| The inability of foreign aid to increase recipients' living standards casts doubt on its effectiveness as a vehicle of economic development. This motivates examination of potential contributors to this dismal experience. Understanding the empirical link between foreign aid and trade and consequently economic performance provides a testable hypothesis in evaluating foreign aid's negative outcome. Whereas the advocacy of free trade and foreign aid has proliferated on both theoretical and empirical grounds, two questions remain: what factors help or hinder a country's capacity to trade, and what factors affect dependence on foreign aid? This dissertation stresses these issues and explores the determinants of foreign aid, trade, and their effect on income and on each other using rigorous econometric techniques. The empirical analysis of 151 countries for the years 1975 to 1998 indicates that government-government foreign aid has a significant and negative impact on trade and on recipient's living standards as measured by GDP per worker. |
