The Role of Aid for Trade and Foreign Direct Investment in Poverty Reduction: A Panel Data Analysis of 91 Developing Countries
Thesis - Open Access
Master of Science (MS)
Department / School
Evert Van der Sluis
aid fopr trade, foreign direct investment, policy, poverty
Aid for trade (AFT) focuses on helping developing nations to overcome supplyside constraints in trade to maximize trade benefits and use trade to achieve economic growth and poverty reduction. Since its inception at the 2005 Hong Kong ministerial conference, AFT has become viewed as a crucial tool for helping developing countries and donors continue to shift their attention to AFT programs, even in times of prolonged global financial crisis. AFT programs ultimately seeks to achieve growth poverty reduction. Thus, this study focuses on assessing the role of AFT and foreign direct investment in poverty reduction using the headcount ratio (1.90 dollars a day) to measure poverty. Specifically, the impact of AFT and FDI is analyzed across different income groups of countries and between agricultural-dependent economies and non-agricultural dependent-economies. This thesis also evaluates the impact of the different components of AFT on poverty as well as assessed how each individual AFT component relates to FDI and lastly, examines whether the effectiveness of AFT is conditioned on the policies and institutional qualities of the aid-receiving country. Using data for 91 developing countries and controlling for other variables that may affect poverty, we employ fixed effects and random effects models for the analysis. The empirical analyses indicate that AFT flows have a robust and positive effect on poverty reduction but the effect differs across countries by income groups and the impact is largest in LDCs. The analyses also show that while AFT may be effective, the extent to which it reduces poverty depends on the policies and quality of institutions in the recipient country. Also, AFT directed to infrastructure and AFT directed to trade policies and regulations is effective in reducing poverty. Furthermore, AFT is more effective in reducing poverty in low-agricultural economies compared to high-agricultural economies. Lastly, the analyses show that AFT directed to infrastructure as well as trade policies and regulations increase net FDI inflows but AFT to productive capacity reduces net FDI inflows. An implication of these findings is that donors could consider focusing their investments on AFT for infrastructure and AFT for trade policies and regulations because these two investments have a significant effect on mitigating poverty in developing countries. Also, in order to attract FDI in developing countries, AFT investments could focus on infrastructure development and improving trade policy regulations.
Library of Congress Subject Headings
Aid for Trade (Initiative)
Poverty -- Developing countries.
Developing countries -- Economic conditions.
Includes bibliographical references (pages 65-75)
Number of Pages
South Dakota State University
Durowah, Olivia, "The Role of Aid for Trade and Foreign Direct Investment in Poverty Reduction: A Panel Data Analysis of 91 Developing Countries" (2017). Electronic Theses and Dissertations. 1187.