The Impact of China’s Digital Aid on Income Inequality: Evidence from 127 Developing Economies

Abstract

While the global economy is on a clear path to recovery, the issue of inequality persists, particularly within developing countries. Based on the panel data of 127 developing economies around the world from 2000 to 2021, this study employs the multi-period DID model to investigate the role of China's foreign digital aid in influencing the level of income inequality in developing economies. The study finds that China's foreign digital aid has significantly reduced income inequality among recipient economies. Further analysis shows that there is an intriguing correlation between digital aid modalities and its effectiveness of implementation. When China's foreign digital aid is an OOF-like program, it can significantly improve income inequality in recipient economies, yet when it is an ODA-like program, it can increase income inequality. In addition, the effectiveness of aid is influenced by the income levels of the recipient economies. Digital aid proves to be more effective in nations with high to middle income economies in comparison to nations with low-income economies. Therefore, the acceptance of China's digital aid has an important role to play in reducing the level of income inequality in developing economies that cannot be ignored.