The Effect of Foreign Aid on Income Inequality in Latin America

Abstract: This thesis investigates the effect of foreign aid on income inequality, and studies the impact in Latin America during the time period from 1960 to 2020. The method employed is a pooled ordinary least squares (OLS) model, using fixed effects. The results imply that foreign aid increases income inequality. The theoretical literature on this topic focus mostly on foreign aid’s effect on economic growth, and growth is thought to lessen income inequality. Aid is on the other hand considered to raise income inequality due to misappropriation of aid by the political and local elite in recipient countries. Negative impacts of aid are also viewed as the result of low accountability of both donors and recipients of aid. Empirical studies examining the impact of foreign aid on income inequality are furthermore scarce compared to aid’s impact on economic growth, and the results of existing studies are inconclusive, where most discover either weak positive or negative effects.