Financing Growth: Foreign Aid vs. Foreign Loans
FRB of St. Louis Working Paper No. 2013-031A
31 Pages Posted: 25 Oct 2013
Date Written: October 10, 2013
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: Suggested Citation