Abstract:
South Asia being a developing region several trade models were introduced to
expand intra-regional trade. For instance, the South Asian Preferential Trade
Agreement, the South Asian Free Trade Area Agreement, and the SAARC
Agreement on Trade in Services. However, the trade among these member
countries hardly improved even though they have the potential. Policy isolation
might be a possible reason for this slow growth in intra-regional trade. Thus, this
study investigates the effect of policy convergence on intra-regional trade in
South Asia. In this regard, both the effects of internal policy convergence and
external policy convergence on the trade policy were measured for the period
from 2000 to 2021. The trade policy was proxied through intra-regional trade.
Meanwhile, monetary policy and fiscal policy were represented through
inflation, money supply, interest rate, government expenditure, and tax revenue
accordingly. Internal policy convergence was measured through the Generalized
Method of Moments (GMM) model while external policy convergence was
measured through the Vector Error Correction Model (VECM). Even though the
internal policy convergences are statistically significant, they depicted a lower
catch-up ratio resulting in a higher length of time for the full convergence.
Meanwhile, external policy convergence also plays a significant role when
deciding the level of intra-regional trade in South Asia because results depicted
that the trade is higher for the country pairs whose external policy convergences
are strong and vice versa. Thus, this study confirms that the lack of internal policy
convergence and external policy convergence is a trickle of significant
hindrances to intra-regional trade in South Asia. Therefore, policymakers need
to concentrate more on policy convergence so as to reach the optimum outcome
of the trade policies in South Asia.
