INCOME INEQUALITY AND INTERNATIONAL FINANCING IN DEVELOPING COUNTRIES

We propose an econometric analysis of the distributive impact of trade flows, foreign direct investment (FDI), official aid and migrants' remittances. Results suggest that FDI increases inequality, while remittances tend to reduce inequality. Trade and aid have a non-linear relationship with income distribution: trade favours the poorest in middle income countries while aid favours the middle class in democracies. Simulations suggest that, on average, the highly adverse impact on distribution of FDI is not compensated by the other three sources of financing. Moreover, African countries show a different pattern of distributional impact of trade and aid.