The Welfare Effects of Reducing the Import Tariff in Afghanistan’s Agriculture Sector: Application of the CGE Model

Document Type : Research Paper

Authors

1 Department of Agriculture Economics and Extension, University of Kabul, Kabul, Afghanistan.

2 Department of Agricultural Economics, Faculty of Agriculture, Ferdowsi University of Mashhad, Mashhad, Iran.

3 Department of Agricultural Economics, Faculty of Agriculture, University of Tehran, Karaj, Iran

4 Department of Nature Engineering, Shirvan Faculty of Agriculture, University of Bojnord, Shirvan, Iran

10.22059/ijaedr.2024.370281.669282

Abstract

The challenge of economic development is to ensure human welfare. Many studies in developing countries have focused on trade liberalization to achieve this goal. Therefore, this study assessed the impact of reducing import tariffs in the agricultural sector on households’ welfare. The study utilized a computable general equilibrium model and Afghanistan's social accounting matrix data, and measured welfare effects using the Hicksian Equivalent variations index. The findings showed that as the import tariff gradually decreased until its full elimination, household expenses increased across various scenarios. The equivalent changes, which reflect the difference between primary and secondary consumption expenditures, were positive after implementing the scenarios. The study found that reducing the import tariff rate in the agricultural sector by 20, 40, 60, 80, and 100 percent increased equivalent changes by 1339, 4427, 7494, 10996 and 10996 million Afg., respectively, indicating an improvement in household welfare. The fourth and fifth scenarios had a greater welfare effect than the first. Based on the study results, it is recommended that the Afghan government focus more on trade liberalization instead of reducing agricultural tariffs. The study also suggests that, along with trade liberalization, the government should shift its focus from domestic production to meeting food needs through imports to ensure household well-being.

Keywords

Main Subjects

Extended Abstract

Introduction and Objectives

International trade plays a crucial role in improving the welfare of households in a country. When countries make multilateral commitments and reduce or eliminate tariffs and trade barriers, it creates opportunities for economic growth and development. To achieve the well-being of households, countries use various policy tools such as import tariffs and quotas, subsidies, and pair prices for consumers. Afghanistan, for instance, usually imposes tariffs on imported goods, which make up about 40 percent of the country's gross domestic product. Therefore, current study is conducted to evaluate the welfare effects of reducing agricultural import tariffs in different scenarios and to suggest appropriate trade policies that can help achieving social welfare in the country.

 

Methods

This article explores the impact of a reduction in import tariffs on the agriculture sector in Afghanistan. The study uses a computable general equilibrium model based on a Social Accounting Matrix (SAM) created by the Biruni Institute in 2018. Previous studies were used to estimate the shift and share parameters of the constant elasticity of substitution (CES) and constant elasticity of transformation (CET) functions. The study simulated five scenarios of tariff reductions: 20%, 40%, 60%, 80%, and complete removal (100%). These scenarios are referred to as the first, second, third, fourth and fifth scenarios respectively. The study used the Hicks equivalent Variation index to investigate the welfare effects. This index measures the difference between primary and secondary consumption of households in terms of welfare.

 

Result and Discussions

     The study's findings indicate that household consumption increased regularly with the gradual reduction of the tariff rate until its full elimination in different scenarios. The amount of Hicks equivalent variation was positive after the implementation of various scenarios. The study results demonstrated that after decreasing 20, 40, 60, 80, and 100 percent of the import tariff rate in the agricultural sector, the equivalent variations have gradually increased by 1339, 4427, 7494, 10996, and 10996 million Afghanis, respectively. Higher household income can reduce the proportion of income spent on food and lead to increased savings. When income increases, people's purchasing power also increases, making them less vulnerable to price changes and ultimately contributing to an increase in household welfare.

 

Conclusions and Recommendations

  This study found that household consumption surged when the import tariff rate on agricultural commodities was declined. This is because household expenditure has augmented as a result of the decline in the the rise in personal income. The results of the study also discovered that the complete elimination of import tariffs has a greater positive impact on household welfare compared to a gradual reduction of tariffs. Therefore, it is recommended that governments focus on completely eliminating tariffs instead of just reducing them. Furthermore, the study suggests that in order to gurantee household welfare, focus should be palced on achiving food demands trough trade liberalizatio rather than relying solely on domestic production.

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Iranian Journal of Agricultural Economics and Development Research
Volume 55, Issue 3
October 2024
Pages 489-505

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