Within-Country Data Analysis
Our analysis at the micro-level utilizes original surveys, survey experiments, and behavioral games conducted in Liberia, a nation that, despite a decade of peace, remains one of the weakest states globally With only 400 miles of paved roads, an inadequate electric grid serving mainly the capital, and a police force of just 4,000 for over 4 million citizens, Liberia faces significant challenges Ranked 177 out of 188 countries on the 2015 United Nations Human Development Index, it is the most aid-dependent country, with official development assistance (ODA) exceeding 176% of its gross national income (GNI), nearly triple that of the next most dependent nation The situation has likely deteriorated further due to the severe Ebola epidemic of 2014-2015, highlighting Liberia's critical importance as a study setting.
In recent years, China's influence in Liberia has surged, mirroring trends seen in other sub-Saharan African nations Much of this growth in presence is attributed to China's significant investment in infrastructure projects Additionally, China stands out as one of the few donors actively engaging in this sector, enabling a clearer analysis of the impacts of Chinese initiatives compared to those from other international donors in the region.
5 See http://hdr.undp.org/en/content/human-development-index-hdi [accessed August 12, 2016]
6 “Top 10 countries with the highest ODA to GNI ratio,” DEVEX, February 8, 2012, https://www.devex.com/news/top-10-countries-with-the-highest-oda-to-gni-ratio-77423
College of William and Mary
USAID/DCHA/DRG Working Papers Series 7
China's involvement in Liberia has sparked civil unrest, particularly highlighted by a $2.6 billion investment from China Union in 2009 for the Bong iron ore mine This investment aimed to restore the mine's capacity to 1 million tons annually and promised to create thousands of jobs for local residents, refurbish a technical school, and enhance infrastructure and services in Bong County.
China Union's investment in Liberia promises to enhance the government's capacity by introducing new infrastructure, improving administrative capabilities, and increasing taxation potential, particularly with the reintroduction of electricity.
In October 2013, the Emergency Response Unit of the Liberian National Police intervened in Bong Mines to disperse striking workers who had occupied the China Union compound, protesting against what they termed “modern slavery” conditions at the mine The workers criticized the Liberian government for its concession agreement with China Union, asserting that the Chinese company showed a blatant disregard for human rights Their grievances extended beyond China Union, highlighting a broader discontent with the Liberian government's actions.
This anecdote raises questions about whether the events in Bong Mines reflect a broader trend, an issue our study aims to explore We will utilize surveys and survey experiments in Liberia to gather insights and data on this matter.
Our primary data source on Liberia consists of surveys and survey experiments conducted in Gbarnga, the fourth largest city in Bong County, as well as in 36 rural towns and villages across Bong, Lofa, and Nimba counties We targeted both urban and rural areas to assess the varying impacts of Chinese aid and investment in these different contexts The focus on Bong, Lofa, and Nimba is particularly significant due to their severe devastation during the civil war, highlighting the need for a nuanced understanding of aid effectiveness in post-conflict regions.
Liberia's border with Guinea and Côte d'Ivoire is both volatile and strategically significant, making it a key area for state consolidation efforts since 2003 For logistical feasibility, we decided to implement the tax compliance game solely in Gbarnga.
In our urban survey, we randomly selected 193 residents from nine neighborhoods in Gbarnga using the random walk technique, while the rural survey involved sampling 18 residents from each village, also employing this method Both surveys explored various topics related to perceived legitimacy, such as perceptions of corruption, trustworthiness, and impartiality Additionally, they included questions on potential confounders like age, income, religion, and ethnicity Furthermore, the surveys assessed respondents' prior exposure to Chinese investment and development projects by determining if they could name or had utilized any Chinese-funded initiatives, as well as whether they or their friends or family members had engaged with these projects.
On October 8, 2013, "The New Dawn" reported that employees of China Union have accused the company of modern slavery practices The article highlights serious allegations regarding labor conditions and workers' rights violations within the organization These claims raise significant concerns about the ethical treatment of employees in the workplace, prompting discussions about labor laws and corporate responsibility in Liberia.
College of William and Mary
USAID/DCHA/DRG Working Papers Series 8 worked for a Chinese contractor For comparability, both surveys measured prior exposure to US investment and development projects, as well
Both surveys featured an experimental component where participants were presented with vignettes detailing social services offered by the Liberian government, as well as by Chinese and American donors and investors For instance, in the "China" treatment group, respondents were exposed to a specific vignette highlighting these services.
Foreign donors and investors play a crucial role in delivering public services, with China being a significant contributor to Liberia's development The Chinese government invests millions of dollars to enhance public services, while Chinese companies actively participate in the construction and maintenance of essential infrastructure Key areas of support from China include the development of roads, schools, hospitals, and clinics, which are vital for improving the quality of life in Liberia.
China plays a crucial role in supporting Liberia by providing essential public services such as new roads, hospitals, and schools, without relying on tax contributions from Liberians This financial assistance allows communities to access vital infrastructure and services that may otherwise be challenging to fund independently.
China has been known to engage in wasteful spending, particularly in infrastructure projects For instance, the country sometimes hires subpar road construction companies, leading to rapid deterioration of roads Additionally, some Chinese firms operating in Liberia do not provide fair wages, subjecting local workers to long hours and poor treatment, often resorting to intimidation if complaints arise Furthermore, there are instances where Chinese officials or contractors misappropriate funds intended for these projects.
The vignettes for "US" and "government" were almost identical, differing only in the name of the social service provider and the funding source, which was taxes in the government vignette, unlike China’s “own money.” After reading these vignettes, respondents were questioned about their belief in the normative obligation of Liberians to pay taxes, a key indicator of perceived legitimacy highlighted in existing literature A control group answered the same questions without the vignettes, allowing for a comparison of tax compliance perceptions in Liberia.
Advantages to our Approach
Our study's significant contribution lies in its ability to triangulate data from various sources and measurement strategies, which together address each other's limitations While surveys effectively capture individual-level exposure to Chinese aid and investment, they may be prone to systematic measurement errors due to reliance on self-reports Conversely, AidData provides a more objective view of exposure to Chinese aid, although it does so indirectly, as not all nearby residents are aware of or utilize the projects listed Additionally, since exposure to these projects is not random, both survey self-reports and AidData records face the risk of selection bias, highlighting the need for a comprehensive approach to data analysis.
Survey experiments address the selection issue by utilizing vignettes to represent exposure to Chinese aid and investment, yet they still depend on self-reported data for crucial variables, such as respondents' perceived obligation to pay taxes In contrast, our behavioral game effectively resolves the selection problem by measuring actual tax compliance rather than relying on self-reports, although it is even more stylized in its approach.
All measurement and identification strategies have inherent imperfections, and no single method can address all limitations at once Our objective is to uncover patterns that remain consistent across various methodological approaches The greater the robustness of our findings against different measurement and identification strategies, the more assured we can be that these results are not simply due to chance or the peculiarities of a specific method or sample.
Within-Country Results
Appendix B, Table 1 presents descriptive statistics on foreign aid and investment exposure, government perceptions, and tax obligation views among rural and urban respondents in Liberia Urban respondents demonstrate a significantly higher awareness and engagement with foreign-funded projects, particularly those from Chinese investors, compared to their rural counterparts While urban individuals are more familiar with and have utilized Chinese projects, rural respondents show a more balanced awareness of both US and Chinese initiatives Additionally, urban respondents are more likely to have personal connections to foreign contractors, especially those from China, whereas rural respondents exhibit similar proportions for both US and Chinese contractors.
A significant majority of respondents in Liberia view their government as equitable in its treatment of various ethnic and religious groups; however, corruption remains a prevalent concern, with 83% of urban respondents and 70% of rural respondents labeling the government as corrupt This division highlights varying perceptions of the government's integrity among different demographics.
College of William and Mary
The USAID/DCHA/DRG Working Papers Series highlights the importance of openness and transparency in governance Despite this, survey findings indicate that while a majority of respondents acknowledge their obligation to pay taxes, the level of agreement is relatively low among both urban and rural populations.
Appendix B, Tables 2 and 3, present correlations between respondents' perceptions of the Liberian government and their prior exposure to Chinese and US investment and development projects in both rural and urban contexts We define perceptions using an additive index based on three indicators: the belief that the government treats all religious and ethnic groups equally, operates in an open and transparent manner, and is free from corruption Additionally, we assess respondents' satisfaction with the quality of democracy in Liberia Furthermore, we evaluate tax compliance and the perceived obligation to pay taxes, utilizing questions from the Afrobarometer survey to facilitate comparisons with other African nations.
In Table 2, we define exposure to foreign aid and investment using an additive index that includes indicators such as respondents' awareness of or experience with public goods from foreign donors, and whether they or their acquaintances have worked for foreign contractors These indicators rely on self-reported survey data Additionally, we measure exposure by the distance (in 10 km increments) from the nearest Chinese project, and further analyze the number of Chinese projects within 30, 40, or 50 km radii However, these proxies are only applicable to Chinese aid and investment and pertain solely to the rural sample, as urban respondents are uniformly located near these projects Consequently, Table 3 emphasizes self-reported exposure exclusively.
We use Ordinary Least Squares (OLS) to estimate correlations, incorporating individual-level controls such as gender, age, occupation, religion, education, and wealth, which is indicated by the quality of materials used in respondents' homes In the rural survey, we also account for community-level factors, including population size, cell phone coverage, the presence of a police station, and an index of available community facilities To ensure accuracy, standard errors are clustered by neighborhood for urban respondents and by community for rural respondents.
Research indicates that exposure to foreign aid and investment, particularly from Chinese projects, does not undermine Liberians' views of their government or their tax compliance In fact, a positive correlation exists between engagement with Chinese initiatives and favorable perceptions of the Liberian government, as evidenced by statistically significant results in rural surveys and a positive trend in urban areas.
The relationship between foreign aid, investment, and the perceived quality of democracy in Liberia is complex Self-reported exposure to US projects shows a positive and significant correlation with perceptions of democracy among both rural and urban respondents In contrast, exposure to Chinese projects does not yield a similar positive effect Interestingly, data from AidData reveals a negative correlation between exposure to aid and perceived democratic quality, particularly among respondents residing farther from Chinese project locations.
College of William and Mary
The USAID/DCHA/DRG Working Papers Series indicates a positive correlation between exposure to Chinese projects and perceptions of government among respondents However, this correlation diminishes—though not significantly—among those living far from these projects This decline may stem from feelings of being underserved by distant initiatives, leading to blame directed at the Liberian government Alternatively, the attitudes of those farther from Chinese projects might be influenced by unrelated factors, suggesting that the relationship could be spurious.
Appendix A, Figures 1 and 2 illustrate the average treatment effect of survey experiment vignettes in rural and urban samples, focusing on respondents' perceived obligation to pay taxes The analysis uses an additive index based on four key questions regarding tax obligations, including beliefs about paying taxes despite poverty, government policies, corruption, and reliance on foreign aid for public goods Respondents' agreement with these statements is coded and combined into an index The figures display the marginal effect of each vignette, controlling for mean variables, with standard errors clustered by neighborhood for urban samples and by community for rural samples Point estimates are represented by squares, while the lines indicate 90% confidence intervals.
Our analysis reveals no significant impact of the vignettes on the rural respondents' perceived obligation to pay taxes, as the point estimates remain nearly identical across treatment groups and the confidence intervals largely overlap.
The US vignettes significantly enhanced the perceived obligation to pay taxes compared to both the control group and the China vignette While the differences between the US and China vignettes are statistically significant (p < 0.05), the effects of the China vignette show no substantial impact, with results being statistically indistinguishable from zero.
Figure 3 illustrates the average treatment effect of vignettes on the proportion of income concealed by participants in the tax compliance game in urban Liberia Tax avoidance rates were notably high, exceeding 50% across all treatment groups, with no significant impact from the vignettes Interestingly, tax compliance seemed to decrease in the government treatment group, although this finding lacks statistical significance.
In a study examining tax compliance, observed rates of tax avoidance in a game setting were significantly higher than the self-reported compliance rates from surveys, which ranged from 85% to 95% This discrepancy may stem from respondents exaggerating their compliance to align with socially acceptable behavior or from lab participants perceiving the game as detached from real-life tax obligations, leading to higher evasion rates Despite the inability to fully distinguish between these explanations, focus group discussions revealed that most participants did relate the experimental scenario to the actual implications of taxation and compliance.
College of William and Mary
USAID/DCHA/DRG Working Papers Series 13
Summary of Results
Our findings indicate that foreign aid and investment positively influence Liberians' perceptions of their government and the quality of democracy in the country This trend is consistent across various demographics, measurement methods, and identification strategies While there is some evidence that Chinese projects may negatively affect perceptions of democracy, these effects are most pronounced among those living far from the projects, suggesting potential confounding factors Conversely, US aid and investment correlate with enhanced views of democracy in both urban and rural areas of Liberia.
Our inability to detect significant negative impacts of Chinese aid and investment on tax compliance and government perceptions may stem from limitations in our research design, such as insufficient statistical power or measurement errors in assessing exposure to Chinese donors and investors This raises concerns about Type II errors, or false negatives, particularly in studies that highlight null effects.
Despite the potential explanations for our null results, several factors indicate they are unlikely to account for the observed lack of effects on tax compliance Notably, these null effects remain consistent across various measurement and identification strategies, implying that issues such as statistical power or systematic measurement error are not significant contributors—unless all our methods exhibit similar flaws.
Research indicates that exposure to Chinese aid and investment does not negatively impact perceptions of government or tax compliance; instead, it enhances views of Chinese donors and investors This finding challenges the notion that China has generated backlash among affected populations Notably, direct exposure to Chinese projects correlates with improved perceptions of the United States, while exposure to US projects does not yield similar results This may stem from Liberians being more critical of Chinese contractors compared to US ones, leading to increased support for US projects.
A significant 73% of urban respondents perceive that Chinese contractors exploit their Liberian employees, while only 20% think they provide a living wage In contrast, 57% of respondents hold the same view about US contractors, with 41% believing they offer a living wage These perceptions are similarly reflected among rural respondents, highlighting concerns about fair labor practices in Liberia.
College of William and Mary
USAID/DCHA/DRG Working Papers Series 14
Respondents living near Chinese investment and development projects, as indicated by AidData, are significantly more likely to report exposure to these initiatives, while their exposure to US aid and investment remains largely unchanged This discrepancy implies that the survey responses effectively reflect actual exposure, minimizing the likelihood of systematic measurement errors influencing the results.
This study examines the impact of Chinese aid and investment on the perceived legitimacy of African governments, specifically focusing on citizens' sense of tax obligation and their views on government fairness and transparency Through a comprehensive analysis utilizing diverse data sources and methodologies, we find minimal effects of Chinese projects on citizens' perceptions of their government in Liberia, consistent across both urban and rural areas Our findings indicate that these null effects are not due to statistical power issues or measurement errors, suggesting they represent genuine outcomes rather than research design limitations.
Recent findings challenge the belief that China's growing influence in developing nations like Liberia undermines tax morale and government perceptions Instead, these results indicate that concerns regarding the negative impact of foreign aid and investment on state legitimacy may be exaggerated While the anticipated positive effects may also be overstated, these insights are crucial for both academic discussions on foreign aid and investment, particularly regarding Chinese initiatives, and for practical strategies to assist fragile, underdeveloped, and conflict-affected states Notably, while no evidence of enhanced state legitimacy was found, there is potential for foreign donors and investors to improve the reputations of both themselves and recipient governments through strategic co-branding This approach could enable recipient governments to gain more recognition for projects primarily funded by external entities Exploring this concept further could be beneficial for researchers and policymakers alike.
The sole exception to our findings is the 30km bandwidth, which may be capturing more urban areas close to various aid projects Therefore, we advise caution when interpreting results derived from this specific bandwidth.
Our survey-based proxies for exposure may be correlated with our AidData-based proxies due to measurement errors that are positively correlated However, since these two sets of proxies are affected by distinct types of measurement error, we consider this explanation to be unlikely.
College of William and Mary
USAID/DCHA/DRG Working Papers Series 15
College of William and Mary
USAID/DCHA/DRG Working Papers Series 16
Bates, Robert H., and Da-Hsiang Donald Lien 1985 “A Note on Taxation, Development, and
Brọutigam, Deborah 2009 The Dragon’s Gift: The Real Story of China in Africa Oxford: Oxford
Cheung, Yin-Wong, Jakob de Haan, Xingwang Qian, and Shu Yu 2012 “China’s Outward Direct
Investment in Africa.” Review of International Economics 20(2): 201–20
Clotfelter, Charles T 1983 “Tax Evasion and Tax Rates: An Analysis of Individual Returns.” The
Review of Economics and Statistics 65(3): 363–73
Cruz, Cesi, and Christina J Schneider 2012 “(Unintended) Electoral Effects of Foreign Aid.” University of California, San Diego
Dietrich, Simone, and Matthew S Winters 2015 “Foreign Aid and Government Legitimacy.” Journal of
Dreher, Axel et al 2015 “Apples and Dragon Fruits: The Determinants of Aid and Other Forms of State
Financing from China to Africa.” AidData Working Paper 15
Dreher, Axel, and Andreas Fuchs 2015 “Rogue Aid? An Empirical Analysis of China’s Aid Allocation.”
Canadian Journal of Economics/Revue canadienne d’économique 48(3): 988–1023
Ellis, Stephen 2006 The Mask of Anarchy: The Destruction of Liberia and the Religious Dimension of an
African Civil War New York: New York University Press
Englebert, Pierre 2000 State Legitimacy and Development in Africa Boulder, CO: Lynne Rienner Fain, Haskell 1972 “The Idea of the State.” Nỏs 6(1): 15–26
Ferguson, James 1994 The Anti-Politics Machine: “Development,” Depoliticization, and Bureaucratic
Power in Lesotho Minneapolis: University of Minnesota Press
Gilley, Bruce 2009 The Right to Rule: How States Win and Lose Legitimacy New York: Columbia
Guiteras, Raymond, and Ahmed Mushfiq Mobarak 2014 “Does Development Aid Undermine
Political Accountability? Leader and Constituent Responses to a Large-Scale Intervention.” University of Maryland and Yale University
Herbst, Jeffrey 2000 States and Power in Africa Princeton: Princeton University Press
College of William and Mary
USAID/DCHA/DRG Working Papers Series 17
Isaksson, Ann-Sofie, and Andreas Kotsadam 2016 “Chinese Aid and Local Corruption.” University of
Gothenburg Working Papers in Economics No 667
Jones, Sam, and Finn Tarp 2016 “Does Foreign Aid Harm Political Institutions?” Journal of
Kelly, Gina, Samuel Brazys, and Johan A Elkink 2016 “The Dragon’s Curse? China, the World Bank, and Perceptions of Corruption in Tanzania.” AidData Working Paper 26
Lake, David A 2010 “Building Legitimate States after Civil Wars.” In Strengthening Peace in Post-Civil
War States: Transforming Spoilers Into Stakeholders, eds Matthew Hoddie and Caroline A
Hartzell Chicago: University of Chicago Press, 29–52
Large, Daniel 2008 “Beyond ‘Dragon in the Bush’: The Study of China–Africa Relations.” African
Levi, Margaret 2003 “A State of Trust.” In Trust and Governance, eds Valerie Braithwaite and
Margaret Levi New York: Russell Sage Foundation, 77–102
Levi, Margaret, Audrey Sacks, and Tom Tyler 2009 “Conceptualizing Legitimacy, Measuring
Legitimating Beliefs.” American Behavioral Scientist 53(3): 354–75
Moore, Mick 2004 “Revenues, State Formation, and the Quality of Governance in Developing
Countries.” International Political Science Review 25(3): 297–319
Morrissey, Oliver 2015 “Aid and Government Fiscal Behavior: Assessing Recent Evidence.” World
Moyo, Dambisa 2010 Dead Aid: Why Aid Makes Things Worse and How There Is Another Way for
Mwase, Nkunde, and Yongzheng Yang 2012 “BRICs’ Philosophies for Development Financing and Their Implications for LICs.” International Monetary Fund IMF Working Paper No 12/74
Naím, Moisés 2007 “Rogue Aid.” Foreign Policy http://www.foreignpolicy.com/articles/2007/02/14/rogue_aid (November 6,
North, Douglass C., and Barry R Weingast 1989 “Constitutions and Commitment: The Evolution of Institutional Governing Public Choice in Seventeenth-Century England.” The Journal of
Ross, Michael L 2004 “Does Taxation Lead to Representation?” British Journal of Political Science
Sacks, Audrey 2012 Can Donors and Nonstate Actors Undermine Citizens’ Legitimating Beliefs?
College of William and Mary
USAID/DCHA/DRG Working Papers Series 18
Washington, DC: The World Bank Poverty Reduction and Economic Management (PREM) Network Working Paper http://siteresources.worldbank.org/EXTPREMNET/Resources/EP95.pdf
Schiere, Richard 2010 “Building Complementarities in Africa between Different Development
Cooperation Modalities of Traditional Development Partners and China.” African
Scholz, John T 1994 “The Adaptive Compliance of Citizens: Tax Compliance as Contingent Consent.”
Australian National University Administration, Compliance and Governability Working Paper
Scholz, John T., and Neil Pinney 1995 “Duty, Fear, and Tax Compliance: The Heuristic Basis of
Citizenship Behavior.” American Journal of Political Science 39(2): 490–512
Scott, James C 1987 Weapons of the Weak: Everyday Forms of Peasant Resistance New Haven,
Strange, Austin et al 2013 China’s Development Finance to Africa: A Media-Based Approach to Data
Collection Washington, DC: Center for Global Development
Torgler, Benno 2007 Tax Compliance and Tax Morale: A Theoretical and Empirical Analysis
Cheltenham, UK; Northampton, MA: Edward Elgar
Wade, Abdoulaye 2008 “Time for the West to Practise What It Preaches.” Financial Times http://www.ft.com/cms/s/0/5d347f88-c897-11dc-94a6-
0000779fd2ac.html#axzz2jsnmAfyL (November 6, 2013).
College of William and Mary
USAID/DCHA/DRG Working Papers Series 19
Figure 1: Average Treatment Effects for Survey Experiment in Rural Liberia
The survey experiment assessed the average treatment effects of vignettes on respondents' perceived obligation to pay taxes, measured on a scale from 0 to 4 Individual-level controls such as gender, age, education, occupation, wealth, and religion were omitted, along with community-level controls including population size, cell phone coverage, the presence of a police station, and an index of health and education facilities Standard errors were clustered by community, with squares representing marginal effects calculated at the mean of all controls and lines indicating 90% confidence intervals.
College of William and Mary
USAID/DCHA/DRG Working Papers Series 20
Figure 2: Average Treatment Effects for Survey Experiment in Urban Liberia
The survey experiment revealed average treatment effects of vignettes on respondents' perceived obligation to pay taxes, measured on a scale from 0 to 4 Individual-level controls such as gender, age, education, occupation, wealth, and religion were not included in the analysis Standard errors were clustered by neighborhood in Gbarnga, with squares representing marginal effects while all controls were maintained at their mean values, and lines indicating 90% confidence intervals.
College of William and Mary
USAID/DCHA/DRG Working Papers Series 21
Figure 3: Average Treatment Effects for Tax Compliance Game in Urban Liberia
The average treatment effects of vignettes in the tax compliance game reveal the total percentage of income that participants did not report throughout all rounds Individual-level controls such as gender, age, education, occupation, wealth, and religion were omitted from this analysis The squares represent marginal effects with all controls maintained at their average levels, while the lines illustrate the 90% confidence intervals.
College of William and Mary
USAID/DCHA/DRG Working Papers Series 22
Exposure to foreign aid and investment 0.36 0.48 732 0.74 0.44 196
Friends or family worked for Chinese company 0.14 0.35 732 0.32 0.47 196
Friends or family worked for US company 0.13 0.33 732 0.27 0.44 196
Believes government treats all Liberians equally 0.86 0.35 674 0.77 0.42 194
Believes government is open and transparent 0.55 0.50 673 0.42 0.49 194
Believes government is free from corruption 0.30 0.46 674 0.17 0.38 194
Perceived obligation to pay taxes
Obligated even if government makes bad policies 0.51 0.50 665 0.68 0.47 192
Obligated even if taxpayers are poor 0.54 0.50 665 0.74 0.44 192
Obligated even if government is corrupt 0.63 0.48 665 0.84 0.37 192
Obligated even if donors provide most public goods 0.75 0.43 665 0.84 0.37 192
College of William and Mary
USAID/DCHA/DRG Working Papers Series 23
Table 2: Foreign Aid and Investment and Perceived Legitimacy in Rural Liberia
Believes quality of democracy is high
Has ever refused to pay taxes
Believes government has right to tax
Believes it is easy to avoid paying taxes
Index of exposure to Chinese projects 0.10
Index of exposure to US projects 0.01
Distance to nearest Chinese project (10 km) 0.00
# of Chinese projects within 30km radius 0.20
# of Chinese projects within 40km radius -0.06
# of Chinese projects within 50km radius -0.08
p