Foreign Aid and the Real Price of Investments

Abstract

This paper outlines how inflows of foreign aid might push up the real price of investments and thus crowd out private investments. The main implication - that aid leads to increasing real investment prices - finds substantial support in panel estimates from 78 developing countries. The effects appear larger in more recent years while they are stronger in countries close to the equator, with low incomes, and with large government sectors. The paper concludes by discussing the relevance of these findings for future development policy.