Report

6 Impact of SAFTA on Member
Countries: General Equilibrium Analysis
INTRODUCTION
To assess the economic-wide impact of various SAFTA
scenarios on the member countries the study uses a CGE
model. The latest GTAP Version 6.02 (limited release)
version has been used for this purpose. The advantage
of using this version is that it includes Pakistan, the
second largest economy in the region, as a separate
entity. In the earlier Version 6.00 Pakistan was clubbed
with the Rest of South Asia (with ABMN), and
hence results could not be discretely attributed to
Pakistan.
ABMN are counted as one aggregation in the
present GTAP model, and labeled as ABMN. Bangladesh,
India and Sri Lanka are the other separate entities
that have been taken in the aggregation. In order to get
as disaggregated sector level results as possible, no
sectoral level aggregations were created in the prepared
database.
The following steps have been undertaken to
estimate the economy-wide impact of various scenarios
of SAFTA on the member countries.
1. SAFTA implementation takes place as per applied
MFN tariffs subsisting on 1 January 2006. The
implementation commenced on 1 July 2006. The
GTAP simulations must take a base that reflects
this position. In this case the GTAP database was
updated till 2005 (based on tariff changes obtained
from TRAINS). The database was also subjected
to shocks to take incorporate the significant grant
of concessions by India to Sri Lanka under the Indo
Lanka FTA. Since the GTAP base database was of
2001, it was assumed that all other concessions
(since they pre-dated 2001) were taken into account
in the base equilibrium of the model.
2. This equilibrium was shocked to take into account
what may be described as the 1st phase of SAFTA
implementation
• Reduction of tariffs by developing countries to
20% by 2008
• Reduction of tariffs by LDCs to 30%
• Reduction of tariffs of developing countries visà-vis
imports from SAARC LDCs to 0–5% by
2009
• Reductions in three categories above (a, b & c)
all subject to the sensitive lists.
• The results provide an updated database that
simulates the equilibrium of 2008–09.
3. The 2008–09 base was then shocked completely
to equate a 2013–16 situation where all SAFTA
duties are brought to zero. A best case scenario of
complete elimination of sensitive lists is also
assumed in this shock.
IMPACT OF SAFTA
The GTAP model provides sophisticated analysis of
possible direct effects of SAFTA including various feedback
effects across several sectors and countries. The
modeling results offer valuable quantitative information.
The fact that some of the policy scenarios have
already been set (and in fact implementation of them
has already commenced), adds to the greater precision
with which the GTAP model can be used as a predictive
tool. A word of caution is required in interpreting the
results of the model. Given the various limitations of
this technique, the results of the model should be taken
only as indicative about the direction of the impact.
More importantly, the results with respect to welfare
gained should be interpreted in terms of marginal gains
or losses as the term ‘welfare’ itself is ambiguous.
The simulations indicate that welfare effects of
SAFTA will be high for countries like India and
Bangladesh while Pakistan and Sri Lanka will only gain
marginally in terms of welfare. There is an indication
of welfare loss for the rest of the world with SAFTA
progressing (Table 6.1).