Foreign Aid Effectiveness: Evidence from Panel Data Analysis M. Adnan Kabir 1 Abstract The effectiveness of foreign aid is an important issue that encompasses a wide range of academic fields but fails to provide any underlying consensus. This study empirically investigates the effectiveness of foreign aid in reducing income inequality of the developing world and subsamples of countries from Africa, South Asia, and South America, which historically demonstrate socioeconomic and geopolitical similarities. In an attempt to recognize aid effectiveness with clarity, this study contributes to the debate in the literature to reconcile the seemingly composite effect of foreign aid on income inequality and extrapolate if the inhibitory mechanisms of institution quality have a regressing effect. Thus, central to the thesis are two intertwining legacies: (a) the possible egalitarian effect of foreign aid on the income distribution of a country and (b) aid effectiveness when a country’s institutional quality is factored in. Using panel data from eight subsamples, the study found statistically significant but marginal foreign aid effectiveness in tackling the income inequality divide of most developing countries. Moreover, the effectiveness diminishes when institutional quality is factored in, which implies a confounding yet deraci- nating effect on foreign aid efficacy. Keywords Foreign aid, income inequality, panel data, institutional quality Introduction The effectiveness of foreign aid has been a growing concern for economists and policymakers alike, a concern that has been growing over the past few decades. Global economic uncertainty and the inability of many poor developing countries to pull themselves out of poverty have led policymakers to treat foreign aid as a legitimate tool in delivering desired economic betterment. After the collapse of the Soviet Union in the early 1990s, countries were no longer inclined toward providing aid that did not produce significant results (Abbink et al., 2002). Richer countries, which were predominantly providing Article Global Journal of Emerging Market Economies 12(3) 283–302, 2020 © 2020 Emerging Markets Institute, Beijing Normal University Reprints and permissions: in.sagepub.com/journals-permissions-india DOI: 10.1177/0974910120961570 journals.sagepub.com/home/eme 1 ULAB School of Business, University of Liberal Arts Bangladesh, Dhaka, Bangladesh. Corresponding author: M.Adnan Kabir, ULAB School of Business, University of Liberal Arts Bangladesh, Dhaka 1209, Bangladesh. E-mail: mkabir.adnan@gmail.com