Financing Growth: Foreign Aid vs. Foreign Loans

FRB of St. Louis Working Paper No. 2013-031A

31 Pages Posted: 25 Oct 2013

See all articles by Subhayu Bandyopadhyay

Subhayu Bandyopadhyay

Federal Reserve Bank of St. Louis - Research Division; IZA Institute of Labor Economics; West Virginia University

Sajal Lahiri

Southern Illinois University Carbondale - Department of Economics

Javed Younas

American University of Sharjah - Economics Department

Date Written: October 10, 2013

Abstract

Compared to foreign grants, do concessional loans from foreign governments and/or unsubsidized loans from foreign private banks lead to faster growth in developing nations? The answer has implications for aid agencies (i) in allocating a given amount of resources between grants and concessional loans; and (ii) in encouraging financial market reforms. We examine the effects of ODA grants, concessional ODA loans, and private offshore bank loans on growth rates of 131 developing nations over 1996-2010 in a unified way. We find evidence of non-linearities in all three relationships, suggesting that at low (high) levels grants are better (worse) than loans (concessional or private).

Keywords: foreign aid, concessional loans, offshore bank loans, economic growth

JEL Classification: F35, O10

Suggested Citation

Bandyopadhyay, Subhayu and Lahiri, Sajal and Younas, Javed, Financing Growth: Foreign Aid vs. Foreign Loans (October 10, 2013). FRB of St. Louis Working Paper No. 2013-031A. Available at SSRN: https://ssrn.com/abstract=2343757 or http://dx.doi.org/10.2139/ssrn.2343757

Subhayu Bandyopadhyay (Contact Author)

Federal Reserve Bank of St. Louis - Research Division ( email )

411 Locust St
PO Box 442
St. Louis, MO 63011
United States

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

West Virginia University ( email )

Morgantown, WV 26506-6025
United States
304-293-7879 (Phone)
304-293-7061 (Fax)

Sajal Lahiri

Southern Illinois University Carbondale - Department of Economics ( email )

MC 415
1000 Faner Drive
Carbondale, IL 62901
United States

Javed Younas

American University of Sharjah - Economics Department ( email )

P.O. Box 26666
Sharjah
United Arab Emirates

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