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Aid Loans versus Aid Grants: Are the Effects Different?

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Listed:
  • Oliver Morrissey,
  • Olaf Islei,
  • Daniel M'Amanja

Abstract

There is some debate regarding whether aid to poor recipients should be given in the form of loans or grants. This paper concentrates on whether the form of aid influences the effects on recipient fiscal behaviour. The main part of this paper investigates the recipient tax revenue response to inflows of aid and whether the composition of aid, i.e. loans or grants, induces a significantly different response. The relationship between aid and tax revenue is investigated for a sample of up to 55 low and middle-income countries over the period 1975-2000. The results indicate that there is no consistent and robust relationship between aid, the composition of aid, and the tax to GDP ratio in developing countries. This cross-country analysis is complemented by a time series study for 1964-2002 of the effect of fiscal variables (government expenditure and revenue) and aid on growth in Kenya. Two measures of aid are used; external grants and loans, and both yield different results. Aid loans are found to have a negative impact on long run growth, while grants have a positive, albeit weak, impact on growth. The paper concludes that, at least for poor recipients, grants are to be preferred to loans because they create no future repayment burden and appear not to have adverse fiscal effects.

Suggested Citation

  • Oliver Morrissey, & Olaf Islei, & Daniel M'Amanja, 2006. "Aid Loans versus Aid Grants: Are the Effects Different?," Discussion Papers 06/07, University of Nottingham, CREDIT.
    • Handle: RePEc:not:notcre:06/07
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    References listed on IDEAS

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    1. Mr. Dhaneshwar Ghura, 1998. "Tax Revenue in Sub-Saharan Africa: Effects of Economic Policies and Corruption," IMF Working Papers 1998/135, International Monetary Fund.
    2. Mr. Alexander Pivovarsky & Mr. Benedict J. Clements & Mr. Sanjeev Gupta & Mr. Erwin H Tiongson, 2003. "Foreign Aid and Revenue Response: Does the Composition of Aid Matter?," IMF Working Papers 2003/176, International Monetary Fund.
    3. Robert Osei & Oliver Morrissey & Tim Lloyd, 2005. "The fiscal effects of aid in Ghana," Journal of International Development, John Wiley & Sons, Ltd., vol. 17(8), pages 1037-1053.
    4. Hulya Ulku & Mr. Tito Cordella, 2004. "Grants Versus Loans," IMF Working Papers 2004/161, International Monetary Fund.
    5. Matthew Odedokun, 2003. "Economics and Politics of Official Loans versus Grants: Panoramic Issues and Empirical Evidence," WIDER Working Paper Series DP2003-04, World Institute for Development Economic Research (UNU-WIDER).
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Patrick Guillaumont & Laurent Wagner, 2014. "Aid Effectiveness for Poverty Reduction: Lessons from Cross‑country Analyses, with a Special Focus on Vulnerable Countries," Revue d’économie du développement, De Boeck Université, vol. 22(HS01), pages 217-261.
    2. Patrick Guillaumont, 2011. "Aid effectiveness for poverty reduction:macroeconomic overview and emerging issues," CERDI Working papers halshs-00554285, HAL.
    3. Patrick GUILLAUMONT, 2009. "Aid effectiveness for poverty reduction: macroeconomic overview and emerging issues," Working Papers P05, FERDI.
    4. Ugo PANIZZA, 2015. "Debt Sustainability in Low-Income Countries - The Grants versus Loans Debate in a World without Crystal Balls," Working Papers P120, FERDI.
    5. Hermann D. Yohou & Michaël Goujon & Wautabouna Ouattara, 2016. "Heterogeneous Aid Effects on Tax Revenues: Accounting for Government Stability in WAEMU Countries," Journal of African Economies, Centre for the Study of African Economies, vol. 25(3), pages 468-498.
    6. Nestor Cheryba, 2020. "Foreign Assistance and Consumption Inequality: Does the Structure of Aid Matter?," Visnyk of the National Bank of Ukraine, National Bank of Ukraine, issue 249, pages 50-70.
    7. T. Bhavan & Changsheng Xu & Chunping Zhong, 2011. "Growth effect of foreign aid and volatility in South Asia," International Journal of Development Issues, Emerald Group Publishing Limited, vol. 10(3), pages 204-213, September.
    8. Giulia Mascagni, 2014. "Aid and Taxation: Evidence from Ethiopia," Working Paper Series 7314, Department of Economics, University of Sussex Business School.
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    10. Bhavan, T. & Xu, Changsheng & Zhong, Chunping, 2010. "Growth effect of aid and its volatility: An individual country study in South Asian economies," Business and Economic Horizons (BEH), Prague Development Center (PRADEC), vol. 3(3), pages 1-9, October.

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