Microeconomic impacts: market and household specific impacts

between infrastructure and external economies, and how these investments shape market and producer behavior. He recognized that agricultural development was not exclusively determined by the "economizing behavior of farmers" but was also determined by the "economizing setting", which, according to him, was made of physical-climatic, socio-cultural and institutional components, that formed the so called "agricultural infrastructure". Wharton (1967) divided

Agricultural Infrastructure in three types: capital intensive (like roads, bridges or dams); capita-extensive (mainly services like extension or agencies for plant and animal health); and institutional infrastructure (comprised of formal and informal institutions). A key point here is that the development of infrastructure accompanies the development of markets, the movements toward specialization, division of labor, monetization of production and purchase of inputs Wharton (1967).

Fosu, et al. (1995) established that to analyze the microeconomic channels, through which public infrastructure affects rural development and rural poverty, we need distinguish between direct effects and indirect effects. The first one come about when public infrastructure increase output by shifting the production frontier and marginal cost curve, and by increasing the rate of return of private investment in rural activities. Other public investments change the relative price structure of inputs and outputs, reducing their transaction costs, and generating a completely different set of price signals that reshape the connection of producers with the market. These connections may occur at the market level, through lower transaction costs, higher spatial market integration and changes in relative prices. These connections may also occur at the household or individual level, as a response to these market changes. In this later case, household specific impacts may be related to changes in factor allocation (labor allocation, land usage, crop choice or input mix) or changes in marketing patterns (sale mix or marketing channels).

Although many authors have recognized that infrastructure related externalities play a role in rural development, there is very little empirical work that backs this proposition at the microeconomic level. If these externalities are related to livelihood strategies, empirical work that evaluates how rural household with different asset compositions generate differentiated livelihood strategies may allow us to evaluate the presence and importance of such effects.

2.3.1 Market specific impacts: the role of transaction costs

Institutional Economics has championed the idea that market transactions are not costless.

Aside from the transport costs, buyers and sellers have to communicate to establish contact and then to bargain, agree and execute a particular transaction, while developing mechanisms to check and enforce the delivery and payment of goods and services to be exchanged.

Williamson (1979), North (1990), among others, have shown that transaction costs are influenced by context in which the transaction are performed. Although the institutional environment (the rules of the game) and institutional arrangements (the specific arrangement that people set up for a particular transactions) are the two major influences on transaction costs and on the risks of transaction failure, infrastructure also plays a key role facilitating or obstructing a market exchange. In an extreme situation the lack of a particular infrastructure service (i.e. a road in good condition or a telephone) may increase transaction costs to a point that it makes prohibitively costly to perform a particular transaction.

Infrastructure services affect transaction costs and through them, affect market development. De Janvry, et al. (1995) shows for México maize producers that insufficient

infrastructure among other key factors will increase transaction costs and determine that a majority of these producers may not be producing for the market and consequently may not be directly affected as producers by policies that affect the price of maize. Holloway, et al. (2000) shows how the provision of infrastructure (measured by time to transport milk to market) hinders participation. Bayes (2001), for example, shows how telephones can be turned into production goods, lowering transaction costs and boosting market development in Bangladesh.

Other works that convincingly report how transaction costs affect market development are those of Omamo (1998), Key and Runsten (1999) and Crawford, et al. (2003).

Rural infrastructure also plays a major role shaping markets trough the reduction of transport and transactions costs by improving spatial market integration. If transportation and transaction costs are low, marketing integration is possible. If not, autarchy will prevail. Badiane and Shively (1998), Kuiper, et al. (1999), Abdulai (2000), among others, have used multivariate cointegration techniques to estimate the degree of spatial market integration. These studies have shown that some markets may respond faster than others when they are affected by some exogenous shock. However, what factors are behind these results is still something that has not been sufficiently researched.

Although the theoretical literature on transaction costs is very extensive the literature associated to measurement of transaction costs is scarce [Boerner and Macher (2002), Wang (2003)]. Recently Renkow, et al. (2004) have estimated fix transaction costs (that is those costs that do not depend on the volume traded) that may prevent access to market to certain producers. Using information of subsistence farmers in Kenya, these authors consider that these transaction costs represent an ad-valorem tax equivalent to 15%. It is somewhat strange however, that the fixed transaction costs are not substantially higher in those zones where access the relevant markets using trucks with respect to those zones where do so using non-motorized transport (like bicycles or mules). The fixed transaction costs associated with these two groups are equivalent to 15% and 11%, respectively; although this difference is not statistically significant. This would have happened, in our opinion, because the sample design did not put care in segmenting producers according to the type of road access.

2.3.2 Household and farm specific impacts

A suitable access to public infrastructure would also have an effect on farm and individual behavior, affecting productivity through technology adoption, input use, crop choice or labor intensity both within agriculture as well as in non-agriculture related activities. During the last few years there has been a wealth of papers looking at how infrastructure investments affect productivity through these channels.⁴ Besides the seminal work of Binswanger, et al. (1993),

4 It is because of this fact that although we deal with this issue in chapter 3 and chapter 7, we do not address the effect of infrastructure on technology adoption and input use in much detail in this study.

which we already mention (which shows how infrastructure investments shape input usage, credit demand and technology choice) many other authors have looked recently at the effect of infrastructure investments on productivity through these channels. For example, regarding technology choice, Dalton, et al. (1997) shows the importance of rural infrastructure in determining production costs and shaping the substitutability between labor, biochemical inputs and capital. In the same area, Ann Hollifield, et al. (2000) show how infrastructure investment in rural telecommunication affects local adoption of new technologies. More recently, Gockowski and Ndoumbe (2004) shows that unit transportation costs significantly decrease the probability of adoption of intensive monocrop technologies and Spencer (1994) shows that the appropriate set of agriculture technology, that is, input efficient, needs to take into account the scarcity of infrastructure, especially rural roads and irrigation systems. Regarding the effect of infrastructure on input mix we should also mention the work of Obare, et al.

(2003). Their work establishes that farmers facing high farm-to-market access costs commit less land, fertilizer and machinery resources to production, but more labor.

Several papers can be reported that have studied how infrastructure investment increases agricultural productivity. Recent studies like that of Mamatzakis (2003), for Greece, show that the public infrastructure operates as complement to private assets and to key inputs but that it may substitute farm labor. This finding is interesting because it shows that the access to infrastructure services may favor intensification processes that are capital and input intensive, reducing agriculture labor demand, which will be repositioned into the labor market as non-agriculture related activities expand as rural markets behave more dynamically thanks to infrastructure development.

On the output side, Pingali and Rosegrant (1995) provides evidence regarding how agricultural commercialization and diversification processes are affected by rural infrastructure availability, while Omamo (1998) shows how better infrastructure endowments affects transaction costs and promotes specialization.

Given that most rural households are engaged in multiple economic activities, either related to agriculture or non agricultural activities (associated to waged-employment or self-employment sources), it is no wonder the access to public infrastructure also affects the labor allocation within the household (diversifying livelihoods). This diversification can be the result of the need to cope with unanticipated risks in a context where the credit and insurance markets are either underdeveloped or even nonexistent [Zimmerman and Carter (2003) or Ellis, et al.

(2003)] or, alternatively, it can be due to the existence of entrance barriers to more profitable labor markets product because of insufficient private or public assets [Reardon, et al. (2001)].

In either case, the access to public infrastructure can have both a direct and indirect role in enhancing the opportunities for income generation of the rural poor.