Table of contentsReduction of foreign aidForeign aid and developmentPositive relationship between foreign aid and developmentNegative relationship between foreign aid and developmentConclusionReferencesForeign aid, Economic growth and economic development are burning issues facing development economists and researchers today. Indeed, some scholars argue that foreign aid leads to growth, while others argue that aid does not contribute to economic growth and therefore has a negative impact on the economic development of the recipient country. Since the 1960s, foreign aid begins its journey, but debates remain controversial whether the main objective of its institution has been achieved or not. Say no to plagiarism. Get a tailor-made essay on “Why Violent Video Games Should Not Be Banned”? Get the original essay Foreign aid consists of donations of money, goods, or services from one nation to another. Such donations may be made for humanitarian and altruistic purposes or to promote the national interests of the donor country. Aid can be between two institutions (bilateral) or several countries (multilateral). Bilateral aid is generally tied aid (conditional aid) when recipients must purchase products and services from the donor country. Multilateral aid is generally untied aid that can be spent in any sector of the recipient country. This is a literature review and for this reason, no separate literature review is presented here. One of the limitations of the study is that it does not observe any trend of a particular economic entity based on empirical evidence. More importantly, this analysis is not country specific and therefore may create ambiguity if someone is considering establishing relationships with a particular economic unit. The excuse for these limitations is that this study is not a quantitative analysis but rather a general discussion on the role of foreign aid in economic development. Shrinkage of foreign aid Foreign aid is decreasing day by day. Rich countries cut their aid funds by 8.4%, taking into account real value and inflation. Last year, the governments of the OECD's 22 member economies donated around €66 billion, or around 0.28% of the GDP of the organization's 22 donor countries; they represented 0.31% of GDP in 2006. After increasing steadily throughout the 1980s and peaking at $60.9 billion in 1992, development aid flows fell to $59.2 billion in 1994. Members of the Organization for Economic Co-operation and Development (OECD) committed 0.30% of GDP. their GNP combined with development aid in 1994, the lowest rate in twenty-one years and less than half the international standard of 0.70 percent. Although the OECD says real aid has increased by 2.4%, Patrick Bond of the South Africa-based Center for Civil Society (CCS) and author of Looting Africa says: Rich countries have reduced their aid by 8.4% in 2007, compared to a 6% increase in arms spending. Global military spending is approximately 13 times greater than overseas development assistance. The reasons for this decline are not difficult to find. Critics have long argued that foreign aid has been wasted by bloated aid agencies that funnel money into the pockets of corrupt Third World governments. One important reason for this decline is the end of the Cold War. Overall, international foreign aid has declined sharplysince the end of the Cold War. Elisa et al. in a World Bank press release, expressed a different opinion on the downward trend in foreign aid saying: according to the African Development Indicators 2001, two important sources of financing, foreign direct investment ( FDI) and public aid, are also decreasing in size. , and tend to favor countries with lucrative mining and oil industries in the case of FDI, or countries with sound social and economic policies in the case of aid. Due to inflation and many other economic factors, the real monetary value of foreign aid is also gradually decreasing. The reduction in the share of food aid also explains the reduction in subsidy flows in many countries. Bilateral aid is also refused by the development partner for alleged corruption in the use of grants by government agencies. Foreign Aid and Development Foreign aid to developing countries has been an important source of financing for stimulating economic growth. However, many studies on aid effectiveness have failed to reach consensus. Some studies of aid effectiveness have shown that foreign aid harms domestic resource mobilization. While others believe that aid has a positive impact on growth. The question now is how does foreign aid affect the economic growth of developing countries? Positive relationship between foreign aid and development Some researchers have suggested that good economic policy is a prerequisite for aid effectiveness. This view has been challenged by many who believe that aid is effective even independent of politics. In general, aid has a positive impact on economic growth through several mechanisms: aid increases investment, aid increases the capacity to import capital goods or technology, aid does not has no negative impact on investment and savings, aid increases capital productivity and promotes endogenous technical change. Papanek finds a positive relationship between aid and growth. Fayissa and El-Kaissy show that aid positively affects economic growth in developing countries. Singh also finds that foreign aid has positive and significant effects on growth when state intervention is not included. Snyder shows a positive relationship between aid and growth controlling for country size. Burnside and Dollar argue that aid works well in an environment of good policies. Developing countries with sound policies and high-quality public institutions grew faster than those without them. Well-managed and heavily supported groups grew much faster, at 3.7% of GDP per capita. Aid has successfully supported poverty reduction and growth promotion in many countries. Therefore, although aid flows did not stimulate growth in all circumstances, on average they had a positive effect. The most influential study of this movement was that of Burnside and Dollar, which focused on the impact of policies on aid effectiveness. The authors used an interaction term between aid and an economic policy index to study the aid-policy-growth relationship. In this study, the authors include fiscal, monetary and exchange variables in the recipient country. The results of Burnside and Dollar's analysis suggest that aid promotes growth only in countries with strong economic policy regimes. The authorsassume that the combined effects of aid and policies are effective because, in good policy environments, either the fraction of aid invested or the resulting increase in productivity is greater. Negative relationship between foreign aid and development On the other hand, foreign aid is found to be significantly and negatively correlated with growth. There are a number of underlying causes, such as aid dependency, economic mismanagement of recipient countries, corruption and poor coordination and cooperation between aid agencies, etc. Many researchers find that foreign aid has a negative impact on growth. “Knack argues that high aid erodes institutional quality, increases rent-seeking and corruption; therefore, it negatively affects growth. Easterly, Levine, and Roodman, using a larger sample to reexamine the work of Burnside and Dollar, find that the results are not as robust as before. Gong and Zou show a negative relationship between aid and growth. First, due to the volatile nature of aid, the government of the recipient country is sometimes unable to mobilize the volume of aid on time and fails to convince donors that the remaining funds will be used. spent efficiently. Thus, the disbursement of aid could be further delayed; hindering the government's ability to spend. Conditionality is another problem linked to foreign aid which hinders the economic development of recipient countries. Moss, a former World Bank consultant, said tied aid is "very inefficient because it restricts the market and therefore costs the donor more money for the same benefit." Second, we believe capacity has been a major constraint. Traditionally, the donor-recipient relationship is asymmetrical, involving a strong and a weak party, where political and economic structures of domination and exploitation leave little space for the latter to choose. If aid is tied, at the time of negotiation, donors negotiate with their great capacity. Sometimes foreign aid makes a nation dependent on aid rather than making it economically independent. Food aid injected into Somalia is causing a food deficit in the country. Somalia has become alarmingly dependent on food imports. Since most foreign aid is given government-to-government, how they allocate foreign aid resources is left to the discretion of leaders, whether in productive or unproductive sectors. More recently, some authors have argued that the effectiveness of foreign aid may depend on how it is delivered. If foreign aid contributes to productive consumption, such as improving education, building rural and urban infrastructure, protecting private property and reducing business risks, it results in a net benefit in terms of economic performance, and countries that receive more aid should expect an increase in their income. well-being. But the leader does not want to invest aid resources in the above sectors because he would fail to return the loan money and would fall victim to the loan trap. Ultimately, it cannot bring adequate economic growth to the country. In reality, foreign aid has generally benefited the ruling elite and senior NGO management. The ultimate objective of foreign aid cannot therefore be achieved. Study reveals that instead of creating wealth, prosperity and economic development, most Africans in recent decades have seen a.. 4.