Trade Liberalization And Poverty Reduction:A Comparative Study Of Developing Countries

This dissertation is mainly investigate whether and to what extent trade liberalization affects poverty reduction efforts in the sample of developing countries, which were divided into11sub samples based on the differences in average economic growth rates, openness level determined by tariff rates, differences in income levels of the economies, and geographic division of the world.We have used absolute poverty measures including poverty head count ratio, poverty depth (poverty gap) and square of poverty gap to represent severity of poverty in the study. To represent trade liberalization, trade share and trade barriers, we have used six different measures of trade openness, trade share and trade policy to analyze the possible nexus. We found that the relationship of trade and poverty is negative in overall sample of developing countries but this relationship is not same across the countries due to differences in tariffs, trade restrictions and trade policies.To test the general argument of the theory that trade leads to growth and growth leads to poverty reduction and we found positive and significant relationship between trade liberalization measures, economic growth and poverty alleviation. These results are in line with previous studies of Levine and Renelt (1992), Taylor (1998), Wacziarg (2001) and Dollar and Kraay (2002). However, this finding is against the argument of Rodriguez and Rodrik (2001) that there is no relationship between trade liberalization and poverty.Our analysis showed that trade openness and economic growth have positive relationship in high growth economies while trade openness has significant and negative effect on absolute poverty in low growth developing countries. Similar lines are also concluded for the case of trade share and absolute poverty in low growth sample of developing countries. The effect of Trade barrier on poverty is positive in both low growth and high growth subsamples of the developing countries.The regression results indicate that the relationship of trade openness is partially significant in case of high growth economies and insignificant in case of low growth developing economies. The effect of trade share on poverty is found to be significant in case of both high and low growth sample of developing countries. We further infer from this finding that the relationship and the effect are sensitive to the poverty level. These findings are for the sample as a whole and cannot be generalized at country level due to huge variation in trade policy, trade share and different tariff rates applied by the developing countries in both the sub samples. Also the nature of poverty varies in both samples.The relationship of trade openness to absolute poverty was found to be insignificant and trade share shows its poverty reducing behavior in open economies of developing world. We found insignificant relationship of all three variables of trade with absolute poverty at both levels in the sample of open developing economies.The analysis of results about the effect of trade on poverty regarding the closed economies sample of developing countries indicates rather different results than the sample of open economies. The effect of trade variables on poverty conclude that the trade openness and trade share has significant role in poverty reduction in closed economies sample of developing countries. The results of trade share reports that the relationship is poverty enhancing in case of closed economies. While with the help of regression estimates we conclude that trade openness and trade barriers have no significant impact on poverty but trade share has its role for poverty reduction.The study concludes that the relationship is rather different across the two regimes:open and closed countries. It further indicates that there is no significant relationship of trade openness, trade share and growth variables in open economies indicating that open economies have strong base and are well prepared to face the pressure of international trade. This finding regarding this relationship is an induction in the current literature. This finding is similar to Rodriguez and Rodrik (2001) who argued that there is no relationship between trade and growth, but here we complement this argument only in the case of open developing economies of the world.The relationship of trade openness and poverty reduction is stronger in closed economics than in the open economies. This conclusion is again a new induction in the current literature on this topic as there were no such researches available to compare our results. The study further explores another dimension that:Do the effects of trade liberalization on poverty vary across the countries with different income levels? The analysis concludes that the relationship is almost alike in the upper middle income and lower middle income countries but it has huge difference in the relationship of the variables in case of lower income countries. We conclude that trade openness, trade share and trade policy have no role in explaining the poverty in upper middle income and lower middle income developing countries. This finding indicates that the role of trade policies should be enhanced and these poor countries should rephrase their trade policies by keeping in view its role for the welfare of household and also it should be rearticulated for the development of the pro-poor trade framework.We conclude that the effect of trade on poverty is also sensitive to income level and holds only in low income developing countries. This finding of the study is another induction in the current literature regarding the trade and poverty nexus.To answer the fourth study question we conclude that in Africa trade openness and trade share both play important role in the welfare of households, while the trade share has no role to play in the sample of African countries.We conclude that in regional analysis of developing countries the effect of trade openness on poverty is generally very weak in Africa. On the other hand share of trade in GDP has proved to be significant for African countries in poverty reduction. Similar conclusion has been made in case of Trade policy in the sample of developing African countries. The regression analysis concludes that the effect of Trade Liberalization on absolute poverty is insignificant in case of African countries.In case of Latin America and Caribbean we conclude that the effect of trade liberalization and trade share with household welfare proved to be insignificant. The effect of trade openness and trade share are also proved to be insignificant in case of Latin America and Caribbean. Only trade policy proved to be vital for the efforts for reduction in poverty. Moreover in the regression analysis we found insignificant role of trade openness, trade share and trade policy with poverty.The analysis for the developing countries of Asia produced rather different results as compared to other three regional samples. We conclude that only trade is significant contributor to household welfare. In poverty and trade relationship we conclude that the trade openness and trade share both are negatively associated with poverty while trade barriers have positive relationship for poverty reduction in the sample of developing Asian countries. In this part of the world the regression results also concluded that this relationship is sensitive to the level of absolute poverty.The analysis for the sample of developing countries in Europe indicates that only trade share and trade openness have significant positive impact on the welfare of household but insignificant relationship of trade policy is found. For the study of trade and poverty relationship there is no established relationship found among trade variables to absolute poverty in Europe.To drape this finding in the regional decomposition of the sample of developing countries, we conclude that the relationship of trade liberalization and poverty reduction is region specific and different across the regions. The above finding is another induction in the literature as this relationship has never been discussed in literature in this manner until to date.