Development Aid and Access to Commercial International Capital Markets

Abstract

Development aid comes in many different forms, and has a large range of effects on the recipient countries and their economies. There exists a vast literature - in economics and other fields of research - on consequences of foreign aid on the recipient economies. Scientific evidence suggests at least that few general conclusions can be made concerning these effects and consequences. It is clear, however, that there are consequences of aid that are not intended - and maybe not even foreseen - by the donors, and that some of these might be hindering economic growth and development. The first part of this thesis is a review of some of the contributions from economic literature on the effects and consequences of development aid on developing economies. Some developing country governments might consider the negative effects of dependency on development aid as large. And even if they don't, a goal of growth, development and poverty reduction might lead to expectations of lower amounts of development aid flowing into the country in the future. Such expectations could lead the government to search for other sources of capital. An alternative way to finance public spending and investment for some countries receiving development aid, could be to enter international capital markets, and borrow money from commercial lenders. The hypothesis laying grounds for this thesis is that infows of development aid may hinder some developing countries from accessing commercialinternational capital markets. I analyze this hypothesis in a theoretical framework, building a stylized model of the interaction between a developing country, a commercial lender, and a donor of development aid. The main implication of the model is that - at least under some circumstances - the presence of an aid-donor can hinder the developing country from accessing the market, through increasing the riskiness of giving loans, perceived by the commercial lender.