SUSTAINABILITY OF ANTI-POVERTY MEASURES: THE HIDDEN USE OF KINSHIP

NETWORKS

ESMERALDA GASSIE

Graduate Centre of Business/ Centre for European Studies, University of Limerick, Republic of Ireland

Esmeralda.gassie@ul.ie

Paper prepared for presentation at the World Bank International Conference

on

Poverty and Social Inclusion in the Western Balkans

WBalkans 2010

Brussels, Belgium, December 14-15, 2010

Copyright 2010 by author(s). All rights reserved. Readers may make verbatim copies of this

document for non-commercial purposes by any means, provided that this copyright notice

appears on all such copies.

2

ABSTRACT :

Business development is a direct cause for reducing poverty and enhancing social inclusion. Using a

recent analysis on LSMS data for Albania, this paper shows that the kinship network does influence

business growth and as such deserve additional attention. The purpose of this paper is twofold. On one

hand, increase awareness on the socio-economic policies, such as anti-poverty measures, undertaken on

time resistant and self sustained foundations. Policies based on local social networks are proofs of

sustainability and efficiency. On the other hand, the aim of this paper is to demonstrate the validity of the

kinship network as a positive contributor to firm growth when they are used constructively.

The model presented in the paper introduces the kinship network participation in firm growth with the

same legitimacy as other economic variables. Its contribution to understanding the underpinnings of

poverty and inequality are yet to be explored.

Keywords list: Albania, Firm growth, Kinship network,

Living Standards Measurement Survey (LSMS)

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INTRODUCTION

Small firms are the most common type of firms found in post-communist Balkan countries. Not only do

they remain small but their main objective is to support households and secondarily to make profit and

grow. Confronted to the embryonic and dysfunctional levels of market and state intervention (O' Brennan

and Gassie 2009), firm growth, which is the pillar of economic growth in the region, often depends on

existing socio-economic networks. A common custom in the Western Balkan countries, using one’s social

network for business or other purposes is considered as fueling corruptive practices. Reports on economic

and administrative transparency in the region have been very critical towards the little progress shown in

fighting nepotism, favoritism, bribing and other forms of corruption. Economic growth pulls populations

out of poverty and increases the standard of living.

Part of anti-poverty measures consists in fostering private entrepreneurship as the core factor of economic

growth. Growth is based on building a sound market economy which cannot properly function if all

economic transactions are not validated by the market. Producing represents the supply side of the

market. Firm growth, defined as the increase in size (number of employees) and turnover of a producing

unit, is key to capital accumulation and economic growth. When social networks are found to be involved

in business activities, the latter are categorized as informal. A lot of research, accompanied by policy, has

been done to help economic agents render their operations formal. Nonetheless, the discrepancy observed

in day-to-day business operations between firm growth obstacles and their importance as the first revenue

source for many households, in addition to empirically based proof of family firms sustainability over

time and across countries, suggest a change of perception.

This paper is based on the assumption that social as well as economic factors participate to firm growth. It

considers a firm growth model that incorporates the most influent type of social network: the kinship

network. As such, it goes beyond the conclusions of family business studies as it enlarges the nuclear

family to the inclusion of other members of the stem family. The database used is the World Bank’s

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Living Standard Measurement Survey for Albania from 2002 to 2005. This paper is organized as follows.

First empirical evidence is given on the importance of the kinship network for firm growth in the Balkan

region. Secondly, the socio-economic model of small firm growth in Albania and its results are presented.

Finally conclusions are drawn on the implications for sustainable anti-poverty and social inclusion

policies.

KINSHIP NETWORKS AND FIRM GROWTH: AN EMPIRICAL PHENOMENON

In the Albanian National Institute of Statitstics (INSTAT)’s annual survey of enterprises, there is no

reference to the ownership structure of firms except for the distinction between public/ private and

national/foreign. The most accurate information on ownership classification is found in empirical

academic studies as well as in the Business Environment and Enterprise performance survey conducted

by the EBRD and the World Bank in 2002 and 2005. The latter surveys show that 8.2 per cent of the 170

surveyed CEOs claim that the largest shareholders are family members (E.B.R.D and W.B. 2002). The

figure increases to 22 percent of the 204 respondents having participated in 2005. For that same year,

more than 40 percent of the 200 businessmen surveyed claim that family and friends were ‘very’ and

‘extremely’ important as potential sources of information about new customers. A contemporary study on

the financing problems of Albanian SMEs, emphasized that one third of the interviewed managers were

family members and a preference was given to local partners compared to foreigners (Bitzenis and Nito

2005). In addition, of all 226 respondents, 41 percent borrowed from friends and acquaintances. Even if

they might not reflect all the existing practices, given the concentration in central urban areas and the

unclear definitions of family, these figures show that the kinship network is involved in funding,

management and possibly ownership and employment. Many empirical studies on the Balkan region have

shown the presence of extended family members as employees or as business financing sources (Bartlett,

Bateman, and Vehovec 2002; Pistrui, Welsch, and Roberts 1997; Poutziouris, O'Sullivan, and Nicolescu

1997). None of these studies build models to actually show quantitative proof of the phenomenon.

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Firm growth involves amongst others investment. Financing investment is one of the first issues firms

face in Albania. Not only bank funding is low but FDI is also the lowest in the region. Very often it is

claimed that FDI in Albania remains limited mainly due to a relatively insecure investment environment,

poor infrastructure (Kaltani 2007), heavy administrative procedures (Hashi 2001; Hashi and Mladek

2000; Hashi and Xhillari 1999), corruption in both the public administration (Feilcke-Tiemann 2006;

Gërxhani and Schram 2004) and the judiciary spheres as well as relatively high taxes (Bitzenis and Nito

2005; Muent, Pissarides, and Sanfey 2001). The investment obstacles and reluctance to cross-border

capital increase are not only dependent on the infrastructure/ business environment in Albania, but indeed

trust. Trust is also the rule that regulates economic interactions. For historical and cultural reasons, trust

towards cooperation with strangers is the Balkan region does not have the same intensity as partnerships

within close-knitted social networks. Thus, the lack of trust hampers economic activities at large,

including those necessary to firm growth, such as re-localisation, cost cutting, mergers and acquisitions.

The exclusiveness generated by the lack of trust, or the preference for kin has consequences on the

success of business relations. The erosion of the social net has taken deeper proportions as the Balkans

have lived under the egalitarianism system of the extended family and community life (Milicic 1998), far

away from capitalist individualism. Counting on the kinship network was a survival strategy during the

shortage economy (Berend 2007).

Many authors have evidenced such phenomena. Aligica (2003) highlights the importance of ethnic and

religious forces in the Balkans, more so than the cooperative or collaborative ones. Grupe et al. (2006)

demonstrate the lack of cooperation amongst the countries in the region, in spite of the encouragements of

the European Union (Dangerfield 2004; Ficici, Rajamanickam, and Thirunavukkarasu 2004; Tzifakis

2007), of the various free trade agreements signed amongst them (Altmann 2003; Busek 2004;

Dangerfield 2006; Messerlin and Miroudot 2003) or of the regional organizations put in place to foster

cooperation (Hyde 2004). Meanwhile, the national balances of payments for each Balkan country, the

worst situation being found in Albania, show consistently that less than 10 percent of overall trade is with

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the regional neighbours (Uvalic 2001; Uvalic 2006). Kernohan (2006) argues that the Balkan countries’

openness is even lower than it was for the Central and Eastern European countries, before they joined the

European Union. The general lack of partnership with foreigners is a recurrent phenomenon in South

Eastern European countries: people who trust only one’s kin or ethnic group were 48 percent in Romania,

65 percent in Bulgaria, 47 percent in Serbia, 38 percent in Montenegro and 72 percent in Macedonia

(Mungiu-Pippidi 2005). Bartlett et al. highlight the ‘general distrust of strangers [which] leaves

individuals with a very narrow choice of informal contacts, mostly kinship and friendship ties’ (2002:

p61) in South Eastern Europe. Hohmann and Welter (2005) mention the ‘trustworthiness criteria’ as an

important element in business. So, on one hand trust is enforceable amongst kinsmen compared to other

types of relations, but it can have, on the other hand discriminatory effects towards non-kin, particularly

business partners. ‘Trust can be defined in relational terms as the belief that the trustee will take one’s

interests to heart […], the belief that the trustee will not take advantage of one’s vulnerability ’ (Beckert

and Zafirovski 2006: p. 690). Fukuyama (1995) observed that in some South European countries, trust is

mirrored in more fluid economic transactions while in other more individualistic countries, higher levels

have to be disbursed to ensure efficiency.

Groups which claim common descent from a common ancestor, even if they cannot demonstrate exactly

how this descent came about, are known as clans. They differ from lineages, therefore from the kinship

network, as members may not be able to state their exact links to each other’ (Fox 1983: p. 90). In the

case of Albania, Ireland or Scotland, clans have been the basis for the constitution of independent units,

politically organized and economically sustained. So the denomination ‘clan’ suggests a politically

inspired concept which is historically outdated, compared to the socio-biological kinship network, and is

not the basic unit of the contemporary Albanian society, as it has often been claimed (Fuga 1998;

Gërxhani and Schram 2004; Kaser 2001; Kressing and Kaser 2002; Schwandner-Sievers and Fischer

2002). But the kinship network is not a clan as it does not have political aims and forms. The case of

kinship involvement in firm growth remains to be proven quantitatively.

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FIRM GROWTH MODEL WITH THE INVOLVEMENT OF THE KINSHIP NETWORK1

Based on a similar study on financial firms in Ghana using LSMS data (Masakure, Cranfield, and Henson

2008), except for the emphasis on the kinship network, and empirical economic models of small firm

growth (Audretsch and Dohse 2007; Bigsten and Gebreeyesus 2007; Brown, Earle, and Lup 2005;

Demirgüç-Kunt and Maksimovic 1996; Hall 1987; Headd and Kirchhoff 2009; Major 2008; Nichter and

Goldmark 2009; Oliveira and Fortunato 2006; Terjesen and Szerb 2008), three sets of variables are built.

The first regroups firm-specific economic indicators (number of employees: EMPL, longevity: LONG,

location: GEO, access to a bank loan: BANK, growth rate of the industry the firm belongs to: SECT). The

second group (DEM) includes personal indicators of the business owner/ manager (age, marital status,

gender). The third set contains variables related to the presence of the kinship in business (KN)

complemented by social capital (SOCE) variables (nephew/niece owns or manages the business,

employees who are household members, number of close friends, trust in central and local governments,

and existence of a business association in the community). Two groups of firms will be tested against

each other: firms exhibiting a rather important influence from the kinship network on sales growth (ΔSA)

for each firm i compared to the ones with no presence, while economic parameters are kept identical.

The firm growth model is not exhaustive so the error term ui is assumed non nil. It will demonstrate the

validity of the following hypothesis: The kinship network does influence firm growth, i.e. a5 is

significantly different from 0.

Amongst publicly available databases, LSMS data was chosen based on two criteria. The long time period

the survey has been implemented, ensuring survey experience, data availability and quality. Carried out in

Albania since 2002, the LSMS is a collaborative project between the World Bank and the National

1 Further statistical results and methodology is available upon request

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Statistics Institute of Albania (INSTAT). It is a triennial nationally representative household survey of the

level of poverty in urban and rural areas based on the 2001 census. The census population is divided in

four strata (coastal, central, mountain and Tirane). Each of them is equally represented in the sample so

that representativity is not an issue. Within each geographical stratum, the population is further divided

into urban and rural totaling up to 14 clusters. Finally, household units are randomly selected in a fixed

pre-determined proportional number, thus respecting the weight of the ratio urban/rural and the stratum

representativeness. Consequently, the regional strata, clusters and household units are each selected

following a different sampling method. Several questionnaires are utilized of which the non-agricultural

economic activities together with the community modules are of interest for this paper. The non-farming

business questionnaire is used mainly to measure self-employment, as it is directed to the head of the

household. Nevertheless questions involve the measurement of businesses employing, managed or owned

by non-family and family members. Thus the issue of control groups, i.e. the presence of family versus

non family businesses, is addressed.

The business sample represents 512 respondents, i.e. 2 percent of the overall sample. The sample

population distribution is not represented given that the primary objective of the LSMS was not to

measure firm growth but households’ living standards. The latter problem exists for the 2005 business

sample representing 4 percent of the LSMS total sample (716 operational business observations over

17,302 respondents). In order for the business sub-sample to be representative at the national level, the

LSMS data have to be compared to the list of firms in Albania for 2002 and 2005 proportional to the

population census. Other studies using the LSMS in Albania have been able to proceed by triangulation

because of the closeness between their topic of research and the LSMS questionnaires (Tzavidis, Salvati,

Pratesi, and Chambers 2008). It is not the case here. Therefore, the business sub-sample at hand is not

considered as a statistically significant representation of Albanian firms. In addition, the 2005 LSMS

survey is different from the 2002. The Enumeration Areas are different and the business questionnaire

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does not collect exactly the same variables. Consequently, the data have been analyzed as a single time

period. Nevertheless, the model is run with a time dummy and strata dummies.

Once the missing values analysis is performed, a linear model is envisaged. After corrections, the

estimated linear model explains more than half, i.e. 53 percent, of the change in natural logarithm of sales.

From the 16 original variables, after deletion of the correlated ones, four were not statistically significant.

According to the estimated statistically significant coefficients, the equation regressed is the following:

LNSA* = 12.5 + 0.22 AGE* - 0.338 GEN* + 0.388 URBAN* - 1.377 SECT1* - 0.844 SECT2* - 0.835

SECT3* + 1.22 KNEMPL* - 1.028 KNO* + 0.63 EMPL* - 0.382 LONG* + 0.902 ASSOC* -0 .282

BANK*+ui

Growth factors include the advanced age of the owner/manager, having numerous employees including

kindred, belonging to a community where associations are present and operating in an urban area. The

highest positive predictor is kin-employees, while kin ownership is negative, as foreseen by literature on

capital control. Sales growth is hindered for female or younger entrepreneurs. Business owners/ managers

who share firm’s control with their kin and/ or obtained a bank loan, while living in rural areas see the

sales level decrease. The firm activity does not benefit from being agricultural, industrial or in services. In

addition, time in operation does not have a positive impact on sales growth. The high intercept indicates

that the initial sales level is not negative. Masakure (2008) did not conclude on the type of influence of

social capital but belonging to a community where associations, including professional ones, exist

increases sales by 90.2 percent. Firm longevity decreases sales by 38.2 percent evidencing the higher

growth of younger firms. The positive influence of the operating in an urban area and hiring additional

employees confirms Masakure et al. results (Masakure, Cranfield, and Henson 2009) while the negative

impact of being a female entrepreneur on sales growth was also observed occurring in Ghana (Masakure

2008). An additional kin employee in Albania increases sales by 122 percent while non-kin employees by

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only 63 percent. The conclusion cannot be that kin members have a positive impact as the presence of an

additional kin-member in the firm’s capital decreases sales by 102.8 percent.

The hypothesis to be tested is: the kinship network does influence firm growth, i.e. a5 is significantly

different from 0. In the case of the estimated equation, a5 represents the coefficient of KNEMPL (a5.1)

and KNO (a5.2), i.e. kin employees and kin owner(s): H0 : a5.1 = a5.2=0 ; H1: a5.1 = a5.2 ≠ 0

A univariate ANOVA is performed on both variables. The null hypothesis is rejected at 95 percent

significance level for both variables2. So both ownership and employment related kinship variables do

influence sales.

POTENTIAL IMPLICATIONS FOR ANTI-POVERTY MEASURES: A NEEDED CHANGE IN

PERCEPTIONS

Anti poverty measures intend to include in virtuous growth circles populations that are excluded from

growth spill-over. Fostering economic activity through the use of the kinship network primarily affects

the poor while they experience difficulties in accessing the market. Measures that legitimize economic

activities while recognizing the benefits of the kinship network are sustainable through time and across

countries. Theoretical models do not yet allow for such encompassing perspectives. Since the beginning

of the 20th century, Weber (Weber and Parsons 1965) opposed the kinship network influence on

economic activities, as a proxy for primitive forms of exchange, and market institutions. The family or the

kinship network has been considered as negative for economic growth in that it has prevented the

development of proper market institutions by its reluctance to innovate (Azariadis and Stachurski 2005),

or by nepotism (Grassby 2001; Siu-lun 1985), generally described as a lack of transparency in economic

transactions. Consequently, when the influence of social groups, like the kinship network or family, is

historically analyzed in development economics, it supposedly reflects a low level of development of the

geographical area studied.

2 These results are valid within the context of the numerous statistical assumptions underlying the Expectation Maximisation missing values method and the ordinary least squared regression model in SPSS.

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Institutionalists affirm that increased wealth brings in issues of ownership and competitiveness, leading to

negative consequences of kin involvement in business. Family business scholars indeed show that

successful family businesses still persist nowadays. Economics focuses on issues of efficiency and

growth, thus concluding in a similar way to institutionalists. Finally, social network analysis temper both

aspects of the issue by considering only the frequency of the links amongst actors and not their finality.

So far, the analytical frameworks that have been developed are rather historically contextualised. They

consider the unit of analysis adapted to the study of the socio-economic transformation as experienced by

western countries (household/ nuclear family/ individual). Or else they do not consider social groups as

important determinants of economic decision processes. Colli and Rose (2008) emit the hypothesis that

family firms emerge in times of uncertainty. From an empirical perspective, historically and culturally

based institutions, such as the kinship network, coexist with market based ones. A similar observation

was made by Ruggles (1987) on 19th century England and America rejecting the institutionalist

perspective on economic transition. It would not be a surprise that, as Sunderland (2007) comments on

social relations during the industrial revolution, there is a biologically based trust in kin.

Firms considered within their cultural and social embedding, are an interesting bridge towards

overcoming the consequences of the current economic crisis. Be it because of their locality or their

flexibility, small firms are the perfect antidote to economic mayhem. The objective in anti-poverty policy

making should therefore privilege a bottom up approach. A further and appropriate survey of culturally

based economic behaviour would indicate structural patterns. The kinship network can be collateralized

when material collaterals are difficult to find, such as for Chinese small businesses (Chua, Kellermanns,

Chrisman, and Wu 2007). The kinship network can be mobilized in rural areas and they have already

proven to be effective for increasing employment (Yusheng Peng 2004). When combining family and

transnational business networks the effect on firm growth can be very valuable (Yeung 2000).

Katzner (2008) states decision making represents a set of ‘mental acts […] relying heavily on the symbols

and their interpretation’ (Katzner 2008: p. 5). Different cultures mould economic agents’ choice making

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and preference expressions in different ways. In ‘quasi’ capitalist economies, such as the Japanese one,

agents do not base their decisions on cost/benefit analysis only, but also on loyalty to ‘the family,

company or society’ (Katzner 2008: p. 85). Katzner shows that efficiency at all costs is not a prerogative.

The rationale, in the western sense would be for Japanese operators, to choose the second optimal

decision, in order to respect to other criteria required by the cultural context, such as for example

employees’ respect for their superiors. Therefore the policies and analytical frameworks cannot be the

same for different culturally based economies.

CONCLUSION

Alternative ways of fighting poverty and social exclusion need using local leveraging channels. For

countries where social structure is dense, i.e. resorting frequently to non-market or social structures,

discarding different types of economic practices other than market ones will have shortcomings.

Concessions to the bottom-up methods of implementing market organized practices can lead to beneficial

effects over time for the population targeted and for funding institutions and will be valid independently

of public governance. On one hand corruption in program administration and implementation is avoided

as the projects are managed at the usual micro-level. On the other hand, the change of perception in the

legislation of bank systems, aid institutions, fiscal authorities or investment regulations can generate

global spill-over effects and facilitate the insertion of economic activities using social networks.

The use of social networks and more specifically the kinship network needs proper identification and

transparent evidencing of the spill-over mechanisms between the social and economic spheres of activity

in particular contexts. This paper showed the existence of the kinship network influence for business

activities in Albania and explored paths of application to anti-poverty measures in Western Balkan

countries. The latter cannot occur without the adoption of encompassing models. This paper evidenced

that including anthropological considerations in firm growth models allowed obtaining interesting but

limited results. The limitations are due to the lack of interest for socio-economic data collection and

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analysis in developed and developing countries. A change of methodological frameworks in socio-

economic policy making and data collection institutions has to occur in order to identify, analyze and

utilize empirical growth factors. Encompassing social and economic factors can lead to enriched results in

policy making (Gassie 2008; Gassie and Hu 2009).

The issue of involving the kinship network into business growth goes beyond the Balkan region. Similar

phenomena have been observed in many other countries with positive effects on growth of firms. The use

of the kinship network involves the exploration of particular channels it takes in various countries and

regions. The survival of successful family firms (Anderson, Jack, and Dodd 2005; Anderson and Reeb

2003; Bruland and O'Brien 1998; Colli 2003; Grassby 2001; Hamilton 2006; Hoffman, Hoelscher, and

Sorenson 2006; Yanagisako 2002) or the recent findings on the issue of homophily proving that social

capital is indeed built based on familiar networks (McPherson, Smith-Lovin, and Cook 2001; Mouw,

Cook, and Massey 2006) do make of the kinship network a concept whose applicability is to be studied at

a global and structural level.

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