Introduction

What is the effect of import tariff changes on the distribution of income? Or of an exchange rate devaluation on the poorest decile of income earners? Such questions have not been emphasized in the trade policy literature. Trade policy is usually justified from an standpoint of efficiency or protection rather than of how the benefits of such a policy are distributed among households.

This chapter considers the impact of trade policy on the household sector. From a methodological standpoint, the modeling of income distribution within a general equilibrium framework is examined. The purpose is to determine the impact of policy changes on the welfare of households disaggregated by income groups.

The first section provides a summary of the literature on trade policy and income distribution using multisectoral models. There is no strong consensus on what effect trade policy will have on income distribution, and inferences depend on which aspect of trade policy is examined and which type of model is constructed.

The second section discusses methodological issues and continues the presentation of existing literature. This section first discusses the basis for household disaggregation and shows how distributional mechanisms are modeled. The manner in which distributional mechanisms are endogenized is also addressed. The final part of this section reviews measures of distribution or welfare used in the literature and how the objective of each study shapes the measure applied.

The third section shows an application of a numerical general equilibrium model to Bangladesh and considers the income distribution outcomes of import tariff and quota removal.