major barrier to investment, especially in innovative methods and inputs, is the problem of the
missing input or market, and of selective market failure (de Janvry, Fafchamps, and Sadoulet
1991).
Before going into more detailed discussion of the institutional aspects of traditional marketing
systems, it will be useful to define a few terms that will be used in this section:
Market rules are the regulations that individuals are expected to abide by when engaging in
market exchange. In addition to the state, market rules may originate from trade organizations,
community norms, and ideological beliefs. An example of a market rule in Michigan is the
regulation prohibiting a fruit seller from misleading the buyer by putting all the good fruit on the
top of the container. This practice is called “facing,” and the rule prohibiting it is intended to
regulate the actions of sellers in order to reduce the transaction costs of exchange. Without rules
against “facing,” exchange would require visual inspection of the product. The need for visual
inspection inhibits trading remotely by product specification, thus raising transaction costs of
exchange for both buyer and seller and reducing volumes traded.
Property rights define rights and obligations in using and exchanging goods and services. Using
the above example, the rule against “facing” protects buyers with the right to view product quality
without having to incur the costs of inspecting the hidden parts of the container. Notice that
property rights are also a form of regulation. By conferring a right to the buyer, they regulate the
behavior of the seller. Regulation is therefore not the opposite of freedom. A right for you
creates an obligation for me. The right presumably makes my behavior more predictable for you,
and may raise your incentive to invest in producing something to trade. Without market rules and
property rights to create a reasonable degree of confidence about the behavior of potential trading
partners, no market activity would be possible. The common prescription that governments
should define property rights and that governments should not regulate markets represents a
fundamental misunderstanding of the nature of markets. Without regulation, there would be no
market. The existence of rights implies some governance system, but not necessarily formal
government.
Exchange arrangements specify the terms and modes by which trade takes place. There are
numerous potential exchange arrangements that can occur within a market economy. Examples
of exchange arrangements include private negotiation in spot markets, auctions, forward contracts
specifying price, product quality, delivery date and location (etc.), and futures contracts. In many
developing areas, non-monetary arrangements involving the exchange of food for labor or land
are common.
Using these concepts, we now turn to an analysis of how the details of institutional design in
market reform programs affect productivity growth in African agriculture.
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