Level playing fields and laissez faire: Postliberal development strategy in inegalitarian agrarian economies

World Developmenr, Vol. 24, No. I, pp. 1133-l 149, 1996 Copyright 0 1996 Elsevier Science Ltd Printed in Great Britain. All tights reserved 0305-750x196 $15.00 + 0.00

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Level Playing Fields and Laissez Faire: Postliberal Development Strategy in Inegalitarian Agrarian Economies MICHAEL R. CARTER and BRADFORD L. BARHAM* University of Wisconsin-Madison, U.S.A. Summary. - Focusing on the rural sector in Latin America, this paper explores the microeconomic linkages between distribution and growth which drive the possible reproduction of rural poverty over time. The result of this exploration is a neostruch&ist perspective which argues that actually existing hissez faire agrarian economies do not present a level playing field, and that low wealth farms face disadvantages which tend to reproduce or even deepen sectoral inequality. The paper then tries to identify the sorts of public policy and collective action which might modify the nature of growth and distribution

in post-liberalizationagrarian market economy. Copyright0 1996Elsevier Science Ltd

1. INTRODUCTION The challenges of inequality and poverty are a recurrent theme in policy documents on Latin America, including the pronouncements surrounding the 1994 Summit of the Americas (see Inter-American Dialogue, 1994). The appropriate response to these challenges depends centrally on whether the persistence of inequality and poverty are simply the wages of long distorted prices and trade regimes, or whether they reflect an intrinsic or structural characteristic of economic growth in Latin America. The former perspective finds its expression in calls for sustained liberalization and macroeconomic stability, perhaps augmented with expanded investment in human capital (e.g., ECLA, 1990; World Bank, 1990). The latter perspective questions the sufficiency of getting prices and the macroeconomy right, and motivates a new look at ancillary sectoral and microeconomic policies. Recent empirical contributions to the endogenous growth literature have brought forward the idea that high initial levels of inequality are statistically linked to poor aggregate economic performance (e.g., see Rod&, 1994; and Persson and Tabellini, 1994). Within this literature, possible explanations of such a finding include growth-dampening political conflict and redistributive cycles driven by initial asset inequality (as Persson and Tabellini argue), as well as

connections between income distribution, domestic market size and industrialization (Murphy, Shleifer and Vi&y, 1989). Skewed income distribution could also dampen human capital accumulation and, with it, growth (Ljungqvist, 1993). Moreover, to the extent that the pattern of growth reproduces or deepens initial inequality, these inequality-growth linkages become even more important. While the precise mechanisms identified by this endogenous growth literature can be debated, its empirical findings do underwrite the notion that high initial levels of inequality have persistent and real effects, and they challenge us to uncover the microfoundations of the inequality-growth relationship. Agrarian growth in Latin America presents a particularly important opportunity to study the microeconomics of growth and inequality. Not only does the agrarian sector house a disproportionate share of Latin American poverty, it is also central to overall economic development (at least at the early stages of

*The work reported here has been generously supported by the John D. and Catherine T. MacArthur Foundation, the U.S. Agency for International Development, the Tinker Foundation and the Land Tenure Center. The authors gratefully acknowledge the helpful comments of two anonymous referees. Final revision accepted: January 1, 1996.

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development when it is the primary sector from which individuals are pushed or pulled into other sectors). Moreover, the inequality in agrarian asset distribution is one characteristic which strongly distinguishes Latin America from East Asia and its record of broadly based growth. While it may be the case that Latin America’s initial asset inequality has reduced growth rates over what they otherwise would have been, this paper focuses on those mechanisms through which growth in those unequal economies has tended to reproduce or reenforce inequality. In its exploration of the linkages between growth, inequality and poverty in the specific context of Latin American agricultural sectors, this paper faces up to two challenges. The first is to explore the real microeconomic linkages between distribution and growth which drive the possible reproduction of rural poverty over time. The result of this exploration is what might be termed a neostructuralist perspective which argues that actually existing laissezfaire agrarian economies do not in general present a level playing field as one moves across the wealth spectrum, and that lowwealth farms face a number of disadvantages in key factor markets. Moreover, the economic importance of those disadvantages may be magnified by the underlying inequality of the land and asset distribution. As a consequence, growth may take an exclusionary form which bypasses and perhaps renders worse off the rural poor, especially in inegalitarian economies. The paper’s second challenge is to identify the content of and prospects for the sorts of public policy and collective action which might modify the nature of growth and distribution in the postliberalization agrarian market economy. In its effort to find a policy route for bypassing a distasteful tradeoff between efliciency and equity, this paper tries to push the literature on open, export-oriented economies beyond its polarized state in which some contributions encourage an unconditional faith in export strategies (usually on macroeconomic and efficiency grounds) and others exhibit a strong distrust, if not complete condemnation of these strategies (usually on equity or environmental grounds). The remainder of this paper is organized as follows. The first two sections report and interpret the results of three microeconometric studies designed to identify systematic patterns of differentiated behavior along the wealth continuum in the context of contemporary Latin American export growth booms. In particular, the studies look at which producers along the wealth continuum participate in the boom, and at the spillover impacts of the boom on wages, asset prices and differentiated patterns of land accumulation. While these static and dynamic effects of agro-export growth on the rural poor are found to be heterogeneous across the three countries studied (Chile, Guatemala and Paraguay), there is a common ten-

dency for financial markets in all three countries to bypass low-wealth agents and leave them to autarchic capitalization and consumption-smoothing strategies which limit their growth and accumulation potential. That is, at least in environments of high inequality, what Barham, Boucher and Carter (1996) call the intrinsic wealth biases in financial markets tend to either reproduce initial levels of inequality, or to mute the potentially positive impacts of growth booms on the rural poor. This perspective on the interlinkages between distribution and growth suggest that financial market innovation is an essential element in breaking the cycle which reproduces initial inequality and poverty. Exploring the menu of rural development policy options, the final parts of this paper argue that liberalization alone, or pursued “out of sequence” with financial market policy, may not suffice to link growth with poverty reducti0n.r Unfortunately, financial innovations cannot be simply willed into existence, and public policy efforts confront the same information costs which underlie the failure of competitive markets to provide small farms buoyant capital and insurance access. Successful policy efforts will thus involve supporting or encouraging the formation of local institutional arrangements, especially cooperative ones like credit unions and group lending schemes, which, if well organized, can reduce information costs and concomitantly ameliorate the wealth-bias of financial markets. In the final analysis, however, as Lipton (1993) has argued, policies aimed at improving the market competitiveness of small farms may have to be supplemented by direct, “old style” redistributive reform if broadly based growth is to be achieved.

2. THE HETEROGENEOUS EXPERIENCE OF EXPORT-LED AGRARIAN GROWTH IN CONTEMPORARY LATIN AMERICA Widespread efforts at structural adjustment, liberalization, and outward-looking development in. the 1980s and 1990s pushed export promotion strategies to the forefront of agricultural policy. Although often motivated by macroeconomic considerations, agro-export promotion can have farreaching welfare impacts on the rural poor. Often these impacts are described in unconditional terms as immutable side effects of agro-export growth by both proponents and opponents of these strategies. This paper analyzes the microdynamics which in fact condition or shape the distributional nature of agro-export growth in order to explore whether and how the sector level growth-equity tradeoff can be superseded by policies and institutions which render sectoral growth less exclusionary of the rural resource poor.‘

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Three intertwined effects axe critical in determining the degree to which agro-export booms are directly inclusive of the rural poor. The first is the extent of participation in agro-export crop production by farms of different size units, especially smallholders. The second concerns the degree to which agro-export booms promote transfers of land among farms of different size units, as more competitive farm size units accumulate land from less competitive ones. The third are those employment or net labor-absorption effects generated by the resulting changes in both cropping choices and the underlying agrarian structure. These types of farm-level distributional impacts have been examined previously in work on cash crops, agro-exports, agricultural commercialization, and adoption of high-yielding varieties (Maxwell and Fernando, 1989 provide a crosscutting review). The agricultural commercialization line of this literature, such as studies by Kennedy (1989), Kennedy and Cogill (1987), and von Braun, Hot&kiss and Immink (1989), examines the adoption of cash crops by smallscale producers, particularly the potential tradeoff between production of food crops for local markets and cash crops for export markets. While these studies explicitly address the crucial interactions between smallholder adoption and local welfare outcomes which are not studied here, they do not fully develop the dynamic effects of structural change on land access, crop choices, and labor absorption. Studies of the direct equity impacts of the Green Revolution, or the adoption of modem variety seeds, are summarized in Lipton and Longhurst (1989). Although the evidence shows that smallholders tend to adopt later, and thereby lose out on innovation rents (i.e., the extra profits associated with being an early adopter of a cost-saving innovation), many studies suggest that small farmers do eventually adopt as extensively as larger farm units. According to Lipton and Longhurst, there is scattered evidence that early adoption by larger units leads to land consolidation, but the paucity of studies cited also suggests that the dynamic link between adoption of modem varieties and changes in agrarian structure has not been as carefully explored as the adoption issue. Indeed, the authors say as much when they urge those promoting new seed programs to be cautious of the effects on smallholders land access (p. 146). Feder, Just and Zilberman (1985, p. 294) make a similar point when they conclude their review article on adoption as follows: The early adopters (usually the larger and wealthier farms) can accumulate more wealth and use the differential in subjective value of land to acquire more land from the laggards. The acquisition of new wealth enables further adoption and thus affects the dynamic pattern of aggregate adoption. Thus, special attention to changes in landholding patterns and wealth accumulation . . is warranted.

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It is this potential link between differential adoption and land valuation, and the induced change in agrarian structure which is of primary concern in this study. Once these changes, or their potential direction are well understood, then comparisons of labor absorption outcomes prior to and after the agro-export boom, or across farms of different size units and adoption patterns, rounds out the analysis of the direct farm-level effects of agro-exports on the rural poor. Interest in the impacts of agro-exports on growth, equity, and environmental sustainability in Latin America has generated a substantial and rich literature, which is summarized by Barham et al. (1992) and Thrupp (1995). While often discussed in unambiguous terms, the findings of our integrated research program on agro-export booms in Chile (fruit), Guatemala (vegetables) and Paraguay (soybeans and wheat) indicate that the contemporary experience of agro-export growth in Latin America is quite heterogeneous. In qualitative terms, and subject to caveats offered below, the Paraguayan experience can be described as highly exclusionary (with diminished peasant land access and falling sectoral employment), the Guatemalan as very broadly based (with increases in both sectoral employment and small-farm land access), and the Chilean boom as ambiguous (with diminished small-farm land access, but probably increased sectoral employment). For the case of Paraguay, Figure 1 presents some of the quantitative estimates on which this qualitative summary rests. The curves in Figure 1 are fitted values for econometrically estimated lifecycle trajectories of land access for farms of different sizes in the frontier region of Paraguay bordering Brazil where over the past two decades a soy-wheat boom has been located.3 To capture the impact of the boom (which has ushered in sharply rising land prices), the statistical specification underlying Figure 1 permits the estimated trajectories to change with changes in the price of land. As can be seen, higher land prices have been associated with increased land access of the largest farm size class, while the land access of other classes has been dampened with the average small farm having access to less land at each stage of its lifecycle. At a national level, this same pattern of unequal land accumulation is visible in the national agricultural census figures discussed by Galeano (1992) who shows that the percentage of land in large farms increased over 1980-90 in this boom region. Adding to the land access squeeze of the peasant sector represented in Figure 1, Figure 2 shows that the Paraguayan frontier region is characterized by a sharply inverse relationship between farm size and labor absorption5 The regression estimates displayed in Figure 2 indicate that annual labor absorption falls sharply as operational farm size increases, from 150 labor days/hectare on a five-hectare farm to only 30 labor days/hectare on a IOO-hectare farm. The highly

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Figure 1. Land access squeeze (export boom orea in EasternParaguay).

exclusionary nature of the Praguayan growth process thus rests on the twin pillars of diminished land and employment access. Not surprisingly, the land issue has emerged as a major political problem in contemporary Paraguay, as Galeano (1992) discusses. The description of the Chilean boom as partially exclusionary reflects a study of Chile’s Central Valley, the core area of the much-heralded Chilean fruit boom (Carter, Barham and Mesbah, 1996). In Chile, a land reform begun in 1968 and curtailed and partially reversed by the military government in 1973, created a class of some 48,000 smallholders (called parceleros), many of whom gamed access to some of the most productive Central Valley land. The military government’s strict laissezfaire attitudes toward agriculture (especially before 1982) renders theparcekro experience a quasi-experimental opportunity to study the distributionat impacts of rapid agro-export growth in an area with a sizeable smallholder population. Analysis of data collected on 207 land reform parceleros in two distinct Central Valley environments reveals several patterns. First, and consistent with other studies of parceleros (e.g., Echenique and Rolando 1991), the data show that nearly half of all parceteros completely sold out their farms between the late 1970s and 1991, leading to a modest reconcentration of land in the hands of medium and large-scale farmers (see Mesbah, forthcoming). Second, while land transactions have been more prevalent in the northern Central Valley where

export production has been most profitable (and where agricultural land prices have skyrocketed to California levels), the spread of the export boom to the southern portion of the Central Valley in the late 1980s ushered in a round of land sales in that region.6 Overall, this relatively rapid exit of smallscale farmers from a booming and highly profitable sector is particularly surprising given that agricultural land markets have generally been considered to be relatively inactive in Latin America, including in pre-1975 Chile. A mobility analysis, which records the movement of households between different farm-size categories during 1977-90, confirms this pattern of a peasant sector squeezed in its land access by the export boom (Carter, Barham and Mesbah, 1996). This analysis shows that large farms in the sample maintained their position over the period, with several large landowners accumulating substantial additional land. Among land reform parcelero households, 47% in the fruit boom region had become completely landless by 1990. Moreover, the mobility analysis reveals no significant upward mobility by any parcelero household. Finally, the analysis shows substantial upward mobility by a class of new actors in the rural economy who possess substantial nonagricultural sources of income. These well-financed new entrants - who are often nonagricultural professionals and business people - have successfully accumulated land from the parceleros.

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Figure 2. Farm size and labor absorption (export boom area in Eastern Paraguray).

This stark and rapid restructuring following the 1970s parcellation has led a number of observers (Jarvis, 1989, Cox, de Zepeda and Rojas, 1990, and Ortega, 1988) to characterize Chile’s agro-export growth boom as an exclusionary experience which pushed out the uncompetitive smallholder sector. This interpretation is bolstered by the fact that the real wage in Chile was flat or declining over the most intense period of sales by parceleros, and by evidence like that of Echenique and Roland0 (1991) who found that only 20-30% of those who sold their farms did so because of lack of interest in farming, or because of old age. The direct exclusionary effects, however, of the boom on the land access of the rural resource poor in the northern Central Valley has been at least partially offset by positive indirect effects from the increased employment generated by the shift to fruit crops. preliminary evidence from the production data gathered in the fruit boom region reveals that while smaller farms are more labor intensive than larger operational units for a given crop, the induced structural change has also shifted patterns of land use into more labor-intensive crops. Thus, overall the agro-export boom has increased sectoral labor absorption. In the southern part of the Central Valley, where an export boom was just beginning at the time of the study, the new labor absorption effects of the boom appear less positive as the boom crops in this area are grown, on larger scale at least, with less labor.

The description of Guatemala’s broadly based agro-export growth path draws on results from a survey of 3 18 Guatemalan smallholder units from five villages in the Central Highlands in 1990-92 (see the appendix for details). Estimates of land accumulation over time show that the export boom in winter vegetable products induced a transfer of land from relatively larger farms to smaller farms (Barham, Carter and Sigelko, 1995). Unlike the Paraguayan study, the boom period trajectory of land accumulation for the small-scale adopter of nontraditional exports is significantly higher than the pre-boom trajectory of this same farm unit prior to the boom. Farms which began with relatively large land endowments (three hectares), do not increase their land access trajectories significantly in the post-boom era, while those households starting with under one hectare which adopt the boom crops do, on average, expand their land access significantly. Because labor absorption is again found to be inversely related to farm size, this induced structural shift of land toward smaller farm units intensifies the labor absorption effects of the boom. Therefore, the direct participation of poorer rural households in this agro-export boom is broadened through both improved land access and labor opportunities. Recent changes in the boom sector may be affecting these initial inclusionary outcomes, but, as discussed below, the Guatemalan highland experience is revealing about the key microeconomic factors that shape the overall competitiveness of smallholders in a dynamic sector.

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3. LEVEL PLAYING FIELDS AND LAISSEZ FAIRE: THE MICROFOUNDATIONS OF EXCLUSIONARY GROWTH The heterogeneous experience of contemporary Latin American agro-export booms poses a challenge to understand why in some instances rapid sectoral growth directly enhances the wealth and earnings of small farmers and rural workers, whereas in other instances it destabilizes their land access and employment in a way which threatens the political and social stability of the rural economy. In general terms, this section argues that laissezfuire does not present a level playing field to small farmers in the context of agroexport boom. More specifically, this section argues that: (a) The direction taken by agrarian growth is shaped by farm size biases which arise in the production or marketing of export crops that differentially advantage one class of producers over another; and (b) The importance and strength of these class biases are shaped by the initial distribution of land wealth in the local economy. After briefly laying out this argument in the abstract, this section revisits the export booms of Guatemala, Chile and Paraguay for evidence on the forces which shape the microeconomic trajectory of agrarian growth and transformation. Size-related biases have long been considered a driving force behind structural change in agriculture in both developed and developing countries.7 Above and beyond technical scale economies in production (which are not generally viewed as prevalent in agriculture), considerable attention has been placed on the biases against smallholders, especially in the context of the Green Revolution. Lipton (1968) and Griffin (1973), for example, offered distinctive views on the biases inhibiting smallholder participation in the Green Revolution, with the former emphasizing peasant risk aversion and the latter uncompetitive, classbiased market structures. Following the lead of Spooner (1988) and Carter, Barham and Mesbah (1996) the following factors have been variously identified to inhibit smallholder participation in new and boom technologies: -Higher risk aversion on the part of smallholders which (in the absence of complete insurance markets) spills over and constrains their adoption of or participation in new and risky opportunities; - Higher input and lower output prices because of bargaining power differences that favor large holders; -Limited credit access for financing working cap ital, longer term investments, and risk exposure; - Lower human capital resources and management skills; and, - Transaction costs associated with coordinating quality control or processing of perishables that leads downstream agents to seek exchanges with larger scale producers.

These sorts of biases against smallholders are often contrasted with their labor and management cost advantages, which can arise from either the ability to mobilize family labor at below market wages and, or the presence of fewer agency problems in ensuring a high-quality effort from laborers and management on a farm largely, if not solely, operated by family labor (Binswanger, Feder and Feininger, 1995 forcefully develop this point). Note that many of these biases, including risk, financial and human capital constraints, transaction costs of coordination, and labor supervision costs only require the presence of imperfect information or information asymmetries between agents to become pertinent. No supposition about market power or exploitation is necessary for these biases to be operative, though these are not ruled out as possible sources of bias. The argument here is that these biases can in fact be anticipated from the perspective of the economics of information which suggest that they are intrinsic and systematic features of actually existing market economies.8 While these various farm size biases can be anticipated, their aggregate impact in a boom sector is contingent for at least two reasons. First, the specific characteristics of boom crops vary in the degree to which the various farm-size biases are likely to be important. As a relevant comparison for the Chilean and Guatemalan cases discussed here, consider an orchard crop with a lengthy gestation versus a vegetable crop with perhaps multiple plantings and harvest cycles in a year. The orchard crop will require considerably more capital access and extended risk exposure, which makes the potential capital market bias against smaller scale, lower wealth producers more important. Conversely, the vegetable crop, if it requires a high level of labor quality in its cultivation and harvest timing, may advantage smaller scale producers by giving them a labor cost advantage. Meanwhile, the orchard crop may only require intensive labor for harvesting, where labor quality may not be as critical and piece rates can ensure effort. In other words, both the individual and overall direction of farm-size biases depend on the degree to which specific characteristics of boom crops privilege certain market exchanges and size biases relative to others. The second contingency emanates from the way that the underlying distribution of assets, especially land wealth, mediates the size and actual importance of farm size biases. Consider again the capital access advantage of large holders in a booming fruit orchard sector, where long-term investments are required, and assume this to be the only significant class bias in this boom crop. If there are both small and large holders present, and the holdings of different sized units are reasonably proximate, then it seems likely that a fruit boom would drive a rapid consolidation of landholdings with smallholders selling out to nearby large holders. If, however, all existing producers in the

LEVEL PLAYING FIELDS AND LAISSEZ FAIRE

locale are small scale, then competition with larger units which might enjoy advantages in capital market access is in a sense virtual, rather than real. Expansion of existing smallholders (and new entrants) would be limited, in real time, by their ability to capitalize themselves up to the larger, size-advantaged scale of operation. Wealthier new entrants would also face the barrier of having to consolidate many smallholdings, an effort that might confront significant transaction costs. Thus, in an initially egalitarian environment, the overall competitive pressures would be less likely to quickly squeeze out existing smallholders through asset and other prices as they would be in a context with large holders as neighbors. In addition to this distinction between real versus virtual land market competition, there is a second circuit by which initial asset distribution may mediate the importance of farm size biases. As Carter and Zimmerman (1995) explore in a dynamic simulation model, it is at least theoretically possible that prices in an economy endogenously evolve in a way which reduces the importance of farm-size biases and ratifies the competitive position of the existing distribution of farms. Consider, for example, an initially egalitarian (East Asian-looking) agrarian economy in which all land resources are on small units which are informationally disadvantaged in capital markets. In such a circumstance, agrarian demand for capital would be low and aggregate production would be highly capital constrained. As long as the land does not instantaneously shift to larger units, there would be downward pressure on interest rates (other things equal) and upward pressure on the prices of agricultural products. Both of these

endogenous price movements would tend to make it worthwhile for smallholders to borrow (or for financial institutions to lend to smallholders), thus reducing the importance of the capital market disadvantage of smallholders. By way of contrast, note that such price movements would not tend to occur in a less egalitarian (Latin American-looking) economy in which a large portion of the land stock is already assigned to larger scale units which are unaffected by the information constraints in capital markets. In this initially inegalitarian environment, smallholders would remain capital constrained with the farm-size biases tilted against them. While this argument is best treated as a theomtical conjecture, it does suggest that the importance of intrinsic farm-size biases - and their impact on the long-run trajectory of asset accumulation - may be shaped by the initial asset distribution. Turning now to tbe empirical cases, analysts of the inclusionary export growth process in Highland Guatemala have suggested that small farms have a competitive advantage in the production of export crops rooted in their ability to circumvent the labor supervision problems facing large farms (see von Braun et al., 1989). Other factors important to small farm competitiveness in the Guatemalan boom likely include the nature of the contractual linkages with processors which in some instances help small farmers to overcome working capital constraints; and the product’s brief cycle which make two or even three crops per season possible. Together these factors add up to the situation shown in Figure 3, which presents estimates showing that the probability of export crop production, and

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Figure 3. Guatemalan export boom (constrained small farm export production).

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direct participation in the growth boom, is high for all but the tiniest farms (Barham, Carter and Sigelko, 1995 present the econometrics underlying Figure 3). Yet, contained within Figure 3 is also evidence of some striking limitations of the small farm sector - limitations which point the way toward understanding the very different outcomes of agro-export booms in Chile and Paraguay. As the solid line in Figure 3 shows, the amount of land allocated to export production by smallholders levels off rather quickly at less than onethird hectare of land, even as total farm size increases.’ The remaining land tends to be allocated to safe, but low-yield basic grain crops. Thus, the adoption ceiling signaled by the low extent of remunerative export crop adoption by smallholders points to potentially countervailing economic constraints which limit the ability of smallholders to fully exploit the opportunity. As explored in detail by Barham, Carter and Sigelko (1995), the adoption ceiling seems to be explained by the inability of smallholders to capitalize and bear the risk of larger extensions of the export crops rather than a family labor constraint.‘o It is striking that small farm financial market constraints appear so pervasive even in a region where these farms have adopted boom crops and done well in the short and medium term.” Unfortunately, these constraints suggest caution about the prospects for continuing a broadly based growth agro-export path in this region. In particular, they suggest that an important part of the competitiveness of smallholders in this environment may result from the highly fragmented preboom land distribution which has insulated them from direct competition with larger scale production units. This conclusion is reinforced by data gathered from a nonrandom sample of larger agro-export producers (30-200 hectares in size) spread throughout the surrounding region, which indicate that these larger producers devote between 60 and 100% of their cropped area to the export crops and have been accumulating land at a very rapid rate.12 The financial market limitations of the Guatemalan small farm sector identify what economic theory suggests is likely to be a consistent competitive disadvantage of low-wealth producers in markets where risk and asymmetric information are important.‘3 In Chile, where the agro-export boom squeezed out the small farm sector, it is not surprising to observe that few small-scale farms produce the lucrative export crops. Data on fruit producers reveal the low adoption rate of export crops by small-scale farmers (CIREN, 1990 and 1991). In the fruit-growing province of Cachapoal, which has about 25% of the land under fruit cultivation nationwide, farms in the O-5 hectares (ha.) size category, represent 57% of all agricultural units, but only 16% of fruit growers. Meanwhile, farms greater than 20 ha. represent 14% of the agricultural units in the province, but comprise 43% of fruit growers.

This limited extent of export-crop adoption by smallholders in Chile’s central valley can be explained by the specific characteristics of fruit production which, in an environment of information-constrained markets, create a bias against smaller production units. Shifting production to fruit plantations is a long-term process that requires large, sunk capital investments with no returns over an extended gestation period. Fruit cultivation and export also require standardized production and packaging, necessitating large quantities of working capital and access to additional investment funds. In Chile, exporter credit was available for such production but most smallholders and parceleros could not borrow. Many smallholders also lacked necessary “human capital” attributes such as technical expertise in fruit production or the entrepreneurial ability and familiarity with institutions such as banks and export firms involved in export production (Jarvis, 1989). Moreover, smallholders were constrained by agro-export firms’ reluctance to contract with small-scale fruit growers because of the transaction costs involved in working with multiple small producers. In short, absent compensatory government policy, or the formation of vigorous social organizations which might bear some of the costs of servicing the small-farm sector, the microeconomics of the fruit boom have simply excluded small farms as producers. In addition, as discussed earlier, the smallfarm biases of the export boom have spilled over into the land market and led to a rapid restructuring of agricultural land ownership. A broadly similar microeconomic scenario underlies the exclusionary export boom in Paraguay. The boom crops (wheat and soy) are not intense in, nor especially responsive to interactive labor inputs, muting the sort of family labor cost advantage to which von Braun, Hotchkiss and Immink (1989) credit the economic competitiveness of small-scale Guatemalan export producers.‘4 The capital access problem, however, continues to weigh heavily against smallholders in the frontier region of Paraguay. Econometric estimates by Carter and Zegarra (1995) reveal small farms there to be much more tightly capital-constrained than large holders. The interaction of crop and market characteristics thus creates a circumstance in which small-scale producers stand at a competitive disadvantage in land markets. Figure 4 graphically portrays econometric evidence from Carter and Zegarra (1995) on the fundamental noncompetitiveness of the peasant sector in the boom region land market. Asked to indicate their willingness to pay for land, the surveyed Paraguayan farmers generated data described by the regression line in Figure 4. This regression maps farm size into this self-reported willingness to pay for land. For the frontier region, the willingness to pay for an additional hectare of land doubles as farm size increases from 10 to 100 hectares, which points to an overwhelming

LEVEL PLAYING FIELDS AND LAISSEZ FAIRE

competitive disadvantage for small farmers in this export boom region. At the time of the survey, the market price for a unit of land was about 1.2 million guaranies per-hectare. At this price, farms below about 50 hectares in size do not appear to be competitive in the sense that the market price exceeds their economic willingness to pay for land. Carter and Zegarra (1995) also econometrically estimate the production or income value of land based on the estimated incremental income increase which can be gained with an additional unit of land. Their estimation method incorporates the effect of differential financial market access into the marginal land valuation measure. While their estimated production value of land will only correspond to an individual’s willingness to pay for land under rather restrictive assumptions (see Carter and Zimmerman, 1995), Carter and Zegarra’s estimates in fact mirror the Figure 4 competitiveness regime based on seifreported willingness-to-pay data, giving further weight to the interpretation that the exclusionary Paraguayan boom experience emanates from biases in financial market access. Given the estimated competitiveness gap between large and small-scale producers in the land market, it is not surprising that the estimates of land accumulation over time (discussed above) show larger units to be displacing smaller ones rapidly in the frontier region, especially given the real - as opposed to virtual - competition between small and large farm units in the frontier region. In addition, given the evidence reported earlier on large farms’ sharply lower levels of labor absorption, it is not surprising that the

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Paraguayan export boom has become socially problematic, especially as the availability of unoccupied land ended with the closing of the frontier in Paraguay around 1980.

4. POLICY OPTIONS FOR ACHIEVING BROADLY BASED GROWTH IN INEGALITARIAN AGRARIAN STRUCTURES In its effort to chronicle those microeconomic factors which have shaped the distributional impacts of rapid agrarian growth in contemporary Latin America, the prior section has laid the basis for an evaluation of the various policy options which are commonly discussed as the basis of an agrarian growth and development strategy. For heuristic purposes, Table 1 arranges those options along a continuum of policy activism which stretches from the quietism of laissez faire to the hyperactivity of dirigistu centralized planning. The relative ranking of the interior policy options (2-4) is somewhat arbitrary and is not central to the argument made here. This section discusses the first four policy groups along that continuum in terms of their direct effects on participation, land access, and employment opportunities of the rural poor. The chief conclusion which emerges is that, reform of information-constrained and wealth-biased markets must not only be part of a broadly based agro-export growth strategy, but it needs to be pursued first among the policy groups, especially in locales with dualistic agrarian structures.

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Table 1. Continuum of policies for achieving broadly based growth Laissez Faire 1. Prices and institutions “right” a. non-distorted price signals b. secure property rights to enhance investment incentives; 2.

“Picking winners” a. infrastructure investment b. technical adaptation and support services

3.

Land market reform a. land taxation b. land banks to eliminate transactions costs and market segmentation c. mortgage banks to provide long-run finance

4.

Reform of information-constrained markets a. nontraditional capital access b. insurance substitutes c. extension services d. cooperative marketing arrangements

5.

Asset redistribution a. landholding ceilings b. land to the tiller and other reforms

Dirigista

(a) Getting prices and institutions “right ” A policy package that eliminates price distortions, which favor large farmers and discourage labor-intensive production (e.g., capital subsidies), and that legally solidified the property rights of small farmers (e.g., land titling) would constitute a minimalist approach to achieving broadly based growth. Historically, price distortions have played an important part in enhancing the relative competitiveness of larger farm units in many parts of the developing world. Indeed, some authors argue that elimination of such distortions can suffice to create poverty-reducing agrarian growth trajectories (de Janvry and Sadoulet, 1993 and Binswanger, Feder and Deininger, 1995). While there is no doubt that the elimination of price distortions is important, the contemporary experience of agro-export growth strongly suggests that simply “getting prices right” is insufficient to generate broadly based growth. Those experiences, buttressed by theoretical advances regarding information constraints and wealth biases in key factor markets, suggest that there are intrinsic market imperfections which hamper small-farm competitiveness and create exclusionary growth trajectories. This is especially the case for markets in areas characterized by a highly dualistic distribution of land ownership. Because smallholders often lack well defined and legally recognized property rights to land, land-titling programs appear attractive as a way to provide institu-

tional preconditions for broadly based growth. Three observations however, question the necessity for “getting property rights right” as a precondition for broadly based growth: - Current smallholders may already have localized, but nontransferable, tenure security.15 - While land titling may make localized tenure security transferable (and thus valuable as a collateral), this may not by itself suffice to improve the capital access of current smallholders16; and, - Making tenure security transferable may have its largest impact by enhancing the marketability of smallholder land to other, better capitalized farmers. The first two observations suggest that a careful look be given to the nature of localized tenure security and the nature of the financial system before land titling is pursued as a device to enhance the direct participation of small farmers in a growth process. The third observation indicates that when the existing distribution of land constrains the adoption of high-growth potential crops - as it would if current landholders cannot afford the capital demands of the new crop production-titling and land market activation may actually speed the displacement of current smallholders. While such policies may be very important in activating agrarian growth, they may militate against the objective of broadly based growth. This may well be a lesson from the Chilean agro-export boom of the 1980s. Once smallholder land titles were made fully secure and transferable, land sales rapidly shifted land to modestly larger and better capitalized units which have been the most successful in the production of fruit for exports. Based on econometric estimates of the competitiveness gap between producers of different scale operating units, Carter and Zegarra ( 1995) argue that tenure security reform pursued out of sequence (that is, before efforts are made to mitigate the competitiveness gaps) could have the same effect in Paraguay, indicating that a liberalization cum land titling policy mix would not suffice to resolve the problem of exclusionary growth discussed earlier. In summary, while a policy of getting prices and institutions right is attractive in the sense that it is relatively straightforward and consistent with the general tenor of market-oriented development strategy, the analysis here suggests that policy must often progress beyond the laissezfaire end of the policy continuum if agro-export growth is to be broadly based at the sectoral level.

(b) Picking winners Public investment can play a role in facilitating the growth of agro-exports through the creation of infrastructure, identification and development of product

LEVEL PLAYING FIELDS AND LAISSEZ FAIRE

markets, and the development of crop varieties suitable to the local environment. Williams (1986), for example, describes the role of such policies in fomenting Central America agro-exports booms in the 1950s and 1960s. Over the 198Os, USAID funded various institutions (e.g., PROEXAG in Central America) devoted to the promotion of agro-export by developing and sharing information on export markets and by brokering business contacts between local exporters and developed country buyers. A modestly activist approach to creating broadly based growth would try to target such public investment on crops which are most likely to conform to the economic capacity of small farmers and which are most likely to generate significant employment increases. Thus, agricultural research and infrastructure development related to agro-exports would be undertaken with an eye toward small farmers and their relative competitiveness. In the language of the industrial policy debate, this policy approach would try to “pick winners” by investing in those activities most likely to generate broadly based growth. There are two questions, however, which confront the effectiveness of a “picking winners” approach to broadly based growth. The first is a technical question: Do agronomic and commercial realities grant policy any degrees of freedom to choose among alternative export crops? The second is an economic question: Can alternative crops be unconditionally and meaningfully ranked in terms of their potential for generating broadly based growth? The prior section argued that most crops are technically scale-neutral, but that it is the structure of markets and prices which twists crop characteristics into farm-size biases. The conclusion to be drawn from this is not that crop characteristics are unimportant in shaping the impact of an agro-export boom on the rural poor. Some crops are indeed more labor intensive than others, and as such they offer advantageous direct and indirect effects. But policy interested in shaping broadly based agro-export growth cannot afford to think about crop characteristics in isolation from initial asset distributions and the factor market structures which shape who eventually grows the crops and how they come to be grown. There are few crops which cannot be grown on large farms, and most crops, when grown on large farms are grown with much less labor intensity than they are grown on small farms. The evidence on labor absorption in the Paraguay boom region is, of course, one example of this phenomenon. Even across the relatively narrow size range of the Guatemala export vegetable sample discussed earlier, labor intensity drops off rather quickly as farm size expands according to regression results reported in Carter et al. (1993). In the end, a policy of “picking winners” means careful attention to crops and crop characteristics in the context of existing market and agrarian structures.

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Crops which seem intrinsically labor intensive and size neutral may well turn out not to be if capital, insurance and output quality factors are skewed against small-scale producers. This would imply that a policy approach that gives up on direct participation by small-scale producers would also be likely to generate less labor absorption than might have otherwise been obtained. While public investment in agroexport promotion implies a responsibility to consider the nature of the growth it will engender, it is not a consideration which can be isolated from the more activist policies shown in Table 1.

(c) Land market reform: perhaps necessary, but not suficientfor broadly based growth As summarized in Table 1, land market reform refers to a set of policies which directly affect either the valuation of land itself (land taxation), the cost of transacting in the land market (land banks which bear the transactions costs associated with large farm subdivision), or access to long-term capital (mortgage banks).17 While a relatively activist policy in microeconomic terms, land market reform is in practice fairly simple because it does not affect the constellation of factors (access to technology, capital, labor etc.) which determine productive returns to land. Small-farm technology and extension policies can, of course, be implemented as a potential complement to land market reform policies. Carter and Galeano (1995) identify segmentation in Paraguayan land markets (where smaller units compete in a different land market segment than do large farms), suggesting that at least in some areas of Paraguay, there are barriers preventing the smooth flow of land between larger and smaller farms. But the expectation that land market reform policies can shift land to the rural poor by facilitating interclass land market transactions relies on the presumption that the rural poor do not suffer a fundamental competitive disadvantage in the sphere of production and marketing which affects their potential for particiA pating in the land market. If such a large competitiveness gap exists, then neither politically feasible progressive land taxation, nor putting the rural poor on an equal transactions cost or mortgage capital basis with the better off, will achieve the desired redistributive effect. They will still be unable to earn sufficient returns to justify paying the market price for the land. No evidence exists in contemporary Latin America of land market reforms that have fundamentally altered patterns of land ownership despite recent efforts. Pilot programs such as the Penny Foundation project in Guatemala and the land purchase financing program of the Honduran Central Bank - in which farms were purchased and subsequently resold under

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WORLD DEVELOPMENT

competitive market terms - have had a very limited impact due to the shortage of funds available.‘* Moreover, in Guatemala, case studies of Penny Foundation farms have shown that the typical smallholder beneficiaries may not be able to generate enough income to repay their land purchase loans, forcing them to abandon their parcels (Schweigert, 1994). Studies on both the Guatemalan and Honduran land purchase financing programs have also shown that the households most likely to survive the first years on the farms had savings to support their subsistence or other adults in the household who could contribute to family income with off-farm employment (Shearer, Lastarria-Cornhiel and Mesbah, 1990). More pointedly, this paper’s identification of capital access problems which have fundamentally constrained and shaped small-farm participation in export booms in Paraguay, Chile and Guatemala suggests strong reasons why such programs are likely to be limited in their impact if they are pursued in isolation from more fundamental factor market reform. In sum, relatively little evidence can be marshaled to show that the nature of the land market per se has inhibited the realization of broadly based growth patterns. Land market reform appears as part of a policy package that could be used to break up the dualistic agrarian structures which are so pervasive in Latin America, the Philippines, and South Africa, but will not be sufficient unless it is part of a broader package which also addresses the concerns regarding sizebiased markets raised above.

(d) Closing the competitiveness gap with factor market reform: the capital-insurance nexus Among the various factors which create farm-size competitiveness gaps, the only one which unambiguously favors small farms is their access to relatively cheap labor. The observation that cheap labor is the small-farm sector’s only advantage is not meant to denigrate its potential importance. Nor does this observation deny the broad historical pattern of family labor agriculture which characterized the economic development of now wealthier countries. In the context of the capital, risk and quality requirements of export agriculture, however, it is important to keep in mind the sharp difference in the absolute size of, say, a North American family farm and a peasant producer in a low wage economy.19 Indeed, as already discussed, the squeeze on peasant land access in the Paraguayan and Chilean booms appears to be fundamentally rooted in the financial market problems of the small-farm sector. The generality of these capital market disadvantages of the small-farm sector is highlighted by the agroexport boom in highland Guatemala which in fact successfully incorporated small farms (many below

one hectare in size) as direct producers despite their weak access to capital. Yet, as Barham, Carter and Sigelko (1995) show, small farms which adopt the remunerative export crops are willing or able to devote only a modest fraction of their meager land resources to the remunerative export crops, in marked contrast to the large farm adopters who devote nearly 100% of their farm area to the crops. Barham, Carter and Sigelko (1995) identify capital and risk constraints as the key factors which underlay this small-farm adoption ceiling, a finding consistent with von Braun, Hot&kiss and Immink (1989) who show that small farmers in this sector pursue costly self-insurance strategies by allocating scarce land resources to basic foodstuffs whose expected economic returns are only a small fraction of that those returns obtainable from export crops. At this level, it seems surprising that smallholders remained competitive in the boom sector in spite of these capital and insurance constraints. Undoubtedly part of the explanation lies in the labor intensity of the export vegetable crops which put a countervailing premium on small-farm access to economically inexpensive family labor. But, while this labor cost advantage may have given the smallfarm sector an advantage in the production of vegetables, it would be misleading to read the Guatemalan experience as evidence that labor cost advantages dominate capital market disadvantages, even for labor-intensive crops. For another component to the Guatemalan story is the nature of the real versus the virtual competition in the highland land market in which the boom took place. Unlike the small-farm sector in Chile’s central valley which was quickly displaced and excluded from that country’s (labor-intensive) fruit export boom by larger and better capitalized producers, the highland Guatemalan smallholder sector seems to have been strongly sheltered from direct competition by a highly fragmented, legally tenuous, and relatively egalitarian preboom local land tenure structure.zo As suggested earlier, the initial distribution of land and wealth may be critical to shaping the dynamic trajectory of growth, and in initially dualistic environments, the capital-insurance nexus which disadvantages small-scale agriculture may indeed be enough to swamp any labor cost advantage and underwrite an exclusionary growth path, to say nothing of the human capital intensity, product quality, and marketing disadvantages that small-scale producers may confront. Theory and empirical evidence thus suggest two very clear messages to those interested in promoting broadly based agrarian growth policies: - It cannot be presumed that family labor advantages guarantee the competitive dominance of small-scale farming and broadly based growth. Moreover, within the limits of a relatively narrow or compressed land distribution, there can be

LEVEL PLAYING FIELDS AND LAISSEZ FAIRE

significant and wide differences in self-insurance capacity which in theory at least could drive unequalizing growth trajectories. - While policy can get away with a less activist stance when legal conditions and the initial land distribution insulate small farms from direct competition with size-advantaged producers,*i small producers will in general stand in need of improved access to both ex-ante and ex-post capital, or in other words, financial assistance to capitalize into agro-export activities and to insure themselves against stochastic shocks to production and prices. They may also need help overcoming major informational costs that might be associated with the adoption of new agro-exports or the weak bargaining position of being an individual small grower interacting with large-scale processors or powerful input suppliers. Unfortunately, rectifying the capital and insurance market disadvantages of small-scale producers is not simple, as the dismal experience with targeted credit and crop insurance programs demonstrate (Von Pischke, Adams and Dunlop, 1983). The transactions costs, informational asymmetries and weak collateral base which disadvantage smallholders in financial markets represent real economic problems. While programs such as credit cooperatives (which reduce transactions costs and exploit informal, local information) and Grameen Bank-like group lending schemes (which reduce lender risk and substitute peer monitoring for collateral) are promising efforts to address the underlying problems, their generalized effectiveness has yet to be demonstrated, especially in agricultural settings where covariate risk is high.22

5. ACTIVIST STATE POLICIES AND BROADLY BASED GROWTH: HOW MUCH WILL BE ENOUGH? Over the past decade, policy has swung strongly toward the laissez faire end of the policy continuum. The contemporary experience of agricultural liberalization and nontraditional agro-export promotion is heterogenous, and cautions against the presumption that agrarian growth free of capital subsidies and policy distortions will be broadly based. Information constraints and wealth biases often make effective or shadow prices in these markets “size-sensitive,” meaning that real economic costs and returns are systematically different for farm units of different sizes. When shadow prices are size-sensitive in a way which renders small-scale farms noncompetitive in land markets, there is a danger that growth will be spread thinly across the agrarian structure, resulting in a growth trajectory which is not broadly based and which potentially induces a socially destructive structural dynamic in the longer run.

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The standard liberalization package of right prices, right institutions and macro stability may not suffice to include the poor in agrarian growth. Indeed, a “right institutions” policy of providing formal land titling may only serve to generalize and make marketable to outsiders what had been locally secure, smallholder tenure. Perhaps useful to get growth moving, such efforts are as likely to work by moving smallholders out, as by including them in the boom. One possible conclusion is that agricultural policy for broadly based growth should be comprised of a well-sequenced combination of “getting prices right,” picking labor-intensive crops, land market reforms, and initiatives aimed at overcoming the factor market impediments thwarting the competitiveness of smaller scale producers. Such an intermediate policy strategy would seek to avoid the centralized state intervention of an earlier era and would enlist investment by states, nongovernmental organizations, and international institutions in first developing markets and local institutions which improve the resource access of the rural poor and hence their competitiveness. Depending on the crop characteristics at hand, and the relevant competitiveness problems, the initial policy efforts would be aimed at redressing these market biases, or level 4 concerns, before turning to full pursuit of reforms indicated in levels 1 to 3 (see Table 1). Unfortunately, two problems confront this intermediate policy strategy. The first is simply the difficulty of addressing fundamental factor market problems, as the experience of targeted, subsidized credit displays (Braverman and Guasch, 1989; Adams and Vogel, 1986). Timmer (1987) remarks that agricultural policymaking becomes “analytically taxing” once one acknowledges the imperfections of rural markets. In that sense, a recommendation for more activist intermediate policy strategy means that the challenges of designing sustainable institutions and finding the right balance of state, market, and civil society become paramount and will vary substantially across time and space. No simple answers such as “get prices right” and “secure land titles” will suffice, and analysts and policy makers find themselves confronting complex institutional and incentive design problems. The second problem with the intermediate policy strategy is that it simply may not suffice to overcome the ways in which dualistic agrarian structures shape markets, technologies, and policies. As discussed earlier, initial asset distributions may tend to create pressures which reproduce themselves. One example of the connection between dualistic agrarian structure and competitiveness outcomes is that the cost-benefit calculus of private bank lending to smaller scale borrowers is not likely to be independent of the extent of demand in credit markets coming from larger scale producers. Another is that the extent and the efficacy of support offered by the state and other organizations

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WORLD DEVELOPMENT

to cooperatives

and other collective action efforts aimed at improving the competitiveness of the rural poor is likely to be constrained by the political and economic strategies of large-scale producer organizations. A third is that market-based technological and institutional innovations are likely to be more rapid and scale-biased when a strong large-scale producer sector is present to demand those services (see de Janvry, Sadoulet and Fafchamps, 1989). Relatedly, public institutions are also likely to respond to pressures from economically important and politically organized constituents. Therefore, the competitiveness gap facing reformers may be a moving target that cannot be easily tackled with intermediate policy reform measures, if the underlying agrarian structure is not altered through the direct use of land redistribution (or what Table 1 labels “level 5” policies) in order to create a critical minimum mass of smallholders. Lipton (1993) makes a similar point when he argues that “new style” market-assisted land reform policies

(which concentrate on the sorts of transaction costreducing measures discussed above) are ultimately a complement to, not a substitute for, “old style” directly redisttibutive land reform. Can the rural poor be included in agro-export growth processes with the help of a series of interrnediate reforms that do not directly attack the structural bases for unequal resource access and scale-biased markets? The answer, unfortunately, is likely to be highly contingent, depending fundamentally on the degree and extent of the competitiveness gap, the associated size biases which arise across regions and over time, and the balance of political power across different classes of producers. Efforts to resolve these basic questions are central to determining the correct combination of policy instruments, ranging from getting prices right to full-fledged land reform, and hence to address the challenge of aiding inegalitarian agrarian economies to follow paths of sustainable development with equity.

NOTES 1. It may also not suffice to even generate growth, as Barrett and Carter (1996) argue.

Boucher and Carter (1996) provide an overview of capital market theory which suggests the likelihood of biases against low wealth, small farmers.

2. This paper does not discuss the sorts of multiplier effects which emanate from agricultural growth. Delgado et al. (1994). Haggblade and Hazel1 (1991). and Hazel1 and Roe11(1983) have looked much more closely at these multiplier effects, arguing that they are much more important than traditionally assumed.

The figure also suggests that beyond four hectares, 9. land allocated to export production begins to rise quickly. This threshold was at the edge of our sample, however, and only a few of the respondents had holdings of four or more hectares.

3. Carter and Zogarra (1995) present the econometric specification and results in detail.

10. The analysis did not identify whether ex-ante capital or ex-posr consumption risk was the operative constraint.

4. By contrast, application of a similar methodology to a sample of farms from other regions of Paraguay showed that

11. In the original study design, villages outside of the successful Cuatro Pines Cooperative were selected in order to determine whether the positive effects of the ongoing agro-export boom in the Central Highlands (found in Von Braun, Hot&kiss and Immink, 1989) were limited to farmers within the co-op. who presumably had a better bargaining position on price, more technical assistance, and perhaps some insurance against risk. Vibrant spot markets for snow peas were found in the Central Highlands, one where most of tbe purchases were made by “coyotes,” who bundled small lots for exporters. Indeed, one of the ongoing problems for Cuatro Pinos management in the late 1980s was members’ selective use of the spot market, when the price offered there was higher than the price guaranteed by the cooperative.

higher land prices have uniformly depressed the lifecycle trajectory of land access of all farm classes. Unlike the frontier region, there has been no particular farm-size bias to the growth process in these other regions. See Carter and Zegarra (1995) for details. 5. Carter and Galeano (1995) detail the regression fication and results underlying Figure 2.

speci-

6. In both the northern and southern parts of the Central Valley, a number of sales took place shortly after parcellation. In the northern region, two thirds of all recorded transactions took place before 1983, whereas in the southern region just more than half (53%) took place after the mid1980s (Mesbah, forthcoming). I. Carter and Mesbah (1993) give a number of references to classical work on this issue. 8. The literature on information and agrarian markets is voluminous. Binswanger and Rosenzweig (1986) catalogue the markets in which information costs and asymmetries are likely to lead to failures and imperfect outcomes. Barham,

12. A second threat to the small-farm sector comes from problems with pesticide residuals. Some exporters are reportedly shifting away from small-scale suppliers whom they find too expensive to supervise for the purposes of assuring market-accepted levels of pesticide residual. These problems signal the sorts of microeconomic constraints which might tilt the competitive advantage of export crop production away from small farmers and undercut Guatemala’s broadly based winter vegetable export boom.

LEVEL PLAYING FIELDS AND LAISSEZ FAIRE 13. As explained in Barbam, Boucher and Carter (1996). capital markets can be intrinsically biased against smallscale producers because the flow of information, which is so central to the operation of that market, has a large fixed cost component, meaning that small transactions become prohibitively expensive. 14. More generally, literature such as Binswanger, Feder and Deiiger (1995) indicates that a family labor cost advantage (rooted in the high costs of supervising hired labor in agriculture) drives the competitive dominance of the owner-operator, family labor farm in many parts of the world. 15. While there can be no doubt that insecure property rights truncate investment incentives, and therefore may dampen smallholder competitiveness in the production of crops which require long term investment (e.g., fruit trees), it is important to note that security of the current occupant may be very different from the security which a potential future occupant would enjoy. The experience of land registries which become outdated when nobody bothers to record transactions indicates that current landholders can feel quite secure in their property rights as defined by their customary system. The need to provide tenure security to enhance the competitiveness of current smallholders should not be taken for granted - it is an empirical question which needs to be carefully evaluated on a case by case basis. 16. Land without legally clear title may offer little security and have diminished economic value to potential occupants from outside the local social context. In this instance, land securely held by the current occupant may have relatively little collateral value to a format financial system. Low collateral value may thus impinge on the ability of smallholders to participate in working capital-intensive export production. The primary question remains an empirical one, however, in as much as format fmancial institutions often show no interest in lending to smallholders even when the latter hold land tides, and smallholders often find the fixed transactions costs associated with format loans sufficiently large to discourage them from demanding formal credit (see Barham, Boucher and Carter, 1996). A recent review of the impact of land titling programs in Latin America and the Caribbean concluded that titling, in and of itself, has not improved credit access for smallholders (for further details see Shearer, Lastarria-Comhiel and Mesbah, 1990). 17. Carter and Mesbab (1993) discuss land market reform policies in greater detail.

1147

18. Lending institutions in the developing countries must rely on depositors and international donors to raise funds for land purchase fmancing. Unless these institutions dispose of very large quantities of capital, their land purchase funds will deplete very rapidly - after only a few land purchases leaving them unable to finance any more transactions until those funds are replenished by borrowers (Shearer, Lastarria Cornhiel and Mesbah, 1990). 19. In a high wage economy, access to cheap and wellmotivated interactive family labor may indeed provide the decisive competitive advantage for a IOO-hectare family labor farm versus a l,OOD-hectarewage Laboror collective farm. Both the 100 and the 1,000-hectare farms am large enough that the fixed costs of information which shape various input and output markets are less likely to be relevant. The same cannot be said, however, about family labor farms with at most a few hectares. For such farms, several orders of magnitude smaller than family farms elsewhere, the advantage afforded by family labor may not suffice to overcome countervailing competitive weaknesses created by the sizesensitive financial, information, and product markets. 20. A similar argument could be made about the Asian experience with small-scale farming. For while it is indeed the case that many East and Southeast Asian countries developed vital, competitive agricultures based on very smallscale family labor farms, they did so in the context of initial distributions and legal landownership ceilings which sheltered small farms from diit head to head competition with significantly larger farms. 21. Size dualism needs to be understood as an economic, not a physical farm-size concept. Economically significant dualism can occur across even a rather narrow range of physical farm sizes, as work on the impact of risk on in more egalitarian economies of sub-Saharan Africa indicates (see Kevane, forthcoming; Carter, forthcoming and Zimmerman and Carter, 1995). 22. A covariate risk is one which effects many people simultaneously. A financial institution whose depositors and borrowers are ah subjected to the same shocks is likely to face solvency problems. A bad crop year, for example, is likely to see the simultaneous increase of loan default and withdrawal of savings deposits. Novel forms of financial intermediation which are based on local information and peer monitoring ipsofucro are likely to suffer from covariate risk problems.

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LEVEL PLAYING

FIELDS AND LAISSEZ FAIRE

Chile: Corporacidn de Investigacidn para Latinoamerica, 1988). Persson, Torsten and Guido Tabellini, “Is inequality harmful to growth,” American Economic Review, Vol. 84, No. 3 (1994), pp. 600-621. Rodrik, Dani, ‘King Kong meets Godzilla: The World Bank and the East Asian miracle,” CEPR Discussion Paper, No. 944 (1994). Schweigert, Thomas, “Penny capitalism: Efficient but poor or inefficient and (less than) second best?” World Development, Vol. 22, No. 5 (1994), pp. 721-731. Shearer, Eric B., Susanna Lastarria-Comheil and Dina Mesbah, “The reform of rural land markets in Latin America and the Caribbean,” Paper 141 (Madison: Land Tenure Center, 1990). Spooner, N., “Does the World Bank inhibit smallholder cash cropping? The case of Malawi,” Institute for Development Studies Bulletin, Vol. 19, No. 2 (1988). pp. 66-70. Thrupp, Lori Anne, Bitter-Sweet Harvests and Global Supermarkets: Sustainability and Equity of Agroexport Diversijcation in Latin America (Washington, DC: World Resources Institute, 1995).

APPENDIX:

DATA

Timmer, C. P., “The agricultural transformation,” in H. Chenery and T. N. Srinivasan (&is.), Handbook of Development Economics, Vol. 1 (Amsterdam: North Holland, 1987), pp. 275-33 1. Von Braun, J., D. Hot&kiss and M. Immink, “Nontraditional export crops in Guatemala: Effects on production, income, and nutrition,” Research Report, No. 73 (Washington, DC: International Food Policy Research Institute, May 1989). Von Piscbke, J. D., and D. W. Adams and G. Dunlop, Rural Financial Institutions in Developing Countries: Their Use and Abuse (Baltimore: Johns Hopkins University Press, 1983). Williams, Robert, Export Agriculture and the Crisis in Central America (Chapel Hill: University of North Carolina Press, 1986). World Bank, World Development Report (New York: Oxford University Press, 1990). Zimmerman, Fredric and Michael R. Carter, “The microeconomics of induced institutional innovation: A dynamic stochastic general equilibrium approach,” Mimeo (1995).

DESCRIPTION

The analysis presented in this paper draws on coordinated farm-level data collection on agro-export booms in Chile, Guatemala, and Paraguay. In each country surveys solicited information that could be used to analyze and compare the agro-export adoption patterns of peasant farms, the land access effect of shifting competitiveness among producers of different farm sizes, and the labor absorption effect created by the new crops and shifts in the underlying agrarian structure. From individual farms, the types of data gathered included: the farm history of land accumulation and deaccumulation, annual land use patterns dating back to the inception of the relevant agro-export boom, input use and income by crop for the last year, income and employment in other activities, and access to credit and other potential important inputs that might affect agro-export adoption. Variations in the local agrarian structure required distinct sample design strategies in each country. In Chile, the study focused on the evolution of land holdings on a sample of 13 ex-haciendas (or large estates) - six in the Cachapoal province and seven in the Ruble province. These areas were originally surveyed in a 1965 study of large estates in Chile’s Central Valley. A list of the 241 “1976 farm units” which had evolved from the original 13 1965 haciendas was formed by reviewing the agrarian reform and parcellation case files maintained by the Servicio A&cola y Ganadero of the Agricultural Ministry, in Santiago. The list was updated to 1991 with information obtained at the Property Registry Offices (Conservadores de Bienes Raices) in Cachapoal and Ruble. A random sample was then drawn from the 1991 farm list, and the current owners (or users) of the selected farms were then interviewed in 1992. In Guatemala, researchers from the University of Wisconsin and the Instituto de Nutrici6n de Centro America y Panama collaborated on the collection of dam from 319 households drawn from five villages in the Central

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DESIGN

Highlands. The five villages were selected purposively from a region where nontraditional exports of winter vegetables, especially broccoli and snow peas, had been booming: four as participants in the agro-export boom; the fifth (a more geographically isolated village) as a “control” site. (Ironically, the control village expanded its participation in the export boom strongly during the year of interviewing.) Following an initial census of the 900 or so households in the five villages, a stratified random sample of 3 19 households was selected on the basis of farm size. Household interviews took place in 199&91. Tbe selected sample reflects the extreme fragmentation of landholdings in the region, with only a small portion (6%) owning more than three or more hectares of land, compared to 79% owning less than 1.5 hectares of land. The lack of larger holdings in the sample was in part a result of choosing household units in the villages as the sample frame rather than a land-based sample frame. A second (nonrandom) sample of large scale producers in the same locale was later collected for purposes of comparison. In Paraguay, random samples of farms were drawn from each of the three regions (colonization, minijiotdia and Brazilian frontier) typically identified as having distinctive socioeconomic environments. For each region, a department was selected (San Pedro for the colonization region, Paraguari for the minifindia region and Itapda in the frontier region). A list of districts (companias) in each departments was then constructed. For companias randomly selected from this list, a census of local farm units was constructed. A stratified random sample of approximately 100 farm units in each department was then obtained from these lists. Large farms were oversampled relative to their population numbers, in order to assure sufficient information on their logic and operation for statistical purposes. Interviews were car tied out in late 1991.