The Cabinet of Ministers of Ukraine approved a Strategy for agricultural sector development until 2020 in October 2013. This Strategy was prepared by the Ministry of Agrarian Policy and Food (MAPF) as a concept for a new detailed Sector Program to be developed by the Ministry during the next months. The approved strategy often refers to self-regulatory actions by industry associations, such as “delegating some powers with regard to monitoring compliance of agriculture produce with national standards to self-regulatory associations” and “delegating some regulatory powers to self-regulatory associations of agriculture producers and engaging them in development and implementation of government agrarian policies”.
AgroInvest provides assistance to MAPF in sharing international experiences with such self-regulatory mechanisms in other countries. In this report, three objectives are accomplished:
- A conceptual framework is provided for the analysis of self-regulatory organizations based on the New Institutional Economics, which highlights the role of institutional and organizational design to explain the performance of economies, industries and organizations.
- Examples of self-regulatory activities of associations/organizations/cooperatives from five countries where self-regulation has been practiced.
- Lessons learned and policy implications from these examples focusing on the conditions or factors that would make such actions workable or not workable in differing situations.
Based on the conceptual framework provided by the New Institutional Economics and the analysis of the five case studies of self-regulatory organizations described below, we offer the following policy recommendations at three levels of analysis – embeddedness, institutional environment and governance.
- Individuals will try to get the best outcome from the resources they own. This decision, however, is not free from constraints or incentives. The set of constraints and incentives faced by individuals will determine how they use the available resources and the final outcome of their efforts. These constraints and incentives are found at the levels of embeddedness (i.e., social norms, customs and personal relationships) and the formal “rules of the game” found in the institutional environment.
- Informal rules – such as traditions, customs, and social norms – create a set of constraints to human action that is not necessarily identical to the constraints derived from formal rules. In this sense, creating a new structure of formal incentives – in the form of public policies – demands a full understanding of the informal rules embedded in a given society.
- Successful self-regulatory organizations are seldom created by diktat. Self-regulatory organizations often emerge from voluntary collective action of independent producers and private entities. Whenever individuals or firms decide to interact and coordinate their activities in some form of voluntary collective action, excessive hierarchy precludes the establishment of self-regulatory organizations or weakens their actions.
- Avoiding the risk of “free rider behavior” motivates most – if not all – forms of collective action, including self-regulatory organizations. Informal and formal rules are shaped by participants in order to avoid the appropriation of collective benefits by agents who did not contribute to its creation.
- Most successful self-regulatory organizations are formed and evolve embedded in a dense network of social relations between producer-members. Such social networks provide the social cohesion and trust for these organizations to emerge and design more formal governance rules to mitigate free-riding behavior and other forms of opportunism.
- The existence of private property rights enforced by a fair and efficient judicial system fosters the establishment of self-regulatory initiatives.
- Protecting private property rights is necessary. This entails guaranteeing those rights which are established by the State rules and respecting private decisions for the allocation of rights whenever a specific public rule does not exist for an economic sector.
- The State should attempt to eliminate any specific barrier to the right of internal organization by members of self-regulatory organizations. Recognizing the right of producers to organize collectively and providing flexibility in laws and regulations dealing with self-regulatory organizations are important pre-conditions for successful collective action in agriculture.
- The institutional rules may foster the participation of the leaders of self-regulatory initiatives in the political process, by proposing changes in the legislation or suggesting new rules. This initiative, however, has to take into account the diversity of different interest groups in society, creating a competitive system for political ideas. The absence of such competition may open room to inefficient practices and rent-seeking behavior that distort markets and divert economic agents from productive activities.
- As suggested in the five case studies presented below, there is no unique governance structure for a successful self-regulatory organization.
- These self-regulatory organizations can represent an industry, a regional cluster, a certain form of producer organization or a subset of industry participants. The different types of self-regulatory organizations are described in the examples below.
- The existence of clear boundaries is necessary for the success of self-regulatory organizations. The rules for membership or exclusion of members have to be clear and enforced accordingly.
- Each self-regulatory initiative must create its own rules for the provision and the appropriation of collective goods, which should respect the specificities of its participants and the market where it acts.
- Monitoring costs should be shared among all members of the self-regulatory initiative. The creation of sanction rules that could be efficiently enforced by the participants of the organization reduces organization costs, since it avoids prolonged conflicts. The judicial system should be seen as a credible last resort, used only in extreme cases when the private rules fail to achieve an efficient outcome.