The Impact of Aid for Trade on Income Inequality: The Case of Developing Countries

Abstract

AfT (Aid for Trade) in developing and less developed countries can help reduce income inequality while promoting exports. The present study analyses the effect of AfT on income inequality for 32 countries using the Driscoll-Kraay estimator for fixed effect and random effect models over the period 2003-2021. The results indicated that total Aft has negative impact on income inequality. Regarding specific AfT components, AfT inflows to built production and develop trade policies had no significant effect on income inequality. However, AfT funds for the improvement of infrastructure significantly reduced income inequality. This suggests that directing AfT funds related with transport and storage, communications, and energy generation and supply can also make the income distribution more equitable in middle-income and low income countries. The panel quantile regression method was also applied. The results demonstrated that infrastructure-oriented AfT or total AfT contributes to a reduction in income inequality, and this effect is stronger in countries with high income inequality.