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Culture and Contracts: the Historical Legacy of Forced Labour JOB MARKET PAPER

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Culture and Contracts: the Historical Legacy of Forced Labour JOB MARKET PAPER Culture and Contracts: The Historical Legacy of Forced Labour JOB MARKET PAPER Arthur Blouin University of Warwick November 2013⇤ Abstract I provide evidence that history and culture can weaken out-group relationships and simultaneously increase the reliance on in-group members for economic activity. This is tested using field data from Hutu and Tutsi farmers in Rwanda and Burundi, and shown to have economic costs of up to 15% of income. Colonial era Tutsi mistreatment of Hutu resulted in some Hutu harbouring resentment towards the Tutsi. This resentment influences contractual partner matching. Hutu with a family history of mistreatment are less likely to choose a Tutsi economic partner. This results in 28% more contractual default, as the replacement partners are less able to fulfill their end of the agreement. Results are robust to the effects of the genocide in Rwanda, historical and current state capacity and is not driven by current location or industry. Keywords: social capital, contracts, culture, default JEL Codes: 15; L14; N57; Q12; ⇤Thanks to Robert Akerlof, Sascha Becker, Daniel Berger, Dan Bernhardt, James Choy, David Hugh-Jones, Victor Lavy, Rocco Macchiavello, Sharun Mukand, Fabian Waldinger and Chris Woodruff for very helpful comments and suggestions. Thanks also to participants in seminars at Essex and Warwick. I am grateful for financial support from the British Academy and the Centre for Competitive Advantage in the Global Economy. 1 1 Introduction Historical events have been shown to cause mistrust across ethnic lines (Nunn and Wantchekon (2009)). However such out-group mistrust along tribal, ethnic or family lines has been associated with greater in-group trust (Alesina and Giuliano (2010)). Social communities with high in-group trust are well positioned to overcome informa- tion (Munshi (2003)), co-ordination (Ostrom (1990)) and enforcement (Greif (1993)) failures, but a lack of business diversity constrains the ability to find an appropriate economic partner. It’s therefore unclear whether interethnic mistrust strengthens or weakens economic relationships1. This paper investigates a historical shock, which simultaneously decreases out-group trust and increases a reliance on within-ethnicity communities. This shock is used to investigate the origins of an increased reliance on ethnicity and its impact on contractual default and income. The setting I consider is the colonial era introduction of forced labour in Rwanda and Burundi, and the impact that it had on Hutu-Tutsi relationships. In the post- colonial era the Hutu and Tutsi have been sharply divided, with Hutu extremists killing 1,000,000 Tutsi and Tutsi sympathizers in the 1994 Rwandan genocide. These tensions are thought to have been exacerbated by Belgian colonial policy in the coffee sector. In particular, the Belgians allowed the Tutsi chiefs to recruit Hutu coffee farmers into forced labour. I use this policy to investigate the origins of ethnic tensions, and quantify their importance for maintaining successful agreements. I find that a family history of forced labour increases interethnic resentment, and increases the reliance on within ethnicity economic relationships, which leads to worse partner matches, increasing contractual default. Forced labour was introduced after Belgium assumed control of Rwanda and Burundi and was related to coffee production. One of Belgium’s first colonial policies was to encourage the production of coffee with subsidies so that they could integrate the region into the monetary economy and tax the profits from coffee2. After these initial programs were unsuccessful, the Belgians introduced coffee quotas in 1931, under which, each Chief was responsible for the maintenance of 1,000 healthy coffee trees. 1Granovetter (1985) argued that cultural differences may account for differences in the strength of these socio-economic ‘ties’. But the influence of culture on economic activity is a difficult problem to study because it’s difficult to separate causal channels. We know history can have long lasting influence on culture (Nunn (2012), Nunn (2008), Dohmen, Falk, Huffman, Sunde, Schupp and Wagner (2011)). For a link between economics and culture see Knack and Keefer (1997), Guiso, Sapienza and Zingales (2004), Algan and Cahuc (2010), Hjort (2011). For a review of the literature on trust and economic activity, see Alesina and LaFerrara (2005). 2Prior to this much of the economy relied on the trade of cattle which was not easily taxable by colonists 2 Maintaining these trees was a large burden on the Chiefs in some regions, so in these regions the Belgians allowed the use of Hutu forced labour. Each Chief was Tutsi, and only Hutu farmers were eligible for the program3. This is expected to have contributed to interethnic tensions: ‘‘The looting and the forced labour continued unabated and, even if the massacres and amputations stopped, the punishments imposed in their place were almost equally vicious...While ‘kiboko’ is Kiswahili for hippopotamus, Belgians had adopted ‘ikiboko’ as the name for a strip of hippo hide that was used as a lash...The humiliating part came with having to bare the bottom, while lying on the ground, face down, which was calculated to inflict maximum pain. As for the divisive part, the colonialist administered those eight lashes on the chief, out of sight of his citizens, and then directed the chief to do the same on the offenders...That way, the [Hutu] citizens blamed their [Tutsi] chief, not the colonial master.” - Butamire (2012) To evaluate the impact of colonial era forced labour on economic relationships I bring together data from several sources: (1) a field survey on contracts from Hutu and Tutsi farmers. Most of the contracts in the data are either inter-household crop insurance4 or inter-household life insurance5. I collect information on the number of defaults and agreements, the value of the agreements, and the reasons for default. (2) Trust game data between people both within and between ethnicities, and across 143 villages6. Due to the sensitivity of the issue, data on interethnic trust7 is rarely available where tensions are highest8. The trust game allows me to construct a measure of interethnic tensions without making ethnicity salient9. (3) Constructed data on historical forced labour from historical reports and archival sources. While local forced labour is very difficult to observe, crop profitability allows us to back out village level 3The rationalization was that traditionally in Hutu communities taxation could be paid for with labour, but the same traditional institution did not exist in Tutsi communities. Forced labour was deemed more culturally acceptable to Hutu than to Tutsi. 4Where transfers are made between households producing different crops when one of the crops experiences a bad harvest. This type of agreement is also discussed in Kinnan, 2008 5Where households help to pay funeral costs in the event of a death in each others families. This type of agreement is also discussed in Fafchamps 2005 6see Berg, Dickhaut and McCabe (1995), Barr (2003), Glaeser, Laibson, Scheinkman and Soutter (2000) for more on the trust game, and Barr (2003), Fehr and Goette (2005) for the trust game implemented in the field. 7The attitudinal change measured could be distrust, resentment, indignation, anger, retribution, vengeance, etc. I remain agnostic about the specific change in attitude. 8Yet these are the regions where observing the economic implications of tensions is most important 9The trust game has been used to measure interethnic attitudes before (Fershtman and Gneezy (2001)) 3 exposure, which was directly associated with the ability of the Chiefs to meet coffee quotas. This measure is constructed using archival data on national crop prices, and GIS estimates of crop suitability10. The final dataset consists of over 600 individuals, and I observe historical family location from one of 332 forced-labour era villages from the (unified) colonial state of RuandaUrundi. My empirical approach uses a differences-in-differences and regression kink design to investigate whether (a) forced labour on coffee farms impacted Hutu resentment towards Tutsi, and (b) this Hutu-Tutsi resentment influences economic relationships. First, I show that forced labour influenced Hutu resentment of Tutsi by comparing the trust game offers from Hutu to Tutsi, between two Hutu living in the same village, but with different forced labour family histories. Hutu whose grandparents parents worked on coffee farms in forced labour villages make significantly lower offers to Tutsi in the trust game than other Hutu. They don’t, however, make lower offers to other Hutu, and Tutsi do not make lower return offers in these regions. This shows that historical interethnic mistrust to was passed from grandparent to parent to child, throwing light on the theoretical mechanism advanced by Tabelini (2008) about the transmission of cultural traits. I proceed by documenting that the increased interethnic resentment causes a greater economic reliance on the ethnic community. I show that Hutu with a family history of mistreatment are 10% more likely to pass up on potentially profitable opportunities with Tutsi business partners. They’re not, however, more (less) likely to select someone of high (low) income or someone growing the same (different) primary crops. This increased ethnic network reliance has economic implications, but those implications are theoretically ambiguous. On the one hand, doing business within a
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