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Did High Debts Distort Loan and Grant Allocation to IDA Countries?

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  • Marchesi, Silvia
  • Missale, Alessandro

Abstract

We examine the allocation of net loans, net transfers, and grants to IDA countries over the period 1982–2008 focusing on the role of debt and debt sustainability in the decisions of multilateral and bilateral donors. We find no evidence of defensive lending but strong evidence of defensive granting. A significant negative reaction of net loans to the debt ratio indeed characterizes the decisions of both multilateral and bilateral creditors. The impact of lower loans on the budget of debtor countries is however accommodated through higher grants, in addition to debt relief. These findings are consistent with a substitution of grants for loans and with the new approach to debt sustainability but question the efficiency and selectivity of foreign aid.

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  • Marchesi, Silvia & Missale, Alessandro, 2013. "Did High Debts Distort Loan and Grant Allocation to IDA Countries?," World Development, Elsevier, vol. 44(C), pages 44-62.
    • Handle: RePEc:eee:wdevel:v:44:y:2013:i:c:p:44-62
    DOI: 10.1016/j.worlddev.2012.12.011
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    2. Marin Ferry & Marc Raffinot, 2019. "Curse or Blessing? Has the Impact of Debt Relief Lived up to Expectations? A Review of the Effects of the Multilateral Debt Relief Initiatives for Low-Income Countries," Journal of Development Studies, Taylor & Francis Journals, vol. 55(9), pages 1867-1891, September.
    3. Anna Tykhonenko & Donnat Grégory, 2022. "Debt Relief: The Day After, Financing Low-Income Countries," Post-Print hal-04298772, HAL.
    4. Carter Patrick, 2013. "Does Foreign Aid Displace Domestic Taxation?," Journal of Globalization and Development, De Gruyter, vol. 4(1), pages 1-47, August.
    5. Yu Ri Kim, 2019. "Does aid for trade diversify the export structure of recipient countries?," The World Economy, Wiley Blackwell, vol. 42(9), pages 2684-2722, September.
    6. Jeremy Bulow & Kenneth Rogoff, 2005. "Grants versus Loans for Development Banks," American Economic Review, American Economic Association, vol. 95(2), pages 393-397, May.

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    More about this item

    Keywords

    aid; debt sustainability; defensive lending; developing countries; HIPC;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F35 - International Economics - - International Finance - - - Foreign Aid
    • O19 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations

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