Trade between rural and urban areas in poor countries is important for economic growth and poverty reduction. But there are several of barriers that can prevent rural-urban market links from working properly. If these barriers are removed, trade will increase and the cost of goods will go down.

Research from the International Food Policy Research Institute, USA identifies the barriers to trade between rural and urban areas within poor countries and looks at ways to reduce them. The research examines factors that affect the nature and size of transfer costs in Indonesia, Ethiopia, Kenya, Bangladesh and Peru.

People face numerous transfer costs when moving goods from one region to another. These include:

• lack of information, for instance about prices being charged in other markets
• transport and communication costs (such as poor quality rural roads and telephone networks)
• taxes, tariffs on inter-regional trade and other inappropriate government regulations – in Ethiopia, local and regional taxes on the grain trade constrain to inter-regional trade
• the time cost of doing business
• social barriers such as ethnicity, race, culture and language – ethnic discrimination in Peru reduces indigenous people’s access to education, credit and jobs.

A number of initiatives can help reduce transfer costs, however. The researchers find that:

• Supermarkets can help small rural producers overcome information problems and connect them to urban consumers. In Indonesia, new trading relationships governed by supermarkets provide farmers with information on the type and quality of goods urban consumers demand.
• Cooperatives help small producers overcome a range of difficulties and sell to urban markets. In Ethiopia and Kenya, dairy cooperatives help small producers by sharing costs and information, providing a guaranteed outlet for their milk production and increasing their bargaining power.
• Telephones make communication between rural and urban areas faster, cheaper and easier. In Bangladesh and Peru investment in rural telecommunications has helped break rural communities’ isolation and connect them to urban areas.

Rural-urban links are becoming more important as society changes. For instance, as more people move from rural areas to towns and cities, rural-urban trade is essential for supplying food to urban areas.

The researchers conclude that transfer costs can be reduced and linkages between rural and urban areas strengthened by:

• reforming market institutions such as the relations between buyers and sellers, and the rules that govern markets
• improving communications, particularly road and telephone connections, both in rural areas and between rural and urban areas
• new types of partnerships – for example between business and non-governmental organisations, and between government and the private sector – which can increase investment in infrastructure.

Source(s):
‘Market Institutions: Enhancing the Value of Rural-Urban Links’, FCND Discussion Paper 195/ MTID Discussion Paper 89, International Food Policy Research Institute: Washington, by Shyamal Chowdhury, Asfaw Negassa and Maximo Torero, 2005 Full document.

Funded by: UK Department for International Development

id21 Research Highlight: 13 June 2006

Further Information:
Shyamal Chowdhury
International Food Policy Research Institute
2033 K Street, NW
Washington DC 20006-1002
USA

Tel: +1 202 862 5600
Fax: +1 202 467 4439
Contact the contributor: S.Chowdhury@cgiar.org

International Food Policy Research Institute

Asfaw Negassa
International Livestock Research Institute
PO Box 5689
Addis Ababa
Ethiopia

Tel: +251 11 6463215
Fax: +251-11-6461252/6464645
Contact the contributor: a.negassa@cgiar.org

International Livestock Research Institute (ILRI), Ethiopia

Maximo Torero
International Food Policy Research Institute
2033 K Street, NW
Washington DC 20006-1002
USA

Tel: +1 202 862 5600
Fax: +1 202 467 4439
Contact the contributor: M.Torero@cgiar.org

Other related links:
'Linking rural and urban areas for development in Ethiopia'

'Framework to examine urban-rural links: an example from Bangladesh'

'Rethinking rural-urban collaboration in India'

'Overcoming the rural-urban divide in China and India'

International Institute for Environment and Development: Rural-Urban Linkages

Livelihoods Connect: Rural-Urban Change