Trade Openness and the Growth–Poverty Nexus: A Reappraisal with a New Openness Indicator

Abstract

Developing countries have greatly benefited from globalization, coinciding with economic growth and structural transformation. The standard trade theory postulates that trade openness contributes to poverty alleviation directly by changing factor proportions of production and indirectly through the trickle-down effect of growth. Existing multicountry studies using the trade-to-gross-domestic-product 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 the 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-gross-domestic-product ratio. Using a newly constructed index of trade openness, which I dub “the price convergence index,” I find a significant direct effect of openness on poverty reduction. The results also suggest that the impact of growth on poverty is greater for economies with more open trade regimes.