The Marshall Plan marks the historical beginnings of the United States aid programme.

Ever since it has been regarded as a model of successful aid and development effort. Its success helped motivate the United States and other developed countries to provide LCD's with development aid. LDC's usually have a shortage of foreign exchangewhich is needed for importing necessary capital and intermediate goods. External resources can play a crucial role in supplementing domestic resources in order to relieve savings or exchange bottlenecks. This is the theory of two gap analysis of foreign aid. Assuming LDC's have comlementary domestic resources that allow them to undertake new investment projects, then foreign aid will overcome the foreign exchange constraint and raise the rate of economic growth. If LDC's have under utilized resources due to balance of payments constraints then aid disbursement will help them to fully utilize their resources.

Many economists searched the allocation and some determinants of foreign aid flows to developing countries and tried to answer two questions concerning foreign aid: 1) Why do countries give foreign aid? and 2) What do the receiving countries do with it?.

The economic objectives of foreign aid are to alleviate poverty and increase savings, investment and rate of growth of GNP in developing countries. However, development assistance has not always succeeded in achieving these objectives because in many cases donor motives for giving aid and recipient motives for accepting it conflict with the economic objectives of foreign aid. There is no historical evidence that over large periods of time donor country assist others without expecting some corresponding benefits (political, economic, military) in return. As Todaro (1989) indicates, "There are likely to be fundamental differences in attitudes and motivations between donor and recipient countries" (Todaro, M.P. 1989, p.485). Thus, foreign aid is a complex term, especially, when it is used to cover a variety of resource transfers from developed countries to developing countries. Many of these may be military and/or political in nature and have nothing to do with assisting economic development.