FOI Working Paper 2010/12, Institute of Food and Resource Economics, University of Copenhagen, Copenhagen Shami, Mahvish, 2010

A road infrastructure project in rural Pakistan provides a natural experiment, finding that improving the connectivity of isolated villages will reduce the likelihood of market interlinkages to the benefit of landlord-dominated villagers and the lowest social class.

Large-scale inequality and villages isolated by poor road infrastructure create a context for market interlinkages in rural Pakistan. An interlinked rural market occurs when two or more markets are supplied by the same individual. For example, consider a landlord-peasant relationship where the landlord provides credit and housing, in addition to employment. Linkages typically occur in land, labour, and credit markets due to inequality causing no alternative options, and to inefficiency caused by missing or incomplete markets. In this framework, the landlord can exert considerable control and the interlinked markets can become exploitative. The peasant, on the other hand, has little bargaining power since he is among many others offering the same service and they are all isolated from the larger economy by poverty and distance. In terms of efficiency, where market imperfections impede transactions, bundling transactions with a single service provider would improve the process. Whether interlinkages exist due to inequality or inefficiency is often found to depend on social status, with lower class more subject to exploitation.

A government motorway constructed in 1998 linking Islamabad to Lahore, in Punjab province, provides a natural experiment to determine the impact of connectivity on market interlinkages. The author uses primary data from a household survey in 8 villages in Hafizabad district, Punjab province, to measure the likelihood of interlinked markets after the motorway is built. The empirical strategy presumes that proximity to the motorway (or its feeder roads) relieves isolation, and thus dependence on interlinked markets. A game theoretical model describes the relationship between a landlord, a peasant, and a third party merchant. Villages are defined as either landlord-dominated or peasant based, and categorized as connected (close to the motorway) or isolated.

The findings show that rural markets continue to be interlinked, regardless of new connections to the larger economy. This implies not only that rural population are still at risk of exploitation, but that development research using standard economic theory is compromised since the assumption of arms-length transactions is violated. While interlinkages are persistent, they are found to be less likely for households in villages connected to the motorway.

The case of landlord-dominated village provides an interesting example of the change in interlinkage relationships that connectivity brings. While inequality and few alternative options created a context for exploitation prior to the motorway, new access to external markets empowers peasants to break out of an exploitative relationship with their landlord. In fact, the model predicts that a landlord can only engage in interlinked markets if they do so in a non-exploitative way.  In contrast, market interlinkages in peasant-based villages were generally for the sake of efficiency, and connection to the motorway has less of an impact on these relationships.

The lowest ‘biradery’, or social class, is most likely to be involved in exploitative interlinked markets. Moreover, the interlinked relationship is more likely to involve the household’s labour. Since labour is directly related to the peasants’ livelihood, tying labour into the interlinked market creates a dependence on the landlord and reduces bargaining power, thus exacerbating inequality. Significantly, the results show that the social class of households located near the motorway will not increase the likelihood of being in an interlinked relationship. The author draws the implication that the lowest biradery, subject to the most inequality, has the most to gain by becoming connected to the larger economy.

Motivated by the continued existence of market interlinkages in rural economies, the author revives what was previously a topic in development literature. Although market interlinkages are found to persist with connectivity, the nature of the relationship changes in favour of the poor. Connectivity is also found to reduce exploitation as the poor benefit regardless of their social class (biradery), being from a landlord-dominated village, or being from an egalitarian peasant-dominated village. In terms of policy decisions, the findings highlight the need for investment in transportation infrastructure as a component of rural economic development.