Institutions, Regional Integration and Bilateral Trade in South Asia: PPML Based Evidence

Saima Nawaz


This paper empirically investigates the role of institutional
framework in promoting bilateral trade through a regional trade
agreement (RTA), namely the South Asian Free Trade Area (SAFTA), using
an institutions-augmented gravity model. Poisson Pseudo Maximum
Likelihood (PPML) estimation technique is used (performed) for a panel
of 11 countries over the period 1996-2015. The initial estimation
results suggest that this RTA is not effective in promoting regional
trade in South Asia. Further empirical analysis reveals that SAFTA
contributes significantly to bilateral trade when the impact of
institutions is controlled for. The key policy lesson emerging from the
analysis is that, given weak institutional structure, a regional
agreement may not produce the desired results. Successful trade reforms
depend on the institutional framework of the countries involved.
Therefore, government should develop institutions to reap the potential
benefits of RTAs. Keywords: Institutions, Regional Integration,
Bilateral Trade, South Asia, PPML

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