Distributional Effects of FDI: How the Interaction of FDI and Economic Policy Affects Poor Households in Bolivia

Abstract

This paper provides a computable general equilibrium analysis of the medium to long-run impact of FDI inflows on poverty and income distribution in Bolivia. The CGE analysis addresses several important transmission channels which have been neglected in the empirical literature by (i) investigating the impact of FDI inflows on incomes of urban and rural households; (ii) taking into account informal activities; and (iii) differentiating between various segments of the urban workforce, whereas previous studies are typically confined to the dichotomy between white-collar and blue-collar workers in manufacturing industries. The simulation results suggest that FDI inflows add to Bolivia's investment ratio, enhance economic growth, and reduce poverty. However, the income distribution typically becomes more unequal. In particular, FDI widens income disparities between urban and rural areas Our results point to two levers through which the Bolivian government may promote growthenhancing and poverty-alleviating effects of FDI. First, it seems important to overcome labor market segmentation. Second, complementary public investment in infrastructure may help remove bottlenecks in the absorptive capacity of the economy that tend to limit productive employment of the poor. Yet, simulated policy reforms or alternative productivity scenarios are hardly effective in reducing the divide between urban and rural areas.

FDI and Income Inequality—Evidence from Latin American Economies

“…In particular, our country-specific findings are in line with those of Nunnenkamp et al (2007) for Bolivia as well as Aitken et al (1996), Hanson (1997), andHanson (2003) for Mexico. According to Table 7, inequality in Bolivia appears to react most strongly to the presence of foreign enterprises.…”

Examining the determinants of inward FDI: Evidence from Norway

“…Therefore, the availability of labour resources acts as an encouragement for FDI inflow. The positive effect of a high unemployment rate on FDI inflow has also been supported by Friedman et al (1992); Nunnenkamp et al (2007) and Chidlow et al (2009).…”

Distributional effects of foreign direct investment on poverty: the case of Vietnam

“…The role of FDI regarding poverty can be classified into indirect and direct effects (Aaron, 1999;Andrew, 2004;Hemmer and Phuong Hoa, 2005;Hung, 2005; N.Q. Ngo Nunnenkamp et al, 2007;Gohou and Soumaré, 2012). The indirect roles of FDI, also called growth-enhancing effects, work through the mediation of growth, with the assumption that growth is good for the poor (Dollar and Kraay, 2001).…”