Pakistan Institute of Development Economics, Islamabad

Intra-ECO Trade: A Potential Region for Pakistan's Future Trade

Author(s): Jahangir Khan Achakzai
Source: The Pakistan Development Review, Vol. 45, No. 3 (Autumn 2006), pp. 425-437
Published by: Pakistan Institute of Development Economics, Islamabad
Stable URL: http://www.jstor.org/stable/41260771
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ThePakistan Review
Development
45: 3 (Autumn
2006)pp.425-437

Intra-ECO Trade: A Potential Region for

Pakistan's Future Trade

JahangirKhan Achakzai

A standard model
gravity wasappliedtoestimate
themagnitude ofpotential
tradeflows
between
Pakistan
andthenineECOmember Themajor
countries. issueinthisanalysis
is to
that
explore Intra-
ECOtradehasgreat forPakistan
potential andthatitgotlowershare
than its
Theresults
potential. from model
thegravity confirmthat
ECOhasa positive andsignificant
trade.
onintra-regional
impact Itsuggests
that trade
intra-regional islower thanwhatwould be
bythegravity
predicted equation,suggesting scopeforregional
greater integration
among the
ECOmember Thisis especially
countries. thecasebetweencountries havea common
that
border.
geographical Theprivilege
ofgeographyandtheexistence
oftrade preferences
among
ECOmembers could
beexpandedtocoverpotential toneighboring
trade countries.

JELclassification:F10, F12, F15

Keywords: International
Trade,Pakistan'sTrade,Gravity
Model

1. INTRODUCTION
There has been a significant revival of regionalismin the world. Regional
trade
preferential agreements of differentkindshavebeenestablished. As a resultof such
agreements, tradehas increasedrapidly.The successof theEuropeanUnion
intra-regional
and ASEAN in promoting internationaltradeand stimulating economicdevelopment has
also encouraged toformeconomicgroups.Thosecountries
othercountries thatdo notform
a tradegroupwouldexperience a reductionintheirtradeshares.
ECO membercountriesinclude:Pakistan,Iran,Turkey,Afghanistan, Azerbaijan,
Kazakhstan, Kyrghyzstan,Tajikistan,Turkmenistan andUzbekistan.
Seen in thisperspective, in 1964 Turkey,Iran and Pakistanput foundation of
"RegionalCooperation forDevelopment (RCD)". Under RCD thecooperationwas made
in thefieldsof trade,communications, banking,industry,politicaland culturalaffairs,
railway and In
transportation. 1985, the name of RCD was changedto Economic
Cooperation (ECO). Afterthedisintegration
Organisation of SovietUnionit was realised
to cooperatewiththe'States' separatedfromRussianFederation. In May 1992,notonly
theCentralAsianStatesgotthemembership ofECO, butalso Afghanistan was included
in ECO. In thisway,themembersof ECO increasedfromthreeto tenas Pakistan,Iran,

Khan
Jahangir Achakzai
<jachakzai@yahoo.com>isAssistant intheEconomics
Professor Department
ofBalochistan Quetta.
University,
Author'sNote:Theauthor
would liketothank hismentor
DrRobertTehforhisvaluable
guidance;
assistance
skillful andconstant
supportthathe provided himduring workin World
hisresearch Trade
(WTO)Secretariat
Organisation Geneva.
Moreover, heowesgratitude
toDrPatrickLowDirector
Economic
Research himanopportunity
forproviding towork ina prestigious
institution
ofWTOforseekingtherequired
assistance
underthe"Ph.DSupport
Programme" ofWTO.Heis thankfultoDrMichel andDrRoberta
Fisher
ofWTOfortheir
Piermartini valuable
inputs.

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426 Khan
Jahangir Achakzai

Turkey,Afghanistan, Azerbaijan,Kazakhstan,Kyrghyzstan, Tajikistan,Turkmenistan

andUzbekistan.
As foras thecase of Pakistanis concerned,thecountryhas a policyof having
closerand growingrelationswithall countriesin generaland theneighbouring ones in
particular.The establishment ofRCD (RegionalCooperation forDevelopment)in 1964 is
a steptowardsthisend. The revivalof RCD underthenew nameof ECO (Economic
Cooperation Organisation) in 1985has institutionalised
thetraditional relations.
The countries oftheECO andtheareas,whicharenowknownas Pakistan,usedto
have traderelationsin thepast and thecaravanscarrying goods fromIndusto Persia,
CentralAsia and then,bringingin returnconsumablegoods to this area. So these
countrieshadbeentrading witheachothersincecenturies.
The availableinformation presentsa dismalpictureof thecurrent stateof intra-
regional trade in the ECO region.The member countries of the ECO stillrelyrather
heavily on industrial economies fortheirexports and imports. The mutual tradein the
region has been stagnantovertime.The shareof intra-regional tradein theworldtradeof
countriesof theregionremainedmoreor less stagnantaround6.0 percentin the year
2005. The intra-regional tradecontinuestoretaina marginal character inECO.
Keeping in view theabove background ofECO countries in termsof statusoftheir
interrelated low shareof trade,thereis a need to strikethecore issue in theirmutual
trade.The important and alarmingquestioncomingup is thatwhytradeamongstECO
countries is so low and itcouldnotriseup? It is essentialto respondto thiskeyquestion
as itformsthebasis of thispaper.The restofthepaperhas beendevelopedto respondto
thisquestionand themethodology presentedhas been directedtowardsthisissue and a
well devised model has been placed to identify the magnitudeof the mutualtrade.
Simplistically it can be said thatthereexistsuntapped/unexplored in the
potentialities
region,whichrequiresto be harnessedthrough collaborative plan and actionto achieve
thetarget ofhigherintra-regional tradewithintheregion.

2. METHODOLOGY
The model,methodology
usedanddataissuesarediscussedin thissection.

2.1. Model
A standard modelis employedto examinethecentralhypothesis
gravity thatIntra-
ECO tradehas greatpotentialforPakistanand thatthecountry gotlowersharethanthe
in theIntra-regional
potential trade.The model,accusedin thepastof lackingtheoretical
foundations,has regainedrespectability
and is now acceptedas a well groundedtool to
analysebilateraltradeflows.1 The gravityequationbasicallystatesthattradebetween
twocountries increaseswiththeirsize and decreaseswiththeirdistance,in a waythatis
reminiscent of Newton's law of gravitywhichsays thatthe attraction betweentwo
heavenlybodiesis proportionalto theproductoftheirmassesandinversely relatedto the
distancebetweenthem.The gravity modelof bilateraltrade,in itsmostbasic form,says
thattradebetweencountryi and country j is proportionalto theproductof GDPi and
'Discussions
onthetheoretical
foundations
ofthegravity aretobefound
equation inDeardoff
(1995),
Frankel
(1996)andBaldwin others.
(1993)among

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 Intra-ECO
Trade 427

GDPj an inverselyrelatedto thedistancebetweenthem.Otherexplanatory variablesthat

areoftenaddedareothermeasuresof size namely,populationand landareasanddummy
variableslikecommonborders,commonlanguageand commonmembership in regional
tradingarrangements.
Using the model, trade is estimatedas a functionof a numberof basic
determinants among a referencegroup of countrieswhich are assumed to exhibit
"normal"traderelations.Parameter basedon thereference
estimates groupare appliedto
thecountrieswhose potentialtradeflowsare of interest.The actual tradevolumesof
thesecountriescan thenbe comparedto thetradevolumespredictedbythemodel.
Generally,thegravitymodelconsidersthreefundamentaldeterminants oftrade:

(1) Size oftheeconomyusuallycapturedbyGDP/GNP,

(2) levelofdevelopment, byincomepercapita,and
as presented
(3) transaction distance.
costs,capturedbygeographical
Since itsinception byTinbergen (1962), thismodelhas becomea popularmethod
ofanalysisdue to itsparsimony andto itsempiricalrobustness.WorkbyAnderson(1979)
and Bergstrand (1985) servedto place thisat firstpurelyempiricalmodel on a solid
theoretical
footing.
Due to its simplicity - in the sense thatit demandsfew variablesand can be
estimatedwithdata thatstemsfromreliableinternational - and because it
data sources
includesgeography as a determinantof trade,ithas becomea favouritemeansto analyse
regionalintegration agreements. Further, althoughit was originallymeantto describe
tradeamong rich nations,the gravitymodel has provento be equally good in the
descriptionof tradebetweenpoor countries,and betweenmore and less developed
countries.
Formally, thegravity equationcan be written as:

77/= pO+ pi * GDPi + P2* GDPj + p3* PC/i+ (34*PCIj+ $5* DISTij
WhereTij is thetradebetweencountriesi andy,GDP and PCI are therespectivegross
domesticproductandpercapitaincomeandDIST is thedistancebetweenthem.
equation.As Hamiltonand
It is worthnoticingthatpricesdo notenterthegravity
Winters(1994) pointout,"thisdoes not implythatpricesare ineffective in allocating
resources. Rather,themodelshouldbe viewedas a reducedformin whichGDP , PCI and
distancearetheultimate determinantsbothoftradeandofprices(andexchangerates).2
We expect trade to be positivelyaffectedby economic size (GDP) and
negativelyrelatedto distance(DIST). The coefficientson per capita income (PCI)
could be positiveor negative.3Since tradeis expectedto increasewiththe size of
domesticeconomy (GDP), the expected sign of pi is positive. The GDP of the
exportingcountrymeasuresproductivecapacity,whilethatof the importing country
measuresabsorptivecapacity.

andWinters
2Hamilton p 81.
(1994),
3Theimpactofpercapitaincomeon trade is notstraight On theonehand,
forward. theLinder
saysthat
hypothesis trade
intra-industry when
increases havesimilar
countries income.
percapita Ontheother
hand,thecomparative - which
theory
advantage is premisedon different
factor - predicts
endowments a
ininter-industry
decline trade
when havesimilar
countries income.

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428 Khan
Jahangir Achakzai

GDP per capitaindicatesthe stageof development of thecountries, it explains.4

First,countries withhigherincomepercapitamaybe expectedto trademorethanpoorer
countriesbecausethelatter tendtohavea production structure thatgivesmoreweight tonon-
tradedgoods(subsistence and
farming services). With development, trade in manufactures
increasesallowingformorecomplementary trade(manufactures againstrawmaterials) and
intra-industryexchanges.Second,in so faras development is ledbya processofinnovation
orinvention ofnewproducts, exports ofhighincomecountries willgrowwiththedemandfor
newproducts. as
Finally, Frankel (1996) pointsout, rich countries maytrademorethanpoor
onessimply becausetheyalsotendtobe moreopentotrade.
Distance,in turn,maybe seen as a generalproxyforthe costsof tradebehind
whichlie a varietyof factors.Since a largepartof thesecostsare madeup by transport
costs,variousstudieshavegonethrough verydetailedandcomplexmeasuresof shipping
distances.5 Differentiatingbetween measures of landandsea distances, betweenharbours
and fromthemto thetradingcentres,and takingintoaccountspecificgeographical and
politicalconsiderations thatmay at certaintimesmake some routesmorecostlythan
others.Yet, the generalagreement seems to be thatthestraight line (in factthe great
circle)betweencapitalsworksas wellas morecomplexmeasures.
In additionto thephysicaldistancebetweencountries, otherfactorsdo have an
impact on thecosts of doing internationalbusiness. Cultural andtheavailability
affinities,
of information abouttheforeignmarketcan be expectedto play also a keyrole in the
determination of thesecosts.To theextentthatneighbouring countriescan be expectedto
sharemanyculturaltraits,and thatinformation fromacrosstheborderis typically more
readilyavailable,a dummyforcommonborders, or adjacency,is normally also included
inthegravity equation.
Finally,and forthesame reasons,thesharingof a commonlanguageshouldalso
be included.Some studiesconstrainall languagesto have the same coefficient while
othersincludelanguagespecificdummiesto capturethiseffect.In thepresentcase, one
dummy, forlanguageis includedinthemodel.
Once all theabove factorsare considered, it is possibleto asses whether a formal
tradeagreement is beingeffective or notin concentrating tradeamongits members.To
thispurpose,dummyvariablesof bloc membership are added to thebasic equation.If
bilateraltradeexceeds (or lies below) the 'normal'levels of trade(normality being
definedas thesample'saveragebilateraltradeflows)theabnormality will be pickedup
bythebloc variables.
The advantageof this methodover other measuresof success of formal
agreements, saytheincreaseinbilateraltradeflowsovera periodoftime,is thatitallows
isolationof the effectof the agreementfromthe size, incomeand the geographical
locationofthecountries involved.TradebetweenPakistanandAfghanistan, forexample,
mayseemto be exceptionally largeonlybecausethesetwocountriesare neighbours. If
proximity alone explainstheintra-regional concentration of trade,therecoveryof these
economiesin recentyearswouldshowitselfin therapidgrowthof theirbilateraltrade
flowsindependently of anytradeagreement amongthem.If thatwerethecase, a non-
significant bloc coefficient would show that,what at firstsightstrikesas a highly

4SeeBrada
andMendez (1985)andFrankel
(1996).
5For
a review
ofthese
seeFrankel(1996).

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 Intra-ECO
Trade 429

concentratingtradeagreementis only the expectedoutcomeof whatKrugmancalls

'naturaltrading forsize anddistanceand whatever
Butifaftercontrolling
partners'. other
or impedetradeamongnationsthebloc coefficients
variablesthateitherfacilitate show
thenone can attribute
results,
significant thisextraeffectto thetradeagreement.

2.2. Estimation
here:
basic equationwas estimated
The following

Ln(Xij) = P0+ pi Ln(GDPi)+ p2 Ln(GDPj)+ p3 Ln(PCIi)+ p4 Ln(PCIj)+

P5 Ln(DISTij)+ P6 (ADJij)+ P7 (LANGij)+ P8 (ECO)
j (in thousandof dollarsat current
i to country
WhereXij are thetotalexportsof country
exchangerates).
GDPi is grossdomesticproductofcountry i.
is
GDPj gross domestic of
product country j.
PCIi is percapitaincomeofcountry i.
PCIj is percapitaincomeofcountry j.
DISTij is distancebetweencountry i andcountry j.
ADJ is dummyforcommonborders.ADJ takesa value of 1 if twocountries
havecommonborderand0 otherwise.
LANGij is thedummyvariableforcommonlanguewhichtakesa value of 1 if
twocountries havecommonlangueand0 otherwise.
ECO is dummyforECO blockcomprising 10 countriesnamely;Afghanistan,
Azerbaijan, Iran,Pakistan,Kazakhstan, Kyrgyzstan, Tajikistan,Turkey,
Turkmenistan, andUzbekistan.
ECO is 1 whenbothcountriesi and j are partof the agreementand zero
otherwise.
As tradeis expectedto increasewithsize of domesticeconomy(GDP), level of
development(PCI) andcommonborder(ADJ) anddeclineswithdistance(DIST), pi, p2,
P3,P4 andP6 shouldbe positive,andP5 negative.

2.3. Sample and Sources

The studycovers137 countries of 10 ECO countries,
consisting 7
15 EC countries,
SAARC countries, 3 NAFTA countries,11 LAIA countriesand91 othertrading of
partners
ECO membercountries. Ninetypercentof ECO exportsare coveredby thissample.That
gives 18632 observations(137*136). However,the model reportslower numberof
observationsbecauseoftworeasons.First,therearesomecountries,whichdo notexportto
in thedataset.Second,sincethemodelwas estimated
all partners instances
in logarithms,
ofzerotradebetweentwocountries weredroppedfromthedatasetsusedinestimations.
The gravityequationwas estimatedfortheyear2005. The exportvalues forthe
ECO countriesweretakenfromtheUN COMTRADE database.The data forGDP and
PC GDP was obtainedfromWorldBank's "WorldDevelopmentIndicators".The data
relatedto the distancebetweencapital cities,countriessharingbordersand common
languagewas obtainedfromFrenchCentreforExploratory studiesand International
Information etd' Informations
(Le CEPII, Centred'EtudesProspectives Internationales).

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430 Khan
Jahangir Achakzai

2.4. The DependentVariable

Thereare twopossibilitiesformeasuring thesize of a tradeflow:at thepointof
export or at the of
point import.Apart from the well-known -
in valuation
differences
exportsare valuedat free-on-board and
prices, imports at
usually cost-insurance-freight
- and apartfromminordifferences
prices due to thetime-lagsbetweentherecording of
exportsbytheexporting countryand therecording of thesameflowas an importby the
importing country,these two measurements should producethe same results.This
analysisuses mostlyexport data, mostof them obtainedfromthe UN COMTRADE
database.

2.5. The Treatmentof Zeros

The dataon bilateraltradeflowsis boundto showsomezeros.These mayreflect
eithertheabsenceof trade,or simplythepresenceof verysmallamountsof tradethatfor
statistical
reasonsare reported as zeros.This posses a methodological problemsinceall
variablesin thegravity modelarein log formandthelog ofzerois notdefined.Thereare
threewaysofdealingwiththisproblem.One ofthemreplaceszerobyverysmallfigures,
say one thousanddollars.Conceptually, thisis an attractive
possibilitybecauseit allows
thekeepingofall observations inthesampleincluding thosethatdue to theirsmallnessin
valuemaynotappearinthestatistical records.
The problemwiththismethodis thatthelog of verysmallfiguresis a relatively
largenegativenumber. Thus,smallbilateraltradeflowswillbe givenverylargeweights.
Anothermethodincludesthe zeros and uses a semi-logformulation thatis the
estimatedwith the Tobit techniquewhich takes accountof truncateddata for the
dependent variable.Finally,a thirdpossibilityis simplyto excludethezero entriesfrom
thesampleand estimateit withOLS.6 This latteris thesimplestof all methodsand has
been widelyused in previousestimations of the gravitymodel. This is the method
followedhere.As Baldwin(1994) putsit "Withoutquestionthe(second) methodis the
rightapproach.It is howeversomewhatmoredifficult and moststudiesshow thatthe
resultingestimatesare not affected
substantially by thechoiceoftheapproach".

2.6. The EstimationTechnique

The modelwas estimatedusingtheOLS technique.The resultsare presented in
Table 1. All basic gravity
variablesare significant
and have theexpectedsign.The bloc
coefficient
showsignificant valuesforECO.

3. RESULTS
The resultsof the model showsthatthe threestandardgravityvariables(GDP,
GDP per capita and distance)are highlysignificant at 5 percentlevel of
statistically
The same is thecase withtheadjacencyand languagevariableswhichare
significance.
also significant at 5 percentlevel of significance.
statistically All variableshave their
expectedsigns. Table 1 the
presents empirical results of the gravitymodel.The model's
overallperformance is quitegood andcomparesfavourably withotherstudies.

6For
a discussion
onthedifferent
estimation seeFrankel
techniques pp145-1
(1996), 46.

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 Intra-ECO
Trade 43 1

Table 1
ModelEstimation
Gravity DependentVariableis TotalExports:
MethodofEstimationOLS
Variable ExpectedSign Coefficient ^-statistic
GDPi + L095 102.13
GDPj + 0.775 89.892
PCIi + 0.076 5.67
PCIj + 0.076 6.225
DISTij - -1.268 -56.505
Adjacency + 1.062 9.183
Language + 0.915 18.89
ECO 1.132 4.34
NAFTA -0.981 -1.664
EC -0.321 -2.048
SAARC 0.803 1.767
ASEAN 0.848 3.456
LAIA 0.409 1.965
Constant -27.934 -82.808
AdjustedR2 0.64
No. Of
Observations 16265

As expected,tradeincreaseswithbothdomesticand foreignGDP and withper

capita income,and falls withdistance.Significant coefficientsforGDP confirmthat
international tradeis strongly affectedby thetradingpartners'incomes.The estimated
coefficient on the log of the exporting countryGDP at 1.1 indicatesthatwhenGDP
increasesby 1 percent,tradeincreasesby 1.1 percent.In case of importing countrythe
coefficient is 0.78, indicatingthatwhenGDP increasesby 1 percent, tradeincreasesby
0.78 percent.
The GDP per capita coefficient is also significant indicatingthat
statistically,
richercountriesdo indeedtrademorethanpoor ones. The coefficient on the log of
country f s percapitaGDP is about0.08, indicating that tradeincreasesby 0.08 percent
whenper capita GDP is increasedby 1 percentin thecase of exporting country.The
valueof thecoefficient on thelog of theimporting country percapitaGDP is also 0.08,
showing that 1 percent risein percapitaGDP brings 0.08 percent increase in trade.The
smallvaluesof thepercapitaGDP explainthefactthatpoorercountries tradeless with
eachother.
The resultsof GDP andpercapitaGDP are moreor less thesame whencompared
withthefindings by otherstudies.For example,Clarete,Edmonds,and Seddon(2002),
witha sample of 83 countriesreportexactlythe same coefficients (1.1 for GDP of
exporting country and 0.8 for importingcountry'sGDP). Frankel(1996), witha sample
of 63 countries findsa coefficientforGNP of 0.93 in theyear1992. His findings forper
capitaGNP during thesame are
periods reported to be 0.13.

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432 Khan
Jahangir Achakzai

The coefficient on thelog of distanceis about-1.27 indicating thatwhendistance

betweentwocountries is higherby 1 percent, tradebetweenthemfallsby 1.27 percent.
The value of the distance coefficientis large, reflectingthat transportation and
communication among most member countriesare generally more costly and act as a
significantbarrierto trade.Cost-increasing tradefrictions reducethe amountof trade
observed;thegreaterfriction, thehigherproportion of givenexpenditure thatgoes on
costs ratherthanthe goods itselfand the smallerthe incentivefortrade.This heavy
impactofdistanceis in linewithfindings byotherstudies.Frankel(1996), witha sample
of 63 countriesbetween1965 and 1992 findsa coefficient fordistanceof -0.77 in the
year1992. Hamiltonand Winters(1992) usinga measureof distancethatcombinessea
distanceplus theoverlanddistancefromportsto theeconomiccentresof thecountries
concerned(19 industrial countries and 57 LDCs), geta coefficient of-0.8 in 1984-1986.
Baldwin(1994), controlling foradjacencyand usingthe greatcircledistancebetween
capitalsfindscoefficients -0.88. Bikker(1987), without controlling foradjacencyreports
a coefficientfordistanceof -1.1. And Boisso and Farrantino (1995) findscoefficient
-1.5 withoutcontrolling foradjacency.
In thecase of adjacency,theresultsfoundherearea bithigherwhencomparedwith
thepreviousstudies.The valueof thedummyforadjacencyis 1.062.Sincethedependent
variableenterstheequationin logarithmic formthecorrect waytoreadthiscoefficient is to
takeitsexponent. This meansthat,forinstance, twobordering countries weretrading189
percent[exp(1.062) = 2.89] morethantwononadjacentcountries. The adjacencydummy
beingsignificant indicatesthatthe extentof tradeflowsbetweencountriesis, ceteris
paribus,higherifthesecountries sharea commonborder.Thisjudgment of 'plausibility',
however,is largelya subjectiveone. It is difficult to have a priorjudgmentof whatthe
valueof thisvariableshouldbe. Indeed,a reviewof previousstudiesshowsthat,although
adjacencyis generallysignificant, the value of the coefficient variesgreatlywiththe
samplesstudied.Hamiltonand Winters(1992), forinstance,finda coefficient 0.8. In
Baldwin(1994) adjacencyhas a coefficient ofonly0.28. Frankel(1996) getscoefficients of
around0.60 fortheyearsbetween1980and 1992.
Finally,thedummyforcommonlanguagewitha coefficient of 0.92 also showa
heavyimpactupontrade.This is a normalfinding in gravitymodelsestimations. Frankel
(1996) findsa coefficient thatfluctuates between0.33 and 0.77 overtime (1976 to 1992)
whennine languages(English,Spanish,Arabic,Chinese,French,German,Japanese,
Dutch,andPortuguese)areconstrained to havethesamecoefficient. Whenthefivemain
languages are allowed to have differentcoefficients he finds that Englishand Chinese
appear to be especially important.Soloaga and Winters (1999) find significant
coefficientsforSpanish(witha meanof 1.93 over the years 1980 to 1996), English
(mean0.33) andArabic(mean2.19).

3.1. Bloc Effects

If therewerenothingto thenotionof tradeblocs,thenthefivebasic variablesin
thegravityequation - size, per capitaincome,bilateraldistance,commonborders,and
commonlanguages - wouldsoak up mostofthevariation in bilateraltradeflows,leaving
littleto attribute
to a dummyvariableindicating whether twocountriesare membersof
thesameregionalgrouping. Variationsin intra-regional
tradewouldbe due solelyto the

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 Intra-ECO
Trade 433

proximity of countriesand theirrates of economic growth.The dummyvariable

represents when both membersof the countrypair are among the ECO bloc. The
estimatedcoefficient of ECO is significant statistically. The coefficient estimateis 1.1,
indicatingthat two membersof ECO countriestrade 210 percentmore among
themselves, afterholdingconstantforGDP, proximity, and theothergravityvariables,
thantwootherwise similarcountries would[exp(l.l) = 3.1].
The resultsof thecoefficient of ECO bloc dummyare in line withtheprevious
of
study Clarete,Edmonds, and Seddon (2002). Witha sampleof 83 countries thestudy
"Asian regionalismand its effectson trade"reportsthevalue of 1.7 forECO dummy
coefficient. The value of the bloc dummycoefficient is lower in the presentstudy.
Perhaps, one of the main reasons of this lower trend is the large number(137) of
countries in thedata setof thepresentstudy.Accordingto theirfindings ECO countries
tendedto trademoreintensely among themselves at the expense of trade with therestof
the world.Estimatesshowedthat intra bloc trade in the ECO region was higherat a
statisticallysignificant level in 1995 and 2000 thanwouldbe expectedif thecountries
werenotmembers ofECO.
Out of the six preferencevariables three (ASEAN, LAIA and ECO) are
statistically significant at 95 percentconfidencelevel, while among the rest three
SAARC gives positivevalue but it is not significant statistically. In case of EC the
coefficient forthedummyvariableis negativewitha statistically significant value.
The resultsfor NAFTA bloc witha negativesign of dummycoefficient are
reported to be insignificant statistically.For NAFTA bloc the same resultis reported by
Frankel.Accordingto him the lack of significance could be due in partto the small
number ofobservations: thereareonlythreepairsofcountries inNAFTA.
The dummyvariableformembership in the same regionalgroupingSAARC is
also notsignificant indicating
statistically, thatthepreferential trading agreements among
these seven countriesdid not yield trade creationbenefits.The previous studies
conducted confirm theinsignificant effectin case ofthisbloc.
The ASEAN preference arrangement showslargepositiveeffects. The highvalue
of thiscoefficient may suggestthatthe economicintegration effectsof ASEAN are
strongenough for the member countries of this group. In the estimates of the present
study the value of ASEAN dummy coefficient is no doubt large and statistically
significant butif comparedwiththefindings of Frankel(1996), it is stilllowerthanhis
findings. More or less thesamedifference is reported by Clarete,Edmonds,and Seddon
(2002). Their for
explanation why the results of their studydiffer fromearlierresearchis
thatthe data used in theirestimatesincludednew membersof ASEAN, namely
Cambodia,Lao PDR, Myanmar, and VietNam; whiletheearlierestimatesdid not.As a
groupof countriesthatare less developedand less integrated intotheglobal economy
thanthepreviousfivemembercountries of ASEAN, theirinclusionin thegravity model
may have diluted the effectof ASEAN on itstrade within the PTA. The same explanation
seemstrueinthecase of thepresentstudy.
Thedummy forLAIA blocalsoreports a positiveandstatistically significantvaluebut
theresultfortheEC arrangements arenotpositive.I do nothavea goodexplanation to the
negative value of EC bloc.Perhaps, the absence of all the trading partners of EC in thedata set
might be oneofthereasonsforthenegative valueofthisimportant economic integration.

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434 Khan
Jahangir Achakzai

4. PROJECTING PAKISTAN'S POTENTIAL TRADE

WITH ECO COUNTRIES
In this section,the model is exploredto predictPakistan'sexportsto all the
membercountriesof theECO region.Using theparameter estimatesproducedby the
gravity equation,we comparethetradevolumespredicted by themodelwiththatof the
actual tradevolumesof the membercountries.This approachinvolvesanalysingthe
differencesbetweenactualandpredicted figuresforPakistan'sexportsto ECO countries.
Therefore, in this the
analysisfirstly, method of predictionwill be explained,and
secondly, theresultsofthepredictionswillbe presented.

4.1. MethodofPrediction
The studyconcentrateson analysingtheresultsofPakistan'spredicted
exportsby
the
using following equation.
Ln(Xij) = -27.93 + l.lLn(GDPi) + OMLn(GDPj) + 0.08 Ln(PCIi) + 0.08
Ui(PCIj) -'21Ln(DISTij) + 1.06(ADJij)+ 0.92(LANGij)+ 1.13(ECO)
The data for membercountriesGDP, PC GDP, the distancebetweencapital cities,
countriessharingbordersandcommonlanguageis utilisedto estimate trade.
predicted
The exercisewouldfollowto applythevaluesof GDP etc.forPakistanand ECO
membercountries, and estimate"normal"tradeflowsby inserting thesefiguresintothe
aboveequation.This givesus an indicationofthepredicted tradevolumeswhichprevail
betweenthesecountries.
As can be seen fromTable 2, Pakistan'sactualexportsto ECO membercountries
werebelowthelevelspredicted bythemodelin each butone of thecases examined.The
exception is foundforPakistan'sexportsto Turkey,wheretheactuallevel is 12 percent
higherthanthepredictedvalue. Whileon theotherextreme,in case of Tajikistanthe
exportsare only3 percentof thepredictedvalue and still97 percentpotentialexistin
case ofPakistan'sexportsto thatcountry.Afghanistan,beingthe secondbiggestmarket

Table 2
Pakistan's PredictedTradewiththeReference
Group
(Thousand
US$)
Partner Actual Predicted Actual
Country Exports Exports Predicted
Ratio
Afghanistan 222316.7 228463.7 0.973094
Azerbaijan 1811.428 8813.905 0.205519
Iran,IslamicRep 41775.36 395510.2 0.105624
Kazakhstan 11291.11 91980.18 0.122756
KyrgyzRepublic 1128.448 12934.89 0.087241
Tajikistan 618.282 17072.92 0.036214
Turkey 110097.9 98044.97 1.122933
Turkmenistan 2094.967 15134.69 0.138421
Uzbekistan 7570.992 74867.81 0.101125

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 Intra-ECO
Trade 435

forPakistan'sexportsafterTurkeyand havingcommonborderwithPakistanbroadly
matchesthepredictedvalue. The country received97 percentof theexportswhichthe
modelpredictsforher. While in case of Iran the exportsare only 10 percentof the
predicted one, despitethefactthatthecountrysharesborderwithPakistan.Amongthe
CentralAsian countries,Azerbaijanis the majormarketforPakistan'sexportswhich
meets20 percentofthepredicted exports.
The resultsclearlyindicatethatthereis considerablescope foran increasein
Pakistan'sexportsto ECO member countries.
We have estimatedthemagnitude of potentialtradeflowsbetweenPakistanand
thenineECO countries. Thesetradeflowshavegrownin therecentyears,particularly on
thesideofPakistan'sexportsto thesecountries, buttheystillaccountedfornotmorethan
sixpercentoftotalexportsofPakistanin 2005.
Usingelasticityestimatesgeneratedby thegravitymodelfor2005, we compute
predictedtradevolumesforPakistanwiththe ECO membercountries.We findthat
Pakistan'sexportvolumesare close to theirpredictedlevel in thecase of Afghanistan,
while in the case of Turkeytheyeven exceed the predictedlimit.There exit ninety
percentgap betweenthepredictedand actualtradevolumeof Pak-Iranbilateralexports,
as thecountry at presentis realisingonlytenpercentof theexportsfromPakistan.
By far the strongestpotentialfortradegrowthemergesin thecase of Iranas well
as all the six centralAsian countrieswhichare receivingless thanfifteenpercentof
Pakistan'sexports.Onlyin thecase of Azerbaijanitis 20 percent.
While the rationalefor expansionof Pakistan'strade withECO countriesis
obvious,groundrealitiesleave muchto be desired.Pakistan'stradewithECO has never
exceeded6 percent.This seeminglyinsignificant level of tradeis not indicativeof a
paucityof potential, butrathera reflection factorsthatmustbe
of severaltrade-inhibiting
overcomebeforePakistanhas a chanceof expandingits tradewithECO countriesto a
meaningful level.
These constraints include:Non-availability of exportablesurplusesof desired
specifications, in
inefficiency production processes,financial constraints, trade
restrictive
practices,communication gaps,customsprocedures andtransportation facilities.
Besides economicfactorsthereare politicalfactorscausinga declinein thetrade
relationsof ECO countries.Due to thesefactorstheorganisation has remainednotable
more for its potentialsthan its accomplishments. The ECO is to date shorton
accomplishments. At presentthereis moreevidenceof competition thanof cooperation
amongthecountries oftheregion.

5. SUMMARY AND CONCLUSIONS

To what extenthas the sub-regionalagreementin ECO regionsucceeded in
concentratingtradeamongtheirmembers? no worthwhileempiricalstudiesexistexcept
thestudybyClarete,Edmonds,andSeddon(2002)whichsuggeststhatthisPTA has been
in doingso. Accordingto theirfindings"ECO countriestendedto trademore
efficient
intenselyamongthemselvesat the expenseof tradewiththe restof the world.Their
estimatesshow thatintrabloc tradein the ECO regionwas higherat a statistically
level in 1995 and 2000 thanwould be expectedif the countrieswere not
significant
members ofECO".

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436 Khan
Jahangir Achakzai

At firstsight,theincreasingparticipation of thebloc's market on thetotalexports

of its membersalso pointsin thisdirection.This idea is also supportedby theresults
obtainedhere with the basic gravitymodel which includes the preferential trade
agreement as the importantpolicy variable thataffect the directionof trade flows among
theECO membercountries.
Indeed,whattheseresultsare showingis thatthemaindeterminant in thechange
of ECO countriestradeflowsin thepasthas been theprocessof regionalism. The main
achievement of thiseconomicintegration seemsto havebeento redressa pattern of trade
in the case of most of the membercountriesthat was heavilydistortedwith the
protectionistpoliciesadoptedbythecountries in thepast.
Finally,theresultsfromthegravitymodelconfirm thatECO has a positiveand
significantimpacton intra-ECOtrade.If thepotential tradeamongECO membersis not
beingrealised,itis due to otherreasons. It is notdue to lackof effectiveness of ECO. It
strengthens the case forfurthertrade liberalisation in the ECO region,possiblyin the
contextof greaterregionalintegration. Greaterregionalintegration, in a way thatis
compatiblewith multilateral liberalisation,could contribute to growthnot only by
increasing tradeand allowingregionalproducers to benefitfromeconomiesof scale,but
also by encouraging foreigndirectinvestment and thedeepeningof capitalmarkets.In
thisregard,therecentinitiatives in regionalintegration are to be welcomed:in 2003, the
ECO membercountriessignedtheECO TradeAgreement (ECOTA) underwhichtariffs
willbe reducedforparticipating members to maximum of 15 percentas thehighesttariff
slab ineightyears.
In summarythe above analysispresentedsupportsthe hypothesisthatintra-
regionaltradeis too low. It further suggeststhatthe membercountriesas a whole
tradeless witheach otherthanwhat would be expected,especiallythe volume of
tradewithcountrieswhichhave a commongeographicalborderis relativelylimited.
The privilegeof geographyand the existence of trade preferencesamong ECO
memberscould be expandedto cover potentialtradeto neighbouring countries.The
resultsalso verifythe hypothesisthatintra-regional tradehas greatpotentialforthe
countriesof theregion.

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