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Decision and Policy Analysis Research Area – DAPA

Formal versus Informal Markets

Wal MartOver the past few decades, huge transformations have taken place in the global agrifood industry. In particular this era of globalization has seen the decline of state-led rural development, whilst witnessing the ascendance of private agribusinesses. Consequently, much of the academic literature has been keen to emphasise the shift from traditional wholesale markets to modern food systems. Employed by many researchers, value chain analysis has become an instrumental tool for analysis and is mainly used to describe the supermarket revolution. This type of structural change in markets is characterised by vertical co-ordination, where a high degree of buyer driveness allows driving agents to simultaneously control production, increase sales and reduce costs and risks.

Much of the evaluation is based on formal markets. Formal markets in agriculture can be described as those governed by high quality and food safety standards and where the activities of companies can easily be monitored. They include domestic supermarket, export chains and processing industries. On the other hand informal markets such as traditional supply chains (wholesale and local wet markets) are more difficult to study and have largely been neglected by research. When talking about helping smallholders increase incomes, it is often said that linking them into high value export chains offers one of the best solutions to decrease rural poverty.

It is the contention of this blog post to challenge this conception that formal markets are necessarily better than informal markets. The relative costs and benefits of traditional versus modern market channels are poorly understood and include many assumptions that lack sufficient empirical evidence to support them. There is an evident divorce between trends identified in the literature (e.g. market modernisation) and reality in the developing world where most small farmers continue to market their goods through traditional informal channels and wet markets. The World Development Report (WDR) 2008 is keen to emphasise this: “the market for food staples remains by far the most important in many agriculture-based economies and transforming countries, because staples take up a major share of household food expenditures and account for the bulk of agricultural gross domestic product (GDP). Therefore, integrating smallholders into traditional markets or improving aspects of informal supply chains are likely to have strongly pro-poor outcomes because of this sector’s broad base.

local food market

But WHY and WHAT assumptions are driving the literature to portray formal markets as being necessarily superior to informal channels. The study of modern markets is relatively new and as a result, researchers have had a tendency to exaggerate the outcomes. For example, the sociologist John Humphrey from Sussex University in the UK argues, ‘’when a significant new trend is first isolated, it is quite common for the pioneering analyses to over generalise both its reach and impact.” Better prices, improved efficiency, higher standards and rejection of sub-standard produce are frequently cited as factors making modern markets better than informal chains. On the other hand, traditional systems are perceived to be inefficient and unorganised.

Quite remarkably, a new breed of literature (mainly from country case studies) is emerging, which counters the conventional arguments about modern food systems. For example, studies on Colombia’s informal markets have shown that smallholders prefer to participate in traditional supply chains because they gain on the spot payment and are not subject to extensive quality checks (where sub-standard produce is rejected), despite formal chains being more lucrative. Moreover, recent data from Nicaragua indicates that smallholder returns from modern markets, once costs are factored in, are lower than traditional wet markets. Furthermore, evidence from Ho Chi Minh city in Vietnam shows that 200 traditional markets continue to supply 8 million customers, despite the expansion of supermarkets since the 1990s. Supermarkets only account for 2% of fresh food sales. Moreover, as traditional food marketing systems are dominated by small family run businesses, they can be a good sector in which to increase labour demand. Whereas, the development of modern distribution outlets could be seen as a way to concentrate labour supply in the services sector.

There are also suggestions that traditional and modern markets complement each other. This applies mainly to emerging economies. Consumers in these countries often have a perception that ‘’fresh ’’ and “cheaper” food is found in local wet markets and prefer buying from them. On the other hand, they would opt to buy dry and packets goods from supermarkets.

Prevalent perceptions of the inefficiency, high transactions costs, unpredictability and poor quality of traditional and informal supply chains needs to change. With little empirical evidence, these chains have been ignored by the mainstream literature and we now have serious knowledge gaps about their structure and operations. Traditional systems are not as simple as they seem and often form intricate and sophisticated networks. Indeed, they offer great opportunities for research and action. Despite, predictions of their disappearance, smallholder have proved to be remarkably resilient over the past few decades. However, to solve widespread rural poverty across the developing world, it may be worthwhile to focus on improving informal and local channels of production before jumping ship to modern value chains.

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