Trade Openness, Inclusive Growth, And Inequality: Evidence From Jordan

Abstract

This study examines the impact of trade openness, poverty, and inequality on inclusive growth in developing economies, taking Jordan as an example. Using panel data from 1990 to 2015, it examines the relationship between trade openness policies, growth rates, poverty, and income inequality in various provinces of Jordan. The empirical analysis assesses whether trade openness policies and reforms have enhanced income equality, and reduced poverty across provinces. Further, within the framework of inclusive growth, the study explores how per capita income growth has changed after trade openness reform. Different econometric techniques, such as the generalized method of moments, fully modified ordinary least square, and dynamic ordinary least square, are employed to assess the relationship between trade openness, poverty, inequality, and inclusive growth. To determine the univariate properties of the series under investigation, two panel unit root tests, based on Levin, Lin and Chu (2002) and Hadri (2000), are implemented. Both aggregate and provincial level panel data are used. Furthermore, two panel cointegration tests are employed—Kao (1999) and Pedroni's (1999) residual cointegration-based tests. The empirical results show that trade openness has a positive and significant effect on inclusive growth, though it is substantially weakened by poverty and income inequality at the national and provincial levels. This inequality is the likely cause for the small contribution of trade openness to inclusive growth. The effect of trade on inclusive growth is significantly positive for all provinces, but the contribution of trade openness varies according to local and provincial factors. Consequently, this study recommends better policies for promoting sustainable and inclusive growth—policies that amend inequality and reduce poverty are more likely to enforce the positive effect of trade openness on inclusive growth. Finally, the study contributes to existing literature, and assists local and international policymakers in understanding the effect of trade openness on inclusive growth at the country and provincial levels. To the best of our knowledge, this is possibly the first attempt to analyze inclusive growth in Jordan.