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Foreign aid and private investment in developing economies

  • Donald W. Snyder

    (School of Economics and Business Administration, Saint Mary's College, Moraga, CA 94575, USA)

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    The effect of aid on private-sector investment has long been a matter of debate. Many economists have taken the position that aid stimulates private investment in LDCs by filling macroeconomic savings or foreign-exchange gaps. Others have countered that aid has a negative effect on private investment because it is often wasted or counterproductive, generates dutch-disease effects, and enables the central government to compete resources away from the private sector. This paper empirically evaluates the association between aid and private investment using annual panel data from 36 developing countries over the period 1977 to 1991. The results clearly show that countries which receive larger aid allocations experience lower subsequent levels of private investment.

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    Article provided by John Wiley & Sons, Ltd. in its journal Journal of International Development.

    Volume (Year): 8 (1996)
    Issue (Month): 6 ()
    Pages: 735-745

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    Handle: RePEc:wly:jintdv:v:8:y:1996:i:6:p:735-745
    Contact details of provider: Web page: http://www3.interscience.wiley.com/journal/5102/home

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    1. Reinhart, Carmen & Khan, Mohsin, 1989. "Private investment and economic growth in developing countries," MPRA Paper 13655, University Library of Munich, Germany.
    2. White, Howard & Wignaraja, Ganeshan, 1992. "Exchange rates, trade liberalization and aid: The Sri Lankan experience," World Development, Elsevier, vol. 20(10), pages 1471-1480, October.
    3. Joshua Greene & Delano Villanueva, 1991. "Private Investment in Developing Countries: An Empirical Analysis," IMF Staff Papers, Palgrave Macmillan, vol. 38(1), pages 33-58, March.
    4. Mosley, Paul & Hudson, John & Horrell, Sara, 1987. "Aid, the Public Sector and the Market in Less Developed Countries," Economic Journal, Royal Economic Society, vol. 97(387), pages 616-41, September.
    5. Landau, Daniel, 1990. "Public Choice and Economic Aid," Economic Development and Cultural Change, University of Chicago Press, vol. 38(3), pages 559-75, April.
    6. Levine, Ross & Renelt, David, 1991. "A sensitivity analysis of cross-country growth regressions," Policy Research Working Paper Series 609, The World Bank.
    7. Halevi, Nadav, 1976. "The Effects on Investment and Consumption of Import Surpluses of Developing Countries," Economic Journal, Royal Economic Society, vol. 86(344), pages 853-58, December.
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