Tropentag, October 5 - 7, 2004 in Berlin "Rural Poverty Reduction through Research for Development and Transformation"

Lack of Institutional Arrangement: The Root of Poverty in Agricultural Sector

Georg-August-Universität Göttingen, Institute of Rural Development, Germany

Abstract

In recent years economists have given increasing attention to the set of ideas that has come to be known as New Institutional Economics (NIE). The NIE attempts to build a theory of non-market institutions on neo-classical foundations. It is important to note that the NIE operates at two levels – macro and micro. The macro level deals with the institutional environment, or the rules of the game, which affect the behaviour and performance of economic actors and in which organisational forms and transactions are embedded. The micro level analysis, on the other hand, also known as the institutional arrangement, deals with the institutions of governance. An institutional arrangement is an arrangement between economic units that governs the ways in which these units can cooperate or compete (TIAN, 2001:387; KHERALLAH and KIRSTEN, 2001:4; Gronewegen, et.al, 1995:5).

Based on the perspective, especially micro level of NIE, this empirical study in Indonesian sugar industry argues that poverty can be seen as an institutional arrangement problem. First, it is proven that there is such thing as unequal bargaining power among economic actors (for example the relationship between sugar cane farmer and sugar mill). Second, an asymmetrical information and interaction between principal and agent in establishing a working contract agreement (in the case of sugar cane farmers and cooperative/middleman/sugar mill). The two issues mentioned earlier are institutional arrangement phenomenon, which often occurred in agricultural sector. These issues have positioned economic actors to be in two polar categories: the winner and the loser. In the extreme case, the winner takes all and leaves nothing for loser (zero sum game). This condition has raised the issue of poverty -not only the economic disparity- to the surface.

Keywords: Indonesia, institutional arrangement, new institutional economics, poverty, transaction costs

Contact Address: Ahmad Erani Yustika, Georg-August-Universität Göttingen, Institute of Rural Development, Chistophorusweg 12/020, 37075 Göttingen, Germany, e-mail: ayustik1gwdg.de