The Effects of Global Interaction on Poverty in Developing Countries, 1991-2005

Abstract

While previous studies have examined the impact of globalization on a myriad of welfare outcomes in developing countries, the effect of cross-national exchanges on extreme poverty remains unexplored. Poverty has declined substantially during this most recent wave of globalization, suggesting that cross-border relations may be partially responsible. We test this proposition by estimating the impact of foreign direct investment (FDI), trade openness, and the presence of international non-governmental organizations (INGOs) on poverty, measured at both the $1.25-a-day (extreme poverty) level, and the $2.50-a-day (moderate poverty) level, net of domestic conditions. Using a sample of 114 developing countries over five waves of data collected from 1991 to 2005, results from random effects models show that FDI exhibits a positive relationship with poverty at the $1.25 and $2.50 levels, while trade openness demonstrates a negative relationship with both extreme and moderate poverty. Once domestic conditions are controlled, INGO participation fails to demonstrate a significant effect on poverty at either level. Among domestic variables, economic growth and fertility rate affect poverty at the $1.25 level, while growth and domestic investment demonstrate an effect at the $2.50 level. These findings confirm that global interaction by poor countries influences poverty reduction within these countries, but in different directions.