Trade Liberalization and International Competitiveness in Iran: An Application of Computable General Equilibrium (CGE) Model

Abstract

Trade liberalization is often the core attention of foreign economic strategies in developing countries. Findings in the literature confirm a significant effect of free trade on developing economies through which the economic sectors benefit from technology transfer and spillovers and increasing production capacities and input productivity leading to international competitiveness. On the other hand, making a policy or a strategy, without being concerned with its indirect and interacted effects on an economy, is controversial and even misleading. However, it is possible to apply for a CGE model in order to control for these effects through predicting changes in economic indicators.This paper specifies a CGE model to examine the effect of trade liberalization on the Iranian economy. Particularly, the main objective is to focus on the scenarios of tariff reduction/elimination in the economic sectors, to seek for their effects on the countryâ s international competitiveness. The Iran's 1996 social accounting matrix is the main data resource for the CGE model estimation that has been done by the GAMS. Overall, the results obtained revealed the fact that trade liberalization was not able to affect significantly international competitiveness of the Iranian sectors at least in the short-run. It implies a continuous support of the trade liberalization strategy in the country should be in effective as a long-run process. JEL Classification: C23, F13