Trade Liberalisation and Poverty in South Asia

Abstract

The relationship between trade and poverty has long been debated in academic and policy circles. The purpose of this chapter is to contribute to this debate through an in-depth study of the experience of Sri Lanka, the first country in South Asia to break away from the protectionist past by embarking on a decisive process of economic opening in 1977. During the first decade after independence in 1948, Sri Lanka continued with a liberal trade regime, until growing balance of payments problems induced a policy shift towards protectionist import substitution policies from the early 1960s. By the mid-1970s the Sri Lankan economy had become one of the most inwardoriented and regulated outside the group of centrally planned economies. In 1977, Sri Lanka responded to the dismal economic outcome of the closedeconomy era by embarking on an extensive economic liberalisation process, becoming the first country in the South Asian region to do so. Despite major macroeconomic problems and political turmoil, market-oriented reforms have been sustained over the ensuing years. Sri Lanka is now classified as one of the few developing countries outside East Asia that have achieved a clear policy shift from the entrenched import-substitution era. This policy transition has brought about notable structural changes in the economy (Athukorala and Rajapatirana 2000; World Bank 2005b; Kelegama 2006). However, the impact of liberalisation reforms on the incidence of poverty and poverty reduction has not yet been systematically studied. Therefore, the main objective of this chapter is to systematically examine the link between trade liberalisation and poverty reduction through employment channels. The chapter is arranged as follows: Section 2 provides an overview of trade policy shifts and the role of trade in the economy. Section 3 surveys the incidence and patterns of poverty. Section 4 examines key channels through which trade policy impacts on poverty. Section 5 examines some cross-cutting issues. Section 6 reports the results of an econometric analysis undertaken to examine the determinant of poverty at the household level with emphasis on the impact of trade policy. The chapter ends with a summary of key findings and policy inferences.