ABSTRACT
This chapter presents trends in the field of development economics and the impact that these trends have on thinking about foreign aid. It discusses the changing notions of what constitutes economic development and, by extension, what drives economic development. If the goal of aid is to foster economic development, than any evaluation of the efficacy of aid must incorporate an understanding of the prevailing notions of development at the time the aid was being administered. An agency problem arises when an agent, acting on behalf of a principal, has the ability and incentive to act in ways that are disadvantageous to the principal. The implications of neoclassical models for thinking on aid were that aid focused less on market-distorting programs, and focused instead on enhancing the depth and scope of market-based institutions in the developing economy. Aid-giving countries and organizations like to exercise a substantial degree of control over how the aid they give is allocated and implemented.
