Social Capital Initiative Working Paper No. 10

SOCIAL CAPITAL AND RURAL DEVELOPMENT: A DISCUSSION OF ISSUES

By Casper Sorensen

The World Bank Social Development Family Environmentally and Socially Sustainable Development Network October 2000

Working papers can be viewed at http://www.worldbank.org/socialdevelopment, or obtained from:

The World Bank Social Development Department Social Capital Working Paper Series Attention Ms. Gracie M. Ochieng 1818 H Street, NW, Room MC 5-410 Washington, DC 20433, USA

Tel: (202) 473-1123 Fax: (202) 522-3247 Email: gochieng@worldbank.org

or: Social Development Department The World Bank 1818 H Street, NW, Room MC 5-232 Washington, DC 20433, USA

Fax: (202) 522-3247 Email: sdpublications@worldbank.org

Papers in the Social Capital Initiative Working Paper Series are not formal publications of the World Bank. They are published informally and circulated to encourage discussion and comment within the development community. The findings, interpretations, judgments, and conclusions expressed in this paper are those of the author(s) and should not be attributed to the World Bank, to its affiliated organizations, or to members of the Board of Executive Directors or the governments they represent.

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SOCIAL CAPITAL INITIATIVE WORKING PAPER SERIES

#1 The Initiative on Defining, Monitoring and Measuring Social Capital: Overview and Program Description

#2 The Initiative on Defining, Monitoring and Measuring Social Capital: Text of Proposals Approved for Funding

#3 Social Capital: The Missing Link? (by Christiaan Grootaert)

#4 Social Capital and Poverty (by Paul Collier)

#5 Social Capital: Conceptual Frameworks and Empirical Evidence An Annotated Bibliography (by Tine Rossing Feldman and Susan Assaf)

#6 Getting Things Done in an Anti-Modern Society: Social Capital Networks in Russia (by Richard Rose)

#7 Social Capital, Growth and Poverty: A Survey and Extensions (by Stephen Knack)

#8 Does Social Capital Facilitate the Poor’s Access to Credit? A Review of the Microeconomic Literature (by Thierry van Bastelaer)

#9 Does Social Capital Matter in Water and Sanitation Delivery? A Review of Literature (by Satu Kähkönen)

#10 Social Capital and Rural Development: A Discussion of Issues (by Casper Sorensen)

#11 Is Social Capital an Effective Smoke Condenser?: An Essay on a Concept Linking the Social Sciences (by Martin Paldam and Gert Tinggaard Svendsen)

#12 Ethnicity, Capital Formation, and Conflict (by Robert Bates)

#13 Mapping and Measuring Social Capital: A Conceptual and Empirical Study of Collective Action for Conserving and Developing Watersheds in Rajasthan, India (by Anirudh Krishna and Norman Uphoff)

#14 What Determines the Effectiveness of Community-Based Water Projects? Evidence from Central Java, Indonesia on Demand Responsiveness, Service Rules, and Social Capital (by Jonathan Isham and Satu Kähkönen)

#15 What Does Social Capital Add to Individual Welfare (by Richard Rose)

#16 Social Capital in Solid Waste Management: Evidence from Dhaka, Bangladesh (by Sheoli Pargal, Mainul Huq, and Daniel Gilligan)

#17 Social Capital and the Firm: Evidence from Agricultural Trade (by Marcel Fafchamps and Bart Minten)

#18 Exploring the Concept of Social Capital and its Relevance for Community-based Development: The Case of Coal Mining Areas in Orissa, India (by Enrique Pantoja)

#19 Induced Social Capital and Federations of the Rural Poor (by Anthony Bebbington and Thomas Carroll)

#20 Does Development Assistance Help Build Social Capital? (by Mary Kay Gugerty and Michael Kremer)

#21 Cross-cultural Measures of Social Capital: A Tool and Results from India and Panama (by Anirudh Krishna and Elizabeth Shrader)

#22 Understanding Social Capital. Agricultural Extension in Mali: Trust and Social Cohesion (by Catherine Reid and Lawrence Salmen)

#23 The Nexus between Violent Conflict, Social Capital and Social Cohesion: Case Studies from Cambodia and Rwanda (by Nat J. Colletta and Michelle L. Cullen)

#24 Understanding and Measuring Social Capital: A Synthesis of Findings and Recommendation from the Social Capital Initiative (by Christiaan Grootaert and Thierry van Bastelaer)

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FOREWORD There is growing empirical evidence that social capital contributes significantly to sustainable development. Sustainability is to leave future generations as many, or more, opportunities as we ourselves have had. Growing opportunity requires an expanding stock of capital. The traditional composition of natural capital, physical or produced capital, and human capital needs to be broadened to include social capital. Social capital refers to the internal social and cultural coherence of society, the norms and values that govern interactions among people and the institutions in which they are embedded. Social capital is the glue that holds societies together and without which there can be no economic growth or human well-being. Without social capital, society at large will collapse, and today’s world presents some very sad examples of this. The challenge of development agencies such as the World Bank is to operationalize the concept of social capital and to demonstrate how and how much it affects development outcomes. Ways need to be found to create an environment supportive of the emergence of social capital as well as to invest in it directly. These are the objectives of the Social Capital Initiative (SCI). With the help of a generous grant of the Government of Denmark, the Initiative has funded a set of twelve projects that help define and measure social capital in better ways, and lead to improved monitoring of the stock, evolution and impact of social capital. The SCI seeks to provide empirical evidence from more than a dozen countries, as a basis to design better development interventions which can both safeguard existing social capital and promote the creation of new social capital. This working paper series reports on the progress of the SCI. It hopes to contribute to the international debate on the role of social capital as an element of sustainable development.

Ismail Serageldin Vice-President

Special Programs

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THE INITIATIVE ON DEFINING, MONITORING AND MEASURING SOCIAL CAPITAL

STEERING COMMITTEE Ismail Serageldin (Vice-President, Special Programs) Gloria Davis (Director, Social Development Department) John Dixon (Chief, Indicators and Environmental Valuation Unit) Gregory Ingram (Administrator, Research Advisory Staff) Emmanuel Jimenez (Research Manager, Development Economics) Steen Lau Jorgensen (Sector Manager, Social Protection, Human Development Department) Peter Nannestad (Professor of Political Science, University of Aarhus, Denmark) John O’Connor (Consultant) Charles Cadwell (Principal Investigator, IRIS Center, University of Maryland) Martin Paldam (Professor, Department of Economics, University of Aarhus, Denmark) Robert Picciotto (Director General, Operations Evaluation) Gert Svendsen (Assistant Professor of Economics, Aarhus Business School, Denmark)

STAFF Christiaan Grootaert (Task Manager) Thierry van Bastelaer (Coordinator) Susan Assaf (Consultant) Casper Sorensen (Consultant) Gracie Ochieng (Program Assistant)

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SOCIAL CAPITAL AND RURAL DEVELOPMENT: A DISCUSSION OF ISSUES

TABLE OF CONTENTS

1. INTRODUCTION........................................................................................................................................... 1

2. SOCIAL CAPITAL AND MANAGEMENT OF COMMON PROPERTY .............................................. 2

IRRIGATION AND SOCIAL CAPITAL.......................................................................................................................3 SOCIAL CAPITAL AND FORESTRY MANAGEMENT ................................................................................................5

3. SOCIAL CAPITAL AND RISK MANAGEMENT IN RURAL AREAS................................................... 7

LOCAL INFORMAL MUTUAL RISK SHARING ARRANGEMENTS ...........................................................................11

4. SOCIAL CAPITAL AND PRODUCTIVITY ............................................................................................. 14

5. SOCIAL CAPITAL AND MARKETING................................................................................................... 18

6. SOCIAL CAPITAL AND VERTICAL RELATIONS............................................................................... 20

7. CONCLUSION.............................................................................................................................................. 22

BIBLIOGRAPHY ............................................................................................................................................. 23

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1. INTRODUCTION

Ever since the concept of social capital entered the academic world in the 1980s and early 1990s through the works of Putnam (1993), Coleman (1988, 1990) and other scholars, most of the discussion has focused on the definition(s) and measurement of the concept.1 This ongoing discussion is essential if the concept is to take place—alongside with other forms of capital—in the social scientist’s toolkit. However, it may not be necessary to wait for that elusive debate to end conclusively before exploring the channels through which social capital contributes to income, productivity, welfare and sustainable development.2

In this paper, we review selected issues relating to rural development. These

include the areas of: • common property management; • risk management; • productivity; • marketing; and • vertical relations.

Although the body of literature is still relatively small, there are lessons to be learned about social capital and its relevance for rural development from the work that presently exists. Furthermore, literature written before the concept of social capital was introduced is also relevant in the emerging discussion about social capital and rural development. In “older” literature on rural development, there was, in Uphoff’s words, “no concept of social capital to inform or guide our work” (Uphoff, forthcoming). Yet much of that “older” literature focused on variables highly relevant or identical to those associated with the discussion of social capital.

A conclusion will be made drawing upon the positive as well as negative

experiences with social capital in rural development. Regardless of this conclusion it may be wise to remember Rondinelli’s claim that: “Organizational solutions can no more be designed and universally prescribed for all rural areas than they can for all developing countries” (As cited in Uphoff, 1998).

1 While social capital is a relatively new concept, parts of the concept can be traced to the economic and sociological literature on the role of institutions. In development economics, social energy, a concept similar to that of social capital, was discussed in the early 1980s (Hirschman, 1984). Meehan used the term “social capital” in 1978 in describing the significance of primary and local organizations (Meehan et al., 1978). However, Meehan's definition of social capital never became an “industry standard” and Meehan is rarely acknowledged for his contribution. 2 This paper will not distinguish between the various definitions of social capital. Literature employing any of the current definitions of social capital is discussed here. For a discussion of the different appraoches to defining social capital, see Grootaert, 1997 and Woolcock, 1998.

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2. SOCIAL CAPITAL AND MANAGEMENT OF COMMON PROPERTY

Social networks can help improve coordination of action, which is of great importance for reducing opportunistic behavior by individuals.3 Opportunistic behavior often occurs when the benefits of non-compliance with rules or norms outweigh its costs. This is often the case in many farming communities in the developing world where some individuals choose not to contribute to local projects. Such decisions often result in the failure of these projects, as there sometimes are no efficient mechanisms for sanctioning those who do not contribute to local projects (Ostrom, 1994).

However, in local communities with well-functioning social networks and local

institutions, the evidence shows that opportunistic behavior can be reduced if not completely eliminated. Repeated interaction, here manifested by associations and other local institutions, tend to reduce opportunistic behavior (Williamson, 1995). When individuals meet and do business on a regular basis, the interaction enhances trust and reduces uncertainty, as well as provides a forum for ostracism toward opportunism, as members learn about the behavior of other members. This creates a environment more likely to lead to solutions to common property problems.

According to Aumann, it is easier to reach solutions to long term collective action

problems when (i) there is a common understanding of the incentive problems facing the individuals involved, (ii) knowledge of other ways to structure their relationship, and (iii) a better knowledge of the individuals involved (Aumann, 1976). Olson argues that “unless the number of individuals is quite small, or unless there is coercion or some other special device to make individuals act in their common interest, rational, self-interested individuals will not act to achieve their common or groups interest” (Olson, 1965:2).4 In other words, it is likely that the management of common property will fail if it is not carried out on a relatively small scale.

Common property can be of two different types: public goods or common-pool

resources (CPRs). CPRs are defined by two characteristics: (i) costliness of design of institutional solutions able to exclude potential beneficiaries from CPRs, and (ii) if one individual “harvests” one unit it cannot be “harvested” by others (Ostrom 1994B).5 CPR

3 Although all individuals may not have opportunistic behavior, the transaction costs of finding the ones that have will most likely be higher than the cost of their opportunistic behavior (Williamson, 1985). 4 Culturalists will disagree with Olson. Knoke concludes in a 1988 study that collective action can arise from affective bonding and conformity to norms (Knoke, 1988). Finkel reached a similar conclusion in his study, only he argued that collective action can be explained by a sense of duty or a unity principle (Finkel, 1988). Although these approaches are different from Olson’s rational choice approach, the solution to collective action problems—as long as it is on a small scale—can still be explained by social capital in the form of social bonding and strong social norms and principles. 5 The problems of CPRs were popularized by Garrett Hardins 1968 article “The Tragedy of the Commons”. The tragedy consist of the fact that all individuals pursue direct and instant benefits from using the natural resources while only bearing a share of the delayed costs of overusing the resources.

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problems exist at all levels. For example, a large-scale CPR problem is the ongoing dispute over the rights to fish in specific areas of the Atlantic Ocean.

In many local rural communities it is common to have shared access to property

such as mountain commons, grazing areas, forests areas, irrigation systems and inshore fisheries, which make solutions to CPR problems important for rural development. Since irrigation problems are common in rural areas, we now review three irrigation cases where farmer organizations, social networks and participation contributed to the outcomes of the projects.6 Following that, we review two forestry management cases to examine if the level of social networks, participation and farmer organizations also can affect other areas of common property management.

Irrigation and Social Capital

Farmer-governed CPRs often differ from centrally managed CPRs in two ways: (i) they exhibit better incentive alignment between the individual farmer and the project, and (ii) farmers enjoy a higher level of autonomy (Ostrom, 1994).7 Ostrom describes how the Chiregad irrigation project funded by USAID/Nepal and the Nepal Department of Irrigation ended in failure, even though it was well funded and planned by educated government officials (Ostrom, 1994). A serious flaw of the Chiregad irrigation system was its failure to involve the local people and their knowledge of the region in the project development. This fundamental oversight resulted in a poorly designed channel system that was often blocked with mud, a result caused by the engineers’ lack of knowledge about local soil conditions. Furthermore, the water-users committee that was established after the construction with the goal of facilitating local participation in the project also suffered from problematic design and implementation. The officials appointed the village leader to be secretary of the committee and gave him the power to appoint the rest of the members of the committee. The purpose in establishing an effective participatory local committee was defeated, however, when the new secretary failed to appoint any of the local people who were managing the irrigation systems before the Chiregad project started.

Instead of being a unitary organization for the new system, the water-users committee became an organization with no lower level branches (Ostrom, 1994). The farmer organizations for each of the irrigation systems ceased to exist as their authority eroded with the formation of the new system level water-users committee. After the project's implementation the local people experienced a less consistent supply of water. Failure to involve the local people in the project, from design to implementation, and the failure to build on existing relatively well functioning local farmer organizations, ensured the failure of the Chiregad irrigation project, and worsened local water supply conditions. Citing studies by Robert Yoder (1986) and Prachandra Pradhan (1989), Ostrom also describes how strong farmer organizations resulted in successful irrigation projects in

6 See Satu Kähkönen’s review (1998) of rural water delivery for a more thorough discussion on how social capital influences the provision of irrigation systems in the developing world. 7 A well-defined group of users is another likely factor to explain the differences.

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Nepal. Yoder and Pradhan identified 19 irrigation systems in the Indrawati Basin in the Sindhu Palchok District that could benefit from external aid. To qualify for this aid the farmers had to accept several conditions. Among the issues addressed in the conditions was the need to establish effective water-users organizations.

Another important part of the Indrawati Basin project was the farmer-to-farmer

institutional design training (Ostrom, 1994). This training brought farmers from their own area to similar areas (in respect to terrain and soil conditions) where farmers had success with designing governance structures. According to Ostrom, “the program enabled farmers, who had developed successful social capital in one setting, to impart their knowledge to other farmers from a similar setting. Given that the visiting farmers could tell rapidly that the farmers in the systems they were visiting were doing much better than they were, the visiting farmer representative took his training program very seriously” (Ostrom, 1994: 32-33). The effectiveness of the program was documented by Lam and Shivakoti (as cited in Ostrom, 1994) presenting evidence that the irrigation systems experienced increased and more stable productivity.

Uphoff uses social structures to explain why an irrigation project in Gal Oya, Sri

Lanka that, before the beginning of an extension project, was characterized by engineers and officials as “the most deteriorated and disorganized in the country”, became very successful (Uphoff, forthcoming: 13 and Uphoff, 1992). When the extension program started in 1981, there was little cooperation between the local farmers and a tradition of violent conflicts, which at times ended with murder over the rights to the water in the area. The program focused on investing in recruiting and training “Institutional Organizers” that would live in the communities and help and encourage the farmers on a daily basis. The “Institutional Organizers” suggested to the farmers that they should find ways to work together to clean or dig channels.8

Once it became clear that cooperation directly led to an increase in the water

supply, people became more helpful to others. This situation was in stark contrast to the negative or zero sum games that had unfolded in the area before the beginning of the project. According to Uphoff, this result was due to repeated interactions through which people learned about each other’s needs and how their own behavior affected mutual welfare (Uphoff, forthcoming). Later in the Gal Oya project, when there was an actual demand for more organized structures, the initially small social structures expanded into farmer organizations that could deal more efficiently with decision-making, conflict resolution and resource management.

A post-project evaluation documents that rice production per irrigation water unit

increased about 300 percent (Wijayaratna & Uphoff as cited in Uphoff, forthcoming). At least two-third of the production increase “was due to creating new roles and social relationships and to activating certain norms and attitudes” (Uphoff, forthcoming: 14).

8 Uphoff explains how a traditional custom in many South Asian countries, the custom of shramadana which obligates people to actively participate in the production of community goods, made it easier for people to take up suggested collective actions (Uphoff, forthcoming).

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Social Capital and Forestry Management

A study of forest co-management in Thailand provides evidence on the importance of social networks, participation and farmer organizations for successful forestry management (Poffenberger & McGean, 1993). Communities in the Nam Sa sub-watershed were failing to communicate with each other and conflicts between the tribes were increasing. The downstream Karen tribe found that their agricultural systems were threatened as a result of upstream deforestation by the Hmong and Lisu tribes. Moreover, all of the tribes were concerned that the government of Thailand would resettle them outside the sub-watershed area. The tribes concluded that by cooperating with the Royal Forest Department of Thailand to find a solution to the problem they had a chance of avoiding resettlement. The strategy developed to reduce the social conflict between the tribes and to improve the environment involved setting up “microwatershed land-use committees and networking resident community groups through a coordinating forum” (Poffenberger & McGean, 1993: viii). The strategy’s focus on participation, local organizations and social network building paid off as the cooperation between the tribes resulted in the Hmong and Lisu tribes abandoning their environmentally destructive practices, replacing them with sustainable practices. The study concludes that “[d]ecentralized controls over clearly defined microwatershed areas by organized local hamlets have reduced threats of fire, illegal logging, and upland erosion and are resulting in impressive natural forest regeneration (Poffenberger & McGean, 1993:viii). An added benefit was the elimination of previous conflicts between the tribes.

A recent paper by Bebbington, Kopp & Rubinoff (1997) discusses the role of local

organizations, with examples from the forestry sector. One case involves community forestry enterprises (CFEs) in Mexico. CFEs are seen by many observers as some of the most successful means of establishing community-based sustainable forestry. One reason for the success of CFEs is the linkage that emerged over time between the CFEs and external actors like NGOs, development agencies, and government. According to the authors, it is, in all likelihood, the quality and durability of the relationships between the CFEs and these external actors that determined the success of the projects. The paper also examines the Bolivian forestry sector and reaches a similar conclusion: the local organizations themselves are not well structured to develop markets or negotiate for contracts to enter the markets, nor do they have the technical capacity necessary to meet market demands. NGOs (one of them in particular, APCOB) and the Bolivian government played important roles in assisting the local groups (Bebbington, Kopp & Rubinoff, 1997C).

Citing a study by Agrawal (1994), Baland and Platteau describe how the Van Panchayat Act passed in Madras in 1931 made it possible for villagers to create community-managed forests by getting access to state-controlled forests. The Van Panchayat Act prescribes the creation of community based forest councils and the tasks they have to perform. Among these are protection of the forest from illegal logging, fires and cultivation, as well as making twenty percent of the forest area available to grazing every year. According to Agrawal, the Van Panchhayat Act has “facilitated the efforts by

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residents of nearly four thousand villages to create local institutions that would permit them to use and manage a significant proportion of the local forests” (Agrawal as cited in Baland & Platteau, 1996). Like Bebbington, Kopp and Rubinoff (1997C), Baland and Platteau stress the importance of vertical linkages for successful local resource management: “To conserve local resources, users need special incentives provided by an external agency” (Baland & Platteau, 1996).

Another study illustrating how participation can reduce social conflict and improve

forest management comes from the Gujarat in India. The area was characterized by recurring confrontations between the government and the local people. The two groups disagreed over the management of the forests. The situation changed dramatically when a project mobilized and involved the local people in the management of the forests. The result of the project: increased local income and fewer conflicts between the government and the local people (Pathan et al., 1993).9

The evidence presented by these studies suggests that higher levels of participation,

use of social networks and local organizations increase the chances of successful common property management in irrigation and forestry. This conclusion may not necessarily carry over to all common property management problems, but it seems reasonable to suggest that local institutions be taken into account whenever a common property management related project is designed and implemented.

9 It is estimated that as many as 12,000 to 15,000 communities in rural India now have community based protection and management of forest resources (World Bank, 1998).

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3. SOCIAL CAPITAL AND RISK MANAGEMENT IN RURAL AREAS Farmers are deeply affected by uncertain conditions related to the weather, pests and markets. For example, seasonal rainfall variability, one of the most damaging climatic factors in the developing world, tends to be greater in areas of lesser mean annual rainfall which often characterizes these rural areas (Stewart, 1991:18). Farmers in the developing world are also more prone to problems of limited capital, adverse policies and poor adaptation and use of new technology (Picciotto & Grover, 1996). In response to the high multitude of risk factors in agriculture, farmers have developed risk management skills. A common form of risk management in the developed world is formal insurance. Farmers purchase insurance that protects them against many of the risks common to agriculture. Farmers are also given relatively easy access to credit, which helps to smooth consumption costs in periods of low agricultural output. Unfortunately, the insurance markets of the industrialized world rarely carry over to the developing world. The problems of information asymmetries, moral hazard and difficult contract enforcement result in incomplete or informal insurance markets in these rural areas.(Alderman & Paxson, 1992). There are ex-ante as well as ex-post forms of risk management in farming (Fafchamps, 1992). Strong social networks and farmer organizations can contribute to making ex-ante as well as ex-post risk management more efficient, thereby reducing the risk faced by the farmers.10 Ex-ante methods are supposed to reduce the farmer’s vulnerability in case of a shock and most often takes the form of diversification of crops and strips (Matlon, 1991). Ex-post methods focus on ways to secure household consumption after a shock occurs. Ex-post methods of mitigating risk can rely on income from activities other than farming, transfers from migratory labor, sales of assets and inter-household/village transfers (Matlon, 1991).11 While social networks and other local institutions may not be relevant to all of these risk-coping strategies, they can have an impact on risk management strategies in the developing world.12

Diversification of land is relevant when discussing the impact of social capital on ex-ante risk management strategies. Individual farmers can implement diversification of crops without regard to the distribution of land between the farmers and as such, needs no institutional arrangements to guarantee its implementation.13 In some cases, individual

10 Matlon also mentions a third risk management strategy. It focuses on relocation of assets at the time a shock occurs. The purpose of this approach is to reduce the damages to production (Matlon, 1990). 11 Instead of differentiating between ex-ante and ex-post risk management, Alderman and Paxson use risk management and risk coping. The first describes methods to reduce income variability, and the latter, consumption smoothing by intertemporal saving or collective risk sharing (Alderman and Paxson, 1992). 12 Risk management by farmers may be effective in the case of idiosyncratic shocks. However their ability to deal with such shocks is limited. Government and development agencies seems better equipped to deal with these types of shocks. One example is the Food for Work programme (Ravallion, 1998). 13 Unfortunately, the impact of crop diversification may be ambiguous in many rural areas of the developing world, as farming land is often situated in marginal agroclimatic zones reducing the choice of crops

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farmers may only own strips that are connected and basically have the same soil conditions, leaving little room for a diverse portfolio of strips. The only option for farmers facing these conditions and who prefer to scatter their strips is to share or exchange land with others.14

Social capital in the form of local level farmer associations, networks or

cooperatives can provide the institutional environment necessary for the scattering of strips. An example of this is the open field system of agriculture. Although almost non-existent in the industrialized world, the open field system of agriculture is still common in some developing world countries (Eggertson, 1990). In the open field system the family unit is typically the decision-maker. Each household cultivates a number of scattered and unfenced strips. When the harvest is over, it is common for the open field to be used as a common grazing area managed by the farming association or cooperative (Eggertson, 1990).

It has been argued that open field systems are inefficient since farmers must spend a

lot of time just to move from one strip to another (McCloskey, 1972). Consolidating strips could increase output. McCloskey argues that scattering strips is a risk-minimization strategy for the farmers, that substitutes for more expensive insurance markets (McCloskey, 1976). Although the arrangement results in a lower output, it is not unlikely that farmers in the developing world characterized by the absence of well-functioning insurance markets would choose lower average income over lower income variability.

Local level farmer associations, networks, or cooperatives can help provide the institutional set-up for diversification of strips and reduce the transaction costs associated with implementing and monitoring the arrangement. In the absence of high levels of social networks and organizations, it is very likely that transaction costs within the farming associations and cooperatives will rise due to a general lack of trust among the members, which eventually can result in a breakdown of the arrangement.15

In contrast to McCloskey, Dahlman argues that open field systems are more

efficient than consolidated strips because they help reduce the bargaining power of individual farmers (Dahlman, 1980). By consolidating fields it is easier for individual farmers to take the whole village hostage by refusing to join a common grazing solution unless considerable compensation is provided. The presence of scattered fields instead of consolidated ones make independent grazing almost impossible. Reducing the bargaining powers of individual farmers ultimately leads to a lower level of noncooperative

available to farmers. If only one or two types of crops can grow successfully in an area, the benefits of crop diversification as a risk management method are reduced. 14 In some tribal societies land is controlled and distributed according to local regulation and held under corporate tenure. A member of the group will then be allocated land sufficient to support his family (Platteau, 1988). Under these conditions membership of a social group is a condition for access to land. 15 In Krishna’s words, “[h]aving an institutional foundation for cooperation helps reinforce expectations of cooperative behavior, thereby strengthening whatever cultural traits may have led to cooperation in the first place” (Krishna, 1997).

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behavior. This follows Eggertson’s conclusion that informal institutional arrangements developed by organizations and networks can help reduce the level of opportunistic behavior, thereby reducing transaction costs for the farmers (Eggertson, 1990).16

In rural areas ofthe developing world, farmers often engage in other business

activities as a means to minimize the effects of shocks. However, the benefits of these activities for risk management are questionable. Businesses are often small and lack solid financial support, leaving them quite vulnerable to shocks. Collective shocks can have a significant negative impact on these businesses, as Sen pointed out in his study of the famine in Ethiopia in 1973 (Sen, 1981).

Strategic use of out-migration to urban areas may appear to be a better strategy for rural farmers to cope with risk since the shocks facing farmers are rarely correlated with the shocks that can influence income in the urban areas. One such example is out-migration from rural areas in India as described by Rosenzweig and Stark (1989). Migration from these areas is often limited to women marrying into families in the urban areas. By establishing a tight network of relatives in areas that exhibit limited income shock correlation with the rural areas, rural inhabitants are better suited to cope with income risk as cash transfers from the out-migrated relatives can help smoothen consumption in case of shocks. Furthermore evidence suggests that households diversify the risk by arranging marriages in different locations, even though it increases the information costs compared to specialization in one locality (Rosenzweig, 1988: 247).

A family will make the decision to send a migrant if the expected benefits are reasonably high and the opportunity cost is low (Lauby & Stark, 1987: 29). Strong social networks play an important role in lowering the opportunity cost of migration and in providing information that will make it easier for the family to decide if the benefits of migration are high enough to justify the monetary cost. According to Taylor, “the importance of migration networks derives from its ability to provide labor market information where such information is scarce and costly, where the labor market is characterized by a high degree of risk, and where the penalty for failure is large” (Taylor, 1986: 167). Also, the effectiveness of labor market information is often related to the trustworthiness of the source. Kinship networks are a more trusted source of information than migrant recruitment agencies (Fawcett, 1989: 678). Networks, however, do not only provide valuable information, they also link the migrants to potential employers (Boyd, 1989). Women Mexican immigrants to the United States usually come from rural areas and do not have significant workforce experience before they migrate. To help them adjust to life in the U.S. and find employment, they rely on extended Mexican women networks. When the immigrant women used more formal channels to try and change their conditions, more often than not they were unsuccessful (O’Connor, 1990). A study by Banerjee showed that 86 percent of the migrants in the study sample had relatives or co-villagers living in Delhi upon their arrival, and in virtually all cases they received some kind of help (Banerjee, 1982: 186). A survey of squatter settlements in Delhi found that

16 Another benefit of scattered fields is that in cases where soil is of uneven quality, scattered fields can help create a more equal distribution of the land in regards to outcome.

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as much as 60 percent of the workers in the sample worked in the same occupational categories as their relatives or co-villagers (Banerjee, 1982:195). The migrants tended to rely more on relatives than co-villagers for help when both types of networks were present. Banerjee uses this fact as an indication that kinship ties are stronger than village ties. However, there did not seem to be any difference in the quality of assistance offered by relatives or co-villagers.17

For migration to be a successful risk management strategy in rural areas, it is important that the sponsors of the migrants receive remittances that are high enough to justify the cost of sponsoring the migrant.18 These costs are often high. Gulati describes how a family in Kerela only managed to raise a third of the money needed to finance their son’s migration to the Gulf region via their own savings. The family raised the remaining amount from relatives and co-villagers. According to the mother, village residents are accustomed to this practice and funds raised are always repaid to the sponsors (Gulati, 1983: 2222). In this specific case, funds were raised outside the household through social networks, but in many other cases it is only the individual household that sponsors the migrant. According to Stark and Lucas “remittances may be seen as one component of a longer-term understanding between a migrant and his or her family, an understanding which may involve many aspects including education of the migrant, migration itself, coinsurance and inheritance” (Stark and Lucas, 1987: 26). Furthermore, “[t]he efficiency of an intra-familial implicit contract comes partly from the fact that much of it has to do with unwritten understandings about the obligations of the two parties and it is probably true that mutual familiarity will support, enhance and ease these understandings” (Stark and Lucas, 1987: 26). The stronger the social networks, the more likely a greater amount of the migrants wage income will be remitted. In the Philippines, families in rural areas often rely on their daughters to supplement the family income by migrating to urban areas. Although women are expected to earn less than men, a higher proportion of their income is likely to be remitted as daughters traditionally maintain closer ties with their families than men in the Philippines (Lauby & Stark, 1987: 31).

Fox argues that out-migration erodes the level of social networks in the rural areas, and that it becomes increasingly difficult to create strong organizations committed to local development in areas with high levels of migration (Fox, 1990).19 By using out-migration as a risk management method, social networks may erode in the rural areas, but the benefits of the urban networks may compensate for this factor.

Multiple business activities and strategic out-migration are important risk management methods for farmers in the developing world. They are especially so in

17 It is important to note that social networks not only reduce the monetary cost of migration but also psychological cost (Banerjee, 1982: 185). 18 Boyd identifies four reasons why remittances are noteworthy: 1) they are an indicator of social networks over space; 2) they have an economic effect in the sending area; 3) they help maintain migration as a household strategy and 4) the can stimulate migration in the future by sending information on the living standards and opportunities in the urban areas (Boyd, 1989: 651). 19 It is not only the creation of local organizations that may be affected by migration. The hardships of family separation can also result in intra-family enstrangement (Seccombe, 1982: 345).

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cases of out-migration. The strength of the networks between farmers and migrants may play an important role for the level of cash transfers, which ultimately affects the level of consumption smoothing in case of shocks. Local Informal Mutual Risk Sharing Arrangements

Informal mutual risk-sharing arrangements in rural areas often include cash and goods transfers, and labor assistance. An interesting feature of these arrangements is that there is often no formal government to enforce them and they still seem to be relatively stable even though many farmers may enter them with self-interested motives. Alderman and Paxson conclude that “in general it is difficult to distinguish between altruism and selfish risk sharing” (Alderman & Paxson, 1992). The question is whether or not it makes a difference for the creation and stability of local mutual insurance systems.

Game theory has shown that mutual solidarity/insurance systems can be maintained in the long run as long if there is a continuous relationship between members regardless of the members having altruistic or egoistic motives for joining the group. To obtain this outcome, the long-term net benefits of staying in the group have to be higher than the short term net benefits of deviation (Axelrod, 1984; Posner, 1980). Social relations can help increase the stability of these insurance systems, as lineage and kinship relations can change the way the members perceive and experience the benefits of deviation and compliance. A member will be more averse to deviating from a group consisting of friends and family than from a group that consists of farmers with whom he has no social relations. Kimball concludes that factors possibly affecting the success of a risk sharing arrangement are the “altruism that goes with blood ties and genuine friendship, or any noneconomic value of belonging to the cooperative (for instance being invited to parties or being greeted in the way)…” (Kimball, 1988: 231).

Ellsworth has shown how networks are important for informal insurance (Ellsworth, as cited in Fafchamps, 1992). Farmers in the developing world can create networks that efficiently reduce the problems of opportunistic behavior by being connected through kinship or lineage to a small number of people who are then connected to other people. According to Fafchamps, “it is easy for an experienced farmer to guess crop yield by observing standing crops at harvest. But it is much harder to guess someone’s income from migration or nonfarm activity… The extreme secrecy surrounding grain storage, livestock, and other assets in rural areas of the developing world is a sign that people consciously try to decrease observability of their income and wealth” (Fafchamps, 1992:152-153). Trust between the members in these networks will make the insurance more efficient, and since many networks are based on people connected through lineage or kinship, mutual trust is expected to be relatively high. Another benefit of networks based on lineage and kind is that they reduce monitoring costs “because the lack of privacy in preindustrial societies [makes] it hard to hide something from your neighbor or brother-in-law, and vice versa” (Fafchamps, 1992: 159).

There seems to be no consensus on the issue of repayment of the transfers resulting from mutual risk sharing arrangements. Fafchamps argues that “[t]he person receiving

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assistance is not expected to give back something equivalent to what is received. What is expected from the recipient is simply to help others in return” (Fafchamps, 1992: 148). Platteau and Abraham, however, describe how many traditional agrarian societies are not used to the idea of insurance and as a result they expect a return from the contributions they make to mutual insurance arrangements. Platteau and Abraham conclude that: “[g]uided on the principle of balanced reciprocity, they do not conceive insurance as a game where there is winners and losers and where income is redistributed between lucky and unlucky agents” (Platteau & Abraham, 1995: 26). In many traditional agrarian societies, insurance mechanisms “take on the form of state-contingent loans (thereby ensuring a good deal of explicit reciprocity) rather than pure gifts or assistance” (Platteau & Abraham, 1995: 27).

Although informal mutual insurance systems exist widely in the developing world, their effectiveness has been a source of debate. Alderman and Paxson’s review of literature on the evidence of complete and partial risk-sharing concludes that there is no convincing documentation to support a perfect risk-sharing model, whereas there is some evidence that supports partial risk sharing. When controlling for income, Ravallion and Dearden (1988) have documented that in rural areas of Java, households experiencing illness receive greater income transfers. In another study, Rosenzweig (1988) finds that families receive higher net transfers when their income falls. However these transfers only compensate for about 2 percent of the actual income decline experienced by the households. This finding challenges the efficiency and benefits of the risk-sharing arrangement studied. It is unclear whether such a low compensation rate is common for risk sharing arrangements in the developing world. One significant problem is that other studies often fail to mention or measure the size of the inter-household transfers (Alderman & Paxson, 1992).20 However, Rosenzweig’s results do provide some evidence that although informal mutual insurance systems exist, they may not be as effective as traditional savings in coping with risk.

Alderman and Paxson also conclude that “formal tests of perfect consumption smoothing, either intertemporally through savings or spatially through sharing of idiosyncratic income shocks, do not provide convincing evidence that such patterns are prevalent in village economies” (Alderman & Paxson, 1992). Even at the village level, it seems that problems of monitoring and asymmetric information are still to blame for the lack of full insurance systems.

This issue is addressed in a recent paper focusing on factors that limit the efficiency of risk-sharing arrangements at the village levelby suggesting that the “village is not necessarily the natural reference group” (de Janvry et al, 1998). Studying secondary water exchanges between households in a Pakistani village, the authors find that exchange occurs more frequently between households particularly close in regards to kinship. A reason for this observation may be that reciprocal exchanges in units smaller than the village community provide more efficient insurance than exchanges at the village

20 Transfers between family members are not by default part of a risk sharing arrangement. The transfers could represent gifts or payment for actual services.

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level. Organizing risk-sharing arrangements among smaller groups with better knowledge of the other members can reduce the transaction costs of the arrangement as it provides better knowledge of the insurance partner’s private information, which reduces the opportunity for moral hazard.

Although informal mutual risk-sharing arrangements are beneficial to the participants, the arrangements can also have negative effects on the rural areas inhabitants’ ability to cope with collective shocks. In villages where mutual risk-sharing arrangements exist, the farmers may be lulled into a false sense of security and stop using intertemporal consumption smoothing methods. Furthermore, they may allocate a significant amount of their current savings to the risk-sharing arrangement. In case of a collective shock, the likelihood of a breakdown of the risk-sharing arrangement is a real possibility and, with no buffer in the form of savings, it is likely that the farmers may be worse off with informal risk-sharing arrangements.

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4. SOCIAL CAPITAL AND PRODUCTIVITY

Social capital can improve productivity through different channels, of which two

are particularly prominent. First, extension projects are most likely to succeed in villages with a high level of social capital. Active participation by farmers in extension projects is often essential for the outcome of the project, and strong, well organized local farmers’ associations/organizations that show commitment to extension projects are better suited to learn about new agricultural technology, farming methods and crops. Such associations/organizations often feature high levels of information-sharing between their members, resulting in more successful implementation of knowledge-intensive training and new technology. Second, social capital contributes to improving farmers’ access to credit.21

Extension activities account for a significant part of development projects in the

last decades. They are seen as a way to provide new technology and knowledge to rural areas, thus helping farmers increase productivity. Although many have been successful, failure has also been a very real part of many extension projects. According to Fafchamps: “Extension projects which have focused their technology dissemination efforts on large, more receptive farmers, have often justified their approach by implicitly assuming the existence of village institutions for the sharing of knowledge. If successful, early adapters, it was argued, would trigger copycats and the technology would trickle down to the entire community” (Fafchamps, 1998: 13). Collier argues that “copying is easy in a village of similar people where one agent gets a knowledge advantage for whatever reason. It is precisely this high incidence of knowledge free-riding in peasant agriculture which inhibits peasant innovation, so that the impetus for research needs to come from outside. There is most to be gained from copying when there is a large difference between the efficiency frontier and the mean producer” (Collier, 1998: 8).

New work, however, is questioning the efficiency of village level information

distribution systems (Udry, 1997, as cited in Fafchamps, 1998). The lack of strong social networks and farmer organizations at the village level is one reason for a limited diffusion of information to all relevant members of the community. Farmers living in communities with low levels of trust and poorly organized farmer organizations do not exhibit the same level of information sharing as farmers living in communities with high levels of trust and well organized farmer organizations. According to Fafchamps: “If technology information circulates at all among farmers, it appears to be in processed form and along networks of friends and relatives rather than in an efficient community-based manner” (Fafchamps, 1998: 17). Not only will communities with higher levels of social networks and farmer organizations be more efficient at sharing information; they will also be more receptive to extension projects, as more farmers are able to see their benefits.

21 See Social Capital Initiative Working Paper No. 8, “Does Social Capital Facilitate the Poor’s access to Credit? A Review of the Microeconomic Literature”, by Thierry van Bastelaer, 1999.

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Bebbington examines rural development and social capital in two communities in Ecuador. Two small communities, Sablog and Gatazo, located within 25 kilometers of each other and with similar soil conditions, have experienced very different development trends. The community of Sablog has seen continued out-migration and degradation of natural resources while the neighboring community of Gatazo has reversed the patterns of degradation and out-migration (Bebbington, 1997). The primary reason for this observation is a shift in Gatazo toward an intensive production of horticultural crops targeted at middle and higher income markets. While Bebbington’s example focuses on the leadership role of the professor who initiated the change, it is likely that the social networks created between the external actor(s) and the local farmer organizations contributed to the positive development in Gatazo.22 In contrast, the lack of such networks in the Sablog community is a likely reason why a similar development has yet to occur in that community.

An illustration that extension projects may have better chances of success in areas with higher levels of social capital can be found in Narayan and Pritchett’s study of social capital in rural Tanzania.23 The authors suggest that households in villages with higher levels of associational life were more likely to use modern agricultural inputs (Narayan & Pritchett, 1996). For each standard deviation increase in associational life, the probability of fertilizer use increased by 38 percent, agrochemical use by 42 percent, and the use of better seed by 17 percent. These findings were all significantly above the mean and suggest a positive correlation between the level of associational life in rural areas and the use of modern agricultural inputs.24

A study by Masona, Vierstra and Vijfhuizen found that approximately 80 percent of

the households managed by women in one province of Zambia had never actually met an extension agent (as cited by Geran, 1996). After forming community groups, 39 of the 60 interviewed groups worked with extension services and two-thirds of these groups saw an increased use of extension services (Geran, 1996). Other benefits experienced by members of the groups included far better knowledge sharing and the empowerment of the group members, making them more able to assume leadership roles in the community (Geran, 1996). The work with the extension services, facilitated through the formation of community groups, provided the women farmers with new and better information that helped improve productivity.

22 Technical assistance alone is no guarantee for creation and maintenance of social capital. If the networks and organizations created by the interaction between the professor and the rural people cease to exist after a period of time it is very likely that the level of social capital also will be reduced. See Narayan, 1997 for a discussion on how social capital can gain or loose value over time as a result of the way people invest in it or use it. 23 In the study, social capital is measured by an index of associational life in the villages, which the authors argue “is a proxy for social capital” (Narayan and Pritchett, 1997: 3). 24 Another finding by Narayan and Pritchett provides evidence that villages with higher level associational life are more likely to have access to agricultural credit. One standard deviation increase in associational life was enough to increase the use of agricultural credit by two-thirds (Narayan & Pritchett, 1996).

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The Six-S project in the sub-Sahara region is another example of an extension project in which where strong social networks, groups building and active participation can be credited for success.25 The Six-S network is located in the Sahel region in Western Africa. Established in 1977, the organization consisted by the late 1980s of more than 3000 groups helping hundred thousands of people in about 1500 villages in the area (Lecomte & Krishna, 1997). The project was established by two development workers searching for a more efficient use of the dry season when most of the farmers had little to do. By promoting and participating in village development during the dry season, the farmers could contribute to the improvement of their economic situation.26 27 This was done by “connecting the scattered self-help groups and supporting the self-reliance of villagers through providing funds and training groups in the Sahel region” (Uemura, 1997).

The strategy of the Six-S associations is related to the concept of social capital

through its focus on connecting groups and initially maintaining them through funding and training. Both founders believed that development assistance should try strengthen, or at least not harm, existing “traditional bases of social cohesion in African society…” (Lecomte & Krishna, 1997: 76).28

The original ideal of supporting villagers towards more self-reliance materializes in

the Six-S structure for selecting programs. Programs are based on the activities that different groups in the villages decide to undertake, as this is believed to reveal their preferences for development of the community. Access to the “flexible funding” facilitated by the Six-S requires social capital building in the local communities and between the Six-S and the local communities. As the Six-S does not intervene in the selection of projects or the transfer of funds from the area level to the local communities, the relationship between Six-S and the local groups benefiting from the funding has to be based on high levels of mutual trust.

To ensure that this level of mutual trust is sufficiently high, the Six-S requires that

only village groups proven to be mature and well organized qualify for funding. According to Pradervand, this rule helps farmers “create a network, find grassroots communicators, master elementary concepts of management, and lay the groundwork for literacy training…” (Pradervand, 1989: 104). The pre-qualification is designed to strengthen the internal capacity of the group. The village has to show Six-S that it is determined to undertake a funded project by completing a project of its own (Lecomte & Krishna, 1997). Once a village has shown commitment and capacity to manage a project, farmers can be granted funding along with the benefit of managing the funds as they deem appropriate. 29 The first two stages of the Six-S funding can, according to 25 Six-S stands for “Se Servir de la Saison Sèche en Savane et au Sahel”. 26 In 1967 Ouedraogo initiated the Naam movement in Burkina Faso. His experiences from the Naam movement combined with Lecomte's idea of “flexible funding” provided the foundation for the Six-S. 27 Lecomte’s prior experiences with donor funded development projects made him believe that a new strategy to development assistance was needed (Lecomte & Krishna, 1997). 28 This is similar to recent social capital recommendations from the World Bank (Grootaert, 1997). 29 It is important to note that the funding takes the form of loans rather than grants.

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Pradervand, “easily take eight to ten years” (Pradervand, 1989: 104). In the third and last stage of the funding, the local groups of farmers should be able to manage with little or no outside financial or technical assistance (Uemura, 1997).

The above cases indicate that rural communities with higher levels of participation,

strong social networks and well functioning local organizations are more successful at using new knowledge and technology to increase farmer productivity.

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5. SOCIAL CAPITAL AND MARKETING

The ability of social capital to increase productivity and provide informal insurance in rural areas in the developing world may result in the farmers’willingness to change production from food crops to cash crops.30 This shift in production is significant since economic success could result from producing high value cash crops for outside markets or the middle class.31 However, cultivating and harvesting the products alone does not make the individual farmer any wealthier, as there are rarely markets for these products in the rural areas. This forces the individual farmer to promote and package products for targeted groups as well as provide transportation to the new markets. Strengthening and reorientating community-based institutions is one important strategy for developing efficient and sustainable marketing and processing systems (FAO, 1991: vi).

It has been argued that the sales position of small farmers in relation to buyers is

favorable if the marketing co-operative of which they are members operates efficiently (World Bank, 1987). In turn, it is likely that a high degree of social capital increases the efficiency of a marketing co-operative. In a comparison between producer groups and more traditional co-operatives, Barker concludes that “because of the close social cohesion between members, producer groups are better placed to exploit the potential advantages of co-operative assembly, handling, and grading than the traditional impersonal co-operative” (Barker, 1981: 147). Producer groups are characterized by restricted membership that excludes farmers who deliberately fail to comply with their contracts. This makes it impossible for farmers to leave the group when the market offers better returns and then rejoin when the situation has reversed.

The Ha-ee unit is a vegetable marketing group in rural South Korea. Mutual aid

practices have always been strong in Korean agrarian culture, but now more and more farmers regard the family unit as the most desirable form of organization (Abbott, 1987: 115). The Ha-ee unit, however, is open to any villager applying for membership. The membership is only cancelled if the villager fails to abide by Ha-ee regulations or stops growing the produces Ha-ee has adopted. By implemeting packaging and grading standards, Ha-ee has managed to improve its bargaining power when marketing its products to wholesale markets in Seoul. This has resulted in a wholesaler’s commission of 5 to 6 percent, significantly below the 8 to 10 percent commission wholesalers normally charge farmers from smaller lots. In a comparison of group and individual prices and marketing costs for squash in 1982, Abbott found that the Ha-ee obtained a price that was about 10 percent higher than individual farmers would be able to obtain. Furthermore, the group marketing had lowered the total marketing costs to USD 1.64 per box compared to USD 2.26 for individual marketing (Abbott, 1987: 118). According to

30 Farmers in the developing world are reluctant to “allocate land to cash crops…if their food security is [not] guaranteed” (Fafchamps, 1998b: 17). 31 Bebbington's main conclusion from analyzing six cases from the rural Andean region is that the most common factor for success is high-value products for middle class and elite markets (Bebbington, 1997).

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Abbott, mutual trust between the members was among the factors that contributed to the success of the Ha-ee crop unit (Abbott, 1987: 119).

Well-established farmer organizations provide the basic structure for market access.

However, linkages between farmers’ organizations are often necessary to improve access to new markets. For example, several villages can cooperate in establishing ways to transport their products to distant markets. This may not be economically feasible for each of the individual farmers or villages, as the cost of transportation is too high compared to the revenue gained.

At the new markets, the farmers can promote their products more efficiently, as

gains are made through economies of scale. By linking and scaling up, farmers also have more bargaining power when trying to influence government decisions and policies. This is important since access to international markets is often under strict political regulation, and convincing the national government to challenge other countries import restrictions can result in better international market access for the farmers.

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6. SOCIAL CAPITAL AND VERTICAL RELATIONS

Rural organizations require internal as well as external capacity to be successful (Carroll, 1992; Bebbington, 1998; Perreault & Bebbington, 1999). External capacity describes the farmers’ ability to negotiate with the state and other relevant actors, while internal capacity refers to efficient management of resources (Carroll, 1992; Bebbington, 1998). Combined, they can affect the income farmers get from natural resources through increased prices (“refashioning market linkages”) and increased productivity from better access to knowledge and technology.32

The effect of linkages between local actors and state actors can have other results in

addition to improving market access for agricultural products. For example, state actors can help provide the right incentive structure for social capital formation (Picciotto & Grover, 1996), but they can, at the same time, dismantle social capital if they do not favor increased associational freedom among groups in society. 33 Buenavista illustrates this problem with a case from a rural fishing town in the Philippines where the village social and economic structure in many ways is dependent on the dynamite fishing technique. She found that government prohibition of dynamite fishing could result in a decline of social capital.According to Buenavista, a better approach for the government is to enable the local villagers to create their own institutions “which adhere to community norms and are carried out by community members themselves” (Buenavista, Internet).34

The importance of vertical relations is also illustrated by the Small Farmer

Development Program in Nepal that was supported by the government bank that provided funding for programs supporting smallholding farmers living in poor areas (Uphoff, 1998). Lele and Mellor argue that the reason for estate agriculture’s success over smallholder agriculture in African nations such as Malawi and Kenya is partly a result of the government’s and donor’s lack of focus on establishing human and institutional capital (Lele & Mellor, 1988). As long as an authoritarian nation’s powerful elite is united in favor of decreased associational autonomy, it will be difficult to find room for the citizenship rights that are the very basic conditions for local organizations to arise.

Bebbington and Fox agree on the importance of interaction between state and

societal actors.On social capital development in the rural Andes region, Bebbington concludes that “rural regeneration is only likely to occur in these areas through concerted 32 In his article “Bridging Organizations and Sustainable Development”, Brown argues that three important roles of organizations affect the level of sustainability: (i) the ability to maintain local effort, (ii) the ability to create horizontal linkages to other organizations, and (iii) the ability to influence politics through vertical linkages (Brown, 1991). 33 According to Bebbington, policy “should foster enabling environments” and politics should “encourage the emergence of civic organizations” (Bebbington, 1997: 195). 34 In some cases these institutions already exist, but they may have been undermined by interest conflicts among community members. Hirschman finds in his study of Latin American community development groups that it is possible to reactivate the “social energy” of the actors that earlier had participated in failed collective action projects (Hirschman, 1984).

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political commitment to highland small farm production. This is unlikely in the absence of effective political mobilization at a national level” (Bebbington, 1998: 1). In Fortmann’s paper on the role of local institutions in communal area development in Botswana, she concludes that “local institutions can assume their proper role in undertaking communal area development only if they trust and respect, and are trusted and respected by, government” (Fortmann, 1986: 75).

In the Andes region, local-level institutions have helped “localities negotiate more

effectively with state, market, and other civil society actors, as well as provide access to new, cleaner technology, financial resources, and new markets” (Bebbington, 1998: 11). These institutions are often created by independent mobilization from below, often initiated by leaders willing to bear the extra risk and cost of forming local rural organizations until a critical mass is reached. Many local rural organizations emerge this way, but often they need the help of outside linkages to scale up and consolidate their organizations (Perreault & Bebbington, 1999; Krishna 1997), especially if they operate under authoritarian rule (Fox, 1996). Krishna describes the importance of linkages for rural communities in the following way: “Sustainable solutions can result only from linking village-level [user committees directly] with higher-level political structures” (Krishna, 1997: 271).

An older study of rural development in 16 Asian countries by Esman and Uphoff

identifies the joining of small base-level groups in larger structures as a key factor for success (Esman & Uphoff, 1974). The reason for this observation is the combination of increased benefits through scale and solidarity. The same authors, however, in a later study, reach the conclusion that horizontal linkages among base-level organizations contribute more to success than vertical linkages (Uphoff (ed), 1983). For local institutions to be successful they “should have more than one level of organization, probably a two-tier pattern, in which the lower tier performs functions at the neighbourhood or small group level, while the other undertakes more complex business activities that require relatively large-scale operations” (Uphoff (ed), 1983: 333).

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7. CONCLUSION

In 1974, Arrow observed that “among the properties of many societies whose economic development is backward is a lack of mutual trust” (Arrow, 1974:26). Based on an observed positive correlation between the level of trust and economic growth and/or sustainable development, several development agencies around the world have started to reconsider parts of their aid policies and programs.35

This paper illustrates how social networks, local organizations and participation can have an effect on common property management, risk management, agricultural productivity, marketing of agricultural products, and vertical relations. The general conclusion to be drawn is that the effect is generally positive. However, this does not mean that there are no negative effects of social capital in rural development. Problems of social exclusion, conformity and authoritarian clientelism are not uncommon and are relevant when discussing the impact of social capital, but it is unclear whether they outweigh the many positive effects of social capital.36 Future research on social capital will help provide a clearer picture of the positive as well as negative consequences of social capital in rural development. The challenge for the future for development agencies and NGOs is to find better ways to identify how to successfully build, or assist in building, social capital in rural communities and steer clear of the external as well as internal threats to the process.

35 The World Bank recently concluded that for more efficient project design and implementation local institutions and social networks need to be factored in (Grootaert, 1997). 36 For a discussion of some of the negative consequences of social capital see Portes, 1988.

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