Correlates of Poverty in Africa: Exploring the Roles of Remittances, Financial Development, and Natural Resources

Abstract

This study examined the correlates of poverty in Africa, exploring the roles of remittances, financial development and natural resources. Using the Human Development Index (HDI) as our measure of poverty and using 54 African countries, we specify these relationships using the System GMM estimator approach. The results show that in Africa as a whole, remittance reduce welfare directly. This supports arguments that, it is mostly the rich who can afford to migrate and thus remit more to their families than the poor and that, remittance received may be used in unproductive ventures. This was mostly seen in the North African (NA) region where remittance was consistently seen to reduce welfare. The direct impact of remittance in the Sub-Saharan (SSA) region was ambiguous depending on the specification of the model. However, remittance was seen to be effective in improving welfare when there is better or wider access to credit by the recipients of the remittances. The results for the continent also revealed that the impact of financial development on welfare was ambiguous. While M2 had no impact on welfare, credit to the private sector reduced welfare directly. This supports arguments that credit may tend to benefit the rich than the poor. This was especially so in SSA. Further analysis revealed that proper regulation of the financial sector that is inclusive of the poor could then lead to a positive impact of financial development on welfare. Further, credit was effective in improving welfare indirectly when it complements remittances. The continent as a whole has failed to utilise its natural resource wealth (minerals) to benefit the poor as it showed no impact on welfare. This supports arguments of African governments’ failure to harness their resource wealth to benefit the poor. This was particularly so for the SSA region while for the North African region, its oil rents was effective in improving the welfare of the people. On the controls, FDI was seen to improve welfare while foreign aid had no impact on welfare and even in some cases a negative impact. Stronger institutions were seen to consistently improve welfare. Development of infrastructure was seen to improve welfare. Our findings are robust in showing the application of our results to a variety of changes in specifications, definition of variable and data usage.