Does foreign aid reduce inequality?

Recent international calls for more effective foreign aid underscore the
surprisingly little evidence on the redistributive impact of aid. Distribution in
recipient countries is not even a qualifying criterion for donors when allocating
aid. This paper addresses the fundamental question of whether current aid
and economic growth trends will likely render substantive egalitarian benefits
to the developing world. Using an ordered probit econometric model in a thirty
developing country panel between 1995 and 1998, the paper finds that aid
and economic growth affect recipient countries’ inequality neither largely nor
always in the same direction. Aid has typically lower impacts on the national
distribution of incomes than economic growth. There are also important
regional differences: the impacts of aid and economic growth are lowest in
Latin America, the already most unequal region in the world. The new calls
for more effective aid are absolutely justified: current strategies will unlikely
improve inequality in the developing world.
José Cuesta
Mariano González
José María Larrú
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