Foreign aid and poverty

In 2000, Millennium Development Goals were set up by the leaders of the world to improve human well-being all over the world. One of these goals was to eradicate world poverty and hunger. Between 1990 and 2015, the proportion of people living on less than $1 a day should be half. For some countries, this goal may be reached even before 2015, whereas for other countries, this goal may not be reached by the end of 2015. Therefore, even though some countries have made improvement in reducing poverty after 1990s, poverty will continue to exist. An understanding of the factors that alleviate poverty is very important for policy makers. Poverty in a country is affected by many factors. One of these factors is foreign aid. The major objective of this paper is to examine the effects of foreign aid on poverty reduction. Different measures of poverty, such as, the head count index, the poverty gap, and the squared of poverty gap will be used. These measures either count the number of poor or measure the extent and distribution of poverty. More specifically, the goal is to find out whether foreign aid has any impact on different measures of poverty. Countries will be divided into different groups according to the level of poverty in order to analyze the effect of the initial level of poverty on the effectiveness of foreign aid. A nonlinear relationship between foreign aid and various measures of poverty will also be examined. Secondary data from Organisation for Economic Co-operation and Development and World Bank will be used.