The Establishment of Institutional Economics and Analysis of Agricultural Development

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VII. The Use of Institutional Economics to Explain Agriculture in Developing Countries Recently, we have seen considerable structural changes in the agricultural sector. Within developing countries, there has been a shift of agricultural production from an industry primarily dominated by family-based and small-scale farms and firms, to that of large firms. Originally, farmers located in developing countries were not linked to customers and corporations of the rich nations. Market liberalization has lead to an increase in demand for products found in developing countires. In accordance, there has been a worldwide increase in consumer demand for differentiated agricultural products that are considered labor intensive. Those who are well endowed, as well as exceptionally skilled, have the ability to be part of the coordinated marketing chains and alliances that are currently dominating the market. Unfortunately, there are several barriers to entry into these high-value chains, such as requirements regarding quality standards and food safety. Thus, there have been increasing concerns for the small farms and agribusiness firms to survive in the medium term. Depending on the external economies of scale that arise through networking, clustering and alliances, there are opportunities that arise for smaller firms. These opportunities focus primarily on product differentiation that is linked to various products that result from niche markets, such as organic products. One potential avenue that has arisen in an attempt to integrate small-farmers in developing countries to the exporting and processing markets in the modern economy is contract farming. Contract farming has provided the agricultural sector with new technology, read... ... middle of paper ... ...nt portfolio in question does not reflect the interests or risks of a given investor or member. The problem materializes when members cannot withdraw or reallocate their investments. Control problems arise when there is a deficiency in external competitive market pressures, which helps discipline managers. Lastly, influence cost problems transpire when wealth distribution amongst members is affected by certain decisions. When there is a wider diversity of interest amid members, the costs tend to be greater. Consequently, vaguely defined property rights results in the predicaments listed above, which in turn affects members’ incentives to invest in organizations and the organization’s capability to generate equity capital. Governance structures are constructed to mitigate the risks and minimize the costs associated with economic transactions (Sykuta, 2001).
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