Financial Development-Poverty Reduction Nexus In Brics: A Panel Data Analysis Approach

This paper’s objectives were two, namely: (1) investigating the impact of financial development on poverty alleviation (proxied by life expectancy) and (2) exploring whether the complementarity between financial development and foreign direct investment (FDI) enhanced poverty reduction in BRICS (Brazil, Russia, India, China, South Africa) countries. The study used panel data analysis estimation techniques, namely pooled ordinary least squares (OLS), fixed effects and fully modified ordinary least squares (FMOLS) with data ranging from 1994 to 2013. The existing theoretical literature shows that financial development can have either a positive or negative impact on poverty alleviation. On the other hand, existing empirical literature produced results which are quite divergent, conflicting and diverse, namely: (1) financial development has a positive effect on poverty reduction, (2) financial development has a negative influence on poverty alleviation, (3) financial development and poverty reduction affected each other and (4) there is a negligible influence of financial development on poverty reduction. Although results show that the impact of financial development and FDI on poverty reduction is mixed, it is quite evident in majority of cases that the complementarity between financial development and FDI enhanced poverty reduction. The policy implication is that BRICS countries should implement policies designed at improving both financial development and FDI inflows in order to be able to reduce poverty.