Institutions and Human Capital

Economic reasoning sometimes suggests that policy reform packages can be organized around the concept of correcting market failures. The concept of market failure is complementary to the framework of farmers' incentives, resources and access, since the effort to make improvements in each of those areas would involve correcting the corresponding market imperfections. In many cases, policies and programs designed to improve incentives and correct market failures involve strengthening institutions. For example, improving small producers' access to credit, and reducing the interest rates they pay at least somewhat, often requires development of new kinds of private rural credit institutions and changes in financial regulations. Likewise, an effort to improve access to land may require legislation that more clearly defines property rights or establishes new rules of the game for land tenure, and it also usually requires strengthening local land registries and sometimes requires new financing mechanisms for land purchase and improvements in rental markets as well. Agricultural technology delivery systems are undergoing profound institutional change throughout the developing world, as discussed in Chapter 8.

In most circumstances in developing countries, an agricultural strategy is incomplete if it does not review the role of human capital, which deserves emphasis of its own in a strategy, apart from the other basic resources. Theodore Schultz has put the matter in the following way:

The decisive factors of production in improving the welfare of poor people are not space,

An evaluation of the Chinese experience in agricultural development underscored the importance of incentives and institutional development:

The structure of incentives determines the economic outcome. The institutions - the rules of the economic game - structure the incentives. There is a strong tendency for political systems to develop institutions which result in weak incentives for agricultural productivity. The first move in the Chinese economic revolution was to institute the household responsibility system and to (slowly) reduce the role of the large state enterprises. It was clearly an important innovation, leading to increased productivity. The lesson is: get the institutions linking actions to consequences right. This is not as simple as it sounds. (From James D. Shaffer and Simei Wen, 'The Transformation from Low-Income Agricultural Economies', in G. H. Peters and D. D. Hedley (Eds), Agricultural Competitiveness: Market Forces and Policy Choice, Proceedings of the 22nd International Conference of Agricultural Economists, Dartmouth Publishing Co. Ltd, Aldershot, UK, 1995, p. 203)

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