Foreign Direct Investment and the Poverty Reduction Nexus in Tanzania *

Abstract

In this study, the causality between poverty reduction and foreign direct investment (FDI) inflows in Tanzania using time-series data from 1980 to 2014 is investigated. The study attempts to answer one question. Does FDI drive poverty reduction in Tanzania? To answer this question, autoregressive distributed lag (ARDL)-bounds testing approach to cointegration and error correction model (ECM)-based causality model within a trivariate setting was used. The study employs three poverty reduction measures to ensure robustness, namely, household consumption expenditure (pov1), infant mortality rate (pov2), and life expectancy (pov3). The results show that there is a distinct unidirectional causality from poverty reduction to FDI in the short run and in the long run when poverty reduction is measured by household consumption expenditure and life expectancy. A unidirectional causality is confirmed from FDI to poverty reduction in the short run, and no causality is recorded in the long run when infant mortality rate is used as a poverty reduction proxy. Based on these findings, it can be concluded that the causal relationship between FDI and poverty reduction in Tanzania is sensitive to the proxy used to measure the level of poverty and to the time span considered.