The Impact of EU-ACP Economic Partnership Agreement (EPA) on the Ethiopian Economy: A Recursive Dynamic CGE Approach
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Date
2011-07
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Addis Ababa University
Abstract
Regional integration arrangements are becoming the fashion of the day. Being part of these arrangements, Economic Partnership Agreements (EPAs) are being undertaken between EU and ACP countries. The impact on Ethiopia’s economy taking in to account the strategic sectors, however, has not been studied. This paper tried to fill this gap by using a Dynamic Recursive CGE model.
To investigate the impact of EPA on the Ethiopian economy, four simulation scenarios are examined. The scenarios involve joining EPA at one time, in 2011, or through phases, a 20% tariff removal each year from 2011-2015. Another scenario involves excluding strategic sectors from the EPA.
The impact of EPA has been found to be significant on traded commodities. Particularly, the price of machineries, vehicles and equipments will decrease. Government revenue also decreases as tariff revenue is an important source of revenue for the Ethiopian government. GDP and trade balance are, however, positively affected. The increase in GDP might be associated to the increase in disaggregated production. The larger increase in exports as compared to the increase in imports leads to an improvement in trade balance. Private consumption also increases. This might be due to the availability of cheap consumption commodities from abroad due to the removal of tariff. On the other hand, our results show a decrease in investment which might be attributed to the inability of domestic producers to compete with foreign suppliers at a lower price.
Our findings also show that protection of strategic sectors benefits only producers in these sectors. Exclusion of strategic sectors from EPA helps producers face less competition as the price of imported commodities will include tariffs. Protection of strategic sectors will also increase government revenue. The impact of protecting strategic sectors on the overall economy, however, is negative. It results in a decrease in GDP as well as deterioration of trade balance.
Keywords: Regional integration, Recursive dynamic CGE, EPA, Ethiopia
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Keywords
Regional integration, Recursive dynamic CGE, EPA, Ethiopia