How the internet can make agricultural markets in the developing world more efficient

WHEN the internet took off in the mid-1990s, it was often claimed that it would improve price transparency, cut out middlemen and make markets more efficient. There is plenty of anecdotal evidence for this, just as there is for similar claims about mobile phones. Empirical data on the impact of these new technologies increasingly support the thesis.

Macroeconomic studies suggest that the internet and mobile phones boost growth. The effect is bigger in developing countries than developed ones, due to the paucity of existing communications infrastructure. The effect also seems to be bigger for the internet than for mobile phones. In a study published in 2009, Christine Zhen-Wei Qiang of the World Bank found that an increase of ten percentage points in mobile-phone adoption increased growth in GDP per person by 0.8 percentage points in a developing country, and by 0.6 percentage points in a developed one. For dial-up internet access, the figures were 1.1 percentage points and 0.75 percentage points respectively; for broadband internet, 1.4 percentage points and 1.2 percentage points.

Critics of such analyses contend that it is difficult to tell whether the adoption of new technologies is promoting growth, or vice versa. Researchers have responded by examining detailed microeconomic data to show how the spread of technology directly affects the prices of particular goods.

By examining historical data for the price of fish as mobile-phone coverage was extended down the coast of Kerala in southern India between 1997 and 2001, for example, Robert Jensen of Harvard University showed that access to mobile phones made markets much more efficient, eliminating wasted catches and thereby bringing down consumer prices by 4% and increasing fishermen’s profits by 8%. Similarly, Jenny Aker of the University of California at Berkeley analysed grain markets in Niger to see how the phasing-in of mobile-phone coverage between 2001 and 2006 affected prices. She found that it reduced price variations between one market and another by at least 6.4%, and more in remote and hard-to-reach markets. With transaction costs cut, prices for consumers were lower and profits for traders higher.

In a forthcoming paper*, Aparajita Goyal of the World Bank has carried out a corresponding study for the internet by examining how the gradual introduction of internet kiosks providing price information affected the market for soyabeans in the central Indian state of Madhya Pradesh. Farmers in the region sell their soyabeans to intermediaries in open auctions at government-regulated wholesale markets called mandis, a system that was set up in order to protect farmers from unscrupulous buyers. The intermediaries then sell on the produce to food-processing companies. The problem with this approach for the farmers is that the traders have a far better idea about the prices prevailing in different markets and being offered by processing companies. With only a few traders at each mandi, they can easily collude to ensure that they pay less than the fair market price; they can then boost their profits by selling on the beans at a higher price.

ITC Limited, an Indian company that is one of the largest buyers of soyabeans, felt it was paying over the odds, but was unable to monitor the traders closely. Starting in October 2000 it began to introduce a network of internet kiosks, called e-choupal, in villages in Madhya Pradesh. (Choupal means “village gathering place” in Hindi.) By the end of 2004 a total of 1,704 kiosks had been set up, each of which served its host village and four others within a five-kilometre (three-mile) radius. The kiosks displayed the minimum and maximum price paid for soyabeans at 60 mandis, updated once a day, along with agricultural information and weather forecasts. ITC also posted the price it was prepared to pay for soyabeans of a particular quality bought direct from farmers at 45 “hubs” (mostly in the same towns as mandis). By setting up the kiosks, ITC enabled farmers to check that the prices being offered at their local mandi were in line with prices elsewhere. It also gave them the option to sell direct.

Bean there, done that

To evaluate the impact all of this had on prices, Ms Goyal used historical data from mandis and the locations and installation dates of the kiosks. She found that the presence of kiosks in a district was associated with an instant and persistent increase of 1.7% in the average price paid at mandis in that district. As expected, the availability of price information increased the level of competition between the traders, raising prices and reducing the variation in prices between nearby mandis. Farmers’ profits increased by 33%, and the cultivation of soyabeans increased by an average of 19% in districts with kiosks. And by buying some produce direct, ITC reduced its costs, which paid for the kiosks.

All this supports the anecdotal evidence that the internet can indeed make agricultural markets more efficient, just as mobile phones can. But whereas the expansion of mobile-phone access is now rapid and commercially self-sustaining—even very poor farmers can benefit from having a phone, and find the money to buy one—the same is not true of the internet. Its use requires a higher degree of literacy, for one thing, and computers cost more than handsets. The e-choupal approach, in which a company pays for the kiosks, offers one model; another is for entrepreneurs to resell access to the internet from village kiosks, which is how mobile phones first caught on. Ms Qiang’s figures suggest that in the long run, the internet could have an even greater impact on economic growth than mobile phones did. But that will depend upon finding sustainable business models to encourage its spread in the poorest parts of the world.

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