South – East Asian Integration in the Context of OIC: Implications of Free Trade among Malaysia, Indonesia and Bangladesh

Organization of the Islamic Conference (OIC) is the second largest intergovernmental organization after UN with its 57 members. OIC accounts for 22.48 percent of world population, 6.64 percent of world GDP, and 9.1 percent of world trade as of 2007. When it comes to having world valuable resources, OIC’s potential is even more striking with more than 70% of oil and nearly 50% of natural gas reserves of the world. However, the level of economic integration and volume of trade among OIC members over the last 4 decades has been less than satisfactory. But recently there have been some efforts towards increased economic cooperation among the member countries as a key strategy for higher economic growth and welfare. Protocol on Preferential Tariff Scheme (PRETAS) signed by nearly a dozen countries proposes a preferential trade regime among the member states. Further steps in the coming years, including possible free trade areas and customs union are also on the agenda. In this context, this paper looks into the likely consequences of an economic integration among three OIC member countries: Malaysia, Indonesia, and Bangladesh. This could be seen as a first step to investigate the possible gains from more comprehensive economic integration initiative including all members of the OIC. Using a multi-sector, multi-country computable general equilibrium framework, we investigate the impact of full trade liberalization among Malaysia, Indonesia and Bangladesh. One should stress that there is not a simple and clear-cut conclusion one can derive: depending on the nature and the degree of integration, the results vary. The simulation results indicate that free trade among these three countries will likely benefit Indonesia and Malaysia while leading to some welfare loss for Bangladesh. Based on the results, it can be suggested that mechanisms be developed in order to strengthen the adjustment capacity of the less developed trade partners. Correspondingly, instead of FTAs, preferential trade arrangements can be considered in the beginning in accordance with the priorities of countries focusing on certain sectors in which they have comparative advantage. Larger integrations may be achieved in the long term gradually through such small-scale integrations.