Foreign capital inflows and poverty linkages in South Asia: Do the forms of capital inflows matter?

Abstract

The relationship between foreign direct investment and poverty reduction has received modest attention in the empirical literature. However, little is known about the relative significant impact of different forms of capital inflows on poverty reduction. This study attempts to investigate the impact of different forms of capital inflows (foreign direct inflows, portfolio equity and portfolio debt inflows) on poverty reduction in major South Asian economies during the post-reform period. The capital inflows-poverty nexus is explored using panel econometric methods robust to cross-sectional dependence. Our empirical results show that while portfolio equity inflows exert a favorable impact on poverty reduction, foreign direct inflows and debt inflows fail to influence poverty. The panel causality results demonstrate that portfolio equity inflows also support poverty alleviation via stimulating economic growth and trade openness. The findings of our study highlight the importance of considering the differential welfare impacts of different forms of capital inflows while implementing capital account liberalization.