The research paper attempts to examine the relationship between foreign--- assistance and poverty reduction in Lao PDR. Specifically, this paper investigates the hypothesis that foreign aid has significant impact on poverty reduction in Lao PDR and assesses the whether foreign aid can assist Lao PDR achieving the MDGs in 2015. An empirical study which follows Boon (1996) has been constructed in order to investigate the effect of aid on two human development indicators – infant morality and adult illiteracy rate.