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Loans or Grants?

  • Daniel Cohen


  • Pierre Jacquet
  • Helmut Reisen

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. We claim that 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. Based on this idea, we present one of the lending scheme that could be applied to the poorest countries and calibrate the cost that would have to be borne by the creditors, were they to incorporate contingencies clause in their lending strategy.

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Article provided by Springer in its journal Review of World Economics.

Volume (Year): 143 (2007)
Issue (Month): 4 (December)
Pages: 764-782

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Handle: RePEc:spr:weltar:v:143:y:2007:i:4:p:764-782
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  1. Jeremy Bulow & Kenneth Rogoff, 2005. "Grants versus Loans for Development Banks," American Economic Review, American Economic Association, vol. 95(2), pages 393-397, May.
  2. Michael A. Clemens & Steven Radelet & Rikhil Bhavnani, 2004. "Counting chickens when they hatch: The short-term effect of aid on growth," International Finance 0407010, EconWPA.
  3. Rodrik, Dani, 1995. "Why is there Multilateral Lending?," CEPR Discussion Papers 1207, C.E.P.R. Discussion Papers.
  4. Alessandro Missale & Silvia Marchesi, 2004. "What does motivate lending and aid to the HIPCs?," International Finance 0411006, EconWPA.
  5. Reisen, Helmut & Soto, Marcelo, 2001. "Which Types of Capital Inflows Foster Developing-Country Growth?," International Finance, Wiley Blackwell, vol. 4(1), pages 1-14, Spring.
  6. Reisen, Helmut & von Maltzan, Julia, 1999. "Boom and Bust and Sovereign Ratings," International Finance, Wiley Blackwell, vol. 2(2), pages 273-93, July.
  7. Hulya Ulku & Tito Cordella, 2004. "Grants Versus Loans," IMF Working Papers 04/161, International Monetary Fund.
  8. Bulow, Jeremy & Rogoff, Kenneth, 1990. "Cleaning Up Third World Debt without Getting Taken to the Cleaners," Journal of Economic Perspectives, American Economic Association, vol. 4(1), pages 31-42, Winter.
  9. Odedokun, Matthew, 2003. "Economics and Politics of Official Loans versus Grants Panoramic Issues and Empirical Evidence," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  10. Daniel Cohen, 2000. "The HIPC Initiative: True and False Promises," OECD Development Centre Working Papers 166, OECD Publishing.
  11. 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.
  12. Patrick GUILLAUMONT & Sylviane GUILLAUMONT JEANNENEY & Lisa CHAUVET & Pierre JACQUET & Bertrand SAVOYE, 2003. "Attenuating through Aid the Vulnerability to Price Shocks," Working Papers 200325, CERDI.
  13. 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.
  14. Robert Powell, 2003. "Debt Relief, Additionality, and Aid Allocation in Low Income Countries," IMF Working Papers 03/175, International Monetary Fund.
  15. Iman Sugema & Anis Chowdhury, 2005. "Aid and Fiscal Behaviour in Indonesia: The case of a lazy government," Centre for International Economic Studies Working Papers 2005-06, University of Adelaide, Centre for International Economic Studies.
  16. 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).
  17. Matthew Odedokun, 2004. "Multilateral and Bilateral Loans versus Grants: Issues and Evidence," The World Economy, Wiley Blackwell, vol. 27(2), pages 239-263, 02.
  18. Devesh Kapur, 2002. "Do as I Say Not as I Do: A Critique of G-7 Proposals on Reforming the MDBs," Working Papers 16, Center for Global Development.
  19. Sanjeev Gupta & Benedict Clements & Emanuele Baldacci & Carlos Mulas-Granados, 2004. "The persistence of fiscal adjustments in developing countries," Applied Economics Letters, Taylor & Francis Journals, vol. 11(4), pages 209-212.
  20. 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.
  21. Louise Young, 2002. "Determining the Discount Rate for Government Projects," Treasury Working Paper Series 02/21, New Zealand Treasury.
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