Lending versus giving: The economics of foreign assistance

Historically, very little attention has been devoted to assessing the costs and benefits of concessional loans vs grants as the means of transferring resources to developing countries. Here it is argued that this omission is in part due to the lack of an acceptable analytic construct within which to measure the costs to donors and benefits to recipients of loans and grants. The paper proposes such a framework and explores some of the policy implications for development assistance policy, in particular the trade-off between the volume of assistance and the terms of that aid. The objective is to lay the groundwork for a more constructive dialogue between borrowers and lenders which, hopefully, could foster foreign assistance flows of greater value to developing countries.