Do the Poor benefit from Regional Trade Pacts? An Illustration from the Central America Free Trade Agreement in Nicaragua

This paper main objective is providing an ex-ante assessment of the poverty and income distribution impacts of a Central America Free Trade Area agreement for Nicaragua. A general equilibrium macro model is used to simulate trade reform scenarios and to estimate their price effects, and a micro-module maps these price changes into variations of real incomes at the individual household level. A useful insight from this analysis is that even if the final total impact on poverty is not too large, its dispersion across households – due to their heterogeneity in terms of factor endowments, inputs use, commodity production, and consumption preferences – is significant and this should be taken into account when designing compensatory policies. Additionally a growth and redistribution decomposition shows that, at least in the short to medium run, redistribution can be as important as growth. A main policy advice emerges: to boost trade-induced poverty reductions, Nicaragua should consider enlarging its own liberalization to countries other than the US.