The Economics of Rotating Savings and Credit Association: Evidence from Ethiopia

Using a unique individual level data on the membership of Rotating Savings and Credit Associations (ROSCAs) collected in 1994 from seven major urban centres in Ethiopia, we provide one of the few econometric tests of the economic theory of ROSCAs. In recognition of the heterogeneity of rosca types across space, we provide basic information about the characteristics of roscas in urban areas of Ethiopia. In addition, we use individual and household level data to describe the characteristics of both rosca participants and non-participants. The findings from the descriptive part of the analysis indicate that most of the rosca members are female, relatively richer and the major motive to join roscas is to buy consumer durables. For instance, Over 45% of households reported that they joined roscas with a purpose to buy durables. In terms of frequency of saving, most rosca members tend to save weekly and monthly, the latter being the predominant choice and a non-negligible amount is being mobilise through the informal institutions. The econometric evidence shows an inverse relationship between volume of rosca contribution and size of rosca as predicted by theory. In addition, we find an inverse relationship between frequency of rosca draw/saving and amount of saving. The welfare position of the household-food expenditure- has been found to be a significant determinant of the volume of rosca contribution but not the decision to join rosca. Most of our findings are consistent with findings elsewhere

State Dependence and Causal Feedback of Poverty and Fertility in Ethiopia

The paper implements simultaneous random effect models as a means to analyse causality issues related to poverty and fertility in Ethiopia, a country which is plagued by high and persistent poverty and very high fertility rates in rural areas. Using longitudinal data from both urban and rural areas of Ethiopia, we analyse the relationship between childbearing and poverty. In addition to identifying state dependence in poverty and fertility, we investigate to what extent fertility act as a feedback mechanism leading to higher poverty and vice versa. We find that poverty itself has little effect on fertility, whereas there is evidence of state dependence in poverty and important feedback from fertility on future poverty. Not unexpected, we find substantial differences between rural and urban areas.

Heterogeneity in returns to schooling: Econometric evidence from Ethiopia

The paper investigates whether returns to schooling in Ethiopia vary across the wages distribution of individuals. To do so it adopts an instrumental variables quantile regression framework that allows for both endogeneity of schooling resulting from unmeasured ability, and possible heterogeneity in the impact of schooling. The empirical estimates indicate that education contributes more to the earnings of the individuals at a lower end of the income distribution. Under the assumption that the wage and ability distributions are related, this result is consistent with the notion that education and ability are substitutes

Why use ROSCAs when you can use banks? Theory and evidence from Ethiopia

Much of the existing literature on the use of informal credit arrangements such as ROSCAs (Rotating and Credit Saving Associations) theorises the use of such institutions as arising from market failures in the development of formal saving and credit mechanisms. As economic development proceeds, formal institutions might therefore be expected to displace ROSCAs. We show, using household data for Ethiopia, that in fact use of formal institutions and ROSCAs can co-exist, even in the same household. We examine usage of both formal and informal institutions across the household income gradient, and provide a theoretical model consistent with these empirical facts

The Complexity of Marriage in Rural Ethiopia: Parental Transfers and Postmarital Residence Choices

This paper examines the relationship between parental transfers and post-marital residence of children in rural Ethiopia. We investigate whether asset transfers to children are an avenue which parents use to secure old age. We model post-marital residence and transfers simultaneously in a two-stage probit least squares estimation framework. We find a positive relationship between transfers and post-marital residence, a 10 proxy for old age support. Children who receive more assets are more likely to stay at birth place after marriage and vice versa. In conditions of scarce or lacking social security mechanisms, parents make strategic transfers to ensure better old age

The impacts of corruption on firm performance: some lessons from 40 African countries

The current evidence-base regarding the impacts of corruption on firm performance is based largely on studies of individual countries and contains mixed results. Therefore, the aim of this paper is to achieve a better insight into this relationship by reporting the results of a firm-level analysis of the impacts of corruption on firm performance using World Bank Enterprise Survey (WBES) data across 40 African countries. The clear result is that corruption significantly enhances rather than harms annual sales, employment and productivity growth rates. The outcome is to re-theorize participation in acts of corruption as beneficial for the individual firms engaged in such activity, while recognizing the wider evidence that this is not an optimal strategy at the aggregate country level. The outcome will be to advance knowledge about how corruption needs to be tackled. To eliminate corruption, it is shown here to be necessary for public authorities to recognize that corruption is an efficient strategy at the firm level and to adopt measures to alter the cost/benefit ratio confronting individual enterprises, and at the same time, to address the country-level formal institutional deficiencies that characterize many developing countries and result in the prevalence of corruption

Business Registration and Firm Performance: Some Lessons From India

The aim of this paper is to evaluate the impacts on future firm performance of a firm deciding to register from the outset of its operations. Until now, the assumption has been that starting up registered is linked to higher future firm performance. Reporting World Bank Enterprise Survey (WBES) data collected in 2014 on 9,281 formal enterprises in India, and controlling for other determinants of firm performance as well as the endogeneity of the registration decision, the finding is that formal enterprises that start up unregistered and spend longer unregistered have significantly higher subsequent annual sales and employment growth rates compared with those registered from the outset. When the number of years spent unregistered is included, there are also productivity gains from delaying registration. The tentative explanation is that in this weak institutional environment, the advantages of registering from the outset are outweighed by the benefits of deferring registration. Evaluating the policy implications, the argument is that there is a need to shift away from the conventional eradication approach toward unregistered startups based on the assumption they are unproductive, and toward a more facilitating approach that improves the benefits of being registered and tackles the systemic formal institutional deficiencies that lead entrepreneurs to delay their decision to register

Informal entrepreneurship in developing economies: the impacts of starting-up unregistered on firm performance

To advance understanding of the entrepreneurship process in developing economies, this paper evaluates whether registered enterprises that initially avoid the cost of registration, and focus their resources on overcoming other liabilities of newness, lay a stronger foundation for subsequent growth. Analyzing World Bank Enterprise Survey data across 127 countries, and controlling for other firm performance determinants, registered enterprises that started-up unregistered and spent longer operating unregistered are revealed to have significantly higher subsequent annual sales, employment and productivity growth rates compared with those that registered from the outset. The theoretical and policy implications are then discussed

Explaining Cross-National Variations in the Prevalence of Informal Sector Entrepreneurship: lessons from a survey of 142 countries

The aim of this paper is to evaluate four competing theoretical perspectives that explain cross-national variations in the level of informal sector entrepreneurship. Scholarship has until now argued that informal entrepreneurship is a result of either: economic under-development and a lack of modernization of governance (modernization theory); high taxes and state over-interference (neo-liberal theory); inadequate state intervention to protect workers from poverty (political economy theory) or the asymmetry between the laws and regulations of formal institutions and the unwritten socially shared rules of informal institutions (institutional theory). Reporting the World Bank Enterprise Survey (WBES) on the varying prevalence of informal entrepreneurship across 142 countries, the finding is that neo-liberal theory is refuted but the tenets of the modernization, political economy and institutional theories are confirmed. Informal entrepreneurship is found to be significantly higher when there is economic under-development, a lack of modernization of governance, inadequate state intervention to protect workers from poverty and greater asymmetry between the formal and informal institutions. The paper concludes by discussing the theoretical and policy implications of these findings