Trade Liberalisation and Poverty in Sri Lanka: A Computable General Equilibrium Micro-Macro Analysis

Abstract

Economic theory suggests that removing trade barriers increases economic growth and reduces poverty in developing countries. Mixed empirical evidence has made the trade — poverty linkage a controversial topic as there is still no guarantee that trade liberalisation will benefit the poor. Since the effects of trade on the poor are indirect, the empirical analysis of this relationship has become a complex task. Trade reform is observed at the macro level while income distribution and poverty issues are observed and analysed at the micro level. A general equilibrium model based Input-Output or Social Accounting Matrix or a microeconomic model based on household survey data alone is therefore not able to fill this micro-macro gap. In order to examine the impact of trade liberalisation on poverty and income inequality within a developing country context, this study develops a macro-micro framework to fill this gap by linking computable general equilibrium (CGE) and microsimulation models in top-down mode for the Sri Lankan economy. While the CGE model analyses the effects of trade liberalisation, the microsimulation model analyses the impact on poverty at the household level.