Trade reforms, macroeconomic performance and welfare in Malawi

Abstract

This paper sets out to show efficiency gains and/or losses of trade reforms in Malawi using simulation experiments in a Computable General Equilibrium (CGE) model. Among others, the study shows that a 50 percent tariff cut coupled with fixed government savings has the same impact on selected macroeconomic variables when capital is mobile as when it is activity specific. When capital is activity-specific, the tariff cut has a positive impact on labour income in the non-agricultural sector and a similar impact on capital income in commercial agriculture. Overall labour income in the agricultural sector is unaffected while the impact on capital income in small scale agriculture and non-agriculture sectors is negative. When capital is mobile, the tariff cut leads to a fall in the capital income in small scale agriculture. The study further shows that doubling foreign aid to Malawi increases consumption and adversely affects the production side of the economy.