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

Poverty and Economic Policy Research Network Working Paper No. MPIA-2008-13

31 Pages Posted: 26 Nov 2008

See all articles by Prakash Sapkota

Prakash Sapkota

Himalayan Institute of Development

John Cockburn

Partnership for Economic Policy (PEP); Université Laval; Partnership for Economic Policy (PEP)

Multiple version iconThere are 2 versions of this paper

Date Written: September 15, 2008

Abstract

Nepal aggressively liberalized its foreign trade during the 1990s. This paper attempts to estimate the impact of trade liberalization on household welfare and poverty in Nepal through the construction of a regional CGE model. The model disaggregates factors of production - capital, land, and labor - by region (urban, Terai and hills/mountains) in order to establish direct links between sector of activity, factor remuneration, and household income. In particular, certain activities are more intensive in factors from a given region (e.g. the manufacturing sector is more intensive in urban factors of production and the agriculture sector is more intensive in Terai factor of production). Regional factor remuneration in turn maps into regional household income. We find that trade liberalization reduces the nominal returns to urban factors of production in comparison with rural factors of production, resulting in a reduction in the relative income of urban households. Rural and urban households consume roughly the same share of industrial goods, but rural households consume relatively more agricultural goods and fewer services. As the fall in consumer prices in the latter two sectors are similar, there is little rural-urban difference in the variation in consumer price indices. Consumer prices generally fall in roughly the same proportion as nominal incomes such that there are negligible welfare changes. However, poverty falls substantially, with the greatest impact in rural Terai, followed by the rural hills and the mountain region, and least in urban areas.

Keywords: Computable general equilibrium modeling, international trade, poverty, Nepal

JEL Classification: D33, D58, E27, F13, F14, I32, O15, O53

Suggested Citation

Sapkota, Prakash Raj and Cockburn, John, Trade Liberalization and Poverty in Nepal: An Applied General Equilibrium Analysis (September 15, 2008). Poverty and Economic Policy Research Network Working Paper No. MPIA-2008-13. Available at SSRN: https://ssrn.com/abstract=1304858 or http://dx.doi.org/10.2139/ssrn.1304858

Prakash Raj Sapkota (Contact Author)

Himalayan Institute of Development ( email )

GPO Box 6052
Kathmandu
Nepal

John Cockburn

Partnership for Economic Policy (PEP) ( email )

P.O. Box 30772-00100
ICIPE - Duduville Campus, Kasarani
Nairobi
Kenya

Université Laval ( email )

Dept. of Economics
Québec, Quebec G1V 0A6
Canada

Partnership for Economic Policy (PEP) ( email )

Duduville Campus, Kasarani
P.O. Box 30772-00100
Nairobi
Kenya

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