2. Literature Review
In the history of foreign aid, Friedman (1958) theoretically argued that aid was only likely to benefit a political
elite. The first empirical analysis of the aid on income inequality was done by Chase-Dunn (1975). He indicated
that foreign aid has positive impact on income inequality. Then, Boone (1997) and Collier & Dollar (2004) found
that aid increases the amount of resources the recipient government has at hand. Aid deteriorates governance
since a less “resource-constrained” has reduced interest in being accountable to the local population (Rajan&
Subramanian 2007). Aid funds can not only diminish democracy but funds may not even reach their intended
purpose (helping the poor). As a matter of fact, these funds are sometimes embezzled and expended by the local
elite in association with governing people (Drazen 2000). All political systems are believed to favor high-income
political elite (Boone 1997) and as such foreign aid would mean more funds for governing people and the local
elite to misappropriate. Aid can be used to maintain and augment existing disparities in income and political
clout.