Does Agricultural Liberalization Reduce Rural Welfare in Less Developed Countries? The Case of CAFTA
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Conventional economic wisdom and findings from aggregate economy-wide models suggest that removing tariffs on agricultural imports is detrimental to rural welfare in less developed countries. This paper explores the rural welfare effects of own-country agricultural liberalization under CAFTA using a disaggregated rural economy-wide model that nests within it a series of micro agricultural household models. Our simulation findings suggest that CAFTA would reduce nominal incomes for nearly all rural household groups in El Salvador, Guatemala, Honduras and Nicaragua. However, compensating variations that take into account rural economy-wide adjustments to policy shocks are mostly negative, implying that current agricultural protection policies are disadvantageous for most rural household groups.