Impact of Trade Liberalization on Poverty in Ethiopia:A Computable General Equilibrium Microsimulation

Abstract

This study analyses the impact of trade liberalization on poverty in Ethiopia using a computable general equilibrium Microsimulation approach. Two scenarios (complete tariff cut anduniform tariff scheme) suggest that further liberalization of trade has a negative short-run effecton the overall economy. We find that the agriculture-based manufacturing sector (in particular,textile and leather) is likely to be strongly affected by tariff reductions. Poverty estimates show anincrease in both scenarios. At the national level, complete tariff cut increases poverty by 2.8%,compared to 2.3% under a uniform tariff scheme. In both scenarios, poverty increases more amongentrepreneur households (3.2% in the uniform tariff cut scenario), than farm and wage earnerhouseholds (0.9% and 1.5%, respectively). This is consistent with the theoretical argument thatpreviously-protected infant industries are highly affected by trade liberalization and may requirecompensatory policies