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2009 AEC- Impact of FDI on Welfare and Regional Integration in Africa

10-Nov-2009

The current financial and economic crises have reanimated the debate on the importance of Foreign Direct Investment (FDI) for economic growth and poverty reduction in developing countries, especially in Africa. Many economists agree on the fact that the current financial crisis may have stronger negative repercussions on economic growth in Africa because of the potential reduction in foreign capital flows. Although, the literature bonds on papers that study the causal link and relationship between FDI and economic growth, the key basic assumption common to these papers is that economic growth is a good proxy for welfare. However, fewer of these papers have been devoted to Africa and its regional disparities on attracting FDI. This paper intends to re-examine the relationship between FDI flows and poverty reduction in Africa across regions. We use as key FDI and welfare variables, respectively, the FDI net inflows per capita and the UNDP Human Development Index (HDI). Our analyses confirm the positive significant relationship between FDI net inflows and poverty reduction in Africa. Nevertheless, this relationship is significantly different between African regions and between Africa and other parts of the World. For instance, whilst the relationship remains positive and significant for economic communities in Central and East Africa, it is non-significant in Northern and Southern Africa and ambiguous in Western Africa. Our results are robust to many model specifications.

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