Abstract
We argue in this paper that canceling 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.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
References
Buchanan, J. M. (1975). The Samaritan’s Dilemma. In E. S. Phelps (ed.), Altruism, Morality and Economic Theory. New York: Russel Sage Foundation.
Bulow, J., and K. S. Rogoff (2005). Grants versus Loans for Development Banks. Paper presented at the American Economic Association Meetings in Philadelphia, 7 Jan.
Clemens, M., S. Radelet, and R. Bhavnani (2004). Counting Chickens When They Hatch: The Short-Term Effects of Aid on Growth. Working Paper 44. Center for Global Development, Washington, D.C.
Clements, B., S. Gupta, A. Pivovarsky, and E. R. Tiongson (2004). Foreign Aid: Grants versus Loans. Finance and Development (September): 46–49.
Cohen, D. (2001). The HIPC Initiative: True and False Promises. International Finance 4 (3): 363–380.
Cohen, D., and C. Vellutini (2004). Beyond the HIPC Initiative. Report to the European Commission. Available at: <http://europa.eu.int/comm./development/body/theme/docs>.
Cohen, D., and R. Portes (2005). Towards a Lender of First Resort. Discussion Paper 4615. Centre for Economic Policy Research, London.
Cohen, D., and H. Reisen (2006). L’aide aux pays pauvres: prêts ou dons? In D. Cohen, S. Guillaumont-Jeanneney, and P. Jacquet (eds.), La France et l’aide publique au déveloment: Rapport. Paris: Documentation Française.
Cohen, D., T. Fally, and S. Villemot (2004). In Favor of a Fund to Stabilize Commodity Exporters’ Income. Discussion Paper 5550. Centre for Economic Policy Research, London.
Collier, P., P. Guillaumont, S. Guillaumont-Jeanneney, and J. W. Gunning (1999). Reforming Stabex. The World Economy 22 (5): 669–682.
Cordella, T., and H. Ulku (2004). Grants versus Loans. IMF Working Paper 161. International Monetary Fund, Washington, D.C.
Gilbert, C., and P. Varangis (2005). Commodity Prices. Mimeo. World Bank, Washington, D.C.
Gupta, S., B. Clements, E. Baldacci, and C. Mulas-Granados (2004). The Persistence of Fiscal Adjustments in Developing Countries. Applied Economics Letters 11: 209–212.
Guillaumont, P., S. Guillaumont-Jeanneney, P. Jacquet, L. Chauvet, and B. Savoye (2003). Attenuating through Aid the Vulnerability to Price Shocks. Paper presented at the World Bank 2003 ABCDE-Europe Conference, Paris, May.
IFIAC (International Financial Institutions Advisory Committee) (2000). Report of the International Financial Institution Advisory Commission (“Meltzer Report”). Washington, D.C.: United States Congress.
Jacquet, P., and S. Marniesse (2005). Financing Global Public Goods. A Report for the Global Task Force on GPG Provision.
Jacquet, P., and J.-M. Severino (2004). Prêter, donner: comment aider? Revue d’économie financière 74: 285–317.
Kharroubi, E. (2005). Déterminants de l’accès aux marchés financiers. Mimeo, Banque de France, Paris.
Lerrick, A., and A. Meltzer (2002). Grants: A Better Way to Deliver Aid. Quarterly International Economic Report, January. Carnegie Mellon University.
Marchesi S., and A. Missale (2004). What Does Motivate Lending and Aid to the HIPCs. Mimeo. University of Sienna.
McGillivray, M., and A. Ahmed (1999). Aid, Adjustment and Public Sector Behavior in Developing Countries. Journal of Asia-Pacific Economy 4: 381–391.
Nunnenkamp, P., R. Thiele, and T. Wilfer (2005). Grants Versus Loans: Much Ado About (Almost) Nothing. Kiel Economic Policy Papers 4. Kiel Institute for World Economics, Kiel.
Odedokun, M. (2003). Economics and Politics of Official Loans versus Grants. Panoramic Issues and Empirical Evidence. UNU/WIDER Discussion Paper 2003/04. United Nations University/World Institute for Development Economics Research, Helsinki.
Powell, R. (2003). Debt Relief, Additionality, and Aid Allocation. IMF Working Paper 03/175. International Monetary Fund, Washington, D.C.
Radelet, S. (2005). Grants for the World’s Poorest: How the World Bank Should Distribute Its Funds. CGD Notes. Center for Global Development, Washington, D.C., June.
Ramey, G., and V. A. Ramey (1995). Cross-Country Evidence on the Link between Volatility and Growth. American Economic Review 85 (5): 1138–1151.
Reisen, H., and J. von Maltzan (1999). Boom and Bust and Sovereign Ratings. International Finance 2 (2): 273–294.
Reisen, H., and M. Soto (2001). Which Types of Capital Inflows Foster Economic Growth? International Finance 4 (1): 1–14.
Sugema, I., and A. Chowdhury (2005). Aid and Fiscal Behaviour in Indonesia: The Case of a Lazy Government. Discussion Paper 0506. Center for International Economic Studies (CIES), May, University of Adelaide.
World Bank (various issues). Global Development Finance. CD-ROM. World Bank, Washington, D.C.
World Bank (various issues). Global Development Network Growth Database. World Bank, Washington, D.C.
Author information
Authors and Affiliations
Corresponding author
Additional information
JEL no.
F34, F35
About this article
Cite this article
Cohen, D., Jacquet, P. & Reisen, H. Loans or Grants?. Rev World Econ 143, 764–782 (2007). https://doi.org/10.1007/s10290-007-0131-y
Issue Date:
DOI: https://doi.org/10.1007/s10290-007-0131-y