Foreign Aid and Income Inequality

Abstract

This study contributes to the empirical understanding of aid effectiveness by examining the impact of foreign aid on income inequality in recipient countries. The impact of foreign aid on income inequality has scarcely been studied despite its importance, while in the existing literature, conclusions are divergent. This study utilizes both Pooled OLS and the Generalized Method of Moments (GMM) estimators for a panel of 156 countries covering the period 1997 to 2018. Data on inequality were extracted from the United Nations World Income Inequality Database (WIID). The results indicate that foreign aid, controlling for other variables, alleviates income inequality at a statistically significant level, and the results are robust. The results also show that democracy may exert negative effects on income inequality in recipient countries up to a certain stage, but the results are reversed after reaching that stage. Nonetheless, the equalizing effect of aid on income inequality remains.