Download This PaperThe Political Economy of Conditional and Unconditional Foreign Assistance: Grants Versus Loan Rollovers
28 Pages Posted: 13 Feb 2006
Date Written: March 2004
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: IMF, conditionality, common agency models, grants vs. loans
JEL Classification: E61, F33, F34
Suggested Citation: Suggested Citation
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