THE IMPACT OF FOREIGN DIRECT INVESTMENT AND FOREIGN AID ON INCOME INEQUALITY IN MENA COUNTRIES: THE ROLE OF INSTITUTIONAL QUALITY MATTER

Foreign Capital Inflows are often considered the key instruments in combating poverty and income inequality in countries around the world. To what extent does governance influence the relationship between foreign aid, Foreign direct investment (FDI) and income inequality in MENA countries? To answer this question, this study investigates the effects of foreign aid, FDI on income inequality and the moderating role of institutional quality in 15 MENA countries over the period 1996–2023, using the Arellano–Bond estimator of the two-stage GMM system in order to overcome endogeneity biais. The results indicate two important conclusions. First, the findings show that both FDI and foreign aid contribute to increasing income inequality in the MENA region. Second, governance plays a moderator role between these variables. In order to maximize the benefits of foreign aid and FDI while reducing inequality, MENA countries need to strengthen their good governance policies.