Agriculture Reference
In-Depth Information
The results of market integration studies on India are mixed, and the only
study on Vietnam concludes that rice markets, at least over distances, are not
well integrated. However, in both cases lack of integration is largely attributed
to government regulations, particularly the restrictions on movement of grain.
In India transportation by road requires passage through a large number of
checkpoints that increases costs and reduces private traders' profitability be-
cause of inordinate delays and payment of “speed money” (World Bank 1999).
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This observation is consistent with the common finding that Indian foodgrain
markets are integrated in the long run but not in the short run. Similarly, in Viet-
nam movement restrictions prevented spatial arbitrage from bringing price dif-
ferences down to the costs of transportation and marketing; as of late 1996 the
procedures to buy and transport rice from the south to the north resembled those
of trade with another country (Minot and Goletti 2000).
Risk Mitigation and Technology Diffusion
New technologies come with risk; hence, their adoption critically depends on
availability and effectiveness of risk management institutions. In the 1960s in-
surance and credit markets were either missing or incomplete in all of these
countries, and farmers operated in a highly uncertain production and marketing
environment, which greatly enhanced the risks and discouraged farmers from
adopting new technology. Besides, domestic markets were very thin, and farm-
ers had little confidence in investing in new technology. The argument was that
the state-sponsored agencies and parastatals could help reduce the risks and
build effective markets, which in turn would encourage farmers to adopt new
technology. Therefore, one of the central rationales for price support policy was
to mitigate those risks and help farmers ensure the profitability of cultivating
their land with modern crop varieties.
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This risk mitigation is no longer a persuasive justification for public inter-
vention. As already argued, the domestic markets are now well integrated and
the high-yielding varieties (HYVs) now cover practically all area sown to wheat
and a large proportion of area sown to rice (Table 2.3). Note that Table 2.3 is
constructed to show the percentage of total HYV rice area to total rice area, and
does not reflect the true saturation of technology adoption. There are essential
8. In addition to imposing several restrictions on private trade, the Government of India has
offered concessions to FCI, such as cheap credit and priority in public transportation, which have
made FCI a privileged trader in Indian foodgrain markets. Furthermore, pan-seasonal and pan-
territorial pricing policy leads to a situation in which there are no geographical and intertemporal
price variations in trade, which both reduces incentives for private trade and destroys the commer-
cial motivation of FCI.
9. In fact, floor price guarantee is a variant of forward-pricing schemes, which promote farm-
ers' willingness to participate and reduce enforcement problems, such as moral hazard and adverse
selection, inherent in instituting futures markets in developing countries. See Stiglitz (1987) and
Islam and Thomas (1994) for a review of these issues.
