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Pathways to African Export Sustainability
Thus, diversification does not make firms footloose across cells and does not explain churning. Quantitatively, in Volpe and Carballo (2009), adding one destination does as much as adding three products on survival; in Cadot et al. (2011), it does as much as adding six products. These results are confirmed by Carrère and Strauss-Kahn’s 2011 study. Looking at spell survival on Organisation for Economic Co-operation and Development (OECD) markets, they find that one non-OECD destination—for the same origin-product pair at the Standard International Trade Classification (SITC)-5 level—adds 11 percentage points to the probability of first-year survival, from 35.7 percent to 46.8 percent, while a second destination adds another 6 percentage points. To have the same effect on survival, the range of products exported to the same destination would have to shoot up from the [0–30] bracket to the [30–200] bracket.1
Contracts, Reputations, and Trade Relationships Incomplete enforcement of contracts across borders affects export survival in two ways: (1) by inducing termination of relationships when one party reneges on a contract and (2) by reducing transaction volumes, which, as we saw earlier, correlate with survival. International trade is particularly vulnerable to incomplete contract enforcement. In the words of Dani Rodrik: Transaction costs [in international trade] arise from various sources, but perhaps the most obvious is the problem of contract enforcement. When one of the parties reneges on a written contract, local courts may be unwilling—and international courts unable—to enforce a contract signed between residents of two different countries. Thus national sovereignty interferes with contract enforcement, leaving international transactions hostage to an increased risk of opportunistic behavior (Rodrik 2000, p. 179, quoted in Araujo and Ornelas 2007).
In the presence of incomplete contract enforcement, market mechanisms typically emerge to alleviate moral hazard and adverse selection. Moral hazard is typically dealt with through self-enforcing contracts with credible non-legal sanctions (later in this chapter, we will discuss the role of ethnic and other networks in this regard), while adverse selection is typically dealt with through signaling and the building of reputations. Reputations are built in the course of repeated interaction. In the case of producers located in developing countries, empirical evidence suggests that buyers in industrial countries typically first test them through