Rural household sources of income, livelihoods strategies and institutional constraints in different commodity contexts - Institutional Constraints to Small Farmer Development in Southern Africa - page 39

Citing Benham and Benham (1998), Makhura (2001) highlighted that NIE postulates
that economic activity is accompanied by multiple costs termed transaction costs and these
determine economic performance. The essence of NIE is that the success of marketing and
economic activity is dependent upon the institutions that facilitate transactions. The NIE
paradigm is well suited to evaluate the organisation of individual transactions (Nabli and
Nugent, 1989). As such, the paradigm seems ideal in explaining the market participation
behaviour of smallholder farmers.
2.8.1 Markets and institutions
Markets can be grouped into informal and formal. In the agricultural context, Kherallah
and Minot (2001) explained that informal markets embrace unofficial transactions
between farmers and from farmers directly to consumers. On the other hand, formal
markets have clearly defined grades, quality standards and safety regulations and prices are
formally set. Smallholder farmers find it difficult to penetrate the formal markets, due to
high transaction costs, high risks, missing markets and lack of collective action (Mangisoni,
2006). In summary, institutional aspects in marketing include transaction costs, market
information flows and the institutional environment.
2.8.2 Transaction costs in smallholder farming
Transaction costs are observable and non-observable costs associated with enforcing and
transferring property rights from one person to another (Eggertson, 1990). These include
the costs of searching for a trading partner with whom to exchange with, the costs of
screening partners, of bargaining, monitoring, enforcement and, eventually, transferring
the product to its destination ( Jaffee and Morton, 1995; Hobbs, 1997). Delgado (1999)
identified high transaction costs as the embodiment of market access barriers among
resource poor smallholders. These high transaction costs result from individual produce
transportation and selling, difficulties in getting trading partners and poor bargaining
power (Delgado, 1999). When transaction costs are high, smallholder farmers may cease
produce marketing. In other words, with high transaction costs, markets fail in their role of
allocating scarce resources to alternative ends. For South Africa, Makhura (2001) explained
that high transaction costs prevail among the smallholder farmers.
2.8.3 Market information
Market information is vital to market participation behaviour of smallholder farmers.
Market information allows farmers to take informed marketing decisions that are related to
supplying necessary goods, searching for potential buyers, negotiating, enforcing contracts
and monitoring. Necessary information includes information on consumer preferences,
quantity demanded, prices, produce quality, market requirements and opportunities (Ruijs,