Effects of Donor-Recipient Cultural Differences on the Aid-Growth Nexus

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Effects of Donor-Recipient Cultural Differences on the Aid-Growth Nexus A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Minasyan, Anna Working Paper Your development or mine? Effects of donor-recipient cultural differences on the aid-growth nexus Discussion Papers, No. 167 Provided in Cooperation with: Courant Research Centre 'Poverty, Equity and Growth in Developing and Transition Countries', University of Göttingen Suggested Citation: Minasyan, Anna (2015) : Your development or mine? Effects of donor- recipient cultural differences on the aid-growth nexus, Discussion Papers, No. 167, Georg- August-Universität Göttingen, Courant Research Centre - Poverty, Equity and Growth (CRC- PEG), Göttingen This Version is available at: http://hdl.handle.net/10419/107667 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. www.econstor.eu Courant Research Centre ‘Poverty, Equity and Growth in Developing and Transition Countries: Statistical Methods and Empirical Analysis’ Georg-August-Universität Göttingen (founded in 1737) Discussion Papers No. 167 Your development or mine? Effects of donor-recipient cultural differences on the aid-growth nexus Anna Minasyan February 2015 Wilhelm-Weber-Str. 2 37073 Goettingen Germany Phone: +49-(0)551-3914066 Fax: +49-(0)551-3914059 Email: [email protected] Web: http://www.uni-goettingen.de/crc-peg Your development or mine? Effects of donor-recipient cultural differences on the aid-growth nexus Anna Minasyan* Department of Economics, University of Goettingen, Germany Abstract Development aid from the West may lead to adverse growth effects in the global South due to the neglected cultural context in the development framework. There is evidence that development agendas are mainly premised upon western thought and belief systems. Therefore, I hypothesize that the expected effect of development aid on the economic growth of recipients is impaired by cultural differences between western donors and aid recipients. I test this hypothesis empirically by augmenting an aid-growth model with proxy variables of cultural distance between donors and recipients. Namely, based on the theory of cultural transmission, I use donor-recipient weighted genetic distance, to capture vertical transmission of culture. Then, I use western education of the chief executive of the recipient country to capture horizontal transmission of culture. Results of OLS panel estimation in first differences for 1961-2010 period show that a one unit increase in donor-recipient genetic distance reduces the effect of aid on growth by 0.2 percentage points, if aid is increased by one percentage point. In turn, a one percentage point increase in aid yields, on average, 0.3 percentage point increase in growth after a decade, if the leader in power has western education. JEL classification: O111; O170; O190 Keywords: aid effectiveness, cultural differences, genetic distance, western education *Corresponding author: Anna Minasyan, Department of Economics, University of Goettingen, Platz der Goettinger Sieben 5, 37073 Goettingen, Germany. E-mail: [email protected]. I thank Axel Dreher, Stephan Klasen, members of the “Globalization and Development” research training group at the University of Goettingen, the participants of the AEL Development Economics Workshop in Zurich, AEL Development Economics Conference in Passau and the participants of the Summer School in Economic Growth at Warwick University for their valuable discussion, feedback and comments. 1 1. Introduction Despite its long history and plethora of studies, no correlation between development aid and the economic growth of recipient countries is found from raw macro-level data, whereas development aid effectiveness literature exhibits varying results (Doucouliagos and Paldam, 2009). For example, several studies report positive and statistically significant effects conditional upon the economic policy and physical climate of recipient countries (Burnside and Dollar, 1997; Dalgaard et al., 2004), while others report an unconditional and positive effect of aid on growth (Hansen and Tarp, 2001) or no statistically significant effect at all (Rajan and Subramanian, 2008). Clemens et al. (2012) analyze three aid-growth models (Boone, 1996; Burnside and Dollar, 1997; Rajan and Subramanian, 2008) and show that, in the short term, aid has a positive impact on growth. Moreover, Brückner (2013) also finds that aid has a positive effect on growth, as long as the simultaneity problem – lower growth more aid – is adjusted in the empirical analysis. Thus, findings of aid effectiveness literature are inconsistent and puzzling, which leaves room for further investigation. Doucouliagos and Paldam (2009) perform meta-analysis of aid effectiveness literature and point out that even in the studies where aid has a positive impact on growth, the size of the effect is too small to matter. This paper specifically explores the causes for this negligible effect of aid on growth. In addition, the bulk of the literature on aid effectiveness investigates the effect of foreign aid on economic growth based on recipient country characteristics only, which include a range of economic and social factors such as trade policy, inflation, budget balance, institutions, ethno- linguistic fractionalization, geography, initial GDP per capita, etc.1 Aid-growth models ignore the intervention aspect of development aid. This is particularly important when the intervention – development aid – comes from culturally distant societies. Western donors and aid recipients from the global South are often characterized by different belief systems and cultures due to their divergent historical, environmental, economic and political pasts, which suggests that the assumption of homogeneity of preferences in the aid-growth model does not necessarily hold – what matters most to the donor might not be a top priority for the recipient at particular point in time and place, which may also drive the mismatch between supply and demand in development transactions (Easterly, 2007). In this paper, I focus on the western donors and hypothesize that donor-recipient cultural differences matter and, the larger these differences between donors and recipients the less effective is aid. As a result, the theoretically expected positive effect of aid on growth is reduced or diminished due to the neglected cultural differences between donors and recipients. My hypothesis is based on scholarly and anecdotal evidence. Often donor objectives are in conflict with local beliefs, preferences and values at particular points in time, space and context. This mismatch and neglect of country-specific circumstances leads to failures of development paradigms as documented by many scholars and practitioners (Hodler and Dreher, 2013; Coyne, 2013; Altaf, 2011; Moyo, 2009; Easterly, 2001; Escobar, 1995; Bauer, 1976). Aid for development is an economic transaction that involves two or more parties. Economic theory tells us that such transactions are often plagued with information asymmetry problems that harm outcomes (Gibson et al., 2005; North, 1987). Due to its complex and latent nature, 1 Dreher et al., 2013b, study the effects of donor-recipient differences in political ideology on the aid-growth nexus. 1 culture of the recipient and the donor and their interplay can greatly influence development aid transaction. Cultural differences may give rise to increased information asymmetry between donor(s) and recipients and negatively affect any potential growth impact of aid (Gibson et al., 2005). Politically, development aid is an intervention from the West in the growth processes of the lower income countries in the global South, with promotion of development strategies premised upon western experience, culture and values (Sen, 2004). Often these interventions are led by time-specific development paradigms (Easterly, 2001) that mostly neglect the diversity of local beliefs and complexities in aid recipient countries (Escobar, 1995). Thus, this paper is motivated by the aid effectiveness puzzle (Doucouliagos and Paldam, 2009) and scholarly debates on culture and development (Sen, 2004; Inglehart and Baker, 2000; Bauer, 1976; Escobar, 1995). The main hypothesis of this paper is that potential effectiveness of development aid, premised upon western culture, is undermined when uniformly applied in societies with different cultures and belief systems. The main contribution of this paper is the empirical investigation of the role of cultural differences
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