Reputation and Credit without Collateral in Africa’s Formal Banking

The analysis of reputation as a contract enforcement instrument where legal institutions, especially commercial courts, fail to enforce commercial contracts has focused on informal credit markets. The literature centres on the argument that lenders or co-borrowers in group lending can easily monitor each borrower, given the small size of an individual lender.s market. Verifiability allows the detection of opportunistic default and hence allows its punishment. This paper argues that in Africa, even formal credit markets rely on reputation. However, the modelling strategy is not based on monitoring and verifiability, given the potential for residual information asymmetry between a bank and a borrower after screening. Instead, the paper conceptualises the relationship between a bank and a borrower as an infinitely repeated game. The bank learns the type of the borrower through repeated interaction, a process by which a borrower builds his reputation as an honest partner. A defaulting dishonest borrower forfeits his access to future loans. The main result of the model is that the higher the reputation of a borrower, the lower his equilibrium payoff that is incentive compatible with debt repayment. Conversely, in the absence of any reputation, the payoff that is incentive compatible with repayment is equal to infinity meaning that credit trade is impossible without either a credible formal contract enforcement mechanism or some level of reputation.

How long can inflation tax compensate for the loss of government revenue in war economies? Evidence From Burundi

We explore the role of reciprocity in wage determination by combining experimental and survey data. The experiment is similar to Berg, Dickhaut and McCabe.s (1995) and is conducted with Ghanaian manufacturing workers. The survey relates to the same sample workers and the firms within which they are employed. We find a strong positive association between individual reciprocity and individual wages. However, the direction of causality is unclear. Various aspects of the distribution of the tendency to reciprocate within an employee.s workforce are also associated with that employee.s wage and, in this case, there are strong arguments for a causal link is from former to latter. In particular, the mean, median, and minimum levels of reciprocity have a positive effect on wages, while the spread in the distribution (standard deviation) has a strong significant negative effect. This suggests that homogenous behaviour, or convergence to a norm, is rewarded. The results underline the importance of behavioural characteristics and firm culture for the operation of the labour market.wages, reciprocity, field experiment

Credit Can Precipitate Firm Failure: Evidence from Kenyan Manufacturing in the 1990s

This paper models firm survival in Kenyan manufacturing with a particular emphasis on the effect of credit on firm resilience. The paper explores how firms coped with the challenging economic environment that prevailed in the 1990s particularly the effect of the dramatic increase in interest rates. The key finding is that the burden of past loans precipitated firm failure in the 1990s but overdrafts did not seem to have had a significant impact on firm failure. Furthermore, older firms appear to have resisted better than younger ones, but there is no evidence that large firms had higher survival rates. These results are robust to different specifications, namely probit models, Cox proportional hazard models and exponential, Gompertz and Weibull parametric hazard models. The main contribution of the paper is to highlight the role of credit in explaining firm failure in a shockprone developing economy. The study shows that the key factors explaining firm survival in developed economies, namely size and age, are not necessarily the most relevant determinants of firm survival in developing economies. Methodologically, this paper is one of the few that have applied hazard analysis to firms in developing economies.

Explaining growth in Burundi: 1960-2000.

This study analyses Burundi’s economic performance over the period 1960- 2000 and finds that it has been catastrophic. The usual economic factors explaining growth are endogenous to political decisions, suggesting that it is politics not economics that explains the dismal performance. This picture particularly limits the relevance of textbook models that rely on the assumption of a competitive resource allocation rule. When cronies rather than qualified managers are running the economy, when priority is given to investment projects in function of their location rather than the objective needs of the economy, the economic model loses its explanatory power. Economic performance has been shaped by the occurrence of violent conflicts caused by factions fighting for the control of the state and its rents. The capture of rents by a small group have become the overarching objective of the successive governments that have ruled the country since shortly after its independence. Therefore, the economic system will not change unless the political system is modernised from a dictatorial regime playing a zero-sum game to a more democratic and accountable regime. Therefore, it would be naïve to propose that economic reforms will boost the country’s economy if they are not preceded or at least accompanied by political reforms. One central message of this study is that Burundi’s poor economic performance is the result of specific identifiable factors evolving around governance. There is nothing fundamentally wrong with Burundi: Development failure may be reversed if the issues identified in the study are properly addressed.

Explaining Growth in Burundi: 1960-2000

This study analyses Burundi’s economic performance over the period 1960-2000 and finds that it has been catastrophic. The usual economic factors explaining growth are endogenous to political decisions, suggesting that it is politics not economics that explains the dismal performance. This picture particularly limits the relevance of textbook models that rely on the assumption of a competitive resource allocation rule. When cronies rather than qualified managers are running the economy, when priority is given to investment projects in function of their location rather than the objective needs of the economy, the economic model loses its explanatory power. Economic performance has been shaped by the occurrence of violent conflicts caused by factions fighting for the control of the state and its rents. The capture of rents by a small group have become the overarching objective of the successive governments that have ruled the country since shortly after its independence. Therefore, the economic system will not change unless the political system is modernised from a dictatorial regime playing a zero-sum game to a more democratic and accountable regime. Therefore, it would be naïve to propose that economic reforms will boost the country’s economy if they are not preceded or at least accompanied by political reforms. One central message of this study is that Burundi’s poor economic performance is the result of specific identifiable factors evolving around governance. There is nothing fundamentally wrong with Burundi: Development failure may be reversed if the issues identified in the study are properly addressed.

The effect of credit on growth and convergence of firms in Kenyan manufacturing

Although some recent studies have analysed issues relating to credit in African manufacturing, they have not directly tested for the effect of credit on firm growth. The use of bank credit can affect firm growth in two opposite ways. The effect may be positive if credit allows a firm to address its liquidity constraint and increase profitability. However, if macroeconomic shocks such as increases in interest rates make firm debts unsustainable as experienced in Kenya in the 1990s, indebted firms may shrink or even collapse. Hence, empirical testing is necessary to determine which effect dominates in a specific case. Using microeconomic data on the Kenyan manufacturing sector, the study finds that conditional on survival, the firms that use credit grow faster than those not using it. This result is robust to alternative estimation procedures, controlling for both endogeneity of the credit variable and selection bias. Convergence in firm size is significant in all the models except the GMM estimation that controls for several forms of endogeneity. The significance of convergence contradicts Gibrat’s law of proportionate effects while supporting Jovanovic’s learning hypothesis. This paper is based on Chapter 4 of my D. Phil thesis at Oxford University. I wish to sincerely thank Marcel Fafchamps, my supervisor, for his dedication and enlightening ideas. My thanks also go to Francis Teal and Jan W. Gunning for first-rate comments on a previous draft. This paper has also benefited from comments from Oxford University CSAE’s seminar participants where an early version was presented. All remaining errors are my sole responsibility.- 1-1

The Effect of Credit on Growth and Convergence of Firms in Kenyan Manufacturing

Although some recent studies have analysed issues relating to credit in African manufacturing, they have not directly tested for the effect of credit on firm growth. The use of bank credit can affect firm growth in two opposite ways. The effect may be positive if credit allows a firm to address its liquidity constraint and increase profitability. However, if macroeconomic shocks such as increases in interest rates make firm debts unsustainable as experienced in Kenya in the 1990s, indebted firms may shrink or even collapse. Hence, empirical testing is necessary to determine which effect dominates in a specific case. Using microeconomic data on the Kenyan manufacturing sector, the study finds that conditional on survival, the firms that use credit grow faster than those not using it. This result is robust to alternative estimation procedures, controlling for both endogeneity of the credit variable and selection bias. Convergence in firm size is significant in all the models except the GMM estimation that controls for several forms of endogeneity. The significance of convergence contradicts Gibrat.s law of proportionate effects while supporting Jovanovic.s learning hypothesis.

Evolution of magnetic helicity during eruptive flares and coronal mass ejections

Funding: UK STFC, High Altitude Observatory and Montana State University.During eruptive solar flares and coronal mass ejections, a non-potential magnetic arcade with much excess magnetic energy goes unstable and reconnects. It produces a twisted erupting flux rope and leaves behind a sheared arcade of hot coronal loops. We suggest that: the twist of the erupting flux rope can be determined from conservation of magnetic flux and magnetic helicity and equipartition of magnetic helicity. It depends on the geometry of the initial preeruptive structure. Two cases are considered, in the first of which a flux rope is not present initially but is created during the eruption by the reconnection. In the second case, a flux rope is present under the arcade in the pre-eruptive state,and the e.ect of the eruption and reconnection is to add an amount of magnetic helicity that depends on the fluxes of the rope and arcade and the geometry.Publisher PDFPeer reviewe

Going nuclear: gene family evolution and vertebrate phylogeny reconciled

Gene duplications have been common throughout vertebrate evolution, introducing paralogy and so complicating phylogenctic inference from nuclear genes. Reconciled trees are one method capable of dealing with paralogy, using the relationship between a gene phylogeny and the phylogeny of the organisms containing those genes to identify gene duplication events. This allows us to infer phylogenies from gene families containing both orthologous and paralogous copies. Vertebrate phylogeny is well understood from morphological and palaeontological data, but studies using mitochondrial sequence data have failed to reproduce this classical view. Reconciled tree analysis of a database of 118 vertebrate gene families supports a largely classical vertebrate phylogeny