Bilateral Trade and Per Capita Income Convergence of Selected South Asian countries and among their ‘Major Trade Partners’

This study determines the existence and magnitude of bilateral convergence of per capita income of ‘selected’ South Asian countries and among their ‘major trade partners’1. Bilateral convergence is characterized by reduction in income differentials within the group of trading partners. Three approaches; intra-trade convergence, bilateral trade convergence, and difference approach (fixed and common forms) have been used. The results of fixed effect model- trade increases between the groups, per capita income differential decreases. Results of bilateral convergence approach demonstrate that bilateral trade ratio does not seem to affect the bilateral income difference significantly in any direction. Under difference in difference approach convergence rates-sigma convergence of per capita income convergence both pre-post liberalization periods has converged. However, convergence occurred only in post liberalization period for Asian economies. The panel data of sigma convergence by using fixed effect model demonstrate that convergence rate has been accelerated in Asian economies. However, the rate of convergence process has been decelerated over the postliberalization period in whole sample countries.