ABSTRACT
Introduction Institutions are important for development (e.g. Keefer and Knack 1997; Acemoglu et al. 2005). This is particularly true of market institutions which play a key role in directing valuable scarce resources to their best possible use. Alternative allocation mechanisms exist, such as command and control within large organizations. But most firms in developing countries are quite small and governments often lack the resources to manage large and efficient public services. This means that markets in poor economies are even more central to the efficient allocation of resources than in developed economies (Fafchamps 1997). This is certainly true in sub-Saharan Africa. Yet the evidence suggests that Africa has weak market institutions and unsophisticated market practices (Fafchamps 2004). This raises two questions: is the lack of market sophistication the result of an inherently market-unfriendly culture; and what can be done to remedy the current situation. The purpose of this chapter is to offer elements of answer to both questions. We argue that there is no reason to suspect African cultures to be any more inimical to market development than other cultures. This conclusion arises from comparing market institutions in Africa to those in other parts of the world today and in the past. The problem is that many African entrepreneurs are unfamiliar with institutional innovations that have emerged in other parts of the world. This lack of familiarity makes them less competitive and makes African economies less productive. Social and economic isolation is the most likely explanation for the lack of familiarity with modern market institutions. This is suggested by observing that non-indigenous entrepreneurs in Africa are more likely to use modern market institutions (Fafchamps 2004). Non-indigenous groups have managed to establish themselves in a number of African countries. Their historical and geographical origin is quite varied, but they seem to share a better familiarity with a small number of key innovations, not just in terms of production technology and internal organization of the firm, but also in the way they interact with others through the market. This familiarity has often enabled non-indigenous entrepreneurs to outcompete native Africans in business. Unfortunately, the institutional
innovations introduced by non-indigenous groups have not always spread beyond the confines of their own social group. The unanswered question is why? We suspect it has to do with political conditions that do not favour social and economic integration.
