On Contracts and Motorcycle Taxi Markets in Benin and Togo

In the motorcycle-taxi market in most Sub-Saharan African countries, the relation between vehicle owner and driver is characterised by a principal-agent problem with the following features: the owner cannot observe the final output of the driver and therefore cannot condition a wage on it, and higher effort from the driver depreciates the motorcycle. These two feature simply that it is in the owner’s best interest that the driver exerts as little effort as possible while still leasing the motorcycle from him. The problem with low effort implementation is that the motorcycle will not generate enough revenue. I analyse the contractual arrangements between owners and the drivers in this market using survey data from four cities in Togo and Benin. Evidence suggests that the quest for trust through kinship between owner and driver may explain the prevalence of a contract that induces drivers to exert excessive effort, leading to adverse outcomes like traffic accidents.

That is Moussa Blimpo in a new cool paper in the Journal of African Economies.

One of the questions the paper addresses implicitly is whether trust necessarily leads to better development outcomes (you’ve seen those cross-country regressions with trust as an independent variable…)

……. in the presence of trust, people tend not to sign formal contracts that define residual rights and the actions to be taken in different expected situations. For example, if the owner and the driver are family members, they will be unlikely to draft a contract that caters to litigation, given that it is socially unacceptable to take a legal action against family.

What this means is that sub-optimal contracting and economic outcomes in developing countries may not be due to a general notion of lack of trust, but rather the lack of a specific kind of trust, let’s call it civic trust. This is the kind of trust that is infused with a healthy dose of skepticism and accompanied by explicit contracting under the shadow of credible enforcement by a third party, the state.

More Evidence of The Effects of Unconditional Direct Cash Transfers

Haushofer and Shapiro have a really cool paper evaluating the impact of unconditional direct cash transfers to households in rural southwestern Kenya (Rarieda in Siaya County). The paper contains several great insights relevant for policy-makers on the promise of direct cash transfers. Here are some highlights:

[i] …… we find increases in holdings of home durables (notably metal roofs, ownership of which increased by 23 percentage points over a control group mean of 16 percent), and productive assets such as livestock, whose value increases by USD 85 over a control group mean of USD 167. These investments translate into higher revenues from agriculture, animal husbandry, and non-agricultural enterprises; monthly revenue from these sources increases by USD 17 relative to a control group mean of USD 49. Note, however, that this revenue increase is partially offset by an increase in flow expenses for agriculture, animal husbandry, and business (USD 13 relative to a control group mean of USD 24).

[ii] We find that indeed monthly transfer recipients are significantly less likely to invest in durables such as metal roofs than lump-sum transfer recipients, suggesting that households may be both credit- and savings-constrained. The fact that program participation required signing up for mobile money accounts, which are a low-cost savings technology (people could have chosen to accumulate their transfer – and even add other money – on their M-Pesa account), suggests that the savings constraint at work is more social or behavioral than purely due to lack of access to a savings technology.

[iii] …. contrary to previous literature and our expectation, we find no significant differences between transfers to men and transfers to women in expenditure decisions or any other outcomes.

Oh, and there is more…

… we find significant reductions in cortisol levels in several treatment arms: specifically, large transfers, transfers to women, and lump-sum transfers lead to significantly lower cortisol levels than small transfers, transfers to men, and monthly transfers. Some of these effects occur in the absence of differences in traditional outcome variables. Together, these results support a causal effect of poverty (alleviation) on (reductions in) stress levels. More broadly, they suggest that psychological well-being and cortisol can complement traditional welfare measures, and in some cases may in fact respond to interventions with greater sensitivity than these traditional measures.

Amazing stuff.

So what are some of the policy implications?

Direct cash transfers are not the panacea to underdevelopment. But these findings and others out there (see summary here) are evidence that we should seriously consider Martin Ravallion’s idea of raising the consumption floor of the poorest of the poor in developing countries through direct policy intervention (e.g. through cash transfers).

Making direct cash transfers work for development will be predicated on taking the interventions out of the humanitarian/aid sphere, and integrating them into the national political economies of developing countries.

In my view, the need for a higher consumption floor will soon become politically salient due to rapid urbanization rates in many developing countries. Obviously, aid money alone will not be able to fully finance such a policy. More efficient public finance management in developing countries will be one way to fill the gap. Putting aside the overhyped storied budgetary leakages due to corruption, many developing countries still do not meet their annual budgeted expenditure goals due to lack of absorptive capacity, i.e. money simply never gets spent at the end of the fiscal year and is returned to the treasury.

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For instance, according to an internal Ugandan government report, between 2004-2010 an average of 3.4% of budgetary allocations to central government ministries, departments, and agencies returned to the treasury (this was net of corruption and other leakages). Note that the figure is most likely higher if you factor in local government expenditures. And as Figure 2 above shows, late disbursement is the norm, which makes budgeting within government agencies a nightmare. In addition, over the same period (2004-10), the proportion of the budget that was simply not released (as opposed to released and not absorbed) was a staggering 9.92%!

This is money that can go directly to citizens’ pockets. And we have the technology, thanks to M-Pesa, to effect the policy. Governments shouldn’t be allowed to handle more money than they have capacity to spend. Plus making legislative appropriation conditional on agency capacity could be a way to incentivize capacity building more than a million workshops and study tours could ever do.

Lastly, the idea of a consumption floor for the urban poor might not appeal to some higher income tax payers. But smart politicians should be able to remind these voters that there is only so much physical security that one can get from high fences topped with electrified razor wire.

Africa’s First City

National Geographic has a fascinating take on Lagos. And since we are just under two months to the next Nigerian elections, here is my favorite paragraph:

When I asked Kola Karim if the federal government’s sorry reputation made Western investors wary of doing business in Lagos, the worldly CEO elaborately dismissed it as a nonissue. Companies partnered with companies, not with bureaucrats, he maintained. “What does government do for you anyway, apart from charging you more taxes?” he said. “Look, it’s not about who rules anymore. Lagos is a train that has left the station. And you can only slow it down—you can’t stop it. So it doesn’t matter who comes next. This is the fun of democracy! It’s not about [President] Goodluck Jonathan! It’s about progress! Forget politics!” [More here]

From a political economy standpoint, one of the most fascinating things to happen in Africa over the last decade or so has been the quiet property rights revolution. In Nigeria, and a few other African countries, millionaires and billionaires have come out of the woodwork, willing to have their estimated net worth published in Forbes and other similar magazines for all to see. Very few of them have been politicians. Yes, many made their money in no small measure because of their political connections. But the fact that they no longer feel the need to hide their wealth from the ever changing political class means a lot.

It means that entrepreneurship and politics are getting decoupled in Africa’s biggest and most important economies. This transition is important because it will allow the magic of specialization to flourish. For instance, Dangote must be a savvy entrepreneur. But I doubt that he would have created as many jobs across the Continent if he also had to worry about running Abuja.

Also, it matters that Forbes’ Africa list is increasingly dominated by politically relevant high net worth individuals, as opposed to “apolitical” migrant businesspeople. Dangote is Nigerian “through and through.” When the going gets tough, he is more likely to voice his concerns than simply exit. The chaps in Abuja can’t simply revoke his visa or work permit. His political views therefore matter a lot.

One hopes that at some point Nigeria’s Dangotes will start investing in higher quality political talent to ease the cost of doing business and improve human welfare through greater investment in public goods.  But of course there is another possible equilibrium path in which they decide that low quality political talent is what’s best for their business prospects.

Either way I hope to visit Lagos soon.

A note on economic development

“I think we have gone too far in the pro-poor direction…… we don’t necessarily have trade-offs. Factories are pro-poor.” Chris Blattman, Yale University

I am on record as not being too enthusiastic about “pro-poor growth” as it is currently practiced. Loans to the poor and other approaches that completely bypass those with a higher probability of succeeding at creating big business – the educated and middle class – will at best only keep the poor afloat and at worst divert resources from much needed long-term investment. I am not saying that the educated have a monopoly on entrepreneurship. All I am saying is that what we want is to create sustainable jobs. This requires scale. And scale comes with big business and industry.

Blattman neatly summarizes this point:

The difference between a country with $1,500 and $15,000 of income a head a head is simple: industry. All the microfinance and microenterprise programs in the world are not going to build large firms and import technology and provide most people with what they really want: a stable job, regular wages, and a decent work environment.

More on this here.

frustrations of the african intellectual

William Easterly on Aid Watch captures the frustrations of African intellectuals and their continued neglect by both the aid industry and their home governments.

African intellectuals continue to be on the periphery of the discourse on African socio-economic development. The independence leaders jailed, killed or exiled many of them, leading to fifty years of disastrous misrule and general mediocrity from Dakar to Mogadishu, Khartoum to Jo’burg. The current crop of autocrats and pretend-democrats did not learn a thing from the last half-century and continue to opt for career poverty-voyeurs development experts from donor countries instead of their own people who may have greater incentives to see their homeland match the achievements of the newly emerging states of Brazil, India and China.