Socioeconomic inequalities and the role of sectoral foreign aid in developing countries

Abstract

Using a panel threshold regression approach, we consider multiple dimensions of socioeconomic inequalities and examine their heterogeneous relationships with sectoral foreign aid. Conditioned on the level of socioeconomic development, three types of inequality and four channels of sectoral foreign aid are considered. We use a comprehensive dataset covering 65 aid‐recipient countries from 1990 to 2017 and find that education aid effectively reduces inequalities but only when the level of institutional quality and other socioeconomic factors is above its 75th percentile value in our sample. These results are robust to alternative measures of income inequality, aid and estimation strategies.