Foreign Aid is a form of international monetary assistance carried out between official institutions which intends to improve the living conditions and reduce national inequalities of outcomes for impoverished citizens in developing nations. Capital inflows have the capacity to smoothen the transition of an economy through three key phases of economic growth characterized by the Chenery-Strout model (J. C. H. Fei and G. Ranis, 968). This line of thought, known as the Modernist Theory approach, proposes that at each phase of growth, a country is constrained by an economic variable; whether this be related to the levels of skills and education accessible to the majority population, domestic savings rates or levels of foreign currency reserves. The role of foreign aid at each of these stages focusses on eliminating the constraint through providing an economys public and private institutions access to the funds necessary for investment purposes. The accumulation of physical capital resulting from investment expenditure in fixed assets like transport networks allows for the creation of internal markets through facilitating the interaction of consumers and producers, enabling producers of locally sourced goods to expand their operations and achieve economies of scale and thus improve their own incomes, whilst providing consumers access to
goods and services that previously may have been scarce, thus improving not only their expected living conditions but also expand their access to the labour market (Mikic, et al. ASEAN Economic Community: A Model for Asia-Wide Regional Integration? Palgrave Macmillan US, 206).
Nonetheless, this policy is fraught with downfalls that have earned it its poor reputation amongst policymakers. Firstly, we have assumed that foreign aid is fast acting and reaches those who are most in need of it, however as seen in countries such as Nigeria and Venezuela, the absence of a reliable political and regulatory framework has had the unintended consequence of impeding structural improvements from financial assistance through generating corruption endemics and monopoly exploitation that actually creates new barriers to economic development. Figure supports this claim by representing the negative correlation between Aid as a percentage of GDP and Growth per Capita (Oxford University Press 25.02.200, Mavrotas) (Review of ADBs Policy-Based Lending). In order to mitigate the possibilities of this, development and macro-economists broadly hold the consensus that development assistance should be given conditional on the implementation of internally generated reforms that foster inclusive economic growth to reduce the disparities of income and opportunity.