Modern Economy, 2011, 2, 62-70
doi:10.4236/me.2011.21010 Published Online February 2011 (http://www.SciRP.org/journal/me)
An Edgeworth Box Approach toward Conceptualising
Economic Integration
Hasanuzzaman Zaman
Centre for Policy Dialogue, Dhaka, Bangladesh
Received December 2, 2010; revised January 11, 2010; accepted January 14 , 2011
Abstract
The joint-communiqué originating from the January 2010 summit between India and Bangladesh has opened
new doors of opportunities for addressing economic integration not just between India and Bangladesh, but
across the South Asian region. In this article, an Edgeworth Box approach has been deployed to help con-
ceptualise the various Pareto-optimal solutions that are to be realised through close bilateral cooperation in
particular. The article attempts to address some of the issues deterring establishment of trade and transport
integration between Bangladesh and India, which are also relevant from the perspective of the entire South
Asia region.
Keywords: Economic Integration, Game Theory, Edgeworth Box, Cooperation, Trade, Transport,
Connectivity
1. Introduction
South Asia is considered to be on e of the least integrated
regions in the world today [1]. Though the region inher-
ited an integrated transport system from the British, this
was fragmented not only by the partition of India in 1947
but also by its political aftermath . South Asia now needs
to be re-integrated within the context of greater political
harmony as it has entered into the second era of South
Asian Association for Regional Cooperation (SAARC).
However, due to lack of integration of the transport sys-
tem in South Asia, logistic costs are high and ranges be-
tween 13–14.0 per cent of GDP, compared to 8.0 per
cent in USA [2]. Intr a-regional trade among the SAARC
member states was only US$ 14.7 billion in 2008 or
around 6.3 per cent of their total global trade, compared
to 60.0 per cent in NAFTA and 26.0 per cent in the
ASEAN region. In order to augment trade flows within
SAARC, integration of the transport network in South
Asia is, therefore, crucial for landlocked countries such
as Nepal and Bhutan and regions such as North-East In-
dia which shares 98.0 percent of its border with Bangla-
desh and only 2.0 percent of its bord er with the mainland
India. This is also especially imperative from the per-
spective of Nepal since it holds the highest share of in-
tra-industry trade within the SAARC community.
The joint-communiqué originating from the January
2010 summit between India and Bangladesh is a key to
unlock the potential that a unified South Asian market
could offer to its members [3]. It is also evident that the
communiqué has opened new doors of opportunities for
improving trade and transport relations, not just between
India and Bangladesh, but across the South Asian region.
This is critically important for stimulating the SAARC
regional integration process. The summit declaration
offered the North-East Indian states access to Chittagong
port and, West Bengal access to Mongla port in South-
West Bangladesh. In turn, India has agreed to provide
unrestricted transit to Nepal an d Bhutan not just for their
bilateral trade with Bangladesh but to use its ports for
third country trade. These agreements will need, in due
course, to be operationalised for initiating economic in-
tegration not just between India and Bangladesh, but
across South Asia.
It is in the aforesaid context that this paper makes an
attempt to theorise South Asia’s regional cooperation
agenda by focusing on the two key actors, India and
Bangladesh, which possess substantial comparative ad-
vantage with regards to their export basket and geo-
graphical location respectively. Suffice to mention that in
view of Bangladesh’s geo-strategic advantage as a result
of its location and India’s important role as a source of
import for the region’s other countries, we will closely
examine the Indo-Bangladesh bilateral relationship since

H. ZAMAN
63
it has wider implications from the regional integration
perspective.
1.1. Objectives and Methodology
The overarching objective is to contribute towards theo-
retical knowledge on economic integration by using em-
pirical evidence to support the case of close cooperation.
The paper’s point of departure is based on the premise
that bilateral non-cooperation is undermining the physi-
cal integration of South Asia and deterring the efforts of
establishing a single market in the SAARC reg ion.
The researchers consulted two key resource persons,
Dr. M. Rahmatullah, Former UNESCAP Director and
currently (2010), Policy Adviser for Transport Sector
Management Reform of the Planning Commission, Gov-
ernment of Bangladesh, and Professor Mustafizur Rah-
man, Executive Director, Centre for Policy Dialogue
(CPD), in order to elicit latest information in the context
of transport and trade respectively. Relevant literature
dealing with trade facilitation measures was reviewed to
better understand the interplay of different institutional
and market forces influencing the economic integration
process in the SAARC region. Using secondary sources
of information such as recent studies that have been car-
ried out on the economic integration topic by renowned
economists and researchers, we have argued that bilateral
cooperation can help to operationalise the SAARC re-
gional integration agenda as envisaged in its mandate –
creation of a single market in the region.
This article deploys a game theoretic approach to help
conceptualise the various possible strategies that partner
countries may consider in arriving at their Pareto-opti mal
solutions, and thereby improve their prevailing status
quo in terms of their trade and transport relations. The
explanation derived from the game theory has been ex-
tended by the Edgeworth Box to put it in the wider con-
text of bilateral/regional cooperation.
1.2. Layout of the Paper
The paper is organised into four sections. The following
section provides a brief literature review relevant to the
topic of this paper given the already large volume of
work that been done on this discipline. Section 2 has
been prepared in a manner that helps to set the tone of
the present paper, i.e., non-cooperation, at bilateral and
regional level is no longer a viable option for countries in
South Asia, especially for Bangladesh. Section 3 identi-
fies key issues undermining regional cooperation and
also discusses the provisions relating to South Asia’s
economic integration process as stipulated in the Indo
Bangladesh Joint Communiqué 2010. Section 4 then
substantiates on the discussion and presents the concep-
tual framework to highlight the theoretical underpinnings
of bilateral and regional cooperation. Section 5 con-
cludes.
2. Cooperation and Economic Integration
2.1. State of Trade Integration
As is known in economics, there are five stages of eco-
nomic integration: a) preferential trade area; b) free trade
area; c) customs union; d) free market; and, e) economic
union. The SAARC region is on stage 2 of the economic
integration process and as a result of the high export
similarity, the scope for intra-South Asia export has been
narrowed down. India records the highest export similar-
ity index which reduces its neighbouring countries’ op-
portunities to explore its large market [4]. Inevitably,
export similarity is also reflected in the similar kinds of
tariff structures in South Asia which have also choked
the scope of intra-industry trade between the SAARC
member states.
South Asia remains far behind most other regions in
terms of share of overall trade. Extra-regional trade
dominates South Asia’s overall trade structure account-
ing for 93.7 per cent of the region’s total export and 96.1
per cent of import (Table 1). The share of intra-regional
export for any country is calculated by taking its total
export to a region (SAARC in this case), divided by its
total exports which is then multiplied by 100 . In estimat-
ing the share of extra-regional export, since we already
calculated the intra-regional export, the remainder ac-
counts for the share of exports earnings generated from
the global market. The similar methods are used to cal-
culate the share of intra-regional and extra-regional im-
port.
Although small economies such as Afghanistan and
Nepal maintain relatively high er level of trade within the
region, overall trade is skewed due to low level of in-
tra-regional trade of large economies like India and Paki-
stan. Most of region’s export is destined to developed
countries: European countries accounted for 23 per cent
of region’s export while the US for 16 per cent during
2008. However, the share of export to these two regions
registered a decline over time (from 53 per cent in 2000
to 39 percent in 2008) while export to other regions has
considerably increased.
Leading export destinations of the region such as
Europe and North America involve large markets, offer
diversified export opportunities and provide preferential
market access for LDCs of the region. India, and in some
cases, Pakistan are two of the major export destinations
for Afghanistan, Nepal, Bhutan and Sri Lanka mainly
because of geographical proximity, common borders and
bilateral partnership/trading agreements. The region’s

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64
Table 1. South Asia’s intra and extra-regional trade in 2008.
Export Import
Countries
(SAARC Member States) Total export
(mil. US$)
Share of
intra-regional
export (%)
Share of
extra-regional
export (%)
Total import
(mil. US$)
Share of
intra-regional
import (%)
Share of
extra-regional
import (%)
Afghanistan 421.95 41.75 58.25 5734.71 40.65 59.35
Bangladesh 13907.4 3.1 96.9 23756.9 16.93 83.07
India 187405 5.1 94.9 300539 0.8 99.2
Maldives 202.63 8.78 91.22 1426.17 15.13 84.87
Nepal 1179.67 73.89 26.11 3540.44 59.59 40.41
Pakistan 21762.9 13.36 86.64 46292.8 2.75 97.25
Sri Lanka 8688.02 8.39 91.61 14051.1 22.87 77.13
Total 233567.57 6.29 93.71 395341.12 3.94 96.06
Source: Authors’ estimate ba sed on IMF, 2009 [5]
sources of import, on the other hand, are widely diversi-
fied among countries of Europe, North America and East
Asia.
Over the recent past, Bangladesh has witnessed a
yawning trade deficit with its neighbou r India. The bilat-
eral trade deficit has more than tripled from US$ 659
million in 1995 to US$ 2.1 billion by 2009 wh ich would
be US$ 3-3.5 billion if the informal trade is added to
Equation [6]. However, with significant reduction in
formal tariff rates and formalistation of illegal trade
through establishment of markets near the Indo-Bangla-
desh border, informal trade is set to decline. It needs to
be underlined here that about 12 per cent of imports from
the global market in Bangladesh is accounted by India,
while its share is less than 0.1 per cent in India’s global
import demand (Ibid). Imports from India, particularly of
fabrics and other industrial raw materials, supports
Bangladesh’s export-oriented sector (mainly the gar-
ments sector) and thereby helps the country to maintain
healthy trade balance with some of its other major trad-
ing partners (e.g. US$ 3.6 billion trade surplus with the
US in 2008-09). Th eref ore, in the contex t of reducing the
bilateral trade deficit with India, an informed approach
would seek to increase Bangladesh’s exports share in
India vis-à-v is trade in both good s and transp ort services,
and not reducing its import.
2.2. State of Physical Integration
Rahmatullah (2004) affirmed that, ‘an increasingly inte-
grated transport system at the regional/subregional level
is essential to facilitate and sustain th e economic integra-
tion process in today’s interdependent world economy’
(p. 365) [7]. The lion’s share of South Asia’s merchan-
dise trade is carried overland through land borders such
as those between India and its neighbouring countries.
However, goods also need to be transhipped since direct
movement of goods and vehicles (transit) is neither al-
lowed across borders between India and Pakistan, nor
between India and Bangladesh. Afghanistan, Nepal and
Bhutan, being landlocked countries, have to entirely de-
pend on connectivity through neighbouring countries,
which are not in operation. Only transhipment, between
India and Bangladesh, is operational which is not suffi-
cient to bring about efficiency in managing movement of
cargoes and vehicles across borders.
In short infrastructur e in SAARC should be conceived
as a regional public good, enabling seamless movement
of factors of production within and across regions,
thereby helping the member states to attain productivity
and growth [8]. De, Khan and Chaturvedi (2008) has
demonstrated, using empirical evidence, the existing
linkages of trade costs, transit and trade flows [9]. That is
the higher the transaction costs between each pair of
partners, the less they trade. Their study shows that a 10
percent fall in transaction costs at border has the effect of
increasing a country’s exports by about 3 percent. Simi-
larly, the World Development Report (2009) estimates
that a 10 percent increase in trade costs reduces trade
volume by 20 percent [10].
In view of Bangladesh’s geographical location in
South Asia which can help SAARC members to connect
to the ASEAN and beyond, the co untry can be perceived
as a prospective Singapore of the land routes and its
transformation will hinge upon two crucial factors: 1)
development of a land link connecting South East Asia
with South Asia; and, 2) the extent of political conces-
sions, in terms of sovereignty loss. Whilst the former is a
matter of transport policy and economic estimations, the
latter will demand close cooperatio n in order to sustain a
healthy Indo-Bangladesh bilateral relation. Rahmatullah
(2010) has emphasised the importance of regional con-

H. ZAMAN
65
nectivity in South Asia and the potential gains that a
transit agreement could accrue to both India and Bang-
ladesh and for the region in general.
3. Urgency for Regional Cooperation
3.1. Costs of Non-Cooperation
De (2009b) demonstrates that there is a positive and di-
rect relationship between infrastructure stock and per
capita income in South Asia, which has grown over time:
a 1 percent increase in the stock of infrastructure has
been associated with a 1 percent increase in per capita
income in South Asia [11]. On the other hand, rising
inequality in infrastructure stock has also been responsi-
ble for widening the inequality gap in South Asia. In
such a backdrop, the urgency for cooperation in order to
promote a strong growth process need not be overstated.
According to Sobhan (2000), physical integration of
the marginalised countries in South Asia into the global
system with more dynamic adjacent regions (through
trade facilitation measures), will cumulate to much more
than the sum of its parts and such close cooperation can
be expected to unleash certain economic synergies, which
could have a transformatory impact on the fortunes of
these countries linked by the transport network [12]. This
hypothesis has been quantified by Wilson and Ostuki
(2007) who estimate that if South Asia and the rest of the
world were to raise their levels of trade facilitation half-
way to the East Asian average, the gains to the region
would be US$ 36 billion [13]. Out of these gains, about
87 per cent would be generated from South Asia’s own
efforts (leaving the rest of the world unchanged). In
overall terms, regional expansion of trade in South Asia
can be substantially developed with concrete programmes
of action to address barriers to economic integration.
It needs to be recalled here that as an integral part of
the Asian Highway Network and Trans Asian Railway
development, intermodal interfaces has been proposed at
vantage locations to serve industrial and other clusters,
and centres to facilitate seamless movement of goods and
services across borders. However, in order to make ef-
fective utilisation of these routes through intermodal
transport connectivity, relevant government authorities
need to put a concerted effort in reducing the high trans-
action costs associated with the movement of vehicles
and cargoes. ADB (2008) summarises some of the key
issues pertaining to the lack of physical, industrial and
communication infrastructure impeding growth in South
Asia [14]. Air and maritime ports are ranked as less
competitive in South Asia as compared to East Asia.
While it takes 2 hours to clear a vessel in Singapore and
Laem Chabang, Thailand, it takes to 2-3 days in Chit-
tagong (Ibid). At Delhi airport average cargo dwell time
is 2.5 days. Furthermore, a journey of 34 days by land-
come-sea routes could be performed within 9-10 days if
appropriate policies and infrastructure are put in place
[15]. The cost of transport for one 20 foot loaded con-
tainer from Delhi ICD to Dhaka is US$ 2,500 which
comes down US$ 1,900 if the shipping route is via
Mumbai, Kolkata and then Chittagong instead of the
Mumbai, Singapore and then Chittag ong (Ibid).
3.2. Indo-Bangladesh Joint Communiqué 2010
It needs to be recalled here that the government of India,
in the Joint Communiqué 2010, has committed to pro-
vide Bangladesh with US$ 1 billion credit for a range of
projects which include development of railway infra-
structure, increasing supply of locomotives and passen-
ger coaches. Bangladesh and India have already allowed
transit to each other for bilateral traffic and it will be in
Bangladesh’s interest to resolve connectivity issue sub-
regionally, by providing connectivity to all the 3-land-
locked countries/territory at a time (Nepal, Bhutan and
North-East India). Since heavy Indian trucks cannot en-
ter Bangladesh as a result of its highways’ physical
weakness, it has been suggested that inter-district Bang-
ladeshi truckers could provide logistic support to carry
goods using multi-axle vehicles and/or truck-trailers to
carry containers.
The government of Bangladesh has agreed to allow
use of Mongla Port by Nepal, Bhutan and India, and at
present, it is estimated that the port has 80 percent spare
capacity (Rahmatullah, 2010). Nepal and Bhutan are
using the already congested Kolkata port and the use of
Mongla Port could help to ease traffic flows between the
Indo-Bangladesh which will enable Bangladesh to trade
in transport services, and earn port charges, rail charges,
road transport charges, and transit fee. Also, the govern-
ment has permitted the use of Chittagong Port by the
North-East Indian States, which has 40 percent spare
capacity at present level of management efficiency (Ibid).
In recent times, November 2010, a British firm, Port Evo,
has offered US$ 800 million investment proposal for
developing the Mongla port under Public-Private Part-
nership (PPP). Indeed, development of Mongla port will
play a significant role in promoting trade and commerce
as Bhutan and Nepal will use this port when transit fa-
cilities will be launched.
Notwithstanding the many positive interventions by
both Bangladesh and India, until expressways can be
built, railway is the preferred mode of transport for
moving goods across Bangladesh (and also India). The
Indo-Bangladesh Joint Communiqué 2010 envisages
establishment of two rail links: a) Birgunj-Rauzal-Kathi-

H. ZAMAN
66
har-Rohanpur-Khulna (connecting Nepal and Bangla-
desh via India); and, b) Akhaura-Agartala (connecting
North-East India with Ban gladesh). In case of the former,
though transhipment facility for containers/cargo at
Khulna will be carried forward by truck (38 km to Mon-
gla Port), it would greatly assist Mongla port to remain
competitive with Kolkata port in terms of managing ex-
port-import traffic. Overall, the Khulna-Mongla project
can play a bridging role in providing greater access to
Mongla Port for goods coming from or going to Nepal.
The Akhaura-Agartala rail link will be strategic in the
near future in connecting North-East India with its
mainland (via Bangladesh).
Finally, it is imperative to examine the Inland Water
Transport (IWT) related provisions in the IBJC 2010
which stipulated ‘Ashug anj in Bangladesh and Silghat in
India shall be declared ports of call. The IWTT Protocol
shall be amended through exchange of letters. A joint
team will assess the improvement of infrastructure and
the cost for one-time or longer term transportation of
ODCs (Over Dimensional Cargo) from Ashuganj’ (para
22). IWT is the cheapest mode of transportation and
prevails only between India and Bangladesh; however,
due to poor implementation and underutilisation of the
facilities, between 1995 and 2002, the goods transported
were slightly more than a hundred thou sand metric ton s a
year (Sikri, 2009). India is expected to provide invest-
ment in Ashuganj port development where Bangladesh
will have the scope to earn considerable foreign ex-
change through IWT charges, port charges, road trans-
port chares and transit fees, which will need to be nego-
tiated ex-ante and specified in the agreements.
Having highlighted the high costs of non-cooperation,
in the following section, the status of regional and bilat-
eral (Indo-Bangladesh) cooperation has been conceptu-
alised in terms of their trade and transport relations, two
key factors responsible for facilitating region al economic
integration.
4. Theorising Bilateral and Regional
Cooperation
4.1. Background
There is no doubt that much empirical work has been
done on the topic of regional cooperation and economic
integration. However, few have attempted to deploy a
theory which could help provide a conceptual framework
to better comprehend the complex nature of cooperation
in the SAARC context. In this section, the paper’s point
of departure, i.e., bilateral non-cooperation is no longer a
viable option, is conceptualised using two frameworks -
the game theory and Edgeworth Box. Both the frame-
works are deployed in order to help conceptualise the
urgency and scope for regional and Indo-Bangladesh
cooperation, reflecting the prevailing status quo in terms
of their export and transport relations (which have been
discussed in the previous section).
As maybe recalled, India has its interest to utilise
Bangladesh’s geographical advantage to connect to its
North-East region, comprising the seven sisters and be-
yond to the ASEAN region; on the other hand, Bangla-
desh is keen to reduce the ever growing bilateral trade
deficit with India through increasing its exports (both in
goods and transport services). Inev itably, development in
the bilateral status quo between India and Bangladesh
will carry unpredictable consequences for regional inte-
gration but since the paper conceives the Indo-Bangla-
desh Joint Communiqué 2010 as the key to catalyse the
SAARC regional integration process, we will initially
focus on these two co untries’ agendas and later extend it
to the wider region.
4.2. Game Theory
Game theory is a branch of applied mathematics which
attempts to capture the behaviour of agents in strategic
situations, in which an individual’s success in making the
right choice is directly dependent on the others’ prefer-
ences. In equilibrium, each player of the game adopts a
strategy that they prefer the most. Two key equilibrium
concepts have been developed (the Nash equilibriu m and
Prisoner’s Dilemma) in an attempt to decipher the deci-
sion-making process of agents in strategic situations
which are often conflictin g in nature. The game theory is
applied from the perspective of SAARC regional and
Indo-Bangladesh cooperation in two ways – 1) where
countries/member states know the equilibrium strate-
gies of the other players (Nash Equilibrium); and, 2)
where one country faces difficulties in comprehending
the others’ strategies (Prisoner’s Dilemma).
In the following table, we have illustrated the urgency
for cooperation under both the assumptions and in doing
so, we have identified two dominant strategies. To keep
matters coherent, let us start with the bilateral coopera-
tion case. India and Bangladesh have to take part in a
cooperation game with an example payoff matrix shown
in Table 2. It is to be mentioned here that the numbers
have been established arbitrarily in view of the logic
that non-cooperation carries high costs for both Bangla-
desh and India.
Table 2. Nash equilibrium and prisoner’s dilemma.
India
Cooperate (A) Defect (B)
Cooperate (A)100, 100 0, 50
Bangladesh Defect (B ) 50, 0 0, 0

H. ZAMAN
67
In other words, if India cooperates, Bangladesh will be
able to increase its export earnings through trade in both
goods and transport services. On the other hand, India
will defect when Bangladesh is not keen to let it connect
with its seven sisters. Similarly, Bangladesh’s coopera-
tion will imply that it is willing to br idge mainland India
with its North-East region. If, however, India is not ready
to provide means by which Bangladesh could reduce its
bilateral trade deficit, the latter will defect. In the back-
drop of the prevailing high costs of non-cooperation,
which have been discussed in the previous Section 2, the
players should cooperate, both adopting strategy A to
receive the highest payoff, i.e., 100 (dominant strategy 1).
If both players chose strategy B though, there is still a
Nash equilibrium, although each player is awarded less
than optimal payoff. If India decides to cooperate and
Bangladesh defects (strategies A and B respectively), the
pay-off would be lower than what would have been real-
ised through und er cooperation.
Thus, Nash equilibrium occurs when both parties ei-
ther cooperate or defect and no agent can benefit by
changing only his or her own strategy unilaterally.
However, when information asymmetry prevails (e.g.
absence of technical details, political uncertainty, etc),
both parties can enter into a prisoner’s dilemma (PD)
situation. In such cases, where countries are not aware of
each other’s strategies, both will be inclined to defect
and adopt strategy B with a zero payoff (dominant strat-
egy 2). The paradox is that both states are acting ration-
ally, but producing an evidently irrational result. There-
fore, in case of India and Bangladesh, governments and
concerned policymakers will need to play a strategic role
in bridging the information gap an d political uncertainty.
To put it in the regional framework, we could simply
replace Bangladesh as SAARC. Given India’s growing
role in the international arena, if all member states of
SAARC are willing to cooperate, India should also fol-
low the same sui t and max imi se the pay-off (strategy A).
On other hand, if India is not willing to cooperate, all
other member states will also defect since the gains real-
ised under strategy A is significantly less than what
would be generated by adopting strategy B. Therefore,
given India’s increasing leadership in global relations, it
has to take the lead role by prioritising regional interests.
4.3. Edgeworth Box Analysis
In economics, an Edgeworth box is used to represent
distribution of different resources. It is used frequently in
general equilibrium theory and can aid in finding the
competitive equilibrium of a simple system. It is a useful
tool to help con ceptualise the scop e for both region al and
Indo-Bangladesh cooperation using a set of preference
(indifference) curves where the competitive equilibrium
may take place. It brings together two agents and two
factors (trade and transport in this case) in a 2 × 2 dia-
gram, depicting areas where Pareto improvement can
take place. Ceteris paribus, i.e., assuming all other things
remain the same, the theory makes the following three
assumptions:
a) The indifference (preference) curves are non-iden-
tical, i.e., India wants to expand its transpo rt connectivity
outreach to the North-East and beyond, while Bangla-
desh and other South Asian countries want to reduce
their bilateral trade deficit with India.
b) No increasing returns, i.e., a zero-sum gum
whereby all players stand to gain or lose.
c) No asymmetry information, i.e., zero transaction
costs implying that parties are well-informed about their
strategic decisions.
These assumptions allow a researcher to get on with
the task of putting the regional cooperation and Indo-
Bangladesh relations in a conceptual framework. The last
two assumptions inherits the Nash Equilibriu m prin ciples
where with zero transaction costs, countries can reach a
mutually beneficial situation (a Pareto optimal equilib-
rium). All these three assumptions offer a first-best world
scenario which can then be used to understand the real
world scenario, and subsequently explore second best
alternatives.
To illustrate this first-best world scenario, let us start
with the Indo-Bangladesh bilateral relations. Figure 1
presents two countries India (OA) and Bangladesh (OB)
initially faced with the status quo at w, with indifference
curves UA0 and UB0. This situation is self-explanatory in
terms of theory – an institutional market failure
(non-Par eto optimal) wher e both countr ies stand to bene-
fit through Pareto improvement from bilateral coopera-
tion. The endowment consists of two factors – bilateral
transport connectivity (y-axis) and bilateral volume of
Y X B ’’ X B’ X B O B
XC
U
A 3
F
Y A ’’ Y B ’’
U
A O
Y A W Y B
U B O
U B 3
U B 2
C
O
A X A’’ X A’ X A X
Y
U B 1
U A 2
E
Y
A’ Y B ’
U
A 1
Figure 1. Edgeworth box analysis.

H. ZAMAN
68
export (x-axis), comprising both goods and services be-
tween the two neighbours.
In the graph, the variables represent the state of trade
and transport connectivity in the Indo-Bangladesh rela-
tions. Specifically, the endowment factor can be concep-
tualised as the following -
XA = India’s current trade level to Bangladesh, where
it is a dominant export player.
XB = Bangladesh’s current trade level to India, where
it is a dominant import player.
YA = India’s geographical disadvantage to connect with
its seven sisters and beyond.
YB = Bangladesh’s position to connect with India’s
seven sisters and beyond.
In terms of numbers, XA and XB represent the current
bilateral trade deficit that Bangladesh is facing today
with India (US$ 2.1 billion in formal terms). YA and YB
are unique from the perspective of transport connectivity.
In other words, given that mainland India shares 2 per
cent of its border with North-East India, YA represents
its inability to transport goods since North-East India
shares 98 percent of its border with Bangladesh.
It is theoretically affirmative that there is much scope
for Pareto improvement, in other words, both countries
can make each other better off without causing harm to
either through close cooperation, assuming there are no
transaction costs (e.g. lack of political will). In the
best-world scenario, if Bangladesh were to remove its
border restrictions for movement of cargoes and vehicles
and allow India to connect with its North-East (moving
from YA to YA’), perhaps mainland India would be also
willing to allow Bangladesh to export more to its market.
XB’ is the new level of Bangladesh’s exports with India,
implying that its imports from India would reduce to XA’.
In this scenario, both Bangladesh and India would have
negotiated with each other to the extent that India would
allow more exports from Bangladesh, whilst the latter
will have granted transport connectivity facilities for
India’s cargoes and other modes of transport. However,
as may be recalled, Bangladesh’s interest would not be to
reduce import from India (which would directly under-
mine the development of its industrial sector), but instead,
focus should be made on increasing export earnings
through trade in tran sport services.
This trend of bargaining for ‘more trade for more
connectivity’ could continue further to reach XA’’ and
XB’’ where both the countries would still be better off
without causing any harm to each other. This is also
relevant from the transport perspective since at YA’ India
can be said to have connected with its seven sisters,
while Bangladesh’s border exists physically at YB” , it ha s
become virtually ineffective due to its augmentation of
exports to the Indian market XA’’.
Let us focus on point E and assume that it represents
the Pareto-optimal equilibrium, with UA1 and UB1 as the
countries’ new preference curves. In the best world sce-
nario it reflects that Bangladesh and India can improve
their bilateral status quo in terms of their trade and
transport relations through close cooperation, but once
they reach equilibrium, it would be difficult for the
countries to make each other better off unilaterally,
without eroding the other party’s interests. It is to be
noted that any movement from w to E or any other point
on the CC (contract-curve) can be considered a Pareto
improvement.
Assuming OA as India and OB to represent all other
SAARC member states, the above discussion on bilateral
relations can be directly applied in the regional coopera-
tion context. Put simply, if India is willing to allow
SAARC countries to increase their export in its market,
India will also gain by transport connectivity which will
aid it to reach its seven sisters and beyond in the East,
and to Central Asia, Middle East and Europ e in the W est.
Conversely, if the member states of SAARC are willing
to let India use their territories to con nect with the global
market, India should also cooperate by letting in more
export from these countries. Thus, at least in theory, the
CC remains identical for regional integration as also for
bilateral cooperation. The emergence of a South Asian
community would be greatly accelerated if its govern-
ments and particularly the government of India were to
commit themselves to invest their political and diplo-
matic resources in advancing the process of integration.
In supporting such initiatives India would need to move
beyond the bilateralism which has been favoured by its
bureaucracies to seek solutions within a broader South
Asian community.
4.4. Theoretical Shortcomings
Both the above discussed theories, in their static form,
have attempted to illustrate the urgency and scope for
cooperation. The game theory is a version of a ‘tit-for-
tat’ or ‘give and take’ game and it is only designed to
provide a framework to recognise when countries are
likely to cooperate with each other. Similarly, in assum-
ing zero transaction costs, the Edgeworth theory reflects
a Nash Equilibrium situation to the extent that both
countries are informed about each other’s strategies.
Nevertheless, if we allow for some dynamics to take
place, all such propositions, inevitably, will be rendered
irrelevant. If India is not willing to allow more exports
from Bangladesh and other countries to enter its market
whereby the latter may not be too keen on granting con-
nectivity, both countries can look for alternative options
to move their respective agendas forward.
What this best-world scenario reveals that there is am-
ple of scope for improving the Indo-Bangladesh relations

H. ZAMAN
69
through improved trade and transport connectivity. In
recent times, one of the most controversial issues has
been the ‘transit fees.’ Though the Indian government
prefers to waiver such fees for movement of its transport
across Bangladesh, the latter will have little to gain if it
is not able to at least reap some benefits from such inte-
gration. Therefore, one of the policy implications for the
Indo-Bangladesh policymakers is that there is an urgent
need to cooperate (see Section 3 for more quantifiable
reasons). The enabling conditions to create such an en-
vironment also remain a key to bridging the political
distrust, which could be another area of research topic.
There are also other external factors, discussed below,
which could undermine Indo-Bangladesh bilateral nego-
tiations.
Currently, India has a bilateral relationship with the
ASEAN and negotiations with the EU are at their ongo-
ing stage. This shows that irrespective of whether Bang-
ladesh proceeds with a transport connectivity agreement
or not, India has sufficient capacity and diplomatic lev-
erage to go forward with an agenda that is, after all, in its
best interest. With India’s focus on availing access to the
North-East and given the already established bilateral
agreement with Bhutan, land routes can be easily paved
to make way, though it would entail high opportunity
costs by consuming more time and money. India will be
able to craft avenues to reach the Far East, whether by
land (via Bhutan) or by sea (via Myanmar) excluding
Bangladesh from the integration process which would
take place within a broader Asian Community through
regional cooperation in order to strengthen transport
connectivity. It is indeed imperative that Bangladesh do
not miss out on this opportunity to connect with the
global markets.
A further raison d'être for bilateral cooperation be-
tween India and Bangladesh arises due to the ongoing
bilateral negotiation between the former and the EU.
Raihan (2009) has estimated that if the bilateral free
trade agreement (BFTA) between the EU and India
comes into effect, Bangladesh would experience a loss of
nearly a full percentage point in exports in the EU mar-
ket, since there is no bilateral agreement with India in
place to protect its imports from the latter [16]. A BFTA
between India and EU could also cause a long-term loss
in competitiveness for Bangladeshi products in the EU
market. However, if a bilateral trade and transport
agreement between India and Bangladesh can be reached
in the near future, the latter would be able to benefit
through the technicality of rules of origin (Roo) in its
exports to the EU. Hence, moving forward with the Joint
Communiqué 2010 is in Bangladesh’s best interest where
all other parties must play a proactive role since it is also
in their best interest. Therefore, the potential benefits of
economic integration which could be unleashed by close
cooperation within the entire SAARC region, is not pre-
dictably and therefore, it could be more than what has
been encapsulated by the Edgeworth Box.
5. The Way Forward
Thanks to Bangladesh’s geographical advantage, the
government has a certain degree of political leverage to
set the terms of reference in regional connectivity agree-
ment. At the time when this paper is going to the press,
the government of Bangladesh has not been able to agree
on the terminology to be deployed in extracting the gains
through transit charges. To be successful, the regional
trade facilitation agenda must include measures that are
mandatory on the contracting parties and set a specific
time-frame for achievement of these measures. Accord-
ing to Sobhan (2000), Bangladesh will prefer to use the
patronage of SAARC and also ALTID to upgrade its
transport links, both to the West and East with India,
rather than to pursue this as a purely bilateral exercise.
For Bangladesh (and North East India), the primary link
remains their regional grouping of SAARC.
Finally, it may be noted that in the EU, economics
have successfully trumped politics and it remains the
driving force behind decisions on regional expansion
through integration into the Single Market. After a long
time South Asia’s political leadership is demonstrating
an awareness that the future is impinging on its present
much more rapidly than it did in the past. Their main
challenge may therefore be to seize the moment and lead
the way into the future rather than being content with th e
prevailing status quo by allowing long-term economic
considerations to t rump short-te rm political impediments.
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