1. FOOD SECURITY
Concepts, Basic Facts,
and Measurement Issues
June 26 to July 7, 2006
Dhaka, Bangladesh

2. Rao 3d:
Market Institutions and
Their Functioning
Learning: The learning outcome will be a thorough
understanding of market institutions in bringing about
poor and good market functioning with a strong focus
on factor market institutions, together with prevalent
types of institutional reforms and the risks entailed to FS.

3. Brief Contents
• market as an institution; institutions for proper
market functioning
• product market and factor market institutions
• land: ownership distribution, tenancy, land titling,
communal resources
• labour market institutions and the meaning of
labour market flexibilization
• credit market institutions
• approaches to institutional reforms and risks
thereof to FS

4. Factor Market
Institutions

5. Land Control Institutions
• Agrarian relations define the institutions that
regulate access to land, the key resource in AG
Agrarian Relations Unit of Control
Communal Individual
Restricted Corporate property e.g., in SSA Private individual property
Access
Open Some forests, arable land, water bodies Open access resources

6. COMMON PROPERTY
• Common property resources belong to a group that makes rules
& imposes sanctions in the use of the resource.
• The rules & sanctions aim to govern interactions between
members and nature, and among members themselves.
• Common property is NOT no property (i.e., open access).
• It is not generally true that mainly the poor benefit from CPR.
True, CPR of food-fodder-fuel-forest may be more critical for
survival and food security of the poor.
• But rich also benefit immensely from CPR (especially control
over the STATE which is itself the "mother of all CPRs“)
• In Africa, communal land regimes prevail and this has helped
prevent landlessness and impoverishment

7. Implications of Corporate Forms
• Corporate forms, unlike open access, do control
access to land
• So they are capable of regulated use (and so
restrict inefficiency) while, at the same
time, preventing undesirable concentration (and
so promote equity)
• Examples include Russian mir, Mexican
ejido, communal property in the New World, in
pre-colonial Indonesia and in much of SSA

8. Private Land Concentration
• Private land concentration arises historically via
conquests, subjugation of original holders or
through a process of enclosures (Europe)
• Membership in an
aristocracy, bureaucracy, army, clan, caste or
ethnic group can perpetuate it
• Private land concentration can also arise from
breakdown in communal forms and exposure to
markets (commercialization)

9. The Inverse Size-Yield Relationship
• “Output”: For a year, say, the total farm-gate
value of all products produced
• “Land”: gross area operated without adjusting
for land quality, YIELD
($ per area)
multiple cropping or 10
irrigation
• Widely documented
across the world
1
1 FARM SIZE 40
(area)

10. Causes of the Inverse Relationship
• Proximate: intensive AG based on irrigation, multi-
cropping, labor-intensive and higher-value crops
– With identical technology, must mean higher L/H
– Also means positive size-labor-productivity relation
• Basic: [given size linked to mode of production]
– Land and labor-supervision diseconomies of scale
– Non-marketed/Non-marketable family labor
– Self-supervising family labor
– Unemployment: MPL,ff = U(ew) < e*w < w = MPL,cf
– Monopoly power: MPL,ff = w < mw = MPL,cf
– Idle land holdings for power, prestige, speculation

11. Fragmented Labor & Land Markets
• Spatial spread of AG production limits labor mobility
• Low infrastructure raises costs of labor mobility
• Localization is fundamental reason for villages
• Village economies are, in a way, self-contained
• Labor suppliers will work for lower wages within
• Familiarity allows employers to prefer suppliers within
• Hence, labor markets will be fragmented over villages
• So too lower transaction costs fragment credit markets
• Inter-village wage + interest rates will be differentiated
• Overall unemployment and overall credit rationing
reinforce labor and credit market fragmentation

12. Power in Fragmented Markets
• Localized/Fragmented labor & credit markets can
make for local labor monopsony & credit monopoly
• The inverse relation supports the former, high
“usurious” interest rates support the latter
• The former requires concentrated ownership and/or
local-employers’ collusion (one-company town)
• The latter requires concentrated wealth and/or
informational barriers that are endogenous
• But localized monopolies must forestall retaliatory
actions – so often thrive on the basis of clan, caste or
or ethnic identity-based discrimination

13. Choice of Tenancy vs Hired Labor
• 4 options: hired labor (WL), share-rent tenancy (SR),
fixed-rent tenancy (FR) and labor rents (LR)
• Supervision: FR > SR > LR > WL
• Land Utilization: WL > LR > SR > FR
• Allocation Efficiency: FR > LR > WL > SR
• Risk distribution: WL > SR > LR > FR
• “Authority”: WL > LR > SR > FR
• Cheung’s Equivalence argument
• Choice not fully rationalized in competitive models
• But with local monopoly, choice can be rationalized

14. Implication (1): Efficiency
• When there is more than one factor of
production, Efficiency is not the same as Productivity
• So inverse relation is not proof of efficiency of small
farms not of efficiency of large farms
• But it is proof of systemic misallocation or inefficiency
• Since land inequality is necessary for such inefficiency, we
have a link between inequality and inefficiency
• This link arises from unequal access to land and capital
(credit) and unequal utilization of labor
• In poor countries, cultivation scale is a negative factor
• But scale can be “advantage” in credit and marketing

15. Implication (2): Underemployment
and Unemployment
• The obverse of inverse relation is
underemployment
• Underutilization of land and underemployment
of labor serve to raise inequality
• Since land inequality is necessary for inverse
relation, we have self-reinforcing inequality
• Asset inequality accentuates income inequality
just as gravity of a massive object curves space
towards itself

16. Surplus Labor vs Labor
Constraints
• Surplus or underemployed labor can coexist
with seasonal labor constraints. This is typical
of most less developed rural economies
• In a land-abundant economy, labor constraints
may be year-round also. This seems to be the
case in some SSA economies in particular
• But the land-labor ratio is not “exogenous”
since the effective availability of land can be
augmented through technological change

17. The New
Institutional Economics

18. The Capacity Wage
• Effort capacity will generally depend on consumption
• The Optimal w* maximizes e per unit of wage-cost w.
Profit-max. farms will set w=w* if they know w-e link
• With given land, the total effort demand E may be met
met with L<L0 workers i.e., Effort
unemployment results!
e*
• But is this model socio-
politically sustainable?
• Leibenstein himself believed
social institutions would
m w* Consumption=w
arise to assure subsistence!

19. Asymmetric Information:
The Market for “Lemons”
• Lemon owners will be eager to sell at a low P but not
owners of quality cars. The high proportion of
lemons at low P may drive buyers out of the market
• At higher P, the proportion of lemons will be lower
but the high P itself will deter many buyers
• It is possible that there is no P* at which
demand=supply, so the market fails completely
• In general, when quality depends on price, info re:
quality is asymmetric and exploited opportunistically
then, markets may be inefficient or completely fail
[George Akerlof]

20. The “Efficiency” Wage Argument
• In capacity wage model, unemployment is due to
quality (e) depending on price (w) but there is no
asymmetric info nor opportunism.
• In efficiency wage model, the e-w relation is due to
shirking, with both asymmetric info and opportunism
• Full supervision has limits. So profit-maximizing farms
will offer a market-non-clearing wage (w*>wfe) – so
carrot of “job rent” gives power to stick of the sack
• The resulting unemployment is good for profits & for
the lucky workers but not for the unemployed or for the
economy. “Efficiency” Wage is, in fact, inefficient!

21. Institutional VS Efficiency Wage
• The issue: what causes unemployment?
• EW explains it by assuming workers have a fallback
(unemp. insurance in AEs). This is taken to be superior
to “institutional” wage arguments (minimum
wage, unions, living or fair wage norms).
• But both EW and IW are “institutional” since wage is
directly or indirectly set by an “exogenous” wage
1. In DEs without unemployment insurance, a purely
institutional wage argument makes good sense.
2. How realistic can shirking be for poor workers at the
margin of subsistence?
3. Since capacity wage is likely to bind, there must be labor
market institutions that avert dismal outcomes.

22. The Credit Rationing Argument
• Asymmetric info here is quality of project financed:
borrower knows more than lender
• Lenders restrict default both by loan supervision and by
a market-non-clearing interest rate (i* < is=d). The
borrower tries to keep this carrot by defaulting less.
• Some potential borrowers will not be able to borrow
• As with efficiency wage, this credit rationing (CR)
outcome is inefficient though lenders and lucky
borrowers gain

23. Collateralization VS Rationing
• The issue: why can’t all get money from lenders?
• There is a simpler explanation than CR: lenders lend
against collateral. Even with asymmetric information
and opportunism, borrowers forfeit collateral if they
default. The lender does not have to offer a low
interest rate, and the market clears.
• Collateralization nevertheless produces“rationing”-like
outcome: only those with collateral can borrow!
• As the old adage goes, if you want to borrow from a
bank, you first have to prove that you don’t need the loan! If
you do really need it, the bank will not be interested in
lending to you!

24. An Institutional View of Labor
and Credit Market Failures
• The most crucial markets in any economy (labor and
credit) fail routinely causing inefficiency & inequity.
Failure means inability of “Supply=Demand” to set P*
• Their actual operation involves institutional adaptation
(social norms, exercise of power, public regulation, etc)
• It is only by invoking a crucial “exogenous” element that
any explanation these markets is even possible
• So the study of labor and capital market institutions is
critical to understanding modern economies
• The distinction between “old” and “new” institutional
economics is not really tenable

25. Factor Market
Reforms

26. Agrarian Reforms
• In all, land inequality favors neither resource use
efficiency (means) nor income equity (ends closely
related to poverty and food insecurity reduction)
• Also, inequality tends to impart a bias for labor-saving
technical change even with land scarcity
• With fragmented markets and local monopoly, there
may even be negative incentive for augmenting land
• All these are prima facie arguments for egalitarian land
reforms (coupled with credit and market access
reforms)

27. Types of Land Reform
• Rules of property in land or other means of production,
rules of access to local public lands, forestry and fishing
and the like directly affect people’s asset base
– e.g., land reform, tenancy reform, nationalization of
forests, etc.
• “Old-fashioned” land reform
• “Market-friendly” land reform
• “Land-titling” where land rights are not fully defined

28. Tenancy and Tenure
• Tenancy divides the controller (may or may not
be the owner) from the holder of land
• Tenancy reforms are predicated on grounds of:
– efficiency
– equity & poverty alleviation
• One issue is fixed rent (FR) vs. share rent (SR)
– Being associated with histories of exploitative and
feudal agrarian relations, SR is frequently the target
of regulation and/or abolition
– Besides, poor landless peasants usually cannot take
on the risk involved in fixed rent tenancy

29. TENANCY REFORMS
• Major thrust has been to restrict or prohibit
sharecropping. In West Bengal, SC tenants are
“registered” (with occupancy right and ceiling on rental
share)
• But regulation can also reduce land given to tenancy
and increase incidence of pure landlessness
• Tenancy reform in China, Laos, Viet Nam suggests
significant gains from individual vs collective
responsibility/reward provided egalitarian land access is
maintained

30. LAND TITLING
• Involves giving cultivating-possessors legal title of ownership to
land they occupy by squatting on it or by custom/communal
practice
• Q: What is the case for land-titling? In general, that it is good
for growth and efficiency. But titling may be neither necessary
nor sufficient
– tenurial security prevents overuse & gives incentive to invest
• But is the land in open access or in communal access?
• But who gets the title? and by what means?
– use as collateral increases access to credit
• But why should individual property be more bankable than communal?
– titles allow land markets essential for commercial development
• But is commercial development the end of development?
• Also, commercial development has often fostered "open access" e.g., in SSA
• Recent African evidence shows no relation between titling and
long-term investment, and no effect on credit access.
• Note also titling can lead to a "land grab" by the strong at
expense of weak.

31. LABOUR MARKET
INSTITUTIONS
• Labour-institutional changes often caused by trade
liberalization, privatization, public expenditure
reduction, transition to democracy (e.g., South
Korea), change of government (Reagan, Thatcher)
• Fiscal Austerity has been a key driving force
• Labour Liberalization Lite
– dismantling job security laws, allowing private & public firms
to exit freely, or safety net provision to the displaced
• Labour Liberalization Heavy
– eliminating unions, wage indexation, minimum wages, etc.

32. Some Consequences of
“Flexibilization” of Labour Markets
• reductions in both employment &
wages, especially in public sector
• wages moving in favour of private sector
• reduced basis for "rent-sharing" between
employers & employees
• greater "informalization" of the workforce and
production
• rural HH may be less affected than
urban, middle-income HH more than poor

33. CREDIT MARKET
INSTITUTIONS
• Divided into formal and informal. A third option in recent
decades is micro-credit e.g., Grameen Bank.
• The poor are mostly excluded from the formal for lack of
collateral and/or high unit costs of loans.
• If informal is more isolated, rates and access to credit for poor
will be worse.
• Development banking & targeted credit (with or without
subsidy) is a solution.
– Good examples are India & Indonesia: before VS after the Green
revolution
• So is micro-credit. But introduction of micro-credit has become
an excuse for state to cut back not only on public credit but
other services for the poor also.
– e.g., Andhra Pradesh experience from 1996-2005.