AID POLICIES AND POVERTY ALLEVIATION: THE CASE OF VIET NAM

Effective use of foreign aid for poverty alleviation requires optimally allocating aid among three components: promotion of economic growth, direct targeting of the poor and safety nets and transfers. This paper analyses the allocation of foreign aid to Viet Nam by examining the poverty situation in Viet Nam and drawing implications. The poverty situation and recent aid trends to Viet Nam suggest that there is an imbalance between aid that promotes economic growth and aid that directly targets the poor. The phenomenon is evident in both the sectoral aid disbursement and the disbursement by approach to poverty. Additionally, aid is not regionally directed in a manner conducive to poverty alleviation and is urban-biased. Since the inception of foreign aid shortly after the Second World War, improving living standards has been a primary objective of many development assistance agencies. Despite the substantial efforts of the donor community, progress in reducing poverty in developing countries has been slow and often limited in scope. In its report on twenty-five years of development cooperation, the OECD stated: “The most troubling shortcoming of development aid has been its limited measurable contribution to the reduction ‐ as distinguished from the relief ‐ of extreme poverty, especially in the rural areas of both middle-income and poor countries” (OECD 1985). Given the increasing scarcity of aid and the persistence of poverty in developing countries, improving the effectiveness of aid in poverty reduction must be a donor priority. Part of the difficulty in measuring the contribution of aid to poverty alleviation lies in the fact that poverty is a multi-faceted problem and there are a number of strategies that may be employed to address poverty. First, there is growing recognition that while economic growth is not a sufficient condition for ensuring poverty reduction it is a necessary condition. Aid that improves overall GDP per capita creates an environment conducive to poverty reduction, indirectly assisting the poor (Burnside and Dollar, 1997). Second, direct interventions, such as micro-credit programmes,