How much do social networks help agrarian households?

There is growing evidence showing that social networks can bridge barriers in access to information and exchange of production factors, and provision of the often lacking public capital and insurance. In Uganda, like in many other developing countries, the state lacks adequate capacity to fully facilitate household access to markets for their farm produce. This is due to a combination of limited budgets and poor governance. In such circumstances, the people rely on their collective effort to overcome market failures and to take advantage of market opportunities. Therefore, social network capital and group activities play a huge role in shaping socioeconomic outcomes.

Past studies have identified two broad concepts of social network capital. The first concept presents social network capital as vested in norms, trust and mutual affection and care for others that permits cooperation, facilitates collective action and therefore leads to the provision of some sort of public goods The second concept presents social network capital as an asset that is embedded in formal and informal institutions of society and confers private benefits to groups of members. Much of the current research tends to define social network capital based on the ability to engage in some kinds of group activities where they can exchange information.

There are good reasons to think that social networks can reduce barriers to the exchange of production factors. Social connections can increase trust between individuals and important information can be exchanged. Social ties can also reduce the risk of violation of agreements, since the violator risks losing not only the contract but also the social connection. These are some of the ways in which social ties are thought to lower transaction costs. However, the extent to which social ties can offset the negative impacts of high transaction costs for exchange of production factors is an open research question.

In many developing countries, poor institutions mean that many such transactions are left on the table since transaction costs are too high. For example, property rights are often vaguely defined and contracts hard to enforce legally. Well-functioning institutions support well-functioning markets through low transaction costs. In these contexts, there is increasing evidence that households instead rely on their social networks. In two recent studies Stein Holden and I examined the roles that social capital plays in mediating economic outcomes in agrarian households.

In one study we showed that social capita helps households to mitigate market risk by helping rural households sell their agricultural produce at better prices. We attribute this to the effect of social network capital on information flow, market intelligence and collective bargaining that enable households to negotiate for higher prices for their farm produce and therefore avoid exploitation by the itinerant middlemen by selling at the market rather than at the farm gate.

In another study we showed that social capital has large positive effects on the ability of households to rebuild their livestock assets in the wake of some undesirable shocks. Our field discussions revealed that this is possible because of four reasons. First, social capital acts as insurance against the effects of shocks that could diminish a household’s stock of livestock assets; second, social capital helps people to obtain information about livestock investment opportunities and possibilities; third, some groups do give out livestock in the form of rotating livestock credit schemes; fourth, repeated interaction with group members builds trust which influences households decisions to enter into livestock share contracts. These contracts provide important channels through which the livestock poor households acquire these assets.

These findings have important policy implications for the development of effective local level risk management institutions. In particular, supporting and strengthening household group activities, such as farmer groups, can provide important pathways for improving not only their resilience to shocks but also their welfare.