Trade Reforms, Macroeconomic Performance and Welfare in Malawi

Abstract

This paper sets out to show efficiency gains and/or losses of trade reforms in Malawi using simulation experiments in a Computable General Equilibrium (CGE) model. Among others, the study shows that a 50 percent tariff cut coupled with fixed government savings has the same impact on selected macroeconomic variables when capital is mobile as when it is activity specific. When capital is activity-specific, the tariff cut has a positive impact on labour income in the non-agricultural sector and a similar impact on capital income in commercial agriculture. Overall labour income in the agricultural sector is unaffected while the impact on capital income in small scale agriculture and non-agriculture sectors is negative. When capital is mobile, the tariff cut leads to a fall in the capital income in small scale agriculture. The study further shows that doubling foreign aid to Malawi increases consumption and adversely affects the production side of the economy.

DOI: 10.5901/mjss.2014.v5n3p307