Foreign Aid, Institutional Quality and Income Inequality in Developing Countries

Abstract

This study examines the role of institutional quality as a complementary factor on the effectiveness of sectoral allocations of foreign aid (i.e. aid to social sectors, aid to economic sectors, aid to production sectors and aid to multi sectors) on income inequality in selected foreign aid recipient countries. This study utilizes System-Generalized Method of Moment on a panel data of 50 of foreign aid recipient countries during the period 1995 to 2017. The empirical findings revealed that the interaction variables between sectoral allocations of foreign aid with institutional quality have a negative and statistically significant effect on income inequality during the period of study. This finding indicates that institutional quality is one the conditional factor for the effectiveness of sectoral foreign aid allocations in narrowing income inequality in developing countries.

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