On The Link Between Foreign Aid And Poverty Reduction In Developing Countries

This article explores the theoretical link and transmission mechanism through which official development assistance (ODA) or foreign aid affect poverty. The study also presents some major debates on the effectiveness of foreign aid on development in general and poverty reduction in particular. The main findings from this exploratory study suggest that, there is no generally accepted economic theory upon which foreign aid allocation is based. Several theories have been advanced, but most of them have been heavily criticized. As a result, there are two distinct and extreme lines of thoughts: those who believe that foreign aid can contribute to a virtuous circle of economic growth and poverty reduction against the other group which contend that foreign aid leads to a vicious cycle of poverty and stunted development. Finally, a third group assumes that once we distinguish channels through which foreign aid affect development, we may notice several degrees of positive impact on development and diminution of poverty, depending on the choice of channel, the recipient country features and the domestic economic policies.