Endogenous institutional innovation and agroindustrialization on the Peruvian coast

This paper presents an analysis of endogenous institutional innovations tha t have recently emerged in the agroindustrial zone of Chincha, on the coast of Peru. These innovations include: (1) contracts between agroindustrial f irms and large farmers, introduced by the firms themselves to assure timely delivery and compliance with strict requirements implied by the emerging d emanding quality and safety standards fur agro-export of processed asparagu s: (2) management services exchanged for labor supervision and land collate ral in share tenancy contracts between a management company and "farmer com panies" of small cotton farmers. These contractu introduced by the manageme nt company illustrate those described theoretically by Eswaran and Kotwal [ Am, Econ. Rev. 75 (3), 352-367]. The nature and importance of these institu tional changes are twofold: (1) They were induced institutional innovations driven by the requirements of agroindustrialization itself. (2) Together t hey had ambiguous employment acid income impacts (tending to the negative). On the one hand, the emergence of asparagus and firm-farm contracts reduce d employment through exclusion of small farms and shifts to capital-intensi ve crops. On the other hand, the reinforcement of smallholder cotton and th e emergence of farmer companies increased employment and income of smallhol ders. The institutional innovation allowed them to reduce risk and increase profits and thus access some of the benefits of agroindustrialization and globalization. While processing firm-farm contracts are common in Peru, as is the presence of NGOs bringing subsidized credit, the private management firm innovation is rare and new in Peru and apparently also in the region, and of great interest. In fact policymakers and NGOs have recently discover ed that this innovation is taking place and are asking hard questions about whether this innovation can and will he diffused. The interest in the priv ate for-profit institutional change is sharpened by growing doubts about ho w economically sustainable and widespread a response NGO help can be to sma ll farmer's in maintaining their participation in income-enhancing agroindu strialization. Moreover, with changes in land laws and markers the fluidity of the situation is apparent, with agroindustrial firms even starting to a sk themselves whether contracts with large farms are necessary and best. (C ) 2000 Published by Elsevier Science B.V.