Can South–South Trade Agreements Reduce Development Deficits?

Abstract

With the rise of India and other Southern engines of growth, the South Asian Association for Regional Cooperation (SAARC) and similar vehicles for South–South regional cooperation have gained in importance. Developing a stochastic frontier gravity model, this article investigates the presence of significant ‘behind the border’ and ‘beyond the border’ constraints and analyzes the potential synergy between trade and development goals in the context of SAARC. In particular, the article demonstrates: (a) a considerable potential for improvement of trade complementarities among SAARC members; (b) a long-run scope for gains from trade; (c) country-specific ‘socio-political–economical–institutional’ rigidities form ‘behind the border’ constraints to trade; (d) that realization of trade potential would eliminate development deficits via growth dividends through trade and investment spillovers, exchange of skills and knowledge; and (e) since tariffs are not an important barrier in this region, emphasis should be placed on higher technology cooperation, and cooperation in areas of education, literacy, gender, institutions ensuring good governance, social capital and infrastructure, to help achieve the SAARC Development Goals (SDGs). The main policy insights are that the removal of ‘behind the border’ barriers and policy coordination would reduce ‘productivity lags’ and close the ‘gap’.