The relationship between foreign aid and income inequality and the role of corruption

Abstract

In this paper, we reassess the relationship between foreign aid and income inequality. The existing literature provides mixed evidence at best on the direction, magnitude, and significance of the relationship between foreign aid and income inequality. We contribute to the literature on this topic by differentiating between types of foreign aid namely: economic, social, production, multi‐sector, and humanitarian aid to determine which types of foreign aid reduce income inequality in recipient countries after accounting for endogeneity bias using generalized method of moments estimation method. We also study the role of control of corruption in the aid‐inequality relationship. The study uses panel data comprising of 78 recipient countries for the last 14 years. We found that an increase in total aid increases income inequality, however, when we differentiate among types of aid, we found that the economic sector, production sector, and humanitarian aid decrease income inequality, multi‐sector increases income inequality while social aid does not have any impact on income inequality. Moreover, we found that foreign aid has a negative relationship with income inequality when its interaction with corruption is included in the model. This result holds for all types of foreign aid. Negative interactions between foreign aid and corruption show that foreign aid reduces income inequality in countries where control for corruption is high.

Foreign aid, institutional quality, and income inequality in Africa: A dynamic panel threshold approach

“…However, one of the most controversial subjects in recent literature has been how foreign aid impacts the alleviation of income inequality. Notwithstanding the fact that a number of empirical studies have demonstrated an inverse link between foreign aid and income inequality (Kasuga & Morita, 2018), some argue that "foreign aid" can only lessen income inequality if indeed the recipient nation has strong policies and institutions (Maqbool & Ali, 2022;Mouneer, Khan, & Safdar, 2022). As a cure for redistributing wealth, African governments, private industry actors, and international bodies need to devote a significant amount of consideration to the right metrics to realize a more inclusive and sustainable development.…”

“…The efficiency of foreign aid declines when institutional quality is considered, which is perplexing and destructive. Maqbool and Ali (2022) used generalized method of moments (GMM) approach and panel data from 78 recipient nations over 14 years to examine foreign aid, wealth disparities, and corruption control. The study found that total aid raises "income inequality," while economic, production, and humanitarian aid decrease it, multi-sector aid increases it, and social aid has no effect.…”

“…Thus, ethnic and income disparity policies that ignore corruption are unlikely to achieve development goals. Maqbool and Ali (2022) reexamined foreign aid and wealth disparity. They used generalized technique of moment's estimation using panel data from 78 recipient nations over 14 years to study the aid-inequality link and corruption control.…”

The Catastrophe of Corruption in the Sustainability of Foreign aid: A Prediction of Artificial Neural Network Method in Indonesia

“…The aid-corruption paradox highlights corruption as a double-edged sword, by impeding the effectiveness of aid and providing a chance for reform (Bauhr et al 2013). Controlling corruption is crucial as it often leads to inefficiency (Maqbool and Ali 2021). International organizations have made anti-corruption efforts a requirement for receiving aid (Ferry et al 2020).…”