Conclusions and Prospects for Future Work on Asian Developing Economies

In this paper, it has been argued that a generic CGE model for analyzing the poverty impact of various economic reforms in South Asia can be built. As a first step, trade liberalization is taken as the specific policy experiment for examination.The specific generic model for South Asia incorporating dualism and rural-urban and urban-rural migration within a Harris-Todaro framework reveals a number of specific features of the connections between trade liberalization and poverty reduction.

Within this particular CGE model, the policy experiments show that in this region trade liberalization can lead to further poverty reduction. This is true at both the national level and at the level of the various household groups. This is indeed good news that conforms to the general prediction of the standard comparative advantage based trade theory.

However, the extent of poverty reduction impact of trade liberalization turns out to be limited. There are several reasons for this. The main reason is that the Harris-Todaro mechanism allows reverse migration to lower paid jobs for the potentially unemployed as protection is removed. Furthermore, the impact of further tariff reductions becomes attenuated for most groups when the tariff levels are lowered sufficiently. On the whole, the high tariff barriers should be dismantled, but beyond a certain point---say about 15 per cent average tariff rate--- the further impacts become negligible.

Several policy conclusions can be reached regarding poverty reduction strategies in South Asia in light of the findings here. Trade liberalization certainly does not conflict with poverty reduction and hence can be pursued without fearing adverse poverty impact. However, the approach may need to be a firm but gradual liberalization with special sensitivity to agriculture and the rural poor. It should also be kept in mind that trade liberalization can certainly help reduce poverty, but by itself it may not be the magic bullet against poverty. The actual poverty reduction impact in South Asia is most likely to remain small for this policy instrument. Hence other growth enhancing reforms need to be pursued simultaneously. Targeted poverty reduction programs may also be needed with emphasis on increasing the efficiency of targeting and improving their cost-effectiveness.Programs such as food-for–work and other employment schemes,microfinance, agricultural credit etc. need to be pursued with a focus on making them more effective in terms of reaching the targeted groups at minimum cost to the programs. Rural industrialization and increase in productivity through investment in social sectors and human capital also remain viable policy options. In terms of Sen's capabilities approach, the capabilities of the poor--- particularly their basic functionings--- need to be enhanced so that they can better participate in income earning activities.

Turning now to some methodological issues for future work, there are at least four categories of Asian economies--- broadly speaking--- that could be the subject of CGE modeling exercises regarding the poverty reduction implications of trade liberalization. First, we have low income countries of South Asia. Here, a model based on an economy such as India or Bangladesh could offer some insights. This is indeed what has been attempted here. The second category would include middle income Asian Developing countries such as Indonesia. The third and fourth categories will include the transitional low and middle income economies in Asia, for example, Viet Nam and PRC respectively.. As any student of the Asian Developing Economies will quickly point out, the four categories are not exhaustive, but they do cover a large number of country cases including the most populous poor countries with a large number of poor people.

Addressing all the structural and institutional issues even in each of the four categories is beyond the scope of this paper. However, as a beginning, the case of India has been studied here. In Asian economies such as India, the low level of income and pervasive poverty present a prima facie case for a policy focus on poverty reduction. However, there has only been mixed success in poverty reduction so far. One reason is that over the past few decades, the growth record has also been somewhat mixed. There have also been macroeconomic imbalances in the form of high fiscal deficit, low domestic savings, and sizable external account deficit. Consequently, both inflation and interest rates were high, making the economic environment unfriendly to adequate and accelerated investment. In the wake of the policy focus on macroeconomic balancing, the growth and poverty impacts of such policies are natural candidates for rigorous investigation within the CGE tradition of modeling.

India is one of the 'big five' in Asia along with PRC, Bangladesh, Pakistan and Indonesia in terms of both population and poverty. These five Asian countries comprise three fifths of the world’s population and two fifths of poor people. The next step may be to move to the case of a middle income Asian country such as Thailand or Indonesia with large numbers of poor.

It should be mentioned here that the modeling approach for the middle income countries will need to be an “extended” dual-dual approach. Since these economies are more diversified with relatively more developed financial sectors, the incorporation of these details may take us well beyond the dual-dual model used here. For transitional economies a different set of structural features may need to be considered. For example, the presence of state owned enterprises and financial controls of various sorts will need to be modeled. These are some fruitful directions for future research.

Finally, one important methodological issue is the level of aggregation on the household side. Clearly, the use of a fully disaggregated data set on the household side removes the compulsion of using the always-somewhat-arbitrary classification of households into various socio-economic groups. Although we are still dealing with a sample of households and not the entire population, it can be argued that this "micro" picture is in some sense as accurate as we can get without enlarging the sample. When data are available, undertaking both group level and micro level poverty analysis can offer important insights.Therefore, micro poverty analysis in macromodels is a desirable direction for research to follow.

To sum up, within a generic CGE model, the consequences of the trade liberalization part of the adjustment policies for allocation of resources, household income distribution of income and impact on poverty has been examined here in a way similar to the dual-dual approach pioneered by Thorbecke and others. Beginning with a solid understanding of the causality of household income distribution, production structure, migration patterns and factor markets emphasizing both formal and informal sectors, the model incorporates the economy wide causality of income poverty in a transparent manner. Although the first stage of the modelling process has only aimed at comparative statics experiments, an eventual dynamic extension will clearly be desirable and possible. The dynamic gains from trade---with proper redistributive mechanisms--- could indeed lead to a more rapid poverty reduction than the comparative statics exercise would indicate. This remains an urgent task within the CGE framework of analysis for all Asian Developing Economies.

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