The Impact of Trade Openness and Foreign Direct Investment on Human Development in Sub-Saharan African Countries: Evidence from Panel Data

Abstract

This study investigates the impact of trade openness and foreign direct investment on human development. The study is based on data from 29 sub-Saharan African countries from 2010 to 2019. We used panel cointegration and a panel vector error correction model for econometric analysis. Besides, the study also attempted to determine the direction of causality among the dependent and independent variables. The empirical result of the study indicates that both trade openness and foreign direct investment have a positive and significant effect on the human development level of sub-Saharan African regions in the long run. Per capita GDP also has a positive and significant impact on the region's long-run human development. In contrast, foreign aid has a negative effect on the human development of sub-Saharan African countries both in the long and short run, and inflation has a negative effect on the region's long-term human development despite its positive effect in the short run. Hence, this study recommends promoting additional foreign investment activities by implementing effective policy tools, creating conducive environments to attract substantial foreign direct investment to the region, and encouraging its foreign investors to participate more in welfare-building activities. Secondly, the research also recommended developing policies that reduce tariff and non-tariff barriers to trade and facilitate the exchange of goods and services between countries by increasing trade agreements. Thirdly, instead of focusing on meeting basic humanitarian needs, development partners should tie their aid into social sector development such as education and health to have a greater impact on human development.