Beyond “Grants Versus Loans”: How to Use Debt for Development?

Abstract

This paper looks at the ‘grants versus loans’ controversy. It questions the claim sometimes made that development institutions should refrain from making loans and should instead distribute ODA as outright grants only. It discusses various reasons why developing countries do not have full access to international capital markets beyond the traditionally invoked problem of weak governance and institutions and beyond factors within their own responsibility. There are market failures that justify ODA, and there is a priori no overall superiority of grants as compared to loans. On the contrary, we believe that loans may provide a superior solution, provided that they focus on the key issue of maintaining debt sustainability. Finally, and beyond the loans-versus-grants controversy, the paper also proposes to revisit the traditional paradigm of ODA.

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