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Trade Liberalization and Poverty in Nepal: an Applied General Equilibrium Analysis

  • Prakash Raj Sapkota
  • John Cockburn

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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Paper provided by PEP-MPIA in its series Working Papers MPIA with number 2008-13.

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Date of creation: 2008
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Handle: RePEc:lvl:mpiacr:2008-13
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  1. John Cockburn, 2004. "Trade Liberalisation and Poverty in Nepal A Computable General Equilibrium Micro Simulation Analysis," Development and Comp Systems 0409012, EconWPA.
  2. Decaluwe, B. & Patry, A. & Savard, L. & Thorbecke, E., 1999. "Poverty Analysis Within a General Equilibrium Framework," Cahiers de recherche 9909, Université Laval - Département d'économique.
  3. Foster, James & Greer, Joel & Thorbecke, Erik, 1984. "A Class of Decomposable Poverty Measures," Econometrica, Econometric Society, vol. 52(3), pages 761-66, May.
  4. Chia, Ngee-Choon & Wahba, Sadek & Whalley, John, 1994. "Poverty-Reducing Targeting Programmes: A General Equilibrium Approach," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 3(2), pages 309-38, October.
  5. Dawkins, Christina & Srinivasan, T.N. & Whalley, John, 2001. "Calibration," Handbook of Econometrics, in: J.J. Heckman & E.E. Leamer (ed.), Handbook of Econometrics, edition 1, volume 5, chapter 58, pages 3653-3703 Elsevier.
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