This paper aims at disentangling the correlation between LDC debt and investment in the 1980's. I show that a large debt was not an unconditional predictor of low investment in the 1980's, nor was investment abnormally low, when compared to a "financial-autarky" rate, calculated in the text. I do find, however, that the actual service of the debt crowded out investment. For the rescheduling countries I show that 1 percent of GDP paid abroad reduced domestic investment by 0.3 percent of GDP. This is identical to the correlation between investment and foreign finance observed in the 1960's.

This paper aims at disentangling the correlation between LDC debt and investment in the 1980s. The author shows that a large debt was not an unconditional predictor of low investment in the 1980s, nor was investment abnormally low when compared to a 'financial-autarky' rate calculated in the text. He does find, however, that the actual service of the debt crowded out investment. For the rescheduling countries, he shows that 1 percent of GDP paid abroad reduced domestic investment by 0.3 percent of GDP. This is identical to the correlation between investment and foreign finance observed in the 1960s. Copyright 1993 by American Economic Association.