The institutional basis of economic failure: anatomy of the segmented business system

There has been a glaring lack of research on institutional configurations, which impede rather than promote economic success. Building on Richard Whitley's business systems theory and based on the experience of East Africa, this paper attempts to fill a gap in the literature by identifying a distinct variety of capitalism, the segmented business system. Segmented business systems are characterized by rigid internal divisions between different areas of economic activity. The relative impermeability of barriers between the latter partially accounts for their weak track record; this is mitigated--but, in some cases, exacerbated--through the operation of informal networks of support. Whilst segmented business systems would seem to be characterized by consistent institutional failure, specific aspects thereof have proved highly functional to elite interests. However, given their vulnerability to external and internal pressures, segmented business systems are likely to remain locked in a cycle of generally poor and uneven economic performance in the absence of radical reforms.