Does foreign aid reduce income inequality in developing countries?

Bon Van Nguyen; Tuong My Cat Vu; Thao Thi Thanh Nguyen; Nhi Buu Duong; Khoa Ngoc Anh Pham; Toa Trieu Kim Le

doi:10.46223/HCMCOUJS.econ.en.15.1.3051.2025

15(1)2025

Does foreign aid reduce income inequality in developing countries?

Author - Affiliation:

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

Corresponding author: Bon Van Nguyen - nv.bon@ufm.edu.vn

DOI:10.46223/HCMCOUJS.econ.en.15.1.3051.2025

Submitted: 03-11-2023
Accepted: 04-01-2024
Published: 01-07-2024

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.

JEL codes

C23; D3; F35

Keywords

developing countries; difference GMM estimator; foreign aid; income inequality

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DOI: https://doi.org/10.46223/HCMCOUJS.econ.en.15.1.3051.2025