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GTAP Resource #1785

"The Rapid Expansion of the Modern Retail Food Marketing in Emerging Market Economies: Implications to Foreign Trade and Structural Change in Agriculture"
by Somwaru, Agapi, Terry Roe and Mathew Shane

The share of resources allocated to food marketed through supermarkets and their marketing channels has grown at an unprecedented rate in lower income countries during the 1990s. Two major effects of this expansion are the potential for (1) having profound impacts on trade flows of higher value added agricultural commodities while at the same time making the sanitary, GMO labeling and other selected points of contention in WTO negotiations almost irrelevant, especially for higher value added commodities and, in the case of developing countries, (2) immiserizing small scale farmers employing traditional production technologies while speeding up the structural change of the commercial farm – modern marketing channel segment of agriculture. Unfortunately, little empirical work has been done to understand the fundamental economics of this phenomenon, and to assess empirically the implications of these two effects. This study rectifies this short coming by developing and empirically testing a methodology for assessing these effects for the case of a single country, such as India.

The evolution of supermarkets cannot be viewed in isolation of the broader economic – general equilibrium forces giving rise to a middle class, nor can this process be viewed in a static context. Likewise, the extremely rapid adjustment this expansion places on smaller scale and traditional farming enterprises must also be considered in a dynamic setting where the “pull forces” of economic opportunities outside of the traditional farm enterprise, and the “push forces” of declining traditional farm returns to land, management and other farm specific resources can be immiserizing. Immiserization can occur in economies where traditional – farm level factor markets for land, labor, and capital are incomplete relative to those available to commercial farmers, where the institutional setting makes the development of small scale farm organizations to discipline the quality and continuity of farm gate products costly, and where access to foreign markets is also made costly due to poor transportation, and concentration in produce marketing. Larger commercial farmers are far better equipped to bypass these bottlenecks.

These concerns expressed with the expansion of supermarkets and their possible harmful affects on the welfare of traditional farmers have received little analysis. Our purpose is to show that differences in the relative capital intensity of the modern marketing channels in contrast to the traditional channels can explain part of this expansion as the process of economic growth gives rise to capital deepening, even when the food share of total expenditures declines. In this case, the lack of complete markets, and policy distortions can further exacerbate the affects of supermarkets on the traditional marketing system and the small farmers it supports.

We build upon a basic methodology developed by Roe and Diao (2004) and utilize a dynamic general equilibrium model that captures the basic features described in Roe and Diao (2004) develop on a case study-country India. The key features captured by the model are (1) nonhomothetic preferences to reflect the change in household expenditure shares on food purchased from modern versus traditional retail outlets as incomes grow; (2) differences in the farm-gate to retail outlet technology among the modern and traditional sectors; (3) the importance of the rest of the economy in the process of growth both as a producer of capital goods and as a competitor for the employment of the economy-wide resources such as labor and capital; and (4) differences in market structure between the supermarket and traditional food retail outlets.

The model captures, in an obviously aggregative way, (1) the rest of the economy, and (2) two vertical market structures, from land – to farm – to market channel – to food retail outlet. The vertical structure depicts marketing channels that require resources to: assemble inputs for farmers, produce raw agricultural output, assemble, process and add value to, and market the final products to retail establishments. In our model, we also capture the incompleteness in capital and possibly the labor market as well. Foreign capital can enter and speed up the transition to long run equilibrium.

The major features of the economy affecting the model results are the relative capital intensity of the supermarket and its accompanying marketing channel relative to the traditional channel. Commercial agriculture is slightly more capital intensive than is traditional agriculture while the rest of the economy is relatively labor intensive by comparison. Since capital goods are produced and imported by the economy, those sectors that are relatively capital intensive can experience a decline in unit costs as capital accumulates and rates of return to capital fall. As capital accumulates the productivity of labor rises, which causes nominal wages to rise. Change in the economy's capital stock has Rybczynski like effects on output supply

Since capital accumulation in supermarkets causes an increase in output in excess of the increase in demand, the resulting effect of the decline in the price of supermarket food on the traditional farm price dominates the upward pressures on the traditional farm price from the increase in food price at traditional outlets. Thus, the evolution of this economy causes traditional farmers to be both "pulled" and "pushed" out of farming. They are "pulled" out by the rise in wage payments due to the increased productivity of labor from capital deepening in the economy, and they are "pushed" out by the decline in the farm level price. Since foreign direct investment is not permitted in the modeled economy, the growth in the modeled economy's capital stock is due to the willingness of domestic households to forego consumption. Opening the economy to foreign investment when the rest of the world is in long-run equilibrium, would cause the modeled economy to instantly adjust to its long-run equilibrium, thus forcing a more rapid adjustment in the traditional food sector. In a real economy, the adjustment would not be instantaneous, but likely more rapid than suggested by the economy modeled here. All of these issues are worthy of future investigation.

Resource Details (Export Citation) GTAP Keywords
Category: 2005 Conference Paper
Status: Published
By/In: Presented at the 8th Annual Conference on Global Economic Analysis, Lübeck, Germany
Date: 2005
Created: Somwaru, A. (5/6/2005)
Updated: Somwaru, A. (5/6/2005)
Visits: 2,183
No keywords have been specified.

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