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Does foreign aid reduce income inequality in developing countries?

Author

Listed:
  • Bon Van Nguyen

    (University of Finance - Marketing, Ho Chi Minh City, Vietnam)

  • Tuong My Cat Vu

    (University of Finance - Marketing, Ho Chi Minh City, Vietnam)

  • Thao Thi Thanh Nguyen

    (University of Finance - Marketing, Ho Chi Minh City, Vietnam)

  • Nhi Buu Duong

    (University of Finance - Marketing, Ho Chi Minh City, Vietnam)

  • Khoa Ngoc Anh Pham

    (University of Finance - Marketing, Ho Chi Minh City, Vietnam)

  • Toa Trieu Kim Le

    (University of Finance - Marketing, Ho Chi Minh City, Vietnam)

Abstract

Income inequality has become an increasingly pressing concern within developing economies. Foreign aid, a crucial source of financial assistance, plays a significant role in bridging the wealth gap in these nations. This paper delves into the research question of whether foreign aid effectively mitigates income inequality in developing countries. It does so by examining a dataset spanning from 2002 to 2022, encompassing 29 developing economies, and employs the difference GMM Arellano-Bond estimators. The results of this analysis demonstrate that foreign aid has a tangible and positive impact on reducing income inequality within these nations. In addition, economic growth plays a vital role in diminishing income inequality. On the flip side, trade openness and institutional quality exacerbate income inequality. These findings yield valuable policy insights for governments in developing countries, emphasizing the importance of utilizing foreign aid effectively as a means to combat income inequality.

Suggested Citation

  • Bon Van Nguyen & Tuong My Cat Vu & Thao Thi Thanh Nguyen & Nhi Buu Duong & Khoa Ngoc Anh Pham & Toa Trieu Kim Le, 2025. "Does foreign aid reduce income inequality in developing countries?," HO CHI MINH CITY OPEN UNIVERSITY JOURNAL OF SCIENCE - ECONOMICS AND BUSINESS ADMINISTRATION, HO CHI MINH CITY OPEN UNIVERSITY JOURNAL OF SCIENCE, HO CHI MINH CITY OPEN UNIVERSITY, vol. 15(1), pages 70-80.
    • Handle: RePEc:bjw:econen:v:15:y:2025:i:1:p:70-80
    DOI: 10.46223/HCMCOUJS.econ.en.15.1.3051.2025
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    References listed on IDEAS

    as
    1. Alesina, Alberto & Dollar, David, 2000. "Who Gives Foreign Aid to Whom and Why?," Journal of Economic Growth, Springer, vol. 5(1), pages 33-63, March.
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    4. Alberto Chong & Mark Gradstein & Cecilia Calderon, 2009. "Can foreign aid reduce income inequality and poverty?," Public Choice, Springer, vol. 140(1), pages 59-84, July.
    5. Kunofiwa Tsaurai, 2023. "Impact of Foreign Aid on Income Inequality in Emerging Markets," Acta Universitatis Danubius. OEconomica, Danubius University of Galati, issue 19(3), pages 59-77, June.
    6. Judson, Ruth A. & Owen, Ann L., 1999. "Estimating dynamic panel data models: a guide for macroeconomists," Economics Letters, Elsevier, vol. 65(1), pages 9-15, October.
    7. David Castells-Quintana & José María Larrú, 2015. "Does Aid Reduce Inequality? Evidence for Latin America," The European Journal of Development Research, Palgrave Macmillan;European Association of Development Research and Training Institutes (EADI), vol. 27(5), pages 826-849, December.
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    More about this item

    Keywords

    developing countries; difference GMM estimator; foreign aid; income inequality;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • D3 - Microeconomics - - Distribution
    • F35 - International Economics - - International Finance - - - Foreign Aid

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