Trade Liberalization Financing and its Impact on Poverty and Income Distribution in Ghana

Ghana has adopted a Growth and Poverty Reduction Strategy that emphasizes increased focus on poverty reduction in the design and implementation of its policies. This study uses a CGE model, social accounting matrix and data from the 1999 Ghana Living Standards Survey 4 to examine the impact of unilateral partial trade liberalization both in isolation and combined with foreign capital inflows and value-added tax on the poverty and income distributions of various categories of households. Those included were agricultural households, public sector employees, private sector employees, nonfarm self-employed workers and non-working persons. The study found that eliminating trade-related import and export tariffs on agricultural goods and import tariffs on industrial goods in isolation, combined with foreign capital inflows and combined with VAT reduces the incidence, depth and severity of poverty of all categories of households, with the exception of the incidence of poverty of public sector employees and the non-working group when import tariffs on industrial goods are eliminated in isolation. On the other hand, elimination of trade-related export tariffs on industrial goods in isolation and combined with foreign capital inflows increases the incidence, depth and severity of poverty of all categories of households, with the exception of the incidence of poverty of the non-working group. Moreover, elimination of trade-related export tariffs on industrial goods combined with VAT reduces the incidence, depth and severity of poverty of all categories of households. Income distributions of the private sector employees and the non-working group were found to improve to a larger extent when trade liberalization in isolation is considered. For agricultural households, on the other hand, the income distribution improves to a larger extent when trade liberalization is combined with foreign capital inflows and VAT. Results also indicate that financing of unilateral partial sector-wise trade liberalization through domestic resources (VAT) could have a greater impact on poverty alleviation and improvement in the income distributions of households than the foreign resources (foreign capital inflows).