EVALUATION OF rAARKETING SYSTE~11S IN LATIN M1ERICA*by

H a ro Id I~i leyProfessor of Agricultural Economics

Michigan State University

IntroductionOur in9 the pas t two and 0 ne .-h a If yea rs a ~,1ichi q a n S tat e

University research team has been conducting studies of mar-keting systems in three LatIn AMerican communities. Therewere two primary purposes for these studies. First, we hopedto provide information directly useful In economic develop-ment planning in the countries where we conducted the studies.Second, we wanted to contribute to improved conceptualizationsconcerning the role of marketing in the development process.

The research program has been carried out under twointerrelated contracts financed by the U.S. Agency for Inter-national Development. Additional funds, personnel and logIs-tical support have been provided by host country agencies.

The Interdisciplinary research team has been composed ofMSU faculty and graduate students from four subject matterdepartments--f'1arketlng (in the College of Business), J\gricul-tural Economics, Communication, and Systems Science.Dr. Charles Slater has been director of one AID contract--theLatin American Market Planning Center. He and I have sharedthe direction of the other contract--the Latin American Food~1ark e tin g Stu dY .

Field research operations were carried out in PuertoRico during 1965-66 and in Golivla and Northeast Brazil during1966-67. Preliminary research reports were prepared in the

*A paper presented to the Markets and Trade and EconomicDevelopment Workshop, North Carolina State University, Raleigh,North Carolina, February 20, 1968.

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field, Final reports are now being written and will becompleted by mid-1968. Ourinq the course of this workseveral graduate students developed thei r theses from theseprojects. Plans are now under way for another field studyto be conducted in Colombia beginning around mld-1968.

In each of the overseas field operations, we formedjoint task forces involving MSU personnel, host governmentemployees, and faculty and students from local universities.The program has, therefore, included a significant trainingactivity as wei I as advisory services to the host governmentagencies.

In this paper I wi II present a brief statement of theproblem studied, a description of our research approach,some of the principal findings and conclusions derived fromthe Puerto Rican and Brazilian s+ ud le s , and finally someconcluding observations on evaluation of marketing systems.

The ProblemSince Wor Id \o.JarI I there has been a surge of interest

In the acceleration of development of the poorer countries.During this period there has been a continual evolution Inthe conventional wisdom about the development process andmeans of inducing more rapid growth. Several partial andsomewhat simplistic development strategies have been advanced,some placing emphasis on Industrialization, others on agri-culture, education, or infrastructure bui ld up , Recentlythere seems to be greater acceptance of more comprehensiveapproaches to development which recognize the interrelated-ness of the various sectors, such as agriculture and industry,and the complexities of the development process.1 Within

'See L.~I. \1Itt, "Ro le of Agriculture In Economic Devel-o pmen t- - ARe vie w .:' J0ur • Farm Ea0n. ~ Feb. I96 5, p p . I20 - 3 I;Max F. Mi IIlkan and David Hopgood, Yo Easy Harvest~ Little,Brown and Co., Boston, 1967; A.T. ~~osher, Getting !J.griau'ltureMoving~ Praeger, New York, 1966; The President's Science

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this context, the market system which Iinks and coordinatesrural and urban areas takes on enhanced importance In econom-ic development planning.

In defining the problem for our research, we foundWalter Rostow1s statement on national integration a usefulframe of reference.2 In this statement he observes the grow-ing economic and social disparities between rural and urbanareas of developing countries. He argues that in most LatinAmerican countries migrants flock to the city seeking betterIiving conditions but employment opportunities are limited.This is related to the lack of an effective market system todistribute urban industrial goods to the rural areas and lagsin the development of food marketing systems to serve expand-Ing urban populations. Rostow's prescription is a four-pronged program: (I) a buildup of agricultural productivity,(2) a revolution in the marketing of agricultural products,(3) a shift in industrial output toward agricultural Inputsand cheap consumer goods for the mass market in both ruraland urban areas, and (4) a revolution in the marketing ofthese manufactured goods, especially in the rural areas.Rostow expressed the opinion that these changes should beaccomplished through a combination of public and privateefforts, but he does not specify exactly how it can be done.This has become a principal task of our research, althoughwe are also concerned with verification of Rostow's generaldiagnosis of the Internal national market processes. Ourresearch program has been substantially focused on the prag-matic interests of USAID and the governments of cooperatingcountries to identify critical marketin~ problems and recom-mend reforms that would contribute to over-al I development

Adv is ory Comm ittee, The rvorZd Food Prob Lem, Vo I. I I, The\~hite House, 1967; H.~1. Southworth and B.F. Johnson, Agri-cuZtural DeveZopment and Economic Growth" Cornel I UniversityPress, 1967.

2\~alter Rostow, View from the Seventh Floor" Harper-Row,New York, 1964, p . 136.

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goals. However, we have also pursued the more fundamentalinterest of improving our understanding of the role of mar-keting in the development process.

The Research ApproachThe different disclpl inary backqrounds .o f our research

team were reflected in the approach to the problem. Thoseof us with economics as a background brought in concepts ofthe exchange system as a coordinator of economic activity.Price theory, the principles of production economics and mar-ket organization were fami Iiar tools, although most of usshared some deep-seated views about the inadequacies of tradi-tional economic theories in dealing with the complex processof economic development.3 We recognized that exchange acti-vities are deeply embedded in social and cultural patternsof behavior. We believed that socio-economic changes weregreatly influenced by the attitudes and viewpoints of marketparticipants. We also saw the exchange system as being linkedtogether by an information network which served as the sourceof data for decision-making. These considerations lead us toconceptual ize the market system as an interactive system con-stantly undergoing change. To assist in the research task,we sought the help of researchers from the related subjectmatter areas of communications and systems analysis.

Puerto Rico was chosen as the site for our initial fieldresearch. The reasons for beginning in Puerto Rico were asfollows: (I) There has been a rapid rate of change with realper capita incomes increasing nearly threefold in a period of25 years; (2) Before these rapid changes began, the socio-economic and cultural conditions were In many ways similar tothose now existing in several other Latin American countries;

3For a critical review of economic concepts relevant tothis study, see Chapters 2 and 3 of a Ph.D. thesis by KellyHarri son, Aq r-i oul.tncr al: r.'aroket Coorodination in the EconomicDeveZopment of Pueroto Riao~ Michigan State University, 1966.

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(3) There had been a systematic effort to foment change whichincluded activities to modernize the food marketing system;(4) Publ ished reports from food marketing studies made around1950 provided excellent benchmark observations which weresupplemented by a sUbstantial amount of other information anddata.

There were four objectives for the Puerto Rican study.I. To measure and analyze the changes that have taken

place in the food marketing system over the 15-yearperiod, 1950-1965.

2. To develop research methodologies useful in apprais-ing marketing problems in Latin American countries.

3. To draw inferences and to formulate hypotheses con-cerning the role of food marketing in countries inthe early stages of economic development.

4. To make recommendations for further improvements inthe Puerto Rican food marketing system.

The research task force was composed of four MSU faculty(part-time) , two post-prel im doctoral c an d Ida f-es , two Depart-ment of Commerce staff members, and three University of PuertoRico graduate students. Additional personnel were used forfield surveys. The rroject was sponsored and financiallysupported locally by the Department of Commerce, the SocialScience Research Center, and the Agricultural ExperimentStation of the University of Puerto Rico. The Departments ofLabor, Agriculture, and Economic Planning also cooperated inthe study.

We began the Puerto Rican study with a review of previousinvestigations, a careful inventory of available secondarydata on food marketing, and a series of personal interviewswith key people in government, industry, and the University.This provided us with an overview of the pattern of economicdevelopment and the efforts that had been made to fosterchanges in food marketing. Later, we followed up with moredetailed case studies of selected market development activities.

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The second phase of the Puerto Rican study was a seriesof field surveys of food marketing participants in the SanJuan and ~'1ayaguez areas. Approximately 850 personal inter-views averaging I to 1-1/2 hours in duration were administeredto samples of consumers, retai lers, wholesalers, processors,truckers, and farmers. The questionnaires included four relat-ed sets of questions: (I) economic information about theirbusiness and their marketing activities, (2) personal dataabout the respondent, (3) the respondent's communication be-havior, and (4) respondent attitudes toward modernity andtheir economic environment.

The structured surveys served several purposes. Fi rst,they provided descriptive measurements of the existing foodmarketing system which we used in guaglng the changes sincebenchmark studies were made In the early 1950's. Second,they were useful in making diagnoses of the current food mar-keting problems. Third, the survey data enabled us to testhypotheses about the dynamic aspects of market processes andeconomic growth, e.g., Innovative behavior and attitudinalbarriers to modernization. Fourth, we were trying to developfield survey Instruments which would facilitate meaningfulcross-country comparisons of market processes.

Some Findings and Conclusions from the Puerto Rican StudyPuerto Rico has several unique characteristics which

we should bear in mind as we describe and evaluate what hashappened there. It is a small island about 35 miles wideand 100 mi les long. For many years, sugar. coffee, tobacco,fruits and vegetables were the principal cultivated crops,with milk and poultry increasing rapidly in recent years.The Island is heavily Involved in external trade, nearly alof which is with the U.S. mainland. More than one-half ofthe food supply is Imported. Sugar, texti les and tourism aremajor sources of export earnings. The population of theisland Is about 2.6 mi II ion, nearly one-half being urbanresidents.

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Since 1898, when the United States took over Puerto Ricofrom Spain, the island has had free trade relationships withthe U.S. Puerto Ricans were made citizens of the U.S. in1917, thus removing pol itical barriers to travel to and fromthe mainland. Between 1940 and 1952 the island shifted to aself-governing. freely associated state of the United Stateswhich we know as the Commonwealth of Puerto Rico (In Spanish,this is Estado Libre Asoaiado). One of the unique featureswhich distinguishes Puerto Rico from the other 50 states isthat their elected representatives to the U.S. Congress donot have voting privileges. Consequently, Puerto Rican resi-dents are not required to pay federal income taxes, althoughthey receive substantial benefits from federal programs in theareas of health, education, housing, etc. This results in asignificant transfer of funds from the mainland United Statesto Puerto Ri co.

The close association of Puerto Rico with the U.S. main-land has had a strong influence on the development of theisland. The commercial ties, fiscal and pol itical stabl IItyhave provided a favorable environment for growth. The effectsof education and cultural interchange with the mainland havesurely had significant influences on the attitudes and aspira-tions of Puerto Ricans regarding social and economic change.

The socio-economic transformation of Puerto Rico beganin the late 1930s with the rise of the Popular DemocraticParty under the leadership of Lufs Mu~6z-Marrn. This Is anInteresting and relevant story in Itself, which I shall pass

• +h l . 4over In IS sem t na r .Under Mu~6z's leadership a number of reforms and devel-

opment activities were undertaken. This was popularly label-ed as "Op e rat lon Bootstrap, iI a di reeted effort to increase

4See Thomas A. Aitken, Jr., Poet in the Portress, SignetBooks, The American Library, Inc., New York, 1965.

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Industrial employment and expand tourism.5 Concurrent,withthese programs, Governor Mu~6z initiated activities to reducefood costs.6 This got under way with a series of comprehen-sive studies of the food production and marketing systems.These included a U.S. Department of Agriculture study ofmarket faci I ities, the Galbraith-Holton study of food dis-tribution, and the broader study of Puerto Rican agricultureby Nathan Koenig.7 The Governor then appointed a Food Commis-sion that examined the various reports and in 1954 recommendeda food marketing reform program which included the fol lowing:

I. The establishment of large--scale retai 1 food storesin urban areas.

2. The formation of cooperative retai I food stores Inoutlying vi Ilages to be served by a wholesale ware-house in San Juan.

3. Government assistance to local businessmen for theestablishment of new food stores.

4. The extension of the tax incentive program to foodprocessors.

5. A training program for food store employees.6. A consumer information program on food buying.The various departments of government fol lowed up by

taking action on al I of the Food Commission's recommenda-tions. It is interesting to note, however, that the most

5 For an account of the program, see Wi II iam H. Stead,Fomento--The Economic Development of Puerto Rico, PlanningPamphlet 103, National Planning Association, Washington, D.C.,1958.

6The activities are presented in more detai I by John R.Wish, Food Retailing in Eaonomic Development: Puerto Riao,1950-Z9653 Ph.D. thesis, Michigan State University, 1967.

7J.K. Galbraith and Richard Holton, i1arketing Effiaienayin Puerto Rico, Harvard University Press, 1955; U.S. Depart-ment of Agriculture,"farketing Facilities for Farm and ReZatedProducts at Ban Juan, Puerto Riao, Agr. Bul. No. 60, Washing-ton, D.C., 1951; Nathan Koenig, A Comprehensive AgriauZturaZProgram for Puerto Rico, U.S.D.A., WaShington, D.C., 1953.

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successful introduction of modern supermarkets was undertakenby Harold Toppel, a businessman from the U.S. mainland. Thelocal food merchants did not respond initially to the govern-ment's incentive rrogram for the establishment of large self-service stores. The Toppel operation began as a smal I opera-tion but has expanded rapidly. By 1966 they were handling 30to 40 percent of the San Juan food store sales and were open-ing new outlets in other cities on the island. From thebeginning) the Toppel stores were Identified as a Puerto Ricanbusiness carrying the name Pueblo,' with a related programto create an image of a local rather than a foreign operation.A mainland-based operation, Grand Union, has had much Jesssuccess In penetrating the Puerto Rican market.

During the late 19505 and early 1960s, several of themarket facll ity recommendations of earl ier studies w e re car-ried out. New grain handling facilities were constructed atthe San Juan port. A new publ ic market site was acquired anddevelooed to faci Iitate the relocation of the food importingfirms from the crowded area in old San Juan to a new, moremodern faci Iity with large warehouses and docks for handJ ingtruck-sized containers brought in by ship from the mainland.However, in 1966, much of the relocation was sti I I to be car-ried out.

With a few exceptions, the establishment of modern,larger-scale retai I units has not as yet had a substantialimpact in bringing about improved vertical coordination ofthe I0c a I f00 d pro d uc t ion .~mar ke tin 9 sY s tem. T his is due tothe fact that supermarket operators have had easy access tomainland sources of supply for both fresh and processed foods.Nevertheless, there have been some Imrortant improvements inthe vertical coordination of mi Ik and egg marketing as aresult of both private and public action. Harrison has care-fully documented these developments in his Ph.D. thesis8

8Kel Iy Harrison, AgricultureZ ~arket Coordination in theEconomic Development of Puerto Rico~ Ph.D. thesis, MSU, 1966.

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where he Indicates that a rather chaotic mi Ik market wasstabilized with a government milk regulation which regulatesprices at al I levels of distribution and supervises farmer-processor relationships. This improved institutional arrange-ment in mi lk marketing had been an important factor stimulat-ing the rapid increase in milk output and the adoption ofmodern dairy technoloqy in response to a sharp rise in consum-er demand for fresh rniIk.

Egg marketing has been revolutionized by the establishmentof a grading system and the Introduction of vertical coordina-tion arrangements which link producer associations with largeretailing firms such as Pueblo. The Deoartment of Agricultureand the Agricultural Extension Service have assisted producergroups in forming closed membership cooperative associationsfor the sell ing of products and the purchase of suppl iesalong with the adoption of modern production technology. Con-currently with the development of producer associations, somelarge-scale commercial egg and broi ler producing operationshave been established by feed companies.

Not al I of the Puerto Rican efforts to modernize theirfood marketing system have been outstanding successes. Themodern slaughter plant built at Caguas has never been ableto attract the slaughter volume away from the smal I municipalfaci I ities. The fruit and vegetable washing and gradingstations promoted by the Department of Agriculture have neverfunctioned successfully. The construction of new centralretai I-wholesale markets {plaza meroados} in urban areasseems to be inadequately coordinated with the basic trendtoward larger-scale wholesale-retai I food marketing units.

The cooperative movement itself, which has received muchsupport and attention in Puerto Rico, has had rather unevenand in some instances disappointing results. Recent effortsare to revital ize cooperative enterprise through an education-al program that emphasizes modern business management tech-niques rather than the more traditional cooperative phi loso-phies and practices.

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Thus far, I have sketched out some of the major institu-tional developments in the transformation of the Puerto Ricanfood marketing system. I wi II now turn to some evidence onthe economic effects of these changes.

The structure of food re ta l I ing has shl fted from atomistic,noncompetitive firms who were highly dependent on wholesalercredit toward larger-scale units that compete through priceand promotional efforts and who are less dependent on whole-s a Ie r c re d It.

In our 1965 consumer survey of San Juan and Mayaguez, wefound that 59 percent of the food purchases were made in super-markets. Consumers using supermarkets as their primary foodsource had higher incomes and higher levels of education thanother shoppers, although people from al I income levels patron-ized the supermarkets. Among all consumers surveyed, one-halfhad automobiles and more than 90 percent had refrigerators.This pattern of durable goods ownership had changed rapidlyover the 1950-65 period.

In spite of the shift toward larger-scale retal I outlets,the total number of retal J food establishments and the numberof persons employed in food reta! Iing has not decl ined. Manyof the smaller neighborhood stores have shifted toward bever-ages, with a declining percentage of food sales. Also, thetotal volume of food sales has expanded with growing popula-tion and rising incomes. Nevertheless, in an economy thatstl II has about 10 percent unemployed, there are many indivi-duals who try to gain part of their livel ihood in the foodbusiness.

Retail gross margins in San Juan declined from the 23percent reported by Galbraith and Holton for 1950 to about16 percent In 1964 for non-supermarket outJets.9 Supermarket

9Depart~ent of Labor, Commonwealth of Puerto Rico, spe-cial studies of operating costs of selected businesses.

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margins for a somewhat different mix of products was estimatedto be about 18 percent in 1964. Pueblo supermarkets reportedmargins of 19 percent in 1964 and 22 percent in 1966, with netprofits after taxes of 4.2 percent in both years. Pueblo'snet profits have been relatively high, as compared with main-land retail food chains. These profits have been largely re-invested in expansion of the Puerto Rican retai I operations.Price comparisons in San Juan for 9 food items purchased fre-quently by low income fami lies showed that supermarkets hadlower prices than smal I stores on 5 items with about equalprices on the other 4.

Food wholesal ing remains a relatively high-cost operationin Puerto Rico, especially on imported foods handled throughtraditional limited-I ine, small-scale wholesalers. For manyyears it was customary for mainland food processors to mar-ket their products through broker-wholesalers located in theSan Juan area under exclusive handling agreements or franchises.Subsequently, the Puerto Rican legislature passed a law whichspecified that if such an agreement were discontinued, thebroker-wholesaler should receive a payment from the mainlandfirm to compensate for the loss of this income-producing asset.This rule undoubtedly serves as a barrier to the modernizationof food wholesal lnq , The large supermarket firms have bypassedthis traditional system by orderinq directly from mainlandwholesale sources with shipments being made In truck-sizedcontainers hauled on special ships (Sea Land and Sea Train).These containers are unloaded on trucks and hauled directlyto the supermarkets, makino possible savings in physicalhandling, reducing losses due to pilferage, and reducing theinventory requirements of the supply system.

mentioned earlier that we were attempting to gain abetter understanding of the process of change through innova-tive behavior. In several of our surveys, we attempted tomeasure the degree of innovation of the respondent. This wasa fairly straightforward attempt to identify what proportion

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of the applicable innovations had been adopted. We foundthat amonq farmers the most innovative individuals tended tobe younger, better-educated, and had greater exposure tomarket information and mass communications. Similar relation-ships were found among retai le rs , but the degree of associa-tion was not as stron9 as we had expected. This suggests thatwe cannot predict with a hi9h degree of accuracy who will beinnovators in the food production-distribution system.

We hypothesized that attitudes of respondents towardmodernization would be an indicator of their wi II ingness toinnovate or accept change. Using a series of attitudinalquestions, we computed an index of modernity which we foundto be significantly correlated with Innovative behavior. Thissuggests some possibi litles for guaglng a community's readi-ness for new practices or institutions.

We supplemented the modernity measurements with a seriesof attitudinal statements about specific market Institutionsor conditions. This provided an indication of the degree ofapproval or disapproval of existing conditions or proposedchanges. We found, for example, strong support for the egggrading program and the milk regulation and general agreementthat new regulations were needed to improve the processingand distribution of meat. On the other hand, most consumersdisagreed that reta i I food stores ri qqe d the ir sca Ies to cheatshoppers on product weight.

Underlying the attitudinal measurements are some implicithypotheses as fol lows:

I. Traditional attitudes and value orientations of marketparticipants limit the possibilities for institutionalreforms and technological innovations.

2. Institutional reforms are more Iikely to be successfulif they are reasonably consistent with attitudes andvalue orientations of market participants.

3. Development programs can be devised to modify atti-tudes and value orientations with the objective offaci Iitating insti tutional reforms.

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vJi II conclude my comments on the Puerto Rican studywith a few summary observations. Fi rst, we believe that inspite of the unique characteristics of Puerto Rico, there ismuch to be learned from their pragmatic approach to foment-ing economic development. In dealing with marketing problems,as well as other development issues, they usually began withbackground studies fol lowed by formulation of action programswhich provide Incentives for private investment. Wheredeemed socially desirable, they have adopted rules and regu-lations to reduce market risks. Second, we feel we were able,with the help of several Puerto Rican agencies and individuals,to identify more adequately some possibilities for furtherimproving their marketing system. Before we left Puerto Rico,we held seminars and rendered special consultations on fur-ther market improvements. Finally, the pi lot study in PuertoRico was very helpful in preparing for the larger-scaleefforts in Brazil and 801 ivi a.

The Northeast Brazi I StudyThe largest and in many ways the most interesting of

our three field operations was carried out in Northeast Grazl I.This was organized as a joint task force with SUDENE, theNortheast Br e z l t planning and development agency.

Several things made this a challenging opportunity.Fi rst, poverty among the 25 mi II ion people Iiving in theNortheast demands urgent attention. Second, the neglect ofmarketing as an integral part of their development programwas apparent and had been expl icitly recognized in the SUDENEthird master plan. Third, the lack of information and rell-·able data about the food and agricultural industry made it adifficult task.

The scope of work was broadened to include not onlyfood marketing, but also the urban-rural flow of both agri-cultural inputs and consumer goods. The industrial sectorwas also studied as a part of the rural-urban system. The

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geographic focus was narrowed to the city of Reclfo and itsfoodshed, wh lch for some products extended out for 200 milesor more. Five commodities were agreed upon for detai ledrural surveys. These were rice, beans, manioc, milk andcotton.

The operational objectives of the program were as fol lows.I. To conduct a diagnostic study of the existing market-

ing systeM for food, selected agricultural products,farm inputs and selected locally produced consumergoods.

2. To formulate recommendations for improvements in themarketing system based upon diagnostic studies.

3. To develop systematic procedures for evaluatingselected potential marketing reforms and arriving atpolicy decisions.

4. To evaluate hypotheses and draw conclusions about therole of marketing in economic development.

5. To provide research training for the Brazi Iian andMichigan State University project staff.

The survey research program was Influenced by our beliefthat a successful marketing reform program requires harmoniouscoordination of al I stages of the production-marketing pro-cess. This line of reasoning suggests that efforts to diag-nose and correct perceived difficulties at one stage of thesystem may fail if inadequate attention is given to Interre-lationships with other stages in the market process. Ourview was reinforced by examples of unsuccessful marketlnqprojects that had been undertaken in the communities we havestudied or have heard about. A particular case was the con-struction of a new wholesale market faci Iity in Reci fe whichhas not as yet been successfully integrated into the food mar-keting system.

In addition to obtaining an over-all description of theexisting marketing system, we sought answers to four basicquest! ons as fo I lows:

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I. What are the barriers to increased productivity andreduced costs in the marketing process for food andselected non-food items?

2. \'Ihat are the conditions in agricultural product andinput markets which retard the adoption of new tech-nology and the expansion of a9rlcultural output?

3. What are the attitudes, personal characteristics,and communication-behavioral characteristics of mar-ket participants that ItJj II Iimlt or condition thekinds of changes that can be successfully introducedinto the production-marketing system?

4. What are the marketing reforms that would stimulategrowth and resource use efficiency in the production-marketing system and which would ultimately contributeto rising levels of income and improved I iving condi-tions for the people of Northeast Grazi I?

The urban surveys revealed that the average per capitaincome of Recife residents was about $300 per year, but thepattern of distribution was highly skewed. One-half of thisaverage income goes for food, with a large portion of the lowincome fami Iies spending more than two-thirds of their earn-i ngs for food.

The urban food marketing system is composed of neighbor-hood street markets, municipal marketplaces, smal I neighbor-hood stores, a few large self-service supermarkets, and streetvendors. Among smal I-scale traditional operators, creditcosts and product spoi lage rates were surprisingly hiqh. Therecent entry of a large self-service store with aggressiveprice pol icies has caused a significant ripple in the retai Iprice structure. However, the surveys indicate that the manysmall retailers lack both the abi Iity and the wi II ingness tochange their methods of operation.

In the Industrial sector there are many managers whofol low traditional business organization procedures whichgive Iittle emphasis to new product development and aggressive

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distribution strategies. A government program to expand in-dustrial activity is currently creating sUbstantial increasesIn physical plant capacity without concurrent emphasis onexpanding market outlets and increasing effective demand, es-pecially in rural areas, w he re two-thirds of the people live.

In the rural areas we find a traditional agriculturepoorly integrated with urban centers. Low levels of agricul-tural productivity are associated with a general lack ofmodern farm inputs such as improved seeds, ferti Ii ze r , andmachinery. r10st farmers are small but surprisingly specializedin production. Three··fourths sold less than $700 worth ofproducts in 1966. One-half of this income was spent for foodfor the fami Iy and, in some of the poorer areas, more thantwo--thirds w as spent for purchased foods. Only one-third ofthe farmers were functionally literate, although more than 50percent had attended school. Fifty-eight percent had radios.Eighty percent make we e k lv trips to the local vi Ilage marketday, although most had to travel by foot, horseback, or byoxcart. Only 56 percent of the farmers were familiar withcommerci a I ferti I J zer, and on Iy 14 percent had ever attendedagricultural extension meetings. Hence, knowledge aboutmodern technology was very low.

In the rural assembly markets for staple foods, we foundmany smal I-scale operators hampered by a poor information andtransportation system and conditioned by a market-sharingethic among traders. The lack of credit to traders and thehigh Interest rates are also significant barriers to increas-ing the scale and efficiency of assembly market activities.In spite of these barriers, there are some successful effortsto develop lower cost market channels Iinking rural and urbanareas.

We have made our prel iminary diagnosis and have offeredan integrated series of recommendations to SUDENE and USAID.Time does not permit further elaboration this afternoon. We

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are now sol iciting Brazi lian reaction and suggestions whichwill be incorporated into our final report to be completedby next June.

Systems Simulation ModelsFrom the beginning of our research and advisory program,

we have recognized the need for analytical techniques to eval-uate the economic consequences of alternative marketing reforms.The income and employment effects become important criteriafor development planners considering recommendations comingfrom diagnostic studies such as ours. Althouqh traditionalcost-benefit analyses continue to be widely u~ed, there is in-creasing interest in the appl ication of systems simulationmodels to the analysis of dynamic processes such as economicgrowth.

Two doctoral candidates trained in sY$tems science haveundertaken the development of first generation systems models,one focused on Puerto Rico and the other on a model of Recife,Brazi I, and its foodshed. Substantial progress has been madeon conceptual and mathematical problems of building systemssimulation models which include expl icit marketing components.Due to the tremendous data deficiencies, especially in Brazil,only crude estimates can now be made. However, the concep-tual fzation procedures have contributed to our understandinqof the marketing process and have served as a useful frame-work for discussions with development planners faced withdecisions on alternative market reforms. Looking to thefuture, systems simulation techniques promise to be even moreuseful when the methodology is further developed and moreadequate data can be generated.

Some Concluding ObservationsThe results of our studies have reinforced our initial

view that marketing reforms can be an active force in bring-ing about modernization of traditional systems of production

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and distribution. We bel ieve w~ have developed an improvedapproach to development planning which places emphasis on therole of the market system as a coordinator and stimulator ofsustained growth.

In the Latin American communities we have studied, itappears that a general strategy can be fol lowed In evaluatingmarketing systems within the context of comprehensive economicdevelopment. However, due to differences in economic andsocial conditions, the specifics of marketing reforms shouldbe tai lor--made to a particular market area. The suggestedstrategy Is to begin with diagnostic studies to describe andanalyze the existing system giving emphasis to the identifica-tion of economic and socio-cultural barriers to change.

On the basis of these diagnostic studies, a set of inter-related market reforms can be devised which are reasonablyconsistent w lr h over-all development goals and which seem tobe feasible within the constraints of the existing economic,social and political systems. Choices between alternativemarket reforms can be faci Iitated by cost-benefit analyseswith some prospects that systems simulation models wi I I be auseful tool for development planning.

Finally, all we are suggesting is that we have a differen-tiated approach to development planning which gives increasedemphasis to the market system as a means of stimulating econom-ic growth. There is evidence to suggest that many economicplanners have regarded marketing as a passive element in thedevelopment process. On the basis of our studies in threeLatin American communities, we see much to confirm WalterRostow's diagnosis that poor market coordination between ruraland urban areas is a major deterrent to economic growth.

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