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The Political Economy of Unconditional and Conditional Foreign Assistance: Grants vs. Loan Rollovers

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  • Wolfgang Mayer

Abstract

Improving the effectiveness of assistance programs is a priority of international financial institutions (IFIs). This paper examines the effectiveness of alternative assistance instruments in a dynamic political-economy framework. Economic policies of the receiving country are distorted by the influence of a domestic interest group. The assistance-providing IFI aims at reducing these distortions. The IFI provides assistance either as grants or loans, and either conditionally on reducing policy distortions or unconditionally. The paper shows that, other things constant, one-time grants are more effective than loan rollovers when assistance is unconditional, but that this effectiveness ranking is reversed when assistance is conditional.

Suggested Citation

  • Wolfgang Mayer, 2004. "The Political Economy of Unconditional and Conditional Foreign Assistance: Grants vs. Loan Rollovers," University of Cincinnati, Economics Working Papers Series 2004-02, University of Cincinnati, Department of Economics.
    • Handle: RePEc:cin:ucecwp:2004-02
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    Cited by:

    1. Wolfgang Mayer & Alex Mourmouras, 2008. "IMF conditionality: An approach based on the theory of special interest politics," The Review of International Organizations, Springer, vol. 3(2), pages 105-121, June.
    2. Alberto Paloni & Maurizio Zanardi, 2006. "Development Policy Lending, Conditionality, and Ownership: A Dynamic Agency Model Perspective," Review of Development Economics, Wiley Blackwell, vol. 10(2), pages 253-266, May.

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