EFFECTS OF UNILATERAL TRADE LIBERALIZATION IN SOUTH ASIAN COUNTRIES:

ESCAP
SOUTH AND SOUTH-WEST ASIA
OFFICE
EFFECTS OF UNILATERAL TRADE LIBERALIZATION
IN SOUTH ASIAN COUNTRIES:
Applications of CGE Models of Bangladesh,
India, Nepal, Pakistan and Sri Lanka
Selim Raihan
June 2015
DEVELOPMENT PAPERS 1501
South and South-West Asia Development Papers 1501
June 2015
Disclaimer: The views expressed in this Development Paper are those of the author(s) and
should not necessarily be considered as reflecting the views or carrying the endorsement of
the United Nations. Development Papers describe research in progress by the author(s) and
are published to elicit comments and to further debate. This publication has been issued
without formal editing.
For any further details, please contact:
Dr. Nagesh Kumar, Director
South and South-West Asia Office (SSWA)
Economic and Social Commission for Asia and the Pacific (ESCAP)
C-2 Qutab Institutional Area, New Delhi-110016, India
Email: [email protected]
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Effects of Unilateral Trade Liberalization in South Asian Countries
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Contents
Foreword ................................................................................................................................................. 6
Abstract ................................................................................................................................................... 7
Executive Summary................................................................................................................................ 8
I. INTRODUCTION ................................................................................................................................. 12
II. METHODOLOGY .............................................................................................................................. 12
2.1. The CGE Model ............................................................................................................................. 12
2.2. Brief Description of Social Account Matrix (SAM) for 2012..................................................... 14
2.3. Structure of the Economies of Bangladesh, India, Nepal, Pakistan and Sri Lanka as in 2012
SAM ....................................................................................................................................................... 16
III. TARIFF LIBERALIZATION SIMULATION IN THE CGE MODELS AND CLOSURES ..... 19
IV. SIMULATION RESULTS ................................................................................................................. 19
4.1. Macroeconomic Effects ................................................................................................................. 19
4.2. Production Effects on Broad Sectors ........................................................................................... 22
4.3. Effects on Exports by Broad Sectors ........................................................................................... 23
4.4. Effects on Imports by Broad Sectors ........................................................................................... 25
4.5. Effects on Output in All Sectors ................................................................................................... 26
4.6. Effects on Exports in All Sectors .................................................................................................. 28
4.7. Effects on Imports in All Sectors .................................................................................................. 29
4.8. Effects on Factor Market .............................................................................................................. 31
4.9. Effects on Capital Returns ............................................................................................................ 35
4.10. Effects on household Income ...................................................................................................... 36
V. CONCLUSION..................................................................................................................................... 39
REFERENCES .......................................................................................................................................... 41
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South and South-West Asia Development Papers 1501
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List of Tables
Table 1: Description of Bangladesh SAM Accounts for 2012 ..................................................... 14
Table 2: Description of India SAM Accounts for 2012 ................................................................ 15
Table 3: Description of Nepal SAM Accounts for 2012 .............................................................. 15
Table 4: Description of Pakistan SAM Accounts for 2012 .......................................................... 16
Table 5: Description of Sri Lanka SAM Accounts for 2012 ........................................................ 16
Table 6: Structure of the Bangladesh economy in 2012 as reflected in the SAM 2012 ............... 17
Table 7: Structure of the Indian economy in 2012 as reflected in the SAM 2012 ....................... 17
Table 8: Structure of the Nepal economy in 2012 as reflected in the SAM 2012 ........................ 18
Table 9: Structure of the Pakistan economy in 2012 as reflected in the SAM 2012 .................... 18
Table 10: Structure of the Sri Lanka economy in 2012 as reflected in the SAM 2012 ................ 19
Table 11: Macro-economic effects (% change from base) ........................................................... 20
Table 12: Percent changes in value added, capital stocks and employment: Bangladesh ............ 31
Table 13: Percent changes in value added, capital stocks and employment: India ...................... 32
Table 14: Percent changes in value added, capital stocks and employment: Nepal ..................... 32
Table 15: Percent changes in value added, capital stocks and employment: Pakistan ................. 33
Table 16: Percent changes in value added, capital stocks and employment: Sri Lanka ............... 33
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List of Figures
Figure 1: Effects on key macroeconomic variables (% change from base) ............................. 20
Figure 2: Production-related effects (% change from base) .................................................... 21
Figure 3: Percent changes in the volume of output (by broad sector) ..................................... 22
Figure 4: Percent changes in the price of output (by broad sector) ......................................... 23
Figure 5: Percent changes in the volume of exports (by broad sector) .................................... 23
Figure 6: Percent changes in the price of exports (by broad sector) ........................................ 24
Figure 7: Percent changes in the volume of imports (by broad sector) ................................... 25
Figure 8: Percent changes in the price of imports (by broad sector) ....................................... 26
Figure 9: Percent changes in the volume of output (by sector) ............................................... 26
Figure 10: Percent changes in the price of output (by sector) ................................................. 27
Figure 11: Percent changes in the volume of exports (by sector) ............................................ 28
Figure 12: Percent changes in the price of exports (by sector) ................................................ 29
Figure 13: Percent changes in the volume of imports (by sector) ........................................... 30
Figure 14: Percent changes in the price of imports of (by sector) ........................................... 30
Figure 15: Percent changes in employment (by skill and broad sector) .................................. 34
Figure 16: Percent changes in total sectoral employment ....................................................... 35
Figure 17: Percent changes in capital returns (by broad sector) .............................................. 36
Figure 18: Percent changes in nominal household income (by household categories) ........... 37
Figure 19: Percent changes in household-specific CPI (by household categories) ................. 37
Figure 20: Percent changes in household real incomes (by household categories) ................. 38
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South and South-West Asia Development Papers 1501
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Foreword
The Development Papers series of the UNESCAP South and South-West Asia Office
(UNESCAP-SSWA) promotes and disseminates policy-relevant research on the development
challenges facing South and South-West Asia. It features policy research conducted at
UNESCAP-SSWA as well as by outside experts from within the region and beyond. The
objective is to foster an informed debate on development policy challenges facing the subregion
and sharing of development experiences and best practices.
In this paper prepared by Selim Raihan for UNESCAP-SSWA, country specific Computable
General Equilibrium (CGE) models are employed to assess the economy-wide effects of
unilateral trade liberalization in five selected South Asian countries; Bangladesh, India, Nepal,
Pakistan and Sri Lanka. Effects of elimination of all import tariffs on economic growth, trade,
employment and household income are captured through exogenous shocks to the price operator.
Though the degree of effects varies from country to country, all the five selected South Asian
countries are observed to benefit out of improving economic conditions. A general fall in import
prices is followed by increase in domestic demand, employment, wage rates, return to capital and
return to land. Terms of trade improves for all five countries with depreciation in real exchange
rates and rising export competitiveness. Higher exports in turn pull up gross production across
sectors.
The analysis finds growth in real GDP triggered by tariff elimination in South Asian countries
ranging from 0.6 percent in Sri Lanka to 3.1 percent in Bangladesh. Certain sectors such as
textiles and clothing are well placed to secure massive export growth, which may go up by more
than 13 per cent in Bangladesh and by 10 per cent in India. One of the key observations of the
paper is the positive impact of across-the-board import tariff cuts on both agricultural output and
exports. This implies that some vital solutions for reviving South Asia’s farm sector could be
sought through a more comprehensive approach to trade liberalization.
Permitting us to appreciate a larger picture without the limitations of partial trade models, this
paper offers rich insights on potential effects of unilateral trade liberalization programmes. We
hope that this paper’s exposition of economy-wide effects will inspire trade practitioners from
the subregion to fast-track trade reforms.
Nagesh Kumar
Head, ESCAP South and South-West Asia Office
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Effects of Unilateral Trade Liberalization in South Asian Countries
June 2015
Effects of Unilateral Trade Liberalization in South Asian Countries:
Applications of CGE Models of Bangladesh, India, Nepal, Pakistan and Sri Lanka
Selim Raihan1
Abstract
This paper explores the economy-wide effects of trade liberalization in five South Asian
countries (Bangladesh, India, Nepal, Pakistan and Sri Lanka) using updated Social Accounting
Matrices (SAM) and static Computable General Equilibrium (CGE) models of these countries
for the year 2012. The CGE framework captures the impact of unilateral trade liberalization on
macro-economy, trade, employment and household welfare in the selected countries by tracing
the price effects of exogenous shocks, where the variations in prices lead to re-allocation of
resources among competing activities, which then may alter the factorial income and, hence, the
distribution of household income. The results show that trade liberalization measures stimulates
growth in employment, for skilled and unskilled labour, as well as real income for all the five
South Asian countries. Tariff elimination increases real GDP at factor cost by 3.1 percent in
Bangladesh, by 2.5 percent in India, by 2 percent in Nepal, by 0.9 percent in Pakistan, and by 0.6
percent in Sri Lanka. The relative price and wage changes in these five economies are also
observed to culminate in a general depreciation of real exchange rates, making their exports
more competitive in the world markets.
JEL Codes(s): F14, F16
Key words: South Asia, Unilateral Trade Liberalization, Computable General Equilibrium
Models, Trade and Employment, Household Income Distribution.
1
Professor, Department of Economics, University of Dhaka, Bangladesh and Executive Director, South Asian
Network on Economic Modeling (SANEM), email: [email protected]. This paper was written with
support from UNESCAP Subregional Office for South and South-West Asia.
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South and South-West Asia Development Papers 1501
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Executive Summary

This paper provides a report of developing CGE models for five South Asian countries
(Bangladesh, India, Nepal, Pakistan and Sri Lanka) and their application in the analysis of
impact of unilateral trade liberalization on macro-economy, trade, employment and
household welfare in these countries. Trade liberalization has been among the major policy
reforms in South Asia. This paper explores the economy-wide effects of trade liberalization
in Bangladesh, India, Nepal, Pakistan and Sri Lanka using the most of updated Social
Accounting Matrices (SAM) of these countries and CGE models of these countries. The
advantage of a CGE framework is that it traces the price effects of the exogenous shock. In
an increasingly market-oriented economy, the variations in prices may be the most important
sources of re-allocation of resources among competing activities, which then may alter the
factorial income and, hence, the distribution of personal income. This exercise employs a
static CGE model for five South Asian countries and the Social Accounting Matrix (SAM) of
these countries for the year 2012.

This experiment undertakes a unilateral elimination of all commodity tariffs. The following
closure assumptions are imposed on the CGE models of the South Asian countries. On the
income-side: total stocks of land, tax rates and technical changes are fixed. Capital is sector
specific. Rigidities in the labor market are reflected by allowing aggregate employment to
change—i.e., labor is in elastic supply with a pool of unemployed workers waiting to be
hired—at a wage (nominal and real) indexed to the economy-wide consumer price index
(CPI). On the expenditure-side: Total real inventories, total real investment and total real
government expenditures are held fixed, whereas both aggregate real household consumption
and real trade balance (exports – imports) are endogenous. The consumer price index (CPI) is
the model’s numéraire.

The macroeconomic effects of the tariff liberalization simulation for the five South Asian
countries suggest that the price of imports in local currency falls by larger margins in
Bangladesh and Nepal. Bangladesh experiences the largest rise in total demand for imports
followed by India. Total domestic demand increases most in Bangladesh, followed by
Pakistan. The average cost of domestic production increases in all countries due to rise in
primary factor costs. India has the highest rise in nominal return to capital followed by
Bangladesh. The GDP price deflator increases in all countries; because, though tariff
reduction lowers the price of investment goods, this is offset by the rise in primary factor
costs, nominal wage, return to capital and return to land. The GDP price deflator has the
highest rise in Bangladesh followed by India and Nepal. The real exchange rate depreciates
in all countries with the largest depreciation in Bangladesh. The terms of trade improves in
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Effects of Unilateral Trade Liberalization in South Asian Countries
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all countries with the largest improvement in Bangladesh. The real exchange rate
depreciation makes exports more competitive in the world market. Hence, exports expand
and the largest positive effect on exports is found for Bangladesh. Higher exports pull up
economy-wide gross production for all five countries with the largest positive effect on
Bangladesh. The largest positive effect on real GDP is seen on Bangladesh and least on Sri
Lanka. Also, largest positive effect on employment is observed for Bangladesh.

Production effects on broad sectors of the simulation shows that, due to tariff liberalization,
larger effects on outputs are observed in Bangladesh and least effects are observed in Sri
Lanka. Average output price of agriculture increases in all five countries with largest effect
in Bangladesh. Average price of industrial goods falls in Bangladesh, Nepal and Pakistan and
increases in India and Sri Lanka. Average price of services increases in all countries except
Pakistan.

The effects on exports by broad sector suggest that there will be positive effects on exports in
all three broad sectors. In general, largest effects on exports would be observed for
Bangladesh followed by India. Sri Lanka will have the least positive effect.

The effects on imports by broad sector indicate that tariff elimination reduces the average
local currency price of imports in all five countries, with largest effect in Bangladesh and
least effect in Sri Lanka. Agricultural imports will rise by more than 100 percent in India due
to the elimination of high agricultural tariff. Industrial imports become cheaper due to tariff
elimination, while import prices of tariff-free services increase due to exchange rate
depreciation.

Agricultural sectors in all countries expand, except in India where the grains and crops sector
contract. Textile and clothing sector in all five countries expands most, with largest
expansion is in Bangladesh. In Bangladesh, Nepal and Pakistan, light and heavy
manufacturing sectors contract, whereas they expand in India and Sri Lanka. Services sectors
expand in all five countries.

All the export-oriented sectors experience rise in export in all five countries. India
experiences the largest rise in agricultural exports. Export of Bangladesh’s major export
product textile and clothing rises by more than 13 percent (highest in South Asia).
Bangladesh, India and Nepal experience rise in exports of light and heavy manufacturing by
more than Pakistan and Sri Lanka.

In Bangladesh, imports in all sector increase. However, in all other four countries, there are
mixed experience. In India, import of grains and crops rise by more than 100 percent. Import
in all other sectors, except transport and communication services and other services, increase.
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In Nepal, imports in all sectors, except livestock and meat products, transport and
communication services and other services, increase. In Pakistan, import in all sectors, except
grains and crops, mining and extraction, transport and communication services and other
services, increase. In Sri Lanka, imports in all sectors, except mining and extraction,
transport and communication services and other services, increase.

In Bangladesh, tariff elimination increases real GDP at factor cost by 3.1 percent. The
average price of value added (1.8 percent) reflects the general increase in returns to capital
(3.4 percent). Tariff elimination increases overall supply of labor by 6.2 percent. Labor
moves from contracting sectors to expanding sectors. Within industry, workers move away
from import substituting sectors (heavy and light manufacturing) to export-oriented sectors,
especially to the textile and clothing sector. In India, tariff elimination increases real GDP at
factor cost by 2.5 percent. The average price of value added (1.6 percent) reflects the general
increase in returns to capital (3.7 percent). Tariff elimination increases overall supply of
labor by 4.8 percent. Labor moves from contracting sectors (grains and crops) to expanding
sectors. Larger rise in employment is observed in mining and extraction and textile and
clothing sector. In Nepal, tariff elimination increases real GDP at factor cost by 2 percent.
The average price of value added (1.7 percent) reflects the general increase in returns to
capital (3.1 percent). Tariff elimination increases overall supply of labor by 4.8 percent.
Labor moves from contracting sectors (light and heavy manufacturing) to expanding sectors
(mainly the services sectors). Larger rise in employment is observed in textile and clothing
sector, processed food and utilities and construction. In Pakistan, tariff elimination increases
real GDP at factor cost by 0.9 percent. The average price of value added (0.9 percent) reflects
the general increase in returns to capital (1.5 percent). Tariff elimination increases overall
supply of labor by 2.2 percent. Labor moves from contracting sectors (light and heavy
manufacturing) to expanding sectors (mainly textile and clothing). Larger rise in employment
is observed in textile and clothing sector and processed food sector. In Sri Lanka, tariff
elimination increases real GDP at factor cost by 0.6 percent. The average price of value
added (0.7 percent) reflects the general increase in returns to capital (1.3 percent). Tariff
elimination increases overall supply of labor by 1.5 percent. Employment increases in all
sectors. However, largest rise in employment is observed in textile and clothing sector.

In all five South Asian counties employment increases for both skilled and unskilled labor. In
Bangladesh and Sri Lanka employment of unskilled labor increases more than skilled labor.
In India, Nepal and Pakistan employment of skilled labor increase more than the unskilled
labor. In all South Asian countries all agricultural sectors experience rise in employment,
except grains and crop sector in India. In the manufacturing sectors, the effects on
employment are mixed. In Bangladesh, Nepal and Pakistan, sectors like heavy and light
manufacturing experience employment loss with rise in employment in other sectors. In India
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and Sri Lanka, the effects on employment are positive in all sectors (except grains and crop
sector in India).

For the effects on capital returns by broad sectors, South Asian countries have different
experiences. In the case of agriculture, Bangladesh experiences the highest rise in returns to
capital and least rise is for Sri Lanka. In the case of Industry, Bangladesh has the highest rise,
whereas Sri Lanka has the lowest rise and Nepal has negative returns. In the case of services,
Nepal has the highest rise and Sri Lanka has the lowest rise.

In Bangladesh, the largest rise in nominal income is for urban low educated households. In
India, the largest rise is for rural other labor households. In Nepal, the largest rise is for urban
low educated households. In Pakistan, the largest rise is for urban poor and in Sri Lanka the
largest rise is for Western region and Saba region households. In general, households in
Bangladesh and India experience larger rises in nominal incomes than households in three
other countries. CPIs of households either fall or rise marginally in the five South Asian
countries. Real income (household nominal income deflated by household-specific CPI) of
all household increases in all South Asian countries.
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I. INTRODUCTION
The economy-wide impact of trade liberalization is a much debated and controversial issue.
Theoretically, trade liberalization results in productivity gains through increased competition,
efficiency, innovation and acquisition of new technology. Trade policy works by inducing
substitution effects in the production and consumption of goods and services through changes in
prices. These effects, in turn, change the level and composition of exports and imports. In
particular, the changing relative prices induced by trade liberalization cause a re-allocation of
resources from less efficient to more efficient uses. Trade liberalization is also thought to expand
the set of economic opportunities by enlarging the market size and increasing the effects of
knowledge spill over. These are the key theoretical components of the effects of trade
liberalization, which together induce growth of output and consequent poverty alleviation.
Trade liberalization has been among the major policy reforms in South Asia. This paper explores
the economy-wide effects of trade liberalization in Bangladesh, India, Nepal, Pakistan and Sri
Lanka using the most of updated Social Accounting Matrices (SAM) of these countries and
Computable General Equilibrium (CGE) models of these countries. The advantage of a CGE
framework is that it traces the price effects of the exogenous shock. In an increasingly marketoriented economy, the variations in prices may be the most important sources of re-allocation of
resources among competing activities, which then may alter the factorial income and, hence, the
distribution of personal income.
The organization of the paper is as follows: Section II presents on the methodology of the paper;
Section III discusses on the simulation design and model closures; Section IV presents the
simulation results in terms on impact on macro-economy, sectoral output, sectoral exports,
sectoral imports, factor market and household welfare.
II. METHODOLOGY
This exercise employs a static CGE model for five South Asian countries and the Social
Accounting Matrix (SAM) of these countries for the year 2012. The modules of the CGE model
and a description of the SAM are provided below.
2.1. The CGE Model
The CGE model is built using the PEP standard static model (Decaluwe et al, 2009) and with
further developments and modifications. In the CGE model, a representative firm in each
industry maximizes profits subject to its production technology. The sectoral output follows a
Leontief production function. Each industry’s value added consists of composite labor and
composite capital, following a CES specification. Different categories of labor are combined
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Effects of Unilateral Trade Liberalization in South Asian Countries
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following a CES technology with imperfect substitutability between different types of labor.
Composite capital is a CES combination of the different categories of capital. It is assumed that
intermediate inputs are perfectly complementary. They are combined following a Leontief
production function.
Household incomes come from labor income, capital income, and transfers received from other
agents. Subtracting direct taxes yields household’s disposable income. Household savings are a
linear function of disposable income, which allows the marginal propensity to save to differ from
the average propensity.
Corporate income consists of its share of capital income and of transfers received from other
agents. Deducting business income taxes from total income yields the disposable income of each
type of business. Likewise, business savings are the residual that remains after subtracting
transfers to other agents from disposable income.
The government draws its income from household and business income taxes, taxes on products
and on imports, and other taxes on production. Income taxes for both households and businesses
are described as a linear function of total income. The current government budget surplus or
deficit (positive or negative savings) is the difference between its revenue and its expenditures.
The latter consists of transfers to agents and current expenditures on goods and services.
The rest of the world receives payments for the value of imports, part of the income of capital,
and transfers from domestic agents. Foreign spending in the domestic economy consists of the
value of exports and transfers to domestic agents. The difference between foreign receipts and
spending is the amount of rest-of-the-world savings, which are equal in absolute value to the
current account balance but are of opposite sign.
The demand for goods and services, whether domestically produced or imported, consists of
household consumption demand, investment demand, demand by government, and demand as
transport or trade margins. It is assumed that households have Stone–Geary utility functions
(from which derives the Linear Expenditure System). Investment demand includes both gross
fixed capital formation (GFCF) and changes in inventories.
Producers’ supply behavior is represented by nested constant elasticity of transformation (CET)
functions. On the upper level aggregate output is allocated to individual products; on the lower
level the supply of each product is distributed between the domestic market and exports. The
model departs from the pure form of the small-country hypothesis. A local producer can increase
his share of the world market only by offering a price that is advantageous relative to the
(exogenous) world price. The ease with which his share can be increased depends on the degree
of substitutability of the proposed product for competing products; in other words, it depends on
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the price-elasticity of export demand. Commodities demanded on the domestic market are
composite goods, combinations of locally produced goods and imports. The imperfect
substitutability between the two is represented by a CES aggregator function. Naturally, for
goods with no competition from imports, the demand for the composite commodity is the
demand for the domestically produced good.
The system requires equilibrium between the supply and demand of each commodity on the
domestic market. The sum of supplies of every commodity made by local producers must equal
domestic demand for that locally produced commodity. Finally, supply to the export market of
each good must be matched by demand.
Also, there is equilibrium between total demand for capital and its available supply. However,
the model assumes flexible wage rates for labor, allowing for unemployment.
2.2. Brief Description of Social Account Matrix (SAM) for 2012
The CGE models of the five South Asian countries use the latest available Social Accounting
Matrix (SAM) of these countries for the year 2012 (Raihan, 2014). The summaries of the SAM
of these five countries are provided below.
The 2012 SAM for Bangladesh has the following accounts: (1) total domestic supply of 10
commodities; (2) production accounts for 10 activities; (3) 4 factors of productions-two labor
types and two capital categories; (4) current account transactions between 4 current institutional
agents- households and unincorporated capital, corporate enterprises, government and the rest of
the world; household account includes seven representative groups (5 rural and 2 urban); and (5)
one consolidated capital account. The structure of the Bangladesh SAM is described in Table 1.
Table 1: Description of Bangladesh SAM Accounts for 2012
Set
Activity (10)
Commodity (10)
Factors of Production (4)
Households (7)
Other Institutions (4)
Description of Elements
Agriculture and extraction: Grains and Crops, Livestock and Meat Products, Mining and Extraction.
Manufacturing: Processed Food, Textiles and Clothing, Light Manufacturing, Heavy Manufacturing.
Services: Utilities and Construction, Transport and Communication, Other Services.
Agriculture and extraction: Grains and Crops, Livestock and Meat Products, Mining and Extraction.
Manufacturing: Processed Food, Textiles and Clothing, Light Manufacturing, Heavy Manufacturing.
Services: Utilities and Construction, Transport and Communication, Other Services.
Unskilled labor, Skilled labor, Capital and Land
Rural: landless, Agricultural marginal, Agricultural small, Agricultural large, Non-farm
Urban: Households with low educated heads, and households with high educated heads
Government; Corporation; Rest of the World and Capital
Source: Raihan (2014)
The 2012 SAM for India identifies the economic relations through following accounts: (1) total
domestic supply of 10 commodities; (2) production accounts for 10 activities; (3) 4 factors of
productions-two labor types and two capital categories; (4) current account transactions between
4 current institutional agents- households and unincorporated capital, corporate enterprises,
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Effects of Unilateral Trade Liberalization in South Asian Countries
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government and the rest of the world; household account includes 9 representative groups (5
rural and 4 urban); and (5) one consolidated capital account. The structure of the India SAM is
described in Table 2.
Table 2: Description of India SAM Accounts for 2012
Set
Activity (10)
Commodity (10)
Factors of Production (4)
Households (9)
Other Institutions (4)
Description of Elements
Grains and Crops, Livestock and Meat Products, Mining and Extraction. Processed Food, Textiles and
Clothing, Light Manufacturing, Heavy Manufacturing. Utilities and Construction, Transport and
Communication, Other Services.
Grains and Crops, Livestock and Meat Products, Mining and Extraction. Processed Food, Textiles and
Clothing, Light Manufacturing, Heavy Manufacturing. Utilities and Construction, Transport and
Communication, Other Services.
Unskilled labor, Skilled labor, Capital and Land
Rural non-agricultural self-employed, Rural agricultural labor, Rural other laboor, Rural agricultural selfemployed and Rural other households
Urban self-employed, Urban salaried class, Urban casual labour and Urban other households
Government; Corporation; Rest of the World and Capital
Source: Raihan (2014)
The 2012 SAM for Nepal has the following accounts: (1) total domestic supply of 10
commodities; (2) production accounts for 10 activities; (3) 4 factors of productions-two labor
types and two capital categories; (4) current account transactions between 4 current institutional
agents- households and unincorporated capital, corporate enterprises, government and the rest of
the world; household account includes 7 representative groups (4 rural and 3 urban); and (5) one
consolidated capital account. The structure of the Nepal SAM is described in Table 3.
Table 3: Description of Nepal SAM Accounts for 2012
Set
Activity (10)
Commodity (10)
Factors of Production (4)
Households (7)
Other Institutions (4)
Description of Elements
Grains and Crops, Livestock and Meat Products, Mining and Extraction. Processed Food, Textiles and
Clothing, Light Manufacturing, Heavy Manufacturing. Utilities and Construction, Transport and
Communication, Other Services.
Grains and Crops, Livestock and Meat Products, Mining and Extraction. Processed Food, Textiles and
Clothing, Light Manufacturing, Heavy Manufacturing. Utilities and Construction, Transport and
Communication, Other Services.
Unskilled labor, Skilled labor, Capital and Land
Rural: landless, Agricultural marginal farmer, Agricultural small farmer, Agricultural large farmer
Urban: Households with low educated heads, Households with medium educated heads and households
with high educated heads
Government; Corporation; Rest of the World and Capital
Source: Raihan (2014)
The 2012 SAM for Pakistan has the following accounts: (1) total domestic supply of 10
commodities; (2) production accounts for 10 activities; (3) 4 factors of productions-two labor
types and two capital categories; (4) current account transactions between 4 current institutional
agents- households and unincorporated capital, corporate enterprises, government and the rest of
the world; household account includes 9 representative groups (4 rural and 3 urban); and (5) one
consolidated capital account. The structure of the Pakistan SAM is described in Table 4.
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Table 4: Description of Pakistan SAM Accounts for 2012
Set
Activity (10)
Commodity (10)
Factors of Production (4)
Households (9)
Other Institutions (4)
Description of Elements
Grains and Crops, Livestock and Meat Products, Mining and Extraction. Processed Food, Textiles
Clothing, Light Manufacturing, Heavy Manufacturing. Utilities and Construction, Transport
Communication, Other Services.
Grains and Crops, Livestock and Meat Products, Mining and Extraction. Processed Food, Textiles
Clothing, Light Manufacturing, Heavy Manufacturing. Utilities and Construction, Transport
Communication, Other Services.
Unskilled labor, Skilled labor, Capital and Land
Large farm, Medium farm, Small farm, Landless farmer, Landless agricultural labor, Rural non-farm
poor, Rural non-farm poor
Urban non-poor, Urban poor
Government; Corporation; Rest of the World and Capital
and
and
and
and
non
Source: Raihan (2014)
The 2012 SAM for Sri Lanka has the following accounts: (1) total domestic supply of 10
commodities; (2) production accounts for 10 activities; (3) 4 factors of productions-two labor
types and two capital categories; (4) current account transactions between 4 current institutional
agents- households and unincorporated capital, corporate enterprises, government and the rest of
the world; household account includes 8 representative groups (4 rural and 3 urban); and (5) one
consolidated capital account. The structure of the Sri Lanka SAM is described in Table 5.
Table 5: Description of Sri Lanka SAM Accounts for 2012
Set
Activity (10)
Commodity (10)
Factors of Production (4)
Households (8)
Other Institutions (4)
Description of Elements
Grains and Crops, Livestock and Meat Products, Mining and Extraction. Processed Food, Textiles
Clothing, Light Manufacturing, Heavy Manufacturing. Utilities and Construction, Transport
Communication, Other Services.
Grains and Crops, Livestock and Meat Products, Mining and Extraction. Processed Food, Textiles
Clothing, Light Manufacturing, Heavy Manufacturing. Utilities and Construction, Transport
Communication, Other Services.
Unskilled labor, Skilled labor, Capital and Land
Western, Central, Southern, North East, North West, North Central, Uva, Saba
Government; Corporation; Rest of the World and Capital
and
and
and
and
Source: Raihan (2014)
2.3. Structure of the Economies of Bangladesh, India, Nepal, Pakistan and Sri Lanka as in
2012 SAM
Table 6 presents the structure of the Bangladesh economy in 2012. In terms of value-addition,
among the agricultural sectors, the leading sector is the grains and crops with 11.33 percent
share. Among the manufacturing sectors, the leading sector is textile and clothing (7.55 percent).
Among the services sectors, the leading sector is transport and communication (27.65 percent).
The textile and clothing sector is highly export oriented. The export basket is highly concentrated
as 88.12 percent exports come from textile and clothing. The heavy manufacturing sector is
highly import dependent. In the case of tariff rate, agricultural sectors have lower tariff rates than
the manufacturing sectors.
16
Effects of Unilateral Trade Liberalization in South Asian Countries
June 2015
Table 6: Structure of the Bangladesh economy in 2012 as reflected in the SAM 2012
Sectors
Grains and Crops
Livestock and Meat Products
Mining and Extraction
Processed Food
Textiles and Clothing
Light Manufacturing
Heavy Manufacturing
Utilities and Construction
Transport and Communication
Other Services
Total
1
Vi/TV
11.33
1.25
6.60
1.34
7.55
1.74
0.99
16.86
27.65
24.69
100.00
2
Ei/Oi
0.42
0.07
0.16
1.53
51.68
2.41
1.17
2.87
0.28
―
3
Ei/TE
0.56
0.01
0.08
1.59
88.12
1.44
1.26
6.30
0.63
100.00
4
Mi/Oi
9.09
2.25
2.20
15.96
17.57
20.83
60.96
2.42
3.65
―
5
Mi/TM
8.05
0.25
0.75
10.87
19.70
8.22
43.16
3.49
5.52
100.00
6
TAR
4.52
8.22
7.61
13.38
25.33
19.59
11.77
―
Note: Vi=sectoral value added, TV=total value added, Ei=sectoral export, Oi=sectoral output, TE=total export,
Mi=sectoral import, TM=total import, TAR=tariff rate, All figures are expressed in percentages.
Source: Raihan (2014)
Table 7 presents the structure of the Indian economy in 2012. In terms of value-addition, among
the agricultural sectors, the leading sector is the grains and crops with 9.36 percent share. Among
the manufacturing sectors, the leading sector is heavy manufacturing (7 percent). Among the
services sectors, the leading sector in other services (31.86 percent). The export basket is fairly
diversified. The heavy manufacturing and mining and extraction sectors are highly import
dependent. In the case of tariff rate, grain and crops sector has the highest tariff rate.
Table 7: Structure of the Indian economy in 2012 as reflected in the SAM 2012
Sectors
Grains and Crops
Livestock and Meat Products
Mining and Extraction
Processed Food
Textiles and Clothing
Light Manufacturing
Heavy Manufacturing
Utilities and Construction
Transport and Communication
Other Services
Total
1
Vi/TV
9.36
3.33
4.20
1.80
1.63
4.61
7.00
10.63
25.57
31.86
100.00
2
Ei/Oi
5.23
2.00
2.09
7.05
25.99
31.47
16.17
15.97
7.66
―
3
Ei/TE
2.55
0.38
1.34
2.35
5.64
19.44
32.49
23.90
11.92
100.00
4
Mi/Oi
2.70
0.51
65.44
9.55
4.18
13.15
21.62
6.20
10.04
―
5
Mi/TM
1.06
0.08
33.88
2.57
0.73
6.55
35.04
7.49
12.60
100.00
6
TAR
58.88
8.54
2.98
32.90
19.83
17.45
12.85
―
Note: Vi=sectoral value added, TV=total value added, Ei=sectoral export, Oi=sectoral output, TE=total export,
Mi=sectoral import, TM=total import, TAR=tariff rate, All figures are expressed in percentages.
Source: Raihan (2014)
Table 8 presents the structure of the Nepal economy in 2012. In terms of value-addition, among
the agricultural sectors, the leading sector is the grains and crops with 25.19 percent share.
Among the manufacturing sectors, the leading sector is light manufacturing (2.25 percent).
Among the services sectors, the leading sector is other services (28.04 percent). The export
basket is concentrated around textile and clothing, transport and communication and other
services. The heavy manufacturing sector is highly import dependent. In the case of tariff rate,
agricultural sectors have lower tariff rates than the manufacturing sectors.
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South and South-West Asia Development Papers 1501
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Table 8: Structure of the Nepal economy in 2012 as reflected in the SAM 2012
Sectors
Grains and Crops
Livestock and Meat Products
Mining and Extraction
Processed Food
Textiles and Clothing
Light Manufacturing
Heavy Manufacturing
Utilities and Construction
Transport and Communication
Other Services
Total
1
Vi/TV
25.19
8.09
2.34
0.95
1.25
2.25
1.57
8.47
21.85
28.04
100.00
2
Ei/Oi
1.66
0.17
3.24
4.23
88.97
3.53
4.66
12.74
0.08
-
3
Ei/TE
4.73
0.21
0.84
3.39
28.34
3.04
7.24
30.64
21.57
100.00
4
Mi/Oi
13.94
5.93
15.84
52.12
47.47
21.45
65.27
5.85
0.12
-
5
Mi/TM
14.47
2.63
1.49
15.25
5.52
6.76
37.04
5.14
11.70
100.00
6
TAR
4.00
1.48
7.04
4.43
8.64
25.54
15.86
-
Note: Vi=sectoral value added, TV=total value added, Ei=sectoral export, Oi=sectoral output, TE=total export,
Mi=sectoral import, TM=total import, TAR=tariff rate, All figures are expressed in percentages.
Source: Raihan (2014)
Table 9 presents the structure of the Pakistan economy in 2012. In terms of value-addition,
among the agricultural sectors, the leading sector is the livestock and meat products with 11.52
percent share. Among the manufacturing sectors, the leading sector is textile and clothing (4.16
percent). Among the services sectors, the leading sector is transport and communication (33.51
percent). The export basket is concentrated as 50.73 percent exports come from textile and
clothing. The heavy manufacturing sector is highly import dependent. In the case of tariff rate,
agricultural sectors have lower tariff rates than the manufacturing sectors.
Table 9: Structure of the Pakistan economy in 2012 as reflected in the SAM 2012
Sectors
Grains and Crops
Livestock and Meat Products
Mining and Extraction
Processed Food
Textiles and Clothing
Light Manufacturing
Heavy Manufacturing
Utilities and Construction
Transport and Communication
Other Services
Total
1
Vi/TV
8.62
11.52
3.55
3.27
4.16
1.08
3.27
5.12
33.51
25.89
100.00
2
Ei/Oi
5.60
0.50
1.63
4.78
36.30
12.64
3.73
1.34
2.72
-
3
Ei/TE
7.98
0.99
1.05
6.40
50.73
7.73
8.70
5.52
10.91
100.00
4
Mi/Oi
7.48
0.15
30.86
5.26
2.80
22.06
35.25
1.15
1.48
-
5
Mi/TM
7.21
0.21
13.35
4.76
2.65
9.11
55.52
3.21
4.01
100.00
6
TAR
2.17
3.75
0.12
11.20
9.78
17.68
7.97
-
Note: Vi=sectoral value added, TV=total value added, Ei=sectoral export, Oi=sectoral output, TE=total export,
Mi=sectoral import, TM=total import, TAR=tariff rate, All figures are expressed in percentages.
Source: Raihan (2014)
Table 6 presents the structure of the Sri Lanka economy in 2012. In terms of value-addition,
among the agricultural sectors, the leading sector is the grains and crops with 16.37 percent
share. Among the manufacturing sectors, the leading sector is processed food (7.24 percent).
Among the services sectors, the leading sector is transport and communication (27.63 percent).
Textile and clothing takes more than 35 percent share in the export basket. This sector is also
18
Effects of Unilateral Trade Liberalization in South Asian Countries
June 2015
heavily import dependent. The heavy manufacturing sector is highly import dependent and takes
around 45 percent share in total import. In the case of tariff rate, agricultural sectors have higher
tariff rates than the manufacturing sectors (except processed food).
Table 10: Structure of the Sri Lanka economy in 2012 as reflected in the SAM 2012
Sectors
Grains and Crops
Livestock and Meat Products
Mining and Extraction
Processed Food
Textiles and Clothing
Light Manufacturing
Heavy Manufacturing
Utilities and Construction
Transport and Communication
Other Services
Total
1
Vi/TV
16.37
1.86
4.75
7.24
6.44
2.56
5.13
10.14
27.63
17.88
100.00
2
Ei/Oi
15.47
0.64
4.99
13.86
60.08
21.61
13.39
12.32
2.86
15.47
3
Ei/TE
11.18
0.05
1.39
7.95
35.54
9.54
14.69
16.70
2.95
100.00
4
Mi/Oi
8.10
2.19
41.19
16.03
62.48
48.73
58.83
8.94
2.39
-
5
Mi/TM
3.98
0.13
8.75
6.37
11.87
13.57
44.99
8.55
1.79
100.00
6
TAR
6.60
6.13
0.05
8.45
0.56
5.25
2.64
-
Note: Vi=sectoral value added, TV=total value added, Ei=sectoral export, Oi=sectoral output, TE=total export,
Mi=sectoral import, TM=total import, TAR=tariff rate, All figures are expressed in percentages.
Source: Raihan (2014)
III. TARIFF LIBERALIZATION SIMULATION IN THE CGE MODELS AND
CLOSURES
This experiment undertakes a unilateral elimination of all commodity tariffs. The following
closure assumptions are imposed on the CGE models of the South Asian countries to capture the
short-run effects. On the income-side: total stocks of land, tax rates and technical changes are
fixed. Capital is sector specific. Rigidities in the labor market are reflected by allowing aggregate
employment to change—i.e., labor is in elastic supply with a pool of unemployed workers
waiting to be hired—at a wage (nominal and real) indexed to the economy-wide consumer price
index (CPI). On the expenditure-side: Total real inventories, total real investment and total real
government expenditures are held fixed, whereas both aggregate real household consumption
and real trade balance (exports – imports) are endogenous. The consumer price index (CPI) is the
model’s numéraire.
IV. SIMULATION RESULTS
4.1. Macroeconomic Effects
The macroeconomic effects of the tariff liberalization simulation for the five South Asian
countries are presented in Table 11. The price of imports in local currency falls by larger margins
in Bangladesh and Nepal. Bangladesh experiences the largest rise in total demand for imports
followed by India. Total domestic demand increases most in Bangladesh, followed by Pakistan.
The average cost of domestic production increases in all countries due to rise in primary factor
19
South and South-West Asia Development Papers 1501
June 2015
costs. India has the highest rise in nominal return to capital followed by Bangladesh. The GDP
price deflator increases in all countries; because, though tariff reduction lowers the price of
investment goods, this is offset by the rise in primary factor costs, nominal wage, return to
capital and return to land. The GDP price deflator has the highest rise in Bangladesh followed by
India and Nepal. The real exchange rate depreciates in all countries with the largest depreciation
in Bangladesh. The terms of trade improves in all countries with the largest improvement in
Bangladesh. The real exchange rate depreciation makes exports more competitive in the world
market. Hence, exports expand and the largest positive effect on exports is found for Bangladesh.
Higher exports pull up economy-wide gross production for all five countries with the largest
positive effect on Bangladesh. The largest positive effect on real GDP is seen on Bangladesh and
least on Sri Lanka. Also, largest positive effect on employment is observed for Bangladesh.
Table 11: Macro-economic effects (% change from base)
Prices
Investment price index
Government price index
Export price index (in local currency)
GDP price deflator
Imports (in local currency)
Exchange rate
Terms of trade
Domestic production
Intermediate input costs
Primary factor costs
Nominal return to capital
Nominal return to land
Volume
Exports supply
Import demand
GDP
Domestic demand
Gross production
Aggregate employment
Bangladesh
0.32
0.97
2.05
1.80
-4.43
8.51
6.77
0.58
-0.53
1.80
3.40
5.24
India
0.49
1.20
4.06
1.64
-0.09
8.29
4.15
0.54
0.37
1.64
3.67
1.77
Nepal
1.52
1.20
1.52
1.64
-4.70
4.21
6.53
0.24
-1.27
1.65
3.05
2.15
Pakistan
0.22
0.58
1.77
0.91
-3.27
3.51
5.21
0.10
-0.55
0.91
1.52
1.52
Sri Lanka
-0.31
0.03
1.16
0.70
-0.81
1.94
1.98
0.24
0.01
0.70
1.33
0.58
13.07
8.87
3.05
2.43
3.36
6.16
8.38
4.63
2.49
1.53
2.37
4.83
5.46
4.09
2.02
1.59
1.90
4.81
3.58
4.58
0.88
0.62
0.78
2.22
1.65
2.04
0.63
0.36
0.61
1.45
Source: Simulations using the CGE models of Bangladesh, India, Nepal, Pakistan and Sri Lanka
The graphical presentations of the effects on key macroeconomic variables are provided in
Figure 1.
Figure 1: Effects on key macroeconomic variables (% change from base)
Bangladesh
10.0
India
10.0
8.51
6.77
8.0
6.0
4.0
8.29
8.0
6.0
3.05
4.0
1.80
2.0
4.15
2.49
2.0
0.0
1.64
0.0
GDP
GDP deflator
Exchange rate
(nominal)
Terms of Trade
(ToT)
GDP
20
GDP deflator
Exchange rate
(nominal)
Terms of Trade
(ToT)
Effects of Unilateral Trade Liberalization in South Asian Countries
June 2015
Nepal
Pakistan
10.0
10.0
8.0
4.0
8.0
6.53
6.0
5.21
6.0
4.21
3.51
4.0
2.02
1.64
2.0
2.0
0.0
0.88
0.91
GDP
GDP deflator
0.0
GDP
GDP deflator
Exchange rate
(nominal)
Terms of Trade
(ToT)
Exchange rate
(nominal)
Terms of Trade
(ToT)
Sri Lanka
10.0
9.0
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
0.63
0.70
GDP
GDP deflator
1.94
1.98
Exchange rate
(nominal)
Terms of Trade
(ToT)
Source: Simulations using the CGE models of Bangladesh, India, Nepal, Pakistan and Sri Lanka
The production related effects of the simulation are presented in Figure 2.
Figure 2: Production-related effects (% change from base)
Bangladesh
India
13.07
15.0
15.0
10.0
5.0
8.38
10.0
1.80
0.58
3.36
2.43
5.0
0.0
0.54
0.37
-0.53
-5.0
Exports
(volume)
Domestic
sales
(volume)
Domestic Intermediate Primary
Gross
production input costs factor costs production
costs
(volume)
Nepal
Exports
(volume)
Domestic
sales
(volume)
15.0
10.0
10.0
5.46
1.65
0.24
1.90
5.0
1.59
0.0
3.58
0.91
0.10
0.78
0.62
0.0
-1.27
Domestic Intermediate Primary
Gross
production input costs factor costs production
costs
(volume)
-5.0
Exports
(volume)
Domestic
sales
(volume)
1.65
0.36
Exports
(volume)
Domestic
sales
(volume)
-0.55
Domestic Intermediate Primary
Gross
production input costs factor costs production
costs
(volume)
Sri Lanka
15.0
10.0
5.0
1.53
Pakistan
15.0
-5.0
2.37
-5.0
Domestic Intermediate Primary
Gross
production input costs factor costs production
costs
(volume)
5.0
1.64
0.0
0.24
0.01
0.70
0.61
0.0
-5.0
Domestic Intermediate Primary
Gross
production input costs factor costs production
costs
(volume)
Source: Simulations using the CGE models of Bangladesh, India, Nepal, Pakistan and Sri Lanka
21
Exports
(volume)
Domestic
sales
(volume)
South and South-West Asia Development Papers 1501
June 2015
4.2. Production Effects on Broad Sectors
Production effects on broad sectors of the simulation are presented in Figure 3 and Figure 4.
Figure 3 shows that, due to tariff liberalization, larger effects on outputs are observed in
Bangladesh and least effects are observed in Sri Lanka.
Figure 3: Percent changes in the volume of output (by broad sector)
Bangladesh
India
4.80
5.0
5.0
4.0
2.91
3.36
3.0
4.0
3.0
2.46
2.63
INDUSTRY
SERVICES
2.37
1.90
2.0
2.0
1.0
1.0
0.0
0.51
0.0
AGRICULTURE
INDUSTRY
SERVICES
All SECTORS
AGRICULTURE
Nepal
Pakistan
5.0
5.0
4.0
4.0
3.0
2.0
3.0
2.45
1.90
1.70
2.0
0.95
1.0
All SECTORS
1.0
0.24
0.0
0.89
0.78
SERVICES
All SECTORS
0.47
0.0
AGRICULTURE
INDUSTRY
SERVICES
All SECTORS
0.59
0.71
0.61
INDUSTRY
SERVICES
All SECTORS
AGRICULTURE
INDUSTRY
Sri Lanka
5.0
4.0
3.0
2.0
1.0
0.34
0.0
AGRICULTURE
Source: Simulations using the CGE models of Bangladesh, India, Nepal, Pakistan and Sri Lanka
Figure 4 suggests that average output price of agriculture increases in all five countries with
largest effect in Bangladesh. Average price of industrial goods falls in Bangladesh, Nepal and
Pakistan and increases in India and Sri Lanka. Average price of services increases in all countries
except Pakistan.
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Effects of Unilateral Trade Liberalization in South Asian Countries
June 2015
Figure 4: Percent changes in the price of output (by broad sector)
Bangladesh
4.0
India
3.2
4.0
3.0
3.0
2.0
0.7
1.0
2.0
0.7
1.0
0.0
0.1
AGRICULTURE
INDUSTRY
0.3
0.0
-1.0
-1.0
-1.0
-2.0
-2.0
-3.0
-3.0
AGRICULTURE
INDUSTRY
SERVICES
All SECTORS
Nepal
SERVICES
All SECTORS
-0.3
-0.2
-0.1
INDUSTRY
SERVICES
All SECTORS
Pakistan
4.0
4.0
3.0
3.0
1.4
2.0
1.0
0.9
0.3
2.0
0.6
1.0
0.0
0.4
0.0
-1.0
-0.7
-2.0
-3.0
AGRICULTURE
-2.4
INDUSTRY
-1.0
-2.0
-3.0
SERVICES
All SECTORS
AGRICULTURE
Sri Lanka
4.0
3.0
2.0
1.0
0.2
0.2
0.3
0.2
AGRICULTURE
INDUSTRY
SERVICES
All SECTORS
0.0
-1.0
-2.0
-3.0
Source: Simulations using the CGE models of Bangladesh, India, Nepal, Pakistan and Sri Lanka
4.3. Effects on Exports by Broad Sectors
The effects on exports by broad sector are presented in Figure 5 and Figure 6. There will be
positive effects on exports in all three broad sectors. In general, largest effects on exports would
be observed for Bangladesh followed by India. Sri Lanka will have the least positive effect.
Figure 5: Percent changes in the volume of exports (by broad sector)
Bangladesh
13.39
15.0
10.0
India
13.07
15.0
10.19
9.46
8.61
10.0
7.15
5.0
7.84
8.38
SERVICES
All SECTORS
5.0
0.0
0.0
AGRICULTURE
INDUSTRY
SERVICES
All SECTORS
AGRICULTURE
23
INDUSTRY
South and South-West Asia Development Papers 1501
June 2015
Nepal
Pakistan
15.0
15.0
10.0
10.0
6.82
5.21
4.36
5.0
5.46
5.0
0.0
4.36
3.57
3.22
3.58
INDUSTRY
SERVICES
All SECTORS
0.0
AGRICULTURE
INDUSTRY
SERVICES
All SECTORS
1.55
1.61
1.65
INDUSTRY
SERVICES
All SECTORS
AGRICULTURE
Sri Lanka
15.0
10.0
5.0
2.36
0.0
AGRICULTURE
Source: Simulations using the CGE models of Bangladesh, India, Nepal, Pakistan and Sri Lanka
Figure 6: Percent changes in the price of exports (by broad sector)
Bangladesh
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
India
5.94
3.71
2.05
1.90
AGRICULTURE
INDUSTRY
SERVICES
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
All SECTORS
4.84
3.90
AGRICULTURE
Nepal
4.06
SERVICES
All SECTORS
Pakistan
6.0
4.0
INDUSTRY
4.28
6.0
4.0
2.46
2.0
2.01
0.83
1.52
0.0
2.05
1.71
1.88
1.77
AGRICULTURE
INDUSTRY
SERVICES
All SECTORS
2.0
0.0
AGRICULTURE
INDUSTRY
SERVICES
All SECTORS
Sri Lanka
6.0
4.0
2.0
1.16
1.16
1.13
1.16
AGRICULTURE
INDUSTRY
SERVICES
All SECTORS
0.0
Source: Simulations using the CGE models of Bangladesh, India, Nepal, Pakistan and Sri Lanka
24
Effects of Unilateral Trade Liberalization in South Asian Countries
June 2015
4.4. Effects on Imports by Broad Sectors
The effects on imports by broad sector are presented in Figure 7 and Figure 8. Tariff elimination
reduces the average local currency price of imports in all five countries, with largest effect in
Bangladesh and least effect in Sri Lanka. Agricultural imports will rise by more than 100 percent
in India due to the elimination of high agricultural tariff. Industrial imports become cheaper due
to tariff elimination, while import prices of tariff-free services increase due to exchange rate
depreciation.
Figure 7: Percent changes in the volume of imports (by broad sector)
Bangladesh
India
104.98
90.0
90.0
70.0
70.0
50.0
50.0
30.0
10.0
1.94
11.49
30.0
8.87
6.47
10.0
-10.0
-10.0
AGRICULTURE
INDUSTRY
-7.99
SERVICES
All SECTORS
AGRICULTURE
Nepal
90.0
70.0
70.0
50.0
50.0
30.0
1.71
6.48
AGRICULTURE
INDUSTRY
-10.0
INDUSTRY
-8.28
SERVICES
30.0
4.09
-2.88
SERVICES
5.76
10.0
-10.0
All SECTORS
-0.72
AGRICULTURE
INDUSTRY
4.58
-4.02
SERVICES
Sri Lanka
90.0
70.0
50.0
30.0
9.13
10.0
2.11
-10.0
AGRICULTURE
INDUSTRY
All SECTORS
Pakistan
90.0
10.0
4.63
2.04
-1.33
SERVICES
All SECTORS
Source: Simulations using the CGE models of Bangladesh, India, Nepal, Pakistan and Sri Lanka
25
All SECTORS
South and South-West Asia Development Papers 1501
June 2015
Figure 8: Percent changes in the price of imports (by broad sector)
Bangladesh
India
8.52
8.29
3.47
5.0
5.0
-5.0
-5.0
-4.43
-6.43
-15.0
-25.0
-0.09
-1.31
-15.0
-25.0
-35.0
-35.0
AGRICULTURE
INDUSTRY
SERVICES
All SECTORS
-30.49
AGRICULTURE
INDUSTRY
Nepal
All SECTORS
Pakistan
4.21
0.58
5.0
SERVICES
-5.0
3.51
1.27
5.0
-5.0
-4.70
-7.93
-15.0
-25.0
-3.27
-4.18
-15.0
-25.0
-35.0
-35.0
AGRICULTURE
INDUSTRY
SERVICES
All SECTORS
AGRICULTURE
INDUSTRY
SERVICES
All SECTORS
Sri Lanka
1.92
5.0
-5.0
-0.81
-0.95
-4.35
-15.0
-25.0
-35.0
AGRICULTURE
INDUSTRY
SERVICES
All SECTORS
Source: Simulations using the CGE models of Bangladesh, India, Nepal, Pakistan and Sri Lanka
4.5. Effects on Output in All Sectors
The effects on output in all sectors are presented in Figure 9 and Figure 10. Agricultural sectors
in all countries expand, except in India where the grains and crops sector contract. Textile and
clothing sector in all five countries expands most, with largest expansion is in Bangladesh. In
Bangladesh, Nepal and Pakistan, light and heavy manufacturing sectors contract, whereas they
expand in India and Sri Lanka. Services sectors expand in all five countries.
Figure 9: Percent changes in the volume of output (by sector)
Bangladesh
India
Other Services
Transport and Communication
Utilities and Construction
Heavy Manufacturing
Light Manufacturing
Textiles and Clothing
Processed Food
Mining and Extraction
Livestock and Meat Products
Grains and Crops
-4.0
-2.0
0.0
2.0
4.0
6.0
Other Services
Transport and Communication
Utilities and Construction
Heavy Manufacturing
Light Manufacturing
Textiles and Clothing
Processed Food
Mining and Extraction
Livestock and Meat Products
Grains and Crops
8.0
-4.0
26
-2.0
0.0
2.0
4.0
6.0
8.0
Effects of Unilateral Trade Liberalization in South Asian Countries
June 2015
Nepal
Pakistan
Other Services
Transport and Communication
Utilities and Construction
Heavy Manufacturing
Light Manufacturing
Textiles and Clothing
Processed Food
Mining and Extraction
Livestock and Meat Products
Grains and Crops
-4.0
-2.0
0.0
2.0
4.0
6.0
Other Services
Transport and Communication
Utilities and Construction
Heavy Manufacturing
Light Manufacturing
Textiles and Clothing
Processed Food
Mining and Extraction
Livestock and Meat Products
Grains and Crops
8.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
Sri Lanka
Other Services
Transport and Communication
Utilities and Construction
Heavy Manufacturing
Light Manufacturing
Textiles and Clothing
Processed Food
Mining and Extraction
Livestock and Meat Products
Grains and Crops
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
Source: Simulations using the CGE models of Bangladesh, India, Nepal, Pakistan and Sri Lanka
Figure 10: Percent changes in the price of output (by sector)
Bangladesh
India
Other Services
Transport and Communication
Utilities and Construction
Heavy Manufacturing
Light Manufacturing
Textiles and Clothing
Processed Food
Mining and Extraction
Livestock and Meat Products
Grains and Crops
-8.0
-6.0
-4.0
-2.0
0.0
2.0
Other Services
Transport and Communication
Utilities and Construction
Heavy Manufacturing
Light Manufacturing
Textiles and Clothing
Processed Food
Mining and Extraction
Livestock and Meat Products
Grains and Crops
4.0
-8.0
-6.0
-4.0
-2.0
Nepal
0.0
2.0
4.0
Pakistan
Other Services
Transport and Communication
Utilities and Construction
Heavy Manufacturing
Light Manufacturing
Textiles and Clothing
Processed Food
Mining and Extraction
Livestock and Meat Products
Grains and Crops
-8.0
-6.0
-4.0
-2.0
0.0
2.0
Other Services
Transport and Communication
Utilities and Construction
Heavy Manufacturing
Light Manufacturing
Textiles and Clothing
Processed Food
Mining and Extraction
Livestock and Meat Products
Grains and Crops
4.0
-8.0
27
-6.0
-4.0
-2.0
0.0
2.0
4.0
South and South-West Asia Development Papers 1501
June 2015
Sri Lanka
Other Services
Transport and Communication
Utilities and Construction
Heavy Manufacturing
Light Manufacturing
Textiles and Clothing
Processed Food
Mining and Extraction
Livestock and Meat Products
Grains and Crops
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
Source: Simulations using the CGE models of Bangladesh, India, Nepal, Pakistan and Sri Lanka
4.6. Effects on Exports in All Sectors
The effects on export by all sectors are presented in Figure 11 and Figure 12. All the exportoriented sectors experience rise in export in all five countries. India experiences the largest rise
in agricultural exports. Export of Bangladesh’s major export product textile and clothing rises by
more than 13 percent (highest in South Asia). Bangladesh, India and Nepal experience rise in
exports of light and heavy manufacturing by more than Pakistan and Sri Lanka.
Figure 11: Percent changes in the volume of exports (by sector)
Bangladesh
India
Other Services
Transport and Communication
Heavy Manufacturing
Light Manufacturing
Textiles and Clothing
Processed Food
Mining and Extraction
Livestock and Meat Products
Grains and Crops
0.0
2.0
4.0
6.0
8.0
10.0
12.0
Other Services
Transport and Communication
Heavy Manufacturing
Light Manufacturing
Textiles and Clothing
Processed Food
Mining and Extraction
Livestock and Meat Products
Grains and Crops
14.0
0.0
2.0
4.0
6.0
8.0
Nepal
10.0
12.0
14.0
Pakistan
Other Services
Transport and Communication
Heavy Manufacturing
Light Manufacturing
Textiles and Clothing
Processed Food
Mining and Extraction
Livestock and Meat Products
Grains and Crops
0.0
2.0
4.0
6.0
8.0
10.0
12.0
Other Services
Transport and Communication
Heavy Manufacturing
Light Manufacturing
Textiles and Clothing
Processed Food
Mining and Extraction
Livestock and Meat Products
Grains and Crops
14.0
0.0
28
2.0
4.0
6.0
8.0
10.0
12.0
14.0
Effects of Unilateral Trade Liberalization in South Asian Countries
June 2015
Sri Lanka
Other Services
Transport and Communication
Heavy Manufacturing
Light Manufacturing
Textiles and Clothing
Processed Food
Mining and Extraction
Livestock and Meat Products
Grains and Crops
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
Source: Simulations using the CGE models of Bangladesh, India, Nepal, Pakistan and Sri Lanka
Figure 12: Percent changes in the price of exports (by sector)
Bangladesh
India
Other Services
Transport and Communication
Heavy Manufacturing
Light Manufacturing
Textiles and Clothing
Processed Food
Mining and Extraction
Livestock and Meat Products
Grains and Crops
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
Other Services
Transport and Communication
Heavy Manufacturing
Light Manufacturing
Textiles and Clothing
Processed Food
Mining and Extraction
Livestock and Meat Products
Grains and Crops
7.0
-1.0
0.0
1.0
2.0
3.0
4.0
Nepal
5.0
6.0
7.0
Pakistan
Other Services
Transport and Communication
Heavy Manufacturing
Light Manufacturing
Textiles and Clothing
Processed Food
Mining and Extraction
Livestock and Meat Products
Grains and Crops
Other Services
Transport and Communication
Heavy Manufacturing
Light Manufacturing
Textiles and Clothing
Processed Food
Mining and Extraction
Livestock and Meat Products
Grains and Crops
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
-1.0
7.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
Sri Lanka
Other Services
Transport and Communication
Heavy Manufacturing
Light Manufacturing
Textiles and Clothing
Processed Food
Mining and Extraction
Livestock and Meat Products
Grains and Crops
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
Source: Simulations using the CGE models of Bangladesh, India, Nepal, Pakistan and Sri Lanka
4.7. Effects on Imports in All Sectors
The effects on imports by all sectors are presented in Figure 13 and Figure 14. In Bangladesh,
imports in all sector increase. However, in all other four countries, there are mixed experience. In
India, import of grains and crops rise by more than 100 percent. Import in all other sectors,
except transport and communication services and other services, increase. In Nepal, imports in
29
South and South-West Asia Development Papers 1501
June 2015
all sectors, except livestock and meat products, transport and communication services and other
services, increase. In Pakistan, import in all sectors, except grains and crops, mining and
extraction, transport and communication services and other services, increase. In Sri Lanka,
imports in all sectors, except mining and extraction, transport and communication services and
other services, increase.
Figure 13: Percent changes in the volume of imports (by sector)
Bangladesh
India
Other Services
Transport and Communication
Heavy Manufacturing
Light Manufacturing
Textiles and Clothing
Processed Food
Mining and Extraction
Livestock and Meat Products
Grains and Crops
-10.0
10.0
30.0
50.0
70.0
90.0
Other Services
Transport and Communication
Heavy Manufacturing
Light Manufacturing
Textiles and Clothing
Processed Food
Mining and Extraction
Livestock and Meat Products
Grains and Crops
110.0
-10.0
10.0
30.0
50.0
Nepal
70.0
90.0
110.0
Pakistan
Other Services
Transport and Communication
Heavy Manufacturing
Light Manufacturing
Textiles and Clothing
Processed Food
Mining and Extraction
Livestock and Meat Products
Grains and Crops
Other Services
Transport and Communication
Heavy Manufacturing
Light Manufacturing
Textiles and Clothing
Processed Food
Mining and Extraction
Livestock and Meat Products
Grains and Crops
-10.0
10.0
30.0
50.0
70.0
90.0
-10.0
110.0
10.0
30.0
50.0
70.0
90.0
110.0
Sri Lanka
Other Services
Transport and Communication
Heavy Manufacturing
Light Manufacturing
Textiles and Clothing
Processed Food
Mining and Extraction
Livestock and Meat Products
Grains and Crops
-10.0
10.0
30.0
50.0
70.0
90.0
110.0
Source: Simulations using the CGE models of Bangladesh, India, Nepal, Pakistan and Sri Lanka
Figure 14: Percent changes in the price of imports of (by sector)
Bangladesh
India
Other Services
Transport and Communication
Heavy Manufacturing
Light Manufacturing
Textiles and Clothing
Processed Food
Mining and Extraction
Livestock and Meat Products
Grains and Crops
-40.0
-30.0
-20.0
-10.0
0.0
10.0
Other Services
Transport and Communication
Heavy Manufacturing
Light Manufacturing
Textiles and Clothing
Processed Food
Mining and Extraction
Livestock and Meat Products
Grains and Crops
20.0
-40.0
30
-30.0
-20.0
-10.0
0.0
10.0
20.0
Effects of Unilateral Trade Liberalization in South Asian Countries
June 2015
Nepal
Pakistan
Other Services
Transport and Communication
Heavy Manufacturing
Light Manufacturing
Textiles and Clothing
Processed Food
Mining and Extraction
Livestock and Meat Products
Grains and Crops
Other Services
Transport and Communication
Heavy Manufacturing
Light Manufacturing
Textiles and Clothing
Processed Food
Mining and Extraction
Livestock and Meat Products
Grains and Crops
-40.0
-30.0
-20.0
-10.0
0.0
10.0
-40.0
20.0
-30.0
-20.0
-10.0
0.0
10.0
20.0
Sri Lanka
Other Services
Transport and Communication
Heavy Manufacturing
Light Manufacturing
Textiles and Clothing
Processed Food
Mining and Extraction
Livestock and Meat Products
Grains and Crops
-40.0
-30.0
-20.0
-10.0
0.0
10.0
Source: Simulations using the CGE models of Bangladesh, India, Nepal, Pakistan and Sri Lanka
4.8. Effects on Factor Market
Table 12 presents the effects on factor market in Bangladesh. Tariff elimination increases real
GDP at factor cost by 3.1 percent. The average price of value added (1.8 percent) reflects the
general increase in returns to capital (3.4 percent). Tariff elimination increases overall supply of
labor by 6.2 percent. Labor moves from contracting sectors to expanding sectors. Within
industry, workers move away from import substituting sectors (heavy and light manufacturing)
to export-oriented sectors, especially to the textile and clothing sector.
Table 12: Percent changes in value added, capital stocks and employment: Bangladesh
Grains and Crops
Livestock and Meat Products
Mining and Extraction
Processed Food
Textiles and Clothing
Light Manufacturing
Heavy Manufacturing
Utilities and Construction
Transport and Communication
Other Services
ALL SECTORS
value added
volume
price
2.3
4.0
1.8
2.4
0.8
4.4
3.1
3.0
7.2
3.3
-0.1
-0.1
-0.5
-0.9
0.3
1.2
4.6
1.0
3.2
1.1
3.1
1.8
Capital stocks
volume
price
0.0
5.6
0.0
3.6
0.0
5.0
0.0
5.2
0.0
8.2
0.0
-0.1
0.0
-1.2
0.0
1.4
0.0
4.1
0.0
3.3
0.0
3.4
Employment
volume
wage
8.5
0.0
5.5
0.0
7.6
0.0
7.8
0.0
12.6
0.0
-0.2
0.0
-1.8
0.0
2.1
0.0
6.1
0.0
5.0
0.0
6.2
0.0
Note: Red fonts indicate exogenous or fixed variables (see explanation on model closure in Section III)
Source: Simulation in the Bangladesh CGE model
Table 13 presents the effects on factor market in India. Tariff elimination increases real GDP at
factor cost by 2.5 percent. The average price of value added (1.6 percent) reflects the general
increase in returns to capital (3.7 percent). Tariff elimination increases overall supply of labor by
31
South and South-West Asia Development Papers 1501
June 2015
4.8 percent. Labor moves from contracting sectors (grains and crops) to expanding sectors.
Larger rise in employment is observed in mining and extraction and textile and clothing sector.
Table 13: Percent changes in value added, capital stocks and employment: India
Grains and Crops
Livestock and Meat Products
Mining and Extraction
Processed Food
Textiles and Clothing
Light Manufacturing
Heavy Manufacturing
Utilities and Construction
Transport and Communication
Other Services
ALL SECTORS
value added
volume
price
0.0
0.0
2.2
1.7
4.4
4.2
1.5
0.4
4.7
1.8
3.5
1.3
1.7
1.6
1.7
0.3
3.5
2.2
2.5
1.9
2.5
1.6
Capital stocks
volume
price
0.0
-0.1
0.0
3.1
0.0
7.2
0.0
1.4
0.0
5.0
0.0
3.6
0.0
2.7
0.0
1.4
0.0
4.6
0.0
3.6
0.0
3.7
Employment
volume
wage
-0.1
0.0
4.7
0.0
11.0
0.0
2.1
0.0
7.5
0.0
5.4
0.0
4.1
0.0
2.1
0.0
7.0
0.0
5.4
0.0
4.8
0.0
Note: Red fonts indicate exogenous or fixed variables (see explanation on model closure in Section III)
Source: Simulation in the India CGE model
Table 14 presents the effects on factor market in Nepal. Tariff elimination increases real GDP at
factor cost by 2 percent. The average price of value added (1.7 percent) reflects the general
increase in returns to capital (3.1 percent). Tariff elimination increases overall supply of labor by
4.8 percent. Labor moves from contracting sectors (light and heavy manufacturing) to expanding
sectors (mainly the services sectors). Larger rise in employment is observed in textile and
clothing sector, processed food and utilities and construction.
Table 14: Percent changes in value added, capital stocks and employment: Nepal
Grains and Crops
Livestock and Meat Products
Mining and Extraction
Processed Food
Textiles and Clothing
Light Manufacturing
Heavy Manufacturing
Utilities and Construction
Transport and Communication
Other Services
ALL SECTORS
value added
volume
price
1.6
1.0
1.9
1.2
0.4
1.1
1.6
3.5
5.0
4.0
-2.8
-11.5
-0.8
-4.8
2.0
5.0
2.9
2.6
2.3
1.8
2.0
1.7
Capital stocks
volume
price
0.0
2.1
0.0
2.5
0.0
1.3
0.0
4.6
0.0
7.4
0.0
-13.2
0.0
-5.3
0.0
6.5
0.0
4.6
0.0
3.4
0.0
3.1
Employment
volume
wage
3.1
0.0
3.8
0.0
2.0
0.0
7.0
0.0
11.4
0.0
-19.1
0.0
-7.9
0.0
9.9
0.0
7.0
0.0
5.1
0.0
4.8
0.0
Note: Red fonts indicate exogenous or fixed variables (see explanation on model closure in Section III)
Source: Simulation in the Nepal CGE model
Table 15 presents the effects on factor market in Pakistan. Tariff elimination increases real GDP
at factor cost by 0.9 percent. The average price of value added (0.9 percent) reflects the general
increase in returns to capital (1.5 percent). Tariff elimination increases overall supply of labor by
2.2 percent. Labor moves from contracting sectors (light and heavy manufacturing) to expanding
sectors (mainly textile and clothing). Larger rise in employment is observed in textile and
clothing sector and processed food sector.
32
Effects of Unilateral Trade Liberalization in South Asian Countries
June 2015
Table 15: Percent changes in value added, capital stocks and employment: Pakistan
Grains and Crops
Livestock and Meat Products
Mining and Extraction
Processed Food
Textiles and Clothing
Light Manufacturing
Heavy Manufacturing
Utilities and Construction
Transport and Communication
Other Services
ALL SECTORS
value added
volume
price
1.2
1.1
0.8
0.6
0.6
1.7
0.8
2.3
1.9
4.1
-1.6
-3.2
-0.9
-3.2
0.6
0.3
1.2
0.7
0.7
1.3
0.9
0.9
Capital stocks
volume
price
0.0
1.9
0.0
1.1
0.0
2.1
0.0
2.8
0.0
5.4
0.0
-4.3
0.0
-3.8
0.0
0.7
0.0
1.5
0.0
1.8
0.0
1.5
Employment
volume
wage
2.8
0.0
1.7
0.0
3.1
0.0
4.2
0.0
8.2
0.0
-6.3
0.0
-5.7
0.0
1.0
0.0
2.2
0.0
2.7
0.0
2.2
0.0
Note: Red fonts indicate exogenous or fixed variables (see explanation on model closure in Section III)
Source: Simulation in the Pakistan CGE model
Table 16 presents the effects on factor market in Pakistan. Tariff elimination increases real GDP
at factor cost by 0.6 percent. The average price of value added (0.7 percent) reflects the general
increase in returns to capital (1.3 percent). Tariff elimination increases overall supply of labor by
1.5 percent. Employment increases in all sectors. However, largest rise in employment is
observed in textile and clothing sector.
Table 16: Percent changes in value added, capital stocks and employment: Sri Lanka
Grains and Crops
Livestock and Meat Products
Mining and Extraction
Processed Food
Textiles and Clothing
Light Manufacturing
Heavy Manufacturing
Utilities and Construction
Transport and Communication
Other Services
ALL SECTORS
value added
volume
price
0.3
0.3
0.5
0.6
0.8
1.4
0.2
0.7
1.1
1.8
0.9
0.7
0.3
0.7
0.2
0.1
0.9
1.1
0.7
0.1
0.6
0.7
Capital stocks
volume
price
0.0
0.5
0.0
1.0
0.0
1.9
0.0
0.8
0.0
2.6
0.0
1.2
0.0
0.9
0.0
0.3
0.0
1.7
0.0
0.6
0.0
1.3
Employment
volume
wage
0.8
0.0
1.4
0.0
2.9
0.0
1.3
0.0
3.9
0.0
1.9
0.0
1.3
0.0
0.4
0.0
2.6
0.0
0.9
0.0
1.5
0.0
Note: Red fonts indicate exogenous or fixed variables (see explanation on model closure in Section III)
Source: Simulation in the Sri Lanka CGE model
The graphical presentation of the employment effects of the simulation are presented in Figure
15 and Figure 16. The closure of the model reflects rigidities in the labor market by allowing
aggregate employment to change—i.e., labor is in elastic supply with a pool of unemployed
workers waiting to be hired—at a wage (nominal and real) indexed to the economy-wide
consumer price index (CPI). Figure 15 suggests that in all five South Asian counties employment
increases for both skilled and unskilled labor. In Bangladesh and Sri Lanka employment of
unskilled labor increases more than skilled labor. In India, Nepal and Pakistan employment of
skilled labor increase more than the unskilled labor.
33
South and South-West Asia Development Papers 1501
June 2015
Figure 15: Percent changes in employment (by skill and broad sector)
Bangladesh
10.00
India
9.57
9.67
10.00
8.05
7.99
8.00
5.25
6.00
5.62
5.59
6.59
8.00
4.00
4.00
2.00
2.00
0.00
0.00
Skilled
AGRICULTURE
5.03
6.00
SERVICES
Skilled
ALL SECTORS
5.11
4.68
1.15
AGRICULTURE
Unskilled
INDUSTRY
Nepal
SERVICES
ALL SECTORS
Pakistan
10.00
10.00
8.00
5.66
6.00
4.00
5.95
5.26
0.20
Unskilled
INDUSTRY
5.34
5.49
4.62
3.31
2.00
8.00
6.46
6.00
3.30
4.00
1.08
0.27
2.25
2.26
2.36
2.36
2.19
2.59
2.08
2.16
2.00
0.00
0.00
Skilled
AGRICULTURE
Unskilled
INDUSTRY
SERVICES
Skilled
ALL SECTORS
AGRICULTURE
Unskilled
INDUSTRY
SERVICES
ALL SECTORS
Sri Lanka
10.00
8.00
6.00
4.00
2.00
2.50
2.29
1.16
0.95
1.25
0.87
1.47
1.52
0.00
Skilled
AGRICULTURE
Unskilled
INDUSTRY
SERVICES
ALL SECTORS
Note: In this diagram, the changes in employment by skill type only reflect scale effects. There are no substitution
effects since wage rates are fixed (i.e., indexed to CPI) in the short run.
Source: Simulations using the CGE models of Bangladesh, India, Nepal, Pakistan and Sri Lanka
Figure 16 shows that in all South Asian countries all agricultural sectors experience rise in
employment, except grains and crop sector in India. In the manufacturing sectors, the effects on
employment are mixed. In Bangladesh, Nepal and Pakistan, sectors like heavy and light
manufacturing experience employment loss with rise in employment in other sectors. In India
and Sri Lanka, the effects on employment are positive in all sectors (except grains and crop
sector in India).
34
Effects of Unilateral Trade Liberalization in South Asian Countries
June 2015
Figure 16: Percent changes in total sectoral employment
Bangladesh
India
Other Services
Transport and Communication
Utilities and Construction
Heavy Manufacturing
Light Manufacturing
Textiles and Clothing
Processed Food
Mining and Extraction
Livestock and Meat Products
Grains and Crops
-25.0 -20.0 -15.0 -10.0 -5.0
0.0
Other Services
Transport and Communication
Utilities and Construction
Heavy Manufacturing
Light Manufacturing
Textiles and Clothing
Processed Food
Mining and Extraction
Livestock and Meat Products
Grains and Crops
5.0 10.0 15.0
-25.0 -20.0 -15.0 -10.0 -5.0
0.0
Nepal
5.0 10.0 15.0
Pakistan
Other Services
Transport and Communication
Utilities and Construction
Heavy Manufacturing
Light Manufacturing
Textiles and Clothing
Processed Food
Mining and Extraction
Livestock and Meat Products
Grains and Crops
-25.0 -20.0 -15.0 -10.0 -5.0
0.0
Other Services
Transport and Communication
Utilities and Construction
Heavy Manufacturing
Light Manufacturing
Textiles and Clothing
Processed Food
Mining and Extraction
Livestock and Meat Products
Grains and Crops
5.0 10.0 15.0
-25.0 -20.0 -15.0 -10.0 -5.0
0.0
5.0 10.0 15.0
Sri Lanka
Other Services
Transport and Communication
Utilities and Construction
Heavy Manufacturing
Light Manufacturing
Textiles and Clothing
Processed Food
Mining and Extraction
Livestock and Meat Products
Grains and Crops
-25.0 -20.0 -15.0 -10.0 -5.0
0.0
5.0 10.0 15.0
Source: Simulations using the CGE models of Bangladesh, India, Nepal, Pakistan and Sri Lanka
4.9. Effects on Capital Returns
Figure 17 presents the results for the effects on capital returns by broad sectors. South Asian
countries have different experiences. In the case of agriculture, Bangladesh experiences the
highest rise in returns to capital and least rise is for Sri Lanka. In the case of Industry,
Bangladesh has the highest rise, whereas Sri Lanka has the lowest rise and Nepal has negative
returns. In the case of services, Nepal has the highest rise and Sri Lanka has the lowest rise.
35
South and South-West Asia Development Papers 1501
June 2015
Figure 17: Percent changes in capital returns (by broad sector)
Bangladesh
6.0
5.0
4.0
3.0
2.0
1.0
0.0
-1.0
-2.0
-3.0
-4.0
5.2
India
5.2
3.4
2.5
AGRICULTURE
INDUSTRY
SERVICES
6.0
5.0
4.0
3.0
2.0
1.0
0.0
-1.0
-2.0
-3.0
-4.0
ALL SECTORS
4.1
3.8
3.7
INDUSTRY
SERVICES
ALL SECTORS
0.8
AGRICULTURE
Nepal
6.0
5.0
4.0
3.0
2.0
1.0
0.0
-1.0
-2.0
-3.0
-4.0
Pakistan
4.4
3.1
2.2
AGRICULTURE
-3.3
INDUSTRY
SERVICES
ALL SECTORS
1.5
1.3
1.3
INDUSTRY
SERVICES
ALL SECTORS
6.0
5.0
4.0
3.0
2.0
1.0
0.0
-1.0
-2.0
-3.0
-4.0
1.5
1.4
1.6
1.5
AGRICULTURE
INDUSTRY
SERVICES
ALL SECTORS
Sri Lanka
6.0
5.0
4.0
3.0
2.0
1.0
0.0
-1.0
-2.0
-3.0
-4.0
0.6
AGRICULTURE
Source: Simulations using the CGE models of Bangladesh, India, Nepal, Pakistan and Sri Lanka
4.10. Effects on household Income
Figure 18 presents the effects on nominal household income by household categories for the
South Asian countries. In Bangladesh, the largest rise in nominal income is for urban low
educated households. In India, the largest rise is for rural other labor households. In Nepal, the
largest rise is for urban low educated households. In Pakistan, the largest rise is for urban poor
and in Sri Lanka the largest rise is for Western region and Saba region households. In general,
households in Bangladesh and India experience larger rises in nominal incomes than households
in three other countries.
36
Effects of Unilateral Trade Liberalization in South Asian Countries
June 2015
Figure 18: Percent changes in nominal household income (by household categories)
Bangladesh
5.00
4.54
4.31
India
4.94
4.56
4.25
5.00
3.92
3.83
4.54
4.00
4.00
3.00
3.00
2.00
2.00
1.00
1.00
0.00
4.59
4.25
3.88
3.41
4.54
3.62
3.06
0.00
Rural
landless
HH
Rural Rural small Rural large Rural non Urban low Urban
marginal farm HH farm HH farm HH educated
high
farm HH
HH
educated
HH
Rural Rural
non agri agri
self
labor
emp
Rural Rural Rural
other agri self other
labor emp
HH
Nepal
5.00
4.00
3.00
2.00
1.00
0.00
3.57
Pakistan
4.09
2.71
2.57
3.90
5.00
3.95
2.92
2.72
Urban Urban Urban Urban
self salaried casual other
emp
HH
labor
HH
4.00
3.00
1.96
2.00
1.63
1.57
1.55
1.52
1.78
1.89
2.06
1.87
1.00
0.00
Rural
Rural
Rural Rural large Urban low Urban
Urban
landless small farm medium farm HH educated medium
high
HH
farm HH
HH
educated educated
HH
HH
Landless Landless Small Medium Large
agri farmer farmer farmer farmer
labor
RNF RNF non Urban
poor
poor
poor
Urban
non
poor
Sri Lanka
5.00
4.00
3.00
2.00
1.21
1.13
1.19
1.12
1.19
1.11
1.11
1.21
North
West
North
Central
Uva
Saba
1.00
0.00
Western Central Southern North
East
Source: Simulations using the CGE models of Bangladesh, India, Nepal, Pakistan and Sri Lanka
Figure 19 suggests that CPIs of households either fall or rise marginally in the five South Asian
countries.
Figure 19: Percent changes in household-specific CPI (by household categories)
Bangladesh
1.00
0.50
India
1.00
0.60
0.18
0.16
0.50
0.50
0.12
0.64
0.41
0.00
0.00
0.00
-0.50
-0.50
-0.24
-1.00
Rural
landless
HH
-0.67
Rural
Rural Rural large Rural non Urban low Urban
marginal small farm farm HH farm HH educated
high
farm HH
HH
HH
educated
HH
-0.06
-0.40
-1.00
Rural Rural
non agri agri
self
labor
emp
37
-0.13
-0.44
-0.83
Rural Rural Rural
other agri self other
labor emp
HH
-0.76
Urban Urban Urban Urban
self salaried casual other
emp
HH
labor
HH
South and South-West Asia Development Papers 1501
June 2015
Nepal
Pakistan
1.00
1.00
0.50
0.19
0.22
0.09
0.50
0.01
0.00
-0.50
0.18
0.14
0.13
0.08
0.01
0.12
0.00
-0.09
-0.18
-0.24
-0.11
-0.50
-0.03
-0.10
-1.00
Rural
Rural
Rural Rural large Urban low Urban
Urban
landless small farm medium farm HH educated medium
high
HH
farm HH
HH
educated educated
HH
HH
-1.00
Landless Landless Small Medium Large
agri farmer farmer farmer farmer
labor
RNF RNF non Urban Urban
poor
poor
poor
non
poor
Sri Lanka
1.00
0.50
0.02
0.02
0.02
0.01
0.00
Uva
Saba
0.00
-0.01
-0.08
-0.03
North
West
North
Central
-0.50
-1.00
Western Central Southern North
East
Source: Simulations using the CGE models of Bangladesh, India, Nepal, Pakistan and Sri Lanka
According to Figure 20, real income (household nominal income deflated by household-specific
CPI) of all household increases in all South Asian countries.
Figure 20: Percent changes in household real incomes (by household categories)
Bangladesh
5.23
6.00
5.00
India
4.35
4.00
3.72
4.82
4.09
3.83
6.00
4.16
5.00
4.97
5.41
3.47
4.00
3.00
3.00
2.00
2.00
1.00
1.00
0.00
3.69
3.84
3.13
2.42
0.00
Rural
landless
HH
Rural
Rural Rural large Rural non Urban low Urban
marginal small farm farm HH farm HH educated
high
farm HH
HH
HH
educated
HH
Rural Rural
non agri agri
self
labor
emp
Rural Rural Rural
other agri self other
labor
emp
HH
Nepal
6.00
5.00
4.00
3.00
2.00
1.00
0.00
5.30
4.29
2.89
2.38
Pakistan
3.87
3.01
2.63
Urban Urban Urban Urban
self salaried casual other
emp
HH
labor
HH
3.88
4.19
Rural
Rural
Rural Rural large Urban low Urban
Urban
landless small farm medium farm HH educated medium
high
HH
farm HH
HH
educated educated
HH
HH
6.00
5.00
4.00
3.00
2.00
1.00
0.00
1.78
1.49
1.50
1.65
1.63
Landless Landless Small Medium Large
agri farmer farmer farmer farmer
labor
1.65
1.19
1.11
1.20
1.10
Western Central Southern North
East
1.27
1.14
1.10
1.20
North
West
North
Central
Uva
Saba
Source: Simulations using the CGE models of Bangladesh, India, Nepal, Pakistan and Sri Lanka
38
1.94
1.90
RNF RNF non Urban Urban
poor
poor
poor
non
poor
Sri Lanka
6.00
5.00
4.00
3.00
2.00
1.00
0.00
1.89
Effects of Unilateral Trade Liberalization in South Asian Countries
June 2015
V. CONCLUSION
This paper provides a report of developing CGE models for five South Asian countries
(Bangladesh, India, Nepal, Pakistan and Sri Lanka) and their application in the analysis of
impact of unilateral trade liberalization on macro-economy, trade, employment and household
welfare in these countries. This exercise employs a static CGE model for five South Asian
countries and the Social Accounting Matrix (SAM) of these countries for the year 2012.
The macroeconomic effects of the tariff liberalization simulation for the five South Asian
countries suggest that the price of imports in local currency falls by larger margins in Bangladesh
and Nepal. Bangladesh experiences the largest rise in total demand for imports followed by
India. Total domestic demand increases most in Bangladesh, followed by Pakistan. The average
cost of domestic production increases in all countries due to rise in primary factor costs. India
has the highest rise in nominal return to capital followed by Bangladesh. The GDP price deflator
increases in all countries; because, though tariff reduction lowers the price of investment goods,
this is offset by the rise in primary factor costs, nominal wage, return to capital and return to
land. The GDP price deflator has the highest rise in Bangladesh followed by India and Nepal.
The real exchange rate depreciates in all countries with the largest depreciation in Bangladesh.
The terms of trade improves in all countries with the largest improvement in Bangladesh. The
real exchange rate depreciation makes exports more competitive in the world market. Hence,
exports expand and the largest positive effect on exports is found for Bangladesh. Higher exports
pull up economy-wide gross production for all five countries with the largest positive effect on
Bangladesh. The largest positive effect on real GDP is seen on Bangladesh and least on Sri
Lanka. Also, largest positive effect on employment is observed for Bangladesh.
Production effects on broad sectors of the simulation shows that, due to tariff liberalization,
larger effects on outputs are observed in Bangladesh and least effects are observed in Sri Lanka.
Average output price of agriculture increases in all five countries with largest effect in
Bangladesh. Average price of industrial goods falls in Bangladesh, Nepal and Pakistan and
increases in India and Sri Lanka. Average price of services increases in all countries except
Pakistan.
The effects on exports by broad sector suggest that there will be positive effects on exports in all
three broad sectors. In general, largest effects on exports would be observed for Bangladesh
followed by India. Sri Lanka will have the least positive effect.
The effects on imports by broad sector indicate that tariff elimination reduces the average local
currency price of imports in all five countries, with largest effect in Bangladesh and least effect
in Sri Lanka. Agricultural imports will rise by more than 100 percent in India due to the
39
South and South-West Asia Development Papers 1501
June 2015
elimination of high agricultural tariff. Industrial imports become cheaper due to tariff
elimination, while import prices of tariff-free services increase due to exchange rate depreciation.
Agricultural sectors in all countries expand, except in India where the grains and crops sector
contract. Textile and clothing sector in all five countries expands most, with largest expansion is
in Bangladesh. In Bangladesh, Nepal and Pakistan, light and heavy manufacturing sectors
contract, whereas they expand in India and Sri Lanka. Services sectors expand in all five
countries.
All the export-oriented sectors experience rise in export in all five countries. India experiences
the largest rise in agricultural exports. Export of Bangladesh’s major export product textile and
clothing rises by more than 13 percent (highest in South Asia). Bangladesh, India and Nepal
experience rise in exports of light and heavy manufacturing by more than Pakistan and Sri
Lanka.
In Bangladesh, imports in all sector increase. However, in all other four countries, there are
mixed experience. In India, import of grains and crops rise by more than 100 percent. Import in
all other sectors, except transport and communication services and other services, increase. In
Nepal, imports in all sectors, except livestock and meat products, transport and communication
services and other services, increase. In Pakistan, import in all sectors, except grains and crops,
mining and extraction, transport and communication services and other services, increase. In Sri
Lanka, imports in all sectors, except mining and extraction, transport and communication
services and other services, increase.
In all five South Asian counties employment increases for both skilled and unskilled labor. In
Bangladesh and Sri Lanka employment of unskilled labor increases more than skilled labor. In
India, Nepal and Pakistan employment of skilled labor increase more than the unskilled labor. In
all South Asian countries all agricultural sectors experience rise in employment, except grains
and crop sector in India. In the manufacturing sectors, the effects on employment are mixed. In
Bangladesh, Nepal and Pakistan, sectors like heavy and light manufacturing experience
employment loss with rise in employment in other sectors. In India and Sri Lanka, the effects on
employment are positive in all sectors (except grains and crop sector in India).
For the effects on capital returns by broad sectors, South Asian countries have different
experiences. In the case of agriculture, Bangladesh experiences the highest rise in returns to
capital and least rise is for Sri Lanka. In the case of Industry, Bangladesh has the highest rise,
whereas Sri Lanka has the lowest rise and Nepal has negative returns. In the case of services,
Nepal has the highest rise and Sri Lanka has the lowest rise.
40
Effects of Unilateral Trade Liberalization in South Asian Countries
June 2015
In Bangladesh, the largest rise in nominal income is for urban low educated households. In India,
the largest rise is for rural other labor households. In Nepal, the largest rise is for urban low
educated households. In Pakistan, the largest rise is for urban poor and in Sri Lanka the largest
rise is for Western region and Saba region households. In general, households in Bangladesh and
India experience larger rises in nominal incomes than households in three other countries. CPIs
of households either fall or rise marginally in the five South Asian countries. Real income
(household nominal income deflated by household-specific CPI) of all household increases in all
South Asian countries.
REFERENCES
Raihan, S. (2014). “Updating the Social Accounting Matrix (SAM) of Bangladesh, India, Nepal,
Pakistan and Sri Lanka for the Year 2012”, paper prepared for UNESCAP Subregional
Office for South and South-West Asia (SRO-SSWA).
Decaluwe, B., A. Lemelin, H. Maisonnave and V. Robichaud (2009). "The PEP Standard
Computable General Equilibrium Model: Single-Country, Static Version", Poverty and
Economic Policy Research Network, Laval University, Laval
41