Impact of Tariff Cuts on Pakistan: A Computable General Equilibrium Analysis with Particular Focus on Main Exports and Regional Disparities

Abstract

The history of Pakistan has been characterised by frequent military interventions in the democratic governing process, diverse economic and trade policies pursued by different autocratic and democratic governments, and regional conflicts and disparities which led to the civil war of 1971 and the secession of the country’s majority wing—East Pakistan. More recently, in common with other South Asian economies, Pakistan has embarked on an extensive trade liberalisation program since the late 1980s, with across-the-board tariff reductions being one of its key ingredients. This study critically reviews the political economy of Pakistan and examines the likely impacts, in both the short run and long run, of the comprehensive tariff cuts on the economy as a whole, its key industries, and its main regions. In doing so, it utilises a computable general equilibrium (CGE) model of the economy. The study highlights the effects of the tariff cuts on the country’s major exports, and on the output and employment levels of various regions of Pakistan.

The review of Pakistan’s economy reveals a possible, positive relationship between trade liberalisation and regional disparities under military regimes. By contrast, under truly democratic governments, trade liberalisation has tended to be associated with reduced disparities. CGE model simulations suggest that across-the-board tariff reductions increase real GDP slightly in the short run but significantly in the long run. At the microeconomic level, a striking implication of the tariff cuts is a persistent slowdown, or even a decline, in cotton and textile related exports in the long run. Increases in regional disparities are also likely. In the short run, the gap between the rates of output growth of the largest and most developed region, Punjab, and two smaller and less developed regions—North West Frontier Province (NWFP) and Balochistan—will probably rise sharply. In the long run, a sustained increase in unemployment in another smaller region, Sindh, is predicted. The study recommends a number of appropriate policy responses to these likely developments, at the national as well as regional levels of government.