The Political Economy of Conditional and Unconditional Foreign Assistance: Grants vs. Loan Rollovers

March 1, 2004

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Wolfgang Mayer, and Alex Mourmouras. The Political Economy of Conditional and Unconditional Foreign Assistance: Grants vs. Loan Rollovers, (USA: International Monetary Fund, 2004) accessed November 24, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Improving the effectiveness of financial assistance programs is a priority of international financial institutions (IFIs). This paper examines the effectiveness of alternative assistance instruments in a dynamic political economy framework. Economic policies of the receiving country are distorted by the influence of a domestic interest group. The assistance-providing IFI aims at reducing these distortions. The IFI provides assistance either as grants or loans, and either conditionally on reducing policy distortions or unconditionally. The paper shows that, other things constant, one-time grants are more effective than loan rollovers when assistance is unconditional, but that the opposite is true when assistance is conditional.

Subject: Financial institutions, Loans, Multilateral development institutions, National accounts, National income

Keywords: Choice of the distortion index, Common agency models, Conditionality, Developing country, Government face, Government's choice, Grant regime, Grants vs. loans, IFI assistance, IMF, Incumbent government, Indifference curve, Initial-period government choice, Loans, Multilateral development institutions, National income, Policy choice, Present value, Reaction curve, Recidivist incentive, Recipient government, WP

Publication Details

Pages:

28
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2004/038
Stock No:

WPIEA0382004
ISBN:

9781451845723
ISSN:

1018-5941

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