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The Private Sector and the Marginalized Poor

An Assessment of the Potential Role of Business in Reducing Poverty and Marginality in Rural Ethiopia


Christine Husmann

The book examines the role that the private sector can play in reducing poverty and marginality in Ethiopia by providing improved agricultural inputs to marginalized poor farmers. By creating a marginality map the author analyzes who and where the marginalized poor are. Data from a household survey about purchasing behavior, demand and needs indicates that this group can be a promising market segment for the private sector if adequate business models are applied. Yet, an analysis of the institutions governing agricultural input markets shows that investments by the private sector are discouraged by de facto monopolies of the government on crucial elements of the different supply chains, including seed breeding, fertilizer imports and finance.
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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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