Foreign Aid, Institutional Quality and Income Inequality in Developing Countries

Authors

  • Ruhaida Saidon School of Economics, Finance and Banking, Universiti Utara Malaysia
  • Zalina Zainal School of Economics, Finance and Banking, Universiti Utara Malaysia

DOI:

https://doi.org/10.32890/ipjaf.2019.3.4.88

Keywords:

foreign aid, institutional quality, income inequality, dynamic panel data

Abstract

This study examines the role of institutional quality as a complementary factor on the effectiveness of sectoral allocations of foreign aid (i.e. aid to social sectors, aid to economic sectors, aid to production sectors and aid to multi sectors) on income inequality in selected foreign aid recipient countries. This study utilizes System-Generalized Method of Moment on a panel data of 50 of foreign aid recipient countries during the period 1995 to 2017. The empirical findings revealed that the interaction variables between sectoral allocations of foreign aid with institutional quality have a negative and statistically significant effect on income inequality during the period of study. This finding indicates that institutional quality is one the conditional factor for the effectiveness of sectoral foreign aid allocations in narrowing income inequality in developing countries.

References

Alderson, A. S., & Nielsen, F. (1999). Income inequality, development, and dependence: A reconsideration. American Sociological Review, 606-631.

Ali, S., & Ahmad, N. (2013). A time series analysis of foreign aid and income inequality in Pakistan. Global Journal of Management and Business Research Economics and Commerce, 13(5), 10-20.

Arellano, M., & Bond, S. (1994). Some tests of specifications for panel data: Monte Carlo evidence and an application to panel data to employment equations. Review of Economic Studies, 58(2), 277–297.

Beck, T., Demirgüç-Kunt, A., & Levine, R. (2004). Finance, inequality, and poverty: Cross-country evidence. The World Bank.

Bjornskov, C. (2010). Do elites benefit from democracy and foreign aid in developing countries, Journal of Development Economics, 92(2), 115-124.

Blundell, R., & Bond, S. (1998). Initial conditions and moment restrictions in dynamic panel models. Journal of Econometrics, 87(1), 115–143.

Boone, P. (1994). The impact of foreign aid on savings and growth. Centre for Economic Performance Working Paper No. 1265. London School of Economics, London.

Boone, P. (1996). Politics and the effectiveness of foreign aid. European Economic Review, 40(2), 289-329.

Bornschier, V., Chase-Dunn, C., & Rubinson, R. (1978). Cross national evidence of the effects of foreign investment and aid on economic growth and inequality: a survey of findings and a reanalysis. American Journal of Sociology, 84(3), 651-683.

Bourguignon, F, Levin, V., & Rosenblatt, D. (2009). International redistribution of income. World Development, 37(1), 1-10.

Brautigam, Deborah A., & Knack, S. (2004). Foreign aid, institutions, and governance in sub-Saharan Africa. Economic Development & Cultural Change, 52(2), 255-285.

Burill, D. (2007). Modelling and interpreting interactions in multiple regression. Available at http://www.minitab.com

Burnside, C., & Dollar, D. (2004). Aid, policies and growth: reply. The American Economic Review, 94(3), 774-780.

Burnside, C., & Dollar, D. (2000). Aid, policies, and growth. American Economic Review, 90(4), 847-868.

Burnside, C., & Dollar, D. (1998). Aid, the incentive regime, and poverty reduction. Policy Research Working Paper 1937. World Bank, Development Research Group, Washington D.C.

Calderon, C, Chong, A., & Gradstein, M. (2009). Can foreign aid reduce income inequality and poverty? Public Choice, 140 (1), 59-84.

Chenery, H., & Strout, A. (1966). Foreign assistance and economic development. The American Economic Review, 56(4), 679-733.

Chenery, H. B., & Carter, N. G. (1973). Foreign Assistance and development performance, 1960-1970. American Economic Association, 63(2), 459-468.

Chong, A. (2004). Democracy, persistence, and inequality: is there a political Kuznet’s curve?. Economics and Politics, 16(2), 189–212.

Chong, A., Gradstein, M., & Calderon, C. (2009). Can foreign aid reduce income inequality and poverty?. Public Choice, 140(1-2), 59-84.

Dreher, A., & Gaston, N. (2007). Has globalization increased inequality? Review of International Economics, 16(3), 516-536.

Doucouliagos, H., & Paldam, M. (2010). Conditional aid effectiveness: a meta-study. Journal of International Development, 22(4), 391-410.

Durbarry, R., Gemmell, N., and Greenaway, D. (1998). New Evidence on the impact of foreign aid on economic growth. CREDIT Research Paper 98/9.

Erikson, F. (2005). Aid and development: Will it work this time? International Policy Network 2005 Great Britain: Hanway Print Centre.

Herzer, D., & Morrissey, O. (2011). Long-Run Aid Effectiveness. CSAE Conference 2011, Economic Development in Africa.

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

Islam, Anisul (1992). Foreign aid and economic growth: an econometric study of Bangladesh. Applied Econometrics, 24(5), 541-544.

Khieu, S. (2013). Essays on the impact of aid and institutions on income inequality and human welfare. (Doctor of Philosophy in Public Policy), Georgia State University.

Layton, T., & Nielson, D. (2009). Aiding Inequality: the effect of foreign aid on income inequality. Brigham Young University.

Nelson, R. (1956). A theory of the low-level equilibrium trap in underdeveloped economies. American Economic Review, 46(5), 894-908.

Organization for Economic Co-operation and Development (OECD). (n.d.a). Aid statistics. Official development assistance – definition and coverage, Available Online: http://www.oecd.org/dac/stats/officialdevelopmentassistancedefinitionandcoverage.htm#Definition [Accessed 30th November 2017]

Organization for Economic Co-operation and Development (OECD). (n.d.b). CPA data series by sector, Available Online: http://www.oecd.org/development/aid-architecture/cpa.htm [Accessed 30th November 2017]

Organization for Economic Co-operation and Development (OECD).(n.d.c). Development Co-operation Directorate (DCD-DAC). DAC members, Available Online: http://www.oecd.org/dac/dacmembers.htm [Accessed 30th November 2017]

Organization for Economic Co-operation and Development (OECD). (n.d.d). The Paris Declaration on Aid Effectiveness and the Accra Agenda for Action [pdf] Available Online: http://www.oecd.org/dac/effectiveness/parisdeclarationandaccraagendaforactionfullrelateddocumentatio n.htm [Accessed 11th November 2013]

Organization for Economic Co-operation and Development (OECD), Query Wizard for International Development Statistics. (n.d.e). QWIDS data query, Available Online: http://stats.oecd.org/qwids/ [Accessed 2 December 2017]

Cassen, R. (1994). Does Aid Work, Second Edition. Oxford: Clarendon Press.

Rodrik, D., Subramanian, A., and Trebbi, F. (2004). Institutions rule: The primacy of institutions over geography and integration in economic development. Journal of Economic Growth, 9(6), 131-165.

Roodman, D. (2004). The anarchy of numbers: aid, development, and cross-country empirics. CGD Working Paper 32. Center for Global Development, Washington, D.C.

Roodman, D. (2007). The anarchy of numbers: aid, development and cross-country empirics. The World Bank Economic Review, 21(2), 255-277.

Sachs, J. D., & Warner, A. (1995). Economic reform and the process of global integration. Brooking Papers on Economic Activities, 26(1), 1–118.

Sachs, J. D. (2005). The end of poverty: economic possibilities for our time, The Penguin Press: New York.

Appendix AShafiullah, M. (2011).Foreign Aid and its Impact on Income Inequality. International Review of Business Research Papers, 7(2), 91-105.

Kuznets, S. (1955). Economic growth and income inequality. The American Economic Review, 45(1), 1-28.

Singh, R. D. (1985). State Intervention, foreign economic aid, savings and growth in LDCS: some recent evidence. KYKLOS, 38(2), 216-232.

Published

2019-10-01

How to Cite

Saidon, R., & Zainal, Z. (2019). Foreign Aid, Institutional Quality and Income Inequality in Developing Countries. Indian-Pacific Journal of Accounting and Finance, 3(4), 47-59. https://doi.org/10.32890/ipjaf.2019.3.4.88

Issue

Section

Main Section