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

Author

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  • Mr. Wolfgang Mayer
  • Mr. Alex Mourmouras

Abstract

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.

Suggested Citation

  • Mr. Wolfgang Mayer & Mr. Alex Mourmouras, 2004. "The Political Economy of Conditional and Unconditional Foreign Assistance: Grants vs. Loan Rollovers," IMF Working Papers 2004/038, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2004/038
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    References listed on IDEAS

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    1. Grossman, Gene M & Helpman, Elhanan, 1994. "Protection for Sale," American Economic Review, American Economic Association, vol. 84(4), pages 833-850, September.
    2. Dixit, Avinash & Grossman, Gene M & Helpman, Elhanan, 1997. "Common Agency and Coordination: General Theory and Application to Government Policy Making," Journal of Political Economy, University of Chicago Press, vol. 105(4), pages 752-769, August.
    3. Bird, Graham & Hussain, Mumtaz & Joyce, Joseph P., 2004. "Many happy returns? Recidivism and the IMF," Journal of International Money and Finance, Elsevier, vol. 23(2), pages 231-251, March.
    4. Mr. Alex Mourmouras & Mr. Wolfgang Mayer, 2002. "Vested Interests in a Positive Theory of IFI Conditionality," IMF Working Papers 2002/073, International Monetary Fund.
    5. Devashish Mitra, 2016. "Endogenous Lobby Formation and Endogenous Protection: A Long-Run Model of Trade Policy Determination," World Scientific Book Chapters, in: The Political Economy of Trade Policy Theory, Evidence and Applications, chapter 1, pages 3-21, World Scientific Publishing Co. Pte. Ltd..
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    Cited by:

    1. Alberto Paloni & Maurizio Zanardi, 2006. "Development Policy Lending, Conditionality, and Ownership: A Dynamic Agency Model Perspective," Review of Development Economics, Wiley Blackwell, vol. 10(2), pages 253-266, May.
    2. Wolfgang Mayer & Alex Mourmouras, 2008. "IMF conditionality: An approach based on the theory of special interest politics," The Review of International Organizations, Springer, vol. 3(2), pages 105-121, June.
    3. Mr. Jeromin Zettelmeyer & Mr. Jonathan David Ostry & Mr. Olivier D Jeanne, 2008. "A Theory of International Crisis Lending and IMF Conditionality," IMF Working Papers 2008/236, International Monetary Fund.

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