EXPLORING THE LINKS BETWEEN TRADE REFORMS AND HOUSEHOLD INCOME DISTRIBUTION IN SOUTH ASIA: A GENERAL EQUILIBRIUM APPROACH

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.