Determinants and Prospects of Intra-regional Trade in the Bay of Bengal and the Andaman Sea (BoBAS) Rim Countries of South Asia: A Gravity Model Simulation Approach

Abstract

Bangladesh, India and Sri Lanka are three important South Asian economies that lie in the Bay of Bengal and the Andaman Sea (BoBAS) rim region. Considering intra-regional trade, these countries are loosely economically integrated, although they have a large potential for sub-regional trade grains. This study examines the determinants and potential of intra-regional trade among these countries. In the beginning, the study estimated the gravity model of trade with a panel random effects estimation for a set of data from 1991 to 2012. Later it investigated trade potential among the countries by a simulation approach that is based on the prior findings of the gravity estimation. The results show that major determinants of intra-regional trade in these countries are size of the domestic market, infrastructure, economic openness, real exchange rate and distance. Countries in the sub-region have high trade prospects and they have not explored the maximum potential of intra-regional trade yet.