Foreign Aid and Economic Development

Foreign Aid and Economic Development: Assessing Whether International Financial Assistance Promotes Self-Sustainability or Creates Dependency

Abstract

This paper investigates the interaction between foreign aid and economic growth to determine whether financial support from international organizations promotes self-sufficiency or places a country on the dependent and unsustainable path. The research analysis is therefore based on the theoretical and empirical analysis conducted on the history of aid including post world war II Marshall plan and the current aid types in the developing economic region. Analytics based on econometric regression analysis have been made accompanied by comparative case-studies of the countries which have already moved beyond the tendency of aid-dependency or those still remaining to be fully dependent on external funding. Available research shows that aid does work depending on the quality of governance, institutions, as well as the quality of implemented policies. While countries like South Korea and Rwanda have used aid for more industrialization and long run economic development, Haiti, DRC has just lived in the loop of aid dependency due to bad governance structures and institutions. This review also focuses on issues like fungibility of aid, Dutch disease effects, conditionality and its effect on aid amongst others, therefore recognising the need for aid restructuring or reformation. Through examining the effects of aid on economic growth and growth in governance decade and economic diversification this paper seeks to make a contribution to the ongoing discussions towards understanding how aid should be restructured in order to foster and support sustainable development. It has implications for policy makers, development agencies, and the multilateral development banks, and underscores the necessity for leveraging foreign aid with policy reforms, better governance, investment in human capital, and pathways away from dependence on aid.