Despite the lack of robust positive correlation between aid and growth, the economists and policy makers shift to
focus on the direct impact of foreign aid on poverty and income inequality in recipient countries. Among the studies that focus on the impact of aid on poverty are Collier and Dollar (2002), Lensink and White (2002),
Kraay and Raddatz (2007) and Bahmani-Oskooeeand Ayolola (2009). However, poor economic performance and
disappointing poverty reduction experience in major aid recipient contrasted with nations that have managed to
achieve significant progress without foreign aid. Currently only a few empirical studies have been performed
looking at the impact of foreign aid on inequality (Bourguignon et al. 2008; Calderon et al. 2009; Shaifullah
2011).
Recently, there were several studies contributed to foreign aid and growth literature by assessing the impact of
different categories of foreign aid and growth (Ouattara and Strobl 2008;Mavrotas 2005; Mavrotas 2002a). They
disaggregated foreign aid into different categories and found different category of foreign aid affected growth
differently.These findings spur a question whether income inequality will have the same significant impact when
aid is evaluated at disaggregated level. Does different sectoral foreign aid have significant impact on income
inequality on the recipient countries? If yes, which sector of aid reduced income inequality? Thus, the objective
of this study is to analyze the impact of sectoral foreign aid on income inequality in aid recipient countries.
This paper is organized as follows. The next section reviews the empirical evidence on the impact of foreign aid
on income inequality using aggegate foreign aid figures. Then, the model specification and econometric
methodology conducted in this study will describes in Section 3. Section 4 discusses the data source of this study,
followed by the interpretation of results and discussions in Section 5; finally, Section 6 concludes.