The Role of International Trade in Poverty Reduction: A Case Study of India

Abstract

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Although it is commonly believed that higher exports results in higher GDP, theoretically, the impact of international trade on poverty reduction is ambiguous. To resolve this ambiguity, this paper aims to examine the impact of India’s exports intensity on poverty outcomes. With poverty as a focal point, the international trade in India is examined together with a wide range of macro variables in order to trace down the poverty-reducing impact of trade. Using a case study approach, time series data on India is taken for the post-globalization period of 1990–2012. The key dependent variable is poverty, which is measured as poverty headcount as wells as poverty gap. The model is regressed using classical Ordinary Least Squares (OLS) as well as system Generalized Method of Moments (GMM) estimator in order to control endogeneity and reverse causality in the model. The results using basic OLS regression state that poverty reduces as exports increases. When the model is tested using the GMM approach, the empirical results do not show any significant relationship between poverty and exports for the basic model. However, when interaction terms of control variables are brought in the model, the results change. The results thus suggest that globalized trade of goods may be an engine for poverty reduction in India, when it is complemented with the right domestic policies.

Keywords: Trade, Poverty, Inequality, Economic Growth

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