The problem of global poverty is the greatest moral challenge of our time that contrasts with the economic growth observed around the world in the last two decades. According to the recent UNDP report, more than one billion people currently live on less than a dollar a day and suffer from malnutrition. Over eight million people die each year because of lack of access to essential resources. The World Health Program states that every six seconds a child dies of hunger. Never before have nations throughout the world experienced such a level of hunger. Africa is one of the most impoverished and least developed regions of the world and has been the most affected by poverty.
Different strategies have been proposed to address the issue of poverty. Among these proposed strategies, Foreign Direct Investment (FDI) is presented as a financing method that could contribute to the reduction of poverty in developing countries. For the proponents of this thesis, FDI have the potential to promote economic growth and to significantly reduce the level of poverty in underdeveloped African countries.
Moreover, endogenous growth theories suggest that FDI is a mean of technology transfer. This transfer can take place directly through training and improve the local workforce. It may also happen by improving the efficiency of production through imitation and copying technologies, management methods and organization. Thus, FDI may favor technological progress, stimulate growth and reduce poverty levels.
Nevertheless, some people argue that FDI, which is one of the most significant illustrations of globalization, might not benefit the poor since Multinational Enterprises (MNEs) usually recruit skilled workers who are likely to be non-poor. Additionally, foreign supply may create foreclosure effects through competitive mechanisms. Competition between local firms and MNEs can have destructive effects on the local economies. In this case, FDI may out-compete local firms, increase unemployment and make local workers become poor or poor workers worse.
It is a fact that the activities of MNEs through FDI have not always stimulated growth and reduced the level of poverty. Nonetheless, many empirical studies show that through FDI, MNEs have repeatedly reduced unemployment rate, stimulated growth in developing countries and contributed to the reduction of the level of poverty. This leads us to say that FDI can indeed be regarded as a mode of financing that would facilitate development and contribute to poverty reduction. Yet, some preconditions must be fulfilled for FDI to stimulate growth and help in reducing poverty.
In recent years, theories of new institutional economics have taken a central place in development models. These theories emphasize the importance of institutions and investment climate in the process of economic growth and poverty reduction. Both factors refer to good governance in its three dimensions: political, economic and administrative.
Far from being a mere slogan, good governance is imperative for countries that are determined to ensure their economic growth and reduce poverty level. Indeed, good governance plays a key role in both the attraction of foreign capital (because there is competition between countries), in the distribution of national income and in the process of poverty reduction. The economic literature reveals that there is a strong relationship between institutional quality, economic growth and poverty level.
It is true that MNEs are not intended for the creation of a reliable institutional, economic and social framework and their mission is not to ensure an equitable distribution of income. The purpose of FDI is to generate profit. In fact, FDI may have strategies for market-seeking or rent-seeking and minimization of costs. However, it is important to note that the purpose that drives MNEs to seek profit is not inconsistent with the process of economic growth, sustainable development and poverty reduction. The point is to find a common ground to allow different parties to benefit.
In light of the foregoing, FDI can be considered as a funding strategy susceptible to lead to the reduction of poverty. Countries around the world are fiercely competing so as to attract more FDI, which is increasingly seen as an engine of growth and development. Asian countries, driven mainly by Chinese and Indian economies have managed to attract significant FDI inflows in recent years. Countries like Malaysia and South Korea have also succeeded in stimulating a strong and sustainable economic growth by attracting FDI and accompanying them with appropriate structural reforms. However, sources from 2009 show that Africa is lagging behind. FDI inflows attracted by the sub-regions are less than 4% of global flows.
To enjoy the benefits of FDI inflows, African countries must promote favorable political and socio-economic environment; in other words good governance. Moreover, the African Diaspora who is conducting business in America, Asia, Australia and Europe should direct FDI in Africa and encourage their partners to do the same to develop Africa in the fight against poverty.
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