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Abstract
This paper examines how market institutions can affect links between urban and
rural areas with specific emphasis on goods market integration in the national context.
Traditionally, development researchers and practitioners have focused either on rural
market development or on urban market development without considering the
interdependencies and synergies between the two. However, more than ever before,
emerging local and global patterns such as the modern food value-chain led by
supermarkets and food processors, rapid urbanization, changes in dietary composition,
and enhanced information and communication technologies point to the need to pay close
attention to the role of markets both in linking rural areas with intermediate cities and
market towns and promotion of economic development and poverty reduction.
This paper begins with a presentation of a conceptual framework of market
integration and then identifies five major factors that increase the transfer costs that
subsequently hinder market integration between rural and urban areas: information
asymmetry, transaction costs, transport and communication costs, policy induced
barriers, and social and noneconomic factors. Five specific cases in five developing
countries are examined in this study to demonstrate the primary sources of transfer costs
and the aspects of market institutions that are important to market integration and
promotion of rural-urban linkages.
While emerging institutions such as modern intermediaries linked to supermarkets
and food processors can reduce information asymmetries between rural producers and
urban consumers, existing institutions such as producers’ cooperatives can pool the risks,
increase the bargaining power of small producers, reduce enforcement costs, and thereby
reduce transaction costs. In addition, new types of partnerships between businesses and
NGOs, and between public and private sectors, can improve infrastructure provision
which, in turn, can reduce transport and communication costs. To the contrary, the
presence of inappropriate policies or noneconomic factors such as those that involve
social exclusion take on a negative role in linking urban and rural markets.