Do South-South Trade Agreements Enhance Member Countries’ Trade? Evaluating Implications for Development Potential in the Context of SAARC

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).