1. Introduction
Over the past decade, foreign aid has been regarded as an important tool in fighting poverty in less developed
and developing countries. Foreign aid or known as official development assistance (ODA) can be define as a
flow or transfer of payment including a grant element made by official agencies, state and local governments, or
by their executive agencies for developing countries and multilateral institutions. The main objective of giving
foreign aid is to develop economic and welfare development in poor and developing countries. Foreign aid is
believed enable to address the poverty and income inequality problem by facilitating faster and sustained
economic growth in these countries. Poor countries are facing scarce of capital for saving and investments in
order to generate income and economic growth. According to Nelson (1956), Erikson (2005) and Sachs et al.
(2005), poor countries have low incomes and savings which leave them in a “vicious circle of poverty” or
“poverty trap”. In other words, they experience a “low-level equilibrium trap” where higher income does not
lead to increase saving but only results in higher population growth.