Trade Liberalisation and Income Distribution: Evidence from a Small Open Economy

Abstract

Over the last few decades there has been a great deal of interest in investigating the link between trade liberalisation and income distribution in developing countries. Although there is a significant amount of empirical evidence to support the positive link between trade liberalisation and growth, the evidence on the relationship between trade liberalisation and income distribution among different household groups has been inconclusive. This study investigates the effects of trade liberalisation on income distribution in the Sri Lankan economy using a computable general equilibrium model. In terms of income distribution it can be observed that tariff reduction in manufacturing industries tends to widen the income gap between the low and the high income earners. Understanding these distributional effects of trade liberalisation will help in designing better targeted and robust welfare programmes in order to mitigate the adjustment costs of further liberalisation in developing countries like Sri Lanka.