On the Link Between Foreign Aid and Poverty Reduction in Developing Countries

Abstract

This article explores the theoretical link and transmission mechanism through whichofficial development assistance (ODA) or foreign aid affects poverty. The study alsopresents some major debates on the effectiveness of foreign aid on development ingeneral and poverty reduction in particular. The main findings from this exploratory studysuggest that there is no generally accepted economic theory upon which foreign aidallocation is based. Several theories have been advanced, but most of them have beenheavily criticized. As a result, there are two distinct and extreme lines of thoughts: thosewho believe that foreign aid can contribute to a virtuous circle of economic growth andpoverty reduction against the other group, which contends that foreign aid leads to avicious cycle of poverty and stunted development. Finally, a third group assumes that oncewe distinguish channels through which foreign aid affects development, we may noticeseveral degrees of positive impact on development and diminution of poverty, dependingon the choice of channel, the recipient country features and the domestic economicpolicies.

Foreign aid, poverty and economic growth in developing countries: A dynamic panel data causality analysis

“…Apart from economic growth, other channels through which foreign aid affects poverty include: (i) its influence on the public-sector spending of the recipient government which might lead to human development and welfare indicators; (ii) stabilisation of the recipient country's economic growth; and (iii) building of democratic and economic institutions, among other things (Mahembe & Odhiambo, 2017). This study, however, is aimed at examining the causal relationship between foreign aid, poverty and economic growth.…”

Foreign aid and poverty reduction: A review of international literature

“…As shown in Mahembe and Odhiambo (2017), channels through which foreign aid affect poverty include economic growth, pro-poor public expenditure (such as education, health and other social programmes), macroeconomic stabilisation effect, and funding of infrastructure and other development initiatives. This study, however, focuses on the studies which empirically examined the direct effect of foreign aid on poverty.…”

An assessment of trade policies related to COVID-19

“…Additionally, states that receive international food assistance from other donor countries have been affected in their access to food due to trade barriers such as export restrictions and additional import controls or tariffs (Cardwell & Ghazalian, 2020). Although the debate on the effectiveness of foreign aid on poverty reduction is controversial, some studies show the positive effect of foreign assistance in diminishing poverty and increasing quality of life in recipient countries (Mahembe & Odhiambo, 2017). Thus, these countries could face several problems with the interruption of those aids, which could worsen the food security of the recipient countries.…”