Energy Poverty, Trade Openness and Foreign Direct Investment: Evidence from Latin America
Abstract
Energy poverty remains a persistent challenge in many developing economies, constraining socioeconomic development and diminishing quality of life. This study examines the impact of foreign direct investment (FDI) and trade openness (TO) on energy poverty reduction in seven Latin American countries—Belize, Bolivia, Honduras, Mexico, Nicaragua, Panama, and Peru—over the period 1992–2024. Employing a Panel Vector Autoregression (PVAR) framework, the analysis reveals that both FDI and trade openness significantly enhance electricity access, which serves as a key proxy for energy poverty. Specifically, a 1% increase in trade openness leads to a 0.083% improvement in electricity access, while FDI exerts a substantially stronger effect, increasing access by 2.325%. Economic growth also contributes to energy poverty alleviation, albeit with a more modest elasticity of 0.195%.
Granger causality tests indicate bidirectional causal relationships between trade openness and energy poverty, as well as between energy poverty and FDI inflows, suggesting the presence of a virtuous cycle whereby improved energy access fosters deeper economic integration. Additional feedback effects are identified between trade openness and economic growth, and between FDI and economic growth. Moreover, trade openness is found to directly stimulate FDI inflows, while economic growth unidirectionally reduces energy poverty. The robustness of these findings is confirmed through FMOLS and DOLS estimations.
Overall, the results highlight the critical role of globalization in alleviating energy poverty in Latin America. Policy implications emphasize the need to reduce trade barriers for renewable energy technologies, promote green-oriented FDI, and channel economic growth toward expanding rural electrification. Nonetheless, the study’s reliance on electricity access as a single proxy for energy poverty and its regional focus point to avenues for future research, including the use of multidimensional energy poverty indices and cross-regional comparative analyses.
Keywords: Energy poverty; electricity access; trade openness; foreign direct investment; globalization; Latin America.
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