Learning and Teaching Unit
Naranpanawa, Athula 2005, Trade liberalisation and poverty in a computable general equilibrium (CGE) model: The Sri Lankan case, PhD thesis, Griffith University, Business school.
Problem/issue: Many trade and development economists, policy makers and policy analysts around the world believe that globalisation promotes growth and reduces poverty. However, critics of globalisation argue that in developing countries integration into the world economy makes the poor poorer and the rich richer. Questions about the relationship between globalisation and poverty remain unanswered.
Fields of literature: economics, poverty, developing countries, Sri Lankan economy
‘Gap’ in the literature (discussed at length in chapter 3): Much of the research about the links between openness, growth and poverty are based on cross-country comparisons. While this research suggests that growth is pro poor, it is unclear how it affects different income groups and sectors within a single economy.
Sri Lanka offers an appropriate context to study income differentials because, despite being the first country in the South Asian region to liberalise its trade substantially, it continues to manifest significant poverty mainly among the rural population. There is a considerable literature to support a Sri Lankan specific computable general equilibrium (CGE) model to simulate the economic effects of trade liberalisation. However, a poverty focused CGE model for Sri Lanka has never been developed.
Question: Does trade reform increase or decrease relative poverty within a country, specifically within Sri Lanka?
A poverty focussed CGE model for the Sri Lankan economy was developed in order to simulate the effects of trade liberalisation upon poverty. As a requirement for the development of such a model, a social accounting matrix of the Sri Lankan economy for the year 1995 was constructed. In order to estimate income differences between urban and rural groups, income distribution for different household groups was empirically estimated and linked to the CGE model in 'top down' mode. This enabled a wide range of household level poverty and inequality measurements to be computed. Finally, a set of simulation experiments was conducted to identify the impact of trade liberalisation in manufacturing and agricultural industries on absolute and relative poverty at household level.
The results show that trade liberalisation of manufacturing industries increases economic growth and reduces absolute poverty across low income household groups. However, very little of this growth 'trickles down' to the poorest people in rural Sri Lanka. The liberalisation of agricultural industries also has little impact upon the incomes of rural groups. Reduced flow of government transfers to households following the loss of tariff revenue may be blamed for this trend.
Although trade reform has a positive impact upon aggregate levels of poverty, the Sri Lankan case suggests that it can also increase the gap between the rich and the poor. This suggests that trade liberalisation should be accompanied by active policy intervention to alleviate the poverty of specific groups and avoid increases in relative poverty within a country.
Last sentence: 'Hence this study highlights the importance of the implementation of redistribution measures to accompany trade liberalisation in developing countries'
