Trade, Poverty and Employment: Empirical Evidence from Pakistan

This study investigates the development effects of trade liberalization in Pakistan over the period 1970-2006. The empirical analysis builds on four indicators of economic development that are per capita GDP, inequality, poverty and employment. Since these indicators have simultaneity problem, the model has been estimated with General Method of Moments (GMM) econometrics technique. The results show that the effect of trade liberalization on per capita GDP is insignificant though sign is positive while its effect on employment is negative. Although trade theory predicts that trade openness is the potential source of economic growth that in turn spills over its positive effects on labor market but this study reveals jobless-openness phenomenon in Pakistan. It is also found that trade liberalization has increased income inequalities because it creates winners and losers simultaneously and the net welfare impact is negative. As far as eradication of poverty is concerned, it has been found that trade accentuates, not ameliorates, and that it intensifies, not diminishes, poverty in case of Pakistan. The role of human capital emerged as a most favorable factor in enhancing PGDP and eradication of poverty. The central message of this study is that trade liberalization is not pro development in case of Pakistan and investment in human capital is the effective tool for development and fight against poverty.