Land Reform Bulletin: 1996
Réforme agraire: 1996
Reforma Agraria: 1996

The Reconstruction of Rural Institutions, Part One

At the end of the 1980s, most agriculture in Latin America and the Caribbean shared the following features: an over-protected agricultural sector; strong intervention from the state; excessive regulations and obstacles to interactions with other economic agents; a static land market; and a bimodal type of productive organization, i.e. a few powerful economic units and a large mass of smallholder producers. During recent years, in the context of economic and political liberalization, analyses and public debate on agriculture in developing countries have explored new trends that include a broader view of the role of agriculture, a change in strategies and a new conception of the interactions among markets, state and civil society. The task of transforming the cluster of state institutions in the rural sector has been very significant. Although some important progress has been made, governments still have a long way to go and there is a lack of institutional answers to the demands and needs of less well-endowed producers. This article reflects on the issues of rural institutions and their reconstruction.

La reconstruction des institutions rurales

La reconstrucción de las instituciones rurales

Contents

• Statism and rural economy

• Rethinking the perspectives towards ownership of rural policies
  • Old problems and new trends
  • Changes and challenges in the countryside
  • Policy reform: towards a responsible and responsive state

Part Two (separate document)

• Building cohesiveness: a new social policy

• Legal reform in the countryside

• Institutional reform
  
  • Democracy and economic reforms
  • Building democracy in the countryside

• Bibliography

Statism and rural economy

• an even greater elimination of paternalistic and authoritarian practices;

• effective state support of the agricultural adjustment process that, by respecting producers' autonomy, is able to induce economic reconstruction and productive conversion processes, accompanied by alternatives to economic development and social cohesion among rural communities;

• an innovative system of incentives and regulations that fosters synergetic linkages among market dynamics, state promotion and producers' strategies.

Several academic works (Bardhan, 1991; Bruyn, 1991; North, 1992; Streeck and Schmitter, 1985; Schmitter and Lehmbruch, 1992) point to new, favourable conditions for institutional change and to the dynamics of social interventions in the market or the role of social capital in institutional crafting. More generally, the possibilities to combine market-assisted strategies, based on interventions by the state, the community and professional associations within state, market, communities and associations, can channel conflicts and generate the kind of synergies needed in a process of reform.

These combinations concentrate on communities that enhance the necessary mutual trust for stable economic change: producers' organizations and other associations that contribute to the development of contracts among social agents that are reciprocally negotiated and agreed upon; markets that open reproduction opportunities to communities; and public policies that assist the market's potential as an efficient mechanism to allocate resources. These combinations have been an exception but, under the new development conditions that are being created, they appear to be feasible and perhaps indispensable.

The academic contributions call for a reformulation of the conceptual frameworks and assertions that were adopted as premises. In this regard, it is worth emphasizing several points that are of critical importance when considering the possibilities for change and development of agrarian institutions.

As a starting point, it is necessary to adopt an institutional framework that is not limited to the network of state institutions and legal supports, but also includes the rules and conventions that are acceptable and agreeable to the producers and the ethical and moral norms of behaviour that are part of the structural framework of social interaction (from a talk by the President of the World Bank to the Staff after the Annual Meeting, October 1996). Within this broader approach, the main role of institutional development is to increase efficiency and reduce uncertainty through the design of a stable - but not immutable - structure that favours economic and social interaction.

Another point of departure is that the institutional framework, in particular the structure of opportunities and incentives created by this framework, is the underlying determinant of economic performance; this thesis has been particularly documented within the scope of the agricultural performance of developing countries.

According to one study, institutions in the broadest sense serve to reduce the uncertainties of people's daily lives; this is expressed in an infinite number of formal and informal rules which regulate the conduct of an individual, i.e. his/her transactions within a society. Institutional stability will last as long as it conforms to a cost-benefit balance for the society. Thus the reformist thrust is created when it is more attractive to alter the institutional contract than to maintain its continuity.

One important consequence of this approach within the framework of what is now known of the political economy on reform is that, although institutional change is propelled by changes in relative prices, demography or technological structure, the only way to define a rhythm of change that limits the inevitable instability change brings is by engaging in processes of consensus building.

Recent political and economic liberalization reforms involving deregulation, privatization, tax reforms and economic stability have made it possible to cancel anti-agriculture biased policies.

Still pending, however, are the implementation of schemes directed to reducing: the disparity and high levels of transaction costs in the rural sector; the missing linkages and inertia that limit economic reorganization and, in particular, the multiplication and diversification of contractual and associative forms; the obstacles to community-based development; and the absence of policies that recognize the diversified strategies of rural producers.

Furthermore, an institutional framework is lacking that would guarantee people's participation as well as redefine the new role and dimensions of state promotion. To sum up, the following are needed:

• an acknowledgement of producers' representations as entities of public interest with rights and responsibilities in the design and management of rural policies. This recognition has to be accompanied by a legal framework that would promote concerted contracts between agents in decision-making, policy design and the allocation of resources by region, activity and producers' group;

• a negotiated state reform that would define the modalities of state promotion, the basic rules of access and the dimensions of the public resources involved in the main instruments of agricultural policies. It is particularly important to define the terms of a direct support system, a scheme to promote and develop capital formation opportunities, a gradual transformation of the tax policy within the rural sector, flexible programmes to accompany trade liberalization that are focused on vulnerable groups and land tenure reforms.

The above elements form the basis for future institutional developments within the desired features of autonomy, inclusion and effective subsidiary action by the state. The definition and implementation of rules and practices that acknowledge the growing dynamism and diversity in the countryside are expressed through the new social agents, groups, associations and organizations that have unfolded a complex and pluralistic fabric and that need to find positive forms of coexistence and synergy.

The transition period of the reform can, however, also result in an institutional crisis in the rural sector in which four factors may arise: an institutional vacuum may be generated or exacerbated by the absence of a new institutional framework for the entire rural society that is operational for all of the implemented structural changes; an imbalance may arise between the intention and the capacity for renovation of rural institutions that must also maintain their legitimacy; a strong, but sometimes dispersed, resistance that can hinder or distort the institutional changes proposed in the reformist strategy; and an absence of synchronization between the structural and institutional development of the rural sector and the changes in the rest of the economy and society, which would imply that a favourable macroeconomic and political setting is not sufficient for structural transformation to take place at the micro- and sectoral level.

The continuation of a rural institutional crisis can create or deepen stagnation of the agricultural sector if there are no new institutional structures able to open new channels through effective economic development supported, in the long term, by a rural development vision that would allow for a greater balance in the relations between the agricultural sector and the rest of the national economy.

Another factor that has an impact on the agricultural sector is the tendency towards selective modernization which takes place only in some sectors or regions based on simplistic economic criteria that envisage these as the only "viable" sectors. In reality, this is the basis for deepening productive and social imbalances in the rural sector, under conditions in which the macroeconomic environment of a country cannot offer by itself a real and lasting alternative to the displaced agents or regions in the countryside, thus leading to vacuum plus exclusion within the restructured countryside.

The three main objectives for rural development can be summarized as: increased productivity; greater justice through higher incomes; and food security. The achievement of these objectives demands an integral transitional strategy based on increased autonomy for producers. It does not make sense to promulgate flexibility, transparency and participation without acknowledging differentiation and economic pluralism. The important thing is to incorporate the many forms of differentiated strategies and social agents in a broader dialogue that results in inclusion. As stated by de Janvry (1989), when the available information is imperfect, it is more important and convenient for the state to strengthen the bargaining power of the less favoured than to try to regulate private contracts.

Without political and social empowerment, which are by no means indifferent to economic performance, it is foreseeable that under the new conditions of deregulation and flexibility in production, farmers - without the strength of a democratic organization and participation - will face greater disadvantages resulting from the opening of the economy and the influence of entrenched local powers.

In other words, it is essential that the complex rural society be reflected in the structure and practices of public institutions, so as to include and qualify the demands of social agents, especially of those who were excluded from the first phase of the reforms.

These factors require profound changes in the mechanisms for access to support services and public resources, accompanied by strong decentralization of development entities, in order to guarantee the necessary autonomy for local agencies in the allocation of resources and a flexibility of their programmes, as well as to open effective and permanent possibilities for reaching a consensus with producers.

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Rethinking the perspectives towards ownership of rural policies

Old problems and new trends

• protection of the agricultural sector through closed markets, price controls, secured supply of subsidized credit, state channels for marketing tax exemptions and other mechanisms;

• excessive state intervention in the markets of both agricultural and livestock products and inputs, as well as in the economic decisions of producers. This latter element led to vast segments of the rural economy being managed as an extension of the state economy;

• excessive regulations and obstacles to the linkage among social agents which was caused by the maintenance of the peasant economy as a separate, almost autarkic part of the economy, by exercising all sorts of prohibitions against the participation of industrialists, investors or commercial agents in agriculture and livestock activities, and resulted in the emergence of black markets and several forms of simulation;

• immobilization of land, especially in countries such as Bolivia, Nicaragua, Peru and Mexico, where excessive regulations hindered investments and economic restructuring, encouraged cases of idle lands and halted access to investment options;

• great heterogeneity in the countryside, where a small number of powerful economic units contrasted with a mass of landholders confined to small units, mostly under minifundio conditions with no chances for development. The chronic concentration of resources and development services in the most developed regions and the anti-agricultural bias of public policies have fed this heterogeneity for decades.

The transformation of the rules of the rural economy implies a change in paradigm - a change that faces many obstacles, but that also presents opportunities. The possibility exists to build an agricultural paradigm with the features mentioned below. Although a new interpretation of the role of agriculture is still a long way off, important trends must be taken into account:

• a free market agriculture, in which the markets work better and the state is streamlined, in both quantitative and qualitative terms;

• an extended agriculture that transcends simple primary production and is based on a greater and more diversified economic organization of rural producers, linked to other economic agents in different forms of horizontal and vertical integration;

• a service agriculture, from the endogenous creation of enterprises responsible for the marketing, storage and transport of products, consultancy in productive projects, dissemination of technology, technical assistance, training and education in business administration;

• a new contractual agriculture that allows for the establishment of clearer and more balanced rules among the different productive agents, encourages private contracts (such as leasing of land and sharecropping) and establishes permanent links with the business community;

• a flexible agriculture in which intersectoral analysis starts at the rural household level - a household that is not participating only in the agricultural sector, but also in the non-farming sector, comprising activity in local rural areas and towns, as well as in migration. A focus on linked markets (land and credit, land and labour, labour and credit) is indispensable for adequate policies in the rural sector; hence the reality of the farm household in developing countries is really that of a "multisectoral firm" and traditional monosectoral policy approaches are inadequate. An analysis of the industrial model of small enterprises in northern Italy, made in 1988, stressed the important articulation between regional cities and the countryside and found a significant statistical correlation between the development of the small enterprise system and the type of labour relations in agriculture based mainly on small family farms and sharecropping. In the latter the basic unit of reference is the farmer's family which obtains income from off-farm activities as well, ensuring the flexibility of the farm's workforce;

• an agriculture that is based on knowledge and human capital that invests more in human capacity building and in the development of producers' roles as market agents and entrepreneurs;

• an agriculture that is linked to macroeconomic policy as well as to rural welfare, as a result of its revaluation as a fundamental component of the national economy and society, and with a differentiated state development based on policies that respond effectively to the needs and possibilities of the different types of producers, regions and products;

• an agriculture that is responsive to the feminization of the countryside as agricultural tasks are becoming increasingly concentrated in the hands of women, in part because of the breakdown of traditional family structures and higher rates of male out-migration from rural areas. Such migration is mostly the result of the search for non-agricultural wage employment elsewhere or it is forced by civil unrest or environmental displacement. In some parts of (mostly southern) sub-Saharan Africa, female-headed households may make up to 60 percent of total households in rural areas. In Asia, women perform more than 50 percent of the work required in rice cultivation. Some of the most complex agricultural systems in Latin America are the home gardens commonly run by women. By tending to home or neighbourhood gardens women can reduce the demands placed on their husbands' wages (in Latin America, a family may save about 10 to 30 percent of the total food bill) or else supplement these with cash income derived from the sales of their produce. Women typically also work more hours than men - up to 60 hours per week - and for less or no income. Their crucial role is to coordinate the activities of the rural sector;

• an associative agriculture with economic organizations and associations that make it possible to establish economies of scale and thus open access to new commercial and financing channels;

• a concerted and co-responsible agricultural policy of rural welfare - of commitments and contributions - focusing on the fight against poverty and the allocation on the part of rural populations of knowledge and skills related to the development of the popular economy and community structure;

• a sustainable agriculture in which the use of resources is integrated with conservation,in which there are new technological matrixes that correspond to productive heterogeneity, which is friendly to peasant production and which guarantees sustainable development;

• an urban agriculture. It was estimated in 1994 that about 12 percent of the world's population - i.e. about 700 million people - is supplied with food by 200 million urban farmers, in large part through informal purchases on the streets. In Asia estimates commonly place the number of households involved in city farming at over 50 percent of total urban households. Vegetables and perishable produce in particular are to a large extent provided by urban agriculture. Urban agriculture, therefore, appears to make a substantial contribution to income flexibility, and to food security at large, providing an estimated 10 to 40 percent of overall nutritional needs in developing countries. Dietary variety is supplied by fruits and vegetables, some livestock (poultry, birds, smaller animals, occasionally cows), staples (cassava, maize and beans), berries, nuts, herbs and spices. Urban food production does not usually require extensive landholdings or guaranteed long-term use. It is characterized by the involvement of women, especially in the large cities of the developing world.

Changes and challenges in the countryside

• One change refers to the type of economic development. Ever since the 1950s, the modernization process of Latin American and Caribbean countries has led the agricultural and livestock sectors to play an efficient role as sources of foreign exchange, food and inexpensive primary goods and to provide the labour force for industrial production. This resulted in widespread poverty and cheap labour in small pockets of developed agriculture that was heavily dependent on subsidies. By the 1970s, however, this development model exhausted itself and its main feature - a closed economy - has practically disappeared. The first transcendental change, the passage from a closed economy to an open economy and from a style of development with an anti-agricultural bias to one that is trying to eliminate that bias, also poses the first important challenge to the present rural society; what is the role of the agricultural sector in a new development model capable of guaranteeing a balanced growth for the sector?

• The second change relates to the technological matrix. The vision of a homogeneous countryside was a very serious conceptual mistake reflected in policies that, by not taking into account the different strategies at the household level, deepened heterogeneity without improving productivity. By favouring technological packages that depended very much on large-scale irrigation systems and industrial inputs, a "mining-type" of agriculture was created which was expensive, dependent on government subsidies and irresponsible in its treatment of the environment. Within this model, research, technological development, technical assistance and the extension systems of the prevalent productive systems were left to their own fate. The exhaustion of this type of development and the new technological revolution give rise to severe doubts about the technological pattern followed in the countryside. This second big change poses another challenge; how to develop new technological matrixes that match the heterogeneity of production, are friendly to peasant production and guarantee sustainable development while, at the same time, rebuilding the technological base derived from the green revolution in order to stimulate the productivity arrived at in the areas with the greatest potential.

• The third change refers to the social fabric which has been radically transformed. At present, Latin American countries are more urban than rural. However, the expected industrial utopia has not been achieved. Industry did not absorb the labour excesses from the rural sector; the service sector expanded, without leading to a highly productive and modern sector with high salaries, but instead, to an informal sector of poverty-stricken populations; and rural-urban migration became a survival strategy for rural communities. All of this altered the social fabric of the countryside. The concept of what it is to be a farmer covers many roles: the smallholder farmer, the agricultural or livestock entrepreneur, the avecindado (neighbour), the woman farmer, the day labourer, the migrant, the transnational farmer, the inhabitant of peasant cities (i.e. the urban peasant). This third big transformation implies a third challenge for the rural world; how to build a new organizational structure that houses the social plurality of the countryside without generating an oligarchy of associations.

• The fourth change relates to statism. It is not so much a question of how large or how small the government should be, but rather of the boundaries between public intervention and private activities and of the interplay between the state and civil society. It has been well documented that statism eliminated these boundaries. In the countryside, bureaucracies were established between the rural community and the state, their power being derived from the mediation between communities and government. Black markets developed to avoid mediation and dependence but bureaucracy developed in state agencies and enterprises that were not subject to accountability. The new communitarian thrust that is appearing in many regions demands clear rules and participation, i.e. democracy. This fourth change implies another challenge for rural society; how to advance in the process of democratization of the countryside by innovating institutions that link community, market, associations and the state.

Policy reform: towards a responsible and responsive state

Likewise, it is necessary to build social consensus on the objectives, terms and costs of the main policies of rural promotion, especially with regard to supports, and translate these agreements into legal schemes that will guarantee the fulfilment of commitments and the stability of policies and rules. The latter is a precondition to the achievement of any other objective and to the generation of certainty among the economic agents in the countryside.

Another essential aspect of the promotion plan is decentralization, i.e. the redistribution of state power into geographical areas, which - in a general democratic context - means the devolution of power in a co-responsible way to both municipalities and producers' organizations. This aspect is also essential for the successful management of differentiated interventions.

A new support policy (enshrined in law and periodically reviewed) can become the nucleus of state promotion. The "green" subsidy - detached from a narrow productive process and focusing on rural incomes - could be the basis for differentiated interventions taking into account producers' characteristics, rural household strategies, regional imbalances and adaptation to trade liberalization. Without neglecting the objective of securing a certain level of income for producers with low incomes, the policy should favour multi-activity in the countryside and reconversions at the farm level, especially if strongly linked with sustainable policies such as soil conservation and water harvest.

In this sense, a support policy decoupled from products would have to incorporate, in a balanced manner, the following objectives: the improvement of competitiveness vis-à-vis the main commercial producers of the country and, thus, a better balance among direct support services delivered by agriculturalists at the national level; the selective compensation, directly or temporarily, of those producers whose incomes and economic strategies have been negatively affected by the structural reforms, i.e. support to such producers so that they can adapt to the new conditions; and the provision of direct assistance and services at the household level in disadvantaged areas, in order to provide an element for capitalization and options for income generation.

Such a policy of direct support could form the pivotal point for the other policy instruments and should support new linkages among policy-makers, producers and other economic agents.

The other four important components of this support system would be:

• A rural financing system that revitalizes the credit culture in the agricultural sector, above all within the context of the family farm economy. This system should match the different producers' characteristics and should be complemented by self-help mechanisms, savings accounts, etc. In addition, the financing system should aim at concentrating the resources of medium- and low-income producers into feasible projects in order to secure the productive use of funds by the borrowers and achieve a solid commitment from the rural community to repay the debt. The emphasis should be laid on savings mobilization and capital formation.

  The institutional components of this system could be: second-tier institutions with the global task of regulating strategies; regional banks as centres of a vast network of local banks; small formal credit and savings groups in each community (as basic subjects of financing) linked through credit unions and/or other forms of regional rural associations, such as cooperatives, which would occupy an intermediate position between the regional bank and the credit groups, and a network of local enterprises - public or private - which would provide commercialization, technical assistance and insurance services.

• The infrastructure policy should focus on substantially expanding small productive infrastructure (irrigation and conservation of aquifers, soil conservation) and commercial infrastructure, such as wine cellars, cold storage and transport systems, without neglecting some large strategic irrigation projects - especially since the total irrigated surface decreased at a rate of 1.4 percent per year in Latin America between 1980 and 1992.

• It is necessary to rebuild science and technology institutions and to provide them with a circuit to improve technology transfer and the training of human resources. This assumes the integration of universities and technical institutes within a scheme for the massive dissemination and transfer of knowledge and skills, supported by new interactions with producers. The reform of rural educational and research institutions should also include the development of a technical training strategy, supported by the premise that human capital is a fundamental factor in reshaping economic activities and by an approach that would aim to expand the activities directed to education and the improvement of its quality, as well as to identify new strategies that match the processes of productive reconversion and economic restructuring. The process of restructuring research and development could usefully be supported by a resource fund from which institutions and research centres can draw (See the interesting issues raised by H. Rouillé d'Orfeuil in the World Bank seminar on Building a global agricultural research system, September 1996).

• A sustainable development policy would encourage and regulate any form of ownership of natural resources, including social responsibility for their use. Thus, in contrast with the scattered efforts of a simple conservation strategy, a productive ecological policy would focus on assisting the producer and not the resource itself. This would lead the producers to acknowledge that sustainable strategies can generate greater and sustainable productivity.

Similarly, in general, there is a need to develop a particularly "user-friendly"

institutional framework, including legal norms and practices. The acknowledgement of farmers' associations as public entities with rights and responsibilities for the management of rural policies, is needed and should be accompanied at national and regional levels by negotiated contracts in the sector, the design of public policies and the allocation of resources. There is also a need for the crafting of a public institutions system that would draw from informal or customary arrangements and provide for systematic consultation and decision-making in relation to public policies (Ostrom, 1992 and 1995). In other words, the purpose is to establish a legal framework that would bring consensus, direction and stability to agricultural and livestock policy in order to generate desirable certainty in the countryside.

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To: The Reconstruction of Rural Institutions, Part Two