Determinants of aid composition Work in progress June 2009 Pernilla - - PowerPoint PPT Presentation

Grants or loans? Determinants of aid composition

Work in progress June 2009 Pernilla Johansson Department of Economics Lund University Sweden

Background

• Donors provide foreign aid as a mix of
• Pure grants (71 percent of gross aid flows, 2004)
• Concessional loans
• Poor countries are heavily indebted
• Pure grants do not add to the debt stock
• Concessional loans add to the debt stock

Importance of the grant–loan mix

• Relation to debt sustainability
• Distinct growth effect (e.g. Dovern &

Nunnenkamp 2007)

• Distinct fiscal impact (e.g. Odedokun 2004)
• Variation of the grant–loan mix across countries
• Note: Average from 1970 to 2004.

ODA/GDP Grant/ODA Bhutan 16 89 Guyana 16 42 South Africa 0.3 93 Argentina 0.1 50

Aid allocation literature – total aid

• The existing aid allocation literature focuses on

total aid (e.g. Alesina and Dollar 2000, Berthélemy 2006, Easterly 2007)

• Recipient needs and merits as well as donors’ self-

interest influence allocation decisions

Aid allocation literature – disaggregated aid

• A few studies disaggregate aid into grants and loans
• Odedokun (2003): donor perspective
• Bertélemy (2006): grants/GDP
• Marchesi and Missale (2007): grants/GDP, loans/GDP
• Ratha (2005): World Bank loans/GDP

Research question

• What recipient country characteristics determine the

grant–loan allocation?

Grants and loans: definition

• The grant ratio

Grant ratio=ODA grants/(ODA grants + ODA loans extended)

• The grant element

Grant element=(face value - pv of debt service payments)/face value

• Disbursement data (commitment data)

Descriptive statistics, 1970–2004

• Pure grants dominate aid disbursements (68%)
• The average grant element is 43 percent.
• Donors have replaced loans by grants
• Allocation by region

Grants and loans by recipient region.ppt

• Bilateral and multilateral donors differ.

Potential determinants of the grant–loan mix

• Radelet and Chiang (2003)
• Recipient need

H1: Poorer countries receive a larger share of aid as grants.

• Prospect for growth

H2: Countries with a higher quality of institutions and polices receive a larger share of aid as loans. H3: Countries with a good growth record receive a larger share of aid as loans.

Potential determinants of the grant–loan mix

• Risk of shocks

H4: Countries facing greater risk in terms of price volatility receive a larger share of aid as grants. H5: Political unstable countries receive a larger share of aid as grants.

• Capacity to borrow

H6: More indebted countries receive a larger share of aid as grants. H7: Countries with a history of paying more debt service receive a larger share of aid as loans H8: High inflation countries receive a larger share of aid as grants.

Potential determinants of the grant–loan mix

• Control variables
• Total level of aid (per capita)
• Recipient population

Modeling framework

• Time period: 1970–2004
• 70 developing countries (26 low-income)
• Explanatory variables lagged and calculated as a

moving average over the three most recent years.

• Bilateral and multilateral aid separately (grant ratio)
• Changes over time
• Fixed effect and logit estimation

Results: baseline regressions

• Regression table 1.ppt
• Poorer countries receive relatively more grants
• Some evidence that prospect for growth influence

multilateral aid composition

• Some evidence that political unstable countries

receive more grants as a percentage of bilateral aid

• No evidence that the debt stock influence aid

composition

Results: baseline regressions (contd.)

• Some evidence that countries who pay more debt

service receive relatively more loans (more concessional loans).

• The level of aid and recipient population are

significant.

Results: changes over time

• Comparison of the 1970 to 1989 period and 1990

to 2004 period

• Few changes
• No evidence that indebtedness influence aid

composition in the second period (positive and significant in the first period for multilateral aid).

Conclusion and future research

• Recipient need rather than indebtedness

determines the grant–loan mix as poorer countries receive relatively more grants.

• Behavior of individual donors
• Interdependencies in aid composition among

donors