Wednesday, October 31, 2012

Missing links, missing markets: The transformation process of rural societies

This weekend I will be going for first time to the NEUDC conference, to be held at Dartmouth College this year. I am excited, because this is probably the biggest development economics conference in the USA and I will have the opportunity to present my favorite outcome from the Gambian networks project, a paper called  "Missing links, missing markets: Internal exchanges, reciprocity and external connections in the economic networks of Gambian villages". 

The transition from primitive economic activities  to more complex exchanges that eventually lead to market economies or alternative modern economic systems was a relevant element in the structure of theories of the classic economic authors and a key issue for the early economic sociologists like Thorsten Veblen, Max Weber and, in particular, Karl Polanyi. In Polanyi's  great transformation, modern societies are shaped in the transition from a network of communitarian reciprocal exchanges  to institutionalized market interactions. The concept of primitive economies as reciprocal exchanges is largely based on Malinowski's  influential description of the production system of the Trobriand islanders, that is also the foundation for Mauss' analysis of a gift economy.

The transformation process  was formalized by Rachel Kranton (AER, 1996). In her model, agents can choose either reciprocal exchanges with other agents whose preferences, production costs and other relevant characteristics are known, or  market transactions with anonymous agents, using money as medium of exchange. If the cost of searching for trading partners is higher than the benefit obtained from consumption diversification offered by markets, then agents will prefer reciprocal exchanges. One of her main results is that reciprocity can be enforced even if markets exist as an alternative for transactions. 

The aim of the paper is to contribute to the empirical analysis of the process of transformation in traditional rural societies using a network perspective. A unique database on economic networks (land, labor, inputs and credit) collected in 60 villages of rural Gambia, where traditional non-monetary economic exchanges -gift economy- prevail, is used to study  the  behavior of  households involved in market transactions. 

The network of economic exchanges in one village

As can be seen in the figure above, most of the households in the village are connected with a link in one or more economic exchanges. And many of these exchanges are reciprocated (the link is bidirectional). If the transformation process is true, household with connections to the market will tend to abandon transactions inside the village and particularly those that imply reciprocation. Given the Gambian network data have information regarding the existence of links external to the village in each of the networks, I can compare if households with links to the market (that are very few, around 10% of all the households in the village) behave differently. 

The empirical analysis is conducted at both household- and link-level, using propensity score matching techniques, OLS linear models and dyadic regressions.  In all the econometric specifications I find support for the two main hypotheses: (i) Substitutability between internal and external exchanges, i.e. households with external economic links are less likely to be involved in economic interactions within the village; and (ii) Reciprocation  versus market, i.e. households with external economic links are less likely to be involved in reciprocated exchanges with fellow villagers.

In the paper I discuss the assumptions required for a causal interpretation of the results, basically that unobservable characteristics determining the creation of internal links affect the the formation of external links in the same direction. I argue that this is plausible, but the potential bias remains as a not fully solved issue to be addressed in future research. 

Even if taken as partial correlations, there are relevant policy implications related to the findings. Rural development programs that aim to increase market integration of isolated villages can have undesired effects, such as the reduction in community interactions and destruction of the gift exchanging system. Therefore, it is necessary to consider the complexities of community exchanges in order to understand the effects of market-oriented interventions. For instance, Von Braun and Webb (1989) and Carney and Watts (1990) have shown how in The Gambia programs that attempted to increase agricultural productivity and cash crops production failed because the traditional economic system was not considered in the design. 

Village gathering where the data about network of economic exchanges was collected 


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