ESSA

ESSA

The development of interconnected markets


Charlie Mei

By

May 16th, 2015


Charlie Mei discusses the proliferation of e-commerce in developing nations, and what this means for market efficiency.


We are midst of a digital era. As I look around me on the train home, technology surrounds me. Students, just like myself, are busily surfing the internet on their phones, listening to music and messaging their friends. Workers are clattering away on their laptops, putting in an extra ‘shift’ of work before they finally head home for the night. While technology has become ubiquitous in most developed countries, the developing world are only beginning to realise the potential of the digital age.

Technology has disrupted the way in which markets work around the world. In John McMillan’s eyes, “a typical market is born and grows like football. It evolves spontaneously, driven by its participants.”[1] Technology has allowed for the creation of new markets, planting the seeds for growth in developing countries. Meanwhile, buyers and sellers – the hub and life of a market – are beginning to recognise the potential of their connected devices in developing economies. E-commerce is allowing markets in developing countries to grow and nurture through the improvement of market design.

Information asymmetry – one of the main contributors to the fall of markets – can be diminished through better connections through the economy. Take Sara Maunda, a hard-working groundnut farmer in the countryside of Malawi. She toils away at her crops, “swinging hoes, clearing land, weeding and planting maize”. With little bargaining power and , she must take whatever price offered by her local grain trader as given. But, in 2011, USAID/Malawi embarked on an ambitious project with Esoko. Sara was able to receive current market information, helping her receive a fairer price. In fact, text messages from Esoko informed her that she found she could sell her crop to a nearby town for five times her local grain trader’s price. Vendors, like Sara’s grain trader, can exploit their customers by setting exorbitant prices when they have superior information. The information gap between buyers and sellers becomes symptoms of market failure. However, with connectivity comes better flow of information, allowing markets themselves to remain functional.

The spread of technology throughout markets also improves allocative efficiency. Fisheries in developing countries have been a prime beneficiary in this respect, as investigated by Harvard economist, Richard Jensen[2]. Deprived of contact with other villages, fishermen from Kerala, India could once only provide their catch to their local stores. Doing so created an of fish locally, resulting in large amounts of wastage. Mobile phones have allowed these fishermen to communicate with nearby villages, allowing them to locate nearby markets with shortages in fish on any given day. As a result, fishermen from Kerala could sell their food at a higher price in undersupplied markets. Jensen found that fishermen in Kerala received an increase in average profits of around 8%, when compared to the situation before the wide adoption of phones in e-commerce. Not only did the sellers benefit, society gained from greater allocative efficiency with the lowering of fish wastage.

The adoption of technology even goes as far as providing new opportunities for trade. Like the developed world, small-to-medium enterprises (SMEs) form the backbone of developing economies. In fact, more than half of the formal workforce of Ghana, Turkey and Ecuador is employed in SME manufacturing. Governments in developing economies are realising the mutual gains from trade made possible by an interconnected market for SMEs. as a means to stimulate local activity in e-commerce. The government believes being associated with this symbol gives indirect benefits to Thai SMEs. Signalling security to consumers, the association increases the credibility of local SMEs, giving them the ability to attract new customers on an international scale. Other governments in developing countries should also follow Thailand’s example in order to realise the value added to their individual economies from increased windows for trade.

Despite e-commerce aiding developing nations with efficiency and productivity, there are drawbacks to the newly emerging framework. As it is a relatively new market for these countries, businesses’ supply chains are unlikely to be efficient. Competition serves as a major deterrent in spurring innovation in this respect. In 2011, venture capitalists poured 691 million into India’s top 52 companies, saturating online markets and putting downward pressures on price. Struggling to make profits, Indian companies have little capacity to improve supply chain processes. Flipkart, India’s version of Amazon, epitomises this notion. They discovered that there were unbelievably high logistics costs associated with delivery, causing them to outlay massive capital expenses to construct their own logistics service. Transaction costs of this sort may affect other firm’s incentives to expand, which could cause the growth of e-commerce to slow.

Developing countries are benefiting immensely from the wider adoption of technology. Electronic devices have played an important role in the improving the market design worldwide. As I sit on the train on the way home, I am thankful for how technology has affected individuals both in Australia and across the world. While the transition is still underway, technology and e-commerce are improving the lives of those who need it most.

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[1] John McMillan, Reinventing the Bazaar. (New York: Norton, 2002), 13.

[2] Jensen, Richard, “The Digital Provide: Information (Technology), Market Performance, and Welfare in the South Indian Fisheries Sector,” The Quarterly Journal of Economics, CXXII (2007): 879.

 

The views expressed within this article are those of the author and do not represent the views of the ESSA Committee or the Society's sponsors. Use of any content from this article should clearly attribute the work to the author and not to ESSA or its sponsors.

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