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Foreign Aid and the Culture of Contracting

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Abstract

We analyze the relationship between foreign aid and the “culture of contracting.” Contracting culture refers to cultural characteristics — trust, respect, level of self-determination, and level of obedience — which allow for impersonal exchange. Theoretically, aid may affect the culture of contracting for better or worse. We empirically analyze this possibility and find that aid generates negative effects on the culture of contracting. The less aid a country receives, the more likely it is to possess a stronger contracting culture. We view our results as identifying another potential unintended consequence of foreign intervention where aid undermines development potential instead of facilitating it.

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Notes

  1. Our analysis is loosely related to the literature on how institutions determine a variety of economic outcomes (e.g., see de Soto 2000; Acemoglu et al. 2001; 2002; Landau 2003; Kerekes and Williamson 2008; Dutta and Roy 2011).

  2. The time periods of the surveys are 1981–1984, 1989–1993, 1994–1999, 1999–2004, and 2005–2007.

  3. We thank the author for providing us with this data set.

  4. The five time periods are 1984 (average 1980–1984), 1989 (average 1985–1989), 1994 (average 1990–1994), 1999 (average 1995–1999), and 2007 (average 2000–2007), unless otherwise noted.

  5. The measurement is net foreign aid, which is aid received, net aid paid back; therefore, we can have a negative number.

  6. The individual components are based on the survey aggregation process described above and are not rescaled to form a relative index. Trust, respect, and obedience are reported as percentage of respondents and self-control is based on a scale from 1 to 10 and multiplied by ten.

  7. The significance on the aid coefficient disappears once we include additional controls such as trade openness. These results are available upon request.

  8. The Hausman test confirmed the superiority of a random effects model over fixed effects. The Hausman coefficients range from 5.34 to 6.88 and p-values range from 0.08 to 0.38, depending on the exact specification.

  9. We do not include these controls in the main specification as it lowers the number of observations and they are significantly correlated with some of our main variables of interest. See Appendix C.

  10. Our results are basically the same if we drop initial income or if we replace latitude with share of population living in the temperate zone as the geographic control measure. Also, our regressions do not appear to suffer from multicollinearity since the variance inflation factor scores fall within the tolerance range of 0–1.

  11. Sargan-Hansen test for over-identifying restrictions is performed to confirm the validity of the instruments. This statistics is insignificant indicating that the instruments are uncorrelated with the error term and are correctly excluded.

  12. See Knack and Keefer 1995; 1997; La Porta et al. 1997; Woolcock 1998; and Zak and Knack 2001 for the importance of trust for a variety of development outcomes.

  13. Embeddedness/autonomy captures respect for tradition, social order, and obedience. Mastery/harmony captures the relationship between mankind and the natural and social world. Mastery refers to cultural emphasis on altering and changing the natural world as a means to improving an individual’s well-being. The last cultural dimension, hierarchy/egalitarianism, captures how societies generate group cooperation and productive activities. To measure each dimension, a survey with a series of questions related to the above distinct values was administered where respondents were asked to rate each of the value items as “a guiding principle in MY life.” Mean ratings of each of the items were computed to create country-level indices.

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Acknowledgements

We thank the editor and an anonymous reviewer for comments and helpful suggestions.

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Authors and Affiliations

  1. Department of Economics, George Mason University, MS 3G4, Fairfax, 22030, VA, USA

    Christopher J Coyne

  2. Department of Finance and Economics, Mississippi State University, Box 9580, 312 F McCool Hall, Mississippi, 39762-9580, Mississippi State, USA

    Claudia R Williamson

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Appendices

Appendix A

Table A1

Table a1 Data description and sources
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Appendix B

Table B1

Table b1 Country and year of WVS
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Appendix C

Table C1

Table c1 Correlation matrix
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Appendix D

Table D1

Table d1 First-stage results
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Coyne, C., Williamson, C. Foreign Aid and the Culture of Contracting. Eastern Econ J 41, 102–125 (2015). https://doi.org/10.1057/eej.2013.44

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