Is the rule of law good for women? Evidence from micro-entrepreneurs in Lusaka, Zambia

The rapidly growing cities of the developing world can be an engine for private sector growth (Krugman, 1991; Glaeser, 2011). However, the positive externalities of living in urban areas become lost opportunities when people cannot safely trade with each other. This can happen either because of lack of mutual confidence or weakness in the rule of law.

Across countries, there is a well-known positive relationship between institutions, trust, and economic growth. In our International Growth Centre (IGC) funded research (Ashraf et al., 2017), we bring this relationship to the micro-level, by studying the extent to which individual trust and local institutions affect the behaviour and performance of small-scale manufacturers in Lusaka, Zambia.

Gender, entrepreneurship, and the rule of law

Our on-going research explores a simple but powerful insight: The shortage in the rule of law is not gender neutral. In a world where men have an advantage at violence and there is little rule of law, unequal bargaining power means that inter-gender economic interactions, such as business partnerships, will break down or fail to form. This breakdown then perpetuates - or may even aggravate - the well-known worldwide gender gap in entrepreneurship (e.g., Global Entrepreneurship Monitor, 2018; Ewing Marion Kauffman Foundation, 2017; OECD, 2012). However, simply introducing rule of law might not improve things: If legal institutions are biased towards men, then greater rule of law may even increase, rather than decrease, social welfare losses.

The main question that we pose in our current project is the following: Do improvements in the rule of law disproportionately benefit female-led enterprises and enable women to trust and engage more in economic collaboration?

The gender gap across the world

Across countries, we find that country-level rule of law and contract enforcement is significantly and positively correlated with female ownership.[1]  However, the highest rate of female entrepreneurship is achieved in countries with both equal bargaining power between genders and strong rule of law, highlighting the complementarity between these two forces. These cross-country facts motivate turning to micro-evidence from Zambia, a country where male bargaining power is relatively high and the rule of law is relatively weak and biased against women.

The gender gap among Lusaka’s entrepreneurs

In 1963, Lusaka's population was less than 100,000 and today it is more than 2.4 million. Besides rapid population growth, the city shares with other capitals such as Kampala and Harare, a business environment made of a multitude of small-scale formal - and more frequently - informal businesses, commonly agglomerated in clusters.

In previous work, we counted more than 47,000 firms within Lusaka’s urban boundaries. We focus here on more than 2,000 manufacturing firms, on account of holding detailed information on this sample and collaboration being particularly important in these industries. We find that only 27% of all the manufacturing entrepreneurs are women and women on average earn half as much as male manufacturing entrepreneurs. How can this substantial gap be explained?

Sectorial and trust differences by gender

Female manufacturers are as educated as their male equivalents. They also work almost as long hours and have almost as much experience. However, as shown in other neighbouring countries (Campos et al., 2017; Alibhai et al., 2016; Klapper and Parker, 2011), women concentrate in the least capital-intensive industries: 75% of female manufacturers are tailors and another 18% make food. Women are almost completely absent from wood and metal manufacturing, which together employ 31% of male entrepreneurs in Lusaka. These differences in sectorial choice explain, in a regression framework, more than half of the revenue gender-gap.

There are surely many reasons for women's over-representation in apparel and food. These industries rely on human capital that may have been developed as part of household production and can sometimes be transferred to the home itself.

One plausible hypothesis is that women face a considerable disadvantage breaking into the largely all-male worlds of metal and wood production. They would have to buy, sell and cooperate with men without the benefit of much formal legal protection. If men have a comparative advantage at violence, then they will also be the more natural participants in markets-without-law. Thus, lack of contract enforcement may lead to limited female participation in the marketplace and, conditional on working, lower earnings for women than men, even when they are serving the same customers.

Consistently with this view, we find that women are significantly less likely to say that they trust strangers or neighbours. This translates into concrete actions: They are less likely to buy products with someone else, share the fulfilment of an order, or even give advice. Male entrepreneurs appear to be more interactive, which might be correlated – among other things – with a greater ability to punish cheating.

Introducing weak institutions that favour men’s natural advantages could make things worse. Only sufficiently strong and unbiased institutions could make men and women interchangeable, leading to integration of markets and elimination of the gender earnings gap. We investigate whether existing local institutions mitigate the gender gap in collaboration and earnings among Lusaka manufacturers.

The rule of law and female entrepreneurship: Cross-sectional findings

We first construct two measures of institutional access: Proximity to the Small Claims Court (SCC) and access to the justice offered by a Market Chief. The SCC was founded in 2009 to enable individuals to solve small lawsuits more quickly and bypass Zambia's overloaded court system. Market Chiefs exercise moderate authority over the firms that have chosen to locate in a particular market. They are particularly active in resolving contractual disputes, although their ability to punish is limited by the ability of market participants to exit the reach of their authority.

We then compare the outcomes of female and male entrepreneurs who are located close to the SCC (within a market) with their counterparts who are located farther away (outside a market). The sign of this comparison is an empirical question: if the legal institutions are even more biased than society as a whole, then access to legal adjudicators might make gender disparities larger.

Results and limitations

We find that women are more interactive in their business dealings when they are in markets and when they are closer to the SCC. We also find that women who are located within a market have substantially higher earnings than women located outside a market, while there are no differences for men. Similar improvements in female earnings are observed closer to the SCC, but the effect fails to be statistically significant.

These results suggest that – on average - local institutions are sufficiently strong to allow women to engage in more business collaborations. However, this evidence suffers from clear (endogeneity) issues: Unobservable characteristics of businesses located inside markets or closer to the court might be driving these correlations, without necessarily presenting causal evidence of the effect of rule of law. In an ideal experiment, one would want to randomise access to contract enforcement and look at the effect on business outcomes for men and women. We get closer to this ideal experiment by running investment games with entrepreneurs in our sample.

The rule of law and female entrepreneurship: Experimental findings

• We find that female trustors are generally less trusting in investment games: in pairs without access to institutions, women send around 25% less tokens than men. We find that institutions help reduce this gender gap.
• In the Chief treatment, the gender gap in trust is eliminated: Women send significantly more tokens and achieve, on average, the same rate of return by the trustees;
• In the SCC, the gap between male and female trustors is reduced, while there is a significant increase in the average share that trustees (of both genders) return to the investor: This is consistent with the idea that the threat of a legal institution induces entrepreneurs to be more trustworthy, but people do not necessarily internalise this effect.

Overall, in the pairs with institutions, total earnings increase, indicating that everyone is made better off through mutual collaboration (and female investors especially so).

Is weakness in the rule of law a bigger problem for women?

Our results suggest that weak and biased rule of law combined with a bargaining disadvantage may hinder women disproportionately from engaging in mutually beneficial collaboration. This may help to explain why there are relatively few female manufacturers and, among those that exist, why they earn less than men.

This is important for understanding gender inequality, but also has strong implications for economic growth: Gender segregation and lack of trade blocks the dynamism of entrepreneurship that rapid urbanisation favours. Our lab-in-the-field experiment suggests that favouring access to and reducing biases in the rule of law can help to alleviate this problem and potentially eliminate these gender gaps.

Going forward: Gender inclusive economic policies

In recent decades, Zambian policymakers have been documenting gender gaps in many of the country’s affairs and developed concrete plans to address them (National Gender Policy 2000, 2014). We put forward the idea that the gender gap in entrepreneurship may be reduced by combining formal legal protection and informal bargaining power.

This recognition opens up opportunities for different types of policies, but at the same time calls for caution. For instance, low-cost policies that increase awareness of existing legal support for small-scale firms might have high returns, especially for women. In our games sample, we find that only 20% of entrepreneurs are aware of the existence and function of the Small Claims Court. However, the positive effects of these policies ultimately depend on the relative bias of legal institutions and society as a whole. Further research in this direction is warranted, especially to exclude backlash effects.

References

Alibhai, S., Buehren, N., Papineni, S., Pierotti, R. (2017). Crossovers: Female entrepreneurs who enter male sectors: Evidence from Ethiopia, Policy Research Working Paper WPS 8065, Washington, D.C., World Bank Group.

Ashraf, N., Chiu, C., Delfino, A., Glaeser, E. and Swanson, N. (2017). Urban density, trust, and knowledge sharing in Lusaka, International Growth Centre Policy Brief. Accessible: https://www.theigc.org/publication/urban-density-trust-knowledge-sharing-lusaka-zambia/

Berg, J., Dickhaut, J. and McCabe, K. (1995). Trust, reciprocity, and social history, Games and economic behavior, 10(1), pp.122-142.

Campos, F., Goldstein, M., McGorman, L., Munoz Boudet, A. M. and Pimhidzai, O. (2014). Breaking the metal ceiling: female entrepreneurs who succeed in male- dominated sectors in Uganda, Africa region gender practice policy brief 9, Washington, DC, World Bank Group.

Glaeser, E. (2011). Triumph of the city: How urban spaces make us human, Pan Macmillan.

Global Entrepreneurship Monitor (2018). Global Report 2017/18.

Ewing Marion Kauffman Foundation (2017). 2017 Kauffman Index of Startup Activity.

Klapper, L. F., and Parker, S. C. (2011). Gender and the Business Environment for New Firm Creation. World Bank Research Observer, 26(2).

Krugman, P. (1991). “Increasing returns and economic geography”, Journal of political economy, 99(3), pp.483-499.

National Gender Policy/NGP (2014). Ministry of Gender and Child Development, Republic of Zambia.

National Gender Policy/NGP (2000). Ministry of Gender and Child Development, Republic of Zambia.

Organisation for Economic Co-operation and Development/OECD (2012). Gender Equality in Entrepreneurship, in Closing the Gender Gap: Act Now, OECD Publishing.

[1]We bring together several cross- datasets on female entrepreneurship, bargaining power, and rule of law: Global Population Poll of the World Justice Project (GPP), the World Value Survey (WVS), the Global Gender Gap Index (GGGI) and the Social Institutions and Gender Index (SIGI), the World Bank Enterprise Survey (WBES), the World Justice Project Rule of Law Index and the Worldwide Governance Indicators. To measure differential bargaining power by gender, we use - for instance - agreement with statements in the World Value Survey (WVS) that “Men make better business executives than women do" and “It is justifiable for a man to beat his wife".

[2] Players are matched in pairs (anonymously). Player 1 (the “investor”) is given ten tokens and has to decide how many to keep and how many to invest in the business of Player 2 (the “trustee”). Player 2 receives three times the number of invested tokens and then has to decide how many to send back to Player 1. After the game is complete, tokens are redeemable for real money. The number of tokens sent by the investor is a measure of trust, while the number of tokens sent back by the trustee (as a proportion of the tokens available) is a measure of trustworthiness.

[3] Access worked in the following way: Player 1 had the option of calling a legal institution (either the SCC or market chief) if he/she felt that Player 2’s choice of how much to send back was unfair. The legal institution would then review the case and decide whether or not to re-allocate the final amounts.

[4] We worked with the Senior Clerk at the SCC and 16 real market chiefs to determine how they would make such allocations (without knowing the identity of the players, just the contested division of tokens).