In the United States and some other countries, there's awareness that babies in orphanages need to have a primary caregiver -- someone they can bond with. If they don't, they will likely grow up with many psychological and cognitive problems. Babies need loving touch for proper brain development and to develop the oxytocin response that will teach them to bond with others.
The foster care system in the United States is far from perfect -- far, far from perfect. But many nations still have a policy of caring for orphans in institutions, rather than in foster homes. It's partly a question of resources; in an institution, one person can care for many more children.
Researchers from the University of Maryland, led by Nathan Fox, just published the results of a years-long study in Romania in which they compared the development of children in orphanages to those in foster homes.
In one orphanage in the study, the ration of caregiver to children was 1 to 22. If each worker worked an eight-hour shift, she could spend less than 22 minutes a shift on each child. Think about a baby who is changed, fed and touched for no more than one hour each day.
The researchers moved half of the 156 children in the study into foster homes and left the rest in institutions. They could do this ethically because there was no foster care system in Romania at this time -- they had to set one up.
According to the article in Science Daily,
The main findings from the study confirmed earlier results that "children reared in institutions showed greatly diminished intellectual performance relative to children reared in their families of origin." Further, children who were randomly assigned to foster care experienced "significant gains in cognitive function."
They didn't look at attachment, but certainly, the longer the children stayed in the institution, the more attachment problems they had. These are expressed in what we now call reactive attachment disorder, oppositional defiance disorder and post-traumatic stress disorder. (Institutionalized babies develop PTSD because their bodies instinctively "know" that if they're separated from their mothers, they will die.)
The researchers also found that 24 months was the critical age for children to benefit from placement into a foster home.
But, the sooner the better! And of course, adoption into a permanent home is the best outcome.