The Nexus Between Trade Liberalization and Poverty: A Disaggregated Analysis

Abstract

Decades after trade liberalization, poverty among the developing countries has continued to rise as their economies adjust to fierce and increasing external competition. This study investigates the impact of the 1988 trade reforms on poverty in Pakistan using micro-level data from 1990 to 2005. Using the feasible generalized least squares (FGLS) model in panel setting to address the problem of heteroskedasticity, we explored the impact of trade liberalization on the poverty level in Pakistan. The findings reveal that reductions in import tariffs have increased Pakistan’s level of poverty. Our findings are robust and impervious to different poverty measures (i.e., headcount ratio, poverty gap, and squared poverty gap). Also, it was observed that lagged trade policies are associated with poverty in Pakistan. The rise in poverty may be attributed to the lower participation of the poor in external markets. It is recommended that policymakers enact policies that will encourage poor people to participate in external markets if they wish to benefit from trade liberalization.