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Financial Structure and Prices in a Backward Agrarian Market

Ben Crow
Lecturer
Development Studies at the British Open University

KAS Murshid
Senior Research Fellow
Bangladesh Institute of Development Studies (BIDS)E-17, Agargaon, Sher-e-Bangla Nagar Dhaka-1207

Shahidur Rashid
Research Consultant

Abstract/ Executive Summary:

This paper presents empirical evidence on price and market structure in the grain markets of a backward area of Bangladesh. The findings form part of a larger investigation into the operation of grain markets in Bangladesh. As in most parts of Bangladesh, this is an area where there appear to be large numbers of competing traders. In practice, the number of independent traders is greatly reduced by ubiquitous financing arrangements through which a small number of large traders provide the working capital for a much larger number of small traders. Conditions attached to the provision of finance restrict the subordinate or tied traders in the timing of their transactions and to whom they can sell. These sorts of financial arrangements are common in many single-cropped and technologically-backward areas of Bangladesh, but are less common in more advanced, Green Revolution areas. The point of the paper is to show that financial arrangements subordinating large numbers of small grain traders have a significant influence on prices, creating extra price margins for the financier-traders who establish these market arrangements. This finding highlights the role of a market rigidity which deregulation cannot affect. These market structures will influence the efficacy of attempts to increase producer prices. They also reduce competition within the market.This paper examines comparative data for the prices of traders tied by working capital loans to large financier traders and those who were not. It also compares the prices of those wholesale brokers who financed collection traders and those who did not.

Keywords: Financial structure,Prices, Backward agrarian market

Location:

Start Date: 15-12-1989

End Date: 15-01-1990

Program Area: Socio-economic and Policy

Non-commodity: Market analysis

Objectives:

To show that financial arrangements subordinating large numbers of small grain traders have a significant influence on prices, creating extra price margins for the financier-traders who establish these market arrangements.

Methodology:

The data has been collected in a large grain market and its agricultural hinterland in Noakhali, a district in the south of Bangladesh. It is a char area, meaning that it is land created by river deposition. In this case, the land was lost to the river and then re deposited after land reclamation in the mid 1960s. It is new land and all the market structures have therefore been created since the beginning of the 1970. This market collects paddy (the unprocessed rice grain) from a single crop area, where there has been little investment in agriculture and no development of irrigation. A group of trader-financiers and absentee landlords has established a hierarchy of interlocked markets for grain, land and money which appears to appropriate a significant share of the agricultural surplus.In order to identify the effect of the loans from large to small traders on price, field researchers gained access to the books of a sample of free and tied traders. With these exact (and generally confidential) records, it is possible to identify significant price differences. We have collected prices from the books of two traders in each category of trader, that is from 8 traders, two tied and two free paddy-collecting traders and two financing and two non-financing brokers. The four brokers all operate in the same large market place. All four itinerant paddy-collecting traders sell in this market place, the two tied traders collect paddy from the newer char lands and the two independent traders collect paddy in an adjacent older area of char land.1 The number of traders chosen for this research was limited by the difficulty of gaining access to sale price records. Access can only be gained to traders' confidential books and records (as opposed to the books kept for display to the Food Department) when a relationship of trust has been established with the trader or, in the case of some large brokers, with his accountant (Sarkar). In this case, data collection and observation had been underway in this area for some eighteen months before the data reported in this paper was gathered. The method of data collection, the data to be gathered and the relationship of trust which made it accessible, all built on the observations and relationships built up over the preceding period (during which less sensitive data had been collected). This type of research is necessarily on the border between anthropology and economics, and the appropriate sample sizes are those of participant observation, rather than those of mass questionnaire surveys.Daily prices were collected covering a period of one month. For comparability, the prices of only two, very similar, varieties of paddy or rice were collected - kajal shail and raja shail - and only for that quality of grain termed 'good' by the traders. Te period chosen December 15th 1989 to January 15th 1990 covers a peak period after the harvest when both independent and tied traders are operating.

Source of Information: The Bangladesh Development Studies,Vol. 19, No. 3 (September 1991), pp. 115-123 Published by: Bangladesh Institute of Development Studies

Article Link (Online Journal):

Funding Source:

Budget:

Total Budget (Tk.) :

Achievement/Findings:

The results provided quantitative confirmation of earlier, qualitative findings suggesting that institutional structures can influence the ability of small traders of accumulate and the extent of competition in an apparently free market. A group of trader-financiers and absentee landlords has established a hierarchy of interlocked markets for grain, land and money which appears to appropriate a significant share of the agricultural surplus. Within the sphere of commerce, the operation of dadon loans which form part of the hierarchy restricts the choice and timing of transactions made by small traders. Discussion with traders in the market suggests that the financier-traders of the South Bazaar are accumulating at a rate far in excess of that of the North Bazaar traders. The South Bazaar traders, who are much more recently established, arc investing in other enterprises (commerce, transport, paddy processing, government contracting and the construction industry). North Bazaar traders are not. The tendency of these financing arrangements seems to be to lower prices paid to the producer (through the effect of dhaner upore loans to peasants) and lower prices at the wholesale level (through the operation of dadon loans to small traders).

Knowledge Management: Journal