Nepal aggressively liberalized its foreign trade during the 1990s. This paper attempts to estimate the impact of trade liberalization on household welfare and poverty in Nepal through the construction of a regional CGE model. The model disaggregates factors of production - capital, land, and labor - by region (urban, Terai and hills/mountains) in order to establish direct links between sector of activity, factor remuneration, and household income. In particular, certain activities are more intensive in factors from a given region (e.g. the manufacturing sector is more intensive in urban factors of production and the agriculture sector is more intensive in Terai factor of production). Regional factor remuneration in turn maps into regional household income. We find that trade liberalization reduces the nominal returns to urban factors of production in comparison with rural factors of production, resulting in a reduction in the relative income of urban households. Rural and urban households consume roughly the same share of industrial goods, but rural households consume relatively more agricultural goods and fewer services. As the fall in consumer prices in the latter two sectors are similar, there is little rural-urban difference in the variation in consumer price indices. Consumer prices generally fall in roughly the same proportion as nominal incomes such that there are negligible welfare changes. However, poverty falls substantially, with the greatest impact in rural Terai, followed by the rural hills and the mountain region, and least in urban areas.
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Find related papers by JEL classification: D33 - Microeconomics - - Distribution - - - Factor Income Distribution D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models E27 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations F14 - International Economics - - Trade - - - Country and Industry Studies of Trade I32 - Health, Education, and Welfare - - Welfare and Poverty - - - Measurement and Analysis of Poverty O15 - Economic Development, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration O53 - Economic Development, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East
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