Foreign aid has shown changes in its prime goal and instrument in the last
several decades. In addition to developing countries’ realities and international
political terrain, new thoughts in development economics have highly
influenced the evolution in foreign aid. This study examines this relationship.
At first, the classical growth theory supported that aid would promote growth
by filling the investment-saving gap of developing economies. Thereafter,
neo-classical trade theory served as an academic basis for the use of aid fund
for structural adjustment, while the capability approach of A. Sen redirected
aid to prioritize human development. New institutional economics and
empirical studies on aid effectiveness led aid to facilitate institutional changes
in developing countries. The recent development in policy evaluation methods
underlined the effectiveness of aid projects at the micro level.