An APMC tale: why market design matters

Nice piece by Niranjan Rajadhyaksha of Mint.

He says APMC were designed with the right intent but have eventually got caught up with similar troubles it was expected to address:

I recently stumbled across an old documentary made by Films Division, perhaps in the 1960s, that helps answer a niggling question: Why were the APMCs set up in the first place?

The documentary, Our Regulated Markets (see here), is structured as a narrative. Jagannath, a farmer in the Sangli area of Maharashtra, faces all sorts of problems when he sells his annual produce in the market. The traders negotiate prices by signalling with their hands under a piece of cloth. Some deals are finalized with movements of the head. The farmer cannot figure out what is happening because he does not understand this private negotiating language. The weights used to measure the grain have been tampered with. The agent who represents the farmer in the market does not reveal how much commission he has deducted before handing out the final payment. There is acute information asymmetry, as well as downright cheating.

The story then moves forward as Jagannath meets his friend Kishanlal. Kishanlal takes him to a new market set up by the government to protect the interests of farmers. There is an open auction system here. The farmer is aware of the prices being quoted at every stage. Some regulated markets are experimenting with sealed bids to avoid collusion. The traders still sometimes conspire to keep prices down by not bidding at all, but the local cooperative then steps in to break the cartel. Disputes are settled by a market committee that has elected farmer representatives.

The entire narrative is structured around the theme about how the new regulated markets set up five decades ago were superior to the traditional markets. Yet, evidence has piled up over the years that the APMCs have also fallen prey to the very habits they were supposed to mend.

These markets are now controlled by cartels with deep links to caste as well as political networks. Prices fluctuate wildly. In a report for this newspaper in April 2013, Pramit Bhattacharya wrote on the existence of cartels in the Lasalgaon APMC, the largest onion market in India. Studies by economists from the Institute for Social and Economic Change in Bengaluru and the National Council of Applied Economic Research in New Delhi also concluded that there was collusion among traders in this market.

Hmm..

He then looks at lessons to be learnt and how market design can help..

Actually no matter what the market design and best intentions, there will always be unintended consequences. These are so important in public policy. And all institutions have a shelf life..

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