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Multilateral and Bilateral Loans versus Grants: Issues and Evidence

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  • Matthew Odedokun

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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  • Matthew Odedokun, 2004. "Multilateral and Bilateral Loans versus Grants: Issues and Evidence," The World Economy, Wiley Blackwell, vol. 27(2), pages 239-263, February.
  • Handle: RePEc:bla:worlde:v:27:y:2004:i:2:p:239-263
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    Cited by:

    1. Jacky MATHONNAT & Josselin THUILLIEZ, 2014. "Identification des déterminants de la mortalité routière - Quel rôle jouent les déterminants structurels ?," Working Papers P92, FERDI.
    2. Tim Harford & Michael Klein, 2005. "Grants or Loans? Development Finance and Incentive Effects," World Bank Other Operational Studies 11230, The World Bank.
    3. Richard M. Bird, 2016. "Reforming International Taxation: Is the Process the Real Product?," Hacienda Pública Española, IEF, pages 159-180.
    4. Brech, Viktor & Potrafke, Niklas, 2014. "Donor ideology and types of foreign aid," Journal of Comparative Economics, Elsevier, pages 61-75.
    5. 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.
    6. 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), pages 764-782.
    7. Hiroyuki Hino & Atsushi Iimi, 2008. "Aid Effectiveness Revisited: Comparative Studies of Modalities of Aid to Asia and Africa," Discussion Paper Series 218, Research Institute for Economics & Business Administration, Kobe University.
    8. Hulya Ulku & Tito Cordella, 2004. "Grants Versus Loans," IMF Working Papers 04/161, International Monetary Fund.
    9. Minasyan, Anna & Nunnenkamp, Peter, 2015. "Donors' openness to immigration and the effectiveness of foreign aid," Kiel Working Papers 1983, Kiel Institute for the World Economy (IfW).
    10. Axel Dreher & Peter Nunnenkamp & Rainer Thiele, 2008. "Does Aid for Education Educate Children? Evidence from Panel Data," World Bank Economic Review, World Bank Group, vol. 22(2), pages 291-314, April.
    11. 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.
    12. de Melo, Jaime & Tsikata, Yvonne, 2014. "Regional integration in Africa: Challenges and prospects," WIDER Working Paper Series 037, World Institute for Development Economic Research (UNU-WIDER).
    13. Kati Schindler, 2010. "Credit for What? Informal Credit as a Coping Strategy of Market Women in Northern Ghana," Journal of Development Studies, Taylor & Francis Journals, pages 234-253.
    14. 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.
    15. Johansson, Pernilla, 2009. "Grants to needy countries? A study of aid composition between 1975 and 2005," Working Papers 2009:19, Lund University, Department of Economics.
    16. 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?," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), pages 631-649.
    17. Iimi, Atsushi & Ojima, Yasuhisa, 2008. "Complementarities between grants and loans," Journal of the Japanese and International Economies, Elsevier, pages 109-141.
    18. Berlinger, Edina & Juhász, Péter & Lovas, Anita, 2015. "Az állami támogatás hatása a projektfinanszírozásra erkölcsi kockázat és pozitív externáliák mellett. Szerződéselméleti megközelítés
      [The impact of state subsidy on project financing under moral ha
      ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(2), pages 139-171.
    19. Brech, Viktor & Potrafke, Niklas, 2014. "Donor ideology and types of foreign aid," Journal of Comparative Economics, Elsevier, pages 61-75.
    20. 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).
    21. 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.
    22. Jacky MATHONNAT & Josselin THUILLIEZ, 2014. "Identification des déterminants de la mortalité routière - Quel rôle jouent les déterminants structurels ?," Working Papers P92, FERDI.
    23. 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).

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