A Dynamic Investigation of Foreign Direct Investment and Poverty Reduction in Mauritius

Abstract

The focus of this study is to investigate the extent to which FDI flowing in Mauritius reduces poverty or increases welfare by using time series data for the period 1980-2013. This study methodologically departs from the existing ones as it uses a dynamic vector autoregressive model that ensures the dynamic behaviour of the time series under consideration is properly captured, while simultaneously catering for endogeneity and causality issues. Any feedback and indirect effects which might be present will also be detected within the VAR/VECM framework. The results show that indeed FDI has contributed to poverty reduction; albeit the magnitude of the coefficient is relatively smaller in the short run as compared to the long run. Also a uni-directional causality is observed between FDI and poverty reduction. Furthermore, the results confirm the fact that FDI reduces poverty through the employment channel. Other important factors contributing to a reduction in poverty according to this study is an increase in government spending as well as trade openness. Whereas, higher debt is observed to increase the level of poverty.