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Since the seminal work of Adam Smith, markets have been considered an efficienttool for co-ordinating the behaviour of economic agents. The basic characteristicof a market economy is that the complex system of interaction amongindividuals is not centrally coordinated. Under the assumption of profit and utilitymaximisation (and a whole set of assumptions about the institutional framework),relative prices and their change over time provide the signals that guide,like an invisible hand, the allocation of resources, i.e., the structure of productionand the intensity of input use in the various production processes. They dothis by co-ordinating the activities of economic agents, i.e., of resource owners,producers, intermediaries, traders, and consumers.After system change in the former Soviet Union and in Central and EasternEurope (CEE) central economic planning had to be replaced by other forms ofco-ordination. The general direction in all transition countries was towards amarket economy, but the speed and depth of reforms towards an environment inwhich markets can evolve differed largely between countries, sectors and betweendifferent phases during the past 15 years. IAMO Forum 2005 focuses onthis development and discusses the functioning of markets, the requirements forthis, and the advantages and disadvantages of other co-ordination mechanismsunder different environments in the agricultural and food sectors in Central andEastern Europe.CEE agri-food markets deserve researchers' and policy makers' attention forseveral reasons. Two of them regard the high demand for support to policy decisionsthat aim to stimulate economic and social development in the region.In most CEE countries, the significance of the agricultural and food sector isrelatively high with respect to income and employment. In particular, rural areas can benefit from the development of this branch of the economy. Also, there ismarked indication that agri-food markets in CEE are not ensuring exchange asfrictionless as possible. This means that large benefits can be expected if potentialimprovements of the economic environment are implemented and if individualagents adapt optimally to that environment.Another motivation for economic research on transition countries is that we arelooking at a huge region that started almost as a vacuum with regard to institutionalsettings. This means that a wide range of substantially different settingswere introduced in the respective countries, and were only weakly confined bypolitical rigidities or path dependencies. From a distant perspective, the repeatedfundamental shifts in recent economic policies almost evoke the impression of atrial and error approach. The consequences of distinctively different options(across countries and periods) can be observed in a way almost similar to a laboratorysituation. Such unique opportunity has attracted economists, particularlythose interested in institutional economics, to conduct research on CEE. However,this also means that the experiences made in CEEC can enhance the generalunderstanding of what markets can do and what the limitations of market coordinationare.This volume contains selected contributions presented at IAMO Forum 2005and gives an overview of the major topics discussed there.Partial analyses of specific economic problems usually abstract from the generaleconomic framework which is assumed to be more or less constant as expressedin ceteris paribus clauses. Oftentimes, the set of institutional conditions is evenassumed to be sufficiently well-described by the framework used in neoclassicalmodels. Particularly for transition countries, this has frequently led to spuriousresults because crucial aspects of the framework actually in place were not considered,and sometimes were not even thought of. An extreme and very obviousexample is the neglect of the effects of the replacement of monetary by nonmonetaryexchange in phases of a barter economy. There is no generic approachto avoid unintended omission of crucial framework conditions, but it must generallybe emphasised that a broad look at the various interdependent markets andat the entire socioeconomic context of a country is needed before going into detail.Descriptive analyses of the situation in various markets form part of such abroad look. The contributions of POPP, FERTÖ et al., WILKIN et al., and HEIN inthe chapter Selected analyses from CEEC provide excellent examples, and focuson market developments in new EU member countries. On the one hand, thepapers show the heterogeneity of problems e.g. due to largely differing farmstructures. On the other hand, several common patterns can be observed: Themarket shares and power of large processors and retailers (hypermarkets, etc.)are increasing. Also, international (especially intra-EU) trade in commoditieshas increased in response to CAP-induced price harmonisation. Both tendenciesweaken the market position of farmers, particularly small entities which cannotsupply in volumes sufficient for large processing and trade firms. Within the food industry concentration increased as many smaller firms could not complywith EU processing standards and had to quit the market. The increased size andspecialization of large producers, as well as of large processors, made many ofthose firms co-ordinate business with each other through long-term contractualagreements rather than by relying on spot markets. This tendency is very distinctin the fruit and vegetable sector, as WILKIN’s contribution describes.Two contributions draw attention to the institutional framework itself, mainlyby looking at circumstances which prevent market allocation from leading to anoptimal outcome. HOBBS describes factors that impede investment and growthby drawing on transaction cost economics. Situations typical for transition countriesare highlighted where e.g. transparency is not sufficient or the existence andreliable enforcement of contract or corporate law are not guaranteed. NUPPENAUstresses the need for the appropriate and precise formulation of land propertyrights, which should evoke a balance between governance and exclusion. Theimportance of appropriate and reliable institutions to avoid flaws is emphasised.But even with suitable institutions, transaction costs cannot be reduced to zero.The main reason for this is that since agents may gain form a head start of information,incentives to reveal their knowledge are quite restricted. Furthermore,some of the information required to make correct decisions is not available. Thisespecially concerns information regarding all future contingencies. An uncertainfuture and the asymmetric distribution of information impose special problemswhen decisions have long-term effects and agents are linked together throughinvestment decisions. This offers possibilities for opportunistic behaviour, i.e.,when an agent behaves in a way that allows him to extract rents from the partners'activities. The friction induced in such situations may result in a marketoutcome that is biased by transaction costs. Mitigating this bias should be a goalof public policy but it is also in the interest of (at least some of the) privateagents involved. This issue is discussed in more detail in the papers dealing withalternative governance structures.A number of contributions to IAMO Forum highlight approaches for measuringthe well-functioning of markets. While studies that aim to directly measuretransaction costs are very rare and are necessarily limited to comparing onlyvery specific portions of transaction costs, most studies focus on indirect indicators.These usually start from the idea that in a well-functioning, competitivemarket any supply or demand shocks are reflected in price changes, not only inthe particular market where the shock occurs but also in other, related markets,i.e., in different locations or at different stages of the production and marketingchain. Consequently, an approach for assessing the functioning of markets is tocompare price differentials with processing-, marketing- or transfer-costs, or –since these costs are usually difficult to quantify – to observe price differentialsover time. Accepting the assumption that the costs reflected by price differentialsare more or less constant (or stationary) over the observed time span, any additionalprice changes or a lack of price co-movement is interpreted as an indication for insufficiently connected or insufficiently functioning markets. Three contributionsin the chapter Analytical approaches for measuring market efficiencydescribe analyses which mainly focus on the vertical dimension, i.e., between marketstages. BOJNEC, in his descriptive price analysis for several agriculturalproducts in Slovenia since 1991, finds a heterogeneous development of the farmgate/consumer price spread: The processing and marketing margins increasedfor wheat and beef while they declined for grapes (processed to wine), sugar andpoultry. BRÜMMER and ZORYA, as well as BAKUCS and FERTÖ, use cointegrationanalysis to describe the degree and nature of vertical price integration in theUkrainian wheat market and the Hungarian pork market, respectively. Bothstudies find that price changes are transmitted vertically, that there is a tendencyto "correct" any deviations from some underlying equilibrium price-relationship.However, such error correction mechanisms are found not to be a constant, universalforce. In the Hungarian paper, it could only be found for a sub-period ofthe observed time span, excluding the highly volatile early 1990s. Also, equilibriumwas found to be achieved by adjustment of farm gate prices only while theretail prices were found to be exogenous, i.e., not responding to any disequilibrium.The paper on Ukraine shows that adjustment processes between wheat andwheat flour prices cannot be sufficiently described by a constant error correctionmechanism for the period 2000 to 2004. In fact, four different regimes of adjustmentprocesses were found to have been in force, reflecting particular phasesof largely differing market situations and political interventions.The functioning of markets depends on several crucial conditions. One of theseconditions concerns the availability of information. Only if agents have perfectand complete information will the exchange lead to an outcome in which no individualcan be better off without reducing the welfare of others. However, inthe real world this condition regarding information is not fulfilled. Informationis not perfect, since the future cannot be predicted with certainty. Incompleteinformation results from, first, not all information being revealed, and second,individuals not possessing the mental capacity to collect and process all information.Moreover, because of its asymmetric distribution, information can beregarded as a resource that can be exploited by agents. This means that there areincentives to hamper the diffusion of information to the public domain. In general,the more uncertain the future is and the more information is tacit, the worsemarkets will function, and the more beneficial become alternative mechanisms ofcoordination. Three papers dealing with this issue of organisational choice.HANF focuses on governance structures within supply chain networks that areappropriate for allowing an optimal flow of information between the involvedindividuals while retaining the necessary hierarchy for efficient implementationof strategic decisions. MAACK’s analysis shows that there is strong mutual interestbetween producers and processors of berry fruits to reduce marketing andprocurement risk, respectively. This can be achieved by switching from spotmarket exchange to contractual supply agreements. A prerequisite for such agreements is that a well-balanced distribution of risks and risk premiums betweenthe farmer and processor is implemented. This means that processors, who – facinga multitude of small producers – are used to opportunities for exerting marketpower, have to agree to cover part of the production risk through appropriatecontractual clauses. Finally, BALINT looks at the various marketing channelsused by Romanian farmers and finds that a self-enforcing dualism exists. Forcommercially-oriented farmers who can supply large quantities, marketing directlyto traders, wholesalers and processors is most favourable and involvesrelatively low transaction costs. Although this form of supply-relationship isusually not based on contractual agreements, it can still be characterised by acertain stability over time. In contrast, small farmers whose production does notconsiderably exceed the subsistence level incur relatively high (per unit) transactioncosts in selling their produce on local markets and to other farmers.Another aspect of organisational choice is the question of whether ownership ofproduction factors is transferred or only the right to use them temporarily. Theuncertainty of future developments implies that the possession of resources cannotbe only regarded from the point of view of income generation at a certainpoint in time. With perfect foresight, there is no difference whether a factor isrented or purchased, because the remuneration would be the same. This perfectsubstitutability is no longer given when the future is uncertain. Income generation,then, is only one feature of ownership. Additional aspects such as insurance,wealth, and speculation as motivations for possession affect the value of ownershipand thus shift the demand and supply curves of the factor. HURRELMAN picksup this issue in her analysis of the Polish land market and shows the impact ofadditional grounds for valuing property on the decision to rent or to buy land.Uncertainty may also affect the specialization of factor use. Allocating a factorof production to different production activities reduces the risk of income instabilities,but at the cost of specialization gains through economics of scale.Moreover, the decision on income combination is – besides risk – affected by acomplex interaction of other determinants. GLAUBEN et al., analyse these interactionsfor the case of part-time farming in China and show how the decision ofincome combination is affected by household characteristics, human capital andother variables.Incomplete and imperfect information not only causes individuals to chooseoptimal governance modes, often it is also understood as a call for governmentintervention. The selected papers in the chapter on policy intervention pleadfor careful selection and coherent implementation of policy instruments. BENNER,as well as KUHN, highlight the significance of information diffusion and arguein favour of government intervention in this area. However, both emphasisethat these interferences should be used carefully and be adjusted to specific marketfailures. Both argue that setting up information systems would improve the functioning of markets. BENNER also discusses possible negative impacts ifgovernments that engage in setting up and enforcing product and process standardstry, at the same time, to foster a sector like agriculture through support inmarketing. The latter activity affects the government’s (crucial) credibility in thefirst activity. KUHN points to negative welfare effects and budgetary requirementsof an intervention system which is implemented to increase price stability.Moreover, when a government intervenes in market allocation or intends to providerules that should facilitate the exchange on markets, it has to take into accountthat the new regulation has to be implemented in a coherent manner. Thisrequires the various policy regulations and institutional settings to be complementaryand not cause frictions which hamper the functioning of the system.LERMAN and SHAGAIDA highlight this aspect in their discussion of the Russianland market, where bureaucracy and high costs for the registration of propertyrights can be regarded as a major cause of the low number of land transactions.However, since economic activities take place in a dynamic environment, thecomparative static point of view may lead to inappropriate policy formulation.WANDEL discusses this aspect in the context of competition policy. From a comparativestatic point of view, market power has to be assessed negatively becauseof the distortions of resource allocation. However, monopoly profits arean indicator of extra rents and thus provide incentives for market entry. On theone hand, this thread may lead to special pricing schemes and/or to the accelerateddevelopment of technological change so that a monopolist can consolidateits market position. But it is possible, on the other hand, that market entry mayin fact happen. In this case, one would observe structural change, which wouldbe accompanied by an improved use of resources. This in turn means that competitionpolicy should not be oriented towards an optimal market structure buttowards the facilitation of market entry so that competition can discover marketopportunities and determine the optimal structure of the market.The present volume shows the wide range of interesting and controversial topicsthat are concerned when looking at co-ordination, particularly on markets inCEE agri-food sectors. It remains a hope that the heterogeneity and dynamics ofthe developments will decrease as successful constellations of framework conditions,organisational choices and individual behaviour become more and moreobvious and widespread in the region. Conversion to sustainable, balanced patternsmight take place, but this cannot be taken for granted. However, chancesfor such development are better the more stable and balanced political developments,as well as international co-operation, become. We hope that the academiccommunity will contribute towards such goal.
