Abstract
Trade reforms in South Asia have been often associated in the popular debate with increases in income inequality and poverty. This creates a growing interest to investigate the link between trade liberalization, poverty and income distribution. This paper provides a quantitative assessment of the likely implications of trade liberalisation in South Asian economies, and in particular the impacts on the household sector. A multi-country computable general equilibrium model (CGE) was constructed by incorporating a multiple household framework into the Global Trade Analysis Project (GTAP) model. The database consists of household survey data of the respective South Asian economies and the version seven of the GTAP database which reflects the 2004 world economy. The study examines the effects of reductions in import tariffs under the SAFTA on the welfare and the income distribution of socio-economic household groups and the implications for government revenue in the respective South Asian economies. The results indicate that although the short-run household gains are limited, in the long-run there is a reallocation of resources from manufacturing to agricultural sectors. Benefits accrue to unskilled rural household labour and to skilled labour in urban households. However, trade liberalisation would lead to reductions in government revenue in all South Asian countries, which in turn may affect the overall welfare of the citizens in those economies.
Highlights
The South Asian Association for Regional Cooperation (SAARC) was established in 1985 by seven countries, viz. Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka, Afghanistan became the eighth member in 2005
The South Asian Preferential Trade Agreement (SAPTA) was replaced by the South Asian Free Trade Agreement (SAFTA) which was signed on January 6, 2004 at the 12th SAARC Summit held in Islamabad
This paper analysed the impact of the SAFTA with full trade liberalisation using a multicountry computable general equilibrium model (CGE) model formulated for South Asia based on the Global Trade Analysis Project (GTAP) model
Summary
The South Asian Association for Regional Cooperation (SAARC) was established in 1985 by seven countries, viz. Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka, Afghanistan became the eighth member in 2005. In addition to the approaches mentioned above, multi-country models have been developed to analyse the links between trade reforms and household income distribution One such example is the global model developed by Ezaki and Nguyen (2008) to investigate the impact of regional economic integration in East Asia on household income and poverty. Based on the review above it is clear that multi-country or global CGE models are the most favoured approach to analyse the issue of trade liberalisation on household income distribution and poverty This is because these types of models offer a complete structure in which to simulate the general impact of trade liberalisation on a national economy in both short run and long run perspectives. Most countries have made progress in poverty reduction following trade liberalisation in the region in the 1990s
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