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RURAL MARKETS
Introduction
Rural Markets: An Overview
Basic Features
•Rural areas of LDCs are characterized by missing or imperfect markets
•Market imperfections are contagious – imperfections in one market can
spill over into others due to interlinkages within rural markets for land,
labour, credit etc.
•Economic relations in rural areas are often governed by informal
institutions
•Incomplete information, lack of incentives and limited ability to enforce
contracts are important factors causing inefficiency
•A study of these factors is important for understanding the development
problems of LDCs
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Information Issues
•Contracts may have limits due to lack of observability in the market
•Example: in case of landlord-tenant relationships in agriculture, an
observed crop failure may be due to laziness of tenant, or due to
drought, pests etc.
•Rental contracts cannot specify these details, and hence inefficiencies
can arise (moral hazard)
•Credit markets – information gaps can result in high risks or raise the
transactions costs for lenders (esp. formal sector lenders), since past
records of loan repayment performance of borrowers are not available
Transactions Costs
•Since supervision in agriculture is not costless, its cost
must be factored in as an additional transactions cost
•Thus, leasing out of land (or hiring in of labour) cannot
be simply at the going wage rate (or labour’s
opportunity cost)
•The relative share of labour and land transactions will
therefore depend on the relative size of the two types
of transactions costs
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Enforcement Issues
•Legal and administrative institutions that ensure that contracts are
honoured may not exist, or may be highly imperfect
•In this situation, informal enforcement institutions come into play
•However, there may be limits to the functioning of these institutions
•For instance, if a very poor farmer knows that he cannot be forced to
repay a loan, he may invest in very risky projects (since risk is
eventually borne by the lender due to legal safeguards for borrowers)
•Outcome – credit rationing by lenders – all borrowers may not get all
the loans they want at the going interest rate – implication for credit
supply curve
Land, Labour, Capital and Credit
•Distribution of land (and to a lesser extent labour) is uneven in rural
economies
•This causes input markets to emerge –leasing out of land, or hiring in
of labour (or both) by large landowners
•Land leasing results in greater equality of operational landholdings,
even while the size of ownership holdings is uneven
•The presence of uncertainty and imperfections causes both land and
labour markets to operate simultaneously, even when both markets
may be perfect substitutes for each other
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Working capital and other inputs
•Capital or other inputs include seeds, equipment and
(very importantly) draught animals
•The market for draught (draft) animals is particularly
vulnerable due to problems of (a) overwork and (b)
simultaneous demand by multiple users
•Thus, operational distribution of land often follows
the distribution of draught power (oxen or tractors)
Rural Credit Markets
•Smoothly functioning credit markets can make all problems in other
working capital disappear
•All profitable inputs can be acquired in this case through loan-financing
•If credit markets fail or are imperfect, the impact will spill over into all other
markets
•Land, labour will flow to those who have access to capital
•If credit markets are imperfect, this has impact on all other markets in the
rural economy. Usually, flexible markets adjust for the non-flexible markets