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Barriers to Entry and Returns to Capital in Informal Activities

TL;DR: In this article, the authors investigated the patterns of capital entry barriers and capital returns in informal Micro and Small Enterprises (MSE's) using a unique micro data set seven West-African countries.
Abstract: This paper investigates the patterns of capital entry barriers and capital returns in informal Micro and Small Enterprises (MSE's) using a unique micro data set seven West-African countries. The author's findings support the view of a heterogeneous informal sector that is not primarily host to subsistence activities. While an assessment of initial investment identifies some informal activities with negligible entry barriers, a notable cost of entry is associated to most activities. The authors find very heterogeneous patterns of capital returns in informal MSE's. At very low levels of capital, marginal returns are extremely high- often exceeding 70 percent per month. Above a capital stock of 150 international dollars, marginal returns are found to be relatively low at around 4 to 7 percent monthly. The authors provide some evidence that the high returns at low capital stocks reflect high risks. At the same time, most MSE's appear to be severely capital constrained.
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Posted Content
TL;DR: In this article, a non-technical introduction to development studies explores the dynamics of socioeconomic development and stagnation in developing countries, including the effects of the 2008 financial crisis, the emergence of the BRICS economies, the role of institutions in development and the accelerated growth of economies in Africa and Asia.
Abstract: Why are poor countries poor and rich countries rich? How are wealth and poverty related to changes in health, life expectancy, education, population growth and politics? This non-technical introduction to development studies explores the dynamics of socio-economic development and stagnation in developing countries. Thoroughly updated and revised, this second edition includes new material on the effects of the 2008 financial crisis, the emergence of the BRICS economies, the role of institutions in development and the accelerated growth of economies in Africa and Asia. Taking a comparative approach, Szirmai places contemporary debates within their broader contexts and combines insights and theories from economics, economic history, political science, anthropology and sociology. Each chapter includes comparative statistics and time series for thirty-one developing countries. Assuming no prior knowledge of economics, this book is well-suited for students in interdisciplinary development studies and development economics, for policy-makers and for practitioners pursuing careers in developing countries. Visit www.dynamicsofdevelopment.com for additional resources.

46 citations

Posted Content
TL;DR: In this article, the authors adapt Lewis's (1954) dual-economy model to the economies of Africa to better understand the role that the in-between sector as defined by Lewis (1979) has played in Africa's recent growth.
Abstract: Africa’s recent economic growth is at a historical high The patterns associated with this growth appear to be quite different from the Asian experiences where rapid growth was fueled by labor intensive, export-oriented manufacturing Because this pattern differs with our typical view of structural transformation, a heated debate has begun over the sustainability of Africa’s growth One thing is clear: the recent growth is not well understood Against this background, we adapt Lewis’s (1954) dual-economy model to the economies of Africa to better understand the role that the “in-between” sector as defined by Lewis (1979) has played in Africa’s recent growth Our framework incorporates the coexistence of a closed and an open modern economy and takes into account the diversity and heterogeneity of the activities that characterize modern African economies We apply this framework to the economy of Rwanda to assess Rwanda’s future growth prospects based on different levels of foreign capital inflows We find that higher foreign inflows lead to significantly more growth in the closed modern economy and stagnant growth in the open modern economy, a phenomenon consistent with recently observed patterns of growth across several African countries

32 citations

Dissertation
01 May 2016
TL;DR: In this article, the authors evaluated informal entrepreneurship in terms of its nature and character; the reasons why different groups participate in it; and potential policy measures which could improve the conditions of entrepreneurs in the sector and facilitate the growth of their informal firms, and encourage their voluntary and gradual formalisation.
Abstract: This study is centred on informal entrepreneurship, an age-old economic endeavour and an integral part of economic activity in Zamfara, Nigeria. The aim is to evaluate informal entrepreneurship in terms of its nature and character; the reasons why different groups participate in it; and potential policy measures which could improve the conditions of entrepreneurs in the sector and facilitate the growth of their informal firms, and encourage their voluntary and gradual formalisation. The study adopted a nested two-stage survey method research design for the data collection (household and enterprise surveys). The household survey sample consisted of 75 enumeration areas drawn from nine localities cutting across rural, suburban and urban localities, while the enterprise survey comprised of 215 participants as a sub-sample of the first stage survey. On the nature and character of informal entrepreneurship, the study reveals that this phenomenon is highly heterogeneous and widely spread among different sectors of the economy with a considerable participation by both males and females. Also, empirical evidence from the study suggests the participants were regulated informally by their trade associations, contrary to the conventional belief that the sector is wholly unregulated. Adopting an eclectic theoretical approach, the study provides insights on the drivers of informal entrepreneurship from three theories with wider application in the field: theories of informal economy, institutional theory, and theory of motives of informal entrepreneurship. These are relevant in explaining the rationale for engagement in the activity and suggest the co-existence of multiple logics and the interplay of inter-institutional systems for engaging in informal entrepreneurship. The study further suggests that almost two thirds of informal entrepreneurs (64%) have dual motives at any one time, and that the primary motivation for informal entrepreneurship can change over time, with such changes following the start of an informal enterprise found among almost one-quarter (22%) of the respondents. Another contribution of the study to the literature is its finding that different groups of informal entrepreneurs vary in their characteristics and motives for starting up informal entrepreneurship. The study further suggests that public utilities and infrastructural services were very poor. The participants operated under poor conditions and unfavourable environments with a severe lack of critical resources, such as electricity supply, which seriously affected their productivity and earning capacities. As a way forward, the study proposes a strategic model comprising nine integrated measures that might help to improve the operating conditions facing informal entrepreneurs and facilitate their voluntary and gradual formalisation. Amongst the key measures proposed are favourable regulatory policies; enabling environments; access to critical resources (particularly electricity and finance); provision of incentives for formalisation; and enhanced security of life and property.

21 citations

Dissertation
01 Jan 2018
TL;DR: In this article, the authors present a Table of Contents (table of contents) with a list of tables, figures, and paraphrases, together with a table of ABBREVIATIONS.
Abstract: .......................................................................................................................... iii TABLE OF CONTENTS ........................................................................................................ v LIST OF TABLES, FIGURES, GRAPHS AND APPENDICES ............................................... xi FIGURES .............................................................................................................................. xi GRAPHS ............................................................................................................................... xi LIST OF ABBREVIATIONS ................................................................................................. xiii CHAPTER ONE: ...................................................................................................................

18 citations

Posted Content
01 Jan 2013
TL;DR: In this paper, the authors used a representative sample of informal entrepreneurs in Madagascar to investigate the role of sharing norms and gender-differentiated allocation of time within the household in the gender performance gap by estimating their effect on the technical inefficiency of female and male entrepreneurs.
Abstract: We use a representative sample of informal entrepreneurs in Madagascar to add new evidence on the magnitude of the gender performance gap. After controlling for business and entrepreneur characteristics, female-owned businesses exhibit a value added 28 percent lower than their male counterparts. Correcting for endogenous selection into informal self-employment raises the gap by 5 percentage points. We then investigate the role of sharing norms and gender-differentiated allocation of time within the household in the gender performance gap, by estimating their effect on the technical inefficiency of female and male entrepreneurs. Only male entrepreneurs seem subject to pressure to redistribute from the distant network. Our findings are consistent with situations where women working at home would essentially feel negatively the burden of their own community due to intense social norms and obligations in their workplace but also of domestic chores and responsibilities. We find evidence of females self-selecting themselves into industries in which they can combine marketoriented and domestic activities.

14 citations

References
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Journal ArticleDOI
TL;DR: In this paper, the authors model economic development as a process of institutional transformation by focusing on the interplay between agents' occupational decisions and the distribution of wealth, and demonstrate the robustness of this result by extending the model dynamically and studying examples in which initial wealth distributions have long-run effects.
Abstract: This paper models economic development as a process of institutional transformation by focusing on the interplay between agents' occupational decisions and the distribution of wealth. Because of capital market imperfections, poor agents choose working for a wage over self-employment, and wealthy agents become entrepreneurs who monitor workers. Only with sufficient inequality, however, will there be employment contracts; otherwise, there is either subsistence or self-employment. Thus, in static equilibrium, the occupational structure depends on distribution. Since the latter is itself endogenous, we demonstrate the robustness of this result by extending the model dynamically and studying examples in which initial wealth distributions have long-run effects. In one case the economy develops either widespread cottage industry (self-employment) or factory production (employment contracts), depending on the initial distribution; in the other example, it develops into prosperity or stagnation.

2,906 citations

Journal ArticleDOI
TL;DR: In this article, the authors studied the economic activities of the low-income section of the labour force in Accra, the urban sub-proletariat into which the unskilled and illiterate majority of Frafra migrants are drawn.
Abstract: This article originated in the study of one Northern Ghanaian group, the Frafras, as migrants to the urban areas of Southern Ghana. It describes the economic activities of the low-income section of the labour force in Accra, the urban sub-proletariat into which the unskilled and illiterate majority of Frafra migrants are drawn.Price inflation, inadequate wages, and an increasing surplus to the requirements of the urban labour market have led to a high degree of informality in the income-generating activities of the sub-proletariat. Consequently income and expenditure patterns are more complex than is normally allowed for in the economic analysis of poor countries. Government planning and the effective application of economic theory in this sphere has been impeded by the unthinking transfer of western categories to the economic and social structures of African cities. The question to be answered is this: Does the ‘reserve army of urban unemployed and underemployed’ really constitute a passive, exploited majority in cities like Accra, or do their informal economic activities possess some autonomous capacity for generating growth in the incomes of the urban (and rural) poor?

2,473 citations

Journal ArticleDOI
TL;DR: In this article, the authors developed a model of growth and income inequalities in the presence of imperfect capital markets, and analyzed the trickle-down effect of capital accumulation, showing that when the rate of accumulation is sufficiently high, the economy converges to a unique invariant wealth distribution.
Abstract: This paper develops a model of growth and income inequalities in the presence of imperfect capital markets, and it analyses the trickle-down effect of capital accumulation. Moral hazard with limited wealth constraints on the part of the borrowers is the source of both capital market imperfections and the emergence of persistent income inequalities. Three main conclusions are obtained from this model. First, when the rate of capital accumulation is sufficiently high, the economy converges to a unique invariant wealth distribution. Second, even though the trickle-down mechanism can lead to a unique steady-state distribution under laissez-faire, there is room for government intervention: in particular, redistribution of wealth from rich lenders to poor and middle-class borrowers improves the production efficiency of the economy both because it brings about greater equality of opportunity and also because it accelerates the trickle-down process. Third, the process of capital accumulation initially has the effect of widening inequalities but in later stages it reduces them: in other words, this model can generate a Kuznets curve.

1,559 citations

Posted Content
TL;DR: In this article, the authors used a randomized experiment to measure the return to capital for the average microenterprise in their sample, regardless of whether they apply for credit and found that the average real return to be 5.7 percent a month, substantially higher than the market interest rate.
Abstract: Small and informal firms account for a large share of employment in developing countries. The rapid expansion of microfinance services is based on the belief that these firms have productive investment opportunities and can enjoy high returns to capital if given the opportunity. However, measuring the return to capital is complicated by unobserved factors such as entrepreneurial ability and demand shocks, which are likely to be correlated with capital stock. The authors use a randomized experiment to overcome this problem and to measure the return to capital for the average microenterprise in their sample, regardless of whether they apply for credit. They accomplish this by providing cash and equipment grants to small firms in Sri Lanka, and measuring the increase in profits arising from this exogenous (positive) shock to capital stock. After controlling for possible spillover effects, the authors find the average real return to capital to be 5.7 percent a month, substantially higher than the market interest rate. They then examine the heterogeneity of treatment effects to explore whether missing credit markets or missing insurance markets are the most likely cause of the high returns. Returns are found to vary with entrepreneurial ability and with measures of other sources of cash within the household, but not to vary with risk aversion or uncertainty.

942 citations

Journal ArticleDOI
TL;DR: In this article, the authors show that the assumption of optimal resource allocation fails and that the heterogeneity of rates of return to the same factor within a single economy, a heterogeneity that dwarfs the cross-country heterogeneity in the economy-wide average return, poses problems for old and new growth theories alike.
Abstract: Growth theory traditionally assumed the existence of an aggregate production function, whose existence and properties are closely tied to the assumption of optimal resource allocation within each economy. We show extensive evidence, culled from the microdevelopment literature, demonstrating that the assumption of optimal resource allocation fails radically. The key fact is the enormous heterogeneity of rates of return to the same factor within a single economy, a heterogeneity that dwarfs the cross-country heterogeneity in the economy-wide average return. Prima facie, we argue, this evidence poses problems for old and new growth theories alike. We then review the literature on various causes of this misallocation. We go on to calibrate a simple model which explicitly introduces the possibility of misallocation into an otherwise standard growth model. We show that, in order to match the data, it is not enough to have misallocated factors: There also needs to be important fixed costs in production. We conclude by outlining the contour of a possible non-aggregate growth theory, and review the existing attempts to take such a model to the data.

809 citations

Trending Questions (1)
What is investment in informal sectors?

The paper does not explicitly define "investment in informal sectors." The paper focuses on the patterns of capital entry barriers and capital returns in informal Micro and Small Enterprises (MSE's) in West-African countries.