Economy-Wide and Employment Effects of Different Scenarios in Bangladesh: Application of a CGE Model

Over the past three decades, computable general equilibrium (CGE) models have become an important tool for empirical economic analysis. CGE models offer a comprehensive way of modeling the overall impact of policy changes on an economy or a region by considering all production activities, factors, and institutions. Such models also include factors such as markets and macroeconomic components: investment and savings, balance of payments, and government budget. CGE models are applauded for being able to incorporate multiple economic linkages that often come handy in explaining trends and structural responses to changes in development policy. CGE analysis allows for the assessment of the impacts of exogenous shocks within a constrained optimization framework (Raihan, Infrastructure and growth and poverty in Bangladesh, 2012). At the core of the CGE model is a set of equations describing the behavior of various economic agents (such as firms and households) when faced with changes in relative prices. In an increasingly market-oriented economy, the variations in prices may be the most important sources of reallocation of resources among competing activities which then may alter the factorial income and hence personal income distribution. Changes in personal income distribution of household groups and consumer price indices may have different implications on the welfare and poverty situations of the distinct household groups. Against this backdrop, this paper employs the CGE model for the Bangladesh economy to explore the impacts of a set of policy and natural disaster shock scenarios. These include a rise in crop productivity, a rise in the demand for labor-intensive exports, a rise in the allocation for social protection to households, and a natural disaster shock. A Social Accounting Matrix (SAM) prepared for the year 2012 serves as the consistent and comprehensive database for the abovementioned exercises.