Realisation of Trade Potential among South Asia and Southeast Asia: Stochastic Frontier and Structural Gravity Analyses

South Asia and Southeast Asia (SASEA) have exhibited overwhelmingly low intra-regional trade compared with other major regional groups such as the EU, NAFTA and Asia-Pacific Economic Cooperation (APEC). The present article attempts to understand the extent of trade potential between the economies of the SASEA, and it measures the loss of trade potential due to behind-the-border inefficiencies. The potential to trade is analysed with the help of the stochastic frontier gravity model (SFGM). The analysis indicates that there are substantial inefficiencies in bilateral trade among the economies of the SASEA. Following the method of Battese and Coelli, the technical efficiencies of bilateral trade have also been calculated. The comparison results indicate that the bilateral technical efficiencies within the region have been falling over the last 30 years. The article further estimates the SFGM for relatively important factors determining the bilateral trade. Noteworthy findings indicate that population has a negative effect on bilateral trade. At the same time, common religion registers as one of the essential variables for higher trade performance, along with common culture and language. The trends in trade creation or diversion are studied by extending the analysis over the three decades. The gravity analysis indicates that the region registered patterns of trade creation in the 1990s and 2000s. However, during 2010s, a significant trend of trade diversion was identified. This article attempts to make a case for increasing commitment to multilateral reduction in trade barriers among the SASEA countries and the eventual creation of a highly integrated trading bloc.

JEL Codes: F02, F14, F15