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Grants Versus Loans

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  • Hulya Ulku
  • Mr. 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.

Suggested Citation

  • Hulya Ulku & Mr. Tito Cordella, 2004. "Grants Versus Loans," IMF Working Papers 2004/161, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2004/161
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    References listed on IDEAS

    as
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    Cited by:

    1. 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.
    2. Philip Michael Kargbo & Kunal Sen, 2014. "Aid Categories that Foster Pro‐Poor Growth: The Case of Sierra Leone," African Development Review, African Development Bank, vol. 26(2), pages 416-429, June.
    3. Daniel Cohen & Pierre Jacquet & Helmut Reisen, 2007. "Loans or Grants?," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 143(4), pages 764-782, December.
    4. Axel Dreher & Peter Nunnenkamp & Rainer Thiele, 2008. "Does Aid for Education Educate Children? Evidence from Panel Data," The World Bank Economic Review, World Bank, vol. 22(2), pages 291-314, April.
    5. 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.
    6. Ugo PANIZZA, 2015. "Debt Sustainability in Low-Income Countries - The Grants versus Loans Debate in a World without Crystal Balls," Working Papers P120, FERDI.
    7. Kimura, Hidemi & Mori, Yuko & Sawada, Yasuyuki, 2012. "Aid Proliferation and Economic Growth: A Cross-Country Analysis," World Development, Elsevier, vol. 40(1), pages 1-10.
    8. Miss Nkunde Mwase, 2011. "Determinants of Development Financing Flows From Brazil, Russia, India, and China to Low-Income Countries," IMF Working Papers 2011/255, International Monetary Fund.
    9. 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.
    10. Cordella, Tito & Missale, Alessandro, 2013. "To give or to forgive? Aid versus debt relief," Journal of International Money and Finance, Elsevier, vol. 37(C), pages 504-528.
    11. Thiele, Rainer & Nunnenkamp, Peter & Dreher, Axel, 2006. "Sectoral aid priorities: Are donors really doing their best to achieve the millennium development goals?," Kiel Working Papers 1266, Kiel Institute for the World Economy (IfW Kiel).
    12. 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, April.
    13. Oliver Morrissey, & Olaf Islei, & Daniel M'Amanja, 2006. "Aid Loans versus Aid Grants: Are the Effects Different?," Discussion Papers 06/07, University of Nottingham, CREDIT.
    14. Dovern, Jonas & Nunnenkamp, Peter, 2006. "Aid and growth accelerations: An alternative approach to assess the effectiveness of aid," Kiel Working Papers 1296, Kiel Institute for the World Economy (IfW Kiel).
    15. Almuth Scholl, 2018. "Debt Relief for Poor Countries: Conditionality and Effectiveness," Economica, London School of Economics and Political Science, vol. 85(339), pages 626-648, July.
    16. Gunatilake, H. & Fabella, R.V & Lagman-Martin, A., 2011. "Foreign Aid, Aid Effectiveness and the New Aid Paradigm: A Review," Sri Lankan Journal of Agricultural Economics, Sri Lanka Agricultural Economics Association (SAEA), vol. 12, pages 1-44.
    17. repec:zbw:ifwkie:3881 is not listed on IDEAS
    18. 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 Kiel).

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