The macroeconomic, industrial and distributional effects of removing tariffs in Bangladesh

Hoque, Serajul (2008): The macroeconomic, industrial and distributional effects of removing tariffs in Bangladesh.

Abstract

This paper examines the economic effects of removing tariffs in Bangladesh using a computable general equilibrium (CGE) modelling approach. The results of the simulations indicate that in the short-run a funded tariff cut with fixed real national savings would increase employment slightly and hence would expand GDP. There would be a small economy-wide welfare gain as measured by real consumption. The sectoral results showed that export-oriented industries would experience an expansion in output and employment. There also would be positive effects on the suppliers to these industries. Lightly-protected industries, which rely heavily on imported intermediate inputs, are projected to show robust expansion as they would benefit from a cost reduction. However, highly-protected, import-competing industries would suffer a contraction in output and employment as they would face increased competition from imports due to the removal of tariffs. The simulation results also indicate that there would have some noticeable effects on the distribution of real consumption between different household groups. Overall, urban households would experience an expansion in real consumption and rural households would suffer a contraction as a consequence of the funded tariff cut with fixed real national savings.

• Item Type: MPRA Paper
• Language: English
• Keywords: CGE model; trade liberalisation; income distribution; Bangladesh
• Subjects: F - International Economics > F1 - Trade > F13 - Trade Policy ; International Trade Organizations; C - Mathematical and Quantitative Methods > C6 - Mathematical Methods ; Programming Models ; Mathematical and Simulation Modeling > C68 - Computable General Equilibrium Models; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O15 - Human Resources ; Human Development ; Income Distribution ; Migration

References

Ahammad, H. (1995), Foreign Exchange and Trade Policy Issues in a Developing Economy, Avebury, Aldershot, England. Annabi, N., Khondker, B., Raihan, S., Cockburn, J. and Decaluwe, B. (2006), “Implications of WTO Agreements and Domestic Trade Policy Reforms for Poverty in Bangladesh: Short vs. Long Run Impacts”, in T.W. Hertel and L.A. Winters (Eds) Poverty and the WTO: Impacts of the Doha Development Agenda, Palgrave Macmillan, Hampshire, UK. Armington, P.S. (1969), “The Geographic Pattern of Trade and the Effects of Price Changes”, IMF Staff Papers, XVI, July 1969, International Monetary Fund (IMF), New York, pp. 176-199. Bandara, J.S. (1991), “Computable General Equilibrium Models for Development Policy Analysis in LDCs”, Journal of Economic Surveys, Vol. 5, No. 1, pp 3-69. Chowdhury, O.H. (1989), “Equity and Efficiency Trade-off in Bangladesh Tax Policy Reform: A Computable General Equilibrium Model”, Philippine Review of Economics and Business, Vol. XXVI, No. 2, pp. 262-286. CIRDAP (Centre on Integrated Rural Development for Asia and the Pacific) (2000), “Impacts of Tariff Liberalisation on Distribution and Resource Allocation in Bangladesh”, MAP Technical Paper Series No. 13, CIRDAP, Dhaka. de Melo, J. (1988), “Computable General Equilibrium Models for Trade Policy Analysis in Developing Countries: A Survey”, Journal of Policy Modeling, Vol. 10, Issue 4, pp. 469-503. Decaluwe, B. and Martens, A. (1988), “CGE Modeling and Developing Economies: A Concise Empirical Survey of 73 Applications to 26 Countries”, Journal of Policy Modeling, Vol. 10, Issue 4, pp. 529-568. Dixon, P.B., Parmenter, B.R., Sutton, J. and Vincent, D.P. (1982), ORANI: A Multisectoral Model of the Australian Economy, North-Holland, Amsterdam. Dixon, P.B., Rimmer M.T. and Tsigas, M.E. (2005), “Macro Industry, States Effects in the U.S. of Removing Major Tariffs and Quotas”, Centre of Policy Studies, Monash University, Melbourne, available at http://www.monash.edu.au/policy/ftp/report/regsc.pdf accessed on August 4, 2005. Dollar, D. and Kraay, A. (2001), “Trade, Growth and Poverty”, Development Research Group, World Bank, Washington D.C. Fontana, M. and Wobst, P. (2001), “A Gendered 1993-94 Social Accounting Matrix for Bangladesh”, TMD Discussion Paper No. 74, International Food Policy Research Institute, Washington D.C. Fontana, M., Wobst, P. and Dorosh, P. (2001), “Macro Policies and the Food Sector in Bangladesh: A General Equilibrium Analysis”, Trade and Macroeconomics Division Discussion Paper No. 73, International Food Policy Research Institute (IFPRI), Washington D.C. GOB (2003a), “Input Output Table 2000 for Bangladesh”, Sustainable Human Development Unit, Planning Commission, Ministry of Planning, GOB, Dhaka. GOB (2003b), “Social Accounting Matrix 2000 for Bangladesh”, Unpublished document, Sustainable Human Development Unit, Planning Commission, Ministry of Planning, GOB, Dhaka. GOB (2003c), Bangladesh Economic Review 2003, Economic Adviser’s Wing, Finance Division, Ministry of Finance, GOB, Dhaka, available at <http://www.mof.gov.bd/previous_budget/economic_2003/economic_review_english.html> accessed on 20 November 2005. Harrison, W.J. and Pearson, K.R. (1996), “Computing Solutions for Large General Equilibrium Models Using GEMPACK”, Computational Economics, Vol. 9, pp.83-127. Hoque, S. (2006), A Computable General Equilibrium Model of Bangladesh for Analysis of Policy Reforms, PhD Thesis, Centre of Policy Studies, Faculty of Business and Economics, Monash University, Melbourne. Horridge, J.M., Parmenter, B.R., Cameron, M., Joubert, R., Suleman, A. and Jongh, D.de. (1995), “The Macroeconomic, Industrial, Distributional and Regional Effects of Government Spending Programs in South Africa”, General Paper No. G-109, Centre of Policy Studies, Monash University, Melbourne. Khan, F.C. (2000), "A Decade of Trade Liberalization: How has Domestic Industry Fared in Bangladesh?", Journal of Bangladesh Studies, Vol. 2, No. 1. Khan, F. C. (1996), "The Incidence of Import Liberalization with and without a Value Added Tax: An Application to Bangladesh", Journal of Policy Reform, Vol. 1, No. 4, pp. 389-412. Khondker, B.H. and Raihan, S. (2004), “Welfare and Poverty Impacts of Policy Reforms in Bangladesh: A General Equilibrium Approach”, presented at the Seventh Conference on Global Economic Analysis, June 17 - 19, 2004, Washington D.C. Klein, L.R. and Rubin, H. (1947-1948), “A Constant-Utility Index of the Cost of Living”, Review of Economic Studies, Vol. 15, No. 2, pp. 84-87. Madden, J. (1990), FEDERAL: A Two-Region Multisectoral Fiscal Model of the Australian Economy, PhD Thesis, Department of Economics, University of Tasmania, Australia. Mujeri, M. and Khondker, B. (2002), “Poverty Implications of Trade Liberalization in Bangladesh: A General Equilibrium Approach”, (mimeo.), Department For International Development (DFID): Dhaka. Noman, A.N.K. (2002), The impact of foreign trade policies and external shocks on the agricultural sector of Bangladesh, Margraf Verlag, Weikersheim, Germany. Pereira, A.M. and Shoven, J.B. (1988), “Survey of Dynamic Computational General Equilibrium Models for Tax Policy Evaluation”, Journal of Policy Modeling, Vol. 10, Issue 3, pp. 401-436. Powell, A.A. and Lawson, T. (1990), “A Decade of Applied General Equilibrium Modelling for Policy Work”, Chapter 8 in L. Bergman, D.W. Jorgenson and E. Zalai (Eds), General Equilibrium Modelling and Economic Policy Analysis, Blackwell, Cambridge, pp. 241-290. Rahman, M. and Bhattacharya, D. (2000), “Bangladesh Experience With Trade and Investment Liberalisation: A Perspective on Poverty Alleviating Implications, Country”, Consumer Unity and Trust (CUTS) Study, Centre for International Trade, Economics and Environment, Jaipur, India. Rodriguez, F. and Rodrik, D. (2000), “Trade Policy and Economic Growth: A Skeptic’s Guide to the Cross-National Evidence”, in B. Bernanke and K. Rogoff (Eds) NBER Macroeconomics Annual 2000, MIT Press, Cambridge, Massachusetts. Salim, R. A. (1998), “An Assessment of Trade and Industrial Policy Reforms in Bangladesh”, Asia-Pacific Development Journal, Vol. 5, No. 1, pp. 71-101. Shoven, J.B. and Whalley, J. (1984), “Applied General-Equilibrium Models of Taxation and International Trade: An Introduction and Survey”, Journal of Economic Literature, Vol. 22, Issue 3, pp. 1007-1051. United States International Trade Commission (USITC), (2004), “Textiles and Apparel: Assessment of the Competitiveness of Certain Foreign Suppliers to the U.S. Market”, USITC Publication No. 3671, Washington DC, available at http://hotdocs.usitc.gov//docs/pubs/332/pub3671/pub3671.pdf accessed on 30 January 2006. World Bank (2002), Globalization, Growth, and Poverty: Building an Inclusive World Economy, Policy Research Report, World Bank, Washington D.C. World Bank (1996), Bangladesh: Trade Policy Reform for Improving the Incentive Regime, World Bank, Washington D.C. World Bank (1991), World Development Report 1991, World Bank, Washington D.C. Yanikkaya, H. (2002), “Trade openness and economic growth: a cross-country empirical investigation”, Journal of Development Economics, 72, 57-89.