3. Methodology
3.1 Model Specification
This study modified Calderon et al.(2009) model in estimating the impact of sectoral foreign aid on income
inequality. The basic specification of this study can be represented by the following equation:
where all variables are in logarithm form as a percentage of GDP except inflation rate.represents income
inequality, as proxied by the Gini coefficient. is the set of sectoral aid, which includes aid to social sector,
economic sector, productionsector and multi sector. Firstly, aid to social sector aims to improve aid human
capital, living standards and reduce income inequality in recipient countries. The sub-sectors of this aid are aid to
education, health, population program and reproductive health, water supply and sanitation, government and civil
society, and others. Secondly, aid to economic sector may improve total productivity in the recipient economies
and directly adds to investment and help to the constraint on public funds available for necessary public
investment. Aid of this sector aims to increase growth and reduce income inequality. Aid to this sector consists of
aid to transportation and storage, communications, energy, banking and financial services, business and other
services. Thirdly, aid to production sector was aims to increase capital accumulation by enlarging the pool of
resources available for investment. The sub-sectors of this aid are agriculture, forestry, fishing, industry and
mining, construction, trade policies and regulations. Lastly, aid to multi sector, which aid for general environment
protection, and other multi sectors. Both of these aids also are expected to reduce income inequality. is a set of
control variables which includes the level of real GDP, employment, trade openness and inflation rate . denotes
an error term. All the variables are expected to be negatively correlated to income inequality except inflation rate.
Thus the sign of the etimated coefficient of all variables must be in the negative sign.