Transaction Costs and the agricultural Contract

that endogenize transaction costs, the neat division between distribution and efficiency matters enshrined in the Welfare Theorems, is lost. Any choice of institutions is not only limited by initial distribution of power, but also entail an implicit distributional choice.

DAHLMAN sees the function of property rights as (PAPANDREOU 1994:223):

„determining income or wealth distribution, on the one hand, and also serving as signals for behavior, thereby guiding incentives, on the other. If we accept the view that institutions are really nothing but specific collections of attenuated property rights, then it follows that institutions are also tied up with both income distribution and incentive formation. the relative efficiency of various institutions now becomes dependent upon our ability to rank various income distributions“⁹³.

3.1.3.3 Transaction Costs and the Agricultural Contracts

EGGERTSSON (1990 :213-4) refers to three elements that are important for the coming analysis and illustrate how the NIE approaches the study of economic organization. First, it is assumed as a working rule that low-cost organizations tend to supersede high-cost ones.

Second, when high-cost organizations appear to persist and it seems that reorganization would increase net output, the search will be for hidden benefits at unexpected margins.

Such offsetting benefits may involve a reduction in supervision costs or an increase in output in a related activity when a nexus of contracts ties several activities, or a host of other factors. Costly behavior is also constrained by contractual stipulations. Finally, if the search for hidden benefits or contractual constraints is in vain, the search will be for political constraints that block the rearrangement of property rights. It is recognized that the polity may not adopt output-maximizing property rights if the new structure might cause distributional losses for those who control the state. And according to Neoinstitutional economics, high (transaction) costs of collective action are the principal reason why the members of a community cannot agree on new rules that would increase the community’s aggregate output.

93 Transaction costs theory, based on the economic history, has very interested contribution to the topic Slavery, as production form in the agricultural societies. DOMAR argues that this form is possible only when the cultivable free land and available labor force’ ratio is very high. In this case the non-working landowners will try to tie up the labor force (LÖCHEL 1995:76). Taking the market in the background, this criterion, rising labor/land ratio, has been linked by BOSERUP and others to the emergence of individual property rights in land. It is therefore no accident that the British legally codified individual property rights for India, but not for their sparsely African colonies (BINSWANGER and ROSENZWEIG 1986:535). In this respect, NORTH has argued that that changing structure of transaction costs made slavery an inefficient institution. Efficiency gains could be made by owners if they changed from slave labor to wage labor. By shifting to wage labor the farm-owners could drastically reduce enforcement costs. The point as viewed by PAPANDREOU is that institutional change does not require efficiency gains to be initiated, it requires gains to the initiators of change, which may or may not coincide with an overall increase wealth, and would surely leave many potential efficiency gains untapped. Furthermore, whatever efficiency gains are made they are intimately tied to a distribution of wealth. An institution can be said to be efficient if it best attains some welfare goal. For a more detailed discussion of institution of slavery, income distribution, and efficiency see EGGERTSSON 1990:203-13; PAPANDREOU 1994:223-6; and LÖCHEL 1995:75-81.

Sharecropping or share tenancy is an contractual arrangement involving rights to the use of land and is a traditional form of organization in agriculture. It was traditionally considered that this form, in addition to the open-field system, is inefficient and therefore inferior to other available forms of organization like wage contracts and fixed rental contracts. It is inefficient in achieving optimal resource allocation because it reduces tenants’ incentives to apply their own labor and other inputs (Marshallian inefficiency).

The sharecropper will have less incentive to increase production as long as he receives only a fraction of the increase in output. Thus he would tend to under supply various inputs and would equate only a fraction of the marginal value product of a variable input to its opportunity cost (see the case of cotton production in New Halfa Scheme, Chapters 5.4.2 and 6.3.3). That is why some economists link economic stagnation in third world countries to the prevalence of share tenancy in their agriculture(EGGERTSSON 1990:223).

The paradoxical status of sharecropping in conventional analysis has bee undermined recently by the new land-tenure economics started by CHEUNG and elaborated by STIGLITZ, NEWBERY and others. In his 1968 article, CHEUNG argues that equilibrium contracts usually have several dimensions, and the puzzle that share tenancy poses for neoclassical economics can be solved by endogenizing the structure of contracts. His model, which derived with the assumption of zero transaction costs, suggests that share contracts need be neither irrational nor inefficient, but the demonstration that various types of contracts can give equivalent outcomes does not explain why one type is preferred to another or provide a theory of contracts. A theory of contracts must take account of transaction costs. Latter (1969) CHEUNG develop his point further and argues: „The choice of contractual arrangement is made so as to maximize the gain from risk dispersion subject to the constraint of transaction costs (EGGERTSSON 1990:226).

According to the new land-tenure economics, if contractual terms can be enforced costlessly, equal efficiency will be established between share tenancy and other forms of land tenure such as fixed-rent tenancy and owner farming. Marshallian inefficiency depends on whether there is a low-cost mechanism in rural communities to enforce the contractual terms of share tenancy. Taking the optimizing behavior of landlords in consideration, land rent under share tenancy is expected to be higher than that of fixed-rent tenancy by a premium for risk and enforcement cost shouldered by landlords. Where the enforcement cost is excessive, fixed-rent tenancy will be preferred to share tenancy if both are available options (MOROOKA and HAYAMI 1989:28). From the other side, it must be remembered, argues EGGERTSSON, that the introduction of enforcement costs influences all forms of contracting. In short, transaction costs are the key variables for explaining the variation in contractual arrangements in agriculture.

3.1.4 Institution Building (Institutionalization)

Like Institutional Development (ID) or institutional innovation, Institution Building (IB) is one of the necessary approaches to improve the performance in any agency⁹⁴. It analyses

94 An assessment of the World Bank’s twenty years experience with rural development has examined the factors that significally affected the success or failure of a project. It was found that by and large there has been some loss of efficiency associated with the rural development lending strategy and that successful rural development presents major challenges for governments of which local organizing and institution building are the most challenging (DONALDSON 1992:111).

linkages of various sorts between the institution being considered and its environment, and how to promote a process of ‘institutionalization’ that gives an organization like an irrigation bureaucracy more than narrowly instrumental capacities to achieve objectives.

UPHOFF (1991:205-6) refers to the view that institutionalization is always a matter of degree, referred to by PARSONS and latter by HUNTINGTON (Chapter 1.2.1), and argues that the capacity of an institution (or agency) to achieve objectives derives from its ability to mobilize and deploy a variety of resources associated with gaining compliance with its directives. Moreover, there are direct relationship, in the same direction, between the degree of legitimacy and status (respect) that people accord to an institution and its decisions from the one side and the forthcoming acquiescence and acceptance of these decisions from those people and, therefore, their ability to achieve the institution’s goals in the other side. This fact will explain the behavior of tenants farmers in the two cases of this study (Chapter 6.2 and 6.3)

Resources in IB model, as viewed above, are treated as one of five key factors in creating capacity. The other four are leadership, doctrine, program, and internal structure. The vision of resources here is not restricted on the ‘hard’ resources (goods and services or coercion) but compasses also the legitimacy and status as ‘soft‘ ones, being based in people’s attitudes and values. The IB model, as discussed by UPHOFF, recognizes that what makes an organization into an institution is the valuation it receives from the public, resulting in respect, loyalty, commitment and other supportive behavior based on norms: „Managers who want to improve the performance capabilities of their agencies will plane and carry out their activities with an eye to how these can enhance the status and legitimacy of their agency, its staff and its program, in the estimation of the various groups on whom it depends for a steady flow of resources and for compliance to achieve its objectives“.

Analysts of Institution Building have distinguished several types of linkages that managers need to concerned with UPHOFF (1991:207-9):

(1) Enabling linkages provide the necessary resources (authority and funds in particular) that permit the institution to operate;

(2) Functional linkages represent the working relationships that any agency must maintain with other institutions or groups, such as cooperative arrangements with the Ministry of agriculture or Extension Department to coordinate irrigation activities with agricultural ones, or liaison with water user associations where they exist;

(3) Supportive linkages include interactions with various organized sectors of the public whose backing will strengthen the hand of an institution when dealing with decision-makers and others who control the resources needed to accomplish the institution’s tasks;

(4) Diffuse linkages refer to communications and liaison with the public at large, to build up broad approval which will create a favorable climate of opinion, for example, through the press. Forecasting and sustaining the last two linkages are necessary for improving managers’ ability to maintain and benefit from the first two.

One main objective of institution building projects is to create an organization that is responsive to the needs of the society around it in some degree. It should help solve the problems of that society. Within this context, an organization becomes institutionalized, i.e., it becomes a valued object (POTTER 1972:152-5). Institutionalization as defined by

ESMAN and BLAISE is „the process by which normative relationships and action patterns are established.“ PARSONS, et al; use the term institutionalization to mean „the integration of the expectations of the actors in a relevant interacting system of roles, with shared normative patterns of values. The integration is such that each is predisposed to reward the conformity of others with the value pattern, and conversely, to disapprove and punish deviance. Institutionalization is a matter of degree, not of absolute presence or absence“. The focus in both cases is on establishing and integrating patterns of interaction so that they become expected and valued. For institution building to take place, as Potter argued, these patterns of interaction must occur between the organization and its environment.

Institution Building accompanied with a project⁹⁵needs high coordination and interaction between all organizations that are related to the project. Two concepts are introduced here as important for understanding such interaction; the totality of action - working in concert toward a common objective, and reciprocity - as you do something for someone else, he becomes obligated to you, that means he will help you. This exchange is very important aspect of the establishment of effective working relationships.

Going a step further to apply these concepts to the institutionalization of organization, Potter counts, from the traditional and recent tests of institutionality, four indicators for the degree of institutionalization: the organization’s ability to survive, the extent to which it is considered to have intrinsic value by its environment, the degree to which specific relationship and action patterns of the organization have become normative for other organizations of the society, and more recently it has been added whether the institution can maintain its innovative thrust. In addition, he talks about three classes of indicators having to do with institutional development. One is the kinds of inputs the institution receives from the society. Second, there are outputs that the institution provides to the society. The third class are the facilitating mechanisms that the institutions must have to provide these kinds of outputs⁹⁶.

A point here that of particular relevance is that institution building has contributed to our understanding of the institutional transfer process. The possibility of borrowing institutional innovations either through processes of diffusion or through organized programs designed to transfer institutions across social, economic, and political constituencies reduces the cost of institutional change. Modern history has witnessed transfer of different forms of institutions among countries. Inappropriate institutional transfer results in biases in the supply of institutional change that are similar to the biases that inappropriate technology transfer introduces into the supply of technical change (RUTTAN 1978:353).

95 The case examined by POTTER is an technical assistance-institution building project.

96 A re-examination of ESMAN and BLAISE’s definition of institution building (POTTER 1972:156) shows, argued Potter, that they have not ignored output, as they refer to physical and/or social technologies. They state that „the introduction of new technologies takes place primarily in and through organizations....institutions as used in this context are organizations which incorporate, foster and protect normative relationships and action patterns, and perform functions and services which are valued in the environment.“ Nor have they ignored the element of input, although it is less apparent in their definition.

They state, „if there is deliberate planning and guidance of institutional change concomitant with induced technological change, then this will lead to a more effective utilization of the society’s resources.“ They view the institution and its environment as parts of a system.

Literature of institution building has evolved out of an effort primarily in the field of public administration, to provide technical assistance agencies with an effective methodology for intervention to induce more effective institutional performance. This body of knowledge has typically adopted an explicitly normative orientation toward institutional change.

Thereby the test of effective institutionalization is the normative impact of the organization on its setting. The institution-building literature, therefore, exhibits a pervasive concern with the problem of transferring particular organizational forms from the developed to the developing counties and with the institutionalization of capacity for technology transfer and innovation.

Institution building approach, at the same time, has been criticized on the grounds that it give no more explicit attention to the development of a typology by which opportunities for appropriate institutional change can be differentiated on the basis of both technological and environmental characteristics. As example, in this connection, RUTTAN (1978:354) refers to SIFFIN’s critique who argues that it is easier to institutionalize an organization that focus on developing technology than an organization that is not technology-centered.

He points out that the relatively „closed-system“ quality of many technologies means that the behaviors they require are quite particular to their operations and not common to the socio-cultural system at large. On the other hand, where there is no closed-system technology, as in community development efforts, effective institutionalization may be exceedingly difficult to achieve.

3.1.5 Organizational Change and Organizational Development (OD)

Two interrelated trends can be identified as emerging from the review of analytical framework conducted in the last two Chapters. First, the shift away from deterministic forms of explanation and towards explanatory logics which emphasize the crucial importance of human agency in shaping organizational structures and practices. There is a growing recognition that of the fact that human agents both individually and collectively enact social and organizational structures by engaging in forms of reasoning and action which transform the conditions under which they act. A second strand of development can be identified in the refocusing of attention on the problem of control. Within the problematic of control, „organizations“ are redefined as power containers supporting institutionalized structures of dominations and regulation, rather than functional units buttressing the established order, the legitimacy of which can be automatically taken for granted⁹⁷ (REED 1992:184-5).

The particular emphasis on the dynamics of control, as REED (1992:186-7) concludes, has also given encouragement and support to perspective and programs geared to the analysis of change and transformation in organizational forms. In contrast to the previous view - organizations are seen as relatively fixed and permanent features of the institutional landscape, change and the inevitable uncertainty and instability that it generates, is now seen as an integral component of complex organization. The shift away from order and permanence towards control and change has also favored a reorientation of theoretical development in which the politics of organization, rather than the technicalities of formal structural design, now play a strategic explanatory role. Indeed, this shift has strengthened the shift towards a more well-developed institutional focus in organizational analysis.

97 For a succinct review of this analysis see REED 1992.

In the light of this, and the analysis that has been dealt with in this Chapter, we conclude that organizations and institutions are not invariant; they vary with time and location, with political arrangements and structures of property rights, with technologies employed, and with physical qualities of resources, commodities, and services that are exchanged.

Institutional change, as discussed above, means also a change in the organizations in order to carry out the social functions more efficiently and in an improved way and to realize more effectively the organizations’ goals and those of the members and of external groups (MANIG 1989:32). OD according to this analysis then means improving the discharge of functions and change at the various levels (members, goals, organizational structure) and fields (values, norms, processes). It regards the normative factors not as abstract things but as personalized, motivating forces affecting organization’ performance (UPHOFF 1991:188)⁹⁸. OD then must concur with institutional change.

Any strategy of organizational change in developing countries, as stressed by HAGE and FINSTERBUCH (1987:3-4), must confront the political realities and cultural values which influence the organization. They refer to OD (or human relation) as one of three schools of organizational change which focuses on individual morale and motivation. It emphasizes changing employee attitudes, group processes, and job designs by means of training, group discussion, and problem-solving groups. The other two schools are organizational theory (the sociology of organization); and organizational design (Management). Organizational theory emphasizes restructuring the organization in the direction prescribed by contingency theory (a dominant perspective in both this and organizational design), as best suited to achieving either efficiency or innovativeness in its market situation. It usually utilizes the change tactics of decree, data collection, group discussion, and restructuring.

Organizational design, in turns, emphasizes improving strategic planning, changing structures for greater efficiency, and improving managerial technologies. It favors the change tactics of decree, group problem solving, and restructuring.

HAGE and FINSTERBUCH (1987:277-8) stress power issues; the role of the influential people and problem-solving groups, in inducing organizational change. If these influential have no interest in productivity, efficiency, innovation, or adaptiveness, then, they argued,

HAGE and FINSTERBUCH (1987:277-8) stress power issues; the role of the influential people and problem-solving groups, in inducing organizational change. If these influential have no interest in productivity, efficiency, innovation, or adaptiveness, then, they argued,