Aquaculture farmer organizations and cluster management: concepts and experiences

2.6
THEORETICAL PERSPECTIVES ON FARMERS’ ORGANIZATIONS
Various theoretical approaches
5
have been developed on FOs, on their role in helping 
to overcome economic coordination problems and promote economic growth, on 
their formation and operation, and on factors that have the potential to influence their 
success. 
2.6.1 Institutions, transaction costs and the processes of institutional change
Over the last two decades, in the context of liberalization’s failure to deliver the 
agricultural growth needed to reduce rural poverty in developing countries, institutions 
have been increasingly recognized as being important in influencing economic 
5
Many of which stem from the literature on New Institutional Economics.

---

Aquaculture farmer organizations and cluster management – Concepts and experiences
10
behaviour and processes of economic growth (Nabli and Nugent, 1989; Poulton 
et al
., 
1998; North, 1990; World Bank, 2002; Dorward
 et al
., 2005). Institutions, defined by 
North (1990) as the “rules of the game”, influence the incentives and actions affecting 
people’s behaviour and can be described at two levels (Davis and North, 1971):
“An institutional arrangement is an arrangement between economic units that 
governs the way in which these units can co-operate and/or compete.”
and
“The institutional environment is the set of fundamental political, social and legal 
ground rules that establishes the basis for production, exchange and distribution. Rules 
governing elections, property rights, and the right of contract are examples…”
Thus, institutions and institutional arrangements, such as FOs or contract farming 
arrangements, are a way for economic actors to reduce the uncertainty inherent 
in human interaction and overcome market failures caused by high transaction 
costs
6
(Dorward, Kydd and Poulton, 1998). The level of transaction costs is heavily 
influenced by imperfect information and the opportunistic behaviour of trading 
partners. According to Williamson (1995), transaction costs are directly related to the 
degree of asset specificity,
7
uncertainty
8
and transaction frequency.
9
If transaction costs 
are prohibitively high, producers and traders will not find it worthwhile to engage in 
output markets (De Janvry, Fafchamps and Sadoulet, 1991), leading to low levels of 
economic activity, constraining economic development, and potentially resulting in a 
“low equilibrium trap” (Dorward
 et al.
, 2003). The transaction costs and risks faced 
by farmers and third parties when doing business with each other can be reduced if 
farmers act together as a unit, especially where investment in specific assets is involved; 
thus, the key importance of FOs in economic development lies in their transaction-cost 
minimizing role.
The institutional environment also has considerable bearing on FO development 
and internal and external relations. Formal laws and government policies along with 
informal institutions based on customs and traditions affect the environment for 
FO development and determine whether it is an enabling or disabling one. Moving 
from a disabling institutional environment associated with economic stagnation to an 
enabling environment associated with economic growth and development can be a 
slow and difficult process (Stockbridge, Dorward and Kydd, 2003). The role of FOs 
in this process can be limited if they are used by powerful organizations to pursue 
elite interests of socially inefficient institutional and technical change. Even if FOs are 
controlled by farmers whose interests correspond with socially efficient change, the 
process of change will be an incremental one.