Empirical investigation of the effects of trade openness on poverty in South Africa and Lesotho

Abstract

The study examined the impact of trade openness on poverty in South Africa and Lesotho separately. The study used the autoregressive distributed lag (ARDL) bounds testing approach with annual data from 1980 to 2019. The study used the consumption-based measure of poverty, measured by consumption expenditure as a target variable of investigation. The study further employed three measures of trade openness, which are sum of trade to GDP, the ratio of exports to GDP, and imports to GDP ratio. The use of three proxies of trade openness allowed the study to check the robustness of the results and to examine the individual effects of exports and imports on poverty. As a contribution to existing literature, the study included a dummy variable for Lesotho to capture the effect of the structural break that occurred from 1990 resulting from retrenchments of Lesotho nationals from South African mines. The overarching aim of the study is to contribute to the ongoing literature on the extent in which trade openness impacts poverty in South Africa and Lesotho, which are members of the Southern African Customs Union (SACU). The pursuit of the present study, among other things, is motivated by SACU’s mandate highlighting the need to foster sustainable economic growth and development among member countries. Such a mandate is underpinned by a focus on generating employment opportunities and alleviating poverty in the SACU area. The study provides a comparison of how the impact of trade openness on poverty differs between South Africa which is an upper-middle income country and Lesotho which is a lower middle-income country. The comparison also considers if the results differ with different proxies of trade openness. The results show that for South Africa, in the long run and short run, trade openness does not lead to poverty reduction, irrespective of the proxy used to measure trade openness. Instead, in the long run, trade openness, proxied by the sum of trade to GDP and the ratio of imports to GDP, has a negative effect on poverty. In the short run, the sum of trade/GDP and exports/GDP are both insignificant to poverty while imports/GDP have a negative impact on poverty. For Lesotho, in the long run, sum of trade/GDP is insignificant to poverty while exports/GDP and imports/GDP have a positive effect on poverty. In the short run, the sum of trade/GDP has a positive impact on poverty, exports/GDP have a negative effect on poverty while imports/GDP are insignificant to poverty. The coefficient of the dummy variable is negative and significant in the short run, confirming the evidence of a structural break. These results suggest that policies adopted in South Africa have not brought significant poverty alleviation. This could be an indication of a situation where policies implemented over the past tend to prevent the poor from benefiting from the gains of trade openness. Based on the findings, the main recommendation for South Africa is that policymakers could review the policies in place and understand the unintended consequences of each policy on poverty reduction. Policymakers in Lesotho could ensure that they adopt policies that benefit the poor directly. If well implemented, such policies could provide relief that will protect the poor from short term adjustment costs arising from trade openness. In view of the overall findings, the current study, therefore, recommends that there be a critical review of policies to assess unintended consequences of trade openness that may lead to increased poverty and ensure alignment of policies to overall poverty reduction objectives. In this context, the study recommends that the mechanism of distributing gains from trade be reviewed to ensure that gains from trade openness, such that the returns from trade, including funds from SACU revenue, are invested towards poverty reduction