Trade Liberalization and Poverty in the Middle East and North Africa

THE IMPACT OF TRADE LIBERALIZATION 63

effect of the E.U.-Jordan Association Agreement. The agreement provides for the gradual reduction of import duties on imports of E.U. industrial and agri- cultural products into Jordan over a period of 12 years according to a tariff reduction schedule that started in 2002 (the year of implementation) and will end in 2012. Reduction in agriculture tariffs will not start until 2006 and will proceed at a much slower rate than that for nonagricultural tariffs (Feraboli and Trimborn 2008, Table 1). As tariffs are reduced, government revenue will be reduced, which will lead in the short run to a reduction of total govern- ment transfers to households, made endogenous in the model, although the share each household will receive is fixed. The reduction in tariffs will affect the aggregate economy through decreases in the prices of imported goods (investment and consumption goods), the creation of higher incentives for investment, faster capital accumulation, and increases in output in the long run. So in the long run, the drop in government transfers to households will be partially offset by the expansion of the tax base. What the net effect will be on household income composed of labor, capital, and transfers is ambigu- ous because trade liberalization affects each source of income differently and each household group relies differently on the various kinds of income. In this study it appears that the net effect on welfare will be positive for most household groups and slightly higher for the poorest one. The highest income group, though, will be worse off. If the value-added tax is increased by 10 percent, the effect of trade liberalization will still be positive for households but the increase will be smaller. Although transfers will remain even higher than in the benchmark year, household welfare will be lower relative to the previous simulation due to a reduction in aggregate income (through lower investment). It has been found that trade liberalization will increase the gap in income, especially in the long run. Although low-income households will overcompensate for losses in transfers by an increase in labor income, rich households’ capital income will increase much more in the long run due to an increase in investment incentives.

Lofgren (1999) analyzed the short-run equilibrium effects of alternative scenarios of reduced protection for agriculture and industry in Morocco. Because the agricultural sector represents the major income source for the poor rural population, it is also the most strongly protected in the country. The results show that lowering agricultural protection would generate aggregate welfare gains, though a significant part of the disadvantaged rural population would lose out substantially. The tariff cut would boost agricultural imports and reduce the demand, prices, and factor returns in domestic agriculture. The welfare changes for any household group primarily depend on the com- bined effects of changes in the prices of factors the group controls and the commodities it consumes. The incomes and resources of agricultural labor would decline significantly, especially in rainfed areas, because these depend

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