Poverty alleviation in developing and underdeveloped countries. Do foreign capital and economic freedom matter?
Abstract
Our study focuses on the role of foreign capital which includes foreign direct investment, foreign aid, and economic freedom in poverty alleviation in developing and underdeveloped countries by using panel data from 1995 to 2018 for 71 countries. In the pursuit of achieving our objective, we employed several econometric techniques such as dynamic ordinary least square, fully modified ordinary least square, dynamic fixed effect, and pooled mean group regression methods. Furthermore, we performed the Granger causality test, impulse response function, and variance decomposition analysis. In our long-run estimations, we found that foreign direct investment could significantly alleviate poverty but increases poverty in the short run. Instead, foreign aid plays no significant role in poverty alleviation. Moreover, economic growth and economic freedom are essential as our findings consistently exhibited that they play a crucial role in poverty alleviation. We also found bidirectional causality between poverty alleviation and population growth, while a unidirectional causal linkage was found from poverty alleviation to foreign aid. We conclude that policymakers should look at a new paradigm of developmental assistance, and governments should also create an aiding environment for foreign investment to support their growth plan.
First published online 13 December 2022
Keyword : foreign aid, underdeveloped countries, foreign direct investment, economic freedom, poverty alleviation, developing countries
How to Cite
Han, Q., Jin, L., Khan, M. A. S., Vitenu-Sackey, P. A., & Obrenovic, B. (2023). Poverty alleviation in developing and underdeveloped countries. Do foreign capital and economic freedom matter?. Technological and Economic Development of Economy, 29(1), 45–73. https://doi.org/10.3846/tede.2022.17691
This work is licensed under a Creative Commons Attribution 4.0 International License.
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Khan, M. B., Xie, H. B., & Saleem, H. (2019). Direct impact of inflow of foreign direct investment on poverty reduction in Pakistan: A bonds testing approach. Economic Research-Ekonomska Istraživanja, 32(1), 3647–3666. https://doi.org/10.1080/1331677X.2019.1670088
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Lewis, O. (1969). Culture of poverty. In D. P. Moynihan (Ed.), On understanding poverty: Perspectives from the social sciences. Basic Books.
Maddala, G. S., & Wu, S. (1999). A comparative study of unit root tests with panel data and a new simple test. Oxford Bulletin of Economics and statistics, 61(S1), 631–652. https://doi.org/10.1111/1468-0084.0610s1631
Magombeyi, M. T., & Odhiambo, N. M. (2018). FDI inflows and poverty reduction in Botswana: An empirical investigation. Cogent Economics and Finance, 6(1), 1–15. https://doi.org/10.1080/23322039.2018.1480302
Mahembe, E., & Odhiambo, N. M. (2019). Foreign aid, poverty and economic growth in developing countries: A dynamic panel data causality analysis. Cogent Economics & Finance, 7(1), 1626321. https://doi.org/10.1080/23322039.2019.1626321
Maruta, A. A., Banerjee, R., & Cavoli, T. (2020). Foreign aid, institutional quality and economic growth: Evidence from the developing world. Economic Modelling, 89, 444–463. https://doi.org/10.1016/j.econmod.2019.11.008
McGillivray, M. (2006). Aid allocation and fragile states (WIDER Discussion Paper, No. 2006/01). World Institute for Development Economic Research.
Moczadlo, R. (2013). Foreign direct investment: A mean for poverty reduction (pp. 51–56).
Mold, A. (2004). FDI and poverty reduction: A critical reappraisal of the arguments. Région et Développement (Special issue), 20, 91–122.
Murthy, N. R. V. (2007). Panel cointegration analysis: An empirical example. In B. Rao (Ed.), Cointegration for the applied economics (2nd ed.) (pp. 222–244). Palgrave Macmillan.
Ndikumana, L., & Verick, S. (2008). The linkages between FDI and domestic investment: Unravelling the developmental impact of foreign investment in sub-Saharan Africa. Development Policy Review, 26(6), 713–726. https://doi.org/10.1111/j.1467-7679.2008.00430.x
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Pedroni, P. (2001a). Fully-modified OLS for heterogeneous cointegration panel. In B. H. Baltagi,
T. B. Fomby, & R. Carter Hill (Eds.), Advances in Econometrics: Vol. 15. Nonstationary panels, panel cointegration, and dynamic panels (pp. 93–130). Emerald Group Publishing Limited. https://doi.org/10.1016/S0731-9053(00)15004-2
Pedroni, P. (2001b). Purchasing power parity tests in cointegrated panels. Review of Economics and Statistics, 83(4), 727–731. https://doi.org/10.1162/003465301753237803
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