Welfare and Poverty Impacts of Tariff Reforms in Bangladesh: a General Equilibrium Approach

Abstract

This paper examined welfare and poverty impacts of trade liberalization in Bangladesh. By using a computable general equilibrium model based on a social accounting matrix, an empirical investigation of the transmission channels linking trade liberalisation to the rest of the economy was carried out by conducting three simulations. In the first two simulations full tariff removal was accompanied by respective increase in production tax rates and income tax rate to ensure revenue neutrality. Third simulation resembles the actual tariff reforms undertaken in the country. This entailed the decline in both the spread and effective average duty rates, thereby reducing the mean rates and variance. The patterns of welfare losses are progressive for rural households but regressive for urban households in the first two simulations. In the third simulation, a clear regressive pattern is observed amont the urban households but it is ambiguous for the rural households. Rural poverty declined due to tariff-income tax reforms and tariff rationalization but worsened in the case of tariff-production tax reforms. Except for the second simulation, the urban poverty headcount, gap and severity all worsen in other two simulations. This confirms that the benefits of tariff rationalization accrue more to the urban rich households compared to their poored counterparts.Trade liberalization, Poverty, Bangladesh, Computable General Equilibrium (CGE) Model