Trade Liberalization and the Dynamic of Poverty in Tunisia: A Layered Microsimulation Analysis

Abstract

Trade liberalization was an integral part of the structural adjustment program that has been adopted by Tunisia since 1986. The trade policy reform has been pursued and consolidated by joining the WTO in 1990 and by concluding a FTA with the EU in 1995. The agreement called for a gradual removal of all tariff and non tariff barriers on industrial goods and the creation of a nonagricultural free-trade zone, over a twelve years transition period. It has been progressively implemented since 1996 and came into force on 1998. A complete dismantlement of these barriers on EU imports will be then achieved by 2008. The effects of this trade liberalization process on poverty in Tunisia are examined, using a layered dynamic CGE-microsimulation approach. A dynamic CGE model, which accounts for the structural features of the Tunisian Economy, endogenously generates the evolution of prices and, for each distinguished household group, income paths under protection and freer trade assumptions. These results are then used to assess the Kings (1983) equivalent income of each household, using a sample of 2500 households from 1995 household survey, and so the effects of the simulated changes on poverty. Dominance tests, through the growth incidence curve, are also used to avoid the arbitrariness of choosing a poverty line and a poverty measure. Simulation results show that although trade openness slowdowns the downward trend of poverty in the short and medium-run, it enhances poverty reduction in the long-run.