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EFFECTS OF UNILATERAL TRADE LIBERALIZATION IN SOUTH ASIAN COUNTRIES:

Applications of CGE Models of Bangladesh, India, Nepal, Pakistan and Sri Lanka

Selim RaihanJune 2015

DEVELO

PMEN

T PAPERS 1505

ESCAP

SOUTH AND SOUTH-WEST ASIA

OFFICE

South and South-West Asia Development Papers 1501

June 2015

2

Disclaimer: The views expressed in this Development Paper are those of the author(s) and

should not necessarily be considered as reflecting the views or carrying the endorsement of

the United Nations. Development Papers describe research in progress by the author(s) and

are published to elicit comments and to further debate. This publication has been issued

without formal editing.

For any further details, please contact:

Dr. Nagesh Kumar, Director

South and South-West Asia Office (SSWA)

Economic and Social Commission for Asia and the Pacific (ESCAP)

C-2 Qutab Institutional Area, New Delhi-110016, India

Email: [email protected]

Effects of Unilateral Trade Liberalization in South Asian Countries

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Contents

Foreword ................................................................................................................................................. 6

Abstract ................................................................................................................................................... 7

Executive Summary ................................................................................................................................ 8

I. INTRODUCTION ................................................................................................................................. 12

II. METHODOLOGY .............................................................................................................................. 12

2.1. The CGE Model ............................................................................................................................. 12

2.2. Brief Description of Social Account Matrix (SAM) for 2012 ..................................................... 14

2.3. Structure of the Economies of Bangladesh, India, Nepal, Pakistan and Sri Lanka as in 2012

SAM ....................................................................................................................................................... 16

III. TARIFF LIBERALIZATION SIMULATION IN THE CGE MODELS AND CLOSURES ..... 19

IV. SIMULATION RESULTS ................................................................................................................. 19

4.1. Macroeconomic Effects ................................................................................................................. 19

4.2. Production Effects on Broad Sectors ........................................................................................... 22

4.3. Effects on Exports by Broad Sectors ........................................................................................... 23

4.4. Effects on Imports by Broad Sectors ........................................................................................... 25

4.5. Effects on Output in All Sectors ................................................................................................... 26

4.6. Effects on Exports in All Sectors .................................................................................................. 28

4.7. Effects on Imports in All Sectors .................................................................................................. 29

4.8. Effects on Factor Market .............................................................................................................. 31

4.9. Effects on Capital Returns ............................................................................................................ 35

4.10. Effects on household Income ...................................................................................................... 36

V. CONCLUSION ..................................................................................................................................... 39

REFERENCES .......................................................................................................................................... 41


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List of Tables

Table 1: Description of Bangladesh SAM Accounts for 2012 ..................................................... 14

Table 2: Description of India SAM Accounts for 2012 ................................................................ 15

Table 3: Description of Nepal SAM Accounts for 2012 .............................................................. 15

Table 4: Description of Pakistan SAM Accounts for 2012 .......................................................... 16

Table 5: Description of Sri Lanka SAM Accounts for 2012 ........................................................ 16

Table 6: Structure of the Bangladesh economy in 2012 as reflected in the SAM 2012 ............... 17

Table 7: Structure of the Indian economy in 2012 as reflected in the SAM 2012 ....................... 17

Table 8: Structure of the Nepal economy in 2012 as reflected in the SAM 2012 ........................ 18

Table 9: Structure of the Pakistan economy in 2012 as reflected in the SAM 2012 .................... 18

Table 10: Structure of the Sri Lanka economy in 2012 as reflected in the SAM 2012 ................ 19

Table 11: Macro-economic effects (% change from base) ........................................................... 20

Table 12: Percent changes in value added, capital stocks and employment: Bangladesh ............ 31

Table 13: Percent changes in value added, capital stocks and employment: India ...................... 32

Table 14: Percent changes in value added, capital stocks and employment: Nepal ..................... 32

Table 15: Percent changes in value added, capital stocks and employment: Pakistan ................. 33

Table 16: Percent changes in value added, capital stocks and employment: Sri Lanka ............... 33


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List of Figures

Figure 1: Effects on key macroeconomic variables (% change from base) ............................. 20

Figure 2: Production-related effects (% change from base) .................................................... 21

Figure 3: Percent changes in the volume of output (by broad sector) ..................................... 22

Figure 4: Percent changes in the price of output (by broad sector) ......................................... 23

Figure 5: Percent changes in the volume of exports (by broad sector) .................................... 23

Figure 6: Percent changes in the price of exports (by broad sector) ........................................ 24

Figure 7: Percent changes in the volume of imports (by broad sector) ................................... 25

Figure 8: Percent changes in the price of imports (by broad sector) ....................................... 26

Figure 9: Percent changes in the volume of output (by sector) ............................................... 26

Figure 10: Percent changes in the price of output (by sector) ................................................. 27

Figure 11: Percent changes in the volume of exports (by sector) ............................................ 28

Figure 12: Percent changes in the price of exports (by sector) ................................................ 29

Figure 13: Percent changes in the volume of imports (by sector) ........................................... 30

Figure 14: Percent changes in the price of imports of (by sector) ........................................... 30

Figure 15: Percent changes in employment (by skill and broad sector) .................................. 34

Figure 16: Percent changes in total sectoral employment ....................................................... 35

Figure 17: Percent changes in capital returns (by broad sector) .............................................. 36

Figure 18: Percent changes in nominal household income (by household categories) ........... 37

Figure 19: Percent changes in household-specific CPI (by household categories) ................. 37

Figure 20: Percent changes in household real incomes (by household categories) ................. 38


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Foreword

The Development Papers series of the UNESCAP South and South-West Asia Office

(UNESCAP-SSWA) promotes and disseminates policy-relevant research on the development

challenges facing South and South-West Asia. It features policy research conducted at

UNESCAP-SSWA as well as by outside experts from within the region and beyond. The

objective is to foster an informed debate on development policy challenges facing the subregion

and sharing of development experiences and best practices.

In this paper prepared by Selim Raihan for UNESCAP-SSWA, country specific Computable

General Equilibrium (CGE) models are employed to assess the economy-wide effects of

unilateral trade liberalization in five selected South Asian countries; Bangladesh, India, Nepal,

Pakistan and Sri Lanka. Effects of elimination of all import tariffs on economic growth, trade,

employment and household income are captured through exogenous shocks to the price operator.

Though the degree of effects varies from country to country, all the five selected South Asian

countries are observed to benefit out of improving economic conditions. A general fall in import

prices is followed by increase in domestic demand, employment, wage rates, return to capital and

return to land. Terms of trade improves for all five countries with depreciation in real exchange

rates and rising export competitiveness. Higher exports in turn pull up gross production across

sectors.

The analysis finds growth in real GDP triggered by tariff elimination in South Asian countries

ranging from 0.6 percent in Sri Lanka to 3.1 percent in Bangladesh. Certain sectors such as

textiles and clothing are well placed to secure massive export growth, which may go up by more

than 13 per cent in Bangladesh and by 10 per cent in India. One of the key observations of the

paper is the positive impact of across-the-board import tariff cuts on both agricultural output and

exports. This implies that some vital solutions for reviving South Asia’s farm sector could be

sought through a more comprehensive approach to trade liberalization.

Permitting us to appreciate a larger picture without the limitations of partial trade models, this

paper offers rich insights on potential effects of unilateral trade liberalization programmes. We

hope that this paper’s exposition of economy-wide effects will inspire trade practitioners from

the subregion to fast-track trade reforms.

Nagesh Kumar

Head, ESCAP South and South-West Asia Office


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Effects of Unilateral Trade Liberalization in South Asian Countries:

Applications of CGE Models of Bangladesh, India, Nepal, Pakistan and Sri Lanka

Selim Raihan1

Abstract

This paper explores the economy-wide effects of trade liberalization in five South Asian

countries (Bangladesh, India, Nepal, Pakistan and Sri Lanka) using updated Social Accounting

Matrices (SAM) and static Computable General Equilibrium (CGE) models of these countries

for the year 2012. The CGE framework captures the impact of unilateral trade liberalization on

macro-economy, trade, employment and household welfare in the selected countries by tracing

the price effects of exogenous shocks, where the variations in prices lead to re-allocation of

resources among competing activities, which then may alter the factorial income and, hence, the

distribution of household income. The results show that trade liberalization measures stimulates

growth in employment, for skilled and unskilled labour, as well as real income for all the five

South Asian countries. Tariff elimination increases real GDP at factor cost by 3.1 percent in

Bangladesh, by 2.5 percent in India, by 2 percent in Nepal, by 0.9 percent in Pakistan, and by 0.6

percent in Sri Lanka. The relative price and wage changes in these five economies are also

observed to culminate in a general depreciation of real exchange rates, making their exports

more competitive in the world markets.

JEL Codes(s): F14, F16

Key words: South Asia, Unilateral Trade Liberalization, Computable General Equilibrium

Models, Trade and Employment, Household Income Distribution.

1 Professor, Department of Economics, University of Dhaka, Bangladesh and Executive Director, South Asian

Network on Economic Modeling (SANEM), email: [email protected]. This paper was written with

support from UNESCAP Subregional Office for South and South-West Asia.

mailto:[email protected]


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Executive Summary

This paper provides a report of developing CGE models for five South Asian countries

(Bangladesh, India, Nepal, Pakistan and Sri Lanka) and their application in the analysis of

impact of unilateral trade liberalization on macro-economy, trade, employment and

household welfare in these countries. Trade liberalization has been among the major policy

reforms in South Asia. This paper explores the economy-wide effects of trade liberalization

in Bangladesh, India, Nepal, Pakistan and Sri Lanka using the most of updated Social

Accounting Matrices (SAM) of these countries and CGE models of these countries. The

advantage of a CGE framework is that it traces the price effects of the exogenous shock. In

an increasingly market-oriented economy, the variations in prices may be the most important

sources of re-allocation of resources among competing activities, which then may alter the

factorial income and, hence, the distribution of personal income. This exercise employs a

static CGE model for five South Asian countries and the Social Accounting Matrix (SAM) of

these countries for the year 2012.

This experiment undertakes a unilateral elimination of all commodity tariffs. The following

closure assumptions are imposed on the CGE models of the South Asian countries. On the

income-side: total stocks of land, tax rates and technical changes are fixed. Capital is sector

specific. Rigidities in the labor market are reflected by allowing aggregate employment to

change—i.e., labor is in elastic supply with a pool of unemployed workers waiting to be

hired—at a wage (nominal and real) indexed to the economy-wide consumer price index

(CPI). On the expenditure-side: Total real inventories, total real investment and total real

government expenditures are held fixed, whereas both aggregate real household consumption

and real trade balance (exports – imports) are endogenous. The consumer price index (CPI) is

the model’s numéraire.

The macroeconomic effects of the tariff liberalization simulation for the five South Asian

countries suggest that the price of imports in local currency falls by larger margins in

Bangladesh and Nepal. Bangladesh experiences the largest rise in total demand for imports

followed by India. Total domestic demand increases most in Bangladesh, followed by

Pakistan. The average cost of domestic production increases in all countries due to rise in

primary factor costs. India has the highest rise in nominal return to capital followed by

Bangladesh. The GDP price deflator increases in all countries; because, though tariff

reduction lowers the price of investment goods, this is offset by the rise in primary factor

costs, nominal wage, return to capital and return to land. The GDP price deflator has the

highest rise in Bangladesh followed by India and Nepal. The real exchange rate depreciates

in all countries with the largest depreciation in Bangladesh. The terms of trade improves in


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all countries with the largest improvement in Bangladesh. The real exchange rate

depreciation makes exports more competitive in the world market. Hence, exports expand

and the largest positive effect on exports is found for Bangladesh. Higher exports pull up

economy-wide gross production for all five countries with the largest positive effect on

Bangladesh. The largest positive effect on real GDP is seen on Bangladesh and least on Sri

Lanka. Also, largest positive effect on employment is observed for Bangladesh.

Production effects on broad sectors of the simulation shows that, due to tariff liberalization,

larger effects on outputs are observed in Bangladesh and least effects are observed in Sri

Lanka. Average output price of agriculture increases in all five countries with largest effect

in Bangladesh. Average price of industrial goods falls in Bangladesh, Nepal and Pakistan and

increases in India and Sri Lanka. Average price of services increases in all countries except

Pakistan.

The effects on exports by broad sector suggest that there will be positive effects on exports in

all three broad sectors. In general, largest effects on exports would be observed for

Bangladesh followed by India. Sri Lanka will have the least positive effect.

The effects on imports by broad sector indicate that tariff elimination reduces the average

local currency price of imports in all five countries, with largest effect in Bangladesh and

least effect in Sri Lanka. Agricultural imports will rise by more than 100 percent in India due

to the elimination of high agricultural tariff. Industrial imports become cheaper due to tariff

elimination, while import prices of tariff-free services increase due to exchange rate

depreciation.

Agricultural sectors in all countries expand, except in India where the grains and crops sector

contract. Textile and clothing sector in all five countries expands most, with largest

expansion is in Bangladesh. In Bangladesh, Nepal and Pakistan, light and heavy

manufacturing sectors contract, whereas they expand in India and Sri Lanka. Services sectors

expand in all five countries.

All the export-oriented sectors experience rise in export in all five countries. India

experiences the largest rise in agricultural exports. Export of Bangladesh’s major export

product textile and clothing rises by more than 13 percent (highest in South Asia).

Bangladesh, India and Nepal experience rise in exports of light and heavy manufacturing by

more than Pakistan and Sri Lanka.

In Bangladesh, imports in all sector increase. However, in all other four countries, there are

mixed experience. In India, import of grains and crops rise by more than 100 percent. Import

in all other sectors, except transport and communication services and other services, increase.


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In Nepal, imports in all sectors, except livestock and meat products, transport and

communication services and other services, increase. In Pakistan, import in all sectors, except

grains and crops, mining and extraction, transport and communication services and other

services, increase. In Sri Lanka, imports in all sectors, except mining and extraction,

transport and communication services and other services, increase.

In Bangladesh, tariff elimination increases real GDP at factor cost by 3.1 percent. The

average price of value added (1.8 percent) reflects the general increase in returns to capital

(3.4 percent). Tariff elimination increases overall supply of labor by 6.2 percent. Labor

moves from contracting sectors to expanding sectors. Within industry, workers move away

from import substituting sectors (heavy and light manufacturing) to export-oriented sectors,

especially to the textile and clothing sector. In India, tariff elimination increases real GDP at

factor cost by 2.5 percent. The average price of value added (1.6 percent) reflects the general

increase in returns to capital (3.7 percent). Tariff elimination increases overall supply of

labor by 4.8 percent. Labor moves from contracting sectors (grains and crops) to expanding

sectors. Larger rise in employment is observed in mining and extraction and textile and

clothing sector. In Nepal, tariff elimination increases real GDP at factor cost by 2 percent.

The average price of value added (1.7 percent) reflects the general increase in returns to

capital (3.1 percent). Tariff elimination increases overall supply of labor by 4.8 percent.

Labor moves from contracting sectors (light and heavy manufacturing) to expanding sectors

(mainly the services sectors). Larger rise in employment is observed in textile and clothing

sector, processed food and utilities and construction. In Pakistan, tariff elimination increases

real GDP at factor cost by 0.9 percent. The average price of value added (0.9 percent) reflects

the general increase in returns to capital (1.5 percent). Tariff elimination increases overall

supply of labor by 2.2 percent. Labor moves from contracting sectors (light and heavy

manufacturing) to expanding sectors (mainly textile and clothing). Larger rise in employment

is observed in textile and clothing sector and processed food sector. In Sri Lanka, tariff

elimination increases real GDP at factor cost by 0.6 percent. The average price of value

added (0.7 percent) reflects the general increase in returns to capital (1.3 percent). Tariff

elimination increases overall supply of labor by 1.5 percent. Employment increases in all

sectors. However, largest rise in employment is observed in textile and clothing sector.

In all five South Asian counties employment increases for both skilled and unskilled labor. In

Bangladesh and Sri Lanka employment of unskilled labor increases more than skilled labor.

In India, Nepal and Pakistan employment of skilled labor increase more than the unskilled

labor. In all South Asian countries all agricultural sectors experience rise in employment,

except grains and crop sector in India. In the manufacturing sectors, the effects on

employment are mixed. In Bangladesh, Nepal and Pakistan, sectors like heavy and light

manufacturing experience employment loss with rise in employment in other sectors. In India


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and Sri Lanka, the effects on employment are positive in all sectors (except grains and crop

sector in India).

For the effects on capital returns by broad sectors, South Asian countries have different

experiences. In the case of agriculture, Bangladesh experiences the highest rise in returns to

capital and least rise is for Sri Lanka. In the case of Industry, Bangladesh has the highest rise,

whereas Sri Lanka has the lowest rise and Nepal has negative returns. In the case of services,

Nepal has the highest rise and Sri Lanka has the lowest rise.

In Bangladesh, the largest rise in nominal income is for urban low educated households. In

India, the largest rise is for rural other labor households. In Nepal, the largest rise is for urban

low educated households. In Pakistan, the largest rise is for urban poor and in Sri Lanka the

largest rise is for Western region and Saba region households. In general, households in

Bangladesh and India experience larger rises in nominal incomes than households in three

other countries. CPIs of households either fall or rise marginally in the five South Asian

countries. Real income (household nominal income deflated by household-specific CPI) of

all household increases in all South Asian countries.


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I. INTRODUCTION

The economy-wide impact of trade liberalization is a much debated and controversial issue.

Theoretically, trade liberalization results in productivity gains through increased competition,

efficiency, innovation and acquisition of new technology. Trade policy works by inducing

substitution effects in the production and consumption of goods and services through changes in

prices. These effects, in turn, change the level and composition of exports and imports. In

particular, the changing relative prices induced by trade liberalization cause a re-allocation of

resources from less efficient to more efficient uses. Trade liberalization is also thought to expand

the set of economic opportunities by enlarging the market size and increasing the effects of

knowledge spill over. These are the key theoretical components of the effects of trade

liberalization, which together induce growth of output and consequent poverty alleviation.

Trade liberalization has been among the major policy reforms in South Asia. This paper explores

the economy-wide effects of trade liberalization in Bangladesh, India, Nepal, Pakistan and Sri

Lanka using the most of updated Social Accounting Matrices (SAM) of these countries and

Computable General Equilibrium (CGE) models of these countries. The advantage of a CGE

framework is that it traces the price effects of the exogenous shock. In an increasingly market-

oriented economy, the variations in prices may be the most important sources of re-allocation of

resources among competing activities, which then may alter the factorial income and, hence, the

distribution of personal income.

The organization of the paper is as follows: Section II presents on the methodology of the paper;

Section III discusses on the simulation design and model closures; Section IV presents the

simulation results in terms on impact on macro-economy, sectoral output, sectoral exports,

sectoral imports, factor market and household welfare.

II. METHODOLOGY

This exercise employs a static CGE model for five South Asian countries and the Social

Accounting Matrix (SAM) of these countries for the year 2012. The modules of the CGE model

and a description of the SAM are provided below.

2.1. The CGE Model

The CGE model is built using the PEP standard static model (Decaluwe et al, 2009) and with

further developments and modifications. In the CGE model, a representative firm in each

industry maximizes profits subject to its production technology. The sectoral output follows a

Leontief production function. Each industry’s value added consists of composite labor and

composite capital, following a CES specification. Different categories of labor are combined


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following a CES technology with imperfect substitutability between different types of labor.

Composite capital is a CES combination of the different categories of capital. It is assumed that

intermediate inputs are perfectly complementary. They are combined following a Leontief

production function.

Household incomes come from labor income, capital income, and transfers received from other

agents. Subtracting direct taxes yields household’s disposable income. Household savings are a

linear function of disposable income, which allows the marginal propensity to save to differ from

the average propensity.

Corporate income consists of its share of capital income and of transfers received from other

agents. Deducting business income taxes from total income yields the disposable income of each

type of business. Likewise, business savings are the residual that remains after subtracting

transfers to other agents from disposable income.

The government draws its income from household and business income taxes, taxes on products

and on imports, and other taxes on production. Income taxes for both households and businesses

are described as a linear function of total income. The current government budget surplus or

deficit (positive or negative savings) is the difference between its revenue and its expenditures.

The latter consists of transfers to agents and current expenditures on goods and services.

The rest of the world receives payments for the value of imports, part of the income of capital,

and transfers from domestic agents. Foreign spending in the domestic economy consists of the

value of exports and transfers to domestic agents. The difference between foreign receipts and

spending is the amount of rest-of-the-world savings, which are equal in absolute value to the

current account balance but are of opposite sign.

The demand for goods and services, whether domestically produced or imported, consists of

household consumption demand, investment demand, demand by government, and demand as

transport or trade margins. It is assumed that households have Stone–Geary utility functions

(from which derives the Linear Expenditure System). Investment demand includes both gross

fixed capital formation (GFCF) and changes in inventories.

Producers’ supply behavior is represented by nested constant elasticity of transformation (CET)

functions. On the upper level aggregate output is allocated to individual products; on the lower

level the supply of each product is distributed between the domestic market and exports. The

model departs from the pure form of the small-country hypothesis. A local producer can increase

his share of the world market only by offering a price that is advantageous relative to the

(exogenous) world price. The ease with which his share can be increased depends on the degree

of substitutability of the proposed product for competing products; in other words, it depends on


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the price-elasticity of export demand. Commodities demanded on the domestic market are

composite goods, combinations of locally produced goods and imports. The imperfect

substitutability between the two is represented by a CES aggregator function. Naturally, for

goods with no competition from imports, the demand for the composite commodity is the

demand for the domestically produced good.

The system requires equilibrium between the supply and demand of each commodity on the

domestic market. The sum of supplies of every commodity made by local producers must equal

domestic demand for that locally produced commodity. Finally, supply to the export market of

each good must be matched by demand.

Also, there is equilibrium between total demand for capital and its available supply. However,

the model assumes flexible wage rates for labor, allowing for unemployment.

2.2. Brief Description of Social Account Matrix (SAM) for 2012

The CGE models of the five South Asian countries use the latest available Social Accounting

Matrix (SAM) of these countries for the year 2012 (Raihan, 2014). The summaries of the SAM

of these five countries are provided below.

The 2012 SAM for Bangladesh has the following accounts: (1) total domestic supply of 10

commodities; (2) production accounts for 10 activities; (3) 4 factors of productions-two labor

types and two capital categories; (4) current account transactions between 4 current institutional

agents- households and unincorporated capital, corporate enterprises, government and the rest of

the world; household account includes seven representative groups (5 rural and 2 urban); and (5)

one consolidated capital account. The structure of the Bangladesh SAM is described in Table 1.

Table 1: Description of Bangladesh SAM Accounts for 2012

Set Description of Elements

Activity (10) Agriculture and extraction: Grains and Crops, Livestock and Meat Products, Mining and Extraction. Manufacturing: Processed Food, Textiles and Clothing, Light Manufacturing, Heavy Manufacturing. Services: Utilities and Construction, Transport and Communication, Other Services.

Commodity (10) Agriculture and extraction: Grains and Crops, Livestock and Meat Products, Mining and Extraction. Manufacturing: Processed Food, Textiles and Clothing, Light Manufacturing, Heavy Manufacturing. Services: Utilities and Construction, Transport and Communication, Other Services.

Factors of Production (4) Unskilled labor, Skilled labor, Capital and Land

Households (7) Rural: landless, Agricultural marginal, Agricultural small, Agricultural large, Non-farm Urban: Households with low educated heads, and households with high educated heads

Other Institutions (4) Government; Corporation; Rest of the World and Capital

Source: Raihan (2014)

The 2012 SAM for India identifies the economic relations through following accounts: (1) total

domestic supply of 10 commodities; (2) production accounts for 10 activities; (3) 4 factors of

productions-two labor types and two capital categories; (4) current account transactions between

4 current institutional agents- households and unincorporated capital, corporate enterprises,


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government and the rest of the world; household account includes 9 representative groups (5

rural and 4 urban); and (5) one consolidated capital account. The structure of the India SAM is

described in Table 2.

Table 2: Description of India SAM Accounts for 2012


Activity (10) Grains and Crops, Livestock and Meat Products, Mining and Extraction. Processed Food, Textiles and Clothing, Light Manufacturing, Heavy Manufacturing. Utilities and Construction, Transport and Communication, Other Services.

Commodity (10) Grains and Crops, Livestock and Meat Products, Mining and Extraction. Processed Food, Textiles and Clothing, Light Manufacturing, Heavy Manufacturing. Utilities and Construction, Transport and Communication, Other Services.


Households (9) Rural non-agricultural self-employed, Rural agricultural labor, Rural other laboor, Rural agricultural self-employed and Rural other households Urban self-employed, Urban salaried class, Urban casual labour and Urban other households



The 2012 SAM for Nepal has the following accounts: (1) total domestic supply of 10




the world; household account includes 7 representative groups (4 rural and 3 urban); and (5) one

consolidated capital account. The structure of the Nepal SAM is described in Table 3.

Table 3: Description of Nepal SAM Accounts for 2012





Households (7) Rural: landless, Agricultural marginal farmer, Agricultural small farmer, Agricultural large farmer Urban: Households with low educated heads, Households with medium educated heads and households with high educated heads



The 2012 SAM for Pakistan has the following accounts: (1) total domestic supply of 10





consolidated capital account. The structure of the Pakistan SAM is described in Table 4.


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Table 4: Description of Pakistan SAM Accounts for 2012





Households (9) Large farm, Medium farm, Small farm, Landless farmer, Landless agricultural labor, Rural non-farm non poor, Rural non-farm poor Urban non-poor, Urban poor



The 2012 SAM for Sri Lanka has the following accounts: (1) total domestic supply of 10





consolidated capital account. The structure of the Sri Lanka SAM is described in Table 5.

Table 5: Description of Sri Lanka SAM Accounts for 2012





Households (8) Western, Central, Southern, North East, North West, North Central, Uva, Saba



2.3. Structure of the Economies of Bangladesh, India, Nepal, Pakistan and Sri Lanka as in

2012 SAM

Table 6 presents the structure of the Bangladesh economy in 2012. In terms of value-addition,

among the agricultural sectors, the leading sector is the grains and crops with 11.33 percent

share. Among the manufacturing sectors, the leading sector is textile and clothing (7.55 percent).

Among the services sectors, the leading sector is transport and communication (27.65 percent).

The textile and clothing sector is highly export oriented. The export basket is highly concentrated

as 88.12 percent exports come from textile and clothing. The heavy manufacturing sector is

highly import dependent. In the case of tariff rate, agricultural sectors have lower tariff rates than

the manufacturing sectors.


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Table 6: Structure of the Bangladesh economy in 2012 as reflected in the SAM 2012

Sectors

1 2 3 4 5 6

Vi/TV Ei/Oi Ei/TE Mi/Oi Mi/TM TAR

Grains and Crops 11.33 0.42 0.56 9.09 8.05 4.52

Livestock and Meat Products 1.25 0.07 0.01 2.25 0.25 8.22

Mining and Extraction 6.60 0.16 0.08 2.20 0.75 7.61

Processed Food 1.34 1.53 1.59 15.96 10.87 13.38

Textiles and Clothing 7.55 51.68 88.12 17.57 19.70 25.33

Light Manufacturing 1.74 2.41 1.44 20.83 8.22 19.59

Heavy Manufacturing 0.99 1.17 1.26 60.96 43.16 11.77

Utilities and Construction 16.86 - - - - -

Transport and Communication 27.65 2.87 6.30 2.42 3.49 -

Other Services 24.69 0.28 0.63 3.65 5.52 -

Total 100.00 ― 100.00 ― 100.00 ―

Note: Vi=sectoral value added, TV=total value added, Ei=sectoral export, Oi=sectoral output, TE=total export,

Mi=sectoral import, TM=total import, TAR=tariff rate, All figures are expressed in percentages.


Table 7 presents the structure of the Indian economy in 2012. In terms of value-addition, among

the agricultural sectors, the leading sector is the grains and crops with 9.36 percent share. Among

the manufacturing sectors, the leading sector is heavy manufacturing (7 percent). Among the

services sectors, the leading sector in other services (31.86 percent). The export basket is fairly

diversified. The heavy manufacturing and mining and extraction sectors are highly import

dependent. In the case of tariff rate, grain and crops sector has the highest tariff rate.

Table 7: Structure of the Indian economy in 2012 as reflected in the SAM 2012

Sectors

1 2 3 4 5 6


Grains and Crops 9.36 5.23 2.55 2.70 1.06 58.88



Processed Food 1.80 7.05 2.35 9.55 2.57 32.90






Other Services 31.86 7.66 11.92 10.04 12.60 -

Total 100.00 ― 100.00 ― 100.00 ―




Table 8 presents the structure of the Nepal economy in 2012. In terms of value-addition, among

the agricultural sectors, the leading sector is the grains and crops with 25.19 percent share.

Among the manufacturing sectors, the leading sector is light manufacturing (2.25 percent).

Among the services sectors, the leading sector is other services (28.04 percent). The export

basket is concentrated around textile and clothing, transport and communication and other

services. The heavy manufacturing sector is highly import dependent. In the case of tariff rate,

agricultural sectors have lower tariff rates than the manufacturing sectors.


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Table 8: Structure of the Nepal economy in 2012 as reflected in the SAM 2012

Sectors

1 2 3 4 5 6


Grains and Crops 25.19 1.66 4.73 13.94 14.47 4.00



Processed Food 0.95 4.23 3.39 52.12 15.25 4.43






Other Services 28.04 0.08 21.57 0.12 11.70 -

Total 100.00 - 100.00 - 100.00 -




Table 9 presents the structure of the Pakistan economy in 2012. In terms of value-addition,

among the agricultural sectors, the leading sector is the livestock and meat products with 11.52

percent share. Among the manufacturing sectors, the leading sector is textile and clothing (4.16

percent). Among the services sectors, the leading sector is transport and communication (33.51

percent). The export basket is concentrated as 50.73 percent exports come from textile and

clothing. The heavy manufacturing sector is highly import dependent. In the case of tariff rate,

agricultural sectors have lower tariff rates than the manufacturing sectors.

Table 9: Structure of the Pakistan economy in 2012 as reflected in the SAM 2012

Sectors

1 2 3 4 5 6


Grains and Crops 8.62 5.60 7.98 7.48 7.21 2.17



Processed Food 3.27 4.78 6.40 5.26 4.76 11.20






Other Services 25.89 2.72 10.91 1.48 4.01 -

Total 100.00 - 100.00 - 100.00 -




Table 6 presents the structure of the Sri Lanka economy in 2012. In terms of value-addition,

among the agricultural sectors, the leading sector is the grains and crops with 16.37 percent

share. Among the manufacturing sectors, the leading sector is processed food (7.24 percent).

Among the services sectors, the leading sector is transport and communication (27.63 percent).

Textile and clothing takes more than 35 percent share in the export basket. This sector is also


June 2015

19

heavily import dependent. The heavy manufacturing sector is highly import dependent and takes

around 45 percent share in total import. In the case of tariff rate, agricultural sectors have higher

tariff rates than the manufacturing sectors (except processed food).

Table 10: Structure of the Sri Lanka economy in 2012 as reflected in the SAM 2012

Sectors

1 2 3 4 5 6


Grains and Crops 16.37 15.47 11.18 8.10 3.98 6.60



Processed Food 7.24 13.86 7.95 16.03 6.37 8.45






Other Services 17.88 2.86 2.95 2.39 1.79 -

Total 100.00 15.47 100.00 - 100.00 -




III. TARIFF LIBERALIZATION SIMULATION IN THE CGE MODELS AND

CLOSURES

This experiment undertakes a unilateral elimination of all commodity tariffs. The following

closure assumptions are imposed on the CGE models of the South Asian countries to capture the

short-run effects. On the income-side: total stocks of land, tax rates and technical changes are

fixed. Capital is sector specific. Rigidities in the labor market are reflected by allowing aggregate

employment to change—i.e., labor is in elastic supply with a pool of unemployed workers

waiting to be hired—at a wage (nominal and real) indexed to the economy-wide consumer price

index (CPI). On the expenditure-side: Total real inventories, total real investment and total real

government expenditures are held fixed, whereas both aggregate real household consumption

and real trade balance (exports – imports) are endogenous. The consumer price index (CPI) is the

model’s numéraire.

IV. SIMULATION RESULTS

4.1. Macroeconomic Effects


countries are presented in Table 11. The price of imports in local currency falls by larger margins

in Bangladesh and Nepal. Bangladesh experiences the largest rise in total demand for imports

followed by India. Total domestic demand increases most in Bangladesh, followed by Pakistan.

The average cost of domestic production increases in all countries due to rise in primary factor


June 2015

20

costs. India has the highest rise in nominal return to capital followed by Bangladesh. The GDP

price deflator increases in all countries; because, though tariff reduction lowers the price of

investment goods, this is offset by the rise in primary factor costs, nominal wage, return to

capital and return to land. The GDP price deflator has the highest rise in Bangladesh followed by

India and Nepal. The real exchange rate depreciates in all countries with the largest depreciation

in Bangladesh. The terms of trade improves in all countries with the largest improvement in

Bangladesh. The real exchange rate depreciation makes exports more competitive in the world

market. Hence, exports expand and the largest positive effect on exports is found for Bangladesh.

Higher exports pull up economy-wide gross production for all five countries with the largest

positive effect on Bangladesh. The largest positive effect on real GDP is seen on Bangladesh and

least on Sri Lanka. Also, largest positive effect on employment is observed for Bangladesh.

Table 11: Macro-economic effects (% change from base)

Prices Bangladesh India Nepal Pakistan Sri Lanka

Investment price index 0.32 0.49 1.52 0.22 -0.31

Government price index 0.97 1.20 1.20 0.58 0.03

Export price index (in local currency) 2.05 4.06 1.52 1.77 1.16

GDP price deflator 1.80 1.64 1.64 0.91 0.70

Imports (in local currency) -4.43 -0.09 -4.70 -3.27 -0.81

Exchange rate 8.51 8.29 4.21 3.51 1.94

Terms of trade 6.77 4.15 6.53 5.21 1.98

Domestic production 0.58 0.54 0.24 0.10 0.24

Intermediate input costs -0.53 0.37 -1.27 -0.55 0.01

Primary factor costs 1.80 1.64 1.65 0.91 0.70

Nominal return to capital 3.40 3.67 3.05 1.52 1.33

Nominal return to land 5.24 1.77 2.15 1.52 0.58

Volume

Exports supply 13.07 8.38 5.46 3.58 1.65

Import demand 8.87 4.63 4.09 4.58 2.04

GDP 3.05 2.49 2.02 0.88 0.63

Domestic demand 2.43 1.53 1.59 0.62 0.36

Gross production 3.36 2.37 1.90 0.78 0.61

Aggregate employment 6.16 4.83 4.81 2.22 1.45

Source: Simulations using the CGE models of Bangladesh, India, Nepal, Pakistan and Sri Lanka

The graphical presentations of the effects on key macroeconomic variables are provided in

Figure 1.

Figure 1: Effects on key macroeconomic variables (% change from base) Bangladesh India

3.05 1.80

8.51

6.77

0.0

2.0

4.0

6.0

8.0

10.0

GDP GDP deflator Exchange rate(nominal)

Terms of Trade(ToT)

2.49 1.64

8.29

4.15

0.0

2.0

4.0

6.0

8.0

10.0


Terms of Trade(ToT)


June 2015

21

Nepal Pakistan

Sri Lanka


The production related effects of the simulation are presented in Figure 2.

Figure 2: Production-related effects (% change from base) Bangladesh India

Nepal Pakistan

Sri Lanka


2.02 1.64

4.21

6.53

0.0

2.0

4.0

6.0

8.0

10.0


Terms of Trade(ToT)

0.88 0.91

3.51

5.21

0.0

2.0

4.0

6.0

8.0

10.0


Terms of Trade(ToT)

0.63 0.70

1.94 1.98

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0


Terms of Trade(ToT)

0.58

-0.53

1.80 3.36

13.07

2.43

-5.0

0.0

5.0

10.0

15.0

Domesticproduction

costs

Intermediateinput costs

Primaryfactor costs

Grossproduction(volume)

Exports(volume)

Domesticsales

(volume)

0.54 0.37 1.64 2.37

8.38

1.53

-5.0

0.0

5.0

10.0

15.0

Domesticproduction

costs


Primaryfactor costs


Exports(volume)

Domesticsales

(volume)

0.24

-1.27

1.65 1.90

5.46

1.59

-5.0

0.0

5.0

10.0

15.0

Domesticproduction

costs


Primaryfactor costs


Exports(volume)

Domesticsales

(volume)

0.10

-0.55

0.91 0.78 3.58

0.62

-5.0

0.0

5.0

10.0

15.0

Domesticproduction

costs


Primaryfactor costs


Exports(volume)

Domesticsales

(volume)

0.24 0.01 0.70 0.61 1.65 0.36

-5.0

0.0

5.0

10.0

15.0

Domesticproduction

costs


Primaryfactor costs


Exports(volume)

Domesticsales

(volume)


June 2015

22

4.2. Production Effects on Broad Sectors

Production effects on broad sectors of the simulation are presented in Figure 3 and Figure 4.

Figure 3 shows that, due to tariff liberalization, larger effects on outputs are observed in

Bangladesh and least effects are observed in Sri Lanka.

Figure 3: Percent changes in the volume of output (by broad sector) Bangladesh India

Nepal Pakistan

Sri Lanka


Figure 4 suggests that average output price of agriculture increases in all five countries with

largest effect in Bangladesh. Average price of industrial goods falls in Bangladesh, Nepal and

Pakistan and increases in India and Sri Lanka. Average price of services increases in all countries

except Pakistan.

1.90

4.80

2.91 3.36

0.0

1.0

2.0

3.0

4.0

5.0

AGRICULTURE INDUSTRY SERVICES All SECTORS

0.51

2.46 2.63 2.37

0.0

1.0

2.0

3.0

4.0

5.0


1.70

0.24

2.45

1.90

0.0

1.0

2.0

3.0

4.0

5.0


0.95 0.47

0.89 0.78

0.0

1.0

2.0

3.0

4.0

5.0


0.34 0.59 0.71 0.61

0.0

1.0

2.0

3.0

4.0

5.0



June 2015

23

Figure 4: Percent changes in the price of output (by broad sector) Bangladesh India

Nepal Pakistan

Sri Lanka


4.3. Effects on Exports by Broad Sectors

The effects on exports by broad sector are presented in Figure 5 and Figure 6. There will be

positive effects on exports in all three broad sectors. In general, largest effects on exports would

be observed for Bangladesh followed by India. Sri Lanka will have the least positive effect.

Figure 5: Percent changes in the volume of exports (by broad sector) Bangladesh India

3.2

-1.0

0.7 0.7

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0


0.3 0.1 0.9

0.3

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0


0.6

-2.4

1.4

-0.7

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0


0.4

-0.3 -0.2 -0.1

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0


0.2 0.2 0.3 0.2

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0


7.15

13.39

9.46

13.07

0.0

5.0

10.0

15.0


10.19 8.61

7.84 8.38

0.0

5.0

10.0

15.0



June 2015

24

Nepal Pakistan

Sri Lanka


Figure 6: Percent changes in the price of exports (by broad sector) Bangladesh India

Nepal Pakistan

Sri Lanka


5.21 6.82

4.36 5.46

0.0

5.0

10.0

15.0


4.36 3.57 3.22 3.58

0.0

5.0

10.0

15.0


2.36 1.55 1.61 1.65

0.0

5.0

10.0

15.0


5.94

1.90

3.71

2.05

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0


4.84

3.90 4.28 4.06

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0


2.46

0.83

2.01 1.52

0.0

2.0

4.0

6.0


2.05 1.71 1.88 1.77

0.0

2.0

4.0

6.0


1.16 1.16 1.13 1.16

0.0

2.0

4.0

6.0



June 2015

25

4.4. Effects on Imports by Broad Sectors

The effects on imports by broad sector are presented in Figure 7 and Figure 8. Tariff elimination

reduces the average local currency price of imports in all five countries, with largest effect in

Bangladesh and least effect in Sri Lanka. Agricultural imports will rise by more than 100 percent

in India due to the elimination of high agricultural tariff. Industrial imports become cheaper due

to tariff elimination, while import prices of tariff-free services increase due to exchange rate

depreciation.

Figure 7: Percent changes in the volume of imports (by broad sector) Bangladesh India

Nepal Pakistan

Sri Lanka


1.94 11.49

-7.99

8.87

-10.0

10.0

30.0

50.0

70.0

90.0


104.98

6.47

-8.28

4.63

-10.0

10.0

30.0

50.0

70.0

90.0


1.71 6.48

-2.88

4.09

-10.0

10.0

30.0

50.0

70.0

90.0

AGRICULTURE INDUSTRY SERVICES All SECTORS-0.72

5.76

-4.02

4.58

-10.0

10.0

30.0

50.0

70.0

90.0


9.13 2.11

-1.33

2.04

-10.0

10.0

30.0

50.0

70.0

90.0



June 2015

26

Figure 8: Percent changes in the price of imports (by broad sector) Bangladesh India

Nepal Pakistan

Sri Lanka


4.5. Effects on Output in All Sectors

The effects on output in all sectors are presented in Figure 9 and Figure 10. Agricultural sectors

in all countries expand, except in India where the grains and crops sector contract. Textile and

clothing sector in all five countries expands most, with largest expansion is in Bangladesh. In

Bangladesh, Nepal and Pakistan, light and heavy manufacturing sectors contract, whereas they

expand in India and Sri Lanka. Services sectors expand in all five countries.

Figure 9: Percent changes in the volume of output (by sector) Bangladesh India

3.47

-6.43

8.52

-4.43

-35.0

-25.0

-15.0

-5.0

5.0

AGRICULTURE INDUSTRY SERVICES All SECTORS-30.49

-1.31

8.29

-0.09

-35.0

-25.0

-15.0

-5.0

5.0


0.58

-7.93

4.21

-4.70

-35.0

-25.0

-15.0

-5.0

5.0


1.27

-4.18

3.51

-3.27

-35.0

-25.0

-15.0

-5.0

5.0


-4.35 -0.95

1.92

-0.81

-35.0

-25.0

-15.0

-5.0

5.0


-4.0 -2.0 0.0 2.0 4.0 6.0 8.0

Grains and Crops

Livestock and Meat Products

Mining and Extraction

Processed Food

Textiles and Clothing

Light Manufacturing

Heavy Manufacturing

Utilities and Construction

Transport and Communication

Other Services

-4.0 -2.0 0.0 2.0 4.0 6.0 8.0

Grains and Crops



Processed Food


Light Manufacturing

Heavy Manufacturing



Other Services


June 2015

27

Nepal Pakistan

Sri Lanka


Figure 10: Percent changes in the price of output (by sector) Bangladesh India

Nepal Pakistan

-4.0 -2.0 0.0 2.0 4.0 6.0 8.0

Grains and Crops



Processed Food


Light Manufacturing

Heavy Manufacturing



Other Services

-4.0 -2.0 0.0 2.0 4.0 6.0 8.0

Grains and Crops



Processed Food


Light Manufacturing

Heavy Manufacturing



Other Services

-4.0 -2.0 0.0 2.0 4.0 6.0 8.0

Grains and CropsLivestock and Meat ProductsMining and ExtractionProcessed FoodTextiles and ClothingLight ManufacturingHeavy ManufacturingUtilities and ConstructionTransport and CommunicationOther Services

-8.0 -6.0 -4.0 -2.0 0.0 2.0 4.0


-8.0 -6.0 -4.0 -2.0 0.0 2.0 4.0


-8.0 -6.0 -4.0 -2.0 0.0 2.0 4.0


-8.0 -6.0 -4.0 -2.0 0.0 2.0 4.0



June 2015

28

Sri Lanka


4.6. Effects on Exports in All Sectors

The effects on export by all sectors are presented in Figure 11 and Figure 12. All the export-

oriented sectors experience rise in export in all five countries. India experiences the largest rise

in agricultural exports. Export of Bangladesh’s major export product textile and clothing rises by

more than 13 percent (highest in South Asia). Bangladesh, India and Nepal experience rise in

exports of light and heavy manufacturing by more than Pakistan and Sri Lanka.

Figure 11: Percent changes in the volume of exports (by sector) Bangladesh India

Nepal Pakistan

-8.0 -6.0 -4.0 -2.0 0.0 2.0 4.0

Grains and Crops



Processed Food


Light Manufacturing

Heavy Manufacturing



Other Services

0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0

Grains and Crops



Processed Food


Light Manufacturing

Heavy Manufacturing


Other Services

0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0

Grains and Crops



Processed Food


Light Manufacturing

Heavy Manufacturing


Other Services

0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0

Grains and Crops



Processed Food


Light Manufacturing

Heavy Manufacturing


Other Services

0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0

Grains and Crops



Processed Food


Light Manufacturing

Heavy Manufacturing


Other Services


June 2015

29

Sri Lanka


Figure 12: Percent changes in the price of exports (by sector)

Bangladesh India

Nepal Pakistan

Sri Lanka


4.7. Effects on Imports in All Sectors

The effects on imports by all sectors are presented in Figure 13 and Figure 14. In Bangladesh,

imports in all sector increase. However, in all other four countries, there are mixed experience. In

India, import of grains and crops rise by more than 100 percent. Import in all other sectors,

except transport and communication services and other services, increase. In Nepal, imports in

0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0

Grains and Crops



Processed Food


Light Manufacturing

Heavy Manufacturing


Other Services

-1.0 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0

Grains and Crops



Processed Food


Light Manufacturing

Heavy Manufacturing


Other Services

-1.0 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0

Grains and Crops



Processed Food


Light Manufacturing

Heavy Manufacturing


Other Services

-1.0 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0

Grains and Crops



Processed Food


Light Manufacturing

Heavy Manufacturing


Other Services

-1.0 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0

Grains and Crops



Processed Food


Light Manufacturing

Heavy Manufacturing


Other Services

-1.0 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0

Grains and Crops



Processed Food


Light Manufacturing

Heavy Manufacturing


Other Services


June 2015

30

all sectors, except livestock and meat products, transport and communication services and other

services, increase. In Pakistan, import in all sectors, except grains and crops, mining and

extraction, transport and communication services and other services, increase. In Sri Lanka,

imports in all sectors, except mining and extraction, transport and communication services and

other services, increase.

Figure 13: Percent changes in the volume of imports (by sector)

Bangladesh India

Nepal

Pakistan

Sri Lanka


Figure 14: Percent changes in the price of imports of (by sector)

Bangladesh India

-10.0 10.0 30.0 50.0 70.0 90.0 110.0

Grains and Crops



Processed Food


Light Manufacturing

Heavy Manufacturing


Other Services

-10.0 10.0 30.0 50.0 70.0 90.0 110.0

Grains and Crops



Processed Food


Light Manufacturing

Heavy Manufacturing


Other Services

-10.0 10.0 30.0 50.0 70.0 90.0 110.0

Grains and Crops



Processed Food


Light Manufacturing

Heavy Manufacturing


Other Services

-10.0 10.0 30.0 50.0 70.0 90.0 110.0

Grains and Crops



Processed Food


Light Manufacturing

Heavy Manufacturing


Other Services

-10.0 10.0 30.0 50.0 70.0 90.0 110.0

Grains and Crops



Processed Food


Light Manufacturing

Heavy Manufacturing


Other Services

-40.0 -30.0 -20.0 -10.0 0.0 10.0 20.0

Grains and Crops



Processed Food


Light Manufacturing

Heavy Manufacturing


Other Services

-40.0 -30.0 -20.0 -10.0 0.0 10.0 20.0

Grains and Crops



Processed Food


Light Manufacturing

Heavy Manufacturing


Other Services


June 2015

31

Nepal Pakistan

Sri Lanka


4.8. Effects on Factor Market

Table 12 presents the effects on factor market in Bangladesh. Tariff elimination increases real

GDP at factor cost by 3.1 percent. The average price of value added (1.8 percent) reflects the

general increase in returns to capital (3.4 percent). Tariff elimination increases overall supply of

labor by 6.2 percent. Labor moves from contracting sectors to expanding sectors. Within

industry, workers move away from import substituting sectors (heavy and light manufacturing)

to export-oriented sectors, especially to the textile and clothing sector.

Table 12: Percent changes in value added, capital stocks and employment: Bangladesh

value added Capital stocks Employment

volume price volume price volume wage

Grains and Crops 2.3 4.0 0.0 5.6 8.5 0.0



Processed Food 3.1 3.0 0.0 5.2 7.8 0.0


Light Manufacturing -0.1 -0.1 0.0 -0.1 -0.2 0.0

Heavy Manufacturing -0.5 -0.9 0.0 -1.2 -1.8 0.0

Utilities and Construction 0.3 1.2 0.0 1.4 2.1 0.0

Transport and Communication 4.6 1.0 0.0 4.1 6.1 0.0

Other Services 3.2 1.1 0.0 3.3 5.0 0.0

ALL SECTORS 3.1 1.8 0.0 3.4 6.2 0.0

Note: Red fonts indicate exogenous or fixed variables (see explanation on model closure in Section III)

Source: Simulation in the Bangladesh CGE model

Table 13 presents the effects on factor market in India. Tariff elimination increases real GDP at

factor cost by 2.5 percent. The average price of value added (1.6 percent) reflects the general

increase in returns to capital (3.7 percent). Tariff elimination increases overall supply of labor by

-40.0 -30.0 -20.0 -10.0 0.0 10.0 20.0

Grains and Crops



Processed Food


Light Manufacturing

Heavy Manufacturing


Other Services

-40.0 -30.0 -20.0 -10.0 0.0 10.0 20.0

Grains and Crops



Processed Food


Light Manufacturing

Heavy Manufacturing


Other Services

-40.0 -30.0 -20.0 -10.0 0.0 10.0

Grains and Crops



Processed Food


Light Manufacturing

Heavy Manufacturing


Other Services


June 2015

32

4.8 percent. Labor moves from contracting sectors (grains and crops) to expanding sectors.

Larger rise in employment is observed in mining and extraction and textile and clothing sector.

Table 13: Percent changes in value added, capital stocks and employment: India



Grains and Crops 0.0 0.0 0.0 -0.1 -0.1 0.0



Processed Food 1.5 0.4 0.0 1.4 2.1 0.0






Other Services 2.5 1.9 0.0 3.6 5.4 0.0

ALL SECTORS 2.5 1.6 0.0 3.7 4.8 0.0


Source: Simulation in the India CGE model

Table 14 presents the effects on factor market in Nepal. Tariff elimination increases real GDP at

factor cost by 2 percent. The average price of value added (1.7 percent) reflects the general


4.8 percent. Labor moves from contracting sectors (light and heavy manufacturing) to expanding

sectors (mainly the services sectors). Larger rise in employment is observed in textile and

clothing sector, processed food and utilities and construction.

Table 14: Percent changes in value added, capital stocks and employment: Nepal



Grains and Crops 1.6 1.0 0.0 2.1 3.1 0.0



Processed Food 1.6 3.5 0.0 4.6 7.0 0.0






Other Services 2.3 1.8 0.0 3.4 5.1 0.0

ALL SECTORS 2.0 1.7 0.0 3.1 4.8 0.0


Source: Simulation in the Nepal CGE model

Table 15 presents the effects on factor market in Pakistan. Tariff elimination increases real GDP

at factor cost by 0.9 percent. The average price of value added (0.9 percent) reflects the general


2.2 percent. Labor moves from contracting sectors (light and heavy manufacturing) to expanding

sectors (mainly textile and clothing). Larger rise in employment is observed in textile and

clothing sector and processed food sector.


June 2015

33

Table 15: Percent changes in value added, capital stocks and employment: Pakistan



Grains and Crops 1.2 1.1 0.0 1.9 2.8 0.0



Processed Food 0.8 2.3 0.0 2.8 4.2 0.0






Other Services 0.7 1.3 0.0 1.8 2.7 0.0

ALL SECTORS 0.9 0.9 0.0 1.5 2.2 0.0


Source: Simulation in the Pakistan CGE model

Table 16 presents the effects on factor market in Pakistan. Tariff elimination increases real GDP

at factor cost by 0.6 percent. The average price of value added (0.7 percent) reflects the general


1.5 percent. Employment increases in all sectors. However, largest rise in employment is

observed in textile and clothing sector.

Table 16: Percent changes in value added, capital stocks and employment: Sri Lanka



Grains and Crops 0.3 0.3 0.0 0.5 0.8 0.0



Processed Food 0.2 0.7 0.0 0.8 1.3 0.0






Other Services 0.7 0.1 0.0 0.6 0.9 0.0

ALL SECTORS 0.6 0.7 0.0 1.3 1.5 0.0


Source: Simulation in the Sri Lanka CGE model

The graphical presentation of the employment effects of the simulation are presented in Figure

15 and Figure 16. The closure of the model reflects rigidities in the labor market by allowing

aggregate employment to change—i.e., labor is in elastic supply with a pool of unemployed

workers waiting to be hired—at a wage (nominal and real) indexed to the economy-wide

consumer price index (CPI). Figure 15 suggests that in all five South Asian counties employment

increases for both skilled and unskilled labor. In Bangladesh and Sri Lanka employment of

unskilled labor increases more than skilled labor. In India, Nepal and Pakistan employment of

skilled labor increase more than the unskilled labor.


June 2015

34

Figure 15: Percent changes in employment (by skill and broad sector) Bangladesh India

Nepal Pakistan

Sri Lanka

Note: In this diagram, the changes in employment by skill type only reflect scale effects. There are no substitution

effects since wage rates are fixed (i.e., indexed to CPI) in the short run.


Figure 16 shows that in all South Asian countries all agricultural sectors experience rise in

employment, except grains and crop sector in India. In the manufacturing sectors, the effects on

employment are mixed. In Bangladesh, Nepal and Pakistan, sectors like heavy and light

manufacturing experience employment loss with rise in employment in other sectors. In India

and Sri Lanka, the effects on employment are positive in all sectors (except grains and crop

sector in India).

7.99 8.05 9.57 9.67

5.25 5.59 5.62 6.59

0.00

2.00

4.00

6.00

8.00

10.00

Skilled Unskilled

AGRICULTURE INDUSTRY SERVICES ALL SECTORS

0.20 1.15

5.03 5.95

5.34 5.11 5.26 4.68

0.00

2.00

4.00

6.00

8.00

10.00

Skilled Unskilled


3.31 3.30

0.27 1.08

5.66 6.46

5.49 4.62

0.00

2.00

4.00

6.00

8.00

10.00

Skilled Unskilled


2.25 2.19 2.26 2.59 2.36 2.08 2.36 2.16

0.00

2.00

4.00

6.00

8.00

10.00

Skilled Unskilled


0.95 0.87

2.29 2.50

1.16 1.47 1.25 1.52

0.00

2.00

4.00

6.00

8.00

10.00

Skilled Unskilled



June 2015

35

Figure 16: Percent changes in total sectoral employment Bangladesh India

Nepal Pakistan

Sri Lanka


4.9. Effects on Capital Returns

Figure 17 presents the results for the effects on capital returns by broad sectors. South Asian

countries have different experiences. In the case of agriculture, Bangladesh experiences the

highest rise in returns to capital and least rise is for Sri Lanka. In the case of Industry,

Bangladesh has the highest rise, whereas Sri Lanka has the lowest rise and Nepal has negative

returns. In the case of services, Nepal has the highest rise and Sri Lanka has the lowest rise.

-25.0 -20.0 -15.0 -10.0 -5.0 0.0 5.0 10.0 15.0

Grains and Crops



Processed Food


Light Manufacturing

Heavy Manufacturing



Other Services

-25.0 -20.0 -15.0 -10.0 -5.0 0.0 5.0 10.0 15.0

Grains and Crops



Processed Food


Light Manufacturing

Heavy Manufacturing



Other Services

-25.0 -20.0 -15.0 -10.0 -5.0 0.0 5.0 10.0 15.0

Grains and Crops



Processed Food


Light Manufacturing

Heavy Manufacturing



Other Services

-25.0 -20.0 -15.0 -10.0 -5.0 0.0 5.0 10.0 15.0

Grains and Crops



Processed Food


Light Manufacturing

Heavy Manufacturing



Other Services

-25.0 -20.0 -15.0 -10.0 -5.0 0.0 5.0 10.0 15.0

Grains and Crops



Processed Food


Light Manufacturing

Heavy Manufacturing



Other Services


June 2015

36

Figure 17: Percent changes in capital returns (by broad sector) Bangladesh India

Nepal Pakistan

Sri Lanka


4.10. Effects on household Income

Figure 18 presents the effects on nominal household income by household categories for the

South Asian countries. In Bangladesh, the largest rise in nominal income is for urban low

educated households. In India, the largest rise is for rural other labor households. In Nepal, the

largest rise is for urban low educated households. In Pakistan, the largest rise is for urban poor

and in Sri Lanka the largest rise is for Western region and Saba region households. In general,

households in Bangladesh and India experience larger rises in nominal incomes than households

in three other countries.

5.2 5.2

2.5 3.4

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0


0.8

4.1 3.8 3.7

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0


2.2

-3.3

4.4

3.1

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0


1.5 1.4 1.6 1.5

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0


0.6

1.5 1.3 1.3

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0



June 2015

37

Figure 18: Percent changes in nominal household income (by household categories)

Bangladesh India

Nepal Pakistan

Sri Lanka


Figure 19 suggests that CPIs of households either fall or rise marginally in the five South Asian

countries.

Figure 19: Percent changes in household-specific CPI (by household categories)

Bangladesh India

4.54 4.31 4.25 4.56

3.83

4.94

3.92

0.00

1.00

2.00

3.00

4.00

5.00

Rurallandless

HH

Ruralmarginalfarm HH

Rural smallfarm HH

Rural largefarm HH

Rural nonfarm HH

Urban loweducated

HH

Urbanhigh

educatedHH

3.88 4.54 4.59

3.41 3.57 3.62 4.25 4.54

3.06

0.00

1.00

2.00

3.00

4.00

5.00

Ruralnon agri

selfemp

Ruralagri

labor

Ruralotherlabor

Ruralagri self

emp

Ruralother

HH

Urbanselfemp

Urbansalaried

HH

Urbancasuallabor

Urbanother

HH

2.71 2.57 2.72 2.92

4.09 3.90 3.95

0.00

1.00

2.00

3.00

4.00

5.00

Rurallandless

Ruralsmall farm

HH

Ruralmediumfarm HH

Rural largefarm HH

Urban loweducated

HH

Urbanmediumeducated

HH

Urbanhigh

educatedHH

1.96 1.63 1.57 1.55 1.52 1.78 1.89 2.06 1.87

0.00

1.00

2.00

3.00

4.00

5.00

Landlessagri

labor

Landlessfarmer

Smallfarmer

Mediumfarmer

Largefarmer

RNFpoor

RNF nonpoor

Urbanpoor

Urbannonpoor

1.21 1.13 1.19 1.12 1.19 1.11 1.11 1.21

0.00

1.00

2.00

3.00

4.00

5.00

Western Central Southern NorthEast

NorthWest

NorthCentral

Uva Saba

0.18

0.60

0.16

-0.67

0.00

0.12

-0.24

-1.00

-0.50

0.00

0.50

1.00

Rurallandless

HH


Ruralsmall farm

HH

Rural largefarm HH

Rural nonfarm HH

Urban loweducated

HH

Urbanhigh

educatedHH

-0.40 -0.44

-0.83

-0.06 -0.13

0.50 0.41

-0.76

0.64

-1.00

-0.50

0.00

0.50

1.00

Ruralnon agri

selfemp

Ruralagri

labor

Ruralotherlabor

Ruralagri self

emp

Ruralother

HH

Urbanselfemp

Urbansalaried

HH

Urbancasuallabor

Urbanother

HH


June 2015

38

Nepal Pakistan

Sri Lanka


According to Figure 20, real income (household nominal income deflated by household-specific

CPI) of all household increases in all South Asian countries.

Figure 20: Percent changes in household real incomes (by household categories)

Bangladesh India

Nepal Pakistan

Sri Lanka


-0.18

0.19 0.09

-0.09

0.22 0.01

-0.24

-1.00

-0.50

0.00

0.50

1.00

Rurallandless

Ruralsmall farm

HH

Ruralmediumfarm HH

Rural largefarm HH

Urban loweducated

HH

Urbanmediumeducated

HH

Urbanhigh

educatedHH

0.18 0.14 0.08

-0.11 -0.10

0.13 0.01

0.12

-0.03

-1.00

-0.50

0.00

0.50

1.00

Landlessagri

labor

Landlessfarmer

Smallfarmer

Mediumfarmer

Largefarmer

RNFpoor

RNF nonpoor

Urbanpoor

Urbannonpoor

0.02 0.02

-0.01

0.02

-0.08 -0.03

0.01 0.00

-1.00

-0.50

0.00

0.50

1.00


NorthWest

NorthCentral

Uva Saba

4.35 3.72

4.09

5.23

3.83

4.82 4.16

0.00

1.00

2.00

3.00

4.00

5.00

6.00

Rurallandless

HH


Ruralsmall farm

HH

Rural largefarm HH

Rural nonfarm HH

Urban loweducated

HH

Urbanhigh

educatedHH

4.29 4.97

5.41

3.47 3.69 3.13

3.84

5.30

2.42

0.00

1.00

2.00

3.00

4.00

5.00

6.00

Ruralnon agri

selfemp

Ruralagri

labor

Ruralotherlabor

Ruralagri self

emp

Ruralother

HH

Urbanselfemp

Urbansalaried

HH

Urbancasuallabor

Urbanother

HH

2.89 2.38 2.63 3.01

3.87 3.88 4.19

0.001.002.003.004.005.006.00

Rurallandless

Ruralsmall farm

HH

Ruralmediumfarm HH

Rural largefarm HH

Urban loweducated

HH

Urbanmediumeducated

HH

Urbanhigh

educatedHH

1.78 1.49 1.50 1.65 1.63 1.65 1.89 1.94 1.90

0.00

1.00

2.00

3.00

4.00

5.00

6.00

Landlessagri

labor

Landlessfarmer

Smallfarmer

Mediumfarmer

Largefarmer

RNFpoor

RNF nonpoor

Urbanpoor

Urbannonpoor

1.19 1.11 1.20 1.10 1.27 1.14 1.10 1.20

0.00

1.00

2.00

3.00

4.00

5.00

6.00


NorthWest

NorthCentral

Uva Saba


June 2015

39

V. CONCLUSION

This paper provides a report of developing CGE models for five South Asian countries

(Bangladesh, India, Nepal, Pakistan and Sri Lanka) and their application in the analysis of

impact of unilateral trade liberalization on macro-economy, trade, employment and household

welfare in these countries. This exercise employs a static CGE model for five South Asian

countries and the Social Accounting Matrix (SAM) of these countries for the year 2012.


countries suggest that the price of imports in local currency falls by larger margins in Bangladesh

and Nepal. Bangladesh experiences the largest rise in total demand for imports followed by

India. Total domestic demand increases most in Bangladesh, followed by Pakistan. The average

cost of domestic production increases in all countries due to rise in primary factor costs. India

has the highest rise in nominal return to capital followed by Bangladesh. The GDP price deflator

increases in all countries; because, though tariff reduction lowers the price of investment goods,

this is offset by the rise in primary factor costs, nominal wage, return to capital and return to

land. The GDP price deflator has the highest rise in Bangladesh followed by India and Nepal.

The real exchange rate depreciates in all countries with the largest depreciation in Bangladesh.

The terms of trade improves in all countries with the largest improvement in Bangladesh. The

real exchange rate depreciation makes exports more competitive in the world market. Hence,

exports expand and the largest positive effect on exports is found for Bangladesh. Higher exports

pull up economy-wide gross production for all five countries with the largest positive effect on

Bangladesh. The largest positive effect on real GDP is seen on Bangladesh and least on Sri

Lanka. Also, largest positive effect on employment is observed for Bangladesh.

Production effects on broad sectors of the simulation shows that, due to tariff liberalization,

larger effects on outputs are observed in Bangladesh and least effects are observed in Sri Lanka.

Average output price of agriculture increases in all five countries with largest effect in

Bangladesh. Average price of industrial goods falls in Bangladesh, Nepal and Pakistan and

increases in India and Sri Lanka. Average price of services increases in all countries except

Pakistan.

The effects on exports by broad sector suggest that there will be positive effects on exports in all

three broad sectors. In general, largest effects on exports would be observed for Bangladesh

followed by India. Sri Lanka will have the least positive effect.

The effects on imports by broad sector indicate that tariff elimination reduces the average local

currency price of imports in all five countries, with largest effect in Bangladesh and least effect

in Sri Lanka. Agricultural imports will rise by more than 100 percent in India due to the


June 2015

40

elimination of high agricultural tariff. Industrial imports become cheaper due to tariff

elimination, while import prices of tariff-free services increase due to exchange rate depreciation.

Agricultural sectors in all countries expand, except in India where the grains and crops sector

contract. Textile and clothing sector in all five countries expands most, with largest expansion is

in Bangladesh. In Bangladesh, Nepal and Pakistan, light and heavy manufacturing sectors

contract, whereas they expand in India and Sri Lanka. Services sectors expand in all five

countries.

All the export-oriented sectors experience rise in export in all five countries. India experiences

the largest rise in agricultural exports. Export of Bangladesh’s major export product textile and

clothing rises by more than 13 percent (highest in South Asia). Bangladesh, India and Nepal

experience rise in exports of light and heavy manufacturing by more than Pakistan and Sri

Lanka.

In Bangladesh, imports in all sector increase. However, in all other four countries, there are

mixed experience. In India, import of grains and crops rise by more than 100 percent. Import in

all other sectors, except transport and communication services and other services, increase. In

Nepal, imports in all sectors, except livestock and meat products, transport and communication

services and other services, increase. In Pakistan, import in all sectors, except grains and crops,

mining and extraction, transport and communication services and other services, increase. In Sri

Lanka, imports in all sectors, except mining and extraction, transport and communication

services and other services, increase.

In all five South Asian counties employment increases for both skilled and unskilled labor. In

Bangladesh and Sri Lanka employment of unskilled labor increases more than skilled labor. In

India, Nepal and Pakistan employment of skilled labor increase more than the unskilled labor. In

all South Asian countries all agricultural sectors experience rise in employment, except grains

and crop sector in India. In the manufacturing sectors, the effects on employment are mixed. In

Bangladesh, Nepal and Pakistan, sectors like heavy and light manufacturing experience

employment loss with rise in employment in other sectors. In India and Sri Lanka, the effects on

employment are positive in all sectors (except grains and crop sector in India).

For the effects on capital returns by broad sectors, South Asian countries have different

experiences. In the case of agriculture, Bangladesh experiences the highest rise in returns to

capital and least rise is for Sri Lanka. In the case of Industry, Bangladesh has the highest rise,

whereas Sri Lanka has the lowest rise and Nepal has negative returns. In the case of services,

Nepal has the highest rise and Sri Lanka has the lowest rise.


June 2015

41

In Bangladesh, the largest rise in nominal income is for urban low educated households. In India,

the largest rise is for rural other labor households. In Nepal, the largest rise is for urban low

educated households. In Pakistan, the largest rise is for urban poor and in Sri Lanka the largest

rise is for Western region and Saba region households. In general, households in Bangladesh and

India experience larger rises in nominal incomes than households in three other countries. CPIs

of households either fall or rise marginally in the five South Asian countries. Real income

(household nominal income deflated by household-specific CPI) of all household increases in all

South Asian countries.

REFERENCES

Raihan, S. (2014). “Updating the Social Accounting Matrix (SAM) of Bangladesh, India, Nepal,

Pakistan and Sri Lanka for the Year 2012”, paper prepared for UNESCAP Subregional

Office for South and South-West Asia (SRO-SSWA).

Decaluwe, B., A. Lemelin, H. Maisonnave and V. Robichaud (2009). "The PEP Standard

Computable General Equilibrium Model: Single-Country, Static Version", Poverty and

Economic Policy Research Network, Laval University, Laval

effects of unilateral trade liberalization …...effects of unilateral trade liberalization in south...

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