Chapter 5 | Page 194 term and they have very little financial return in the short-run.27 Others contend that loans with future obligations encourage more positive fiscal management as compared to grants.28 Despite these differences of opinion, it is argued that economic analysis and empirical tests show that loans are better than grants in promoting budgetary discipline in recipient governments because, grants are less-efficiently utilised by recipient governments especially when measured against efficiency indicators based on ‘government investment spending in relation to consumption spending, higher tax effort and reduced domestic financing of fiscal deficits’.29 The fiscal behaviour of the government is also shaped by the understanding that they will have to repay the loan. Governments take a much more relaxed approach to management of domestic revenue efforts if the aid is in the form of a grant.30 It has also been shown that loans are positively correlated with increased tax revenue while grants have the opposite effect.31 Hence one approach for loans is to incorporate long concessional and pay-up periods, although this could also mean that fewer funds for loans will be available due to the longer recovery period. All forms of debt, such as loans and securities, are cumulative and can present enormous long-term challenges for poor countries. It is often argued that grants financing is a better option from the perspective of poor States32 because it does not incur additional debt and can be justified by the existing unequal distribution of global resources.33 Whether grant aid or loans are preferable depends on the policy environment and economic conditions. 27 See ibid., 1. 28 Ashna Rahman, 'Fiscal Effects of Aid' (Paper presented at the APEA Conference, University of Washington, Seattle, July 29-30, 2006) <http://www.apeaweb.org/confer /sea06/papers/rahman.pdf>. 29 Matthew Odedokun, 'Economics and Politics of Official Loans versus Grants: Panoramic Issues and Empirical Evidence' (WIDER Discussion Paper No. 2003/04, World Institute for Development Economics Research, January 2003), <http://archive.unu.edu/hq/library /Collection/PDF_files/WIDER/WIDERdp2003.04.pdf>. 30 Morrissey, Islei and M’Amanja, above n 26. 31 Ibid., 2. 32 Ortiz, above n 15, 73. 33 Ibid.