TITULO ONCE

The endogeneity of institutions leads individuals to act in a manner that reproduces and reinforces associated beliefs and behaviours (Janvry et al. [1993] and Greif and Latin [2004]). As a result, the more privileged groups want to defend these institutions to perpetuate their wealth and power and block the enrichment of other groups. In contrast, the subordinate classes are far less interested in changing the larger structures of the state and the law than they are interested in working the system to their minimum disadvantage (Scott [1985]). The resulting diffusion of interests and free-riding makes the formation of broad coalitions difficult (Janvry et al. [1993]). Researchers have identified a number of other internal and external obstacles that farmers confront. Internal obstacles include the free-rider problems, horizon problems, portfolio prob- lems, control problems, and decision-making problems. External obstacles include information, resources, political environment, culture and Porter’s five forces (Egerstrom [2004]). A number of these external obstacles can be linked to the nature of the institutional environment in which co-operatives find themselves.

Dominant institutions reinforce social stratification and imbalances of power

Contrary to the traditional view of rural communities as systems of communal solidarity, most rural villages are highly stratified by economic class and power, and the gap between the haves and have-nots is growing. One reason is that market orientation and the deregulation of the economy have changed the dynamics of rural life. Huge numbers of small farmers are migrating to the cities to take off-farm jobs. The result is a reduction in face-to-face communication between those that remain behind, which in turn diminishes the trust and sense of community among the villagers. As well, social ties and interdependence are weakened by the development

of commercial services. Both informal and formal co-operation occurs less, social capital is decreasing, and the villagers’ solidarity is further broken.

Furthermore, the economic and social lives of citizens in rural communities are dominated by rural elites – e.g., local party branch and village leaders, and those with strong ties to power holders. Since the elites earn most of their income by appropriation, they receive the lion’s share of fertile land, agricultural inputs, and credit provided by the government. Local authorities fail to dispense justice and are non-responsive to local farmers’ hardships. Further, their strong ties with local elites, and their lack of accountability and political transparency have resulted in public funds being used to support the patronage system rather than the overall development goals.

For small farmers, co-operation gives them hope for empowerment and reduced dependence and susceptibility to appropriation. For these reasons, rural elites and local authorities are mo- tivated to frustrate and repress voluntary co-operation. As a result, the FPCL, the only legal document to support small farmer co-operation, is either not enforced or has its meaning altered to meet the goals of the elites.

During decades of Commune life, the autonomy, independence, and institutions of small farmers were dismantled. Farmers were forced into an institutional straitjacket devised by the government and elites to make them subordinate recipients of government programs and subjects of claims from outsiders. As a result small farmers are far less interested in changing the larger structures of the state and the law. Their motivation is to work the system to their minimum disadvantage. For example, during the years of the People’s Commune, shirking and free riding was rampant (Lin [1988]). In much the same way, farmers today “choose” to join and become members of C+H co-operatives – i.e., doing so is a way of working the system.

In addition farmers are pressured to join C+H co-operatives through a number of other mechanisms:

1. Co-operatives become channels of government funds and support programs – thus, farmers are deprived of certain economic benefits (e.g., subsidized credit and agricultural inputs) if they decide to stay out of the co-operative;

Chapter 7. Analysis of the Company + Households Model 2. Only C+H co-operatives and their members are allowed to engage in the production of some products (e.g., pigs and cattle), since individual household production is banned in the name of animal and public health;

3. Some agribusinesses are monopolies/monopsonies, and farmers have to be members of co-operatives controlled by them if they want to do business with these businesses;

4. Some farmers are members of C+H co-operatives because it is dangerous economically and socially to not participate with the local elites.

Even though C+H co-operatives are not owned and controlled by small farmers, they are nevertheless important as a means of providing a marketing outlet for agricultural production, introducing high-quality breeding stock and crop seeds, circulating market information, improv- ing the quality, quantity and consistency of agricultural production to meet consumers’ needs, and assisting small farmers to develop more sophisticated skills and adopt best practices. The fact that many farmers have voluntarily participated in the C+H co-operatives indicates that farmers are receiving some benefit from these organizations. Thus, C+H co-operatives do contribute to the development of a modern supply chain and ensure that small farmers have access to this chain in a way that appears to be at least somewhat beneficial.

Tangible benefits from group actions are marginal

The principal economic motivations for forming a farmer co-operative are to increase bargaining power and to develop a competitive yardstick. However, the small scale of operations means that Chinese small farmers cannot generate substantial economic benefits from their collective actions. The average size of farmland for each household is less than half a hectare, a size which prevents small farmer groups from engaging in capital and management intensive operations where the profit level is higher.

For example, taking into account the small size of land per household (less than half a hectare), even with 1,000 to 2,000 households engaging in collective action to pool their production, the group would still be unable to reach a scale of production that is cost competitive and

economically viable. On top of this farmers must add the costs and risks associated with operating a self-help group.

Most co-operatives pay off only after a considerable amount of time and effort. To organize and operate a farmers’ group and become the residual claimants, farmer members have to exert their control. But doing so comes at a cost. If the members do not have the financial and man- agement skills to operate the co-operative, they would need to rely on expensive professional services, such as accountants and lawyers. In addition, there are costs associated with controlling managers and monitoring the board to hold it accountable (Hansmann [1996]) .

When many persons share ownership of a group, the collective decision making process is costly, as there are likely to be differing opinions, preferences, and vested interests among the members of the group. It can take a long time to reach an agreement on the shared goals the group is to pursue and to resolve the conflicts among members. These are the costs of collective decision making (Hansmann [1996]).

When joining a co-operative, farmer members pledge many of their assets, both farm and personal, in order to participate. As a result, they face far greater risks than they would if they were to continue to contract with a private firm. In the event that the co-operative fails. they stand the risk of losing a substantial portion of their personal wealth. Small farmers are also forced to operate in terms of short-term interests due to the scarcity of resources and low income potential. The resulting horizon problem also discourages co-operation (Vitaliano [1983]).

These forces can be seen to be at work in some of the examples presented in the previous chapter. For example, the Green Onion Association in Yuammou, Yunnan does not require member capital contributions, and they are not democratically controlled. Another example is the Chicken Growers Association in Gannan, Jiangxi which chose not to engage in more advanced levels of processing and distribution, which have higher profit levels, due to the costs to farmers.

Lack of leadership

Since the authoritarian government never allows organizations to be operated independent of government control (CIDA [2008]), there are no organizations which can take a lead in coordinat-

Chapter 7. Analysis of the Company + Households Model ing farmers actions and in representing them in the policy-making process. In contract, external agents and organizations play (and played) a key role in fostering rural reforms and policy mak- ing in North America, Europe and some developing countries. As Harris, Fulton, Stefanson, and Lysyshyn [1998] say, the roles played by the external agent include: (1) mobilizing stakehold- ers; (2) helping farmers develop institutional arrangements which can address assurance and credible commitment issues; (3) identifying the problems and needs faced by farmer groups; (4) developing strategies to address these problems and needs; and (5) mobilizing resources both from within and outside the groups.

Although some NGOs are attempting to assist farmers in China in forming their own groups, they do not have the knowledge and skills required to be effective facilitators. These include: a solid knowledge of the agri-food industry, the ability to link this knowledge with an appropriate organizational arrangement, and the ability to foster mutual trust and interdependence among stakeholders (Harris et al. [1998]).

Individual leaders are also important. The most important attribute of a successful co- operative leader is his or her vision of a business opportunity and the ability to motivate members to take advantage of it (Baker and Soren [2004]). However, most of the better-educated farmers with entrepreneurial skills have moved to the cities to take jobs. Those staying in the villages have been thoroughly socialized by dominant institutional norms, making it difficult for them to understand the nature of the co-operative opportunity – the ability to work together for mutual benefit and to determine their own destinies democratically.

Co-operators that believe in and understand collective action often have great difficulty communicating their paradigm to a community permeated by the traditional power structure. Even when a co-operative is started, it is not easy to translate the vision into practice because there are few real world examples that can be emulated. As a result of dominant institutions, co-operative organizations inevitably lose many of the properties that made them unique. In particular, farmers with an entrepreneurial drive are more inclined to run their own business since the direct economic returns on their investments of capital, time, and effort are limited in co-operatives due to ill-defined property rates.

In addition, those leaders dedicated to co-operation and community development may find themselves being pushed out of the co-operative if their organization threatens the power base of local elites or if they were to compete seriously with established private interests.

Lack of a Business-Friendly Environment

The participation of government officials in business activities for their own interests is a serious obstacle to the development of competitive markets (Rausser and Johnson [1993]). The au- thoritarian political system encourages blockholding by restricting markets for control, limiting competition, and offering weak protection to investors of small and medium enterprises (SMEs). SMEs are also vulnerable to manipulation and control by local elites and special groups. Business owners that feel insecure resort to seeking protection from power holders, thereby reinforcing the establishment of the patron-client network.

Farmers groups face the same risks as other members of the rural business community that have to deal with authoritarian government interference. The government imposes unreasonable burdens on SMEs such as interfering with their markets, and providing little information or tech- nical assistance. The fact that the institutions of the market-economy are not fully implemented or enforced, including the rule of law, gives these organizations no recourse.

Small farmers’ self-help groups are confronting internal and external obstacles that marginal- ize them in the co-operative sector. In contrast, C+H co-operatives are being venerated as the best examples of agricultural modernization, and are favoured by local authorities. The next section of this chapter is devoted to examining the basis of the relationship of unequal power and status that exists between the company and households in the C+H co-operative model.