Foreign Aid's Impact on Income Inequality

Abstract: Despite indications that inequality can have a large impact on development, little research on the relationship between foreign aid and inequality exists. The majority of the studies on the subject also focus on overall aid figures, thereby leaving the question of whether the purpose of aid matters unexplored. This study uses panel data on 116 countries over the time period 1972-2011 to focus on whether aid affects inequality, and in particular whether the effect in that case depends on the type of aid. Aid is therefore separated into four statistically valid categories: economic, social, reconstructional and residual. The results indicate that a relationship exists between all four categories of aid and inequality, and that the purpose of aid does matter. Economic and social aid show a positive relationship to inequality, while reconstructional and residual aid display a negative one.