Latin America’s rural institutions are at a crossroads. Despite the profound changes of the last decade, many institutions continue to suffer from the inertia associated with the overly protectionist policies that pervaded Latin American agriculture through the end of the 1980s. Although nearly all of the countries in the region implemented adjustment and structural reform programmes - with varying degrees of success - the rural sector generally, and agriculture in particular, cannot be regarded as the most dynamic actors in that process. In many cases, agents and institutions in these sectors confined their activities to defending against deregulation, privatization and streamlining efforts that were affecting all of the region’s economies. In other cases, progress was made in establishing more modern institutional arrangements. However, such progress has often proven to be of limited value, inasmuch as it was not based on a rational national institutional structure and did not derive from a national consensus on how best to achieve sustainable and equitable rural development.
Following the poor results achieved in the wake of the structural reforms that dominated the Latin American scene during the last decade, recommendations calling for a “small but strong” state are being called into question more frequently. The pervasion of market failures in the region’s rural environment and the increasingly evident inability of non-governmental organizations (NGOs) to serve as substitutes for the state and as sustainable and legitimate promoters of development, has produced a breeding ground for the emergence of voices demanding that the state resume an active role in rural development.
The emergence of rural institutions to take up the much-needed functions left unattended by the state has been slow to occur and, where it has occurred, has not necessarily benefited the rural poor. Some authors, such as de Janvry, Key and Sadoulet (1997), view this process as part of a transition from a structure based on state institutions to one based on the market and the private sector - a process whose slow pace has had a negative impact on the neediest segments of the rural world. Others, such as David, Dirven and Vogelgesang (2000), suggest that this withdrawal of the state was too extreme, leaving gaps that could never be filled by private agents. Issues that remain to be evaluated include an assessment of the functions that the state actually carried out prior to abandoning the field and the possibility that, in many rural areas of Latin America, when the state did play a role it was often co-opted by a local elite to the detriment of the majority of the rural population. Given the realities of rural Latin America, instead of “filling the gaps left by the state” or “handing back to the state functions it should never have abandoned”, the point may be to construct for the first time a system of institutions that foster rural development.
In a recent document, Piñeiro et al. (1999) review the recent history of the reforms of the agricultural public sector in Latin America, giving a more balanced view of the role of the state than the one prevailing in Washington circles in the 1990s. The authors analyse the first wave of reforms and the current second wave and explore a much-needed third wave. They link institutional aspects with the effectiveness of policies, programmes and projects financed by the public sector and try to tackle the issue of how to improve public sector management and capacities in order to complement private sector activities. Although the focus of this work is more on agricultural than on rural institutions, the approach is very much in line with what we try to pursue here. This chapter can be seen as an extension of their analysis to the broader issue of rural institutions.
In analysing the relationship between institutions and rural development, it should be stressed that Latin America’s rural population is mostly poor and immersed in an environment marked by uncertainty and risk. Despite the urbanization of recent decades, a significant portion of Latin America’s poor continues to live in rural areas. In Colombia, for example, where 35 percent of the population is rural, nearly three-fourths of poor people live in rural settings. In Mexico, where 25 percent of the population is rural, 57 percent of those living in poverty inhabit rural areas. In Brazil, where 18 percent of the population is rural, 40 percent of the poor inhabit rural areas, while in Peru, where 28 percent of the population is rural, 41 percent of the poor are rural. Moreover, a number of studies, including Valdés and Wiens (1996) and Altimir (1994), indicate that in the case of the extreme poor (those who are unable even to meet their basic nutritional needs) the figures are even more dramatic. Depending on the country, between 50 and 80 percent of those living in extreme poverty in Latin America live in rural areas.
What institutional structure, then, would best serve the needs of Latin America’s rural sector? Clearly, there is no simple answer, nor one that is universally applicable throughout the region. Any proposal attempting to achieve such universality would be of little practical use. Nevertheless, certain common features can be outlined, based on the make-up of the region’s rural setting, its institutions and prevailing economic and social trends. Institutions are social constructions and as such are very much endogenous; we reconstruct them continuously through conscious efforts as well as unintentional events. Although we recognize here that there are obvious limits to the intentionality, prediction and control of any process of institution building, a conscious leadership backed with suitable policies can do much to nurture a process of collective construction of those institutions needed to foster a sustainable and equitable rural development in Latin America.
The chapter continues with a section on conceptual issues in which we define the concept of institutions, what constitutes an institutional failure and the elements of an appropriate institutional framework. There follows a stylized description of rural society and of the development of rural institutional arrangements in Latin American and the Caribbean; the section includes an analysis of why institutions in Latin American and the Caribbean are in general unresponsive, as well as a description of the crisis of governance in the region. The next section focuses on institutional innovations and the elements of a new institutional framework for rural development in the region. The final sections provide suggestions for future research and concluding remarks.
“Institution” in its most general sense refers to different types of organizations, markets, contracts, cultural norms and informal or formal rules that define rights of access to goods and services, as well as access to the management of a given space or to its natural resources.[4] Thus:
Institutions facilitate decision-making and coordination between individuals, reducing uncertainty regarding how others will behave.
Individuals perceive institutions as resources (potential benefits) or as restrictions (potential costs) depending on their interests, ways of thinking and cultural framework.
Institutions provide incentives or disincentives to individuals. In the case of markets, these are economic incentives that have been fairly well quantified. In the case of institutions outside the market arena, the incentives are more qualitative or, in any case, more difficult to measure.
Institutions as regulatory systems are costly to establish, reform, monitor and empower.
The development of institutions is a process that is clearly endogenous to the actual economic and social development of a country or region. Institutions affect how assets are distributed in a society; at the same time, however, ownership and access to assets influence how institutions act and develop. Therefore it is impossible to create new rural institutions without simultaneously acting upon the structure and distribution of assets within rural society.
Market, state or institutional failures?
Hatzius (2000) proposes four types of institutional failures. The first two relate to public goods and the presence of negative externalities and are treated as market failures in the neoclassical economic literature. Market failure associated with public goods concerns situations in which the good or service is not provided through the market in a manner that provides optimal social benefit due to the nature of the good (the impossibility of excluding third parties acts as a disincentive to optimal production) or to the fact that the level of investment or the associated risk is very high. The optimal institutional arrangement may involve the public provision of the good, or it may involve local organizations working collectively - organizations that may be as effective as the state in providing the good or service.
Market failure associated with negative external factors concerns costs to the society that are not incorporated in the market price of the good or service, hence producing greater than optimal use. A typical example is the over-exploitation of natural resources. The optimal institutional arrangement, in this case, could involve taxes or subsidies to internalize the externalities or, alternatively, the introduction of regulations governing the management of the resource (particularly in the case of collective ownership of a given resource).
The other two types of institutional failures are outside the conceptual framework of neoclassical economics, which focuses on resource-allocation efficiency. The third type of institutional failure relates to the inability of markets to resolve on their own problems of poverty and equity (issues not usually viewed as “market failures” in the strict sense). The optimal distribution of property rights or the need for winners to compensate losers are typical examples. A broad range of institutional configurations, combining collective efforts by public agencies with civil society organizations, are usually considered to be responsible for ensuring equity, sustainability and consensus among the affected parties.
Finally, the fourth type of institutional failure relates to the assumption that competitive markets are associated with perfect information. The problems of asymmetries in the distribution of information and the existence of transaction costs (i.e. costs of information and of preparing, monitoring and enforcing contracts) are typically studied in the context of institutions beyond the market sphere, representing a set of problems requiring specific institutional measures.
Taking into account these institutional imperfections and market failures, an institutional framework compatible with sustainable, equitable rural development should include at least the following two elements:
A system of allocating well-defined and transparent rights and responsibilities, including procedures to monitor and enforce agreements.
Effective and efficient markets in the framework of a complex organizational arrangement that includes networks, coordinating bodies and secondary organizations that facilitate collective action and reduce transaction costs between the different individuals and interest groups.
The importance of institutions in rural development has long been recognized by decision-makers in Latin America. It has also been recognized by those implementing public policy that institutions are not “free” goods - i.e. they are costly to establish, reform, monitor and empower. What is lacking are operational mechanisms to evaluate and compare the effectiveness and efficiency of institutional arrangements in providing public goods and services in Latin America’s rural areas, with particular attention to serving the rural poor.
Experience seems to suggest that there is no single institutional solution when it comes to resolving problems of inadequate access to public goods and services, correcting negative externalities, promoting more equitable arrangements or rectifying asymmetries in access to information and power.
The role of the market on the one hand, and of the state (or collective action) on the other, poses what is clearly an empirical question. The answer depends on the geographic and cultural context and the point in history at which a specific organizational arrangement - one designed to provide a specific public service or good or to manage a resource - occurs. What seems clear is that regardless of the institutional arrangement, it must be “validated” through some participatory system that ensures sustainability.
Defining rurality
For the purpose of this paper we have preferred to define rurality in a rather loose way, trying to capture the idea of all activities in the rural space including agriculture, agrobusiness, rural education, infrastructure in villages and secondary towns, financial services, municipal development, etc. As discussed more in depth in this volume’s chapter by Graziano da Silva, the statistical agencies of most Latin American countries define rural areas as those having less than a certain number of dwellings or inhabitants. However, focusing on such a quantitative approach is not useful for our purposes.
Instead, following the renewed interest by Latin American scholars in the European experience of rural development with its focus on collective territorial resources as the core of endogenous development, we will be looking at rural development within a territorial rather than sectoral framework. Here rural development is contextualized by focusing on the needs, capacities and perspectives of local people. Rurality encompasses the entire range of actors linked to local communities in which low population density prevails, affecting communication and transport patterns, social network composition and the availability of specialized services.
The attempt to develop rural institutions in Latin America in recent decades - and the type of institutions developed - grew out of a change in the rural development paradigm that occurred beginning in the 1970s. The “new” consensus was based on an integral approach that incorporated the participation of the beneficiary population in planning, executing and maintaining public projects. Coombs (1980) argued that this consensus was aimed at: meeting the basic needs of the rural poor, with special attention to women, children and disadvantaged minorities; increasing rural employment and the productivity of small producers and other rural workers; and securing the full participation of the rural poor in the development process as well as the equitable distribution of benefits.
At the institutional level, this consensus broke from the belief that the most efficient and effective way of organizing and providing rural services was to separate actions according to the sector involved, each with its system of independent supply across rural areas, administered by specialized ministries and their subdivisions in the capital city. Specialized and centralized programmes of this type suffered from a number of problems, including:
the costs of maintaining vast centralized bureaucracies;
the costs resulting from duplication of efforts (due to lack of coordination between programmes and sectors);
poor targeting;
a paternalistic and authoritarian tone which led to reinforcing a sense of dependency and undermining the self-confidence of beneficiaries;
a fragmented and myopic conceptual approach on the part of authorities, who ignored the complementary and interdependent needs of the beneficiaries and thereby undermined the functional relationships between the various sectoral actions and between a programme, its beneficiaries and the socio-economic environment; and
a top-down approach that created legitimacy problems for institutions.
In the course of the last three decades, a number of different institutional arrangements have played out in the context of this consensus. As indicated by Campos (2000), many developing countries continue the search for an institutional scheme that will help in the “management of social conflicts”. While the institutional framework in developed countries evolves very slowly, the change in institutional arrangements often occurs more quickly in developing countries.
As part of these institutional changes, numerous programmes have emerged which were designed to foster a decentralization of resources and decision-making so as to generate new systems of planning and coordination calling for leadership roles by state and municipal governments, as well as by project beneficiaries. Examples of such programmes include the Integrated Peasant Development Programme (PDIC) in Colombia, the National Solidarity Program (PRONASOL) in Mexico and the National Compensation and Social Development Fund (FONCODES) in Peru. These demand-driven programmes brought together the local population in order to channel social demand for projects to be financed by the programme, as well as to establish a rapport with the municipal authorities responsible for managing the funds, setting priorities and coordinating the works to be carried out. Although several of these programmes subsequently suffered from political biases during their execution, they were broadly recognized as good practices during the first stage of their implementation.
Institutional arrangements that assign resources in response to community-organized demands without having clear targeting mechanisms may fail to reach the poorest segments of the rural sector. This targeting bias may occur within a community or between communities. It will occur because the poorest among the poor may not be able to respond to these demand-driven initiatives. As Escobal and Ponce (1999) point out, this may have been the case of projects like PRONASOL in Mexico. Other projects like FONCODES in Peru were able to develop simple mechanisms to elicit the preferences of such groups.
A number of authors have shown that rural inhabitants in general, and those depending on agriculture in particular, are capable of promoting their own interests if they are able to build institutional networks or if they succeed in forming collective organizations. Producers’ associations, water management organizations and credit unions are just some examples of these efforts. In other cases NGOs, financed by international cooperation, have acted as the “representatives” of rural society. In some cases, such as those mentioned by Preciado (2001) or Zaidi (1999), these institutions have become key political actors in the rural development of certain countries. These institutions have emerged strengthened as they assumed those responsibilities that the state was leaving behind.
However, for most of these institutions, replicability, sustainability and legitimacy have been major challenges that they have been unable to address for the most part. For example, it is now recognized that the role NGOs were expected to play was unrealistic, and that the hope that they would, in time, replace the state in meeting local needs formerly provided by the state was illusory. The growing role given to (or, rather, left to) civil society and NGOs has constituted a major challenge for the latter. As Bebbington (1997) notes, NGOs are experiencing a crisis in terms of institutional identity, legitimacy and sustainability after recognizing the low effectiveness of their efforts to impact rural poverty in recent decades.
Heterogeneity of the rural world
Latin America’s agricultural and rural sectors are unquestionably heterogeneous, both from one country to another and within individual countries. There are, however, certain common features that, while not applicable to all agricultural and rural settings in the region, do represent a significant portion of Latin American rural society:
This description of the rural structure of Latin America should be viewed in a context in which, as noted by Gordillo de Anda (1997), the Latin American economic paradigm is being remoulded. The chief features of this change include: (a) a more competitive environment; (b) greater interdependence between macroeconomic policy and sectoral policies and performance; (c) a more integral approach in which agricultural activities go beyond mere primary production; (d) an increasing division of labour and specialization, with contract agriculture and producers’ associations gaining increasing importance; (e) a greater share of both time and income of the rural population occupied by non-agricultural rural activities; and (f) increased importance of factors associated with natural resource conservation.
A description of rural institutions
At the institutional level, David, Dirven and Vogelgesang (2000) show clearly how during the last two decades policies directed at the agricultural sector were linked to a development paradigm in which the market and the private sector played the leading role, while the state was obliged to limit its participation to productive activities. In nearly all countries, this meant a dismantling of the state’s marketing apparatus, a scaling back or elimination of development banks, a drastic reduction in research and extension activities and changes in regimes governing ownership of land and water. The authors themselves acknowledge, however, that many of the reforms directed at the agricultural sector were implemented later than reforms in other sectors of the economy - and even then, only partially.
Despite these trends and the policy changes they engendered, rural institutions have remained unchanged in many critical respects. Among these are:
Latin American agricultural institutions have tended to devote more attention to protective structures than to seeking greater efficiency in competing in the increasingly global environment.
Public bureaucracies have opted for excessively regulatory systems rather than flexible structures that promote increased investment in the rural sector. This is particularly evident in institutions that regulate the system of land tenancy, though it can also be seen in institutions that regulate access to forestry resources and water.
These same bureaucracies have failed to simplify the regulatory structure that should enhance the link between economic agents involved in the rural sphere. As Gordillo de Anda (1997) suggests, these structures have kept the rural economy isolated from market signals.
One of the bureaucratic problems associated with rural organizations is a lack of continuity, particularly in regards to leadership. The ministers and top directors of the organizations connected with the rural world are constantly being rotated for political reasons. Further, as Piñeiro et al. (1999) point out, central bureaucracies in charge of the agricultural sector in Latin America have gone through a process of reforms that in most cases imply downsizing without a clear idea of what their role may be in the new economy that emerged after the liberal reform of the late 1980s and 1990s. Winters, Corral and Gordillo (2001) note that it is difficult in these circumstances to establish long-term relationships that could help build the social capital needed to create sustainable rural development.
Why are rural institutions unresponsive?
Although there are many reasons Latin American rural institutions have failed to successfully deal with the challenge of rural development, the following may be the most critical:
inadequate provision of public goods, which limits the effectiveness and efficiency of these institutions;
dissociation between the costs and benefits of the rural development efforts they undertake;
asymmetry in the distribution of information, which hinders the democratization of decision-making and the establishment of effective mechanisms to enhance accountability;
high transaction costs, which make it difficult for rural actors - especially the poorest - to participate in institutional arrangements as well as in the markets for goods and factors.
These basic problems, common to most if not all Latin American rural institutions, lead to opportunistic behaviour on the part of individuals and institutions, produce ample opportunities for private appropriation of public goods and foster corruption and individual rent-seeking rather than promotion of the common good. The problems of asymmetry or absence of information, along with high transaction costs, can also be seen in the lack of coordination between the various regional and local organizations and between these organizations and the national government. They also are reflected in the inflexibility of national, regional and local bureaucracies and in their inability to adapt rapidly to changes in rural areas.
At the national level, there tends to be a lack of coordination between ministries. Agricultural ministries generally regard rural development as a strictly agricultural issue, thereby hindering coordination with the other ministries that also play a significant role in questions of rural development. Smith (1997) documented various studies suggesting that the provision of local public goods is given insufficient attention by the central government. So it is that local rural infrastructure - such as the construction and improvement of rural roads, the establishment of small rural electrical power systems or the provision of drinking water on a small scale - is a priority for localities that lack such services, but is ultimately far less important to institutions within the national hierarchy whose priorities are based on the demands of more powerful interest groups.
None of the four reasons cited (insufficient public goods, dissociation between benefits and costs, asymmetries of information and high transaction costs) can be remedied by exclusively market-based solutions. According to Bardhan (1996), successful cases of development in Asia would suggest that the state plays a much more active role than that ascribed by the “Washington Consensus”. Such intervention, in the form of regulation, allocation of credit, industrial promotion and the creation of a development bank, have strengthened rather than replaced the market, leading to coordination in the public sector through an explicit structure of incentives.
Why do bureaucracies fail to function properly?
For Johnson (2000), “Political decision makers do not try to obtain what they want, but rather, learn to want by valuing what they obtain.” Since the process of formulating and implementing policy is complex, attention must be given not only to the institutional structure but also to the behaviour of the social actors who interact with those structures. Such behaviour is associated with what has come to be known as governance.
Governance is a central concept that should be a part of any examination of new rural development institutions in Latin America. The concept of governance has five key institutional dimensions (World Bank, 1994): the executive, the bureaucracy, the rule of law, the nature of the policy formulation process and civil society. Good governance means that the executive branch of government is responsible for its actions (accountability) and the bureaucracy is efficient and sensitive to the needs of society. The legal framework should be capable of adjusting to circumstances and should have consensus support. The process of formulating policy should be open and transparent, so that all affected groups can express their opinions on decisions. Lastly, civil society should be strong enough to be able to participate actively in public affairs, helping to transform a top-down structure into a more democratic and endogenous institutional framework.
Rural institutions in Latin America face a crisis of governance. In general, the executive branch has not succeeded in building consensus regarding the basic strategies for achieving sustainable rural development; the bureaucracies are, in many cases, inefficient and, in others, face constant efforts by interest groups to assume control. Moreover, bureaucracies that operate these institutional structures suffer from the dilemma of those who attempt to isolate themselves from political power, guaranteeing them greater short-term effectiveness but, typically, at the cost of less accountability.
How can this crisis of governance be overcome? Again, greater transparency and a structure of clear rules, in place of discretionality, are key building blocks for the new types of institutions. However, as noted by Bardhan (1996), in the medium term this type of structure can rob bureaucracies of the flexibility needed to deal with an environment of uncertainty.
Failures at the local level
Along with institutional failures in the national government, there are also failures in regional and local governments. Such failures are typically ignored by those who prefer to see decentralization as a panacea rather than as a challenge. As suggested by Bardhan (1996), the state-market debate, the lack of capacity for accountability and the question of legitimacy of local governments are generally not taken into account. In other cases, such as that of Mexico, Fox (1995) suggests that often, despite the fact that the Government indicated clearly the need to establish accountability mechanisms, these were ineffective as long as there was no attempt to change the national power structure toward more democratic structures.
Bardhan (1996) provides evidence suggesting that local institutions work better when their asset-ownership structure is not concentrated in a few hands. Policies and programmes that seek to equalize opportunities contribute to a virtuous cycle involving better institutions and better distribution of wealth. As Bardhan points out, the relationship between distribution of wealth and successful collective action is an area of research that, to date, has received too little attention. The cost of administering certain institutional arrangements is greater in environments marked by greater inequality in the distribution of wealth. In this context, the policy prescription would be very different in countries with more egalitarian income distribution, such as Chile or Costa Rica, compared to countries such as Haiti or Brazil.
Before outlining a number of guidelines for constructing a new institutional framework for the rural sector in Latin America, it is worth emphasising the argument of Gordillo de Anda and Farcas (2000) that redesigning the institutional fabric in order to foster sustainable rural development requires a social pact at the national level that reconciles the interests of different social groups. This pact must seek to link rural and urban sectors, rather than merely focusing on rural development in a limited sense. Such a pact must allow for the creation of institutional arrangements that enhance the potential of markets, while at the same time developing empowering mechanisms for cooperation and joint participation by different social actors. Building this social pact and the new institutional arrangements which arise requires macroeconomic stability, and conversely macroeconomic stability should be reinforced through such a pact.
Strategic pillars: reducing uncertainty and risk while combating rural poverty
One of the central characteristics of inhabitants in rural areas in Latin America is that they generally have very limited capacities to consolidate risks and mobilize resources for risky but highly profitable investments. Rural households are unable to deal with an economic environment characterized by risk and uncertainty due to limited financial and productive assets, low levels of technology, lack of access to insurance and credit and weak enabling institutions. A strategy for building new rural institutions must be aimed at reducing the vulnerability of Latin American rural households to risk and focusing attention on the poorest segments of the population. Such institutional development must allow for the construction of a stable but flexible regulatory structure, while fostering economic and social interaction within the rural sector.
Rural areas deal with this environment of risk and uncertainty with a set of institutions, many of them informal, which constitute a major part of its social capital. The problem with these institutional arrangements is that they more typically take the form of social safety nets rather than networks for building productive assets. One of the most important challenges faced by policy is to transform these institutions into true assets that may foster better linkages with markets.
These institutional innovations must be framed within a context in which rural development policy is a state policy - that is, a policy based on a consensus broad enough to guarantee continuity. Moreover, institutional structures must adopt policies aimed at implementing specially designed programmes or interventions targeted at combating rural poverty. As indicated in the previous section, rural households have a highly heterogeneous structure in terms of assets and capacities and employ diversified income generation strategies. Therefore the content of projects, programmes and public interventions must be designed to include a major local component, so that the intervention can be adapted to the particular context in which they are to be applied.
Public investments need to have a key role in this institutional transformation. Active policies to equalize opportunities through investment in public goods and services by helping establish a more equitable rural sector would enhance democratization of the rural sphere and increase opportunities for cooperation and consensus building.
Core elements of a new rural institutional framework
One critical element in designing a new institutional framework for Latin American rural development is the need to maintain an inclusive approach. Any rural development strategy that ignores the key actors - their interests and conflicts and their preferences for certain institutional frameworks - will have difficulty achieving success. Following the thoughts of Hatzius (2000), it is necessary to develop a broader range of institutional configurations combining the collective efforts of public agencies with civil society organizations in order to ensure more equitable, sustainable and mutually satisfactory relationships among those involved in rural development. The element of inclusion refers not only to individuals and formal organizations, but also to informal and traditional rules. This inclusive approach will work only if the prevalent top-down institutional design is replaced by a more horizontal and democratic approach.
The gender dimension constitutes a second element. While women currently play a fundamental economic and social role at the household and community level, without specific provisions for their incorporation women tend to participate less in rural development programmes. The new generation of social safety nets in Latin American and the Caribbean which specifically target women as beneficiaries, described in further detail in the chapter by Davis in this volume, is a move in the right direction. Further, before establishing a specific programme, it would be wise to include appropriate representation of the interests of all actors, both men and women, at the local, regional and national levels.
A third element is the existence of an authority that ensures and respects the rights of rural actors, while at the same time observing and enforcing established rules. The more such an authority is able to reduce the risks associated with establishing more complete and complex contracts between actors involved in the rural sphere, the greater will be the possibility of laying the foundation for more sustainable and equitable rural development.
A fourth element is a network of organizations that facilitates collective action and reduces transaction costs between different actors. The fewer the number of restrictions on the participation of the poorest and weakest in the rural market for goods and factors, the more these institutions will be able to increase well-being and be socially sustainable.
Reducing problems of information asymmetry is also a key to building more solid, effective and legitimate rural institutions. As part of this process, it is vital to improve the links between local, regional and national institutions. As has been pointed out by de Janvry, Key and Sadoulet (1997), these links help to reduce transaction costs, diversify risks and increase access to broader markets. Finally, as de Janvry, Key and Sadoulet (1997), Hatzius (2000) and others have suggested, it is essential to identify transaction costs that interfere with establishing more fluid rural institutions. The reduction of costs for obtaining information, negotiating contracts and monitoring compliance with such contracts would allow for the emergence of specific institutional arrangements to solve problems in individual rural localities, without the need for a generalized prescription.
The voice of the poor
The difficulty of attending to the needs of the poor using formal institutional arrangements is being increasingly recognized (Salmen, 1990). So it is no surprise that many international institutions have directed their attention at institutional structures that allow the “voice of the poor” to be heard. The idea that it is indispensable that beneficiaries participate in the preparation, design and implementation of rural development projects and programmes constitutes a key principle. However, in order for this participation to move from being merely a democratic gesture to a full institutional arrangement, rural actors must be provided with the capacities and instruments to make their voices heard.
The poor have already their own “access institutions”. In fact, “the voice of the poor” differs from participatory approaches by focusing on what is normally not said and by allowing singular points of view to emerge. “The voice of the poor” is recognition that knowledge is fragmented. It should not therefore be intended as an intentional way of facilitating the participation of the poor in development but rather as acknowledging and valuing the poor’s own institutions.
Although many of the key proposals for sustained rural development are relatively uncontroversial (more and better services in education, health, communications infrastructure, etc.), the priority given to these investments does not always lead to an appropriate allocation of public funds. The absence of strong rural institutions and of opportunities for potential beneficiaries to have sufficient political representation has meant that, in practice, such investments are assigned less importance compared to other investments that are perceived by politicians as more profitable in garnering votes. A more inclusive institutional structure should make it possible to break this process of rural marginalization on the national political scene.
Institutional arrangements and incentive structure
Proposals for institutional arrangements need not be neutral in terms of an incentive structure. In fact, a neutral scheme tends to favour those with more assets and better access to public goods and services. Therefore, Latin American rural institutions need to be structured as a mechanism for creating equality of opportunity. How, then, is one to establish contractual arrangements that provide appropriate incentives? This could be done by achieving greater participation in financing activities linked to rural development, in order to create a sense of ownership in the local community and a willingness to share responsibilities for the operation and/or maintenance of the investments carried out. Participation of the beneficiaries in selecting, implementing, supervising and financing projects ensures that the investments actually address local needs, generate savings and increase local responsibility for the actions undertaken.
One example of this incentive-compatible structure is provided by the PDIC in Colombia. This programme focused on improving the income-generating capacity of participating communities, based on a system of identification and priority checking of community needs based on municipal participation. Through requiring co-financing the programme developed an incentive structure that helped trigger a more efficient behaviour on the part of local stakeholders.
In order for the rural sector to be able to respond to the incentive structure underlying new rural policies, the capacities of the rural population - particularly the poor - and of the associated institutions need to be enhanced. This means improving the allocation of individual, household, organizational and community assets within the rural environment. It is essential, however, to have an appropriate social and institutional environment to initiate this process. As indicated by Berdegué, Escobar and Carney (1999), it is impossible to create a process of innovation in the rural sector without economic growth, dynamic and competitive markets, sound institutions, peace, tolerance and respect for individual and collective rights.
At the same time, the public sector could benefit from incorporating certain practices common to the private sector. One example involves establishing competitive funds for allocating resources in different areas of responsibility (research, technology transfer, tertiarization of public services, etc.). Gill and Carney (1999), quoted by Berdegué, Escobar and Carney (1999), suggest that competition for funds functions properly when: (a) there are sufficient research and development capabilities; (b) the government leads the process of institutional reform toward tertiarization of service, with a clear sense of priorities; (c) those who manage the funds do not implement projects; and (d) management is sufficiently broad-based so that no single individual interest predominates. These competitive funds tend to have a public goal for the project but look to the private sector for a more efficient management structure to achieve that objective. The fund may introduce a subsidy (private firms bid for the lowest subsidy) to generate the proper incentive structure.
However, there are limits to developing structures based on competitive funds. As indicated by Gill and Carney (1999), as well as by Huffman and Just (2000), the fact that competitive funds produce short-term results, along with the need to reduce uncertainty in certain types of spending (such as research and development), suggests the advisability of combining competitive funds with institutional arrangements that require greater state participation.
Flexible institutions to carry out a diverse range of policies
There have been increasing calls for diversified policies to deal with the heterogeneity of Latin America’s rural society. As suggested by de Janvry, Key and Sadoulet (1997), this differentiation could be justified both in terms of efficiency (to address varying market failures) and in terms of equity, if the state decides to intervene to correct detrimental distributive effects. However, it should be recognized that policies can have different impacts either because a given policy has different effects on the various economic agents, or as the result of the existence of differences in policies, programmes or interventions.
There is broad consensus on the inadvisability of using non-differential or universal policy instruments - both macroeconomic, such as exchange rates, and sectoral instruments, such as price supports - to benefit specific segments of the population, due to the leakage of benefits to unintended third parties. Instead, decentralization and the increased participation of social actors within the rural environment opens up major opportunities for rural institutions to employ differential types of interventions, given their enhanced capacity to target the benefits of such policies (such as by excluding those who are not entitled to the benefits).
As noted by de Janvry, Key and Sadoulet (1997), such policies should be consistent with regional and national policies, and interventions should be monitored to prevent the improper diversion of funds within the community based on the local power structure and to the detriment of the poorest groups. The use of co-financing mechanisms, along with active participation by the community and NGOs in decision-making regarding implementation of these various interventions, can reduce these risks. Further, differentiation implies poverty targeting if the poorest segments of the population are to be served. Mechanisms for targeting should be explicit and verifiable and based on objective criteria.
There is ongoing tension between the need for flexible institutions that can adapt to the conditions of a particular environment and the need for solid, stable institutions. For example, the lack of flexibility and capacity on the part of many regional or local institutions has often served as justification for national governments to circumvent these bodies and instead deal directly with the beneficiary institutions or individuals. This type of action, while it can produce short-term benefits, severely affects the viability of local institutions. Heidhues, Karenge and Schäfer (1999) maintain that aversion to change can also be considered to be a positive factor if it leads to the stability and permanence necessary for gaining social acceptance. The constant flow of information between institutions and their potential beneficiaries serves to alleviate the tension between the need for flexibility and the need for stability.
Differentiating between public spending and the public administration of expenditure
The public budget is, in and of itself, an institution. The set of rules and regulations (written and unwritten) that determine the manner in which public spending is allocated is a matter of vital interest to rural institutions. The budget represents simultaneously the political resolve of the state and the real priority given to the rural sector. Recent works prepared by FAO (2001) show that while most of the 12 countries studied increased public spending to the rural sector between 1995 and 2000, this spending still represents a small portion of the overall budget. Only Mexico shows rural spending that consistently represents more than 8 percent of total public spending for a prolonged period, while the median spending for the countries analysed is 2.5 percent.
The study also shows how public interventions in budget and public spending reflect inconsistency in terms of a strategic sectoral or national approach. Therefore it is not surprising that there should be a great dispersion in programmes and projects. There is also a clear failure to develop appropriate institutional arrangements to facilitate negotiation between the various sectoral actors and decision-makers involved in implementing the public budget, as well as institutional arrangements that ensure efficient management and control of public resources. More serious is the fact that most of the studies conducted under this initiative conclude that a major portion of the resources are directed at programmes with dubious social benefit.
Complementarities of public interventions
The importance of the allocation and complementarity of assets (physical, public and human and social capital) in determining strategies for generating income and raising the living standards of the rural population is widely recognized. Evaluating the efficacy of institutions in terms of a specific geographic impact provides a highly useful approach to gauging the direct and indirect impact of different projects and programmes interacting simultaneously (see, for example, Escobar, Milicevic and Berdegué, 1999). One of the main conclusions to be drawn is a recognition of the importance of the complementarity of institutional arrangements in the success of individual actions undertaken.
The positive impact of demand-driven institutional arrangements may be limited by the lack of a coherent strategy that contemplates the overall benefit of complementary interventions. This seems to be the case with otherwise good initiatives like those promoted by PRONASOL in Mexico or FONCODES in Peru (as noted in Escobar et al., 1999). Further, there is still little experience in developing good evaluations of rural investment in complex or multi-objective projects. In order to pursue rural strategies that privilege complementary investment interventions, the importance of evaluation needs to be recognized and evaluation capacity needs to be developed. This idea is discussed more fully in the chapter by Davis in this volume.
Decentralization: potential and limitations in promoting rural development
The uncertainty and risk that characterize Latin America’s rural environment, as well as the differences in geography, history, ethnicity and access to markets, public services and infrastructure, account for the complexity of local responses and the great diversity of activities they generate. In light of this (and as indicated earlier), there is a need for flexible institutions able to carry out a range of policies with knowledge of the local circumstances. Such flexibility is often difficult to find in centralized structures.
The decentralization efforts that have become more widespread in Latin America during the last several years are a response to democratization initiatives as well as to recognition that national bodies often lack the capacity to deal with the challenges of local development. The transfer of responsibilities to sub-national bodies is justifiable in terms of efficiency and equity. However, what to transfer and how to accomplish this are questions still in the process of being resolved. As indicated by de Janvry, Key and Sadoulet (1997), there is little doubt that functions that can be carried out at less cost, with higher quality and more participation, should be transferred. The more involved the local actors are, the greater is the chance that the resources will be managed more efficiently.
However, the lack and asymmetry of information (as described in the previous section) prevents the development of transparent local oversight mechanisms to enhance the efficiency gains that should logically result from decentralized institutional arrangements. According to Van Zyl et al. (1995), greater decentralization - both in the fiscal realm and in regard to decision making on national investment directed at the regional and local levels - is essential in order to ensure management that is more efficient and more transparent to local users. However, although decentralization offers the possibility of creating an incentive structure that addresses local needs, such efforts are not a panacea. Decentralization must be supplemented by mechanisms to enhance coordination with the national government, both to ensure consistency with regional and national policy and to prevent the risk (indicated earlier) of strategic local allocations based on the local power structure working to the detriment of the poorest groups.
Step by step
Despite broad recognition of the difficulty of building institutions and the need for flexible structures, in practice institutional changes in Latin America’s rural sector have occurred in spurts, in response to abrupt changes in the alignment of forces among social actors. The idea of introducing a scheme for gradual institution-building is critical, although there are very few cases - one such being the Project on Rural Development in Southern Lempira (PROLESUR) in Honduras, reported by Winters, Corral and Gordillo (2001) - where this has been put into practice. After meeting its initial objective (improve the production of staple crops), the project expanded to other agricultural activities, including production of animal products and horticulture and ultimately non-farm activities such as the processing of agricultural commodities. Constructing institutions little by little, building upon previous successes and taking into account prior failures, would foster a long-term approach not generally seen in the region.
This is a valid approach not only for building organizations, but also for designing and implementing programmes, projects or interventions. It is advisable to begin with a pilot programme, including a well-designed evaluation (again as described in the chapter by Davis), and learn from experience before expanding to a regional or national scale. In order to institute this in daily practice in Latin America’s new rural institutions, it is necessary to build consensus regarding the legitimacy of the actions undertaken by employing a long-term approach. A number of examples of this approach are discussed in the chapter in this volume by Davis, including the National Programme for Education, Health and Nutrition (PROGRESA) in Mexico, the Family Allowance Programme (PRAF-II) in Honduras and the Social Protection Network (RPS) in Nicaragua.
Some positive experiences
Several institutional experiences bear more detailed examination in order to determine whether they are replicable in other rural settings in Latin America. In terms of large projects aimed to the rural sector we should mention two. One is the experience of PROGRESA in Mexico; the second is that of the Rural Social Welfare System of Brazil. The first of these is an education, health and nutrition programme, created in 1997, whose ultimate objective is to stimulate (on the demand side) investment in human capital in the country’s poorest localities and households. It attempts to break the inter-generational cycle of absolute poverty associated with high levels of fertility, malnutrition, infant mortality and school desertion, factors that are especially important in Mexico’s rural areas. PROGRESA’s guidelines reflect the effort to systematize previous experiences and incorporate new approaches more compatible with sustainable rural development, such as: targeting of actions; viewing families as the medium for united action; employing a gender approach; co-responsibility; providing structural help rather than aid; promoting participation by the community and by local officials in planning and monitoring; utilizing an integral approach (education, health and nutrition); seeking complementarity with other programmes; coordinating between different levels of government and federal departments; and emphasizing the importance of monitoring projects and conducting impact assessments.
The positive impact of PROGRESA has been widely documented. Attanasio, Meghir and Santiago (2002), Behrman, Sengupta and Todd (2002) and de Janvry and Sadoulet (2002), among many others, have shown that conditional cash transfers have important welfare benefits for the rural poor. However, as noted by de Janvry and Sadoulet (2002), there are still questions regarding efficient use of the resources invested. Further calibrating transfers to incentive levels may improve efficiency gains.
Brazil’s Rural Social Welfare System has it roots in the 1970s, with the first attempt to extend social welfare protection to rural workers. Later, efforts were made to form a social welfare system to eliminate the disparities in treatment between urban and rural workers. It was successful in establishing a universal social welfare system for workers in rural areas (men and women), incorporating workers from the informal sector as well as those working in the family economy. It also standardized the minimum benefit received by urban and rural workers (set at the minimum wage). Although the establishment of the rural social welfare system does not produce immediate changes in the productive structure of the rural economy, it is a key element in providing income stability in the rural sector. During the 1990s Brazil added a series of conditional cash transfer programmes. As Costa Delgado (1999) shows, the Rural Social Welfare System of Brazil has succeeded not only by increasing the welfare of the poorest segments of the rural sector but also constitutes a key element in developing a sense of inclusiveness throughout rural Brazil.
Another important institutional innovation of the 1990s are the Social Investment Funds, which are very good examples of introducing accountability, minimizing corruption and political influence and fostering participation from local communities. Rawlings, Sherburne-Benz and Van Domelen (2001) use the examples of several Latin American countries (Bolivia, Honduras, Nicaragua and Peru) to show that demand-driven programmes such as social funds that rely on communities to define investment priorities can, when properly designed, be very effective in reaching the poor, particularly the poorest of the poor. However, even well-built social fund infrastructure cannot improve living standards unless other sectors complement these investments.
At the national level it is also important to review the experience of Brazil. In 1999 Brazil created the National Committee for Sustainable Rural Development (CNDRS) with Ministry status. Its mission is to create a broad national forum to achieve consensus on main priority investment areas for rural development, as well as to devise the best ways to decentralize the execution of its actions at the municipal level. The CNDRS started by covering three critical areas (strengthening of family agriculture, access to land and rural economy diversification) and as a result of the process of constructing consensus between its members, added a fourth area (rural education) in 2002. The idea of having a coordinating body at the cabinet level responsible for analysing and modifying public policy at the national and federal levels for the purpose of achieving rural sustainable development deserves close attention and may be considered as an alternative to the option of extending the authority of the typical Ministry of Agriculture to cover the much broader scope of rural development.
The building and adaptation of an institutional framework for Latin America’s rural sector will be a massive, slow and complicated process. Along the way, continued input will be needed from those studying the sector from the vantage points of different disciplines and approaches. One of the first priority areas should be that of systematic analysis of the institutional innovations occurring in the region so as to produce feedback and gain experience from their success or failure.
The literature associated with the “new institutional economy” has laid the foundation for improved understanding of how and why institutions operate. Conceptual frameworks related to theories of public choice, transaction costs and the principal-agent theory should be put into practice. This would facilitate a better understanding of the incentive structure that underlies Latin America’s rural institutions and make it possible to assess which mechanisms would be appropriate in each case.
In terms of achieving better institutional designs, a study of independent transactions as a mechanism for establishing contractual relationships (in order to promote incentive structures with lower transaction costs) would be a valuable subject for further research. On this topic, Dorward et al. (2001) and Poulton et al. (1998), quoted by Schuetz (1998), show that interdependence between the provision of inputs and the points to which production is directed can produce incentives for small producers, provided they are properly organized. The viability of, and the conditions required for, this type of transaction in Latin America’s rural settings remain to be studied. As suggested by Dorward et al. (2001), it is also important to establish limits for this type of arrangement where the development of competitive markets could be affected.
There is also a need for further research on the private sector’s role in financing and producing public goods and services that are provided (or that might be expected to be provided) by local governments. Privatization and the concession of public services at the national level or for the main capital cities have received considerable scrutiny, including extensive examination of their advantages and limitations. However, there has been little effort to explore the private sector’s potential role in investing in the provision of services not being provided in the quantity or with the quality required by the rural sector.
There also needs to be a better understanding of the relationship between distributive conflicts and institutional arrangements. Bardhan (2001) explores this issue on a conceptual level and shows how such conflicts could prevent institutions from transitioning to a form more compatible with sustainable development. Knowledge of this issue applied to the particular characteristics of the region could contribute significantly to understanding the relation between inequality in the allocation of assets in a given rural setting and the chances of generating successful collective action.
It is clear that the state needs to promote institutional arrangements and public interventions that reduce transaction costs in order to provide more successful connection among rural households and with the markets for goods and factors. However, there has been little empirical research on how to compare institutional arrangements and how to measure the respective costs of different arrangements.
One last area where further research is needed involves the identification and construction of institutional performance indicators. Long-term objectives include overcoming rural poverty, achieving sustainable rural development and reducing and/or mitigating vulnerability and uncertainty in the rural sector. Therefore, each institution involved in this task needs to identify strategic indicators for measuring efficiency and effectiveness in the use of public resources for rural development. Such performance indicators become, for all involved, the cornerstone of an effective system of accountability - or, as Johnson (2000) suggests, a professional public bureaucracy that uses standards and direct performance indicators and that emphasizes monitoring of products, rather than of inputs or processes. In order to build on the basis of experience a set of institutional performance indicators, it is vital first to systematize experiences in building organizations in Latin America’s rural sector.
Sustainable institutional building in any context is not an easy task. It is not a top-down activity and it may well be a much less intentional and controlled process than we may like to believe. The particular characteristics of rural Latin America make this challenge even greater. There has been an emergence of rural institutions to take up the very necessary functions left unattended by the state, although the shape and characteristics of this institutional fabric are clearly not well-suited for following a sustainable and equitable path for rural development.
At the core of these institutions’ inability to deliver the public goods expected of them is a dissociation between the costs and benefits of the rural development efforts they undertake, the asymmetry in the distribution of information they deliver, which hinders the democratization of decision-making and the establishment of effective mechanisms to enhance accountability; and the high transaction costs they generate, which make it difficult for rural actors - especially the poorest - to participate in the institutional arrangements developed, as well as in markets for goods and factors.
In a context where reducing uncertainty and risk while combating rural poverty should be the strategic north for rural development in the region, a key element for overcoming these institutional failures is that of pursuing a more inclusive approach to rural institution-building. Any rural development strategy that ignores the key actors - their interests and conflicts, and their preferences for certain institutional frameworks - will not work. This does not mean that there is no need for some sort of leadership. On the contrary, the existence of an authority that ensures and respects the rights of rural actors, while at the same time observing and enforcing the established rules, is also a key element for constructing this new institutional fabric.
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[3] The author is Principal
Researcher at GRADE en Lima, Perú. The author would like to acknowledge
the comments on an earlier draft of this paper provided by Benjamin Davis, Ruben
Echeverría and Maria Grazia Quieti. The author is responsible for any
remaining errors and the views expressed in this paper. [4] In this regard, see Hatzius (2000) and Kähkönen (1998). Although our definition of institutions is broad enough to cover "organizations" (i.e. groups of individuals bound by some common purpose to achieve specific objectives) in order to contribute to policy research, we will be differentiating where appropriate between organizations and other types of institutions. |
