Trade Openness, Structural Transformation, and Poverty Reduction: Empirical Evidence from Africa

This paper examines the poverty reduction effects of trade openness and structural transformation in Africa. The study uses a panel data covering the period from 1981 to 2010 and constituting 43 African countries. Using System generalized methods of moments, findings show that trade openness initially exacerbates poverty by about 1.3% and after one period lag, it reduces it by about 1.2%. Structural transformation lagged two periods, on the other hand, led to poverty reduction of about 3%. Further, the results show that infrastructure development and fostering the participation of the private sector in the continent greatly contribute towards poverty reduction. The study also confirms the famous 'Bhagwati hypothesis' that growth is good for the poor, as an increase in GDP per capita found to have a proportionate reduction in poverty levels (0.7 to 1%). The study also investigated the causality between trade openness and structural transformation, and the results demonstrated that there is a bi-causality relationship between the two variables. As a robustness check, the results were validated using fixed effects, random effects, and panel vector auto regression (PVAR) models. Thus, the implication is that despite the initial costs inflicted on the poor, African economies need to focus on reforms that help them achieve structural transformation in its broader sense and boost international trade.