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UNU-WIDER Loans or Grants?

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A teenager wears torn rubber boots in a muddy local market in Bac Ha, Viet Nam. As of 2005 figures, half the world population—more than 3 billion people–is estimated to live on less than USD 2.50 a day. Bac Ha, Viet Nam. UN Photo/Kibae Park.

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Loans or Grants?

We argue in this paper that cancelling the debt of the poorest countries was a good thing, but that it should not imply that the debt instrument should be foregone. Debt and debt cancellations are indeed two complementary instruments which, if properly managed, perform better than either loans or grants taken in isolation. The core of the intuition, which we develop in a simple two-period model, relates to the fact that the poorest countries are also the most volatile, so that contingent facilities, explicitly incorporating debt cancellation mechanisms, are a valuable instrument.
Publisher:
UNU-WIDER
Series:
WIDER Discussion Paper
Volume:
2007/06
Title:
Loans or Grants?
Authors:
Daniel Cohen, Pierre Jacquet, and Helmut Reisen
Publication date:
November 2007
ISBN 13 Print:
9789292300227
ISBN 13 Web:
9789292300234
Copyright holder:
© UNU-WIDER
Copyright year:
2007
Keywords:
grants, loans, developing countries
JEL:
F34, F35
Project:
Conference on 'Aid: Principles, Policies and Performance'
Sponsor:
UNU-WIDER gratefully acknowledges the financial contribution to the conference by the Finnish Ministry for Foreign Affairs.
Format:
online and printed copies

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