- ADBI series on Asian Economic Integration and Cooperation
Edited by Douglas H. Brooks and Susan F. Stone
4. Regional integration and trade costs in South Asia Nilanjan Banik and John Gilbert INTRODUCTION 4.1 The beneficial effect of free and fair trade is well known.1 Trade affects growth in three primary ways. First, trade encourages flow of resources from low-productive sectors to high-productive sectors, leading to an overall increase in output. Export growth may affect total productivity growth through dynamic spillover effects on the rest of the economy (Feder 1983). The possible sources of this positive dynamic spillover include more efficient management styles, better forms of organization, labor training, and knowledge about technology and international markets (Chuang 1998). Second, with unemployed resources, an increase in export sales leads to an overall expansion in production and a fall in unemployment rate. As production increases, because of increase in scale of operation (economies of scale) firms become more efficient (Helpman and Krugman 1985). Third, international trade also allows for the purchase of capital goods from foreign countries and exposes an economy to technological advances of industrialized countries. Recent theoretical work suggests that capital goods imported from technologically advanced countries may increase productivity and thereby growth, since knowledge and technology are embodied in equipment and machinery and therefore transferred through international trade (Chuang 1998). In other words, trade plays an important role for economic growth of a region. Despite these positive aspects, free trade is opposed mainly because workers and producers associated with the inefficient industries stand to lose out. There is considerable lobbying pressure by inefficient producers demanding more protection....
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