Trade and poverty nexus: A case study of Sri Lanka

Abstract

The link between trade liberalisation and poverty has become one of the most debated topics in recent years. There is a growing body of empirical literature on this topic and many studies provide mixed results. In this study, Sri Lanka is used as a detailed case study and a computable general equilibrium (CGE) approach is used as an analytical framework to examine the trade-poverty nexus. The results suggest that, liberalisation of the manufacturing industries is more pro-poor than that of the agricultural industries. Overall, this study suggests that trade reforms may widen the income gap between the rich and the poor creating uneven gains across different household groups in Sri Lanka. While short-term complementary policies are needed to compensate vulnerable income groups, long-term policies are needed to make gains from trade liberalisation more inclusive and equitable to maintain economic and political stability in Sri Lanka.