Bi-directional Relationship between Foreign Aid and Trade: An Empirical Analysis

Venalk, Varun (2014). Bi-directional Relationship between Foreign Aid and Trade: An Empirical Analysis Honours Thesis, School of Economics, The University of Queensland.

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Author Venalk, Varun
Thesis Title Bi-directional Relationship between Foreign Aid and Trade: An Empirical Analysis
School, Centre or Institute School of Economics
Institution The University of Queensland
Publication date 2014-11-10
Thesis type Honours Thesis
Supervisor Kam Ki Tang
Do Won Kwak
Total pages 67
Language eng
Subjects 14 Economics
Formatted abstract
This thesis explores the extent to which self-interest motives in terms of increased trade drives donor countries’ aid allocations to recipient countries. The self-interest could potentially be served in two ways: (1) if donors provide aid to recipients with the expectation of increased exports to or imports from them, and (2) if donors provide more aid to those recipients with which they have greater export ties. Previous literature identifies several factors that can affect aid allocations and trade flows between donor-recipient pairs. The literature also shows that this relationship holds in both directions, that is, aid and trade between donors and recipients can cause each other. This thesis takes a donor perspective and estimates the relationship between donor aid and donor exports to, and imports from the recipient countries. Models that attempt to quantify the bi-directional relationship between aid and trade need to account for two important sources of endogeneity – omitted variables and reverse causality. This thesis contributes to the literature by using a new method to account for endogeneity arising from omitted variables and reverse causality. We use fixed effects, multilateral resistance terms, and instrumental variables. The instruments have a strong theoretical and empirical foundation, and the use of fixed effects and multilateral resistance terms are backed by theoretical models in previous literature. Another contribution of this thesis is that we estimate the aid-trade relationship in both directions, as opposed to just one direction. The empirical estimation uses aid and trade panel data spanning from 1980 to 2009, for 23 donor countries and 97 recipient countries. The results from our empirical analysis provide partial support for donor self-interest motives as a factor in their aid allocation decisions.
Keyword Foreign aid
Foreign trade

Document type: Thesis
Collection: UQ Theses (non-RHD) - UQ staff and students only
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