**Limitations associated with the use of microdata and the reconciliation with macroeconomic statistics should be considered** . Nationally representative household surveys are incorporated in the CGE modeling framework to provide information related to the contribution of labor to value added, disaggregated by sector and type of worker. To incorporate this information, one must reconcile macro and microdata sources. This reconciliation must deal with the fact that (1) the aggregates obtained from microeconomic data do not add up to the aggregate statistics in national statistics; and (2) microeconomic data may not provide accurate information about some very small sectors.

# 6. Concluding remarks

**This paper discussed a simulation framework used for the ex-ante assessment of the distributional aspects of trade, at the sectoral and sub-national district levels.** In this regard, the assessment of the distributional aspects needs to operate within a systematic framework. The CGE-GIDD is a macro and microeconomic model linked through a set of linked aggregate variables, including labor supply, skill formation, and real earnings. The model operates in a top-down fashion. The CGE model relies heavily on economic theory and provides aggregate and complex interactions within consistent market-clearing mechanisms. The microsimulation can project the behavior of consumers and workers at a very disaggregated level. The CGE-GIDD allows us to track patterns from policy shocks, to macro and sectoral outputs, and finally to disaggregated effects on labor at a sub-national sectoral level. On a technical level, the labor market specification is a key element that drives the distributional results. In such circumstances, the assumptions used to model and calibrate the labor market and the complementarities between workers and capital have a great influence on the results.

**A set of relevant trade policy simulations were assessed for the case of Sri Lanka** . An ex-ante evaluation requires the creation of a counterfactual simulation that serves as a comparison. The baseline follows historical trends and is key in understanding the net effect of the alternative policy scenarios. The alternative scenarios contemplate i. a unilateral para-tariff liberalization, ii. FTA with China, iii. FTA with India, and lastly, iv. a full-reform scenario that incorporates the previous three elements plus implementation of the WTO Trade Facilitation Agreement. In practice, the level of protection with tariffs is small for open economies and most of the effective gains from trade would come from reduction in NTMs and extra forms of taxation, such as para-tariffs. Macro simulation results show strong complimentary between the policy choices. As a result, and for brevity, only the para-tariff unilateral liberalization and the full-reform scenario were discussed in the section dealing with the distributional assessment.

**Reductions of trade barriers result in faster expansion of GDP and trade, accompanied by greater economic activity in urban areas, shifts toward export competitive sectors and increases in wage inequality** . With respect to baseline and by 2028, implementation of full trade reform would help in reducing poverty (PPP$5.50/day) 0.66 additional percentage points. Our analysis shows that despite these positive effects on poverty reduction and in the absence of additional policies, the economic gains would be in favor of skilled workers – which are located in the top 40 percent of the income distribution. In the realm of scenario analysis, it is important to highlight that these results are not forecasts; rather, these results can be best understood as mechanical responses only occurring when the economy operates under a narrow set of assumptions. Policy creates a new set of incentives for economic actors and the framework presented here can assess the magnitude and direction of those incentives within a complex, systematic, and detailed framework.

**The distributional gains from trade have long been recognized as an important component for economic theory and subsequently for trade policy design and implementation** . Recent advances in computational power, better standards for collecting macro and micro data and increases in the technical capacity of governmental bodies (particularly national statistical offices, and finance ministries) increase the accessibility these methodologies in developing countries. This paper aims to demonstrate how this

35