3. BASIC CONCEPTUAL FRAMEWORK: HOW INSTITUTIONS MAKE A
DIFFERENCE
The functioning of the food system and allied legal and commercial systems may affect farm
productivity via several pathways: (1) by affecting the costs and risks of making investments in
the food system that raise land and labor productivity; (2) by affecting the costs and risks of
production and sale of crop output, which may induce investment in farm capital and use of
complementary variable inputs; and (3) reducing costs in one market (e.g., for food) may induce
shifts in crop composition toward higher-valued crops and greater commercialization, which is
usually associated with increased demand for management skills and knowledge, which in turn
increase efficiency (Schultz 1978). To the extent that technical innovation is demand-driven and
is responsive to market signals (as suggested by Hayami and Ruttan 1985), changes in agricultural
input and output prices may have longer run effects on the types of technology generated. For
example, research on urban consumption patterns for coarse grains has led to insights about the
attributes that breeders need to stress in their selection strategies (Boughton et al. 1995).
Institutions are the rules, laws, norms of behavior, ideology, and their enforcement characteristics
that structure the behavior of individuals and firms in the economic system. Institutions are the
rules of the game; organizations are the players. Together they define the incentive structure of
societies and economies (North 1994). Institutions and the technology employed determine the
transaction and transformation costs that determine the costs of production. In situations where
exchange is risky and costly, trade tends to adapt in ways that reduce such risks (such as trade
within kinship group networks) but in so doing limit the scope of the market and hence impede
the development of more efficient production processes relying on specialization and scale
economies (Robison and Siles 1997). While a specific goal of policy is to reduce marketing costs,
the evolution of more productive economies over the past two-hundred years has featured the
development of more complex and costly marketing and contracting arrangements but which has
promoted investment in more technically efficient production processes (North 1994). The
evolution of more productive economic systems may involve higher marketing costs, not less. In
this regard, marketing systems performance should be evaluated not solely to the extent that costs
of the existing system are minimized (a static approach). One needs to consider those costs in
relation to the set of services provided, and the effect of these services on technical innovation
and productivity growth throughout the food system. For example, a complex contracting
mechanism between a supplier and buyer of a given product may involve high costs in terms of
negotiation, legal services, monitoring, and related public resources to resolve contract disputes if
necessary. Such mechanisms may provide the stability of returns to justify major investments in
new technology that lead to productivity gains at other stages of the food system.
The situation of relatively low levels of productivity in Africa coexisting with the widespread use
of technical knowledge in many other parts of the world indicates the need for attention to the
barriers to the adoption of productivity-enhancing inputs in African food and agricultural systems.
From the point of view of the individual peasant or other market participant, it is clearly not a
single problem or factor that describes the opportunity set. It is a system. Individuals have
limited capacity to deal with the circle of poverty alone. The problems seem to lie in the
economic environment which structures economic incentives: constraints and opportunities. A
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