Trade liberalization, poverty and income distribution in Thailand: a computable general equilibrium-microsimulation analysis

Economic theory suggests that removing distortions such as tariffs and other trade barriers will cause an economy to operate more efficiently and to grow more rapidly. Since economic growth is generally found to be the main source of poverty reduction, trade reforms that increase growth have been the focus of trade negotiators, researchers, developing countries' governments, and international development agencies as tools to reduce poverty. However, since the empirical evidence of trade-growth-poverty linkages is mixed, there is no guarantee that trade liberalization will benefit the poor. The analysis of the impact of trade liberalization on poverty and inequality is complex since trade reform is observed at the macro level while income distribution and poverty issues are observed and analyzed at the micro level. A general equilibrium model or an income generation model based on household survey data alone is therefore not able to fill this micro-macro gap that has characterized the trade-poverty literature to date. Two approaches, based on a macro-micro framework, are developed in this study in order to bridge this micro-macro gap. The framework centers on the communication between a CGE model, which is used to analyze the general equilibrium effects of trade reform, and household survey data, which are used for poverty analysis at the micro level. The simulation results show that trade liberalization has a positive effect on economic growth in Thailand. The manufacturing sector's output expands after trade liberalization, while the output of the agricultural sector declines. There is also a movement of labor out of agricultural sectors into the expanding manufacturing and service sectors after trade reform. At the micro level, household income is found to increase; this is mainly due to an increase in unskilled and skilled wages, which are the main source of income for the majority of Thai households. Trade liberalization is found to reduce poverty; this reduction in poverty is greater when the more liberalized trade policy is implemented. However, policies aimed at skill advancement or skill training would ensure the smooth movement of workers from agricultural sectors to manufacturing and service sectors