Troika of Trade Openness, Poverty and Income Inequality: Empirical Evidence from Lower and Middle Income Countries

Abstract

The current study investigates the relationship among trade openness, poverty and income inequality in the developing economies classified as lower and middle income countries. Kao and Fisher cointegration tests are employed to see the long-run equilibrium relationship among the variables. Panel cointegration regression is employed to calculate the magnitude of variables through FMOLS and DOLS techniques. The results demonstrate that interaction of these three variables differ for income groups of countries, however, trade openness and poverty increase income inequality in both groups. Similarly, income inequality decreases trade openness in both lower income and middle income groups of the economies. Trade openness increases poverty in lower income countries only. Poverty increases income inequality in lower income countries but in middle income countries it decreases trade openness. In the control variables the financial development has shown encouraging effect on trade openness in lower and middle income countries. GDP growth has shown positive impact on income inequality in lower income countries but negative impact in middle income countries. As trade openness has discoursing effect so the economies should carefully deal with the implications through proper policy framework.