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Remittances, Trade Liberalisation, and Poverty in Pakistan : The Role of Excluded Variables in Poverty Change Analysis

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  • Rizwana Siddiqui

    (PIDE)

  • A. R. Kemal

Abstract

This study attempts to assess the impact of two shocks - trade liberalisation and a decline in remittances from abroad- on poverty in Pakistan using a CGE framework. It is found that tariff reduction in the absence of a decline in remittances reduces poverty, as measured by the head count, poverty gap, and severity ratios (FGT indicators) in both the rural and urban areas of Pakistan. In terms of welfare, all households appear to gain. The results show that the gain in welfare is larger for urban households than for rural households. We conclude from this that trade liberalisation reduces the gap between urban and rural households. In a second set of experiments, it was found that trade liberalisation in the presence of a decline in remittances reduces welfare in urban households but rural household still show an increase over the base year. According to all FGT indicators, poverty increases in urban households but not in rural households. The combined stock is more harmful to households in the urban areas than in the rural areas. However, this welfare gain and poverty reduction in the presence of trade liberalisation only. Aggregate statistics show that the negative impact of remittance decline dominates the positive impact of trade liberalisation in urban areas. On the other hand, in the case of rural areas, the positive impact of trade liberalisation dominates the negative impact of decline in remittances. It shows that the decline in remittance inflows is a major contributory factor in explaining the increase in poverty in Pakistan.This study attempts to assess the impact of two shocks - trade liberalisation and a decline in remittances from abroad- on poverty in Pakistan using a CGE framework. It is found that tariff reduction in the absence of a decline in remittances reduces poverty, as measured by the head count, poverty gap, and severity ratios (FGT indicators) in both the rural and urban areas of Pakistan. In terms of welfare, all households appear to gain. The results show that the gain in welfare is larger for urban households than for rural households. In addition, poverty reduces by a larger percentage in urban households than in rural households. We conclude from this that trade liberalisation reduces the gap between urban and rural households. In a second set of experiments, it was found that trade liberalisation in the presence of a decline in remittances reduces welfare in urban households but rural household still show an increase over the base year. According to all FGT indicators, poverty increases in urban households but not in rural households. The combined stock is more harmful to households in the urban areas than in the rural areas. However, this welfare gain and poverty reduction in the presence of trade liberalisation only. Aggregate statistics show that the negative impact of remittance decline dominates the positive impact of trade liberalisation in urban areas. On the other hand, in the case of rural areas, the positive impact of trade liberalisation dominates the negative impact of decline in remittances. It shows that the decline in remittance inflows is a major contributory factor in explaining the increase in poverty in Pakistan.

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Bibliographic Info

Paper provided by East Asian Bureau of Economic Research in its series Development Economics Working Papers with number 22224.

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Date of creation: Jan 2006
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Handle: RePEc:eab:develo:22224

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Keywords: Trade Liberalisation; remittance; poverty; households;

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  1. Rizwana Siddiqui & Zafar Iqbal, 1999. "Social Accounting Matrix of Pakistan for 1989-90," PIDE-Working Papers, Pakistan Institute of Development Economics 1999:171, Pakistan Institute of Development Economics.
  2. Rizwana Siddiqui & A. R. Kemal, 2006. "Poverty-reducing or Poverty-inducing? A CGE-based Analysis of Foreign Capital Inflows in Pakistan," PIDE-Working Papers, Pakistan Institute of Development Economics 2006:2, Pakistan Institute of Development Economics.
  3. A. R. Kemal, 1981. "Substitution Elasticities in the Large- Scale Manufacturing Industries of Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, Pakistan Institute of Development Economics, vol. 20(1), pages 1-36.
  4. Clarete, Ramon L. & Whalley, John, 1988. "Interactions between trade policies and domestic distortions in a small open developing country," Journal of International Economics, Elsevier, Elsevier, vol. 24(3-4), pages 345-358, May.
  5. Hans De Kruijk, 1987. "Sources of Income Inequality in Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, Pakistan Institute of Development Economics, vol. 26(4), pages 659-672.
  6. Mohammad, Irfan, 1999. "Emigration from Pakistan - 1947-97," MPRA Paper, University Library of Munich, Germany 38623, University Library of Munich, Germany.
  7. Decaluwe, B. & Patry, A. & Savard, L. & Thorbecke, E., 1999. "Poverty Analysis Within a General Equilibrium Framework," Papers, Laval - Recherche en Politique Economique 9909, Laval - Recherche en Politique Economique.
  8. John Cockburn, 2002. "Trade Liberalisation and Poverty in Nepal A Computable General Equilibrium Micro Simulation Analysis," Economics Series Working Papers, University of Oxford, Department of Economics WPS/2002-11, University of Oxford, Department of Economics.
  9. Foster, James & Greer, Joel & Thorbecke, Erik, 1984. "A Class of Decomposable Poverty Measures," Econometrica, Econometric Society, Econometric Society, vol. 52(3), pages 761-66, May.
  10. Rashid Amjad & A.R. Kemal, 1997. "Macroeconomic Policies and their Impact on Poverty Alleviation in Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, Pakistan Institute of Development Economics, vol. 36(1), pages 39-68.
  11. Sohail J. Malik & Mohammad Mushtaq & Hina Nazli, 1989. "An Analysis of Production Relations in the Large-scale Textile Manufacturing Sector of Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, Pakistan Institute of Development Economics, vol. 28(1), pages 27-42.
  12. Rehana Siddiqui & Rizwana Siddiqui & Zafar Iqbal, 1999. "The Impact of Tariff Reforms on Income Distribution in Pakistan: A CGE-based Analysis," The Pakistan Development Review, Pakistan Institute of Development Economics, Pakistan Institute of Development Economics, vol. 38(4), pages 789-804.
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