Reducing poverty and income inequality in Sri Lanka: does trade liberalisation help?

Abstract

The impacts of trade liberalisation in South Asia on poverty and income inequality in Sri Lanka are examined in this paper using a multi-country computable general equilibrium model. A non-parametric extended representative household-agent approach employing micro-household survey data is used to estimate the income inequality and poverty effects. Two trade liberalisation policy simulations are investigated: (1) the formation of a South Asian Free Trade Agreement and (2) unilateral trade liberalisation in South Asia. The results indicate that overall income inequality and income inequality among different household groups in the urban, rural and estate sectors in Sri Lanka would fall under both trade liberalisation policies. Foster, Greer and Thorbecke indices reveal that poverty would also decline in all three sectors. In both instances, unilateral trade liberalisation delivers the greatest reductions.