Trade Openness has been one of the most important economic policies after moving from closed to an open economy. To which extent opening up to international trade affects extreme poor people is the key motivation for this dissertation. The poverty-trade openness relationship remains unclear in previous studies. Although considerable research has been devoted to the effect of trade liberalization on poverty, rather less attention has been paid to the impact of trade openness. This study examines whether potential key complementary factors, such as financial development, democratic governance, and technological capabilities maximize the gains from trade openness. Using a panel of transition countries over the period 1990-2013 and the Arellano – Bond system GMM estimator, the paper confirms the lack of importance of complementary factors. The robustness of the findings are examined in a number of ways.
Higher trade openness in its own is associated with an increase in extreme poverty. This result reflects that the costs of trade openness outweigh benefits for the poor. Besides, there is no significant estimated effect of trade openness on poverty reduction even if it is accompanied with well-developed financial sector and strong technological capabilities. The paper concludes that potential key complementarities do not appear in practice. Higher trade openness is associated with higher poverty when government becomes more democratic in transition countries, contrarily to what one might expect. The lack of complementarities can be explained by the limitations of potential benefits of trade openness on the poor. Greater openness to trade has negative consequences on poverty reduction and even these broad factors studied here are not enough to overrun the negative effect of trade on poverty reduction.