CGE Analysis: LDC Graduation

Caliendo-Parro CGE analysis on OECD ICIO 2025 (base year 2022)

BDPolicy Lab · 2026-05-29

Abstract

This brief presents computable general equilibrium (CGE) simulation results for Bangladesh under a chosen trade policy scenario. The model is the Caliendo-Parro (2015) exact-hat-algebra framework, calibrated to the OECD Inter-Country Input-Output (ICIO) 2025 edition with 2022 as the base year, aggregated to 13 sectors and 9 regions. The analysis quantifies real-income welfare effects, tariff-revenue changes, and shifts in bilateral export shares, with direct relevance to Bangladesh's scheduled graduation from least-developed-country (LDC) status on 24 November 2026.

Key findings

Bangladesh is scheduled to graduate from LDC status on 24 November 2026. The graduation date was confirmed by UN General Assembly Resolution 76/8 (UN Committee for Development Policy). Graduation ends duty-free, quota-free access under the EU Everything But Arms (EBA) scheme and similar LDC preferences, exposing Bangladeshi exports to most-favoured-nation tariffs in key markets. As of 18 February 2026 the Government of Bangladesh has an extension request under review by the Committee for Development Policy under its crisis-response provision.
Ready-made garments make up 81.5% of merchandise exports (FY2024-25). RMG export earnings reached USD 39.35 billion of a USD 48.28 billion merchandise total in fiscal year 2024-25 (BGMEA / Export Promotion Bureau). Concentration at this level means preference erosion in any single apparel market propagates across the whole external sector, which the CGE counterfactual captures through the textiles/RMG channel.
Trade openness fell to 26.8% of GDP in 2024 from 33.8% in 2022. Trade (exports plus imports) as a share of GDP declined from 33.8% in 2022 to 26.8% in 2024 (World Bank World Development Indicators, NE.TRD.GNFS.ZS). The contraction reflects import compression under foreign-exchange pressure during 2022-24 and softer external demand, raising the stakes of any further trade-cost shock from preference loss.
The IMF flagged revenue, banking, and exchange-rate reform as binding constraints. The IMF Executive Board concluded the 2025 Article IV Consultation with Bangladesh on 26 January 2026 (Country Report No. 2026/024), highlighting weak fiscal revenue, banking sector stress, and exchange-rate reform as central to macroeconomic stability. These constraints limit the fiscal space available to cushion the welfare cost of preference erosion quantified here.

Bangladesh welfare effect

-0.140

% real income

RMG export share to EU27

-41.48

Loss of EU EBA preferences and other LDC tariff benefits

Result

Bangladesh real income changes by -0.140% under this scenario. The counterfactual equilibrium converged. The welfare figure is the change in real income: counterfactual nominal income deflated by an expenditure-share-weighted consumption price index. Bilateral export-share changes in the ready-made-garments sector are shown in the chart, identifying the destination markets where Bangladesh's competitive position shifts most under the scenario.

These results are model counterfactuals on the OECD ICIO 2022 base year, not forecasts. They isolate the trade-policy channel and hold other macroeconomic conditions fixed.

Data and methodology

The model is the Caliendo and Parro (2015) multi-sector, multi-country trade model solved in exact hat algebra (app/models/cge/caliendo_parro.py). Structural parameters - bilateral trade shares, value-added shares, input-output coefficients, and final-demand expenditure shares - are calibrated directly from the OECD ICIO 2025 edition, base year 2022 (app/models/cge/calibration.py), aggregated to the 13-sector, 9-region 'bd-policy-13-9' profile. Sector trade elasticities are the published Caliendo-Parro estimates (app/models/cge/elasticities.py). Scenarios are defined in app/models/cge/scenarios.py; the LDC-graduation scenario applies most-favoured-nation tariff increases on Bangladeshi exports to the EU27 and other developed markets in place of lost preferential access. Welfare is measured as the change in real income: counterfactual nominal income deflated by an expenditure-share-weighted consumption price index (app/models/cge/welfare.py). Tariff revenue and bilateral export-share changes are read directly from the solved counterfactual equilibrium.