An Estimation of the Latent Bilateral Trade between India and Pakistan Using Panel Data Methods

The aim of this paper is to estimate the potential for trade between India and Pakistan, assuming a normalized neighborly relationship. We used an augmented gravity model with a panel data for 21 years. This paper utilizes the panel fixed effects decomposition and Hausman and Taylor estimation methods to estimate the effect of time-invariant variables on the volume of potential trade. The present volume of trade is dwarfed by our estimates of the potential trade. This seems to ratify the expectation of businesses on both sides. It would appear that the development of a bilateral relationship between India and Pakistan, in the context of regionalization, should be motivated by strong economic considerations. It would include sector-driven as well as market-access approaches. While the theoretical background appears subtle, strategic market consequences arise from the dynamics of regional market structure. Assuming a positive relationship between trade and per capita income, here is a peace dividend that is difficult to ignore in a regional environment of oppressive poverty.