Jun 01 2009

Low Transaction Costs to Attract Development Initiatives

by at 4:18 pm under Uncategorized

There’s a running joke that professionals flock to DC to do the right thing for the wrong reasons. For instance, those who work at financial institutions such as the World Bank or IMF may do so under the pretense of believing in its supposed social purpose, when they are actually there for prestige and job security. Governmental workers may not get the high salaries of the private sector, but they have at least inserted themselves into the power culture of Washington. Even those who work at nonprofits may only be there for resume-building in lieu of an objective to make a difference. Such exaggerated ulterior motives for stability are reminiscent of Douglas North’s analysis of institutions—constraints meant to bring about stability rather than efficiency.

North’s theory of institutions and institutional change raises salient considerations for appropriate development strategies. According to North, neoclassical assumptions are flawed in not acknowledging the inherent complexities of human behavior. Uncertainty and unpredictability give way to higher transaction costs, which has the tendency of deterring the political and economic entrepreneurship that can bring about enhanced economic performance. Institutions, both formal and informal, are constructed to reduce the fear of the unknown, which provides incentives for economic exchange. However, incentive incompatibilities further complicate institutions, since they are created to serve the interests of those with bargaining strength.

Development itself is tricky, because it is full of unknown risks where lives are at stake, and waiting for information feedback may come at the cost of too many premature deaths or conflict. Institutions are essential to this because of its ability to bring about incentives for development, albeit chained to the institutional framework. The key to approaching development strategy is to bring about the circumstances that will compel those with agency—the actors with the bargaining power to devise and alter institutions—to come up with socially efficient solutions.

The private objectives of those with agency must be consistent with the strategy. Powerful actors, then, must be convinced that the development strategy has a low enough transaction cost to make it worth investment; and once a window of opportunity arises from the structure of development, the institutional framework can be altered to further promote the potential for positive externalities. The best method of doing this is to pitch an approach from the local level, as the context of the ground presents situations where transaction costs are more easily managed.

The case of Rwanda’s agricultural development structure can be narrowed down to focus on its cash and export specialty coffee crops. To be considered includes the scale and scope of the coffee market, the Rwandan labor market and its resources and organization, political prescriptions concerning trade, the country’s producer driven governance structure as well as its agricultural transport and communication networks, and all the interdependencies between all these factors. The main question to ask is whether investment in this cash crop would move Rwanda up the value chain.

Although Rwanda is endowed with the ideal climate, altitude, and appropriate soils to accommodate the production of specialty coffee, certain structures can be organized to enhance the circumstances for a productive coffee strategy. This Rwandan coffee strategy has to guarantee a sustainable and environmentally conscious method of coffee production. Policies that standardize method of yielding high-quality, consistent crops must be developed. To counteract the potential for the exploitation of workers, policies that encourage the establishment of coffee grower’s cooperatives can be implemented—and its externalities can provide community networks that will foster social capital and accountability. Establishing a bicycle transportation network can also promote regional communication ties, along with making the production of high quality coffee crops more efficient.

Niche marketing must be ensured to turn Rwandan coffee into the economic driver that will bring in increasing returns at low transaction costs. All that is necessary is simple, local aid policies that focus on coffee producer education, support and marketing. Efficient property rights must be established as well—and only then will a socially profitable enterprise arise. Since this strategy can attract feasible short-run policy implementations with low transaction costs that are attractive to political and economic investments, these development circumstances will eventually shape long-run economic changes and move Rwanda up the value chain via positive externalities.

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