Villa Borsig
Workshop Series 2000 - The Institutional Foundations of a Market Economy
- Bhuban B. Bajracharya
Subsistence
Economy and Institutions
for Mobilizing Social Capital
Bhuban B. Bajracharya
The world has shrunk, intensifying the need to bring all communities
- world, national, and local - into the mainstream of development. The
stark differences between communities at all these levels require different
development strategies and different institutional frameworks.
No one now doubts that the market economy is the most efficient.
Its strength lies in its ability to incorporate many elements of social
interest, while the socialistic design cannot so easily incorporate elements
of market forces. But the market economy presupposes the existence of elaborate
institutions to ensure competition. Institutional and legal frameworks
for information, facilitation, monitoring, regulation, and arbitration
must be in place for the market economy to work efficiently. Institutional
and legal gaps in these areas will doom the market system, leaving deep
economic scars and damaging the very foundation of a market economy.
Features of Poor Economies
Developing countries have in common poverty, both economic and human, a
large agricultural subsistence sector, more severe poverty in rural and
marginalized communities, social exclusion, a poor resource base, a low
growth rate, and uncertain trade. This paper explores these features with
particular reference to Nepal.
Poverty
Poverty is the major threat to many developing countries. If institutions
fail to deal with poverty, the market economy will be jeopardized as the
argument in favor of direct government involvement in the economic sphere
gains momentum. Poverty is widespread and multidimensional, and it is exacerbated
by low human development. According to the most recent estimates (NLSS
1996), about 42 percent of Nepalese lived below the poverty line in 1995–96.
More than half of this group (25 percentage points) was counted as moderately
poor and the rest (17 percentage points) as very poor, lacking any assets.
Calculated according to the dollar a day poverty line, the incidence of
poverty in Nepal is 53 percent (World Bank 1998a, p.5).
In addition to its income poverty, Nepal has low human development indicators—literacy,
life expectancy at birth, gender, and so on. About 60 percent of the adult
population is illiterate, and the rate is even higher for backward communities
and women. Life expectancy at birth is only 56 years. The infant mortality
rate is about 75 per 1000 live births.
Subsistence Sector
Many poor economies have a large subsistence sector existing side by
side with a small but dynamic modern sector. From an institutional point
of view, the greatest dilemma of these economies is that the institutions
responding to the needs of the dynamic modern sector are not suited to
the large subsistence sector. This problem is made more complex by the
illiteracy of large groups of people.
Subsistence Agriculture
The large subsistence sector in many countries is agriculture. More
than 67 percent of people 15 years and older in Nepal are involved in subsistence
agriculture (NLFS 1998–99). If only currently employed people in the agriculture
sector are counted, the rate rises to 90 percent. Because these people
are involved in agriculture for survival, not for economic gain, both their
production and social activities are defined more by traditional sociocultural
institutions than by economic logic. Subsistence agriculture is characterized
by self-sufficiency in limited household needs, without much specialization.
Rural Areas and Ethnicity
Poverty and subsistence activities are especially pronounced in rural
and inaccessible areas and among less developed and more vulnerable communities.
Poverty in Nepal is more severe in high mountainous and inaccessible areas
and is more common in rural than urban areas. Poverty is especially severe
within lower-caste groups, ethnic minorities, and tribal groups (NESAC
1998).
Social Exclusion
Some occupational groups that have traditionally been socially excluded
are now experiencing new forms of exclusion, for example, from educational
institutions. But exclusion is not limited to these groups. The poor generally
have access to poor-quality public education institutions, which puts them
at a disadvantage. In Nepal exclusion is apparent in increasing regional
disparities, particularly between prosperous areas and stagnant, undeveloped,
inaccessible areas. The outmigration of better-off and educated people
to urban centers and the absence of effective social services in remote
areas have kept these areas in poverty.
Poor Resource Base
Poverty among the rural poor derives from poor access to all resources,
especially land, and low productivity. According to the 1991 Rural Credit
Survey in Nepal, about 93 percent of the rural poor were small and marginal
or landless farmers (Chhetry 1996). The poor own low-quality land
and have less access to productive agriculture inputs, so their productivity
is lower.
Low Growth Rate
Broad-based growth and targeted programs for areas and communities outside
the mainstream development process are two basic development strategies.
Sector-oriented broad-based growth is to be achieved through a liberal
market economy. However, the economic growth has largely bypassed the rural
poor in Nepal since the mid-1970s. Growth has been too weak and narrowly
based to reach the poor, and institutions have been inaccessible to them.
Except in years of good monsoons, agricultural growth has not surpassed
population growth, and occasional overall high GDP growth rates have been
produced by urban-biased nonfarm sectors.
Uncertain Trade
Besides urban-biased nonfarm sectors, the other sector that can promote
growth is exports. Nepal’s major exports have been carpets and garments,
although some agricultural products have recently been exported to India
and Bangladesh. But exports face market problems and new forms of protectionism
such as quality and labor standards. Quality standards are not bad in themselves
if they are set realistically and if an international institutional framework
can help developing countries meet those standards.
Issues to Consider in Modern Development
Successful development must take into consideration the dual role of public
institutions, empowerment and mobilization of people, the effects of unequal
incomes, and traditional social stratification.
Dual Role of the State
Development has to acknowledge the dualistic features of developing
economies. While the modern sector requires public supervisory and regulatory
functions, a welfare approach is still necessary to respond to the problem
of poverty.
Social Mobilization
Successful poverty reduction calls for empowerment of people, good governance,
and people’s participation. Social mobilization has brought about broader
involvement in decisionmaking and has introduced communities to commercialization
and market forces.
Inequality
Income inequality has restricted the access of the absolute poor to
better education, resulting in a new form of marginalization. In developing
countries with social stratification, this marginalization has helped perpetuate
the social exclusion of lower-caste people and of less developed and inaccessible
areas.
Agriculture Technology
Developing countries are fast losing their comparative advantage in
agricultural exports, primarily because of the technology gap. Research
and extension need new institutional modalities to become demand driven
and directly responsive to the needs of farmers.
Social Stratification
Traditional social stratification is different from more formal organizational
design. Capacity building of various public institutions thus must accompany
private sector development.
Institutions and Social Capital
Experience in poverty alleviation and rural development has shown the need
for good governance and the participation of beneficiaries in program planning,
implementation, and monitoring. Institutions—defined to include organizations,
processes, linkages, and relationships— should focus on:
-
Activating local people through social mobilization.
-
Capacity building of local government agencies through decentralization.
-
Strengthening central planning to develop effective policies and ensure
a competitive market-oriented setting.
People, development agencies, and local government institutions are the
main actors in mobilizing social capital. Development agencies are needed
to provide illiterate subsistence laborers, especially in rural areas,
with information about opportunities for development through market mechanisms
and support so that they can implement further activities themselves. Such
agencies can be nongovernmental organizations, community-based organizations,
project offices of donors, government-promoted agencies, and so on. To
encourage and support this process local government agencies need to promote
socioeconomic infrastructure at the local level. Strong and effective local
government institutions are required to coordinate and integrate planning
and implementation on multiple fronts—infrastructure, human resources,
delivery of support and social services—and to ensure effective mobilization
of resources.
Development agencies can help mobilize people to identify opportunities
and constraints and to plan income-generating activities. To ensure sustainability,
these activities must be demand driven. Whenever possible people should
pay for services provided through such intervention programs.
Saving and microcredit are key elements of the development process.
Small institutions such as the Grameen Bank can extend microcredit. Banking
institutions prefer to provide wholesale credit to microfinancing institutions
rather than to be directly involved in these activities. In Nepal several
variations of this basic model are followed by different agencies and programs.
Some target socially homogeneous (ethnic and tribal) groups, while others
cover whole settlements. In other cases, asset ownership is the basis for
forming homogeneous groups. Microcredit is the critical component in all
these programs.
Most of these efforts involve agriculture and livestock development,
with a strong focus on developing market linkages. Wherever possible, extension
services or technical backstopping is made available for a fee. These services
are different from the free, but costlier extension services provided by
the government. The institutional framework of the conventional government
extension services has been a complete failure, neither demand driven nor
sustainable. The introduction of new market-driven agricultural practices—cultivating
off-season vegetables and raising livestock—has enabled farmers to pay
for extension and veterinary services and has exposed subsistence farmers
to market forces and market mechanisms.
In most of these efforts, community-based and nongovernmental
organizations are involved in social mobilization and in helping beneficiary
groups plan and implement income-generating activities. It is notable from
an institutional standpoint that most of these organizations are engaged
by donors and none by the government, which still favors establishing specialized
institutions such as the Grameen Bank.
In developing countries, government and other formal institutions
do not respond well to the needs of the subsistence sector. Governments
may run targeted welfare programs but make little effort to bring the subsistence
sector into the mainstream development process based on market forces.
This gap is filled by nongovernmental and community-based organizations
through social mobilization. But the place of these organizations in the
government’s overall operations is unclear. A strong institutional set-up
is needed to mobilize widely scattered agencies for social mobilization.
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References
Chhetry, D. 1996. “Some Aspects of Poverty in Nepal: Microanalysis.”
Monitoring Micro Impact of Macro Policies (MIMAP) Project, Agriculture
Projects Services Center (APROSC) and International Development Research
Center (IDRC), Kathmandu.
Nepal, CBS (Central Bureau of Statistics). 1992. “Nepal
Rural Credit Survey 1991.” His Majesty’s Government of Nepal, Kathmandu.
———. 1996. “Nepal Living Standards Survey Report 1996,
Volume One: Main Findings.” His Majesty’s Government of Nepal, Kathmandu.
———. 1997. “Nepal Living Standards Survey Report 1996,
Volume Two: Main Findings. His Majesty’s Government of Nepal, Kathmandu.
———. 1999. “Nepal Labor Force Survey for 1998–99.” His
Majesty’s Government of Nepal, Kathmandu.
Nepal South Asia Center (NESAC). 1998. Nepal: Human Development
Report—1998, Nepal South Asia Centre, Kathmandu.
World Bank. 1998a. “Poverty in Nepal at the Turn of the
Twenty-first Century.” Volume I. Draft report. Washington, D.C.
World Bank. 1998b. “Poverty in Nepal at the Turn of the
Twenty-first Century.” Volume II. Draft report. Washington, D.C.
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