Foreign Aid and its Impact on Income Inequality

Abstract

The efficacy of foreign aid is questioned frequently. Foreign aid is alleged to have “ulterior motives” of promoting donors’ interests and perpetuating poverty. It is also accused of aggravating income inequality in recipient countries. We present the theoretical perspectives of foreign aid's impact on income distribution and look for empirical evidence of such an alleged relationship in a panel of 94 countries over 20 years. The data, however, show evidence to the contrary that aid causes small reductions in inequality. The findings are similar to those in recent studies on the topic. We have also found that trade and the share of population under the age of 15 worsen inequality.

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