Likewise, divisions, created by conflict, transport costs and both formal and informal barriers to trade, separate economic agents in one country from the advantages of density in other countries. By reducing distance and division, market integration, both within and between countries, brings economic agents in lagging regions closer to the density of leading regions, promoting positive spillover effects which enhance spatial multipliers.<sup>12</sup> Given that South Asia is the most densely populated region in the world, it is well placed to bring areas close to the market and bolster the value of the spatial multiplier. Market integration (global, regional, and within country) can ignite growth, as countries benefit from increased demand, agglomeration and scale economies, improved factor mobility, and the free flow of ideas and technology. Market integration can pull weak countries towards income levels that they would be unable to achieve in isolation. Land locked countries, in particular, (Afghanistan, Nepal) can benefit from cross-country growth spillovers and neighborhood effects. Neighboring countries can provide mutually beneficial economic linkages, spillovers, and complementarities that allow groups of countries to increase their incomes.

The region has significantly more room to benefit from market integration globally, across countries within South Asia, and within country. Globally, South Asia’s rapid GDP growth benefited from rapid expansion in trade. It has experienced one of the fastest growth rates in trade (figure 10) averaging 10.8 percent in 2007, following growth of almost 12 percent during 2005-06, which was the highest among all regions. Yet, the region has more room to benefit from trade. Despite recent reforms, South Asia continues to have the most restrictive tariff policies compared to other regions (figure 11). Among developing countries, South Asia has the most protective agricultural trade policies. South Asia’s global integration, measured by trade as a ratio of GDP, was 49 percent in 2007, which although higher than its late 1990s ratio of 20 percent, is the lowest among developing countries.<sup>13</sup> Within South Asia, market integration is the lowest in the world as reflected by intraregional trade between countries being less than 2 percent of GDP for South Asia compared to 40 percent for East Asia. Border barriers to trade and services have mostly disappeared in the rest of the world but not in South Asia. Divisions across countries in South Asia have increased dramatically over the last four decades.<sup>14</sup> In 1948, South Asia’s share of intra-regional trade as a share of total trade was 18 percent. In 2000-2007, it fell to 5 percent of total trade. Cost of trading across borders in South Asia is high. At the Petrapole-Benapole, one of the main borders between Bangladesh and India, trucks wait for more than 100 hours to cross the border. It takes 200 signatures in Nepal to trade goods with India, and some 140 signatures in India to trade goods with Nepal. It is estimated that trade between India and Pakistan, currently at US$1 billion,<sup>15</sup> could jump to US$6 to 10 billion, if divisions were removed. Divisions in South Asia have been aggravated by conflict.

> 12 A spatial multiplier is a concept which captures the additional beneficial effects which result from a policy change as a result of the feedback from spillovers between neighboring regions. 13 See World Bank, 2008a.

> 14 Borders and divisions are not the same thing. Borders define a nation state whereas divisions influence the flow of people, goods, services, capital, ideas and technology across borders. 15 Includes both formal and informal trade.

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