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Micro-macro linkage, Trade

Research notes · Jun 30, 2010

Welfare and poverty impacts of trade liberalization: A dynamic CGE microsimulation analysis

Selim Raihan

Dept. of Economics, University of Dhaka, Bangladesh

Volume 3(1) Spring 2010

Cite as: S. Raihan; 2010; Welfare and poverty impacts of trade liberalization: A dynamic CGE microsimulation analysis; International Journal of Microsimulation; 3(1); 123–126. doi: 10.34196/ijm.00032

Abstract

This case study focuses on the application of a dynamic top-down CGE microsimulation model of the Bangladesh economy. Specifically, this paper examines the macroeconomic, poverty and welfare impacts of complete and unilateral domestic trade liberalization in Bangladesh over the last two decades. Two different poverty lines for rural and urban households are used, which are endogenously determined by the model taking into account the rural and urban Consumer Price Indices (CPIs). The results suggests marked differences between the short and long run impacts of tariff liberalization. In the short run there are possibilities of reduced welfare and increased poverty. However, in the long run, resources are reallocated towards the more efficient and expanding sectors, generating positive outcomes in terms of welfare gains and poverty reduction.

This article contains 4 tables.

Tables

Table 1. Macroeconomic effects (% change from the base year value).
Variables SR LR
Real GDP −0.18 1.32
Welfare −0.37 0.85
Headcount Ratio 0.74 −4.57
Domestic Terms of Trade 10.73 8.98
Imports 11.45 25.28
Exports 18.22 41.13
Urban CPI −9.13 −6.84
Rural CPI −8.75 −6.61
Skilled wage rate −10.51 −6.49
Unskilled wage rate −8.86 −4.81
Agricultural capital rental rate −8.63 −8.96
Non-agricultural capital rental rate −9.65 −9.03
User cost of capital −9.41 −7.32

Source: Author′s calculations, based on simulation results.

Notes: Short run (SR) refers to year 2008 and long run (LR) refers to year 2020; Welfare is measured as the sum of individual household equivalent variations; Domestic Terms of Trade are represented by the ratio of the domestic export and import price indexes.

Table 2. Percentage changes in volumes from the BaU path.
Imports Domestic Output Exports Domestic Consumption Domestic sales of local goods
SR LR SR LR SR LR SR LR SR LR
Paddy     −2.08 −2.67     −0.45 −0.58 −2.08 −2.67
Grains −7.85 −10.06 0.85 1.09     −2.61 −3.34 0.85 1.09
Other Crops 9.65 12.37 1.83 2.34 9.4 12.05 2.18 2.8 1.73 2.22
Livestock −9.96 −12.77 −0.85 −1.09     −0.89 −1.14 −0.85 −1.09
Poultry     −0.72 −0.92     0.95 1.22 −0.72 −0.92
Shrimp     4.1 5.26 13.78 17.67 0.49 0.63 −1.16 −1.49
Other Fish −9.1 −11.67 −0.48 −0.62 7.57 9.71 −0.58 −0.74 −0.58 −0.74
Rice Mill 2.53 3.24 −0.58 −0.74     −0.46 −0.59 −0.58 −0.74
Grain Mill 27.89 35.76 −2.6 −3.33     −2.18 −2.8 −2.6 −3.33
Food 35.07 44.96 −2.24 −2.87 5.97 7.65 3.88 4.98 −3.2 −4.1
Mill Cloth     −2.62 −3.36     −1 −1.28 −2.62 −3.36
Woven RMG −7.27 −9.32 18.35 23.53 21 26.92 6.84 8.77 6.98 8.95
Knit RMG −5.43 −6.96 31.57 40.48 31.69 40.63 −4.25 −5.45 13.22 16.95
Other Textile 16.51 21.17 18.29 23.45 21.33 27.35 17.47 22.4 18.23 23.37
Other Industry 9.04 11.59 −2.74 −3.51 5.01 6.42 2.14 2.74 −3.23 −4.14
Urban Construction     1.11 1.42     2.81 3.6 1.11 1.42
Rural Construction     0.2 0.26     1.89 2.42 0.2 0.26
Public Construction     1.42 1.82     3.13 4.01 1.42 1.82
Utility     0.13 0.17     1.81 2.32 0.13 0.17
Trade     −0.76 −0.98     0.9 1.16 −0.76 −0.98
Transport     −0.42 −0.54     1.25 1.6 −0.42 −0.54
Housing     −1.19 −1.53     0.46 0.59 −1.19 −1.53
Education & Health     0.11 0.14     1.79 2.29 0.11 0.14
Pub Admin     1.17 1.5     2.88 3.69 1.17 1.5
Private Service     −0.89 −1.14     0.77 0.99 −0.89 −1.14

Source: Author′s calculations, based on simulation results.

Notes: Short run (SR) refers to year 2008 and long run (LR) refers to year 2020.

Table 3. Income and welfare effects (percentage change from BaU path).
Variable Period Rural Urban
Landless Marginal farmer Small farmer Large farmer Non-Agricultural Illiterate Low education Medium education High education
Income SR −8.25 −8.47 −8.59 −8.48 −8.72 −8.42 −8.59 −9.08 −8.93
  LR −4.60 −5.08 −5.39 −5.91 −5.33 −4.91 −5.32 −5.92 −5.96
CPI SR −8.06 −8.02 −8.03 −8.01 −8.18 −8.35 −8.43 −8.53 −8.69
  LR −6.09 −6.05 −6.05 −6.04 −6.18 −6.27 −6.33 −6.37 −6.46
Welfare (EV) SR −0.19 −0.46 −0.52 −0.28 −0.52 −0.06 −0.15 −0.47 −0.10
  LR 1.61 1.01 0.62 0.11 0.86 1.41 0.99 0.40 0.23

Source: Author’s calculations, based on simulation results.

Notes: Short run (SR) refers to year 2008 and long run (LR) refers to year 2020; EV = Equivalent Variation.

Table 4. Poverty Effects (percentage point change from the BaU Poverty Levels).
Poverty Index Period Rural Households Urban Households
Landless Marginal Farmer Small farmer Large farmer Non-Agriculture Total Rural Education
Illiterate Low Medium High Total Urban
P0 2005 0.63 0.56 0.37 0.17 0.45 0.55 0.54 0.45 0.23 0.11 0.32
SR 0.21 0.77 1.83 2.95 0.91 0.92 0.00 0.00 1.43 0.00 0.06
LR −6.30 −3.12 −3.88 0.00 −4.56 −4.83 −4.28 −6.75 0.00 0.00 −4.71
P1 2005 0.171 0.136 0.076 0.027 0.112 0.12 0.15 0.11 0.05 0.02 0.08
SR 0.43 1.25 2.17 1.74 2.31 1.47 −0.11 0.54 3.30 0.00 0.12
LR −7.02 −6.13 −4.45 −2.52 −4.30 −5.62 −6.06 −6.58 −1.51 0.00 −6.04
P2 2005 0.063 0.046 0.021 0.007 0.038 0.051 0.065 0.045 0.032 0.01 0.035
SR 0.57 1.67 2.59 2.46 2.90 1.80 −0.14 0.71 3.36 0.00 0.09
LR −3.34 −2.92 −2.12 −1.20 −2.05 −2.68 −2.89 −3.13 −0.72 0.00 −2.88

Source: Author’s calculations, based on simulation results.

Notes: Short run (SR) refers to year 2008 and long run (LR) refers to year 2020; P0 = Head-count poverty; P1 = Poverty gap; P2 = Squared poverty gap.