Do Foreign Direct Investment and Trade Openness Influence Poverty in Pakistan? Evidence from NARDL Approach

Abstract

Poverty is considered a complex and multifaceted phenomenon that can be subjected to various socio-economic factors. This study aims at assessing the potential asymmetric influence of foreign direct investment (FDI) and trade openness on poverty in Pakistan from 1972 to 2018 by employing the Non-linear Autoregressive-Distributed Lag (NARDL) approach. The asymmetric ARDL bound testing technique confirms the long-run association among the selected variables. Furthermore, we deploy three proxies (Gini index, headcount ratio, and household consumption expenditures) to measure poverty for more robust results. The findings demonstrate that positive shocks from foreign direct investment and trade openness work as effective measures by reducing the harmful effects of poverty. Conversely, the vicious circle of poverty becomes severe due to the negative shocks in foreign direct investment in the case of the Gini index and household expenditures consumption as a proxy of poverty and the negative shocks in trade openness in the case of household expenditures consumption as a proxy of poverty. Moreover, the findings also disclose that population growth and health expenditures help in ameliorating the deleterious repercussions of poverty. For policymakers having an interest in asymmetric nexus among foreign direct investment, trade openness, and poverty, this study suggests the apropos implications.