IOU 35’ i5“ ABSTRACT URBAN MARKET PROCESSES IN RECIPE, BRAZIL BY Robert W. Nason Though there have been many approaches to eco- nomic development, the urban rural relationships between agriculture, industry, and consumers through the market- ing system have often been ignored. Thus, the marketing linkages within the economy of selected Latin American countries has become the topic of a large-scale research project sponsored by the United States Agency for Inter- national Development. This thesis, as part of the above total project, reports on the research carried out on consumers and in the urban marketing system for foods in Recife, Brazil. The purpose in studying these populations was to understand the functions, institutions, and environment of the system members. This documentation then formed the basis for the analysis of the important question of how to induce changes in the system so that it transmits demand to the producers and stimulates efficient flows of goods to consumers in response to their demands. 2--Robert W. Nason Thus, by nature, this work took the form of a diagnostic study. The data used in this study were obtained from exploratory interviews, surveys of consumers, retailers, and wholesalers and special studies. The major findings of this research deal with the adequacy of the present distribution system, the possibility of change within the system, and the strategy that is implied to bring about that change. It was found that the few large-scale, self-service retailers had con- sistently different characteristics and market behavioral patterns than the bulk of the traditional participants. The evidence collected indicates that the traditional urban distribution system which is largely made up of many very small units cannot spontaneously amass capital to change its technology of operation and does not gen- erate competitive behavior. 0n the other hand, the few large self-service retail units do amass capital, do use it to change the technology of their operations, and do act as if they are in a competitive environment. The large self-service retailers had lower sell- ing prices for higher quality products than the rest of the retailers. For example, the large self-service re- tailers sold higher quality manioc flour for 8.3 per cent less than the total retail average price. The first effects of vertical integration and coordination stimulated by these large retailers was 3--Robert w. Nason visible in price reductions at retail. One self-service store was integrated through the milling process in rice and priced higher quality rice 15.4 per cent below the other non-integrated, large self-service retailers. Further, many of the very small retailers used credit weekly at annualized rates of interest up to 774 per cent. The large retailers used very low—cost credit. The spoilage caused by the present marketing sys- tem imposes a tremendous cost on the economic system. For example, 25 per cent of the fruits and vegetables that were handled by the traditional retailers spoiled such that they could only be sold for cost or less. In addition, 12 per cent could not be sold at any price. The consumer research indicated that the median per capita income was $160, and 53 per cent of this was spent for food. Prime reasons given by consumers for use or non-use of specific retailer types were locational convenience and level of price. There is every indica- tion that consumers will shift to the retailers that serve their needs with the higher income, more educated consumer tending to change more readily. Finally, this work presents a recommended strat- egy for inducing change in the urban distribution system by fostering increases in the scale of retailing at all levels, by promoting competitive retail behavior, and by encouraging vertical integration and coordination. URBAN MARKET PROCESSES IN RECIPE, BRAZIL BY Robert WPrfiason A THESIS Submitted to Michigan State University in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY Department of Marketing and Transportation 1968 PREFACE This thesis is part of two research projects on the role of marketing in economic deve10pment. The first is the Latin American Food Marketing Study under the guidance of Dr. Charles C. Slater, Professor of Market- ing; Dr. Harold M. Riley, Professor of Agricultural 8co- nomics; and Dr. R. Vincent Farace, Assistant Professor of Communications. The first phase of this research project, sponsored by the United States Agency for Inter- national Development and contracted by Michigan State University, was carried forward in Puerto Rico during the period of June, 1965, to June, 1966. The second phase of this contract, of which this thesis is a part, was built on the work done in Puerto Rico and was con- ducted in Recife, Brazil, during the period of Septem- ber, 1966, to December, 1967. The second project, the Latin American Market Planning Center, was likewise contracted by Michigan State University from the United States Agency for In- ternational Development and fielded in Recife, Brazil, and La Paz, Bolivia, during the period from September, 1966, to December, 1967. Dr. Charles C. Slater was the director of this research as well. 11 In all three countries, both of these projects received substantial local financial and personnel sup- port which added immeasurably to the interdisciplinary team of researchers from Michigan State University. This team consisted of faculty and graduate students from the Departments of Agricultural Economics, Communications, Engineering, Management, and Marketing. This thesis is part of the work that was com- pleted in Recife, Brazil. For research purposes, the economy was divided into the following sectors: Industry, food and non-food; Rural production of foods; Rural assembly of foods; Urban distribution. This work deals with the urban distribution system for foods and the consumer buying process which logically fits as the end part of the distribution system of foods. iii ACKNOWLEDGMENTS From the inception of this work, the author was priviledged to have the total support of and guidance of his Doctoral Committee, Dr. Charles C. Slater, chairman; Dr. Harold M. Riley; and Dr. R. Vincent Farace. Each of these committee members contributed greatly to the final manuscript, both through prompt and constructive criti- cism and through the different interdisciplinary vantage points from which they viewed the thesis. Further guid- ance was given by Dr. Donald A. Taylor, Professor of Marketing, in the early stages of the research formula- tion. Invaluable support was given this research ef- fort by Dr. Ferdinando de Oliveira Santos Neves and Dr. Kelly M. Harrison, who together were the joint Chiefs of Party in Recife for the project. Further assistance was given by Dr. Leonardo Valadares De 86 B. Sampaio and Dr. Cleto Veras, SUDBNB economists, who shouldered much of the responsibility for coordinating the field research operations. The broad scope of this research could not have been achieved without the dedicated help of three Bra- zilians. These three young people not only carried iv forward the research in all aspects, but did so in a spirit of mutual dedication. My heart and thanks go out to Lucia Maria Pessoa Santos, Andre Pereira da Silva, and Alan Edward Fiore. This author is also indebted to the many inter- viewers who, in trying conditions, carried forward the data gathering phase of this research. Special thanks also go to the Instituto de Pesquisas Economica for mak- ing such high-caliber interviewers available to the project. Sincere thanks are due Mr. Gordon Noel Paterson who, as administrator, spent long hours keeping the of- fice support functions at maximum efficiency as well as the right funds in the right place when needed. Without his help, the first questionnaire could not have entered the field. Finally, a debt of gratitude is due the author's wife, Leslee, who not only directly contributed to the research process by editing and proof-reading, but con- tributed understanding and support which are so vital to completion of the work. Any errors of fact or logic are the sole respon- sibility of the author. PREFACE . TABLE OF CONTENTS ACKNOHLEWMENTS O O O O O O O O O O O O O 0 LIST OF TABLES O O O O O O O O O O O O O 0 LIST OF FIGURES . . . . . . . .y. . . . . . Chapter I. THE MARKETING PROCESS IN DEVELOPING SOCIETIES . . . . . . . . . . . . Introduction . . . . . . . . The Role of Marketing in Economic Development . . . . . . . . . . A Strategy for Marketing Rationalization . . . . . . . . Summary of Marketing in Economic Development . . . . . . . . . . The Role of Marketing in Perspective. The Urban Distribution System, Part of the Total Research . . The Setting, Recife, Brazil The Problem . . . . . . . . The Methodology, A Summary Thesis Organization . . . . II. THE CONSUMERS OF RECIPE . . . . . . Demographic Characteristics of Consumers . . . . . . . . . . . Food Shopping Preferences and Behavior in Recife . . . . Attitudes toward Modernization . Summary...o......oo. III. RETAIL DISTRIBUTION OF FOOD . . . . Introduction . . . . . Types of Retail Outlets in Recife Demographic Characteristics . . . Physical Characteristics of the Retail Outlets . . . . . . . . vi Page ii iv viii xiii 19 32 34 45 47 49 54 61 62 63 71 113 124 128 128 130 143 146 Chapter IV. V. VI. APPENDIX APPENDIX Retail Practices and Decision Rules . Performance Characteristics of Food Retailers . . . . . . . Limitations on Food Marketing in Recife . . . . . . . . . . . . . Summary and Conclusions . . . . . . . URBAN WHOLESALE SUPPORT SYSTEM FOR FOODS Introduction . . . . . . . . . . . . Demographic Characteristics . . . . . Structural Characteristics of the Recife Wholesaler . . . . . . . . . Wholesale Practices and Decision Rules . . . . . . . . . . Performance Characteristics of Food Wholesalers . . . . . . . . . Limitations on Wholesale Food Marketing in Recife . . . . . . . . Summary and Conclusions . . . . . . . THE BEGINNINGS OF CHANGE . . . . . . . The Spontaneous Evolution of Large-Scale Retailing . . . . . . . The Wholesale Market Changes CONCLUSIONS AND RECOMMENDATIONS . . . . Introduction . . . . . . . . . . Large-Scale Retail Store Encouragement Coordination of Fairs and Markets . . Voluntary Full-Line Wholesaling . . . Consumer Education . . . . . . . . . Conclusions . . . . . . . . . . . . . I: METHODOLOGY . . . . . . . . . . . II: INDEX ITEM PRODUCT MOMENT CORRELATION O O O C O O O C O O BIBLIOGRAPHY O O O O ‘ O O O O O O O O O O O O 0 vii Page 155 176 195 213 220 220 224 225 230 239 245 252 254 254 266 273 273 279 295 312 318 319 322 351 359 Table 2.1 2.2 2.3 2.4 2.5 2.6 2.8 2.9 2.10 2.11 2.12 2.13 LIST OF TABLES Distribution of the POpulation of Recife According to Age Groups in 1960. . . . . The Distribution of Family Income and Average Propensity to Consume . . . . . Relationship between Independent Variables, Pearson Product Moment Correlation Coefficients . . . . . . . . Per Cent of Income Spent on Food . . . . . Independent Characteristics of Housewives Related to Refrigerator Ownership . . . Total Weekly Food Purchases Related to Type of Retail Outlet Used . . . . . . . Level of Literacy and Education Related to Type of Retail Outlet . . . . . . . . Reasons for Use or Non-Use of Store Types Given by Store Type Users and Non-Users . . . . . . . . . . . . . Weekly Food Expenditures, Frequency of Purchase, and Per Trip Expenditures by Type of Retail Outlet for Users of Each Retail Type . . . . . . . . . . Products Purchased by Customers of Various Retail Types for Home Consumption . . . . . . . . . . . . . . Per Cent of Customers that Use Delivery and Credit by Retail Type . . . . . . . Consumption of Selected Commodities by Income Level of Consumers . . . . . . Weekly Food Purchases Related to Price and Quality Considerations . . . . . . . viii Page 65 72 75 8O 84 88 89 91 94 97 98 100 103 Table 2.14 2.15 2.16 2.17 2.18 2.19 2.20 2.21 2.22 2.23 2.24 2.25 2.26 3.2 3.3 Mass Media Exposure Related to Price and Quality Considerations . Weekly Food Expenditure Related to Time of Purchase in Street Fair Level of Literacy and Education Related to Time of Purchase in Street Fair The Relationship of Mass Media Exposure to Advertising Influence . Weekly Food Purchases Related to Mass Media Usage Level of Literacy and Education Related to Mass Media Usage Weekly Food Purchase Related to Consumer Innovativeness Level of Literacy-Education Related to Consumer Innovativeness Weekly Food Expenditure Related to Consumer Attitudes Mass Media Exposure Related to Consumer Attitudes Level of Literacy-Education Related to Consumer Attitudes Fatalism of Consumers A Profile of Modern and Traditional Housewives Demographic Characteristics of Food Retail Respondents by Retail Type Physical Characteristics of Food Retail Units by Retail Type. Levels of Asset Value of Food Retail Units by Retail Type Page 105 106 106 108 111 .111 114 115 117 118 118 120 124 144 147 150 Table 3.4 3.8 3.9 3.10 3.11 3.12 3.13 3.14 3.15 3.16 3.17 3.18 Labor Characteristics of Food Retailers by Retail Type . . . . . . . Per Cent of Retailers by Type Carrying Various Commodities . . . . . Customer—Related Practices and Decisional Characteristics of Food Retailers by Retail Type . . . . Sources of Supply of Selected Commodities by Retail Type . . . . . . Sources of Supply of Selected Commodities by Retail Type . . . . . . Supply-Related Practices and Decisional Characteristics of Food Retailers by Retail Type . . . . . . . . . . . . Communications-Related Practices of Food Retailers by Retail Type . . . Practices and Decision Rules Related to the Business Operations of Food Retailers by Retail Type . . . . . . . Functional Characteristics of Food Retailers by Retail Type . . . . Price and Quality Levels for All Retailers, Four Self-Service Stores, and One Large Supermarket . . . . . . Spoilage Rates of Selected Commodities by Retail Type . . . Mean Price Margins for Selected Commodities by Retail Type . . . . . . Physical Past and Expected Volume Change by Type of Retailer . . . . . . Productivity Measures by Type of Retailer O O O O O O O O O O O O O O D Clarity of Barrier Perception by Retail Type . . . . . . . . . . . . Page 151 154 157 163 164 165 172 174 178 183 187 191 193 194 200 Table Page 3.19 Perceived Relative Importance of Barriers to Expansion by Retail Type . . 202 3.20 Perceived Relative Importance of Limitations on Profits by Retail Ilype O O O O O O O O O O O O O O O 204 3.21 Perception of External Barriers to Expansion Held by Retailers Who Desire to Expand, by Retail Type . . . . 205 3.22 Perception of External Barriers to Profits, by Retail Type . . . . . . . . . 207 3.23 Internal Barriers by Retail Type . . . . . 211 4.1 Physical Characteristics of Food Wholesale Units by Wholesale Type . . . . 226 4.2 Labor Characteristics of Food Wholesalers by Wholesale Type . . . . . . 228 4.3 Per Cent of Wholesalers by Type Carrying Various Commodities . . . . . . 229 4.4 Sources of Supply of Selected Commodities for Compartment unclesalers O O O O O O O O O O O O O O O 232 4.5 Sources of Supply of Selected Commodities for Established Wholesalers . . . . . . . . . . . . . . . 232 4.6 Number of Suppliers and Credit Given to Compartment Wholesalers for Selected Commodities . . . . . . . . . . 233 4.7 Per Cent of Sales of Compartment and Established Wholesalers by Customer Type . . . . . . . . . . . . . . 240 4.8 Spoilage of Selected Products Carried by Wholesalers . . . . . . . . . 242 4.9 Price Margins by Selected Commodities for Wholesalers . . . . . . . 243 4.10 Perceived Relative Importance of Barriers to Expansion by Wholesale Type O O O I O O O O O O O O O O O O O O 246 xi Table Page 4.11 Perceived Relative Importance of Limitations on Profits by Wholesale Type . . . . . . . . . . . . 247 4.12 Perception of External Barriers to Expansion Held by Wholesalers Who Desire to Expand, by Wholesale Type . . . 248 4.13 Perception of External Barriers to Profits by Wholesale Type . . . 250 4.14 Internal Barriers by Wholesale Type . . . . 252 5.1 Effect of Bom Prego on Margins and Volumes . . . . . . . . . . . . . . . 260 6.1 Financial Statement . . . . . . . . . . . . 286 A1.l Area Characteristics . . . . . . . . . . . 329 Al.2 Master Table of Probability . . . . . . . . 331 A1.3 Sub-Tables of Possible Samples . . . . . . 331 Al.4 Selected Areas . . . . . . . . . . . . . . 334 Al.5 Skip Intervals for Feirantes . . . . . . . 335 A1.6 Skip Intervals for Neighborhood Stores. . . 337 Al.7 Sub-Sample for Retailer Diary . . . . . . . 345 Al.8 Consumer Sample . . . . . . . . . . . . . . 349 A2.l Consumer Index Item Product Moment Correlations . . . . . . . . . . . 354 A2.2 Neighborhood Store Index Item Product Moment Correlations . . . . . . . 356 xii LIST OF FIGURES Figure Page 1.1 Inducing Internal National (Regional) Market Development . . . . . . 35 2.1 Distribution of Family Income (Lorenz Curve) . . . . . . . . . . . . . 73 xiii CHAPTER I THE MARKETING PROCESS IN DEVELOPING SOCIETIES Introduction There are at least four major viewpoints on the process of economic deve10pment and development strategy.1 The first viewpoint places emphasis on investment in in- frastructure as a necessary condition for sustained devel- opment. This investment involves such areas as lines of communications, transportation, power, etc. Much of this kind of infrastructure is necessary; however, much also gets channeled into what John Kenneth Galbraith calls ”Symbolic Modernization," where impressive infrastructure (capitals, airports, etc.) partially supplant the neces- sary infrastructure.2 The second viewpoint emphasizes the imposing of industrial investment in conjunction with infrastructure build-up. As Heilbronner notes, the goal of deve10pment is ”. . . the deepening flow of incomes 1For an historical deve10pment of thought on eco- nomic deve10pment and growth, see: Latin American Studies Center, Food Marketing in the Economic Development of Puerto RICO {EasE LanSIng, MiEfi.: ILaEIn American STUdies Center, MIchigan State University), in press. Chapter I. 2John Kenneth Galbraith, Economic Develo ment (Cambridge, Mass.: Harvard UniversIty Press, 1954), p. 4. 2 "3 and the widening flow of production . . ., which is to say the goal is the increasing of per capita income and pro- duction. As industrialization gains momentum, four factors become clear. These are noted by Rostow in his book, gig! from the Seventh Floor. First, there is some industrial capacity, usually developed to substitute for the import of certain kinds of consumers' goods . . . This both saves foreign exchange and permits industrialization to begin, and it is no great trick to market for a rich urban middle class. The second characteristic of these countries is that, leaving the textiles aside, the market for these manu- factured goods is small; and there is a tendency for industrialization to slow down, once the substitution for imports has mainly taken place. A third characteristic of such countries is that, al- though some agricultural development is taking place, the gap between rural and urban life is widening. O O O O O O O O O O O O O O O O O O O O O O O O O O 0 Finally, as a result of this imbalance, men and women move from the countryside to the cities, where often they remain unemployed and impose a burden on govern- ment budgets for housing, education, and so on, even though they live in urban slums. Galbraith echoes these first two points by noting that: . . . to the extent that the high incomes of the minor- ity draw development resources into privileged consump- tion, social differences are widened, and to the strains 3Robert L. Heilbroner, The Great Ascent (New York: Harper & Row, Publishers, 1963), p. 53. 4W. W. Rostow, View from the Seventh Floor (New York: Harper & Row, PuEIIsfiers, 19641, pp._133:T35. associated with poverty may be added thgse associated with obvious differences in well-being. The second two points made by Rostow lead to the third viewpoint in the thought and practice in economic development. If urban centers grow, as they are in Latin America and other developing areas,and the rural producer of food remains unchanged, how can the growing non-rural papulation be fed? Thus, the notion evolved that an em- phasis on agriculture must be added to industrialization for development to take place. Agricultural progress is equated with the expanding capacity of farm people to play an increasingly ef- fective part in accelerating the national output through supplying their total economy with foods and fibers appreciably faster than population growth adds new mouths to feed. Only as agricultures meet this test of proficient performance do they become capable of enabling an ever larger prOportion of the total population to help expand the national output through engaging in non-farm employments, including those which generate the increasingly productive farm tech- nologies and related skills and knowledge, which in turn enable farmers to make steady increases in their productivity. Although all of these approaches singly or in combination have had important effects on the deve10ping areas, it is evident that few have measured up to the expectations of their founders and implementers. SGalbraith, op. cit., p. 7. 6John M. Brewster, "Traditional Social Structures as Barriers to Change," A ricultural Develogment and Eco- nomic Growth, ed. Herman . outfiworth and_ ruce . aofifiston (Ithaca, N. Y.: Cornell University Press, 1967), II. 66. Why have these programs not fostered more rapid development? There are many possible answers to this ques- tion which involve non-economic aspects of the farmer's environment, such as the political, cultural, and social environments; however, a growing group of scholars suggest that the role of the marketing system has not adequately been examined relative to the development process. The marketing system is used here to include the exchange sys- tem of transfering property rights, the physical distribu- tion system, and the information system on supply and de- mand throughout the channel of distribution. No one denies that in the developing economy the agricultural production of foods and the urban consumers are interdependent, as are the urban industrial producers of non-foods and the rural consumer. The links or interfaces between these sectors is the marketing system. However, the generally held view to date is that the marketing system, by defi- nition, must follow the development of the industrial and agricultural sectors and automatically distributes this 7 0n the other production if an when it becomes available. hand, the scholars who have studied the marketing system hold that the kind of links in the system, the kind of marketing mechanism, does not evolve in a way that allows 7N. R. Collins and R. H. Holton, "Programming Changes in Marketing in Planned Economic Development," A riculture in Economic Develo ment, ed. Carl Eicher and Lawrence WIEE (New YorE: McGraw—Hill Book Company, 1964), p. 359. the distribution of goods to be efficient nor in a way which encourages the growth of the producing sectors. As Collins and Holton note: "rarely . . . is it recog- nized that industrial and agricultural sectors in turn are dependent on the development of a distributive sec- tor to bridge the gap between producer and ultimate con- sumer."8 It seems unfounded to assume that the commer- cial sector will develop in an optimal fashion spontane— ously when these expectations are not held for the indus- trial or agricultural sectors. Hence, the fourth view- point in the evolution of thought on development problems concerns the role of marketing on economic development. It is to this fourth viewpoint that this work addresses itself. The Role of Marketing in Economic Development The first person to point out specifically that distribution was of greater importance in the economic development of backward areas than its neglect in the literature would suggest was Holton, following his work with Galbraith in Puerto Rico.9 This research, which was fielded in 1949 and 1950, tried to assess the distribution system for both foods and non-foods 81bid., p. 359. 9J. C. Abbott, "The Development of Marketing Institutions," Agricultural Development and Economic Growth, ed. Herman . Southwortfi and Bruce F. jofinston (Ithaca, N. Y.: Cornell University Press, 1967), p. 364. in terms of its present costs and efficiency and in terms of what improvements could be made.10 Hence, the idea was introduced that the consumers could be better off and the development of the country aided if the marketing system operated more efficiently. This new-found link in devel- opment thought was given emphasis by the Report of the Panel on the World Food Supply, formulated by the Presi- dent's Science Advisory Committee. The improvement of food storage, processing and dis— tribution systems in the developing nations is as im- portant as increasing production. The encouragement of private investment to develop facilities for stor— ing, processing and distributing goods deserves a high priority. Governments of developing countries must provide a climate hospitable to the kinds of private enterprises that can stimulate change from a subsistence-oriented farming economy to a market- oriented one.1 Thus, the first possible role of marketing in the economic development concerns the improving of the market- ing system such that the consumer is better off than before. This is to say that the products that are produced in the rural area move to the urban consumer with one or more of the following benefits to the consumer: with decreased loss and spoilage, in increased more stable volume, and at 10John Kenneth Galbraith and Richard H. Holton, Marketing Efficiency in Puerto Rico (Cambridge, Mass.: arvar n verSi y ress, , pp. 1-4. 11 President's Science Advisory Committee, "Report of the Panel on the World Food Supply," Vol. II, The World Food Problem (Washington, D. C.: U. S. Government PrInt- Ing UffIce, 1967), p. 539. lower more stable prices. There has been a good deal of debate since the Gal- braith and Holton study on the role of marketing. Most of this debate has revolved around the agriculture sector, al- though by no means all of it. John C. Abbott sums up the concensus of recent thought on the importance of marketing in development projects by making the following observations: (1) Cash returns to producers depend on their goods reaching a consumer. So the success of a project to change a physical production pattern depends on an effective organization to bridge the gap between the producers and the consumers. This gap may be of varying width and complexity. (2) Detailed market knowledge and research is essen- tial in determining which products to grow and which varieties of these products. Other marketing factors-- ease of handling, durability in transport, suitability for processing--also have to be taken into account. (3) The cost of marketing can cancel out efficiency in production. No matter how suitable an area may be for production and how acceptable the product in consumer markets, if the cost of getting it to those markets takes too high a share of the final price, then produc- tion may be uneconomic except on a subsistence basis. Excessive losses in transport to the market, heavy in- vestment and operating costs of equipment and organi- zation to reduce such losses, and high margins and risk allowances due to an inefficient marketing structure are some of the more obvious cost obstacles. (4) Greatly improved marketing organization may be essential to take full advantage of favorable produc- tion opportunities. In many situations there is a need not so much to reduce the cost of marketing as performed at present, but to develOp much more elab- orate and comprehensively organized marketing systems. For fresh fruit and vegetables, for example, these must often include uniform and precise grading, pack- ing, temperature control in transit, timing and ad- justment of total quantities delivered to particular markets, and consistent and thorough sales promotion. '(S) Distributive organization to furnish production supplies and consumption requirements is also needed. If fertilizer, insecticides, farm machinery and tools are not readily available at low cost, the agricul- tural production targets on which a project is based may never be attained. If a suitable range of con- sumer goods is not obtainable conveniently and inex- pensively, then settlers accustomed to a fairly high level of living are likely to be dissatisfied and to come under family pressure to leave the project area. Where settlers come from near-subsistence environ- ments, maintenance of an attractive and varied dis- play of consumer goods at a range of prices can be a major stimulus to productive effort. There may be little incentive to obtain income beyond subsistence needs where the prices of the next rank of consump- tion items seem. very high or the goods which nor- mally occupy the next rank--textiles, domestic hard- ware, cheap jewelry and ornaments-—are unknown and unavailable. 2 The above list which applies equally to development of areas where specific area development projects have not been instituted, placed forward the second important concept beyond that of simple marketing efficiency, namely that the marketing system may be able to posi- tively influence the producers to provide increased flows of products, at lower costs for better quality, and in better alignment with the market needs. There are two aspects of this influence on producers which need to be noted: The first is that the marketing system influences the production of goods, kind, and amount. The second notion is that the marketing system can supply production inputs and incentives in such a way as to facilitate pro- duction expansion and improvement. Hence, the marketing 12John C. Abbott, "Marketing and Area Develop- ment Studies,” Tsward Scientific Marketin , ed. Stephen A. Greyser (Chicago, III.: IEerIcan MarEetIng Association, 1964), pp. 425-426. system on either side of production can influence the kind and amount of goods produced. Rostow, in his book View from the Seventh Floor, places these roles of marketing in perspective in what he calls a "national market" by developing a four-point 13 "The four elements are these: a national strategy. build-up of agricultural productivity; a revolution in the marketing of agricultural products in the cities; a shift of industry to the production of simple agricul- tural equipment and consumers' goods for the mass market; and a revolution in marketing methods for such cheap man- ufactured goods, especially in rural areas."14 He fur- ther emphasizes that these four elements must be carried forward simultaneously.15 Thus, the national market con- cept indicates that economic development involves the flows of goods between urban and rural areas in an inter- nal interlocking marketing system that allows the urban and rural areas to be interdependent and mutually rein- forcing in their areas of comparative advantage. Rostow's notion of production for mass consumption is paralleled closely by what Galbraith calls the "Popular Consumption Criterion" for development, where development is organized around the present and prospective consumption require- 13Rostow, 92. cit., p. 136. l‘xbid. 15 Ibid. 10 ments of the typical or model consumer.16 The potential role of marketing in economic de- velopment can be summarized simply by noting that pro- ducers must sell their products through a marketing sys- tem to the ultimate consumer, and they must procure their inputs to their production from some factor marketing system. Changes in the factor market which make it easier and cheaper to acquire factors of production may induce a production response. It should be noted that incentive goods are included in this flow of prod- ucts to the producers. 0n the other side of the pro- ducer, changes in the marketing system may provide pro- duction incentives and/or consumer benefits. Usually both effects go together. With this general background in mind, it is use- ful to narrow the scope of the problem and move ahead with more detailed evidence that the critical relation- ships stated above have some merit. The first limit, which has already been implied, is one of extent. Under no circumstance is marketing viewed as a whole solution to the development process; merely what is suggested is that marketing has a role to play along with the other approaches to development. A balanced growth strategy is thus implied. Second, because the supply of food has IGGalbraith, 9;. Ci ., pp. 10-11. 11 such an impact on the economy, over half of the urban consumers' income is spent on food and almost all of the rural population produce food, this study will be lim- ited to food distribution. Third, though the factor market of the agricultural producer is important and there are several possible ways that marketing can help him improve his production and quality, the results of the past efforts on improving the farm technology, try- ing to help the farmer use better inputs and methods of farming, have in many cases been disappointing. Thus, it seems germane to look elsewhere for ad- ditional reasons for the agricultural non—response. This is not to say that the input side of the agricultural producer is not important, but to say that by itself it cannot solve the non-response problem.17 Thus, the sys- tem of food distribution that lays between urban demand and farmer production will be discussed below. The Distribution System for Foods from Farm to Consumer What is the role of the distribution system for foods in encouraging farm production and innovation? ___ 17For an analysis of the input marketing vari- ables to the farmer, see: Donald Walter Larson, "A Diagnosis of Product and Factor Market Performance in the Bean Industry of Northeast Brazil" (unpublished Ph.D. dissertation, Michigan State University, 1968), Chapters 4 and S; and Latin American Studies Center, The Market Processes of RecifeJ Brazil, andiIts Food Shea (East Lansing, Mich.:'—Latin AmeriCan Studies Center, Michigan State University), in press. 12 There are two degrees of answers to this question. First, the implication of Rostow's framework is that if the dis- tortions in the system were removed and the products could flow more smoothly to the ultimate consumer, then the producers would respond with increased production; i.e., the marketing channel is in itself a barrier to produc- 18 tion. Abbott carries this logic a step further by out- lining two basic requirements of the marketing structure so that market demand provides production incentives at the farm. (1) Reasonably stable prices, i.e. without discon- tinuous intra- or inter-seasonal changes, at a re- munerative level. Unless farmers have confidence that prices will bear some minimum relationship to costs, they will hesitate before incurring addi- tional work or expense to increase their output or raise its quality. (2) Adequate marketing channels and facilities. The marketing system should ensure that growing urban demand, stabilized prices, and differen- tials for quality at the processing or consuming level are actually reflected in profitlfincentives to the producer and not lost en route. In reference to marketing facilities and organization, Abbott spells out the kind of blocks to production, "Owing 18Walt W. Rostow, "The Concept of a National Mar- ket and Its Economic Growth Implications," Marketing and Economic Develo ment, ed. Peter 0. Bennett (Cfiicago, 111.: AmerIcan MarEeEing Associatflbn, 1965), p. 15. 19J. C. Abbott, "The Development of Marketing Institutions," Agricultural Development and Economic Growth, ed. Herman . outhwofth and Bruce F. 3ofinston (Ithaca, N. Y.: Cornell University Press, 1967), p. 365. 13 to poor transport facilities, high margins and risk al- lowances due to an inefficient marketing structure, or other cost factors, production for market may be uneco- nomic; marketing costs take too high a share of the final price."20 The second level of answer to the question of the role of the distribution system in encouraging farm pro- duction is that,beyond simply not being a barrier to pro- duction, it is an incentive in its own right. This view has been taken by Collins and Holton after their studies in southern Italy in 1962-63 where "it became apparent that changes in the organization of marketing might be necessary if changes in production were to be realized in an underdeveloped area and that marketing might be the leading factor in encouraging changes in the production 21 sector.” They further state "that building the dis- tributive capacity stimulates the productive sector to supply the desired product mix."22 Although the Sears development in Latin America is not agricultural, its ef- fect on the economy and production is worth noting. The producers of consumer goods can be visualized as farmers and the inception of a Sears store searching for supply is not unlike the innovation of large low-margin retail- ers in an urban area. The stabilization of the market 201bid., pp. 365-366. 211616., p. 365. 22Collins and Holton, pp. ci ., p. 366. 14 for producers, the installation of standards of products, and the managerial talent that moved back in the channel to the producers had a profound effect on them. "In Peru, Brazil, Colombia, Mexico, Venezuela, and to a les- ser degree Panama, Costa Rica, and El Salvador, the es- tablishment of a mass distributor has made possible more efficient production, improved product deve10pment, lower selling prices, expanded markets, and enhancement of the local economy."23 The difference between these two degrees of mar- keting participation in economic deve10pment is summarized by Collins and Holton. The discussions of distribution in deve10pment plans generally focus on removing the obstacles in the marketing process. This implies, however, that the distributive sector plays only a passive role in deve10pment, whereas it can under certain circum- stances play a very active role by changing demand and cost functions in agriculture and manufactgring in such a way as to encourage their expansion. 4 production Response The above concept is based on the assumption that producers as well as channel members do respond to the changes that occur in the distribution system that reaches 23John F. Gallagher, "Markets as a Basis for In- dustrial Development," The Challen e of Deve10pment, ed. Richard J. Ward (Chicago, 111: AIEIne Publishifig‘Co., 1967), p. 318. 24 Collins and Holton, pp. c t., p. 360. 15 toward the market; i.e., if the risks and uncertainties of such eventualities as spoilage, low price, cheating, fluctuating prices, fluctuating volumes, etc., are re- duced, then the farmer or channel member would adjust his use of inputs to produce or handle more products more efficiently. There are many scholars who believe that this modernization response is blocked by factors other than a rational consideration of inputs versus the market.25 Some of these scholars feel that those in the traditional economy have a distaste for work and a lik- ing for leisure, others believe the master servant re- lationship has eliminated any technological creativity, and still others see low-level achievement motivation as the cause. Further, other scholars feel that the lack of an independent-experimental frame of mind is responsible, while others suggest that the social structure and rules limit the interpersonal bonds to family and kinship groups, and, finally, some have pointed to the idea that social striving is not connected to technological prog- ress.26 It is not the purpose of this work to refute the above positions, but to suggest, along with some schol- ars, that maximization behavior, the seeking of increased * ‘* 25A summary of current theories and notions on the process of modernization and innovation can be found in: Latin American Studies Center, Food Marketin in the Eco- nomic Development of Puerto RIco, Cfiapter I. Brewster, 2p. cit., pp. 67-68. 16 well-being, which results in responses to the market factors, is also an important force in blocking the modernization responses of traditional system operators. W. H. Wiser and C. V. Wiser,in their book Behind Mud Walls, 1930-1960, point out that the major barrier to the use of new practices is the perceived risk and un- certainty of failure which combines the cost of the new practice, as well as the possible loss of production.27 Brewster explains the above risk as follows: So close is life to the bone that their impulse to take a chance on gaining a whole loaf from new and untried techniques is inhibited by anxiety over losing the crumb they feel sure of getting from their old practices. And this progress-blocking anxiety stems from sound economic sense. For in- novations carry an immense risk for the uniniti- ated, and the risk is magnified by the very poverty they might escape by taking it. Operating at a bare subsistence level, a crOp failure or a failure to cover the bggrowed money by added harvests would be calamitous. Maximization, the Profit MotiveJ and Equilibrium It is necessary to examine further the concept of maximization. Brewster points out that in all cultures, people seek increasing physical comfort and freedom from anxiety, increasing respect and esteem from others, as well as from within, and ways of relating to one another 27W. H. Wiser and Charlott V. Wiser, Behind Mud Walls 1930-1960 (Berkeley: University of CaIIfornIa Press, 1963), pp. 117-118. 28Brewster, gp. cit., pp. 67-68. 17 so that these goals can be accomplished.29 The question then is, what are the relevant ways of relating the peo- ple in the system so that their goals can be moved ahead? Obviously, the market system evolves so that this spe- cialization can take place. Belshaw, in his work 252217 tional Exchange and Modern Markets, emphasizes that "maximization is a primary and valid psychological as- sumption," and that in the peasant or traditional mar- ketplace "this takes the explicit form of maximization of returns, expressed in monetary terms."30 It should be noted that Belshaw indicates that short-term profit is not the only motivation.31 Belshaw summarizes his analysis in the following way: The characterization of primitive and peasant societies as being uninterested in maximization is demonstrably false. Achievement orientation, maximization, enterprise, and capital investment are not, therefore, charac- teristics which have to be created 23 novo, although many theories of economic growth in unaeraevelOped countries naively assume the contrary, and base their arguments upon it. The task of modernization is rather to harness these principles to a new in- stitutional complex, and to put them to work in an altered context.32 ngrewster,‘gp. cit., p. 73. 3oCyril S. Belshaw, Traditional Exchan e and Modern Markets (Englewood ClIffs, N. 3.: FreniIce- Ra11, Inc., 1965), p. 77. 31Ibid. 321bid., pp. 96, 109-110. 18 The next question which must be looked at is what are the implications of maximization at the farm produc- tion end of the market system? Theodore Schultz, in his book Economic Crises in World Agriculture, devotes con- siderable effort to documenting the notion that the tra- ditional farm system is in a state of equilibrium given its environment, sources of inputs, and knowledge. His conclusions are as follows: First, farmers in poor countries are in general not inefficient in using (allocating) the agricultural factors of production that they have at their dis- posal. Their preferences for acquiring and holding wealth, which appear to be essentially the same as those of modern farmers, and the state of the arts to which they are bound, have remained virtually constant for generations. As a consequence, they have long since attained a type of economic equilibrium . . . Second, when it comes to investment to increase agricultural production, farmers who are bound by traditional agriculture have in general exhausted all profitable Opportunities to invest in the ag- ricultural factors at their disposal. This means that the marginal rate of return to investment in agricultural factors of the type which farmers have long been using is low, so low that there is little or no incentive to save and invest. There- fore, economic groggh from traditional agriculture is very expensive. In conclusion, it is hypothesized that the tradi- tional system members have an underlying propensity to react to changes in the economic environment as well as the non-economic environment in a way which optimizes their well-being. It must be remembered that this 33Theodore W. Schultz, Egonomic Crises in World Agriculture.(Ann Arbor, Mich.: ‘UfiiVersity of MIChIgan ress, ), pp. 43-440 l9 reaction is also influenced by the ability, resources, and technology at their disposal. The marketing system is, hence, only one part of the influence on the system member, the degree of which has yet to be determined. Summary In summary, there are two hypothesized roles that the marketing of agricultural production performs: first, the role of efficient distribution of foods to consumers which may lead to lower prices of foods in relation to quality, and, second, the role of marketing in stimulat- ing better and more plentiful production, thus possibly reducing the production costs per unit of output in rela- tion to quality and improving the product mix that reaches the market. These are laudable objectives in themselves, but the question of how they are operationally achieved needs to be asked. A Strategy for Marketing Rationalization It is one thing to state that marketing has rel- evance to the development process, but it is quite another thing to indicate how the ideal structure and functioning can be achieved. It is easy to expound that marketing has a role to play, yet the question of how a country or region moves toward a modern market from a traditional system is awesome. It is to this awesome question that this analysis must turn, and it is to this question that 20 a realistic answer must be devised. This question has two parts: first, what changes can be made to reduce the market risks and uncertainties relative to oppor- tunities in the channel Of distribution which block the desired behaviors Of the market participants; and, sec- ond, how can these changes be brought about in the northeast Of Brazil? The Traditional Marketing System As will be documented in Chapter III, the tradi- tional urban distribution system is made up of small operators. These Operators buy from small Operators who usually in turn buy from small operators, and so goes the channel until the producer is reached. Some channels are short, small producer to small retailer to consumer, while others are very long and involving six or eight steps. The evolution of this system follows a simple path. At first, the subsistence farmers sell in town only their occasional surpluses when they harvest their crops and in times of non-harvest buy from other 34 As urban areas farmers who are in a harvest period. grow, traders form who buy and sell the farm surpluses and in many cases move the goods to other market loca- tions.35 The surplus of the subsistence farmers moves 34 Belshaw, pp. cit., pp. 56 and 57. 35 Ibid.’ pp. 55, 56, 810 21 toward the urban areas in this way and, as the demand in the urban areas increases, more and more small traders enter the distribution process. Channels become more complex but their basic na- ture does not change as the complexity is due to the ad- dition Of more small Operators. Because the technology Of distribution remains relatively constant due to the small nature of the traders, the volume soon outstrips the technology and the distribution system does not have the capability to accumulate capital.36 Zimmerman fur- thers this analysis to include the system in ability to change its technology. We have already seen that under pure competition the sum of the marginal product of labor times the number of labor units, plus the marginal prod- uct Of capital, multiplied by the number of capi- tal units equals total production and that there- fore the sum of the two elasticities must be equal to 1. Hence only one conclusion is possible: pure competition is incompatible with technical progress. The small producer and channel member faces the risks and uncertainties in his environment which include the distortions (fluctuations of price and volume, spoil- age, etc.) in the market in front of him and the distor- tions of supply behind him, as has been noted. The risks caused by these distortions are so large relative 361bid., p. 63. 37L. J. Zimmerman, Poor Lands, Rich Lands: The Widening Gap (New York: Random House, 1 , p. . 22 to the resources Of the Operator that they seem over- whelming and insurmountable, which in fact they are. If the small Operator mustered up all his resources, he could not influence these distortions and would then face the alternative of starvation for his family and himself. Uh- 1ess he begs for mercy from his relatives and friends, he cannot survive in the face of failure, as there is no welfare system. Hence, given the traditional structure Of dis- tribution and production, there is no point where the system spontaneously seeks improved technology as the pos- sible costs dwarf the possible returns leading to rein- forcement Of the traditional system and its proliferation at constant technology. Even where improved technology has been provided by deve10pment agencies, the small Op- erators have refused to accept it, and for good reason.38 Abbott reinforces this conclusion by noting that "the large number of small, independent enterprises involved in the production and marketing process in many develop- ing areas makes difficult the achievement of rapid, si- multaneous improvements in output and quality of farm products and in the prices Obtained for them . . . At the other end of the chain, the small scale of operations and diffuse organization of retail enterprises is a 38Schultz, gp, ci ., p. 39. 23 comparable Obstacle."39 What can be done to break this stalemate in technological progress? Forces for Change A number of authors have placed forward various solutions that range from simply ignoring the problem to the develOping of cheap quality agricultural inputs which make it worthwhile for the farmer to learn to use them. Schultz takes this latter view and adds the need to have extension agents perform the training and education ne- cessary for use of these new inputs.4o After so ably de- fining the nature of the production equilibrium that was presented above, it is disappointing that Schultz seem- ingly falls into the fallacy that he condemns others of, that is, not seeing all the forces that make the tradi- tional system Operate in equilibrium and that hold the technological process at a standstill. Certainly the high profit inputs are important and the educational function is essential to their adoption, but neither can be effective if the market risks and uncertainties be- tween the Operator and demand are not dealt with at the same time. Risk, as is used in this work, is defined as any possible occurrence or set of occurrences which have an adverse effect on the decision maker and, from the 39Abbott, 92. cit., pp. 381-382. 4oSchultz, gp. cit., p. 47. 24 decision maker's vantage point, has a known probability Of occurrence; i.e., it is possible to insure against the adverse outcome. Uncertainty is the situation where the decision maker cannot describe the outcome with known probabilities. It is because these market forces form a prior condition to change in technology and have been largely ignored in the deve10pment process that the em- phasis Of this study will be concerning this aspect of the environment of the Operator. Barrier Removal What then is the answer to these risk and uncer- tainty barriers? There are two approaches which are both necessary. First, it is necessary to study the perceived barriers of all of the system members in an attempt to understand what it is that they feel creates the high risks and uncertainties that block their expansion to use of more efficient technology. This study will at- tempt to perform analysis on the above question for 41 the urban distribution system. From this analysis 41The same analysis is presented for the rural assembler and producer in Donald Walter Larson's "A Diagnosis Of Product and Factor Market Performance in the Bean Industry of Northeast Brazil," (an unpublished Ph.D. dissertation, Michigan State University, 1968); and the Latin American Studies Center report, The Market Egocesses Of Recife Brazil, and Its Food Shed (East Lansing, MiEh.: gratin Amefican Studies Center, Michigan State University), in press. 25 will come an understanding of what changes in the dis- tribution system would be desirable from the point of view of inducing expansion of volume and use Of more ef- ficent technology by the operators in the system. Aggrggation The second approach concerns the ability of the Operators in the system to cope with and contribute to the change in the system. It has been previously sug- gested that the scale of the operators in the traditional system precludes them from participating in the changes spontaneously. Thus, if volume were aggregated, the new organization could use its volume to both combat the dis- tortions in the system and to streamline its own Opera- tion. Aggregation is used here to mean horizontal inte- gration, coordination, and growth. The barriers that were restrictive to the smaller Operators would be less restrictive to the aggregated unit because of its buying power and ability to pool and accumulate resources. The power thus aggregated is relatively greater than that held by the small traditional operator and is greater relative to the barriers in the system and, hence, can be used to rationalize the channel Of distribution. The potential power Of the unit is a function Of the size Of its volume. The use Of this power to rationalize the system is what is known as vertical integration and co- ordination. 26 Vertical Integration and Coordination It is useful to dwell a moment on this concept of vertical integration and coordination. It is worthwhile to digress a moment to define vertical integration and coordination. Vertical integration is the term applied to the vertical structure associated with internal co- ordination whereby two or more stages of the system are 42 Vertical coordination joined together in one firm. is the linking of stages in the system between two or more firms through information exchange, informal agree— ments, or contracts.43 Vertical integration and coor- dination are the result of a powerful channel member who feels that he can gain competitively by using his re- sources and power to obtain better, more reliable, lower cost sources of supply, and better distribution of his products to the ultimate consumer. There are two key notions in the above statement. First, the channel unit must want to improve his Operation. This means that he feels a competitive force in the system and wants to sur- vive and prosper in this competitive atmosphere. If he did not feel the force of competition, there would be 42Ronald L. Mighell and Lawrence A. Jones, Vertical Coordination in A riculture (Washington, D. C.: U. 3. Dept. Of AngcuIEure Economic Report NO. 19, U. S. Govt. Printing Office, February, 1963), p. 10. 43 Ibid. 27 little incentive to change and vertically integrate or coordinate. Thus, competition is the driving force which causes the desire to improve. The second factor is the ability to cause verti- cal integration and coordination. As was noted, volume is one key to gaining vertical integration and capital resources is the other. Capital accumulation is also a function Of size. Thus, the greater the size within the limits of maintaining aggressive competition, the greater the ability of the unit to bring about vertical integra- tion and coordination. Scale Economies The other side of the aggregation argument needs to be briefly presented. One of the striking disecono- mies of the traditional marketing system is the poor con- dition that the product reaches the market (see Chapter III). This fact is especially true for the highly per- ishable foods which are almost exclusively handled by the traditional marketing system of small Operators. If steps are to be taken to preserve quality, i.e., if truck transportation, refrigeration, protective packaging, and adequate storage are to be used, the whole scale of Op- eration must be shifted upward for economical Operation?4 In terms Of the efficiencies Of modern practices such as * 44President's Science Advisory Committee, 22. c:it., p. 540. 28 truck load transportation, bulk handling, grading, etc., large-scale units are necessary as well. Hence, increased scale operations not only allow vertical integration and coordination, but internal efficiency of the channel mem- bers. As the internal efficiencies are fostered by ver- tical coordination and vice versa, the performance of the total channel is accelerated. There is one caution that must be sounded. Aggre- gation and the use of modern technology not only afford the Opportunity for better distribution, but cost a great deal Of capital in terms of buildings, trucks, equipment, etc. These costs must be weighed against the benefits to the system. Location Of Aggregation in Channel Of Distribution The next question that must be asked is where in the channel Of distribution should this aggregation pro- cess be fostered? Though there is no certain answer to this question, there are some factors to consider which, when applied to a given situation, indicate the location of best advantage. First, channel members including pro- ducers tend to lOOk toward their markets as a critical barrier to expand,increasing their volume and efficiency. Pointed out earlier was the prohibitive effect Of the unstable demand and the kind of risk that the small tra- ditional Operator feels in the face of this unstable 29 market. Thus, it stands to reason that it is safer to invest in better methods if a stable demand is clearly visible, than it is to try to develop a better, more stable source of supply in the hope that it can be sold on the market for a profit. This is not to say that both forces are not important, but to say that the demand side possibly has a prior veto power on the channel member. The conclusion that can be drawn from this situation is that the closer that aggregation is to demand, the easier it will be accepted because the consumer demand is immi- nent and visible. Aggregation at the closest point to demand then might provide a stable market one step re- moved from the demand and, hence, may induce aggregation two steps removed from demand and so on back up the chan- nel to the producer. This process can be likened to a river with a series Of dams along it. The consumer is represented by the ocean and the dams represent the inefficient channel members and barriers. The producer whose Objective is to get the water to the ocean sees this series of blocks and distortions. If he produces more water, it likely gets blocked by the dams in front of him and he likely becomes discouraged. The same is true for the channel members near the producer. If they improve their Opera- tions, it just likely gets backed up at subsequent dams. However, if the dam nearest the ocean is removed, then 30 the second dam has a clear channel to the demand and may be induced to work to take advantage Of that demand, which reduced that barrier, and so forth. This analogy illus- trates the possible effect on vertical coordination Of aggregation at the retail level. Further, not only are the barriers to channel members possibly reduced, but the now larger retailers might use their increased volume to force a response from their suppliers or to verti- cally integrate the suppliers' functions into their own organization. These influences of the initial retail aggregation then can work sequentially back toward pro- duction. It has been noted earlier that competition is the driving force which compels the retailers to use their power to rationalize the channel. Competition can be lessened in terms of technical innovation in two direc- tions. First, as stated previously, if the unit is too small, it cannot innovate. Secondly, if the units grow tOO large and thus too few in number, they may find it easier to collude or price fix than to lock horns in com- petition. Thus, some degree Of monopoly behavior may oc- cur. The channel level closest to final demand has the greatest opportunity tO aggregate without this danger Of monopoly behavior because Of the concentrated demand of the urban setting. This is to say that there is room for many large retailers in the urban centers because of the close proximity of the consumers to one another and the 31 sheer size of the damand. Hence, the second factor to consider is the possibility of over-aggregation and mo- nopoly. The conclusion is that the further back in the channel the aggregation occurs, the more likely monopoly power could exist because the suppliers and customers are separated by physical distance and specialization in products. In the assembly process, for example, one as- sembler could aggregate to the point that he could con- trol a geographical area of production for one commodity and thus have a partial monopoly. A third consideration which is important is to take advantage of the units in the system where aggrega- tion has already taken place to some degree and where ag- gregation might be easier to foster. Aggregation typi- cally takes place in the urban area which, in general, is more modern than the rural areas. This means that some retailers and wholesalers already have greater size than most traditional channel members, and that they, as a group, would be more willing to modernize due to the in- fluence of the urban area and of urban living. However, food processors may or may not be centered in the urban area. Almost by definition, food processors have tO ob- tain some aggregation before they can use the equipment for processing efficiently. Thus, processors are prime points for encouraging vertical integration and coordina- tion as well.45 45Abb°ttp 220 Cite, P.‘ 3810 32 In conclusion, the retail level has the best ad- vantage for aggregation; but depending on the level of development Of the system of distribution and the kinds of institutions, wholesalers and processors may have ad- vantage as well. Also, depending on the local conditions, one or more of these institutions might be appropriately developed as the focal point of the channel rationaliza- tion. Summagy of Marketing in Economic Development In summary, this chapter has presented the notion that the marketing must play an important role in linking the system of rural production to urban markets and urban production to rural markets in a mutually reinforcing interdependent system of flows of goods and demand infor- mation. Further, the role of the marketing system was to remove the blocks to efficient flows on the demand side as a precondition to production responses by channel mem- bers and producers of foods. It is not held here that production responses would necessarily occur automatic- ally, but that the operators in the system would be more susceptible to using the changes in technology that they have refused to use in the past. These changes would be brought about by the forces in the factor market, educa- tion programs, and forces in the demand side channel. The result of these changes, however, are not only a production response from producer forward, but a 33 decrease in the price level for foods which results from the change process. This change in prices benefits the consumer in terms Of an increase in real income which al- lows him tO purchase more food and non-food goods, thus increasing the demand for both. This demand increase gives further impetus to the development of the food sec- tor and provides a wider market for non-food goods. The mechanism for instituting the reforms in the marketing system is the aggregation of volume and capital to create a competitive jockeying for success which would lead to vertical integration and efficient operation in the total channel. Though the aggregation might be fos- tered at any point in the channel, for many situations the retail level holds promise because it is adjacent to ultimate demand. It is in the urban centers where aggre- gation and modern ways are more prevalent, and it is the level where the most constructive competition can evolve. The essence Of this argument is summarized by John Mellor when he noted that "an Obvious precondition to increase in agricultural production is development of an environ- ment in which enough Of the proceeds of increased produc- tion go to the farmer decision maker to provide incentive to him."46 46John W. Mellor, "Toward a Theory Of Agricultural Development," Aggicultural Development and Economic Growth, ed. Herman M. Southwofth and Bruce F. JOHnston (Ithaca, N. Y.: Cornell University Press, 1967),p. 48. 34 Further, Rostow states that he is "confident that the modernization of marketing arrangements from the farm to the city is a crusade we can enter with a conviction that the benefits will far outweigh the costs in readjust- 47 Finally, it is important to reiterate that mar- ment." keting alone is not a total solution but part of the strategy to deve10pment. Hoselitz points out "that in- creasing numbers of market-oriented individuals in a so- ciety may provide a strong stimulus to economic growth, but whether strong enough to overcome the impeding fac- tors in the social structure and perhaps in the ecology of a society is difficult to say. . ."48 Role Of Marketing in Perspective This chapter so far has been concerned with the description of the development process and one kind of prescription which is hypothesized to aid the develop- ment process. It is useful at this point to attempt to bring these notions together to show the expected results from the prescription. Figure 1.1, which is based on the combined thinking Of this research team, but especially that Of Dr. Charles C. Slater, presents this hypothesized n ‘— 47Rostow, "The Concept Of a National Market and Its Economic Growth Implications," p. 16. 48Bert F. Hoselitz, "The Market Matrix," Labor Commitment and Social Chan e in Develo in Areas, e3. fiiIBerE E. Maore and ArnoIg S. Fe13man (New YorE: Social Science Research Council, 1960), pp. 235-236. 35 FIGURE 1.1 INDUCING INTERNAL NATIONAL (REGIONAL) MARKET DEVELOPMENT Determine Market Channels, Risks, uncertainty, Opportunity’\ Opportunity termine larket hannels, isks, ncertainty, / opportunitn Feedbac.’ RURAL PRODUCTION Increased Efficiencfi Scale 8k & ‘ l ncertainty1 3 ncreased I ‘\\ pportunity ( , , l ‘ Purchase [Propensities] (\l * Fee - Feed- ' Ecreasedil bacg T , back Encreased fficienc Increased Efficienc Scale / Scale Consumer DISTRIBUTION Income TRIAL PRODUCTION ’ URBAN FOOD Real URBAN INDUS- 36 flow of change stemming from an emphasis on the distribu- tion sector of the economy.49 The first step in this description of change is to understand the marketing system. This is a research step. It is necessary to know the flows of goods and services and information through the various channels of distribution, the characteristics and behaviors of the various channel members, and the technical practices in use, such as grading, method of handling goods, process- ing, etc. Once the description of the marketing system is understood, then the research can turn to the analysis Of the reasons why the system does not perform more effi- ciently. This analysis tries to understand the percep- tion of the channel members as to the opportunities that exist and the barriers that keep them from taking advan- tage Of the Opportunities. These barriers are perceived risks and uncertainties which make the expected cost of change to take advantage Of the opportunities greater than the expected benefit of that change.50 49Charles C. Slater, "Marketing Processes in De- veloping Latin American Societies," to be published in Journal of Marketing, XXXI, NO. 3 (July, 1968). 50Vincent R. Farace and Thomas R. Webb, "Commu- nication and Marketing in Latin America: A Preliminary Conceptualization," paper presented to the International Communication Division, Association for Education in Journalism, Iowa City, Iowa, August 28—September l, 1966, page 12. 37 With this knowledge, the second step can be con- sidered. It is hypothesized that if the perceived op- portunities relative to risks and uncertainties are in- creased, or perceived risks or uncertainties are reduced relative to Opportunities, then at some point the chan- nel member would perceive a net benefit in change and would then take advantage of the Opportunities, i.e., he would change. There are several ways of changing the channel member's perception of this risk-uncertainty Op- portunity relationship. First, this perception is based on the member's ability. This is to say that managerial talent, financial resources, environmental control, in- ternal efficiency, etc., all play a role in the channel member's perceptions as to what he can do and not do. Hence, training and financing programs increase the mem- ber's ability to act and thus change his perception Of the risks and uncertainties that face him relative to his Opportunities. This point has been noted as key earlier in this chapter. The second way of changing the risk-uncertainty- IOpportunity relationship is tO change the environment of the channel member such that he perceives a lowering Of .risk and uncertainty and/or an increase in Opportunities. Changes in the kinds of marketing distortions mentioned in this chapter provide an example of this kind of bar- liier; examples are uncertain transportation, uncertain Spoilage, uncertain prices, etc. 38 In summary, the marketing reforms deal with the laying of adequate infrastructure so that improved mar— keting technology can be injected into the system to ade- quately capitalized recipients. Market reforms thus must insure that the marketing system members have the founda- tion to take advantage of the reduced perceived risks. I.e., risks and uncertainties are relative to opportuni- ties and capabilities Of the system member affect both. There are a number of places in the system where risks and uncertainties and opportunities could be at- tacked by reforms in the system. These are noted in Figure 1.1 at the top of each circle. However, this chapter has built a rationale for inducing market re- forms in the urban distribution system, and thus the ef- fects of this approach will be examined. Again, it must be stressed that this is not the only good approach to the problem, but is one which seems to have merit beyond the emphasis given it to date. A development program should be a balance of reforms in all three sectors. 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Hm ... ... m ... ... 0H ... ... m ... ... o ... ... m ... ... ma m\m m\v mm OH ma ma vm ppm m o Ambh nonoo N H use” acmecum>oo m N coauwuoasou none 098 m m mmwaaozm mo xumq o N mouauo uusoowo coax m m cowumuoH uoom 0N ma modem mo xumq me He socos mo goon “momcoanom m mo Have? a umuflmv caumconxu who: mwoawmuom mumaamuom mumawmuom muoawouom ocNuco>oum mEoHnoum mowed Ram mow>uomumaom ooocwoormamz uaumwsou< acouuanH one: use Aazmu ammo NAME AHHBHmU¢um mH.m uqm<8 203 Table 3.20 shows much the same results when re- spondents were asked what the important limitations on profits were. The lack of money was seen as less impor- tant relatively, while the lack of demand was seen as more important. Again, the self-service retailers showed a respect for competitive forces that the other types did not feel. Having seen the relative importance of barriers to the retail types, the individual barriers can now be analyzed. Table 3.21 presents the findings of the se- ries of questions pertaining to the problems of expan- sion. The percentages also indicate relative importance of various limitations, but not as clearly as the pre- ceding analysis where the orders of magnitude between barriers were shown. The larger the retailer, the greater was the percentage who felt they could obtain loans at reasonable costs and the lesser was the percentage who felt that the lack of regular customers, irregular sup- ply of presently carried products, general competition, and the danger of floods were important reasons for not expanding. Again, the self-service retailers saw com- petition from supermarkets as important as any of these barriers, while competition from supermarkets was viewed by the smaller retailers as less important relative to the other barriers. 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