Abstract
The main objective of this paper is to provide an ex-ante assessment of the poverty and income distribution impacts of the Central American Free Trade Area agreement on Nicaragua. The authors use a general equilibrium macro model to simulate trade reform scenarios and estimate their price effects, while a micro-module maps these price changes into real income changes at the individual household level. A useful insight from this analysis is that even if the final total impact on poverty is not too large, its dispersion across households - due to their heterogeneity of factor endowments, inputs use, commodity production, and consumption preferences - is significant and should be taken into account when designing compensatory policies. Additionally, growth and redistribution decomposition show that, at least in the short to medium run, redistribution can be as important as growth. The main policy message that emerges from the paper is that Nicaragua should consider enlarging its own liberalization to countries other than the United States to boost trade-induced poverty reductions.
Highlights
The debate on the Dominican Republic - Central American Free Trade Agreement (DR-CAFTA) between the U.S, five Central American countries (Costa Rica, Guatemala, Honduras, Nicaragua, and El Salvador), and the Dominican Republic has been heated by the usual arguments surrounding recent trade deals
This paper analyzes the income distribution and poverty impacts of various trade options currently under the scrutiny of Central American policy makers, and in particular, it assesses for Nicaragua the poverty effects of the DR-CAFTA recently signed between five Central American countries plus the Dominican Republic and the U.S The methodology adopted here relies on a general equilibrium macro model, used to simulate various trade reform scenarios and to estimate the price effects of these scenarios, and a micro-module which maps the aggregate general equilibrium price changes onto variations of real incomes at the individual household levels
Among the various assumptions that make this complex analysis treatable, the main one consists of taking into account just the short-term impacts
Summary
The debate on the Dominican Republic - Central American Free Trade Agreement (DR-CAFTA) between the U.S, five Central American countries (Costa Rica, Guatemala, Honduras, Nicaragua, and El Salvador), and the Dominican Republic has been heated by the usual arguments surrounding recent trade deals. The changes in relative factor prices ( between labor and capital remunerations, and between skilled and unskilled labor wages) and relative goods prices (such as between food and non-food items) are linked to the household survey to generate income distribution effects This methodology does not maintain full consistency between the micro data and the CGE results; by combining the two, it maps aggregate results from the CGE to the detailed information available in the household survey and provides a much more nuanced and useful analysis of poverty impact. This approach allows decomposing the total effect on poverty into an aggregate income growth component and a redistribution component
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