Tariff Reduction and Income Distribution: A CGE-based Analysis for Urban and Rural Households in Pakistan

Abstract

The study, based on SAM-based CGE model, examines the impact of reduction in tariff on industrial imports on urban and rural households and on other broad macroeconomic aggregates. Based on simulation exercises for 40 percent, 60 percent and 80 percent reduction in tariff on industrial imports, the results suggest that tariff reduction lowers price of imported goods, affects domestic relative price structure, and supply and demand of goods. The results show that the impact of these changes in relative prices is disproportionately higher for the low-income groups. The returns to labour and capital have declined in nominal terms. The share of capital in total GDP increases from 0.72 to 0.73 while the share of labour declines from 0.28 to 0.27. This has negative welfare implications as poor households receive higher percentage of their income from wages and salaries. Results also reveal that tariff reduction increases the gap between the rich and the poor. The Gini coefficient indicates worsening of income distribution, however, the difference between the pre- and post-reform Gini coefficient is very small.

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