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Capital inflows, financial development and poverty reduction in Nigeria

Fagbemi, Fisayo and Olufolahan, Toyin (2019): Capital inflows, financial development and poverty reduction in Nigeria. Published in: American Journal of Research No. 3-4, March-April 2019 (April 2019): pp. 53-78.

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Abstract

This paper examines the joint effect of capital inflows and financial development on poverty reduction in Nigeria between 1980 and 2017 using ARDL bound test and Granger causality test based on Vector Error Correction Model (VECM). As capital inflows involved three subcategories (FDI, portfolio investment and remittances), the paper assesses all three in turn. Empirical results indicate that the interaction term of capital inflows and financial development reflects a significant decrease in poverty headcount in the long run as well as in the short run, underlining that the indirect role of both capital inflows and financial deepening in poverty-reducing channel is paramount. The findings underscore the view that capital inflows and financial development could jointly strengthen the means to reinforce incentive and inclusive structures for the extension of credit to innovative small enterprises or individuals, and thereby accentuating poverty-reducing effect. Further evidence reveals that the causal direction between capital inflows, financial development and poverty alleviation is unidirectional, which runs from both foreign capital inflows and financial deepening to poverty level. Hence, the study suggests that ensuring that financial sector development coincides with rising inclusiveness and rates of capital inflows is critical for improved performance and poverty alleviation drive in Nigeria.

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