under the range of best-practice.<sup>26</sup> Service-sector infrastructure is estimated to be the most developed in Sri Lanka among the South Asian countries. It is ranked at slightly below the sample average.

The East Asia region is located close to South Asia, however, it is clearly more developed. East Asia also is more advanced in almost all aspects of trade facilitation than the South Asia region.<sup>27</sup> This implies that the South Asian countries are confronting significant obstacles to trade facilitation and that the potential benefits from raising capacity toward levels in the more advanced countries outside the region -- such as East Asia -- could be considerable.<sup>28</sup> It is important to note that capacity building in South Asia and the rest of the world will simultaneously increase both region’s intra-regional trade and the trade with the rest of the world. Yet, by looking at the simulation results for intra-regional trade and the trade with the rest of the world respectively, we identify how much gains come from South Asia’s own improvement and how much gains of the region depend on gains in trade with its partners. The first set of the analysis will explicate the benefits that accrue to South Asia from its own capacity building in trade facilitation. The second set of the analysis will demonstrate the region’s benefit from its capacity building as well as capacity building undertaken by the rest of the world.

Table 1 summarizes the results of the two sets of the analysis. It is found that the total gains in the value of trade flow to South Asia from the capacity building in both the South Asia’s and the rest of the world’s capacity building is approximately 36 billion. This amount is the sum of (A) the gains in the intra- South Asia trade from the region’s own capacity building, (B) the gains in trade between South Asia and the rest of the world from South Asia’s capacity building, and (C) the gains in trade between South Asia and the rest of the world from capacity building by the rest of the world. The first set of the analysis will investigate the detail of the first element (A), and the second set of the analysis will investigate the detail of the second (B) and the third (C) elements.

The simulation analysis based on the gravity model of bilateral trade flow has its own advantage to use the estimated elasticities of trade flow with respect to various influence factors including trade facilitation measures instead of using any assumed values of parameters. There are several drawbacks of this approach that should be remembered. The gravity model treats each sample independently, and hence, capacity building may create trade among certain countries, say, within the regions, and, at the same time, may divert trade with other countries, say, against the rest of the world. This trade diversion

> 26 The “regulatory environment” indicator reflects transparency of government policy and control of corruption. This category is less objective than the other three categories and, therefore is sensitive to the way the evaluation is made. For example, Bangladesh is rated as the most corrupt in the World according to Transparency International 2000-2002.

> 27 The sample for East Asia does not include the OECD countries.

> 28 It also should be noted that the benchmarks of trade facilitation for four South Asian countries are higher than those for most of the developing countries with similar income levels. Therefore, in setting capacity building goals for the region, it is appropriate to compare performance with countries at more advanced stages of development.

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