Social Barriers to Entrepreneurship in Africa: The Forced Mutual Help Hypothesis

Abstract

Africa economy is characterized by a large informal sector and by an overrepresentation of entrepreneurs of foreign origin in the formal one. The paper argues that social arrangements prevailing in Africa partly explain these results. As formality marks economic success, local entrepreneurs in the formal sector have the social obligation to provide a job and to redistribute their wealth to the members of their extended family. Such firms are less productive than their foreign counterparts. High family taxes and reduced profit margins discourage formal entrepreneurship. The relevance of the theory is assessed with a database compiling surveys from 10,480 enterprises in 31 Sub-Saharan African countries performed between 2002 and 2007. The empirical analysis supports the theoretical analysis. Combined with the lack of credit, the labor management distortion created by the family tax takes its toll on the growth of the African formal economy. Using the estimated structural parameters, the proportion of missing African entrepreneurs varies between 5% and 8% of the overall workforce of the formal sector.

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Reference

Philippe Alby, Emmanuelle Auriol, and Pierre Nguimkeu, Social Barriers to Entrepreneurship in Africa: The Forced Mutual Help Hypothesis, June 2013.