Why don’t African markets operate as economics textbooks tell us they should? How do long-term trading relationships and business networks get established in the absence of enforceable legal redress against fly-by-night tricksters?

A study by the Centre for the Study of African Economics shows how African markets are imbedded in webs of social relationships that shape and constrain them. It throws light on Africa’s unusual place within the world economy and its difficulties breaking into non-conventional export markets.

In the absence of large hierarchical organisations such as firms and government agencies, both gift and market exchange retain a significance in Africa they have lost elsewhere. As legal institutions offer little protection against breach of contract and the cost of searching for and screening products and business partners is high, there is considerable potential for opportunistic behaviour and an incentive to deal with those you can trust. High transaction costs combine with small transaction size and rampant poverty so that communities are trapped, and invest in low-income activities unable to establish the contacts needed to penetrate more profitable sectors.

The study suggests many African entrepreneurs find it hard to delegate authority or hire sufficient staff for fear of theft. Business people hold power close to their chest and are often overextended and overworked. Building trust is extremely time-consuming. A large number of small cash sales may be required before trade credit is offered. Economic agents understandably prefer to deal with members of their own community due to the resources needed to screen unknown individuals. For their part, African workers have a real fear of not being paid: in public administration and parastatals non-payment of wages is frequent.

The report also produces evidence that:

• Family and kinship do not play as significant a role in African markets as is popularly supposed. Africa’s businessmen and women may get start-up capital from relatives but otherwise generally keep family and business separate.
• Business groups which have cosy relationships with undemocratic regimes, or are perceived to do so, have limited incentives to invest and good reason to raise and maintain flight capital.
• In poor, stagnant economies where patterns of trade are dominated by primary commodities, business communities are most likely to be closed groups.
• Familiarity with a particular type of business reproduces itself over time, locking groups or countries into specific production patterns.
• Most manufacturers purchase inputs from a handful of suppliers, to whom they are extraordinarily loyal, even when alternative suppliers are available.

The implications emerging from the report suggest the need for:

• Further research into the relationship between Africa’s network segmentation and the international division of labour.
• Better understanding of how the nature of Africa’s business networks has large efficiency and equity costs which negatively impact international trade.

Source(s):
‘Networks, communities and markets in Sub-Saharan Africa: Implications for firm growth and investment’ by Marcel Fafchamps, WPs/99-24, Centre for the Study of African Economies, University of Oxford, December 1999 Full document.

id21 Research Highlight: 25 April 2001

Further Information:
Marcel Fafchamps
Centre for the Study of African Economies
Department of Economics
University of Oxford
Manor Road
Oxford OX1 3UL
UK

Tel: +44 (0)1865 271084
Fax: 44 (0) 1865 281447
Contact the contributor: csae.enquiries@economics.ox.ac.uk

Contact the contributor: marcel.fafchamps@economics.ox.ac.uk

Centre for the Study of African Studies, Oxford, UK

Other related links:
The World Bank features links to research on social capital

Livelihoods Connect has over 30 documents on social capital

The African Development Bank is dedicated to combating poverty and improving the lives of people of the continent

The African Development Institute is a policy research institute focusing on practical solutions to development

Further information from the Centre of African Studies, Edinburgh