Trade Opening, Fiscal Reforms, Poverty, and Inequality: A CGE Analysis for Bangladesh

Abstract

We assess the short- and long-run impacts of tariff reform policies on Bangladeshi households' poverty and income distribution by developing an 86-sector, four-factor, and nine-household-group computable general equilibrium (CGE) model. The main findings are that the complete removal of tariffs leads to a decrease in overall poverty with rich household groups in a relatively better position. In the short run poverty incidence increases for rural landless, urban illiterate, and low-educated household groups whereas rural large farmer and urban medium household groups enjoy improvements in all poverty indicators. In terms of income distribution, trade liberalization enhances inequality slightly, but there is a tendency towards more equitable distribution in the long run. The choice of a fiscal compensatory mechanism with consumption tax is likely to play a negative role in terms of poverty and inequality in the short run; however, interestingly, the results are pro-poor in the long run.