The Value Chain Approach to Economic Growth and Poverty Reduction


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Overview of USAID's value chain approach delivered at the 16th Session of the United Nations Commission on Sustainable Development Learning Centre, 6 May 2008

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  • Integrating Growth and Poverty Reduction Economic growth is key to poverty reduction – David Dollar and Kraay “Growth is Good for the Poor” The question is – while growth is necessary for reducing poverty – by itself – it is insufficient In countries where the gap between the rich and the poor is great (most places where we work) and in countries that we would call fragile (starting at a very low level of income) – ECONOMIC GROWTH REDUCES POVERTY BUT NOT VERY EFFECTIVELY, EFFICIENTLY, OR SUSTAINABLY why would this be TO REDUCE POVERTY -MANY ARGUE – REQUIRES EFFORTS NOT ONLY TO GROW DEVELOPING ECONOMIES BUT ALSO TO LINK THE POOR TO GROWTH OPPORTUNITIES This is the focus of my presentation
  • Staley and Morse Modern Small Industry for Developing Countries 1964 But this is a static analysis; it helps identify where small firms can be competitive but not how they can increase their competitiveness
  • GUIDING QUESTIONS: Where do you see your products coming from? ( lead to information on INCREASED COMPETITION-INCREASED COMPETITIVENESS) Where are the markets? Where are your products going to? ( info. On end markets-consolidation of national and global retailers-supermarkets) horticulture-where are the major markets? –concentration on supermarkets in northern countries / emergence of supermarkets in emerging countries (eg, Uchumi, Nakomad in kenya supermarkets.) How is the structure of markets changing? ( concentration of retailers, coffee: continued concentration on global buyers; Since ’94, we see a lot of liberalization of markets in Africa, are we also seeing economic growth? ( or are we seeing more poverty?) Increased globalization leads to …increased competition betw. Industries and countries. In research, what we observe is that when there is economic growth, then there is absolute reduction in poverty. We also see that NOT all EG have the same impact on poverty. FACILITATION NOTES: Use a flipcharts-filter the comments to the above questions. Globalization Increased competition Economic growth results in poverty reduction
  • Historically firms have tended to compete against other firms in the same country; With globalization, industries in one country are competing against the same industry in another country. Consequently, firm- level competitiveness is no longer sufficient ; rather the market system that delivers a product from its inception to the consumer must be able to compete against market systems elsewhere. Market liberalization resulting from globalization shifts the competitiveness strategy from the firm to the industry. Overview: Globalization: - A reality -Both threat and opportunity for SMEs- Coordination and cooperation is more important than ever! Who is my competitor? Examples : Palestine horticulture ( Israeli subsidy, how can I beat them…it’s not only Israel who is your competitior, its Egypy, Morocco…) Kenya avocadoes ( good product but the it’s quality is not differentiated in end markets-on the other sirde, Philippines all the key stakeholders working together creating a brand with good quality control etc. They realized that they are in the same boat.) In a globalized economy, industry competitiveness and the value chain approach are critical to being able to sustain growth in efficiency, output and incomes , donors concerned about growth that reduces poverty must focus not only on the small and very small firms that the poor own and operate but also on the industries in which large numbers of the poor participate.
  • If our goal is promoting economic growth and creating wealth by sustainable linking small firms into productive markets, then our objectives are To increase the competitiveness of industries in which MSEs participate To increase MSE benefits from participation in these industries These are the questions that USAID, as part of the K&P research agenda under AMAP BDS IQC is attempting to answer
  • What is a value chain? A chain of value added activities and firms involved in taking a product from its inception to consumers Actors in the chain include producers, processors, exporters, importers, service providers – finance, sector specific, non-sector specific Where are small firms in value chains ? – even global or export chains? producers or suppliers to larger firms up the chain – Could be input suppliers – could be services providers could be traders, brokers, retailers or wholesalers or transporters – Links. IN THE 21ST CENTURY these chains have becoming increasingly complex – crossing international boundaries and made up of a network of linked firms This has increased attention to the coordination of all these firms in a chain to reduce transaction costs to improve rapidity of response to market demands to improve response to quality, quantity and on-time delivery demands of final buyers to improve efficiency of flows of money, product, information Supporting Markets – include finance and business services – serve to support the core product market Global and national enabling environment
  • The importance of the end market competitive strategy – TALK ABOUT RWANDA COFFEE Competition is created in three ways improving efficiency improving quality/uniqueness/product differentiation or taking advantage of changes in demand (e.g. specialty coffee) To compete, the VCs and their firms need to be able to get a product to market at lower price/greater efficiency, at better quality or in a more unique form, and by taking advantage of changes in consumer demand. Clearly the last two are easier for small firms – nonetheless, efficiency will always be important Example from McKinsey Report – product differentiation or changes in demand Coffee is and will remain a commodity. For many coffee farmers, the only way up is out. Coffee prices continue their steady decline, creating an economic and humanitarian disaster for many of the world's 25 million coffee farmers, whose production costs have exceeded revenues for four successive seasons. The take-away Producers of higher-quality beans should move into specialty coffee markets. The rest might be better off diversifying into other crops and into related businesses, such as tourism and light manufacturing.
  • International level – what are they WTO decisions, Free trade agreements, VC governance (rules set by private sector – e.g. EUREGAP) Examples: Kenya – the impact of Euregap on horticulture Morocco - the impact of free trade agreements on Morocco, the impact of the ending of the Lome Agreement in Kenya Value chain governance – sets rules for quantity, quality standards for whole industries National level Costs, though the regulatory burden and red tape, taxes, levels of corruption, infrastructure services, labor market regulation, and finance. Risks, through policy predictability, property rights, and contract enforcement. Barriers to competition, through regulations controlling startup and bankruptcy, competition law, and entry to finance and infrastructure markets. Example Brazil – taxes and impact on informality and cost of doing business and corruption Guatemala – export tariffs Haiti – port costs
  • Vertical linkages include: Access to markets Access to wholesalers Access to inputs Ask: How efficiently is the vertical chain transmitting products, information, money , etc. ??what about transferring skills and reducing transaction costs Examples : Importance of vertical linkages – Peruvian Brazil nut exports vs Bolivia, in Indonesia cocoa, in Haiti handicrafts commitment failure of suppliers information not provided (Indonesia) traders who don’t value quality The importance of horizontal linkages to: reducing the transaction costs of working with many small suppliers creating collective efficiencies – external economies Agglomeration strategies – key to competitiveness – key to efficiency could be an association could be a cooperative could be a broker cooperatives and associations are NOT always the best answer to agglomeration so much push in USAID for associations examples: JOBS Bangladesh – shoes (vertical w horizontal) group exporters group suppliers Kenya BDS India GMED links to ITC
  • Supporting markets include commercial sources of finance, value chain finance business services (technical assistance, product development, training), and inputs. To upgrade and be competitive, MSEs need access to supporting markets – not just for the period of a project but on a sustainable basis Key to the concept of support markets is the recognition that recurrent constraints in a value chain need to be addressed with commercial solutions and through markets not by unsustainable project interventions . Example: Cross-cutting = Legal, management, market information, business training, ICT vet services – Mercy Corps Azerbaijan agronomic services – in Albania – spraying of grapes Guatemalan craft industry – need for product design services Sector specific – provided by actors in the supply chain (by buyers or input suppliers) Finance Haitian artisans – value chain finance vs microfinance Uganda stockists – microfinance KenyaBDS – sprays and inputs provided by buyers
  • While we are interested in how the VALUE CHAIN works, it is still individual firms that take the risks and invest the capital to produce a product or service. e.g. Their ability and willingness/ incentives for upgrading are key to improving competitiveness. WHAT IS involved in firm-level UPGRADING ? (what about chain-level upgrading?) Improving products (design, quality, uniqueness) Improving process Specializing in new functions Moving into new market channels WHAT DOES UPGRADING require ? Access to supporting markets Access to learning , know how, skills, information Incentives – risks, low expected returns create disincentives for upgrading
  • The relationships between buyers and sellers in a value chain can be characterized by a bundle of attributes including: Financial flows Trust Services Products Timing of product flows.
  • “ SH” = Smallholders “ HVEV” = High value export vegetables Notes on Factor #1: Low level of mechanization and high labor input make HVEV better suited for smallholder farms, which are labor-intensive (rather than land or capital intensive) Production of HVEV on large tracts is not cost-effective due to high labor supervision costs and need for multiple supervisory levels Notes on Factor #2: There are approx. one million smallholders currently producing vegetables for commercial purposes. Many of these smallholders live in areas where high value export vegetables can be grown. Rough estimate of one million is based on the following information: Of about 5 million rural households, 1 million are pastoralists and 4 million are crop farmers. About 25 percent of crop farmers, or 1 million households, plant vegetables for the purpose of selling them. Notes on Factor #3: Tanzania has plentiful soil and water for growing these vegetables. Appropriate agro-climatic zones can be found in the northern and southern highlands, including areas near Arusha, Moshi, Lushoto, Morogoro, and (possibly) Iringa. These regions are served by good quality trunk roads, which is an additional advantage. This argument could be supported with national data indicating regions with the combination of higher altitude/cooler temperatures, good soils, and sufficient rainfall or mountain stream runoff. Notes on Factor #4: Farmers and extension agronomists interviewed for study indicated that it takes no more than two growing cycles for farmers to learn how to cultivate new vegetable varieties. Draw from survey data to provide evidence of smallholders’ preference/eagerness to export smallholders’ ability to grow new types of vegetables (product upgrading) smallholders’ willingness to work in groups to lower transaction costs
  • “ SH” = Smallholders “ HVEV” = High value export vegetables iche Notes on Factor #1: Food safety and compliance with sanitary and phytosanitary standards is essential prerequisite for export. Costs of GlobalGAP certification include high initial investment costs, plus annual maintenance and certification renewal costs (estimated annual costs: USD $1,500 to USD $5,000 per farm). Because of relatively small scale of their revenues, smallholders have difficulty absorbing these costs and remaining profitable in short-run. The survey indicates that SH knowledge of “Good Agricultural Practices” is EXTREMELY limited. Notes on Factor #2: Current export of HVEV from Tanzania is very low, with only 2 exporting firms (include recent export statistics) Notes on Factor #3: There is only 1 daily international passenger flight from Arusha-Moshi airport. Cut flowers receive first priority for the limited cargo space available on this passenger plane. By contrast, note that m odern cold storage facilities are available at airports in Arusha-Moshi, Dar Es Salaam, and Nairobi
  • Should add a few more Tanzania related findings such as infrastructure conditions, ability to learn new farming practices etc etc
  • Based on 7 responses: 2 UK, 4 Holland, 1 anonymous; Clive Lawrance, Kees Rijnhout, Piet Schotel, Harry Vervelde, Piet Voskamp, Rob Hooper, and one anonymous.
  • Together, these two charts help to illustrate that Tanzania is closer to being competitive in the two most important areas (safety standards and quality) but is much less competitive in the next two decision criteria of highest importance (price and on-time delivery).
  • Leave this up on the screen while questions are being asked.
  • The Value Chain Approach to Economic Growth and Poverty Reduction

    1. 1. The Value Chain Approach for Economic Growth and Poverty Reduction Jason Wolfe , Enterprise Development Advisor +1 (202) 712 1882
    2. 2. DEVELOPMENT CHALLENGE <ul><li>Will the poor be marginalized by globalization ? </li></ul>Can small firms and farmers compete in globalized markets?
    3. 3. OPPORTUNITIES: COMPARATIVE ADVANTAGES <ul><ul><li>Non-repetitive production processes </li></ul></ul><ul><ul><li>Seasonal activities </li></ul></ul><ul><ul><li>Low capital requirements </li></ul></ul><ul><ul><li>Relative labor-intensiveness </li></ul></ul><ul><ul><li>Small production volumes </li></ul></ul>
    4. 4. THREATS: GLOBALIZATION & COMPETITIVENESS <ul><li>Liberalization of tariff and non-tariff barriers </li></ul><ul><ul><li>Bilateral free trade agreements </li></ul></ul><ul><li>Consolidation of national and global retailers </li></ul><ul><ul><li>Wal-Mart </li></ul></ul><ul><ul><li>Increased concentration into international supermarkets </li></ul></ul><ul><li>Consumer concerns and standards </li></ul><ul><ul><li>Labor practices, SPS, EUREPGAP </li></ul></ul><ul><li>Niche and specialty markets </li></ul><ul><ul><li>Organic vegetables </li></ul></ul><ul><ul><li>Specialty coffee </li></ul></ul>
    5. 5. <ul><li>Globalization shifts the nature of competitiveness </li></ul>GLOBALIZATION & COMPETITIVENESS Entire industries , rather than individual firms, are competing against each other for market share
    6. 6. DEVELOPMENT OBJECTIVES <ul><li>Improving the competitiveness of target industries </li></ul><ul><li>Improving benefits to small firms and farmers </li></ul>How can we achieve systemic competitiveness to the benefit of MSEs?
    7. 7. WHAT IS A VALUE CHAIN? <ul><li>Value chain? </li></ul><ul><li>Supply chain? </li></ul><ul><li>Industry? </li></ul><ul><li>Subsector? </li></ul><ul><li>Cluster? </li></ul>Market system of linked firms that bring a product from inception to final market
    8. 8. <ul><li>End-market competitiveness: </li></ul><ul><ul><li>Efficiency/cost </li></ul></ul><ul><ul><li>Quality/product differentiation </li></ul></ul><ul><ul><li>Changes in demand </li></ul></ul>END MARKETS End Markets define opportunities for growth
    9. 9. <ul><li>Global </li></ul><ul><li>WTO, FTAs, standards </li></ul><ul><li>National </li></ul><ul><li>Property rights, tariffs, taxes, regulations </li></ul><ul><li>Local </li></ul><ul><li>Municipal infrastructure </li></ul><ul><li>Industry </li></ul><ul><li>Codes, conventions </li></ul>ENABLING ENVIRONMENT Enabling Environment circumscribes the boundaries of opportunities
    10. 10. <ul><li>Vertical linkages </li></ul><ul><ul><li>Direct the product to market </li></ul></ul><ul><ul><li>Direct revenue and information to suppliers </li></ul></ul><ul><li>Horizontal linkages </li></ul><ul><ul><li>Create economies of scale </li></ul></ul><ul><ul><li>Increase market power </li></ul></ul>INTER-FIRM COOPERATION Inter-Firm Cooperation is fundamental to growth and upgrading
    11. 11. <ul><li>Sector-specific services </li></ul><ul><li>Cross-cutting services </li></ul><ul><li>Financial services </li></ul>SUPPORTING MARKETS Supporting Markets supply the resources firms need to upgrade and compete
    12. 12. <ul><li>Improving process </li></ul><ul><li>Improving products </li></ul><ul><li>Specializing in new functions </li></ul><ul><li>Moving into new market channels </li></ul>FIRM-LEVEL UPGRADING Firm-Level Upgrading improves the capacity to respond to market opportunity Increasing risks & rewards
    13. 13. RELATIONSHIPS Relationships are the engines that create investment and sustain competitiveness <ul><li>Promote win-win relationships </li></ul><ul><li>Foster learning & innovation </li></ul><ul><li>Increase depth & breadth of benefits </li></ul><ul><li>Create incentives for investment </li></ul>
    14. 14. PRINCIPLES OF THE VALUE CHAIN APPROACH <ul><li>Focusing on market systems </li></ul><ul><li>Exploiting the power of end markets </li></ul><ul><li>Building private sector ownership </li></ul><ul><li>Limiting the role of the project through facilitation </li></ul><ul><li>Leveraging incentives </li></ul><ul><li>Transforming relationships and changing behavior </li></ul><ul><li>Advocating for change in small, riskable steps </li></ul>
    15. 15. CASE STUDY: TANZANIA <ul><li>High-Value Export Vegetables in Tanzania </li></ul><ul><li>Heavily rural population: </li></ul><ul><ul><li>39.5 million people </li></ul></ul><ul><ul><li>28 million in rural areas </li></ul></ul><ul><li>Poverty: </li></ul><ul><ul><li>$340 per capita income </li></ul></ul><ul><ul><li>36% below poverty line </li></ul></ul><ul><li>Economy depends heavily on agriculture: </li></ul><ul><ul><li>85% of exports </li></ul></ul><ul><ul><li>80% of work force </li></ul></ul>
    16. 16. <ul><li>Smallholders have comparative advantage in production </li></ul><ul><li>Approximately 1 million smallholders currently produce vegetables for market </li></ul><ul><li>Soil and water resources are plentiful in Northern and Southern Highlands </li></ul><ul><li>Smallholders have land, labor and desire to enter HVEV market channels </li></ul>TANZANIA: COMPARATIVE ADVANTAGES
    17. 17. <ul><li>Lack of cost-effective certification for smallholders in Tanzania </li></ul><ul><li>Absence of lead firms willing to invest in the value chain and work with smallholder suppliers </li></ul><ul><li>General factors preventing expansion of value chain </li></ul><ul><ul><li>Limited air cargo capacity from Arusha-Moshi </li></ul></ul><ul><ul><li>Lack of inputs (esp. seeds) within Tanzania </li></ul></ul><ul><ul><li>Policy barriers (duties on inputs, National Certification) </li></ul></ul><ul><ul><li>Weak service markets </li></ul></ul>TANZANIA: THREATS
    18. 18. TANZANIA: VIEW FROM THE BASE OF THE CHAIN <ul><li>End Market </li></ul><ul><li>Limited knowledge of market conditions </li></ul><ul><li>Inter-Firm Cooperation </li></ul><ul><li>Strict requirements and standards restrict entry into global markets </li></ul><ul><li>Prefer selling to export markets but do not have access </li></ul><ul><li>Need for an effective intermediary with exporters </li></ul><ul><li>Need to improve trust in producer groups </li></ul><ul><li>Firm-Level Upgrading </li></ul><ul><li>Buyer support can affect the ability of producers to upgrade </li></ul><ul><li>Upgrading offers scope for collaboration with buyers </li></ul><ul><li>Certification is more likely when they know other certified producers </li></ul>
    19. 19. TANZANIA: EU MARKET TRENDS <ul><li>Increasing EU vegetable imports </li></ul><ul><li>Consumer trends towards healthy, convenient, fair trade, and eco-friendly food </li></ul><ul><li>De-commoditization / increased branding </li></ul><ul><li>Concentration of market power </li></ul><ul><li>Shifting procurement strategies </li></ul>
    22. 22. YOUR QUESTIONS?