This article challenges a long-held development-policy assumption that aid and foreign-direct investment~FDI! serve as substitutes or complements in accelerating the development of the world's poorer countries+ We show both theoretically and empirically that aid and FDI affect development differently+ Aid contributes powerfully to both economic growth and human development, and the higher the level of human capital in a country, the more aid contributes+ By contrast, FDI, at best, has no effect

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... on economic growth and actually slows the rate of human development in less-developed countries+ We find no evidence that the degree of democratic responsiveness in government conditions the effectiveness of either aid or FDI, although we do find that democracy independently increases human development in all but the most developed countries+ Our results demonstrate that FDI and aid are not, and cannot be, substitutes in the development of the world's poorer countries+ Nor even can they be thought of as complements-certainly not at mid to low levels of devel-opment+ In the end, poor countries need democracy and aid, not FDI+ But as important as official assistance is to improving people's lives, the reality is that it is trade and private capital flows that will make the real difference that are more, more, much more significant+ U+S+ Secretary of State Colin Powell 1 In the dialogue on sustainable development, it is widely accepted that even the most promising less-developed country often lacks the resources to fund its own development and must look to foreign capital to augment domestic sources+ These foreign capital inflows come most commonly in two forms: foreign aid, and