Don’t Help me, Trust me – Your African Coffee Producer

By Tanja Goodwin At a recent speech at DRI, Andrew Rugasira described what happened as Good African Coffee, the business he founded in Uganda’s Rwenzori mountains, began to take off. As farmers began to produce higher quality coffee and see higher prices for their crops:

Something really extraordinary began to happen.  The values that we don’t really hear about in a lot of these development reports began to manifest: entrepreneurship, business exposure, dignity, esteem, the pride in producing a product that they knew was going into a market…

[vimeo https://vimeo.com/78374531]

Find Andrew's full speech and other video from DRI's conference here. 

While the role of beliefs and values as catalysts for economic growth may still be “underrated and underdebated,” development economists have recently begun taking a closer look.  As a new working paper by Chris Coyne and Claudia Williamson explains, higher levels of self-determination, mutual respect and trust allow impersonal market transactions to happen efficiently, and more market transactions improve economic specialization and productivity.

Since every pound of African coffee we buy in the US relies upon dozens of formal and informal contracts between farmers, packagers, exporters and retailers, the “culture of contracting” matters. And contracts rely on interpersonal trust between strangers each pursuing his or her own self-interest.

Trade sets off a positive feedback loop: In Uganda, the more local producers sell their coffee to strangers, the more they will trust new buyers. The more buyers receive good quality the more they will trust, and look for, coffee from Uganda. Trade induces more trade.

But does aid induce more trade? For Coyne and Williamson, aid flows tend to create dependency and weaken the incentives for people to engage in business and trade, economic activities that rely upon contracts. Where aid triggers rent-seeking activities like corruption or fraud, it is also likely to reduce trust among strangers.

Coyne and Williamson find empirical evidence that trade and aid affect values in opposite ways. This implies it’s the business relationships—not the handouts—that help African farmers in the long run. Yet for Rugasira, getting investors and retailers to look beyond Uganda’s image as war-torn playground of Idi Amin or Joseph Kony has been incredibly difficult. He concluded, “If we treat [African people] like entrepreneurs, people with dignity and self-respect…we might find that we have a different set of results.”

PUBLICATION: Dignity and Development

What do dignity and liberty have to do with institutional outcomes on development? DRI Post-doctoral Fellow Claudia Williamson publishes in the Journal of  Socio-Economics:

This paper explores how expanding the notion of informal institutions in the broader institutional framework provides a more complete explanation for development. Specifically, I incorporate McCloskey’s notion of ‘dignity and liberty’ as part of the institutional nexus. By doing so, a richer explanation and understanding of the importance of institutions in explaining different economic outcomes is offered. Focusing on bourgeois dignity offers a precise mechanism to explain how institutions matter to support economic growth. In addition, analyzing the changing attitudes towards the bourgeoisie provides a specific example of mechanisms that can lead to institutional change.

She concludes:

As such, we arrive at two main conclusions: 1) dignity must be grounded in liberty, and 2) economic exchange as a result of underlying liberties leads to dignifying the bourgeoisie. This suggests that by moving towards freer trade, poor countries today will reap the traditional benefits of free trade, but it might also set in motion a cycle for more liberties and institutional change.

WORKING PAPER: Foreign Aid's Amplification Effect on Political Institutions

Does foreign aid encourage democracy in recipient countries, or does it strengthen their dictators instead? These have long been the contradictory predictions of two competing hypotheses in the aid debate, but a new DRI working paper by Nabamita Dutta, Peter T. Leeson and DRI Postdoctoral Fellow Claudia Williamson suggests that in reality neither prediction captures the entire picture:

This paper offers a third hypothesis about how aid affects recipients’ political institutions that we call the “amplification effect.” We argue that foreign aid has neither the power to make dictatorships more democratic nor to make democracies more dictatorial. It only amplifies recipients’ existing political institutions. We investigate this hypothesis using panel data for 124 countries between 1960 and 2009. Our findings support the amplification effect. Aid strengthens democracy in already democratic countries and dictatorship in already dictatorial regimes. It doesn’t alter the trajectory of recipients’ political institutions.

The amplification effect of aid means, the authors suggest, that both competing hypotheses ascribe too much power to foreign assistance. Aid doesn't alter the institutional trajectory of any country; it makes democracies more democratic, and autocracies more dictatorial. So aid given for the "purposes of democratizing the dictatorial developing world may not only fail,"  they write, "but may actually cause harm."

What could this mean for the real purpose of aid -- economic growth and development?

To the extent that because of their stronger constraints on executive power, democracies tend to pursue better economic policies than dictatorships, when democracies receive foreign aid they become more democratic, leading to the adoption of better policies, which in turn leads to higher economic growth. Conversely, when dictatorships receive aid they become more dictatorial, preventing the adoption of better policies, which in turn prevents increases in economic growth.

Read the paper.

ARTICLE: Think tanks help alter public opinion

DRI postdoctoral fellow Claudia Williamson writes for The Oklahoman on December 9, 2011:

Voters aren't particularly thankful for government right now. According to Gallup, congressional job approval is tied for an all-time record low of just 13 percent.

Voter frustration stems from the fact that things at the federal level never seem to change; national debt grows while corporations get taxpayer handouts. But what about policy groups trying to improve government at the state or local level, such as the Oklahoma Council of Public Affairs?

Research I recently completed with colleagues at George Mason and Duquesne universities suggests these think tanks have made some strides in changing the public's mind, but that their legislative impact is limited.

State-based think tanks are nonprofit research organizations that operate with two goals: educating the citizenry and affecting public policy. We looked at think tanks whose policy preferences included reducing the role of government and increasing the role of private markets.

Unfortunately, these groups don't appear to have a direct impact on policy. We analyzed data sets for each state between 1997 and 2010 and found little evidence that market-oriented think tanks lead to more pro-market policies such as lower tax rates or less government spending.

Evidence shows that, unlike think tanks, political lobby groups influence state public policy. For example, union lobbyist spending leads to more government employees and higher government wages. This finding may reflect the fact that lobby groups are legally permitted to advocate directly for policy changes. Think tanks are not. In other words, they don't need to engage the public to secure desired policy outcomes. Lobbying dollars trump public opinion.

Discouraging as this might be for advocates of better and smaller government, here is some good news: Spending and investment on the part of free-market think tanks between 1997 and 2002 led to an increase in pro-market attitudes between 2003 and 2008. These think tanks were particularly effective in shifting public opinion on issues regarding welfare policies and government intervention into the market.

For example, the OCPA increased its expenditures from $50 to almost $300 per thousand state residents over the past 13 years. During this time, the policy environment improved slightly from a free-market perspective. However, state employee wages also increased, as did government expenditures for education and welfare.

Yet the council's spending wasn't a complete waste; public opinion in the state regarding markets in general and welfare spending in particular shifted toward less government intervention.

The way any policy group potentially influences economic policy is by shifting ideology. But translating shifting attitudes into policy change takes time — perhaps decades — in sharp contrast to lobbying efforts that can have an immediate political impact.

These results suggest policy groups operate via the channel of ideas while lobbyist groups go directly to the source: politicians. Still, free-market advocates have reason to hope. Politicians ultimately respond to public opinion. And though free-market think tanks might not be winning legislative battles, they are winning a longer war of public opinion.

Read more on the Oklahoman

Read the working paper "Think Tanks"