Remote fishing communities in Brazil received low prices for their fish, were unable to afford productive investments, and therefore remained in poverty. By collectively purchasing boats they overcame the market power of intermediaries and broke the cycle of poverty
Remote communities, such as those in rainforests and high-altitude mountains, have limited access to outside markets, since the costs of transporting goods produced in such places are very high. In addition to the actual costs of transport, this remoteness often means that few middlemen find it profitable to make such long and expensive journeys, allowing a limited number of middlemen to exert strong market power and offer low prices to remote communities for the goods they sell. Limited market access and intermediary market power contribute to the persistent problems of poverty with which remote areas of the world contend (Asher and Novosad 2020, Asturias et al. 2019, Bergquist and Dinerstein 2020, Grant and Startz 2022).
In our research (Bartkus et al. 2022), we examine these issues in the Brazilian Amazon. We study a programme to purchase boats so that communities can directly deliver fish to distant markets and bypass middlemen. This is achieved by our NGO partner, Fundação Amazonas Sustentavel (FAS), who organises communities and provides up-front financing (later repaid by the communities) to collectively purchase the boats. This initiative led to an income gain of 27% over comparison communities, largely through an increase in the price per kilogram of fish paid by buyers to community fishermen. The cost-benefit analysis on the initiative showed a payback on the investment in boats within three fishing seasons, well within the life of a typical boat (20-30 years) on the Amazon River.
Remoteness and fishing in the Mamirauá and Uacari reserves
Our research focuses on the Mamirauá and Uacari reserves, within the Amazonas state. The main commercial transport ferry travels upriver from the state capital of Manaus, Amazonas (population 2 million) to Fonte Boa (population 37,000) in Mamirauá in 2 days 21 hours. Traveling further upriver to Carauari (population 26,000) in Uacari takes the ferry an additional 3 days 13 hours, making the whole journey from Manaus 6 days 10 hours one way.
The sale of pirarucu – a huge, pre-historic, air-breathing fish that can reach 2 meters in length and which is caught during a concentrated annual season – represents the main source of income for most river communities. The current pirarucu supply chain and market structure limit the value captured by fishermen through the sale of their pirarucu. Regional middlemen operate boats with 20- to 30-ton cargo holds filled with ice, essential for preserving fish during the long trip to market, and arrive at the communities’ river docks to pick-up the pirarucu catch. These middlemen have relationships with buyers in the regional market towns such as Fonte Boa and Carauari, or alternatively, transport the pirarucu to Manaus for sale to refrigerated storage and processors (“frigorificos”).
Collusion in the Amazon
The small, fragmented, and isolated nature of the Amazon communities combined with the perishable nature of the product reinforces the weak bargaining position of fishermen. In essence, the middlemen dictate the price per kilogram at the community’s dock. Figure 1 illustrates this with the example of the prices for each step of the pirarucu value chain in Mamirauá’s regional market.
Figure 1: Pirarucu Value Chain, Mamiraua, reais per kilogram
Collusive behavior is not prohibited in Brazil. The pirarucu fishing season and market are organised annually at the Tefe Pirarucu Business Meeting (held annually in June/July, i.e. directly before the pirarucu fishing season begins in late August). During this annual meeting, frigorificos and middlemen establish target prices per kilogram of pirarucu, including both the price middlemen will pay fishing communities and the price that middlemen will receive from frigorificos in Manaus. As a consequence, in 2018, the river communities in Mamirauá and Uacari captured roughly one-sixth of the overall value created by the pirarucu they catch and only about one-third of the fish’s pre-processed value.
Does intermediary market power lead to a poverty trap?
We illustrate the long run consequences of intermediary market power by developing a model where fishermen can sell to middlemen (who offer low prices for the fish), or fishermen can pay a high fixed cost to operate their own boat to bring the fish directly to market. We show that when middlemen have very strong market power fishermen are never able to accumulate the funds needed to buy their own boats, and thus they remain low-income indefinitely. This can lead to a poverty trap created by market power on the part of the middlemen. These mechanisms are consistent with the high cost of the boats observed in the data. The average income per household is about R$670 per household per month. With an average of 18 households per community, the overall annual income of a river community is approximately R$145,000. The average cost of a sufficiently large boat, with the necessary hold to carry ice, is approximately R$150,000. Communities consume a high fraction of their income, implying that they live close to subsistence, further underscoring the implausibility of such a purchase. In reality, the purchase of a boat has required that households across eight to ten communities pool their resources to make the investment.
Working collectively, fishing communities break a poverty trap
Starting in early 2018, our NGO partner, FAS, organised Mamirauá and Uacari fishermen into associations of eight to ten communities and extended them credit to finance the boat purchase. These investments in boats would improve fishermen’s access to regional markets by allowing the communities to transport pirarucu directly to regional market towns such as Fonte Boa and Carauari, rather than depending on middlemen.
The Mamirauá and Uacari community associations, supported by FAS, purchased eight boats. As of the start of the pirarucu fishing season in August 2018, only six of the eight boats were delivered intact. Two boats lacked fully functioning electrical systems. The failure to deliver these boats on time in effect created a natural experiment in Mamirauá. Some communities could transport their pirarucu catch by boat to sell in regional markets, while other communities with no access to a boat for the 2018 pirarucu fishing season were forced to continue their existing practices of selling to the middlemen.
Using household and community survey data from communities that did and did not receive boats, we estimate the effects of the boats on fishing activities and livelihoods. The NGO-organised and community-financed boat purchases in the Amazon enabled households to earn higher prices for their fish, thereby increasing their incomes by 27% during the first fishing season, also leading to increased consumption. The results showed that the increase in income largely arose from higher prices (20% higher) earned by the fishing communities.
These results imply a strong return on investment for these boats. Each boat costs about R$150,000 and serves an association of eight to ten communities. The results from 2018 pirarucu fishing season indicate that each household with access to a boat earned R$184 in incremental monthly income as compared to communities with no access to boats. Given the number of households per community and boat operation costs, the payback period on the boat investment solely from pirarucu fishing is estimated at just under three years. In addition to the benefits from fishing, these boats are used during the off-season to transport basic goods and people, which provides additional benefits to the communities.
Given the increased income for communities fishing pirarucu, this programme could productively be extended to other fishing communities in the Amazon. Potential acquisition of boats would enable more communities to bypass regional middlemen and transport their pirarucu to the regional centers of Tefe and Manaus.
References
Asher, S, and P Novosad (2020), “Rural roads and local economic development.” American Economic Review, 110(3): 797-823.
Asturias, J, M García-Santana, and R Ramos (2019), “Competition and the welfare gains from transportation infrastructure: Evidence from the Golden Quadrilateral of India.” Journal of the European Economic Association, 17(6): 1881-1940.
Bartkus, V O, W Brooks, J P Kaboski and C Pelnik (2022), “Big fish in thin markets: Competing with the middlemen to increase market access in the Amazon.” Journal of Development Economics, 155: 102757.
Bergquist, L F, and M Dinerstein (2020), “Competition and entry in agricultural markets: Experimental evidence from Kenya.” American Economic Review, 110(12): 3705-3747.
Grant, M, and M Startz (2022), “Cutting out the middleman: The structure of chains of intermediation” (No. w30109). National Bureau of Economic Research.