4. BEYOND LIBERALIZATION: ADDRESSING THE INSTITUTIONAL DETAILS OF
MARKET DEVELOPMENT
Market liberalization is not an end in itself. Schultz's "efficient but poor" observation of low-
resource farmers also describes the functioning of firms, markets, and entire economies in many
developing areas (Shaffer et al. 1985). Marketing margins may approximate costs, but these costs
may be too high and unstable to encourage rapid private investment in the marketing system to
promote on-farm productivity growth. A market can be efficient and still result in poverty. The
institutional challenges in alleviating poverty over the long run can be seen by contrasting
marketing systems in high-income countries like the U.S. with those in sub-Saharan Africa. In
many high-income countries, policies and infrastructure have lowered the risks and transaction
costs of engaging in commercialized agriculture through:
• futures and options markets to shift and absorb market risks associated with production
and investment;
• commodity exchanges to enable participants to lock-in quantities for sale or purchase to
facilitate advance planning in production decisions;
• specialized insurance to reduce many types of risks;
• low-cost market information accessible on a daily basis, linked to national and global
information systems utilizing modern communication technology;
• large volumes handled by marketing and processing firms, which allow them to spread
their fixed costs and hence reduce the risks of sunk-cost investments;
• globalized trading networks to reduce covariant supply risks and reduce search costs;
• well-specified grades and standards to allow for remote contracting by commodity
specification rather than by visual inspection;
• sophisticated contracting arrangements that reduce the risks of specialized investments
with large sunk costs by locking-in the terms of exchange over a relatively long time
period;
• well-established legal systems to accommodate more sophisticated contracting
arrangements and contract disputes;
• rules addressing problems of concentration of wealth and power (e.g., antitrust
legislation);
• rights of farmers to organize to act collectively in the market and politically;
• the establishment of collateral to encourage the development of credit systems; and
• competitive financial systems serving rural areas to reduce credit-related constraints on
crop input use; local financial intermediaries linked to, and having access to, international
capital.
By contrast, agricultural marketing systems in most of Africa are generally characterized by the
following:
• Primary forms of exchange involving high transaction costs, such as private haggling in
spot markets over small volumes. These costly exchange procedures reduce incentives to
invest in specialized production processes by reducing the profitability of production for
the market.
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