Welfare and Poverty Impacts of Policy Reforms in Bangladesh: A General Equilibrium Approach

Abstract

Our study assesses the impacts of different policy reforms like domestic trade liberalization, implementation of WTO agreements in textile sector and WTO negotiations of service liberalisation like free movement of natural persons and examines their welfare and poverty implications for the economy of Bangladesh. We use a comparative static computable general equilibrium (CGE) model based on 1995-96 Social Accounting Matrix (SAM) of the Bangladesh economy. The 1995-96 SAM of Bangladesh is characterised by 26 production sectors, 7 factors of production and 7 household groups. The household groups differ with respect to employment status, income levels and expenditure patterns. Since poverty outcomes are manifested and measured at the household level, we concentrate on how the meso-environment facing the households, particularly the poor households, is affected by these policy reforms. The direct effect of trade liberalization through the price channel depends on how changes in prices of importable due to tariff changes, affect the prices faced by households of the imported commodities and get transmitted to other commodities as well. On the other hand, implementation of WTO agreements for textile and apparels (T&A) and thus phasing out of MFA regime from 2005 will likely to affect the prices of T&A in the international market and, therefore, may affect the volume of export of Bangladesh ready-made garments (RMG), which may have important impact on poverty and welfare of the households in Bangladesh. Finally, if free movements of natural persons are allowed, which is an agenda for many developing countries under the WTO negotiations, it may raise the remittances for the Bangladesh economy significantly, which may have important poverty and welfare implications. Our study carries out three simulations to examine the welfare and poverty impacts of policy reforms on the 7 representative household groups. Equivalent variations (EVs) and FGT measures are applied to estimate welfare and poverty changes respectively. The first simulation entail full liberalisation of tariffs and resultant reduction in government revenues are mobilized by enhancing (i.e. by 55 percent) the existing production taxes and imposing new taxes on construction sector such that pre-simulation budgetary position of the government is retained; in the second simulation export of RMG is reduced by 25 per cent; and in the third simulation the remittances are increased by 50 per cent. The summary of the simulation outcomes is as follows: (1) In the first simulation, it is observed that, EVs are negative for all household groups. The values of the EVs of rural households envisage relatively larger losses for the well-off groups (e.g. large farmer and non-farm) compared to the poor household groups (e.g. labour and small farmer). The pattern is however reverse in the case of urban group with the EV of poor household group (i.e. worker low skilled) fell more than that of urban rich household groups (e.g. medium-skilled and professional). It also appears that welfare losses are larger for rural household groups compared to their urban counter parts. In the first simulation, poverty status of all household groups has deteriorated. The loss, however, is marginally higher for the urban households compared with the households who reside in the rural location. (2) In the second simulation (fall in export of RMG by 25 per cent), interestingly though incomes of all households decline, equivalent variations and consumption growth of all households increase indicating improvements in welfare. This result may seem to be counter-intuitive. The possible explanation behind such result may be the fact that in our static CGE setting due to the fall in export of RMG, there is an increase in the domestic supply, which results in fall in the domestic prices of goods. This fall in prices may be higher than the fall in income, which results in increase in real income. However, this improvement may not sustain in the long-run. There are improvements in poverty profiles for the rural households, and, except for the head-count poverty measure, the gap and severity of urban poverty increase. (3) In the third simulation, a 50 per cent increase in remittances raises welfare for all the household groups and the welfare improvement is higher for urban professional household, rural large-farm and non-farm households. On the other hand, the poverty profiles of the rural households deteriorate, and though there is an improvement in urban head-count index the gap and severity of urban poverty increase.