The "eliminate-the-middleman" obsession in development

The conventional wisdom on development, across sectors, paints the middleman as an evil set of actors exploiting customers, especially poor people. In agriculture, there are middlemen who skim away a major share of the profits of farmers. There are money lenders who charge usurious rates from poor borrowers. Another are the quacks who peddle false and dangerous medical treatments to poor people. 

Accordingly, the mainstream narratives from the academia and the media have advocated their elimination. This is a simplistic and dangerous view. 

This post will argue that such middle-men while undoubtedly responsible for several problems and being exploitative, are also important and unavoidable actors in their respective contexts. So strategies to eliminate them are not only likely to fail but are also undesirable. It is required to acknowledge the reality and figure out means to formalise their activities by integrating them into the mainstream activities in each of these areas. This will be extremely challenging and will be a long-drawn process with several pitfalls and failures, but cannot be avoided.

Let's examine three specific types of middlemen.   

In the context of the recent agriculture reforms, the role of arthiyas or commission agents has come into focus. The popular media narrative paints them as the exploitative agent from whose clutches the farmers have to be liberated. Consider this from a recent report,

When farmers get their produce to mandis, they approach the commission agent who sorts, cleans, weighs and sells the produce. The procuring agency pays the commission agent the money who deducts 2.5 per cent of the amount before handing over a cheque to farmers. The government has often urged commission agents to transfer the entire MSP to the farmer and then take payment for their services, but this practice is seldom followed... The commission agent is also the farmers critical credit support system in times of need. Even though interest rates on these loans range from 18 to 24 per cent, most farmers don’t mind this practice. Bahadur Singh, 62, a farmer from Sangrur said, “Arthiyas help us with money whenever we are in need. They lend us money for seeds, farm operations and even for our children’s education. Will any big company or bank lend me money without any paperwork within a few hours’ notice?” The 27000 commission agents in Punjab generally have a network of more than 100 farmers who hail from the commission agent’s village and villages in the vicinity. These farmers sell through them and are financed by them...

Sanjeev Dhammi, a commission agent at Khanna has been in the business for 30 years. His family has been in it for 50 years. “The farmers we lend to have been our family acquaintances for generations. When a farmer approaches me for a loan, I give it without any paperwork or collateral. That’s because of the trust and mutual respect between us. A farmer can knock on my door in the middle of the night for any financial help for a medical emergency and I issue a cheque without any questions asked. The government wants to finish us off by ending mandis with this new law. It must realise that without our services the procurement system would become a nightmare.”... Commission agents are a single source of collecting produce of hundreds of farmers. Big corporations don’t have the capability to go to every farmer and collect their produce.

As can be seen, the middlemen offer important and necessary post-harvest sales related services. In their absence, someone has to perform these services. Besides, many also fill other market failures, especially access to credit and inputs. There are some recent field studies which indicate that the maximum possible increase in farmer incomes from direct sales is, at best, no more than in the high single digits.  

Interestingly, even among the farmers, elimination of the middlemen ranks very low as a priority for action by governments. 

The most commonly cited example of exploitative middle-men are the moneylenders. But they play a critical role in being the lender of last resort to the poor and others who do not have access to the formal financing networks. 

In this context, it is useful to keep in mind that the rapid progress in recent years on financial inclusion has been mostly about having a bank account. It provides a savings mechanism and also collateralised loans. But for the vast majority of people who do not have either collateral or formal creditworthiness assessment signals, financial inclusion counts for little in terms of access to credit. They have to rely on moneylenders and pawnbrokers.  

This has been rudely exposed during the Covid 19 when people depleted their savings quickly and had to borrow to survive. Including those with access to bank accounts, it was not the formal financial channels but the moneylenders and pawnbrokers that they could fall back to meet their credit requirements. When further research of Covid 19 times is done, it is most likely to reveal the central role played by cattle and gold as important shock absorbers, with the latter so for even the middle-class. 

We all know the consequences of the misguided regulatory overkill on Microfinance Institutions by the state government of Andhra Pradesh in 2010 which brought the industry to its knees. The vacuum was not filled by banks and other formal institutions but by moneylenders. In fact, the share of moneylenders only appears to have increased in arguably India's best performing state on financial inclusion. 

A third caricature of middle-men are the so-called quacks or rural medical practitioners (RMPs) in rural areas. They are unlicensed and informal medical practitioners who are often blamed for spreading superstition and wrong treatments among the poor. For sure, all these are relevant for a large number or such practitioners. The representatives of the medical profession in general have been strongly against recognising such practitioners and integrating them into the mainstream of health care system. In fact, there have been several attempts to have them banned altogether and criminalised. 

But such quacks are estimated to form 80-90% of the point of first medical contact in India and number over a million, much higher than doctors. In fact, there is evidence that the quality of treatment by quacks from southern states is better than those delivered by qualified doctors from north and such quacks persist even with increased aggregate incomes. They include alternative medicine practitioners, traditional healers, vaids, compounders, lab technicians, pharmacists, and so on. Many of them are long-time practitioners and also enjoy the deep trust of their communities. In the circumstances, like with the moneylenders, they cannot be ignored and have to be part of any meaningful effort to improve health care, especially preventive and primary care. 

Therefore, instead of ignoring or banning their activities, the objective should be to identify, certify, train, accredit, integrate, and regulate their activities. There should be a well-thought out and practical plan for each one of the six activities. Given the complex nature of the problem, it will have to be second-best plans, with an appetite to see failures in implementation but a resolve to iterate and improve with each failure. Most importantly, while there should be an umbrella regulatory framework for the nation as a whole, the operational details should be left to the discretion of states.

In fact, it's not incorrect to say that in India, arguably the four biggest saviours for the poor during the Covid 19 have been the much derided old-style PDS, NREGS, gold, and moneylenders. To the next list of Covid 19 social stabilising mechanisms one could also add the quack. The millions of JDY accounts counted for little as a credit sourcing mechanism, though they were important to access cash transfers by governments. 

Yet, perversely influential parts of the economic orthodoxy and popular commentary have been strongly advocating replacing all of these with cash transfers like universal basic income scheme and financial inclusion and strongly discouraging gold savings and reliance on moneylenders. 

None of this is to advocate complete deregulation and to allow moneylenders and other middlemen to operate with impunity. Exploitative practices are likely with all these intermediaries will have to be curbed. Instead, the path ahead should be to acknowledge their relevance and figure out ways to utilise them to realise the larger objectives. This would require regulation, but one which has to be like that with any other market, designed on merits rather than any ideological or other biases and prejudices. 

Update 1 (18.12.2020)

Shoumitro Chatterjee et al has this to say about middlemen in agriculture

The market system with many intermediaries at multiple levels is less a sign of market inefficiency and more a rational response to the dominant structure and condition of Indian farming, which is characterised by tiny farm sizes. There is little evidence of intermediaries charging big mark-ups or delays in the movement of goods. Furthermore, farmers are also paid quickly. Other than remote locations, there is little evidence of the market power of the much-vilified middleman. Intermediaries also help reduce risks faced by farmers, often paying them for the produce before they themselves get paid and absorbing the risk of the crop failing or prices falling (this is especially true in vegetables). Brokers also seem to proliferate in dynamic markets where both local and non-local buyers are present, where they play an important role in providing some assurance against counter-party risk in the context of weak relationships between parties. This is especially the case when there is no formal regulation to provide such assurance.