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. ' See, for example, Massell et al., (1972);Halevi (1976); Chaudhuri (1978: pp. 76-109) Levy (1987a;1987b;1988);Odedokun (1992) and Gyimah-Brempong (1992).
' Gross domestic investment is the aggregate of private and public investment. It is not a reliable proxy for private investment because public and private investment are determined by different causal factors. Moreover they may be either complements or substitutes: certain types of public investment such as infrastructure can make future private investment more profitable whereas other types such as parastatal enterprises may crowd private investment out of the financial markets; and all public investment competes with private investment in the input markets. Mosley (1987: p. 126) and Mosley eta1 (1987: pp. 624-625) estimate international cross-section private investment equations and report a positive relationship with aid flows, but private investment is not their primary concern and they do not present complete regression results. Landau (1990: p. 575 footnote 7) computes bivariate correlations between aid and private investment and finds a positive @