Poverty and Shared Prosperity Implications of Deep Integration in Eastern and Southern Africa

Evidence indicates that trade costs are a much more substantial barrier to trade than tariffs, especially in sub-Saharan Africa. We decompose trade costs into: (i) trade facilitation; (ii) non-tariff barriers; and (iii) the costs of business services. We assess the poverty and shared prosperity impacts of deep integration to reduce these three types of trade costs in: (i) the East African Customs Union (EACU)-COMESA-SADC “Tripartite” FTA; (ii) within the EACU alone; and (iii) unilaterally by the EACU. We employ an innovative multi-region computable general equilibrium (CGE) model to estimate the changes in the macroeconomic variables that impact poverty and shared prosperity. We utilize the CGE model estimates in the Global Income Distribution Dynamics (GIDD) microsimulation model to obtain assessments of the changes in the poverty headcount and shared prosperity for each of our simulations for each of our six African regions or countries. We find that these reforms are pro-poor. There are significant reductions in the poverty headcount and the percentage of the population living in poverty for all six of our African regions from deep integration in the Tripartite FTA or comparable unilateral reforms by the EACU. Further, the incomes of the bottom forty percent of the populations noticeably increase in all countries or regions of our model that are engaged in the trade reforms. The reason the poor share in the prosperity is due importantly to the fact that the reforms increase unskilled wages faster than rewards of other factors of production, as the reforms tend to favor agriculture. Despite the uniform increases in income for the poorest 40 percent, we find some cases where the share of income captured by the poorest 40 percent of the population decreases. We find that the estimated gains vary considerably across countries and reforms. Thus, countries would have an interest in negotiating for different reforms in different agreements.