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Grants Versus Loans

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Author Info

  • Hulya Ulku
  • Tito Cordella

Abstract

Under what conditions should grants be preferred to loans? To answer this question, we present a simple model à la Krugman (1988) and show that, for any given level of developmental assistance, the optimal degree of loan concessionality is positively associated with economic growth if countries are poor, have bad policies, and high debt obligations. We then test our model by estimating a modified growth model for a panel of developing countries, and find evidence supporting our predictions. Finally, we assess the determinants of current aid allocations and find that the degree of concessionality is negatively correlated with countries' levels of development.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 04/161.

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Length: 90
Date of creation: 01 Sep 2004
Date of revision:
Handle: RePEc:imf:imfwpa:04/161

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Related research

Keywords: Development; Economic growth; Economic models;

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References

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  1. Alberto Alesina & David Dollar, 1998. "Who Gives Foreign Aid to Whom and Why?," NBER Working Papers 6612, National Bureau of Economic Research, Inc.
  2. Tito Cordella & Giovanni Dell'Aricca, 2002. "Limits of Conditionality in Poverty Reduction Programs," IMF Staff Papers, Palgrave Macmillan, vol. 49(Special i), pages 68-86.
  3. Frey, Bruno S. & Schneider, Friedrich, 1986. "Competing models of international lending activity," Journal of Development Economics, Elsevier, vol. 20(2), pages 225-245, March.
  4. Azam, Jean-Paul & Laffont, Jean-Jacques, 2003. "Contracting for aid," Journal of Development Economics, Elsevier, vol. 70(1), pages 25-58, February.
  5. Matthew Odedokun, 2004. "Multilateral and Bilateral Loans versus Grants: Issues and Evidence," The World Economy, Wiley Blackwell, vol. 27(2), pages 239-263, 02.
  6. Sanford, Jonathan E., 2002. "World Bank: IDA Loans or IDA Grants?," World Development, Elsevier, vol. 30(5), pages 741-762, May.
  7. Ross Levine & Norman Loayza & Thorsten Beck, 2002. "Financial Intermediation and Growth: Causality and Causes," Central Banking, Analysis, and Economic Policies Book Series, in: Leonardo Hernández & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (S (ed.), Banking, Financial Integration, and International Crises, edition 1, volume 3, chapter 2, pages 031-084 Central Bank of Chile.
  8. Frank Windmeijer, 2000. "A finite sample correction for the variance of linear two-step GMM estimators," IFS Working Papers W00/19, Institute for Fiscal Studies.
  9. Svensson, Jakob, 1998. "Foreign aid and rent-seeking," Policy Research Working Paper Series 1880, The World Bank.
  10. Beck, Thorsten & Levine, Ross & Loayza, Norman, 2000. "Finance and the sources of growth," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 261-300.
  11. Richard Blundell & Steve Bond, 1995. "Initial conditions and moment restrictions in dynamic panel data models," IFS Working Papers W95/17, Institute for Fiscal Studies.
  12. Hansen, Henrik & Tarp, Finn, 2001. "Aid and growth regressions," Journal of Development Economics, Elsevier, vol. 64(2), pages 547-570, April.
  13. Murshed, S Mansoob & Sen, Somnath, 1995. "Aid Conditionality and Military Expenditure Reduction in Developing Countries: Models of Asymmetric Information," Economic Journal, Royal Economic Society, vol. 105(429), pages 498-509, March.
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Citations

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Cited by:
  1. Larru, Jose Maria, 2006. "La ayuda al desarrollo: ¿reduce la pobreza?
    [Foreign Aid: reduce poverty? (in Spanish)]    ," MPRA Paper 2341, University Library of Munich, Germany.
  2. Axel Dreher & Peter Nunnenkamp & Rainer Thiele, 2006. "Does Aid for Education Educate Children? Evidence from Panel Data," KOF Working papers 06-146, KOF Swiss Economic Institute, ETH Zurich.
  3. Cohen, Daniel & Jacquet, Pierre & Reisen, Helmut, 2007. "Loans or Grants?," Working Papers UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  4. 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 06-124, KOF Swiss Economic Institute, ETH Zurich.
  5. Fitoussi, Jean-Paul, 2006. "Commentaire du rapport La France et l’aide publique au développement," Open Access publications from Sciences Po info:hdl:2441/4481, Sciences Po.
  6. 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.
  7. Nkunde Mwase, 2011. "Determinants of Development Financing Flows from Brazil, Russia, India, and China to Low-Income Countries," IMF Working Papers 11/255, International Monetary Fund.
  8. Oliver Morrissey, & Olaf Islei, & Daniel M'Amanja, . "Aid Loans versus Aid Grants: Are the Effects Different?," Discussion Papers 06/07, University of Nottingham, CREDIT.
  9. Yasuyuki Sawada & Ayako Matsuda & Hidemi Kimura, 2012. "On The Role Of Technical Cooperation In International Technology Transfers," Journal of International Development, John Wiley & Sons, Ltd., vol. 24(3), pages 316-340, 04.
  10. Raihan, Selim & Razzaque, Mohammad A, 2007. "WTO and regional trade negotiation outcomes: quantitative assessments of potential implications on Bangladesh," MPRA Paper 38475, University Library of Munich, Germany.

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