5 This lack of any clear correlation between openness measures and poverty indicators in aggregate could be because there is too much heterogeneity in the effects of trade reforms on the poor. Since poor workers in import-competing sectors lose from reforms, while poor workers in export-oriented sectors gain, it could be that in the aggregate these different effects cancel each other. Similarly, cross-country studies have tended to favor larger samples and focus on developing countries at best. While using a broader sample increases the degrees of freedom, it may also introduce unwanted heterogeneity if factors explaining poverty differ between country groups.

Another possibility suggested by Winters and McKay (2004) is that trade liberalization almost certainly requires combination with other appropriate policies. The sort of policies envisaged would be those that encourage investment, allow effective conflict resolution, and promote human-capital accumulation. Linear regression models would not capture such complementary dynamics. A number of recent studies emphasize the importance of complementary policies in determining the benefits or costs of trade reforms for developing countries. For example, Bolaky and Freund (2008) show that trade reforms actually lead to income losses in highly regulated economies. Excessive regulations restrict growth because resources are prevented from moving into the most productive sectors and to the most efficient firms within sectors. Similarly, Sindzingre (2005) suggests that institutions could help explain the heterogeneity in the globalization-poverty relationship. She argues that domestic political structures and institutions (such as oligarchic or predatory regimes) may prevent the poor from benefiting from globalization.

More recently, Haltiwanger (2011) and McMillan and Verduzco (2011) argue that benefits of trade depend to a large extent on national institutional settings. The process of tradeinduced growth entails a continual reallocation of resources away from less productive activities to more productive ones. Many things can go wrong in this reallocative process if economies are distorted, for instance if transportation or communication infrastructure are not sufficiently developed, if ineffective (or non-existent) competition policy does not prevent large firms from abusing their market power, or if financial markets are not sufficiently developed to fund new and expanding businesses. In such distorted economic environments, there is little chance that the benefits of greater trade openness materialize and – in extreme cases – a “de-coupling” may take place, i.e. cases in which policy reforms induce downsizing and exit of some firms but do not lead to the expansion of other firms.

Similarly, reviewing the new wave of research under the International Collaborative Initiative on Trade and Employment, Newfarmer and Sztajerowska (2012) conclude that the benefits of trade do not accrue automatically, and policies that complement trade opening are needed. Policies that embed trade reforms in a context of macroeconomic stability and a sound investment climate on the one hand and, on the other, protection for