Trade Liberalisation in South Asia: Impact on Trade and Income Distribution in a Multi-Country CGE Model Focusing on the Sri Lankan Economy

Abstract

In 1995, the seven South Asian countries: Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka, instigated a framework for region-wide integration under the South Asian Preferential Trading Agreement (SAPTA). Subsequently, the member countries agreed that SAPTA would take steps towards transformation into a South Asian Free Trade Area (SAFTA) by the beginning of 2006, with full implementation completed by 31 December 2015. The momentum towards regional preferential trading arrangements and greater regional economic integration raises many important issues for the individual countries and for the South Asian region as a whole; the region has second largest incidence of poverty in the world next to Sub-Saharan Africa. Even though the South Asian Association for Regional Co-operation (SAARC) members initiated regional economic initiatives in 1995, intra-regional trade still stands at an extremely low level, below five per cent even after a decade or so. Hence, it is important to evaluate the economic impacts of SAFTA relative to alternative trade policies to determine which policies boost intra-regional trade and best deliver increased welfare to citizens, thereby helping to alleviate income disparities and poverty in the region. This study does so with a particular emphasis on the income inequality and poverty effects of trade liberalisation in South Asia on households in Sri Lanka.