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

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.