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The Economic Impact of an Externally Financed Loan Program
The IDB in Colombia: A Case Study*
Published online by Cambridge University Press: 02 January 2018
Extract
A loan is considered a purely financial transaction that alters the composition of particular portfolios while leaving the aggregate stock of assets unchanged. Because such a transaction does not of itself generate new production, its dollar value is excluded from the calculation of GNP. It is probably for this reason that the economic significance of lending programs for stabilization purposes has been largely neglected. The transfer payment is similar to the loan in that neither enters the income stream directly, yet the former is considered to have a substantial economic effect.
In a development context external financing is thought to be a significant variable for increasing an economy's growth rate. The success of these loans in generating growth is usually measured by comparing the actual growth rate with some desired standard growth rate.
- Type
- Research Article
- Information
- Journal of Interamerican Studies and World Affairs , Volume 12 , Issue 2 , April 1970 , pp. 205 - 216
- Copyright
- Copyright © University of Miami 1970
Footnotes
*
Grateful acknowledgement of helpful advice and suggestions is due to Professors Hensley, McNicoll, Streeter, Wogart, aad Wright. The usual caveat is applied to the remaining errors and omissions.
References
1 A statement, related to appropriate budget concepts for stabilization policy, by Arthur Okun exemplifies this tendency: “… the whole conceptual framework of income accounting … does distinguish loans from income payments, and I don't see any way of viewing loans as income-generating expenditures. They just aren't” ( Hearings, J. E. C., The Federal Budget as an Economic Document, 88:1, p. 21 Google Scholar). Although it is clear that loans do not directly contribute to income, it is not clear that they do not ultimately generate income. See Break, George, Federal Lending and Economic Stability (Washington: Brookings, 1965)Google Scholar, for the best statement of this possibility.
2 The simple multiplier effect of a transfer payment can be demonstrated in the following way. Starting with the income identity:
(1) Y = C + I where C is consumption and I is private investment, write the consumption function in the form:
(2) C = C(Y + Tr), where Tr are transfer payments. Substituting (2) into (1) and differentiating, we get (holding I constant):
(3)
If the assumption that the marginal propensity to consume out of transfer payments (∂C/∂Tr) equals one is reasonable, the multiplier effect of the change in transfer payments equals the usual multiplier effect of a change in expenditures. Note that this is true even though transfer payments, like loans, are not direct income payments. This same analysis is applied to lending programs in section I.
3 See, for instance, Nevin, Edward, Capital Funds in Underdeveloped Countries (New York: St. Martin's Press, 1961)Google Scholar; Mikesell, Raymond, Public International Lending for Development (New York: Random House, 1966).Google Scholar
4 IDB, Social Progress Trust Fund, Seventh Annual Report (Washington: 1968), p. 1.Google ScholarPubMed
5 IDB, Proceedings, 9th Meeting of the Board of Governors (Bogota, April, 1968), p. 55; IDB, Seventh Annual Report, p. 102; D.A.N.E., Republic of Colombia, Plan general de desarrollo (Bogota, 1965), p. 85.
6 IDB, Proceedings, 1st Meeting of the Board of Governors, San Salvador, El Salvador (Washington, 1960), p. 9.Google Scholar
7 IDB, Proceedings, 9th Meeting of the Board of Governors, Bogotá, April, 1969, p. 45.Google Scholar
8 Investment is defined to include additions to human capital as well, even though the rate-of-return is more difficult to measure.
9 Simply put, this means that the change in income attributed to the loan program will depend upon the marginal relationship that exists between investment and the loan program and consumption and income.
10 Nothing more than 
a multiplicative factor in expression 3.
11 See George Break, Federal Lending, chapter 2 for a detailed analysis of the stabilization effects of government lending.
12 The high propensity to import weakens the multiplier effect in its later stages as well. See Holtzman, & Zellner, , “The Foreign Trade and Balanced Budget Multipliers,” American Economic Review, March 1958.Google Scholar
13 This is basically the role the U.S. government plays when it pools the agency loans and issues participation certificates. These certificates are as safe as U.S. bonds and carry similar interest rates. See paper, Staff, “Loans, Participation Certificates, and the Financing of Budget Deficits” in Budget Concepts for Economic Analysis (Washington: Brookings, 1968).Google Scholar
14 Chow, Gregory C., “Tests of Equality between sets of Coefficients in Two Linear Regressions,” Econometrica 28 (July 1960): 591–605.CrossRefGoogle Scholar
15 Loans were made to Cellulosa y Papel, S.A. (1962), a private company located in Cali for the construction of pulp mills and to the Republic of Colombia (1963) for the construction of a sodium carbonate and caustic soda plant in Cartagena. The loans were for $1,400,000 and $11,949,400 respectively.
16 IDB loans accounted for 25 percent of the total external financing received by Colombia during this time. The structural shift cannot therefore be solely attributed to the IDB. The AID program was also introduced at approximately the same time.
17 There is also the question of whether the t-test etc. is of any meaning since time cannot be said to be distributed randomly.