TARIFF REDUCTION AND FUNCTIONAL INCOME DISTRIBUTION IN PAKISTAN: A CGE Analysis

This paper analyses impact of one of the major trade liberalisation policies of Structural Adjustment reforms, tariff rate reduction, on functional income distribution to households in Pakistan through CGE modelling, that is well known for this type of analysis. Using SAM-based CGE model, simulation exercises are undertaken to describe the impact of key adjustment policy i.e., reduction in tariff rate by 80% on industrial imports. Simulation results of CGE model simply show the direction of change in various variables as a result of tariff reduction. The main conclusions are as follows. The results show the impact on income of households through change in factor prices. It shows that real income of households’ has increased due to decline in prices. The percentage share of labour in GDP has increased while of capital has declined. The study by Siddiqui and Iqbal (1999) shows that higher percentage of income from capital goes to rich and higher percentage of wages and salaries goes to poor segment of population). This implies that the gap between the rich and poor has reduced. The study shows that consumption of all goods but education has increased and consumption of non-food items increases more as compared to food items. This implies that tariff reduction has welfare enhancing impact on households.Indeed the analysis with disaggregated households sector will give the relatively better picture. Due to decline in import prices, industrial imports have increased by 10% while all other imports have declined. All exports increase. But industrial exports increases more as compare to exports from all other sectors.