By Kibrom Abay, Goytom Kahsay and Guush Berhane
In brief
Markets in developing countries are characterized by a broad range of failures that affect individuals and those institutions that attempt to improve how they function. Often they are inefficient, lack clarity, and are deficient in contract enforcement and monitoring results in costly transactions. In the absence of well-established factor markets, the role of indigenous institutions (the iddir) and social networks can be substantial for mobilizing agricultural production. Specifically, this study explores the role that the more informal iddir networks play in improving small farmer households’ access to land, labor, and credit transactions, significantly enabling effective functioning within communities across many aspects of their lives.
The iddir network and its membership
Iddir is the most inclusive and widespread type of social network in Ethiopia, prevalent both in rural and urban settings, and inclusive of gender, wealth, education, religion, and ethnicity. Originally, iddir networks were established to provide financial (cash) and other types of support (in kind) when a family member dies. However, a close look at iddir networks reveals that they go beyond this association, as they are involved in many socio-economic issues. Iddirs provide small credit for their members, often without collateral; help unemployed members; finance their members’ health care expenditures; provide financial assistance when their members suffer from other shocks; and, in recent years, provide insurance for death of key livestock, such as oxen.
Iddir networks often have well-defined and written rules. Membership is on a voluntary basis and commonly open to all members living in a village. They are required to pay a monthly contribution, while new members may have to pay an entrance fee. The fees are relatively small, encouraging inclusivity. Besides providing linkages among members, iddirs reduce transaction costs and provide security against shirking or defection in the absence of formal contractual agreements.
Factor markets
Factor markets are incomplete and dominated by traditional arrangements. Most of these arrangements or transactions do not involve formal contractual agreements. Thus, their validity hinges on informal relationships and trust among agents. Social networks play a key role in trust formation and information sharing, aiming to reduce information asymmetry among agents of rural factor markets. When information asymmetry is binding and lack of trust and reputation limits potential efficiency improvements in factor markets, iddir networks can serve as information hubs where households can exchange information relevant to their input endowment. Furthermore, and most importantly, the network built through iddir associations serves as a safety net (insurance) and a basis for stronger reciprocity among members.
This study
This study postulates how iddir networks can bridge the information and reputation-related gaps between those who would like to acquire access to land or labor and those who would like to provide these factors through land or labor-sharing agreements.
The data used for this study come from a longitudinal household survey collected to evaluate the Productive Safety Net Program (PSNP) in Ethiopia. Four rounds of interviews (2006, 2008, 2010, and 2012) were conducted with the sample households with two-year gaps. Table 1 presents the distribution of iddir membership across the surveys from the four main regions covered in the longitudinal survey. There is an increasing trend in membership numbers across the surveys, probably attributed to the recurrence of drought and other shocks in rural Ethiopia in recent years, for which an iddir network can directly or indirectly mitigate such shocks for a household.
Table 1—Overall distribution of iddir membership across sample households of PSNP surveys
|
Survey |
||||
|
2006 |
2008 |
2010 |
2012 |
|
| Iddir-members |
1,629 |
2,157 |
1,974 |
2,453 |
| Non-members |
1,569 |
1,534 |
1,024 |
1,383 |
| Share iddir members, % |
51 |
58 |
66 |
64 |
Source: Authors’ estimates
Estimation results
The results of these investigations highlight that informal indigenous networks can help the formation of physical and social capital that can improve factor market transactions among smallholder farmers. Specifically, joining an iddir network is found to improve households’ access to land, labor, and credit transactions between 7 and 11 percentage points. Furthermore, these findings also indicate that iddir networks crowd out borrowing from local moneylenders (locally referred as Arata Abedari), a relatively expensive credit source, without affecting borrowing from formal credit sources.
Policy implications
These study results improve understanding of the roles non-market arrangements, such as social networks, can play in mitigating market inefficiencies in poor rural markets. The results also have important policy implications for designing alternative policy measures that aim to improve these markets.
These policy considerations include:
- New thinking regarding ways of supporting these iddir networks, given their direct and indirect importance in factor markets and other development issues
- Focus on scaling up the institutional capacity of these networks without diluting their institutional strength
- Forming partnerships between iddir networks and other governmental and non-governmental organizations
- Expanding formal credit institutions by combining the desirable qualities of iddir networks with the institutional capacity of the formal organizations
- Creating an initiative to tap the potential of iddir networks
- Research into the efficiency of transactions through iddir networks to design better policy interventions