Multilateralism, regionalism and income convergence: ASEAN and SAARC

The complementary nature of regional trade agreements (discriminatory RTAs) and multilateralism (non-discriminatory) is widely discussed in the literature (Jayanthakumaran and Sanidas, 2007; Ornelas, 2005; Koopmann, 2003; Either, 1998). The argument is based on the fact that RTAs and multilateralism are interdependent and that both encourage trade creation (both world and intra-regional) and growth. The next step in this process is to test the hypothesis that multilateralism and RTAs are complementary and that regional income convergence is likely to occur with like-minded and committed RTAs that often have links geographically and culturally. Trade and investment reforms (regardless of RTAs or multilateralism) tend to induce the resources within a region to be reallocated in response to the removal of quotas and tariffs from sectors traditionally protected, and allow income to flow from a rich to a poor nation. The catch up due to involvement in newly emerging manufacturing sectors occurs in the light of the comparative advantage (at the expense of agriculture), and converging capital-labour ratio across countries in the region (Slaughter, 2997). Our expectation is that regional members are mare likely to integrate due to their ethnic and cultural links, and lower transport and transaction costs. The existing literature on the trade-growth nexus (Lewer and Van den Berg, 2003) and trade-income convergence/divergence nexus (Ben-David, 1996) reveals a strong foundation for forming this hypothesis