Institutions and Infrastructure for Market Development

Outcome Statement

Research under the Infrastructure and Institutions for Market Development program helps shape the understanding of the important role that infrastructure and institutions play in development. Two projects carried out under this program have been adopted as best practices by the World Bank. The first one implemented a detailed analysis of how to prioritize investments in infrastructure projects to diminish the potential negative effects of CAFTA on agriculture in Central America. The project won the AAA award from the World Bank and was presented in its Knowledge Fair. The impact evaluation design implemented in the second project – Ethiopia Energy Access Project – has also been adopted by the World Bank and several multilateral agencies as a best practice in impact evaluation. For example, MCC has been promoting a similar methodology of randomized vouchers for households to partially cover the costs of the last mile connection in Tanzania. Similarly, Asian Development Bank (ADB) is starting a new initiative with IFPRI’s MTID to apply a similar method to evaluate the impact of their rural electrification projects.

The infrastructure research has also played a crucial role in the development of the “Framework for the Improvement of Rural Infrastructure and Trade-Related Capacities for Market Access (FIMA)”. This framework was carried out by the CAADP Pillar II Expert Reference Group led by the Conference of Ministers of Agriculture of West and Central Africa (CMAWCA) and our program plays a central role in the infrastructure component. This framework is currently under implementation and we continue to play an advisory role.

Similarly to infrastructure, institutions such as vertical coordination arrangements (i.e. contract farming) or horizontal coordination arrangements (such as cooperatives) or property rights or labor market regulations are central for connecting smallholders to markets. On this subject too, MTID undertook two major initiatives on institutions that have had important influence during the past few years.

The first initiative was on developing a rural labor strategy which included four pillars: (i) short-term response, employment and safety nets; (ii) efficient allocation of available rural labor resource; (iii) building up human capital; and (iv) promoting net job creation: expansion vs. graduation. This strategy was developed for the FAO and was circulated for comments among all UN agencies. Following an intensive review, FAO decided to implement it.

The second study focused on the development of a score card for grants and loans that combines a dimension of risk and poverty. The main objective was to improve the way microfinance and financial institutions target their grants and investment for the rural poor by combining the information from the risk scorecard and poverty scorecard so that they not only target the poor but also assure sustainability. This project was initially funded by the Inter American Development Bank (IADB) and as a result of it the Multilateral Investment Fund (MIF) of the IADB is launching a call for proposals to test the scorecard. The projects with the highest poverty score and highest financial sustainability based on a due diligence review of the business model proposed will be selected. Through this competitive process, the project will award eligible institutions a maximum contribution per project of US$ 250,000 to implement individual projects in each of the three beneficiary countries. The call for proposals is expected to identify around 20 project proposals and the size of the fund will be around US $3 million. This project is being implemented with the Regional Unit of Technical Assistance and our role will be to evaluate the impact of the score card.

More recently, the work on food prices has been widely cited and has had a significant impact over stakeholders and the media. A project was carried out at IFPRI analyzing the role of speculation and hoarding in rising food prices. The study argued that the changes in supply and demand fundamentals could not fully explain the drastic increase in food prices and, as a result, rising expectations, speculation, and hoarding had also contributed to the increasing level and volatility of food prices. An examination of weekly reports by the U.S. Commodity Futures Trading Commission (CFTC) on trading activities in futures markets by commercial traders and noncommercial traders showed that for maize, wheat, soybeans, and rice, the total number of positions in futures contracts by noncommercial traders as a fraction of the total positions (commercial plus noncommercial) had significantly increased within the first six months of 2008. This implies the possibility of a price bubble above what is justified by fundamentals. The study warned that excessive speculation in the commodity futures market can, in principle, push up not only futures prices but also spot prices above levels justified by supply and demand. The authors proposed a new global institutional arrangement to address these problems. This arrangement would consists of two prongs: (1) a minimum physical grain reserve for humanitarian assistance that would be supplied by the main grain producing countries and funded by a group of countries participating in the scheme (that is, the Group of Eight Plus Five [G8+5] countries [Canada, France, Germany, Italy, Japan, Russia, the United Kingdom, the United States, Brazil, China, India, Mexico, and South Africa] and maybe others); and (2) a virtual reserve and intervention mechanism to calm markets under speculative situations, backed up by a financial fund. This would be an intervention mechanism based on a coordinated commitment by the group of participating countries supplying funds if needed for intervention in grain markets.

This work had a significant impact: it was mentioned in the G8 Statement of global food security in Tokyo. The statement specifically said: “We will explore options on a coordinated approach on stock management, including the pros and cons of building a ‘virtual’ internationally coordinated reserve system for humanitarian purposes”; World Bank’s president Robert Zoellick urged study of the plan for a “virtual” reserve; the French government as well as governments of many other countries also supported the idea.

An earlier project examining the impact of a nationwide property titling program on credit access in Peru entitled “Do Property Titles Increase Credit Access among the Urban Poor? Evidence from a Nationwide Titling Program” produced surprising results. According to the findings of this study, despite the distribution of over 1.2 million property titles to urban squatters, credit rationing remained a key feature of the micro-lending environment in urban Peru. In particular, post-reform, a full 34% of households with titles remained fully rationed out of the formal credit market. Access to credit from private-sector lenders appeared unaltered by titling. The study suggested that one reason why titling programs may fail to reduce credit constraints is because they unavoidably signaled to lenders that a government prioritizes housing for the poor, and hence is more likely to side with borrowers in enforcing credit contracts.

This study has had significant influence on other studies on the same subject, especially on the work promoted by Hernando de Soto. As the Economist pointed out “Nobody had ever disputed that property rights matter for investment: you are more likely to put money in something if you are sure you own it. De Soto’s insight - that title frees up credit, turning dead capital into live capital - was widely hailed (by The Economist and others). …De Soto argues that it is above all the lack of title that explains why poor people have been unable to turn their assets into capital”. Our research conducted jointly with Harvard University, showed that securing title does not necessarily lead to this piece of alchemy, i.e. poor people with titles are no more likely to obtain a loan from a commercial bank.

The titling work resulted in new designs of titling programs. In this new design not only a title is given, but also direct interventions with the commercial banking system are being implemented so that a credit history can be built in addition to the possession of titles. A clear example of this is the case of the Honduras land titling program. In this program, the government negotiated with the commercial banking system to develop a trust fund based on direct loans to the new land owners with the warranty of the government so that they can pay to the original owners and at the same time develop a credit history in addition to just having the property title.