Liberalizing trade, and its impact on poverty and inequality in Nicaragua.

Abstract

The Doha round of multilateral trade negotiations stalled in 2008 owing in no small degree to a lack of agreement on the terms of substantially reducing trade-distorting support for agricultural products and to what extent this will be beneficial to developing countries. Nicaragua presents an interesting case in point, being one of the poorest economies in Latin America with still a relatively large agricultural sector and high degrees of rural poverty. In 2005, the country signed a free trade agreement with the United States. This chapter provides a quantitative analysis addressing that question. It does so using a computable general equilibrium (CGE) model for Nicaragua coupled with a micro-simulation methodology. The first section provides background information on trade reform policies and macroeconomic trends in Nicaragua, with special reference to the agricultural sector and rural poverty. The section that follows describes the main features of the CGE model and the micro-simulation methodology used to assess the impact on poverty and inequality. The author then lay out the model scenarios considered, which include liberalizations of agricultural and all merchandise goods trade by the rest of the world and by Nicaragua itself. That is followed by a summary analysis of results. This analysis includes tests for the sensitivity of the results with respect to assumptions regarding the responsiveness of trade to price liberalization, as identified through the relevant trade elasticities. The final section provides conclusions and possible policy implications.