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

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Presentation on theme: "FOOD SECURITY Concepts, Basic Facts, and Measurement Issues June 26 to July 7, 2006 Dhaka, Bangladesh."— Presentation transcript:

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 functioningmarket as an institution; institutions for proper market functioning product market and factor market institutionsproduct market and factor market institutions land: ownership distribution, tenancy, land titling, communal resourcesland: ownership distribution, tenancy, land titling, communal resources labour market institutions and the meaning of labour market flexibilizationlabour market institutions and the meaning of labour market flexibilization credit market institutionscredit market institutions approaches to institutional reforms and risks thereof to FSapproaches 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 AGAgrarian relations define the institutions that regulate access to land, the key resource in AG

6 COMMON PROPERTY Common property resources belong to a group that makes rules & imposes sanctions in the use of the resource.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.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).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.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“)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 impoverishmentIn 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 landCorporate 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)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 SSAExamples 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)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 itMembership 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)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“Output”: For a year, say, the total farm-gate value of all products produced “Land”: gross area operated without adjusting for land quality,“Land”: gross area operated without adjusting for land quality, multiple cropping or multiple cropping or irrigation irrigation Widely documentedWidely documented across the world across the world

10 Causes of the Inverse Relationship Proximate: intensive AG based on irrigation, multi- cropping, labor-intensive and higher-value cropsProximate: 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]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: MP L,ff = U(ew) < e*w < w = MP L,cf –Monopoly power: MP L,ff = w < mw = MP L,cf –Idle land holdings for power, prestige, speculation

11 Fragmented Labor & Land Markets Spatial spread of AG production limits labor mobilitySpatial spread of AG production limits labor mobility Low infrastructure raises costs of labor mobilityLow infrastructure raises costs of labor mobility Localization is fundamental reason for villagesLocalization is fundamental reason for villages Village economies are, in a way, self-containedVillage economies are, in a way, self-contained Labor suppliers will work for lower wages withinLabor suppliers will work for lower wages within Familiarity allows employers to prefer suppliers withinFamiliarity allows employers to prefer suppliers within Hence, labor markets will be fragmented over villagesHence, labor markets will be fragmented over villages So too lower transaction costs fragment credit marketsSo too lower transaction costs fragment credit markets Inter-village wage + interest rates will be differentiatedInter-village wage + interest rates will be differentiated Overall unemployment and overall credit rationing reinforce labor and credit market fragmentationOverall 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 monopolyLocalized/Fragmented labor & credit markets can make for local labor monopsony & credit monopoly The inverse relation supports the former, high “usurious” interest rates support the latterThe 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 former requires concentrated ownership and/or local-employers’ collusion (one-company town) The latter requires concentrated wealth and/or informational barriers that are endogenousThe 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 discriminationBut 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)4 options: hired labor (WL), share-rent tenancy (SR), fixed-rent tenancy (FR) and labor rents (LR) Supervision: FR > SR > LR > WLSupervision: FR > SR > LR > WL Land Utilization: WL > LR > SR > FRLand Utilization: WL > LR > SR > FR Allocation Efficiency: FR > LR > WL > SRAllocation Efficiency: FR > LR > WL > SR Risk distribution:WL > SR > LR > FRRisk distribution:WL > SR > LR > FR “Authority”:WL > LR > SR > FR“Authority”:WL > LR > SR > FR Cheung’s Equivalence argumentCheung’s Equivalence argument Choice not fully rationalized in competitive modelsChoice not fully rationalized in competitive models But with local monopoly, choice can be rationalizedBut 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 ProductivityWhen 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 farmsSo inverse relation is not proof of efficiency of small farms not of efficiency of large farms But it is proof of systemic misallocation or inefficiencyBut it is proof of systemic misallocation or inefficiency Since land inequality is necessary for such inefficiency, we have a link between inequality and inefficiencySince 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 laborThis link arises from unequal access to land and capital (credit) and unequal utilization of labor In poor countries, cultivation scale is a negative factorIn poor countries, cultivation scale is a negative factor But scale can be “advantage” in credit and marketingBut scale can be “advantage” in credit and marketing

15 Implication (2): Underemployment and Unemployment The obverse of inverse relation is underemploymentThe obverse of inverse relation is underemployment Underutilization of land and underemployment of labor serve to raise inequalityUnderutilization of land and underemployment of labor serve to raise inequality Since land inequality is necessary for inverse relation, we have self-reinforcing inequalitySince 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 itselfAsset 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 economiesSurplus 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 particularIn 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 changeBut 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 consumptionEffort 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 linkThe 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 metWith given land, the total effort demand E may be met met with L

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 marketLemon 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 buyersAt 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 completelyIt 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]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 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 opportunismIn 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*>w fe ) – so carrot of “job rent” gives power to stick of the sackFull supervision has limits. So profit-maximizing farms will offer a market-non-clearing wage (w*>w fe ) – 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!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? 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). 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 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 lenderAsymmetric 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* < i s=d ). The borrower tries to keep this carrot by defaulting less.Lenders restrict default both by loan supervision and by a market-non-clearing interest rate (i* < i s=d ). The borrower tries to keep this carrot by defaulting less. Some potential borrowers will not be able to borrowSome potential borrowers will not be able to borrow As with efficiency wage, this credit rationing (CR) outcome is inefficient though lenders and lucky borrowers gainAs 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?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.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!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!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*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)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 possibleIt 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 economiesSo 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 tenableThe 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)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 scarcityAlso, 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 landWith 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)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 baseRules 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“Old-fashioned” land reform “Market-friendly” land reform“Market-friendly” land reform “Land-titling” where land rights are not fully defined“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 landTenancy divides the controller (may or may not be the owner) from the holder of land Tenancy reforms are predicated on grounds of:Tenancy reforms are predicated on grounds of: –efficiency –equity & poverty alleviation One issue is fixed rent (FR) vs. share rent (SR)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)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 landlessnessBut 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 maintainedTenancy 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 practiceInvolves 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 sufficientQ: 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 is the land in open access or in communal access? But who gets the title? and by what means?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?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?But is commercial development the end of development? Also, commercial development has often fostered "open access" e.g., in SSAAlso, 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.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.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)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 forceFiscal Austerity has been a key driving force Labour Liberalization LiteLabour Liberalization Lite –dismantling job security laws, allowing private & public firms to exit freely, or safety net provision to the displaced Labour Liberalization HeavyLabour 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 sectorreductions in both employment & wages, especially in public sector wages moving in favour of private sectorwages moving in favour of private sector reduced basis for "rent-sharing" between employers & employeesreduced basis for "rent-sharing" between employers & employees greater "informalization" of the workforce and productiongreater "informalization" of the workforce and production rural HH may be less affected than urban, middle-income HH more than poorrural 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.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.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. 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.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.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


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