1 Department of Economics, Aarhus School of Business, Aarhus BSS, Aarhus University2 GlobID -Globalization and Industry Dynamics, Aarhus School of Business, Aarhus BSS, Aarhus University3 Department of Economics and Business Economics, Aarhus BSS, Aarhus University4 Department of Economics and Business Economics, Aarhus BSS, Aarhus University
Abstract: A popular argument for the absence of any beneficial effects of foreign aid is that it is skimmed by political elites in recipient countries. However, studies also suggest that aid may be more effective in relatively democratic developing countries. This paper provides some simple theory indicating how foreign aid and democracy can be associated with a more, not less, skewed income distribution. By using data on income quintiles derived from the World Income Inequality Database for 88 developing countries, the results indicate that foreign aid and democracy in conjunction are associated with a higher share of income held by the upper quintile. It thus appears that foreign aid, contrary to popular beliefs, leads to a more skewed income distribution in democratic developing countries while the effects are negligible in autocratic countries.