variation. The regions away from the main trade corridors have the poorest infrastructure and face the greatest constraints. Raising the level of the infrastructure and reducing regulatory barriers to trade, whether international or national, will help integrate the lagging regions into both the national and global economies, reducing the relative advantages of the coastal states.

- Third, factor mobility, and in particular migration rate, is low in South Asia. At the official level the restrictions on labor mobility between countries is huge. Within countries, labor mobility is also limited.  For example, only 2 million people migrate every year in India from rural to urban areas, compared to nearly 20 million people in China. Increased agricultural productivity will help to reallocate labor and capital from low value activities (agriculture) to high value activities (manufacturing and services sectors) and support growth.

- Fourth, South Asian firms are disproportionately small. They are unable to reap the benefits of scale economies because of labor and regulatory restrictions which prevents them from growing. The policy changes aimed at taking advantage of the interactions between geography, transportation, factor mobility, and scale economies will lift growth not only in the lagging regions but also support higher growth rates at the country level and in South Asia.

In summary, regional cooperation will support higher growth, especially in the lagging regions, by reducing trade and transport barriers thereby promoting trade, facilitating factor mobility, reducing transport cost, and supporting agglomeration benefits. These ideas are developed in greater detail below.

# **_A.  Regional Cooperation for Supporting Growth in the Lagging Regions_**

In terms of policy focus, the two main ways by which regional cooperation can foster higher growth in South Asia and especially in the lagging regions is by promoting market integration and by improving infrastructure.

_Market Integration_ : Market integration allows economic agents to interact across spatial scales: local, regional, and international. The extent to which economic agents take advantage of market integration is impacted positively by density, but negatively by both distance and division.<sup>10</sup> A high level of economic density implies “thick markets” in the exchange of goods and services, as well as in the informal exchange of ideas. This creates productivity advantages for firms and welfare advantages for workers. By contrast, a high level of distance to density denies economic agents the opportunity to access these markets with consequent negative impacts on poverty and well-being.<sup>11</sup>

> 10 See Fujita, M., P. Krugman, and A. J. Veneables, 1999, The Spatial Economy: Cities, Regions, and International Trade, Cambridge, Mass: MIT Press.

> 11 Distance here is to be interpreted as an economic and social concept, rather than a purely physical concept.  As such, a location which is physically close to a region of high density can, in principle, still be economically distant.  This will be the case, for example, if the quality of spatially connective infrastructure linking the two areas is poor or there are economic, social and institutional barriers to commuting and the free flow of labor between the areas.

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