The only way countries have /ever/ developed is by the production of value, products that a market wants to buy, usually an export market. Handing out free money doesn't help to achieve that goal. It just perpetualtes dependence.
It seems to be the "new hip thing" within the aid-industrial complex, though. I hope it will not do too much damage to these societies, like many of the previous "effective forms of aid" did.
I think the argument is that initial capital can jumpstart that production of value. If you spend 10 hours a week maintaining your straw roof, and then someone buys you a metal roof, you can now spend those 10 hours a week on an exportable trade/product.
Production needs to be efficient in order to compete. Efficiency needs knowledge. These "groups of poor" lack that knowledge. And the amount of free money is way to low to produce anything with enough surplus value. How many unskilled carpenters, metal workers, and hair stylists do they need? I am currently in Kenya, and the amount of barber shops is amazing.
Production of value is stuff that a country can export, to earn hard currency that can buy knowledge to increase the country's production efficiency. Like Taiwan did, and Korea, and Malaysia, and China, and any country that has ever successfully developed in the past 70 years.
But the aid curse will not allow it, unfortunately.
I think both these explanations are missing that there are many factors behind successful economic development, and increasing one factor of production will help if it is the limiting factor, but hurt if it is already abundant.
If you give money to people who already have technical know-how, a willing market, a solid distribution network, and a stable legal system but just lack access to capital, it will usually have very good returns. If you give it to people who have none of these, it will get spent on whatever good happens to be available, usually booze. If you replace the government of a country that has capital, an educated populace, and solid infrastructure but suffers from endemic corruption and lack of solid legal foundations, you will probably also help spur economic development.
What I wish more poverty-alleviation problems did was focus on identifying and eliminating bottlenecks to economic growth. The casual American readership loves to think there's one solution and then loves to argue over what it is, but I don't think it works that way. Poverty is complex; the reason that inner-city Baltimore is poor is very different from the reason Kenya is poor, which is different from why rural China is poor.
It seems to be the "new hip thing" within the aid-industrial complex, though. I hope it will not do too much damage to these societies, like many of the previous "effective forms of aid" did.