42 - 42 Chapter 2 investment rate because the ICOR...

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42 Chapter 2 investment rate because the ICOR rose-that is, the ratio of growth to investment fell. We could equally say the price of apples fell be- cause the price of oranges was unchanged and the price ratio of ap- ples to oranges fell! Rather than worrying about how much investment is ”needed” to sustain a given growth rate, we should concentrate on strengthening incentives to invest in the future and let the various forms of invest- ment play out how they may. (I talk more about how to do this at the end of this chapter and in future chapters.) Jointly Checking the Aid-to-Investment and Investment-to- Growth Links I can construct a scenario of what income a country would have achieved if the predictions of the financing gap approach had been correct and then compare the prediction to the actual outcome. The financing gap model predicts that aid goes into investment one to one, or more. I stick to the one-to-one prediction to be conserva- tive. So investment to GDP will increase over the initial year by the
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