Costos de Transaccion e Intercambio

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2. Systems of Exchange

Inspired by the Making Markets Work Better for the Poor (MMW4P) framework, whichis an elaboration of the SLA in line with the critical remark of Dorward et al. (2003), weborrowed and adapted their concept of a market into one of systems of exchange. Asystem of exchange is a broad term that refers to mechanisms that allow people to

trade; buy and sell1. They constitute mechanisms that mediate households access toassets and opportunities to valorize the proceeds that can be generated by usingthem. MMW4P framework was developed to study and understand the functionsmarkets play in accomplishing pro-poor growth and to aid policy design. Theframework joins DFIDs SLA and the analysis of market performance based on ideasfrom new institutional economics drawing on transaction costs and how these affecteconomic behavior and pro-poor market development. The main objective of MMW4Pis to alter the structure and characteristics of markets in order to enhance theparticipation of the poor in ways that benefit them (Gibson et al, 2004; Johnson; 2005).

Well functioning systems of exchange are relevant everywhere but especially indeveloping countries, where the vast majority of the world (rural) poor live. Systems ofexchange are important to individuals and households livelihood strategies as theyprovide opportunities to get better returns from assets and to obtain new assetsthrough exchange (Johnson; 2004:3). The way in which systems of exchange functionand perform enables rural households, producers for example, to exchange theirproduction for income which can be destined to improve their livelihoods (Oyewole etal.;2006:114). In this regard, systems of exchange are especially relevant to somecategories of poor households, those with minimum assets e.g. land, that needmarkets to valorize them. Nevertheless, systems of exchange in developing countriestend to be quite imperfect and deficient; constraining poor households participation in

them and limiting the potential benefits they could derive from them. In extreme andworse cases, systems of exchange simply do not exist.

Agricultural growth which depends on the performance of agricultural systems ofexchange has the potential to reduce poverty in rural areas, as well as to contribute towider economic growth2. Despite its potential benefits, agricultural growth does notseem viable in rural areas of developing countries; to understand why this is so, wemust take a closer look at the concept of systems of exchange and its performance.

We believe an appropriate analytical approach to the analysis of systems of exchangeshould dedicate attention to the following complementary components: a) the chain of

contractual arrangements, i.e. a governance structure, concerning exchangetransactions between sellers and buyers (often including several intermediaries sometimes aggregating value through processing or transformation- between the initialsellers and the final buyer/consumer), b) the infrastructure necessary to physicallyenable the exchange, c) a number of supportive services and d) the broaderinstitutional environment in which the transactions and contractual arrangements of theexchange system (as a particular governance structure) take place.

1 Markets constitute just one example of systems of exchange, others include non-market exchange arrangements

-like in certain value chains-, and/or vertical integration (hierarchy), informal non-market exchange configuration like interlocked transactions in isolated rural economies.2 Dorward and Kydd (2005) describe three mechanisms by which agricultural growth can have a poverty

alleviation effects: a) raising agricultural productivity and incomes of the rural population that depend on suchactivities; b) providing staples for the poor in rural and urban areas at cheaper prices; and c) favoring economicgrowth and the creation of economic opportunities in other sectors of the economy.

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Source: author elaboration, based on Johnson et al. (2005)

In a system of exchange, the basic actors are the buyers, sellers and possiblyintermediaries (transporters, processors and retailers) that participate in the exchangetransaction. They frame their exchange through institutional or contractualarrangement, also called governance structures. Governance structures refer to theparticular voluntarily and consciously designed rules governing contractualarrangements assembled and followed by economic actors (individuals/organizations)to guide their interactions (exchange) (Williamson, 1994). In practice, a system of

exchange can take different forms under which the economic transactions betweeneconomic actors take place. In this sense, the particular form a governance structuretakes is at the center of and represents the defining feature of a system of exchange.Actors can use a variety of (formal and informal) governance structures (Williamson,1991) for their transactions, as the exchange can go on through spot markettransactions or could be undertaken in hybrid market and non-market exchangearrangements -like in certain value chains-, and/or vertical integration (hierarchy),formal non-market exchange configuration, which all represent contractualarrangements among economic actors.

Systems of exchange do not exist in abstract and neither do they perform

automatically. Supporting the economic actors performing a transaction is the basicinfrastructure that enables the exchange transaction to take place. Infrastructureincludes all the physical requirements needed to support the realization of thetransaction: roads, electricity, telecommunications and information. Best et al. (2005:4)identify the major challenges that smallholder/rural households face when connectingto national or regional markets, being one of the most important the lack of or poorconditions of infrastructure. In extreme cases, lack of infrastructure in particularroads- may create conditions of complete market failure for some households. In othercases, even with infrastructure households can only participate in systems ofexchange in quite unfavorable conditions due to thin market i.e. facing amonopsonistic market structure- caused by geographic isolation.

Producers Consumers

I n f r a s t r u c t u r e

Contractual Arrangement

S e r v i c e s

Institutional Environment

Collector Processor Retailer

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Additional to infrastructure, systems of exchange need the provision of services thatsupport exchange. These can include: credit for working capital, insurance services,technical assistance for processing, packaging and conservation of traded goods,storage facilities, legal services for the elaboration of contracts and guarantees for theirenforcement, communication and information services about prices and quality amongother. The Rural Economic and Enterprise Development framework has identified the

provision of and access to supporting financial and non-financial services andresources as one of the main pillars to boost/foster rural economic growth (GTZ;2003). Microfinance services3, for example, plays a crucial role of enablelingentrepreneurs to start a new or expand an existing business that would help them getout of poverty. The poor may have better projects or strategies that would yield themhigher profit and income levels, but these activities usually demand certain levels ofinvestment and initial inputs (start-up costs). If the poor are not able to secure a loan toinvest and venture in these activities, they may be simply excluded to take part in themdue to a lack of resources.

Overall, the lack of organizations that provide services to support exchange and/or lackof basic infrastructure in rural areas conditions the performance of systems ofexchange negatively, creating situations of access failures or deteriorating theconditions in which poor households gain access to opportunities of exchange4.

Along with infrastructure and services that support exchange between economicactors, there is also the institutional environment in which the system of exchange as awhole is embedded. The institutional environment refers to the broader frameworkwhich serves as a supporting structure for specific contracts or (institutional)arrangements among individuals (North; 1990); it is composed of the (political, socialand legal) formal and informal rules of the game that establish the foundations for

human interaction (Davis and North; 1971:5-6). Formal rules are explicitly written down(constitutions, laws, property rights) and informal rules are not coded (sanctions,taboos, customs, traditions and codes of conduct) and are sometimes very difficult torender explicit.

A part from rules, Bastiaensen et al. (2002) include in their definition of institutionalenvironment social structures and culture as shown in the table below. Socialstructures refer to the composition of connections between people in which individualsparticipate at different levels, being the most elemental a relationship between twopeople. Other collective forms of social structure can be of an open and flexible nature,such as networks, or of a more closed and regulated nature as is the case with

organizations, which are groups of individuals jointed together with the purpose ofrealizing certain goals (De Haan et al. 2005). On the other hand, Culture involvespeoples perceptions and identities. Peoples identity is among other things a functionof how they see themselves compared to others; in this regard, it assigns social roles,reflecting who people should be and they should do or not do (Bastiaensen et al.,2002).

The Institutional Environment

3Microfinance is a term commonly used to describe the provision of financial services to the poor, especially loans

but also savings, in small scale in urban and rural areas. These are destined for consumption, investment in

business working capital and to cope with risk.4 Public investment in institutional and physical infrastructure may support market development and hence reducetransactions costs, favoring tradability of commodities (Ruben; 1998).

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SocialStructures

Social RelationshipsNetworks

Organizations

RulesFormal RulesInformal Rules

CulturePerceptions

Identities

Source: Bastiaensen et al. (2002)

With these elements, the institutional environment provides the broader cultural,historical and social heritage from which the concrete forms of governance structureare assembled (Williamson; 1994) and which interacts and shapes the governancestructure designed and employed by economic actors. The institutional environmentexerts influence on governance structures and their performance as its elementsinfiltrate the process of conscious design as well as the implementation of the rules ofthe game in the governance structure enacted by economic actors to guide their

interactions. For example and as we will discuss in chapter four, many transactions inrural areas of developing countries, such as interlinked contracts, are undertakenthrough vertical patron-client relationships, a social structure that serves as thefoundation for the exchange transaction.

As we mentioned before, well functioning systems of exchange are important forhouseholds livelihoods strategies. For rural households the capability to use andvalorize assets in an effective and profitable manner depends at least partially- on theexistence and performance of systems of exchange. Understanding the nature ofsystems of exchange and how they perform is thus crucial to help us understand howlivelihood opportunities are shaped and constrained, as they determine to what extent

they do or do not participate and benefit from it. But to understand the performance ofsystems of exchange and hence the terms under which households are allowed totake part or are excluded from them demands the analysis of the different componentsof the systems of exchange components. In certain rural areas, where theinfrastructure is lacking, and where there is little or no provision of basic financial andnon-financial services and/or the institutional environment is particularly unhelpful toenforce contractual commitments, no workable systems of exchange may develop atall. In other less extreme cases, systems of exchange may be functioning but someindividuals or groups, especially the more vulnerable socio-economically poorergroups, may not be able to gain access or are otherwise excluded from them(Johnson; 2004). (or gain access in very unfavorable conditions).

As we mentioned before, lack of organizations that provide services to supportexchange and/or lack of basic infrastructure in rural areas gives rise to processes ofaccess failures. In this context, Dorward and Poole (2003:??) identify three types ofaccess failures that leave households exclude from systems of exchange andopportunities: (1) lack of resources, (2) transaction failures and (3) social exclusion.

Lack of resources refers to a situation in which households suffer from lack of

access to systems of exchange as a result of no having the resources toparticipate in particular productive activities and their associated systems of

exchange. In this regard, we must differentiate between those minimum assetsthe households itself must have in order to secure its livelihoods (labor of

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sufficient quality and in the case of livestock and agricultural activities: land) andthose others additionally needed (financial services and/or technical assistance)and provided by organizations. Lack of resources would also include inputsneeded for production, services and infrastructure that support the trade activityitself (transportation services, cooling and storing infrastructure).

Transaction failures refer to situations whereby households are excluded from

systems of exchange as transactions costs weight heavily on small scaletransactions and on households who are socially or geographically marginalize.Transaction failures are explained by high transaction costs associated withinformational asymmetries, lack of infrastructure, transportation costs anddiseconomies of scale in transportation and commercialization. Both lack ofresource and transaction failures give raise to economic exclusion.

Additionally, for Dorward and Poole (2003:??) rural households often cannot

gain access to systems of exchange as a result of social exclusion ordiscrimination based on individual features (cast, class, tribe, gender, religion orpolitical affiliation). Social exclusion can also be read as the consequence of a

lack of social capital5

.In the context of the livelihood framework, social capital itis seen as an asset available to households which can help secure access toassets and livelihood strategies i.e. including systems of exchange.

Within this context, systems of exchange fail the poor when they are not capable toaccess them, or can only access them on very poor terms. We will now focus ourattention on the nature of the commodity being exchange as well as the dimensions ofthe transaction which influence and determine the level of transaction costs associatedwith the exchange and therefore the institutional arrangement used to adopt toundertake the exchange.

3. Transaction Costs and Systems of Exchange

Basic neoclassical economic theory assumes that markets work under certainconditions such as perfect competition and perfect and costless information, whichmakes them free of transactions costs. Further more, it assumes that prices convey allthe information needed to coordinate economic activities. In the real world, as speciallyin rural areas of developing countries, it is very difficult to find competitive well-functioning systems of exchange as in many cases, the assumption that information iscomplete, symmetrical among actors, and free or cheap to acquire and use does nothold in the real world.

The existence of imperfect and asymmetrical information6 introduces the need toacquire (costly) information or to operate under incomplete information, and opens awindow for opportunistic behavior between parties to a transaction, introducinguncertainty to transactions. Both realities entail additional costs beyond production

5Social capital refers to (vertical and horizontal) networks as well as membership in (formal and informal)

organizations; both expressions of social relationships of actors (social structure) as well as the links

(actions/interactions within the structure) established between them (Woolcock and Narayan; 2000). Social capitalemerges from an actors relations with others and his/her advantage resides in being part of networks/organizations

which allows him/her to receive benefits such as access to resources and transaction cost mitigation. For a goodexample of the role of social capital in economic processes, see Brautingams (1997) research on industrial

development in Nigeria.

6 Information asymmetry is a condition when one party to a transaction has more or better information than theother party.

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costs, in order to enable the transaction to take place. Buyers and sellers have tospend additional resources to acquire information (about products, prices, inputs andbuyers or sellers), negotiate contracts (managerial expertise, hiring legal services) andmonitor and enforce contracts (monitoring the quality of goods, evaluating theperformance of a buyer of sellers, legal costs of guarantying and enforcing thecontract) thereby increasing transaction costs (Hobbs; 1996:17). Consequently,

additionally to production costs we must take into account transaction costs associatedwith imperfect and asymmetrical information. Transaction costs often determine theviability of exchange, since if the benefits generated by a potentially interestingtransaction do not outweigh the level of transaction costs to be incurred in order tomake it happen, it dos not make sense to realize it. In this regard, transaction costs arelogically very closely related to the (non) performance of real world systems ofexchange.

Especially when transaction costs are extremely high, systems of exchange will notperform well (or not at all) due to failures associated with transaction costs (transactioncost failure). Transaction costs are higher in developing countries, especially ruralareas, characterized by lack of infrastructure, presence of risk related to opportunism,uncertainty, weak information flows, coordination problems and weak institutionalenvironment, which altogether increase transaction costs and thereby constrainconstrains households access to markets and impedes market expansion (Richards;2005, Dorward et al. 2003:6, Dorward and Kydd; 2005:8).

The nature of the commodity being exchanged as well as the dimensions of thetransaction also influence and determine the contractual arrangement used to governthe exchange. In this regard, for Williamson (2003) a market is just an alternativecontractual arrangement vis--vis other ways of allocating resources and whether or

not market exchange is possible and constitutes to best institutional arrangement toorganize exchange is closely related to issues of transactions costs.

For Williamson (1991) contractual hazards arise from the nature of transactions whichincreases the costs of exchange and creates the need to use alternative systems ofexchange that would reduce transaction costs. The author identifies three dimensionspresent in any transaction: asset specificity, uncertainty and frequency. Assetsspecificity refers to specific specialized investments which cannot be reoriented toother uses without loosing part of its productive value; this gives rise to a bilateraldependency relation which requires the development of special arrangements to avoidopportunistic behavior7. Uncertainty (due to incomplete contracting) in a similar manner

calls for close collaboration or coordinated adaptations (accomplished throughconsciously coordinated administration within the firm) as oppose to autonomousadaptations (where individuals parties respond to market opportunities as signaled bychanges in prices). As continuity of the exchange relation becomes more importantparties will benefit from a spirit of cooperation which demands added private ordering.Depending on the values they take, transaction costs are raised for any transactionexchange. As asset specificity, uncertainty and frequency increase, so does the levelof transaction costs.

7 Understood as self-interest seeking with guile (Williamson; 1984:??)

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Each transaction is associated with a particular level of transaction costs. Astransaction costs increase for a specific exchange, the transaction itself requires adifferent mode of exchange suited to deal with the higher level of transaction costs. Inthis sense, transactions, which differ in their attributes, are aligned with governancestructures, which differ in their costs and competence, in a discriminating-mainly,transaction costs economizing-way (Williamson,1994:88). Williamson identifies three

alternative governance structures for exchange:

The classic market(simple spot market exchange), is the type of non-repetitive

exchange where autonomous and anonymous parties to an exchange engagein.

Hybrid structure (term Willamson uses): points at long-term contractual relations

that preserve the autonomy of the parties to the exchange, but due to longerterm arrangement provides additional transaction-specific (and transaction costreducing) safeguards compared to the market.

Hierarchy (or vertical integration): refers to transactions that are undertaken

under unified ownership and are subject to administrative controls.

Undertaking a transaction in a classical market, hybrid or hierarchy responds to thefeatures present in these governance structures: incentive intensity, administrativecontrols and contract law regime that deals with different levels of transactions costsassociated with the dimensions of transactions. A transaction characterized by lowasset specificity, low uncertainty and low frequency would most probably take place ina spot market, but as these three dimension of transactions change, so does the modewhere it takes place. Taking the opposite case, a transaction involving high assetspecificity, high uncertainty and high frequency would be held under the hierarchymode (vertical integration); for transactions with middle range values the selected

mode would be the hybrid one.

Attributes of Market, Hybrid and Hierarchy Governance StructuresAttributes Market Hybrid Hierarchy

Instruments

Incentive IntensityAdministrative

Controls

High-poweredNil

Less high-poweredSome

Low-poweredMuch

Performance

Attributes

AutonomousAdaptation

CoordinatedAdaptation

MuchNil

SomeSome

NilMuch

Contract Law Legalistic Contract asFramework

Fiat

Source: Williamson; 1991 and Williamson

The reader can see from the table above that the classical market is supported bystrong incentives, almost no administrative controls (perfectly autonomous,uncoordinated adaptations8) and is governed by legal rules and a contract law regime.

8Williamson contrasts Hayeks and Barnards approaches to adaptations between parties to a transaction: Hayek

refers to autonomous adaptations in which individual parties respond to market opportunities as signaled bychanges in relative prices; whereas the adaptations of concern to Barnard are cooperative adaptations accomplishedthrough administration within the firm (Willimason 1993:11)

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On the other side of the scale, hierarchies are characterized by little incentives, highadministrative controls (perfect for coordinated adaptations but not for autonomousadaptations). Hierarchies are governed by their own set of rules and norms andconflicts are settled by fiat. Hybrid governance structures sit in the center with middlevalue of incentive intensity and administrative control; and use of contract as aframework of contract low regime. Transactions are located in exchange systems

which features help undertake transactions at the lowest cost possible.

In agriculture, where the most distinguishing feature of agricultural produce is itperishability (Masten; 2000:187) appropriate ways to organize production andexchange are needed. The perishable nature of agricultural products increases thecomplexity of a transaction, poses contractual hazards because its quality candeteriorate (Hobbs and Young; 1999:5) and increases the costs associated with theexchange9. Perishability impose sorting and information costs on buyers to determinethe product quality as well as it increases the negotiation costs among parties to theexchange, as procedures are required to establish which party is responsible for theproduct quality at different states of the transaction (Hobbs and Young; 1999:5). Inaddition to persihability and quality monitoring, the authors further add that theexchange of agricultural products is also increasingly complex given the uncertainty ofbuyers to find a reliable supply of produce (timeliness and quantity), sellers may alsoface uncertainty in finding a suitable buyers and both parties face price uncertainty,which is normally attached to product quality which may be difficult to assess.

To deal with these costs, high levels of coordination are needed which demand movingthe transaction beyond spot market into other mechanisms of exchange that wouldprobe to be a more appropriate and efficient way to organizing an industry (Goletti;2005:21, Williamson; 2003:??). An alternative mechanism to organize production and

exchange vis--vis markets or hierarchies is the value chain which should beinterpreted as part of the continuum between markets and hierarchy (Hobbs; 1996:??).

9 Transaction costs may be associated with poor communications, dispersed produces and buyers and the need tomonitor commodity quality characteristics (Dorward; 2001:71).

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