Report

34 QUANTIFICATION OF BENEFITS FROM ECONOMIC COOPERATION IN SOUTH ASIA
Sri Lanka and India. Pakistan is the only country where
the value of the index declines.
In short, it can be said that increase in competitiveness
of the major trading partners in the region has
also been accompanied by a rise in the trade complementarities
within the region. There is therefore an
economic justification in suggesting that intra-regional
trade in South Asia has a potential to increase
substantially. To examine whether the countries are at
different stages of production within an industry, which
might further strengthen the argument for rising
potential of intra-regional trade, we estimate intraindustry
trade indices.
Table 3.5 Trade Complementarity Index
for Total Trade
Country
Complementarity Index
for Total Trade
1991 2004
Bangladesh–SARRC 0.22 0.33
India–SARRC 0.28 0.41
Pakistan–SARRC 0.63 0.34
Sri Lanka–SAARC 0.29 0.62
INTRA-INDUSTRY TRADE IN SAFTA REGION
Intra-industry trade arises if a country simultaneously
imports and exports similar types of goods or services.
Similarity is identified here by the goods or services
being classified in the same ‘sector’. It is customary to
distinguish between two different types of intra-industry
trade, each warranting a different type of explanation,
namely:
• Horizontal Intra-industry Trade: This refers to the
simultaneous exports and imports of goods
classified in the same sector and at the same stage
of processing. This is likely to be based on product
differentiation.
• Vertical Intra-industry Trade: This refers to the
simultaneous exports and imports of goods
classified in the same sector but at different stages
of processing. This is likely to be based on the
increasing ability to organise ‘fragmentation’ of the
production process into different stages, each
performed at different locations by taking
advantage of the local conditions.
Measuring Intra-Industry Trade:
The Grubel-Lloyd Index
The most often used method for determining the extent
of intra-industry trade (IIT) was proposed by Grubel
and Lloyd (1975). This measure, now known as the
Grubel–Lloyd index, is simple to calculate and
intuitively appealing. It is calculated as:
⎛| export −
⎞
sector i
import
sector i
|
GLsector i
= 1 −⎜
⎜
+
⎟
⎝ exportsector i
importsector i ⎠
If the country only imports or only exports goods
or services within the same sector, such that there is no
intra-industry trade, the second term on the right-hand
side of equation is equal to one, such that the whole
expression reduces to zero. Similarly, if the export value
is exactly equal to the import value, the second term
on the right-hand side of equation is equal to zero, such
that the whole expression reduces to one. For simplicity,
we multiplied by 100, therefore the Grubel–Lloyd index
varies between zero (indicating pure inter-industry
trade) and 100 (indicating pure intra-industry trade).
We estimate intra-industry trade using the industry
classification (eight industries) provided in WITS for
the years 1991 and 2004. The results of intra-industry
trade indices have been presented in Table 3.6. Countrywise
analysis show that:
Sri Lanka
In 1991, Sri Lanka had high IIT with Pakistan in the
agricultural materials sector which, in 2004, has
remained close to the same (Table 3.6). In the
agricultural raw materials sector, IIT was high in 1991
between Sri Lanka and Pakistan at 94.2, but the figure
fell drastically to 6.1 by 2004. Instead, IIT between Sri
Lanka and India has risen in this sector from 42.1 in
1991 to 93.4 in 2004. In the food sector, IIT between
Sri Lanka and Pakistan fell from a high 93.5 in 1991
to 68 in 2004. Sri Lanka’s IIT with Bangladesh has
increased in the manufactures sector (from 24.8 in 1991
to 93.4 in 2004), Textiles sector (up to 80.3 in 2004)
and the other manufactures sector (from 57.3 in 1991
to 86.7 in 2004).
Based on the rise in IIT in 2004 in relation to 1991,
there is a large potential for trade between Sri Lanka
and Bangladesh in the Manufactures, Textiles and
Other Manufactures Sectors. Further, there is potential
between Sri Lanka and India and Sri Lanka and
Pakistan in the Agricultural Raw Materials and
Agricultural Materials sectors respectively.
India
In the agricultural raw materials sector, India’s IIT
increased sharply with Bangladesh (from 17.49 in 1991
to 96.3 in 2004) and with Sri Lanka, too, increased
considerably (from 42.1 in 1991 to 93.4 in 2004). In