Economic Integration: An Analysis of Major SAARC Countries

Purpose-The paper deals with the relationship between GDP, GDP per capita, Exchange rate volatility, and common border on intra-regional trade among SAARC countries. Design/methodology/approach-The methodology implemented is based on the Extended Gravity Model, while the empirical analysis is based on the SAARC countries for the time period 1991-2010. Findings- Results show that GDP, GDP per capita, Exchange rate volatility, and common border on intra-regional trade had significant effect among SAARC countries. However, this effect is poor which reflect through small magnitude of coefficient. Research limitations/implications- The dataset includes annual time series from 1991- 2010 for major SAARC countries including Nepal, Sri Lanka, India, Pakistan, and Bangladesh. However, due to insignificant trade Maldives, Afghanistan and Bhutan are excluded from the study. Due to large heterogeneity in variables and limited role of OLS technique the Generalized Least Square (GLS) method is applied in this study. Practical implications-As political disputes reduced among SAARC countries, the trading activity will be enhanced. Originality/value- The paper differs from the previous ones in introducing the Exchange rate volatility, and common border among the explanatory variables by implementing a GLS technique; this is one of the first empirical applications on SAARC countries. JEL classification: F15, F17