U Use of personalized trading networks. This reduces transaction costs of exchange, but
limit the scope of the market. Marketing systems that fail to reduce the uncertainties and
potential opportunism of trading gives rise to alternative trade networks based on
personalized kinship ties. Trade based on kinship ties tend to succeed in minimizing
transaction costs of exchange. But because they limit the scope of trading activity,
marketing systems based on personalized trade ties reinforce semi-subsistence production
patterns with high production costs (Robison and Siles 1997; North 1985).
• Semi-subsistence agricultural structure (a small percentage of production is marketed),
leading to wide fluctuations in volumes traded and prices according to the weather.
Markets tend to be thinly traded due to semi-subsistence production patterns, which in
turn attracts few buyers. Poor transport and communications also restrict the scope of the
market. Small variations in total supplies have large effects on marketed volumes and
hence on prices. Price uncertainty increases the risk of commercialized production and
thus reinforces the incentives to engage in subsistence agriculture.
Subsistence farm families are typically not specialized in farming but produce a multitude
of consumer goods and farm inputs. Diversification can be a strength of a system where
markets are risky, but it can be a barrier to an improved system. Increased productivity
requires specialization, division of labor, and investment in technological inputs (which
often require a larger scale of operation to be productive and profitable). Specialization
requires greater coordination between the production of farm inputs, farming, assembly,
processing, storage, transport and wholesaling, and retailing. More sophisticated
exchange arrangements (e.g., contingent contracts — those that specify partner
obligations and rights contingent upon a future outcome like the weather or price level)
arise to reduce the risks and transaction costs of participating in more specialized
production patterns. Coordination becomes increasingly critical to performance. It is the
particular institutions of the system — rules, exchange arrangements, property rights, etc.
— that facilitate or inhibit effective coordination in complex sequences of production and
distribution.
This problem is exemplified by Ethiopia’s food price instability problem. With 80% of a
normal crop of grains consumed on farms, a 20% increase in output increases potential
domestic marketed supply by 100%. Price fluctuations can be very large and political
pressure develops to do something about price instability. Uncertain future grain prices
reduce the demand for inputs, which in turn constrains the development of coordinated
systems of farm credit and input supply. Although a major increase in fertilizer use would
most likely promote farm productivity and food security, fertilizer use in the current
system is constrained by failure to develop institutional arrangements for dealing with the
price and output risks of farmers, risks of nonrepayment of credit for lenders, and the
resulting risks to input suppliers of holding unsalable inventories. An attempt in 1996 to
solve the problem through marketing board support prices was ineffective and expensive
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