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Donors’ Mechanisms for Financing International and National Public Goods: Loans or Grants?

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  • Raechelle Mascarenhas
  • Todd Sandler

Abstract

This paper investigates whether three classes of donors – multilateral organisations, regional institutions and bilateral donors – tailor their mix of grants and loans to reflect international benefit spillovers and recipient‐specific benefits, derived from aid‐funded activities in developing and transition countries. To account for recipient benefit shares, donors should use a greater share of grants when supported activities yield a larger portion of international public benefits. A greater reliance on loans is appropriate when a large portion of recipient‐specific benefits are associated with the assistance. By reflecting recipient benefit shares in the grant‐loan mix, donors’ assistance also promotes allocative efficiency. Using the Credit Reporting System (CRS) database from OECD for 1980–2000, our analysis establishes that various donor classes apply different grant‐loan mixtures when supporting the environment, health, knowledge and governance sectors of recipient countries. We employ analysis of variance and other statistical comparisons of the means to investigate differences among donor classes. We demonstrate that bilateral donors do the best job in tailoring their grant‐loan mix to accord with the extent of international public good benefits embodied in the aid‐supported activity. Multilateral organisations’ grant‐loan mix is intermediate of the three types of donors, with some evidence of them relying more on grants to finance activities that possess a larger share of international public good spillovers. Regional institutions, however, do not discriminate their grant‐loan mix by either sectors or the associated public good spillovers. This finding suggests that regional development banks need to adjust their grant‐loan mix to better account for international benefit spillovers if these institutions are to warrant the increased funds to underwrite regional public goods that they have been seeking. If, however, their mix is institutionally set, then the stakeholders must give these institutions greater flexibility to tailor their grants and loans to who benefits from the aid‐supported public goods. This is the first paper to empirically ascertain whether the grant‐loan mix is tied to the inherent publicness of the aid‐funded activities.

Suggested Citation

  • Raechelle Mascarenhas & Todd Sandler, 2005. "Donors’ Mechanisms for Financing International and National Public Goods: Loans or Grants?," The World Economy, Wiley Blackwell, vol. 28(8), pages 1095-1117, August.
    • Handle: RePEc:bla:worlde:v:28:y:2005:i:8:p:1095-1117
    DOI: 10.1111/j.1467-9701.2005.00721.x
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    References listed on IDEAS

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    1. Matthew Odedokun, 2004. "Multilateral and Bilateral Loans versus Grants: Issues and Evidence," The World Economy, Wiley Blackwell, vol. 27(2), pages 239-263, February.
    2. Kaul, Inge & Conceicao, Pedro & Le Goulven, Katell & Mendoza, Ronald U. (ed.), 2003. "Providing Global Public Goods: Managing Globalization," OUP Catalogue, Oxford University Press, number 9780195157413, Decembrie.
    3. Sandler,Todd, 2004. "Global Collective Action," Cambridge Books, Cambridge University Press, number 9780521834773, May.
    4. Easterly, William, 2002. "How Did Heavily Indebted Poor Countries Become Heavily Indebted? Reviewing Two Decades of Debt Relief," World Development, Elsevier, vol. 30(10), pages 1677-1696, October.
    5. Sandler,Todd, 2004. "Global Collective Action," Cambridge Books, Cambridge University Press, number 9780521542548, May.
    6. Kanbur, Ravi & Sandler, Todd & Morrison, Kevin, 1999. "The Future of Development Assistance: Common Pools and International Public Goods," Staff General Research Papers Archive 1629, Iowa State University, Department of Economics.
    7. Kanbur, Ravi, 2002. "IFI's and IPG's: Operational Implications for the World Bank," Working Papers 127298, Cornell University, Department of Applied Economics and Management.
    8. Matthew Odedokun, 2003. "Economics and Politics of Official Loans versus Grants: Panoramic Issues and Empirical Evidence," WIDER Working Paper Series DP2003-04, World Institute for Development Economic Research (UNU-WIDER).
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