Cooperating to compete : associative peasant business firms in Chile

J.A. Berdegué Sacristán

    Research output: Thesisexternal PhD, WU

    Abstract

    Since 1990 the government of Chile has carried out a major effort to support the participation of small scale agriculture in one of the most liberalized and competitive economies of the developing world. In particular, the Agricultural Development Institute (INDAP), and agency of the Ministry of Agriculture, has spent about 1.5 billion dollars to finance technical assistance and investment programs with the purpose of enhancing the capacities of smallholders and to link them to more dynamic and profitable markets. One of the key elements of this effort has been the formation and development of <em>Empresas Asociativas Campesinas</em> (EACs, or Associative Peasant Business Firms).</p><p>EACs are legally constituted organizations whose members or owners are exclusively or mainly small farmers and peasants who control the decision-making process in the organization, which carry out marketing or value-adding activities directly linked (upstream or downstream) to their members' primary production, and whose main purpose is to improve the performance of their members' farms as economic units that engage in market transactions.</p><p>About 780 of these EACs have been formed in the past decade, with a total membership of approximately 58,000 small farmers (about one-fifth of the total number of small farms in the country). Their gross sales in 1998 amounted to about $ 100 million.</p><p>This program has implied a break with the traditional transfer of technology approach of agricultural innovation, as well as with its emphasis on increasing the yields of undifferentiated commodities as the primary strategy to improve the economic performance of small farms and the well-being of peasant households. Instead, the new strategies that have gradually evolved since the early 1990's emphasize: (a) that the development of small scale farming is market-driven, which in Chile means diversifying into non-traditional enterprises and value-adding; (b) substituting the linear research-extension-farmer arrangements by more complex and diverse private-public networks and alliances; (c) the recognition of EACs as the primary social agents of peasant agricultural development; (d) the development of new facilitation approaches to support the new strategy.</p><em><p>The research questions</p></em><p>The research focused on the following questions: (a) Have EACs achieved their purpose of improving the performance of their member's farms and the income of their households?; (b) Are EACs sustainable as economic organizations?; (c) What is the relationship between the institutional and the economic performances of these EACs, and; (d) What changes in public policies are needed to improve the impact and sustainability of these EACs?</p><em><p>Conceptual framework and methods</p></em><p>A multi-disciplinary approach is used in this research, taking advantage of various theoretical perspectives, including: the concepts of agricultural knowledge and information systems and of innovation as the product of social learning within multi-agent networks; the concept of transaction costs advanced by neoinstitutional economics; the theory of social capital, and; the concept of design principles of institutionally robust organizations for collective action, proposed by comparative institutional analysis.</p><p>The research combines descriptive and analytical quantitative methods applied to large data sets obtained from national surveys of peasants households, small farms and EACs, with 14 qualitative in-depth case studies of specific organizations engaged in milk, potato, vegetable and raspberry production, marketing and value-adding.</p><em><p>Main results</p></em><p>The main findings of the research are as follows:</p><p>1. The participation of small farmers in EACs is conditioned to a greater degree by the market and policy incentives they face, than by the assets at their disposition. The exception is that the poorest strata of peasant households tend not to participate in these organizations. Market incentives are closely linked to the transaction costs faced by farmers. Participation in EACs is high only for those small farmers working with products-markets with high transaction costs.</p><p>2. Community groups and organizations facilitate the formation of EACs, as they provide the initial fora where alternatives can be discussed, weighed and decided upon. These local groups 'incubate' EACs. However, the local tradition of rural organization by itself does not seem to have a decisive influence as many regions with high levels of civic participation show low levels of membership in EACs, and vice versa.</p><p>3. The support of external agents (such as NGOs, private extension firms, etc.) is essential for the emergence of EACs. If local leaders build-on farmers' willingness to question the <em>status quo</em> and to take action, external agents provide 'road maps' for collective action, as well as the networks needed to obtain information, knowledge, expertise and financial resources.</p><p>4. Hence, the emergence of EACs is the result of the interplay of all these actors: individual farmers, rural communities, external facilitators, governments, and markets. The nature of that initial interaction, and the balance of each agent's contribution, has a major influence on the characteristics and future performance of an EAC.</p><p>5. EAC participation has a positive and significant impact on the farm's net margin of the members, only when the organization is working in markets with high transaction costs. An EAC cannot improve on the results that a small farmer can obtain working alone in markets with low transaction costs, such as the spot markets of undifferentiated commodities like wheat or potatoes.</p><p>6. EAC participation does not have a significant impact on the total household income of the members, even when dealing with high transaction cost markets. Whatever gains a farmer makes in the share of household income derived from on-farm production, is compensated by the loss of non-farm employment and income opportunities.</p><p>7. A large majority of EACs show operational and financial results that question their viability in the absence of significant public subsidies. Around one-fifth of the EACs could survive if the current government programs were suddenly discontinued, while an additional 15% could probably consolidate their position in a reasonable period of time if they take action with that goal in mind.</p><p>8. EACs set up with the primary purpose of trading undifferentiated commodities in spot or wholesale markets fail because their members default on their commitment to the collective action. They do so because under these market conditions, the EAC cannot improve on the market prices or other market benefits, while it does impose additional costs and risk compared to those incurred by an individual selling his or her produce alone. Moreover, the members defect selectively, by working alone in the marketing of their products, while participating in other activities provided by the EAC that more often than not are relate to the intermediation of public programs and subsidies. Under those conditions, the EACs are rapidly denaturalized.</p><p>9. On the other hand, EACs can be successful when their core activities aim at: (a) differentiating the members' raw products through value-adding; (b) providing price and market information when those resources are difficult to obtain and when their lack can have significant repercussions on the price obtained; (c) overcoming investment, technology, or knowledge and management market access barriers, and; (d) expanding the portfolio of clients, in particular in the case of highly perishable products.</p><p>10. Effective EACs are part of effective multi-agent networks. Linkages to actors outside the rural communities is of the essence to operate in dynamic and competitive markets.</p><p>11. When EACs are embedded in a rural community their internal rules and decision-making processes become more effective and less costly because they take advantage of certain conditions derived from the close social and geographic proximity of their members: reduced costs of monitoring the compliance of members with agreements and obligations; reduced heterogeneity of the members which in turns aids the formulation of rules acceptable to all; enhanced social costs and consequences of non-compliance with agreements and obligations; greater fairness and better graduation of sanctions for non-compliance with agreements and obligations due to more information about the context in which the violation took place; greater degree and higher quality of participation in the internal life of the organization. Yet, such close social and geographic proximity can also lead to the undermining of the operational rules of the EACs, as when enforcement of agreements is hampered by family obligations or when those with greater power in the community exert an undue influence within the EAC.</p><p>12. Effective internal systems of rules in EACs must address not only the allocation of costs and benefits between the individual members (i.e., the free-riders problem), but also the distribution of contributions and appropriations between the members as individual and independent farmers, and the EAC as a business-oriented organization. The balance between the EAC's economic and financial performance and sustainability, on the one hand, and the impacts of the collective effort on individual farms and households, on the other, depends on how this dual allocation problem in solved. Only when the internal systems of rules are transparent in transmitting market signals to the individual members, <em>and</em> when such rules effectively reduce the transaction costs of negotiating, monitoring, and enforcing agreements between the EAC and its members, can this problem be solved in a balanced way. The organization will eventually fail if its system of rules is designed with the aim of 'shielding' its members from market signals.</p><em><p>Thinking about the future</p></em><p>The policies and programs designed during the past decade have run their course. The current crisis of dozens of EACs signals the need for a revised strategy to improve the quality of the existing EACs, meaning by that EACs that are: (a) more effective in improving the performance of their members as independent farmers in a market economy; (b) increasingly self-sustainable as business firms, and; (c) institutionally robust as social platforms for collective action. To make progress in this direction, revised policies should consider:</p><p>1. Developing alternatives for the thousands of smallholders engaged in the production of traditional agricultural commodities who lack the capacity to diversify into new products and markets. For many, these alternatives are to be found in new rural non-farm activities. If the options for rural development continue to be restricted to agricultural development, then the political pressures to set up ineffective EACs will be irresistible.</p><p>2. Sharply revising the contention that always and under any circumstances having an EAC was a superior condition to not having one. EACs can be effective only under certain conditions and to achieve a narrower set of goals than we used to think ten years ago. Public policies aiming at supporting the development of 'social capital' and civic participation in the countryside, and even those designed to improve the productive, technological and economic development of small farmers, cannot rest on EACs alone and must work with a broader set of rural organizations and groups.</p><p>3. Furthering the generation of approaches and methods for EAC development based on the concept of social learning. Significant progress has been made in moving away from the linear transfer of technology approach, but it is still quite insufficient. To a large extent, many continue to see the development of EACs as the outcome of pre-conceived social engineering initiatives. This study has found that successful EACs are the result of gradual and complex processes of innovation involving multiple agents with different perspectives. There is a need to invest more to generate knowledge about approaches and methods to facilitate social learning process with the aim of supporting the formation and development of EACs.</p><p>4. Investing in human capital. The effort to develop the human capital in and around EACs has been negligible compared to the hundreds of millions of dollars invested in 'brick and mortar' projects. We need to start thinking seriously, and with a sense of urgency, about the most appropriate ways to make up for the time lost in providing to all these actors the knowledge, capacities and skills that are indispensable in their new domains of activity.</p><p>5. Thinking and acting in terms of networks. We need to take steps to understand and learn how to work not only with EACs, but with EACs in the context of multi-agent networks. Concepts, methods and tools need to be developed that will enable us to become more aware and more adept at working with a network perspective.</p><p>6. Understanding that EACs are successful only if they transmit market signals. EACs are set up with the explicit purpose of providing an organizational platform for small farmers to have access to more dynamic and profitable markets; almost always this means that they will be subject to more, not less, intense competition. Understandably, public programs in support of peasant farmers want to somehow protect them from the adverse consequences of moving into fiercely competitive markets. But this is not the issue, as no one can seriously question the need to have in place mechanisms to ease the transition. The question is how do we do it. Until now we have relied almost solely on direct subsidies and subsidized loans than very often decouple EACs from the market signals they are supposed to respond to. What are the insurance systems, the risk-sharing private-public contracts, the training programs, the government regulations and legal frameworks, that can at the same time help small farmers and their EACs learn their way about the new markets, and that at the same time do not create artificial 'bubbles' that burst the very day when the external funding stops? We must stimulate and support institutional experimentation with this question in mind.</p>
    Original languageEnglish
    QualificationDoctor of Philosophy
    Awarding Institution
    • Wageningen University
    Supervisors/Advisors
    • Röling, N.G., Promotor
    • Reardon, T.A., Promotor, External person
    Award date19 Dec 2001
    Place of PublicationS.l.
    Print ISBNs9789058085443
    Publication statusPublished - 2001

    Keywords

    • small businesses
    • cooperative farm enterprises
    • farmers' associations
    • peasant workers
    • chile

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