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Loans or Grants?

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Author Info
Cohen, Daniel
Jacquet, Pierre
Reisen, Helmut

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Abstract

We argue in this paper that cancelling the debt of the poorest countries was a good thing, but that it should not imply that the debt instrument should be foregone. Debt and debt cancellations are indeed two complementary instruments which, if properly managed, perform better than either loans or grants taken in isolation. The core of the intuition, which we develop in a simple two-period model, relates to the fact that the poorest countries are also the most volatile, so that contingent facilities, explicitly incorporating debt cancellation mechanisms, are a valuable instrument.

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Paper provided by World Institute for Development Economic Research (UNU-WIDER) in its series Working Papers with number UNU-WIDER Research Paper DP2007/06.

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Length: 18 pages
Date of creation: 2007
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Handle: RePEc:unu:wpaper:dp2007-06

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Related research
Keywords: grants; loans; developing countries;

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This paper has been announced in the following NEP Reports: References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Ratha, Dilip, 2001. "Complementarity between multilateral lending and private flows to developing countries : some empirical results," Policy Research Working Paper Series 2746, The World Bank. [Downloadable!]
  2. Matthew Odedokun, 2004. "Multilateral and Bilateral Loans versus Grants: Issues and Evidence," The World Economy, Blackwell Publishing, vol. 27(2), pages 239-263, 02. [Downloadable!] (restricted)
  3. Paul Collier & P. Guillaumont & S. Guillaumont Jeanneney & Jan Willem Gunning, 1999. "Reforming Stabex," The World Economy, Blackwell Publishing, vol. 22(5), pages 669-682, 07. [Downloadable!] (restricted)
  4. Lucas, Robert E, Jr, 1990. "Why Doesn't Capital Flow from Rich to Poor Countries?," American Economic Review, American Economic Association, vol. 80(2), pages 92-96, May. [Downloadable!] (restricted)
  5. Michael Clemens & Steven Radelet & Rikhil Bhavnani, 2004. "Counting Chickens When They Hatch: The Short-term Effect of Aid on Growth," Working Papers 44, Center for Global Development. [Downloadable!]
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  6. Ramey, Garey & Ramey, Valerie A, 1995. "Cross-Country Evidence on the Link between Volatility and Growth," American Economic Review, American Economic Association, vol. 85(5), pages 1138-51, December. [Downloadable!] (restricted)
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  7. Hulya Ulku & Tito Cordella, 2004. "Grants Versus Loans," IMF Working Papers 04/161, International Monetary Fund. [Downloadable!]
  8. Dani Rodrik, 1995. "Why is there Multilateral Lending?," NBER Working Papers 5160, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  9. Odedokun, Matthew, 2003. "Economics and Politics of Official Loans versus Grants Panoramic Issues and Empirical Evidence," Working Papers UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER). [Downloadable!]
  10. Cohen, Daniel, 2001. "The HIPC Initiative: True and False Promises," International Finance, Blackwell Publishing, vol. 4(3), pages 363-80, Winter. [Downloadable!] (restricted)
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  11. Summers, Robert & Heston, Alan, 1991. "The Penn World Table (Mark 5): An Expanded Set of International Comparisons, 1950-1988," The Quarterly Journal of Economics, MIT Press, vol. 106(2), pages 327-68, May. [Downloadable!] (restricted)
  12. Helmut Reisen & Julia von Maltzan, 1999. "Boom and Bust and Sovereign Ratings," OECD Development Centre Working Papers 148, OECD, Development Centre. [Downloadable!]
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  13. Sanjeev Gupta & Benedict Clements & Emanuele Baldacci & Carlos Mulas-Granados, 2004. "The persistence of fiscal adjustments in developing countries," Applied Economics Letters, Taylor and Francis Journals, vol. 11(4), pages 209-212, March. [Downloadable!] (restricted)
  14. Summers, Robert & Heston, Alan, 1988. "A New Set of International Comparisons of Real Product and Price Levels Estimates for 130 Countries, 1950-1985," Review of Income and Wealth, Blackwell Publishing, vol. 34(1), pages 1-25, March.
  15. Cohen, Daniel & Fally, Thibault & Villemot, Sébastien, 2006. "In Favour of a Fund to Stabilize Commodity Exporters' Income," CEPR Discussion Papers 5550, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  1. George Mavrotas & Peter Nunnenkamp, 2007. "Foreign Aid Heterogeneity: Issues and Agenda," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 143(4), pages 585-595, December. [Downloadable!] (restricted)
  2. Axel Dreher & Florian Mölders & Peter Nunnenkamp, 2007. "Are NGOs the Better Donors? A Case Study of Aid Allocation for Sweden," Kiel Working Papers 1383, Kiel Institute for the World Economy. [Downloadable!]
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