8 CHAPTER 1 Key Concepts and Issues
To better identify the key concepts relating to this study, we examine here three issues relating to smallholder commercialization and RPOs. The first issue focuses on the role of collective action in helping smallholders overcome marketing constraints. The second issue concerns the extent to which poorer households tend to participate in RPOs. The third issue examines the possible constraints on an RPO’s marketing performance. These issues are used to guide the empirical elements of this study presented in later sections.
Issue 1: Collective Action Can Help Smallholders Overcome Marketing Constraints
Although smallholders in many developing countries have benefited in recent decades from technological advances in agriculture, they face relatively greater challenges when it comes to commercializing their surplus output (see, for example, Dorward et al. 2004; Fafchamps and Hill 2005). One way of explain- ing the persistently low levels of smallholder commercialization relates to the idea of transaction costs: the costs entailed in marketing surplus output create a wide differential between selling and purchase prices, limiting the benefits smallholders are able to accrue from their market-based exchanges. These transaction costs may include the costs associated with finding a partner to trade with, delivering the commodity, negotiating a contract, or enforcing the agreement (for example, de Janvry, Fafchamps, and Sadoulet 1991). Importantly, some of these transaction costs are fixed (that is, indepen- dent of the size of the transaction); thus the unit cost of transacting tends to decrease as the amount to be sold increases. Therefore—in addition to such problems as lack of collateral, distress selling, and information asymmetries— smallholders typically face proportionally higher transaction costs than do other types of sellers because of the small size of each transaction. In some cases, it may be more advantageous for a household not to participate in the market at all (Goetz 1992; Key, Sadoulet, and de Janvry 2000). In other words, if the difference between the price received and the transaction costs is not at least equal to the reservation price demanded by the producer (based, for example, on costs of production), the producer will not engage in market transactions.
Collective action mechanisms can help smallholders reduce the transac- tion costs of commercializing their surplus output. By pooling their surplus output into a single tradable lot and using this larger quantity as the basis for negotiating with buyers, they can increase their bargaining power in the market and reduce per-unit transaction costs. In short, an organization that aggregates its members’ outputs can reward them with increased access to market as well as better rewards through higher prices.
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