Making Markets Work and Work for the Poor

1. Making Markets Work and Work for the Poor Eleni Gabre-Madhin IFPRI May 23, 2006

2. Agenda • Market impacts on the poor: the jury is out • Making markets work: Challenges and directions • Making markets work for the poor: addressing the needs of the poor • Promising new directions

3. The core challenge: achieving a market-led agricultural transformation • Historically unique: “In Asia, we simply did not have to worry about the market.” Dr. Norman Borlaug • In addition to market liberalization, the forces of “globalization” have led to dramatic changes in the global agro-food system  key challenges faced: • the role of the smallholder • the fate of traditional agriculture • the evolution of traditional markets • the dynamics between private and public sector • the balance of power in the global market arena

4. INFRASTRUCTURE Road network Telecommunications Market facilities Storage and processing Logistics/handling INSTITUTIONS Information Coordination Contracts Rules Enforcement INCENTIVES Policy reform Tax and tariffs Investment climate TRANSACTION COSTS MARKET ACCESS COORDINATION ENFORCEMENT INFORMATION INPUTS/ FINANCE/ SERVICES DELIVERY SMALLHOLDER PRODUCER Increased Technological Intensity Increased Commercialization of Output Modernization of Agriculture; Improved Producer Livelihood How Markets Matter

5. The Market Problem Market liberalization and the unleashing of market forces has not lead to expected outcomes. Why? Because getting prices right, while necessary, is not enough. Why? Markets are embedded in human interaction Humans are boundedly rational, complex, and shaped by culture, history, and social forces Interaction is costly to coordinate Interaction requires enforcement

6. Elements of market failure • Transaction costs are high: • Little market information • No product standards • Limited market coordination • Contract risk is high and trade is largely personalized • Market finance is lacking • Weak private sector • Markets are thin and weakly integrated • Markets are risky

7. Transaction costs are high Maize import-export parity band Source: Puetz, 2003

8. Price volatility is high Parity price analysis - wheat Negassa, 2003

9. 29%  May 00-01 62%  May 00-01 Markets are weakly integrated Maize

10. Getting Markets Right: The New Agenda • Reduce marketing costs (transport; handling) • Reduce transaction costs (search, information, enforcement, ..) • Increase finance • Increase market integration (responsiveness) • Increase competition • Increase participation

11. The 3 I’s of Market Development INCENTIVES Policy reform Tax and Investment climate Trade Policy Macro-Economy PUBLIC SECTOR PRIVATE SECTOR INFRASTRUCTURE INSTITUTIONS Coordination mechanisms: exchanges value chains contracts Regulations and Laws Dispute settlement Grades and standards Industry Associations Farmer Associations FARMERS TRADING FIRMS PROCESSORS TRANSPORTERS STORERS Telecoms Roads/Transport Storage Logistics/Handling Research Extension Information systems

12. Pro-poor markets? Specific challenges DIMENSIONS OF POVERTY • Spatial dispersion • Asset poverty: financial, physical, human, social, natural capital • Small scale • Vulnerability • Weak social participation and lack of power/voice Higher transaction costs Higher risk Market development goes beyond improved market access

13. Challenges of Market Development • A holistic approach that addresses “3 I’s of market development”: Incentives, Infrastructure, Institutions • A concerted focus on specific challenges of poverty space, assets, scale, resources, power Making markets work andwork for the poor

14. Making markets work for the poor • Size and scale matters • Location is crucial • Land quality and resource base is important • Public good investments in asset creation are essential • Vulnerability matters • Social capital is key: both bridging and bonding

15. Overcoming household level transaction costs • Vertical coordination (bridging)  contract farming • improves chain-efficiency • depends on characteristics of actors • Horizontal coordination (bonding) cooperatives/ass’ns • decreases search, negotiating and monitoring costs • although coordination in itself can be costly

16. HHD TRANS COSTS HHD TRANS COSTS Smallholder Market Participation in LFA Household Conditions Contextual Factors Livelihood Strategies Farming system Diversification Intensification Resource use Wage employment Non-farm activity Migration Transfers INSTITUTIONS INFRASTRUCTURE POLICY NATURAL DEMOGRAPHIC Household Vulnerability to Risk House- hold Assets Food security Income Well being Cons’n smoothing MARKET PARTICIPATION mi > 0 : seller mi < 0 : buyer mi = 0 : autarky

17. Household market participation regimes • Autarky: S = 0, P=0 • Seller only: m>0: S>0, P=0 • Buyer only: m>0: S=0, P>0 • Net seller: m>0: S-P>0 • Net buyer: m>0: S-P <0 Explaining paradoxes: Why do producers undertake “inverse arbitrage”? ie. Sell low and buy high? Is this due to missing credit market? High storage costs? Weak assets?

18. Smallholder Households’ Position in the Maize Market percent Jayne et al, 2005

19. Impact of assets and size on market participation N= Farm size (ha) Asset values (US$) Gr. Rev., maize sales (US$) Gr. Rev., crop sales (US$) Total hh income (US$) Top 50% of maize sales 23,680 6.0 1,558 690 823 2,282 Rest of maize sellers 234,988 3.9 541 74 135 514 Households not selling maize 762,566 2.8 373 0 36 291 Jayne et al, 2005

20. The second revolution? Promising directions in market development • Commodity exchanges have recently emerged throughout the developing world, particularly Asia the share of Western exchanges has dropped to half its market share since 1990, especially post 2000 • New commodity exchanges are driven by information technology and promise to revolutionize agriculture in the same way that the Green Revolution did • Based on a new partnership between the private and the public in the new arena created by market liberalization.

21. Emerging exchanges growth  Dalian Commodity Exchange now 2nd in the world (overtaken Chicago B of Trade)  Indian exchanges growing by 250% annually since 2003

22. Explosive growth and reach to the poor in India

23. Technology driven approach in India • Vast commodities market: 7500 small localized markets (known as ‘Mandies') • In 2002, the Government of India identified the agricultural sector as a thrust area for modernization and began an initiative to commission an effective nationwide commodity trading infrastructure envisioned a state-of-the-art nationwide commodities exchange • 3 new exchanges started Nov 2003: Multi Commodity Exchange, National Commodities and Derivatives Exchange, and National Multi-commodities Exchange • System of linking rural markets using low-cost VSAT technology  over 4800 trading terminals in the rural market towns, enabling wide access to the national exchange

24. Impact on smallholder livelihoods • Risk management: Farmers can lock in a price before sowing • Information: Farmers are better able to negotiate prices given market transparency • Transaction costs: Farmers are not restricted or captive to local market • Space no longer matters with technology

25. In sum • To make markets work for the poor, market development efforts must go beyond the 3 I’s of market devt • Interventions must address assets, vulnerability, location, size and collective action • Market development efforts must be integrated and holistic • Promising new directions: commodity exchanges