DOES FOREIGN AID REDUCE POVERTY?

This paper examines the effect of foreign aid on poverty. The impact of aid on poverty is assessed using dynamic panel estimation techniques, which enable us to control for time-invariant country-specific effects and endogeneity of aid. The results suggest that aid has a significant poverty-reducing effect even after controlling for average income. Specifically, foreign aid is associated with a decline in poverty as measured by the poverty rate, poverty gap index and squared poverty gap index. We also find that the composition of aid mattersmultilateral aid and grants do better in reducing poverty than bilateral aid and loans. Copyright (C) 2011 John Wiley & Sons, Ltd.