Trade Liberalization, Economic Growth and Poverty: A Case Study of South Asian Countries

Abstract

WTO (World Trade Organization) that replaced GATT (General Agreement on Tariffs and Trade), claims speedy growth and reduction of poverty through greater trade expansion. This study evaluates the existence and impact of relationship between trade liberalization, economic growth and poverty in the context of selected South Asian countries namely Pakistan, Bangladesh, India, Sri Lanka, Nepal, Bhutan and Maldives. Time series and cross sectional data is pooled and divided into two sub periods as pre liberalization (1960-1980) and post liberalization period (1981-2011) to compare the relationship of trade with growth and poverty between the two periods. GLS technique is used with countries’ Fixed and Random Effect Models. Variables are trade openness, average income growth, poverty, income inequality, unemployment, infrastructure development (transport and communication sector development) government consumption, investment, life expectancy at birth, literacy ratio, secondary school enrolment ratio, skilled labor, inflation rate, and population growth. First, trade openness along with other variables is estimated to see its impact over growth and then trade openness and growth along with other variables are estimated to see their impact over poverty of the South Asian region during both periods. Results show in the pre liberalization period an insignificant positive relationship of trade openness with average income growth and significantly negative relationship with poverty. During post liberalization period this impact is significant and positive over growth and poverty in South Asian region. The relationship is weak in both cases. Per capita income growth shows a strong, positive and significant impact over poverty. Gini (income inequality) is negatively related with average income growth and positively with poverty. Unemployment reduces growth of income (mostly significantly) but an ambiguous relationship with poverty. Government consumption and investment show strong, positive and significant impact over growth and a positive impact over poverty of the region. Infrastructure development raises growth weakly and lowers poverty strongly, Inflation lowers economic growth and raises poverty, population growth shows a strong, negative impact on economic growth that enhances poverty. These all results are significant. Life expectancy at birth, literacy ratio, secondary school enrolment ratio and skilled labor also show a positive and significant association with average income growth and significantly strong and negative relationship with poverty. The overall results of South Asian countries suggest that liberalization policies can play an effective role if they are made sufficiently pro-poor and pro-growth. For this purpose complementary policies are needed to strengthen the institutional capabilities and improve the poverty situation in South Asian region.