Regionalism And Trade In ECO Region

The regionalism has become much more widespread after World War II. Its pace has drasticallyaccelerated during the last quarter century. It has shifted successfully from simple border measures i.e.tariff reductions “shallow integration” to a complex paradigm of regional policies and institutionalintegration “deep integration”. According to WTO,354regional trade agreements (RTAs) are currently inforce and some546notifications of RTAs had been received by the GATT/WTO. The average number ofRTA participants per WTO member has risen from an average of about2RTA in1990to over12in2011.The intimate relationship between regionalism and trade is underscored well in the economicliterature. This dynamic relationship works both ways, in the sense that one may be the cause and/orconsequence of the other. Along with traditional trade effects (the allocation of resources), regionalismmay affect welfare through dynamic effects i.e. accumulation effects (economies of scale) and thelocation effects (agglomeration). Besides developed countries, developing countries also activelyparticipated in regionalism. After a success story of signing RTAs with developed countries (North-Southregionalism), developing countries are also participating in RTAs with developing countries (South-Southregionalism).The Gravity theory is probably the most successful warhorse for empirical studies in internationaleconomies. It has been used extensively for explaining trade flows for more than half a century. Thegravity model of international trade explains trade volumes; however, regionalism has been afertile domain for its application. Its empirical and recent theoretical strengthening has made itan appropriate research tool to estimate trade flows. The gravity model is used to evaluatevarious aspects of regionalism. Recently, there has been a growing interest in the use of panel data ineconometric analysis. The panel data framework has several advantages over pure cross-sectional or time-series analysis. The panel data usually provide a large number of data points, increasing the degrees offreedom and reducing the collinearity among explanatory variables, thus improving the efficiency ofeconometric estimates. More importantly, the panel data framework helps to unravel the time invariantcountry-specific effects and to capture the relationships among the relevant variables over time. The useof panel data also resolves or reduces the magnitude of a key econometric problem that often arises in empirical studies, namely the presence of omitted variables that are correlated with explanatory variables.The panel data framework also provides the possibility of generating more accurate predictions forindividual outcomes than time-series data alone.Pakistan, Iran and Turkey initiated regionalism in the region, establishing “Regional Cooperation forDevelopment”(RCD) in1964. It was renamed as “Economic Cooperation Organization”(ECO) in1985with revised agenda on economic cooperation. In1992the organization was expanded to includeAfghanistan, Azerbaijan, Kazakhstan, Kyrgyz Republic, Tajikistan, Turkmenistan and Uzbekistan. Thepromotion and expansion of intra-region trade has been a primary objective of ECO. In pursuance of thisobjective, the organization has taken various measures including the ECO Trade Agreement (ECOTA),establishment of ECO Trade and Development Bank (TDB), reactivation of ECO Chamber of Commerceand Industry (CCI), execution of Transit Transport Framework Agreement (TTFA) and so on.We apply the gravity model to assess determinants of trade in the Economic CooperationOrganization (ECO) region. In the first part of the study, a particular attention is paid to evaluate theimpact of ECO on regional trade. For this purpose, the model is estimated for a sample of34countries,the ten members of ECO and24as their main trading partners for a period of32years. As, the ECO havebeen functioning since1985. This period is characterized as highly integrated in the world economy.However, intra-regional trade has been low within ECO countries during the entire period. Hence, itmakes sense to assess determinants of low intra-regional trade in the ECO region. For this aim, the modelis tested for Pakistan’s exports to nine other ECO member countries for a period of20years. In a paneldata framework, we used the pooled OLS, the random effects and the fixed effects estimations. Weaugment standard gravity model with contiguity, common language, common religion, infrastructure,tariff rates and exchange rates in search of determinants of trade and factors causing low intra-regionaltrade.Our results show that trade is determined by the economic sizes of origin and destination countriesand distance between them. We also find contiguity, common language and common religion asdeterminants of trade. Importantly, the ECO dummy variable, which is the variable of our interest, ispositive and significant in all the three specifications, implying that the ECO membership foster trade inthe region. Our results also show that the policy variables; infrastructure, tariff rates and exchange ratesplay an important role in explaining regional trade flows. The fixed effects model is found preferable tothe pooled OLS and the random effects model.