Foreign direct investment, foreign aid and incomes inequality: Empirical insights from African and South American countries

Abstract

There is growing evidence that income inequality has been increasing over the years, and that it has consequences for social stability and peace because extreme inequality often leads to civil unrest and violence. Given an increasing level of resource transfers to developing countries in the forms of foreign direct investment (FDI) and foreign aid (FA) as well as growth in international trade over the years, an interesting research question arises – how have these external financial resources affected income distribution in developing countries? This paper reports findings of the study on the effects of FDI and FA on incomes inequality in 71 African and South American countries for the period of 1970–2014. We find that FDI decreases incomes inequality while FA increases it in general. However, magnitudes of the effects are stronger for South American countries as compared to African ones.