Does Aid Reduce Poverty?

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AID AND DEEPENING POVERTY -Zulfiquer Ahmed Amin HOLLIS Chenery and Alan Strout are proponents of the "two-gap" model of development. Which is: savings determine investments -- and per capita income determines savings. Since poor countries have low incomes, and, accordingly, low savings, they are caught in a "vicious circle of poverty." Thus, it is argued, investment financed by foreign aid will break this vicious circle and connect LDCs to the virtuous circle of productivity and growth. Thus, to remove the shackles of poverty, many African countries received substantial aid over a sustained period, amounting to approximately $400 billion from 1970 to 2000, i.e. around $35 per capita per year. In Africa, aid as a percentage of Gross National Income (GNI) grew continuously between 1970 and 1995, starting at around 5 percent in 1970 and peaking at around 18 percent in 1995. During the 1970s, when the percentage of aid as a proportion of GDP was still relatively low, GDP growth per capita was high. In the late 1970s, the proportion of aid grew dramatically but GDP growth collapsed, and was even negative for several years. In Mozambique, Official Development Assistance (ODA) covered the entire spending, including investment, consumption and military expenditure, but it could not even be used entirely. This bountiful flow of aid funds left no room to spend the country's own savings inside its own borders. Mozambique's rich and powerful were really "forced" to invest their money overseas. ODA accounted for 10.1 percent of Tanzania's GNP in 1985, and by 1990 the net ODA proportion of its GNP had soared to 69.3 per cent. In 1976, the country had a per capita income of $180. Measured by that benchmark, 24 other countries were poorer. In 1986, Tanzania's per capita income was $250, and only 13 other countries were less well off. Then, far above average assistance

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