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5.2 Marketing and its role in economic development


5.2.1 What is marketing?
5.2.2 Characteristics of agricultural and livestock marketing
5.2.3 The role of marketing and trade in development
5.2.4 Requirements for market development


5.2.1 What is marketing?

Markets are the context, both physical and conceptual, where exchange takes place. Marketing includes all activities from the producer to the final including processing and distribution systems. The term producer includes farmers or pastoralists and the manufacturers of production inputs when they produce the commodity being marketed. The term consumer is used for anyone who is the final consumer of a product or the final user of a production input (e.g. pastoralists may consume butter and veterinary inputs). The retailer is the final link in the chain from producer to consumer. Hence, an urban butcher is a retailer and so is a vaccinator in the government veterinary services who delivers a vaccination. The wholesaler delivers the product to the retailer. The term farm gate is the location of a sale where a farmer keeps his or her animals or produces his or her crop (i.e. on a farm in the case of settled cultivators or at an encampment in the case of pastoralists). The terms market actors and market agents are used interchangeably to represent any persons participating at any level of the market.

The objectives of marketing vary. For the individual producer or consumer, the objectives may be to maximise benefits from the resources available and to expand marketing operations in order to increase wealth. From a societal viewpoint, the objectives may be to encourage efficient allocation of resources, to create wealth and promote economic growth in order to improve the general welfare of society. Important considerations may also be to improve distribution of income between sectors of the economy and to maintain some stability of supply and demand for marketed goods. The concurrence of marketing objectives with national policy objectives identified in module 2 will be discussed later in this module.

5.2.2 Characteristics of agricultural and livestock marketing

Agricultural marketing in Africa normally begins at the level of the individual smallholder. Producers usually carry out some or all of the marketing steps. Often, because producers are also consumers, little of what is produced is marketed. Livestock owners may be only marginally market-oriented. Because of traditional attitudes towards wealth in cattle, owners may choose to hold cattle rather than market them.

Producers are likely to be some distance away from consumers. They may also be highly dispersed. Both conditions affect the nature of the marketing and distribution process. Also affecting the process is the nature of agricultural and livestock commodities, which are rarely in consumable form when first entering the marketing system, and suffer from perishability or are otherwise susceptible to losses during storage/handling. Agricultural, and particularly livestock products, are generally seasonal in supply and are more susceptible to natural shocks. In Africa, the marketing of agricultural products typically suffers from limited institutional support.

5.2.3 The role of marketing and trade in development

Marketing and trade play vital roles in the economic growth and overall development of a nation. The major roles of marketing and trade in the national economy can be thought of in terms of:

· specialisation in activities of comparative advantage
· enhanced resource-use efficiency and trade
· advances in marketing with economic growth.

Specialisation in activities of comparative advantage

Without market facilities, areas must maintain diversified activities to produce their own food, shelter, tools and other needed goods. In the presence of a market, however, an individual can specialise in one activity and sell the surplus in order to purchase other needed goods. The individual is likely to specialise on the basis of a comparative advantage in that activity for which he or she has some special resource or ability. A comparative advantage exists when an individual or region can produce a good, relative to the price of other goods, more cheaply than another individual or region. In livestock production, comparative advantage is often the result of agro-ecological conditions particular to a region making it suited to certain specialised activities. The agro-ecological basis for production results in regional comparative advantage, whereby all of an area with that common agro-ecological base shares the ability to produce the good relatively more cheaply than another area.

Box 5.1: Comparative advantage.

Table 5.1. Production possibilities of beef and mutton for Countries A and B.

Proportion (%) of land devoted to

Production ('000 t)

Beef

Mutton

Country A

Country B

Beef

Mutton

Beef

Mutton

100

0

90

0

25

0

50

50

45

30

12

25

0

100

0

60

0

50

In this very simplistic example, countries A and B produce both beef and mutton. The two countries have an equal amount of productive land. Country A, however, has more favourable agro-ecological conditions than B for both mutton and beef. Table 5. 1 shows the relative production potential of both countries for different proportions of land devoted to each product.

The trade-off ratio between beef and mutton for Country A is 3/2 (i.e. 90/60 under complete specialisation; 100% of land devoted to each) while for Country B it is 1/2 (i.e. 25/50). The trade-offs for the two countries can be expressed as:

Beef

Mutton

Country A, 1 t

= 2/3 t

Country B. 1/2 t

= 1 t

Note that country A can produce more of either beef or mutton than country B. Thus, country A has an absolute advantage for both beef and mutton over country B. However, when we consider the trade-off ratios between beef and mutton for individual countries, we find that to produce one tonne of mutton, country A has to give up the production of 3/2 t of beef and Country B only 1/2 t of beef. Therefore, Country B has a comparative advantage in the production of mutton and Country A has a comparative advantage in the production of beef.

The important point is that both countries would benefit if they could trade with each other in the item for which each has a comparative advantage.

Figure 5.1. Production possibilities with and without specialisation of trade for Countries A and B.

Figure 5.1 further explains the concept of specialisation and trade for beef and mutton for Countries A and B. If we look at the total production of beef and mutton in the two countries, we find four possible situations:


Total production
('000 t)

a. Countries A and B devote half of their land to each product 45 + 30 + 12 + 25

= 112

b. Both countries specialise in beef 90 + 25

= 115

c. Both countries specialise in mutton 60 + 50

= 110

d. Country A specialises in beef and Country B in mutton 90 + 50

= 140

The largest amount of production results from each country specialising in the product for which it has a comparative advantage. Both countries will, however, end up with more of one good than they need and none of the other. So, for the benefits from comparative advantage to be realised, trade must occur. Figure 1 illustrates that the largest production results at point C, where both countries specialise and trade for one product only.

Specialised activities lead to trade. The gains from trade will be the value of additional production made possible through specialisation and trade. The exact gains from trade will depend on the market prices of the goods with and without trade. This concept applies equally to individuals, who use their comparative advantage to specialise in one task, selling their products to trade for the other goods they need.

Exercise 5.1: Comparative advantage (estimated time required: 3/4 hour).

The table below provides production alternatives for countries C and D in milk and beef production.

Proportion (%) of land devoted to:

Production ('000 t)

Country C

Country D

Milk

Beef

Milk

Beef

Milk

Beef

100

0

7000

0

9000

0

50

50

3500

10

4500

30

0

100

0 20

0

60


Question 1. What are the trade-off ratios between milk and beef for countries C and D? (Hint: create two trade-off tables, one expressed in terms of 1 kg milk, the other 1 kg beef.)

Question 2. Where do absolute and comparative advantages exist for milk and beef? Use your results to discuss the type of trading scenario which would be to the advantage of both countries.

Question 3. Draw a graph, as in Figure 5.1, showing the point of greatest benefit to both countries.

Enhanced resource use efficiency and trade

Through specialisation and trade, a community is better able to utilise its limited resources. Specialisation and the resulting efficiency of resource-use is the basis for economic growth and development. As markets and economies develop, surpluses occur more frequently in profitable activities, creating new wealth, while products are moved greater distances than before. Thus, trade is a necessary ingredient for economic growth. Marketing is simply the means by which trade occurs.

Advances in marketing with economic growth

As economic growth proceeds, several changes in marketing take place. With economic development, the activities and tasks of marketing increase. Activities such as storage and processing, packaging and retail distribution become more important. Greater activity moves away from the site of production and towards marketing. This, in turn, creates employment opportunities and further specialisation (diversification of the community). Since livestock products typically have positive income elasticities of demand, economic growth can lead directly to new opportunities for production. Thus, the livestock subsector increases in importance.

With development, more economic agents may enter trade, helping to improve marketing services and, in some cases, allowing the market to capture external economies of scale. This refers to a situation where the presence of many agents allows each one to operate at a lower cost. An example is the case where increased trade in some commodity (e.g. livestock allows for the establishment of large storage facilities (e.g. pre-slaughter holding areas), which lowers per unit storage costs. The physical infrastructure can also be affected in a positive way by large markets, in the form of better roads and communication, offering the potential for external economies of scale.

(Hint to instructors: Discuss the differences between external and internal economies of scale. For example, discuss external economies with respect to milk production density.)

5.2.4 Requirements for market development

For market development to occur, rural areas must be effectively linked, in terms of information and infrastructure, through the middlemen in the marketing system with urban centres of consumption. With the shift in resources away from production to marketing services, small-scale processing can expand markets by increasing demand through diversification of the end products. Perhaps most important, and crucial to the reform of African marketing systems, is the requirement that the institutional and policy environments do not discourage or unnecessarily impede the actions of marketers. As well, property rights and contracts should be protected.

Another important factor in the development of markets is the disequilibrium between demand and supply. Producers and consumers then must exert greater efforts to cope with each others' requirements. Increased efficiency resulting from trade is not in itself sufficient to create wealth. A stable but static equilibrium, where supply meets demand, may no longer produce new wealth. Disequilibrium, along with technical and institutional changes, may be the conditions needed to move to even greater comparative advantage and efficiency levels.

Further, initial scarcity of resources (poverty trap) can cause subsistence activities to dominate, denying the surplus labour or resources necessary to invest in new knowledge or technology required to create comparative advantage. The institutional and organisational requirements necessary to expand markets may also be enormous. The role of property rights will play an important role, as marketing inherently involves transferring property rights. The nature of the society may restrict the scale on which such transfers can take place.


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