Does good governance and trade openness contribute to poverty reduction in BRICS? An empirical analysis

Abstract

Institutions are critical economic pillars that influence not only growth but also the distributional outcomes that affect the speed of poverty reduction. High variability in the extent of policy and trade benefits creates large disparities and makes the role of institutions more pervasive. In this light, this study aims to investigate the impact of governance and trade openness on poverty reduction in BRICS countries from 1991 to 2019. For this purpose, the study uses the dynamic common correlated effect method with a recursive mean adjustment approach to analyse the relationship among the heterogeneous panel variables with cross-sectional dependence. The system generalised method of moments (GMM) instrument variable approach confirms the consistency of the results. Further, the study applies the Dumitrescu–Hurlin causality test to determine the causal relationship between variables. The findings show that trade openness and economic growth effectively reduce poverty in BRICS. Trade benefits the poor by raising their income. However, the negative effects of governance on poverty reduction dilute these benefits through a weakened trickle-down effect. In addition, income inequality creates a negative impact on poverty reduction, which widens the poverty gap in the BRICS countries even further. The consistency of the results is confirmed by the system GMM instrument variable approach. As a result, it is recommended to ensure better regulatory practices that improve the quality of governance and address any structural inequalities directly.