IndexReduction in 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 that people deal with development economists and researchers today. This is simply because some researchers support the idea that foreign aid leads to growth, while others argue that aid does not contribute to economic growth and therefore does not have a negative impact on the economic development of the receiving country. Since the 1960s, foreign aid begins its journey, but there are still controversial discussions as to whether the main objective of its establishment has been achieved or not. Say no to plagiarism. Get a tailor-made essay on "Why Violent Video Games Shouldn't Be Banned"? Get an Original Essay Foreign aid is donations of money, goods, or services from one nation to another. Such donations may be made for humanitarian, altruistic purposes, or to advance the national interests of the donor nation. Aid can be between two (bilateral) or more (multilateral) institutions. Bilateral aid is usually tied aid (conditional aid) when recipients have to purchase products and services from the donor country. Multilateral aid is usually 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 provided here. One of the limitations of the study is that it does not observe any trend of any particular economic entity based on empirical evidence. More importantly, this analysis is not country specific, so it could create ambiguity if someone intends to relate to 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. The Contraction of Foreign Aid Foreign aid is decreasing day by day. Rich countries have cut aid funding by 8.4%, taking into account real value and inflation. Last year the governments of the 22 economies that belong to the OECD donated around 66 billion euros, or around 0.28% of the GDP of the organisation's 22 donor countries; in 2006 it was equal to 0.31% of GDP. 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 cooperation and economic development (OECD) committed 0.30% of GDP. their combined GNP with development aid in 1994, the lowest rate in twenty-one years and less than half the international standard of 0.70%. 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 aid by 8, 4% in 2007 compared to a 6% increase in armaments spending. Global military spending is about 13 times greater than foreign development assistance. The reasons for this decline are not difficult to find. Critics have long argued that foreign assistance has been wasted by bloated aid agencies pouring money into the pockets of corrupt third world governments. One of the important reasons behind this decline is the end of the Cold War. Overall, international foreign assistance has declined dramatically since the end of the Cold War. Elisa, et al. in a World Bank press release, expressed adifferent opinion on the downward trend of foreign aid stating: according to the 2001 African Development Indicators, two important sources of financing, foreign direct investment (FDI) and official aid, are also decreasing in size, and tend to favor those countries with profitable mining and oil industries in the case of foreign direct investment, or countries with sound social and economic policies in the case of aid. Due to inflation and many other economic factors, the real value of the monetary value of foreign aid is also gradually declining. The declining share of food aid is also a reason for the reduction in the flow of grants for many countries. Bilateral aid is also rejected by the developing partner due to 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 to improve economic growth. However, numerous studies on aid effectiveness have failed to reach a consensus. Some aid effectiveness studies have found that foreign aid has negatively affected domestic resource mobilization. While others are of the opinion that aid has a positive impact on growth. Now the question 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 regardless of politics. In general, aid has been found to have a positive impact on economic growth through several mechanisms: aid increases investment, aid increases the capacity to import capital or technological goods, aid does not have a negative impact on investment, and aid to savings, increase the productivity of capital and promote endogenous technical changes. Papanek finds a positive relationship between aid and growth. Fayissa and El-Kaissy demonstrate that aid positively affects economic growth in developing countries. Singh also finds evidence that foreign aid has strong, positive effects on growth when state intervention is not included. Snyder shows a positive relationship between aid and growth when the size of the country is taken into account. Burnside and Dollar argue that aid works well in a context of good policies. Developing countries with strong policies and high-quality public institutions have grown faster than those without them. Groups with good management and high aid grew much faster, with a GDP per capita of 3.7%. Aid has successfully supported poverty reduction and growth promotion in many countries. As a result, although aid flows have not stimulated growth in all circumstances, they have had a positive effect on average. The most influential study on this movement is that of Burnside and Dollar which focused on the impact of politics 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 included fiscal, monetary and exchange rate variables in the recipient country. The results of Burnside and Dollar's analysis suggest that aid promotes growth only in countries with healthy economic policy regimes. The authors assume that combined aid-policy effects are successful because, in a good political context, either the fraction of aid invested or the resulting increase inproductivity are higher. Negative relationship between foreign aid and development On the contrary, foreign aid appears 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 humanitarian agencies, etc. Many researchers believe that foreign aid has a negative impact on growth. «Knack argues that a high level of aid undermines institutional quality, increases rent-seeking and corruption; therefore, it negatively affects growth. Easterly, Levine, and Roodman, using a larger sample to reexamine the works 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 in time and fails to convince donors that the remaining funds will be spent efficiently. Therefore, the disbursement of aid may be further delayed; hampering the government's spending capacity is another problem that limits the economic development of the recipient countries , a former World Bank consultant, said that tied aid is “highly inefficient because it narrows the market and therefore costs the donor more money for the same benefit.” Secondly, we believe that capacity has been an important limitation. the donor-recipient relationship was asymmetrical, involving a strong party and a weak one, where the political and economic structures of domination and exploitation gave little room for choice to the latter. If the aid is tied, at the time of negotiation, donors bargain with their high capacity. Sometimes foreign aid makes a nation dependent on aid rather than making it economically independent. Food aid released into Somalia causes a food deficit in the country. Somalia has become alarmingly dependent on imported food. Since most foreign aid is government-to-government, it is the ruler's discretion how to allocate resources for foreign aid, both in productive and unproductive sectors. More recently, some authors have argued that the effectiveness of foreign aid may depend on how the aid is delivered. If foreign aid contributes to any productive consumption, such as improving education, building rural and urban infrastructure, protecting private property, and reducing trade risks, it results in a net benefit to economic performance, and countries who receive more aid should expect their costs to increase. well being. But the sovereign does not want to invest aid resources in the above-mentioned sectors, because they would not be able to repay the loan money and would become victims of the loan trap. Ultimately, it cannot lead to adequate economic growth of the country. In reality, foreign aid has generally benefited the ruling elite and top management of NGOs. So the ultimate goal of foreign aid cannot be achieved. A study reveals that instead of creating wealth, prosperity and economic development, most Africans have experienced a sharp decline in their standard of living in recent decades. On the contrary, the ruling elite has become richer. According to Mathew, in 2009, in the Daily Gambia Echo, “during the period when foreign aid was pumped into Africa, GDP per capita fell by an average of 0.59% per year between 1975 and 2000. It was found that foreign aid does more damage to Africa.. 4.