Households heterogeneity in a global CGE model: an illustration with the MIRAGE-HH (MIRAGE-HouseHolds) model

The objective of this paper is to develop a version of the MIRAGE model with household heterogeneity and a public agent, to better analyze the impact of trade liberalization and other trade reforms on real income and welfare at the household level In a first step, the model disaggregates the representative household into up to 13-39 households in five developing countries (Brazil, Pakistan, Tanzania, Uruguay and Vietnam). The sources of income and consumption structure reflect disaggregated statistical information coming from households’ surveys. The new model better captures the behavior of the public agent in terms of revenues collected and in terms of expenditures. Since domestic remittances may constitute an important determinant of income redistribution, the new version also endogenizes private inter-households transfers. This new version of MIRAGE takes into account the reaction of households to these shocks in an integrated and consistent framework. We study the impact of full trade liberalization on these households. This study concludes that: (i) while the impact of full trade liberalization may be small at the macroeconomic level, the effect on households’ real income may be quite substantial at the household level with a great heterogeneity in terms of results; (ii) the major channel of heterogenity of the impact of trade liberalization on households’ real income is productive factors’ remuneration while the channel of consumption prices of commodities has limited impact; (iii) various domestic policies simultaneously implemented to trade liberalization like modification of public transfers to households or changes in income taxation may significantly change the picture and offer compensation for negative effects of this shock or amplify direct impact of full trade liberalization; (iv) the impact of trade reform on poverty and inequality is significant and diverse from one country to the other.