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Collective Action, Transaction Costs and Contractual Hazards: Explaining the Divergent Performance of Guatemala’s Fondo de Tierras and Agros Guatemala

 

Maxime Gasteen
Chapter 1: Introduction

 

In Guatemala, the Fondo de Tierras, a government body set up after the civil war, and Agros International, a private non-profit, both implement similar programs to increase land ownership amongst the rural poor. This program revolves around selecting a group of beneficiaries, locating a suitable farm and negotiating with the owner for a price. The agency then provides credit for agricultural inputs and technical assistance for crop diversification in the hope that the subsistence farmer will be transformed into a family farm, owning his or her means of production.

 Yet the difference in performance of the two agencies is significant. For example Agros actively targets the landless poor, whereas the Fondo de Tierras often works with beneficiaries who are relatively well off (Gauster and Garoz p.9). Perhaps the most significant indicator of performance is abandonment. Farmers presumably abandon their new land because their old life styles offered a better livelihood. Abandonment is therefore a significant condemnation of the program’s performance: Agros’ abandonment rates are 17.7% as opposed to 30% for the Fondo de Tierras (Gauster and Isakson 2007:1528).

The question therefore is why is Agros able to implement the same program as the Fondo de Tierras and make it a success? This question is especially pertinent when set in the context of the wider literature on using market mechanisms to promote land access in developing countries. This type of land reform, called Market Assisted Land Reform (MALR), has been widely promoted by the World Bank in Colombia, Brazil and South Africa. Its results, while not a total failure, have not been spectacular, with accusations of corruption and mission drift (e.g. Borras Jr 2003).

My essay is an attempt to overcome ideological battles that dominant analysis of MALR over whether states or markets should bring development to the rural poor.  Instead, I argue that the relative failure and success of the Fondo de Tierras and Agros International are rooted in institutional relationships and incentives.  Using a New Institutional Economic Perspective, I will show how the Fondo de Tierras underperforms because it not only fails to address the significant transaction costs that prevent the landless poor from obtaining quality land, but it also imposes additional transaction costs on beneficiaries. The reason for this is rooted in a collective action problem at the end of the Civil War when the MALR was negotiated. The Guatemalan state was pressured into delivering some form of agrarian reform following 30 years of civil war, as is evidenced by the 1996 Peace Accords on agricultural development. However, the Guatemalan state has a far deeper and more dependent relationship on large landowners, in whose interest it is to maintain the status quo. The state’s agrarian reform institutions, the Fondo de Tierras and the Ministry for Agriculture, do not have the incentives to fully carry out either type of program (redistribution or MALR) and therefore are unable to put in the necessary work to transform the landless peasant into a capitalist family farmer.

The experience of Agros International backs up this institutional perspective on MALR because it shows how an organization with a different set of incentives is able to build a series of relationships with a group the state has marginalized for centuries and put in the necessary time and effort to see the peasantry transformed from subsistence farmer to small-scale commercial farmer. The relationship Agros has developed with beneficiaries can be shown in many ways, including its larger number of field visits, more intense focus on technical cooperation and diversification, an insistence on communal participation, larger emphasize on women’s rights and real efforts to develop community organizations to manage social relations and production. Ultimately, Agros International acts as an institutional entrepreneur to overcome some of the collective action problems and high transaction costs that have caused the Fondo de Tierras to fail.

In the context of this argument, I will examine the work of Agros International using data from several week of fieldwork in Central America. I conducted interviews with 28 beneficiaries and visited 9 different farms, and conducted a focus group in each village.  Their experience with a similar program, though run on a much smaller scale, reveals interesting lessons about the nature of state-led attempts to impact land access. This paper will argue that Agros is able to succeed where the government of Guatemala cannot because it is outside (though not separate from of course) the institutions (and lack thereof) that provide perverse incentives for an organization mandated to reduce rural landlessness. This suggests therefore, that in countries where good governance is lacking and institutions for reform that are open and accountable are nonexistent, the 'third sector' could be a viable partner for international actors to facilitate land access using a similar approach to land banks.

Chapter 3: Overview of the Two Programs and Metrics for Success

 

Fondo de Tierras:

Background

            Set up 1996 after Civil War with Peace Accords

Method

Self-selecting groups

Business Plan

Apply for credit

Receive technical help (no participation, private)

 

Agros International

Background

Working in Guatemala since 1982

Presence in Ixil area

Method:

• Communities approach Agros
• Work on community development/leaderships- organizations set up (production committee, land committee, education etc…)
• Search for land and negotiate price together
• Provide technical assistance and credit

 

Defining ‘success’

World Bank evaluation:

Very positive- looks only at how many loans given out

Little date on actual impacts (increased well being, quality of farms etc..)

 

A program to increase land access should:

Work with landless poor

Increase incomes/well being (theory of property right and credit)

Provide quality land for production

 

Outcome	Indicator
Work with landless poor	Number of beneficiaries who are landless and poor
	Participation of landless poor
Increase wellbeing	Abandonment rates
	Conditions on Farm
Provide quality land for production	Land Quality

 

 

 

The table below compares the performance of the Fondo de Tierras and Agros International for each of the indicators identified above.

 

Indicator	Fondo de Tierras	Agros International
Reaching Poor	Beneficiaries allowed to earn 4x minimum wage	Only works with landless, rural poor
	No mechanism to prioritize the poorest	Asset and income survey carried out to determine land goes to poorest.
Abandonment Rate	30%	17.7%
Land quality	Most land is of poor quality	72% say land is very good quality
Conditions on Farm	68% without sufficient access to water	11% without sufficient access to water
	61% lack schools	27% lack schools
Immigration	?	25% of respondents still have work outside farm
		All focus groups report significant change has been no more migration of men for wage labor
Impacts on Beneficiary		88% report ability to support family is better or much better
Participation	48% of beneficiaries did not participate in project planning	68% of beneficiaries always participate in project planning. 26% sometimes participate

Table : Comparing the Performance of the Fondo de Tierras and Agros International

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Chapter 3: Literature Review

This chapter will survey the literature on Market Assisted Land Reform, with the goal of demonstrating its neo-classical bias. Neo-classical economics is mainly concerned with market efficiency and if it does deal with power at all, it is mainly in the context of principle-agent problems. In brief, neo-classical economics is not able to cope with issues of power and the role of institutions. On the other hand, MALR has been heavily criticized by scholars mainly concerned with power and ideology, and how markets typically serve to increase exploitation and increase the wealth of the wealthy. I argue ultimately that this group is unable to offer better alternatives to MALR, because of the assumption that the state is better agent of redistribution and justice than the market, an argument which seems weak in the context of failed state-led land reforms in Latin America in the 1970s.  Finally, this section surveys the NIE literature, showing how it has space for both considerations of economic efficiency and social wellbeing and also the role of power and ideology in shaping markets and exchange.

 It is important to recognize why land reform remains a critical and contentious issue in the contemporary world. From an economic modernization approach, pursued by both socialist and capitalist regimes, reform of the traditional agrarian relations, and therefore the destruction of the lord- peasant relationship, is a pre-condition of modernization (Bernstein 2002, Moore 1966). Land reforms and issues of access to land remain important if one is concerned about poverty reduction and equity, because land is a source of wealth, livelihood security and collateral for credit and 70% of the world’s poor are found in rural areas (e.g. FAO 2005, Deiniger 1999). Since the end of the Cold War, one stream of thought concerning land reform has dominated policy efforts to solve the agrarian question, based on classical micro-economic theory. This section looks at the development of this stream of thought, known as Market Assisted Land Reform (MALR).

Classical economic theory assumes that perfect markets transfer factors of production from less efficient to more efficient producers, resulting in efficiency gains and economic growth (Larson 1997). In the last 15 years, policy-makers from transitioning countries and international development institutions such as the World Bank have sought to harness market forces to allocate rural resources more efficiently in the developing world, hoping to stimulate production, transform social relations and stimulate investment and growth (e.g. Dieniger 1999). These “market assisted land reforms” are based on the three interlocking assumptions: 

1.                  By defining and enforcing property rights, the state creates functioning land markets.

2.                  Free land markets allocate resources efficiently i.e. land is redistributed to the people who will make it most productive under free market exchange and the highest bidder will be the person who can make the land most productive.

3.                  Clear property rights will increase tenure security that will then increase investment. Secure tenure will drive down transaction costs and increase incentives for investment, as well as increase access to credit for investment (Barrows and Roth 1990).

 

The World Bank claims that market assisted land reforms can now not only increase efficiency but can also deal with equity concerns. Hence there is no role for state redistribution or intervention to achieve socially desirable equitable goals (Deiniger 1999). The reason for this is the World Bank’s appropriation of the discourse of the small farmer, recognizing that small producers produce more per acre than large landholders. Small-scale producers have higher yields because they use practically free family labor to squeeze every last bit of produce out of the land. On the other hand, a profit-maximizing firm, again according to classical economic theory, produces until the marginal product of labor, or the extra output produced by one additional worker, is equivalent to the cost of employing one additional worker (i.e. the wage rate) (Thiesenhusen 1989). Moreover, the supervisory costs associated with hired labor also limits the productivity of commercial farmers (Dieniger 1999). Therefore, a well functioning land market should transfer land to small-scale producers who produce more with a marginal unit of land than large landholders/firms.

 

This theoretical insight gained currency at the World Bank in the 1990s and was subsequently applied to four countries: South Africa, Brazil, Colombia and Guatemala.[1] The MALR approach therefore is the intellectual background to the Fondo de Tierras. However, as demonstrated above, the performance of the Fondo de Tierras has fallen far short of expectations.

 

The World Bank recognizes that there were some flaws with the Fondo de Tierras, although they certainly give it a much rosier assessment than outside observers, rating the outcomes, the performance of the bank and the performance of the Guatemalan government as satisfactory (its second highest rating) (2006:4). For the Bank, success is defined less in actual impacts on beneficiaries, and more in how many loans were provided. It does recognize some failures in the program. For instance, the two year delay in starting the program is explained by “the national elections that took place in 1999 and the subsequent transition to a new administration” (2006:10). They also recognize the need for a Board of Directors subject to objective evaluation to prevent political interference, as well as the need to increase technical assistance and farm credits, including access to working capital.  Other recommendations from this evaluation include increasing the efficiency of the data collection for monitoring and evaluation purposes and implementing computerized financial management systems. Overall, the report seems surprised that the Government of Guatemala does not want to continue with a second phase of the MALR- again the World Bank puts this down to a change of administration. An alternative explanation could be the underperformance and high cost of the fund or institutional incentives to discontinue such an expensive program given the contemporary political environment, which has seen the weakening of guerrilla and opposition groups that forced the negotiation of the Fondo de Tierras in the first place.  In sum, where the World Bank recognizes problems with the Fondo de Tierras, these are rather mechanical in nature and recommends technical fixes to increase the efficacy of implementation. There is, for the Bank, nothing wrong with the actual model nor the institutions involved in implementing it.

 

Critical Theory Approach to Explaining the Failure of MALR

 

For neo-Marxists, MALR is a corollary to the global restructuring that took place following a crisis of capitalism in the 1970s and the demise of alternative development paths following the debt crisis and the end of the Cold War. In neo-Marxist theory, the classic agrarian question revolves around the modernist transition to commercialized, if not capitalist, agriculture, capable of supporting an emerging industrial society, in particular the urban proletariat (Moyo and Yeros 2005:14). Yet, global and local political economic developments have put a spanner in the works of the modernist project as global commodity food chains have subordinated agricultural in even the most peripheral of areas to its logic “without creating home markets capable of sustaining industrialization” (ibid). A seismic shift has occurred in the global system, including global agricultural markets, in the wake of the crisis of capitalism of the 1970s. Seeking to reduce the impacts of crisis in the core, spatial fixes were sought for the release of over-accumulated capital through the devaluation of peripheral currencies and industries, via liberalization and privatization (Harvey 2005:56). Crystallized in the controversial structural adjustment programs (SAPs), peripheral countries were removed from the statist development path of ISI, bringing to an end the ambitious post-independence development and modernization plans revolving around industrialization. Alternative development strategies, drawing on the neoclassical assumptions of comparative advantage, rely instead on “export agriculture in saturated and luxury markets”, which in the case of Guatemala are bananas, coffee and cacao for export (Moyo and Yeros 205:18). Market Assisted Land Reform is part of these global processes.

 

The resurgence of the discourse on private property rights is, for neo-Marxist theorists, closely tied to neo-liberal hegemony and the renewed interest in land reform and privatization within the World Bank (Mayo and Yeros 2005:12).  MALR is therefore an appendage to neo-liberal policies that are not aimed at reducing global poverty but at securing global markets and the position of global elites within them. A strong critique from the neo-Marxists concerning MALR and its approach to land reform concerns the process of social change itself. Legal reforms, such as titling, are meant to encourage the creation of capitalist family farms, benefiting the economy as whole, as higher incomes from increased productivity and efficiency encourages rural capitalists to enter the market, employ labor for their farms, and thus provide an incentive for the abandonment of subsistence agriculture via the proleterianization of the peasantry (Mayo and Yeros 2005: 21). For the neo-Marxist critiques of MALR, the legalistic, technical approach to development, is ahistorcial and asocial, ignoring how processes play out on the ground. Moreover, such technical approaches to the agrarian question – that is how to stimulate the accumulation of capital in the rural sector- ignores the wider processes in the global system. These processes include the hegemony of neo-liberalism, the realignment of transnational capital and nation-state power and the core-periphery dialectics which benefit well from the presence of a semi-proletariat class that functions as a reserve army of labor in order to drive down production costs by subsidizing themselves the social cost of reproduction (Yeros and Mayo 2005:31).

 

Some of the strongest criticisms of Land Funds in general come from this school of thought, focusing on the inevitable failure of the fund not because of operational failures (corruption, lack of funds) but because it fails to address the social nature of land.  Borras argues that ” the underlying assumption that peasants and landlords will behave in a particular, supposedly ‘rational’, way, given proper institutional rules and incentives, may not be true in most rural settings” (2003:389). For example, Borras argues that land transacted under MALR is often overpriced in the economic sense, as elites want to hold onto land for prestige and political influence. He states “politics play a crucial function; and the power of dominant classes to influence price setting for land regardless of its true economic value is crucial”.  Borras also critiques “the [MALR] assumption that peasants (usually viewed as a homogeneous mass) and landlords can become willing buyers and willing sellers, and can negotiate freely and fairly ignores the nature and dynamics of political power relations that exist in most rural areas of developing countries” (ibid). Hence, MALR is bound to fail because of the power dynamics that exist in peripheral countries.

 

In the Guatemala case, this argument claims that land is not a simple commodity, and is bound up with social and historical processes which mean the MALR is bound to fail. Gauster and Isakson argue that the Land Fund failed because of “the inherently flawed model of MALR that treats land as nothing more than a commodity” (2007:1518).  In particular, they point to the hoarding of productive land by landowners for both economic security as well as social prestige. The logical conclusion to this argument is to implement wide ranging state redistribution. Gauster and Garoz argue that “without state expropriation and redistribution, it is impossible to break the feudal structure that exists in Guatemala” (YEAR:13). However, the evidence I have presented suggests that a private organization is having some success in transforming the subsistence peasantry into capitalist family farms using MALR methodology, which indicates that the problems the Gauster and Isakson identify are not insurmountable.

 

Gauster and Isakson, who claim the MALR model is inherently flawed, proceed to describe a host of operational failures that really do not undermine the entire notion of MALR itself. They say MALR in Guatemala has failed because of a lack of political will, a failure to reach the poor, high transaction costs and a limited supply of land, all of which are very similar to the World Bank’s critiques (and defence) of MALR (2007:1522). By focusing on the operations side of the failure of the Fondo de Tierras, Gauster and Isakson do not show how or why MALR is bound to fail by misconceiving land as a commodity rather than a social process.

 

What is lacking from these critiques is an overall explanation of why the Fondo de Tierras is failing- instead we get a piecemeal explanation that combines neo-Marxist critiques of markets, exploitation and social relations and more mundane implementation and operational failures. Even though institutions are mentioned – in particular the lack of institutions to enforce property rights and the influence over the landed elite in shaping the Fondo de Tierras- there is no theoretical insight into why the land fund behaves this way. Thus the substance of the critique from both the World Bank and these critiques is remarkably similar and does not address the role of institutions in explaining the failure of the Fondo de Tierras.

 

3^rd approach: NIE

Broadly speaking, the World Bank presents neo-classical explanations for the problems experienced by the Fondo de Tierras. Whilst they are most certainly true on one level, the complete absence of a discussion of the role of institutions and incentives in determining the outcomes of the Fondo de Tierras weakens their analysis because we are still left wondering why the Fondo de Tierras is under-funded, why the Minister for Agriculture was replaced 7 times in three years and why the Board has meddled so obviously and so politically in the operations of the Fondo.  On the other hand, critical analysts, such as Guaster and Isakson are not able to explain why Agros International is able to succeed where the Fondo de Tierras cannot because they focus on the inherent failures of the market approach. Yet Agros uses a very similar methodology with clearly superior results.

 

A third way of approaching the difference in performance of the Fondo de Tierras and MALR is using New Institutional Economic framework. This framework is compelling because it provides an insight into why the Fondo de Tierra underperforms relative to Agros International that includes elements of social relations and power, yet without dismissing the possibility of leveraging market mechanisms for equitable rural development given the correct institutional context.

 

NIE is particularly appropriate to this topic because it seeks to understand the divergence between the theory of perfect markets, as illustrated at the start of this section, and the empirical reality of outcomes that fall far short of predictions, as the Fonod de Tierras has clearly done. It argues that the institutional environment is critical to understanding how markets are shaped and behaved and how particular incentives for action are created (c.f Kheri YEAR, North 1990). Neo-classical economics largely ignores the role of politics and power in exchange and often assumes that markets look and operate the same in different contexts, and assumes an environment where there are zero transaction costs (North 1989:1329). Indeed, in the neo-classical world there are no institutions, but only agents and principles. However, North and others argue that in the real world exchange is never costless and the key to understanding economic performance and the behavior of market actors is the cost of transacting (ibid). Institutions are the rules, both formal and informal, that govern the transaction and either impose or reduce transaction costs. As North says, they are “the humanly devised constraints that structure political, economic and social interactions” (1991:97).

 

NIE often takes an evolutionary perspective to the development of markets and institutions (e.g. Williamson 2000). In small scale societies, personal relationships can govern exchanges and reduce transaction costs associated with uncertainty through social pressure and sanctions. However, as exchanges become more and more widespread, uncertainty increases and as does the potential for transaction costs to increase. Contracts are always incomplete, as the parties can never be entirely certain that the other side will fulfill their obligations. Furthermore, neoclassical economics assumes that win-win cooperation is possible between two agents because information is complete and the game (i.e. the transaction) continues indefinitely. However, when information is incomplete and the game is only played once, NIE theorists have demonstrated that the incentives to cheat and not cooperate are high (North 1991:98). Society therefore needs institutions that can facilitate transactions by reducing uncertainties.

One of the major ways in which institutions reduce transaction costs is by reducing contractual hazards (e.g. North 1991:99). Across different cultures or geographical areas, traders could never be certain that the receiver would pay for the goods or not exact some sort of unanticipated tariff. A host of institutions were therefore created, ranging from paying tolls to retaining an armed guard with the shipment, to reduce the contractual hazard (ibid). The way in which institutions shape the nature of the contractual hazard is therefore key to understanding the nature of the exchange.

 

Another important element of the NIE relevant to my argument is the interpretation of property rights. For neo-classical economists, the fundamental characteristic of property rights is their alienability, which allows the asset to be exchanged freely, to appreciate freely and to be used as collateral (REF). Yet, property rights are rarely – if ever- ‘free’: there is a host of conditions attached, for instance, to what one can and cannot do with a piece of land, from hedge sizes to buildings erected on it. From the NIE perspective, what determines in large part economic transactions are these constraints imposed through rules and how far they facilitate transaction (or not). For example, restrictions on building sizes one may erect on one’s property might seem a restraint of free-spirited entrepreneurial activity but from a different perspective these rules might serve to enhance the value of surrounding people’s properties. Therefore, institutions and bureaucracies that enforce them are not impediments to exchange, as many neoclassical economists might argue. Instead, they shape the rules of the exchange by determining the transaction costs in such a way that hopefully maximized the welfare of society.

 

However, the need to create institutions (also called governance) creates a clear common action problem. The rise of the state, the breakdown of interpersonal relations and the uneven redistribution of coercive power makes it very attractive for some groups to capture the power of the state and exclude others from the process of making the rules of the game i.e. the institutions that shape transactions and impose the constraints on economic life (North 1989:1322). This group will exclude others as long as their personal gain from excluding others exceeds the cost of keeping certain group out, even if there is clear net social benefit of opening up the power structure to other groups. These kinds of perverse incentives from a social justice perspective helps to explain the persistence of institutions and rules that perpetuate massive inequality in many parts of the world, even though the welfare of those societies would clearly be increased were the rules of the game opened up to other people.

 

In summary, there are three key elements of the NIE literature that I will apply to explain the varying performance of the Fondo de Tierras and Agros International: transaction costs, contractual hazard and a common action problem. The creation of the Fondo de Tierras is clearly a mechanism to reduce transaction costs for poor people to gain access to land. However, my analysis will show that the landed elite have clear incentive to keep the transaction costs as high as possible for land transfers between themselves and the peasantry because the value of the land is not captured in its economic price- there are a host of social and political benefits that arise from landownership in Guatemala. There are several concerns from a contractual hazard perspective, including worries on both sides of the negotiation that the rules of the game will be changed at any time and also difficulties associated with enforcing property rights given the exclusionary nature of the Guatemalan justice system (REF). Finally, a clear common action problem is at the root of the failure of the MALR. At the end of the civil war, elites were forced to bargain with resistance groups representing the landless poor and agree to some form of land reform. However, conservative forces shaped the nature of these agreements and pressure from landowners since has guaranteed a slow implementation of even these limited promises. In essence, the landed elite are still shaping the institutional rules of the game, very much in their favor, to the exclusion of the landless poor.

 

Chapter 3: A New Institutional Economic Analysis of the Fondo de Tierras and Agros Guatemala

This chapter is an NIE analysis of the common action problems, transaction costs and contractual hazards faced by the Fondo de Tierras and Agros Guatemala that aims to explain the worse performance of the former despite implementing broadly similar programs. First, I trace the historical development of the land tenure institutions in Guatemala to understand the bargaining position and power of the landed elite and peasant group prior to the negotiations over the Peace Accords in 1996 that ultimately created the Fondo de Tierras. I then explain the poor performance of the Fondo de Tiereras using the lenses of common action problems, transaction costs and contractual hazards, and then use these same lenses to show how Agors International is able to act as an institutional entrepreneur and implement a more successful program.

 

The development of the Guatemalan land tenure institutions

Land is not an institution: it is an asset, whose value and exchangeability is defined by institutions, which are both formal and informal rules that shape transaction costs (North 1991). It is difficult to pinpoint which institutions exactly govern the transaction of land, but such a governance structure is often called the land tenure system, and includes property rights laws, government bodies to enforce these as well as customary rights and attitudes to land ownership. This section lays out the contemporary state of the land tenure system in Guatemala and then traces the development of this dual-natured and exclusionary system from colonial times to the 1996 Peace Accords.

 

For my argument it is important to understand the historical development of the Guatemalan land tenure system to understand the bargaining position of the landed elite at the point when the Fondo de Tierras was created. The history of the land tenure system developed by the Guatemalan state is one of appropriation, patronage and exclusion. The Spanish crown dispossessed indigenous groups and allocated land as favors and rewards to loyal conquistadores (Brockett 1989:100). The crown restructured the entire social structure of indigenous communities to provide labor for landowners loyal to Spain, effectively granting feudal rights over land and people to the Spanish elite. In this closed access system, the state retained the right to distribute land and grant title in a very top-down manner (Mauro and Metel YEAR:1). Thus the land tenure system was built around maintaining the colonial state and society, and the state imposed many restraints on the exchange of land, such as retaining the sole right to declare boundaries and arbitrate in disputes (ibid).

 

Independence did not inherently change the governance of land transactions. It did make it harder for landowners to get free or cheap labor to work on plantations as liberal notions imported from Napoleonic Europe clashed with the reality of bondage for the majority of Guatemalan peasants and led to a removal of feudal-type rights held by landowners (Mauro and Metel YEAR:6). This labor shortage required urgent attention with the coffee export boom of the 19^th Century. Indeed the ‘liberal’ reforms that accompanied this boom provided a set of laws that stimulated further dispossession of remaining indigenous lands and created a new form of servitude that lasted until 1945 (Brockett 1988:101). Under this reform, the Church was disentitled of many assets, common land were divided and privatized and vagrancy laws were introduced that essentially forced all indigenous men to pay their debts to society by working for free on large estates (Mauro and Metel YEAR:7). This ‘liberal’ agrarian reform reveals the power of the landed elite and their relationship with a state almost entirely reliant on their production for global export markets for revenues, a pattern which continues today (Pelepsey and Ruben 2000:3). Thus the development of capitalist coffee plantations did not free labor and create markets, but instead entrenched the colonial land tenure system more than anywhere else in Central America (Mauro and Mertel YEAR:8).

 

The failure of reform in the period between 1944-1954 illustrates the dominance of the landed elite and their established access not only to national elites but also to transnational elites, especially in the United States. The Arbenz government sought to undo the basis of landed elite power by abolishing compulsory labor, establishing mechanisms by which people who work the land for more than 10 years become owners of that land and, most controversially, appropriating unused land for redistribution under Decree 900 (VERIFY) (Brockett 1989:108). This appropriation measure sparked the ire of the United Fruit Company who had under-declared the value of thousands of acres to dodge taxes, and was able to rely on important contacts in the US, right up to Secretary of State Dulles, to instigate a coup against Arbenz and set motion a civil war that would last another 4 decades (Brockett 1988:101).

 

Any attempts at reforming the land tenure regime on both efficiency and equity grounds were put on hold during the conflict, which was especially brutal to rural indigenous populations. The only attempt to address landlessness was by colonization of the Peten region in the North: however “land grabbing by local elites meant that there…was no land left to distribute” (Brockett 1988:105). The lack of effort to confront rural poverty was a large factor in increasing peasant mobilization and creating a pool of disaffected and poor farmers to support or even join the guerilla (Brockett 1988:110). This in turn lead to an incredibly ruthless offensive in rural areas, in particular the Ixil, eliminating not just guerillas but all who might support them, and resulting in a genocide against the indigenous population (quote TRC report UN). 

 

By the mid-1980s however, the Guatemalan state was struggling to sustain a brutal war effort that was increasingly unpopular amongst the elite as it interfered with their businesses (A BIT GLIB). As the time to negotiate a peace approached, and therefore the creation of the Fondo de Tierras, three key characteristics of the Guatemalan land tenure system in the early 1990s are therefore clear from this historical account:

1)      It is a dual natured land system, with large estates producing for the global market and small farmers producing for domestic consumption, either through subsistence farming or locally focused markets (Pelepesy and Ruben 2000:1).

2)      The Guatemalan state is beholden to the landed elite, dependent on its export earnings for revenues

3)      There is Growing dissatisfaction amongst those condemned to subsistence farming at the concentration of land ownership.  2% of farmers own 57% of arable land and 87% of farms with an average size of 1.2 hectares occupy just 16% of arable land (2003 Agricultural Census, quoted in Gauster and Isakson 2007:1521).  The gini coefficient of farmland distribution, which measure inequality, is 0.84 (with a maximum score of 1), which is the second highest in Latin America (ibid). Guatemala’s land system and agricultural economy is essentially dualistic.

Concrete NIE on FT

The historical overview presented above positions the bargaining power of the landed elite at the end of the Civil War. A central element of the NIE analysis toolkit is the concept of common action problems. Transactions are governed by rules that determine how easy it is to exchange an object. The making of these rules requires collective action; however different interest groups have varying incentives to shape the governance structures (rules, institutions) in their favor to the detriment of other group’s welfare. This section will first outline a hypothetical case showing why it is logical for the landed elite in Guatemala to resist attempts at land redistribution in any form. It will then look at the specific negotiations that occurred in the creation of the Fondo de Tierra, as well as evidence from its operations that clearly demonstrate the presence of a conflict of interest that reveals the superior power of the landed elite, to the detriment of the intended beneficiaries.

 

It is important to demonstrate the feasibility of my argument that the landed elite have a clear incentive to maintain a limited access system (i.e. exclude landless poor from private ownership) and so shape the rules of the land reform game so that it will fail. Diaz demonstrates that when land is sufficiently abundant, rent is maximized when there are fewer landowners and when not all land in the country is privately held (2000:552). Limited control over an abundant resource gives the owners quasi-monopoly power over the use and value of the land. Moreover, in the context of a non-industrial society with unequal land distribution, land has clear non-economic value in that it maintains social prestige and leverages access to state elites who are dependent on agricultural production from these large landowners for state revenues. If land reform, whether it be redistributive or market-led, is conceived of in terms of a non-cooperative game between the state, the landed elite and the peasantry, then the scene is set for the manipulation of any attempts to change the current land distribution. We would therefore expect to see landed elites’ resistance both to efforts to redistribute land and use publicly held lands to increase land access for the landless. As I will show below, this is exactly what happened in Guatemala.

 

De Janvry’s analysis of the failure of land reforms in Latin America in the 1960s and 1970s demonstrates the plausibility of this hypothesis. Responding to popular pressure, Latin American states, such as Peru and Bolivia, instituted redistributive land reforms using rational economic analysis to justify the reforms (de Janvry 1989:1397). This was based on the observation that small producers produce more at the margin the large producers, because of their use of family labor and costs associated with supervised labor. However, all of the states made the fatal mistake of threatening appropriation of land that was underused, rather than appropriating it right away (ibid). The state therefore provided a clear incentive for large landowners to modernize their underused farms, with capital intensive investments, to stave off the appropriation. Moreover, by modernizing this increases their economic power and hence their political power, and then these newly modernized elites were able to engage in rent seeking behavior to make the state cover the cost of their modernization investments (de Janvry 1989:1404). This rent seeking took the form of subsidized credit and inputs, favorable location of public works projects, as well as tax breaks and favorable exchange rate manipulation (ibid). Thus, we moved from a market failure of no land markets and limited credit to a political failure of defensive modernization and rent seeking behavior.

 

This study is particularly relevant to the present argument as it shows how efforts to reduce transaction costs that are preventing other groups from owning land can actually change incentives that lead to a common action problem- the manipulation of the original program by interested parties to maximize their rent. In Guatemala, the context for attempts to reduce the transaction costs of those wishing to own land is the negotiated end to the 40 year civil war in 1996. No-one won this repressive and bloody conflict, yet all sides were interested in ending in by the late 1980s (REF). In a sense the negotiations were a non cooperative game between the state, the business and landed elite and the resistance fighters, and each group sought to shape the outcomes of the negotiations in their interests. A set of accords were signed in 1996 between the main guerilla groups, the EGP and URNG (CHECK) and the government. These accords were conservative, reflecting the relative strength of the state and business elite. For example, the Accord on Socioeconomic Aspects and the Agrarian situation adopted the World Bank policies of Market Assisted Land Reform by setting up the Fondo de Tierras, promising to redistribute state-owned land, reform the judicial system and set up a land registry (Garoz and Gauster REF).

 

This accord was perhaps the most contentious of all, with on the one hand peasant interest groups such as National Coordination of Peasant Organizations (CNOC) arguing for extensive redistribution and reinstating the concept of social function of land (FOOTNOTE) and on the other hand the Committee of Agricultural, Industrial and Finance Associations (CACIF) demanding the sanctity of property rights be respected and resisting any form of redistribution (Guaster and Isakson 2007:1522). Thus we have the game set-up: the state forced to negotiate some form of land issue to placate rebel groups but under intense pressure from the business elite to resist any redistributive reforms that might impact their interests. The decision to instigate MALR in Guatemala demonstrates the power of the business elite, shaping the nature of the institutional change by these negotiations. Indeed, the business elite were in a far more advantageous positions compared with their 1970s counterparts, when the state was inclined to listen to popular pressure for land redistribution (REF). In contrast, the Guatemalan state of the 1990s was more aligned with the business elite and needed to placate the protest groups rather than pander to them (REF). Overall, Meitenbauer criticizes these accords for a “ lack of transparency and publicity, as well as limited participation” (1999:4).

 

It is of course impossible to verify that the business elite, including the landed elite, colluded with the government to create an accord that would placate protest groups without compromising their advantageous social and economic situations. The conservative outcome of the negotiations over agrarian reform provides one piece of evidence for this. Further evidence to strengthen this claim comes from the actual operations of the Fondo de Tierras. The World Bank evaluation of their loan for the Fondo de Tierras notes two key indicators that the landed elite and the land fund are colluding, or at least working to further the interests of the former. The first is “[the] increased political intervention” into the operations of the Fondo (2006:11). Politically motivated interference from the Board of Fontierras into their operations indicates attempts to shape the institutions that are trying to reduce transaction costs for the landless poor. In 2004, the Board fired 40 people on the land registration team simultaneously, with accusations that they were fired because they were not protecting the interests of large land holders (Land Fund Institute in Crisis, Central America Report, 33 (26), 2006;- LOOK UP). While the 7 member Board is supposed to provide autonomous oversight of the operations of the Fondo and includes several members from peasant and indigenous groups, it also has 2 members from the Ministry of Finance and Agriculture and agribusiness and producer group representatives (Gauster and Isakson 2007:1529). The result is, Gauster and Isakson conclude, that “during its eight years of operation Fontierras has been marred by allegations of profiteering and political maneuvering” (2007:1529). Even the World Bank, it its very positive assessment of the Fondo de Tierras, concludes that  “there were instances when pressure by interest groups represented on the Board led to poor decision-making regarding credits and land purchases” (2006:11).

 

The second World Bank indicator of the manipulation of landowners of the Fondo de Tierra program is “[the] continuous upward pressure on the price of land purchased through FONTIERRAS” (2006:11). A clear indication of the non-economic value of land in Guatemala is the fact that many land owners refuse to sell their unproductive land (Gauster and Isakson 2006:1523). Land is a source of power, giving access to local and national power structures, as well as hedge against unpredictable government policies that might provoke inflation or other economic worries. Gauster and Isakson present clear evidence that poor quality land has been overpaid for, concluding that “most of the farms that have been purchased through Fontierras are characterized by deteriorated soil and scarce tree cover, are difficult to access, and have limited supporting infrastructure like irrigation, roads and working capital” (2006:1525). This indicates collusion between the landed elite and the Fondo because selling poor quality land at inflated prices adds to their wealth but does not diminish the power they hold with their remaining land holdings.

 

Finally, as the theory on collective action problem predicted above, elites do not want the state to increase the numbers of land owners, as this would impact the rent they receive from owning land. Evidence for this comes from the refusal of the Fondo de Tierras to use state owned land to promote land ownership as well as complete inaction on the part of the government to appropriate land fraudulently obtained during the civil war, both of which were clear mandates in the Accord on the Socioeconomic Aspects and the Agrarian Situation (Article 34).

 

Thus we can see the results of the common action problem set up at the end of the civil war. A government and business elite, desperate to end a war draining both their resources, negotiated a conservative peace accord with weakened opposition groups. The establishment of the Fondo de Tierras is evidence of this bargaining, although it did have a mandate to alter the transaction costs faced by poor peasants when they want to own land, such as a lack of credit and technical knowledge to make a farm commercially viable. Further evidence of manipulation of this attempt to alter the rules governing transactions costs is provided by the high price of land paid for poor quality farms, the lack of land made available for sale and the refusal to use other mechanisms, such as using state owned land, to increase the number of private land owners in the country. This indicates that the landed elite, who have a political and economic incentive to maintain a quasi-monopoly over a relatively abundant resource, are shaping the rules of the game to the disadvantage of the landless poor. The next section examines attempts to reduce the transactions costs faced by the landless poor in obtaining land, and demonstrates similarly that these have been subject to political manipulation that means the Fondo de Tierras is unable to succeed.

           

Not only failing to reduce transaction costs, but adding new ones

As should be clear by now, from the NIE perspective, rules that shape transaction costs are critical to determining the nature of exchange. Prior to the end of the civil war in 1996, Guatemala had a dualistic land system that presented very high transaction costs for landless farmers to own a piece of land, or increase the size of their holdings. Whereas classical economic theory predicts a redistribution of land from large land owners to small land owners because the latter are more productive, the empirical reality has been the maintenance of this dual structure of land holdings, where land does not pass between the two classes (Lawson 1997). It is in the interest of the landed elite to hoard land and exclude others from gaining land ownership, or in other words to keep the transaction costs high for those outside the system and maintain them at a minimum for those within the system. This dual-structured land tenure system allows the landed elite to achieve this goal.

 

Hence we would expect the Fondo de Tierras to address these barriers to creating a unified land market. On the surface, its mandate suggests that it is doing precisely this. The range of tools available to it under the 1996 Peace Accords include:

• Stimulating access to land by providing credit to small farmers
• Stimulating productivity and investment through aid with productive projects
• Invest in public infrastructure to facilitate access to markets (roads etc…)
• Undertake legal reform to establish juridical framework that is secure and open to all to enforce contracts and property rights
• Improve available information, with land registries and data collection on agricultural activities
• Enact a land tax to incentives the selling of idle land

(Source: Garroz and Gauster)

 

However, if we look at what the Fondo de Tierras and related programs are actually doing, it is clear that they are falling far short of reducing transaction costs for the poorest so that they might become land owners. The World Bank evaluation finds that “other policy interventions foreseen in the Peace Accords, such as the implementation of an integrated rural development strategy, were not pursued by the authorities” (2006:11). The question is why has the government not tried to alter the transaction costs of purchasing land?

 

It has been incredibly difficult for the government to enact any meaningful land tax, which is one of the most commonly used policies to stimulate land transfers, which again points to the power of the landed elite in maintaining the dual structured agricultural system (Garoz and Gauster REF). The total revenue obtained by the land tax amounts to a miniscule 0.13% of GDP (ibid). The government has also notably failed to reform the land registry, which functions as more of a deed system- so land owners have to establish ownership by rooting through a history of the deeds to the property, a costly and daunting system to peasants who mistrust authority and are likely to be illiterate  

(Methenbauer 1999:4).

The cost of establishing property rights remains stubbornly high, another factor which raises the transaction costs for those excluded from the system.  Methenbauer estimates that the land tax for transactions (not the same as a tax on land) is 10% of the land price, the registration fee is 0.15% and lawyer fees range from 1-16% of the price (1999:7). For comparison, the total highest transaction costs of land in Europe is 9% in France, whereas in the US it averages closer to 1% (ibid). It is clear that it remains prohibitively expensive, through the rules established that govern transaction costs, to establish land ownership. This system of governance has essentially remained unchanged, despite promises for reform, which perpetuates the dualistic land system and demonstrates the power of the landed elite to shape the rules governing land transaction.

 

Moreover, the structure of the Fondo de Tierras program actually imposes additional transaction costs on supposed beneficiaries. First, the demands on beneficiaries are high. They are supposed to self-select, organize a committed group, search for a suitable piece of land and then apply to the Fondo de Tierras for a loan and technical assistance, which then takes an average of 24.5 months to be finalized (Garoz and Gauster REF). The Fondo also prioritizes assistance to those groups with the best business plan for their proposed land, which obviously works against illiterate subsistence farmers who are not familiar with credit, investment and perhaps commercial agriculture.

 

The Fondo de Tierras therefore not only has failed to address the high transaction costs that perpetuate a dualistic land tenure system divided between large land owners and subsistence farmers, but has also added extra transaction costs which make it unlikely that a significant amount of land will be transferred from large landowners to subsistence farmers. The next section looks at some contractual hazards built into the Fondo de Tierras which also makes it unlikely that it will succeed.

 

Contractual Hazards built in to the Fondo de Tierras

The final element of the NIE I want to analyze is the role of contractual hazards in shaping the performance of the Fondo de Tierras. Well functioning institutions are supposed to not only reduce transaction costs, but also reduce contractual hazards, which broadly means reducing risks and uncertainties. Some key ways in which this is done is for the state to act as a third party enforcer in the shadows: contracts are signed with the knowledge the arbitration is possible in the courts, even if the state is not directly present at the negotiations themselves (REF Barzel A Theory of the State). Two aspects of the structure of the Fondo de Tierras increase the contractual hazards for one party- the peasants attempting to buy the land.

 

The first way in which this is done is by information asymmetries in the negotiating process. The Fondo de Tierras stimulates a maximum, flat subsidy for all beneficiaries to purchase land, which was $1600 in 2000 (de Janvry 2000:291). This might make sense from a planning perspective, to ensure regularity of budgets and also to reduce the burden on staff to determine how much each beneficiary should receive. However, it severely disadvantages peasant groups when trying to negotiate the price of land, because the landowner automatically knows their maximum price, whereas they do not know his minimum price. In such negotiations, the most economically efficient and equitable outcome (Pareto Efficient) is where price of the land falls a where the minimum acceptable price of the land owner meets the maximum acceptable price of the buyer. (Put a diagram about pareto efficient transactions here). However, if the maximum price is already known, the owner has little incentive to reduce the price to the Pareto efficient price if this maximum price falls above the Pareto efficient price.

 

A second and very important contractual hazard facing peasant groups trying to buy a farm through the Fondo de Tierras program is fear over changing rules. In any game, fear that the rules might get changed at anytime to benefit one side can lead to non-optimal behavior in order to hedge risks (REF).  (get some better evidence on this???). Peasant groups have good reason to expect the Fondo de Tierras to not always act in its interests, despite the clear mandate it has to aid peasants who seek to own land, given a history of state oppression during the Civil War in rural areas. Theoretically this could reduce the number of peasants who will even apply to the program in the first place, as well as reduce their incentives to undertake extra risks in order to make their farm commercially viable. If extra investment, and hence increased risk, is a key component to making their new farms viable, but beneficiaries are not sure whether they will receive continued support from the Fondo de Tierras in terms of agricultural support or credit, two criticisms leveled at the Fondo, then they have clear incentives to revert to subsistence agriculture to guarantee food security. (HAVE ANY DONE THIS???)

 

Furthermore, the lack of a well-functioning judiciary that is accessible to landless peasants to enforce contracts over land is a last contractual hazard that explains why the Fondo de Tierra underperforms. As mentioned above, judicial reform is stipulated in the Peace Accords, in part to stimulate the creation of a land market (REF). Methenbauer argues that land tenure institutions in Guatemala are severely constrained by uncertainty over the enforcement of contracts (1999:9). He concludes that “accessibility, especially in rural areas, is very low or even non-existent” (1999:8). Evidence to support this includes mass public action, such as recent street protests in Solola in the Central Highlands, over the rise of criminal gangs and police inaction, as well as increases in locally administered justice, such as lynching (REF Newspaper and GODOY).Furthermore, adjudication of land rights issues are further hampered by the lack of a specific agrarian jurisdiction (Methenbauer 1999:10). Overall, the judicial contexts of Guatemala is very uncertain, and especially biased against the rural poor who do not know how to negotiate the complex institutions even if they were made available to them, which generally they are not.

 

The Fondo de Tierras therefore fails to impact landlessness and create commercial farmers out of subsistence farmers for the interconnected reasons of being manipulated to act in the interests of the landed elite because of a common action problem, which leads it to not only fail to implement new rules and laws to reduce transaction costs but to add new transaction costs to impede the transfer of land to the landless poor. Added to this are the contractual hazards related to the maximum price ceiling imposed on beneficiaries, the mistrust between beneficiaries and the Fondo de Tierras and the inability of the state to act as a legitimate third party enforcer of contracts. The next section examines how Agros International navigates this institutional environment and overcomes some obstacles in order to implement a program that on the whole experiences more success.

 

New Insitutional Economic Perspectives on the Performance of Agros International

The Fondo de Tierras essentially use a similar program approach to solving rural landlessness and poverty: providing credit and technical support so subsistence farmers can purchase land and become successful commercial farmers. The question remains however of why Agros is able to perform much better using a similar methodology to the Fondo de Tierras. The argument elaborated in this section is that Agros International acts like an institutional entrepreneur in a land tenure environment characterized by a common action problem of dominating landed elite interest, high transaction costs and uncertainty in contract enforcements.  LIT OR THEORY EXPLAINATION OF IDEA OF INSTITUTIONAL ENTREPRENEUR….

 

Common Action Problem- clear incentives to work for the poor:

The common action problem facing the Fondo de Tierras is the requirement to reshape the rules of land ownership and access through collective action that is dominated by the interests of the landed elite that run counter to the types of changes that need to be made to the governance structure surrounding land transactions to stimulate land ownership amongst the rural poor. Agros International on the other hand has no established relationship with the Guatemalan state or the landed elite, and therefore the work it tries to do is not directly shaped by them. It is therefore freer than the Fondo de Tierras to work to achieve its mission, which is demonstrably pro-poor. Its mission clearly states: QUOTE here. Moreover, Agros’ 10 foundational principles include a commitment to participation (““Allowing our activities and strategies to be shaped by the people and cultures we serve”), a commitment to justice and serving the poor (QUOTE) and promoting dignity and livelihoods through land ownership.

 

Evidence for this pro-poor mission is found in Agros’ selection of beneficiaries. I noted in the introduction how the Fondo de Tierras provides credit for beneficiaries with who earn up to 4 times the minimum wage. The minimum wage is 45 Quetzales (around $6) per day (VERIFY), simple math tells us, therefore, that the subsidized credit and technical assistance is available to Guatemalans who earn up to $8,800 per year. Considering that the average income in the Ixil area where Agros mainly works was 4,000 Quetzales per annum ($533) in 2004, many non-poor people, with presumably higher education levels, are able to access the Fondo (UNDP 2004). Indeed, they might well be able to access the Fondo’s resources better because of the requirement that credit be given to the group of farmers with the best business plan. By contrast, Agros is committed in rhetoric and practice to working with the genuinely landless. In Guatemala, field staff carry out an in-depth socioeconomic survey with each potential beneficiary that measures incomes and assets, and information from the interview is cross-checked with other community members. Although thus system is not perfect- due to the lack of a formal registry, it is very difficult to ascertain whether someone owns property elsewhere or not, Agros is trying very hard to provide credit and assistance to the genuinely landless. In fact, 68% of respondents in my research stated that Agros reaches its goal of working with most marginalized and vulnerable all the time, and 32% reported they achieve this most of the time. Some respondent did point to the fact that some community members began working with Agros with more assets (land and equipment) than others and therefore it has been easier for them to pay back their land loans. Overall, however, respondents were clear that they were all from broadly similar socioeconomic situations: extreme poverty and landlessness.

 

OTHER EVIDENCE- TIME, EFFORT AND RESOURCES PUT INTO TRANSFORMING THE PEASANTRY..

 

Thus the mission of Agros seems more decidedly geared toward the genuinely landless than the Fondo de Tierras, as evidenced by Agros’ careful beneficiary selection. However, the Fondo itself has a rather progressive mission QUOTE here, yet fails to deliver it. How then can Agros ensure that the mission is actually carried out the ground, and not be subverted by vested interests as I hoped the previous section demonstrated was the case for the Fondo de Tierras. Agros is structured such that the Guatemalan office is actually an autonomous organization and linked in a type of confederation with Agros International in Seattle. Only the national board and executives and international executives and board shape their missions and policies and select appropriate land for beneficiaries. Interestingly some people who make up part of the Guatemalan elite do sit on the national board, however I found no evidence that they try to shape Agros’ approach in a way that benefits them. This can be explained partly by the existence of a considerable number of accountability mechanisms to ensure that Agros Guatemala works in line with the priorities of Agros International. These include providing accounts for all the money spent provided by Agros International in monthly budget requests (AND YEARLY audits (REF???).  (MORE EVIDENCE HERE??).

 

This section demonstrated that Agros International does not suffer from the same collective action problems that divert the Fondo de Tierra’s attention away from its original mission. The next section shows that Agros also acts as an institutional entrepreneur to overcome the transaction costs inherent in land purchases and that I argued are intentionally kept in place to maintain the dominance of the landed elite in regional and national politics. Obviously Agros cannot by itself change the land registry system or alter the structure of the land tax, two policies that maintain transaction costs for land purchases intolerably high, but it can overcome other transaction costs that the Fondo imposes on its beneficiaries.

 

Overcoming Transaction Costs

One important transaction cost under the Fondo de Tierras is the complicated nature of the application process. Groups need to form themselves, contact the Fondo, produce a competitive business plan and jump through a series of hoops for an average of 24.5 months from the time the community identifies a suitable piece of land to purchasing it (REF). DO I HAVE DATA ON AGROS TURN AROUND TIME???. Agros also visits suitable plots of lands with a team of agronomists, credit officers and beneficiary representatives to determine the suitably of the land, and produces a production plan in conjunction with the beneficiaries to map out needed investments and future production potential, so that beneficiaries can pay back their loans and accumulate capital. Clearly Agros supports genuinely landless peasants more than the Fondo de Tierras.

 

Another important way in which Agros tries to reduce the transaction costs is by acting as an advocate for peasant groups in their negotiations with land owners. Whereas the Fondo leaves the negotiations up to the peasant groups and in fact leaves them at a disadvantage by publicly stating the maximum price available to peasant groups ($1600 per person in the group), Agros negotiates directly with the landowners alongside the beneficiaries to get the lowest possible price. They can more realistically achieve this than the Fondo de Tierras because the seller does not automatically know the maximum price Agros can pay. The presence of highly trained agronomists and financial officers alongside peasant groups presumably also strengthens the beneficiaries’ bargaining position.

 

Furthermore, it is clearly in Agros’ interest to negotiate the lowest price possible for the land, as this leaves more resources available to fund future programs. Evidence to support this comes from the idiosyncratic way in which Agros generates funding for its programs. Agros links a community, often a church group, in the US to a village in Guatemala and asks for a guaranteed 5 year commitment. This is the most important way in which they raise money. Therefore, to generate significant additional revenues, Agros must set up new villages, assuming they cannot add more US groups to an existing village. This is a fair assumption to make because of the other idiosyncrasy of this funding model. Each group sends out a group once a year to work and live in the village for one to two weeks. This very hands-on model makes it hard to Agros to justify new funding for a village with existing funding because future funders get to visit their proposed site. It is reasonable to expect they will not fund villages that are clearly not wanting for donations.  Finally, Agros has no incentives to buy poor quality land at high prices because not only does it have little association with the landed elite who promote this program, but has clear incentives to create successful farming communities in order to garner more donations in the future.

 

I suggested above that beneficiaries of the Fondo de Tierras program tend to be suspicious of the government, given past experiences of interaction with the state. Agros overcomes transaction costs related to this mistrust with an emphasis on shared values between the communities and Agros, in particular rooted in Christianity. 100% of the beneficiaries I spoke to identified as Christian. NEED SOME THEORY REFERENCE HERE ON HOW RELIGION LOWERS T-COSTS

 

The final way in which Agros Guatemala works to overcome burdensome transaction costs is by creating economies of scale, using available technical expertise and the trust developed between Agros and the beneficiaries to maximize the benefits of production. Whereas the Fondo de Tierras provides limited technical support and no marketing or sales support, Agros Guatemala is trying to create a mini-regional economy in the Ixil region based on coffee production and peas for export. A host of transaction costs confront the small farmer trying to break into export markets, including their more complex and distant supply chains, their volatility and the presence of coyotes, or middle men, who take advantage of this and skim unearned income from linking small producers to wholesalers. Agros Guatemala hires experts, using money from coffee production, to coordinate the sale of premium green beans to export markets so that more money stays with the producers. They are looking into ways to increase processing of the beans in the communities themselves, and enabling producers to capture the added value associated with this. Agros is also training producers by bringing them to meetings with wholesalers so that they can negotiate deals themselves and finally they are working on creating producer groups who will hopefully be able to take advantage of the economies of scale offered by linking together small producers in the future. In all these ways, Agros is working to overcoming the transaction costs that provide serious barriers to the rural poor being able to produce commercially from the land.

 

Reducing Contractual Hazards

The final way in which I analyzed the institutional nature of the Fondo de Tierras was through the lens of contractual hazards. The absence of a legitimate and impartial third party enforcer, I argued, severely limited the ability of the Fondo de Tierras to stimulate land ownership through market mechanisms. Agros obviously does not have the power or clout to act as a legitimate third party enforcer in all ways, however it can reduce the contractual hazards inherent to land transfers in two significant ways.

 

The first is by viewing Agros as a force that strengthens excluded peasants’ abilities to access the justice system. [is there a case in which this happened in GUA???]. In a way, Agros could be considered a fourth party enforcer that tries to make the legitimate third party enforcer, the Guatemalan state, live up to its obligations.

 

The second is the way Agros can overcome contractual hazards is the way in which it enforces contracts within its own social system (hmm). For example the land title is held in trust until the land debt is repaid, which deals with uncertainty over whether or not beneficiaries will repay their loan and the unlikelihood of the Guatemalan judiciary enforcing this contract.  Due to the trust based on shared values developed between Agros and its beneficiaries in Guatemala, it is arguable that beneficiaries fear less that the rules of the game will be arbitrarily altered against them, because this risks damaging the trust between the two parties.

 

 

 

	Fondo de Tierras	Agros International
Common Action Problem	Landed elites have status and interest to prevent increase in private land holdings	No perverse incentives built into institution.
	Allows wealthy to access program,	Demonstrably pro poor
Transaction Costs
Contractual Hazard