Trade liberalisation and its impact on income distribution in Ghana

Abstract

In this article, we analyse the impact of trade liberalisation on income distribution in Ghana using a computable general equilibrium (CGE) model. We focus on household income groups defined by location, economic activities and income quintiles using the 2013 social accounting matrix (SAM) for Ghana. Consistent with the existing literature, we find that trade liberalisation affects negatively the total and factor income and consumption spending of rural farm households, while it benefits urban non-farm households. Our results also suggest that import tariff reduction creates a substitution effect which decreases the demand for domestic commodities; ultimately affecting farmer’s income, demand for labour and land, and crop capital rents.

Keywords:

• Trade liberalisation
• income distribution
• CGE model
• Ghana

Notes

Acknowledgements

Many thanks to Gennaro Zezza, Daniela Maggioni and Ermias Engida Legesse for excellent research support. Also, we thank the conference participants of EcoMod 2018.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 The SAP consists of a number of different policies designed by the IMF and the World Bank. The policies include liberalization of markets; privatization and divestiture; wage cuts and currency devaluation; promoting good governance and fighting corruption etc. The policies of the SAP are the same as the principles of the Washington Consensus. The Washington Consensus is again used in this text and it follows the definition given above.

2 The index is calculated as the number of countries to which the reporter exports a particular product divided by the number of countries that report importing the product that year (WITS).

3 Table A2 shows trade balance by agricultural commodities using data from the SAM.

4 Hirschman-Herfindahl index is a measure of the dispersion of trade value across an exporter’s partners. A country with trade (export or import) that is concentrated in very few markets will have an index value close to 1. Similarly, a country with a perfectly diversified trade portfolio will have an index close to zero (World Integrated Trade Solution (WITS)).

5 These two models, though similar in practice, depart from each other in terms of the assumptions and the nature of the macro closure. Moreover, structuralist models are usually formulated in a demand-driven and dynamic setting. The latter permits the construction of an independent investment function which is determined by previous year savings. Thus, in the structuralist context, modellers attempt to depict the structural properties of the country under study and the characteristics of the SAM. Taylor (1990) and Dervis et al. (1982) are good expositions of the structuralist and neoclassical CGE models, respectively.

6 There is one commodity named ‘cocer- other cereals’ which has no activity. This commodity is imported, used in the production process as intermediate commodity and consumed as finished goods by households.

7 This refers to the behavioral responses to a given policy direction. For example, household or firm’s decision to consume or produce a given commodities given a policy change in income or tax (see Bourguignon and Da Silva, 2003 for other illustrations).

8 This CES function implies that products are differentiated by country of origin.

9 This closure is usually given as; Government – flexible government savings and fixed direct tax rate; Rest of the World (ROW) – fixed foreign savings and flexible real exchange rate; Savings and Investment (S-I)-fixed capital formation and uniform Marginal Propensity to Save (MPS) across all institution. In this closure, the modeller assumes exogenous real investment and full employment.

10 The entire set of parameters adopted in our CGE model is available upon request. There exists income elasticity estimate for Ghana by Breisinger, Diao, Kolavalli, Al-Hassan, & Thurlow (2011).

Additional information

Notes on contributors

Isaac Mensah

Dr Isaac Mensah worked as a research fellow at Ca' Foscari University of Venice for 3 years and obtained a doctorate degree in Economics, he is currently an economist and a consultant with a research focus in international economics, development economics and economic policy monitoring and evaluation.