Public institutions Institutions

Posted April 1997

The state and the market: the missing link

by Gustavo Gordillo de Anda
Director
FAO Rural Development Division
presented at the International Seminar on Agriculture and Sustainable Development in the Mediterranean (Montpellier, France) 10-12 March 1997

Summary

The paper argues that the sterile debate over state versus markets is giving way to a much more complex set of issues involving the interaction between the market and the institutions of both civil society and the state. The effects of structural adjustment programs during the 1980s and 1990s have shown that markets do not function by themselves, mainly because they are imperfect. The state, on its part, has been inefficient in implementing public policies that define the role of all productive agents, and civil society organisations, while an emerging global force, have been constrained in their efforts to achieve cooperation and solidarity to overcome the deficiencies of the state and the market.

Therefore, there is a need for strategic alliances as an "institution" to overcome different barriers that hinder a fair and balanced development. The paper also argues that because of democratic and decentralisation processes, governments increasingly depend on a broadly-based political consensus fashioned through negotiation and compromise among numerous power holders and interest groups. Coalition building requires both a supportive discourse -- "ideological cement" -- and specific institutions through which coalition and alliances can evolve. The article concludes by identifying what are the necessary broad principles that need to be incorporated for redefining policy, transforming institutions and helping people define, endogenize (internalise) and actualise a people-centred development approach.


Introduction

Experience tells us that for development to work, people have to feel that they directly benefit. And for that to work, there has to be a mix of market mechanisms, civic society, and, of course, a governmental system of support. All three parts of the development equation need the other parts. The market needs civic society, civic society needs government and the government needs the private sector and civic society. This requires a three-pronged development approach that identifies and designs the most conducive mechanisms for each sector to foster the other and creates a more enabling environment for all three sectors involved to flourish. Thus, there is a need for a conceptual framework for normative action that facilitates the interactions among them and guarantees the efficiency and effectiveness of the transactions for sustainable development.

This framework, or what can be called, "new institutional development" evolves within the synergetic linkages among market dynamics, state promotion and producer's strategies. First of all, let me clarify that the concept of institutions is a comprehensive one. It does not only refer to governmental institutions, but to civil society institutions, such as co-operatives or farmer's associations; not only to formal institutions, such as written laws, but to informal institutions, such as land leases or share-cropping contracts. Within this institutional framework, the most important "missing link" is that of alliances and strategic convergence among different social actors in the rural area.

The transition from a close economy to a market economy, or commonly known as structural adjustment policies, has been characterised mainly by three phenomena:

  1. The market economy has been the force behind economic growth and welfare, however, it has also been characterised by what economists refer to as "market failure", mainly resulting from asymmetric and incomplete information;
  2. The implementation of public policies has been inappropriate in defining the role of all productive agents, mainly due to rent-seeking activities; and
  3. The crucial role of civil society organisations to legitimise not only development programs but also their efficiency and efficacy has been constrained regarding co-operative mechanisms or the principle of solidarity. Therefore, there is a need for strategic alliances as an "institution" to overcome different barriers that hinder a fair and balanced development.
Why do we need strategic alliances? To provide the most disadvantaged populations a greater bargaining position vis-à-vis the state and market forces. The efforts of all three parts, i.e., market, state and civil society, are required in this endeavour. The energies of these institutions are available, waiting to be tapped. Indeed if we, as policy makers, take as our explicit goal the creation of wholly new institutions, we could release something far more powerful than the energy of each: the synergy of 'collective imagination and action' that results in sustainable development for the next generation.

Let me start the presentation by discussing the role of the state and the market in rural development and the transition and necessary actions to be taken to achieve a new institutional development.

The State

One of the main roles of the state is to provide a regulatory framework and judiciary systems to settle disputes and enforce the law. North (1981) argues that this is one of the important set of goods and services the state provides in exchange for revenue, which in turn depends on the citizenry's acceptance of the state's right to tax, which is closely linked to legitimacy.

North (1981) identifies two general theories that explain the existence of the state: a contract theory of the state which emphasises the role of the state in establishing a framework for more efficient trade and a predatory theory of the state which envisages the state as the agent of a particular group in society that it serves by raising revenue.

From the predatory perspective, the state is interested in achieving economic growth insofar as it increases the tax base available for exploitation. To accelerate this growth the state is interested in achieving an efficient set of property rights to reduce transactions costs. However, it is also interested in a set of property rights that reduces the costs of collecting taxes. Thus, there is tension between redistributive and growth objectives. These two objectives may not be compatible in the short-term (FAO, 1991). For example, a monopoly or oligopoly is more likely to reduce the transactions costs of revenue collection, but is less likely to distribute effectively property rights for growth.

This tendency is illustrated by Bates's (1981) observation that governments often prefer to employ such non-market policy instruments as quotas, restrictions and protection, which implicitly confer property rights, rather than such market interventions as price policies. This is because market interventions have a strong public-good aspect and many of the benefits become dissipated over the population at large rather than solely enhancing the positions of either members of the government or critical groups of the constituency.

The agricultural sector is often a major source of government revenue in many third world countries, and governments may face the acute dilemma of whether to develop an institutional framework that more effectively reduces the transactions costs of revenue collection or one that more effectively increases agricultural growth. For example, although in theory a progressive land tax based on the productive potential of land should be extremely beneficial in land-scarce economies in encouraging the intensive use of land, in practice the costs of conducting the necessary cadastral surveys and resolving disputes regarding the productive potential of land tend to make such a tax impracticable. Similarly, although there may be a case for imposing a value-added tax on all agricultural output, the problem of assessing the output of a multitude of small farmers is such that, in practice, governments tend to impose taxes on those products that have to be marketed through a limited number of outlets, such as export crops destined for overseas markets, even though this may create a bias against exportable crop production. (FAO 1991).

Another characteristic of the government is that it is the only agent that has the resources to transfer risk as a public good (FAO 1991). For instance, it has been observed that in Africa government policy may be an additional source of risk to farmers since it is often not independent of existing risk but may in fact compound it. In stabilisation programmes, government may transfer risk from the individual agent to government or, in perverse cases, vice versa. Bates (1983) interprets the behaviour of the cocoa board in Ghana in the early 1960s as an example of marketing board income stabilisation at the expense of individual producers where prices paid to farmers fluctuated more than world prices

Governments also have problems with imperfect information and incomplete markets. Unless government is an active participant in agricultural markets, in conjunction with the private sector, it is unlikely to collect price information and other types of economic cost information as a by-product of its other activities. It will therefore have to collect information at a cost. We could argue then that information problems are worse for the state than for the private sector. This is also an area where there may be conflict between the state as facilitator and the state as predator. Information has certain public-good attributes, and in its role as facilitator the state could make the markets function more effectively, with lower transactions costs, if it were to disseminate freely the information it gathered. However, where information is imperfect it can also be a source of rent to government agents. Thus, the free provision of information by government could, in some circumstances, remove opportunities for raising revenue.

Finally, I believe that the state is retreating from some of its traditional roles but is performing others. The state continues to be a society's instrument for maintaining stability and for reallocating resources from one group to another for public purposes. In particular, the state needs to continue fulfilling functions that are its unique realm: macro and sectoral policy in support of rural development, the delivery of public goods and services, regulation of environmental effects, regulations of competitiveness of markets and the enforcement of contracts, provision of information when it creates positive externalities such as new technology, assistance in access to assets for the poor, and welfare and safety nets for the poorest (de Janvry, 1996). However, governments increasingly depend for their function on a broadly-based political consensus fashioned through negotiation and compromise among numerous power holders and interest groups. Civil society is one of those groups that is consistently gaining power.

The Market

I would argue that the virtues of the market are exaggerated in line with the vices of the state.

The institutional prerequisites for markets to perform dynamically are increasingly emphasised today, thanks in large part to the work of Douglas North and others following his lead. The particular areas of market failure that affect growth concern technology and capacities, environment and vulnerability to external events, the last being an area where market failures have become more extreme and very evident during the course of the 1970s and 1980s (Thorp, 1996). Indeed, the experience of the 1980s leads us to emphasise the importance of the formal structure of laws and their enforcement for effective fiscal management and in countering many market failures, in addition to the more obvious issues of public security and the maintenance of secure property rights and contracts.

Markets are imperfect: asymmetric information

Neo-classical economics has shown that markets are imperfect and they do not guarantee inclusion for all economic and social agents mainly because information is asymmetric. It is now recognised that with the existence of imperfect markets and informational asymmetry it is even more difficult to separate efficiency issues from equity issues. Under certain circumstances, changing property rights or asset distribution can make possible transactions that increase the overall productive potential of the economy, and hence achieve a Pareto improvement (Bardhan, 1989).

In neo-classical economics, the market is seen as a rather mechanistic device that, on the basis of the relative strengths of supply and demand, sets a price at which the "market" clears. In real life, exchange transactions are governed and influenced by a large variety of factors that make the process difficult and costly. Markets can be extremely complex institutions, but they basically evolve to facilitate and reduce the costs of exchange transactions. In the agricultural sector, their structure and operations are influenced by the nature of three major factors and their interactions: individual human behaviour, the economic environment and the specific features of the agricultural sector.

Because information is asymmetric, or what Williamson (1975) has termed "information impactedness", one group of participants involved in the exchange of a particular commodity will have better access to information and hence greater bargaining power than other and will contrive to use it to their own advantage. When information is costly and asymmetrically distributed, incentive problems arise. Much of the literature on this topic was first developed in respect to insurance markets but it can be applied to many different market situations such as the provision of credit and a variety of other contracts. When 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.

In the case of collective goods, when information is costly and asymmetrically distributed, property rights cannot be perfectly enforced. As Binswanger and Rosenzqeig (1985 - FAO p. 15) argue, in the absence of the perfect enforcement of property rights there is always some incentive for the theft of attributes because in these circumstances the identity of the thief is easily concealed. Many legal and cultural institutions and customary practices governing exchange transactions are adaptations to this problem; i.e., they reduce the costs of information or increase penalties for theft.

Because of information asymmetry, one of the main issues to consider under the new land-market approach to land reform is a question of sequencing. If we go ahead too fast in the process of putting land in the market, we have to ask ourselves, first of all who has the information about the price, who sets the price and who can afford it. Generally, what happens is that the people that we are precisely trying to assist, are the ones at a disadvantage because they do not have the necessary assets (credit, knowledge, information, etc.) to access land, and that is a recipe for disaster. Then it is imperative that before the market process is in force, the necessary regulatory and normative conditions are already in place, i.e., all other micro reforms should precede land-market reform.

We might conclude by saying that the pure form of the neo-liberal model makes assumptions which no one can accept at face value. The assumptions of perfect markets and perfect knowledge, the static nature of the optimum and its dependence on the existing income distribution represent the core of the problem of its applicability. In reality, market failures are extensive and, the institutional requisites to counter those failures are either absent or only slowly coming into place. Since the evolution of institutions itself reflects power structures, the hierarchical rigidities continue to obstruct positive change. For example, the most widely discussed and acclaimed success case following neo-classical economics in Latin America has been Chile. What is less widely acknowledged, however, is how far the Chilean model has evolved, and how far it depends on special circumstances, in particular prior institutional strength and a considerable role for the state. Since the mid- 1980s, securing an exchange rate appropriate for long-run competitiveness has taken precedence over "the market". A degree of restriction of capital movements and a modest element of agricultural protection have been discreetly part of Chilean good practice.

We need to underline the importance of prior institutional maturity to any type of political or economic reform, and so it is a continued attention to investment in institution-building that is critical. Success has a greater chance when rooted in historically strong institutions, of both state and society, and in a depth of understanding of the need to build political consensus behind the economic model achieved.

A new paradigm to institutional development

A typical response to market failure is to assume that there must be government intervention to solve the problem. The examples of market failure indicate that regulatory functions will still have to be performed.

The transformation of the rules of the rural economy implies a change in paradigm - a change that faces many obstacles but, as W. Shakespeare once said: "Sweet are the uses of adversity", i.e., it also presents many opportunities. The old paradigm of the rural development was characterised by protection of the agricultural sector, excessive state intervention, excessive regulations and obstacles to the linkage among social agents, immobilisation of land, and large heterogeneity in the countryside. It is the de facto heterogeneity (i.e., pluralism) that is encouraging an institutional transformation.

A new paradigm should evolve in an environment of free-market, extended and service agriculture: An agriculture that is based on new contractual arrangements and on an agriculture that understands the rural household as a multi-sectoral firm able to link with the different markets (land-credit, land-labour; labour-credit). This new paradigm takes into account physical, human and social capital for a successful achievement of rural development. It is an approach that is founded in concerted and co-responsible agricultural policy of rural welfare and that stresses rural poverty alleviation and the incorporation of local knowledge and organisations (Gordillo de Anda, G. 1996)

Institutional reconstruction

There is growing consensus that we need to focus on institutional reconstruction, i.e., an even greater elimination of paternalistic and authoritarian practices; an effective state support of the agricultural adjustment process that, by respecting producer's autonomy, is able to induce economic reconstruction and productive "reconversion" processes, accompanied by alternatives to economic development and social cohesion of the rural communities; and an innovative scheme of incentives and regulations that foster synergetic linkages among market dynamics, state promotion and producer's strategies.

Consensus Building

Within this approach, the main role of institutional development is to increase efficiencies and reduce uncertainties through the design of a stable structure that favours economic and social interaction. This is expressed in a number of formal and informal rules which regulate the conduct of an individual within a society. Institutional stability will last as long as it conforms to a cost-benefit balance for the society, and the only way to define a rhythm of change that limits the inevitable instability change brings is by engaging in processes of consensus building.

For institutional reconstruction to take place, there is a need for designing schemes directed at reducing the disparity and high levels of transaction costs in the rural sector; the missing linkages and inertia that limit economic reorganisation and, in particular, the multiplication and diversification of contractual and associative forms, the obstacles to community-based development, and the absence of policies that recognise the diversified strategies of rural producers (Gordillo de Anda, 1996).

Therefore, to foster a process of consensus building that guarantees people's participation and to design a new role and scope for state promotion the following is needed:

Given the relevance of the last point, I will expand on it:

Land tenure reforms. Land tenure reforms are sometimes reduced to a single dimension: the redistribution of land either through confiscation or through buyouts. However, the experience and result of the agrarian reform concept, especially from the Mexican and Chinese experience, tells us that:

  1. Land reform must be accompanied by corresponding institutional reforms relating to land tenure and rural development; and
  2. Land reform must be accompanied by policy reform (Gordillo de Anda, 1996a).
The above lessons helps us identify three "generations" of land reform:
  1. Land is issued or redistributed by the state according to defined discretionary rules;
  2. Land is purchased for redistributive purposes; and
  3. Land reform occurs in the context of a comprehensive supporting institutional framework, that enshrines rights and security.
The last case, or what I call "the third generation of land reform" is also distinct in that it does not concern itself solely with landless groups, but also seeks to utilise reforms as a means to strengthen the economic and productive potential of existing producers who are constrained by pre-existing tenure arrangements and institutional dysfunction (Gordillo de Anda, 1996a).

To sum up, land reform is basically an institutional reform with clear legal, political and economic consequences. From the economic side, through the recognition of existing land markets, and ipso facto, of different types of transactions, the third generation land reform has a direct impact on production processes and the allocation of resources. But, above all, it is clear that land reforms constitute political reforms: it implies both the displacement of a category of social agents (the informal "rule-makers") and simultaneously, the constitution of a new social force -- the newly enfranchised farmers. This latter group, the farmer beneficiaries of the reform process may become part of a new post-reform governing coalition (Gordillo de Anda, 1996a).

For the purpose of this discussion, it is worth emphasising the findings of two major household surveys that were carried out in 1990 and 1994 in Mexico (De Janvry, A., Gordillo, G., & Sadoulet, E. "Mexico's Second Agrarian Reform: Household and Community Responses, 1990-1994" -- to be published in 1997). The Mexican government undertook a "third generation" reform between 1991 and 1992. The most important findings from the surveys is that once state agencies withdraw from certain activities of the rural development process (i.e., provision of inputs, credit, marketing), various forms of farmers' production that had been repressed by state intervention, but had not disappeared, resurfaced immediately. This leads us to argue that command-style economic management systems in rural areas subordinates peasants' forms of production but does not suppress them. This also means that the withdrawal of state agencies from certain crucial productive functions and the development of new forms of markets, will lead to further adaptation of existing customary arrangements and practices.

The third generation of land reform calls for the full participation and intervention of civil society organisations -- from the local to the national level, from community groups, advocate NGOs, technical NGOs, farmers' associations, chambers of agriculture, etc. -- which are needed and should deliberately be sought. Because of the emergence of a social category resulting from land reform -- new owners --, I would argue that it is in the interest of the government to develop and consolidate a strong alliance with these new social categories. Coalition building requires both a supportive discourse -- "ideological cement" -- and specific institutions through which coalition and alliances can evolve. These are convergent coalitions, i.e., coalitions in which a diverse range of actors with different and even antagonistic views, coalesce around a number of limited issues from which they all stand to gain. It is important to stress that the main strength of a coalition derives from its coherence (Gordillo de Anda, 1996a).

Social policy and fiscal reform

It is naive to assume that the removal of government interventions will result in reasonable approximations of perfect markets. Furthermore, it does not follow that social welfare will rise as a consequence of the removal of some or all government interventions. On the contrary, the impact of structural reform and liberalisation has negatively affected the poorest. In order to increase the well-being of marginal or unprotected groups, it is essential to improve the quality of their lives and their access to knowledge and the resources to make knowledge productive. What really matters is a social policy that provides incentives and opportunities to its social groups by means of investment in human capacity building. The ability to increase productivity by investing in people has acquired a crucial role in development strategies. To shelter the most disadvantage groups, such as the landless and net buying smallholders during the transition period from a command economy to a more market economy, special programs of income generation (public works programs) and targeted food subsidies (social funds) are required (de Janvry, 1996).

One of the main aspects of social policy reform is its linkages with the macro-economic policy, particularly with fiscal policy. Since most developing country governments have increasingly exhausted the option of credit and privatisation as sources of funds, the need for revenue raising through taxation is bringing a renewed realisation of the importance of fiscal reform. This has led to a growing awareness of the critical importance of the uncoded values and attitudes that underpin the formal institutions. People's belief in the ability of the state to deliver goods and services is crucial to the creation of the culture of tax paying that is alien to most developing countries. Moreover, whether or not a society believes in the right of all to free primary education and health care will critically affect whether targeted social policy substitutes for the welfare state.

Furthermore, since markets must be managed and market failures compensated for, a relationship of mutual trust and confidence between private and public sectors is also crucial, and in turn requires institutionalised channels of communication able to survive the transience of the actors concerned, particularly those in the public sector (Thorp, 1996). The fundamental point of view is that neither a one digit inflation policy nor a fiscal surplus can be considered only in terms of the needs for a macro-economic policy, but within the framework of their linkages with social policy. Redistributive policies cannot be set aside until stabilisation is achieved because of the latent fragility generated on the political scene which, in turn, has an impact on economic stability (Gordillo de Anda, 1996).

Some potential measures to overcome traditional (orthodox) strategies in terms of redistributive policy could be summarised as follows:

Growing fiscal transfers with healthy financial support as one of the pre-conditions to redesign social policy in relation to:

Pillars of the new institutional development

For the new institutional development to succeed, there are some key elements that need to be present and fostered by the three "institutions", i.e., state, market and civil society. The following list is not exhaustive nor it indicates an order of priority in which these "broad principles" should occur. They do, however, point out to the fact that they are highly inter-dependent. Therefore, the main components of the new paradigm are:

Participation

As efforts are made to enable people, more attention is paid to the development of local institutions that are empowered enough to command authority and promote participation. As complexities of micro-level intervention gain centre stage, analyses of local cultures gain greater importance. The assumption is that people will be more responsive if they are central to the design and implementation of programmes that affect their lives and livelihoods, and if they make some personal investment or commitment. A recognition that there is more to development than just economic productivity leads to a focus on social processes as well as products, on the strengthening of local institutional capacities and on the fostering of constructive dialogue and collective action. In pursuit of these aims, the appeal of indigenous management is self-evident: the mobilisation of local strategies by local people for the control and use of their own resources in the struggle for self-reliant development.

For participation to work effectively, we need to recognise the institutional power structures. If promoted by a hierarchically structured and centrally managed organisation, effective devolution, local empowerment and village-level resource management may well be elusive. Since local resource management decisions are made in the context of local political and institutional structures, recognising this dimension of rural people's knowledge is key (Chambers, 1994). Participation cuts across all the following "principles."

Convergence

A variety of preconditions are likely to favour collaboration between civil society and government. At a macro-political level, there needs to be some convergence on development objectives, a convergence that will be more difficult to achieve if there is a history of conflictive and antagonistic relationships between governments and citizens (Farrington & Bebbington, 1993). More specifically, there needs to be convergence in their visions of the future of the rural poor, and then of the technological and organisational strategies that are most likely to achieve those objectives.

NGOs have sometimes sought means of engaging with market agents for the sustained development and dissemination of technologies. Some of these links have been between the NGO itself and the market agents, and in other cases the NGO has promoted direct contacts between the rural poor and the market agent. These interactions have the potential to be strategies for enhancing the capacity of the poor in negotiating their market relationships, and for finding mechanisms of supporting local innovations that are more sustainable to the extent that they do not depend on institutional interventions (Farrington & Bebbington, 1993),

However, while convergence facilitates collaboration, it does not mean that there needs to be congruence in development objectives before states and civil society work together. For instance, while more profound levels of participation and empowerment may be central concerns for many NGOs, this has not prevented some of them from seeking to identify how less radical change in the government sector might be promoted in order to generate positive outcomes for the rural poor.

Clear values

A new relationship between the state, market and civil society will depend on the prevailing political regime, and on the speed and type of transitions taking place. In an ever-increasing deregulated market it is necessary for different actors involved to determine and pursue clear values and visions. For example, NGOs must decide to what degree they wish simply to provide basic services (more effectively and efficiently than the state) and to what extent they want to transform relations within civil society, and between civil society and the state.

Linkages

Linkages do not function by themselves. Whether structural or operational, if linkages are to be effective, the mechanisms underpinning them have to be tailored to the specific characteristics of the institutions concerned, and have to be managed to meet the opportunities and constraints arising both from changes in socio-political context and from the evolution of specific types of interaction (Farrington & Bebbington, 1993).

The existence of personal networks cutting across institutional boundaries is one of the most important prerequisites for successful collaborations. While the context (socio-economic and political) may structure actions, it does not determine them, and individual actors and organisations have certain room to manoeuvre. Looking at how actors have operated within socio-economic and political structures in the past may serve as an indication to what extent apparent functional complementarities between different organisations are exploited.

While the state may try to take the initiative in promoting co-ordination mechanisms and linkages, it will not be able to set the agenda independently. As it becomes more accountable (dependent) on citizens' support for the implementation of programmes, its own bargaining strength will be reduced, and that of the society as a whole correspondingly increased. Citizens, will have greater scope to press for policy changes; civil society has become the voice in denouncing wrongdoing.

Social capital

One thing that we have learned by now is that physical capital alone is not enough. Human capital and social capital are necessary complementary inputs for physical capital to have a long-standing impact. Social capital refers to norms of reciprocity and networks of civic engagement; to features of social organisation, such as trust, norms, and networks, that can improve the efficiency of society by facilitating co-ordinated action (Putman, 1993). Many examples of social capital can be found in rotating credit facility based on trust where it serves as a kind of collateral and it is available to those who have no access to ordinary credit markets. (e.g. the Mingas in Ecuador, the Ko in Japan the Arisan in Java) they are seen more than economic institutions as mechanisms to strengthening the overall solidarity of the village.

The norm of generalised reciprocity is a highly productive component of social capital generally associated with dense networks of social exchange. Networks of civic engagement increase the potential costs to a defector in any individual transaction; in the language of game theory, it increases the interaction and interconnectedness of games. The importance of social capital increases as economic development proceeds, it does not wear out the more it is used but if unused it deteriorates at a relatively rapid rate (Ostrom, 1995).

Redefinition of property rights

The poorer people are, the more they need secure rights. To enjoy their rights, they need to know what they are and how to claim them. They also often need organisation and solidarity to overcome vested interests. Communication of their rights to poor and scattered rural people is perhaps the most promising frontier for the state in rural development in the 1990s.

Property rights and tenure issues are important to assure success in efforts to combine appropriate management of natural resources with productivity increases in developing-country agriculture. Failure to understand existing and alternative property-rights arrangements and how they work may result in inappropriate action by governments and NGOs. Action research to enhance such understanding is of critical importance for policy makers. Action by governments and NGOs should enhance rather than replace social capital, which has been built up at the community level over generations.

Policy makers, researchers and practitioners tend to pay too much attention to the negative effects of free access to natural resources and the potential benefits from privatisation of natural resource ownership or how common-property institutions may be superior to both free access and private ownership to achieve appropriate natural resource management and sustainability in agricultural production. We should focus on processes and not output. We should be able to transfer the collective knowledge gained through the building of social capital to a diversity of institutions and systems. We should all be open to learning, from the experience of privatisation and state modernisation to the successful experiences of management common-property resources (CPRs). In the words of Elinor Ostrom (1995), "We should not be concerned primarily with the preservation of any one kind of institutional arrangement. Rather, the major problem is to avoid the multiplicity of failed projects and institutions that has dominated past policies."

Common-property institutions are in jeopardy when policy planners and makers act as they do not exist or as they are not effective under new economic arrangements. The absence of local, indigenous institutions to govern and manage smaller CPRs may lead to an even greater acceleration of the destruction of valuable natural resources. They need to function within a framework of effective rules regarding access and use patterns, and the design of these rules is difficult no matter what institutional arrangements are used. But one thing is for sure, they need to come from the people themselves and be responsive to their physical, biological and cultural environments.

Collective action

Taking as an example the case of irrigation systems, Ostrom (1995) asks herself: "why are farmer-governed irrigation systems able to achieve better and more equitable outcomes than those managed by national agencies? Because they know the rules of the game. On farmer-governed irrigation systems, farmers craft their own rules. This is not just rhetoric, a study in Nepal shows how farmer-organised irrigation systems worked more effectively and efficiently in the long run than centrally, donor financed large irrigation systems that disregard the importance of farmer's incentives to participate in maintenance work.

The evidence that farmers can overcome local collective-action problems when they have sufficient autonomy (either because of the formal legal system or because they live in such remote areas that no one cares what they do) is also consistent with a substantial literature on the capacity of resource users to govern inshore fisheries, mountain commons, grazing areas, and forest resources in all parts of the world. Creating local organisations and selecting people from the community as leaders who are rewarded for their performance can help surmount the substantial difficulties of sustaining long-term collective action (Ostrom, 1995).

The type of farmers' responses to collective-action problems illustrates how rules affect outcomes. Reaching a high level o f common understanding about the structure of incentives farmers face, the types of individuals with whom they interact, and alternative ways of structuring their relationships is a prerequisite for organising associations to undertake major, long-term collective action (Aumann, 1976).

The destruction of prior institutional and physical capital, such as farmer's organisations, is not uncommon in major donor-financed, government-controlled irrigation schemes. On self-organised systems farmers make their own decisions about design of physical systems and service areas, determines the water allocations and handle maintenance. Contracted staff by farmers continue to work as long as their product is beneficial to the collective interests of the group, and the officials are generally paid in kind which has an effect on their overall productivity and household subsistence strategies. What is important to farmers is the realisation that the long-term benefits exceed investment costs. One of the failures of government-sponsored projects in general is the belief that by reducing labour cost and increasing productivity it would guarantee success, forgetting the importance of labour mobilisation and maintenance work needed to operate the systems. Without a realistic requirement to pay back capital investments, host government officials and the more influential farmers are motivated primarily to invest in rent-seeking activities and may overestimate previous annual costs in order to obtain external aid.

Alliances and partnerships

The new institutional development integrates rural peoples knowledge and needs into a broader dialogue. Strategic alliances are formed among interest groups, as part of a wider process for regional sustainable development. This process enhances new opportunities for democratic decision-making enabling local groups to become political entities capable of negotiating effectively with government bodies or with competing interest groups (Chambers, 1994) .

For alliances and partnerships to be sustainable, the partners need to agree on the objectives -- which must be clear and realistic -- and on the roles of insider groups and external support organisations. Initiatives should be linked to specific policy decisions. Measures should be developed to bridge the gaps between external and local participants. Establishing genuine partnerships often requires external support organisations to make longer-term commitments and to gain in-depth understanding of the local people and their culture and environment. It is important for local people to share responsibility at all stages. The sharing of responsibility improves the sense of mutual dedication and equity among all involved and also helps to build capacities. Shifting the leadership to local people can help participatory efforts and prevent local peoples' dependency on external support. Success should be measure by the extent that external assistance in no longer needed.

Finally, the new institutional development embraces Korten's (1990) proposal to put learning at the core of an organisation's philosophy. The new institutional approach is more interested in how we learn than on what we learn. Learning environments promote creative thinking and provide open and equal interactions through personal exploration and experimentation. The new institutions will show realistic and rapid feedback flows for adaptive responses to multiple realities through multiple linkages and alliances, with continuous dialogue between different actors.

Conclusions

There is significant scope for interaction between efficiency, consensus building, participation, and democracy. I hope this presentation has been able to show that the sterile debate over state versus markets is giving way to a much more complex set of issues involving the interaction between the market and the institutions of both civil society and the state.

I started this presentation with a question: what is the missing link in the relationship between the state and the market. The answer is a multidimensional one, as is the problem of rural sustainable development. The missing link calls for strategic alliances and convergence among different actors to redefining policy, transforming institutions and helping people define, endogenize (internalise) and actualise a people-centred development approach. To address the pluralism of issues we need:

There are pending issues as to who does what and how. Since the new institutional development is a demand-driven and learning-by-doing process these are questions that do not have static answers. We might draw some conclusions and recommendations, however. For example, efforts should be oriented to increasing civil society capacity to use the market as part of a strategy to scale up their innovations and for local groups to link more closely with the private commercial sector in order to enhance their own institutional sustainability. The size of human capital and resources locked up in government institutions usually represents a huge under-utilised potential. Civil society should identify how best they might support but not substitute for what exists working with government in long-term partnerships.

The new institutional development should be committed to improving linkages within and between institutions; and to fostering a learning environment that focuses on problem-solving, action-oriented, interactive and field-based approaches. This is an approach that develops the capacity and involves the major stake-holders in decision-making, policy-making, and collective action. The new institutional approach strives to promoting learning by doing from the local level to the international level; to working with diverse and often conflicting groups; to fostering a collaborative style of work through partners and networks; to mixing insights from the north and the south, from different perspectives, disciplines and approaches. It combines theory, practice and capacity development to serve as a bridge or linking mechanism.

Knowledge, says Alvin Toffler (1995), is the most expensive asset of all. If we as responsible policy makers set the stage for coalitions, for empowering the poor through collective action, they also could gain in this world of such rapid knowledge transformation. Communication technology links the world's people into a single instantaneous communication system: the "global village". This gives us a powerful new "collective intelligence." No period in human history has faced comparable needs and opportunities for rapid social innovation that only a free an pluralistic society can produce. We have the tools to face this challenge. This new 'revolution', i.e., the "people-centred revolution", has had different ways of presenting itself. We need to define what these roles are, what are the constraints, opportunities and incentives for the individuals and their organisations to become part of the new institutional change at each level. We need a systems approach that is to be decided by consensus and coalitions and by basic political commitment.

We must, as a first step, launch the widest possible public debate over the need for a new institutional reconstruction attuned to the needs of a twenty-first century civilisation. We need and we can serve as a forum to generate and disseminate the broadest array of imaginative and feasible proposals for "rural restructuring".


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