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.

Countries that receive more aid for every dollar of goods they trade score lower on average on the index for culture of contracting, even controlling for reverse causality. The index combines answers to survey questions on trust, respect, individual self-determination, and obedience.

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.”

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