National Council of Applied Economic Research
Opinion: Sanjib Pohit
Transport connectivity between India’s N-E and the eastern neighbourhood can improve. But trade gains per se seem limited.
After a gap of four years the BIMSTEC (comprising Bangladesh Bhutan India Mynamar Nepal Sri Lanka and Thailand) summit was held virtually in last week of March to deliberate on the prospects and way forward of this regional group.
BIMSTEC group was formed in 1997 but not much happened over the years even though it brings together 1.67 billion people and a combined GDP of $2.88 trillion.
In his address Prime Minister Narendra Modi urged the member nations of BIMSTEC to make the Bay of Bengal bridge of connectivity bridge of prosperity and bridge of security. He argued that BIMSTEC must also move fast on the ongoing initiatives in the field of transport connectivity based on the BIMSTEC’s Master Plan for Transport Connectivity prepared by ADB.
Simultaneously the time has come to take electricity grid inter-connectivity ahead in discussions and introduce it on the ground to ensure energy security.
It must be appreciated that the Prime Minister has been on dot regarding the role of BIMSTEC from India’s point of view. From the political economy context it is a good move to isolate Pakistan and develop closer economic cooperation with our neighbours. It has a positive impact on the development of north-eastern States as it creates level playing field in the production process by reducing transport costs as inputs may be brought from neighbouring countries at a lower cost.
India as well as other neighbouring countries on the east can gain mutually. This way India’s act East policy may strengthened.
However it would be wrong to expect too much from BIMSTEC as some economists argue since it runs against the doctrine of trade theory.
Rationale for trade
Countries engage in international trade for two basic reasons each of which contributes to their gain from trade.
Firstly countries trade because they are different from each other. Nations like individuals can benefit from their differences by reaching an arrangement in which each does things in which it has a relative advantage. That is trade between two countries can benefit only if each country exports the goods in which it has a comparative advantage. This is the basic proposition of the Heckscher-Ohlin theory of trade which states that countries tend to export goods that are intensive in the factors they are abundantly endowed with.
In lay man’s language it implies that a labour surplus economy like India would export labour intensive goods while a capital surplus economy such as US should export capital intensive goods.
Secondly countries trade to achieve economies of scale in production. That is if each country produces only a limited range of goods it can produce each of these goods at larger scale and hence more efficiently than if it tried to produce everything.
It is economies of scale that keep each country from producing the full range of products for itself; thus economies of scale can be an independent source of international trade. Intra-industry trade plays a large role in the trade in manufactured goods among advanced industrialised nations.
If these are the two premises under which countries can gain from trade let us examine to what extent these are applicable for the members of BIMSTEC. As it stands BIMSTEC is essentially a trading bloc of labour abundant economies. All these countries have shortage of capital. Thus the member nations can not gain from BIMSTEC under the first premise.
Can the BIMSTEC members benefit from economies of scale in production? Economies of scale is a phenomenon of capital intensive goods. Since they have comparative advantage in producing labour intensive goods this does not hold for the members of BIMSTEC. In the European Union where this has played a major role in harnessing the gain of free trade a large part of it can be attributed to the intra-firm trade of the multinational enterprises. But they have an insignificant presence in the member nations.
Of late being part of a global value chain have led to gains from trade for countries. All the members of BMSTEC are desperately seeking to be part of global value chain by offering tax incentives. Except Thailand none of them have been successful in this venture. However all members of BIMSTEC aspire to tie up with technologically developed Asian countries like Korea Japan etc. outside this group. Thus there is little scope that members would gain from this channel.
In sum improved connectivity will usher in lower trade cost which could be the driving force for gains from BIMSTEC.
The writer is Professor NCAER