From market liberalization to market development: The need for market institutions in Ethiopia

Agricultural market liberalization in the developing countries is entrusted with the objective of increasing agricultural production through improving the economic incentives of farmers and the participation of the private sector in economic activities. Nevertheless, the impact of market liberalization on agricultural production may be limited due to high price risks and high transaction costs faced by economic agents, unless the markets have vested mechanisms to control such problems. Markets fulfill such controlling functions only when they are developed. To such extent, market liberalization is only a necessary but not a sufficient condition to achieve policy objectives sought from the reform process. This study investigates the behavior of grain prices, grain markets, and farmers for a staple food crop around Ambo, Ethiopia, with the purpose of understanding the decision-making environment of economic agents observed during the post-liberalization period. The major evidence is of a liberalized grain marketing system that lacks important institutions and public goods necessary to reduce high price risk and high transaction costs faced by economic agents. In view of this, it is recommended to develop the markets through developing the market institutions and through providing the public goods necessary for an efficient marketing system.