Institutional and Institutions

TOPIC 1 G.A. OBARE Outline

• Schools of thought • NIE and • Core assumptions of NIE • What are institutions? • NIE examples • Critiques of NIE • Behavioural economics • Main reference: ch 2 of textbook New Institutional ? • Coase, North, Williamson • Stiglitz, Ostroms, Bardhan, Fafchamps, Hayami, Platteau Schools of Thought • Economics of imperfect information • Agency theory • economics • Property rights theory • Incomplete • Theory of collective action

• ? Motivation • People seeking answers to questions that neoclassical economics could not answer or could not answer satisfactorily – Why do firms exist (in the variety of forms that they do)? – Why does vertical coordination within supply chains occur? – Why does sharecropping persist in rural areas of many low income ? – Why does underdevelopment persist? (why does technological and economic not occur?) • New ways of looking at questions and phenomena that were previously the preserve of anthropologists or sociologists – Collective action • Williamson (2000): “New institutional economists are the blue-collar guys with a hearty appetite for reality.” Neoclassical economics: Assumptions of • Behavioural assumption: profit or utility maximisation • Perfect information • Homogeneous, private products • No barriers to entry or exit (costless) • Large numbers of buyers and sellers • No economies of scale or production externalities • Complete set of markets? • Clear, enforced property rights? Core assumptions of NIE • Imperfect information about the intentions and behaviour of other economic actors – asymmetric information • Opportunism: “self-interest with guile” (Williamson 1985) – Shirking – Adverse selection – Moral hazard – Strategic default – Free-riding – Hold-up • Bounded rationality – Reliance on conventions and norms Institutions • “rules of the game” (North 1990) – Structure economic, political and social interaction – Predictability • INCENTIVES – Rewards (“carrots”) and punishments (“sticks”) – Economic, legal, social • Enforcement – third party (law enforcement, social ostracism) – second party (retaliation) – first party (self-imposed codes of conduct) Example: Ghana Cotton Sector (1990s) • Contract farming arrangements for cotton – Inputs and pre-harvest services provided to producers on credit – Repay loan at harvest time • Challenges to cotton development thro’ CF – Priority to food crops (compound system), but no support → input diversion (shirking) – Competing firms → side-marketing, strategic default • Tackle latter thro’ standardised input package and setting of common , adjusted for “free” inputs (incentives) • common price set too low (no competition) – Exacerbated input diversion • Penalty for input diversion or strategic default (enforcement) – Blacklisting (could not take to court – cost, village solidarity) – Ineffective due to: lack of information sharing (names, relatives – imperfect information!), rotation of staff (avoid collusion – P-A!), new entry • New entrants tended to register worst offenders (adverse selection) Classifying Institutions • Institutional environment – “political, social, and legal ground rules that establish the basis for production, exchange and distribution” (Davis and North 1970) • … and institutional arrangements – modes of managing transactions (contracts etc) • Formal – legal environment and property rights (written down and enforced by the state) • … and informal – norms and conventions (unwritten and informally sanctioned) • In general, informal institutions change more slowly than formal – Exception: constitution THE ECONOMICS OF INSTITUTIONS Level Purpose Theory 1 Embeddedness: Protection, preservation, Social theory (Informal institutions, traditions, power norms, religion, culture, socio- political imperatives, etc.)

2 Institutional environment: First order economising: Economics of Formal rules of game: (property Get the institutional property rights rights, laws, constitutions, etc.) environment right Positive political theory

3 Governance: Second order Transaction Play of the game: economising: cost economics (Aligning governance structures Get the governance with transactions) structure right

4 Neoclassical analysis: Third order economising: Neoclassical Performance (Optimality, , Get the marginal economics quantities, incentives, etc.) conditions right Agency theory

Adapted from Williamson 1999 Institutions and organisations • Institutions = rules of the game • Organisations = players of the game – “groups of individuals bound together by some common purpose to achieve certain objectives” (North 1993) – Examples: political parties, regulatory bodies, firms, family farms, cooperatives, churches, schools • Institutions within organisations • Dynamic interaction between institutions and organisations – Institutional environment influences which organisations appear/exist – Organisations create new institutional arrangements and lobby for changes in institutional environment North’s theory of development • Wealth is created through trade (transacting) and specialisation (as per ) • Gains from specialisation offset by rising transaction costs as trade becomes longer distance and more complex – Within village: everyone knows everyone else (low cost of information), social norms, arbitration by elders – c/w rural-urban or international trade • Secret of development is to establish institutions that reduce transaction costs of trade – Formal institutions become more important as trade becomes longer distance, larger volume and more complex • Institutions are created by the powerful to further their own interests – May or may not benefit the poor – Powerful may perceive their interests either as pro-trade or rent- seeking Binswanger et al. on “Behavioural and material determinants” • Land-abundant, semi-arid tropics – Low population density (high information costs) – Rainfed agriculture (covariant risk, seasonality) – Plenty of sources of idiosyncratic risk (e.g. illness) • No insurance markets – covariant risk – high information costs (moral hazard) • No credit markets – No collateral – covariant risk – high information costs (strategic default) – No insurance • Social institutions to protect against idiosyncratic and, to a lesser extent, covariant risk – E.g. Compound system Critiques of NIE • Efficiency vs power – Institutional arrangements vs environment – Radical critique even of institutional arrangements (whose transaction costs are minimised?) • Measuring transaction costs – Specific to individual players – If transaction costs are too high, no transactions occur, so cannot be observed • Predictive power – Human agency – Politics – Peculiarities of local context What NIE is and isn’t

IS ISN’T

Departure from neoclassical Total rejection of economics neoclassical economics

Source of importantly Radical critique of different answers to pressing mainstream theory or questions development practice Source of analytical tools Ideology and new ways of looking at the world Behavioural Economics

• Insights from psychology, neuroscience etc

• Modify the assumption of the rational, utility maximizing behavior of economic agents

• Self-interested, others-interested

• Amplifies importance of peer influence (embeddedness) NIE concepts: Transaction Cost Economics (TCE)

TOPIC 2 Outline • What are transaction costs? • Exchange, contract enforcement and property rights • Coordination – Vertical – Horizontal – Complementary • Techno-economic attributes of goods • Key references: chs 4 and 5 of textbook Transaction costs

• “the costliness of information is the key to the costs of transacting” (North 1990) • Steps in the contracting process – searching – Screening – Negotiating – Monitoring – Enforcement • Costs = time, transportation, third-party services • Additional transaction costs – Credible commitments – Transaction losses and/or renegotiation • If transaction costs are too high, no transaction will occur Transaction vs transformation costs

• Transformation costs = costs of production – Land, labour, capital • Transaction costs = “the costs of doing business” (transacting) – Not conceivable in a “Robinson Crusoe” – They arise due to the existence of institutions • What about: labour supervision and Transport costs? Example: Rural microfinance • Consider: i* = (a + k) / (1 – d) • “a” are largely transaction costs (staff time, transport) – Searching, screening (training) – Processing applications, record keeping – Repayment visits (monitoring, enforcement) – Non-transaction costs: office rental • Structure contract so as to reduce “d”? – Regular repayments (increases “a”!) – Group liability • Neither group liability nor regular repayments work well for seasonal agriculture – Covariant risk, seasonality • Transaction costs and risk prohibitive – Micro-finance does not serve most smallholder farmers in SSA (no transactions occur) Exchange, contract enforcement and property rights • North (1990): “The inability of societies to develop effective, low- cost enforcement of contracts is the most important source of both historical stagnation and contemporary underdevelopment in the third world.” • Development entails move to longer-distance, more complex trade – From personalised to impersonal? • Institutions must evolve to support this (keep transaction costs down) – Contract enforcement is critical: protecting property rights during transactions – From informal to formal institutions? • N.B. also examples of importance of personalised dealings and trust in modern, high trade • Reliance on courts is expensive – Must complement with other mechanisms SSA food grains trade

• Prices are not publicly announced

• Goods are highly differentiated

– no formal grading system

– Variable weights

• Contracts are oral and non-standardized

• Little inspection or certification

• No recourse to legal means of contract enforcement

– Too slow, expensive, corrupt Resulting risks • Both producers and traders are highly vulnerable to being cheated with respect to: – prices – Qualities – Quantities – Timing of delivery – Product spoilage or loss during transport • Uncertainty and imperfect information – Genuine problem or opportunistic behaviour? • Risks discourage trade and investment – Thin markets Enforcement mechanisms • Relational contracting – Repeated dealings – Bilateral reputational investments: serve as collateral against opportunism or credible commitment – Trust – Obvious constraints on market expansion! • Multilateral punishment strategy (collective action) – Within trading networks – E-bay feedback • Third party enforcement (public or private) – Requires that information on behaviour is readily available in a transparent way – Deals are large enough to justify costs of recourse to third party enforcement • Moral authority – Strong and widespread adherence to norms • New forms of reputational mechanisms – Branding (multilateral reputational investment?) A Typology of contract enforcement

THIRD-PARTY MORAL AUTHORITY Information Rules Norms Laws

REPUTATION TRUST Network-based exchange Relation-based exchange

Collective Action

Source: Gabre-Madhin (ch 4) COORDINATION AND MARKET DEVELOPMENT TOPIC 3 Coordination in Exchange Transaction • Defn: efforts by different players to act towards a common goal • Neoclassical Assumption: • Perfect information, • perfect fungibility of capital, • homogeneity • market always clears (perfect competition) DD=SS “invisible hand of the market”> No COORDINATION PROBLEM NIE Assumptions: incomplete mkt, DD‡ SS, mkt does not clear • Variants of Coordination: – vertical: along the supply chain (A-B-C> – horizontal :Betwn players at a point eg at A, B, C etc – complementary: between players complementing services at a stage (bank>telecom, email>telecom) Introduction ii.

• Coordination moves a way from normal atomistic competition and spot market transactions to allow deliberately structured relationships that: – provide incentives for specific, lumpy or complementary investments – equilibrate quality and timing of goods supplied and demanded – assist contract enforcement COORDINATION COSTS • Ex-ante costs: • searching partners, • drafting contract, • negotiating contracts • Ex-Post costs: • monitoring contracts, • monitoring negotiation, • cost of breach of contract • Asset specificity costs: • physical fixity • human fixity>special training • mkt fixity>limited buyers • Result is thin mkt: – spot mkt> vertical coordination>vertical integration Compete in Vertical Integration markets (firm / hierarchy)

Asset specificity, Participate in uncertainty, Bilateral Relationships markets frequency (vertical coordination)

Horizontal Pure Competition Horizontal Integration (spot markets) Coordination (hierarchy)

Precision of quality or timing requirements, enforcement difficulties, excludability Vertical coordination in exchange transactions • Driven by asset specificity in the presence of – Bounded rationality + opportunism – uncertainty • Asset specificity – Physical, human – Asset fixity: cost of exiting a particular investment – Transaction specificity: value depends on continuation of particular contract – Vulnerability to “hold-up” – Attributes of markets as important as assets themselves (“thin market” problem in rural Africa) • Vertical integration – Centralised decision making replaces costly contracting – but trade-off with internal performance incentives • Other factors driving vertical coordination – Specificity of quality and timing requirements – Missing credit markets Horizontal coordination in exchange market • New territory – compete or collude! • African cotton work - horizontal coordination to: – Facilitate input supply on credit – Enforce grading (quality control) – Fund research and extension? • Zambia and Zimbabwe (1995-2001) cotton – successful horizontal coordination (duopoly) • Tanzania cotton – Private coordination not feasible → look to state for input supply, quality monitoring • Tanzania tobacco – Horizontal integration (private) Other examples • Farmer organisation – Closer coordination driven by: • investment in lumpy assets to meet increasing buyer demands • Prohibitive transaction costs in dealing with individual producers – Collective decision making too cumbersome → ultimately move to “new generation cooperatives”? • Natural resource – Markets → collective action → state intervention – Driven by spatial and other externalities Complementary Coordination eg. MFI credit with extension fertiliser with seeds (BAT contracts, MOCO) • Critical to agricultural development – yet largely ignored in agricultural development discourse • Complementarity of support services (seeds, fertilisers, credit, technical advice, information and market linkages) for agricultural production • Profitability of using one service (and, therefore, demand for that service) depends on access to others • Profitability of supplying one service depends on availability of others • Where markets are thin, exposure / “hold up” problem  N.B. Problem disappears as market volumes / densities increase Techno-economic attributes of goods 1. Traditional export cash crops – High fixed costs in processing → incentives to utilise capacity – Concentrated markets → loan recovery through interlocking is feasible – Full package of services provided to contract farmers – Horizontal coordination to assist loan recovery 2. High value commodities (e.g. horticulture) – Supply contracts provide incentives for investment in supply chain (horizontal coordination or integration) – Timing (perishability), traceability and quality assurance are difficult for smallholders – Collective action to reduce these costs and enable investment in lumpy assets – Otherwise, exporters rely on large-scale suppliers or own estate instead? Techno-economic attributes ii

3. Food staples – Lower value added + less concentrated markets → no incentive for processors to provide full package of services to growers – Complementary coordination problem unresolved – Asian Green Revolutions: active role for state (coordination, subsidies)  Liberalisation in Africa is a “huge experiment”: no major agricultural intensification breakthrough post-liberalisation – Decentralised planning processes facilitate complementary coordination under market liberalisation? Hierarchy (private / public) Market Failure

Asset specificity, uncertainty, Vertical frequency or Complementary Coordination

Pure Competition Horizontal Hierarchy (spot markets) Coordination (private /public)

Precision of quality or timing requirements, enforcement difficulties, excludability Market Failure: An Overused Term?

• Where markets are missing or no investment takes place, clear cut?

• What if private traders do not service remote areas?

– Is the market working or failing?

– Balance of transport vs transaction costs? ANALYSING INSTITUTIONS: The IAD Framework TOPIC 4 Role of IAD • Developed by Ostrom, 1994, update later Ostrom 2005 • Focus: interrelationship between environment, actors, actions & institutions that bind actors • Goal: Analyzing how change can be influenced • Analyses NIE theories: – Trade-offs betwn performance & functions – Aspects of market efficiency (IMPERFECT MARKETS) – Rent seeking & its effects eg. corruption – Winners & losers in institutional arrangements – Institutional Design vs • effectiveness, • efficiency, • equity & sustainability TYPOLOGY FOR THE ROOTS OF IAD

• A) Collective Action: – physical/material conditions – community attributes’ – rules in use’; – actors’ and ‘action situations’ arena’; – Feedback of outcomes – interactions’ and ‘evaluative criteria’.

• B) Transaction Cost Economics – Environment: physical, Econ, governance) – Characteristics of goods/ services being exchanged, – Characteristics of potential parties to a transaction IAD FRAMEWORK ACTION DOMAIN • SCOPE:INSTITUTIONS, ACTORS & ACTIONS • Defn: an arena: MKT, NRM, political area • Has clear boundaries, which help in – Setting purpose for analysis – Research questions – Expected level of change or outcome • (smallholder, Mkt, SHGs) – Variables for analysis (exogen, endog) • ( socio-econ, poverty reduction, food security) • Examples of Action Domain: – Exchange of goods/services, NRM Institutions/attributes • Scope: Formal or Informal rules

• To Identify Institutions ask:

– WHAT they are?: behavior, levels

– WHY they exist?

• Coordinative: sharing, responsibility, scope exit/entry,

• Compliance: rules, authority, scope (exit/entry)

– WHO actors are: social, human, natural, financial

– HOW they act: rules, hierarchy, exchange, hybrid Structural Elements of institutions 1. Market contracts---private sector--- with remunerative incentive---private rights

2. Hierarchy contract---state sector---coercive incentives---public rights

3. Gift contract---collective action sector---normative incentives---collective action rights Activities & attributes • Production activities Linked to resources • Exchange Activities & products • DIMENSIONS (4) – Exclusion: from resources & products (monopoly, oligopoly, state intervention) – Products/services: primary, secondary, exploitable – Economies of scale: smallholder, large scale – Nature of NR: rights - common, private, public – Transaction risks: • asset fixicity, , substantive risks weather etc), bounded rationality risks, Risks in frequency in transactions (lead to opportunisms)

Actors & their attributes • PRIVATE actors (entrepreneurs, farmers) • Public actors (State,) • Collective Action actors (SHGs, CBOs, ) • Hybrid Actors (combined) • ATTRIBUTES OF ACTORS: – opportunism (bounded rationality) – moral hazardous behaviors – free riding (CA) – collective liability (CA) – peer monitoring (contract enforcement) – rent seeking

Institutional ACTORS and levels of action and decision making Environment • Physical: • Climate, biophysical, technology, roads, topography, telecommunication, • Socio-econ: • Demography, socio-culture, economics, inflation (assets, finance) • Policy/governance: • Politics, • legislation (judicial system) > enforcements, contractual rights > property rights • social norms & conventions Technological Environmental typology Credit Typology: The Low Cost Financial Service Frontier and Institutional Innovation Outcomes • Change in: – Demand – Supply – Prices – Equity & distribution – Sustainability of natural resources – Efficiency – Food security, poverty reduction, welfare NIE & EXCHANGE OF GOODS AND SERVICES

TOPIC 5 Core problem focus

• Exchange in poor rural areas

• Thin Markets due to low density in rural areas

• Low competitive rural markets to allow efficiency

• Existence of market failures in local areas Key concepts

• Establishment/ enforcement of exclusive property rights (trade contract enforcement)

• Coordination mechanisms that lead to Transaction cost economics

• Collective selling and assembling Key outline • What is exchange? • Transaction costs in exchange? • Property rights in exchange (Exclusive rights) • Contract enforcement in exchange • Information flow • Techno-economic attributes of goods Transaction Costs

• “the costliness of information is the key to the costs of transacting” (North 1990) • Steps in the contracting process – What/ how to Search in searching – What / how to Screen – Who, What and how to Negotiate – Who, what and how to Monitor – Who, what and how to Enforce • Costs = time, transportation, third-party services • Additional transaction costs – Credible commitments – Transaction losses and/or renegotiation costs • If transaction costs are too high, no transaction will occur Transaction vs Transformation Costs

• Transformation costs = costs of production:

– Land, labour, capital

• Transaction costs = “the costs of doing business” (transacting)

• What about:

– labour supervision?

– Transport costs? Exchange, Contract Enforcement and Property Rights • North (1990): “The inability of societies to develop effective, low- cost enforcement of contracts is the most important source of both historical stagnation and contemporary underdevelopment in the third world.” • Development entails move to longer-distance, more complex trade – From personalised to impersonal? • Institutions must evolve to support this (keep transaction costs down) – Contract enforcement is critical: protecting property rights during transactions – From informal to formal institutions? • N.B. also examples of importance of personalised dealings and trust in modern, high value trade • Reliance on courts is expensive – Must complement with other mechanisms SSA Food trade • Prices are not publicly announced

• Goods are highly differentiated

– no formal grading system

– Variable weights

• Contracts are oral and non-standardized

• Little inspection or certification

• No recourse to legal means of contract enforcement

– Too slow, expensive and corrupt Problems of exchange in SSA

• Both producers and traders are highly vulnerable to being cheated with respect to: – Market prices – Qualities – Quantities – Timing of delivery – Product spoilage or loss during transport • Uncertainty and imperfect information – Genuine problem or opportunistic behaviour? • Risks discourage trade and investment – Thin markets Enforcement Mechanisms

1. Relational contracting (lower level-informal) 1. Repeated dealings 2. Bilateral reputation (if you do not pay, you are cut from subsequent transaction): serve as collateral against opportunism or credible commitment. Used by donors to cut aid, credit etc 3. Trust 4. These limit mkt expansion> thin mkt>village based mkt 2. Multilateral Enforcement strategy (collective action) 1. Within trading networks EU>Eurogap, COMESA, EAC, SADC,OPEC 2. E-bay feedback (American E-Business network) 2nd level-Semi- formal) 3. Third party enforcement (public or private) 3rd. Level>formal 1. Requires that information on behavior is readily available in a transparent way (eg. USA records on persons/immigrants) 2. Require that Deals are large enough to justify costs of recourse to third party enforcement Enforcement Mechanisms cont.

4. Moral authority (depends on culture/ norms of society_Hybrid) Require strong and widespread adherence to norms (localised)

5. New forms of reputation mechanisms (for standardization)

Branding,Trade-mark, Patents eg.Mc-Donald, Toyota, Mercedes, copycat 1. Market Failure through Exchange Enforcement Bottlenecks

weak

• Prisoner’s dilemma of reliance on reputation, repeated trading & commitment • Weak trust > weak social cap > weak norms > weak morals > weak laws > weak rules • Weak infn > Opportunism > strategic-default > weak-commitment > market failure 2. Cost centers in Exchange Enforcement

• Enforcement costs increases with increase in exchange boundaries A Typology of Contract Enforcement in Exchange Transaction r.t. NIE Concepts for intervention

THIRD-PARTY MORAL AUTHORITY Information Rules Norms Laws

REPUTATION TRUST Network-based exchange Relation-based exchange

Collective Action

HIGH INFORMATION FLOW & HIGH COLLECTIVE (SOCIAL) INTEREST > HIGH MORALITY > ADHERENCE TO EXCHANGE NORMS OR RULES OF TRADE KEY POINTS FROM TOPIC 1. Self-enforcement (Through Trust & Reputation), Collective Action, & 3rd. Party Enforcement are key In Efficient Market Exchange 2. However, Information Is Key In Moving From Trust To 3rd Party (To reduce transaction costs) 3. Policy Intervention Is Thus On Information Flow 4. Policy can also be on collective action but which must be encouraged from ethnicity/kinship 5. Beyond kinship, collective action may be from high order norms such as regional trade associations (EAC, COMESA, SADC) or rating based systems (eg. Europe-gap) (Qn). What variables would one use to analyze the impact of self- enforcement, CA & Information on the structure, conduct and performance of participants along the supply chains AGRICULTURAL MARKETING INSTITUTIONS AND RURAL DEVELOPMENT Cooperatives and Parastatals Outline

• Background: Building the case for cooperatives

• Understanding cooperatives – philosophy and social, and cultural settings

• Cooperative genealogy (developing country)

• Quasi state marketing agencies (parastatals) and examples

• Institutions and environment Introduction

• Markets - a powerful force for good.

• Demand and supply aggregation

• Provide opportunities at the micro level for welfare improvements => sustainable macro‐level growth (Well- functioning!)

• Poor can be systematically excluded from or disadvantaged by market exchange Introduction II

• Why exclusion? – information asymmetries, – transactions costs, – risk, – insecure property rights or other regular sources of market • Imperfections disturb the appealing fiction of a first‐best world. • Challenge: Can marketing mitigate these effects? Cooperatives

• Private business organization owned and controlled by people who use its products, supplies or services

• Autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly-owned and democratically-controlled enterprise http://www.ica.coop/coop/index.html Identity • Built around two pillars: – values: self-help; self-responsibility; democracy and equality; equity and solidarity; and – principles • Coops are closely related to collectives. • Principles: – User-Owned: owners and financiers are the users of the cooperative. – User-Control: those who control the cooperative are the users – User-Benefit: to provide and distribute benefits to its users on the basis of their use Other principles ala International Cooperative Alliance

• Generally socially oriented (minded) – Voluntary and Open Membership – Democratic Member Control – Member Economic Participation – Autonomy and Independence – Education, Training and Information – Cooperation Among Cooperatives – Concern for Community (http://www.ica.coop/coop/principles.html) Statistical information on global cooperative movement

http://www.ica.coop/coop/statistics.html Organizational and ideological roots

• Origin traceable to multiple influences and extend worldwide

– In the Anglo-sphere, post-feudal forms of co-operation between workers and owners, "profit-sharing" and "surplus sharing" arrangements, existed as far back as 1795 (Gates, 1998) Types of Cooperatives • Classified as either consumer or producer cooperatives • Operate in a broad variety of sectors/industries: – Agriculture (of interest to us) – Arts and crafts – Business – Credit unions – Housing • Agric cooperatives widespread in rural areas – United States: marketing and supply cooperatives – Europe: strong agricultural / agribusiness cooperatives, and agricultural cooperative banks – Developing countries: With few exceptions, cooperatives have struggled to succeed, particularly in Africa. Organizational culture and investment behaviour • Organizational culture – ‘shared realities’ that appear to exist among groups of people within an organization • The culture components: – Governance structure - power structure of the organization; – Norms - what is followed in every day action; and – Communication – Language used as a means of communication (Giddens, 1979 and 1984). • Components form the interrelated parts of any ‘organizational culture’ (see also Hardesty (1992): http://cooperatives.ucdavis.edu/reports/rr3.pdf Co-operative organizational cultures • Classified according to dominant stakeholder groups: – supplier-oriented – government-oriented – specialist-oriented – customer-oriented – owner-oriented • Supplier-oriented – interested in maintaining or increasing suppliers’ wealth (culture emphasis: good member service, high producer price and low farm input prices). Co-operative organizational cultures ii • Government-oriented organizations: – Emphasis: satisfying the needs of their principal stakeholders, – Highlights role of formal rules and cost budgeting, and member and staff loyalty and obedience – Goal: bureaucrats safety and wealth preservation Investments tend to focus on maintaining current production levels. • Specialist-oriented organizations – Emphasize the professional values of their principal stakeholders in which quality of product considerations and production technology are important. – Capital investments geared towards technological expansions and the importance of expertise rather than satisfying supplier needs or customer demands Co-operative organizational cultures iii • Customer-oriented organizations – Focus: satisfying the needs and activities of customers (non-members in the case of coops). – Satisfaction creates normative visibility of activities (highlights quality of products and production systems and service availability) – Quality control systems and effectiveness are emphasized from the customer perspective • Shareholder-oriented organizations – Motive: satisfying shareholders needs (manifested changes in stock prices, dividends or in the profitability of the organization) – Capital investments: reducing operating or fixed costs or towards long term improvements in profitability and efficiency. Organizational Cultures and Environments iv • Organizational cultures – partial outcome of environmental conditions under which organizations must operate to survive • Environments analyzed according to their dynamism and degree of market-basis

• Dynamism - the degree to which the environment stimulates changes in products and production technologies – Dynamic markets: product life cycle is short, or the evolution in production technologies is rapid • Degree of market basis - the market conditions for raw materials or end products – In regulated markets, competition is limited either through regulation or contracts (in the deregulated markets, no such limitations exist) Organizational Cultures and Environments v • Illustrative fit between the environment and organizational culture: – supplier-oriented unlikely to: – Provide a responsive basis for a change in products and production technologies. – Accommodate the need for open competition => the only environment where this culture is apt to be successful is a stable and non-market- based environment – government-oriented cultures focus on formal rules => is unlikely to function well in a regulated, non-market-based environment • the internal regulations of such a culture generally seek to stabilize its organizational activities • best suited to a stable and regulated environment – Specialist-oriented cultures emphasize innovations – cope better in a dynamic environment (they also manage well in regulated and unregulated markets when they put their innovative skills into practice) Organizational Cultures and Environments vi

– Customer-oriented cultures aim at satisfying customer needs. – ∆ customer needs in dynamic => evolution of the product range and higher requirements in product and production quality – Operate well within a dynamic environment, where the identification of customers’ needs is important – May lack efficiency in the operations to generate profits • Shareholder-oriented cultures emphasis on ↑ in shareholders’ wealth: – Cope well in market-based environments where efficiency is important and product development or processing changes is limited – Do well within dynamic environments, but may not be as competitive in a highly dynamic industry, with product and processing innovations premium Cooperatives: Opportunities and challenges for rural development • Development of entrepreneurial skills – Economic organization theory perspective • Multiple ownership and purposes: entrepreneurial function less clearly allocated than in an investor- owned firm. • tends to be a problem in cooperatives (Poter and Scully, 1987) • Trends in the agri-food sector call for interventions to strengthen the entrepreneurial capacity of farmer organizations – Theory suggests that there may be some big obstacles to surmount NGC: Opportunities and challenges for rural development, iii • Questions: – is the development sector prepared to undertake such task? – has the entrepreneurial approach been internalized by development agencies? • Traditionally, development sector stressed the importance of farmer organizations as tools of political empowerment, advocacy and representation • In liberalized agricultural markets in a context of the growing importance of global agri-food chains – Misleading! NGC: Opportunities and challenges for rural development, iv

• Development practitioners - cooperatives as countervailing power to existing market forces as their market function, and thus; – Agents of social change, hence notion of social entrepreneurship in cooperative development! (Novkovic, S. 2008) • Interventions devoted to different dimensions of organizational strengthening, • Economic overlooked • Among small and poor agricultural producers, coops take long to take off without support Private sector entrepreneurship • Private firms: lower transaction costs main benefit of working with cooperatives rather than with multiple individual small producers • Lower costs and economies of scale, cooperatives => competitive advantages, particularly in sectors that are dominated by small producers (Valentinov, 2007) • Compared with the development sector, the private sector private firms source products that meet their demands and standards, and • Look for reliable business partners who can deliver products in specific volumes, at a good price, on schedule, and that meet quality and other specific requirements PS entrepreneurship ii

• Unlike the ‘project mindset’ of development practitioners, the private sector has an instrumental view of entrepreneurship

• Define expectations and performance indicators before any collaboration

• Often do offer support to the development of producers’ organizations (suppliers) a certain level of ‘doing good business’ Reconciling collective, social and instrumental entrepreneurship • Through strategic partnerships framed by a value chain perspective – The ‘inclusive business’ approach adopted by SNV in Latin America, based on this idea • Target: conventional private lead firms interested in strengthening the capacity of their small-scale (and often vulnerable) rural providers • Development sector is aware their interventions often fail due to lack of markets or uncertain sales. • Private companies in a much better position to facilitate (and profit from) stable markets, so in principle the door should be open for collaboration Strategic partnership challenges • For cooperatives in developing countries – Tension between engaging in new entrepreneurial relations while remaining an organization controlled by, and works for the benefit of, its members.

– Introduction of entrepreneurial settings in governance might drift coops away from the interests of their members • Directors (farmers with limited education and access to information) ability to deal with the rising challenges of dynamic agri-business Strategic partnership challenges, ii

• The dichotomy between efficiency and equity, (Bernard and Speilman, 2009), and

• Finding right trade-offs between a business orientation and social inclusion Making the cooperative’s entrepreneur unique

• Development sector: How to adopt a more business- oriented vision without becoming part of the mainstream business Strategic partnership challenges iii

• Does it matter when a development agency becomes an investor? • More willing to bear higher risks if the business is expected to be more inclusive? (conditionality) • Private sector: social concerns are not just a matter of building a good corporate image, but of adopting an ethical approach towards society • Has the power to change the living conditions of many, and has a very important role to play in ameliorating global inequalities. (So awareness!) Strategic partnership challenges iv

• Global crises to leverage the emergence of new business models, able to deal with social and environmental concerns

• Therefore critical issue: how to mainstream the partnerships between the sectors without jeopardizing inclusiveness Genesis of marketing organizations in Developing countries (e.g Africa) • Economics – Risk in agriculture – Instability in export agriculture (cash crops) – Price stabilization – Scale investments – Inadequacy of financial markets • Public sector intervention (motivation) – ↑Marketing cost – Unstable agric Institutions Liberalization and aftermath • Liberalized economies and developed poverty reduction strategies • Aim: opening up new market-led opportunities for • Results: mixed (Winter-Nelson and Temu, 2002; Dorward and Kydd, 2004; Fafchamps, 2004) • ↑ smallholders farmers still engage in subsistence agriculture - unable to benefit from liberalized markets • Poor infrastructure (Kydd and Dorward, 2004; Dorward et al. , 2005) and lack of market institutions (World Bank, 2002) characterize the subsector • Results: high transaction costs, coordination failure and pervasive market imperfections Liberalization and aftermath ii • Partial implementation of reforms and policy reversals have muted the positive effects of liberalization (Jayne et al. , 2002) • Disengaging state marketing boards as a lead up to expanded for the private sector to take over their functions not fully realized • Legacy of farmer cooperatives in Africa not been exemplary in providing business opportunities and marketing services to small producers (Hussi et al. , 1993; Akwabi-Ameyaw, 1997). • In 1960s seen and promoted as source of decentralized grassroot participation in credit, input and commodity markets Liberalization and aftermath iii

• With time perceived by govts as a threat to their own political control • Consequently, govts sought to increase their control => ↓ effectiveness • In 1970s most coops were under govt control with minimal member interests repersentation. • Donors view: middle ground between public and private sector roles (For details see Umma Lele. 1989) Leveraging collective action for Rural Marketing

• Rural Market Imperfections and the role of institutions for collective to improve markets for the poor Quasi-state Agencies: Parastatals and rural Development

TOPIC 6 Overview

• Asian govts used grain price stabilization as a major policy instrument and to promote green revolution (In the 60s)

• This was the condition for parastatal creation

• Quasi- governmental in nature and meant to undertake public marketing activities in basic staples such as rice and wheat Quasi-state Agencies: Parastatals and rural Development II

• Meant to: – Provide a price support system – Procure staples on government account – Hold public stocks, and – Distribute the stocks through public distribution systems or open market operations as a means of holding the price for consumers within a band • Consequence: a great degree of govt intervention in grain mkts Parastatal operations and price stabilization lessons: The Asian experience

1. Within limits, public grain-price stabilization contributes to agricultural growth and overall .

2. Pre-conditions for the success

– The presence of market failure

– High level of govt commitment (improved incentives, institutions, and investments for increasing grain production) Parastatal operations and price stabilization lessons: The Asian experience II

3. Conditions change

4. Parastatal agencies incur huge costs in stabilizing grain prices

5. Govts have a positive role to play! , “getting the markets right,” instead “getting the prices right.”

(Shahidur et al., 2008) Implications for policy and rural development

• Parastatal centred policies have to change at some point

– The rationales for public intervention in food-grains markets, especially in Asia, have changed over the years

– The food marketing parastatals expensive and wasteful: alternative institutional mechanisms that are far less expensive and distorting, are available Implications for policy and rural development • Grains and cereals, the main focus of the parastatals on grains, unlikely to drive agricultural growth in the future – On the demand side, consumer preferences are changing away from cereals – On the supply side, small farmers cannot expect to make a satisfactory living from growing cereals (wheat and rice) on their progressively smaller landholdings Parastatals and Development: the case of SSA • Smallholder market participation and escape from semi- subsistence poverty traps achievable: – smallholder organization; – inter-market commerce cost reduction; – access to improved technologies and productive assets • Therefore, macroeconomic and trade policy tools less useful in inducing market participation by resource poor farmers (Barrett, 2008) • BUT: Parastatals and Development: SSA II

• Transactions costs - negative effects on market participation • Institutional innovations—such as group marketing— emerging to mitigate the costs of accessing markets • Output price - no effect on output market entry; only provides incentives for increased supply by sellers • Price and non-price factors influence adoption and intensity of input use Arega et al., (2008) The Example of NCPB - Kenya

• Grains sub-sector under Crop Development Division, Ministry of Agriculture. • Regulated and controlled by National Cereals and Produce Board of Kenya (NCPB • Government pursues maize marketing policy objectives through the National Cereals and Produce Board (NCPB) • NCPB procures and sells maize at administratively determined prices, and stores maize as a contingency against future shortages • A private sector marketing channel competes with the NCPB Effectiveness

– Stabilized maize market prices in Kenya, reduced price levels in the early 1990s, and raised average price levels by roughly 20% between 1995 and 2004,

– price-raising activities transferred income from urban consumers and net-buying farm households to large-

and small-scale farmers who are sellers of maize.

(Jayne et al., 2008) Institutions, rural development and environment

• Common property: efficient and equitable and compliments private property rights consistent with village resources and economies (Runge, 1986)

• Institutions for natural resource management that appear participative, equitable and efficient, lack the three counts from a gender perspective (Agarwal, 2000) Institutions, rural Dev and Environ II • Two property rights problems inherent in watershed management. – With insecure property rights uplanders don’t invest in soil conservation measures. SO: strengthen individual rights to those lands and support land markets (Govt to implement) – Uplanders don’t account of the off-farm impacts of their investments and land use patterns. SO: create private property rights and markets for environmental goods and services Institutions, rural Dev and Environ III

• Public action in support of more secure collective or private property rights appropriate (circumstantially?)

– E.g. in South East Asia where government, forest plantations, and wealthy absentee landlords— monopolize land rights in competition with smallholder farmers

– Africa: customery governance institutions provide smallholder farmers with relatively secure and long- term property rights Institutions, rural Dev and Environ iv • CA for catchment management successful if it appeals to the self-motivation of farmers to improve their fields and the welfare of their families (Shaxson, 2000) • Reduced risk, ↑ possibility for cash crop production and punishment avoidance are 3 motivations for farmers to adopt soil and water conservation practices (Tiffen and Gichuki, 2000) • ‘‘small is beautiful’’ (Schumacher, 1973) hypothesis “and watersheds – Philippines, people have been most interested in forming landcare groups at the sub-village level, with groups of < 40 members (Mercado, Patindol, & Garrity, 2000) Institutions, rural Dev and Environ v – Kenya: catchment approach has worked best where focal areas are small, and where the members know each other as neighbors (Tiffin & Gichuki, 2000) • State as problem and solution in conservation efforts: – supporting (?) adoption of unsustainable farming and land clearing practices by undermining the property rights of local farmers (South East Asia) – re-classifying large areas of forest as agricultural land (e.g. in Kenya) References

PRIMARY TEXTBOOK: Kirsten, J.F., Dorward, A.R., Poulton, C. and Nick Vink, N. (2009): Perspectives on African Agricultural Development. Washington, D.C.: International Food Research Institute (IFPRI). The book is available and downloadable for personal from IPPRI website. http://www.ifpri.org/publication/institutional-economics-perspectives-african-agricultural-development OTHER: Ménard, C. And Shirley, M.M. (2008). Handbook of New Institutional Economics. Heidelberg: Springer-Verlag

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