INSTITUTIONAL ECONOMIC ANALYSIS OF VEGETABLE PRODUCTION AND MARKETING IN NORTHERN PHILIPPINES: SOCIAL CAPITAL, INSTITUTIONS AND GOVERNANCE Promotor: Prof.dr.ir. A.J. Oskam Hoogleraar Agrarische Economie en Plattelandsbeleid Wageningen Universiteit Co-promotor: Dr.ir. L.H.G. Slangen Universitair Hoofddocent Leerstoelgroep Agrarische Economie en Plattelandsbeleid Wageningen Universiteit Promotiecommissie: Prof.dr. A. Niehof, Wageningen Universiteit Dr. H.A.J. Moll, Wageningen Universiteit Prof. G. Van Huylenbroeck, Universiteit Gent, België Prof. K. Karantininis, KVL, Denemarken Dit onderzoek is uitgevoerd binnen de onderzoeksschool Mansholt Graduate School of Social Sciences 2 INSTITUTIONAL ECONOMIC ANALYSIS OF VEGETABLE PRODUCTION AND MARKETING IN NORTHERN PHILIPPINES: SOCIAL CAPITAL, INSTITUTIONS AND GOVERNANCE Aimee Milagrosa Proefschrift ter verkrijging van de graad van doctor op gezag van de rector magnificus van Wageningen Universiteit, prof.dr. M.J. Kropff, in het openbaar te verdedigen op maandag 12 februari 2007 des namiddags te vier uur in de Aula. 3 Institutional economic analysis of vegetable production and marketing in northern Philippines: Social Capital, Institutions and Governance Ph.D. Thesis, Wageningen University (2007), With references – With summaries in English and Dutch. ISBN 90-8504-597-5 Subject headings: Philippines, vegetable production and marketing, new institutional economics, social capital 4 For my mother Sergia and my husband Dirk 5 Abstract Milagrosa, A., 2006. Institutional Economic analysis of vegetable production and marketing in northern Philippines: social capital, institutions and governance. PhD Thesis, Wageningen University, the Netherlands. With summaries in English and Dutch 184 pp. This study examines vegetable production and marketing among indigenous communities in northern Philippines using an institutional economics approach. It develops a framework that analyses the four levels of institutions; Social Embededdness, Institutional Environment, Governance Structures and Resource Allocation alongside the Structure, Conduct and Performance of the vegetable sector. Using this integrated framework, the thesis engages on a range of topics from the structure of the sector to sales and margins, from trust to favoured-buyer systems and from transaction cost analysis to farmer’s decision-making processes. Also, a framework that aligns efficient contract types with governance structures based on observable transaction attributes was developed. The modeling approach that determines how farmers choose trading partners based on farm and farmer characteristics, transaction attributes and social capital was likewise used. The first important finding of the study is that a dual structure - in terms of farm-size and total sales - exists in the province. On the one hand, several small farmers own small farm sizes and share a small percentage of total market sales. On the other hand, a few big farmers own big farms and share a big percentage of total market sales. Three governance structures dominate trade; the most common are commissioner- based followed by wholesaler and contractor-based organization. Another important finding of the research is that many farmers turn to wholesalers for loans because of difficulties accessing or complying with formal credit institutions. At harvest time the repayment scheme forces farmers into trading arrangements with wholesalers which in turn, lowers search, negotiation and enforcement costs. This locked-in effect reduces trading alternatives for farmers and lowers total transaction costs. Not surprisingly, wholesaler-based governance structure is the most efficient marketing arrangement from a transaction costs perspective. A third important finding of the thesis is that the social capital of farmers and traders in the province, aggregated from scores on trust, associatedness, common goals and optimism, is low. Current social capital is ineffective in facilitating market information exchange and providing countervailing power to farmers in selling crops. With regards to decision-making, the study showed that farmers with relatively higher social capital select traders differently from farmers with lower social capital. Moreover, ethnicity is a significant factor that influences trust, volunteerism and social networking as well as trading partner selection. This thesis shows that bringing in social elements such as social capital and culture in institutional economic analysis yields richer results in the explanation of behaviour of the market and its participants. Keywords: Philippines, vegetable production and marketing, institutional economics, social capital, institutional environment, governance structures 6 Preface In writing the acknowledgement, I am reminded of an unpleasant incident that occurred 14 years ago. As the valedictorian of the 200-plus graduating high school students of batch 1993, I was instructed by our then-advisor to compose the valedictory address for the commencement exercises. By midday I was halfway though with the essay in which I, given the privilege to be the voice of the young graduates, carefully poured out our gratitude to teachers, mentors and families that supported us during our high school education. I didn’t manage to finish the essay, let alone read it during graduation, because by afternoon, the same advisor notified me that I was moved down to salutatory honours. Four years of dedication to academic excellence and bringing honour to the University was apparently not enough to accord me the highest tribute let alone warrant an explanation for the change in decision. Now, as I write this preface, I am resolute to see it until the end. I am overjoyed that finally my efforts are being recognized and that I will be rewarded for something I worked hard for and truly deserve. This thesis marks the end of a long journey I was determined to take, for as long as I could remember. It marks a milestone in my life; the fulfillment of a dream, the end of an era, and the beginning of another period of my existence. I traveled across countries and discovered unfamiliar cultures to fulfill my dream of a higher education. I learned a lot about myself in the process. I realized that the journey is equally important as the outcome because of numerous enriching experiences and fascinating people who I met along the way. Now, I would like to take this opportunity to thank the many individuals who have contributed their time and effort in assisting me in my education and the process of creating this book. If I have forgotten to mention some names, please note that I thank you from my heart nevertheless. First of all, I would like to express my sincerest gratitude to my supervisor Louis H. G. Slangen for the valuable contributions and many fruitful discussions we had in the duration of my PhD studies. His thoughtful guidance and critical reviews of my output helped me find a path towards which to direct my work and steered me back when I tended to get lost. My deepest appreciation also goes to my promotor Arie J. Oskam. I am profoundly grateful for all his constructive comments to make my thesis better, for his unwearied reviews of numerous drafts and for the academic, professional and personal advice. His detailed remarks helped me refine the quality of my work. Moreover, without his assistance when I was left without funding, I probably would not have finished at all. An important part of this thesis was written under the supervision of Alison Burrell. I would like to express my deep and sincere appreciation for her involvement and assistance with regards to my models. Hectic schedule notwithstanding, Alison patiently guided me until the models worked and the econometrics made sense. Thank you for sharing your experience, knowledge and precious time, and for the priceless lessons that would last a lifetime. I am indebted to the whole Agricultural Economics and Rural Policy Group for the help and support, the productive discussions and valuable suggestions with regards to 7 my work. Special thanks go to Karen, Wilbert and Dineke for the indispensable technical support I needed over the years I stayed in and out of Wageningen UR. The journey I took was made easier because friends and family have made the five- year, three-week and five-day voyage more bearable with their friendship and support. For the camaraderie and useful informal conversations, I would like to thank all the friends that I have met in the course of my education in Wageningen; my co- PhDs in AEP as well as other PhDs from other groups. For the companionship of all Filipino scholars still in Wageningen or gone home, thank you for making my stay more enjoyable. My faith has sustained me through the most trying times of the research. I am grateful to the Filipino Catholic Community in Bonn led by Father Jun de Ocampo for the spiritual lift I needed when I was down or doubting. I also express my gratitude to Weng for taking care of Toria and to Rowie, Matladi and Ela for being good friends through and through. I would also like to thank the support of Papa Rudi and Mama Ute Hampel who were very generous with their time in taking care of Toria; Dirk and Angela Holtermann for the words of encouragement; and Otto and Renate for the concern about my welfare. Without my mother, Sergia Milagrosa, I would not have the emotional strength to pursue my PhD to its completion. She is the role model I try to emulate, and from whom I developed the idea to obtain a doctoral degree. I also thank my sisters-in- crime Aileen and Rene Ann ‘Bong’ who have always been very supportive of me. Ate Aileen’s package from Australia arrived at the most appreciated opportunity, when I was at my lowest point with literally nothing to wear. I especially thank Bong from the bottom of my heart for coming over from the Philippines to take care of Toria. To all of you, thanks for giving me some sunshine, for your prayers and advice that sustained me through my years in Europe and strengthened me to push on.