We use an average of 84 products by district pair with the majority of products recording nil in either consumption or production value (the products’ details along with their production and consumption values are reported in Tables A1-A6 in the Appendix). Table 10 presents the cosine index for each contiguous district pairs along with the number of matched products that have non zero values on each side of the border. The indices are always positive, which suggests that some degree of complementarity exists for all the district combinations. This result confirms that the trade potential (at least in agriculture) is promising in the entire study region.

The degree of complementarity varies markedly across district pairs. In particular, it is very high between Panchagarh and the Indian districts, with values of the index close to 0.7. Part of the reason for this high value is the importance of rice production in Panchagarh and in consumption in Indian districts, which signals a trade opportunity. In addition, Panchagarh’s production is generally more in line with Indian consumption than in the case of Nepalese districts with a higher number of non-zero matches.

Complementarity between the Nepalese and the Indian districts is lower, with Ilam having the lowest cosine index with both Uttar Dinajpur and Darjeeling. Part of the reason for these lower values is due to the greater importance of tea production in Nepalese districts than in Indian households’ consumption, as explained above. However for a number of products Nepalese districts’ production and Indian districts’ consumption are well above the average, such as milk, meat, potato (for Ilam). These are additional to the potential in tea trade discussed in the next sections.

**Table 10: Cosine index of production-consumption complementarity**

|||**Ilam**|**Jhapa**|**Panchagarh**|
|---|---|---|---|---|
|**Uttar Dinajpur**|Index|**0.112**|**0.250**|**0.694**|
||non 0 match|25|23|32|
|**Darjeeling**|Index|**0.144**|**0.202**|**0.676**|
||non 0 match|19|20|29|

_Note: the index uses consumption data for Indian districts and production data for the other districts_

# <u>Price differentials</u>

Another way to look at potential trade gains from deeper integration is to examine price differentials of homogeneous products across-bordering districts. Such differentials would indicate potentially large spatial arbitrage opportunities if barriers were reduced. In that case increased trade would tend to bring prices of the same commodities more in line with each other.

We use three different sources for price data, one for each country. For India, we rely on the data from the Government of India’s Labour Bureau, which collects district-level consumption price data for industrial workers. The data are available only for Darjeeling. For Nepalese and Bangladeshi districts, we were unable to find price data at the district level, thus we compute unit values from the household surveys. We keep only those products with values that have a small dispersion. After this procedure we are able to match 7 products between Nepalese districts and Darjeeling and 6 products between Panchagarh and Darjeeling. We then convert Indian prices into the other currency using the average exchange rate for the year of the relevant survey (which happens to be 2010 for both Nepalese and Bangladeshi surveys).

It is important to note at least three limitations, which should induce caution when interpreting the results of such comparisons. First, unit values are subject to measurement error as the household has to recall both the price and the quantity of purchases (Gibson and Rozelle, 2005). Second, while 17