Impact of Trade Policy Reforms on Poverty and Income Inequality in Bangladesh: A Computable General Equilibrium Analysis

Abstract

In the 1980s and 1990s Bangladesh implemented various trade liberalisation reforms as part of its Structural Adjustment Programmes. During these periods, the country's growth performance was impressive. Nevertheless, a continuing high prevalence of poverty and increased income inequality raised concern that the trade liberalisation policies may have worked against the poor. Thus, the widely stated view that trade liberalisation is pro-poor has become a matter of great debate in the case of Bangladesh. The present study develops an 86-sector, 4-factor and 9-household group poverty-focused static computable general equilibrium (CGE) model for Bangladesh. This is used to analyse the poverty and distributive effects of tariff reform policies on various household groups, in both the short run and the long run. Unlike traditional ORANI type CGE models, the present model has a social accounting matrix (SAM) extension. The SAM provides a quantitative framework in which the value added originating in the production process flows down to various factors of production as returns, which in turn flow to various household groups and other institutions as income. The model also endogenises the monetary poverty line to estimate poverty incidence among different household groups. A non-parametric representative household approach is used to estimate income distribution functions for each group of households from household survey data. These are then linked to the CGE model in a top-down fashion to estimate absolute and relative poverty.