Impact of foreign aid on income inequality in emerging markets


  • Kunofiwa Tsaurai University of South Africa


Foreign aid, income inequality, emerging markets, panel data


This paper investigated the influence of foreign aid on income inequality in selected emerging markets using panel data (2004-2019) analysis methods such as fully modified ordinary least squares (FMOLS), fixed effects and pooled ordinary least squares (OLS). The study also examined whether human capital development is a channel through which foreign aid influenced income inequality or whether human capital development is one of the conditions which must be fulfilled in the recipient country before foreign aid can have a significant reduction effect on income inequality in selected emerging markets. Foreign aid was found to have non-significantly reduced income inequality across all the three estimation methods. Pooled OLS and FMOLS show that human capital development significantly reduced income inequality. Under the fixed effects and FMOLS, human capital development was found to be a factor which be available in the recipient country before foreign aid can significantly reduce income inequality in selected emerging markets. Foreign direct investment and unemployment significantly led to the increase in income inequality across all the three econometric estimation methodologies. Trade openness and financial development produced similar results but only under the pooled OLS. Trade openness significantly reduced income inequality under the FMOLS and the fixed effects. Responsible authorities are therefore urged to implement policies that increases human capital development, financial development and trade openness to enhance income inequality reduction in selected emerging markets.


Aye, G.C. and Edoja, P.E. (2017). Effect of economic growth on CO2 emission in developing countries: Evidence from a dynamic panel threshold regression model. General and Applied Economics,

Berthélemy, J.C. (2006). Bilateral donors’ interest vs. recipients’ development motives in aid allocation: do all donors behave the same? Review of Development Economics 10, 179–194.

Calderon, M.C. Chong, A. and Gradstein, M. (2006). Foreign aid, income inequality and poverty. Inter-American Development Bank Research Department Working Paper Number 547

Castells-Quintana, D. and Larru, J.M. (2014). Does aid reduce inequality? Evidence for Latin America. United Nations University, UNU-WIDER unpublished paper.

Chiswick, B. R. (2003). Jacob Mincer, Experience and the Distribution of Earnings. Review of Economics of the Household, 1 (4): 343–361.

Chong, A. Gradstein, M. and Calderon, C. (2009). Can foreign aid reduce income inequality and poverty? Public Choice, 140, 59-84.

Cysne, R.P. (2009). On the positive correlation between income inequality and unemployment, The Review of Economics and Statistics, 91 (1), 218-226.

Destek, M.A. Sinha, A. and Sarkodie, S.A. (2020). The relationship between financial development and income inequality in Turkey, Journal of Economic Structures, 9 (11), 1-14.

Ghosh, B. and P. De (2005). Investigating the linkage between infrastructure and regional development: Era of planning to globalisation, Journal of Asian Economics, 15 (1), 1023-1050.

Griffin, K. and Enos, J.L. (1970). Foreign assistance: Objectives and consequences, economic development and cultural change, 18, 313-327.

Herzer, D. and Nunnenkamp, P. (2012). The effect of foreign aid on income inequality: Evidence from panel cointegration. Structural Change and Economic Dynamics, 23 (3), 245-255.

Hyangmi, I.M. (2014). The effects of disaggregated foreign aid on income inequality. KDI School of Public Policy and Management, Master of Public Policy Unpublished Thesis.

Im, K.S. Pesaran, M.H. and Shin, Y. (2003). Testing unit roots in heterogeneous panels. Journal of Econometrics, 115(1), 53-74.

Jacoby, H. (2000). Access to rural markets and the benefits of rural roads, The Economic Journal, 110, 713-737.

Kabir, M.A. (2020). Foreign aid effectiveness: Evidence from panel data analysis. Global Journal of Emerging Market Economies, 12 (3), 283-302.

Kao, C. (1999). Spurious regression and residual-based tests for co-integration in panel data, Journal of Econometrics, 90 (1999), 247-259.

Kim, S. (2022). Foreign aid and income inequality, KDI School of Pub Policy and Management Paper Number 4070325.

Lassoued, M. (2021). Microfinance, financial development, foreign aid and income inequality: Evidence from Sub-Saharan Africa, International Journal of Economics and Financial Issues, 11 (3), 35-44.

Le, Q.H. Do, Q.A. Pham, H.C. and Nguyen, T.D. (2021). The impact of foreign direct investment on income inequality in Vietnam, Economies, 9 (27), 1-15.

Letsoalo, T.E. and Ncanywa, T. (2021). Effects of external financial flows on income inequality in selected Southern African Development Community member states, Africa’s Public Service Delivery & Performance Review, 9 (1), 1-12.

Levin, A. Lin, C.F. and Chu, C.S.J. (2002). Unit root tests in panel data: Asymptotic and finite-sample properties. Journal of Econometrics, 108 (1), 1-24.

Liu, G. Liu. Y. and Zhang, C. (2017). Financial development, financial structure and income inequality in China. World Economy, 40 (9), 1890–1917

Magnon, K.A. (2012). Foreign aid, inequality and poverty: Is the effect in Sub-Saharan Africa different? Research Papers Number 221.

Mouneer, S. Khan, R.E.A. and Safdar, N. (2022). Does corruption invade the effectiveness of foreign aid on income inequality in developing economies? Pakistan Journal of Humanities and Social Sciences, 10 (1), 332-344.

Nam, H.T. (2016). The effect of foreign direct investment on income inequality in Vietnam. International Journal of Economics, Commerce and Management IV, 158–73.

Nosheen, M. Maqbool, S. Mubarak, S.H. and Ali, A. (2021). The impact of foreign aid on income inequality: Evidence from developing countries. Application of the FMOLS approach. NUST Journal of Social Sciences and Humanities, 7 (2), 166-185.

Pham, T.H.H. (2015). Income inequality and foreign aid. Lemna Working Paper Number EA 4272.

Rahnama, M. Fawaz, F. and Gittings, K. (2017). The effects of foreign aid on economic growth in developing countries. The Journal of Developing Areas, 51 (3), 153-171.

Saidon, R. and Zainal, Z. (2019). Foreign aid, institutional quality and income inequality in developing countries. Indian-Pacific Journal of Accounting and Finance, 3 (4), 47-59.

Saidon, R. Yusop, Z. and Ismail, N. and Hook, L. (2013). Sectoral foreign aid and income inequality. International Journal of Economics and Finance, 5 (9), 117-122.

Shafiullah, M. (2011). Foreign aid and its impact on income inequality. International Review of Business Research Papers, 7 (2), 91-105.

Sharafat, A. and Najid, A. (2013). A time series analysis of foreign aid and income inequality in Pakistan. Global Journal of Management and Business Research Economics and Commerce, 5 (13), 11-20.

Stead, R. (2007). Foundation quantitative methods for business. Prentice Hall. England.

Tim, L. (2008). The effects of foreign aid on income inequality, Journal of Political and International Studies, 26 (4), 35-55.

Tsaurai, K. (2021). Determinants of trade openness in transitional economies: Does the complementarity between foreign direct investment and human capital development matter? International Journal of Economics and Business Administration, 1X (1), 318-330.

Younsi, M. Khemili, H. and Bechtini, M. (2019). Does foreign aid help alleviate income inequality? New evidence from African countries, International Journal of Social Economics, 46 (4), 549-561.

Zhu, S.C. and Trefler, D. (2005). Trade and inequality in developing countries: A general equilibrium analysis, Journal of International Economics, 65 (1), 21-48.




How to Cite

Tsaurai, K. (2023). Impact of foreign aid on income inequality in emerging markets. Acta Universitatis Danubius. Œconomica, 19(3), 59–77. Retrieved from



Business Administration and Business Economics

Most read articles by the same author(s)

1 2 > >>