Nested Markets and Common Pool Resources: a Contribution from Economic Sociology

Nested markets with common pool resources in multifunctional agriculture

Nico Polman, Krijn J. Poppe,Jan-Willem van der Schans and Jan Douwe van der Ploeg

LEI Wageningen UR and WageningenUniversity

Corresponding author:

Abstract

Nested markets are segments of wider (more global) markets where the specificities of place and networks provide room for specific products, extra trade and premium prices. Nested markets imply boundaries (and often boundary organizations that actively deal with these boundaries). These boundaries are permeable. Nonetheless, they define a space that allows for premium prices, cost-reductions, specific connections, reduced transaction costs and differential development trends. Nested markets can only be dealt with, if adequate concepts and a proper analytical approach are being used. The common pool resource theory is such a concept. This enriches the concept of multifunctional agriculture. Two empirical cases are analysed with these concepts.

1. Introduction

Over the last twenty years the idea has gained ground that agriculture not only provides private goods as food, feed, fibre and now also fuel. In addition agriculture provides public goods like landscape, carbon sinks, resilience to flooding or fire, biodiversity, animal welfare etc.The idea that agriculture produces public goods has been labelled as ‘multifunctional agriculture’. The OECD (2001) has defined two key elements for multifunctionality: 1) the existence of multiple commodity and non-commodity outputs produced jointly by agriculture; and 2) the fact that some of the non-commodity outputs feature the characteristics of externalities or public goods, with the result that markets for these goods do not exist or function poorly.The concept of multifunctional agriculture has become a corner stone in the thinking on the EU’s Common Agricultural Policy (CAP). The CAP has moved away from price intervention in the markets for private goods like cereals and wheat, towards direct payments.In many member states these direct payments are coupled to land areas (also increasing their value), with multifunctionality as one of arguments. Countries like Australia, Brazil or the US show less enthusiasm to implement such policies.

Governments in the EU member states and at the lower regional level try to promote multifunctional agriculture in order to stimulate rural development. The CAP (especially its so called Pillar 2) provides ample possibilities and money. However these projects often do not produce public goods, but private ones. Jongeneel et al. (2008) and also in the the Dutch policy context multifunctionality has been broadened to moreactivities like: regional branded products, social care farming (providing care and health to e.g. kindergarten children or re-socialising ex-drugs addicts), leisure farming (sports activities on the farm etc), education and nature management.Only the last one of thesedeals with public goods in the sense of the OECD definition. The others deal with niches for private goods. And in many cases the link with the amenities of public goods seems to be weak.

This leads us to the insight that the concepts of private and public goods to describe modern agriculture are not enough to deal with reality of rural development. This paper investigates if the concept of Common Pool Resources is useful in a policy context and analyses possible consequences for governance of rural areas.The CPR in this paper focuses on the interrelations between supply and demand in so called nested marketsthat have their specificities of place and networks.Nested markets can be seen as a form of hybrid governance as developed in New Institutional Economics in whichspecific combinations of market incentives and modalities of co-ordination involving some form of hierarchical relationship characterise hybrid forms (see Ménard, 1995: 175). We describe two cases in the Netherlands that are regarded as multifunctional in the broad context used in this paper and interpret them in a Common Pool Resource [CPR] framework. The cases on regional brands and growers associations are selected respectively for specificities of place and specificities of networks. We argue that this context is relevant for future EU policy design and that the link between multifunctional agriculture and rural development could benefit from insights from CPR theory.

Before we present the cases, the next sections review the concept of multifunctional agriculture, the notion of nested markets (section 3) and the link between nested markets and common pool resources (section 4). The paper finishes with discussion and policy implications.

2. Multifunctional agriculture

The concept of multifunctionality in agriculture began to take shape in 1992, during the Earth Summit in Rio, in a period involving profound changes in the position of the primary sector in the world economy, and the approach to relative support policies (Van Huylenbroeck et al., 2007; Salvioni et al, 2010). In Europe, the concept was legitimised with the debate regarding Agenda 2000, mainly as a defence of the EU’s position in WTO negotiations. In fact, multifunctionality was presented in that context as a specific element of the European agricultural model, which gave legitimacy to public funding no longer linked to product quantity, but to the provision of services together with agricultural products in the strict sense. At the same time, the OECD, in the late ‘90s and early years of the new decade, undertook a systematic definition of the concept of multifunctionality and an analysis of various countries’ positions about the use of the term, and its political valence internationally (OECD, 1998, 2001, 2005).

OECD provides an operating definition of multifunctionality, referring to the primary sector’s capacity to produce agricultural commodities, coupled – in a certain measure inevitably – with “non-commodity outputs”. In particular, according to the OECD, the key elements for defining multifunctionality are: 1) the existence of multiple commodity and non-commodity outputs produced jointly by agriculture; and 2) the fact that some of the non-commodity outputs feature the characteristics of externalities or public goods, with the result that markets for these goods do not exist or function poorly.

The Institute for European Environmental Policy recently identified the public goods in agriculture (Cooper et al, 2009). They restrict their inventory to the public goods concept that is well established in economic theory which definespublic goods by the following characteristics:

• Non-excludable – if the good is available to one person, otherscannot be excluded from the benefits it confers.

• Non-rival – if the good is consumed by one person it does not reducethe amount available to others.

They find a wide range of public goods associated with agriculture. The most significant of these are environmental -such as agricultural landscapes, farmland biodiversity, water quality, wateravailability, soil functionality, climate stability (greenhouse gas emissions),climate stability (carbon storage), air quality, resilience to flooding and fire – aswell as a diverse suite of more social public goods, including food security, ruralvitality and farm animal welfare and health. They all share the characteristics of non-rivalryand non-excludability to varying degrees.Many, Cooper et al (2009) note, are complex entities,with both public and private characteristics.

Since the formulation of the OECD definition, the term has entered the common language of those involved in various guises in agriculture and rural development, and has acquired different definitions depending on the context. The literature refers to agricultural multifunctionality, in its broadest accepted meaning, according to four types of function: following the Van Huylenbroeck et al. (2007) categories, these can be grouped as follows: “green” functions (landscape and bio-diversity management); “blue” functions (water resource management and flood control); “yellow” functions (vitality of rural areas, historical and cultural heritage, rural amenities); and “white” functions (food security and safety).

The definition of multifunctionality and the categories labelled by Van Huylenbroeck (2007) suggest that multifunctionality is often a characteristic of the agricultural system in a certain rural area or region, and not necessarily of an individual farm. This is most clear in public goods like landscape, which are defined on the level of (certain parts of) Tuscany or the Beemster (a Dutch polder on the Unesco Heritage list).

In less academic environments (including policy making) the term multifunctionality is often used in a broader sense and also linked to farms and farmers involved in other activities than producing the classical private goods food, flowers, feed and fibre. It is therefore useful to clarify the distinction between this concept and those of diversification and pluriactivity. In fact, though the literature often uses these three terms as synonyms, partly because of the many ways their definitions overlap, they refer nonetheless to distinct phenomena, summed up as follows (table 1).

Table 1: Definition of the phenomenon

There is more than pure private and pure public goods. Table 2 uses the concepts of non-rivalry and exclusion to show that there are two intermediate forms. Common goods where rivalry exists but exclusion is not possible; CPR like common fish grounds or water systems are classic examples. And quasi-public goods (club goods, toll goods), where exclusion is possible, but rivalry does not exist. Landscape is a classic one: persons can be asked a fee to enter a region, but as long as the area is not overcrowded, the visit of one person does not reduce the possibilities of another to experience the landscape.

Table 2: A typology of goods

Source: Jongeneel et al. (2009)

The four types of goods as described in table2 suggest that there are possibilities for governments to ensure the production of public goods by private parties such as farmers. This is the case for public goods, where governments can hand out contracts or pay subsidies to promote the provision of such goods. But it is even more the case with common goods and quasi public goods where also producers themselves have options to organise themselves. Slangen and Polman (2002) for instance suggest on basis of the club theory that cooperatives can play a role in landscape provision. A nature or landscape cooperative can reduce transaction costs in a contract with the government and can improve the blending of pure individual goods (e.g. milk production) with quasi-public goods (e.g. access to land for hikers or cows in the meadow) at a regional level. Such farm groups might also create common goods (from web sites to joint facilities) that help them to reap the benefits of multifunctionality.These developments together imply a shift in rural governance and a shift for market governance to hybrid governance structures.

An important characteristic of all this thinking and analysis is that it stresses the supply side of agriculture. Recently Ladegard and Romstad (2009) argued that much more attention should be given to the demand side. One of their arguments is that the demand side is much more complex than most people think. It is not just the demand for landscape or meadow birds. It is much more complex. They gave an intriguing example on the relation between markets in agri-tourism, inspired on the wine route example by Getz and Brown (2004):

“Imagine a family of four consisting of two adults and two children on vacation by car. For simplicity and without loss of generality let us call them Hansen. After having been stuck together in the same car for three to four hours with the exception of some short breaks, they start to be pretty fed up with each other, and now they are looking for a good place to stop and have a break from each other. As many modern households the Hansens have diverse interests. They are therefore more likely to stop at a place that offers activities that cater to their diverse demands. Mr. Hansen dreams about two to three hours of peaceful fly fishing, while Mrs. Hansen is looking for a place with art galleries and antique shops. The children, one boy and one girl, also have different wants. The teenage son looks for a place where he could play some sports, like a friendly pick-up game of soccer or basketball, while the daughter wants to go horseback riding. Now suppose they found some place that in a credible way offered these activities in a safe environment, i.e., it is possible to let the children loose. It is far more likely that they would stop at such a place rather than at a place that has less to offer. If the Hansens were well organized and structured, they would most likely have sought such locations out on the web before starting on their journey.

After two to three hours of being apart the Hansens reconvene. Hopefully, all are rested and ready to enjoy being together again. If they enjoyed their activities, it is not unlikely that they would like to repeat the activities the morning after. They would then be looking for a place to have a nice dinner, and maybe spend the night in the vicinity. This is where “the big money” are spent, i.e., some local businesses are really going to make a profit. However, the profits enjoyed by the restaurant and the lodging providers are not only a result of their actions. After all, the Hansens may not have stopped if it had not been for the fly fishing, the art galleries and antique shops, the local sports facility where some other children were playing pick-up games, and the riding center.

While too many regional and rural development strategies focus mainly on the supply side, we think social welfare is further enhanced if one is able to see supply and demand together. This holds for the local business benefits and consumer satisfaction. In our tourism tale it is easy to see that it is the municipality’s ability to meet consumer demands that determines the level of success in the business. This ability increases if there is cooperation among the local businesses in terms of marketing, in particular with increased use of the web for planning tourist activities. But marketing is one thing, being able to meet the demand is another issue.

Some interesting and complicated issues quickly arise in our setting. Suppose that some of the activities that made the Hansens stop, for example the art gallery, were not profitable by themselves.”

Recently rural sociologists have introduced the term ‘Nested markets’ as a heuristic concept to explore arrangements in the border zone between markets and hierarchal management(see Polman et al, 2010). Also from the New Institutional Economics literature it is known that markets require institutional supports to exist and develop (Menard, 2005). The nested market concept follows Shanin (1973) by focusing on market places as specific places where specific transactions take place between specific suppliers and specific consumers. These producers and consumers are linked through specific networks. Their transactions are embedded in specific frameworks and offer specific advantages to both groups. Together these specificities of place and networks compose (especially when knit together into a coherent whole) a nested market.It are the interrelations between supply and demand in such nested markets with their specificities of place and networks that one tries to understand better and links with multifunctional agriculture and rural development. It also implies that not all nested markets are alike as Ménard (2005) argues for markets in general.

Nested markets can be seen as a form of hybrid governance as developed in New Institutional Economics in whichspecific combinations of market incentives and modalities of co-ordination involving some form of hierarchical relationship characterise hybrid forms (see Ménard, 1995: 175). Such situations are not unique to agriculture. In the urban domain shopping malls, airports and business parks provide examples of complex nested markets due to common pool resources in infrastructure and complementarities in supply to clients. A famous case with special public-private institutions is the La Defense business park in Paris (Emergent Urbanism, 2008).

Our insight is that this is also the case in agriculture and that making the nested markets as a CPR concept more explicit, could throw new light on the relationship between multifunctional agriculture and rural development.In this contribution we focus on new nested markets that emerge in the context of rural development processes (although the empirical illustrations to be discussed go beyond the framework of RD processes only). Our reasoning is grounded in the empirical observation that these newly emerging nested markets are different, in several respects, from the large commodity markets for agricultural and food products. This does not imply, of course, that the later are not embedded[1]. They are as well ‘nested’ in institutional frameworks, normative patterns and specific infrastructures (including specific technologies). Neither the ‘new’ nor the ‘old’ rural markets can be equated to spot markets. The central question, though, is about the specificity of embeddedness.