot of similarities among the BoBA rim countries in terms of cost to export (per container), number of documents required to export and import indicating a similar number of days required for release of goods from each other for export and import purpose. It makes trade between these countries easy and beneficial equally for all member countries. The table (panel A) also reveals that the BoBA rim countries export almost 9% of the total world export and 8% of the total world import. If these countries explore and find export destinations and import sources within BoBA, then export and import percentages (as percentage of the world volumes) of this zone will significantly increase because export and import values will decrease by minimizing transport and transaction costs and time because of shorter distances and use of cheaper water communications. This prospect would expand industries of the member countries creating more jobs and spurring economic growth.  

Table: Trade scenario of BoBA countries vis-a-vis the Low & midle-income countries and the World (continues…)

Panel B
  Trade% GDP Export Val Index Import Val Index Export Vol Index Import Vol Index
BGD 46.2964 455.682 417.484 382.223 212.105
IND 53.8441 742.928 903.282 409.893 460.718
IDN 48.6374 279.118 428.096 116.544 220.91
MYS 142.721 232.447 251.208 145.366 149.104
MMR 38.5808 693.31 507.932 309.355 238.089
SGP 365.965 297.705 277.243 255.759 192.152
LKA 49.2578 187.994 286.611 140.538 220.806
THA 133.345 331.347 404.382 207.541 231.117
LMI countries 53.1644 . . . .
World 60.1145 . . . .

Source: World Development Indicator (World Bank 2018)

Note: LMI = Low and middle-income 

From the table (panel B) we can also see that there are stark differences between some countries in terms of trade as % of GDP, for example, Bangladesh, India, Indonesia and Sri Lanka trade around 50% of their GDP figures— much less than Malaysia, Thailand and Singapore. Malaysia and Thailand trade around 1.5 times their GDP and Singapore does more than 3.5 times its GDP. It means that Bangladesh, India, Indonesia, Sri Lanka and Myanmar have a lot of potentials to exploit and increase their export while the import volume indices for Bangladesh, Malaysia, Thailand and Singapore are comparatively lower. Therefore, if the countries expand the principle of comparative advantages, then Bangladesh, Malaysia, Thailand and Singapore may import from other BoBA countries instead of producing inside. However, it is subject to the existence of comparative advantages, which need to be explored.  

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