Trade and investment potential among BCIM countries: prospects for a dynamic growth quadrangle

Author:Mohammad Masudur Rahman
Position:Microcredit Regulatory Authority, Dhaka, Bangladesh

Purpose – The purpose of this paper is to explore the trade and investment potential under the ambit of sub-regional cooperation comprising the four contiguous countries of Bangladesh, China, India and Myanmar (BCIM). Design/methodology/approach – The study addressed both intra-regional and intra-industrial trade, applying a dynamic gravity model of bilateral trade flows by product... (see full summary)

1 Introduction

Most of the trade theories address a qualitative question of identifying the trade pattern and how much trade in goods and services are remained as another important concern. The understanding of the determining factors of trade is important task in policy formulation. The thriving empirical study can conjecture the volume of unrealized trade flows and suggest a desirable trade partner and market. Bangladesh, China, India and Myanmar (BCIM) forum, which is a Track-II initiative1 floated in 1999 comprising BCIM, is an effort primarily from the non-government section of the countries who intends to influence policymakers, business people and government representatives to boost-up the regional cooperation by transferring it into growth quadrangle or regional economic development area (REDA). Recently, during the visit of the Bangladeshi Prime Minister in Beijing declared a joint communiqué and agreed to actively participate in and promote the BCIM regional economic cooperation process (March 19, 2010 Financial Express). In view of the ongoing pace of globalisation formation of sub-regional forums or growth zones that could play an important role from the perspective of strengthened global integration of the member countries of the growth zones. Deeper integration among the member countries could help create wide possibilities of business opportunities in many diversified areas. Available studies indicate several advantages emanating from regional or sub-regional forums or growth zones. These advantages include, among others:

  • easy market access;
  • widened scope for realising complementarities among countries of the grouping;
  • economic development within and outside the zone utilizing efficient use of resources; and
  • transfer of technology.
  • The idea of growth zones in the literature of Development Economics and the success of existing growth zones-Mekong Sub-region (GMS) Growth Triangle, Southern China Growth Triangle and the Growth Triangle comprising the Johor State of Malaysia, Singapore and the Riau Islands of Indonesia – strongly inspired the non-government section of these countries to lodge a debate to form a growth zone comprising these four countries. It is argued that formation of growth zones will initiate faster economic growth process by increasing the possibility of efficient use of the region's unused resources, ESACP (2002). Resource endowments in the BCIM region are different from one another, which also supports the pre-condition of the formation of this type of regional integration. China and India have comparatively better technology, more efficient labor force, and improved physical and commercial infrastructure. On the other hand Bangladesh and Myanmar have unskilled and semi-skilled labor force, basic, and intermediate technology. The sectoral composition of GDP of these countries also confirms these complementarities of economic activities among these countries, which shows industrial sector is dominating in China (52 percent of total GDP in FY 2009), agriculture sector in Myanmar (50 percent of total GDP in FY 2009) and services sector in India and Bangladesh (56 and 49 percent of total GDP in FY 2009). Along with strong cultural affinity, the closer geographical proximity and presence of huge informal border trade among the countries, give a strong optimism for forming a regional trading block comprising these four countries.

    The gravity model has become a great powerhouse of trade research in recent years because of the model's empirical success. There are plenty of empirical studies explicitly focused trade flows and trade barriers in a gravity model framework ( Tinbergen, 1962 ; Poyhonen, 1963 ; Wilson and Otsuki, 2005; Baldwin and Taglioni, 2006 ; Helble et al., 2007 ; Hoekman and Nicita, 2008 ; Duval and Utoktham, 2009 ). Gravity model has also been used to estimate the bilateral trade potential ( Batra, 2004 ; Chan, 2005 ; Kalirajan and Bhattacharya, 2007; Christos, 2007 ; De, 2009 ). One of the advantages of gravity model is that it can provide a convincing analytical framework for various trade policy options.

    2 Rationale of the study

    The BCIM sub-regional economic cooperation is perceived to have enormous potentials to generate benefits for the region in general and the weaker parts of the region in particular. The share of intra-regional trade within BCIM countries increasing overtime, e.g. in year 1990 it was 1.1 percent of total world trade, which reached at 4.5 percent in year 2009. However, in case of intra-regional trade it is way behind compared to its neighboring economic blocks, e.g. ASEAN (35 percent of total trade in 2009), and some other very alluring growth zones. In the backdrop of this lower trade orientation, non-government sections of these countries put forward a proposal to form a growth quadrangle comprising these four countries.

    A comprehensive market access to the larger economies such as India and China could open up opportunities for diversifying and expanding export capacity of the less developed economies of the regional grouping such as Myanmar and Bangladesh. Cooperation arrangement among these geographically contiguous areas could provide opportunities for expanded legal trade with positive welfare implications for the local economies and the local population. Deeper integration of the members of the BCIM could create opportunities for technology transfer to poor countries like Myanmar and Bangladesh. These countries could reap the benefits of the relatively advanced technological endowments of India and China which in term could help these countries to develop at a faster pace.

    In addition, an important resource of the region is the huge reserve of natural gas in Bangladesh and NEIs. Besides, there is very large reserve of coal in West Bengal and Assam. Proper implementation of this sub-regional cooperation could combine the resources of the constituent members in order to gain competitive edge in attracting both domestic and foreign investments and promoting export for the mutual benefit of the members involved ( Rahman et al., 2007 ).

    Together with the economic factors, the strong cultural affinity, the closer geographical proximity and presence of a huge informal border trade among the countries also provide strong optimism for forming a regional trading bloc comprising BCIM. Again, BCIM cooperation is expected to help to revive the centuries-old Silk Road running from Chittagong to Yunnan through Myanmar, a fact that will help to facilitate transit and thus trade among these countries. The potential benefit of utilizing the two ports of Bangladesh, i.e. Chittagong and Mongla, is a vast increase in trade and investment in this region and will be particularly useful to India in communicating with its “Seven Sisters” provinces, i.e. Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland and Tripura. For the above reasons, this cooperation is expected to bring about a process that reveals growth potential for the region as a whole, and for north-east India, south-west China and the two least developed country members, Bangladesh and Myanmar, in particular. In this context, to foster BCIM cooperation and make the policy makers proactive it is felt that an in-depth analysis of the potential outcome of closer integration among the four countries should be carried out.

    2. 1 Review of literature

    Since the BCIM initiative is still under process, to date there have been very few studies that have attempted to quantify the potential gain and loss that would be generated as a result of the implementation of this initiative, especially any ex ante analysis; rather, almost all the papers are based on theoretical grounds of the regional trading blocs.

    A gravity analysis of the Andean Community (AC) and MERCUSOR region by Carrillo and Li (2002) concluded that the presence of common borders and availability of land transportation would create 5.7 times and 3.1 times more trade between the countries, respectively, compared with countries that did not have those features. The similarities in culture and closer proximity among the countries can increase the potentiality of economic integration among South Asian countries ( De and Bhattacharyay, 2007 ). The increase over time of trade complementarity indices (TCI) in the South Asian Association for Regional Cooperation (SAARC) region that gives grounds for strong optimism that greater opportunity will arise for intra-regional trade.

    A study on BCIM economic cooperation by Rahman et al. (2007) concluded that depending on the market size and the different stages of economic development, together with their proximity in terms of geographical location, a huge potential existed for trade and investment complementarities among BCIM countries. Using different trade indices, such as Regional Orientation Index (RTOI), Grubel-Llyod Index (GLI) and Trade...

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