On Brokers:

When I was growing up, Doordarshan was the only channel available. There used to be a television serial called Gul Gulshan Gulfam which was shot in backdrop of Dal Lake, Kashmir. Many times it used to portray that carpet makers in Kashmir are poor because they don’t get a fair price for carpets woven by them. They receive only about a fraction of the market price in Western Markets. And the blame was laid on brokers. The serial made an assumption that brokers are exploiters. I faithfully believed the serial then. I heard and believed similar arguments ascribing poor conditions of agricultural laborers. If was often argued, that a substantial chunk of profits are always eaten by the market brokers like traders etc. and the agricultural farmers are poor as a result. In fact many farmer poverty alleviation schemes are based on the premise of elimination of brokers. Brokers generally have a negative connotation. People generally loathe brokers, and treat with suspicion every percentage cut they make. Having grown up, I think that this argument is one of the biggest myths and misconceptions that floats around, and genuinely believed by masses. The carpet weavers were not poor because brokers were exploiting them. The carpet weavers were poor because relatively more carpet producers are competing for proportionately smaller set of carpet brokers. This gives a bigger bargaining leverage to broker, and he manages to strike the equilibrium price of carpets lower that look ridiculously low. There is a still significant price multiple between broker’s acquisition price, and brokers selling price, and I will discuss it in another blog post. To remove this inequity, the bargaining leverage has to shift to weaver’s side. There are two ways of achieving it. Reducing the number of weavers or increasing the number of brokers. Governments’ typical response to similar problems is to come up with solutions that bypass brokers which reduces the number of brokers even further, and increases the bargaining leverage manifold in broker’s favor. So the weaver’s suffering gets compounded, and his prices gets further beaten down. Any good solution will aim to increase the number of brokers(number of weavers is not a control variable) instead of bypassing them, and create mechanism for fair play among brokers. The brokers will start competing for same set of weavers, and the price will shift in favor of weaver. Brokers are not bad.