This paper revisits the relationship between trade and poverty in developing countries using panel data and advanced estimation techniques that account for omitted variable bias. It finds strong evidence that higher trade dependence (measured by a greater trade-to-GDP ratio) reduces poverty in developing countries, but this effect is not statistically significant in Africa.
Additionally, the study discovers that trade reforms (measured by changes in tariffs) do not have a systematic effect on poverty in either developing countries or Africa. When interaction effects are considered, the results indicate that while trade is a necessary condition for poverty reduction, it is not sufficient on its own. Country-specific characteristics significantly influence whether the potential benefits of trade can be realized in any given context.
Focus of the Paper
Although the literature on the trade-poverty relationship is extensive and continuously evolving, it has a significant limitation: existing studies often rely on ad-hoc and subjective approaches to model selection. This approach creates a substantial risk of omitted variable bias, hindering a causal interpretation of the regression results.
Our paper addresses this limitation by employing a post-double-selection estimation method that allows for principled covariate selection, thereby reducing the risk of omitted variable bias in model selection.
A second contribution of our paper is that, unlike previous studies, it accommodates a broad range of interaction effects between trade openness and control variables, rather than limiting the analysis to a few variables chosen by the researcher.
Finally, we account for heterogeneity in the impact of trade openness by using an aggregate measure (the trade-to-GDP ratio), examining measures of import and export exposure, and including a wide array of tariff indicators.
Organization of the Paper
- Section 2 presents specific facts about trade and poverty in developing countries.
- Section 3 outlines the empirical framework and the data used in the study.
- Section 4 discusses the regression results.
- Section 5 includes robustness checks.
- The final section offers concluding remarks.
Disclaimer: The findings, interpretations and conclusions expressed herein are those of the author(s) and do not necessarily reflect the views of the United Nations or its officials or Member States. The designations employed and the presentation of material on any map in this work do not imply the expression of any opinion whatsoever on the part of the United Nations concerning the legal status of any country, territory, city, or area or of its authorities, or concerning the delimitation of its frontiers and boundaries. This paper has not been formally edited.