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Informal Institutions and their Consequences for Market Transactions in the Lithuanian Dairy Sector

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Title:
Informal Institutions and their Consequences for Market Transactions in the Lithuanian Dairy Sector
Creator:
JAGMINAITE, EVELINA ( Author, Primary )
Copyright Date:
2008

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Subjects / Keywords:
Agriculture ( jstor )
Breeding ( jstor )
Cattle ( jstor )
Dairy farming ( jstor )
Farming ( jstor )
Farms ( jstor )
Fats ( jstor )
Milk ( jstor )
Quality analysis ( jstor )
Raw milk ( jstor )

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University of Florida
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University of Florida
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Copyright Evelina Jagminaite. Permission granted to the University of Florida to digitize, archive and distribute this item for non-profit research and educational purposes. Any reuse of this item in excess of fair use or other copyright exemptions requires permission of the copyright holder.
Embargo Date:
8/31/2006
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436098795 ( OCLC )

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INFORMAL INSTITUTIONS AND TH EIR CONSEQUENCES FOR MARKET TRANSACTIONS IN THE LI THUANIAN DAIRY SECTOR By EVELINA JAGMINAITE A THESIS PRESENTED TO THE GRADUATE SCHOOL OF THE UNIVERSITY OF FLOR IDA IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF ARTS UNIVERSITY OF FLORIDA 2005

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Copyright 2005 by Evelina Jagminaite

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iii TABLE OF CONTENTS page LIST OF TABLES.............................................................................................................iv LIST OF FIGURES.............................................................................................................v ABSTRACT....................................................................................................................... vi CHAPTER 1 INTRODUCTION........................................................................................................1 Overview....................................................................................................................... 1 Statement of Purpose....................................................................................................3 2 LITERATURE REVIEW.............................................................................................5 Informal In stitutions.....................................................................................................5 Informal Institutions in Lithuania.................................................................................8 3 OVERVIEW OF THE LITHUANIAN DAIRY SECTOR........................................12 Milk Quality Evaluation System................................................................................15 Transactions between Dairy Farmers and Processors................................................18 4 METHODS.................................................................................................................23 5 DATA AND FINDINGS............................................................................................25 6 CONCLUSION...........................................................................................................35 LIST OF REFERENCES...................................................................................................38 BIOGRAPHICAL SKETCH.............................................................................................41

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iv LIST OF TABLES Table page 1 Does controlled milk grade match with processing plant milk grade?....................26 2 Did milk quality match in the past?.........................................................................27 3 Why do you think thes e differences exist?...............................................................27 4 What could the farmer do?.......................................................................................28 5 Who do you think is responsible for the differences in milk quality?.....................29 6 Do milk-collection center employees tell when milk samples will be collected?...31 7 Logit regression model.............................................................................................32

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v LIST OF FIGURES Figure page 1 Probability of being cheated, if informed when milk samples will be collected versus not informed when milk samples will be collected (1 not informed, 2 informed)..................................................................................................................32 2 Probability of being cheated if one trusts milk collector versus if one does not trust milk collector (1 = do not trust, 5 = fully trust)...............................................34

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vi Abstract of Thesis Presen ted to the Graduate School of the University of Florida in Partial Fulfillment of the Requirements for the Degree of Master of Arts INFORMAL INSTITUTIONS AND TH EIR CONSEQUENCES FOR MARKET TRANSACTIONS IN THE LI THUANIAN DAIRY SECTOR By Evelina Jagminaite August 2005 Chair: Jeffrey Samuel Barkin Major Department: Political Science To understand the economic difficulties that countries in transition are experiencing, it is important to consider th e informal sphere of economic relations. The assumption of separation between formal rule s and incentives and the informal sphere of economic relations ignores the specific cont exts in which business transactions are embedded. Actors’ incentives and expectations are shaped not just by formal rules, but also by the informal “rules of the game.” In formal rules often play a critical role in institutional outcomes. That the same fo rmal rules and/or c onstraints imposed on different societies produce diffe rent outcomes demonstrates that informal constraints should not be ignored. Lithuania's post-Sovi et legacy has influenced contemporary patterns of behavior, resulting in a culture of informality and widespread disregard for formal law. To understand the difficulties of economic sphere governance in Lithuania, the influence of informal in stitutions must be considere d. My study identified informal institutions, tested the extent to which informal institutions are prevalent in the

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vii Lithuanian dairy sector (specifically in tr ansactions between dairy farmers and milk processing plants) and examines how informal institutions affect the outcomes of transactions. My study contri butes to a better understanding of how to design more effective market institutions in transitional economies.

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1 CHAPTER 1 INTRODUCTION Overview My study built on the perspective and fi ndings of the historical embededness approach (Perrow 1981,1986; Fligstein, 1985; Granovetter 1985; Bradach and Eccles 1989; Powell 1990; Freeland 1996). I view the process of change as gradual and historically contingent (Thelen 1992). My argument emphasizes behavior, as well as attitudes. My study examined the connections among peopleÂ’s prior experiences and their current attitudes and behaviors. Hence, I tested whether the informal institution of blat that persisted under the Soviet Union is able to change the outcomes of business transactions under todayÂ’s market system. I considered whether blat was a response to an inefficient state economy and has dissipated si nce the market system was established; or whether blat persists and is still capable of chan ging outcomes of market transactions. Under the Soviet system, ineffectiv e government bureaucracy was largely responsible for growth in informal in stitutions (Ledeneva 1998, Bunce 1999, Jowitt 1992). Since valued goods and services were hard to acquire, people developed common patterns of adaptive behaviors to resolve the problem of chronic shortages and to make the system more flexible and adaptive: The shortage economy and the communist partyÂ’s ruthless control of the public sphere caused citizens throughout comm unist Europe to develop adaptive mechanisms of behavior centered on private networks (Howard 2003: 10).

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2 These networks were and still are called blat . This means that when people were faced with problems, they would resolve them pr ivately, engaging in exchange of goods or privileges. The literature suggests that the Soviet leg acy has created a wide spread culture of informality, where social context inherited from the former socialist period affects patterns of behavior of to dayÂ’s entrepreneurs (Smallbone and Welter 2001). In her analysis of blat, Ledeneva suggests that since th e fall of the soviet system, blat relations have transformed market conditions, changi ng many relations and friendships (Ledeneva 1998). However, it is not clear how blat relations have changed nor what role the culture of informality has played in this process. No studies have analyzed how patterns of blat could be affecting business transactions toda y. Who are the winners an d losers in the new system? What are the possible outcomes of a gi ven business transaction? To answer such questions, it is not enough to evaluate formal governance structures and their effects. We must consider the influence of a post-Sovi et legacy and the e ffects of informal institutions to comprehensively anal yze such business transactions today. Generally, the change of informal institutions is expected to be slow and incremental (Helmke and Levitsky 2004). Fo r example, many informal norms of behavior survived the transition from th e soviet economy to a free market economy (Clarke 1995). However, informal institutions can change: sometimes quickly. For example, in Uganda the rule of law is not ta ken seriously regarding driving. It is almost impossible to get a speeding ticket since peop le can easily bribe th eir way out of it or avoid stopping altogether when police attemp t to pull them over. However, since the summer of 2004, the government of Uganda has enforced a seat belt law. The

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3 government has enforced this law successfully ; and in response, every car, bus, and taxi has installed seat belts. This example s hows that important sources for informal institutional change can come from shifts in formal regulations. The literature on informal institutions reveals little about how informal institutions change, are modified, or are re invented over time in relation to changes in formal rules and regulations (Helmke and Levi tsky 2004). No studies address how blat relations have transformed since the breakdown of the S oviet economy, what consequences this transformation may have for market transacti ons, or how widespread those consequences are. Statement of Purpose It is not enough to analyze informal institutions in a particular context. It is also important to understand whether informal ins titutions actually have consequences for business transactions and how widespread those consequences are. Therefore, I conducted in-depth interviews to contextualize informal in stitutions in the Lithuanian dairy sector and to validate surveys. Secondly, I surveyed dairy farmers to examine how widespread the prevalence of informal institu tions is; and to examine how these informal institutions affect market transactions. My study had a double aim. First, I contex tualized the understanding of informal institutions in transition and thus co ntributed to the understanding of how blat relations have transformed in the post-communist context. Second, I tested whether informal institutions can alter the outcomes of ma rket transactions. My study challenges the assertions that market processes of effici ency are the primary forces that shape the outcomes of economic transactions (Willia mson 1985). Market processes are embedded

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4 in social structures, which are able to shape and structure market transactions; causing inefficient economic outcomes for the parties involved.

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5 CHAPTER 2 LITERATURE REVIEW Informal Institutions The term informal institution has been applied to many phenomena such as personal networks, corruption, mafia, second economies, traditional and cultural norms, and so forth. Therefore, it is important to clarify what an informal institution is and how the concept can be used to analyze how widesp read its consequences are for transactional outcomes. My literature review, examined the concept of informal institutions generally; and how they manifest in the Lithuanian context specifically. Culture plays an integral part in sh aping and defining formal and informal institutions. Culture in its broadest mean ing includes mental processes, beliefs, knowledge, and values, including human actor s and actions (Tylor 1871). Culture is unique in the means by which people in a given society satisfy their needs, regulate their society, and regulate distribution of social power. It is socially transmitted, often symbolic, and it constructs information that shapes human behavior and regulates human society. Culture is patterned and provides a model for appropriate behavior (Bodley 2000). Culture fosters formation of informal in stitutions; however, in order to analyze the effects of informal institutions on transactions it is analytically useful to decompose the two concepts. Helmke and Levitsky (2004) s uggest disintegrating the two concepts by defining informal institutions in terms of shared expectations rather than shared values. So, what does the word institution mean? Douglas North (1990) defines institutions as norms that regulate behavior and choice. In stitutions are “rules of the game in a society

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6 or, more formally, humanly de vised constraints that shape human interaction (North 1990: 3).” Institutions “are perfectly analogous to the rules of the game in a competitive team sport (North 1990: 4).” They consist of formal written rules, as well as unwritten codes of conduct that influence and suppl ement formal rules (North 1990). “Taken together, the formal and informal rules and the type and effectiveness of enforcement shape the whole character of the game (Nor th 1990: 4).” North distinguishes between formal and informal constraints as part of the workings of institutions. On a continuum taboos, customs, and traditions would be at one end and written constitutions at the other (North 1990:4). Formal institutions include ju dicial rules and contracts, which determine formal constraints. Informal institutions are defined by codes of conduct and norms of behavior, which determine informal constraint s. The fact that the same formal rules, when imposed on different societies produce different outcomes, illustrates the importance of informal constraints on formal structures (North 1990). Furthermore, according to the discussion by Helmke and Levitsky (2004) informal institutions are conceptualiz ed as rule-bound, patterned beha viors that are rooted in shared expectations about other’s behaviors. It is important here to distinguish between informal institutions and other patterned behavi ors. For example, to stand in line is an informal institution, while to take ones coat off in a movie theatre is a behavioral regularity. In the first case, not following the rules will trigger social disapproval, while in the second case, leaving ones coat on will not trigger negative reactions. To be considered an informal institution, a behavior al regularity must respond to widely shared expectations, the violation of which generate some kind of external sanction (Helmke and

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7 Levitsky 2004). “Informal institutions are shar ed expectations that are enforced through mutual reciprocity (Helmk e and Levitsky 2004: 725-740).” In contrast, formal institutions can be defined as the rules and procedures defined by law and enforced through official channe ls and government institutions, such as courts, legislatures, and poli ce. Furthermore, formal institutions can be defined as organization rules, such as official rules of corporations, government agencies, and so forth. On the contrary, “informal instituti ons are usually unwritten rules, based on mutually shared expectations that are cr eated, communicated, and enforced outside of formally sanctioned channels (Hel mke and Levitsky 2004: 725-740).” Finally, it is important to distinguish betw een the existence of informal rules in formal organization and informal institutions versus informal organizations. Informal institutions imply rules that actors follow, not the actors themselves (North 1990). In organizations, informal patterns of behavior ca n fill spaces that formal rules cannot reach (Ouchi 1980). Ineffectiveness of formal structures can result in the use of informal networks, where the change in formal structur es can result in a change of paperwork, not of the informal institution itself (Ledeneva 1998). Informal organizations such as the mafia or a clan can follow informal rules but are not informal institutions. Informal institutions develop when a group of pe ople voluntarily agree on doing something together and they let a code of unwritten rule s develop to guide their activities, including decisions on how to deal with those who breach these rules (G. Hyden, personal communication). Informal institutions can opera te in the context of formal institutions, sometimes helping the system to perform a nd sometimes inhibiting its performance (G. Hyden, personal communication).

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8 Informal Institutions in Lithuania In the Lithuanian context, informal institutions resemble blat ; a word that does not need a definition for the people who lived under the Soviet regime. However, it is difficult to explain the essence of blat to those who did not ex perience it, as it means different things in different contexts (Ledeneva 1998). In the simplest sense, blat was the use of personal relations and informal contac ts to obtain goods and se rvices that were in short supply and were used to go around fo rmal procedures under Soviet system. Blat is an acquaintance or a friend thr ough whom you can obtain some goods or services in short supply, cheaper or bette r quality. Also, blat is a reciprocal relationship <…>. Blat is about using informal cont acts, based on mutual sympathy and trustthat is, using friends, acquaintances, occasional contacts. Blat also takes place where one arranges a good job for anot her, or where, on otherwise equal conditions, the one who is known or r ecommended gets chosen. Sometimes blat means influence and protection, all kinds of ‘umbrellas’, using big names-so-called ‘I am from Ivan Ivanovich’— in troductions (Ledeneva 1998: 34). Blat relationships resembled family relati ons (Wittgenstein 1958). Furthermore, it was characterized by non-monetary excha nge, similar to barter based on personal relationship. “In the planne d economy, money did not function as the main element of transactions, things were sorted out by mu tual help, by barter (Ledeneva 1998: 19).” Under communism, the economic and politic al spheres were tightly intertwined. Public and private spheres of life were not se parate; everything was supposed to be under control of the state (Agh 2003). The informal practices, the so-called “second economy” pervaded the Soviet command system (G regory and Altman 1989). “The informal economy took care of many needs, which we re not met by the command economy, and thus contributed to the functioning of the Soviet system (Ledeneva 1998: 5).”

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9 In this context, favors of access were possi ble because personal resources were not used. Resources of the state, which was pe rceived as the enemy, were distributed and were perceived as sharing, helping out, a nd mutual care (Ledeneva 1998). “Sharing access with friends and acquaintances became so routine that the difference between blat and friendly relations became blurred: one al most became the consequence of the other (Ledenva 1998: 20).” Reciprocity in blat relations was not immediate. “T ransactions could be circular, A provided a favor to B, B to C, C to D, and D to A, and the last chain might have not taken place (Ledeneva 1998: 21).” Blat relations were fluid; they permeated every sphere of life, making it difficult to draw boundaries between blat , corruption, and bribery (Ledeneva 1998). It was widely used therefor e mutually expected and enforced through reciprocity. If you receive “help” you are e xpected to return the favor. If you do not “help” you soon receive a bad repu tation and will not be “helped” in the future. Overall it was perceived as a legitimate practice by society and everyone widely used blat relationships. Since the break down of the Soviet Uni on, the market economy has transformed many relationships and friendships. Money b ecame the main mode of transaction, and access to goods and services that were in short supply under the Soviet system became open if one had money to purchase those goods. However, in some cases it is still common to hear of people re ceiving special services under blat , especially when one deals with government . To cut through bureaucratic red tape , it is not as simple as just paying somebody a bribe. One has to know how to do it in a ritualized symbolic manner. If the person just receives a m onetary bribe he/she is afraid to be turned in, it is also easy

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10 to label the person who took the bribe as corr upt. Paradoxically, one can still bribe, but it has to be done according to a specific ritu al of exchange. This means following certain unwritten rules of behavior th at are almost ritualistic. The exchange is blurred between friendship and bribery. In other words it is a blat exchange. This means that there has to be an impression of friendship and mutuality between the two parties. Establishing a blat relationship is a subtle balance between intimacy and distance. It is important to act very friendly to the person that one wants to brib e. Under this type of exchange, the word bribery is not even used. It is called he lping out or asking for a favor. Under this ritualized exchange the party that is asking for a favor, in addition to paying the bribe monetarily, also invites the party that is “helping out” ove r to ones house for a dinner and drinking, where the two partie s spend a substantial amount of time sharing intimate life stories with each other. Sometimes, one can receive a favor without paying a monetary bribe, by inviting the pa rty that is “helping” for an ex travagant evening of dining and drinking. After this ritual there is an impre ssion of mutuality and trust. Where the party that gave the bribe, whatever form it was pr esented in, should not feel violated and the person who took the bribe feels better because they helped somebody who now is a good acquaintance. Usually after this type of exchange there is a hope for future interaction with expectations of mutual help if needed from either party. Today, from qualitative accounts it seems that blat exchange plays an important role when one deals with government. However, economists (Scherer and Ross, 1990; Schmalensee and Willing, 1989; Williamson, 1985, 1991) would expect that in a capitalist exchange, market forces will pervad e, eradicating culturally conditioned social norms of exchange. Therefore I ask: Can soci al norms of exchange, in this case the

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11 institution of blat, change the outcomes of market tran saction in the Lithuanian dairy sector?

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12 CHAPTER 3 OVERVIEW OF THE LITHUANIAN DAIRY SECTOR The agricultural sector has always, before and during the years of Soviet control, been an important aspect of the Lithuanian economy. Agricultural production during the Soviet years had been built through the cr eation of collective farms. Agricultural collective farms under the Soviet Union were exclusively organized around production and sales cooperatives. Under the system of mass collectivization, ever yone living in the countryside was forced to work on collective farms. However, workers were allowed to till some private land, a household plot, assigned to individuals by the collective farm. It was possible to rent some equipment from the collective farm to work on household plots. After the breakdown of the Soviet system , farmland was ceded to its original ownership before the 1940 communist takeove r. Collective farms were dissolved and workers were allowed to take anything from collective farms, such as animals and small equipment. Expensive equipment, such as ca rs and tractors, were auctioned off. Since then, market transactions have dominated the sector. Some collective farms were able to sustain themselves and not dissolve. Toda y, around 33.5% of Lithuanians are farmers (DSRL 2002). A significant share of the Lithuanian gr oss domestic product (GDP) is produced in the agricultural sector; 14.7% in 2002 (Min istry of Agriculture 2002). Traditionally the dairy sector has been expor t-oriented (Kedaitiene and Hockmann 2002). In 2000, more than 40% of production was exported to forei gn markets (Ministry of Agriculture 2000).

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13 Individual milk processing firms have achie ved expansion into in ternational markets. Therefore, the dairy sector is highly comp etitive internationally (Lithuanian Agrarian Economy Institute 2001), accounting for over 30% of Lithuanian agricultural exports (Ministry of Agriculture 2003). The main products for export are skimmed m ilk powder and cheese. Together they account for more than 50% of total dairy e xports. By 2000, the United States had become the main export market for Lithuanian da iry production. CIS countries attract more exports than the EU. A good image of Lithuanian dairy products, similarities in business practices, and old business contacts due to 50 years of common history provide competitive advantage in this market segm ent for Lithuania (Kedaitiene and Hockmann 2002). The milk processing industry sector is highly modernized. The industry was well developed even in the mid-wars period (19181940). Lithuanian dair y products were well known in European markets. During Soviet ti mes, the dairy-processing industry was slow to modernize due to the lack of equipmen t and capital (Kedaitiene and Hockmann 2002). However, it was one of the main sectors in the food industry. It encompassed production of whole milk, cheese, butter, and canne d dairy products (Ked aitiene and Hockmann 2002). Before Lithuania gained independen ce and became a market economy, there were 45 dairy plants in Lithuania, each was part of one of the nine ma jor dairy complexes. Each plant had well defined areas of milk purchases and sales (Kedaitiene and Hockmann 2002). Since the 1990s, the dairyprocessing industry has unde rgone several rounds of privatization. Kedaitiene and Hockmann (2002) in their description of the Lithuanian

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14 dairy industry summarize this process. During th e first round of priv atization, of 33 milk processing companies, only three firms (Bir žu Pienas, Rokiškio Suris, and Jonavos Pienine) were sold. This led to partial priv atization of the sector . In this round, only 30% of assets belonged to private capital. According to the law of privatization at the time, dairy producers could obtain up to 50% of the cap ital of the dairy plants. However, because of the lack of capital and complex privatization process, primary producers were reluctant to take part in the privatization pro cess. Foreigners could not participate in this initial phase. This resulted in a partial privatization of the sector dominated by domestic capital. In the second round of privatization that started in 1995, rules were modified to ease access to assets of m ilk processing enterprises. Additionally, foreign investors were permitted to participate. Financial investors EBRD, Namura, Bankers, and Trust Company provided the majority of foreign resources (Jansik 2001). On the other hand, small-scale farming, the fragmentation of farmland, and a low number of livestock per farm characterize the Lithuanian dairy production sector. Most farmers in Lithuania are somewhere between producing for subsiste nce and for market exchange. Farms are small: between 6 and 10 hectares (Lithuanian Agrarian Economy Institute 2001). However, if farmers need more land, it is easy to rent at low rates, often more as little as the maintenance of the field. Subsistence farming is used to supplement household incomes. There are many farmers at retirement age and between 40 and 50 years old. The young population tries to get out of the countryside to find jobs in the cities. It is uncommon to find young, progressive farmers. The farmers who are in th eir 40s or 50s either have a job outside the farm, such as teaching, carrying mail or other government employment or are

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15 unemployed. There are not many job opportunitie s outside of governmental jobs in the countryside. Most farms in Lithuania are m ono-crop producers who consume part of their production and sell the rest (Lithuanian Agrarian Economy Institute 2001). Dairy is central to the live lihood of most Lithuanian farmers. Forty-one percent of all farms are involved in dairy produc tion (Ministry of Agriculture 2002). Of these, 84% are small producers who own 1 to 2 cows, and 15% own 3 to 9 cows. Fewer than 1% are large producers, ow ning 10 or more cows. About 90% of dairy is produced in mono-crop farms. These features limit the ab ility to modernize agricultural production, because only a few farm ers posses capital resources to mechanize their farms. Nevertheless, the industry of dairy production and processing has been acknowledged as a priority br anch of agriculture. The Mini stry of Agriculture (2001) stated that modernization and restructuring of the primary dairy produc tion sector is one of their main priorities. Since the second round of privatization, which was boosted by an influx of foreign direct investment and modernization of equipment in the milk processing sector, the modernized firms have pushed through high quality requirements for raw milk production. This was generated by EU requirements of quality certification regarding dairy exports into the EU. The EU has delegate d money to the Lithuanian SAPARD program for promotion of dairy fa rm modernization. Furthermore, in the negotiations with the European Commi ssion, of all new EU members in 2004, the Lithuanian dairy sector received the highest financial support. Milk Quality Evaluation System In the transaction between dairy farm ers and milk processing plants, two organizations play important roles. First, the government laboratory (Pieno Tyrimai)

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16 plays a primary role by determining milk quality grade for payment purposes. Second, the Cattle Breeding Agency plays a seconda ry indirect role by monitoring good milk quality producing cattl e. This agency mon itors good quality catt le by testing milk samples according to the same protocol as milk processing plants at the laboratory Pieno Tyrimai for cattle breeding purposes. Because Cattle Breeding Agency collects milk samples and delivers them to the state labor atory following the same protocol as milk processing plants, milk quality results should be similar between the two organizations. If milk quality results are drastically different between the two organizations it is indicative of problems with milk quality results as reported to farmer s by milk processing plants. A centralized independent state laboratory (Pieno Tyrimai) is responsible for milk quality control of the entire country since 1998. It is associated with the Veterinary College of Lithuania and shares its database on milk quality results with the faculty and students of the veterinary college for resear ch purposes. It tests raw milk composition, quality falsification for payment purposes, a nd performs all necessary tests for milk recording. The laboratory is equipped with m odern equipment, which allows testing in compliance with EU legislation. Pieno Tyrima i has been accredited to perform physical, chemical and microbiological testing of raw milk. Pieno Tyrimai has developed an expedient sy stem of milk sample delivery and data reporting to their clients. Milk samples ar e collected by employees of milk-collection centers from individual farmers, delivere d to the laboratory, and than tested by the laboratory. The laboratory performs milk quality tests on fat content, lactose, somatic cells, total bacterial count, inhibitory s ubstances, and on milk freezing point. Based on these indicators the laboratory assigns a quality grade to ever y milk sample delivered that

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17 is not damaged and meets laboratoryÂ’s require ments. After testing milk samples, test results are entered into the laboratory's comput er database, where they are systemized and delivered to their clients in printed test reports or if possible by e-mail. Another agency that plays an indirect role in the transaction between dairy farmers and milk processing plants is the Cattle Breed ing Agency. This agency is responsible for controlling dairy cattle for breeding purposes, in order to improve the reproductive capacity of Lithuanian dairy cattle. This agency is responsible for collection, maintenance, and monitoring of breeding inform ation for the cattle database. In order to evaluate cattle breed quality for milk produc tion, the agency collects milk samples from farmers who sell their milk and are registered to participate in the program and deliver them to the state laboratory Pieno Tyrimai fo r milk quality analysis. This agency collects milk samples from farmers according to the same guidelines as milk processing plants and evaluates milk grade according to the same criteria based on the quality results reported to them by Pieno Tyrimai. The agency has no incentive to falsify milk quality results as higher or lower since there is no monetary exchange based on milk quality between farmers and the breeding agency. This is an independent party that is involved in the transaction. Therefore if milk quality grade as reported to the farmer by milk processing plants and the Cattle Breeding Agency differs, it is a good indicator of whether a farmer is being cheated by milk processing plants. As my findings show a lot of farmers indicate that the breeding agency often shows higher milk quality results than the milk processing plants. One important factor in determining the pr ice of milk is its quality. Milk quality grade is determined by Pieno Tyrimai, based on indicators of fat content, lactose, somatic

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18 cells, total bacterial count, inhibitory substances, and on milk freezing point. According to the report of the laboratory, the price of milk is determined for each farmer using a formula. The strongest determinants in the pr ice that a farmer will receive for their milk is lactose, fat content, and the level of somatic cell count. Milk processing plants are interested in having lactose levels and fat c ontent levels lower, because this results in lower prices that the firms have to pay for raw milk. In-depth interviews with government o fficial of the Cattle Breeding Agency, experimental results from the Food and Veteri nary Agency, and Pieno TyrimaiÂ’s apparent transparency, suggest that the state laborator y Pieno Tyrimai is a credible organization. Pieno Tyrimai does not falsify milk sample results. Therefore, my data indicates that somewhere before milk samples arrive to the laboratory, most of the cheating occurs that results in lower milk quality evaluation reports. Transactions between Dairy Farmers and Processors Three large milk processing companies a nd four smaller ones dominate the milk processing market. Some processors provi de credits to large-scale producers for modernization of their farms and establish long-term contracts. The main mode of governance in the market of raw milk is cont ractual arrangements. Spot markets of strong vertical control are unimpor tant (Kedaitiene and Hockme n 2002). The Ministry of Agriculture sets up the basic guidelines of the contracts, such as duration or payment schemes. The contracts between farmers and milk processing plants are renewed annually. The contracts do not predetermine how much the farmers will get paid for their milk; it is open to fluctuation. So farmers pr omise to sell the milk to the given processing plant without knowing how much he/she will get paid for their milk in a few months. If a

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19 farmer wants to terminate the contract she is allowed to do so for a fee. Farmers get charged fees for entering into the contract and terminating it. Processors provide better conditions to larg e milk producers, due to lower transport and transaction costs. Small farmers get paid less for the same quality raw milk than large farmers. For the most part all farmers are pr ice takers. However, large farmers have a bit more leverage than small farmers. They can negotiate 3 to 6 cents more than small farmers per kilogram of raw milk. Furtherm ore, if farmers are organized into milk production cooperatives they can negotiate higher prices for raw milk. Some large farmers are organized into a powerful lobby grou p Lietuviskas Pienas and are able to sell their milk for more than other large farmer s who are not organized. Smaller farmers for the most part are not organized into milk-c ollection cooperatives, so they are not well positioned to negotiate for better prices. The pricing system of raw milk is categorized according to the quantity of milk an individual farmer sells per day. A farmer selling up to a 100 kg of milk per day is paid approxima tely 30 cents per kilogram of raw milk. A farmer selling from 101 to 200 kg per day is paid approximately 40 cents per kg of raw milk. A farmer selling more than 200 kg is pa id from 50 to 65 cents per kilogram of raw milk. These prices are paid only for the highest milk quality grade. If milk quality does not meet the highest standards the price for ra w milk is much lower. Small farmers bring their milk to the milk-collection centers that have refrigerators. The farmers who get paid from 30 cents per kg to 50 cents per kg bring their milk to the same collection centers and pour it into one big refrigerato r where everyoneÂ’s milk is mi xed. However, milk prices are determined according to how many liters of milk they sell to a given collection center.

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20 For the most part, milk-processors ow n milk-collection centers. Sometimes cooperatives or private indivi duals who are usually richer farmers own sometimes milkcollection centers. These colle ction centers sign contracts with the processing plants. Processing plants send trucks to collect m ilk from the milk-collection centers or sometimes collection centers have their ow n transportation to bring milk to the processing plants. Farmers who bring their milk to the milk-collection centers in their transactions deal with milk-collection cente rs. This is where their milk samples for quality evaluation are collected and this is where they are paid for their milk. Under the formal rules, milk samples are collected randomly for fat content, lactose, somatic cells, total ba cterial count, inhibitory substa nces, and milk freezing point twice a month. Before milk samples are colle cted milk has to be mixed with metal nonrusting tools in circular mo tions going up and down. The samp les are collected into dry plastic containers and placed into boxes, wh ich should be locked in the presence of a farmersÂ’ committee selected to supervise this process. However, my survey indicates that the rule of how milk samples are locked is not uniformly enforced. Usually in twenty square kilometers ther e are from one to three collection centers. So, sometimes there is no competition and so metimes there is little competition between milk-collection centers. Where few collection centers are found close to each other, prices might differ between the two by 1 to 2 cents per liter of milk. If the farmer is dissatisfied with the way milk-collection center operates, such as there is a lot of overt corruption he/she can leave to another one, if one is present. However, if a farmer chooses to leave due to some kind of disput e he probably will neve r come back to the same milk-collection center, unless the employ ees change. Therefore, these disputes are

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21 not very common because farmers realize thei r vulnerability, since there is no guarantee that the farmer will be treated better in the other collection center. Large farmers belong to a different milk-co llection system than small farmers. Milk processing plant cars come to collect milk dir ectly to large farmersÂ’ farms. Furthermore, milk samples for large farmers are collected under different rules. In 2002 the food and veterinary agency conducted experiments to evaluate whether there was cheating in the milk quality evaluation process. This experi ment was based on the complaints by the large farmers, which are organized in the powerful lobby group. The experiment discovered that there was a lot of cheating in the system. In response to the study, the legislation was passed that gave more pow er to large farmers on how milk samples should be collected. Farmers who sell 500 kg of milk per day and have their own milking and cooling systems are allowed to collect milk samples by themselves. Pieno Tyrimai comes to these farmers to pick up milk samples or the farmers can deliver the samples to the laboratory themselves. In this system farmers are monitored by milk processing plants, which take milk samples for themselves to double check on the farmerÂ’s performance. The employees of the state laboratory indicated that due to this new syst em, large farmers have more control over their milk samples. However, since large farmers now have the power in their hands some of them figure out how to deceive milk processing plants. Other farmers who have their own milk ing and cooling systems but produce less than 500 kg per day are allowed to have their own boxes that are locked on their farms. Milk collectors usually come to these farmers to collect milk. After milk-collection center employees collect milk samples, the box with samples has to be signed and locked by the

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22 farmer whose milk was collected. This way the farmers are able to observe and make sure that no cheating occurs before boxes with milk samples are locked. After the containers with milk samples are locked they are not s upposed to be opened till arrival to the state laboratory for testing.

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23 CHAPTER 4 METHODS Formal institutions are written down, easily identified, and officially enforced their measurement does not require ex tensive contextual understand ing which facilitates large n studies (Helmke and Levitsky 2004). On the other hand it is much more difficult to identify informal institutions. This type of study requires in-depth contextual knowledge that can be attained through in-depth in terviews and complemented by questioners. Therefore, due to the need for substantial contextual knowledge, my study is limited to the small n case study design. In my study I identified informal institu tions by identifying stable patterns of behavior that do not correspond to the expected outcomes according to the formal rules in the domain of market transactions between milk producers and processors. My study consisted of the two series of interviews. Th e first part included 32 in-depth interviews with farmers, milk-collection plant employ ees, government officials, and members of dairy cooperatives. This part of the analysis familiarized me with the industry and sensitized me to the existence of informal institutions. I conducted the first round of the in-depth interviews before surveying farmers. The in-depth interviews helped me to create the questionnaire. Befo re the conduct of surveys, I reviewed the draft of the questionnaire with several farmers to test if the language used in questioners was appropriate. In light of these respon ses the questioners were adjusted. The second part of my study included a ra ndom sample of 85 surveys conducted in person with dairy farmers whose cows are co ntrolled by the Cattle Breeding Agency. The

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24 random sample of farmers who participated in the surveys was obtained from Cattle Breeding AgencyÂ’s municipality offices . The surveys were conducted in three geographically dispersed municipa lities. In the first, the Sirvintu municipality in the western part of Lithuania, 55 surveys were collected with 7 missing responses. In the second, the Jonavos municipality central part of Lithuania, 12 surveys were conducted with 2 missing responses. In the third, the Plung es municipality in the eastern part of Lithuania, 18 surveys were conducted with 6 missing responses. After the questionnaires were completed I conducted a second round of in-depth interviews with a few government officials mentioning the results that I found from the survey. During this round of interviews govern ment officials were more willing to share information since they recognized the discove ry of the true problems in milk grading system. These interviews reaffirmed my findings and extended the understanding of the problem with quality evaluation system in the industry. Overall, I analyzed how informal instituti ons affected the outcome of transactions. The outcome of the transaction between the two parties is the grade of the milk. The grading system of milk determ ines the price that the farmer gets for his/her sold milk. From this analysis I further extrapolate the e ffect of informal institutions on the outcomes of the market exchange between dairy farmers and milk processing plants.

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25 CHAPTER 5 DATA AND FINDINGS In-depth interviews with farmers and govern ment officials indicated that there was a lot of shirking in the way milk sample s were handled by the employees of milkcollection centers. For milk gr ade to be accurate, the sample has to be taken strictly adhering to a protocol. First, milk has to be well mixed in circul ar motions moving up and down, than a sample has to be collected into a clean dry cont ainer, and conserved. Some farmers suggested that one way to cha nge milk quality grade is to add a drop of sweetened water to the sample. This would dras tically affect lactose and protein levels in milk and lower milk quality grade. Milk quality grade could also be affected if the sample is taken without thoroughly mixing milk before it is collected. This could either lower milk quality grade or make it higher depending on how the sample is taken. Furthermore, some farmers reported that ar ound the holiday seasons their fat content as reported by milk-collection centers tend to be lower than reports of fat cont ent by Cattle Breeding Agency. Other farmers described that when the differential between the milk-collection center and Cattle Breeding Agency persists they argue with the milk-collection center employees. After that type of confrontation milk quality as reported by milk-collection centers tends to improve for a while. Many farmers in the in-depth interviews i ndicated that their milk quality grade as reported to them by the milk-collection cente rs drastically differs from what Cattle Breeding Agency reports. This differentiation should not be large a ffecting the grade of milk. It is natural that it will not match prec isely but the differential should not be by an

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26 entire grade or 1% in fat c ontent. Milk quality usually fl uctuates according to seasonal variation and the type of food the cattle are fed, but it does not fluctuate daily, where one day fat content is 4% and the next day it is 3% (Aniulis and Japertas 2001). Reflecting on this information, I concluded that the question of whether milk quality grade matches between milk-coll ection center reports and Cattle Breeding Agency would be a good indicator whether cheating is taking place in the way milk samples are handled before they arrive to the state laboratory Pieno Tyrimai. The survey question “Does controlled milk gr ade match with milk-collection plant milk grade?” was used as a dependent variable in the logit regression model. Therefore, the sampling frame was limited only to the farmers whose cows are controlled for breeding purposes by the Cattle Breeding Agency. The farmers who answered NO to the question were likely to be cheated in their transaction with milk processing plants. This means that these farmers receive much lower pay for raw milk. Sixty seven percent of farmers replied that their milk quality results as re ported to them by milk processing plants did not match and were lower than quality evalua tion reports provided to them by the Cattle Breeding Agency (Table 1). Sixty four percent of the farmers, who said that their milk quality grade is the same betw een the two organizations, indicat ed that in the past their milk quality was not the same (Table 2). Table 1. Does controlled milk grade ma tch with processing plant milk grade? Frequency Percent Valid Percent Cumulative Percent Valid No 54 63.5 67.5 67.5 Yes 26 30.6 32.5 100.0 Total 80 94.1 100.0 Missing System 5 5.9 Total 85 100.0

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27 Table 2. Did milk quality match in the past? Frequency Percent Valid Percent Cumulative Percent Valid Did not match in the past 16 18.8 64.0 64.0 Always matched 9 10.6 36.0 100.0 Total 25 29.4 100.0 Missing System 60 70.6 Total 85 100.0 Most farmers expect to be cheated in thei r transactions with milk-collection centers. Sixty seven percent of the farmers who repor ted that their milk quality grade differs between milk-collection center reports and Cattle Breeding Agency believe that it is due to cheating. Fourteen percent believed it is due to natural conditions, and 20% gave other reasons (Table 3). Table 3. Why do you think these differences exist? Frequency Percent Valid Percent Cumulative Percent Valid Cheating 34 40.0 66.7 66.7 Natural conditions 7 8.2 13.7 80.4 Other 10 11.8 19.6 100.0 Total 51 60.0 100.0 Missing System 34 40.0 Total 85 100.0 These results indicate that farmers in most cas es expect to be cheated in the transaction and do not respond to it by filing complaints to the government. Seventy eight percent of the farmers who reported that their milk qua lity grade differs between milk-collection center reports and Cattle Breed ing Agency indicated that th ey could not do anything to

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28 change the situation (Table 4). This context provides an incentive structure to which the farmers attempt to respond covertly w ithout government’s intervention, because government intervention is perceived to re sult in negative conse quences. If farmers expect to be cheated and accept it as the rules of the game they also expect to be able to cheat the system and get away with it. Table 4. What could the farmer do? Frequency Percent Valid Percent Cumulative Percent Valid Cannot do anything 39 45.9 78.0 78.0 Other 11 12.9 22.0 100.0 Total 50 58.8 100.0 Missing System 35 41.2 Total 85 100.0 In the transaction between dairy producers and processo rs, milk-collection center employees are inter-agents between the two parties. They hold a position of authority over farmers. They are the ones that are respon sible for paying for milk and for collecting milk samples from farmers. A lot of tens ions surround milk-collection center employees. When asked to be interviewed about their work they were very unwilling to speak and often would say that they are under fire from both ends. They are sometimes perceived as cheaters, sometimes as victims, sometimes as collaborators in helping farmers to covertly defy milk processing plants. When farmers get low milk quality grade, their aggression focuses on the milk-collection center employee, if prices are low for milk they complain and ask milk collectors why the prices are low and if there is any way that they could be higher. If farmers have problems with their cows where most of them have a mastitis infections and milk quality is low, collec tion center employees are asked to “help” and collect milk samples only from the cows that are healthy.

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29 The authority and power increases if the milk-collection center is owned by the milk collector himself/herself. Many farm ers suspect that milk-collection center employees are partially responsible for faking milk quality results. Eighteen percent of the farmers who responded that their milk qua lity differs between the two organizations believe that it is solely the fault of milk-c ollection center employees, 39% believe that it is the fault of milk processing plants, 14% beli eve that it is the fault of the sate laboratory Pieno Tyrimai, and 12% believe it is the fau lt of milk processing plants and collection center employees (Table 5). Table 5. Who do you think is responsible for the differences in milk quality? Frequency Percent Valid Percent Cumulative Percent Valid Milk-collection plants 19 22.4 38.8 38.8 Milk-collection center employees 9 10.6 18.4 57.1 Laboratory Pieno Tyrimai 7 8.2 14.3 71.4 DonÂ’t know 4 4.7 8.2 79.6 Processing plants and laboratory 4 4.7 8.2 87.8 Milk-collection plants and collection center employees 6 7.1 12.2 100.0 Total 49 57.6 100.0 Missing System 36 42.4 Total 85 100.0 However, even though the employees of the milk-collection centers or their owners have more authority and can abuse it, they cannot do it overtly. For the most part, milkcollection center employees live in the sa me communities or neighboring ones. They do not want to be isolated from their communitie s. Milk collectors deceive farmers, but are

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30 also willing to help them when they are aske d to do so. Farmers do not feel as abused and are more willing to accept cheating, if they ha ve an impression that they can somehow circumvent the system as well. From in-d epth interviews some farmers acknowledged that in cases of emergency they can make arrangements with the milk-collection center employee to collect milk samples only from some cows and not the others. One story illustrates this pattern. A farm er with a medium sized farm hired bad milk maids; therefore, cows were not m ilked properly. If the cows are not milked appropriately, they have a high risk of getting mastitis infections. Th erefore, the farmerÂ’s cows contracted a mastitis infection. The fa rmer was afraid of bankruptcy, because he could not sell the milk for an extended peri od of time and could not get any revenue. He had also had taken a loan to upgrade his farm. The farmer arranged with the milk collector that he would take milk samples onl y from the healthy cows. The milk collector and the farmer lived in the same village and were long-term acquaintances. The milk collector sympathized with the problems that the farmer faced and agreed to help for a favor. The farmer indicated the milk collect or was a good person and therefore agreed to help. Furthermore, if the farmers are cheated in th e transaction, there has to be at least an impression of mutual exchange where both si des the farmers and milk-collection center employees pat each otherÂ’s backs. One other wa y in which farmers feel that the employee of a collection center is on their side is if they are told when milk samples will be collected. Thirty seven percent of surveyed farmers reported that the employees of milk processing plants tell them, against formal rules, when milk samples will be collected (Table 6).

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31 Table 6. Do milk-collection center employees te ll when milk samples will be collected? Frequency Percent Valid Percent Cumulative Percent Valid No 48 56.5 63.2 63.2 Yes, sometimes 28 32.9 36.8 100.0 Total 76 89.4 100.0 Missing System 9 10.6 Total 85 100.0 One of the farmers described that the milk collector is her neighbor and a long-term friend. However, she knows that this frie nd cheats her because her milk quality sometimes drastically fluctuates; even t hough, she has not changed feeding patterns for her cows or done anything else differently. The farmer also k nows that the milk collector is cheating other farmers, because the milk co llector always struggled due to the shortage of money. However, now the milk collector is able to renovate her house, which would not be possible if she was living just off of the milk collector’s salary. However, the farmer does not challenge her friend and neighbo r because she is afraid her milk quality will get even worse and besides her friend always lets her know when the milk samples will be collected. It appears that some farm ers operate under mutual expectation of being cheated, accepting this as a part of “rules of the game” and engaging in it by attempting to cheat the system as well. This circular relationship of you scratch my back, I will scratch yours resembles blat that persisted under the S oviet Union for circumventing inflexible government bureaucracy. However, data analysis s hows that persistence of blat relations has a deleterious effect under the market system by increasing tran saction costs for all th e parties involved. The logit regression model shows a positiv e significant association between the dependent variable, whether milk grade as reported by the Cattle Breeding Agency

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32 matches the milk grade as reported by the milk processing plant, and the explanatory variable, of whether a farmer is told when milk samples will be collected, controlling for other variables (Table 7). Table 7. Logit regression model B S.E. Wald df Sig. Exp(B) TRUST 1.323 0.558 5.610 1 0.018 0.266 LOCKED 0.811 0.645 1.579 1 0.209 0.445 CONTACTED 1.978 0.726 7.431 1 0.006 7.230 HOWMILK 1.468 0.923 2.530 1 0.112 4.341 Constant 5.227 2.645 3.905 1 0.048 186.290 The model demonstrates that even though all farmers have a high probability of being cheated 67.5% (Table 1), the farmers who are to ld in advance when milk samples will be taken are 92.5% of the time mo re likely to be cheated than the farmers who are not told when milk samples are going to be collecte d, whose probability of being cheated is 62.9% of the time (Figure 1). 92.5 62.9 0 10 20 30 40 50 60 70 80 90 100 12 Series1 Figure 1. Probability of being cheated, if in formed when milk samp les will be collected versus not informed when milk samples will be collected (1 not informed, 2 informed) An account by the owner of a large farm (20 cows) illustrate s this paradoxical finding. The farmer said that his milk quality results in the past were not very good; even

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33 though, the milk collector who came to his farm was open for “negotiation”, meaning he offered to “help” if the farmer ever had a problem. The farmer refused the offer from the milk collector and requested the state agency to issue him an individualized code for locking his samples on his farm this farm er was qualified to get individualized box because his farm is modernized. Since then his milk quality has improved dramatically. Another variable (TRUST), whether the fa rmer trusts the milk-collection center employee or not, is significantly related to the dependent variable. The dependent variable is negatively associated with th e independent variable (TRUST). As trust increases, the likelihood for a farmer to have his/her milk quality match between milk processing plant and Cattle Breeding Agency in creases. When the farmer fully trusts the milk collector the likelihood of having milk grade differ between the two organizations is 60%. If a farmer somewhat trusts the milk-collection center employee his/her probability of having different reports from the two organi zations increases to 85%. If a farmer does not trust the milk-collection center employee his/her probability of having different reports from the two organizations increases to 99% (Figure 2). I also tested for other variables to see if th ey have significant e ffects. Some of them were excluded from the final model and some of them were left, due to their theoretical importance. Because the data was collected in three municipalities, I included the region effects into the model to see if the region ha d an affect. The model showed that region had no significant influence on the results; therefore, I excluded the region out of the final model (Table 7). Other non-significant variab les were left in the model due to their theoretical importance. Whether cows ar e milked by hand or by milking machinery (HOWCOW) could affect the quali ty of the milk because of higher risk of contamination

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34 when milking by hand. However, when this vari able is tested against dependent variables it is not significant. Therefore, whether co ws are milked by hand or not has no influence on the response variable. Furthermore, whet her milk samples are locked (LOCKED2) in front of farmers or not is not significantly related to the response variable either. The reason why this variable is not significantly related to the re sponse variable is because the policy where the boxes with milk samples are lo cked is not clearly defined and it appears that it is not uniformly enforced. 60 85 95 98 99 0 20 40 60 80 100 120 12345 1 2 3 4 5Percentage Series1 Figure 2. Probability of being cheated if one trusts milk collector versus if one does not trust milk collector (1 = do not trust, 5 = fully trust) .

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35 CHAPTER 6 CONCLUSION The process of change as it applies to the Lithuanian da iry sector is gradual and historically contingent. Economis ts are reluctant to include i ndependent effects of social structure on economic organization. The theo ry of economic organization (Williamson, 1985, 1991) argues that market processes of efficiency and competition form economic organizations and their transactions. My anal ysis suggests a differe nt direction, showing the importance of social processes of GranovetterÂ’s (1985, 1994) embeddedness argument, where economic actions are embedde d in social context and shape economic outcomes. Social institutions interact with economic realities and shape path-dependent trajectories that can be altere d with the change in economic incentive structures such as greater market transparency, alterations in power dynamics, and competition pressures. It is not clear who the beneficiaries are in transactions between dairy farmers and milk processing plants: if it is the processing plants or the intermed iaries, the people who are involved in transportation and collection of raw milk from farmers to milk processing plants. However, farmers with small farms are clearly the losers in the transactions with milk processing plants. They are too small to qualify for individualized milk containers for their samples with individualized locks, they are not organized to challenge the system, and they get the least pay for the same quality raw milk as larger farmers. They are the most disadvantaged group with the le ast economic power. Their rationality is context bound (Simon 1957). Under the Soviet system, blat was an efficient response to the ineffective Soviet economy and latter it beca me a part of cognitive map of behavior in

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36 regards to the way transactions were conducte d. In the early stages, ”institutions develop as repeated patterns of behavi or that evoke shared meani ngs among the participants. The legitimation of this order involves connec ting it to wider cognitive frames, norms, or rules (Scott 1995: 68).” Today, blat has not lost its legitimacy and it is a familiar path to follow in attempts to protect one’s intere sts. Furthermore, the Soviet legacy has weakened civil society and prejudiced pe ople against civic organizations and the formation of formal interest groups to defend ones interests (Howard 2003). These realities contribute to bigger probl ems of information asymmetries. For the most part, farmers expect to be cheated and they believe nothing can be done about it. This system pers ists and farmers contribute to its persistence by engaging in blat relations instead of finding other channels for solving the prob lem of corruption. Thirty-seven percent of farmers re ported that they are engaged in blat relations in their transactions with milk processing plants (T able 6). This is likely an underestimation, since this was a sensitive topic and not all farmers were willi ng to share this information. Therefore, the institution of blat persists even though it is not the most efficient economic outcome. My data shows that under blat, the institutional framework provides a context under which the outcome is not conducive to capturing more of the gains from market transaction. My study illustrates how the persistence of blat contributes to th e persistence of corruption. Persistence of blat today perpetuates the cycle of corruption and disregard for formal law. Consequentially, market transa ctions are less efficient due to increased transaction costs for parties i nvolved. Under the Soviet system, blat was perceived as a legitimate practice (Ledeneva 1998). Blat is hard to label as a corrupt exchange because it

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37 is not understood as such, it is interprete d as mutual exchange or “helping out.” Consequently even though the country has unde rgone drastic changes in formal rules and has become a market economy, the legitimacy of blat still persists, causing widespread disregard for formal law and alteri ng efficient market outcomes. “The success stories of economic history de scribe the institutional innovations that have lowered the costs of transacting <…> a nd hence permitted the expansion of markets (North 1990: 108).” As a society develops econo mically, its social context must evolve as well, allowing interpersonal networks to be replaced by formal institutions of market system in order to be able to capture mo re gains from market exchanges (North 1990). This process eventually will lead into the sy stem where social relations are embedded in the economic system rather than the other way around (Stiglitz 2000).

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38 LIST OF REFERENCES Agh, A. (2003), “Public Administ ration in Central and Easter n Europe,” in Peters, B.G and J. Pierre (ed.), Handbook of Public Administration. London: Sage Publications. Aniulis E. and A. E. Japertas (2001), Karviu Mastitas, Kaunas: Lithuania. Bodley, J. H. (2000), Cultural Anthropology, London: Mayfield Publishing Company. Bradach, J. L. and R.G. Eccles (1989), “Pri ce, Authority, and Trust: From Ideal Type to Plural Forms,” Annual Review of Sociology, 15, 97-118. Bunce, V. (1999), Subversive Institutions: the Design and the Destruction of Socialism and the State, New York: Cambridge University Press. Clark, S. (eds.) (1995), Management and Industry in Russia: Formal and Informal Relations in the Period of Transition , Aldershot, UK: Edward Elgar. Department of Statistics of th e Republic of Lithuania (2002), Lithuanian Statistical Yearbook, Vilnius: Lithuania. Fligstein , N. (1985), “The Spread of th e Multidivisional Form among Large Firms, 1919-1979,” American Sociological Review , 50, 377-391. Freeland, R. F. (1996), “The Myth of the M-Form? Governance, Consent, and Organizational Change,” American Journal of Sociology , 102, 481-526. Granovetter, M. (1985), “Economic Action a nd Social Structure: The Problem of Embeddedness,” American Journal of Sociology , 91, 481-510. Gregory, C.A. and J. C. Altman (1989), Observing the Economy, New York: Routledge. Helmke, G. and S. Levitsky (2004), “Informal Institutions and Comparative Politics: A Research Agenda,” Perspectives on Politics , 2, 725-740. Howard, M.M. (2003), The Weakness of Civil Societ y in Post-Communist Europe, New York: Cambridge University Press. Jansik, C. (2001), “Foreign Di rect Investment in the F ood Processing of the Baltic Countries,” Agrifood Research Finland , Economic Research Report 250, Helsinki. Jowitt, K. (1992), New World Disorder: the Leninist Extinction, Berkeley: University of California Press.

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39 Kedaitiene, A. and H. Hockmann (2002), “M ilk and Milk Processing Industry in Lithuania: An Analysis of Horiz ontal and Vertical Integration,” Institute of Agricultural Development in Central and Eastern Europe . Ledeneva, A. V. (1998), Russia’s Economy of Favors: Bl at, Networking and Informal Exchange, Cambridge: Cambridge University Press. Ledeneva, A. V. (2001 ), Unwritten Rules: How Russia Really Works, London: Center for European Reform. Lithuanian Agrarian Economy Institute (2001), Agriculture in Lithuania 2000: Development and Prospects, Vilnius: Lithuania. Ministry of Agriculture (2000), Agriculture of Lithuania 2000, Vilnius: Lithuania. Ministry of Agriculture (2001), Lithuanian Agricultura l Development 2001, Vilnius: Lithuania. Ministry of Agriculture (2002), Agriculture of Lithuania 2002, Vilnius: Lithuania. Ministry of Agriculture (2003), Agriculture of Lithuania 2003, Vilnius: Lithuania. North, D.C. (1990), Institutions, Institutional Change and Economic Performance, Cambridge: Cambridge University Press. Ouchi, W. (1980), “Markets, Bureaucracies, and Clans,” Administrative Science Quarterly , 25, 129-140. Perrow, C. (1981), “Markets, Hierarchies, a nd Hegemony,” in van De Ven A.H. and W. J. Joyce (eds.), Perspectives on Organization Design and Behavior , New York: Wiley. Perrow, C. (1986), Complex Organizations: A Critical Essay , 3rd ed., New York: McGraw-Hill. Powell, W.W. (1990), “Neither Market nor Hi erarchy: Network Forms of Organization,” in Staw B.M. and L.L. Cummings (eds.), Research in Organizational Behavior, Greenwich, CT: JAI Press. Scherer, R. M. and D. Ross (1990), Industrial Market Structure and Economic Performance, 3rd ed. , Boston: Houghton Mifflin. Schmalensee, R. and R. D. Willig (eds.) (1989), Handbook of Industrial Organization, Vol 2., Amsterdam: North-Holland. Scott, W. R. (1995), Institutions and Organizations, Thousand Oaks, CA: Sage Publications. Simon, H. A. (1957), Models of Man: Social and Rational , New York: Wiley.

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40 Smallbone D. and Welter F. (2001), “The Di stinctiveness of Entrepreneurship in Transition Economies,” Small Business Economics, 16(4), 249-262. Stiglitz, J. E. (2000), “Formal and Informal In stitutions,” in Dasgupta P. and I. Serageldin (eds.), Social Capital: a Multifaceted Perspective, World Bank: Washington, DC. Thelen, K. (1992), “Historical Institutionalis m in Comparative Politics,” in S. Steinmo, K. Thelen, and F. Longstreth (eds .), Structuring Politics: Historical Institutionalism in Comparative Perspective , New York: Cambridge University Press. Tylor, E. B. (1871), Primitive Culture, London: Murray. Williamson, O.E., (1985), The Economic Institutions of Capitalism, New York: Free Press. Williamson, O.E. (1991), “Comparative Economic Organization: the Analysis of Discrete Structural Alternatives,” Administrative Science Quarterly , 36, 269-296. Wittgenstein, I. (1958), The Blue and Brown Books, Oxford: Basil Blackwell.

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41 BIOGRAPHICAL SKETCH Evelina Jagminaite graduated from Viln ius 27 High School in Lithuania. After graduating from high school, she attended the Un iversity of Florida, Gainesville Fl, and earned a Bachelor of Arts degree in an thropology. In August 2002, Evelina began a masterÂ’s program there. In August 2005, she was awarded a Master of Arts degree in political science, specializing in development administration.