Abstract
While previous studies have examined the impact of globalization on a myriad of welfare outcomes in developing countries, the effect of cross-national exchanges on extreme poverty remains unexplored. Poverty has declined substantially during this most recent wave of globalization, suggesting that cross-border relations may be partially responsible. We test this proposition by estimating the impact of foreign direct investment (FDI), trade openness, and the presence of international non-governmental organizations (INGOs) on poverty, measured at both the $1.25-a-day (extreme poverty) level, and the $2.50-a-day (moderate poverty) level, net of domestic conditions. Using a sample of 114 developing countries over five waves of data collected from 1991 to 2005, results from random effects models show that FDI exhibits a positive relationship with poverty at the $1.25 and $2.50 levels, while trade openness demonstrates a negative relationship with both extreme and moderate poverty. Once domestic conditions are controlled, INGO participation fails to demonstrate a significant effect on poverty at either level. Among domestic variables, economic growth and fertility rate affect poverty at the $1.25 level, while growth and domestic investment demonstrate an effect at the $2.50 level. These findings confirm that global interaction by poor countries influences poverty reduction within these countries, but in different directions.
Highlights
Over one billion people – around 25% of the world’s population – live in extreme poverty, surviving on $1.25 a day or less, with an additional two billion living in moderate poverty, on less than $2.50 a day (Chen and Ravallion 2007)
This research addresses three questions: Does a country’s level of interaction in the global environment via international economic and polity institutions affect the percentage of its population living in extreme poverty? Do the effects of global variables on poverty hold when controlling for domestic conditions within that country? Is there a difference in the effects of global interactions net of domestic conditions at the $1.25-a-day and $2.50-a-day levels?
The persistence of this effect net of other significant domestic variables demonstrates that gains in poverty reduction that can occur as a product of economic growth or educational development may be hampered by the presence of high levels of foreign direct investment (FDI)
Summary
Over one billion people – around 25% of the world’s population – live in extreme poverty, surviving on $1.25 a day or less, with an additional two billion living in moderate poverty, on less than $2.50 a day (Chen and Ravallion 2007). The percentage of the population living in extreme and moderate poverty has decreased since 1990 (Chen and Ravallion 2007; Ravallion, Chen, and Sangraula 2008), with particular gains in poverty reduction realized in many East and South Asian countries. These Asian successes have masked increased levels of poverty in many parts of Sub-Saharan Africa, Latin America, and the former Soviet countries of Eastern Europe (Sala-I-Martin 2006; Ravallion et al 2008). A competing view, developed by scholars in the dependency and world-systems schools, asserts that greater levels of globalization lead to negative economic and welfare outcomes as developing countries are exploited by those ahead of them on the development curve (Wallerstein 1974)
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