Improving Agricultural Market Performance:
Creation and Development of Market Institutions
15
quotas, and product standards to keep out cheaper imports, as well as by keeping in place an
inefficient and fragmented domestic distribution system.
Food security and affordable food prices have become a pressing concern as a result of high
rates of urbanization in many countries. In many OIC and non-OIC countries, rising
urbanization has shifted Governments’ policy priorities from promoting agricultural
production and rural livelihoods to maintaining low – and sometimes artificially low – urban
food prices. Inefficient agricultural market systems may drive up food prices. The over-reliance
on food imports or rigid restrictions on food imports, combined with inefficient domestic
production and distribution, may also drive up food prices in urban areas, reducing purchasing
power and food security. Inefficient market systems also impede development of exports, of
both basic food commodities and cash crops such as cocoa, coffee, tea, rubber, and oil palm.
In some countries, such as the United States and many other Organisation for Economic Co-
operation and Development (OECD) countries, inter-sectoral shifts and subsequent rises in
real wages economy-wide, though they have not led to reverse migration from urban to rural
areas, have been accompanied by significantly increased agricultural productivity. This does
not appear to be the case in the less-developed OIC member countries, in which urbanization
has not led to increased real wages or productivity, either in the urban or the rural segments of
the economy, as urban unemployment has remained persistently high. Without rises in real
wages, Governments have faced pressure to keep urban food prices artificially low with food
subsidies, agricultural price controls, and import tariffs and quotas. These policy actions,
though they may satisfy, at least temporarily, demands by urban populations for lower food
prices, have increased burdens on the farm sector and have impeded agricultural productivity
growth.
Efficient agricultural market systems are needed to ensure the delivery of inputs such as seed
and fertilizers; improve farming techniques through extension services and agricultural
research; reduce losses and raise the quality of produce through better post-harvest handling,
storage, and distribution; apply health and safety standards; and make agro-food products
competitive in export markets. While some countries attempt to curtail exports of certain
commodities through export levies (e.g. palm oil in Indonesia)10, exporting can, in turn, help a
country to specialize in one or more economic activities where it may be able to develop a
competitive advantage based on natural resource endowment, climate, geographical location,
and business environment. In this way it can develop sustainability through trade advantage,
fulfilling its other needs in the global marketplace.
Finally, environmental and climate-related issues may put agricultural productivity at further
risk, thereby increasing countries’ vulnerability to external shocks affecting agricultural
production and further challenging aspirations of food self-sufficiency, food security, and rural
development. Efficient agricultural and food markets can – to some extent – mitigate these
risks but require efficient participation from private sector participants as well as Government
intervention in the form of market institutions which facilitate an efficient exchange between
private sector participants and, therefore, a well-performing agricultural market. .
Thus, agricultural and food markets are a priority area for nearly every Government,
regardless of income level. Consequently, it is possible to draw important lessons and identify
10 Indonesia Investments (2017), Palm Oil, available a
Accessed June 2017].