An Assessment of the Potential Role of Business in Reducing Poverty and Marginality in Rural Ethiopia
IV. The supply side of BoP markets and prospects for the private sector to reduce poverty in rural Ethiopia
IV-1 Institutions and transaction costs – defining the concepts
As Part II and III illustrated, economic performance in Ethiopia is not sufficient to provide all people with sufficient exchange entitlements that would enable them to satisfy their needs (cf. Sen, 1981). The majority of the Ethiopians must still be classified as poor and vulnerable (Bromley and Anderson 2012).
Considering these facts, the question arises why Ethiopia is so poor and what can be done about it. This question, i.e. why some countries are poor while others are rich, is one of the very fundamental questions economists try to answer (see e.g. Acemoglu et al., 2005; Acemoglu and Robinson, 2012; North, 1989, 1990; Spolaore and Wacziarg, 2013). For a long time, answers to this question were mainly given by neoclassical economists who explained long-run growth with a country’s saving rate and other parameters of standard growth models (see e.g. Romer, 1986; Mankiw et al., 1992).
But some decades ago, a new field of economic research started to include institutions as fundamental cause of long-run growth. Authors of this strand of science termed New Institutional Economics (NIE) see institutions and the resulting costs of transactions (see Box 10 for definitions) as the determining factors for the economic performance of a country (Coase, 1960; Commons, 1931; North, 1993). Institutional economists do not reject but distance themselves from neoclassical economics. They extend economic thinking by skipping some of the very fundamental assumption of neoclassical thinking such...
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