Trade Liberalization and Poverty Reduction

In a study, Patia Topolova tested whether openness had adversely impacted poverty and found this to be the case in rural India. This chapter revisits the openness-poverty relationship in India and reverses the Topalova finding. It points to several problems with the Topalova study and after correcting for them and extends the analysis to the latest available expenditure survey of the National Sample Survey organization. The authors conclude that of the overall reduction in poverty during 1987-2004, 38 percent can be attributed to change in the exposure to foreign trade. Since the authors control for time-fixed effects and poverty has declined over time, they are able to infer that the greater exposure of the labor force to foreign competition speeded up poverty reduction. The magnitude of impact and its statistical significance vary across rural and urban regions and the two regions taken together, as also across tariff and nontariff measures used, but in no case do the authors find increased openness to result in increased poverty.