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

Wolfgang Mayer and Alex Mourmouras

No 2004/038, IMF Working Papers from International Monetary Fund

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.

Keywords: WP; developing country; present value; IMF; conditionality; common agency models; grants vs. loans; policy choice; incumbent government; recidivist incentive; reaction curve; initial-period government choice; government's choice; IFI assistance; recipient government; government face; grant regime; choice of the distortion index; indifference curve; Multilateral development institutions; Loans; National income (search for similar items in EconPapers)
Pages: 28
Date: 2004-03-01
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Citations: View citations in EconPapers (3)

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