The Impact of Aid for Trade on Income Inequality: The Case of Upper-Middle-Income 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 10 upper-middle-income countries using the Pesaran (2006) Common Correlated Effect estimator for 2003–2018. Total AfT had no significant impact on income inequality. Regarding specific AfT components, AfT inflows to develop infrastructure had no significant effect on income inequality. However, AfT funds for developing productive capacity significantly reduced income inequality. This suggests that directing AfT funds to increase production in sectors like agriculture, industry, fishing, and tourism can also make the income distribution more equitable in upper-middle-income developing countries. Finally, the relationship between per capita income and income inequality supported the Kuznets’ inverted U hypothesis. JEL Codes: O10, F35, P45