Did high debts distort loans and grants allocation to IDA countries?

Silvia Marchesi and Alessandro Missale

No 226, Working Papers from University of Milano-Bicocca, Department of Economics

Abstract: We examine the allocation of net loans, grants and net transfers to IDA countries over the period 1982-2008 focusing on the role of debt, and debt sustainability, in the decisions of multilateral and bilateral donors. We estimate a dynamic panel of 75 IDA and IDA-Blend countries for the period 1982-2008, where the sample includes 40 HIPC and a control group of other 35 low-income countries. Our results point to no evidence of defensive lending as opposed to strong evidence of defensive granting. A significant negative reaction of net loans to the debt ratio characterizes the decisions of both multilateral and bilateral creditors. The impact of lower loans on the budget of debtor countries was however accommodated through the transfers of other resources, in the form of conventional grants (on top of debt forgiveness). This result is consistent with a substitution of grants for loans and the new approach to debt sustainability but questions the efficiency and selectivity of the aid policy.

Keywords: defensive lending; foreign aid; grants; highly indebted poor countries.; defensive lending; foreign aid; grants; highly indebted poor countries. (search for similar items in EconPapers)
JEL-codes: C23 F34 F35 O19 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2012-08, Revised 2012-08
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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http://repec.dems.unimib.it/repec/pdf/mibwpaper226.pdf First version, 2012 (application/pdf)

Related works:
Journal Article: Did High Debts Distort Loan and Grant Allocation to IDA Countries? (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:mib:wpaper:226

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