Distribution policy under trade liberalisation in Zimbabwe: a CGE analysis

A computable general equilibrium model is used to simulate the economy-wide and income distribution effects of transfer policies to the poor. The model consists of seven income distribution groups - communal farmers, resettlement farmers, unskilled workers, agricultural wage workers, skilled workers, industrial capitalists and agricultural profit earners. The first four groups are treated as a low income group and the last three as a high income group. Experiments to increase each of the low income groups' incomes by 5% using different sources of finance are simulated using the model. These are: an increase in government expenditure without budget balancing measures; an increase in government transfers offset by a decrease in government spending elsewhere; and an increase in direct or indirect taxes. The results of such experiments indicate that a policy of increasing direct taxes and increasing the government deficit in order to support the transfers are favourable in terms of increased incomes in the short run. A policy of increasing indirect taxes and transferring the revenue raised to the poor ranks last in terms of reducing income inequalities. Finally, targeted transfers are generally better than universal transfers in terms of their benefits to low income groups and in reducing income inequalities between the low income and the high income groups.