Poverty alleviation in developing and underdeveloped countries. Do foreign capital and economic freedom matter?

    Qifei Han Affiliation
    ; Lifu Jin Affiliation
    ; Muhammad Aamir Shafique Khan Affiliation
    ; Prince Asare Vitenu-Sackey Affiliation
    ; Bojan Obrenovic Affiliation


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.
Published in Issue
Jan 20, 2023
Abstract Views
PDF Downloads
Creative Commons License

This work is licensed under a Creative Commons Attribution 4.0 International License.


Abduvaliev, M., & Bustillo, R. (2020). Impact of remittances on economic growth and poverty reduction amongst CIS countries. Post-Communist Economies, 32(4), 525–546.

Abiola, A. G., & Olofin, O. P. (2008). Foreign aid, food supply and poverty reduction in Nigeria – Examination of possible nexus (MPRA Paper No. 16263).

Aguilar, R. A. C., Fujs, T., Lakner, C., Nguyen, M. C., & Prydz, E. B. (2019). September 2019 global poverty update from the World Bank.

Ahmad, F., Draz, M. U., Su, L., Ozturk, I., Rauf, A., & Ali, S. (2019). Impact of FDI inflows on poverty reduction in the ASEAN and SAARC economies. Sustainability, 11(9), 2565.

Alam, I., & Quazi, R. (2003), Determinants of capital flight: An econometric case study of Bangladesh. International Review of Applied Economics, 17(1), 85–103.

Anetor, F. O., Esho, E., & Verhoef, G. (2020). The impact of FDI, foreign aid and trade on poverty reduction: Evidence from Sub-Saharan African countries. Cogent Economics & Finance, 8(1), 1737347.

Anon. (1998). Identifying the poor – A question of methodology. Businessline, 1.

Arndt, C., Jones, S., & Tarp, F. (2015). Assessing foreign aid’s long-run contribution to growth and development. World Development, 69, 6–18.

Arvin, B. M., Barillas, F., & Lew, B. (2002). Is democracy a component of donors’ foreign aid policies? In B. M. Arvin (Ed.), New perspectives on foreign aid and economic development (pp. 171–198). Praeger.

Asteriou, D. (2009). Foreign aid and economic growth: New evidence from a panel data approach for five South Asian countries. Journal of Policy Modeling, 31(1), 155–161.

Ben Slimane, M., Bourdon, M. H., & Zitouna, H. (2015). The role of sectoral FDI in promoting agricultural production and improving food security. International Economics, 145, 50–65.

Bernanke, B. (1986). Alternative explanations of the money-income correlation. Carnegie-Rochester Conference Series on Public Policy, 25, 49–99.

Brady, D. (2009). Structural theory and poverty. In Rich democracies, poor people: How politics explain poverty (pp. 145–164). Oxford University Press.

Chong, A., Gradstein, M., & Calderon, C. (2009). Can foreign aid reduce income inequality and poverty? Public Choice, 140, 59–84.

Das, A., & Sethi, N. (2019). Effect of FDI, remittances and foreign aid on economic growth: Empirical evidence from two major South Asian economies. Journal of Public Affairs, 20(3), e2043.

Dhahri, S., & Omri, A. (2020). Foreign capital towards SDGs 1 & 2 – Ending poverty and hunger: The role of agricultural production. Structural Change and Economic Dynamics, 53, 208–221.

Do, Q. A., Le, Q. H., Nguyen, T. D., Vu, V. A., Tran, L. H., & Nguyen, C. T. T. (2021). Spatial impact of FDI on poverty reduction in Vietnam. Journal of Risk and Financial Management, 14(7), 292.

Dollar, D., & Kraay, A. (2002). Growth is good for the poor. Journal of Economic Growth, 7(3), 195–225.

Easterly, W., & Pfutze, T. (2008). Where does the money go? Best and worst practices in foreign aid. The Journal of Economic Perspectives, 22(2), 29–52.

Engle, R. F., & Granger, C. J. (1987). Cointegration and error-correction: Representation, estimation and testing. Econometrica, 55(2), 251–276.

Fauzel, S., Seetanah, B., & Sannassee, R. V. (2016). A dynamic investigation of foreign direct investment and poverty reduction in Mauritius. Theoretical Economics Letters, 6(2), 289–303.

Fraser Institute. (2020). Economic freedom of the world report.

Gohou, G., & Soumaré, I. (2012). Does foreign direct investment reduce poverty in Africa and are there regional differences? World Development, 40, 75–95.

Granger, C. W. J. (1969). Investigating causal relations by econometric models and cross-spectral methods. Econometrica, 37(3), 424–438.

Guterres, A. (2018). World investment report 2018. Investment and new industrial policies (pp. 125–182). UNCTAD. United Nations Publication.

Gyeke-Dako, A., Agbloyor, E. K., Agoba, A. M., Turkson, F., & Abbey, E. (2022). Central Bank independence, inflation, and poverty in Africa. Journal of Emerging Market Finance, 21(2), 211–236.

Heritage Foundation. (2020). Economic freedom index.

Hunt, J. (2008). Aid and development. In Kingsbury, D., McKay, J., Hunt, J., Gillivray, M., & Clarke, M., International development: Issues and challenges (pp. 74–103). Bloomsbury Publishing.

Im, K. S., Pesaran, M. H., & Shin, Y. (2003). Testing for unit roots in heterogeneous panels. Journal of Econometrics, 115(1), 53–74.

Isaiah, B. (1967). Karl Marx: His life and environment. Times Book Division.

Jena, N. R., & Sethi, N. (2019). Foreign aid and economic growth in sub-Saharan Africa. African Journal of Economic and Management Studies, 11(1), 147–168.

Kaidi, N., Mensi, S., & Amor, M. B. (2019). Financial development, institutional quality and poverty reduction: Worldwide evidence. Social Indicators Research, 141(1), 131–156.

Kao, C., & Chiang, M. H. (2000). On the estimation and inference of a cointegrated regression in panel data. In B. H. Baltagi, T. B. Fomby, & R. Carter Hill (Eds.), Advances in Econometrics: Vol. 15. Nonstationary panels, panel cointegration, and dynamic panels (pp. 179–222). Emerald Group Publishing Limited.

Kaya, O., Kaya, I., & Gunter, L. (2013). Foreign aid and the quest for poverty reduction: Is aid to agriculture effective? Journal of Agricultural Economics, 64, 583–596.

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.

Kloeppel, A. (2013). Economic freedom essential to reduce poverty.,impact%20on%20reducing%20poverty%20than%20redistribution%20of%20wealth

Levin, A., Lin, C.-F., & Chu, C.-S. J. (2002). Unit root tests in panel data: Asymptotic and finite-sample properties. Journal of Econometrics, 108(1), 1–24.

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.

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.

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.

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.

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.

Nelson, C., & Plosser, C. (1982). Trends and random walks in macroeconomic time series: Some evidence and implications. Journal of Monetary Economics, 10(2), 130–162.

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.

Pedroni, P. (2001b). Purchasing power parity tests in cointegrated panels. Review of Economics and Statistics, 83(4), 727–731.

Pesaran, M. H. (2004). General diagnostic tests for cross section dependence in panels (Cambridge Working Papers in Economics No. 435). University of Cambridge.

Pesaran, M. H. (2007). A simple panel unit root test in the presence of cross-section dependence. Journal of Applied Econometrics, 22(2), 265–312.

Petrikova, I. (2015). Aid for food security: Does it work? International Journal of Development Issues, 14(1), 41–59.

Pineda, M. E. (2018). Theories of poverty. Profolus.,ideas%20called%20Marxism.%20...%203%20Restricted%20Opportunity%20Theory

Rao, D. T., Sethi N., Dash, D. P., & Bhujabal, P. (2020). Foreign aid, FDI and economic growth in South-East Asia and South Asia. Global Business Review.

Sahoo, K., & Sethi, N. (2017). Impact of foreign capital on economic development in India: An econometric investigation. Global Business Review, 18(3), 766–780.

Schiller, B. (1972). The economics of poverty and discrimination. Prentice-Halle.

Schultz, T. W. (1961). Investment in human capital. The American Economic Review, 51(1), 1–17.

Sethi, N., Bhujabal, P., Das, A., & Sucharita, S. (2019). Foreign aid and growth nexus: Empirical evidence from India and Sri Lanka. Economic Analysis and Policy, 64, 1–12.

Shahbaz, M., Zeshan, M., & Afza, T. (2012). Is energy consumption effective to spur economic growth in Pakistan? New evidence from bounds test to level relationships and Granger causality. Economic Modelling, 29(6), 2310–2319.

Sims, C. A. (1980). Macroeconomics and reality. Econometrica, 48(1), 1–49.

Sims, C. A. (1986). Are forecasting models usable for policy analysis? Federal Reserve Bank Minneapolis. Quarterly Review, 10(1), 1–16.

Singh, D., & Gal, Z. (2020). Economic freedom and its impact on foreign direct investment: Global overview. Review of Economic Perspectives, 20(1), 73–90.

Soumaré, I. (2015). Does FDI improve economic development in North African countries? Applied Economics, 47(51), 5510–5533.

Spencer, H. (1851). Social statics: Or the conditions essential to human happiness, and the first of them developed. John Chapman.

Sumner, A. (2020). Eradicating global poverty could be as simple as donating 0.1% of GDP – so why haven’t we done it yet? World Economic Forum.

Sumner, A., Gulrajani, N., Wickstead, M., & Glennie, J. (2020). A proposal for a new universal development commitment. Global Policy, 11(4), 478–485.

Sun, Q., Tong, W., & Yu, Q. (2002). Determinants of FDI across China. Journal of International Money and Finance, 21(1), 79–113.

Timothy, M., Khazamula, C. P., Anim Francis, A. K., Tichaona, P., Nelson, R. E., & Aluwani, M. (2015). Comparative impact of public expenditure on agricultural growth: Error correction model for South Africa and Zimbabwe. Journal of Human Ecology, 50(3), 245–251.

Topalli, M., Papavangjeli, M., Ivanaj, S., & Ferra, B. (2021). The impact of FDIs on poverty reduction in the Western Balkans. Economics, 15(1), 129–149.

World Bank. (2010). World development indicators.

World Bank. (2017). Cost of closing poverty gap. PovcalNet. World Development Indicators.

World Bank. (2020). Overview. Understanding poverty.

Wulfhorst, E. (2020). Bill Gates: COVID-19 has made inequality worse in every way possible. World Economic Forum.