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.
