Political Economy of Regional Trading Arrangements in South Asia

We examine how the factors conventionally found important for trade in other regions of the world influence trade in South Asia. Our gravity model starts by estimating the effects of economic variables such as per capita income and the size of economies on bilateral trade. We then use a novel dataset by extending the model to evaluate the role of non-economic factors such as geography, political cooperation and cultural similarity among nations. We find that the positive effects of incomes and cultural similarity on trade are largely neutralized by adverse political developments that repress trade within the region.