Unilateral Liberalization versus Regional Integration: The Case of ECO Member Countries

By Achakzai, Jahangir Khan | The Lahore Journal of Economics, Summer 2010 | Go to article overview

Unilateral Liberalization versus Regional Integration: The Case of ECO Member Countries


Achakzai, Jahangir Khan, The Lahore Journal of Economics


Abstract

Using an international dataset on bilateral trade for 137 countries in 2005, we estimate a gravity model to address the question of whether intra-Economic Cooperation Organization (ECO) trade is too low and whether the scale of trade at present is accounted for by regional integration or unilateral liberalization. The results of the gravity model confirm that intra-regional trade is lower than predicted by the gravity equation. The results also validates the theory that the present level of trade is attributed to regional agreements rather than unilateral liberalization, suggesting greater scope for regional cooperation among ECO member countries.

Keywords: Bilateral trade, economic cooperation organization, regionalism.

JEL Classification: N70, P45.

1. Introduction

Several theories of regionalism emerged in the 1990s as a response to the sudden upsurge of regionalism in the world in the second half of the 1980s and early 1990s. Some focused on the welfare effects of regionalism, while others tried to pin down the political economy rationale for such moves. In general, the success of the European Union (EU), the oldest regional scheme and the relation between the US and the EU, have spurred these theoretical developments. Studies of actual cases of integration, however, are far fewer.

In particular, the spread of regionalism among small countries and the possible motivation for these countries to enter into South-South regional integration agreements (RIAs) in the 1990s have received very little attention. Yet this kind of regionalism is booming once again and, as opposed to the frustrating experience of South-South regionalism in the 1970s, seems to be succeeding.

What has pushed these countries to try the regional route once again? The purpose of this paper is to explore the motivation for recent regionalism among Economic Cooperation Organization (ECO) member countries. There has been a radical change in the foreign trade policy of ECO countries. Having restricted trade policies during the postwar period, the region turned toward more open regimes. What made regionalism in the ECO region suddenly so attractive was the evolution of regionalism in the North. There has been a significant revival of regionalism in that part of the world. Regional preferential trade agreements of different kinds have been established. As a result of such agreements, intra-regional trade has rapidly increased. The success of the EU and Association of Southeast Asian Nations (ASEAN) in promoting international trade and stimulating economic development has also encouraged other countries to form economic groups.

Seen in this perspective, Pakistan, Turkey, and Iran laid the foundations of Regional Cooperation for Development (RCD) in 1964. Under the RCD, member countries cooperated in the fields of trade, communications, banking, industry, political and cultural affairs, railways, and transportation. The organization was renamed the Economic Cooperation Organization or ECO in 1985. Seven new members, namely Afghanistan, Azerbaijan, Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan joined the regional bloc in May 1992.

Traditionally, almost all of the ten member countries of the ECO have been trading with each other for centuries. In order to institutionalize their traditional relations, member states took the initiative to establish the RCD in 1964 and ECO in 1985.

Pakistan is characterized by a policy of closer and growing relations with all countries in general and neighboring ones in particular. In light of the above mentioned policy, the country has been striving to strengthen trade ties with ECO countries. Unfortunately, their share in intraregional trade has remained negligible, despite the fact that the member countries of ECO are linked with each other geographically.

The available information presents a dismal picture of the current state of intraregional trade in the ECO region. …

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