FDI and poverty reduction in Botswana: A multivariate causality test

Abstract

In this study, the causal relationship between foreign direct investment (FDI) inflows and poverty is investigated using Botswana as a case study, 1980 to 2017, using a trivariate causality framework. The main objective of this study is to establish the direction of causality between FDI and poverty. Three proxies of poverty have been used: 1) household consumption expenditures; 2) infant mortality rate and 3) life expectancy. The study uses the ARDL-bounds testing approach and ECM-based Granger-causality model in a stepwise fashion to examine this linkage. The empirical results show that the causal relationship between FDI and poverty reduction in Botswana may be sensitive to the proxy used to measure the level of poverty reduction. When infant mortality rate and life expectancy are used as proxies for poverty reduction, a unidirectional causality from FDI to poverty is found to prevail both in the short and in the long run. However, when household consumption expenditure is used as a proxy, no causality is found, irrespective of whether the causality test is conducted in the short or in the long run. On the whole, the study found that Botswana could benefit from FDI inflows in the fight against poverty.