Does Foreign Direct Investment Reduce Poverty in ECOWAS? Evidence from Panel Data Analysis

Abstract

The study examines the effect of FDI on poverty in ECOWAS countries between 1986-2023. The study used the Panel Autoregressive Distributed Lag (PARDL) model for both long-run and short-run relations between variables. Overall, the long-run results suggest that labour force participation, FDI accumulation, institutional quality, and employment are crucial for poverty reduction, often helping to lower the rural and urban poverty headcount ratio in SSA. On the other hand, capital formation and government spending are found to have a positive and statistically significant association with poverty, suggesting that these resources are not being effectively deployed in the local economy and that no adequate integrative mechanism exists through which productivity gains can diffuse broadly to improve living standards for all groups in society. The error correction term is negative and statistically significant, further validating a relatively fast speed of adjustment toward long-run equilibrium. FDI has a positive and statistically significant impact on poverty in the short run, but its long-run benefits require time to materialise, a phenomenon likely attributable to initial adjustment costs or structural rigidities. In the short run, other variables including government expenditure and employment do not have statistically significant effects on poverty. These results highlight the importance of stronger institutional frameworks, employment generation-oriented policies, and better-managed FDI inflows so that their benefits translate into concrete and sustained poverty alleviation across ECOWAS.