Investigating institutional constraints to smallholder development: the issues and antecedents - Institutional Constraints to Small Farmer Development in Southern Africa - page 6

Externalities are another reason that efficient markets do not automatically materialize from
the actions of economic agents; benefits and costs of production, marketing and consumption
activities accruing to other than those directly responsible for the activities (Frank, 1994).
Economists believe that dealing with these problems through collective action is the basis for
the evolution of institutions. In turn, institutions contribute to growth in output in agriculture
by altering the incentives, rights to use of available productive resources, and knowledge and
skills to use what is available or develop new ways and means to attain the goals of economic
activity (Eicher and Staatz, 1984; North, 1992). The diverse actions and arrangements
that produce the foregoing outcomes, which can broadly be described as coordinating and
facilitating actions, can also be included as part of these institutions to obtain what Eicher
(1999) describes as 'a good institutional environment'. All these elements, be they formal
or informal, which modify the incentive structure, set the rules of engagement in respect
to resource use and human interactions, and guarantee some measure of predictability in
the system by removing uncertainties, constitute institutions as North (2003) observes.
In the way North (2003) has elaborated the concept, institutions embrace the rules and
norms that regulate human actions and the arrangements in place to ensure compliance as
well as the mechanisms in place to facilitate access to productive resources. A more formal
discussion on the link between human actions and institutional development is taken up
later in Chapter 2 of this volume. Those mechanisms that facilitate compliance with formal
rules and informal norms are what North (2003) identified as enforcement characteristics
which are so ubiquitous they embrace almost every aspect of economic, political and social
life. Figure 1.1 presents, on the basis of work done by Norton et al. (2006), an analysis of
these institutional variables implicated in farming systems performance.
In the views of Norton et al. (2006), institutions and the human factor interact to determine
the farming system. The implication is that these factors are also involved in system
performance, as noted by North (1990, 1992, 2003). If formal rules and informal norms
recognize and imbue individuals with property rights in some productive resources but
they lack sufficient information to efficiently utilize the resources, performance is affected
negatively. Information asymmetry in the way George Akerlof (2001) has described
it in his Nobel Lecture thus becomes an important institutional factor or enforcement
characteristics governing access to markets for producers. This link has also been made
by Van Huylenbroeck and Espinel (2007) on the basis of case studies of small livestock
producers in Uganda, crop farmers on an irrigation scheme in the Peninsula of Santa Elena
(Ecuador), and a biodiversity preservation scheme. So, rules and norms confer rights and
individuals are able to take advantage of such rights under appropriate conditions such as
affordable prices, access to credit and other facilitating services, effective infrastructure,
adequate security, etc. Many or all of these require that appropriate and well-functioning
organizations and political systems are in place to provide the requisite governance. It is
therefore understandable that institutions can be viewed quite broadly as 'the structure
that humans impose on human interactions' (North, 1990). Table 1.1 attempts to condense