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Developing countries have greatly benefited from globalization, coinciding with economic growth and structural transformation. The standard trade theory postulates that trade openness contributes to poverty alleviation directly by changing factor proportions of production and indirectly through the trickle-down effect of growth. Existing multicountry studies using the trade-to-gross-domestic-product ratio to measure openness often fail to find a direct effect of openness on poverty over and above the growth–poverty nexus. This paper is motivated by the concern that the failure of these studies to detect the effectiveness of the factor proportion channel may be due to limitations of the commonly used measure of trade openness: the trade-to-gross-domestic-product ratio. Using a newly constructed index of trade openness, which I dub “the price convergence index,” I find a significant direct effect of openness on poverty reduction. The results also suggest that the impact of growth on poverty is greater for economies with more open trade regimes.

The existing literature has highlighted the positive effect of foreign direct investment (FDI) on export upgrading and associated terms of trade in developing economies. However, the FDI effect has been found to be negative in South Asia. In this paper, we elaborate on the South Asia-specific effect by emphasizing the role of human capital in the positive link between FDI and terms of trade. We argue that education levels in South Asia have lagged behind those in East Asia and other developing regions. This has resulted in a world market integration strategy in South Asia that specializes in less skills-intensive products and generates associated FDI flows. We demonstrate these patterns for two South Asian economies (Bangladesh and Pakistan) and two East Asian economies (Malaysia and Thailand) for which historical breakdowns of FDI data are available.