Endogenous institutional innovation and agroindustrialization on the Peruvian coast

This paper presents an analysis of endogenous institutional innovations that have recently emerged in the agroindustrial zone of Chincha, on the coast of Peru. These innovations include: (1) contracts between agroindustrial firms and large farmers, introduced by the firms themselves to assure timely delivery and compliance with strict requirements implied by the emerging demanding quality and safety standards for agro-export of processed asparagus; (2) management services exchanged for labor supervision and land collateral in share tenancy contracts between a management company and “farmer companies” of small cotton farmers. These contracts introduced by the management company illustrate those described theoretically by Eswaran and Kotwal [Am. Econ. Rev. 75 (3), 352–367]. The nature and importance of these institutional changes are twofold: (1) They were induced institutional innovations driven by the requirements of agroindustrialization itself. (2) Together they had ambiguous employment and income impacts (tending to the negative). On the one hand, the emergence of asparagus and firm–farm contracts reduced employment through exclusion of small farms and shifts to capital-intensive crops. On the other hand, the reinforcement of smallholder cotton and the emergence of farmer companies increased employment and income of smallholders. 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 discovered that this innovation is taking place and are asking hard questions about whether this innovation can and will be diffused. The interest in the private for-profit institutional change is sharpened by growing doubts about how economically sustainable and widespread a response NGO help can be to small farmers in maintaining their participation in income-enhancing agroindustrialization. Moreover, with changes in land laws and markets the fluidity of the situation is apparent, with agroindustrial firms even starting to ask themselves whether contracts with large farms are necessary and best. © 2000 Published by Elsevier Science B.V.