Trade openness and the growth-poverty nexus: Reappraisal with a new openness indicator

Abstract

Developing countries have greatly benefited from globalization, coinciding with economic growth and structural transformation. Standard trade theory postulates that trade openness contributes to poverty alleviation directly by changing factor proportions of production and indirectly through the trickledown effect of growth. Existing multi-country studies using the trade-to-GDP ratio to measure openness often fail to find a direct effect of openness on poverty over and above the growth-poverty nexus. This paper is motivated by the concern that failure of these studies to detect the effectiveness of the factor proportion channel may be due to limitations of the commonly used measure of trade openness, the trade-to-GDP ratio. Using a newly constructed index of trade openness, which I dub "?the price convergence index' (PCI), I find significant direct effect of openness on poverty reduction. The results also suggest that the impact of growth on poverty is greater for countries with more open trade regimes.