Does Foreign Aid Fuel Trust?

What are the socioeconomic effects of foreign aid in developing countries? How effective is aid in promoting social capital? The paper focuses on these questions from an empirical perspective and assesses the casual effect of foreign aid on trust in Uganda. Individuals living in counties that received more aid exhibit up to 13.3% higher probability to trust others with respect to those living in counties with no aid. The same finding holds when taking into account the intensive margin, i.e. an increase of 1% in foreign aid induces an increase of 1.1% in the probability of trusting other people. We use also an instrumental strategy based on the enforcement of Non Governmental Organizations (Amendment) Act and we show that the link from aid to trust is robust to different estimation strategies. Finally, we find that a channel is operating through lowering inequality. We demonstrate that foreign aid has a stronger effect in counties where there is a lower level of perceived inequality