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Prospects of Economic Cooperation in the Bangladesh, China, India and Myanmar Region: a Quantitative Assessment

Md. Tariqur Rahman
Research Associates
Centre for Policy Dialogue (CPD), Bangladesh

Muhammad Al Amin
Research Associates
Centre for Policy Dialogue (CPD), Bangladesh

Abstract/ Executive Summary:

The BCIM forum is a Track-II initiative1 that was floated in 1999 and comprises Bangladesh, China, India and Myanmar. It is an effort primarily by the non-government sector of the member countries to influence policymakers, business people and government representatives in boosting regional cooperation by transferring it into a growth quadrangle or Regional Economic Development Area (REDA). The idea of Growth Zones in development economics and the success of existing growth zones – the Greater Mekong Subregion (GMS) and the southern China Growth Triangles, and the Growth Triangle comprising Johor State of Malaysia, Singapore and the Riau Islands of Indonesia – inspired the non-governmental sector of those countries to initiate a debate on forming a BCIM growth zone. It has been argued that the formation of growth zones or REDA will initiate a faster economic growth process by increasing the possibility of efficient use of the region’s unused resources (ESCAP, 2002). Although the overall findings detailed in this paper provide strong grounds for motivating policymakers in the countries concerned to form another new regional economic bloc, the results need to be interpreted carefully. One major limitation is the downward bias of the overall findings, especially for ex-ante analysis, as the simulation considers only merchandise trade and does not take into account the presence of the huge informal trade among these countries. However, to turn this initiative into an economically beneficial regional bloc for the populations of this region, together with tariff reductions for regional imports, the following areas are worth focusing on the immediate term: (a) As BCIM is a Track-II initiative primarily taken by academicians, businesspersons and civil society organizations – including researchers – more awareness-building activities are needed to build greater consensus among policymakers of these countries as well as the public, in order to create pressure on the decision-makers in the government sector; (b) To reap the benefits of a reduction in transportation costs, the immediate realization of the “Trans Asian Railway” is necessary, together with progress of the “Asian Highway”, with the financing assistance from multinational donor agencies; (c) India should play a proactive role in terms of its political and economic commitments in effective operationalization of this regional initiative; (d) The possibility of gas and electricity trade within the region, especially between Bangladesh and Myanmar, should be taken into consideration within the framework of this regional cooperation.

Keywords: Macro-economic, BCIM, Economic gains, Regional cooperation, Economic effects, Trade creation, Trade diversion, Revenue, Welfare effects, Equilibrium analysis

Location: In Bangladesh

Start Date:

End Date:

Program Area: Comparative study

Non-commodity: Business, Market analysis, Socioeconomic

Objectives:

To examine the macro-economic performance of the individual countries and the current level of trade among the BCIM member countries at the regional level.

Methodology:

To quantify the economic impact of regional cooperation among the countries of BCIM, a simulation exercise was conducted. A partial equilibrium SMART model developed by UNCTAD/World Bank was used to carry out this ex-ante analysis. To estimate the impact of full, moderate and partial liberalization on total trade, welfare and trade revenue earnings of BCIM countries, the SMART simulation technique focused on one importing market and its exporting partners, and assessed the impact of tariff change scenarios by estimating new values for a set of variables. To model consumer behaviour, SMART relies on the Armington assumption, which implies goods that are imported from different countries, although similar, are imperfect substitutes. In particular, the adopted modelling approach was based on the assumption of imperfect substitution between different import sources (different varieties). The relationship between changes in the price index and the impact on total spending was determined by a given import demand elasticity, i.e., the extent of the between variety allocative response to change in the relative price was determined by the Armington substitution elasticity. To measure the impact of different trade policy options, and to anticipate the likely economic effects of various policy alternatives, three scenarios were constructed. The first scenario estimated the trade, welfare and revenue effects under full liberalization by assuming that the respective country would eliminate all existing import tariffs and provide duty-free access for all merchandise products from BCIM countries. On the other hand, the second and third scenarios estimated the trade, welfare and revenue effects under moderate and partial liberalization by assuming that the respective country would eliminate 75 per cent and 50 per cent import tariffs, respectively, from existing levels for all products from BCIM countries. The prospects were assessed of another possible regional bloc in this region, which might be defined as SAFTA + Myanmar + China economic cooperation. In the case of SAFTA + China + Myanmar, three alternative scenarios were estimated similarly to that for BCIM, i.e., the considered countries would cut 100 per cent, 75 per cent and 50 per cent tariffs from their existing levels, respectively, for their partner countries under different scenarios. The possible “total trade effect”, together with the “trade creation and trade diversion effect” and “welfare and revenue effect” of these two blocs were measured under the three different scenarios of tariff cuts considered for BCIM cooperation. Import demand elasticity and import substitution elasticity were taken by default, which was determined by SMART model, whereas export supply elasticity was taken as infinity.3 Together with measuring different impacts for each country, the simulation identified the top 15 trade-generating products where negotiation efforts would need more attention to maximize the benefits of economic cooperation within the proposed region. Data were extracted from WITS (base year data for tariffs is 2007) and extracted at the HS 6-digit level. The bound tariff rate was avoided in all cases. Some limitations are noteworthy such as the fact that both the gravity and SMART models captured only static gains from trade. The study also considered only the free movement of goods and withdrawal of tariff barriers; however, the movement of services, capital and labour, and the removal of non-tariff barriers were ignored. The impact of non-tariff barriers was not quantified for simplicity purposes.

Source of Information: Asia-Pacific Research and Training Network on Trade (ARTNeT), Working Paper Series, No. 73, July 2009

Article Link (Online Journal): http://hdl.handle.net/10419/64276

Funding Source:

Total Budget (Tk.) :

Achievement/Findings:

Although the overall findings detailed in this paper provide strong grounds for motivating policymakers in the countries concerned to form another new regional economic bloc, the results need to be interpreted carefully. One major limitation is the downward bias of the overall findings, especially for ex-ante analysis, as the simulation considers only merchandise trade and does not take into account the presence of the huge informal trade among these countries. However, to turn this initiative into an economically beneficial regional bloc for the populations of this region, together with tariff reductions for regional imports, the following areas are worth focusing on the immediate term: (a) As BCIM is a Track-II initiative primarily taken by academicians, businesspersons and civil society organizations – including researchers – more awareness-building activities are needed to build greater consensus among policymakers of these countries as well as the public, in order to create pressure on the decision-makers in the government sector; (b) To reap the benefits of a reduction in transportation costs, the immediate realization of the “Trans Asian Railway” is necessary, together with progress of the “Asian Highway”, with the financing assistance from multinational donor agencies; (c) India should play a proactive role in terms of its political and economic commitments in effective operationalization of this regional initiative; (d) The possibility of gas and electricity trade within the region, especially between Bangladesh and Myanmar, should be taken into consideration within the framework of this regional cooperation.

Knowledge Management: Report/Proceedings