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Multilateral and Bilateral Loans versus Grants: Issues and Evidence

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  • Matthew Odedokun
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    Abstract

    This paper examines a wide range of issues relating to the mix between loans and grants as well as the degree of concessionality of loans. A number of empirical tests are carried out based on annual panel data over 1970 to 1999 for 22 donor countries and 72 recipient countries. Based on the tests, we observe that for bilateral donors, past grant-loan mix (and, hence, reflows from past transfers) do not influence the volume of current resource transfers. Our tests also show that the rate of official borrowing by the recipients (and, by deduction, the extent of their past debt burden) is positively influenced by the extent of the concessionality of such loans - irrespective of whether it is in the form of subsidised interest rates or longer grace periods. The paper concludes with a review of the circumstances in which grants, soft loans and non-concessional loans might have their respective comparative advantage, as well as a discussion of the need, so as to overcome the negative incentive problems of soft loans, for a typical concessional loan package to be separated into two constituent parts. This would enable the recipient to be given the grant component and the option to take from the non-concessional loan component as much as desired. Copyright Blackwell Publishing Ltd 2004.

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    Bibliographic Info

    Article provided by Wiley Blackwell in its journal The World Economy.

    Volume (Year): 27 (2004)
    Issue (Month): 2 (02)
    Pages: 239-263

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    Handle: RePEc:bla:worlde:v:27:y:2004:i:2:p:239-263

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    Cited by:
    1. Viktor Brech & Niklas Potrafke, 2013. "Donor Ideology and Types of Foreign Aid," CESifo Working Paper Series 4314, CESifo Group Munich.
    2. Elizabeth Asiedu & Boaz Nandwa, 2007. "On the Impact of Foreign Aid in Education on Growth: How Relevant is the Heterogeneity of Aid Flows and the Heterogeneity of Aid Recipients?," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 200701, University of Kansas, Department of Economics.
    3. Rainer Thiele & Peter Nunnenkamp & Axel Dreher, 2006. "Sectoral Aid Priorities: Are Donors Really Doing their Best to Achieve the Millennium Development Goals?," KOF Working papers, KOF Swiss Economic Institute, ETH Zurich 06-124, KOF Swiss Economic Institute, ETH Zurich.
    4. Hulya Ulku & Tito Cordella, 2004. "Grants Versus Loans," IMF Working Papers 04/161, International Monetary Fund.
    5. Dreher, Axel & Nunnenkamp, Peter & Thiele, Rainer, 2008. "Does Aid for Education Educate Children? Evidence from Panel Data," Open Access Publications from Kiel Institute for the World Economy, Kiel Institute for the World Economy (IfW) 28827, Kiel Institute for the World Economy (IfW).
    6. Cohen, Daniel & Jacquet, Pierre & Reisen, Helmut, 2007. "Loans or Grants?," Working Paper Series, World Institute for Development Economic Research (UNU-WIDER) UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
    7. Iimi, Atsushi & Ojima, Yasuhisa, 2008. "Complementarities between grants and loans," Journal of the Japanese and International Economies, Elsevier, vol. 22(1), pages 109-141, March.
    8. Johansson, Pernilla, 2009. "Grants to needy countries? A study of aid composition between 1975 and 2005," Working Papers, Lund University, Department of Economics 2009:19, Lund University, Department of Economics.
    9. Nunnenkamp, Peter & Thiele, Rainer & Wilfer, Tom, 2005. "Grants versus loans: Much ado about (almost) nothing," Kiel Economic Policy Papers 4, Kiel Institute for the World Economy (IfW).
    10. Tim Harford & Michael Klein, 2005. "Grants or Loans? Development Finance and Incentive Effects," World Bank Other Operational Studies 11230, The World Bank.
    11. Hiroyuki Hino & Atsushi Iimi, 2008. "Aid Effectiveness Revisited: Comparative Studies of Modalities of Aid to Asia and Africa," Discussion Paper Series, Research Institute for Economics & Business Administration, Kobe University 218, Research Institute for Economics & Business Administration, Kobe University.

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