Discussion Paper No. 70: Hatzius, Thilo: Nature and Institutions as Goods? On the Nature of Goods in Sustainable Rural Development

Diskussionsschriften Nr. 70 der Forschungsstelle für Internationale Agrar- und Wirtschaftsentwicklung eV, Heidelberg, Januar 2000

The author is a free lance consultant, formerly senior researcher and now affiliated with the Research Centre for International Agrarian and Economic Development (FIA), in Heidelberg, Germany. Correspondence should be directed to the Research Centre for International Agrarian and Economic Development (FIA).


1 Sustainability and institutions in rural development 2

1.1 Introduction 2

1.2Nature, institutions and the poor- central issues in policy analysis for sustainable rural development 3

1.3Institutional failure – towards an extended concept 5

1.3.1 Market failure and price incentives 6

1.3.2Institutional failure – including non-markets and non-price incentives 8 Disjunction between costs and revenues in the public and non-profit sectors 8 Asymmetric distribution of information and transaction costs within public, non-governmental and private organizations 9

1.4The poverty - resource degradation link 10

2 Policy analysis for an institution oriented strategy for sustainable rural development 12

2.1Institutions in development – some clarifications 12

2.2Classifying goods – the properties of rivalry in use and exclusion 13

2.3Issues in policy analysis for sustainable rural development 17

3 Conclusions and policy implications 20

3.1Conclusions 20

3.2Policy implications 22

References 24


CBACost Benefit Analysis

CPRCommon Pool Resource / Common Property Resource

EIAEnvironmental Impact Assessment

GTZDeutsche Gesellschaft für Technische Zusammenarbeit

CIAComparative Institution Analysis

IMSCIndirect Marginal Social Cost

IRRInternal Rate of Return

NGONon-Governmental Organisation

NPENew Political Economy

O&MOperation and Maintenance

SCBASocial Cost Benefit Analysis

TCATransaction Cost Analysis

UNCEDUnited Nations Conference on Environment and Development

WTOWorld Trade Organisation

WUAWater User Association

Summary [1]

Problems of environmental and resource degradation have been attributed to the poor in developing countries by some people, to the rich in developed countries and to their excessive consumption by others. The contradicting and sometimes confused discussions on the subject are strained by differences in perspective and often by a mix up of subject matters, of levels of analysis and the types of resources in question. The present paper relates to rural areas of developing countries and sees both environmental degradation and poverty as cases of institutional failure which have to be considered in a strategy of sustainable development.It recommends an extension of the mainstream concept of market-failure when analyzing the institutional options available. In a strategy of sustainable rural development, the distribution of property, user and access rights to natural resources as well as the frictions and costs which occur when transacting in real markets and within real organizations are considered important. These are issues which have been of particular interest to economists specializing in environmental, resources and institutional economics. After discussing some of these issues the paper in a first part identifies different types of institutional failures, including poverty, a lopsided distribution of incomes and rights to natural resources as well as incentive problems due to asymmetries in the distribution of information leading to the corresponding agency problems. It then discusses the assumed link between poverty and the degradation of renewable natural resources in rural areas of developing countries which cannot be confirmed from the literature. In a second part the paper recalls the important features of institutions to be considered in policy analysis for rural development and then sketches the properties of an institutional framework conducive to sustainable development. It furthermore underlines the importance of considering natural and institutional capital in development strategies just as financial and physical and, more recently, human capital are. In it’s main section this second part presents a 2 x 2 policy analysis matrix for the classification of goods and resources, distinguishing between the two properties of rivalry in use and ease for exclusion ofusers . The four groups of goods and resources identified have different requirements for institutional design, be it the provision of goods and services to the poor, the provision and maintenance of rural infrastructure or the management of renewable natural resources. Institutions in this framework are partly considered as public or meritory goods to be provided on a central government level, partly public goods on an international or on the local level. On all levels collective action by stakeholders and serious efforts to find a consensus is needed. The paper discusses a number of questions which should be asked when revising or designing a new institutional set-up for the management of a particular resource or the provision of certain goods or services in rural development. In the table these questions are arranged around the central 2 x 2 part of the matrix.In a final section, some conclusions are drawn concerning an institution oriented approach to sustainable rural development.

Key words – common property resources, environmental policy, institutions, land degradation, natural resource economics, poverty.

1 sustainability and institutions in rural development

1.1 Introduction

In the years following the report of the BRUNDTLAND commission (1987) and the 1992 UN Conference on Environment and Development (UNCED) the term ’sustainability’ has been used in such an inflationary way as to make the concept and the policy issues involved become increasingly blurred. The term ’sustainable’ - now generally having the connotation of an environmentally friendly, nature saving or respecting development - is not new to development practitioners. They have been using it for quite some time in the sense of a continuing (i.e. sustainable) positive impact of an aid program or project [2] on people’s livelihoods and - more generally - on development. The well-known critique of aid in general [3] and of the limited impact aid often has on the alleviation of poverty [4] is part of the concern about non-sustainability in the old sense. With respect to the new meaning, many studies have pointed to the negative impact development programs, projects and policies often have on the environment [5] . Others have shown the negative correlation between growth and environmental quality. Others again have raised the issue of how the poor contribute to the degradation and deterioration of natural resource systems. The picture drawn in this respect, however, is often blurred and rarely framed in an adequate way.

The present paper will therefore try to get a clearer picture of some of these issues applying a new institutional economics framework, i.e. a framework combining elements from neo-classical and institutional economic theory, and insights from recent literature on the subject. In the first part it will identify some central issues in policy analysis for sustainable rural development. It then discusses different categories of institutional failure, including both market and non-market failure, and raises the question, if nature and institutions might be considered as forms of capital in the context of sustainable rural development. Then the assumed poverty-resource degradation link will be discussed based on a survey of literature. In the second part, the role and importance of institutions within an economy, and particularly for development are summarized before presenting a 2 x 2 matrix for the classification of goods and resources in an institution oriented strategy of sustainable rural development. In this matrix the two intrinsic properties of exclusion and rivalry in use allow the characterization of four types of goods and resources which require specific institutional configurations for their provision and management. Corresponding policy issues will be discussed and in a concluding section a strategy for sustainable rural development with a focus on institutions outlined.

1.2 Nature, institutions and the poor - centralissues in policy analysis for sustainable rural development

It is a common practice in the development aid community to blame the ’institutional framework’ whenever projects and programs do not have the desired outcome or positive impact predicted in feasibility studies and prescribed in development plans. It is therefore surprising, that this experience has not led to a common understanding of institutions [6] nor to the development of simple methods for the normative analysis of institutions and their application in the appraisal of policies and projects. Corresponding to this, ex-post evaluations of the impact institutional development activities have had on a sustainable resource use are also rare. So are studies including institutions as explanatory variables in models of growth and development. Technical innovations, population growth, the physical capital stock and financial capital are generally included as determinants of growth, the impact of institutional innovations and the damage on the environment, however, are mostly ignored in a reduced and cryptic understanding of development.

There is, of course, a reason for this. The assessment and valuation of nature and institutions poses conceptual problems, just as the assessment of incentives and disincentives not conveyed by prices and markets does. The same holds true for the costs of collecting, providing and spreading information and the cost of transacting in markets and within other non-market institutions which are the particular focus of neo-institutional process oriented economics. Though quite easily to grasp conceptually, these items are difficult to identify and even more difficult to quantify. The same, however, holds true for externalities referred to by neo-classical economists and for internalities and derived externalities referred to in a non-market context [7] which will be discussed in the subsequent sections.

The assumption that positive effects of growth ’trickle down’ through the market system to the poor has been justified by methodological ease and wishful thinking rather than factual evidence. The important role of informal institutions as a form of social capital and of natural resources as natural capital, the latter often a crucial source of goods and services for the livelihoods of the poor, on the other hand, has recently been recognized by many development theorists and practitioners. An adequate analysis in quantitative terms and it’s consideration in development models and within strategies for sustainable rural development, however, is still missing, the conceptual issues involved not very clear. For some authors institutions, traditional knowledge and the ability to maintain sustainable livelihoods in adverse circumstances are seen as ’social capital’. For others it is not institutions themselves but the trust they create between agents acting within a dynamic social system [8] . In the case of natural capital conceptual work concerning the valuation ofnatural resources and of the environment is more advanced. Ecological and resource economists have widened the concept of capital. The need for valuation of assets in form of natural resources, bio-diversity or landscapes as well as the flows of goods provided by nature is now generally acknowledged, in national accounting as well as in the appraisal of projects and policies. There is evidence of green accounting being introduced in national accounts and of a general agreement on the appropriate application of methods for the valuation of nature and of intangible assets such as landscapes, rare species or bio-topes [9] . In project appraisal methodology the assessment of the environmental soundness (Environmental Impact Assessment) now has been introduced by most donor agencies. The integration of goals other than economic efficiency into social cost benefit methodology (SCBA) by a corresponding revaluation of goods and services, however, which at some time in the past had been attempted in the form of weights to consider social goals [10] , has not been adopted on a larger scale as it would have introduced even more vagueness into a rather rigorous but widely questioned instrument in public finance and aid. In the case of environmental goals such an introduction has not been tried. Instead, separate indicators within a multi criteria analysis has been recommended [11] .

The important role of public agencies in alleviating poverty is out of question, though non-public non-market institutions are often assumed to be more effective and efficient. The role of NGOs and of nation states as well as the term ‘public’ become blurred considering the global dimension of environmental degradation and poverty. The responsibilities for different tasks and on different levels are not clearly separable, collective action of stakeholders, coalitions and networks are terms referring to new institutional configurations. The poor have been recognized to suffer more than anybody else from the negative effects growth has on the environment and on natural resources. They are also most hit by the growth enhancing structural adjustment policies (SAP) imposed by the Washington consensus . As the poor usually live in the more precarious environments and have less resources and capabilities to cope with negative effects (externalities) or to escape from these environments, a close relationship exists between environmental and poverty issues - not only in a local but just as much or even more so in a global context. The question, however, if the negative effects of unabated growth and of consumption patterns in industrialized countries [12] or the production and consumption patterns of the poor in developing countries have to be blamed is inadequately posed, as it concerns two different systems, one being a subsystem of the other in many respects [13] .

From the few subjects treated it should become clear, how extremely complex the subject of poverty and environmental degradation really is. At this point it should suffice to insist on the necessity of choosing a transdisciplinary approach when it comes to design strategies for sustainable rural development. From an economic point of view, we may conclude that institutions matter and that an institutional approach focussing on a variety of institutions besides markets and on incentives beyond prices is necessary. The market failures neoclassical economists used to focus on are not sufficient to grasp the problem situation in rural areas of developing countries, where the sustainable use of natural resources and the environment and the creation of sustainable livelihoods for the rural poor concern all levels – the local, the national and the global. What is needed, and where the present paper tries to contribute some insights, is a common understanding of some of the underlying concepts to be able to communicate on the principal issues and find solutions to the principal problems.

1.3 Institutional failure – towards an extended concept

Economic theory provides us with a useful theoretical framework for analyzing questions of choice. Since Adam SMITH introduced the metaphor of the invisible hand leading utility or profit maximizing individuals to come up with socially adequate (respectively optimal) outcomes, competitive markets are considered the most effective and efficient form of coordinating individual decisions concerning the production, consumption and exchange of goods and services. As markets link the costs of producing a good (supply) to the income sustaining it (demand), market prices are seen as providing the right incentives for individual decision making and are also considered the most straightforward way to estimate the value of goods and services.

The term economic efficiency is often used, with respect to markets, as well as to prices, to institutions, activities or outcomes. It is a yardstick applied by economists to assess these and many other things. In a general sense it refers to the cost minimizing, respectively benefit or utility maximizing use or allocation of resources, mostly of a national economy, sometimes of smaller or larger organizational units, in the production, consumption and exchange of goods and services. In terms of neo-classical welfare theory the exchange of goods and services and the allocation of resources within an economy are considered economically (better: socially) efficient (or PARETO-optimal [14] ) in a (fictitious) equilibrium situation in which nobody can be made better off without anybody else being made worse off, assuming the winners compensate the losers. In terms of economic policy, competitive markets, by giving incentives to innovative entrepreneurs and by eliminating inefficient producers and institutions are the driving force in this ongoing process within an economy, leading to growth and development. In such a world of economic efficiency, innovative entrepreneurs and creative destruction (SCHUMPETER) are the winners, resource poor rural people and nature are the losers.

In Social Cost Benefit Analysis (SCBA), the application of neoclassical welfare economics to select policies, programs and projects, based on the assumption of a rational, benevolent state maximizing the welfare of society, there is also no place for institutions other than markets, for the poor and for nature. The same market prices leading the innovative entrepreneurs are not used for the valuation of goods and resources in SCBA as deviations of actual (financial) prices from socially optimal ones (including all costs and benefits to society) are omnipresent, mainly due to externalities (’market failure’) and policy interventions by the state which distorting markets and prices. In the economic assessment of alternative policies or projects with SCBA, a second-best system of prices, the shadow (economic or social) prices, is used; for tradable goods based on prices in the world market, for non-tradable ones derived therefrom or determined in some other way [15] . Other sources of market (institutional) failure, however, and their treatment in policy and project analysis are ignored.

1.3.1 Market failure and price incentives

We consider four major types ofinstitutional failures. The first two, relating to public goods and to negative externalities, are commonly treated as market failures in mainstream (neoclassical) economic analysis. The failure of markets to provide for the poor and work towards equity, however, are generally not considered in this framework. The public good type of market failure refers to situations where a good or service will not be provided in a socially optimal way by private initiative through markets; either not at all, or not efficiently or not sufficiently. The reason might be that (i) a market does not come about because of the particular intrinsic properties of a good, e.g. the exclusion of non-paying users is not possible ( free rider problem), (ii) markets do not provide enough of the good or service because not all the positive effects are compensated for by the market price, private providers thus making a loss and not offering the optimal, welfare maximizing amount ( positive externalities); (iii) the provision of a good or service requires an investment which is very risky , which is subject to increasing returns to scale (decreasing average costs), which is very specific for a particular purpose, very costly or has a long gestation period (like in the case of infrastructure or other lumpy investments ). In this latter case, once the investment has been done, it is very difficult for a competitor to offer corresponding goods or services. Such a ’natural monopoly’, however, does not necessarily mean, that public provision is necessary. Local governments or civil society organizations in an effort of collective action might be just as, or even more effective and efficient, leaving a certain regulatory or subsidiary function, perhaps the payment of a lump-sum subsidy to the state [16] .

The second type of market failure refers to external costs ( negative externalities), costs to society which are not included in the market price. The under-pricing or non-pricing of a good or resource or a feature of it leads to a consumption or use pattern not corresponding to a social optimum. Examples are environmental degradation, pollution or the exploitation of a natural resource beyond a sustainable level. As will be shown later in the paper, either taxes or subsidies are needed in order to internalize externalities into market prices, or, particularly in the case of common property natural resources (CPR) with the intrinsic property of rivalry in use, the introduction of rules concerning the management and use are needed in order to cope with the problem of non-sustainable use. Usually, but not always, this would be a task of the central government, collective action at some other level being another option in the case of CPR. Comparative institutional analysis would help to decide on the appropriate institutional configuration.

Both, the third and the fourth type of failure are outside the neo-classical economic analysis framework which is only concerned with allocation efficiency. The inability of markets to take care of societal goals concerning poverty and equity are not seen as market failures in a narrow sense. In the application of analytical tools such as SCBA these goals are taken care of by assumptions concerning the optimal distribution ofproperty rights to productive resources and the assumption of winners compensating losers. In a sustainable rural development context, however, the distribution of property rights to natural resources and the considerations of questions of who are the losers and winners of a project or policy and compensation and, in particular,the consideration of future generations [17] , are of central concern. A wider range of mixed institutional configurations, combining collective effort by public agencies with civil society organizations contributions to secure equity, sustainability and a consensus among stakeholders need to be considered. In case there are off-site and off-time external benefits and costs, collective action has to be extended to a higher level. In this case, central governments and international bodies need to join in hierarchical coordination efforts [18] . SCBA methodology in these cases is not suitable or needs to be modified and extended [19] . Recently in an effort to find a synthesis between ordo-liberal and new institutional thinking ‘consensus’ and ‘system conformity’are new evaluation criteria proposed besides efficiency [20] .

The fourth type of institutional failure concerns the assumption of competitive markets, which in neo-classical economic theory implies both, perfect information and perfect markets.The public good type market failure takes care of cases of non-perfect market coordination in the case of natural monopolies, other deviations from the standard assumptions are analyzed in neo-classical microeconomic theory with corresponding models of non-competitive market exchange. Problems of asymmetries in the distribution of information and of transaction costs (e.g. the costs of information and of preparing, monitoring and enforcing contracts for the provision of goods and services) which also concern assumptions of the competitive market model will be treated in the following section, as they are mainly analyzed in the context of non-market institutions.

1.3.2 Non-market institutional failure – including non-markets and non-price incentives

Non-market failures and non-price incentives arise in a range of institutional set-ups, including markets and the private sector, as well as the public, non-governmental and civil society sectors. Theextended concept, which has already partly been referred to in the previous section, includes

· the disjunction between costs and revenues in the public and non-profit sector,

· equity and distribution, particularly distribution of property and user rights of natural resources ,

· asymmetries in the distribution of information and

· transaction costs.

This broader concept is a logical consequence when considering the issues treated by the NIE school of thought. Though lacking the methodological rigor of the quantitative analysis of markets, the comparative assessment of institutional configurations considers theproperties of the resources to be managed, goods and services to be provided, including issues of financing, the analysis of type and distribution of property or user rights, and the assessment of transaction costs. The analysis of non-price incentives and disincentives, of course, cannot be done as rigorously in quantitative terms as microeconomic price and marketanalysis. It should, however, give some insights into the central issues. Disjunction between costs and revenues in the public and non-profit sectors

Non-price incentives are omnipresent for decision-makers working in public and semi-public, non-profit, civil society and private organizations. Particularly in activities related to the provision of public goods and services and the exploitation of natural resource in public ownership and in activities financed by taxes, donations or loans from international finance institutions and by charity money, these non-price incentives are omnipresent. Handling the tremendous resources involved means power, influence, and reputation. The regular incomes earned are often less important to stakeholders than the incentives from these fringe benefits. Rent-seeking and corruption are common language names for some ofthe more extreme cases, non-market failure due to self serving behavioral patterns a more scientific circumscription. Features of neo-classical economic theory have been applied to the analysis of these phenomena by political scientists and economists of the Public Choice and New Political Economy (NPE) schools of thought. The subject of analysis is the individual motivational structure in the political realm. The assumptions about rational expectations, methodological individualism, individual preferences and utility maximizing behavior of political actors are those of the neo-classical model. In the application of these concepts, however, some authors have warned against oversimplifications. TOYE [21] e.g. has criticized the ’profoundly cynical view of the state in developing countries’ and the corresponding bias of neo-liberal policies towards market-orientation, state-minimalism and privatization of natural resources promoted by the international development finance institutions, generally related to with the term ’Washington consensus’.

Another source of non-market failure pointed out by WOLF (1988). He refers to the disjunction between costs and revenues in non-market organizations, i.e. organizations which do not sustain themselves by selling goods and services in the market like government agencies and non-profit organizations. “The predominant and ineluctable source of non-market failure lies precisely in those circumstances that provide the rationale for non-market activity in the first place”. He sees the lack of a mechanism to eliminate inefficient and ineffective providers comparable to the competition and price mechanism in the market as a source of redundant and rising costs inherent in the public as well as the non-profit sectors and describes internalities and specific organizational goals as well as derived externalities as sources of non-market failure. The influence of power and of privileges leading to distribution inequities are, of course, not only features of government agencies and non-profit organizations but are omnipresent within the whole range of institutional configurations – those acting within markets or hierarchies, within NGOs, civil society or grass-roots organizations.

In search for effective and efficient institutional configurations international development finance institutions have turned to NGOs as intermediaries between the state and local grass-roots organizations and as providers of goods and services to beneficiaries of aid. This interest, however, has been dampened in recent years as donors as well as most northern NGOs are increasingly aware of the same sources of non-market failure attributed to public agencies. They respond by introducing national and national competitive tenders for service contracts which are seen as market surrogates. The competition for markets is being combined with the competition within markets, the intrinsic properties of the goods and services, exclusion and rivalry in use, will determine which institutional mechanism will be chosen. In both cases, the beneficial forces of markets turning private vices into public virtues mentioned earlier and having been described by Adam SMITH some 225 years ago ( the ’invisible hand’) are thus working towards effectiveness, efficiency and sustainability. Asymmetric distribution of information and transaction costs within public, non-governmental and private organizations

COASE, ARROW and WILLIAMSONhave first led the interest of economists to another kind of non-market failure, the so-called agency-problems . The general idea is so simple that it is hardly understandable how it could have escaped the interest of development economists for such a long time. The problem of finding an appropriate institutional configuration in terms of a mixture of the market and the non-market has first been defined by COASE and then, in particular, by WILLIAMSON and ARROW. Transaction costs and agency-problems related to asymmetries in the distribution of information which lead to shirking, moral hazard, and adverse selection are the phenomena analyzed by new institutional economists. Parting from neo-classical economic theory analyzing markets in equilibrium, they look at incentive and selection problems within the whole range of market and non-market institutional configurations. Seeing market transactions as a process they are bridging the gap which separated economists from other social scientists for quite some time. Not much empirical quantitative work on transaction costs is available, however, and any straightforward rules for the design of institutions in the market- non-market range are missing. The importance of principal-agent relationships, however, of strategic behavior of economic agents, of non-price incentives, information and transaction costs is unquestionable. Demands for transparency and accountability are indicators recognized by development practitioners and decision makers in rural development. Models of game theory, on the other hand, by reintroducing extremely simplifying assumptions seem to be a regression to practitioners, and boring reading at times.

1.4 The poverty - resource degradation link

Resource degradation considered an unwanted change in natural systems has often been seen in direct relationship to poverty. Thus, two predicaments, one in the social, the other in the natural system which make up our common world are obviously interrelated, though the link between the two is not quite clear. For some authors, like PANAYOTOU (1994) and SWANSON & CERVIGNI (1996) the negative impact of poverty on the environment is a well established fact, population growth being a central explanatory variable in their model. For others like DOVE (1993) and BARRACLOUGH (1993) the stress on the environment and on natural resources attributable to demands generated by the poor is very small: “Consumption of natural resources by the very poor is rather insignificant in most countries” [22] .There is, on the other hand, the perspective of many environmentalist groups blaming the excessive consumption by the rich and the north, the wrong technologies and the unabated growth in developed countries [23] . Who is right? The answer is quite simple: both. Both are right in terms of their frame of reference and taking into consideration their simplifying assumptions. And we should be generally warned not to mix up subjects, levels of analysis, and resources and should carefully analyze arguments and underlying assumptions.

Whereas PANAYOTOU, SWANSON, and particularly EHRLICH & EHRLICH (1990) take a macro and global perspective - the latter with a particularly crude model and correspondingly crude policy prescriptions [24] -, DOVE (writing on tropical forests) and BARRACLOUGH (referring mainly to dry-land regions) look at very specific local environments in a micro perspective. This latter perspective is most in line with our subject matter and is therefore the only one of concern in this paper. The conclusions from literature on the link between poverty, resource degradation and non-sustainable development concerning this level can be resumed as follows:

-In strategies for sustainable rural development the goal of poverty alleviation can be considered complementary to the goal of a sustainable use of renewable natural resources.

-The rural poor a priori do neither particularly harm the environment or natural resource base nor are they particularly bad resource managers.

-The rural poor without private property rights to natural resources and the resource poor small farmers are the most vulnerable strata in a rural society. Depending for their livelihoods on natural resources managed under a common pool regime (CPR) or a very narrow natural resource base, they suffer most from any natural changes in the population-resource ratio and from man-made (institutional) changes in the right of access to natural resources [25] .

-Against some popular believe, resource degradation is not necessarily a function of a CPR regime but concerns a de jure or de facto open access regime [26] . Evidence of resource degradation is sometimes only temporary or seasonal, often not well understood and founded, and sometimes a plain lie [27] .

-The production and income from the own labor often being the only source of livelihood, the poor in order to survive are sometimes forced to take more out of a natural resource system than the natural regeneration rate produces. Their extremely high time preference rate in non-normal climatic situations (in economists parlance) is understandable, particularly in case no alternatives to employ family labor productively to provide some income is available.

In terms of a strategy of sustainable rural development with poverty alleviation and sustainable resource use as principal goals, this suggests, firstly, the strategy should focus on institutions regulating access to and management of natural resources [28] . It should, secondly, provide alternative employment and income opportunities outside the natural resource sector, and it should, thirdly, consider the regional, national, and global dimensions of local resource degradation.

This, however, might not be as straightforward as it seems at first sight considering the political economy of natural resource depletion in a typical rural setting in developing countries: There is usually a basic conflict between the rural poor, with extremely short term survival needs and ’outsiders’ with a short-term income or profit maximizing objective (government agents, ’concessionaires’ and multinational corporations, or in particular cases, the ’drug barons’ [29] ). There is also a basic conflict between local people and other ’outsiders’ defending special interests of groups in society and of future generations (regional and national governments) as well as defending the interests of the global community represented by foreign governments, international aid agencies as well as international non-governmental organizations [30] . Any rural development strategy failing to consider these different groups of stakeholders and failing to recognize and understand the differences in their interests and strategies and the incentives and disincentives accruing to them from different institutional configurations will be bound to result in non-sustainable outcomes in the long run - with negative effects on the local poor as well as on natural resources and the environment – on a local as well as on a global level – and, last not least, on future generations.

2 Policy analysis for an institution oriented strategy for sustainable rural development

2.1 Institutionsin development – some clarifications

The term institutions in it’s general meaning refers to different types of organizations, to markets, contracts, cultural rules and – in our particular context – to informal rules and formal laws defining the rights of access to goods and services and the management of natural resources. Before introducing a framework for classifying resources, goods and services in this context, based on their intrinsic properties, we will specify the role of institutions in policy analysis for sustainable rural development and describe an institutional framework conducive to sustainable development:

1. Institutions are understood as markets, organizations and generally accepted and enforced rules of behavior in a society facilitating decision making and the coordination of decisions between stakeholders by defining their decision space and reducing uncertainty about the behavior of others and about outcomes of decisions.

2. Stakeholders perceive institutions as resources (potential benefits) or constraints (potential costs) depending on their particular cultural background, rational, preference and interest structure as well as their ownership or access rights to resources.

3. Institutions convey incentives and disincentives to stakeholders - in the case of markets economic and easily quantifiable ones (prices), in the case of non-markets in multiple other, mostly qualitative and not easily observable and measurable ways .

4. Institutions as formal norms, rights and contracts are costly to establish, to reform, to monitor and to enforce; different mixed institutional configurations will differ with respect to these (transaction) costs.

5. Transaction costs occur in the case of markets and non-market institutional set-ups, including, besides the costs named under (4) the costs of coordinating and communicating, of information gathering and exchange.

6. In the comparative analysis of institutions, of transaction costs and of institutional change the institutions might be partly treated as endogenous, partly as exogenous variables depending on the objective of the analysis (positive or normative). In applied research for sustainable rural development both, positive and normative analyses need to be done, both requiring the determination and involvement of stakeholders in a participatory assessment exercise.

7. In normative institutional analysis for sustainable rural development the existing formal and informal institutions are usually considered as exogenous, a sub-set being analyzed as endogenous variable to be explained and as policy variables subject of collective choice [31] . EIA will be contributing positive, SCBA normative elements for choice decisions.

Characteristics of an institutional framework conducive to sustainable rural development are:

1. a state authority which promotes, guaranties and respects a liberal, market-oriented economic order, sets goals in terms of (economic, social and ecological) indicators and continually monitors the impact of policies and projects,

2. effective and efficient markets within a multilevel organizational set-up including secondary and tertiary organizations, networks, coordination bodies (’civil society’) facilitating collective action and low cost transactions between different types or stakeholders, with both declared and undeclared objectives and interests,

3. transparent and well-defined rights and responsibilities, including property, access and user rights to natural resources - either in the form of traditional, socially and legally acknowledged rules, or in the form of formal legal titles and contracts, together with the corresponding enforcement procedures and institutions (authorities, penalties, sanctions) respectively.

The identification and assessment of transaction costs and the determination of an adequate, site-specific mix of institutions, policies, programs and projects are the principal characteristics of an institution oriented strategy of sustainable rural development. Methodologically institutions in such an approach are considered goods with meritory characteristics . Securing property rights and enforcing them, promoting organizations to provide social infrastructure and take care of operation and maintenance (O&M) of this infrastructure are activities for which the private sector will rarely show an interest unless public entities take the initiative. As we explained in the first part of this paper, the market will under-supply these goods and services because of a public good type market failure . Establishing or reforming formal laws, defining access and user rights and enforcing them means providing meritory goods. In other cases stakeholders might be given incentives to provide goods and services within some mixed institutional configuration, the state only fulfilling certain functions of regulation and control and providing incentives to compensate for losses.

2.2 Classifying goods – the properties of rivalry in use and exclusion

In economic theory any resource, product or service might be treated as a ’good’. Following this practice we will only differentiate between these three categories in case any particular feature of a good or issue in policy analysis for sustainable rural development requires this distinction. We need to keep in mind, however, that fostering institutions and dealing with activities for sustainable use and protection of nature and the environment, personal involvement of stakeholders is a salient feature. We are therefore mostly dealing with goods having the characteristics of providing a service rather than a product, the former being characterized by a much more intensive client involvement and participation of users [32] .

Leaving these participation and consensus oriented aspects of goods aside and looking at Table 1, we note that - from an institutional point of view - the two properties of ’exclusion’ and ’rivalry in use’ allow us to distinguish four types of goods. Three of these are indicated by hatching in the central 2 x 2 matrix of the table [33] are called collective goods as opposed to private goods indicated in the non-hatched upper right section of the matrix. The former are of particular interest in managing natural resources and providing social services to the poor. Here, collective or public responsibility is mandatory, collective action at a lower level might be an alternative in certain societies in case both, markets and governments, fail to come up with socially adequate solutions. Institutional choice along the range of configurations from public intervention on the central level to some form of collective effort on the local or on some other level is thus the central issue ofcomparative institutional analysis based on Table 1.

Table 1: Classifying goods by the properties 'exclusion' and 'rivalry in use'


(phys./ inst.)

non-rival use

rival use

Issues in policy analysis:



IMSC = 0

IMSC > 0

crowding? carrying capacity? neg.*externality?

exclusion simple

Collectiv. Goods & resourc .

club or toll goods and resources

private goods and resources

internalizing externalities: PIGOU tax/subsidy? COASE: assign property rights? representation problem? transaction cost problem?

exclusion diffi cult

public goods and resources

common pool
goods & resour

lumpy investment? pos. externalities? free riders?
financing and implemenation level?
O&M services?
are comparative I-/ CB-/ TC analyses necessary?

separability? exclusion technology?

why? how? whom?

exclusion costs < benefits? exclusion socially accepted? enforceable? sanction mechanisms?

rivalry at local, regional, national, or global level? relevant actors? mediation rules, quantify trade-offs!

institutional development at local, regional, or national level? configurations:markets, networks, public, private, collective action?



indirect marginal social cost

CBcost benefit

Note: * technological, private + public



TCtransaction cost

Before spelling out the difference between the three types of collective goods of central concern in this paper, we will briefly comment on the group ofprivate goods (field 1-2 in central matrix in Table 1). We are quite familiar with them as most of the goods we use or consume in daily life are of this type. They are also called market goods, because their intrinsic properties generally allow for market provision and exchange. T he interest of neo-classical economic theory concentrates on these goods, and policy analysis based on models of markets is a rather straightforward affair. Private goods have the intrinsic properties of rivalry in use and users are easily excluded from their use if they cannot pay the market price. Rivalry in use means, the goods can only be used by one user or only consumed once, a reason for the term substractability sometimes being used. Easy exclusion of non-payers (free-riders) by some institutional or technical device (or both) in economic terms means the benefits of excluding non-payers at least exceeds costs in the case of a natural resource. In case of most private goods, their properties are such, that the market price serves as institutional device for excluding users not willing (or not able) to pay, no particular exclusion devices being necessary. Under the assumption that there are no price distortions or market failures (externalities, transaction costs, poverty) the market supplies goods by private initiative at a socially optimal level. Valuation of these goods might be done by using market prices if no policy distortions and externalities exist. Applied welfare economics (SCBA) identifying price distortions or externalities will adjust prices, usually using international opportunity cost (shadow) prices.

SCBA, however, is of secondary importance in the assessment of a strategy for sustainable rural development with an emphasis onpovertyalleviation and the sustainable use of renewable natural resources. In SCBA, the focus is not on the national economy and on the allocation of scarce financial resources within the economy. In rural development access to natural resource and it’s management and the provision of social services is of central interest. Externalities, positive and negative ones, accordingly have to be dealt with on the local level and in a participatory, consensus oriented approach, collective goods sometimes requiring some collective action, with central government being of secondary importance. The adequate tools being comparative economic, transaction cost and institutional analyses and, for specific components and national economy interrelationships, an EIA (Environmental Impact Assessment) or a SCBA.

Within the group of collective goods in sustainable rural development the criteria of ’rivalry in use’ and ’exclusion’ allow us to distinguish between two sub-groups, the ’ pure’ public goods which are both non-rival in use and exclusion is difficult (field 2-1 in the central matrix of Table 1) and the ’mixed’ goods [34] - each having only one of the two properties. Formerly just one of the two has been considered sufficient to define a public good. Now, politicians and development planners are increasingly aware, that most types of infrastructure, from transportation and communication to the supply of water for irrigation and human consumption, long considered public goods to be provided by the state can actually be provided by mixed market-non-market institutional configurations thus avoiding the non-market failures discussed in section 1.3.2 of this paper. Now, only a few ’pure’ public goods, foreign policy, the defense and the formal institutions, such as the legal system of a country and the enforcement of the law being the more important ones [35] . Many environmental amenities, natural resources and types of social infrastructure are nowadays considered as mixed rather than public, at least in some of their features. In the search for appropriate institutional set-ups for sustainable rural development the distinction between club (or toll) goods and a common pool resource (CPR) is therefore a necessity.

In the case of a club or toll good we still have the property of non-rival use, but exclusion is either an intrinsic property or can be reached by effectively and efficiently restricting access, i.e. excluding free riders by a technical (e.g. a fence in the case of a park or golf course) and/or an institutional device (charging a cost-based user fee). The name ’club’ refers to the exclusive right by a particular group of beneficiaries, the name ’toll’ to the possibility of collecting a toll or fee. Examples for club or toll goods are certain types of infrastructure, such as irrigation dams or canals, privately run roads or bridges or natural resources in the form of communal ranges or forests, jointly used (i.e. the local population and tourists) natural parks, or closed groundwater basins - as long as there is no rivalry in use.

In the case of a common pool resource (CPR) there is rivalry in use - either as an intrinsic property of the good or resource in question, or rivalry has developed over time. As an example, until recently, the environment and many renewable natural resources with no possibility for exclusion have been non-rival in use. With growing populations, economic growth and rising income and consumption levels, however, an increase in demand on natural resources eventually leads to negative externalities. Often not clearly visible, environmental deterioration or resource degradation will eventually indicate the fact that markets fail – the economic description of the phenomenon. In ecological terms crowding effects occur because the carrying capacity of a resource or ecosystem has been transgressed, meaning the rate of harvest has exceeded the rate of natural (re-) growth or, respectively, the rate of pollution has exceeded the rate of absorption or regeneration of a natural sink. Thus, in case rivalry in use becomes visible we are generally faced with a problem of common pool resource (CPR) management. If exclusion is possible, measures to restrict access are indicated, otherwise management rules have to be designed. As recent work has shown, privatization or management by a public entity is usually not indicated but rather some form of public regulation and collective action by stakeholders the preferred institutional set-up . The general idea in any set-up would be to concentrate on monitoring the use and changing management rules in order to bring the demand on the resource in balance with the natural supply.

2.3 Issues in policy analysis for sustainable rural development

The fields framing the central 2 x 2 matrix in Table 1 refer to the issues touched upon in this paper. Some relate to specifications, others to questions to be asked when designing a strategy for sustainable rural development. Starting on the top left corner, the term dynamic refers to goods and resources or the natural and policy environment changing over time in some specific technical, physical, social, or institutional feature (e.g. an institutional innovation). As an example, changes in the policy environment in a developing or transition country (e.g. structural adjustment program) requires a large irrigation system to be institutionally and technically redesigned to allow for services, formerly provided by a public agency, to be at least partly provided by some other institutional set-up. In a collective participatory effort, water users would agree to operate and maintain the secondary or tertiary irrigation system themselves, leaving O&M of the dam and the primary canals either to a collectively (by water user associations) owned or private service enterprise or to a public agency. This institutional innovation will need to be complemented by some technical devise for measuring water and delivering it in bulk, changing the system ofcharging water fees correspondingly.

In the given example emphasis is on an institutional innovation for the coordination between public, collective and private organizations. A combination between a tendering process for O&M activities for the big structures (dam and primary canals) in which private firms as well as the enterprise, to be founded and collectively owned by water user groups, would be supervised by a public agency. The water user groups would have to coordinate amongst themselves to create the enterprise and to determine, at which level and price they would take over the water from the big structures and how, finally, amongst and within water user groups distribution of water would take place. Organization and financing of the O&M services within a subsystem (tertiary canals) would be completely up to collective action within the group.

There are other cases, where e.g. a public agency might first have to formalize institutionally the exclusion of some users by registering private property or user rights instead of former collective user rights, before private enterprises owning the resource could apply an exclusion technology. A famous example is the introduction of barbedwire for fencing formerly free ranges in the American west, in Australia or Africa. Or another case, where some institutional exclusion mechanism based on cultural rules and taboos might be loosing it’seffectiveness or functionality over time. This has e.g. been reported about sacred forests and protected areas in traditional societies of Africa or Asia, where the ancestors had been buried. In this latter case, some other institutional or technical device might be necessary in order to protect the forest from overuse, privatization in this case certainly not being the first best solution.

For policy analysis, the lower left corner of Table 1 indicates the central questions to be asked: why and how should exclusion be done and whom to exclude, and an additional question: is it economical to exclude users, i.e. do the benefits of excluding some uses or users justify the costs of the exclusion technology? Certainly not always a straightforward affair. An irrigation system, however, serves as an example, where these questions are quite common and the solution is quite straightforward. There are distribution structures to be built whenever some specific quantity of the commonly used resource needs to be separated from the rest. Inmany cases such an investment might not have been justified in a traditional system. Modernizing the system, however, might mean at the same time a reallocation of water rights as well as the construction of physical exclusion or distribution structures respectively.

Often – this is even more so when it comes to privatize a CPR – the question of separability and social acceptability is of a central importance. Even if the physical structures would be feasible and cost effective, it might still be a question if they can be protected against vandalism and if there are institutions to sanction any vandalism. With respect to a natural range CPR it has been pointed out by several researchers that managing subdivided natural ranges is often not feasible because climatic conditions vary extremely over time and over very short distances. Many countries have experienced serious resource degradation problems when subdividing and privatizing forest and range land [36] . From this experience we might conclude, that, without a clear understanding of the dynamics of a natural resource, of traditional management rules, and of the issues of poverty and social acceptance involved privatization and individualization of a resource should not be undertaken, even if - from an economic, institutional or technical point of view - exclusion and enforcement technologies exist.

Just as in the case of exclusion , rivalry in use has a dynamic dimension to it as the physical and institutional properties of a good or resource or of the environment might change over time. As indicated in the top row of Table 1, a resource is non-rival in use as long as the indirect marginal social costs of the use of a natural resource is zero (IMSC = 0). Positive IMSC arise whenever crowding leads to a non-sustainable use. Also, the capacity of a natural resource to continue producing a constant yield over time might be destroyed by some other reason, e.g. a natural (climatic) calamity or some human intervention (burning, pollution). Positive IMSC also arise from some users imposing negative externalities on others - within an economy, but also on far away countries or on future generations.Often, the capacity of users to detect critical values and levels at which rivalry might occur (crowding effects, carrying capacity, externalities) might need to be enhanced by some upper echelon national or international agency. Also the motivation ofrelevant actors to coordinate and to agree on management rules (critical values of indicators, save minimum standards, sanctions) and their enforcement often goes beyond the capacity of local, regional or sometimes even national actors. The analytical and mediation tasks for finding institutional set-ups which will lead to a consensus on rules and guaranty the sustainable use of natural resources and the environment on the local, regional, national or global level are tremendously complex. A continuous inquiry, information and coordination process by stakeholders, with markets as well as non-market public, private or mixed organizations and networks, grassroots and non-governmental organizations on different levels etc. is necessary to master this task. The identification of stakeholders on the different levels, the rules for the mediation process and the trade-offs for different stakeholders of different solutions will be the central tasks in this process.

The middle part of the last column in Table 1 refers to the question of market failure treated in section 1.3.1, the upper block to national policies dealing with problems of market failure of the negative externality type, the lower block to policies dealing with market failure of the positive externality type in which the question of a mixed (market- non-market) institutional set-up for providing lumpy investments (infrastructure) and an effective and efficient provision of O&M services is an important issue. Either market or institution oriented policies and the corresponding analytical tools and assessment methods are concerned.

In the first case of negative externalities the state might either correct for them by means of imposing taxes or paying subsidies in such a way that input costs and consumer prices will reflect the social opportunity costs, thus internalizing externalities (PIGOU solution). In addition, improving institutions in order to eliminate the causes for transaction costs and externalities will facilitate internalization of externalities. Registering or more clearly defining rights and obligations in the use of natural resources, fostering markets and non-market institutions of exchange and coordination, improving the legal system and the enforcement of laws, increasing transparency etc. will be necessary (COASE solution [37] ). The identification and representation problems, however, are not easily to be solved in practice [38] .

The lower block of questions in the central field of the last column of Table 1 refers to public goods and CPR resources, thus cases, where markets fail because of exclusion difficulties – both in the case of non-rival and rival use respectively. For the corresponding problem situations public institutions providing goods and services and directly managing natural resources have been considered adequate solutions in the past, particularly in developing and socialist countries. In times of transition, however, and considering the principles of participation, subsidiarity and sustainability in rural development, policies aiming at the delegation of resource management and provision of goods and services to collective, private or mixed institutional set-ups are considered more appropriate, the state concentrating on the provision of pure public or meritory goods [39] . Thus, in case of positive externalities, free riding and lumpy investments being an issue, mixed institutional set-ups for implementing and financing policies and projects have to be assessed. Comparative institutional, cost-benefit and transaction cost analyzes will need to be considered as instruments – not with a high level of sophistication but for structuring the problem situations and check consistency. Traditional tools used in economics like regional input-output or social accounting analyzes, simple linear or multiple-goal programming models, of course, could be integrated in such an approach to policy analysis. The complexity of the situation, the volume of investment, the funds available are the determining factors, besides, of course,the capabilities and interest of stakeholders.

3 Conclusions and policy implications

3.1 Conclusions

Though not satisfactorily reflected in the appraisal documents, the last decade has brought an increased awareness for considering institutions and nature as goods or forms of capital, in both research and development practice. Policy makers have recognized that environmental degradation is a concomitant phenomenon of unabated economic growth. They are acknowledging that nature and institutions matter and are not free goods, i.e. goods and resources with no costs. They further acknowledge that the development of institutions and the enhancement of organizations as (transaction) cost saving activities require particular emphasis in sustainable rural development. Development analysts have to recognize, that the transaction costs involved in coordinating and transacting in markets and within organizations have to be at least identified and, ideally, qualitatively and quantitatively analyzed in comparative institutional analyses as part of the assessment of potential projects and policies. Stakeholders on all levels have to recognize that present institutional set-ups do not guarantee the use of nature in a way allowing future generations to benefit from environmental amenities comparable to those enjoyed today. Civil society, central government and international institutions and organizations have to cooperate in raising awareness and transparency of the problems touched upon, the states only providing meritory goods, fostering (markets and non-market) institutions and take care of adjusting prices in order to internalize externalities [40] .

In the case of nature as a good , even if it is intuitively recognized that nature and natural resources when depleted, i.e. losing valuable properties and potentials by overuse, by time or by natural calamities, need to be depreciated just as physical and financial capital is, there is still no agreement on the practical consequences. The consideration of amortization and reinvestment into nature and - more generally – the valuation and accounting procedures in project appraisal and in the evaluation of tax, subsidy and pricing policies is far from being properly spelt out in terms of pragmatic formulas and indicators. The debate in the literature on weak and strong sustainability and on the introduction of ‘green accounting’, though showing some progress and a new understanding of the term capital [41] , for development practitioners little progress and guidance is visible.

In the case of social capital as a good, on the other hand, economists are understandably reluctant to consider trust or institutions as sources of trust as a new form of capital [42] . Though by many seen as the missing link to understanding development, there is no common use of the term social capital in the social science literature. The vagueness and the lack of consensus, however, is a serious impediment for introducing policies for the enhancement of social capital. Some social scientists, in particular sociologists, equating social capital with trust leave out the question of quantification all together. Others, in particular institutional economists, consider the formal and informal institutions in an economic system as social capital which create trust thus reducing transaction costs in the market and non-market. This gives at least a conceptual basis for positive and normative analyzes of institutions, for formulating and testing hypotheses concerning the role of institutional change in economic development and, ideally, coming up with some tools or procedures for consensus oriented normative institutional analysis for the design of strategies of sustainable rural development. The social dilemma we are confronted with in some rural settings where the poor are overusing natural resource systems because of acute crisis in their livelihoods deserve methodologically and ethically more sophisticated approaches then those available at present.

The fact that the World Bank, up to quite recently dominated by mainstream economic thinking and far from considering anything but physical and financial capital in the past, is gradually including human and natural capital, and more recently even social capital in their conceptual work, might be an indicator for some improvement being underway, though apprehensions concerning the conceptual and measurement problems seem to prevail. The ‘Post-Washington consensus’ recently quoted by some authors, on the other hand, does not seem to have reached the project level. As long as nature, the poor and future generations have no voice as stakeholders and the proxies causing turmoil around WTO conferences seem to have a completely different view on the central issues of concern in our world, any consensus seems to be far in the future.

Some tentative conclusions concerning the discussions on social capital at this point could be as follows: Firstly , the term of social capital certainly should not be applied to ‘human capital’. For too long the importance of education, of innovative entrepreneurs, of human capabilities or, more generally, of a work ethic for development to take place has been recognized by economists [43] . Human capital is a concept and form of capital in it’s own right and has even been introduced into formal models of growth and development and in the construction of development indicators [44] . Secondly, institutions, including informal norms of behavior and a formal legal system as well as organizations, inter-personal and inter-organizational networks etc. might be subsumed under the term social capital and be considered as an asset for economic development, even though the theoretical implications, conceptual and measurement problems are far from being solved [45] . Thirdly, for the time being there seems to be an unanimous agreement in the development community that ’institutions matter’. What is missing are operational tools, e.g. for assessing and comparing institutional configurations for the efficient and effective provision of goods and services to the poor and for deciding on adequate institutional development measures to enhance the sustainable use and management of natural resources in rural areas of developing countries. Fourthly, inter- and transdisciplinary research [46] , theoretical as well as empirical and action-oriented, is gradually gaining momentum. Traditional border lines between disciplines are being transgressed,natural and social scientists are joining forces. This must be considered an institutional innovation in the search for transparency on the causes for environmental and resource degradation and the link to poverty which is far from being understood and certainly not proven.

3.2 Policy implications

Firstly, concerning a strategy for sustainable rural development there is no general theory nor empirical evidence available in favor of a particular conservation strategy or a particular regime of property, use and access rights to natural resources (state, individual or CPR) nor in favor of a particular institutional configuration (state, private / market or collective action) for providing goods and services.

Secondly , the relevant policy issues in sustainable rural development should be treated together with all the relevant stakeholders in a participatory appraisal and mediation approach. Though part of the rhetoric of most appraisal reports, systematic participation still seems to be the exception rather than the rule - for political or practical reasons, for lack of funds or time or because of ignorance of it’s importance for sustainability. This importance follows from evidence that the perception of a certain problem situation by different stakeholders, including their ideas about appropriate solutions, usually differ widely,due to their economic and social situation, to previous experience and knowledge, to cultural background, intentions, perceptions, interests, objectives, or, more generally, preferences. Thus, a truly participatory approach to policy analysis has to face the fact, that such an exercise might e.g. come to the conclusion that (i) a problem does not exist at all, (ii) there is a problem, but no feasible or generally acceptable solution is available at present, (iii) no stakeholder – state or private, local, national or international – is willing to commit effort, funds or time. Funds and time already invested in all three cases, however, will not be lost but will result in more understanding and transparency of the problem situation, perhaps in the initiation of a process of awareness building, and - in some future time - to individual or joint actions towards a solution.

Thirdly , experience shows that blue-print solutions are rarely available when it comes to solving problems of non-sustainable resource use, of structural poverty, of inadequate provision of productive or social services, or of inadequate operation and maintenance of physical or social infrastructure. How much market and how much state or collective action is adequate in a particular geographical, cultural and institutional context and for the provision of a particular good and service or the management of a particular resource can only be determined for a specific point in time because of the dynamic nature of the situation indicated.

Forthly , policy analysis for sustainable rural development comprises the identification of an appropriate institutional configuration for the management of natural resources and the provision and financing of goods and services. The framework presented in Table 1 relates intrinsic properties of resources, goods and services and to issues in policy analysis in a systematic way. It seems to be appropriate to get more clarity on the complex issues involved in policy analysis for sustainable rural development.


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[1] The paper is an extended English version of a paper presented at the Tropentag 1998, Göttingen University (see HATZIUS, T. (1998): Bekämpfung von Armut und Ressourcendegradierung. Zur Frage eines standortgerechten Institutionen- und Maßnahmenmix in der Entwicklungszusammenarbeit. FIA-Diskussionsschrift No. 68, Heidelberg, Dezember). The author would like to thank Miguel FERNANDEZ, Herbert KÖTTER, Rainer MARGRAF, Meinolf MEYER, Axel WOLZ and Wolfgang-Peter ZINGEL for helpful comments on an earlier version of the paper. The usual disclaimer applies.

[2] Here understood as a set of activities providing goods and services with a clearly defined goal and during a well defined and limited time span.

[3] See e.g. BAUER (1984); SCHULTHES (1987); LEFTWICH (1994)

[4] See e.g. WHITE & LUTTIK (1994)

[5] Dee e.g. AHMAD, 1992; SMITH, 1994; LELE, MITRA & KAUL, 1995; CAIRNCROSS, 1995; SWANSON & CERVIGNI (1996)

[6] There is certainly lack of clarity and consistency in the use of the terms ’institution’ and ’institutional framework’. ARROW even warned against too clear a definition of the term:RICHTER & FURUBOTN referring to him in a recent textbook (1996) stay quite general when understanding institutions as a 'system of formal and informal rules, including enforcement measures'. HERRICK (1989: 431) subsuming organisations, markets, contracts and cultural rules under the term probably gives the widest range of facets to the term. I accept this wider definition but want to put emphasis on the formal and informal management rules and laws defining rights of access to resources which leads me to seeing institutions in terms of goods or ’institutional capital’ to be provided for sustainable rural development.

[7] See WOLF (1988), chapter 4.

[8] See FUKUYAMA (1995), MOORE (1999)

[9] See e.g. BARTELMUS (1994), WORLD BANK (1995)

[10] See e.g. SQUIRE & VAN DER TAK (1975), IRVING (1978)

[11] See FLEISCHER & WAIBEL (1994)

[12] The categories northern, western and developed are difficult to apply consistently in this context.

[13] Conceptually, however, there is hardly a difference between the two levels, see e.g.KEOHANE & OSTROM (1995)

[14] PARETO is the name of the economist who formalised the corresponding analysis of an economy. In testing for an improvement of PARETO-efficiency by a policy or project within a social cost benefit analysis (SCBA) framework, it is assumed, that the winners compensate losers and are still better off than without the policy or project. If winners really compensate losers, however, usually is of no concern. With respect to the sustainability issue we need to keep in mind, that a positive and high internal rate of return (IRR) of a project analysed with the standard SCBA methodology is still not an indicator for sustainability- in neither of the two senses indicated in the introduction.

[15] Shadow prices assumed to reflect real costs or benefits of the goods and services to society, are also called opportunity cost, economic or social prices depending on the specific aspect looked at and who is looking at the problem treated. There is a huge amount of literature on the subject, on a theoretical plane comparable to the controversies around sustainability and the nature of goods.

[16] The implications for pricing and the need for regulation and subsidies are subject of the so-called ‚marginal cost controversy‘, see e.g. COASE (1988, reprint from 1946).

[17] Neo-classical economists treat this problem in terms of capital theory: if perfect substitutability of man-made for natural capital is assumed, ‘weak sustainability’ is given; ‘strong sustainability’ requires conservation and maintenance of natural capital for future generations because of imperfect substitutability; there is, however, no reference to distribution goals, see e.g. GOLDING & WINTERS (1994), FABER et al. 1995), BECKERMAN (1995)

[18] Sometimes, however, mechanisms in the form of traditions and taboos take care of intergenerational distribution or nature conservation goals.

[19] Methodological questions concerning the introduction of income weights, first done by SQUIRE & VAN DER TAK (1975), have not been solved, the introduction into standard SCBA methodology not taken place. CARNEY (1998):1 uses the term ‚social efficiency‘ but warns, that it is not an easy concept to work with as it has no natural boundaries. "To the extent that it involves meeting people’s needs there must always be an additional decision taken about how far the public sector should go in doing this, given scarce resources and inevitable trade-offs between provision in different areas.“ With other words, there are no rules for the allocation of scarce resources under social efficiency criteria, similar to standard SCBA methodology for economic efficiency. As working with distributional weights has not found acceptance in practical project appraisal, collective bargaining, consensus approaches and comparing trade-offs in the attainment of different societal goals are necessary. For the theoretical underpinnings see e.g RAWLS (1971), POSNER (1986), ELSTER (1989)

[20] See e.g. PIES (1998)

[21] TOYE (1991), (1993)

[22] BARRACLOUGH, ibid.: 31

[23] See e.g. EHRLICH and others

[24] See for a critique of this simplistic model e.g. by BLAIKIE & BROOKFIELD (1987) and ALMARIC (1995)

[25] Historically, ‘hidden agendas’ and interests of stakeholders have often led to a change in property regime resulting in resource degradation, see e.g. PETERS (1994), LEACH & MEARNS (1996), THOMPSON (1995), MESSERLI & HOFER (1995). But even well meant efforts based on theoretical reasoning often have had a detrimental impact on natural resources and traditional resource management systems, see e.g the cases described by. PLATTEAU (1995) and BRUCE et al. (1995) for Africa, THIESENHUSEN (1996), RICHARDS (1997), and JANSEN & ROQUAS (1998) for Latin America.

[26] The tragedy of the commons (HARDIN, 1968) thus being rather a tragedy of open access.

[27] See the contributions in LEACH & MEARNS (1996)

[28] It is very clear from the literature, that the exclusion of the poor from common pool resources by changing the property regime or by enforcing existing conservation laws leads to social unrest and further resource degradation.

[29] See e.g. PLATTEAU (1995), THIESENHUSEN (1996), RICHARDS (1997)

[30] The concern being mainly bio-diversity, natural habitats and ecosystems as well as climatic change.

[31] See also OSTROM (1992), SNIDAL (1995)

[32] See e.g. HUPPERT & URBAN (1994)

[33] This matrix has been presented in similar form e.g. in BLAKART (1994), World Development Report (1994), and, more recently, GERRARD (2000).

[34] HANLEY (1991) uses the terms ‘impure public goods’ for mixed goods and refers to Paul SAMUELSON (1954) having shown that a system of pure markets will undersupply not only pure public goods but also mixed goods.

[35] These pure public goods are sometimes called meritory goods. Peter ZINGEL informed me about Richard MUSGRAVE having been the first to apply this term.

[36] See e.g. OSTROM various, PETERS (1994)

[37] COASE (1960) as an important reference. In German terminology it is a question of a more ‘Ablaufpolitik’ (interventionist) oriented, or a more ‘Ordnungspolitik’ (institution) oriented approach.

[38] See e.g. MASON (1996)

[39] Besides the range of national and international policy tasks the this would comprise the fostering of the institutions and the regulation, monitoring and evaluation of activities related to the use of natural resources and the environment.

[40] Ordnungspolitik and Ablaufpolitik (German terminology) in a global context become increasingly relevant subjects.

[41] See e.g. NORDHAUS (1992), REDCLIFT (1993), BARTELMUS (1994), FABER et al. (1995), SERRA (1996)

[42] OSTROM (1995), THOMPSON (1995), EVANS (1996), MOORE (1999)

[43] e.g. Prominent development economists such as SCHUMPETER, SCHULTZ, BOSERUP, BAUER, HIRSCHMAN, ADELMAN & MORRIS

[44] see e.g. PAYNE (1987), MONISSEN & WENGER (1987) and more recently TIMMERMANN (1995),WELTBANK (1995), SEN (1997), OECD (1998).

[45] See EVANS (1996); Peter ZINGEL suggests the possibility of estimating the value of social capital indirectly and partially, e.g. by the damage done to a countries economy through a breakdown of social order during a civil war.

[46] Transdisciplinary research looks for insights into practical problems of society with the goal of solving them, see especially MITTELSTRAß (1995). Interesting practical implications of such research are treated in BARTELMUS (1994), FABER et al. (1995); KEOHANE & OSTROM (1995), HOLDEN et al. (1998).