lIBIIAIIIES PATRON: This book has been wrapped to preserve it for your use. Please follow these procedures: 1) Remove wrap carefully, or ask Circulation staff to remove it for you, 2) Leave this band in place around the book. 3) Return book to the Circulation Desk. ClRC STAFF: Place unwrapped book with this band on Repair shelfr DO NOT PLACE THIS BOOK IN A BOOK RETURN Thank you, Preservation Department ". C‘ o ire/IE; Branch: / NC 9/05 ( ‘PreserveBkBandindd This is to certify thesis entit AGRICULTURAL MARKE'. IN THE ECONOMIC I OF PUERTO I presented Kelly Max Ha: has been accepted tow of the requiren Ph.D ' degree i I B February 21, 196 Date 0-169 ABSTRACT AGRICULTURAL MARKET COORDINATION IN THE ECONOMIC DEVELOPMENT OF PUERTO RICO by Kelly Max Harrison Since World War II economic growth has become a major- goal for most nations of the world. The literature abounds with research studies and proposals for accelerating econ— omic development. 'Only in the past decade has there been any significant interest in appraising the role of marketing in the development process. The few studies which have attempted to evaluate the role of marketing in economic development have indicated that it can have a significant impact on growth rates. In spite of the fact that many Latin American countries have made some progress in accumulating social overhead capital in preparation for a take-off into sustained growth, the breakthrough has been slow in coming for most of the countries in that area. Walter w. Rostow has suggested that a lack of integration between rural and urban sectors is a major reason why such nations have not experienced satisfac— tory economic growth. The solution he suggests is to create national markets whereby the two sectors are linked together through effectively coordinated marketing channels. This should produce a condition of self-reinforcing economic growth. Kelly Max Harrison In June, 1965, an interdisciplinary team of researchers from Michigan State University began the first phase of a two and one-half year study to evaluate first in Puerto Rico mwithen in Northeast Brazil the validity of Rostow's national nmrket concept and to determine the role that food marketing plays in economic growth. This thesis reports the findings of the research in the agricultural marketing portion of the Puerto Rican study. A review of works by other social scientists and direct observation in Puerto Rico suggested the hypothesis that atomistic and imperfectly competitive markets in develop— ing economies are generally accompanied by high risks, primi-' tive production methods and ineffective transmission of mwmumer demand. Three commodity marketing studies in Puerto Rico provided support for this hypothesis. These commodity studies indicated that effective vertical coordination in marketing channels between producers and consumers plays an important role in reducing uncertaini- 1fles, eliminating unnecessary marketing effort and lowering waste and spoilage. Comparisons against specific market performance criteria indicated that the marketing channels fbr milk and eggs, which have undergone important coordina— tflon adjustments in the past fifteen years, have shown sig— ruficant improvements in terms of production and marketing costs, technological progressiveness, and product quality. It was also found that government programs designed to lower Kelly Max Harrison marketing risks and achieve better market coordination were important factors in improving market performance for milk and eggs. An effort to relate innovativeness among agricultural producers to certain socio~economic characteristics yielded inconclusive results. Several indicators were explored for nwasuring such things as modern attitudes, communication exposure, market attitudes and risk perception. Several variables appeared to be related to innovativeness through the strength of the relationships in this study do not warrant definite conclusions. An exploratory factor analysis provided possible guide- lines for future research of factors affecting innovativeness mnihampering market development. These findings suggest the following conclusions: The structure and performance of the marketing system 1. may have significant effects on the total production of a given commodity, on consumer prices and on the adoption of improved production and marketing methods. 2. Government policies can be devised within the framework of social values and goals which will contribute to more effective market coordination and more rapid agricul- tural development. However, if such policies are to be successful they should be based on dynamic rather than Static economic performance criteria. Kelly Max Harrison Further research directed toward measuring innovativeness and willingness to change among entrepreneurs seems warranted. With such a tool change agents could make maximum use of government programs and resources in their efforts to achieve rapid economic development. AGRICULTURAL MARKET COORDINATION IN THE ECONOMIC DEVELOPMENT OF PUERTO RICO By Kelly Max Harrison A THESIS Submitted to Michigan State University in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY Department of Agricultural Economics 1966 . 1' ~31.) &#v0/ ACKNOWLEDGMENTS The research for this thesis was done while the author was employed as a research assistant under contract between NMchigan State University and the U. S. Agency for Inter— national Development. To the directors of that research project, Dr. Charles C. Slater and Dr. Harold M. Riley, can be attributed many of the ideas and concepts developed herein. The continual exchange of ideas which took place throughout the research contributed immeasurably to the final product reported in these pages. Special acknowledgment is made for the assistance and critical review of my colleagues on the project, including Jerry Wish of the Department of Marketing and Transportation Administration, Michigan State University, Jose Santiago and Idalia Rodriguez of the Department of Commerce, Commonwealth of Puerto Rico. Throughout the development of this thesis the author was privileged to have the constant interest, encouragement mwiassistance of the members of this thesis committee. Tb the Chairman of that committee, Dr. Harold M. Riley, the author expresses his deepest appreciation. His probing cudticisms and pertinent comments were appropriately blended inth remarks of encouragement and optimism. The other members of the thesis committee, Drs. Charles (L Slater and James D. Shaffer, provided valuable guidance eSpecially during the difficult stages of research design and final analysis. Their comments and criticisms of earlier drafts helped to improve the analysis and clarify the presentation of this dissertation. The author also wishes to acknowledge the assistance provided by Dr. Vincent Farace of the Department of Com— munication. He provided special help in planning and carrying out the statistical analysis. Finally, I express my deepest appreciation to my wife and our families. Their encouragement and confidence were a source of strength through many difficult and dis- couraging days. The special patience and encouragement of my wife throughout the months of research and analysis made this thesis possible. i1 TABLE OF CONTENTS Page ACKNOWLEDGMENTS 11 LIST OF TABLES v LIST OF ILLUSTRATIONS .viii Chapter I. INTRODUCTION 1 The Problem. . . . . . . . l The Approach . . . . . . . . . . 7 The Objectives. . . . . . . . . 9 Methods of the Study. . . . . . . 10 Plan of the Thesis 12 II. REVIEW OF LITERATURE. 14 Theories of Economic Growth 14 The Role of Agriculture. . . 21 Marketing in Development . . . . . . 23 The National Market . . . . . . . . 29 III. MARKET COORDINATION IN ECONOMIC DEVELOPMENT . 3H Introduction 3h Prevailing Conditions in Developing Nations . . . 35 The Vicious Circle of Low Productivity. . 39 The Role of Exchange in Society . . . . #2 Market Coordination in a Bargained Exchange System. . . , 45 . 48 Market Coordination in Economic Theory. Atomistic Competition and Economic Growth. 54 Economic Policy--Values, Goals and Programs 60 Summary 75 IV. DEVELOPMENT OF THE PUERTO RICAN ECONOMY . . 77 Political and Economic Development . . . 77 Agricultural Development . . . . . . 87 iii Chapter Page V. MARKET COORDINATION AND ITS EFFECTS ON MARKET PERFORMANCE IN PUERTO RICO-- THREE COMMODITY STUDIES 110 Introduction. . . . . . . . . . . llO Eggs . . . . . . . . . . . . . 112 Milk . . . . . . . . . . . . . 137 Fruits and Vegetables. . . . . . . . 176 Summary .- . . . . . . . . . . 208 VI. THE RELATIONSHIP OF ATTITUDES AND SOCIO- ECONOMIC CHARACTERISTICS TO ASSOCIATION MEMBERSHIP AND INNOVATIVENESS 212 Introduction. . . . . . . . . . 212 Description of Variables. . . . . . . 219 Simple Correlation Tests. . . . . . . 226 Multiple Correlation . . . . . . . . 2A2 Factor Analysis. . . . . . . . . ' 2H7 VII. SUMMARY AND CONCLUSIONS . . . . . . 272 REFERENCES 285, APPENDIX A: Factor Analysis 291 iv LIST OF TABLES Table Page 4.1 Gross Domestic Product and Per Capita Income for Puerto Rico-—Se1ected Years (1954 dollars) . . . . . . . . . . 80 4.2 Gross Domestic Product, Agriculture and Manufacturing Gross Product and Percentage Increase from 1950 to 1960 for Puerto Rico (1954 dollars) . . . . . . . 81 4.3 Employment in Puerto Rico by Industry- -Se1ected Years . . . . . . . . 82 4.4 Production of Sugar Cane and Number of Farms According to Size of Area Harvested, 1963-1964 . . . . . . . . . . . . 9w 4.5 Percentage Change in the Production of Major Agricultural Products in Puerto Rico 1951 to 1963 . . . . . . . . . . . 96 5.1 Total Egg Consumption in Puerto Rico; Volume Imported and Volume Produced in Puerto Rico, 1950-51. . . . . . . . . . . 115 5.2 Production and Cost Comparisons from a Study of Six Commercial Egg Producers in Puerto Rico, 1951. . . . . . . . . . . . 129 5-3 Production Characteristics of Commercial Egg Farms in Puerto Rico for Selected Years . . 132 5.4 Milk Production by Farm Size, 1949 . . . . 139 5-5 Milk Production in Puerto Rico by Type of Producing Unit, Fiscal Years 1952-1965 . . 151 5.6 Percentage of Gross Farm Income Derived from Cane, Milk and All Other Products in Selected Years 5. . . . . . . . . . 153 5.7 Net Return as a Per Cent of Gross Sales for Milk Pasteurizing Plants in Puerto Rico, Selected Years . . . . . . . . . . 157 v Table 5.8 5-9 5.10 5.11 5.12 5.13 5.14 5.15 6.3 6.4 6.5 Page Statistics of First Class Dairy Farms in Puerto Rico, 1951—65 . . . . . . . . 165 Per Cent of First Class Milk Producers in a Sample of 233 Who Used and Permanently AdOpted Specific Innovations, 1964. . . . 172 Value of Dairy Equipment Imports, New and Improved Pasture, and Incentive Payments to Dairy Farmers in Puerto Rico, 1951- 64. . 174 Value of Fruit and Vegetable Production and Number of Farms Reporting Sales in 1950—51 . 179 Percentage of Various Products Delivered to Specific Destinations in MetrOpolitan San Juan—-1952— 53 (Per Cent of Total Dollar Value) . . . . . . . . 182 Per Capita Consumption and Percentage Change Since 1950 of Selected Food Commodity Groups in Puerto Rico . . . . . . . . . 187 Value of Domestic and Imported Fruits and Vegetables, Puerto Rico Fiscal Year 1951— 1965. . . . . . . . . . . . . . 19o Characteristics of Minor CrOp and Fruit and Nut Farms in Puerto Rico, 1950 and 1959 . . 192 Summary of 1964 Sales Data for Farms in a Farmer Sample in the Mayaguez Region (N = 172) . . . . . . . . . . . . 221 Production and Marketing Practices Used in Making up the Index of Innovativeness and Questions Asked Each ReSpondent. . . . . 224 Hypothesized Relationships Between Associa- tion Membership and Other Socio-Economic Variables, Correlations Obtained and Statistical Significances of Each . . . . 228 Hypothesized Relationships Between Innova- tiveness and Other Socio-Economic Variables, Correlations Obtained and Statistical Significance of Each . . . . . . . . 233 Summary of Association Membership-~Multiple Correlation . . . . . . . . . . . 244 V1 Table 6.6 6.7 6.8 6.9 6.10 6.11 6.12 6.13 6.14 Summary of Innovativeness-Multiple Corre- lation Factor I: Modernism (Variance Explained — 9.15%) — Factor 11: Anti-Innovation (Economic) (Variance Explained = 6.13%). Factor III: Transitional (Non—Mass Communi- cation) (Variance Explained = 4.36%) . Factor IV: Anti-Innovation éMarketing) (Explained Variance = 4.65 ). . Factor V: Cooperativisanariance Explained 4.75%) . Factor VI: Traditional Individualism (Variance Explained = 3.97%). Factor VII: Isolated Individualism (Variance Explained = 4.01%) 3.87%) . Factor VIII: Fatalism (Variance EXplained — vii Page . 246 . 251 . 255 257 259 261 262 265 266 LIST OF ILLUSTRATIONS Figure Page 4.1 Average Annual Rainfall, Puerto Rico. . . . 89 4.2 Organization Chart for the Puerto Rican Department of Agriculture. . . . . . . 133 viii CHAPTER I INTRODUCTION The Problem Economic development literature indicates that prior to World War II economists placed emphasis on industrial expansion as the key to induced economic growth. After World War II, several development economists began to sug- gest that the agricultural sector should first be developed, then the industrial sector. During the past decade econo- mists have turned to a doctrine of balanced growth between rural and urban areas.1 While development economists now generally agree that productivity gains are important in both the industrial sector and the agricultural sector, there has been little serious consideration of the role of distribution or exchange in the development process. Empha- sis has been placed on improving productivity in industries turning out tangible products as opposed to the intangible but critically important coordinating functions of the mar- keting system. Walter W. Rostow is a notable exception. He has recently noted that the marketing system may play a critical ___ —— lLawrence W. Witt, "Role of Agriculture in Economic IEVeIOpment--A Review," Journal of Farm Economics, Vol. 47, No.1.(February, 1965). 1 role in the "balanced" growth of rural and urban sectors in a develOping country. Rostow has stated that many devel- Oping nations have passed beyond the development stage characterized by a build-up in social capital and are now at a point where significant structural distortions exist which hinder economic growth. These structural distortions are accompanied by the following conditions: 1. There is some industrial capacity, usually developed to substitute for the import of certain kinds of consumer goods. 2. The market for most of these manufactured good is narrow, textiles being an exception. 3. Although some agricultural development is taking place, the gap between rural and urban life is widening. 4. As a result of this imbalance, men and women flock from the rural areas to the cities where there is insufficient industrial momen- tum to provide full employment.2 Rostow suggests that the way to achieve a take-off into sustained growth for nations experiencing such condi- tions is to break down these structural distortions, to produce a self reinforcing agricultural and industrial ex- pansion, and to create truly national markets. Improvements 2 Walter W. Rostow, View From the Seventh Floor (New York: Harper & Row, 1964)} pp. 133-135. in agricultural productivity, especially in food products, are a significant factor in the broader market integration process outlined by Rostow; During the past decade there has been growing concern for the rapid expansion of world population and its pressure on food supplies. Special concern has been focused on the underdeveloped countries where agricultural production tech- niques are still basically primitive. Various pOpulation and food supply studies have indicated that many develOping nations are barely holding their own in the production of food supplies for growing pOpulations. The critical role of food production was stressed by Lawrence W. Witt in his Presidential Address before the American Farm Economic Association in August, 1966. Implicitly, everyone assumes that an agricultural revolution is needed, which draws on nonfarm produced inputs. The modern agriculture of tomorrow in developing countries requires a dif- ferent size of farm, new combinations of resources, new pricing policies for agricultural inputs, different capital structures, and may well require substantial changes in the geographical distri- bution of farming and farm people. He concludes: The food problems posed by the population explosion can be solved. . . . There will be ng greater challenge in your lifetime and mine. In a recent publication Robert D. Stevens has pointed out that develOping nations may have to produce significantly larger amounts of food in order to supply the rising demand “ *— 3Lawrence W. Witt, "Food," to be published in Journal EELEPrm Economics, December, 1967. """ brought on by population growth and rising incomes. He uses an equation developed by Ohkawa to demonstrate the relation- ship: d = p + gn, where d 2 growth in food consumption, p = rate of growth in pOpulation, g = rate of growth in per capita income, and n = the elasticity of demand for food associated with changed in income. Food needs are determined by the rate of population growth, which is fairly high in most Latin American countries (Stevens uses 2 per cent as a representative figure for all developing nations), plus an additional increase in food con— sumption brought on by rising incomes, which is determined by income elasticity in the country. Higher per capita in— comes are certainly a goal in all Latin American countries. If we assume a 2 per cent rate of pOpulation growth, a 2 per cent growth in per capita income, and an income elasticity of .7, food consumption increases at a rate of 3.4 per cent per year. A population increase of 3 per cent per year coupled with a growth in per capita income of 4 per cent and an income elasticity of .7 would yield a yearly increase in food consumption of 5.8 per cent. This suggests that three factors altering consumer demands for food products are at work in developing nations. The first and perhaps most important in its impact is a ___ “Robert D. Stevens, Elasticity of Food Consumption {gfiociated with Changes in Income in Developing Countries, Fbreign Agricultural Economies Report No. 23, U.S.D.A., MarCh: 1965: p- )4. rapidly rising population. The second is rising per capita incomes. And the third and perhaps least obvious is the change in products and services required to fulfill changing consumer demands brought on by the first two factors men- tioned above. The impact of these factors is focused first on the food distribution sector and then on the food pro- duction sector. Stevens points out that if either or both are unable to adjust adequately to changing consumer demands, rising food prices may create dangerous inflationary pres— sures in the developing nation. Thus, food production increases are necessary if infla- tionary pressures are to be avoided. But it is also impor- tant that the marketing system be effectively organized and coordinated in order to insure that the food production is distributed efficiently. The structure and performance of the marketing system may significantly affect food prices, first through the addition of marketing costs and second through its effect on the willingness of producers to in~ crease investments of labor and capital in expanding food production. The adoption of new agricultural techniques is gener- ally regarded as a necessary condition for significant im- gmovements in food output. However, it is not a sufficient (H‘independent condition for agricultural development. It should be recognized that productivity inprovements cannot and will not take place if the proper incentives are not transmitted to producers or if producers are not adequately informed of consumer demands for their products through the marketing system. This statement is deceiving. There are few people who would disagree that farmers must be made aware of market demands for their products. Yet in devel- oping countries there appear to be few who really understand the importance of the market in communicating that demand to producers. For instance, in talking with AID officials from Bolivia the author learned (in a personal interview with Dr. Edmund Faison, Marketing Advisor to the productivity center, USAID, La Paz, Bolivia, June 10, 1966) that until recently peasant farmers in the "altiplano" of Bolivia did not make a practice of shearing sheep each year because they perceived no market for the product and because they believed it would make the sheep sick. The AID mission there, in conjunction with a team from Utah State University, is cur- rently helping farmers to develOp both domestic and export markets for the products and providing technical assistance in teaching the Bolivian farmers how to properly harvest the wool. Dr. Milo Cox, Chief of the Rural Development Division in the Latin American Bureau of AID/Washington, in a per- sonal interview listed several such examples of marketing problems among agricultural producers in the different countries of Latin America. There appears to be a need for added emphasis on mar— keting as the focus of all production. And there is little doubt that economic development can only proceed through specialization, exchange and resulting productivity gains. If producers are not aware of markets or if those markets are unstable and poorly coordinated, there is little likeli— hood that agricultural productivity gains will be achieved. To summarize, this discussion suggests that in many developing nations a wide diSparity exists between rural and urban areas. Industrial growth is thwarted by food shortages and high food prices, while at the same time agricultural development lags because farmers have uncertain markets for their products. Rostow has said that the solution to this dilemma is to link rural and urban areas together with an effective two—way flow of products—-each sector providing the other with a market outlet. But for this effective linkage to occur, the marketing system must provide adequately for the smooth flow of prod- ucts and profit incentives both to agricultural and indus- trial producers. The structure and performance of these market channels therefore becomes an important factor in determining the success of developing nations in achieving the take—off into sustained economic growth. The Approach This dissertation is the result of cooperation in a study of food marketing in Puerto Rico by a team of re- searchers from Michigan State University, the University of Puerto Rico, and the Puerto Rico Department of Commerce. The research was financed under contract number AID/csd 786 between the United States Department of State, Agency for International Development and Michigan State University. The Puerto Rican study is the first of two phases in a two and one-half year research program for the purpose of evaluating the role of food marketing in economic development in Latin America. The author was given the Opportunity and responsibility of cooperating in a study of that portion of the food market channel directly relating to agricultural producers. The fifteen year period from 1950 - 1965 was chosen for intensive study, since the economy has experienced rapid economic growth during that period. The author spent a year in residence in San Juan, Puerto Rico, during the data collection phase. After a brief orientation to the island, it was decided that the best approach to the analysis of the farm marketing system would be to select certain key commodities and perform a detailed analysis of the distribution develop~ ments since 1950. Accordingly, eggs, milk and fruits and vegetables were selected for detailed study. The reasons for the selection are discussed in Chapter V. These case studies are designed to provide information on a broad range of marketing developments. But the primary emphasis was on the sequence of events, e.g. government programs and indi- 1ddua1 marketing innovations, which resulted in the present nmrketing systems for these commodities. The commodity Studies are presented in Chapter V. While the case studies held the prospect of providing historical data on the development of agricultural markets of Puerto Rico, there was little hOpe of achieving much in— sight into the process by which individual values and actions interrelate with government policies and programs to produce a specific blend of agricultural coordination in a given commodity. Therefore, the research included a second phase for the collection of data to permit some ex- ploration of these relationships. A number of hypotheses were formulated relating marketing behavior, attitudes, economic performance, communication and a number of demo- graphic variables. The relationships are discussed and evaluated in Chapter VI of this thesis. The Obiectives The dissertation has five basic objectives: 1. To review the role of food production and marketing in the economic development of Puerto Rico. 2. To describe the role of effective agricultural market coordination in the improvement of agricultural productivity. 3. To develop a conceptual framework for the development of marketing policy within the context of dynamic economic performance criteria. 10 A. To utilize that framework in the evaluation of the economic impact of government marketing policies and private coordination develop- ments in milk, egg, and fruit and vegetable production and distribution in Puerto Rico since l950. 5. To explore, through farm survey data, the relationship between agricultural productivity, innovation, market structure, and a variety of specific farmer attitudes and attributes. Methods of the Study The research method required three specific types of data collection—-secondary data collection, personal depth interviews and a farmer sample survey. The secondary data collection was the first phase of the research study. Data were examined and recorded from a variety of government agencies. In some cases where published data were not avail- able, they were obtained through personal interviews with the apprOpriate government official. The second phase of the research was a series of per— sonal depth interviews. The interviews were designed to collect detailed information on the develOpment of the mar— keting system for the three commodity groups under study. They included department of agriculture officials, agricul- tural extension agents, representatives of private and co- OPerativemarketing firms, and farmers. These depth ___ ___—___" ll interviews were valuable in tracing the historical develop- ment of the market channels and providing insights into the impact of market coordination on individual participants in the distribution system. The sample survey of farmers was concentrated in the Mayaguez agricultural region. Depth interviews and other evidence of recent agricultural marketing develOpments in that area suggested the possibility of relating the impact of a particular type of marketing organization to agricul— tural deveIOpment in general. In Chapter V these marketing organizations are described in detail. Basically, they are farmer c00peratives organized with the assistance of govern- ment agricultural agents for the purpose of promoting efficient marketing and production techniques. The case study for eggs indicates something of the impact of these associations on market coordination and productivity among the members in the region. A random sample was chosen to obtain approximately eQual representation between egg producer association mem— bers and non—members, and milk producer association members and non-members. In addition, a random sample of pineapple, papaya and orange association members was chosen. These samples were drawn from lists of all producers in the region Supplied by the regional office of the Department of Agricul- ture. Since the regional agricultural office had no list Of fruit and vegetable non-association members in the region, a sample of the Agricultural Statistics Division of the 12 Department of Agriculture was used for randomly obtaining the names and addresses of an appropriate number of these producers. Because of interviewing difficulties and limi— tations of the original population listings, the final N was l72——approximately 30 less than the desired sample size. However, the defkfit was about equally divided among the various sub-samples so that no severe limitation occurred in analysis in any sub-group. A group of agricultural extension agents contacted each of the l72 farmers personally and completed a question- naire. The schedule was made up of four parts: (I) eco— nomic information about the farm (2) mass communication eXposure (3) attitudes and (A) personal and demographic in— formation. The information was punched on IBM cards which were returned to East Lansing for data analysis. Three basic statistical methods were utilized to test hypotheses and eXplore relationships in the data: (1) simple cor- relation, (2) multiple correlation and (3) factor analysis. A precise description of the application of these methods of analysis is given in Chapter VI. Plan of the Thesis Basically, Chapter II is a review of the literature dealing with some general theories of economic growth and the effect of agriculture and marketing on the economic de- velopment process. . A . 13 Chapter III provides a conceptualization of the impact of market coordination on economic growth. It explains one of the major hypotheses underlying the entire study and relates that to government policy and planning. Chapter IV reviews the development of the Puerto Rican economy. It familiarizes the reader with some of the devel— opments leading up to the rapid changes that are now taking place on the island, especially in food marketing. Chapter V presents the three case studies of market development in Puerto Rico since 1950. A series of perform— ance criteria suggested from Chapter III is utilized to evaluate the three commodity industries. Chapter VI reports the results of the sample survey among farmers in the Mayaguez region. The chapter provides some early research explorations toward a method of obtaining information helpful to the government policy maker in devising adequate market programs. Moreover, several sug— gestions are given for further research. Chapter VII includes a brief summary of the results of the research and presents a series of conclusions relating to market and agricultural development in Puerto Rico. It contains a brief discussion of the possibilities of applying the conclusions in Latin American nations and makes sug- gestions for further research. CHAPTER II REVIEW OF LITERATURE Theories of Economic Growth Since the days of Adam Smith economists have shown a great deal of interest in the study of the causes of economic growth. It is interesting, however, to note how little agreement exists among contemporary economists as to the causes and nature of the economic development process.‘ The one point on which most economists agree is that development requires large amounts of capital. But even here opinions vary as to the level or rate of capital accumulation neces- sary for sustained growth. Other than capital accumulation there are few points on which deveIOpment economists exhibit common agreement. The purpose of this chapter is to review briefly some of the major contributions to economic develOp— nmnt literature. The latter part of this chapter places Special emphasis on the recent interest in marketing in the development process. Adam Smith An early attempt at a systematic description of the economic growth process was made by Adam Smith in his famous work, An Inquiry into the Nature and Causes of the Wealth in 15 of Nations. There Smith synthesized the works of previous political economists and laid down the basic framework which was eXpanded by Ricardo and others and which indeed has provided an important part of current economic theory. Smith made several lasting contributions to the theory of development. Perhaps the most widely recognized in western societies is his rationalization of the economic system of free enterprise as a process in which individual economic action guided by enlightened self interest will lead to an efficient allocation of resources and equitable distribution of the economic gains based on each individual's factor contribution. The doctrine of laissez faire is the basis for the theory of perfect competition. Smith believed that within a society organized around the laissez faire principle the key to increased productivity was division of labor. He illustrated that greater division of labor and specialization lead "(1) to an increase in dex— terity among workers; (2) to a reduction in the time neces- sary to produce commodities; and (3) to the invention of n5 better machines and equipment. Smith believed that the initial impetus toward special- ization among men was a natural tendency "to truck, barter and exchange one thing for another."6 However, a 5Gerald M. Meier and Robert E. Baldwin, Economic Devel- gpment Theory, History, Policy (New York: John Wiley and Sons, Inc., 1957), p. 21. Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, ed. Edwin Cannan (New York: The Modern Library, Random House, 1937), p. 13. 16 pre-condition to Specialization was some minimum accumulation of capital. And Smith is not clear as to the method of this accumulation process. He does point out that an agricultural surplus is necessary to start the development process: When by the improvement and cultivation of land the labor of one family can provide food for two, the labor of half the society becomes sufficient to pro- vide food for the whole. The other half, therefore, or at least the greater part of them, can be employed in providing other things, or in satisfying the other wants and fancies of mankind. According to Smith accelerated development could come about only as capitalists were willing to save and invest in new and improved methods of production. The investment of capitalists thus provided jobs for the surplus workers from the agricultural sector. He emphasized that the propensity to save was an important determinant of development: Parsimony, and not industry, is the immediate cause of the increase of capital. Industry, indeed provides the subject which parsimony accumulates. But what- ever industry might acquire, if parsimony did not 8 save and store up, the capital would never be greater. He warns that in addition to a slow rate of capital accumulation, economic deveIOpment may be limited by the size Of the market. If the market is very small the principle of division of labor cannot be carried to its fruition and productivity gains will be limited. g 71bid., p. 163 8Ibid., p. 321. 1? Neo-Classical Modifications Adam Smith and his followers thus emphasized the impor— tance of economic specialization accompanied by increasing capital savings for investment in improved production tech— niques. In this system it was assumed that capitalists were the only group from which capital saving could be derived. Alfred Marshall and others modified the theory of capital accumulation by including the possibility that in— vestors and savers do not have to be the same people. The capital market was visualized as the institution facilitating the flow of savings from laborers, landlords, and capitalists into productive investment. Under the neo-classical model, economic development was viewed as a gradual harmonious process whereby all groups would eventually reap the benefits of growth. Marshall's concept of "external" economies illustrates the ways in which investments by one entrepreneur may eventually benefit others. §§Dumpeter's Disharmonious Growth In his book The Theory of Economic Development, J. A. Schumpeter rejects the classical and neo-classical belief that economic growth is a gradual harmonious process. He argues that, in fact, real economic advances come in leaps and Spurts as a result of great innovations. Consequently, Schumpeter placed a great deal of emphasis on the entre-I preneur as the central figure in the development process: 18 He is the innovator, the one who undertakes new combinations of the factors of production. In- novations may occur in the following forms: (1) the introduction of a new good, (2) the use of a new method of production; (3) the opening of a new market; (A) the conquest of a new source of raw material supply; and (5) the reorganiza- tion of any industry. Schumpeter argued that economic development does not take place gradually and smoothly in an environment where businessmen can evaluate the risk and readily compare the rate of return to the interest rate in order to make in- vestment decisions. In Schumpeter's world ”a high degree of risk and uncertainty exists.":LO The entrepreneur, then, is the particular type of individual who is willing to operate in an uncertain environment and make innovations successful. It is this kind of environment which leads Schumpeter to conclude that great Spurts of development are centered around and ignited by significant economic innovations. He recognized the importance of capital accumulation in the development process. But he did not feel that the two—classical theory of capital accumulation was appropriate in a real world of high risk and disharmonious growth. While some of his ideas have been supplanted by later economists, Schumpeter's emphasis on the entrepreneur as the agent of economic growth continues to receive a great deal of attention. Later chapters in this thesis will discuss 11m importance of innovation in the process of agricultural development. 9Meier and Baldwin, p. 87. lOIbid. l9 Keynesian and Post-Keynesian Contributions In 1936 John Maynard Keynes published a book which stimulated a revolution in the economics of income and em- ployment. His work was aimed toward explaining the causes and remedies for the great economic depression which gripped the developed nations. Keynes pointed out that unemployment and economic stag— nation could be an equilibrium condition in a capitalistic economy. There are two factors which can cause such a situ- ation. (l) The investor's perception of the relationship between the cost of capital (interest rate) and the probable return to investment may make him unwilling to provide pro- ductive investments in an amount sufficient to insure full employment. (2) The demand for money for liquidity purposes is such that if the interest rate falls below some minimum level, people in the economy would rather hold cash balances than purchase securities at a low return (i.e. perceived return is too low). Either of these two conditions can create a shortage of investment capital which prevents full Employment. A continuation of the low propensity to invest would lead to idle plant capacity, greater unemployment and less consumption. This was the situation that existed during the Great Depression. Therefore, a lack of effective demand was postulated as the main factor preventing full em— PlOyment. Keynes argues that the only way to alleviate the problems was through heavy government Spending with deficit financing. Such Spending would provide additional employment 20 and foster confidence in the economic future which would en- courage private investment. This would lead to greater employment and greater income through the multiplier effect. Most develOpment economists argue that even though Keynes' analysis has considerable appeal in developing econ- omies, his solution is not directly applicable. They argue that even though low income, low employment and low invest- ment are the same conditions postulated by Keynes, his remedies do not apply in developing nations. They are in— applicable because unemployment, though extensive, is usually confined to unskilled workers. In addition excess capacity prevails only in particular industries and sectors. Because of shortages and bottlenecks elsewhere, deficit financing is most likely to result in a rise :Btth: piice level without any increase in real pu . However, some economists are now arguing that Keynesian analysis can and should be used to a much greater extent in diagnosing and treating the development problems of the poor nations. Post-Keynesian analysis is generally an extension of Keynes' teaching, and its two main proponents are Ensey Dormer and R. F. Harrod. Working separately, these two economists came up with similar economic growth models based on Keynesian analysis. Their major contribution was in viewing capital accumulation in a dual role. Investment generates income and it also increases the productive 11Ibid., p. 42. ___— 21 capacity of the economy by increasing its capital stock. Thus, Harrod and Domar were concerned with determining the conditions required for smooth growth in real income. Even though their growth model was designed for developed econ- omies, it has been widely used for forecasting growth rates and determining savings rates for income growth targets in developing nations. The model specifies that the equilibrium condition for full employment growth is 9% = % where AI represents a change in investment, S,is the marginal prOpensity to save and I/K is the prevailing capital output ratio. Of course, the above equation can be rearranged into 9% = g . This relationship states that investment must grow at some con- stant rate S/K to assure full employment equilibrium. Thus, while post-Keynesian analysis depends heavily upon Keynes' theories, it is much more oriented toward in- vestment than his emphasis on aggregate demand. The Role of Agriculture During the past several years there has been a resur- gence of interest in the agricultural sector as it affects the development process.12 This interest is probably due to the rising pressures of pOpulation on food supplies dis— cussed in Chapter I. ~__ 12See Lawrence W. Witt and Carl Eicher, (eds.), Agricul— ture in Economic Development (New York: McGraw Hill, 1965), for a number of related articles and a selected bibliography Oh the subject. 22 Johnston and Mellor have noted that the agricultural sector may contribute to economic growth in three ways. (1) It must provide adequate food supplies to a rapidly ex- panding urban population. (2) It may serve as a source of labor and capital for industry. (3) A rapidly developing agriculture, with rising incomes, may serve as a source of capital savings and increased demand to stimulate other aspects of the economy.13 Lewis and otherslu have tried to show that the agricul~ tural sector in many developing nations has unemployed or underemployed laborers who can be drawn off to industrial occupations without affecting total agricultural output. The argument contends that those remaining on the farm could then produce a surplus which might somehow be saved and in— vested in industrial projects to employ surplus farm labor. The process could be self-sustaining at least until the labor surplus is dissipated. Yet Schultz has argued rather convincingly that it is highly unlikely that agricultural labor could be withdrawn in most developing nations without reducing agricultural pro— 15 duction significantly. l3Bruce F. Johnston and John w. Mellor, "The Role of Agriculture in Economic DeveIOpment,“ American Economic Re~ 332E: Vol. 51 (September, 1961), pp. 5661593. luSee Arthur Lewis, "Development with Unlimited Supplies of Labor," The Manchester School, May, 1954; and John C. H. Beis and Gustav Ranis, Development of the Labor Surplus Econ— 9&1 (Homewood, Illinois: Richard D. Irwin, Inc., 1961). l 5T. W. Schultz, Transforming Traditional Agriculture (NEW Haven: Yale University Press, l9ofl). *“ 23 Moreover, other economists have questioned the reality of attempting to "force" saving of any agricultural surplus which might be produced. It is extremely difficult to per- suade a farm family to maintain the same low quality diet and save any agricultural surplus for investment in urban areas. There is a growing interest in the development of tra— ditional agriculture as a major step toward economic growth. / lo Recent develOpment literature reflects this concern. Most of the studies listed in footnote 16 suggest that a rapid increase in agricultural productivity is necessary early in the development process. Such an increase in productivity is largely dependent on the adoption of modern farming tech— niques. Marketing in Development The development theories discussed earlier in this chapter make little reference to the role of marketing in the develOpment process. Marketing is one of the sectors which implicitly adapts itself to the more important changes 16 The following publications and articles are a sam— pling of the literature suggesting the importance of rising agricultural production in the development process: Stephen Emke, Economics for Development (Englewood Cliffs, N.J.: Prentice Hall, 1963), Robert D. Stevens in the work cited in footnote 4; Joseph D. Coffey,"Transforming Peru's Traditional Agriculture" (unpublished Ph.D. dissertation, North Carolina State University, 1966); Lawrence W. Witt in the article c1ted in footnote 1; Raymond P. Christensen and Harold T. Yee, "The Mechanics of Agricultural Productivity and Economic Growth," Agricultural Economics Research, Vol. XVI, No. 3 (July. 19614), pp. 65-71. ‘_._~\_.- ... _d ..——._~— 24 taking place in the economy. It is assumed in such theories that marketing is a passive element of the economic system. There is little doubt that everything included in the pre- vailing development theories is important in the development process. But the question becomes, "Do such theories suffice to Operationally define the critical factors contributing to the growth process?" Perhaps development economists have not gone far enough into the details of development in order to really understand the dynamic relationships affecting economic growth. At the present time a good bit of interest is being given to the role of marketing in economic development (the AID contract supporting this thesis research is a manifes- tation of such interest). Yet until recently there was little concern for the possible effect of marketing in the growth process. Richard Holton has given several reasons for this neglect by development economists and policy planners. One reason is that they are much more interested in increasing the production of physical goods (as opposed to intangible marketing services) which are much more easily associated with a rising real standard of living. The second reason is that inefficient marketing systems in developing countries afford a dole for the otherwise unemployed. This is a pain— less way to avoid the difficulty of facing up to high unem- Ployment. A third reason is that developing nations fmequently have difficulty in evaluating the proportion of 25 the work force absorbed by and net income originating in the marketing sector as a result of its characteristic structure. There is, then, some considerable difficulty in trying to "sort out” the effect of marketing in a deveIOping economy. And finally, economists have been somehow prediSposed to ig— nore the economics of marketing and the possibility of improving real incomes by improving the distribution system.17 Holton drew some of these observations from a study of the Puerto Rican food marketing system authored jointly with J. K. Galbraith. In that study, it was found that food marketing was being performed by highly inefficient methods and institutions in Puerto Rico. By comparing the food retailing and wholesaling system as it existed in 1950 to a reasonably efficient model, it was found that the yearly 18 b cost of food could be reduced by more than $15 million y improving retail and wholesale distribution techniques and institutions. Peter Drucker and J. C. Abbott are two other individ- uals who have stressed the need for a more thorough study 19 Of the role of marketing in develOpment. Drucker has ___; 17Richard H. Holton, "Marketing Structure and Economic Development," Quarterly Journal of Economics, Vol. 67 (August. 1953). pp. 3&4-361. 18Richard H. Holton and John K. Galbraith, Marketing Eiilglencxin Puerto Rico (Cambridge, Mass.: Harvard Univer- sity Press, 1955), 19Peter F. Drucker, "Marketing and Economic Develop— ment," Journal of Marketing, Vol. 22 (January, 1958): PP. 252~259. 26 asserted that marketing is the most effective engine of eco— nomic development. Among other things he emphasizes the importance of the distribution system in training and devel- Oping entrepreneurs and managers so important in the develop- ment process. While Drucker concentrated on the importance of mar- keting in general, Abbott has been particularly concerned with agricultural marketing. In 1958 he published through FAO a marketing guide for developing nations in which he stressed the importance of effective marketing systems at all stages of development.20 During 1962 he published an article in which he noted that the marketing system can have a significant impact on the transmission of incentives to agricultural producers. He listed three basic conditions essential for agricultural development. (1) Prices for agricultural products must be stable at a renumerative level. (i.e. farmers must be fairly certain that prices at harvest time will bear some reasonable relation to pro- duction costs.) (2) Adequate marketing facilities must be available. The market should be organized and coordinated in such a way as to reflect price incentives warranted by Sprly and demand conditions back to producers. (3) There should be a satisfactory system of land tenure. x 2OJ C Abbott Marketing Problems and Improvement . . 5 . £32§£2fl§, Marketing Guide No. 1 (Rome: Food and Agricultural Organization, 1958)- 21J. C. Abbott, "The Role of Marketing in the Develop- nmnt of Backward Agricultural Economies,' Journal Of Farm W, Vol. XLIV (May, 1962), pp. 349-362- .— _ 7 7 .m’. fit _A‘qu ‘11; _ 27 George Mehren in attempting to find out why in all economies the agricultural production and distribution sys- tem is last and least developed, noted many of the same difficulties mentioned by Abbott. He listed several other reasons for the slow development of the agricultural produc- tion and the marketing system. One important reason cited was that production and distribution firms are usually small, fragmented, and multiproduct enterprises. The implication is that such firms are not able to operate at sufficient scale to accumulate capital or achieve efficient levels of operation. A second reason is that there is little induce— ment or capacity for such firms to adopt modern financing, storage, transportation and communication facilities.22 Reed Moyer in an extensive review of the literature in the field has noted that marketing can contribute to development in a number of ways. The following list sum- marizes his conclusions on the function of marketing in economic develOpment: l. The marketing system can reduce risks by providing adequate information flows. 2. It can provide the organizational frame— work necessary in coordinating production and consumption and in rationing the supply of commodities to consumers in response to their expressed needs and wants. k 22George L. Mehren, "Market Organization and Economic [Evelopment, Journal of Farm Economics, Vol. 416 (December, 1959), pp. 1307—1315. - -_ a": .1; :__ __.-‘..e‘lfi.m—_.o4--- 28 3. Marketing institutions can be a major source of entrepreneurial talent and capital for other sectors of the economy. A. The marketing system may generate pecuniary and technological internal and external econ- omies for producing firms as a result of the extension of their markets. 5. The marketing system may draw subsistence producers into the exchange economy. 6. Marketing institutions can increase the elas- ticities of supply and demand by making available new or improved products which buyers may find desirable. 7. Marketing institutions can lower consumer costs by improving distribution efficiency through technological innovation, more intensive re- source use and less spoilage. 8. The marketing system can reduce transaction and exchange costs between producers and consumers.23 The LUErature discussed above suggests that marketing holds an important place in the economic development process, If one examines closely the conclusions of a number of writers with respect to marketing, he discovers that a _.__ _ 23Reed Moyer, Marketing in Economic Development, Occa- sional Paper No. 1 (East Lansing: Institute for Interna- tional Business Studies, Michigan State University, 1965), pp. 7—19- 29 common thread appears. Further research should be designed to define more clearly the Specific ways in which marketing can be used as a lead element in economic development. More— over, conclusions in the latest publications by Mehren, Abbott and Holton on the subject suggest that significant production improvements must be accompanied by marketing im- provements and vice versa. It appears that improvements in the marketing sector at times can serve as a catalyst in bringing about improvements in other marketing firms and also in producing and consuming units.2u Later chapters in this thesis discuss this possibility in the light of agricultural marketing developments in Puerto Rico. The National Market The conclusions mentioned above are basically consis— tant with those of Walter Rostow and Lauchlin Currie. Both of these economists have proposed a kind of development program which would permit a two pronged attack on production and marketing improvements. Currie asserts that developing nations under the in- fluence of economic development theorists have placed too nmch emphasis on GNP growth rates, production and invest~ nmnt. As a result consumption has lost its place as the goal of production. He therefore suggests a development 2“See George L. Mehren and J. C. Abbott in the works already cited. Also Norman R. Collins and Richard H. Holton, l'Programming Changes in Marketing in Planned Economic Devel- Opment, " Kyklos, Vol. 16 (January, 1963), pp. 123- 134. 30 plan which would place primary emphasis on increased consump— tion (particularly of the low income underemployed). He stresses the value of economic theory in his plan and is eSpecially convinced that the Keynsian analysis of the lack of effective demand is useful. Basically, he argues that economic efficiency considerations and traditional develop- ment theory are necessary but not sufficient to break through the vicious circle of poverty in develOping nations. The approach must also include considerations in income distri— bution or, as he prefers, relative consumption gains arising from income re—distribution. Currie has suggested that those countries interested in real economic develOpment should reformulate their devel- Opment objectives, taking into consideration the importance of income distribution as well as aggregate gross income. He defines a program designed to assure the elements of a minimum tolerable standard of living for, say, the poorer half of the population in terms of the basic necessities of food, clothing, housing, health, primary education, miscellaneous goods, and amusements. Currie argues that most Latin American nations fit in with the type of stagnation analysis that was applicable to Western EurOpe and the United States in the thirties, the Keynesian analysis of lack of effective demand, and un-used _— 25Lauchlin Currie, Accelerating Development: The Necessity and the Means (New York: McGraw Hill: 1955): P- 20. 31 capacity. He contends that the World War II experience of great increases in output when all resources were bent toward common goals was quite a revolution. With little or no immediate addition to capital, output in the United States, stated in 1954 dollars, increased from $186 billion 4.25 in 1938 to over $320 billion in 194 The increase in output came from intensive use of existing facilities and labor. Thus, he suggests mobilizing the citizenry as well as resources for a domestic war. Finally, he proposes that the experiences of EurOpean recovery after the Second World War teach useful lessons to developing nations on some effective ways to utilize injections of technical assistance and capital funds. Of the many problems in developing nations, Currie sug- gests that the lack of effective demand is one of the biggest. 1m implies that efforts to improve the real incomes of low income families both rural and urban, coupled with the avail- ability of basic consumer items, may permit developing nations to break out of the vicious circle of poverty and low effective demand. Walter Rostow's national market concept is closely related to this idea. Fundamentally, Rostow views the devel— opment problem in most Latin American nations as depending on the terms of trade between their own industrial and agricultural sectors. 26Ibid., p. 81 32 The prices paid in the countryside for manufactured goods in these developing nations are too high, while the prices paid by the cities for the output of rural areas and the total resources allocated 27 from the cities for rural development are too low. He suggests that the operational task of development is "to break down these structural distortions, to produce a self-reinforcing agricultural and industrial expansion, and to create truly national markets."28 There are four basic tasks involved in creating such national markets: (1) A build up in agricultural produc- tivity; (2) a revolution in the marketing of agricultural products; (3) a shift of industry to the production of simple agricultural equipment and consumer goods for the mass market and (4) a revolution in marketing methods for cheap manufactured goods, especially in rural areas.29 The implications of the conclusions of both Rostow and Currie are that the necessary build up in agricultural productivity is drastically affected by the availability and adoption of non—farm inputs and by the structure and per- formance of agricultural product markets. Poorly coordinated and inefficient marketing channels may therefore impede the agricultural development process. At the same time the capacity and willingness of farmers to buy non-farm in- Puts may be closely related to the profit incentives trans— nutted to the producer. 27Walter W. Rostow, "How to Make a National Market," Dapirtment of State Press Release, No. 498, October 1, 1963, p. . 28Ibid. 291b1d., p. 5. 33 Much of the discussion in Chapter VI is directed toward an examination of the characteristics of innovators. Con— sequently a brief review of the literature of innovation is included there. It should be made clear, however, that a study of the factors determining innovation cannot be divorced from a study of the causes of agricultural produc- tivity improvements. In fact, as several authors in the pre- ceding literature review have noted, the wideSpread adoption of production innovations is necessary before productivity can be significantly improved. The following chapter builds upon previous literature in order to establish a theoretical and conceptual framework for the remainder of the thesis. It also includes a discussion of a basic hypothesis under— lying the research. CHAPTER III MARKET COORDINATION IN ECONOMIC DEVELOPMENT Introduction The preceding chapter provided a review of some of the existing theory and conclusions regarding economic develOp- ment. The chapter included a review of some of the major economic theories of development beginning with Adam Smith together with recent contributions. The chapter also re- viewed the literature concerned with the role of marketing in economic development. The purpose of this chapter is to provide the concep- tual framework which will relate the remainder of the thesis to economic develOpment theory. In a sense it is a proposal for adding a new and somewhat different dimension to economic development theory and policy. The chapter embarks from the previously reviewed literature on develOpment. It describes the role of exchange in the development process. The perfect market is then discussed as a possible performance norm for a bargained exchange economy. The next step is to examine the necessity of a dynamic set of performance norms since economic growth is a process involving a never ending series Of approximate equilibria. Next, the discussion moves to an examination of evidence in several developing nations 34 35 which indicates poor economic performance (in a dynamic sense) in atomistically competitive markets. Finally, the chapter reviews a series of common general policy goals in developing nations,specific market performance goals, and potential marketing policy measures to achieve those goals. Prevailing Conditions in Developing Nations A review of current economic data and research studies in developing nations suggests that underdevelopment may be generally characterized by the existence of several common conditions. The following discussion is not intended to be an exhaustive list of all such factors. Rather it is a list of some of the important conditions bearing on the marketing system. Atomistic competition is present in most aSpects of commodity production and marketing in develOping nations. On the other hand, factor ownership is frequently concen- trated in the hands of relatively few. And in some cases large land holdings create a feudalistic economic structure. A heavy concentration of capital holdings in the hands of a few wealthy families is also a common occurrence. Neverthe- less, the domestic food production and distribution sector are usually made up of large numbers of business units com- peting atomistically. Low per capita incomes are a characteristic of all de— V91Oping nations by definition. In fact, the mOSt frequently 36 expressed goal of economic growth is to increase per capita incomes. Low nutritional levels in the face of rapid population growth and low levels of food production are a reality in today's developing nations. In many cases malnutrition and starvation already exist on a wide scale while in other nations the reality of food shortages is postponed only by nutritionally deficient but quantitatively sufficient diets. Low-absolute levels of labor productivity are evident in virtually all underdeveloped nations. Some argue that the marginal productivity of some workers is zero, especially in the agriculture and trade sectors. If such were the case those workers could be withdrawn from their jobs without affecting total output. The issue of zero marginal produc- tivity is currently unsettled, but most economists agree that low labor productivity is a wideSpread condition in underdevelopment. Underemployment of economic resources is a frequently cited condition in develOping nations. Here the reference is to all factors of production including land, labor, caPital, and management. The argument states that for a Variety of reasons entrepreneurs do not utilize an optimum Combination of resources in production of goods and services, i.e. existing factors of production could be re—allocated 37 to increase total output. Schultz,3O Welsch,31 and Coffey32 have argued (on the basis of research in various aspects of traditional agriculture in four different countries) that there was relatively little or no inefficiency in the allo- cation of available resources. Their explanation for low productivity was a lack of availability and use of more pro- ductive techniques. However, these studies were only meant to examine resource allocation within the agricultural sector. They did not consider the possibility of total resource allo— cation in the economy. The possibility still exists that certain resources (capital) should be transferred into agri— culture with labor being removed to other, more productive uses. Capital deficiencies are regarded by most economists as the single most critical problem in the underdeveloped world. Adam Smith stressed the importance of saving for investment in improved production techniques. And the em- phasis on capital has continued through current writings on development economics. In Chapter £2 the review of economic development theory reflects the historical emphasis on capital formation. The reality of existing capital shortages in developing nations coupled with the existence of atomistic _¥ 3OSchu1tz, pa§§i_m_. 31Delane E. Welsch, ”The Rice Industry in the Abakaliki Area of Eastern Nigeria, 1964” (unpublished Ph.D. disserta- tion, Dept. of Agricultural Economics, Michigan State Univer— sity, 1964). 32Coffey, passim- . ...-- ,_-‘_~__-‘ -.....— _MJ 38 competition suggests that capital formation in the private sector is inhibited by a low level of equity capital pre- vailing in business units and the resultant low absolute returns to each individual firm. Capital accumulation for investment in productive innovations is difficult for such business units because of the necessity of using a high per- centage of the low absolute returns for family survival. For the typical businessman capital savings for a Specific investment is slow and seemingly hopeless. Unused productive capacity is frequently a problem in Spite of the previously mentioned shortage of equity capital hideveknfing nations. The situation arises as a result of a basic malallocation of resources. Hence, if an inordinate amount of capital (in relation to other industries) has been allocated to the production of a given commodity, then the capital equipment will not be used to its capacity since consumer demand will not be sufficient. A preoccupation with large capital—intensive industrial develOpment projects has often resulted in a poor allocation of productive resources in the light of effective consumer demand. Low literacy levels are a common characteristic of develOping nations. It should be noted that there are a few exceptions, like Argentina, but generally illiteracy is a major problem in underdeveloped nations. Consequently, educational improvement is usually a major thrust in devel- opment programs. 39 The Vicious Circle of Low Productivity Throughout the underdevelOped world, interest is cur- rently focused on the necessity of bringing about greater productivity through a variety of development programs. Usually the primary goal (if one exists) is to bring about an increase in capital saving and encourage the investment of that capital in technological (or even organizational) innovations which will lead to a greater output per unit of inputs. Simply stated, the goal is greater efficiency of resource use through the application of modern techniques. Schultz has argued rather convincingly that there is rela— tively little hope of achieving productivity gains in tradi- tional agriculture through more efficient combinations of existing resources.33 He concludes: "The key to growth is in acquiring and using effectively some modern . . . factors II 34 of production. But whether or not possibilities exist for a more efficient combination of existing resources, few develOpment economists would disagree with Schultz con— cerning the necessity of effective utilization of modern techniques in developing nations. Given the necessity of technological innovation and in view of existing conditions in developing nations as Previously described, what are the critical factors inhib- iting the diffusion of more productive techniques? 34 33Schultz. Ibid., p. 176. 4O Thoughtful researchers have suggested a number of reasons. Some of those frequently mentioned in various combinations are: low level of education and training, poor communica- tions, inadequate transportation, insufficient saving and 35U low achievement motivation. ndoubtedly each of these fac- tors, in addition to many more, play some role in the pre- vention of technological innovation. It is, therefore, not the purpose here to disclaim the importance of these factors or to suggest entirely new ones. Rather the purpose is to explain within the framework of the marketing system the ways in which those factors interact to inhibit the process of innovation. Basically the argument states that as a result of ex— isting conditions (especially small scale atomistic competi— tion, insufficient education and training and inadequate com— munications) businessmen find themselves trapped in a position of not being able to improve productivity through technological innovations. The difficulty is not an inherent 35For a discussion of the importance of improved educa- tion and training, see Schultz, Chapter 12. The importance of communications is pointed out in Wilbur Schramm, Mass Media apd National Development: The Role of Information in the Egyeloping Countries (Stanford, California: Stanford Univer— sity Press, 1964). The effect of transportation development on economic growth is emphasized in Charles P. Kindleberger, Egonomic Development, 2nd edition (New York: McGraw-Hill Book Co., 1958), Chapter 9. The critical importance of saving was noted by W. A. Lewis in "Economic Development with Un- limited Supplies of Labour," The Manchester School,May, 1954, pp. 139-191. Achievement motivation as a factor in economic development has been studied intensively by David McClelland. See The Achieving Society (Princeton, New Jersey: Van Nostrand Co., 1961). —w-- 41 lack of desire for improving productivity, but rather a low level of individual initiative attributable to low knowledge levels, small incomes, and an absence of effective economic incentives. The individual businessman is unable to see any practical or worthwhile way of improving his well—being through saving and investing in technological innovations. The remainder of this thesis focuses on the role of an effectively coordinated, development oriented marketing system in providing direction and innovative stimulation to the develOping economy. The thesis examines several pos— sible effects of such a marketing system on the develOpment process. The major ones are: (a) more efficient use of resources committed to distribution, (b) more effective com— munication of economic incentives, and (c) the market's effect as a catalyst in producing the kinds of innovation and change in production, distribution and consumption which are compatable with the goal of economic development. In another sense, the thesis is an examination of the hypothesis that atomistic competition as it exists in most developing nations is a hindrance rather than a help in the develOpment process. Specifically, the hypothesis states that atomistic competition does not automatically contribute to economic growth by encouraged productivity improvements and more effective market coordination. The atomistically competitive market price system without effective market exchange and property rules or without some external direc- tion and control should not be expected to lead automatically 42 to rising productivity and better market coordination. The needed adjustments may be fostered through competitive changes or induced by government policy. Chapter 5 examines data on agricultural market coor- dination in Puerto Rico in order to evaluate the above hypoth— esis and also to illustrate Specific policy measures utilized in achieving improvements in food marketing. Finally, Chapter 6 utilizes data from a farm survey to test a series of hypotheses related to the more general hypothesis listed above. The purpose is to consider the interaction of economic, demographic and attitudinal vari— ables as they affect the market coordination process. The remainder of this chapter examines the conceptual, theoretical and policy implications bearing on the market coordination process. The Role of Exchange in Society In order to evaluate the effect of the market on economic develOpment, it is first necessary to view economic exchange as a part of the larger social setting. One of the critical factors bearing upon exchange is the prevailing type of political and social organization in a country. The nature of customs, habits and mores are important deter- ndnants of exchange behavior. By the same token the type of political system may vary from dictatorship to socialism 0r capitalism with considerable effect on the nature and Operation of the exchange system. 43 There are at least three ways of organizing for eco- nomic exchange in a society. They are: (l) bargained ex— change, (2) status exchange, and (3) administrative 36 exchange. Any of the three may be utilized to some extent in combination with any form of political organization. In most societies all three types of exchange are employed at different points in the economy. The bargained exchange system is one in which "trans- actions are governed primarily by a set of impersonal rules within which exchange rates are established by bar— gaining processes."37 In such a system individual enter- prises are permitted freedom in bargaining for exchange of commodities among themselves. This type of system is most frequently associated with a democratic form of political organization but is used to some extent in practically all societies. In the status exchange system, ”transactions are governed primarily through the prescribed roles associated with social position. Exchange rates tend to be prescribed n38 or fixed by custom. In this type of exchange system Social roles and customs become extremely important because they govern the exchange of economic goods. This type of _E 36A. Allen Schmid and James D. Shaffer, "Marketing in Social PerSpective," Aggicultural Market Analysis, ed. A Vernon L. Sorenson (East Lansing Michigan: Michigan State University Business Studies, 19 4). 37Ibid., p. 23. 38Ibid., p. 20. 44 exchange system is frequently associated with more primitive societies though variations of the principle Operate in most societies today. "To each according to his need and from each according to his ability, if voluntarily accepted by the members of society rather than being enforced by author— ity, would be a system of status."39 An administrative exchange system is one in which transactions are governed by those with political authority. In this case political authority carries along with it the right to determine how resources and products should be dis— tributed in an economy or some sub—part of an economy. Most frequently the dictatorship, socialism or some other form of centrally controlled political system is associated with this type of exchange system. But practically all societies have some transactions which are governed by administrative decree. This is true of so—called democratic societies as well as totalitarian. Regardless of the combination of various types of ex— change systems existing in a society, the efficient func- tioning of some kind of exchange system is necessary to allo- cate factors of production to alternative ummsand to allocate final consumption goods in payment for those factors. The exchange system is therefore the allocating mechanism of all economic goods. Indeed, as Kenneth Boulding has said, the ___; 391bid., p. 21. -_——-- 45 "study of exchange comprises nine tenths of the economists dominion.”O The following sections will examine the role of market coordination and the relationship of market coor- dination to both static and dynamic economic theory. The basic type of exchange system.is ”bargained" since this is the assumption of traditional capitalistic economic theory. Market Coordination in a Bargained Exchange System The bargained exchange system was defined earlier as one in which exchange is accomplished through an impersonal set of rules where a bargaining process establishes exchange rates. The working of the price mechanism to coordinate production, marketing and consumption decisions is described below. In any society basic decisions must be made regarding who will produce what products and where and in what form they will be consumed. Those decisions may be made by rela- tively few individuals in positions of political power (ad- ministrative exchange) or by a large number of individuals (bargained and status exchange). On the bargained and status exchange systems where large numbers of independent decisions are involved there must be some way of coordinating and in— tegrating the decisions if confusion and chaos are to be avoided. In the status exchange system, social roles, customs and habits provide the necessary structure and coordination. uoKenneth Boulding, Economic Analysis (New York:' Harper & Row, 1941), pp. 3-83 46 In the bargained exchange system, individual decisions to produce, buy or sell are coordinated for all participants by the market price system. The marketing system brings to— gether individual buyers and sellers to provide them the Opportunity to bargain and exchange commodities while seeking the greatest possible returns. If an individual finds prices for his commodities so low that they place his returns below returns available in the production Of alternative commodi— ties, he will change Over to the production of other items. If enough producers follow suit, the quantity of that product available in the market will decline, and buyers will grad— ually bid the price up in order to fill demands. But if prices go above a certain level, they will make alternative purchases. In this way supply and demand determine product prices in the market place which in turn determine the allo— cation Of productive resources. The market, therefore, theoretically coordinates itself. Yet in a practical sense it is almost always necessary to have an outside force es- tablish and enforce basic rules and regulations in the mar- ket in order to provide structure and minimize dishonesty among traders. The important fact is that the marketing System through flexible prices coordinates an immense number Of independent decisions which ultimately determine how available resources will be utilized to satisfy the society's needs and wants at any point in time. If the marketing and pricing mechanisms are not working effectively, then coordination Of the system is inhibited, 47 and individuals depending on the system may make erroneous production decisions. The result will be a poor allocation of existing resources in the light of consumer demands. Problems frequently arise in this respect as a result of con- tinuously changing attitudes,iastes and desires in a devel— Oping economy. The price system is frequently slow or in- effective in communicating those changes to individual producers, eSpecially if there are time lags associated with long production cycles. Moreover, we are talking about an extremely complicated and continuous process in which inter- actions in the market are continually altering the attitudes and perceptions of both producers and consumers. The market price system may have some difficulty in transmitting the effect and magnitude of such changes. In summary, market coordination may be defined as the process in an exchange system whereby producers, distribu— tors and consumers interact to exchange relevant market information, establish conditions Of exchange and accomplish physical and legal transfer of economic goods. Through this coordination of independent participants using the informa- tion provided by flexible product prices, basic resource allocation decisions are made independently by producers, distributors and consumers to determine what will be produced by Whom plus where, when, and in what form the products will be delivered. 48 Market Coordination in Economic Theory A good part Of conventional micro-economic theory is concerned with a framework for decision-making at the indi— vidual firm and family level in markets which are regulated by supply and demands. It is not the purpose of this chapter to review that part of micro~economic theory. This thesis is more concerned with the aggregative aspects of independ- ent firm decisions as they affect coordination in the market. However, it is worthwhile to review some of the major aSpects of the theory in order to demonstrate more clearly the rela- tionship between a study Of market coordination and economic theory. Perfect competition, according to micro—economic theory, exists in an economy when the following conditions are ful- filled: (1) each buyer or seller in the economy is so small in relation to the entire market in which he Operates that he is not able to influence the prices of products he buys or sells, (2) there are no artificial restrictions on demands, supplies or prices, (3) goods, services andresources are perfectly mobile in the economy, and (4) all economic units possess perfect knowledge of the economy.”1 Pure competition defines a situation where the fourth condition does not hold. It can be shown that in a perfectly competitive economy Where all firms seek to maximize their individual profits 1Richard H. Leftwich, The Price System and Resource Allggggiog (New York: Holt, Rinehart and Winston, 1960), 99- 23-25. 49 using marginal analysis, the market will be perfectly co— ordinated and resources will be perfectly allocated to produce a maximum of economic goods with available re— sources. One should hasten to point out that economists (in— cluding Adam Smith and other classicals plus the current Chicago school) have never suggested that such an ideal situ— ation could exist in reality. The concept of a perfect mar— ket has been used as an abstract ideal for heuristic purposes in demonstrating the workings and benefits of marginal analy- sis143 in a market price economy. In teaching economic theory, the assumptions Of perfect competition are gradually relaxed to demonstrate the use of economic analysis under less rigid assumptions. In fact, economists not particularly concerned about the total allocation of resources in society but with the inter—firm allocation of resources, frequently use less restrictive definitions for demonstrating micro—economic theory. The relaxation of the conditions Of perfect compe— tition to reflect a more realistic competitive system creates some difficulties in evaluating the efficiency of resource allocation. The problem has received quite a bit of interest through imperfect competition, workable competition and ___ 42 A. P. Lerner has summarized the marginal conditions leading to such a perfect allocation. See Lerner, The Eco- flgmics Of_ContrOl (New York: The Macmillan Co., 1949) pp, 75_77. 43The term marginal analysis is used to describe an economic decision making process whereby an individual business- man continually seeks tO equate returns and costs at the mar— Sin with respect to all factors of production. SO performance studies. But there is still no generally accepted theory of resource allocation under imperfect com- petition. Historically, the perfect competition model has been used by economists for teaching and even for policy consider— ations on an individual firm basis. However, in policy matters concerning the entire economy, economists have been careful to note that perfect competition does not exist but that conditions Of pure competition are sufficient to provide a tendency toward Optimum allocation of resources.AM But even pure competition is difficult to achieve. The work of Chamberline and Robinson among others on monOpOlistic com- petition reflects the concern for this possibility. Never- theless, many economists believe that the best interest Of society will be served by making competition in the economy as near perfect as possible. There is a difference of Opinion regarding the his- torical evidence on this point. Peterson argues that the followers Of Chamberlin "fell into the bad habit Of equating competition with pure competition, of confusing theoretical "85 benchmarks with policy norms He cites evidence to support the conclusion that classical economists (especially ___ 44 For an interesting discussion on the position of classical economists regarding this matter see Shorey Pat- terson, "Antitrust and the Classic Model," The American lflgmomic Review, Vol. XLIII (March, 1957), pp. 60-78. Re- printed in Richard B. Heflebower and George W. Stacking, eds), Readings in Industrial Organization and Public Policy Homewood, 111.: Richard G. Irwin, Inc., 1958),pp. 316—333. ASIbid., p. 332. 51 Marshall and John B. Clark) were well aware Of the Short- comings Of perfect competition as a policy norm. He is con- vinced that Schumpeter, Chamberlin, Galbraith and others misconstrued history and criticized earlier economists for utilizing the static model of perfect competition as a policy norm when in fact the classicals held no such views. Ac— cording tO Peterson earlier economists did attempt to go beyond the static model to consider the importance of change and economic growth on competition. Regarding John M. Clark's concept of workable competition he says: In a sense he bridged the periods by paralleling the exact modern idea of pure competition with an equally sophisticated conception of the realizable and ac- ceptable working of markets, and thus formulated with added fullness and precision a basis Of policy toward which hi6 father and his father's contemporaries were moving. Nevertheless, it is difficult to dispute the point that the general feeling with respect to economic policy in the United States has been that more competition is usually bet— ter than less and that many policy programs have been sought to move us toward the perfectly competitive ideal. George Stigler implies that perfect competition in contrast to work- able competition is still an effective policy norm.u7 As a result there has been somewhat of a preoccupation with competition without sufficient concern for its effect ___. u6lbid., p. 333. 2”George J. Stigler, "Workable Competition, Comments," Reprinted from American Economic Review, May, 1956 in Harvey J. Levin, (ed.), Business Organization and Public Policy (New York: Holt, Rinehart, and Winston, 1963), pp. 214126. 52 on the economic goals of society (especially the major goal of increasing output). The work Of J. M. Clark, Bain, and others is an attempt to integrate earlier thoughts on the subject with current observations in order to bring into con- sideration the dynamic aSpects of competition and their ef— fect on the performance of the economic system. The effort of contemporary economists to improve economic theory has centered around a desire to make the theory dynamic. J. M. Clark has characterized his work as an "effort to reduce or bridge the gap between theory and reality; and in particular the gap between theories of cost- price equilibrium and theories of production, growth, and develOpment."248 The concern of Clark and other recent econ- omists has been on producing an acceptable alteration of static perfect competition theory and equally static monopo- listic competition theory in order to consider for policy purposes the dynamic and "process" aspects Of a growing economy. Ackley has defined such a dynamic theory as consisting Of three steps. The first step is "to put (the effects Of change and uncertainty) back into static theory.”9 The second step is to understand and describe the sequence of 248J. M. Clark, "Competition: Static Models and Dynamic ASpects," Heflebower and Stocking, p. 244. ugGardner Ackley in a discussion of J. M. Clark, "Com— petition: Static Models and Dynamic ASpects," Ibid., p. 259. 53 events leading toward equilibrium and to take into account the fact that the economic system "never reaches one equi— librium before that equilibrium is replaced by another."50 The third step in constructing a dynamic theory is the one with which Clark is most concerned. In fact, Clark probably would not deny that static theory, with certain modifica— tions for taking into account the tendencies toward equi— librium, can be made dynamic in the definition implied in the first two steps. But the kind of dynamics with which traditional static theory cannot deal is where processes of change are seen at least in part to be irreversible, self—generative, and self-determining. . Thus (dynamic theory) would attempt to explain, at least in part, such things as the state Of tech- nology, the number Of sellers, the evolution of buyers tastes, the nature of the market institutions, the attitudes of sellers, . . . etc."51 Real progress in formulating such a dynamic theory has been slow. More Often than not, as critics point out, the results Of such efforts have been the formulation of a set of conditions describing "workable competition" or ”accept— able performance" for purposes of policy guidance in a given industry. Critics argue that such policy guides are Simply the result of the application of static theory and personal JUdgment on the part Of the researcher. In Spite of the shortComings Of the dynamic theory approach to economic policy, it appears that for develOping nations such an approach is the most realistic and rewarding. —_ 5OIbid., p. 260 51Ihid. 54 This is due primarily to the fact that rapid changes in all aSpects of life are occurring and must continue to occur at an accelerated pace if economic development is to be achieved. The static theory of perfect competition cannot be made to deal with such magnitudes of change. DevelOping economies cannot afford the luxury Of falling back on the neat and completely determinate theory of static analysis for policy direction. They must learn to deal with the in- determinatedness of economic life as it really exists and formulate economic policy accordingly if they are to make adequate progress toward the goal Of accelerating growth. With this discussion relating economic theory, govern- ment policy, and market coordination, we turn to the examination of some examples of the impact of atomistically competitive markets on the development process. Atomistic Competition and Economic Growth Several years ago Sol Tax made an intensive study Of an isolated village in Guatemala. Being an anthrOpOlogist, he examined several aSpectS of the lives of the peOple. He found that with respect to the economic system of the village and surrounding region, there was considerable specialization and exchange. He also found that the market place could be 52 "characteriZEd as perfectly competitive insofar as it tends to be (a) atomistic, (b) Open, (c) free, and (d) based B; . 52A more accurate term might be "purely competitive," Since there is no indication that perfect information was available to all traders and producers. 55 on rational behavior."53 In this "purely competitive" system he found that living standards were extremely low. The people were only able to produce the basic necessities to maintain life. Moreover, he found that in Spite Of in- creasing Specialization and exchange, the economy had been stagnant for some time at this low level Of economic life. Tax was disturbed by what he saw. He asked the question: "Why does not the fact that everybody works hard for himself alone, and seeks to maximize his Own rewards, have the effect Of creating wealth for all?" Pure competition, which is frequently posited as a stimulus to efficient allocation Of resources and economic growth, seemed to prevail in the economy, but there were no evidences of economic advancement. In answer to his own question, Tax concluded: "what seems to be lacking in Guatemala is the beginning of the accumula- tion Of technical knowledge that eventually results in improvement in the material standards of life."55 He was completely convinced that the absence of an expansion of technological knowledge was the primary factor preventing economic expansion. His conclusion on the topic is inter- esting. If economists had been living in western Guatemala the past two hundred years, they could not have credited to free competition the glory that progress in technology has deserved. 6 53Sol Tax, Penny Capitalism (Chicago: The University Of Chicago Press, 1963), p. 15- 541bid., p. 28 55Ibid. 56Ihid., p. 29. 56 Even though Tax‘s statement is somewhat strong, his point seems valid. Advancing technology is a critical factor if greater productivity and economic growth are to be achieved. An interesting point which he failed to consider is the possible adverse effect Of atomistic competition on the Spread of new techniques of production. An anthrOpO- logical study in Southern Italy does give some indication that small scale atomistic competition tends to create pessi- mism and a complete lack of trust for the unknown and even for one's fellow man. Edward Banfield spent nine months studying the culture and economy Of Montegrano, an extremely impoverished village in Southern Italy. His description of the economy was not as thorough as the one given by Tax for his Guatemala village, but it is Obvious that a considerable degree of specialization and exchange existed. He also made it clear that the peOple lived just at the level of subsistence. He too found that atomistic competition was the rule, and that it was accompanied by a very strong feeling of self- preservation. The rule prevailing in all social and economic relationshi s was to "maximize the material Short-run advan— p ) tage of the nuclear family (the most prevalent form of 'business organization), assume that all others will do like~ wise."57 He hypothesized that the keeping of this rule M 57Edward C. Banfield, The Moral Basis of a Backward §2§£§Ey (Chicago: The Free Press, 1958), p. 85. 57 leads to a complete lack of COOperation among the people in achieving social improvements. It was an extreme application of the hedonistic principle which in Montegrano seemed to result in a total abasence of a Spirit Of OOOperation for mutual improvement. "58 The probable factors leading to "amoral familism are not discussed by Banfield. However, his findings suggest that many generations of atomistic competition and poverty with little advance in technical knowledge resulted (perhaps justifiably so) in the destruction Of any real hope for the individual to improve his position through new and risky methods or cooperative ventures. Banfield describes the peasant: ”Getting ahead" and "making a good figure" are two Of the central themes of the peasant's existence. But he sees that no matter how hard he works he can never get ahead. Other people can use their labor to advantage, but not he.59 This conclusion was supported by the research results. Out of 32C peasants who were given thematic apperception tests, only Sixteen described a situation where a family was able to "prosper by thrift or enterprise, and even in these cases the success was not great enough to raise it out of the peasant class."6O Banfield concluded that "amoral familism” was the pri— mary factor preventing economic development in Montegrano. . 58This is the term Banfield uses to describe the pre- Vlously mentioned social and economic behavior. 591hid., p. 65. 6OIbid-, pp- 65—66. 58 He generalized to other developing nations: Lack of such association (i.e. political and cor- porate) is a very important limiting factor in the way Of economic development in most Of the world. Except as people can create and maintain corporate organization, they cannot have a modern economy. TO put the matter positively: the higher the level of living to 8e attained, the greater the need for organization. 1 Cyril Belshaw observed peasant markets in Fiji and New Guinea and concluded that agricultural producers there were emerging on the foundation of specialized production with little reference to marketing. There were large numbers of traders competing atomistically: The large numbers, the strength of the competition, the relative weakness of the prestatory links which Should create monopolistic frictions, combine to keep capital accumulation to the minimum. This in turn limits the internal growth dynamic Of the system.62 He noted that for the situation to improve, several condi- tions seemed to be necessary. "One would be for a reduction in numbers Of traders relative to the volume of trade, giving a trader a chance to achieve economies Of scale."63 He mentions that "advantages to the alert can accrue through the sudden widening of the tranSportation network."64 Finally, he points to a limitation of market activities due to the "absence or deficiency of communication institutions."65 61lhid., p. 7. 2Cyril S. Belshaw, Traditional Exchange and Modern garkgts (Englewood Cllffs, N.J.: Prentice-Hall, Inc., 1965), 63 64 65 Ibid. Ibid. Ibid. 59 Thus Belshaw noted that in Fiji and New Guinea, the economic development process appeared to be hindered by excessive numbers Of very small traders competing in a market with in— adequage tranSportation services and poor communications. He diagnosed the difficulty as too much peasant competition in the face of extremely imperfect markets. A diagnosis similar to the ones noted by Tax in Guatemala and Banfield in Southern Italy. A common thread runs through these research studies. Each points to a market exchange system where economic growth is directly inhibited by small scale atomistic competition or by factors directly related to atomistic competition. Conditions in the production and distribution of fruits and vegetables in Puerto Rico suggest that a similar Situation has existed there for a number Of years. Small scale compe- tition and a lack of organization in the markets has resulted in little use of available technologies due to a high degree of uncertainty and a prevailing pessimistic attitude toward "getting ahead" through individual initiative. The analysis in Chapter 5 will further discuss the situation. In light Of the foregoing discussion regarding the necessity Of dynamic policy norms and the possibility that atomistic competition in some cases may inhibit the develOp- ment process, it is important to look now at the possible implications for economic policy goals and measures. The following section examines some general and Specific policy _s 60 goals for developing nations and suggests several classes Of market policy measures compatible with those goals. Economic Policye—Values, Goals and Programs It was pointed out earlier that a given society might utilize various combinations of political, social and ecoe nomic organization. The particular combination in use is determined historically by a wide range of factors not the least of which are the values and beliefs held by the people Of the society. Within the framework Of any political economy there are basic goals or Objectives. Whether they are well defined and consistent or fragmentary and inconsistent, they compose the structure on which the political system depends. It is a well known fact that, regardless Of the political and economic organization, if the perceived goals of the politi- cal group in power are not in harmony with the values and goals of the peOple, pressures will be brought to bear in an attempt (through revolution or orderly political processes) to effect a change in leadership. On the other hand, the feasibility of achieving a re-direction of govern- ment policy goals is determined by the power (including political, economic and military power) of those in control. Moreover, "the determination Of people's values is not an ;.66 especially welledeveloped science and because of M 66Dale E. Hathaway, Government and Agriculture (New York: The Macmillan Co., 1963), p. 11. _ - -- fl -M " ,. ‘ A“ .. M..«’L“_ ___ .__._«._._..._._.... . 61 conflicts and confusion it is difficult even for a sensitive and well intentioned political administration to formulate acceptable policy goals and programs. This is eSpecially true in a developing nation where values and beliefs may be undergoing rapid change and where the peOple are impatient for tangible results. The characteristic political insta- bility in Latin America attests to the fact that formulating acceptable policy goals and measures to achieve those goals is a difficult undertaking in developing nations. The following is a discussion Of some of the general and specific goals relative to economic development and mar— ket coordination. In general, they are believed to be consistent with the current values and goals of the devel- Oping nations in Latin America. The chapter concludes with a brief discussion of the kinds Of policy measures available for achieving these goals. Coperal Goals Probably the most universal goal among the nations of Latin America is achieving a higher level Of living. Evi- dence suggests that most of the peOple in Latin America hold values consistent with the goal Of higher incomes. Again the historical political unrest frequently has developed because of impatience with 81 w economic advancement. This goal is most frequently expressed by economic planners as a desire to achieve a Specific percentage growth in gross national product. Occasionally the goal is expressed in .‘l ””W- 62 terms Of a specific monetary increase in per capita income. Because of the rate Of population growth, a per capita in- come goal is a more accurate indicator of changes in levels Of living, but even that does not provide an accurate measure of progress toward the basic goal of the people. When trans- lated to the individual level in an economy, the goal states that each person should be provided with adequate income so that he is able each year to purchase and consume more economic goods than the year before. Evidence suggests that this goal dominates cultural, political and economic life in Latin America today. The second general goal is closely related to the first, and in fact, is implied in the restatement Of that goal at the individual level. The Objective may be stated as a desire to achieve an equitable distribution of the benefits of economic growth. The growth in per capita income Should be achieved in such a way that the increase is equitably dis- tributed among'UE peOple in the economy. Achieving a 6% increase in per capita income may be a worthy achievement in one sense, but if the increase is concentrated in the hands Of a small percentage Of the pOpulation, it will have little impact on the level of living among the majority. The term "equitable" was used in stating this goal. Perhaps a better term would be "acceptable," Since within each country social and political realities will determine the type Of distri- bution of benefits deemed acceptable. In one country equal 63 distribution Of the growth benefits may be the goal while in another the goal may tolerate considerable inequality. The third general goal is concerned with equality of Opportunity and individualism. The typical Latin American is quite anxious to protect his rights as an individual. And this individualism is accompained by a desire to be given a fair Opportunity to participate in the deveIOpment process and to fully utilize his abilities for economic gain. A frequent, though not universal, corrollary to this goal in Latin America is to maintain freedom Of individual, political, social or economic action to the extent that such actions are not detrimental to others in the society. The final general goal is the maintenance Of an accept- able level of economic stability. This goal appears to lack the strong support of basic values among the peOple. But there is a feeling that real incomes should not be permitted to decline for any reason. In Latin America most individuals are little concerned that economic fluctuation may arise from inflation, natural disaster, Speculation, international disturbances, or other semi—controllable factors. They are ill-equipped to withstand such fluctuations whether they are chronic or temporary. Hence, the strength of the economic stability goal is frequently the result of a reali- zation on the part of those in political power that their constituents Often have difficulty in distinguishing between I! . temporary setbacks" and permanent economic trends. 64 This is not an exhaustive list of all the economic goals existing in the nations Of Latin American nations. It was not intended as such. Yet it does include those that are in general critical to economic growth and market coordination. The goals discussed are all centered on the necessity of generating and "equitably" distributing more and more economic goods Since it is believed that these are dominant considerations in the minds of the majority of peOple in Latin America today. Market Performance Goals There are two broad market performance goals which are (consistent with the economic goals discussed above. They are concerned with (l) improving resource allocation and (2) stimulation Of technological progress. In the following section these goals are discussed individually. In addi- tion, their relationship to market coordination is described, and finally, three specific market performance goals are suggested. Resource Use.--It is difficult to formulate a specific goal with reSpect to efficiency of resource use. The dif— ficulty arises because (as noted earlier in this chapter) economic theory gives no clearly defined efficiency norm for a dynamic and less than perfectly competitive economy. Dynamically modified67 equilibrium analysis would suggest _— 67This term is used to refer tO static competitive theory modified to account for risk and uncertainty and to 65 that an Optimum allocation of resources can be achieved under perfect competition (and in certain cases under pure compe— tition). At various times economists point out, as did the Attorney General's Committee to study the Anti-trust Laws, that the concepts of pure and perfect competition are tools of theoretical analysis. They are not intended to and do not constitute a description of reality.68 Moreover the committee emphasized at a later point in the report that "pure and perfect competition are wholly theoretical stand- ards, in that they are not intended op §p£p_to be guides to public policy."69 Nevertheless, we still find economists asserting that pure competition can and should be used as a norm for public policy. Witness the following statement by Richard Leftwich, in his popular intermediate theory text: ". . . economic models set up on the assumption Of pure competition furnish us with a 'norm' or 'ideal' situa- tion against which we can appraise the actual operation of the economic system."70 Such a preoccupation with pure or atomistic competition may be leading developing nations describe the sequence of events leading to equilibrium, but not including provision for endogenous determination Of variables previously considered exogenous in equilibrium analysis. 8Report Of the Attorney General‘s National Committee §Q_Study the Antitrust Laws (Washington, D. C.: U.S. Govern— ment Printing Office, 1955). pp. 337—338- 691hid., p, 338 (italics in the original). 7OLeftwich, p. 26. 66 astray in their attempt to optimize resource allocation and economic growth. Perhaps a more realistic, though somewhat more ambiguous and less satisfying, goal for developing nations with respect to resource use would be to continuously utilize existing resources in such a way as to result in rising productivity. The annual goal might be to achieve a specific increase in productivity in the economy. Sub—goals and policy measures would then be designed to achieve the over—all output Objec- tive. Admittedly, this kind of goal does not permit separa— tion of the benefits of more efficient use of existing resources and the benefits Of technological innovation. But the previously cited works of Schultz, Welsch, Coffey, Tax, Banfield and Belshaw suggest that the two concepts should not be separated anyway. They are dynamically interrelated in the marketing system and should be handled accordingly in formulating policy goals. This does not mean that economic theory is useless. It simply means that less atten— tion should be given to achieving the "ideal" while more attention is directed toward evaluating the actual perform- ance of the economic system. Specific resource use performance goals in developing nations might be formulated around four different considera- tions: (1) are production and marketing costs being reduced and, if so, how are the benefits distributed and used to further economic growth Objectives? (2) does the marketing SYStem provide for effective transmission Of incentives 67 throughout in order to encourage and reward efficiency and innovativeness? (3) does the marketing system function so as to transmit effective consumer demand to producers and facilitate production advancements? and (4) does the mar- keting system provide for dynamic interaction between pro- ducers and consumers in order to create and fulfill demands for new and better products? Marketing performance goals formulated around these considerations should lead in a dynamic and develOping economy to a realistic evaluation Of resource efficiency in production and marketing and suggest specific government policies to cOpe with apparent dificiencies. Technological Progress.——The second area of concern with reSpect to market performance goals is the stimulation of technological progress. The foregoing discussion pointed out that it is not desirable to separate for policy purposes the productivity effects of more efficient use of existing resources and technological innovations. This does not mean, however, that certain goals should not be utilized to en- courage and facilitate the discovery and rapid adoption of technological innovations. The structure and conduct of the marketing system may have a Significant impact on tech- nological progressiveness among marketing firms as well as among producing and consuming units. With respect to technological progressiveness as af- fected by the marketing system, there are two major factors , 4 d 68 to consider in formulating policy goals and programs. They are: (1) Does the prevailing market structure and conduct slow down technological innovation among producing, distrib— uting, processing, or consuming units? and (2) Does the prevailing market structure and conduct provide for adequate (public and/or private) basic and applied research with satisfactory communication Of the research findings? Market Coordination.——In judging the efficiency and progressiveness Of any industry, it is important that the production-marketing system be evaluated realistically with reSpect to its effectiveness in coordinating production, distribution and consumption. Evidence suggests that prOper communication through the marketing system between consumer wants and producers, coupled with the potential power of the producer and marketing agents to alter consumer wants, is a critical and dynamic process which must be Operating in order to encourage greater efficienty in production and distribution and at the same time to improve the variety and quality of consumer goods. Such a process of dynamic interaction in vertical market channels appears to be uni- versally present in rapidly develOping economies. Improvements in resource allocation and technological progressiveness seem to be important ingredients for all rapidly developing economies. These kinds of improvements must take place among individual firms at horizontal levels in the vertical market channel. To illustrate the effect 69 Of market coordination on resource allocation and techno— logical progressiveness, consider a situation where the vertical coordination process is improved to some minimum level whereby marketing risks and price fluctuations are sig- nificantly reduced at one particular point in the market channe1--say at the producer level. The probable effects of such improved market stability may be some combination Of lower costs and greater returns. Either of these results may provide a stimulus to the producer to make new invest- ments in order to increase his scale of Operation, adopt more efficient production techniques or in other ways improve the efficiency of his production operation. AS noted earlier there are good indications that economies of scale asso— ciated with technological innovations are principle "movers" of economic development at the individual firm level. But technological innovation usually requires capital accumula— tion and investment which in turn is critically related to the process of market coordination that provides production incentives and determines the degree Of market uncertainty at any point in the channel. Hence, performance improve- ments in any sector Of an exchange economy are a function, at least to some extent, of the intangible and unmeasurable factor of market coordination in the product channel. Specific Performance Goals.—- It is almost impossible to design a quantitative or even qualitative measure of "market coordination." However, the performance of the YO marketing system with respect to certain factors i3 affected by market coordination. The following Specific performance goals afford some Opportunity for evaluation Of the effective- ness of market coordination as well as resource use and tech- nological progressiveness. 1. Costs Of production and marketing—-usually influenced heavily by economies of scale and management improvements. 2. Progressiveness—-i.e., willingness to adopt new improved production and marketing techniques. 3. Produce variety and quality-—a frequent and almost universally beneficial correlate of a dynamic process of demand creation and improved market coordination. Economic development literature is becoming more and more concerned with the importance of technological change on the growth process. Nevertheless, to date there has been little attempt to integrate for policy purposes technological progress with market structure and conduct. The foregoing discussion is an attempt to bring the two together in a policy framework where economic growth is a high priority goal. The three performance criteria listed above are used in Chapter 5 of this thesis to evaluate the dynamic perform— ance of the Puerto Rican production-marketing system for milk, eggs and fruits and vegetables for the period 1950— 1965. This affords an Opportunity for practical application Of the conceptual scheme proposed in this chapter. The 71 present chapter is concluded with a discussion of the types Of policy measures compatable with the general and specific policy goals discussed above. Policy Measures There are six classes of government programs which might be utilized if the marketing system as evaluated by the above criteria is not performing acceptably. Each of the following will be discussed briefly below: (1) property rights laws, (2) facilitative regulations, (3) assistance to marketing organization, (4) market control programs, (5) market planning and assistance arrangements and (6) direct government investment. In any exchange economy there must be some way of providing for orderly protection of the rights Of individuals or business units with regard to prOperty ownership. The problem is especially crucial in an economy based on bar— gained exchange. Procedures must be established for the orderly flow of products and property rights as goods change hands. Marketing performance may depend on the adequacy of government rules and regulations establishing procedures for protecting property rights and providing prOper judicial proceedings for settling exchange disputes. These kinds of laws and regulations are quite basic and are usually for— mulated fairly early in the development process. However, they require frequent scrutiny to assure that they serve the needs of a changing economy. 72 Often, government marketing policy in private enter— prise economies is concerned primarily with providing ser- vices and regulations that will facilitate competition and improve exchange efficiency. Such policies may be extremely beneficial in an over—all effort to improve marketing per— formance. Specific examples Of helpful regulations include collection and dissemination of market information, pro- vision for uniform grades, weights and standards, fair trade regulations, anti-trust legislation, credit assistance and research and assistance in the use Of new techniques of production and distribution. In the U.S. these and similar methods have been utilized in a highly successful effort to improve marketing efficiency while facilitating compe— tition. Most develOped nations have found that certain kinds Of economic institutions are a valuable aid in the develOp— ment process. Earlier, Banfield was quoted as saying that a lack Of effective political and economic organizations can prevent economic development. It therefore may be necessary for government marketing policy to include provi- sions for facilitating and encouraging certain types Of economic organizations and associations. Two of the most common are corporate and cooperative associations. Others might include trade associations, professional groups, research consortiums and other organizational forms which in a given situation might contribute to improved over- all marketing performance and economic growth. 73 The fourth type Of governmental market policy program is market control programs. These are government policies planned Specifically to alter the market coordination process. They are most frequently used in cases where the market for a given product is chronically unstable or out of balance with the rest of the industry or economy. They represent a more strenuous effort to improve production and marketing efficiency through manipulation and assistance in the market coordination process. Specific examples of market control programs are price supports, marketing boards, marketing agreements and orders and direct government allo- cation programs. The first four types of marketing policy measures encompass most Of the marketing programs utilized in the U.S. and other "private enterprise" economies trying to bring about better market performance. The last two policy measures suggest moving toward stronger government action. There appear to be times in develOping nations when, as a result of extreme uncertainty, small scale business, low technical knowledge or inertia, individual businessmen are Slow to move ahead with production and marketing schemes necessary for economic development. In such cases it may be possible to devise government programs which can provide encouragement and assistance to interested parties. The government of Puerto Rico has utilized this technique for encouraging local as well as foreign firms to invest in certain productive enterprises. A Special government agency 74 (Fomento) is charged with the reSponsibility of interesting and encouraging investors, making preliminary feasibility studies, Obtaining loans, providing buildings and assisting in various other ways the Operation of the enterprise. A second approach also being tried in Puerto Rico is regional agricultural planning. The island is divided into five regions. In each a regional director is reSponsible for coordinating all agricultural programs. The regional direc- tor in Mayaguez has used his authority to make intensive studies of agricultural production and marketing in the region. Using that knowledge he has launched Specific plans for improving resource use through assistance to farmers in re-allocating resources and coordinating agricultural markets. Such programs afford the Opportunity for the govern- ment to evaluate needs on a broad scale and concentrate efforts toward encouraging private enterprise to provide those needs. The two programs mentioned above are more fully discussed in Chapters 4 and 5. Finally, a method for achieving marketing performance goals which is one step beyond the method just discussed would be for the government to directly finance and manage production and/or distribution units. There may be certain cases where private enterprise will not provide effective development even with encouragement and assistance. At other times it is necessary for the initial firm that is ”breaking the ice" in an industry to lose money in the early years of Operation. Food storage and processing facilities 75 are examples of marketing investments which may require direct government participation. Summary There are several conditions which seem to prevail in all develOping nations. These include atomistic competition, low incomes, poor nutrition, low productivity, capital de- ficiency and high levels Of illiteracy. As a result of these conditions it frequently appears that individuals are trapped in a vicious circle Of poverty, inefficiency and low achieve— ment motivation. This chapter suggests that the structure and conduct of the marketing system may be a critical and causitive factor in this vicious circle of low productivity. The tendency of most economists to view the structural conditions Of static competitive theory as a desirable policy goal has resulted in little attention being given to the possibility that the marketing system can play an active role in the economic develOpment process. In order to begin to evaluate the role of the exchange system, it is necessary to recognize that the system is dynamic and self—generative, and that it determines endogeneously many of the variables commonly regarded as exogenous. Static competitive theory is inadequate either in evaluating or providing policy norms for such a system. In order to provide realistic policy formulation and planning in developing nations, one must recognize the dynamic interdependence between resource use efficiency, technological change and the exchange system. 76 There is evidence from several developing nations to suggest that the dynamic interrelationship described above is important enough to inhibit the development process. The conclusion, therefore, is that developing nations may need to formulate dynamic market performance goals (which are compatible with broader economic goals) and design effective policy programs to assist in fulfilling those Objectives. The following chapter provides a brief historical review of political and economic development in Puerto Rico. It also reviews more Specifically a number Of developments having Special Significance for market coordination in the past 15 years. CHAPTER IV DEVELOPMENT OF THE PUERTO RICAN ECONOMY Political and Economic Development Early Development Puerto Rico was discovered and claimed for Spain by Christopher Columbus in 1493. In the early 1500's the island was colonized. It soon became an important link in the de- fense and trade pattern of the Spanish Empire. The main natural resources of the island were agricultural land and a plentiful supply of water, and until the 19th century the primary products of the island were coffee, ginger, sugar, molasses and hides. The Spanish exported most of those products and thus drained most of the wealth from the island. In 1765 an island wide census indicated a population of 44,883 of whom 5,037 were slaves. Most Of this population lived in extreme poverty and ignorance on farms controlled by absentee owners.71 In 1898, during the Spanish-American War, the United States took possession of Puerto Rico. The island was already heavily dependent upon external trade. Its main H 71Harvey S. Perloff, Puerto Rico's Economic Future (Chicago: The University Of Chicago Press, 19507, p. 13, 77 78 exports were coffee and sugar, while food products made up the bulk Of imports. Sugar production expanded rapidly after the American take-over and soon became the dominant economic product of the island. During the periodilom 1898 to 1927, there was a tremendous influx Of American capital princi- pally in the production and processing of sugar and tobacco. The economic stimulus provided by this flow of capital con- tributed to a rapid increase in the gross product of the island and precipitated a build-up in the island‘s economic infra-structure, but did little to alleviate the poverty Of the average Puerto Rican. Self Government The appointment of Governor Rexford G. Tugwell in 1941 signalled a new era in Puerto Rico's struggle for economic and social advancement. The appointment of this reform- minded governor, coupled with the creation and pOpular sup- port Of a new political party headed by Luis Munoz—Marin, indicated a new concern both in Washington and Puerto Rico for economic and social reform. During the period from 1941—1948, Tugwell and Munoz moved rapidly to lay the legis- lative and administrative foundation for self-government on the island. In 1948 Munoz became the first popularly elected governor of Puerto Rico and swept his POpular Democratic Party into complete control of the legislature. Munoz accepted the election as a mandate to continue the program Of economic reform which he had begun during his earlier 79 years in the legislature. He, therefore, moved ahead with a program which became known as ”Operation Bootstrap." The reform program received additional impetus with the granting of Commonwealth status in 1952.72 The Economic Development Administration (EDA), the government agency which became the action center for Opera— tion bootstrap, was created in 1950. The administrator of the agency was given the reSponsibility "to direct and super- vise all Of the programs whose objectives are closely related with the economic promotion Of Puerto Rico."73 The main thrust of the EDA has been toward promotion Of industrial develOpment and tourism. It provides assist- ance to firms or individuals interested in establishing new plants in Puerto Rico. It also does a great deal Of general promotional work for the island through a number of branch Offices in major cities of the United States. As of December 1965 the industrialization program had helped to promote some 1,211 plants with a total employment Of 82,175. 72Under the Commonwealth political status Puerto Rico was given complete local autonomy under a constitution rati— fied in a referendum of the peOple of Puerto Rico. Puerto Rico was thus granted the same rights and responsibilities as any state with two exceptions--Puerto Ricans do not have voting representation in Congress and they are not allowed to vote in the election of the United States President and Vice President. Also Puerto Ricans do not pay federal taxes. 73William H. Stead, FomentO-—The Economic Development pf Puerto Rico (Planning Pamphlet Number 103, Washington, D.C.: National Planning Association, 1958), p. 26. 80 Measures Of Economic Growth The economy of Puerto Rico has experienced an amazing rate of growth since 1940. During the decade Of the 1940's, gross domestic product increased from $499 million to $879 million stated in constant 1954 dollars. The average annual rate of growth in net real per capita income for the period from 1940 to 1950 was 4.2 per cent. That rate of growth was exceeded by only four nations in the world for the same period. By 1960 the gross domestic product had in- creased to $1,484 million in constant 1954 dollars. The rate of growth of net real per capita income between 1950 and l96o was 5.1 per cent which again was one of the highest rates of growth among the nations Of the world. Table 4.1 shows the gross domestic product and per capita income for Puerto Rico in selected years between 1940 and 1964. TABLE 4.1--Gross Domestic Product and Per Capita Income for Puerto Rico-—Selected Years (1954 Dollars) GNP Gross Income Fiscal Years (millions Of > Per Capita dollars) (Dollars) 1940 * 269 1950 844.1 399 1960 1,488.8 639 1964 1,960 776 ¥ *Not available Source: Ingreso y Producto, Junta de Planificacion de Puerto Rico. 81 During the period from 1940 to 1950, much of the growth in the economy took place in the agricultural (eSpecially sugar cane) sector and also in commerce and services. On the other hand, by far the largest growth component between 1950 and 1960 was manufacturing. This reflects the tremen- dous emphasis placed on industrialization by the government after 1950. Table 4.2 shows that during the decade between 1950 and 1960 agricultural gross output increased by 32 per cent compared to a 76 per cent increase for the whole economy and a 212 per cent increase for the manufacturing sector. TABLE 4.2--Gross Domestic Product, Agriculture and Manufac- turing Gross Product and Percentage Increase From 1950 to 1960 for Puerto Rico (1954 Dollars) Millions of Dollars % Increase 1950 1960 Gross Domestic Product 844.1 1488.8 76 Agriculture 132.1 173.8 32 Manufacturing 110.2 343.34 212 Source: Ingreso y Producto, Junta de Planificacion de Puerto Rico. Table 4.3 contains employment figures which reflect the changes which were taking place in the Puerto Rican labor force during the decade of the 1950's. In 1950 the total employment in Puerto Rico was 596,000 of which 36 per cent 82 was agricultural employment and 9 per cent manufacturing. By 1960 employment in agriculture had fallen to 24 per cent and manufacturing had risen to 16 per cent. Unemployment during that ten year period declined only slightly from .13 per cent to 12 per cent of the labor force. TABLE 4.3-~Employment in Puerto Rico by Industry-Selected Years 1950 1960 Thousands % Thousands % Total Employed 596 100 564 100 Agriculture 216 36 133 24 Manufacturing 55 9 93 16 Other 325 55 338 6c Unemployed 88 13 75 12 Source: Statistical Yearbook of Puerto Rico, Puerto Rico Planning BOard. The paragraphs above illustrate the magnitude of eco— nomic changes which occurred in Puerto Rico during the brief Span of ten years. A large amount of investment funds were needed in order to accomplish the shift from an agricultural economy to an economy with considerable emphasis on manu- facturing. Gross fixed domestic investment increased from $111 million in 1950 to $348 million in 1960, an increase Of more than 200 per cent. A significant part of that in- vestment came from external sources, largely mainland 83 private investors. About 43 per cent of all Puerto Rican investment funds came from external sources between 1947 and 1960. Undoubtedly a high proportion Of that external invest— ment was for new plant and equipment since most of the 57 per cent internal investment was for depreciation and public saving. Puerto Rico experienced more than 300 years of colonial rule in which Spain drained Off all the economic gains leaving little to be shared by the mass of citizens on the island. Then in the span of five decades the people of Puerto Rico established a flourishing agricultural economy based on sugar, tobacco and coffee production. But the masses still lived in poverty. Amid growing discontent a new political party was formed in 1938. Its leader, Luis Munoz—Marin, was completely dedicated to political, social and economic reform. Overwhelming political support for Munoz and the reforms he advocated led to a period of remarkable economic growth and social change. From 1950 to 1960 gross income practically doubled, manufacturing became a real economic factor, tourism blossomed and agri- culture began a relative decline in importance. Puerto Rico's rapid growth was thus based on two factors: (1) a strong political unity centered around the single purpose Of achieving better levels of living for all the people and (2) a well—planned industrial develOpment program designed to make the most Of Puerto Rico's unique relationship to the United States under Commonwealth status. 84 Important Features of Commonwealth Status Both Of the factors mentioned above as critical in Puerto Rico's economic growth are closely related to the unique political relationship between the United States and the Commonwealth. The special features Of Commonwealth status and their importance will be discussed briefly in this section. One Of the biggest hurdles which developing nations face is the achievement Of political stability. Puerto Rico has not diSplayed the instability characteristic of other Latin American nations. One of the reasons may be that Puerto Rico has never been completely independent. In 1952, at a time when they appeared ready to accept it, the Puerto Ricans were given most Of the advantages of independence without many of the disadvantages. This occurred after a period of territorial rule by the United States with a locally elected legislative assembly. During that period the people of Puerto Rico and their political leaders were given practical experience in the Operation of a democratic society. When the Puerto Rican governor and his adminis- trators took over, most government agencies were staffed by Well trained individuals and organized for relatively effi— cient Operation. Moreover, the continuing loose political tie to the United States seemed to lend a considerable degree of economic and social stability that encouraged rapid growth. In addition, private citizens of the United States 85 have been able to invest freely in Puerto Rico without fear of government confiscation. Economists have Often noted that economic growth can be drastically retarded by "limitations of the market." That is, if the market for a given product is quite small, it may be impossible to achieve all the economies of scale which exist in production and distribution of that product. It is therefore significant that Puerto Rico under territo- rial and Commonwealth status has had with few exceptions, the same trade status as any state in the union. Under this arrangement the United States has long purchased the bulk of Puerto Rico's primary product--sugar. In fact, Puerto Rican sugar producers Operate under the same government price sup- port and quota program as United States producers. In exchange the Puerto Ricans have historically purchased from 40 to 50 per cent Of their food supply from United States producers and processors as well as significant prOportions of other items ranging from consumer to producer goods. More recently the vast United States market has served as an outlet for the diverse products of manufacturing plants established under the assistance and encouragement of the Economic Development Administration. In many cases the free access to United States factor markets, cheap Puerto Rican labor, and access to the huge United States finished product market were critical factors in making manufacturing invest- ments in Puerto Rico feasible for prOSpective investors. 86 A factor which is closely related to the free trade factor is the Official use of United States currency. This means that Puerto Ricans do not have currency exchange prob- lems when trading with the mainland. It also means that they are not bothered with balance Of payments difficulties or currency devaluation decisions. Finally, it means that Puerto Rican entrepreneurs have greater access to United States capital markets. Federal assistance and unilateral transfers have been extremely important to Puerto Rico in its rapid economic develOpment. Practically all federal government programs available to state or municipal entities on the mainland are available in Puerto Rico. In agriculture this includes all the service agencies such as the agricultural extension ser— vice, experiment station research, soil conservation service, etc., it includes credit agencies such as the Farmers Home Administration and certain federal price support programs such as the sugar program mentioned earlier. Other federal agencies such as the Small Businesses Administration, the Federal Housing Administration, the Urban Renewal Administra- tion, the Federal Communications Commission, and the Federal Aeronautics Administration provide services to the people Of Puerto Rico. The unilateral flow of funds from the United States into Puerto Rico through these federal programs (with- out a return flow of revenue Since Puerto Ricans do not pay federal taxes) amounts to a significant portion Of the gross product of the economy. In 1965 transfer payments from the 87 U. S. Treasury made up about 8 per cent Of the gross domestic product for the island. In summary there is little doubt that Puerto Rico's Special relationship to the United States does provide sig- nificant economic advantages. Political stability, free trade, common currency and access to federal programs have undoubtedly contributed greatly to the rapid rate of economic growth which Puerto Rico has achieved in the past twenty years. Agricultural Development Because Of the lack Of mineral resources, the relative isolation and the high pOpulation density, the Puerto Rican economy has historically been highly dependent on its agri— culture. Sugar cane has been especially important as a source Of employment for the rural inhabitants and a source Of export earnings to support the urban economy. In the past 15 years certain forces have been set in motion that appear to be very basic long run structural changes in the Puerto Rican agricultural sector. Those factors are dis— cussed in the following section. Eppography and Resources The island of Puerto Rico is located in the Greater Antilles chain which stretches from the southern coast of Florida to the Northern coast Of Venezuela. It includes the islands of Cuba, Haiti-Dominican Republic, United States and English Virgin Islands, Jamaica, Trinidad and a number of 88 Other islands. Puerto Rico is located about 1,000 miles southeast Of Miami, Florida. The longest part of the island runs east and west facing the Atlantic Ocean on the North and the Caribbean Sea on the South. The maximum length of the island is 113 miles and the maximum width is 41 miles. The total land area is about 3,435 square miles. Extending all around the coast Of the island is a narrow fertile plain which rises gradually to a mountainous interior. The moun- tainous and hilly terrain occupies a major portion of the land area of the island. The climate Of the island is almost ideal. The average temperature for the island as a whole ranges from 73 degrees Farenheit in January to 79 degrees in July. Temperatures, of course, are higher in the lowlands and lower in the mountainous areas but the two extreme temperatures on record are 39 and 104 degrees. And the tradewinds, blowing almost constantly from the Northeast, serve to moderate the temper- atures of the island. As a result Of the central mountain range, rainfall varies tremendously from the northeastern part of the island to the southeast. Figure 4.1 shows the lines Of average annual rainfall in Puerto Rico. Annual rainfall varies from a maximum of 200 inches on the mountain Of El Yunque in the Northeast to a minimum Of 30 inches along the southwestern coast. Generally, rainfall ranges from 30 to 80 inches in the fertile coastal plans and from 60 to 100 inches in the highlands. In most areas of the island, the rainfall is 89 .mma .s .Asmma .nassoamno>acp Heasopaom sandpwomo .OOHm Howmwm ”ransom 00E Ohm—wan. , m mu "noumsm OHmV OOHM wanes .OOHm Opposm .Hflwmcfimm Hassc< mmmaw>arn Ac _ zxmpmsowm psmprdda — wocmsmamm _ _ _ f. 54— . ., a g . 1 up: 104 Under his supervision, the assistant Secretary Of Operations has specialists in individual areas such as mar- keting and production. These Specialists are asked to work closely with regional directors in develOping programs that will contribute to the region's agricultural development. The responsibility of each regional director is to coordinate the work of all agricultural agencies in his region (including semi-autonomous commonwealth agencies and autonomous federal agencies). The objective is to see that these agencies are working together without duplication and dissention toward more efficient agricultural production in the region. TO accomplish the job, each director has a co— ordinating committee made up of the apprOpriate heads Of all agricultural agencies in his region. And through this com- mittee the regional director is theoretically able to mobi- lize, toward a common cause, the resources Of the Department Of Agriculture,the Agricultural Extension Service, the Agri— cultural Experiment Station, Vocational Agriculture workers, the Soil Conservation Service, the agricultural credit agencies, and any other agricultural agencies Operating in his region. The logic of such an approach is that all of the agricultural agencies have contributions to make and that a coordination of their efforts will provide mutual help among the agencies, avoid duplication and increase the over—all efficiency and effectiveness of their agricultural development activities. 105 One of the first duties of each regional director after the department's reorganization was to make a compre- hensive development plan for his region. In order to prepare such a plan, each regional director conducted an inventory of all farms in his region. That information was tabulated and used to indicate the existing structure and problems of the farmers. Employing that data, the director and his staff were able to move ahead with the identification Of Specific farm problems and the formulation Of a broad regional plan for attacking these problems. At the present time two of the five regional plans have been completed. The Mayaguez region was the first to complete a develOp- ment plan and has generally served as the pilot region for the new approach. There work has now been completed in going beyond the broad long range develOpment goals to establish shorter term Objectives to be used in achieving the long range goals. In most cases objectives have been narrowed to such a degree that each agricultural agent in the region has certain Objectives to be achieved in the coming year. The Objective may be to work with a certain Specific group Of farmers to encourage them to improve drainage, to adopt a new sugar cane variety or to join a marketing COOperative. In this way each agricultural worker in the region, whether he be a Department of Agriculture employee, an extension agent, a vocational agriculture teacher, etc., is assigned certain specific Objectives to be accomplished in the Coming year. Thus, duplication Of effort is avoided and a 106 direct line of reSponsibility is established toward the end Of achieving certain regional goals aimed at improve- ment of agricultural productivity in the region. Cooperative Development COOperation among farmers and sugar cane workers ex- isted in Puerto Rico before 1900. However, cooperatives did not become important in the economy until after 1920. In that year a law was approved in the legislature to facilitate the organization and Operation of consumer and producer co- Operatives. The usual tax exemptions were approved under the law provided the COOperative followed the rules of one member-one vote, return of profits to members on a patronage basis and less than 50 per cent of total business carried on with non—members. Between 1920 and 1945 the cooperative movement expanded rapidly, eSpecially among farmers. During the period several large COOperatives were organized which remain a potent force in the agricultural economy (e.g., a coffee marketing and supply cOOperative, a tobacco marketing cooperative and two cooperative sugar mills). The Agricultural Extension Service was quite active during this period in assisting farmers to organize and Operate cooperative enterprises. A visit by Father Joseph McDonald, one Of the COOpera- tive leaders in Nova Scotia, to the Catholic University in Ponce started a move that completely altered the nature Of cooperativism in Puerto Rico. His philosophy of 107 COOperativism was that it should serve not only as a tool Of economic improvement but as a tool of social reform.80 This philOSOphy was soon accepted by other cooperative leaders on the island, partially as a result of a series of seminars given by Father McDonald at the University of Puerto Rico in the summer Of 1945. Moreover, the philosophy in— filtrated political circles through a personal interview between Father McDonald and Louis Munoz Marin, then Presi- dent Of the Senate Of Puerto Rico. As a result Of that inter- view, a committee was appointed in the senate to travel to Nova Scotia and study their cooperative movement for the pur- pose Of making recommendations to improve the laws and policies governing cooperatives in Puerto Rico. The Committee recommended that the legislature approve a new law which would provide for: (1) the organization of credit COOperatives, (2) the creation of a Department Of COOperatives in charge Of assisting in the organization Of OOOperatives and reSponsible for promoting cooperative edu- cation, (3) the develOpment of a curriculum for cooperative education in the University of Puerto Rico and in public schools and (4) the creation Of a credit agency for coopera- tives. This law reflected the new cooperative philOSOphy on the island. The Department of Cooperatives was given the 0Victor M. Valcarcel, "El Movimient Cooperativo en Puerto Rico," Instituto de Cooperativismo, Universidad de Puerto Rico, unpublished manuscript, undated, p. 37. 108 task Of fomenting cooperative develOpment and providing co— Operative education. There is little doubt that after 1947 (when the law was approved) there was a great deal more em- phasis on the social Objectives of cooperatives than had been evidenced before. In 1957 Fomento Cooperativo was created as the high level government agency responsible for the intensification of the cooperative movement. The philOSOphy of social reform carried over to this new agency. Significant growth has occurred since 1947 among credit, consumer and housing cooperatives. In 1962 there were 255 credit unions, 92 consumer COOperatives and 34 housing co- Operatives on the island. Membership in these cooperatives had grown rapidly to over 100,000. On the other hand agri- cultural COOperatives experienced very little growth after 1945. In 1962 there were 29 agricultural cooperatives with about 42,000 members. This represents about 13 per cent of 1 the island's rural population. Recently, there has been a new government emphasis on COOperative development. A new administrator was appointed for Fomento COOperativo who has expressed a great deal of interest in boosting the number and quality Of agricultural COOperativeS. The Federal Agricultural Extension Service, Puerto Rico Agricultural Extension Service, Cooperative lSocio Economic Development of Cooperatives in Latin America, A report to the Government of the United States by the COOperative League of the United States, San Juan, Puerto Rico, 1963, p. 281. 109 League Of Puerto Rico and Fomento COOperativo are currently cooperating in an intensive educational program for coopera— tive members and leaders. The emphasis is upon modern management techniques for effective cooperative business firms. In general cooperatives have received a great deal of interest and political support in Puerto Rico. Since 1945 the prevailing philOSOphy has been that they should be designed to fulfill both economic and social needs of mem- bers. This chapter has given the reader a brief historical review Of political and economic development in Puerto Rico. It was designed to point up the important factors related to economic develOpment and especially to improve market coordination. The following chapter provides an evalua— tion of the effect of market coordination upon market per- formance for three commodity groups. :. h. .m- L. CHAPTER V MARKET COORDINATION AND ITS EFFECTS ON MARKET PERFORMANCE IN PUERTO RICO-- THREE COMMODITY STUDIES Introduction Earlier chapters in this thesis have developed the con— ceptual framework for relating market coordination to econ~ Omic development. The purpose Of this chapter is to describe and analyze agricultural production and marketing develop- ments in the Puerto Rican economy for the period 1950—1965 in order to evaluate the effects Of certain changes in market performance. Three groups Of commodities were chosen for this analy— sis. They were selected partially because Of their impor— tance to the Puerto Rican economy and partially because they illustrate a broad range of coordination methods and effec— tiveness. The commodity groups are milk, eggs, and fruits and vegetables. Vertical coordination has improved rapidly for milk and eggs with the development Of a variety of govern— ment programs and market institutions. 0n the other hand coordination arrangements have remained almost static for fruits and vegetables since 1950. The marketing system for 110 111 fruits and vegetables described by Nathan Koenig in 1950 as being "heavily burdened with inadequacies and an excess of intermediary handlers. . . . The heavy toll exacted by this sort Of inefficient structure has long restricted consump— "82 tion and retarded production. The system remains much the same as he described it 15 years ago. The Obvious diversity between egg and milk markets on the one hand and fruit and vegetable markets on the other hand affords an Opportunity to study the marketing develop- ments since 1950 in order to find out what factors have con— tributed to the different degrees of market develOpment. The analysis provides an Opportunity to test (for these three commodities) the hypothesis that atomistic and poorly co- ordinated markets tend to inhibit the process of agricultural development. The chapter is divided into four parts. Each Of the first three parts are devoted to one commodity group. Within each part there will first be an introductory section dis- cussing general commodity conditions during the period under study, i.e. 1950—65. Then there will be a section centering on market conditions existing prior to 1957.83 The discus- sion will then turn to the analysis of the basic changes in _ 82 Nathan Koenig, A Comprehensive Agricultural Program £9; Puerto Rico (Washington, D. 0.: United States Depart— ment of Agriculture, 1953), p. 219. 83This break was chosen because a concerted government effort to improve food distribution started to bring about coordination changes in the system at that time. 112 production and market coordination during the period from 1957 to the present. Finally, for each commodity group there will be an analysis Of market performance changes since 1957. The fourth part Of the chapter is a summary section, drawing together the results of the three commodity studies and sug- gesting conclusions from the analysis. Essa The island Of Puerto Rico has experienced rapid eco- nomic growth since 1950. Table 4.1 shows that per capita income has almost doubled in real terms since that time. Needless to say, the impact of such growth on egg production and distribution has been significant. Rising consumer incomes have been accompanied by a stronger demand for animal products. Per capita consumption Of eggs has more than doubled since 1950. At the same time, retail marketing facilities have undergone rapid change. The expansion in sales of modern self—servide retail stores has greatly affected the quality Of eggs required from pro— ducers. Moreover, production and marketing structures have undergone significant change during the period. Those changes are examined below. Epoduction and Marketing Conditions; 1950-57 In 1950 egg production in Puerto Rico was widely scattered among a large number Of subsistence farms. Most Of the farms on the island kept a small flock of hens to 113 84 supply family needs with occasional sales to local colmados or neighbors. There were very few commercial egg farms. The Census Of Agriculture in 1950 indicated that there were 47,241 farms reporting hens in production. These farms made up 88.3 per cent of all farms in Puerto Rico in 1950. Thus, a large percentage of the farms were either producing eggs for home consumption or for both home consumption and sale. The average number of hens per farm reporting in 1950 was only 16.9. The widely scattered nature of egg production made mar- keting both difficult and expensive. Eggs were marketed by individual producers through truckers, local colmados or directly to consumers. Eggs were sold through market plazas to a limited extent. In 1950 the five principal markets of Puerto Rico handled an estimated 287,416 dozen eggs with a total value Of $177,000. This represented only about 3 per cent of the domestic egg production. Eggs sold in the plazas were largely produced on very small farms and were assembled by truckers in relatively small quantities and marketed through retailers in the plazas. Facilities for handling the eggs were poor and spoilage rates were high. Consumers purchasing the eggs did SO with the risk that a high percentage might turn out to be Spoiled. The Perkins' Study in 1956 stated: There is no careful handling and storage by farmers and dealers, transportation and maintenance expenses 84The term used in Puerto Rico to designate small retail food stores. 114 are high. Eggs are not refrigerated or graded, and the marketing may take well over a week. They are, therefore, usually Of poor quality when they reach the consumer, especially in the large cities. In the smaller towns, peOple purchase eggs from peddlers who buy at thg farms and therefore usually get fresher eggs. 5 Perkins found that even under existing marketing con- ditions there was a decided consumer preference for locally produced eggs against imports. He found that in the five year period between 1950 and 1955 the average wholesale price for locally produced eggs was $.57 a dozen, which was about $.12 more per dozen than the average wholesale price of im- ported eggs. Nevertheless, egg imports made up a large per- centage Of the total egg consumption in Puerto Rico in the early 1950's. Table 5.1 shows the quantity Of both imported and locally produced eggs in 1950. It also indicates that 38.7 per cent Of the eggs con- sumed in Puerto Rico in 1950 were imported. Perkins noted that the poorly coordinated and inefficient marketing system for domestically produced eggs would probably prevent the future substitution of Puerto Rican eggs for imports.86 In 1950 there were no government regulations to encour- age grading or to establish the minimum requirements for the storage and handling of eggs. In the absence Of such 85Maurice F. Perkins, Agricultural Credit in Puerto Rico. (A special report published by the Department of FO- mento and the Puerto Rican DevelOpment Bank, Commonwealth Of Puerto Rico, 1958). 86Ibid., p. 256. 115 regulations, it was difficult even for progressive farmers to practice grading, refrigeration and efficient handling. TABLE 5.1——Total Egg Consumption in Puerto Rico: Volume Im- ported and Volume Produced in Puerto Rico, 1950—51 Produced on Imports as a (Eggggid Puerto Rican (882:8) Per Cent Of Farms (dozen) Total Consumption Eggs in shell 4,139,847 9,123,768 13,263,615 — Driedl 1,180,942 - 1,180,942 — Frozenl 444,369 - 444,369 - Total 5,765,158 9,123,768 14,888,926 38.7 1Shell egg equivalent for eggs imported as dried or frozen. Source: Statistical Yearbook — Puerto Rico; 1950—51. In general, egg production and marketing in Puerto Rico in 1950 was characterized by a large number Of producers and small egg dealers working on a part time basis. The result was an ineffectively coordinated marketing system which in— volved a high degree Of risk for all concerned. The pro— ducer, in addition to bearing the risks associated with disease and weather, was constantly faced with price uncer- tainties and demand fluctuations. Even the few existing commercial producers remained small and were faced with con— siderable uncertainty in the marketing of their production. Most were unable to achieve the necessary economies of 116 scale either in the production or marketing of their eggs. Because Of the lack of large Scale commercial egg producers, there were large numbers of egg dealers who collected eggs and either retailed them directly to consumers or passed them along to other retailers to sell. These dealers added their margins to the price of eggs and often contributed to the uncertainties and risks associated with marketing eggs. As a result of the risk and inefficiencies mentioned above, Puerto Rican consumers continued to purchase large quantities of imported eggs which were also of low quality owing to the length of time required in shipment. The waste and Spoilage in the handling both Of imported and locally produced eggs helped to maintain high prices and discourage consumers from increasing consumption. Thus, in 1950 there was a definite need for improvements in egg marketing methods and coordination in Puerto Rico. The consumer preference for local eggs in Spite of poor handling, refrigeration and high prices, indicated that consumption Of locally produced eggs could be readily expanded if producers were willing to adopt improvements in the production, classification, trans- portation and storage Of their eggs. The system was ready for improvements which could benefit all parties concerned, especially the Puerto Rican consumer. Akrket Coordination, 1957—65 Perhaps one can attribute some Of the rapid egg pro- duction and marketing changes from 1957—65 to the introduction 117 of modern self—service retail stores in Puerto Rico. These modern, well—managed supermarkets require a stable supply of consistently high quality products. They tend to seek out and encourage those suppliers who can meet their quality standards with large supplies in order to lower transaction and exchange costs. These factors have undoubtedly been sig— nificant in Puerto Rico. But it Should be recognized that conditions were ripe in the imperfectly competitive egg mar- kets for basic changes that would improve the coordination of the system and lead to better performance Of the market. Some Of the resulting market institutions are discussed below. It was noted earlier that prior to 1956 there were very few well organized and large scale egg producers on the island. Two reasonably large producers (around 5,000 hens) began Operation in the San Juan area in the early 1950's. These producers were able to develop their own marketing program with delivery to larger colmados and direct farm sales to consumers.87 Vertically Integrated Private Producers.—~The rapid expansion in supermarket numbers as well as sales since 1956 has been accompanied by a similar increase in large-scale integrated egg production and/or marketing firms. By 1965 ‘— (_— (Information Obtained in personal interviews with Manuel Santana, Extension Poultry Marketing Specialist, Uni- versity of Puerto Rico, Manuel Rodriguez, Dairy Supervisor Of Pueblo Supermarkets, and Edwin Betancourt, Manager, Granja Country Club Egg Farm. 118 there were at least Six (including two cooperatives) large scale producer—distributors catering especially to supermar- kets and other large retailers under their own brand names or with private label sales. The two privately owned producer-distributors had expanded to 15,000 and 25,000 hens and had been joined by a third producer in 1958 which had 80,000 hens in production by 1965. The latter firm is now the largest Single producer on the island and is the only one vertically integrated (either by ownership or contract) from the feed manufacturing stage through egg marketing. A fourth privately owned firm is primarily a marketing or- ganization. The Operation purchases eggs from small scale producers on the basis of a Simple written or verbal agree- ment. The eggs are then graded and packaged for distribu- tion through supermarkets under the firm's own brand name. In order to meet the Special quantity and quality demands of large retailers, these privately owned firms, along with other smaller scale units, have broken from the traditional pattern of egg production and distribution in Puerto Rico. Their market contacts are directly with retailers, providing more effective market information and lowering market instability arising from uncertainty and erroneous market intelligence. Cooperatives.-—A second major develOpment in egg mar- keting has been the organization Of several marketing co- Operatives. Many Of these have eXperienced some difficulty 119 in maintaining good member relations and in stabilizing supplies and sales. As a result most Of them have either ceased Operations or remained quite small. However, one marketing COOperative remains as a major producer-distributor. This is the egg marketing cooperative organized as a separate arm Of Cafeteros de Puerto Rico. (A very large coffee mar- ket COOperative which has become quite diversified.) The COOperative was originally organized to assemble, grade, package and distribute eggs for its small scale egg producer members in the South Central part of the island. Initial interest and patronage in the cooperative was high, and it was necessary for the cooperative to purchase a large amount of grading, packaging, storing and distributing equipment. Contract prices to producers had to be reduced in order to pay for the new equipment. Also, in order to market a con- sistent quality product, it was necessary for the cooperative to include quality control clauses in producer contracts, e.g. requiring farm refrigeration and specifying certain management practices. In protest against these COOperative requirements and due to growing alternative sales outlets, many producers withdrew their support from the cooperative. Consequently, the COOperative found itself with insufficient and unstable egg supplies. In order to stabilize its supply and utilize existing equipment, the cooperative entered into egg production Operations. At the present time the COOper— ative maintains about 23,000 hens in production and con- tinued to provide marketing services for its members. 120 Egg marketing COOperatives have been somewhat success— ful in Puerto Rico as a means Of bringing together small Scale producers for the purpose of grading, packaging, and distribution Of eggs at an economical level of Operation. They have also permitted producers to enjoy more accurate marketing and technical information and more stable relations with retailers. Non-profit Producer Associations.--A third type of mar- keting institution arising in reSponse to the changing retail structure in Puerto Rico since 1956 are producer owned non- profit egg marketing corporations. The purposes and advan— tages of these associations are basically the same as those listed above for cooperatives.88 They are discussed separ- ately, however, because of the unique conditions which pre— ceded the organization Of the first such association and because the whole approach Of planning and implementing pro- duction and market coordinating institutions may have some applicability for certain pragmatically oriented developing nations. The Lajas Valley Egg Producers Association was the first of three such associations to be organized. It grew out of a plan by the Lajas Valley DevelOpment Office (a 88These associations were incorporated as non—profit corporations rather than cooperatives only because the co— Operative law in Puerto Rico requires that certain condi- tions be fulfilled before the government can grant a cOOper- ative charter. Among the conditions are cooperative educa- tion for all members and leaders. The process usually requires 6-12 months. The association members were not in a position to accept such delays. 121 government agency) to encourage egg production in the Lajas Valley. That Office hired a full time poultry Specialist and gave him the reSponsibility of interesting farmers in egg production and then helping them to start production. He was fairly successful and soon had farmers producing and marketing eggs in Lajas and surrounding towns. AS these commercial producers gradually expanded their flocks, they experienced greater difficulties in finding market outlets. The government agent began to consider a marketing coopera— tive. At that time the owner of the largest supermarket chain on the island (Pueblo Supermarkets) made a $5,000 grant to the Agricultural EXperiment Station for the purpose of encouraging agricultural production. The Lajas Valley Development Office requested that the money be loaned to local egg producers for the purpose of organizing an egg marketing COOperative and buying necessary grading equipment. The request was granted and Pueblo Supermarkets agreed to purchase eggs from the association to be marketed under the Pueblo label. At this point two other government agencies stepped in to provide assistance. The Economic Development Administration (Fomento) provided a building rent free for six months, and the Agricultural Extension Service provided management training and guidance to the members of the asso- ciation. The association has been quite successful. Production has increased from 311,000 dozen in 1963 to 546,00 dozen in 1965. The association, through its Pueblo supply contract, 122 has given its members a stable and steadily expanding out— let for their production. Records Of the association Show that prices paid to producers have not changed since 1963. The policy of the association is to maintain a stable price to producers and handle any resulting deficits or surpluses through feed sales and patronage refunds. In this way, the policy has permitted producers to make long run expansion plans on the basis Of stable expected prices. Each producer has a full supply contract so all his production goes to the association. Moreover, the contract states that expansion of flock size by an individual producer will only be approved if a profitable market outlet can be Obtained for the added supply. Yet the association has been quite successful at marketing added quantities of eggs as indicated by the rapid growth in volume. AS a remflt the average flock size Of its member has increased from about 2,000 birds in 1963 to 2,857 birds in 1965. The marketing margin for the association has remained fairly stable. The following example is illustrative of recent prices. In May, 1966, association members were re— ceiving 51 cents per dozen for Grade A large eggs at the farm. The eggs were collected by the association, candled, graded, cartoned and delivered to retail stores at a price of 64 cents per dozen. This provided the association with a margin of 13 cents per dozen. Retail prices during the same month were about 77 cents per dozen for Grade A large eggs in Pueblo Supermarkets. Though the 13 cent retail 123 margin appears high, it may be partially justified by the fact that Pueblo provides a very large and stable outlet and gives Special promotion tojts private label eggs purchased from the association. Basically, the exchange price on private label eggs between the association and Pueblo is determined by sub— tracting 3 cents from the prevailing price of other major brands. Then Pueblo usually prices its private brand at l to 3 cents less than the major brands depending on supply and demand conditions. Occasionally, the associations and Pueblo cooperate to lower prices even more in order to clear a surplus through the market. One of the most unique fea- tures of this association is the degree of cooperation which occurred between the farmers, the Lajas Valley DevelOpment Office, the Extension Service, Pueblo Supermarkets and For mento. Each played a vital role in this market coordina— tion effort. But perhaps the most significant feature in the develOpment of this marketing institution is the active planning, organizing and coordinating role taken by the Lajas Valley Development Office. This government agency was charged with the reSponsibility of fomenting agricul— tural development in the Lajas Valley. The encouragement and assistance in egg production and marketing is but one phase of the over—all agricultural program of the develOp- ment office. Other aSpects of the agency's program were equally as successful in the egg production—marketing phase described above. 124 In 1965 the director of the Lajas Valley Development Office published an experiment station bulletin describing the program and accomplishments of the agency. In that bulle- tin he concluded among other things: "The direct and in- direct benefits now derived, or which may be derived from the Lajas Valley Development Program in a relatively short time in the future, fully justify government investments."89 He also noted: "The procedures followed in planning and im— plementing an agricultural development program for the Lajas Valley are also applicable to other areas of Puerto Rico."90 When the Department of Agriculture was reorganized along the lines described in Chapter IV, Mr. Gonzalez was appointed regional director for the Mayaguez region. He began to apply the basic procedures developed in the Lajas Valley DevelOpment Program to the entire Mayaguez region. Two other egg marketing associations have been organized in the region. The three producer groups have been federated for the purpose of carrying out a joint marketing program and purchasing supplies jointly. Moreover, the procedure is being used in the promotion of coordinated production- marketing associations for other agricultural products such as milk, oranges, sugar, papaya and pineapple. Early 89Antonio Gonzalez Chapel, Planificacion e Implemen— Egcion de un Programa de Dessarollo Agricola en el Valle—He Lajas, Boletin 192 (Estacion EXperimental Agricola, Univer- Sidad de P.R., Rio Piedras, 1965), p. 32. 901bid., p. 33. 125 indications suggest that the integrated government planning and marketing approach will yield significant results in the next few years. Before moving to the discussion of other government egg marketing programs, two general observations are offered concerning the benefits of the production-marketing regional planning approach described above: 1. It helps government agricultural workers and farmers alike to recognize the important relation- ship between agricultural production and mar- keting. That is, production and marketing can be more effectively coordinated to the benefit of farmers and the economy in general. Specific benefits of the producer associations are: a. It permits small producers to COOperate in lowering production and marketing costs. It gives each producer a stable market outlet. It provides retail buyers with a stable supply of consistent quality products. It reduces risk and uncertainty which arise in a situation where producers and distributors have limited knowledge of technical and marketing developments and where factors of production are highly immobile due to poor communications. 126 2. The regional planning approach provided one centralized agency with at least a basic knowledge of farm units and farmers in a given region for the purpose of guiding long—range agricultural develOpment through planning and technical assistance to individual farmers. The regional agricultural planning approach being pioneered in the Mayaguez Region in Puerto Rico is a good example of a practically designed government program oriented toward the improvement of resource productivity in agricul— tural production and distribution. Grading regulations.--The effectiveness of the egg mar- keting institutions just described has been enhanced by the passage of several market regulations since 1956. Marketing literature abounds with examples of the benefits of effec- tive market grades and standards. The first government egg regulation was approved in 1956.100 It provided for the creation within the Department of Agriculture of a contin- uously supervised egg grading and inspection service. The grading system adopted was identical to the grading system Of the United States Department of Agriculture. The market regulation also made provisions for container labeling and on-farm refrigeration requirements for all graded eggs. 100"Standards on Services for Continuous Supervised Grading and InSpection of Shell Eggs for Human Consumption," Department of Agriculture and Commerce, Santurce, Puerto Rico, August 9, 1956. Amended September 30, 1959. 127 In 1958 a second egg marketing regulation was approved by the Secretary of Agriculture.101 The intended purpose of this regulation was basically to protect Puerto Rican egg producers from unfair and harmful competitive practices such as ”dumping" by U.S. competitors. It was also designed to upgrade the quality of imported eggs as a protection to con- sumers. A third purpose of the regulation was to provide Specific requirements for refrigerating and storing eggs during the marketing process. The most recent egg market regulation was approved in 1964. The purpose of the law was to prevent the practice whereby "eggs from foreign countries have been and are being sold as if they were from Puerto Rico."102 The Act states that "this is a bad practice, prejudi- cial to the Puerto Rican consumer."103 It therefore provides for the labeling of each egg before sale in Puerto Rico. Eggs must be stamped indicating the place of origin——Del Pais (locally produced), U.S. or imported (foreign country). The Act does not apply to eggs produced in Puerto Rico and packed in one—dozen con— tainers, or eggs produced in Puerto Rico and supplied in containers of any type, capacity or size to private institutions, and to government . . . institutions, nor to eggs prgguced at home, when directly sold to the consumer.1 101"Market Regulation Number 3A,” Department of Agri- culture and Commerce, Santurce, Puerto Rico, June 26, 1958. 102Commonwealth of Puerto Rico, Act. No. 118, San Juan, Puerto Rico. Approved June 29, 1964, p. l. lOBIbid. lo”Ibid. 128 By and large these government regulations represent an attempt to enhance competition in egg markets and improve the quality of eggs available to the Puerto Rican consumer while holding egg prices constant. The survey (discussed in Chapter I) among farmers in the Mayaguez Region and other project surveys have shown that farmers, retailers, whole— salers and consumers generally believe that these regulations have been beneficial. From 60 to 90 per cent of the indi— viduals in these various groups expressed the belief that egg grading regulations have proven helpful to producers and CODSLIHIGI‘S . Production and Marketing Performance The changes described above in egg marketing institu- tions since 1950 have been accompanied by some significant improvements in production and marketing performance. These changes will be discussed below under the headings of (1) costs of production and marketing, (2) progressiveness and (3) product quality. Costs of Production and Marketing.—-The most signifi- cant performance changes in egg production and marketing have taken place in the realm of production efficiency. It ap— pears that costs of production have been reduced substane tially since 1950. Table 5.2 summarizes a study by the Ex- periment Station on the costs of production of six commercial egg producers in 1951. These farms were selected from a *_ -. 3' _fl.” "' "‘3- .-__.M.._ _p m _ i 129 TABLE 5.2--Production and Cost Comparisons From a Study of Six Commercial Egg Producers in Puerto Rico, 1951 Individual Producer B C D E F Average # of hens in production Average annual production/hens Average production cost/dozen Average marketing cost 1 dozen Average total cost per dozen Feed cost as % of total cost Labor cost as % of total cost Pounds of feed con- sumed per dozen eggs Average monthly mortality per 100 hens 1392 226 60.0 5-9 65.9 48 5-3 5-5 1.7 835 M02 178 132 85 116 135 153 123 67 76.3 78.8 76.1 104.1 102.u 76.3 85.1 86.2 104.1 102.u 61 60 67 55 58 10.9 13.0 7.1 16.8 21.9 8.7 9.8 10.5 9.8 10.6 3.0 1.9 2.3 3.7 2.5 Source: Manuel Pinero and Hector Bayron Montalvo, Estudio Sobre los Costos para Producir Huevos en Puerto Rico, 1951 Boletin 122, Rio Piedras, Puerto Rico: Estacion Experi- mental Agricola, Universidad de Puerto Rico, September, 195A. 130 census of farms with annual egg sales of more than $200.00. The table indicates that the average number of hens per farm ranged from 85 to 1,392. It also shows that average cost of production per dozen ranged from about .66 for the largest producer to $1.02 and $1.04 for the smallest and next to the smallest producers respectively. The raw data indicates that larger producers had lower costs of production. This may have been due to economies of scale and/or to improved production techniques on the larger farms. Perhaps the latter was a more important reason since the data in Table 5.2 reveals that the larger producers had greater output per hen and more efficient feed conversion ratios than smaller pro- ducers. These production costs included marketing costs ranging from about six to ten cents per dozen for three of the six farms studied. The three which reported no marketing costs apparently sold directly to consumers. Data are not available on current costs of production for commercial egg producers, but some general comparisons can be drawn using prices paid to members of the Lajas Valley Egg Producers Association in 1965. Such a comparison shows that even after excluding the marketing costs of the most efficient producer in the 1951 study, costs of production were $.60 per dozen while members of the Lajas Association were paid prices ranging from $.41 for Grade A small to $.57 for size Grade A jumbo in 1965. For the most efficient pro— ducer the cost of production in the 1951 study exceeds by 3 cents per dozen the price received for jumbo eggs by 131 association members in 1965. This difference appears even more significant when one considers the fact that the con- sumer price index for Puerto Rico, based on 1957—59 2 100, went from 79.6 in 1950—51 to 116.1 in 1964—65. Thus, if egg prices had risen in step with the general price level, the farm price of jumbo eggs in 1965 would have been about $.86, rather than $.57. This analysis suggests that real per—unit production costs of commercial egg producers have been reduced consider- ably since 1951. Several additional comparisons support the conclusion that egg production costs have been lowered in Puerto Rico since 1950. Table 5.3 summarizes those comparisons. Column 1 in that table shows that the number of commercial egg producers had increased from an estimated 38 in 1950—51 to 195 in 1963-64. This indicates greater Specialization in production which, according to Department of Agriculture per— sonnel and Agricultural Extension workers, has resulted in improved production practices and greater efficiency of re- source use. Columns 2 and 3 indicate that while the number of hens held on commercial egg farms has only slightly more than doubled since 1956-57, the quantity of eggs produced on commercial farms has almost quadrupled. Column 4 then Shows that average yearly production per hen on commercial farms increased from 168 in 1956—57 to 232 in 1964-65. 132 TABLE 5.3--Production Characteristics of Commercial Egg Farms in Puerto Rico for Selected Years .——1 ~02 0) CU CU) bDI H (DE E 80‘“ o ins-4 C: C 54 L210) p m Ocn 013m 5 a) CHL'L. HE ~HCDCT4 H E 0 +354 po HO 8 r—i om 03H <20 0 Mai 3&4“ :S'UcU Year 0 (Du-4 '0 C2 “CO-H MC 2 e: 2:: 2;: DOS 0 5(1) Dan-{O 04 (D +J'Os4 28 073 CE CCUCU ECU E HM >30) A (1)0114 (DU) HO CUCDO r—HEOU) 0'3 85 530 888 3.988 1.8"; $60 OE: COr-l (1)0)930) (UM-H zch B o -4CLO\J 049.0 1950-51 38b 1956-57 60-65 180,000 2,500 168 20.7 1957-58 79 — - - - 1958-59 108 - — - - 1959-60 121 285,997 — - - 1960—61 136 278,000 4,704 203 32.3 1961-62 178 394,494 6,758 205 41.1 1962-63 192 - 8,818 - 46.9 1963—64 195 482,831 8,844 220 45.6 1964—65 _ 448,330 8,682 232 46.5 aCommercial egg farms are defined by the Puerto Rico Department of Agriculture as those farms having more than 200 producing hens. bThe 1951 cost study by Pinero and Bayron (See Table 5.2 p.129) indicated that a Department of Economics and Rural Sociology census of commercial egg producers in Puerto Rico found 38 farmers with annual egg sales of more than $200.00 It would seem more likely that there were 38 farms having more than 200 hens in production. Source: Puerto Rico Department of Agriculture and es- timates by Nathan Koenig, A Comprehensive Agricultural Pro- gram for Puerto Rico (Washington, D.C.: U.S. Dept. of Agri- culture, 1953); and Maurice Perkins, Agricultural Credit in Puerto Rico (A Special Report published by the Dept. of Fomento and the Puerto Rican Development Bank, Commonwealth of Puerto RICO, 1958. 133 In summary the limited data available for comparing egg production efficiency for 1950 with 1965 suggest the fol— lowing: (l) the size of producing units has been increasing, (2) the growth of specialized commercial producers has been accompanied by better management practices and greater pro- duction per hen, and (3) real production costs have been reduced significantly. Very little data is available for evaluating changes in the cost of marketing eggs in Puerto Rico. One of the reasons is that significant changes have taken place over the past 15 years with respect to the marketing and coordi- nation arrangements. Currently available data are not com- parable to earlier data because the production and marketing phases have been vertically integrated through private firms and COOperative associations. The importance of truckers and other middlemen in the exchange process has declined. The farmer survey in the Mayaguez region pointed out that none of the eggs produced by farmers in the sample (which included about 71 per cent of all commercial producers in the region) were marketed through truckers. About 20 per cent were sold directly to retailers and 75 per cent to co- operatives or marketing associations. Egg marketing Special- ists in Puerto Rico argue that this vertical integration has lowered exchange costs by (l) eliminating excessive trans- action costs and (2) duplication of marketing services, by reducing market information gathering costs, by lowering un- certainty and by permitting more accurate scheduling of 134 production, grading and distribution to the satisfaction of consumer demand. The atomistic and imperfectly competitive markets of the early 1950's, in comparison to the present marketing structure appears to have fostered higher exchange costs. Progressiveness.--This measure of performance is based on the degree to which available innovations have been adopted. Egg producers in Puerto Rico by and large were quite slow to adOpt available innovations prior to 1957. One innovation example which stands out is the enterprise of commercial egg production itself. In spite of the fact.that a few commer- cial producers did exist, the adOption of the innovation came fairly slowly and only after other marketing coordination changes. From 1957 to 1964 the number of commerical egg producers more than doubled (see Table 5.3). Another important egg production innovation, which was slow to be adOpted, was improved breeds of laying hens. The value of baby chick imports (for both broiler and laying stock) was $249,188 in 1950, $505,420 in 1957 and $951,843 in 1965. Indications are that most of the imports in earlier years were dual purpose breeds rather than the more Special- ized and efficient strains of layers and broilers. The farm survey in the Mayaguez agricultural region, which included 57 commerical egg producers, indicated that of all those farmers now using improved laying breeds, only 20 per cent had begun doing so prior to 1957. As a result of the slow 135 adOption of improved and Specialized strains from the U.S., production per hen remained fairly low until 1957. At that time the adoption process Speeded up, and average production per hen moved from 168 on commercial farms to 232 in 1964—65. Similarly, the innovation of scientifically mixed and controlled feed rations, after having limited acceptance in the early 1950‘s, has been rapidly adopted since 1957. Total commercial poultry feed sales (including broiler feeds) al— most doubled from 1958 to 1964. The fact that at least 25 per cent of all domestically produced eggs are candled, graded, cartoned and delivered in refrigerated trucks to retailers shows the rapid improvements in marketing methods. In 1950 all eggs were marketed with- out such quality control and effective handling methods. All of these innovations are closely related to the first innovation-—organization for efficient commercial production. AdOption and improvement with respect to that innovation is still very much in process in Puerto Rico. But indications are that the adoption process is moving ahead rapidly. It is significant that almost half of the commercial egg producers on the island are members of some kind of eco- nomic organization for the encouragement of egg production. The types of organizations include a highly integrated cor— porate firm, a marketing firm using producer contracts and a non—profit marketing and supply corporation owned by pro— ducers. Since members of these groups are generally believed to be the most progressive on the island, it appears that 136 for egg production in Puerto Rico the diSplacement of atom— istic competition in egg production and distribution by the various institutional forms mentioned above has stimulated production and encouraged technological innovation. Product Quality.—-As noted earlier in this chapter, the quality of eggs available to the Puerto Rican consumer was low and quite variable before 1957. Since there were no government grading regulations, consumers could not be sure that they were buying a consistant quality and size of egg from one purchase to the next. In contrast to this situation, it is estimated by the author that about 25 per cent105 of all eggs produced in Puerto Rico in 1965 were graded, packaged, and distributed under quality regulations Specified and enforced by the De- partment of Agriculture. This means that the eggs were candled, graded, sized and placed in one dozen cartons with the date of packaging indicated and the inspection seal of the Department of Agriculture applied. The bulk of these eggs were distributed through supermarkets, superettes and large colmados. However, the competitive effect of better quality eggs in supermarkets and larger colmados has improved the quality of eggs sold directly to consumers and distributed through various combinations of producers, truckers and small 105This figure was obtained by estimating, from personal interviews, the yearly production of the six major egg pro- ducers who grade and package virtually all their production; summing that figure and dividing by the total domestic pro- uction. 137 retailers. Distributors of eggs through these channels have been forced to deliver better quality eggs in order to com- pete with the larger retailers handling only consistently fresh graded eggs. The length of time from production to consumption has been significantly reduced. Finally, the quality of imported eggs has been improved as a result of changes in domestic production and marketing practices and government regulations. At one time Puerto Rico was used as a dumping ground for surplus and low quality U.S. eggs. More effective coordination and improved handling methods of local producers, in conjunction with government import regulations, has brought a marked improvement in the over— all quality of imported eggs. 14.1.29: Production and Marketing Conditions, 1950-57 By 1950 dairying had developed as one of the major agricultural enterprises in Puerto Rico. In fiscal year 1950 the total value of milk production was 21.8 million dollars-—second only to sugar cane in the value of farm out- put. Thus, milk production accounted for more than 10% of the gross value of agricultural output in 1949-50. Koenig points out that from 1940 to 1950 considerable progress was made toward improving the production methods and sanitation requirements of dairy farms in Puerto Rico.106 Moreover, 106Koenig, pp. 230—233. 138 Perkins notes that during the years between World War I and World War II, outstanding progress was achieved in the con— trol of cattle diseases such as Texas fever, brucellosis and bovine tuberculosis.107 The immediate impact of effective control of these diseases was to improve dairy profits and increase milk production on the island. Perkins classified dairy farms in 1950 into three broad categories: (1) commercial dairy farms--medium to large land owners milking 50 cows or more, (2) family farms -—a comparatively small group where the family provides all or most of the labor, (3) subsistence farms—-a large number of unspecialized mixed farms maintaining a very few animals: these farms do not generally market their milk.108 The third category mentioned above apparently accounted for the largest number of milk producers, but by far the smallest amount of milk was produced on such farms. The second cate- gory, family farms, apparently also included a relatively small number of commercial milk producers. Most of the farms in these two categories who reported having dairy cows in 1950 used the cattle only to produce milk for home con- Sumption and were not producing for sale. Table 5.4 illus- trates the relative importance of the different size farms in milk production during 1950. As shown in Table 5.4 the farms with less than 30 cuerdas, which would include the majority of family 107Perkins, p. 308. 108Ibid., p. 310. 139 subsistence farms, made up 72 per cent of all farms reporting cows milked during 1949. Yet they produced only 14 per cent of all milk sold in that year. At the other extreme farms with more than 260 cuerdas made up a total of only 3 per cent of all the farms reporting cows milked in 1949, but they pro- duced a total of 47 per cent of all milk marketed. If we combine the two largest size categories and the two smallest, it is found that almost 75 per cent of the milk was pro- duced on farms of seventy or more cuerdas. The farms ac— counted for less than 12 per cent of all farms reporting cows milked. The statistics indicate that most of the milk produced for sale in 1950 was marketed on relatively large farms. TABLE 5.4--Milk Production by Farm Size, 1949 w rim 8 C m~4c M H H (UH e—im 4.) p w p viz Clp as Mass 2.2 we Size of Farm 0.x "O 0.14 Q—if—i 0'8 212 (Dr-i CDPGJr—i Or—l +3th [In-f mcm-H w—i cmch 2 02m 2: (02: 0 94m CD (DUO) +3 Qr—{q—g ECO H Ecn MI: scam 1» 3 QM4L+3 mra n+3 N (U0 NCDCUO SO (DOCH.H mo ammo cma meow 3-29 cuerdas 19,890 72.4% 7.85 13.6 30-69 cuerdas 4,290 15.7% 6.61 11.6 70-259 cuerdas 2,454 8.9% 15.92 27.7 260 or more 836 3.0% 27.10 47.1 U. S. Census of Agriculture - 1950. Puerto Source: Rico, Vol. 1, Part 34, Chapter 5, U.S. Dept. of Commerce, 1951. 140 Koenig estimated that "considerably less than one-half of all the milk produced actually enters into the marketing system that is governed by the sanitary regulations of the Department of Health."109 It is therefore apparent that many of the 27,470 farms reporting cows. milked were either marketing their production through distribution methods other than normal commercial firms or were producing only for home consumption. In Spite of the fact that many improvements were made in the ten years prior to 1950, milk processing and distrib- uting still lagged behind developments in production. Koenig estimated that about one-fourth of the milk produced in 1949-50 was handled by relatively modern marketing techniques. The other three—fourths was produced for home consumption or distribution by producers under relatively uncontrolled conditions as unpasteurized raw milk.110 The Department of Health had developed certain sanitary regulations by which they classified dairy farms as first class or second class. A first class dairy was defined as one that, "among other things, has the necessary facilities to sterilize the cone tainers, to cool the milk, to store and to bottle it in accordance with the conditions required by the Secretary of h "111 Healt A second class dairy was one which had been exempted from any of the requirements which, in the Secre- tary's Opinion, were not absolutely necessary for the pro— tection of public health. The Department of Health reported w...— 109Koenig, p. 231. llOIbid., p. 230 lllIbid. 141 that in 1951 there were 296 first class dairies which pro- duced the 46 million quarts of milk processed by pasteurizing plants on the island. Of that total only 35 million quarts were sold as pasteurized milk. There were 660 second class dairy farms selling milk to some 22 raw milk bottling plants and 402 Grade D raw milk dealers selling milk to a large number of milk stands over the island and delivering directly to consumers. Since, as Koenig noted, only about one-fourth of all milk produced in Puerto Rico was handled by modern mar- keting techniques, there were certain inefficiencies in the production and processing of milk in Puerto Rico. At that time, there was no milk market regulation to establish a classified pricing plan for assuring smooth coordination of supply and demand both in the surplus season and in the sea- son of production deficiency. Producers and their buyers were completely free to bargain and establish milk prices throughout the year. As a result, milk dealers were care- ful not to purchase more milk than they were absolutely sure they could sell, since any surplus milk would have to be sold at a loss. Therefore, to reduce risks, milk dealers bargained with producers for an even supply of milk through- out the year, based primarily upon milk production during the season of lowest output. Since most of the milk was produced and sold on this basis, much of the excess pro— duction in the flush season was left for the farmer to sell at whatever price he could obtain or feed to livestock. 142 Aside from a small amount of chocolate milk, the only other outlet of any significance for surplus milk was in the pro- duction of native cheese. However, this outlet was not sufficient to handle the ups and downs of milk surplus dis— posal in Puerto Rico. Under such a system neither the processor nor the producer could be free of considerable risks in his business. The producer was faced with the possibility that production increases might be difficult to market either to his normal buyers or to others in the market. He might be forced to accept an extremely low price, or he might not find a buyer at any price. In addition he was exposed to the possibility that his buyer might even refuse to take delivery of his normal production. 0n the other hand, the milk dealer or processor faced a similar type of risk. He was forced to estimate his sales from day to day and make purchases on the basis of a fluid milk price in order to fulfill those demands. If he purchased more milk than he was able to sell, then he was forced to take a loss on the surplus. The risk and un— certainty characterizing the marketing system was a major factor limiting the expansion of the dairy industry in spite of low per capita consumption in 1950. Another factor which gives an indication of the inef- fectiveness of the milk production and marketing complex is the quantity of milk and milk products imported. In 1950 Puerto Rico imported about 29.5 million quarts of evaporated, dry and condensed milk (converted to fluid milk equivalents). 143 Hence, in that year Puerto Ricans imported and consumed almost as much milk in the form of evaporated and dry milk products as was produced and pasteurized for local consump- tion. It is entirely possible that during the surplus pro- duction season of 1950, Puerto Rican producers were forced to use their milk for livestock feed while consumers were importing at considerable expense milk products from the United States and other foreign countries. The production- marketing system was not able to meet the needs of Puerto Rican consumers for fresh milk at competitive prices. As a result consumers turned to the nearest substitute. The fact is, however, that fluid milk prices were higher than they might have been under a more orderly marketing system. It appears that market uncertainty and poor coordination helped to keep local production at low levels by keeping marketing costs high, by inhibiting technological innova+, tions and by distorting the consumer demand signals of the price system. The possibilities will be examined later in this chapter. Evolution of a Market Control Scheme.—-As stated above, the distribution system for milk was highly disorganized and quite risky for producers, distributors and processors. There were no government regulations outside of health regu- lations. Producers and processors occasionally used con— tracts, but these were frequently disregarded by one party or the other when it appeared advantageous. Coordination 144 problems became particularly acute as the quantity of milk entering the marketing system began to increase rapidly during the first few years of the decade between 1950 and 1960. A rapid shift from second class dairies to first class dairies contributed to the difficulties. It meant that more producers were competing for stable processor outlets and were willing to make deals or arrangements with processors in order to obtain a buyer for their milk. The number of first class producers increased from 296 in 1951-52 to 400 in 1954-55. By 1957—58 there were 465 first class dairy farms in Puerto Rico. In 1954 several processors made an attempt to stabilize their milk supplies by establishing an arbitrary production quota system with their producers. This base quota system consisted of an arbitrary determination by the milk dealer of the amount of milk that he would be able to take from each producer at fresh milk prices. The producer was then notified that the balance of his milk would be purchased at surplus milk prices. The surplus milk was used in price wars between dealers during the periods of excess supply, and producers became quite disenchanted with this arbitrary and in their view unfair system of price determination.112 Therefore, in August 1954 a group of dairy farmers petitioned the Economic Stabilization Administration of the ¥ 112George E. Pringle, "The Puerto Rico Milk Industry" (unpublished manuscript dated January 19, 1959). 145 Commonwealth Government requesting that the administration establish and enforce a production quota system for the milk industry including minimum producer prices for fluid and surplus milk. The petition was denied at that time because the government believed that pricing methods were satis- factory under competitive market forces. The market relations among producers, processors and distributors continued to deteriorate. And it became appar- ent that something would have to be done to stabilize the market. To that end several meetings were held in the early part of 1955 between producer representatives, milk dealers and processors. The result of those meetings was an agreer: ment between milk dealers and producers to establish a milk processing plant for converting surplus milk into dairy products. Furthermore, Fomento agreed to grant a loan toward the financing of the plant. The final agreement was that producers and dealers would provide $146,000 and Fomento would loan $250,000. This would furnish the $396,000 required to build the size of plan deemed necessary to handle expected milk surpluses for the island. The plant was constructed and agreement was reached between producers and dealers whereby each producer would be assigned a quota based on his average daily production during the months of August through November. The farmer was to be paid the fluid milk price for all milk within the quota and would be paid the surplus milk price on any output above that quota. Apparently the arrangement was a pragmatic 146 and effective solution to market coordination problems in the dairy industry of Puerto Rico. But basic weaknesses in the arrangement and other problems resulted in continuing difficulties in the industry. To begin with, only about one-half of the milk distributors finally agreed to go along with the plan. This left the manufacturing plant with a heavy debt and only limited working capital when it opened in December, 1955. To make matters worse the volume of surplus milk had been seriously underestimated, and the size of the plant erected was not large enough to handle the volume of surplus delivered in the first few weeks of Operation. The fact that the plant was not fully completed when it began operations compounded the difficulty. When the plant was first opened, milk receipts were over three times its rated capacity. As a result large quantities of skim milk were destroyed or sold as hog feed.113 Additional problems arose as a result of efforts by noncooperating milk processors to bid producers away from COOperating processors by offering fluid milk prices for their total output. These difficulties occasioned a great deal of animosity among producers, processors and distributors. The net effect was a serious deterioration of market relations by 1956.11“ In 1956 a group of producers, processors and milk dealers asked the Senate of Puerto Rico to conduct a study 113Ibid., p. 9. llulbid. 147 of the dairy industry for the purpose of determining the need for a milk regulation. A Special Senate Committee was appointed to study the situation, and they held four public hearings during April and May of that year. The testimony in the hearings by producers, processors and dealers alike favored a milk industry regulation. At the end of the study the commission concluded that the dairy industry was indeed in a chaotic situation and that direct government action was necessary to bring about an improvement in relations between milk producers and distributors. They recommended that a regulatory agency be created to: (l) implement such regula- tions as will permit the disposing of the surplus milk, (2) launch educational drives directed to increase fresh milk consumption,(3) organize the processing and distribution of fresh milk while taking into account the most effective method of lowering costs.115 On June 28, 1956, the Legislature of Puerto Rico ap- proved a law providing for the regulation of the milk indus- try and creating an Office of Milk Regulation. The law impowered the Secretary of Agriculture and Commerce to ape point an administrator for that office. The administrator of the Office of Milk Regulation was authorized to: (1) fix minimum fluid and surplus milk prices to producers and maxi— mize prices at other distribution levels, (2) hold public ll5Act No. 34, Legislative Assembly, Commonwealth of Puerto Rico, Approved June 11, 1957, English Translation, p. 2. 148 hearings, (3) grant Operating licenses to producers, dealers and processors, (4) carry out such other actions as are necessary to assure compliance with the law. This included such things as cancellation of license, auditing of the records of producers and milk dealers, requiring regular re- ports from processors and/or producers and subpoena power. An administrator was immediately appointed who supervised the preparation of a Specific dairy industry regulation. On June 11, 1957, the Legislature approved the regulation and it became Public Law #34. The expressed purpose of the law was to insure that all endeavors should be directed towards having the public interest adequately served through the pro— duction of enough pasteurized milk by a strong indus- try, operating efficiently, which can supply the consumer with milkligd its products at just and reasonable prices. The major provisions of the regulation were: (1) a base-surplus pricing plan, (2) maximum and minimum prices at various levels of distribution, (3) a milk promotion fund, (4) Operation of the surplus milk processing plant previously established by producers and distributors and (5) establish conditions governing producer, processor and distributor relations. The regulation provided that each producer would be paid 16-1/2 cents per quart for fluid milk and 10 cents per —‘ 116office of Milk Regulation, Milk Industry Regula- tion N02_l (Department of Agriculture, Commonwealth Of Puerto Rico, as amended July 26, 1962)- 149 quart for all milk designated as surplus. In order to define "surplus" milk, the regulation required that each producer should establish a milk production base during the months from August to November. The regulation offered a specific means of calculation so that each farmer would Share equally in the fluid milk market according to his base production. The second major provision of the regulation was that prices were to be fixed at a Specific level for all channels of distribution. For example the maximum sale price for all home delivered fresh milk in glass containers was set at 25 cents per quart and for cardboard containers at 27 cents per quart. This was a maximum price which could not be ex- ceeded for any reason. Similar prices were established for other outlets such as milk agents, restaurants, retail stores, etc. In addition the law provided that no discriminatory price reduction could be made at any level of distribution. Any price reduction on milk made to one purchaser had to extend to all customers. The third major provision of the regulation was for a milk industry promotion fund. The purpose of this fund was to maintain a source of support for advertising of fresh milk in Puerto Rico. The regulation required that producers and processors each contribute one-fourth of a cent per quart on all milk produced and processes as non-surplus milk. That money was to be used to promote the sale of fresh milk and milk products on the island. 150 The fourth major provision of the regulation dealt with the milk products factory. It established the rules under which surplus milk would be transferred from processor to the milk products factory and provided for the payment of tranSportation subsidies in some cases. The final provision contained basic rules for the con— duct of business between various participants in the milk marketing system. It made certain provisions for coordina- tion of the exchange system. For instance it provided that once an agreement was established between a producer and a processor, neither the producer nor the processor could ab- stain from fulfilling the terms of that agreement without the consent of the Administrator. It also created Similar provisions for processor-distributor contracts. Market Coordination,l957-65 Milk Industry Developments.——Since 1951 there have been some very significant changes in the dairy industry in Puerto Rico, one of the most striking of which is the rapid growth in output. Since fiscal year 1951-52 total milk production in Puerto Rico has more than doubled. Table 5.5 shows total Production for selected years. And since 1951 domestic out- put has gone from 150 million quarts to more than 358 million quarts. A high percentage of that production is consumed as fresh milk. Thus, per capita consumption has increased rapidly in the past 15 years. 151 TABLE 5.5——Milk Production in Puerto Rico by Type of Pro- ducing Unit, Fiscal Years 1952-1965 — :3 '0 £77 C3 0 C: H60 0 H (Ur—l 'H H p c c m S m p C) O OUJ-r-i c0 0 :5 U) U20 U) (H: "O CU) SCUM CDCO'U Year 52 .234 .2808) 3.2+)8 m -pc>m +3 ECO prczm C) (D O'UOCU 00) 1—1 :343-r—I UGO-H PSDH CU 'UUJH "COIL: CD'U (U +3 OH-r—i QUE-H MOS-«+3 O Saw-4m HQJOCU 'r-li-«GJO E—t Datum ‘14ng Can-«F3491 1951-52 150,998 45,638 105,360 30.22 1952-53 163,960 56,542 107,418 34.48 1953—54 180,493 70,974 109,519 38 37 1954-55 191,717 80,051 111,666 41.75 1955-56 207,077 93,239 113,838 45.02 1956557 220,405 104,344 116,061 47.34 1957—58 232,797 114,471 118,326 49.17 1958—59 249,525 128,916 120,609 51.66 1959-60 280,976 151,556 129,420 53.94 1960-61 289,219 165,018 124,201 57.05 1961—62 311,020 183,354 127,666 58.95 1962-63 332,781 206,504 126,277 62.05 1963-64 353,018 285,269 127,749 63.81 1964-65 358,286 251,794 106,492 70.3 Source: Office of Milk Regulation. 152 A second surprising feature of the dairy industry in Puerto Rico has been the rapid rise in the production of milk for pasteurization. Since the Department Of Health requires that only those farms possessing a first class license may sell milk to pasteurizing plants, the increase in production of first class dairies illustrates the increase in pasteurization. Table 5.5 shows that production on first class dairies has increased from a total of 45 million quarts in 1951-52 to more than 251 million quarts in 1964-65. Milk production on second class and non-commercial dairy farms increased only slightly to 127 million in 1963-64 and then fell back to 106 million quarts in 1964—65. Stated in per— centage terms first class milk production has grown from 30 per cent of the total domestic supply to over 70 per cent. Thus, virtually all of the increase in milk production on the island has taken place on first class dairies producing milk primarily for pasteurization and fresh consumption. The rapid increase in milk production has moved the dairy industry into a place of special importance in the agricultural economy of the island. Table 5.6 indicates that in 1951—52 sugar cane supplied more than 50 per cent of the gross farm income of the island while milk production made up only 9.9 per cent. By 1964 the percentage of gross farm income derived from sugar cane production had declined to 30.1 while the percentage derived from milk production increased to 20.7 per cent. In a period of less than 15 years, milk production had risen to seriously challenge the 153 dominance of sugar cane on the island. This has been ac- complished largely as a result of direct substitution of dairy pasture for sugar cane fields. The shift out of sugar cane production has been especially obvious in the North central part of the island around Arecibo. Within that area much of the flat and fertile sugar cane land of medium-sized farms has been shifted to the production of grass and other products necessary for the operation of dairy farms. TABLE 5.6e-Percentage of Gross Farm Income Derived from Cane, Milk and All Other Products in Selected Years. Per Cent of Gross Farm Income Derived From: Year Sugar Cane Milk All Other 1951—52 50.1 9.9 40.0 1955—56 44.3 14.6 41.1 1960—61 38.6 17.9 43.5 1963-64 33.9 20.1 46.0 1964—65 30.1 20.7 49.2 Source: Ingreso Agricola de Puerto Rico, 1950-51-— 1963-64, Facts and Figures on Puerto Rico's Agriculture, 1965, Puerto Rico Department of Agriculture, Office of Agri- cultural Statistics. Total milk production, in addition to being increased through the use of additional land and other resources, has been bolstered by improvements in production techniques. 154 The Puerto Rican Department of Agriculture has develOped an incentive program for improving pasture lands. Commercial dairy farmers on the island have responded quite readily. The sample of first class dairymen in the western agricul- tural region of the island indicated that about 93 per cent of the farmers in the sample had established new or improved pasture under the program. Moreover, commercial dairymen on the island appear to have rapidly adopted high output rations and improved methods for handling feed products in order to achieve greater efficiency in the number of acres available for feed production. In the survey mentioned above, 76 per cent of the dairymen reported that they were using gnaxichOp as a part of their ration. While the above sur- vey was applied only among farmers in the western part of the island, there is no reason to believe that dairymen there are any more progressive than milk producers in the rest of the island. This indicates that Puerto Rican dairy- men in general have been willing to adOpt sound production practices. Processing.——In 1951 more than two-thirds of all the milk produced in Puerto Rico was sold in raw form or con- sumed at the farm level without further processing. In 1947 there were nine pasteurizing plants on the island, seven of which were in the San Juan Metropolitan area. These nine plants handled all of the 45 million quarts of milk produced by first class dairies. By 1965 there were 155 thirteen pasteurizing plants on the island who handled the 251 million quarts of first class milk produced domestically. There was only a slight increase in the number of pasteur- izing plants on the island, and most of the new ones were set up in cities other than San Juan. There was, however, a striking increase in the capacities of pasteurizing plants on the island. Rising consumer incomes along with stable price and supply situations encouraged dairy processors in Puerto Rico to invest in pasteurizing facilities. Since processing margins are fixed by the milk regulation, pro- cessors have been encouraged to adopt the most efficient methods of operation in order to reduce costs and thereby raise profit margins. A survey conducted among milk pas- teurizers on the island shows that a high percentage have adopted the same milk processing practices that are used by progressive stateside pasteurizers. Price competition among fresh milk processors has not been a significant factor even though it would be per— mitted under the industry regulation if the processor were willing to grant a lower price to all customers. It is ap- parently because of this latter qualification and the oli- Opolistic nature of the industry that processors have not chosen to practice price competition. Each processor realizes that any price reduction would simply mean that others would quickly follow suit and nmkawould be better Off. Neither is there a significant amount of advertising com- petition. Because the fresh milk produced by all 156 pasteurizing plants isquite homogeneous, there seems to be little advantage in advertising other than institutional pro- motion. Competition among processors has been limited to competition on the basis Of service to the customer. There is apparently a significant amount of competition among con— sumer route salesmen for home delivery customers. In general the milk processors on the island have Shared in the tremen- dous rise in milk consumption on the island. They have con- tributed to the milk industry promotion fund and have received the benefits of that industry-wide advertising as well as the benefits accruing individually from the rapid rise in consumption. Processor gross margins under the milk regulation are quite low in comparison to farm to retail Spreads on the mainland. A study in California states that the average wholesale price spread was 13.6 cents per quart in the twenty 117 largest metrOpolitan areas of the United States. In com- parison the spread in Puerto Rico is seven cents per quart. This illustrates the low gross margins decreed under the regulation for milk processors on the island. In spite of the fact that gross margins have been quite low since 1957, milk processors have evinced a fairly steady gain in profits as a percent of gross sales. In 1958 net profits as a percent of sale ranged from —2.4 to 3.0 among 117D. A. Clarke, Jr., Economic Aspects of Milk Price Regulations, Agricultural Experiment Station, Information Series in Agricultural Economics No. 63—64, November 1963, p. 21. 157 the island fluid milk processors. By 1963 all but three of eleven processors had made an increase in profits aid six indicated profits of more than three per cent of gross sales (see Table 5.7). The fact that prices and supplies are stable and that the processor does not have to handle surplus milk seems to permit pasteurizing plants to Operate fairly efficiently. TABLE 5.7--Net Return as a Per Cent of Gross Sales for Milk Pasteurizing Plants in Puerto Rico, Selected Years. Processing Net Return on Sales (Per Cent) Flrm 1963 1962 ‘ 1960 1959 1958 A ‘(0-9) ”(O-2) 0.6 2.8 3,0 B 6.6 24.2 2,5 3.0 0.3 C 1'1 1-3 -(l-O) 3.0 2.1 D 0.]. 0.9 l l * l O E 5-2 5.3 - - _ F 6.2 4.8 1.8 4,7 4.6 G 3.4 2.9 3.0 3,1 2.6 H 3-3 1.0 1.6 3,3 -2.4 I 2.0 —0.2 2.3 2,3 0.1 J -l.9 —5.5 -4.5 -3,5 1.2 K 4'2 35 1.5 2,3 1.2 L 2.8 2.8 1.2 0.4 1,1 Average 2.3 1.8 1.4 2,8 2.0 *Data not available Source: La Industria de la Leche y de la Ganaderia, Junta de Salario Minimo, Department del Trabajo, Estado Libre Associado de Puerto Rico, December, 1964. Effects of the Regulation.--Dairy industry develOpment in the past fifteen years is one of the bright spots in the agricultural sector of Puerto Rico. Producers and processors 158 during that short Span of time have accomplished a change- over from a system of production and distribution charac— terized by small farms, unsanitary conditions and disorgan- ized distribution to one utilizing modern production and processing methods. They have requested and received a government regulation which has contributed greatly to the stability of the industry. While it is impossible to deter- mine the Specific effect of the milk regulation upon total consumption, dairy farm productivity and processor effi— ciency, one can speculate that the dairy industry regulation, which was established in 1957, contributed to the improvement of the dairy industry in at least five different ways: (1) It provided a guaranteed price for producers and an equitable payment plan so that producers could share equally in the fluid milk market. With a guaranteed price, producers have been willing to make long range investments and to ex— pand production facilities and improve production efficiency. (2) It offered an incentive for the improvement of sanitation practices. The guaranteed farm price for milk produced on first class dairies and marketed as fluid milk was 16.5 cents per quart. This encouraged second class dairymen to upgrade sanitation equipment and practices in order to obtain a first class license. The net effect of the regulation was to im- prove significantly the quality of milk available to the Puerto Rican consumer. (3) The milk regulation stabilized supply arrangements between producers and processors by re- quiring a producer to sell all his output to a single 159 pasteurizing plant. Hence producers had guaranteed outlets and processors had guaranteed supplies. (4) The regulation provided for the processing of and fair payment for surplus milk. (5) The dairy industry regulation made provision for advertiSing and promotion of fresh milk consumption on the island. Through a united effort producers and processors were able to encourage consumers to substitute fresh milk for imported dry or evaporated milk and to increase consump- tion of fresh milk. That the milk regulation has been re— garded as a significant improvement in the industry is illustrated by the fact that 86 per cent of the farmers, 80 per cent of the consumers and 75 per cent of the proces— sors in the surveys mentioned earlier indicated a belief that the milk regulation had benefited producers, processors and consumers alike. Although the dairy industry regulation has signifi- cantly improved milk marketing in Puerto Rico, it has several characteristics which may cause long-run difficulties in the milk marketing structure of the island. The most im— portant of these are the structural rigidities brought on by the regulation. One of the difficult features of an administered price system is that the price established must be realistically related to production and distribution costs and to consumer demand. To avoid the difficulty, prices should be set only after production cost studies and demand studies indicate prOper prices. 160 A second factor is the rigidities imposed by fixed maximum prices at various types of retail outlets. Several processors argue that as a result of the homogeneity of the product and the restraints imposed by the regulation, the only area of competition is in home delivery sales. Because of the same intensive competition, all processors in Puerto Rico make home deliveries six days a week. Conclusions from research studies in the United States have suggested that home deliveries on a three day basis permit more efficient use of resources without significantly reducing sales vol- ume. The consumer survey of this food marketing project revealed that about 98 per cent of the homes in San Juan and Mayaguez samples had refrigerators. Thus, refrigeration is no longer a barrier to three-day delivery in Puerto Rico as it once was. A third rigidity caused by the regulation arises from the requirement that a given producer or processor can break supply agreements only with the permission of the market administrator. The policy of the administrator has been to grant such changes infrequently and only under very urgent circumstances. As a result both producers and processors are deprived of the Opportunity to seek more satisfactory agreements. Because the regulation Specifies a processor pool payment plan, the producer who is bound to a processor whose milk sales are declining will receive a lower blend price as a result of the processor‘s higher surplus desig~ nations. To date, the process of switching processors 161 (which would provide a competitive solution to the problem) has been difficult enough, so that it has created certain inequities in payments to producers and inhibited over—all processor marketing efficiency. A second major weakness of the Puerto Rican regulation is its omission of any quality incentives. The pricing scheme does not include a method of paying for milk on the basis of total milk solids. This fosters indifference among producers toward the quality of milk produced, and Opens the door to possible adulteration practices. The pricing scheme also penalizes those producers who incur the extra costs of producing milk high in butter fat. One may argue that since a significant percentage of Puerto Rican production is utilized for fluid consumption (which even the U.S. is usually standardized to fairly low butterfat levels), the omission of an incentive payment for butterfat content does not create significant problems. Encouragement of production of milk with lower butterfat content may lead to the best allocation of resources anyway. Still, there are certain advantages that could be achieved with at least a minimum incentive plan without fostering any resource allocation problems. Moreover, provisions are needed for controlling bacteria count and foreign material in the milk delivered to proces— sors. Finally, the milk regulation permits no quantity dis— counts. Even in those cases where a distributor can demon— strate cost justifications, he is required to maintain one 162 price for all buyers. Distribution costs are seldom the same for all outlets and all sales quantities. The inflex- ible pricing structure produced under the current regulation lowers the effectiveness of the competitive price system in allocating milk supplies to consumers through the most effi- cient market channel. Admittedly, this difficulty, in con— junction with the problem of setting price levels that are "in harmony" with the rest of the economy, is to be expected when prices are determined administratively by a political entity rather than through the impersonal competitive price mechanism. But, the administered price system should be able to utilize certain aSpects of the competitive price system where they encourage greater productivity and lower consumer prices. There is no reason why a more flexible pricing policy could not be devised which would permit price discounts adjusted to reflect differences in distribution costs. Such a plan would incorporate some of the benefits of the competitive price system while eliminating the dis- advantages discussed earlier. Production and Marketing Performance Costs of Production and Marketing.——The foregoing dis— cussion has described some drastic changes in the dairy in- dustry since 1950, both in competitive structure and in over- all coordination of the marketing system. These changes have been accompanied by some significant improvements in 163 production efficiency. Puerto Rican dairy farmers have been fairly successful in lowering real costs of productiOn over the fifteen years since 1950. 'Several indicators of the improvements in production efficiency are discussed below. Data from an unpublished manuscript by Placido Acevedo can be used to demonstrate the change in the real cost of milk production on first class dairy farms between 1953 and 1963.118 He utilized cost studies of the Puerto Rico Minimum Wage Board. Mr. Acevedo found that production costs were 13.60 cents per quart in 1953 and 16.50 cents per quart in 1963 as determined by the minimum wage studies. Net returns per quart were 2.4 cents in 1953 and 1.3 cents in 1963. His analysis thus indicates that the absolute cost of producing milk on first class dairy farms in Puerto Rico increased by 2.9 cents per quart from 1953 to 1963 while net returns declined from 2.4 cents to 1.3 cents per quart. If the 1953 cost of production per quart is inflated by the consumer price index, the cost of production for that year stated in 1963 dollar values is 18.25 cents per quart. Hence, the real costs of production in 1963 were 1.75 cents per quart less than in 1953—54. It should be emphasized that the foregoing discussion was concerned only with first class dairies. No attempt is made here to evaluate the production efficiency of second ¥ llBFrom an unpublished manuscript by the Administrator of the Office of Milk Regulation, Placido Acevedo, undated. 164 class or non-commercial producers. Their production gener— ally remained constant over the period under consideration while first class production increased by over 500 per cent. This in itself is somewhat of an indication of improvements in production efficiency. The shift from a second class license or from a non—commercial producer usually involves an investment in additional sanitation equipment. Frequently, the farmer realizes that to make the changeover to first class production profitable, he must increase the scale of output and adOpt more efficient production techniques. Hence, the producer who obtains a new first class license is likely to invest some additional capital in up-grading or increasing the Size of his herd, purchasing milking machines or other equipment and improving feed production or handling facilities. These kinds of improvements have been shown to be cost re- ducing or output increasing innovations among dairy farmers in the U.S. and in Puerto Rico. Thus, one may argue intu- itively that the rapid changeover to commercial first class production has probably been a positive factor toward greater over-all production efficiency. Table 5.8 contains four series of statistics on first class production of milk in Puerto Rico. These statistics give some indication of possible changes in production ef- ficiency since 1950. The first column shows the number of first class dairy farms in operation at the end of fiscal years 1952 through 1965. The number increased from 296 in 1953 to 747 in 1965. The percentage increase in first class 165 TABLE 5.8--Statistics of First Class Dairy Farms in Puerto Rico, 1951—65 N b Average fu? ert Average Total Daily Y 0C1 lrs Number Production Production ear D 738 of Cows (Thousand per Cow in Falry Per Farm Quarts) Production arms (Quarts) 1951-52 296* 73 45,635 1952—53 330* 71* 56,542 1953—54 360* 72* 70,974 8.10 1954-55 400 73 80,051 1955-56 400* 82* 93,239 1956-57 410 90 104,344 1957—58 465 89 114,471 8.98 1958-59 521 89 129,916 1959-60 566 93 151,556 1960—61 588 100 165,018 1961—62 639 99 183,354 10.53 1962—63 691 97 206,504 10.49 1963-64 718 103 225,269 10.68 1964—65 747 107 251,794 11.20 *Estimated Source: Office of Milk Regulation and Bureau of Agri- cultural Statistics, Department of Agriculture, Commonwealth of Puerto Rico. 166 dairy farms was 38 per cent during the five year period from 1952-to 1957. But during the first five years that the milk regulation was in effect (1957—62), the number of first class dairy farms increased by 56 per cent. It was mentioned earlier that most dairy Specialists in Puerto Rico are convinced that first class milk producers make more efficient use of their resources than second class or non-commercial producers. During 1953-54 Perkins made a comparison between the average production of cows on first class dairy farms and average production for all other dairy cows. He found that the average production per cow on first class dairies was more than twice the average production of all other dairy cows.119 Column 4 in Table 5.8 indicates that average daily pro- duction per cow on first class dairy farms has increased from 8.10 quarts in 1953-54 to 11.20 quarts in 1964-65. Going back to 1949-50 the average daily production was only 7.07. It is evident that first class dairy farms have made significant improvements in productivity per cow since 1950. Finally, column 2 in Table 5.8 shows the average num— ber of cows per first class dairy farm for fiscal years 1952 through 1965. The number has increased almost yearly from 73 in 1951-52 to 107 in 1965. This figure may or may not be an indicator of improvements in production efficiency. The relevant average cost curves for different size dairy farms ¥ 119Perkins, p. 311. 167 have not been determined by research studies in Puerto Rico. While the average number of cows per farm has been high throughout the period under consideration, this might be due to the fact that economies of scale do in fact exist, or it might be caused by the fact that first class milk pro— ducers in Puerto Rico have historically been large landowners who may not have known much about cost at various herd sizes but who did have an abundance of capital and land to invest in dairying. It is probably more likely that some economies of large scale production do exist since the trend toward larger herds- has been quite pronounced and steady. The data summarized in this section suggest that pro- duction efficiency in the dairy industry has increased sig- nificantly. Production costs in real terms were about 1.75 cents less per quart in 1963 than in 1953—54. Factors con- tributing to this improvement appear to have been increasing numbers and production of first class dairy farms, higher average production per cow and increasing herd size. Prior to the passage of the milk regulation in 1957, the dairy industry was completely dependent on a bargained price system for allocating available supplies in the mar- ket place. Producers were free to sell their milk to the highest bidder, and processor-dealers were also able to bargain for the best deals. In such a syStem daily supplies and demands established the price of milk. Exchange costs in a competitive price system are fre- “W“ *- ,pn __. quently somewhat high, especially for perishable commodities. 168 There are several reasons for this. Supply agreements be- tween buyers and sellers are often quite unstable. There flsalways the possibility that either the buyer or seller will find a more attractive Offer and terminate the arrangement. This means that the other party has to find and come to terms with another buyer or seller. In such a search process, the individual must incur certain costs associated with gathering and evaluating information, bargaining with possible buyers or sellers and making the final decision. In the event that a buyer is not immediately available, the seller may incur financial losses due to spoilage Of the product. Finally, indirect costs may be present in a competitive exchange sys- tem on account of the necessity of financial hedging against risks and the abandonment of business investment Opportunities because of price or supply uncertainty. These factors, in addition to a pronounced seasonal production pattern, combined to make exchange costs fairly high in the milk industry prior to 1957. There is no data available to indicate the magnitude of such costs, but un- doubtedly they were regarded by producers, distributors and processors alike as being too great to tolerate since a government regulation was requested and supported by the industry. The result of that request was a regulation which pro— vided for a marketing system in which most exchange rela- tions were administered by a government agency. Exchange costs under such a stable arrangement were probably reduced 169 significantly. Moreover, price and supply arrangements became completely stable under the regulation. The admin— istered price system almost completely eliminated informa- tion gathering, bargaining and market risks. Of course, the elimination of these costs would have done producers and distributors little good if the administered prices had not been sufficiently high to cover production and distribution costs with an acceptable margin of profit. It appears that the industry has been satisfied with the operation of the regulatory system since, as noted earlier, a high percentage of farmers and processors surveyed in this research project indicated a belief that the regulation had been beneficial to producers, distributors, processors and consumers. Progressiveness.—-The review in Chapter III of research findings in several different countries by Tax, Banfield, Belshaw, Schultz and others suggested that technological progressiveness is one of the critically important factors for improving agricultural productivity. The rate at which proven technological innovations can be diffused among agricultural producers is a critical variable in determining the rate of agricultural output of a given commodity. Of the writers mentioned above, Tax, Banfield and Belshaw imply that the structure and coordination of the marketing system may have a significant effect on technological progressive- ness among agricultural producers. Data on the Puerto Rican dairy industry indicate first of all that producers have 170 readily adOpted improvements in production techniques since 1950 and secondly that market stabilization through govern- ment administration has been a positive factor in the adOpt- tion process. The contrast between the two following statements points up the magnitude of technological changes on dairy farms in Puerto Rico since 1950. This industry is only slightly mechanized. As a result, the man-hours needed to produce 100 pounds of milk is from 3 to 4 times as great as the number required on the mainland. Only a few dairies in Puerto Rico use milking machines. Few use power mowers or cutters. Still fewer have silos. Farm and barn layouts are poor. Production is low. There can be little doubt as to the important role that mechanization and related technology could play in the improvement of dairying on the island.12 In this dramatic develOpment (rapid change-over to first class dairy farms and rapid increase in output since 1953), the adoption of new technology has played an important role. At the present time such innovations as artificial breeding, pasture improvement, better feeding methods, better breeds, farm records, mechanization, and disease and para- site control are widespread. It is apparent that the rapid growth of the dairy industry has been influenced by favorable farmer predisposition toward the adOption of new technology.1 The first statement was excerpted from Koenig‘s study of the Puerto Rican agricultural economy in 1950, and the second was drawn from a doctoral dissertation on adoption of innovations among first class dairy farmers in 1965. 120 , Koenig, p. 180 121Otis Oliver Padilla,"The Role of Values and Channel Orientations in the Diffusion and Adoption of New Ideas and Practices, A Puerto Rican Dairy Farmers Study" (un ublished Ph.D. dissertation, Michigan State University, 196 L p. 57. 171 Koenig's statement makes it clear that the adOption of im- proved production techniques in the dairy industry as a whole had been slow and inadequate prior to 1950. But Oliver found that in 1964 first class dairy farmers were quite progressive in terms of innovations adOpted. In his study Oliver gave farmers a list of Specific innovations and asked them, among other things, if they had ever used the practice and if they were now using it. Table 5.9 includes a list of the innovations he used and the per- centage of the 233 farmers in the sample who had (1) used the practice and (2) permanently adopted it. At least a majority of producers had permanently adopted six out of the ten innovations suggested by Oliver. The percentage of adoption among farmers samples for such important innovations as fertilizers, use of artificial breeding and pasture im— provement was over 70 per cent. The survey discussed in chapter VI of this thesis included a set of questions on technological innovations. The sample of 54 included a high percentage of all first class dairy farmers in the De- partment of Agriculture‘s Mayaguez region. Of the 54, 99 per cent had permanently adOpted fertilizers, and 89 per cent had permanently adOpted insecticides. In addition officials at the Office of Milk Regulations have indicated122 that virtually all first class milk producers now have bulk 122Personal interview with Mr. Placido Acevedo, Ad- ministrator of the office of Milk Regulation and his economic assistant Felix Roman on July 30: 1965' 172 storage tanks (since all pasteurizing plants use bulk tank pick—ups) and milking machines. And Oliver noted that an estimated 95 per cent of all first class dairy farms now have milking machines. It is evident that Puerto Rican pro- ducers have made great improvements in production methods over the past fifteen years. TABLE 5.9--Per Cent of First Class Milk Producers in a Sample of 233 Who Used and Permanently AdOpted Specific Innovations, 1964 Per Cent of Sample iPer Cent OfiSample Innovations Who Had Used The Who Had Permanently Practice Adopted the Practice Fertilizers 99.1 98.7 Internal Parasite Control 92-7 90.9 Artificial Breeding 84.1 68.2 Pasture Rotation 80.7 78.5 Pasture Renewal 77.2 71.2 Herbicides 57.5 50.6 Insecticide 48.1 40.8 Salt Stations 44.6 35.6 Record Keeping 18.0 14.6 Silage 8.6 6.4 Source: Otis Oliver Padilla, "The Role of Values and Channel Orientations in the Diffusion and AdOption of New Ideas and Practices, A Puerto Rican Dairy Farmers Study" (un ublished Ph.D. dissertation, Michigan State University, 196 ). 173 The impact of government market regulations on the rate of adOption of innovations is demonstrated by the data in Table 5.10. Here the rate of adoption of certain innova- tions is indicated. Perhaps one of the most important innovations in dairy production has been the changeover to mechanical milking. Puerto Rican farmers purchased only $62,529 worth of new dairy farm equipment in fiscal year 1951 (the bulk Of which was for milking machines). While the amount purchased increased each year through 1957 when purchases amounted to $222,931, purchases dropped Off in 1958 only to rise again in 1959. A second type Of produc— tion innovation which has been important in improving productivity is pasture improvement. The number Of cuerdas of pasture established as well as the number of cuerdas improved increased steadily from 1954 through l959-—reaching a combined total of 50,800 cuerdas in the latter year. Both dropped Off a bit in 1960 but remained fairly high through 1964. Finally, government incentive payments to producers for the purchase or construction of new equipment or facilities followed the same pattern. Payments rose steadily through 1956 with a sizeable decline in 1957 fol- lowed by a jump upward in 1958. And payments fluctuated between $40,000 and $140,000 per year after 1958. The general pattern for the innovations mentioned above seems to be a rapid increase during the years prior to 1959 and followed by either continued less significant expansion or relative stability. The milk regulation was 174 TABLE 5.lO--Value of Dairy Equipment Imports, New and Im— proved Pasture, and Incentive Payments to Dairy Farmers in Puerto Rico, 1951-64 Cash Payments Import Value 4 New of Dairy PaSture Pasture to Producers Year Farm Equip— EStab— Improveda for New Equip- ment lished (cuerdas) FEEEEiiggs (dollars) (cuerdas) (dollars) 1950—51 62,529 — - - 1951-52 23,847 - — - 1952—53 29,644 - — - 1953—54 73,653 5,300 4,700 4,500 1954-55 162,582 12,000 5,500 23,965 1955-56 213,899 14,800 4,900 39,596 1956-57 222,931 22,300 5,300 18,722 1957—58 63,792 19,200 16,200 22,815 1958-59 124,988 32,200 18,600 40,871 1959-60 126,174 18,900 6,900 84,978 1960—61 164,689 23,500 7,100 108,691 1961—62 201,584 27,287 9,656 139,830 1962—63 307,287 30,000 8,200 120,357 1963—64 228,365 — - 91,4242 aRefers to the amount of new pasture established and cuerdas improved with assistance from the Commonwealth government's pasture improvement program. b Refers to government incentive payments to producers for purchasing new equipment or facilities, e.g. silos, molasses tanks, Source: stables, milk rooms, etc. External Trade Statistics, Puerto Rico Planning Board and La Industria de a1 Lechegy de la Ganaderia, Junta de Salario Minimo, Departmento del Trabajo, Estado Libre Associado de Puerto Rico, December, 1964. 175 first passed in 1956 and became effective in 1957. The market stability created by the law may have been a factor in the decisions of producers to make capital investments in modern production techniques at a rapid rate after 1955. There are, of course, any number of other factors which undoubtedly affected those decisions. One can only speculate as to the positive effect of the market regulation and the possible negative effect of poor market coordination had it not been granted by the Puerto Rican government. In summary Puerto Rican dairy farmers have made sig- nificant improvements in the use of modern production tech- niques over the past fifteen years. The passage of a govern- ment regulation for the dairy industry appears to have sta— bilized market relations and reduced investment uncertainties sufficiently to provide some impetus to the technological adOption process among dairy farmers. Product Quality.-—Previous discussion has established thefact that the quantity of milk produced and sold to pas- teurizing plants increased rapidly after 1950. This is probably the best indication of quality improvements in milk production. To review, in 1950 only 35 million quarts out of a total production of 146 million quarts were pasteurized (about 25 per cent) as compared to pasteurization of 225 million out of a total production of 358 million quarts in 1964-65 (about 63 per cent). The Department of Health re- quirements on sanitation practices and refrigeration in 176 producing, tranSporting, processing and distributing pas- teurized milk have been sufficiently strong to assure ade- quate quality. Sanitation regulations earlier in the period were somewhat inadequate but significant improvements have been made. Some problems of enforcement of sanitary regula- tions among producers still exist but, in general, the quality of processed milk in Puerto Rico is quite satisface tory. There can be little doubt that since 1950 consumers have benefited by a substantial improvement in the quality of milk available to them. Fruits and Vegetables Production and Marketing Conditions, 1950-57 Production of fruits and vegetables in Puerto Rico in 1950 was diSpersed over a large number of small subsistence type farms. In most cases fruit or vegetable production was not the main enterprise of the farm. Puerto Rican farmers have traditionally regarded fruit and vegetable production as secondary to major crops. The bulk of the production came from farms where the major enterprise was sugar cane, coffee, or tobacco or from part—time or subsistence farms. Banana production illustrates the inter~relationship between coffee production and other tree crops. In the 1950 census of agriculture, more than 31,000 farms reported pro- ‘duction of bananas. On virtually all of those farms, bananas were produced as a by—product of coffee production. The trees were planted to provide shade for the coffee trees, and 177 the bananas produced were considered as supplementary to the principal cash enterprise of coffee. The situation was the same for several other tree crops (e.g. plantains and oranges). The same type of complementary production arrangements existed for such starchy root crOps as yams, taniers, potatoes and casava. These crops were planted under the coffee trees or on small vacant plots on the coffee plantation. They were mainly produced for home consumption, but the excess was marketed when buyers were available. There were a few pro— ducers who Specialized only in the production of starchy vegetables in certain parts of the island, but such Special- ized producers most commonly used small plots on hillsides where little else could be produced and followed primitive production practices. The situation was much the same in the production of other vegetables mentioned above. In the 1950 census, 2,294 farms reported having produced tomatoes, while 1,535 reported the production of peppers. Included in the census were only those farm.units having 3 or more cuerdas, so additional production of these products could have been accomplished on smaller garden-type plots. Very little of the production of such plots was marketed, however. Of the farms reporting tomato or pepper production in the census, the average number of cuerdas harvested per farm was .69 and .41 respectively. While tomato production was generally regarded as the most commercialized of all vegetable production, there were 178 several pockets of Specialized commercial producers of scattered subsistance or part—time farms. Table 5.11 reveals the value of production of fruits and vegetables for Puerto Rico in 1950-51. The group labeled starchy vegetables made up more than one-half of the total value of $17,539,000 for all fruit and vegetables. Fruit production was valued at $4.6 million and other vegetables $3.0 million. It is interesting to compare the total value of local production with the value of imports of fruits and vegetables. Momsofthe production mentioned above and listed in Table 5.11 was consumed as fresh produce. In 1950 Puerto Rico imported large quantities of fresh, frozen, canned and dried fruits and vegetables, and a significant percentage of Puerto Rico's consumption of processed fruits and vege— tables was supplied by imports. Moreover, as indicated in Table 5.14 Puerto Rico imported a large amount of fresh fruits and vegetables. The total value of all fruit and vegetable imports in 1950-51 was over $14 million. Thus, in 1950 some 40-45 per cent of the total consumption of fruits and vegetables on the island was imported. In 1950 virtually all the fruits and vegetables mare keted in Puerto Rico were purchased by merchant truckers buying at farms or at concentration points in rural areas. These merchant truckers then transported the products to consuming centers where sales were most often made to re— tailers in the market plazas or occasionally to consumers. Truckers seldom had an established place of business, for 179 TABLE 5.ll--Value of Fruit and Vegetable Production and Num- ber Of Farms Reporting Sales in 1950—51 $ Value Of " T 'W . . . Number of Farms Description Production Reporting Sales $000 Starchy Vegetables 9,917 - Sweet Potatoes 1,377 25,552 Bananas 4,101 12,214 Plantains 1,717 7,804 Dasheens 190 12,499 Yams 500 12,506 Breadfruit 908 553 Taniers 992 21,009 Casava 132 8,069 Other Vegetables 3,007 ‘ Pumpkins 398 2,158 Peppers 364 1,535 Cabbage 370 992 Tomatoes 893 2,294 Others 973 - Fruit 4,615 - Avocados 638 10,200 Oranges 631 9,618 Coconut 1,380 3,578 Mangos 167 1,173 Pineapple 1,290 140 Grapefruit 210 1,135 Others 299 - Total Fruit and ‘ Vegetables 17,539 —— 1950. Source: U.S. Census Of Agriculture for Puerto Rico - 180 their truck bed served as a grading, packing and storage warehouse. Yet these truckers performed (though frequently inefficiently) the important marketing function of assembling food products from large numbers of small producers, trans- porting the products to urban areas and distributing them to other middlemen or to consumers. lley provided the neces- sary link between small geographically scattered producing units and small retailing, wholesaling or consuming units. The service provided by merchant truckers was a necessary part of the coordinating mechanism of the highly competitive bargained exchange system for fruits and vegetables. Unfor- tunately, their handling methods had significant influence on the marketing methods of their buyers and on the practices of farmers as well. Neither producers nor merchant truckers were able to understand the nature of consumer demand sufficiently to perceive the need or profitability of washing, grading and carefully handling perishable commodities. Nor was there a clear understanding of the importance of such practices on marketing efficiency and hence industry profits. As a result, there was little protection of fruit from the trOpical heat, and products were ordinarily transported in bulk. Nathan Koenig observed that the movement of products from the farms to the mar- keting centers of Puerto Rico is a costly process. This is due to the inefficient 'methods that are em— ployed. All the fruits and many others products that move in the market are sold by count. Although some of the products are placed in sacks, their 181 handling is as costly as handling bulk shipments. Since there is no grading to promote buyer confi- dence, the practice of the trade is to inspect each item that is received. He also observed that the bulk tranSportation of fruits led to a great deal of Spoilage and waste as:a result of brufis1ng and mashing and due to the lack of protection while in transit. A high percentage of locally produced fruits and vege- tables were marketed through Municipal Market Plazas. A study in the San Juan Metropolitan Area by the Puerto Rico Department of Agriculture noted that during a sampling period in 1952-53 the destination of about 39 per cent of the fruits, 78 per cent of the starchy vegetables and 93 per cent of the other vegetables were market plazas. Table 5.12 summarizes the results of that study. Since the market plazas consisted of individual stalls provided to retailers for displaying their products, they had no facilities whatsoever for grading, storing or efficiently handling produce. Perkins noted that parking around market plazas was generally limited and that there were no unloading platforms or areas provided for sorting or grading products. Both wholesale and retail Operations were carried on in the market plazas, often by the same individual. The most prevalent type of market price and supply in- formation was market observation or word of mouth reporting. Merchant truckers obtained price information by direct 123 Koenig, p. 221. 182 .mmuwm .Qm nomad «cash cow mnosoEoo a mangSOHmw< on obnoEpnwmoQ «nose com me MGON ma w poem on mOpmwp< moa we OHospmm nmoamncow oEAOHaflsw one «mmom ma mo Nocoeflh moanoo «Hamsnoz oaoaopnwm nonnmnwz mflsoq, "mossom OOHm Opnosm on mmHOOHnw< mOpo: mm. mm.m mo.a om.m m:.HH «mm.m oo.ms nonpooomo> hzosmpm mm. ::.m mm.a om.H Hm.qm @m. wo.mm pflssm ma. oa.m Sm. om. mm.a no.4 so.mm ooaoooowo> Smooq 6cm zoaaow «comma mCOHpSpHpmnH moamm mm smcpo use nonmooosm noammoaoz mo 68 o Noam coa memo o mpcwnswpmom 3 soESmcoo o H o pmxnmz .p . m Q Aozam> HOHHOQ ampOB mo pcoo Hmmv mmummmauuzmsh com copflaomospoz CH wooepmcflpmoa OHMHoomm Op oono>fiaom mposoosm msoflsm> no oWMpcoosomnan.m mqm.S4 pm m Q o 0 $4 '0 c» .1: £3 a): ri®r4 p o oo 'UQr—I 49>; H>> pm 000- :3 +3 p , £23 :36 0C2 (0604-3 H0 H :00 Giza! ms: ’61) £4 >s-r-l :5 a) o- Qd) wfia m -p:sp H J-JSH :30 rice-1 or) m 0T4 ()3 .cm 43:!“ >342 '6 on +>o 3r4® o m “C H 600 aim mw+ (Dr—i cal-H hi4 cme HQ. H.043 <0. H325 A A A A Cd .0 0 'U Innovations: l. Fertilizers 2. Insecticides 3. Classifying and grad- ing products 4. Special handling and packaging to prevent quality damage and product loss 5. New varieties or breeds in your principal farm enterprise 6. Buying group 7. Contracts with buyers 8. Marketing group 225 questions in Table 6.2, two innovation scales were con- structed. Innovation scale #1 was computed by taking the number of applicable practices adopted and dividing by the total number of applicable practices for each respondent. This scale simply shows the percentage of innovations adopted by the farmer out of all those perceived by him as applicable on his farm. Innovation scale #2 is an indicator of the earliness of adOption of innovations in the study by individual farmers. The year of adoption was converted into a percentile scale for each innovation. Applicable innovations were then em- ployed to compute an average percentile score for time of adoption for each respondent. It was decided after careful examination of the re- lationships between the two scales and other variables that innovation scale #1 for purposes of this study gives a more accurate indication of innovativeness than the second Scale. Innovation scale #2 has the advantage of taking into consid- eration the time of adoption as well as the act itself. But it also introduces the possibility that a younger farmer who began using all the innovations six years ago when he first started farming may receive a lower score than the Older farmer who adOpted relatively few innovations 25 years ago. Studies have shown (and it is supported in this study) that younger farmers dc>tauito be more innovative. The simpler Percentage of applicable innovations adOpted thus gives a 226 better indication of the act of adOption which is the rele— vant concept for this study. Independent Variables The other variables used in the following analysis cover a wide range of socio-economic factors. The Economic variables include such things as gross farmhsales, value of farm holdings, farm sales growth over the past five years and Size of the farm. Demographic variables are those having to do with the physical and educational characteristics of the respondent and his family. Examples of these variables are age, educa- tion, size of family, place of residence and religion. Communication variables are those providing information describing the channels, sources and nature of information received by the respondent. Illustrations are newspapers read, membership in farm organizations, source of market news, etc. The Attitude variables are made up of a series of statements with which the respondents were asked to indicate their agreement or disagreement on a five point scale. Then the individual's reSponse was taken as an indicator of his attitude with reSpect to such things as luck, scientific inquiry, product grading, COOperatives, etc. Simple Correlation Tests Hypotheses were formulated to predict that association membership and innovativeness would be significantly 227 correlated (either positively or negatively) with certain of the other variables. ~In the section below the results are discussed. ASsociation Membership Included in Table 6.3 is a list of the variables which were predicted to be significantly correlated with associa- tion membership. Also, the sign of the relationship is pre- dicted in column three of that table. The reader will notice that in general the correlations were fairly low. Only three variables were found to be significantly related to association membership at the .01 level. Two of those, member of coop (.16) and member of other agricultural organ- izations (118), suggest that the individual's participation in other organizations would make him a more likely candidate for participation in a producer association. The other significant variable is education (.21). Association members tend to have more years of schooling than nonmembers. There were several other variables which, though not statistically significant had a simple correlation of at least +.13 with association membership. They include the attitude statement suggesting that to be lucky is the best way to get ahead in life (~.l3), an index of the respondent's knowledge of political leaders (.15), the number of farm magazines read (.14), use of insurance (.14), gross farm 1 sales (.13), acres in farm (.14), family income (.13) and educational aSpirations for the eldest son (.13). / TABLE o.3——Hypothesized Relationships Between Association 228 Membershipa and Other Socio—Economic Variables, Correlations Obtained and Statistical Significances of Each. Variable Name Modernities Modernity index (Range : 0-403 Lower values indicate modern— ity and Higher values traditionalism) .12 New customs better than (lzstrongly disagree, old ones 5=strongly agree) .03 Children should exactly fol- (l=strongly disagree, low traditional customs 5=strongly agree) .13 Ways of past better (l=strongly disagree, 5=strong1y agree) .ll Scientists leave things (l=strong1y disagree, alone 5=strong1y agree) .04 Get ahead-—be lucky (12strong1y disagree, 5=strongly agree) .13 Farmers can't do much to (lzstrongly disagree, change things 5=strongly agree) .01 Can only confide in family (lzstrongly disagree, 5=strongly agree) .05 Prefer to work alone (12strongly disagree, 52strongly agree) .02 Attitude Toward Government Egg grading regulation good (1=strongly disagree, 5=strongly agree) .04 Milk regulation beneficial (l=strongly disagree, 5=strong1y agree) .01 Count on government help (lzstrongly disagree, O4 5=strongly agree) ' Government program help (lzstrongly disagree, politically influential 5=strongly agree) ..O7 229 TABLE 6.3—-Continued. c 14 o a TSC m-H c (1) O N .C: O U) .H 'H U) °H Variable Name :34; 0"} g f; weix £~a Ora c 044 .p-p rim -Hs4n c>w can '0 H +3 QH E H ocaw >50 wlo 002 mm mo Marketing Farmers should let others (l=strongly disagree, do marketing 5=strongly agree) - .05 Not wise to deal directly (l=strongly disagree, with retailers 5=strongly agree) - -.Ol Grading waste of time (l=strongly disagree, 5=strongly agree) - .03 Increase use of contract (l=strongly disagree, 5=strongly agree) + ..12 Communication Index mass media eXposure (O=no eXposure, 12: high exposure) + .09 Index political knowledge (O=low, 7=high) + .15 Number farm magazines read .' + .14 Talk to friends of new techniques (O=no, lzyes) + ..10 Members of coop (O=no, l=yes) + .16** Member other agricultural organization (O=no, l=yes) + .18** Do friends think you adopt first (O=no, l=don't know, 2=yes) + .05 Cooperatives Would you share equipment « with a neighbor (O=DO: l=yes) + ~03 Would you help with com- munity improvement (0:00, l=yes) + .04 230 TABLE 6.3——Continued. c H 'dil tic ®¢4 z .0 if .2 Variable Name g]: U,C p w Q)O m we” a: if 538:: gen cap 13:44: Qu-i Eh oc>m >.O Tao 002 mm mo Risk Effect of 50% output (Range from 1=have reduction due to tech- to borrow money to nological improvement 6=sell out and move to the city) - -.11 Investment risk (1="safe" low return 2=s1ightly risky high return) + .14 Use insurance (O=no, l=yes) + .14 Farm Business Gross farm sales 1964 (dollars) + .13 Index of sales growth (per cent increase) + .02 Acres in farm 1964 + .14 Farm and equipment value (dollars) + .03 Family income (dollars) + .13 Age and Education Ase (yearS) — -.10 Education (years of schooling) + .2l** Education for son index (O=low aspiration, 5=high aspiration) + .13 aThe range Of the variable "association membership" is 0—1 where 0 denotes nonmembership and 1 denotes membership in one or more of the producer associations. *“Statistically significant at the .01 level. 231 In retrospect these results imply that the factors most often held in common by those joining the producer associations are membership in other organizations, ability to accept the risk of innovation and more education. Though not statistically significant in this study, other factors which may be important are a greater exposure to new ideas and experiences through communication, current farm sales and income.139 The variables which show the highest cor- relation in this study are those which one would intuitively expect to be characteristic of individuals participating in such an organization. In fact these are the kinds of characteristics which might be possessed by the individual who is alert and interested in finding ways to improve his well being. They are also the ones that would most likely dominate the judgment of a government agent who was charged with the reSponsibility of investing time and perhaps money in assisting a limited number of farmers for the purpose of Obtaining maximum return (through greater agricultural productivity) on a given government investment. To summarize, simple correlations were generally low for all variables correlated with association membership. The most highly correlated variable with simple correlation of -.21 explained only 4.4 per cent of the variance in 139Thetscorrelation between these variables and associa- tion membership may exist because of the impact of the asso- ciation on the individual's farm business. It cannot be interpreted, therefore, as being a relationship which existed prior to the joining of an association. 232 association membership. The bivariate analysis of associa- tion membership suggests three possible conclusions. (1) There is little "difference" between association members and non-members. (2) The main differences appear in the ”intuitive" success criteria. (3) The procedures used in measuring the variables in the study lacked the sensitivity to measure the more subtle differences hypothesized. Innovativeness Innovation scale #1 was correlated across all 172 re- Spondents with many of the same variables mentioned above in addition to others. In Table 6.4 the results are given along with the name of the variable and hypothesized rela- tionships. A double asterisk denotes the statistically significant (at the .01 level) correlations. For ease of presentation the variables are listed under general headings. Each heading and its significant variables will be discussed briefly below. To indicate the world view of the reSpondent, the group of variables listed under modernity were designed. The conceptual basis and some of the questions were derived from earlier wOrk by Kluckhohn and Strodtbeckll‘lO and by 141 Otis Oliver. The earlier work had pointed out that. 140Florence Rockwood Kluckhohn and Fred L. Strodtbeck, Vgriations in Value Orientations (Evanston, Illinois: Row Peterson and Company, 1961). 141Oliver. 233 TABLE 6.4-~Hypothesized Relationships Between Innovativenessa and Other Socio—Economic Variables, Correlations Obtained and Statistical Significance of Each C: H or; TIC aha c Q)O can o . co H H m 3 Variable Name DE; 8 g m wrix £44 mri Qp rim -HS4H OCU (is '0 34+); 04H E‘: H ocam >>m Tao 002 :mn mo Modernity Modernity index (Range 2 0-4, Lower values indicate modern— ity and Higher values traditionalism - -.20** New customs better than (l=strongly disagree, old ones 5=strongly agree) + .04 Let leaders solve problems (l=strongly disagree, 5=strongly agree) - —.22** Scientists leave things (1=strongly disagree, alone 5=strongly agree) - -.11 To get ahead—~be lucky (l=strongly disagree, 5=strongly agree) — -.l3 Farmers can't do much to (1=strongly disagree, change things 5=strongly agree) - .19 Ways of past better (l=strongly disagree, 5=strongly agree) - —,08 Eat, drink and be merry (l=strong1y disagree, 5=strong1y agree) - —,12 Familism Can only confide in family (1=strongly disagree, 5=strong1y agree) - —.27** Prefer to work alone (1=strongly disagree, 5=strong1y agree) + .02 Attitude Toward Government Egg grading regulations good (1=strongly disagree, 5=strongly agree) + .23** TABLE 6.4-~Continued. 234 C3 .4 foil "0;; (Du-l C m o can o cur-1 Hm ~r-i Variable Name :34; 3 8 t; max .QH ma cam-1 43+: Ha) vii-«$4 oau 045-4 'OH-P 0.7—1 EH O Oct >30 r40 00: mm mo Milk regulations (1=strongly disagree, beneficial 5=strongly agree) + 09 Count on government help (l=strongly disagree 5=strong1y agree) + .13 Government program help (l=strongly disagree politically influential 5=strongly agree) - .09 Marketing Farmers should let others (1=strongly disagree, do marketing 5=strongly agree) - .14 Not wise to deal directly with retailers (1=strongly disagree, 5=strongly agree) — .07 Communications Index mass media exposure (O=exposure, l2=high exposure) + .28** Index political knowledge (O=low, 7=high) + .34** Number farm magazines read + .13 Talk to friends of new techniques (O=no, l=yes) + .01 Member COOp (O=no, l=yes) + .14 Member other agricultural V organizations (O=no, l-yes) + .23** Member other organization (O=no, l=yes) + .20** Index economic isolation (O=most isolated, 12=least isolated) + ,30** 235 TABLE 6.4-—Continued. c «4 rec; o c o H c - o o can 0 Variable Name 313 '32 '3 m G)O m bDr-i X .C: H cur-i C 044 +>p rim w-i 5-4 H O “5 0.5.. 'U 544) D..:—1 E H o OCU >30 wao 002 mm cm) Self Perception of Innovativeness Do friends think you adopt (O=no, l=don't know, first szes) + .03 COOperativism Would you share equipment (O=no, l=yes) + -,O9 Would you help with com— munity project (O=no, l=yes) + —.12 Risk Effect of 50% output reduc— (l=borrow money .11, tion due to technological 6=quit farming-- innovation move to City) — -.10 Investment risk (O=low risk, low profit, l=somewhat risky,high profit) + .14 Use insurance (O=no, l=yes) + .12 Farm Business Gross farm sales 1964 (Dollars) + .07 Index of sales growth (% growth 1959-64) + .31** Acres in farm 1964 + ~06 Farm and equipment value (Dollars) + -.04 Family income (Dollars) + .15 Additional non-farm income (Dollars) - .08 Age and Education Age ' (Years) — —.29** 3'.- < E... ”,4... d-u-'--_.. -u 236 TABLE 6.4-~Continued. C -H 6 Q T52 w-H c o o N.c o _ m.4 rim 3 Variable Name :3: g g m tmrix .e-a Ora CGJ'r-l +34—3 HQ) -a:4s ocu Q54 T3H4J ova _E H o ocu >30 wao (JLDE man can) Education (years) + 28** Education for son index (O=low aSpiration for son, 5=high aSpiration)+ .18** Investment Invest in farm improvement (Choice of 8 alterna- tives to invest $500) + —.18 Invest in non-farm business (Choice of 8 alterna— tives to invest $500) (O=no, l=yes) - .20 Invest in family education (Choice Of 8 alterna- tives to invest $500) (O=no, l=yes) + .21** (Choice of 7 alterna— tives to invest amount equal to annual salary)— -.l8** Hide money a~'The range of the variable innovativeness in 0—100 where larger numbers indicate a greater tendency to inno- vate. **Statistically significant at the .01 level. modernism might be indicated by the values and attitudes held by an individual. Kluckhohn and Strodtbeck commented that values held with respect to the following "orientations" suggest the degree to which an indhddwfl. will be receptive 237 to new ideas and a changing environment. They are (1) human nature orientation, (2) man—nature orientation, (3) time orientation, (4) activity orientation and (5) relational orientation. Part of these orientations were tapped in a series of seven agree-disagree statements. The results of those reSponses were combined to yield an index of the degree to which each individual's attitudes indicate "modernism." The modernity index was significantly correlated with in— novativeness with an r of -.20. The only one of the indi- vidual items making up the index which revealed a significant correlation was a statement suggesting that peOple should depend upon community leaders to solve common problems. Two other variables which were included in the modern- ity index are listed under familism in Table 6.4. It was hypothesized that the more innovative individuals would be those who depended less on extended family support. and more on the self. A feeling that peOple other than family members can be trusted was found to be significantly cor— related (-.27) with innovativeness. It was hypothesized that a favorable attitude toward government assistance would correlate with innovativeness. But only one of the four attitudes toward government vari- ables was statistically significant. The simple correlation between an agree—disagree statement suggesting that the government egg grading regulation had proven to be beneficial was +.23. 238 None of the hypotheses relating marketing attitudes to innovativeness could be accepted. Since five of the eight innovations used in the innovation index were marketing practices, this was somewhat surprizing. This supports earlier conclusions that Puerto Rican farmers do not com- pletely understand the vital interrelationships between prO- duction and marketing. The set of variables showing the highest general cOr- relations with innovativeness were fixee labeled communica- tions. The first of those is an index computed for each individual by combining in index form his regular weekly eXposure to various mass media (radios, newSpapers, televi- sion and magazines). That index of mass media exposure was significantly correlated with innovativeness (r = +.28). The correlation of +.34 for an index of knowledge about political leaders is also a reflection of the amount of communication exposure and its effect on innovativeness. It is interesting to note that "talking to other farmers about new farming techniques" did not show a statistically significant correlation to innovativeness. The correla- tions for belonging to COOperatives (+.14) and other organ— izations (+.23) were statistically significant. The index of economic isolation was prepared by considering the dis— tance Of the farmer from a village, the number of visits per week to the village, the type of road and whether or not the farmer lived on his farm. Economic isolation was significantly correlated with innovativeness (+.30) 239 suggesting that the ability of the farmer to get off his farm and into a city or village is importantly related to innova- tiveness. The discussion in earlier chapters frequently referred to the importance of perceived risks and uncertainties in the marketing system. It was not possible to derive a satis- factory method of measuring the impact of such uncertainties in this study. But three statements were used in an attempt to get some notions about the effect of business risks in general on the individual farm business. Though the cor- relations of these three variables with innovativeness were in the direction hypothesized, they were not large enough to be statistically significant at the .01 level. The first was a question asking the respondent to indicate what he would have to do if the adOption of an innovation causes a 50 per cent decrease in total output. The alternatives ranged from the least damaging "borrow money" to the most serious ”sell out and move to the city." The simple corre- lation between this variable and innovativeness was —.10. The second risk question asked the reSpondent to state how he would invest $10,000 giving a highly lucrative but some- what risky alternative and a low yielding but completely safe alternative. The simple correlation with innovativee ness was +.14. Finally, respondents were asked if they had farm, home, crop or livestock insurance (r = +.l2). vPer- haps these kinds of risk measures can be improved through 240 further research in order to get a better indication of attitudes toward and the effects of risks. Under the farm business heading, the group of variables include a number of variables relating to the size and success of the farm unit in economic terms. Only sales growth showed a statistically significant correlation with inno- vativeness. But the relation there was quite strong (+.3l) suggesting that indeed those farmers who are using new tech- niques have shown farm sales increases over the past five years. It is somewhat surprising that the simple correlation between innovativeness and gross sales for 1964 was only .07 and that the relationship between value of farm holdings and innovativeness was negative. This might be due to sev— eral very large estates included in the sample where there is absentee ownership and where managers are regarded as somewhat conservative and disinterested about production improvements. As other innovation studies have shown, age and educa- ‘Eigp were highly correlated with innovativeness. Moreover, the reSpondents were asked to indicate what level of educa- tion they would like their eldest son to have and whether they thought it possible to achieve. An index was devised using the two questions, and it correlated significantly with innovativeness (+.l8). This gives an indication of the respondent's achievement motivation as reflected through edu— cational aSpirations for his son. 241 Finally, the investment variables indicate the relation- ships between the predispositions for investment alternatives and innovativeness. It was found, contrary to the hypothesis, that there was a strong negative relationship of —.18 between "invest in farm business" and innovativeness and a positive relationship of .20 between "invest in non-farm business" and innovativeness. Perhaps this only reflects the ability of innovative producers to perceive the many profitable non- farm investments available in the booming Puerto Rican economy in comparison to the sluggish agricultural sector. In summary there is a significant relationship between certain kinds of sociO—economic variables and innovativeness. The correlations suggest that some kind of modernity test may be useful for predicting innovativeness when used in con— junction with other variables such as age, communications, business growth variables, investment preferences and perhaps some other variables such as risk perception, cooperativism and marketing attitudes if they can be better operationalized for quantitative research methods. To explore the possibil- ities, a multiple correlation analysis was performed using as the dependent variable innovativeness and as the inde- pendent variables a combination of socio—economic variables which had shown greatest correlation to innovativeness in; the simple correlation matrix of all factors. The results are examined in the following section. 242 Multiple Correlation The Simple correlation analysis implied that there might be some possibility of predicting association member- ship and especially innovativeness with certain independent variables. To explore that possibility, the variables cor- relating most highly with association membership and inno- vativeness were used as independent variables in multiple correlation equations. For association membership the 29 most highly correlated variables were used in a least squares delete program on the CDC 3600. The innovativeness analysis started with 34 independent variables. The least squares delete program is designed to first perform a least squares analysis using the initial 34 variables. Then the variable making the least contribution to the variance of the depend- ent variable is deleted and a new least squares analysis is performed. This process is continued until sufficient vari- ables have been deleted to produce a least squares result correSponding to the objective criteria formulated by the researcher and included in the computer program. This per- mits the researcher to determine which variables make the least contribution to the variance of the dependent variable and omit them, while selecting the least squares equation deemed most apprOpriate for predicting variability in the dependent variable. In deciding what number of independent variables should be included in the reported equation, the following criteria were used. (1) The co—efficient of multiple correlation (R2) should be as large as possible. 243 (2) At the Same time the co—efficient of multiple correlation corrected for degrees of freedom (R2) should also be as high as possible (this permits the researcher to observe "explained variance" after spurious correlations due to large numbers of independent variables which have been removed). (3) The standard error of the estimate should be as low as possible. (4) The independent variables should have logical theoretical relationships to the dependent variable. The multiple cor- relation results are discussed below. Association Membership The conclusions in the section on simple correlations between association membership and other variables suggested that there appeared to be little detectable difference be- tween association members and non—members. To further test that conclusion, the multiple correlation analysis was per- formed. Using the previously discussed criteria, it was decided that a multiple correlation equation containing 16 independent variables best "explained" association membership. Table 6.5 summarizes the results of that analysis. The variation in association membership explained by the 16 independent variables was 18 per cent. Yet when Spurious correlations were removed by correcting for degrees of freedom (R2) the "explained" variation was only 9 per cent. Just three of the independent variables had regression coefficients that were significantly different from zero at 244 TABLE 6.5-—Summary of Association Membership——Multiple Correlation Dependent Variables % of applicable in— Independent Variables novations adopted R2=.18; R2=.09 Regression . . . Name Coefficient Significance Communication Listen to radio yesterday —.059 .04* Number magazines read regularly -.011 .40 Farmers principal source of price information in selling livestock .104 .19 Visits to market principal source of price information in selling fruits .247 .11 Member of COOp .122 .03* Member other agricultural organization .097 .08 Self perception of innovativeness -.O20 .37 Demographic Age -.031 .17 Education .022 .24 Education for son index —.O39 .12 Value Orientations Modernity index .010 .22 Children should follow traditional customs exactly --019 -39 Get ahead-—be lucky -.O48 .08 Farmers will increase use of contracts .072 .04* Too much foreign competition .074 .32 _ Farm Business More than $200 fruit sales in 1964 .054 .49 *Denotes those variables significant at the .05 level or better. . _r. ,.. _ _1-.. ...¢---- __ . .-. . .._. ~ . , “_— 4&1 «hgafmwn 245 the .05 level. They were "listen to radio yesterday," "mem— ber of coop" and "farmers will increase use of contracts." In general the analysis supports the earlier conclusion that variables have not been prOperly measured to detect differences between association members and non-members, if any such differences do exist. Innovativeness The multiple regression equation containing the 34 variables with the highest simple correlation with innova- tiveness had an R2 of .45. -But R2 was only .32. By deleting 14 variables which made little contribution to the explained variance, a least squares equation was obtained with an R2 of .44 and an R2 of .36. This means that the 20 independ- ent variables shown in Table 6.6 accounted for about 44 per cent of the variance in innovativeness among farmers in the Sample. Table 6.6 presents the results of the multiple cor- relation analysis. Seven of the twenty regression coeffi- cients are significantly different from zero at the .05 level. The independent variables are grouped under four major headings: communication, demographic, value orientations and farm business. The reader should note that many of the variables contributing to the explanation of innovativeness in the multiple correlation are the same as those found sig- nificantly related in the simple correlation tests. On the 246 TABLE 6.6——Summary of Innovativeness--Multiple Correlation Dependent Variables . % of applicable in- lndependent Variables novations adopted R2=.443 22:.36 Regression Name Coefficient Significance Communication Mass media exposure -.865 .19 Listen to radio yesterday 1.951 .30 Read a newspaper yesterday 1.351 .16 Index of market news use —5.694 .01* Help from Department of Agricul— ture radio program 4.445 .09 Personal contacts principal source of local news -12.649 .02* Member of non-agricultural organizations 5.188 .08 Demographic Live on farm all year -l-369 ~30 Age -l.335 .19 * Value Orientations Modernity index .915 .01* Can only confide in relatives -4.022 .00* Let leaders solve problems —l.630 .19 Consumers spend more on plantanos in periods of scarcity -1.522 .25 Index of consumer demand knowledge —l.502 .09 Egg grading regulation good 1.558 .33 Supermarkets have all the business they can get -l-154 .33 Too much foreign competition 7.481 .05* Invest in business other than farm .019 .08 Hide money in a Safe place —l4.086 .05* Farm Business Index of sales growth .077 .03* *Denotes those variables significant at the .05 level or better. . 247 other hand there are several new variables appearing in the analysis. In conclusion there is evidence that multiple correla- tion methods using communication, demographic, attitudinal and economic concepts as independent variables can be uti- lized to predict innovativeness. An R2 of .44 was obtained using 20 such independent variables. However, in order to ' there is a definite need to improve "eXplained variance,’ define more explicitly variables related to innovativeness and to improve the measurement of variables used in this study. As a step toward that goal, a factor analysis was performed with the results discussed in the following sec- tion. Fgctor Analysis Introduction The two preceding sections have examined the results of bivariate analysis and multiple correlation analysis. The conclusions in the two sections indicated that there is a possibility that innovativeness can be predicted using certain independent variables. But further research is needed to verify and improve on this study. Thtsadditional research should be directed toward uncovering other sig- nificant independent variables and improving the measure- ment of those used in this research. To that end an explor- atory factor analysis was performed using 90 of the 201 variables tapped in the survey questionnaire. The author 248 selected those variables judged most useful in describing and differentiating farmers in the sample in terms of willingness to change and innovate. These variables again represented various aSpects of economic and marketing be- havior, demographic characteristics, communication behavior, demographic characteristics, communication behavior, and individual attitudes. The following section reviews the results. Kerlinger defines factor analysis as "a method for determining the number and nature of the underlying variables among large numbers of measures."142 In this study the pur- pose of the factor analysis is to explore the relationships existing among the variables in order to determine the num- ber and nature of the factors underlying the 90 items used in the field survey. Kerlinger points out that factor analy- sis serves the cause of scientific parsimony. That is, it helps the researcher to find out if he can achieve the same measurement of a factor with fewer variables. Factor analy- sis may provide the researcher with additional information about the "real" factors underlying his variables and the relationships existing between those factors and between the variables that make them up. The next section examines the purpose of factor analysis in relation to the results and conclusions of the computations performed for the farmer survey. 142Fred N. Kerlinger, Foundations of Behavioral Re- geargg (New York: Holt, Rinehart and Winston, Inc., 1964), 249 Appendix A 6-1 gives the rotated factor loadings and communalities for an eight factor solution performed on 90 variables from the farmer survey. The table shown there is the result of computations performed by Michigan State Uni- versity's CDC 3600 computer using a varimax solution with orthogonal rotation. The starting point was a simple cor— relation matrix for the 90 variables. Using those simple correlations the computer first produced a two—factor solu- tion by assuming the 90 variables measured two factors and attempting to group the variables in such a way as to "ex- plain" as much of the total variance as possible. The two factor solution eXplained 18 per cent of the variance in the variables. The computer was programmed to perform additional factor solutions until a point was reached where (among other objective criteria) the last factor had no more than three variables loading most heavily on it. This produced a factor analysis print-out showing factor solu— tions ranging from two through ten. In order to decide. which of the ten solutions most nearly described the constructs underlying the 90 variables, the author utilized the following decision criteria. The ideal solution should:(l) eXplain a high percent of the variance of the variables in the study, and each factor should contribute a significant per cent to that explained variability (this refers to variance in the factor columns), (2) indicate "pure" factor loadings:(i.e. a variable cor- relating highly with one factor should not have particularly 250 high correlations with other factors), (3) have a high level of communality (i.e. all factors together should account for a high percentage of the variability in a single variable--this, then, refers to row variance), (4) have a logical eXplanation in theory and practice as judged subjectively by the researcher. On the basis of these cri— teria, an eight factor solution was chosen. The prOpor- tion of variance of all the variables explained by the eight factors was 41 per cent. Each of the factors will be discussed briefly. Results Table 6.7 lists the variables and factor loadings for the first factor. It reveals that this factor explained 9.15 per cent of the variance in all the variables included in the analysis. It is the most important factor in the solution.. The table also shows the factor number and in— tensity of other loadings of more than .25 for the variable which gives an indication of the degree to which a variable measures or correlates with more than one factor. For each of the eight factors, names were devised to indicate the concepts believed to be underlying the related variables. The first factor is labeled modernism. The high loading on the political knowledge index (+.75) and mass media eXposure variables (+.76, i-75, +.65 and +.62) suggests that these kinds of indices can Offer an indication of the communication aSpect of modernism. 251 TABLE 6.7-—Factor I: Modernism (Variance EXplained = 9.15%) . Primary Secondary Vgiiggie Variable Name Factor Factor .Secondary Loadings Loadings Factor 4 Read neWSpaper yesterday (Ozno, l-yes) .76 - 48 Highest grade reached in school (years) .75 - 10 Political knowledge index (O=low knowl- edge, 7—high knowl- edge) .75 —.30 II 5 NeWSpapers read regularly .75 4.35 II 66 NeWSpapers major source of local news (O=no, l-yes) .65 - 7 Number magazines read regularly .62 —.48 II 70 Index of economic isolation (O=most isolated, l2=1east isolated) .54 -.36 VII 49 Total family income in 1964 (dollars) .55 -.36 II 89 Index of educational aspiration (O=low achievement aspira— for son, 5=high) .56 .31 III 16 Additional non-farm income (dollars) .47 — 23 One can only confide in relatives (1: strongly disagree, 5=strong1y agree) —.47 .53 VI 90 Mobility index (0: least mobile, 4: most mobile) .47 - 252 TABLE 6.7-~Continued. Variable Number 21 68 20 47 17 22 50 64 24 Primary Variable Name Factor Loadings Most important thing in life to succeed is luck (l=strongly disagree, 5=strongly agree) —.47 Radio major source of local news (O=no, l=yes) —.43 Better if Scientists left things alone (1=strongly disagree, 5=strongly agree) —.45 Age (years) -.41 Read any magazine yesterday (O=no, l=yes) .44 Children be instructed follow ways Of past (l=strong1y disagree, 5=strongly agree) -.39 Watched TV yesterday (Ozno, l=yes) .39 Things of past are better, changes bring problems (lzstrongly disagree, 5=strongly agree) -.37 Number dependent on family income —.36 Would dedicate 50 hours to community improvement (O=no, l=yes) --35 Eat, drink, and be merry, for tomorrow we may die (l=strongly disagree, 5=strong1y agree) —.33 Secondary Factor Loadings .29 --37 .26 —.46 -.41 .26 —.63 -.25 .29 .43 Secondary Factor VI III VII II VII VI VI 253 TABLE 6.7—-Continued. Primary Secondary Variable Variable Name Factor Factor Secondary Number . . Factor Loadings Loadings 33 Farmers can not do much to change things (l=strongly disagree, 5: strongly agree) .32 .40 VIII 59 Total sales value of farm (dollars) .31 -.45 11 77 Mass media principal information source in selling starchy vegetables (O=no, l=yes) -.34 - For purposes of detecting modernity, three communication variables might be sufficient. They might include the polit— ical knowledge index and questions to determine the number of magazines and neWSpapers read regularly. In additiOn to the high loading (+.75) of years in school on the modernism factor, an index of education aSpiration for a son loaded +.56 on the factor. Hence, education and educational achievement appear to be important variables in measuring modernism. .Total family income had a factor loading of +.55, and the index of economic isolation correlated with the modernism factor at +.54. This suggests that the degree of personal exposure to other individuals and economic well-being are correlated with modernity. The factor loadings of other 254 similar variables in Table 6.7 support this conclusion. There is a strong indication, however, that one or two well designed economic well—being variables would be sufficient to indicate that aSpect of modernity. A third group of variables load fairly highly on this factor. These are the attitude questions. Six of the nine attitude variables designed originally to measure modernity Show factor loadings of +.25 or more with this factor. This signifies that for future research the three not loading significantly on this factor should either be improved or replaced with variables tapping different aspects of the modernity factor. Secondary loadings of the variables making up factor I were most commonly on factor II——anti-innovation (economic) or on factor VI——traditional individualism. Factor 11 is illustrated in Table 6.8. It is quite clearly a factor reflecting innovation. Since negative loadings are most prevalent, it is labeled anti—innovative. Because factor IV is also an anti-innovation factor, it is further designated as anti-innovation (economic). However, the two have quite different variables loading on them. Factor II includes only production innovations (i.e. fertilizer, insecticides and improved breeds or varieties) in addition to several variables loading signifi— cantly on this factor which were indicators of farm size, sales and other economic characteristics. Factor IV includes primarily marketing innovations. Factor II is relatively 255 TABLE 6.8-—Factor II: Anti—Innovation (Economic) (Variance Explained = 6.13%) . Primary Secondary Vgiiggie Variable Name Factor Factor Sgggpgiry Loadings Loadings 15 Acres farmed -.75 .34 III 51 Fertilizer in use now (O=no, l:yes) -.62 - 73 Radio, neWSpapers trucks and non- farmers main source of information in selling livestock (O=no, l=yes) .60 - 72 Farmer's main source of information in selling cattle (O=no, l=yes) —,55 _ 14 Monthly food expendi- ture for family (dollars) —.51 - 58 Using selling groups now (O=no, l=yes) —.49 -.41 IV 11 Index of innovation influence (O=low influence, 4=high influence) -.47 - 7 Number magazines read regularly —.48 .62 I 59 Total sales value of farm (dollars) -.45 .31 1 52 Insecticides in use now (O=no, l=yes) -.42 — 47 Age (years) -.42 -.41 I 55 Using improved vari- eties or breed in principal farm enter— prise (Ozno, l=yes) -.39 .29 I 49 Total family income in 1964 (dollars) -.36 .55 1 256 TABLE 6.8—-Continued. . Primar Secondar Variable . y y Number Variable Name Factor Factor Sggopdary Loadings Loadings C or 5 Number of newspapers read regularly -.35 .75 I 39 Prices determined mostly by big pro— cessors and retailers (l=strongly disagree, 5=strongly agree) -.35 - 30 As family income rises, smaller prOportion spent on food (1: strongly disagree, 5=strongly agree) -.31 —.39 III .34 v 63 Use insurance (O-no, l=yeS) ”.30 "' pure. Secondary loadings are primarily on factor I and factor 111. The factor explains 6 per cent of the variance among the 90 variables. Table 6.9 gives factor loadings for the third factor which was designated as Egansitional non-mass communications. It was somewhat difficult to understand and label this fac— tor since the loadings were low and primarily negative and secondary loadings were numerous. The negative correlations between the factor and three radio variables suggest low mass media orientation as do loadings for variables 82 and 78, but the positive correlations between the factor and variables 18, 45, l5 and 89 suggest a more modern leaning. Thus, this 257 TABLE 6.9—-Factor III: Transitional (Non-Mass Communication) (Variance EXplained = 4.36%) Primary Secondary Variable Name Factor Factor Loadings Loadings Variable Number Secondary Factor 83 Non-farmers, truckers, and COOpS main source of information in selling fruits (O=no, l=yes) —.58 — 2 Listened to radio yesterday (O=no, l=yes)- -.58 .28 I 3 Hours listened to radio per week -.49 — 28 When dealers reduce prices, less profit for everyone (1= strongly disagree, 5=strongly agree) .45 — 78 Market visit principal source of information in selling starchy vegetables (O=no l=yes) ’ .44 .40 v1 30 As family income in- creases, smaller pro- portion spent on food (l=strongly disagree, 5=strongly agree) -.39 —.31 II 18 New customs usually better than old ones (1=strongly disagree, 5=strongly agree) .39 - 45 Close relative asked you to cosign loan what would you do (O=no, 1=yes by obligation, 2=yes) ..38 .27 68 Radio major source of local news (O=no, l=yes) -.37 —.43 I 258 TABLE 6.9-~Continued. . Primary Secondary Vfiiiggie Variable Name Factor Factor Sgggggiry Loadings Loadings 82 Farmer's main source of information in selling fruits (O=no, l=yes) -.35 -.02 VIII 15 Acres famred .34 —.75 II 84 Index of perceived crOp risk (O=low perceived risk, 6=high) -.33 -.56 VIII 46 If friend asked you to cosign loan, what would you do (O=no, l=yes by obligation, 2=yes) .33 .49 V 89 Index of educational aspirations (O=low achievement aspira- tions for son, 5=high).3l .56 I factor seems either to measure several things or indicates some state of transition. Factor IV is the second anti—innovation factor, sub— headed marketing. The loadings are given in Table 6;10. Like factor II this one is relatively pure with fairly high primary factor loadings. However, here all but three of the variables are innovation measures and specifically marketing innovations. As one would expect, the secondary correla- tions are primarily with modernism and anti-innovation (eco- nomic). TABLE 6.10--Factor IV: 259 Variance = 4.65%) Anti—Innovation (Marketing) (Explained Variable Number Primary Secondary Variable Name Factor Factor Loadings Loadings Secondary Factor 87 85 54 53 75 57 65 55 34 Innovation index number 5 (% of innovations per— ceived applicable, range = 0-100) —.71 -.31 Innovation index number 1 (% applicable inno— vations adopted, range = O-lOO%) -.68 - Packing in use now (O=no, l=yes) -.64 - Selection and classi- fication in use now (O=no, l=yes) —.58 -.26 Farmers main source of information in selling poultry (O=no, l=yes) —.49 .27 Contracting with buyers now (O=no, l=yes) —.43 .25 Association member— ship (O=non—member, l=member) —.43 — Using improved vari- eties or breed in principal farm enter— prise now (O=no, l=yes) -.39 .29 —.39 —.25 Big supermarkets, use buying power to main- tain low prices (l=strongly disagree, 5=strong1y agree) -.39 .31 II II II III II III - -v- .- .-‘—. 260 TABLE 6.lO—-Continued. . Primary Secondary Vfiiiggie Variable Name sFactor, Factor Sgggpgiry Loadings Loadings 56 Using buying group (O=no, l=yes) -.37 —.25 I 86 Innovation index #2 (average per- centile rank Of farmer based on innovation use and time of adOption, range = 0—100. -.36 .30 VIII Factor V has been labeled COOperativism (See Table 6.11). But this factor should not be interpreted as measuring only participation in cooperative businesses. It appears to be a broader concept including significant loadings on attitudes toward government, relatives, friends and retailers, as well as COOperative marketing and value orientations. The nega- tive correlation (—.35) with "effects Of a 50 per cent out— put reduction" implies that cooperativism may be related to the individual's perceptions of his financial ability to remain solvent in the face of economic catastrOphes. Factor VI has been named traditional individualism (see Table 6.12). Again, it was somewhat difficult to logically sort out the variables loading on this factor in order to ascertain the underlying concept being tapped. There are several loadings which point to traditionalism (variables 25, 23, 24 and 78). On the other hand there are 261 TABLE 6.ll—-Factor V: Coopera;ivisnlweriance Explained = .750) Primary Secondary Variable Name Factor Factor Secondary Loadings Loadings Factor Variable Number 27 Grading and refrig- eration of eggs is wise regulation (l=strongly disagree, 5=strong1y agree) .62 ~ 44 Believe future buyers will increase use of contracts ' @:strongly disagree, 5=strongly agree) .59 .36 VI 43 Figures of Agriculture Dept. on prices are reasonable (l=strong1y disagree, 5=strongly agree) .52 - 42 Government programs beneficial only for select group of dealers (l=strong1y disagree, 5: strongly agree) .51 — 46 If friend asked you to cosign loan, what would you do (O=no, l=yes by obligation, 2=yes) .49 —.06 VII 35 Farmers should be organ— ized in groups to bargain (l=strongly disagree, 5=strongly agree) .47 —.33 VIII 31 Milk regulations ben-f efited the industry and consumers (1: strongly disagree, 5zstrongly agree) .46 -.32 VII 20 Better if scientists left things alone (l=strongly disagree, 5=strongly agree) —.46 —.43 .I 262 TABLE 6.ll-—Continued. Variable Number Primary Factor Loadings Variable Name Secondary Factor Loadings Secondary Factor 4O 29 61 37 Farm tenure (l=owner, 2=renter, 3=man- ager, 4=share- cropper) Can count on govern- ment to resolve marketing and price problems (l=strongly disagree, 5=strongly agree) Organization of groups of coops can be ben— eficial (1=strongly disagree, 5=strong1y agree) Effects of 50 per cent output reduction due to innovation (I: borrow money, 5=quit farming, move to ' city) Not wise for farmer to bargain directly with retailers (1: strongly disagree, 5=strongly agree) -.38 .36 .35 —.35 —.31 .28 I —.26 IV —.28 II TABLE 6.12-—Factor VI: Traditional Individualism (Variance Explained = 3.97%) . Primary Secondary V Eiiggie Variable Name FFactOr Factor Sgcondary * Loadings Loadings ac or 25 Prefer to work alone than be tied to family (lzstrongly disagree, 5=strongly agree) TABLE 6.12——Continued. 263 Variable Number Variable Name Primary Factor Loadings Secondary Factor Loadings -Secondary Factor 23 35 38 24 41 78 44 82 One can only confide in relatives (1: strongly disagree, 5=strongly agree) .53 Farmers should let others take care of marketing problems (l=strongly disagree, 5=strong1y agree) -.5l Grading and packaging are waste of time for farmers (1: strongly disagree, 5=strongly agree) Eat, drink and be merry, for tomorrow we may die (l=strongly disagree, 5=strongly ggree) .43 Risk and insecurity in produce market much less today than 10 years ago (l=strong1y disagree, 5: strongly —.50 agree) .42 Market visits principal source of information in selling starchy vegetables (O=no, l=yes) .40 Believe future buyers will increase use Of contracts (l=strongly disagree, 5=strongly agree) .36 Farmers principal source of information in ' selling fruit (Ozno, l=yes) —.3O -.47 -.26 .25 -33 .37 .44 -59 -35 VIII III III III '264 three variables with correlations indicating progressive mar- keting attributes (variables 35, 38 and 44). .Future research should be directed toward Operationally improving some of the variables in order to purify the factor. Factor VII (Table 6.13) has been titled isolated indi- vidualism. The two highest loadings are on television ex- posure and are negative. 'This, in addition to the negative correlation on economic isolation, implied a measure of low communication eXposure. Moreover, other loadings (e.g. variable l2, 13, 74 and 31) suggest measures Of individualism. Factor VIII appears to be primarily related to fatalism (see Table 6.14). The two most highly loaded variables hint at low credit availability and perceptions Of high risks in certain farm enterprises. "Farmers can‘t do much to change ’ shows a loading of .40. Loadings on variables like things,‘ ”big supermarkets use buying power to hold prices down" and "farmers should be organized in bargaining groups“ imply a likelihood of resignation to accept and even "over- emphasize” bad farming conditions. The positive correlation to the innovation index including a time of adoption dimen— sion may Show a relationship between fatalism and earlier innovators who had bad innovation experiences. Again, secondary factor loadings suggest that several of these variables were multi—dimensional. Further research should include other more apprOpriate variables for tapping this factor. For instance previous research by Rogers indicates that "fatalism" is importantly related to innovation. 265 TABLE 6.13—-Factor VII: Isolated Individualism (Variance Explained = 4.01%) Primary Secondary Variable Name Factor Factor Secondary Loadings Loadings Factor- Variable Number 9 Hours TV watched per week -.76 - 8 Watched TV yesterday ' (O=no;~1=yes) —.63 .39 I 12 Asked more often for information than others (O=les, 1: don't know, 2=more) -.48 - 79 Truckers, farmers, non- farmers and COOpS principal source of information in ; selling starchy vege- tables (Ozno, l=yes) .44 -.29 VI 13 Member Of any coop (O=no, l=yes) —.43 —.32 II 67 Television major source of local news (O=no, l=yes) ~.42 —.03 II 74 Market visits principal source of information in selling poultry (O=no, l=yes) —.39 .29 II 34 Big supermarkets use buying power to main— tain low prices (1: strongly disagree, 5zstrongly agree) .38 —.39 IV 31 V —.35 VIII 70 Index of economic iso— lation (O=most isolated, l=least isolated) -.36 .54 I 31 Milk regulations bene— fited business and consumers (l=strongly disagree, 5=strongly agree) —.32 ..46 V TABLE 6. 266 l4-—Factor VIII: 3-87%) Fatalism (Variance Explained = Variable Number 60 84 88 26 32 62 33 34 36 Primary Variable Name Factor Loadings Get credit from dealer from whom buy major part Of farm supplies (O=no, l=yes) -.61 Index of perceived crop risk (O=low perceived risk, 6: high) Index of perception of main farm problems (problems perceived range = 0-11) Consumers Spend more on plantanos during scar- city (lzstrongly dis- agree, 5=strongly agree) .56 —.48 -.46 Supermarkets have all the business they will get (l=strongly dis— agree, 5=strongly agree) —.45 Share equipment with neighbors (O=no, l=yes) ~45 Farmers cannot do much to change things (l=strongly disagree, 5=strongly agree)- .40 Big supermarkets use buying power to main— tain low prices (12strongly disagree, =strongly agree) —.35 Farmers should be or— ganized in groups to bargain (l=strong1y disagree, 5=strongly agree) -.33 Secondary Factor Loadings Secondary Factor -.33 III -.27 II -.27 I .26 VII .32 I --39 IV .47 v 267 TABLE 6.14-—Continued. Primary Secondary Variable Name Factor Factor Loadings Loadings Secondary Factor Variable Number 86 Innovation index num- ber 2 (average per- centile rank Of farmer based on in- novation use and time of adOption, range = 0-100) .30 -.36 1v- In general the results signify that factors I, 11, IV, V, VII and VIII, though somewhat interrelated, were measuring Specific underlying factors which could be fairly easily identified. The strength of factor loadings for individual variables in each factor and between factors gives some indications for further research in Operation— alizing variables to more accurately measure those concepts for eventual predictive purposes. Factors III and VI do not present clearly identifiable underlying characteristics. Secondary correlations with other factors in addition to conflicting variable loadings within the factor may mean that several concepts are being tapped. -It would appear that these two factors are "catch all" categories for vari— ables not correlated sufficiently with other factors to be absorbed elsewhere, yet not intercorrelating sufficiently with each other to tap a truly independent factor. There 268 is, of course, also the possibility that the researcher has not prOperly interpreted these factors to discover the basic underlying characteristic tapped by the factors. Conclusions The eXploratory factor analysis may signify that the research to be carried out in the second phase of the food marketing study should consider the following: 1. -Identify the major factors believed critical for explaining innovation. This should in— clude modernism, transitionalism, tradition— alism, innovation—economic, innovation— marketing, cooperativism, individualism, fatalism and possibly other factors deemed important by previous researchers. Variables should be designed to tap various aspects of these factors using the results of this study to suggest possible Operational improvements. In measuring modernism the cause of scientific parsimony may be served by including only variables determining political knowledge plus regular exposure to the various mass media. Indices of economic isolation and mobility appear useful in denoting modernity as are age, education, educational aspirations for a son, farm sales, farm value and the seven 269 attitude variables appearing in factor I of this study. Moreover, variables should be added to make sure that all aspects of value orientations identified by Kluckhohn and Stradtbeck are included (i.e. relational, activity, man-nature, time and human nature orientations). Production and marketing innovations should be approximately equally represented in the questionnaire. To measure and identify transitionalism, Specific variables should be designed. Oliver’s research in Puerto Rico included variables identifying transitional individ— uals. It may be that his results will provide some assistance in preparing questions to specifically tap this factor (see con- clusion number 8). Efforts should be made to operationally improve the variables measuring coopera- tivism. Again, this term should be used to include a broad range of cooperating including corporate business organization, personal willingness to submit self to group control, attitude toward government control as well as cooperative business organization. The factor analysis suggested that the individual's 7. 8. 9. 270 capacity to withstand financial losses is correlated with COOperativism, and this hypothesis Should be submitted to further testing. ' Two of the eight factors in this analysis indicated some relationship to individualism (isolated individualism and traditional in— dividualism). Perhaps specific variables could be designed which would more accurately tap an individualism factor. This factor should not necessarily be considered as the .lantithesis of cooperativism since it measures a slightly different concept in which an individual might possibly be consistent and still score fairly high on both factors. If one examines the traditional individualism factor (VI) carefully, it appears that the factor taps an underlying concept closely relating to modernism. It may, therefore, be necessary to direct future research toward isolating a single modernism factor which would subsume both traditionalism and transi- tionalism since these appear to simply be stages in the process of individual moderni— zation. The variables which disclosed some degree of fatalism through loadings with factor VIII 10. 11. 271 were not specifically designed to measure that concept. They should therefore be im— proved to more adequately measure that factor. Furthermore, additional questions should be devised to tap fatalism. Though other factors did not appear in the exploratory factor analysis of the 90 selected variables, there may be others significantly related to economic change which Should be tapped in the future. Consideration should be given to including variables designed to measure empathy and achievement orientation. Rogers has shown that these deserve attention in order to predict innovation and economic change. Many of the 90 variables included in this exploratory factor analysis made no significant contribution to the measurement of any of the factors. These should be pinpointed and excluded in future research. _. _n-F' , 71,-.-_.-__._——A-o— 4 CHAPTER VII SUMMARY AND CONCLUSIONS Since World War II a great deal of attention has been focused on the study of the economic develOpment process. Opinions regarding sectoral emphasis have ranged from indus- trial to agricultural and then to a balance between agricul— ture and industry. Most economists now regard economic development as a complicated process involving social, polit- ical and economic variables. Recently, Walter W. Rostow has commented that many Latin American nations have achieved some build-up in economic infrastructure, yet they have not been able to move into take—off for sustained economic growth. He believes that this difficulty arises primarily from a wide diSparity between rural and urban areas within the countries. Indus- trial growth is inhibited by food shortages and high food prices while agricultural productivity lags because farmers perceive no stable and remunerative markets for their products. In short the urban—industrial and the rural-agricultural sectors are not effectively integrated. The solution proposed by Rostow is to break down these structural distortions through more effective marketing channels and to create an integrated national market. 272 273 According to Rostow there are four basic tasks in- volved in creating national markets. Of special interest in this thesis are the first two since they deal with the agricultural sector. (1) Accomplish a builduup in agricul— tural productivity. (2) Improve the marketing system for agricultural products. This thesis deals with both tasks in addition to pointing to strong interrelationships between the two. Other economists (most notably Theodore W. Schultz) have emphasized the importance of a build-up in agricultural productivity. But most development economists have shown little interest either in the importance of improved mar- keting channels as an active force in the develOpment process or of the effect of agricultural market structure and per— formance on productivity. The purpose of this thesis is to eXplore the role of the agricultural marketing system in the economic develOpment process. A review of the literature in economic develOpment reveals a great deal of emphasis on capital formation. Most economists agree that developing nations must find a way to accumulate capital for investment in new and improved pro— duction enterprises. There has been relatively little inter- est in the effect of the exchange system on economic growth. Generally, primary emphasis is focused on output improvements in agricultural and/or industrial production sectors. It is implicity assumed that the performance of the distribution system for those products either has little effect on ecoe nomic growth or will be improved "automatically" (through 274 competition) as output goes up. Recent studies on the role Of marketing in economic development indicate that neither of these assumptions are universally valid. The marketing system for either agricultural or industrial products may affect economic growth rates in several ways. (1) It can reduce risks through adequate information flows.(2) It provides the mechanism to effectively or ineffectively co— ordinate the production and distribution of economic goods according to eXpressed needs and wants. (3) Marketing in— stitutions may be a major source Of entrepreneurial talent and capital for other sectors of the economy. (4) The mar- keting system may generate pecuniary and technical internal and external economies for producing firms by extending their markets. (5) The marketing system may pull subsist— ence producers into the exchange economy. (6).Marketing institutions can increase elasticities of supply and demand by making available new or improved products which consumers may find desirable. (7) Marketing institutions can lower consumer costs by improving distribution efficiency and re— ducing spoilage. (8) The marketing system can reduce transaction and exchange costs.l"3 Thus a review of the limited literature on the subject suggests that the per- formance of the distribution sector may have a Significant effect on the rate of economic growth in a developed country. ___— 143Moyer. 275 There are a number of conditions which seem to prevail in most develOping nations. These include atomistic compe— tition, low incomes, poor nutrition, low productivity, capital deficiency and high levels of illiteracy. As a . result of these conditions, individuals within developing nations are frequently trapped in a vicious circle of poverty, inefficiency and low achievement motivation. The dilemma appears to hinge not on a lack of individual desire for productivity improvements but on a belief that such changes are unrealistic and hopeless given the small scale of business units, the large number of competitive units, low income and low knowledge levels. Research studies in Guatamala, Southern Italy, Fiji and New Guinea, as well as the study of Puerto Rico, reported in this thesis have affirmed that strong atomistic competition may act as an impediment to productivity gains rather than as a stimulus as is generally assumed in economic theory. Perhaps this tentative conclusiOn implies that the traditional policy norms relating pure competition and "efficient" resource allocation should be re—examined to determine their application to developing nations. While it can be shown that under conditions of perfect competition resources will be allocated Optimally, the point is irrele- vant for develOping nations because the conditions are seldom in fact fulfilled. This point, in combination with the evi- dence that small scale atomistic competition dampens initia— tive and inhibits productivity gains, shows that policy 276 norms for developing nations should go beyond the static theory of perfect competition to a dynamic view of the economic process. This dynamic view of economic theory would be one where processes of change are seen at least in part to be irreversible, self-generative, and self-determining. . Thus (dynamic theory) would attempt to ex- plain, at least in part, such things as the state of technology, the number of sellers, the evolution of . buyers tastes, the nature of the market inst&tutions, the attitudes of sellers, etc.l’4 Prograxsin.formulating such a theory has been extremely slow. Attempts have generally produced nothing more than a set of conditions applicable for policy guidance in a par- ticular industry. This does not necessarily mean that develOping nations should fall back on static economic theory which makes no provisions for uncertainties, technological change, sequential business decisions based on information feedback, endogenous determination of crucial variables, etc. Perhaps the most realistic alternative is for developing nations to formulate dynamic performance goals. Thus, efforts would be focused on achieving gains in productivity rather than on static economic efficiency. For the agricultural marketing sector specific policy goals might be grouped under (1) those aimed at achieving better usage of available marketing methods and resources and (2) those aimed at en- couraging the adoption of new techniques. _— l44Abkley, p. 260. 277 The appraisal of marketing performance utilizing a dynamic model affords a flexible and pragmatic approach to market policy formulation to encourage greater productivity. There are at least six different types of policy measures which may be able to contribute to the goal of rising pro— ductivity in partiéular market situations. They include property rights laws, facilitative regulations, direct as+ sistance to marketing organizations, market control programs, market planning and technical assistance and direct govern- ment investment. For this thesis, the background research was performed as a part of AID contract csd/786 which is a two and one— half year study of the role of marketing in economic develop- ment. The.research contract calls for two distinct phases. The first phase (which has just been completed) was an evaluation of the role of food marketing in the economic develOpment of Puerto Rico. This location was chosen for the first phase of the research for several reasons. (1) The island has experienced rapid economic growth since 1950. (2) Good benchmark studies had been done in the early 1950's on the marketing system. (3) Relatively good secondary data are available. (4) The culture of the island is quite similar to those of Latin American nations. The first phase was designed to develOp the theoretical and conceptual framework for evaluating marketing in economic development and to provide a testing ground for the methodo— logical tools to be used the second phase of the research. 278 At the present time the second phase of the research is being carried forward in the Northeast of Brazil. The prin- cipal findings of this thesis as summarized below should provide some guidance in the design and execution of the second phase research in Brazil. 1. Atomistic and imperfectly competitive market chan- nels are characterized by high risk, primitive production methods and ineffective transmission of consumer demand to producers. In Puerto Rico the three commodity studies in- dicated that where government and private efforts to improve market coordination arrangements have altered atomistic mar- ket conditions, there have been rapid productivity improve- ments. 2. Several dynamic performance criteria were used to evaluate the progress in milk, egg and fruit and vegetable markets since 1950. The criteria were (1) costs of produc- tion and marketing (2) progressiveness and (3) product quality. a. With reSpect to these criteria, performance in egg production and marketing in Puerto Rico has been satisfactory. The system has performed especially well in lowering pro~ duction and marketing costs and enhancing product quality. b. Similarly, market performance has been satisfactory for milk producers, processors and distributors in Puerto Rico. 279 Significant improvements were observed in all Of the criteria. c. Performance in fruit and vegetable produc— tion and marketing has been much less satis- factory than in the two commodities mentioned above. .Evidence reveals that very little wideSpread improvement has taken place in any of the three performance criteria. A few isolated producers or organizations are progressing in some of the criteria. 3. In Puerto Rico evidence suggests that special efforts in milk and egg markets to improve the coordination between various stages of production processing and distribu— tion have been associated with lower product costs, improved product quality and greater market stability. Simultaneous and joint action by participants at various stages in the production~marketing process was required to bring about coordination improvements. In the case of eggs, there is some indication that large scale retailers played an especially critical roll by providing a strong and stable demand for higher quality eggs. Similarly, the stabilization of retail milk prices through government regulation was critical in the dairy industry. 4. In fruit and vegetable production and distribution, competiton has remained atomistically competitive. There are relatively few examples of vertical integration or r , r . . - I 280 effective coordination. Generally, marketing methods are the same as in 1950. 5. .Intensive government programs and assistance have frequently preceded performance improvements in milk and egg production and marketing. Egg grading and handling regula— tions in 1956 and 1958 gave impetus to commercial egg pro— duction as did government encouragement and assistance in the organization of producer marketing groups. ‘Government as— sistance in milk production and marketing included disease and insect control, pasture improvement, artificial insemi— nation, new facilities or equipment subsidies and a marketing regulation. 6. Though government programs have been enacted for fruit and vegetable producers, they have not effectively encouraged changes in the production and marketing structure or coordination. 7. The three Puerto Rican case studies lend support to the hypothesis that atomistic competition is associated with extensive marketing uncertainties and slow adoption of new production and marketing methais. This conclusion must be considered tentative because it depends on the divergence summarized above between conditions in the milk and egg markets as Opposed to fruit and vegetable markets in only one develOping area. Additional evidence is needed before stronger conclusions will be warranted. 8. Also, the case studies point out that certain kinds of government programs and planning assistance in marketing 281 may have a significant impact on market coordination and adoption of new and improved techniques. The agricultural planning program being piloted in the Mayaguez agricultural region, with a strong emphasis on government assistance to farmers in organizing production and marketing groups, appears to hold some promise as a way of accelerating agricultural develOpment in other areas of Latin American. 9. A Special sample of farmers was drawn in the Mayaguez agricultural region to facilitate comparisons be- tween production-marketing association members and non— members. Simple correlations between association membership and a number of other variables produced the following con— clusions. (a) Only four out of thirty—five hypothesized differences were statistically significant using simple correlation. Association members were found to be more likely to do business with COOperatives, belong to other agricultural organizations and have more education. In ad- dition association members appeared to be better able to withstand financial loss resulting from a drastic reduction in annual production. But the data suggest little measurable difference between association members and non-members. (b) Differences which were measurable were primarily in the "intuitive" success criteria. 10. Using the same survey data, correlations between innovativeness and several other variables were found to be significantly different from zero at the .01 level of significance. Those correlations imply that more 282 innovative farmers in the study had more "modern" attitudes, had greater mass and interpersonal communication exposure, had experienced a more rapid increase in farm sales in the past five years, were younger and better educated and pre— ferred to invest in nonfarm business or education for the family. ll. A multiple correlation equation using 16 independent variables explained only 18% of the variation in the dependent variable—association membership. This supports the conclu— sion of the simple correlations that little measurable dif- ference exists between association members and non—members in the Mayaguez agricultural region. 12. A multiple correlation equation containing 20 independent variables "explained" 45% of the variance in the dependent variable-innovativeness} Regression coefficients having significance at the .05 level or below show that eXplanatory variables for innovativeness must be drawn from a wide range of socio—economic characteristics and value orientations. There may be a possibility that further re- search will lead to a method of "predicting innovativeness" among farmers in developing nations. 13. An exploratory factor analysis using 90 out of some 200 variables measured in the study indicated that 8 factors were being tapped. They were modernism, anti- innovation (economic), anti—innovation (marketing), transi- tionalism, traditionalism, individualism, isolated individ— ualism, cooperativism and fatalism. Specific conclusions 283 for future research involving these concepts are given at the end of Chapter VI. The principle findings summarized above offer the following conclusions with respect to the role of marketing in agricultural development. (1) The structure and per- formance of the marketing system may have significant effects on the total production of a given commodity, on consumer prices and on the adoption of improved production methods (innovation). The coordination of the agricultural exchange system affects significantly the production decisions of producers and therefore the agricultural development process. (2) Within the framework of societal values and goals, government policies can be devised which will contribute to more effective market coordination and more rapid agricul— tural development. But if such policies are to be effective, they should be based on dynamic rather than static economic performance criteria. The second phase of the Latin American Food Marketing Study project will be carried forward in Recife, Brazil. The author will be in residence there as a part of the field research staff. The following are suggestions for possible implementation in the Brazil study. 1. The research design should permit further verifi— cation of the tentative conclusions of this thesis. 2 . Special efforts should be directed toward identify- ing more explicitly alternative government marketing policies aimed at improving market coordination and evaluating their 284 specific effect on agricultural productivity and develOpw ment. 3. -Specific marketing costs (including waste and Spoilage) should be determined for a few commodities in order to permit intercountry comparisons as well as commodity channel comparisons. A. There is evidence that additional variables should be operationalized to more adequately eXplain innovativeness. In the factor analysis the findings indicated that the 90 variables considered from the Puerto Rican survey tapped at least eight factors. -Most of those factors appear to be cor- related with innovativeness. Furthermore, the measurement of some of the variables making up those factors should be improved for the second phase. 5. There is a special need for devising improved methods for measuring market risk perceptions of individual farmers. The Puerto Rican evidence suggests that perceived market risks may be a significant variable in the adoption process. 6. The individual's perceptions of marketing risks should be related to their business performance, achievement motivation, demographic characteristics and value orienta- tions. This will give an indication of the effect of these variables on the individual's perception of market risk intensity which in turn affects his business decisions. REFERENCES Abbott, J. C. Marketing Problems and Improvement. Marketing Guide No. 1. 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New York: John Wiley and Sons, Inc., 1957- Moyer, Reed. Marketing in Economic Development. Occasional Paper No. 1. East Lansing: Institute for Interna— tional Business Studies, Michigan State University, 1965. 288 Office of Milk Regulation, Milk Industry Regulation No. 1. Department of Agriculture, Commonwealth of Puerto Rico, as amended July 26, 1962. Padilla, Otis Oliver. "The Role of Values and Channel Orientation in the Diffusion and AdOption of New Ideas and Practices, A Puerto Rican Dairy Farmers Study." Unpublished Ph.D. dissertation, Michigan State Uni— versity, 1964. Patterson, Shorrey. "Antitrust and the Classical Model," The American EconomibcReview, Vol. XLIII (March, 1957), __EOn78; reprinted in Richard B. Heflebower and George W. Stockings, (eds.). Readings in Industrial Organi- zation and Public Policy. Homewood, Illinois: Richard D. Irwin, Inc., 1958: ‘unfjs‘fl ufl.‘ Perkins, Maurice F. Agricultural Credit in Puerto Rico. 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Stead, William H. Fomento—-The Economic Development of Puerto Rico. Planning Pamphlet Number 103. Washing— ton, D. C.: National Planning Association, 1958. Stevens, Robert D. Elasticity of Food Consumption Associated with Changes in Income in Developing Countries. 0 Foreign Agricultural Economies Report No. 23, U.S.D.A. March, 1965. Stigler, George J. "Workable Competition, Comments," American Review, May, 1956; reprinted in Harvey J. Levin, (ed.), Business Organization and Public Policy. New York: Holt, Rinehart, and Winston, 1963. Tax, Sol. Penny Capitalism. Chicago: The University of Chicago Press, 1963. Valcarcel, Victor M. "El Movimient Cooperativo en Puerto Rico." Instituto de Cooperativismo, Universidad de Puerto Rico. Unpublished manuscript, undated. Villafane, Edgardo Gonzalez. "Costos y Practicas en el Mercadeo de Tomates a1 Nivel del Productor, Puerto Rico, 1963-64." Forthcoming Experiment Station Bul— letin. Welsch, Delane E. "The Rice Industry in the Abakaliki Area of Eastern Nigeria, 1964." Unpublished Ph.D. disser— tation, Nachigan State University, 1964. 290 Wish, John R. "Food Retailing in Economic Development, Puerto Rico, 1950-1965. Unpublished Ph.D. disser- tation, Michigan State University, 1966. Witt, Lawrence W. "Food, to be published in Journal of Farm Economics, December, 1967. . "Role of Agriculture in Economic Development—-l A Review," Journal of Farm Economics, Vol. 7, No (February, 1965). Witt, Lawrence W. and Eicher, Carl. (eds.). Agriculture in Economic Development. New York: McGraw Hill, 1964. ‘T 1 APPENDIX A FACTOR ANALYSIS [E “r_.. ...,.._ r .u“ F... c...‘ 291 292 mm. HQ. 00.: No.: *mm. mo. NN.: bw.: NH. :mazla- om. NH.: Ho.: mo. mo. 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