Theoretical and Applied Economics
No. 3 / 2026 (648), Autumn
Does foreign aid reach the poorest? A multidimensional poverty analysis for Pakistan
Higher Education Department, Government of Punjab, Pakistan
Arslan KHALID
Higher Education Department, Government of Punjab, Pakistan
Abstract. This study examines whether foreign aid effectively reaches the poorest segments of society by analyzing its impact across multiple dimensions of poverty in Pakistan. Moving beyond conventional approaches that rely solely on the poverty headcount ratio, this research employs the Foster-Greer-Thorbecke class of poverty measures, including poverty incidence, poverty gap, and poverty severity, to capture distributional dynamics. Using panel data spanning 1995-2025 and applying a dynamic System Generalized Method of Moments estimator, the study addresses issues of endogeneity, persistence, and unobserved heterogeneity. The results reveal that foreign aid significantly reduces poverty incidence but exhibits diminishing effectiveness when addressing poverty depth and severity. This suggests that aid disproportionately benefits individuals closer to the poverty line, while the poorest remain relatively underserved. The findings contribute to the literature by highlighting the distributional limitations of foreign aid and underscore the need for more targeted and inclusive policy interventions.
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