The impact of foreign direct investment, foreign aid and trade on poverty reduction: Evidence from Sub-Saharan African countries

Abstract

Despite postulations on the effects of foreign direct investment (FDI), foreign aid, and trade on growth, empirical evidence from extant research has been mixed. The focus of recent research has shifted from the growth effects of these international flows to their poverty reduction effects. However, results have also been mixed. Most studies have examined the empirical evidence of these flows separately and have mostly conducted single country studies. In this study, we use data from twenty-nine countries in Sub-Saharan Africa between the period 1990–2017 to analyze the effects of FDI, trade, and foreign aid on poverty reduction in a single model using the Feasible Generalized Least Square (FGLS) technique. Our results show that FDI and foreign aid have a negative effect on poverty reduction in the countries studied. These results suggest that the level of FDI required to alleviate poverty has not been reached, and foreign aid have not been properly channeled. However, the results show that trade has a positive and significant impact on poverty reduction, especially in low-income countries. We conclude with policy recommendations.

Keywords:

• foreign direct investment
• foreign aid
• trade
• poverty reduction
• SSA
• FGLS

JEL Classification:

• F21
• F35
• F10
• I30

PUBLIC INTEREST STATEMENT

Foreign Direct Investment (FDI), foreign aid, and foreign trade are different types of international flows received by countries. Past research has argued that these international flows can help improve economic growth. More recently, it has also been argued that these international flows can help in poverty reduction. In this study, we use sample data on 29 Sub-Sahara African countries (SSA) for 1990 to 2017 to explore the impact of these international flows on poverty reduction in SSA. From our results, only foreign trade had an overall positive impact on poverty reduction. Further analysis revealed that foreign trade only reduced poverty in low-income countries but not in middle-income and high-income countries; FDI and foreign aid still had no impact on poverty reduction. These findings suggest that FDI and foreign aid have not been appropriately channeled into sectors that would have a positive impact on poverty reduction in SSA countries.

Notes

1. The countries used for the study include Benin, Botswana, Burundi, Cameroun, Central African Republic, Congo, Cote d’Ivoire, Gabon, Gambia, Ghana, Guinea, Kenya, Malawi, Mali, Mauritania, Mauritius, Mozambique, Namibia, Niger, Nigeria, Rwanda, Senegal, South-Africa, Sudan, Tanzania, Togo, Uganda, Zambia, and Zimbabwe.

2. Low-income countries: Benin, Burundi, Central Africa Republic, Gambia, Guinea, Malawi, Mali, Mozambique, Niger, Rwanda, Tanzania, Togo, and Uganda. Lower-middle income countries: Cameroun, Congo Republic, Cote d’Ivoire, Ghana, Kenya, Mauritania, Nigeria, Senegal, Sudan, Zambia, Zimbabwe. Upper-middle income countries: Botswana, Gabon, Mauritius, Namibia, South-Africa.

Additional information

Funding

The authors received no direct funding for this research.

Notes on contributors

Friday Osemenshan Anetor

Friday Anetor is a lecturer at the Pan-Atlantic University, Lagos, Nigeria. He specializes in International Economics and Quantitative Economics, such as Applied Statistics and Mathematical Economics. He has several publications in reputable journals.

Ebes Esho

Ebes Esho is a post-doctoral research fellow at the University of Johannesburg, South Africa. Her research has an overarching focus on business and management in Africa, and span across international business and strategy.

Grietjie Verhoef

Professor Grietjie Verhoef is a professor of Accounting, Economic and Business History at University of Johannesburg, South Africa. She has published several articles in international journals and edited books. Her research spans the development of financial institutions, voluntary savings organizations, colonial economic growth, and the development of the insurance industry in Africa. Her latest book is: The power of your life. The Sanlam century of insurance empowerment, 1918–2018. Oxford: Oxford University Press.