O MEET
the Millennium
Development Goals,
including
cutting global poverty in half by
2015, donor countries have been
called upon to allocate 0.7 percent of their
GNP for official development assistance. But
this raises the question of what form the aid
should take—loans or grants? Scholars have
argued, at least since the early 1960s, that
recipient countries view loans as different
from grants because they carry the burden of
future repayment. This induces policymak-
ers to use funds wisely and to mobilize taxes
or, at least, to maintain current levels of rev-
enue collection. In contrast, grants are
viewed as free resources and could therefore
substitute
for domestic revenues. The
strength of these arguments depends on how
strongly policymakers perceive loans,
in
practice, as being different from grants. If a
large share of these loans is provided on
highly concessional terms, and loans are fre-
quently forgiven, policymakers may come to
view them, over time, as roughly equivalent
to grants.
Some recent initiatives have called for a
shifting of foreign aid toward grants while
increasing overall assistance to developing
countries. These initiatives are driven, in
part, by the belief that excessive lending has
led to massive debt accumulation in many
developing countries and has not helped
them reach their development objectives.
From this perspective, aid should be moti-
vated primarily by humanitarian objectives
and thus take the form of grants. It is
thought that such an approach would both
help recipient countries develop their
economies and improve their prospects for
achieving debt sustainability.
In response to these initiatives, some
donor countries and researchers have
expressed concern that a significant shift to
grants would make it difficult for the
International Development Association, the
World Bank’s concessional lending arm, to
maintain lending at the existing level. They
also fear that such a shift could dampen pub-
lic support in donor countries for transfers
to developing countries.
One quest