The way to development of Saarc

The Logic to Regional Focus on Trade & Investment
When Paul Krugman won the Nobel Prize in economics on October 13th, the news was greeted with nostalgia. Since 1999 he had been writing a twice-weekly column for The New York Times and has regularly attacked the acts of the Bush Administration and talked about “Scale Economies�. He primarily won the prize for his models of international trade and economic geography, whereby, he gave more clarity and practical meaning to the model of “monopolistic competition� published originally by Avinash Dixit and Joseph Stiglitz, when they introduced economies of scale into trade theory and beyond.
Economies of scale had long posed awkward problems for theorists. If bigger firms face lower costs, then in principle one firm should supply the entire market, thereby enjoying the lower costs of all. But in the Dixit-Stiglitz model, the monopolizing logic is offset by a countervailing force: consumers’ taste for variety. People prefer to spread their custom over different versions of the same good. The market is therefore carved up among competing firms, each offering a product bearing its own distinctive stamp. Such a model gave Krugman, as he put it, “a tool to open cleanly what had previously been regarded as a can of worms�. Thus, he literally saved economics or economic theories from an abiding empirical embarrassment.
Earlier we had reasoned that countries gain from specialisation and exchange, concentrating on what they do best and importing the rest. This theory explained why Portuguese might sell wine in exchange for English cloth but did not explain why similar countries, possessing similar ratios of capital, labour and land, should so vigorously trade similar goods back and forth. This phenomenon in itself, by any standard, did not represent a merely small blind spot! According to the WTO, 52 percent of Germany’s exports to France are things France also produces and exports to Germany. But the Dixit-Stiglitz model, with its subtly differentiated firms competing for variety-loving consumers, lent itself to basically explaining only why Germans might import Renaults, even as the French imported Volkswagens.
However, more importantly, what we learned ‘new’ from the Krugman model is that when trade barriers fall, firms gain access to bigger markets, allowing them to expand production and reap economies of scale, but at the same time, openness also exposes them to competition from rival foreign firms, paring their margins. Some firms may go out of business, but consumers have more to choose between domestic survivors and foreign entrants. Thus the gains from trade arise not from specialisation, but from ‘scale economies’, fiercer competition and cornucopia of choice that globalisation provides. The concept of scale economies for the first time gives economics a sense of space. For example, he himself argues that nighttimes satellite photos of Europe reveal the distinctive contours of economic activity: bright lights cluster around metropolitan centres, shinning particularly more brightly around the triangle of Brussels, Amsterdam and Dortmund. Earlier, economists struggled to explain these images as they did not fall in line with the crux of the theory itself; They were accustomed to assuming that firms face constant returns to scale and yet if this was to be true then every person could essentially create his own little backhouse production chain and there would be no need for an economy to divide into a farm belt and an industrial belt?
With this new model, by contrast, big factories benefit from lower costs of production. Manufacturing firms might therefore cluster near a large market, leaving behind a sparsely populated hinterland, in order to make the most of scale economies and minimise the cost of transporting goods to their customers. Earlier theorists reasoned that firms herd together to benefit from some kind of “spillover� i.e. perhaps firms pick up tricks of the trade and other know-how from their neighbours.
But this argument appeared somewhat unsatisfying, because largely spillovers could neither be measured nor could their scope be delimited. What we have learned from Mr. Krugman is that regional focus, proximity and neighbourhood cooperation instead yield new yet tangible benefits and strengths. The opportunity for firms to locate in regional strong areas is a gift to other firms in the areas, because in attracting new workers it also brings new customers. Unlike a technological spillover, the real physical proximity of firms and real production work taking place in common areas of interest leave a paper trail, showing up in firms’ growth in general, thus benefiting the entire region by making it more competitive in a global environment.