Fiscal policy and poverty reduction in sub-Saharan Africa: is the relationship influenced by the business cycle?

Abstract

PurposeThe study examined the effect of fiscal policy on poverty in sub-Saharan Africa (SSA) while accounting asymmetric (captured by economic downturns) and spillover effects.Design/methodology/approachThe study used a fixed effect (within regression) IV model to account for country-specific characteristics. The study also adopts a cross-sectional and spatial dependence-consistent model to account for the potential cross-sectional and temporal dependence in panel data modeling.FindingsThe study discovered that the effect of fiscal policy on poverty is dependent on the state of the economy. Specifically, we find that fiscal policy helps to reduce the level of poverty during an economic downturn, more than at any other time. More specifically, the findings indicate that the fiscal policy lowers the rate of poverty in SSA, following macroeconomic shocks (captured by the COVID-19 epidemic, the Global Financial Crisis, and the commodity terms of trade shocks). Our findings suggest that fiscal policy is an important policy tool to mitigate the effects of macroeconomic shocks in SSA. Further, the findings also demonstrate that there is a spillover effect of poverty in the region. This implies coordinated, constructive actions by the regional governments can help to lessen the detrimental effects of extreme poverty.Originality/valueThe study examined the effectiveness of fiscal policy to reduce poverty in the event of an economic downturn.