Linking Value Chain Analysis and the ““Making Markets work better for the Poor”” Concept


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Linking Value Chain Analysis and the ““Making Markets work better for the Poor”” Concept

  1. 1. Linking Value Jörg Meyer-StamerChain Analysis and jms@mesopartner.comthe ““Making Frank WältringMarkets work fw@mesopartner.combetter for thePoor”” ConceptFinal Version Duisburg and Dortmund February 2007Paper prepared for the Pilot Project“Innovative Approaches to PrivateSector Development”
  2. 2. Content1 Purpose of this paper 12 “Making market systems work better for the poor” and “Value Chain Promotion”: What is it about? 13 Concepts and methodologies 33.1 M4P 33.1.1 Weaknesses of the M4P approach 63.2 Value Chains 73.2.1 Types of value chains 83.2.2 Value chains and donor interventions 93.2.3 Weaknesses of the value chain approach 113.3 Interim conclusion 124 How to link M4P + VC: Conceptual considerations 134.1 Value chains 134.1.1 Value chain differentiation 134.1.2 Value chain and territory 174.1.3 Value chains and markets 194.2 Making markets work 204.2.1 M4P and P4M 234.2.2 Understanding market failure 244.3 Who are “the poor”? 255 How to link M4P and VC analysis: Practical considerations 275.1 Analysis before action 275.2 Action research 295.2.1 Selecting a target group for a pro-poor value chain promotion project 305.2.2 Launching a pro-poor value chain promotion project 316 Conclusion 367 Bibliography 37
  3. 3. IIIFiguresFigure 1: The market concept of the M4P literature .................................................................3Figure 2: Simplified structure of the pepper and cloves value chains in Sri Lanka..............................................................................................................................14Figure 3: Structure of the pepper value chain in Sri Lanka ....................................................15Figure 4: Downstream part of the cinnamon value chain in Sri Lanka ...................................16Figure 5: The Commodity Chain of the Knitwear Industry in Santa Catarina, Brazil ..............................................................................................................................17Figure 6: The Cluster and the Value Chain perspective.........................................................18Figure 7: The 2 Pillars of Value Chain Promotion ..................................................................19Figure 8: The Context of Poverty and Micro-Enterprise Development...................................26Figure 9: The USAID approach to value chain promotion......................................................28Figure 10: The spiral model of sequencing in the EU LEADER programme..........................30Figure 11: Initial Sequence for a Pro-Poor Value Chain Initiative ..........................................32Figure 12 ................................................................................................................................35
  4. 4. SummaryThe main concern in development cooperation today is to achieve a bigger impact on povertyalleviation. This refers to all arenas, including private sector development. The conceptualdiscussion on private sector development has recently addressed the question of how tocreate an enabling environment and make markets work, and in particular make marketswork better for the poor. At the same time, practical activities in private sector developmentare addressing value chains, something that reflects realities of private companies that areconstantly battling to find markets for their products, and access to markets is often organ-ised through value chains.At first glance, the “Making Market Systems Work Better for the Poor” approach (M4P) andthe value chain approach appear to be incompatible. However, a closer look reveals that theM4P literature paints a differentiated picture of markets, which is informed by the analysis ofreal markets, particularly rural markets. It stands for a pragmatic approach that can give im-portant inputs for conceptual development for value chain approaches. At the same time, it isimportant not to merge the M4P and the value chain approaches, since this would compro-mise many of their respective strengths.Value chain projects sometimes spend a lot of time and effort on research before going intopractical activities. We suggest that there is little point in introducing M4P into a research-focused approach to value chain development, since this might lead to enormously complex,resource-intensive and lengthy research projects. Instead, we suggest a process-orientedapproach to value chain development that involves strong elements of action research. Wesuggest that there is a good opportunity to introduce M4P elements into such an approach.AcknowledgementsThis paper has benefit tremendously from the discussions at a workshop in Hanoi in Novem-ber 2006. We greatfully acknowledge the comments and suggestions made by Alan Johnsonand Dominic Smith (ADB/DFID M4P project), Kees van der Ree, Bas Rozemuller and MarijeBoomsma (ILO), Michael van den Berg (SNV), Ellen Kramer and Khan Nha (GTZ PovertyReduction project), and Thomas Finkel, Angelika Hutter, Vu Nhu Quynh and Pham NgocTram (GTZ SME project). Useful comments on earlier draft versions were given by SabineBecker, Shawn Cunningham, Doug Hindson and Peter Richter. The usual disclaimers apply.
  5. 5. 1 Purpose of this paperThe initial intention behind this paper was to verify whether it makes sense toconnect the literature on value chain analysis and the literature on “Making mar-ket systems work better for the poor” (M4P) in order to develop an analytical in-strument that makes value chain promotion more pro-poor. In the course of thework it became clear that the M4P concept is work in progress. Thus, this paperturned out to be a contribution to the evolving conceptualisation of M4P as well. Adraft version of the paper was finished in the first semester of 2006. The conceptoutlined in that paper was discussed with M4P and value chain practitioners in aworkshop in Hanoi in November 2006. An M4P-informed value chain analysiswas conducted in December 2006 in Vietnam’s Dak Lak province through theVietnamese-German project “Support for Poverty Reduction” which is managedby the Ministry of Labour, Invalids and Social Affairs (MOLISA) and GTZ.The paper is organised as follows. Section 2 gives a brief introduction to the twoconcepts, and Section 3 has a closer look at them. In Section 4, we discuss con-ceptual issues involved in the connection between value chain analysis andmaking market systems work better for the poor. In Section 5, we outline a practi-cal approache to analyse value chains in an action-oriented way that is informedby both approaches.2 “Making market systems work better for the poor” and “Value Chain Promotion”: What is it about?The starting point of this paper are two lines of conceptualisation and develop-ment practice that have recently started to converge: “Making market systemswork better for the poor (M4P)” and “Value Chain Promotion” (VCP). Both ap-proaches address the issue of private sector development, including promotion ofsmall producers in rural areas, from specific angles and against specific patternsof conceptual evolution.M4P has evolved from the BDS discussion of the late 1990s. The BDS discus-sion was based on the observation that the established donor approach for pri-vate sector development was not particularly effective. One of the main deficien-cies was the fact that it ignored existing business service markets, and indeedoften created unfair competition to existing service providers through subsidisedgovernmental business promotion programmes and organisations. The traditionalapproach to business development was a typical example of the donor approachanalysed by Pritchett and Woolcock: “need as the problem, supply as the solu-tion, civil service as the instrument” (Pritchett and Woolcock 2004, 193). With theBDS approach, the pendulum swung to the other extreme, emphasising the need
  6. 6. 2 Jörg Meyer-Stamer and Frank Wältringfor market development yet not clearly defining the role of government in thisprocess. Today, “BDS market development terminology is fading in favor of vo-cabulary that explains how market development can help the poor benefit fromeconomic growth. What was understood as BDS markets are increasingly calledbusiness service markets, commercially viable solutions, or support markets”(Miehlbradt and McVay 2005, 2). M4P shares with BDS the emphasis on marketdevelopment, but it has at the same time a wider and a less clearly definedscope.VCP has in recent years evolved from the subsector approach. To some extent itwas driven by practitioners’ insight in the need to connect producers to the mar-ket, and indeed understanding and verifying the target market before engaging inupgrading activities with producers and manufacturers. To some extent it is in-formed by the academic literature on global value chains, i.e. dense networksthat often involve retailers and other big corporations in industrialised countriesand a huge number of suppliers all over the world. The emergence of valuechains is primarily driven by the market. Development practitioners have ob-served this process and spotted an opportunity. The value chain approach hasreceived a particularly strong impulse from the discussion on rural and agricul-tural development, as decreasing transport and communication costs havestimulated the emergence of value chains that connect producers of fresh fruitand vegetables, processors and packaging houses in developing countries, andsupermarkets in industrialised countries. Research showed that poor smallhold-ers can in principle be integrated into such value chains, thus raising the expec-tation that value chain promotion can have a direct pro-poor effect (Dolan, Hum-phrey and Harris-Pascal 1999).At first glance, the rationale for connecting these two approaches may not appearparticularly convincing. First, there seems to be an intrinsic problem with the M4Papproach. Markets are about allocation, not about distribution. While “makingmarket systems work better” is a plausible proposition, “... for the poor” appar-ently is not. The M4P literature overcomes this problem by looking at marketsystems, i.e. the interaction between markets and other forms of allocation, nota-bly hierarchy (i.e. through government interventions or by the activities of majorcorporations). Moreover, the “better” is not to be understood in the sense of“better for the poor than for everybody else” but rather in the sense of “better thanso far”. The M4P literature points out that markets are often rigged in a way thatbenefits only a small group of already well-off, and that levelling the playing fieldcreates new opportunities for the not-so-rich.Second, value chains are not primarily about markets. The literature on globalvalue chains has pointed out that the main reason why such chains exist is thefact that the market rarely works properly. Transactions in global value chainstend to be complex, information can only partially be codified, and suppliers willoften face limitations with respect to their capacity to respond to the requirementsof global buyers (Gereffi, Humphrey and Sturgeon 2005). In other words, globalvalue chains as relatively stable, coherent structures exist because they are su-perior to anonymous markets. However, from a development policy angle, global
  7. 7. Linking Value Chain Promotion and the M4P Concept 3value chains still look much more like market arrangements than like anythingelse, and when it comes to promoting value chains one would try to rely on mar-ket adjustment as much as possible.3 Concepts and methodologies3.1 M4PThe M4P approach has been promoted in particular by DFID, SIDA and the AsianDevelopment Bank. With the M4P approach, they aspire to make their privatesector development approach more pro-poor, thus aligning it with the MilleniumDevelopment Goals.The market concept of the M4P literature is summarised in the following figure.Figure 1: The market concept of the M4P literature Source: Presentation given by Marshall Bear, November 2005What this figure tries to depict is the fact that the functioning of markets dependson two sets of factors. Intangible factors (lower semicircle) include formal and in-formal rules. Tangible factors include infrastructure and other services (upper
  8. 8. 4 Jörg Meyer-Stamer and Frank Wältringsemicircle). Both tangible and intangible factors are shaped by government, theprivate sector and its organisations, the third sector, and informal networks (outercircle).A specific element of M4P in this respect is the focus on institutions. What ismeant by this? Let us quote the explanation given by Ferrand, Gibson and Scott(2004, 14 f):“What are the most important formal rules impinging on the market and the poor?How do they impact on the market?These include: Generally applicable rules such as contract, property, consumer protection, weights and measures, health and safety, competition and tax laws. These are not market- specific but may be most important in shaping markets. Sector-specific rules such as banking law, electricity and telecommunications acts and land use and ownership laws. Non-statutory regulations such as industry codes of good conduct, quality standards and registers.What (and who) are the most important formal mechanisms for enforcement ofrules? How do they impact on the market?This includes, for example, commercial justice institutions, government systems of regu-lation, inspection and licensing, inland revenue authorities, company and land registries,industry regulators, local government tax offices, and self-regulation mechanisms in busi-ness associations.What are the most important informal institutions impinging on the market? Howdo they impact on the market?The actual way in which rules are interpreted and applied is often shaped more by socialnorms and practices as much as the letter of the law. Where formal rules and their appli-cation are weak, the business environment is governed by the informal. For example, thegeneral impracticality of commercial and contract law often means that business transac-tions become focused within established networks. In Africa, it is recognised widely thatexisting networks and trust – arising from particular conditions – is a key hindrance totrading and to collaborative business arrangements. While in Asia many networks ofsmall business have developed – to permit flexible production specialisation – in Africathis is less common. Overall, when the formal rules surrounding markets are weak andinformal institutions are not supportive of business transactions, the environment for mar-kets is significantly dysfunctional.”In a development policy perspective, the M4P approach effectively distinguishesthree intervention levels (e.g. DFID 2005):1. The micro level, where the focus is at creating functioning markets and effec- tive BDS structures.2. The meso level, which, though it remains conceptually somewhat fuzzy, con- sists of para-governmental structures that are funded by external donors and that substitute defunct or ineffective national government structures in devel- oping countries.
  9. 9. Linking Value Chain Promotion and the M4P Concept 53. The macro level of generic framework conditions, in particular the legal framework and the rules and regulation that guide its delivery.The argument of the M4P concept can be summarised in two points: Development-oriented interventions need to create effective markets, rather than distorting or substituting them in the way traditional donor interventions often did. This point takes the key insight of the BDS approach as its point of departure and applies it in a more comprehensive manner. Those market adjustment activities must be prioritised that have a strong pro- poor effect. The M4P approach emphasises the need for systematic research in this respect.The first argument is close to the one made by Meyer-Stamer (2001, 23) who ar-gues that a significant part of meso-level interventions is temporary in nature andneeds to be designed in a way that does not compromise the phasing-out of in-terventions as a given market begins to work effectively. The M4P approach ne-glects the corollary emphasised by Meyer-Stamer, namely that some meso-levelinterventions are permanent in nature since the market will never take care ofthem; typical examples include, for instance, some activities in the field of qualityassurance, certification, testing and calibration.In the body of literature on M4P, Dorward and Kydd (2005, 16 ff) relate to this lineof reasoning. They observe that it can be entirely unrealistic, and indeed self-defeating, to take the principle of making markets work too far. They highlight thefact that highly fragmented markets can lead to prohibitively high transactioncosts while at the same time creating barriers to entry that reinforce critical bot-tlenecks. One of the examples they provide is “asset specificity”. If an entrepre-neur buys a truck to transport mangoes, but it turns out that there are not manymangoes to be transported, she can still use the truck to transport, say, bricks.But if an entrepreneur invests in a highly specialised canning operation for man-goes, the absence of mangoes creates a serious problem. Therefore, in a com-petitive market with high information cost and little direct communication betweenmarket participants, entrepreneurs may hesitate to invest into anything that dis-plays a high asset specificity. Dorward and Kydd present hierarchies, be theygovernment institutions or private sector organisations, as a necessary comple-ment to markets. The way they conceptualise hierarchies, for instance as corpo-rations that organise various stages in a value chain or organise outgrower op-erations, relates to the literature on value chains, though they do not make thisconnection explicit.The M4P approach emphasises the need for analysis. According to DFID (2005,19), “the M4P approach will draw upon the following types of data: Poverty reports including household surveys and PPA surveys. Specific market and transactions studies using participatory and other tech- niques to complement existing poverty data.
  10. 10. 6 Jörg Meyer-Stamer and Frank Wältring ‘Doing Business’ and Investment Climate Surveys. Trade, production and price data. Market outcomes and data from the operation of value chains. The rate and direction of the evolution of key markets for the poor, especially the: – process of market deepening and the expansion of the access frontier; – crossing of key thresholds for participation, outreach, choice, economies of scale and sustainability; and – effects of cross market linkages.”In other words, the M4P approach involves a rather comprehensive effort in con-ducting studies, more comprehensive indeed than the already quite comprehen-sive “BDS market assessments” of the recent past.3.1.1 Weaknesses of the M4P approachThe M4P approach is still at an early stage of conceptual development, and it isstill searching answers to important conceptual as well as practical issues.Conceptual weaknesses: The marketThe key issue in the concept, the market, remains fuzzy. From an economicsperspective, the different types of market failure and the reasons for their exis-tence are not discussed in a systematic way. Similar to the BDS approach, mar-kets are discussed in an inductive way, and the analysis of markets is informedby concepts from a business administration perspective, not a microeconomicsperspective. The M4P discussion may have something to learn from the discus-sion on privatisation in this respect; for instance, Brücker and Hillebrand (1996)offer an excellent overview of market failure and options in addressing it. From asocial science perspective, the issue of “embeddedness” of markets (Granovetter1992) in social structures is something that should be elaborated much strongerand more consistently in the M4P literature (see also Platteau 1994).Conceptual weaknesses: The poorThe M4P literature is somewhat blurred when it comes to “the poor”. It neither in-troduces different levels of poverty, from relative income poverty to absolute des-titution, nor does it explicitly explain whether it is based on a static or dynamicconcept of poverty. In fact, it avoids one of the prominent concepts in poverty re-
  11. 11. Linking Value Chain Promotion and the M4P Concept 7search, namely exclusion. This is somewhat puzzling since “making marketswork for the poor” can to some extent be translated into “integrating poor intomarkets”, i.e. taking direct action to address exclusion.Conceptual weaknesses: GovernmentIn the way it is summarised in the most recent concept paper (DFID 2005), theM4P concept fails to address the issue of sustainability of intervention vehicles /structures for market alignment. It establishes high requirements on the effective-ness of government structures, yet delivers no visible contribution to strengthen-ing government structures. In fact, existing government structures in partnercountries are effectively sidelined with programmes like ComMark in Southern Af-rica. In Nigeria, PrOpCom acts like any meso-institution anywhere that has de-cided to build a powerful value chain on the basis of currently weak, fragmentedstructures, very similar to what, say, Scottish Enterprise has done since 1999 inits “Scottish Food & Drink” initiative, except that at some stage PrOpCom willterminate, while new types of market failure will continue to emerge.Practical issuesWhile emphasising the relevance of market failure and the need for market ad-justment tools, the M4P literature so far does not provide any tools that wouldpermit efficient analysis of market failure. A development practitioner who needsto prepare Terms of Reference for a consultant who is supposed to analyse mar-ket failure is pretty much left to her own devices. The M4P literature names sometypes of market failure, such as public goods and externalities, market power andeconomies of scale, asymmetric information, and costs of establishing and en-forcing agreements (DFID 2005, 6). However, we have not been able to locate atoolkit that would guide practitioners in identifying market failure, understandingthe underlying reasons, and finding efficient and sustainable means of address-ing it.3.2 Value ChainsBoth academic research and development practitioners have for a number ofyears been addressing “value chains”. A value chain is the sequence of activitiesinvolved in transforming raw materials into a product that is acquired by the finalcustomer. It includes business activities from the generation of raw materials, totransforming them into intermediate products, to manufacturing the final product.It includes business transactions, but also transactions between companies andgovernments (e.g. the bureaucracy involved in transborder trade), and transac-tions between companies and supporting institutions in areas like finance, train-ing, research and development, metrology and certification, and others.
  12. 12. 8 Jörg Meyer-Stamer and Frank WältringA value chain can be relatively straightforward, for instance in the case of the or-ganic vegetable value chain, where rural producers, intermediates and proces-sors / packaging houses, and wholesalers and retailers are involved. A valuechain can be extremely complex, for instance in the case of a passenger car or apersonal computer, or in fact in footwear or garments, where producers in variouscountries across the globe interact.Value chains exist at the subnational regional level, the national level, and theglobal level. In subnational regions, value chains are difficult to distinguish from“clusters”; in fact, some development agencies use the terms “cluster” and “valuechain” interchangeably. Most of the academic literature on value chains ad-dresses them at the global level.How are value chains different from supply chains? They are not. What is differ-ent is the angle of analysis. The supply chain literature is rooted in industrial en-gineering faculties and business schools. The guiding question of the supplychain literature is: How can a company manage its supply chain more efficiently,and create a competitive advantage through unique and more efficient supplychain management? Examples for best practice in supply chain management in-clude retailers like Wal-Mart and Ikea, who are not only capable of spotting low-price / good quality producers across the globe but also highly skilled in organis-ing the logistics along their value chain in such a way that cost efficiency is high,lead times are short, and working capital requirements are low.The value chain literature is rooted in development studies and sociology. Itstarted from the observation that agricultural and industrial development proc-esses in developing countries increasingly are based on interaction with leadfirms in industrialised countries. The concern of this body of literature is not withthe efficiency of lead firms such as Wal-Mart or Ikea but rather with the develop-ment prospects of companies that are dependent on Wal-Mart or Ikea for theirexport sales, and that are thus integrated into the global economy in a dependentway. The main focus is at the analysis of power structures in the world economy.3.2.1 Types of value chainsThe current state of research on value chains (in particular global value chains,but its findings to a large extent apply to national-level value chains as well) dis-tinguishes four types of value chains (Schmitz 2005, 6):1. “Arm’s length market relations. Buyer and supplier do not need to develop close relationships because the product is standardised or easily customised. A range of firms can meet the buyers requirements. When problems arise buyers move on to different suppliers.2. Modular networks. Firms develop information-intensive relationships, divid- ing essential competences between them. The buyer provides the design and product specification and highly competent suppliers provide products and
  13. 13. Linking Value Chain Promotion and the M4P Concept 9 services at short notice to any kind of specification drawing on the specialisa- tions in their cluster. Information intensity is high, transactional dependence is low, and confidence in supplier competence is high.3. Captive networks. In this case, one firm exercises a high degree of control over other firms in the chain. In garment and footwear chains, buyers often specify the characteristics of the product to be made by their suppliers, spec- ify the processes to be followed and inspect that these specifications are fol- lowed. Typically this occurs when the buyer has doubts about the compe- tence of the supply chain.4. Hierarchy. The lead firm takes direct ownership of some operations in the chain. The case of the intra-firm trade between a trans-national company and its subsidiaries falls into this category.”Recent research on global value chains has primarily looked at Type 2 and Type3 value chains, i.e. value chains that are neither market based nor organisedwithin a multinational firm. Such value chains exist because the market does notwork (market failure) and an intra-firm setup would involve prohibitive transactioncosts and constant problems with principal-agent issues. Let us look at these twoissues in some more detail: Market failure: What is traded in global value chains are non-commodity products, i.e. products that are produced according to specific parameters. Some of these parameters are specifically defined by the buyer, for instance designs. A key issue here is that the buyer cannot fully codify its requirements but needs ongoing communication with the supplier to explain what exactly is wanted. Other parameters are features such as quality criteria, compliance with environmental or social standards, and others. So far, experience has shown that international standards such as ISO 9000, ISO 14000, and SA 8000 cannot guarantee that suppliers meet the requirements of buyers, so that buyers tend to prefer direct interaction and control. Hierarchy, transaction cost, principal-agent problems: Over the past two dec- ades, there has been a strong tendency away from the Chandlerian model of company evolution, i.e. major integrated corporations, since experience showed that a model of a company that focused at its core competencies and outsourced many non-core activities was more efficient. This was due to lower transaction costs in coordinating inter-company relationships, some- thing that was more efficient that one integrated company with a bloated in- ternal bureaucracy, as well as the absence of the principal-agent issues common in big, spatially scattered corporate organisations.3.2.2 Value chains and donor interventionsThe value chain issue has been taken up be donor agencies, which perceivethem both as a risk and an opportunity. The risk lies in the fact that developing
  14. 14. 10 Jörg Meyer-Stamer and Frank Wältringcountry producers cannot be integrated into global markets if they cannot meetthe requirements of value chains lead firms regarding cost, quality, certification,quantity, and timely delivery. The chance lies in the fact that connecting devel-oping country producers to the world market can be easier if the donor agencymanages to build a direct relationship with a value chain lead firm.In fact, donors recently have started to work directly with value chains, i.e. by en-gaging with the lead firms / global buyers, for instance in a number of GTZ-managed public-private partnership projects. To some extent, this was driven bya combination of global buyer’s concern with corporate social responsibility (inparticular the desire not to appear as culprits for miserably labour conditions insweat shops, or being linked to child labour) and donor organisations’ concern toimprove the productivity levels in companies that are part of value chains so thatthey reap greater benefits, including higher wages and better working conditions.Various donor organisations have formulated approaches for value chain analy-sis. While having some features in common, existing approaches to value chainanalysis demonstrate a number of specific differences. They are summarised inthe table in Annex 1. Identifying the similarities and differences within existingvalue chain analysis approaches does not become obvious by casting a quickglance. Many of them are integrated into wider market or demand assessmentsor integrated into LRED, BDS, Enabling Environment, PPP, BDS or cluster de-velopment activities.Similarities in the approachesThere are certain similarities among the different value chain analysis ap-proaches: Most of the approaches combine the analysis of the chain with the analysis of interventions. The sequence of an analysis usually includes the following steps: identifica- tion of the subsector, analysis of the chain linkages, analysis of the market, analysis of potentials, analysis of constraints, analysis of solutions, analysis of interventions. Nearly all of the approaches apply criteria that in general are including in- crease of competitiveness, employment effects and sustainability. There is a tendency especially in approaches of donors to integrate partici- patory elements and to use the value chain analysis also to identify potential partner organisations or lead firms. Often activities that have started at the governmental level include very study- and less participatory-based ap- proaches, e.g. to design a national export strategy. There is a trend towards incremental analysis approaches, often based on larger baseline studies.
  15. 15. Linking Value Chain Promotion and the M4P Concept 11Differences in donor approachesThere are differences with respect to engaging the stakeholders and the targetgroup, in the way of planning interventions, with regard to the time sequence ofanalysis and intervention and in the combination of value chain analysis withother approaches. Regarding the latter point, it is common to find mixed ap-proaches that combine and complement value chain analysis with other devel-opment approaches (Cluster, value chains, PPP, LED, investment promotion,OD, EE, BDS). Examples are many GTZ projects but also other donor organisa-tions that follow a systemic approach which goes beyond the focus on interfirm-linkages and BDS and that analyse interventions in a more integrated cross-cutting form (e.g. Vietnam, Sri Lanka). Regarding planning and sequencing, thereare two fundamentally different types of approaches: Incremental approaches that analyse parts of the chain on a continuous base to identify further opportunities for donor intervention. Many projects that started with large studies subsequently focused on more specific sub-areas (e.g. AfE in Bangladesh with the KATALYST project). Other approaches start already with participatory research that involves different stakeholders through workshops and interviews (stakeholders usually come from the pol- icy, social and economic sphere) with the objective to initiate an iterative pro- cess of planning / implementing / assessing / planning. Planning approaches that follow a step-by-step procedure from information gathering, sub-sector selection, identification of constraints, identification of intervention approaches towards planning and implementing interventions. These approaches often take longer until they reach implementation. They often also do not include the stakeholders in the final planning process of in- terventions (AfE, IDE, …).Finally, it is noteworthy that while all approaches focus at the need to increasecompetitiveness, some are primarily looking at livelihood improvement (e.g. IDE).3.2.3 Weaknesses of the value chain approachThe academic value chain literature addresses global value chains. It typicallylooks at products that are produced in developing countries and consumed in in-dustrialised countries, from Kenyan fresh vegetables to Mexican blue jeans toTaiwanese computers. It analyses producers in developing countries that are al-ready highly competitive; the fact that they are able to consistently satisfy the so-phisticated demand of leading companies in industrialised countries bears wit-ness of this. However, only occasionally does the value chain literature trace theevolution of producers in developing countries and the stages that preceded theirintegration into global value chains. The exact mechanisms of how producers indeveloping countries become integrated into global value chains are not at allclear. What exactly happens before producers appear on the radar screen ofglobal buyers, how first contact is established and how the initial interaction goesis not well understood. In this respect, the literature is only of limited value to
  16. 16. 12 Jörg Meyer-Stamer and Frank Wältringpractitioners who want to upgrade producers in developing countries so that theyappear on the radar screen of global buyers.In the practitioner literature, there appears to be a tendency to ignore the differ-ences between Taiwanese computer manufacturers and, say, Guatemalanhandicraft producers. There seems to be an assumption that pretty much anyproducer anywhere can in principle be integrated into global value chains. This isa repetition of a misunderstanding that came up in the discussion on cluster de-velopment and promotion some years ago, where we have shown that conceptsthat have been developed in settings with highly competitive industries cannoteasily be transferred to survivalist sectors (Altenburg and Meyer-Stamer 1999).3.3 Interim conclusionValue chain promotion is concerned with competitiveness of producers. It aims atconnecting producers in developing countries with markets, be it nationally orglobally. Value chain promotion, as conducted by donor agencies, is implicitlypro-poor in that it focuses at groups of producers who will not spontaneously linkup with external buyers because of too wide a gap between their supply capacityand the demands of buyers, which may be a result of insufficient skills, an unfa-vourable, peripheral location, a disabling environment, or other factors.The M4P approach is concerned with market adjustment. It is explicitly pro-poor.It aims at improving the effectiveness of market mechanisms, so that barriers toentry are lowered and more economic opportunities are created. Moreover, moreeffective markets are expected to lead to lower prices and thus an increase in theeffective purchasing power of poor.VCP and M4P look at development challenges from different angles. One mightexpect M4P to be very generic (though the examples mentioned in the M4P lit-erature are not), and VCP to be highly specific. However, M4P does not only lookat market adjustment from a macro-economic perspective, in the way the “ena-bling environment” approach does. It also addresses the micro- and mesolevels.From this angle, one can argue that VCP and M4P are complementary and canbe connected.One element that must be highlighted is the fact that the M4P literature explicitlyaddresses different markets – not only product markets, but also factor markets,for instance the labour market. This is an element that only appears in an indirect,implicit way in the value chain literature and practice. The labour market is un-doubtedly one of the most important markets in terms of making the economymore pro-poor. Distortions in the labour market are one of the most importantreasons for persistent marginalisation and poverty (Granovetter 2005), not only indeveloping countries but also, for instance, in the U.S. (Rosenfeld 2002). Ad-dressing the labour market, as well as other factors markets, in VCP in a consis-tent and systematic way may be a promising way of making it more pro-poor.
  17. 17. Linking Value Chain Promotion and the M4P Concept 13So the conclusion is this: M4P can inform VC work, but the two should not bemerged. M4P and VC overlap. M4P covers issues like labour markets, which arenot systematically addressed in VC. VC has an explicit focus at supranational is-sues, which are beyond the scope of M4P.4 How to link M4P + VC: Conceptual considerationsIn this section we will highlight a number of issues that so far are not adequatelyaddressed in the M4P and the VCP literature. We will indicate a number of con-cepts and strands of academic discussion that may help in creating a sounderfoundation for both approaches.4.1 Value chains4.1.1 Value chain differentiationThe “value chain” metaphor is valuable in more than one sense. Not only is achain a relatively flexible structure that will change its form frequently withoutchanging the basic structure. There is also one physical feature of a chain: It isimpossible to move it by pushing it. The only way to move a chain is by pulling.Translating this metaphor takes us to the main difference between VCP and tra-ditional approaches. The latter often had a tendency to strengthen the supply ca-pacity of producers and small companies without having a confirmed order, i.e.they assumed that a market would be available, which sometimes was the caseand often not. VCP starts from an understanding of the final demand and worksits way back through distribution channels to the different stages of productionand manufacturing. That is, proper VCP does this. There are also VCP interven-tions which effectively are re-labelled sector activities, sometimes based on aterminological and conceptual confusion around the terms sector, subsector andvalue chain: Among development practitioners, sectors are commonly understood along the lines of the International Standard Industry Classification, i.e. the food sector, the metalworking sector, the textile sector, etc. It is also not rare to find that, for instance, microenterprises are addressed as a sector, and “in- formal sector” is a firmly established term that indicates yet a different ap- proach to classification. The different sector definitions reflect different inter- ests. The ISIC classification is guided by the interest of statistical offices to organise the complex reality of an economy in a way that is practical for data collection and presentation. The microenterprise definition is guided by the interests of policy makers who perceive a type of enterprise to be systemati- cally disadvantaged and who need criteria to define those businesses that will benefit, for instance, from simplified tax payments. The informal sector defini- tion was originally driven by the interest to highlight dismal working conditions
  18. 18. 14 Jörg Meyer-Stamer and Frank Wältring in a particular type of business. None of these definitions makes much sense in the context of targeted business promotion activities, though. Subsectors have been defined as “all the firms that buy and sell from each other in order to supply a particular set of products or services to final con- sumers” (Lusby and Panlibuton 2002, iv). This definition is somewhere in between the sector terminology and the value chain concept. At first glance, it appears to be quite similar to the value chain definition. Unlike the value chain, though, it does not define economic activities from the perspective of the final consumer, and this establishes a crucial difference between “sub- sector” and “value chain”.From a practitioner’s perspective, proper VCP, based on a genuine effort to un-derstand the structure of a value chain starting at the final customer, has a bigdisadvantage. It tends to involve a hugely complex system that is very difficult toaddress for any practical purposes. This is not a new discovery. Long before theterm “value chain” in the way it is used in this paper was coined, when research-ers were still talking about “networks”, they detected that one “sector” in one re-gion can involve a variety of different structures that are only loosely interrelated.Silicon Valley, for instance, is not one value chain but actually several, each withdifferent final customers, internal structures and challenges regarding upgrading(Storper and Harrison 1991).At first glance, a value chain appears to be a very straightforward affair. Simpli-fied value chain maps usually look like the one depicted in Figure 2.Figure 2: Simplified structure of the pepper and cloves value chains in SriLankaThis figure is taken from a presentation on the experiences of a GTZ VCP projectin Sri Lanka. A more detailed, yet still simplified map of the pepper value chainlooks as depicted in Figure 3. This and the following figure have been elaboratedin stakeholder workshops of the GTZ Value Chain Project in Sri Lanka.
  19. 19. Linking Value Chain Promotion and the M4P Concept 15Figure 3: Structure of the pepper value chain in Sri Lanka
  20. 20. 16 Jörg Meyer-Stamer and Frank WältringThis is still a relative straightforward picture, which is mostly due to the fact thatthe distribution channels and final customers of Sri Lankan pepper are not par-ticularly diversified. Things look quite different for the cinnamon value chain,which serves quite different final customers.Figure 4: Downstream part of the cinnamon value chain in Sri LankaCinnamon is not only used as a kitchen spice. It is also an input for the pharma-ceutical and fragrance industries. So far, Sri Lankan producers have not reallytapped into these markets. But as they will develop a capacity to establish link-ages with such customers, the map of the Sri Lankan cinnamon value chain willbecome significantly more complex, since different needs and demands of finalcustomers will lead to a segmentation of value chains inside Sri Lanka (which arenot captured in Figure 4).Similarly, research that we conducted in Brazil in the second half of the 1990s ona textiles and garments value chain in the Vale do Itajaí region showed a pictureof four distinct patterns of industrial organisation, feeding into five different distri-bution channels. At first glance, one might have expected one value chain. How-ever, the reality is much more complex. This has important consequences for any
  21. 21. Linking Value Chain Promotion and the M4P Concept 17effort in upgrading, since different segments of the industry have quite differentrequirements. In other words, in order to upgrade the textile and garments sectorin this region, one would have to launch not one but several value chain initia-tives, each of them addressing one specific value chain. Most companies wouldonly be part of one value chain initiatives, while other players, such as skills de-velopment or technology institutions, might have to be involved in four or fivevalue chain initiatives at the same time.Figure 5: The Commodity Chain of the Knitwear Industry in Santa Catarina,Brazil Source: Meyer-Stamer 1998What is the conclusion from this line of argument? Value chains tend to be highlycomplex systems. An effort to analyse them in a systematic way will thus tend toinvolve a very significant research effort. It is important to note that not only thepurpose but also the scope of VCP-related research would be different from atypical academic GVC research project. GVC research focuses at the issue ofpower imbalances in the international economy. It often takes individual retailers,or narrowly defined final customers, as its starting point. A VCP project cannotafford this kind of focused perspective but rather has to take a much broaderlook. A GVC researcher would be satisfied with a paper that investigates theconnections between French fragrance manufacturers and Sri Lankan cinnamonproducers. For somebody who is supposed to do spice value chain promotion inSri Lanka, this would only be one piece of a much bigger puzzle. In other words,value chain initiatives need to be managed carefully so that they don’t get out ofhand.4.1.2 Value chain and territoryValue chains do not per se have a territorial dimension. Obviously, each elementhas a location. But the defining feature of the value chain is the pattern of con-nection between various producers, services and customers. The following pic-ture captures this aspect by comparing the value chain approach with the clusterapproach. Cluster promotion and value chain promotion are not profoundly differ-
  22. 22. 18 Jörg Meyer-Stamer and Frank Wältringent in terms of the objectives and instruments. The main difference is the clearterritorial focus in cluster promotion, whereas VCP involves a functional focus.Figure 6: The Cluster and the Value Chain perspective Source: own designNevertheless, practical experience seems to indicate that it makes sense to havea closer look at the territorial dimension of VCP. The purpose of a VCP analysisis to have a very clear idea regarding the upgrading necessities of local produc-ers that for whatever reason have become the object of a donor project or a do-mestic development initiative. The upgrading effort would not relate to someanonymous market but rather the very specific demands of lead firms in a givenvalue chain. Integrating domestic firms into global value chains involves two dif-ferent types of challenges. One of them is related to territorial issues; the otherone are national framework factors.Regarding national-level factors, one of the issues that often comes up in VCPprojects are supply chain issues. Exports of fresh products are hampered by theabsence of cooling facilities at the main airport. Exports of all sorts of productsare hampered by clumsy and unpredictable procedures at ports. Exporters find itdifficult and/or very costly to have their products tested and certified. Communi-cation between suppliers and customers suffers from slow and unreliable Internetconnections. Such issues are generic in nature. They need to be addressed atthe national level. They require direct interaction with national ministries, customsauthorities, metrology institutions, and other organisations. For instance, in thecase of the GTZ VCP project in Sri Lanka, one of the major obstacles for organicvegetable exports was the fact that vegetables were routinely fumigated at the aircargo facility of Colombo airport. Since a fumigated vegetable is no longer an or-ganic vegetable, changing this routine was one of the major achievements of theproject.At the same time, it is essential to work directly with producers. This is where theterritorial angle comes in. In any value chain, it is quite unlikely that producers are
  23. 23. Linking Value Chain Promotion and the M4P Concept 19randomly scattered across the country. More likely, they will be concentrated incertain locations – due to climatic and soil conditions (or coincidence) in agricul-ture, due to cluster effects in industry and services. Thus, direct interaction withproducers has by nature a strong territorial focus.As a consequence, it is recommendable to conceptualise VCP as an activity thatrests on two pillars, i.e. national level activities and activities at the territorial level,at least under those circumstances where the topic of integration in global valuechains, or into sophisticated national value chains, is being addressed.Figure 7: The 2 Pillars of Value Chain Promotion Source: own design.Balancing both things in one programme or project is a challenge. One wouldlook at one programme with two components, a national-level component and aterritorial component. However, the management of such a programme can eas-ily get out of hand, especially if it addresses several value chains and thus nu-merous producer locations. A plausible alternative approach is one where a VCPproject comes in at the national level to bridge the gap between territorial initia-tives and the external or national market. For instance, the experience of GTZ inSri Lanka indicated a win-win game, where the national level VCP project bene-fited from another GTZ project with a territorial focus and vice versa (Richter2005). At the same time, the VCP project could easily look for opportunities forinteraction with other projects by other donors (e.g. a USAID spice sector projectin a different part of the country, or an ILO SME promotion project in yet anotherpart of the country), something that would have been difficult if both projects hadbeen part of one strictly managed programme.4.1.3 Value chains and marketsWe have already pointed at the fact that value chains exist because real worldmarkets are quite different from the ideal markets of microeconomics textbooks.This does not mean, though, that value chains are a substitute for markets. Theyare rather a mixture of different modes of coordination, where network-type coor-
  24. 24. 20 Jörg Meyer-Stamer and Frank Wältringdination is a key element yet market coordination and coordination through hier-archy also play an important role.From the perspective of promotion activities, the existence of close network rela-tionships between producers and customers is the point of departure. An analysisof a given value chain will normally detect parts of the chain that are primarilymarket-coordinated, and other parts that are primarily coordinated through hier-archies. Typical examples of market coordination in a value chain are non-strategic services or commodity inputs. Typical examples of hierarchical coordi-nation are on the one hand outgrower systems which are coordinated by majorcompanies, on the other hand services offered by (typically government-run)supporting institutions. An analysis of a value chain needs to understand whichtypes of transactions are predominantly coordinated through networks, markets,or hierarchies, and to what extent one mode of coordinated might be substitutedthrough a different, ultimately more efficient mode.4.2 Making markets workOne of the features of the M4P literature is its close connection to the BDS dis-cussion and literature. Unfortunately, BDS has never enjoyed an understandingof markets that was firmly rooted in microeconomics concepts. BDS, and espe-cially BDS market assessments, are the world of A C Nielsen and Philip Kotler,not the world of NBER and Joseph Stiglitz. Fortunately, the M4P literature alsodraws on other arenas of discussion, such as rural development economicswhich have developed insights into the functioning, and the frequent dysfunction-alities, of markets (Dorward and Kydd 2005). What appears to be a really nicemarket in the real world often turns out to be the opposite once closely scruti-nised. Geertz (1992) has shown that bazaars are rather dysfunctional markets,where price formation is extremely intransparent and thus the price mechanism,the best feature the market has to offer, does not work properly. Dorward andKydd (2005) point out that atomised agricultural markets in African locations arecreating such high transaction cost that they are ultimately dysfunctional, too.What is missing in the M4P literature are references to the widely accepted in-sight that markets are one out of three forms of coordination, the other two beinghierarchies / organisations and networks / communities. While economics re-search has formulated the market / hierarchy / network trias of modes of coordi-nation (Powell 1990, OECD 1992), social scientists tend to distinguish market,organisation and community (e.g. Wiesenthal 2000). What is important in bothstrands of theorising is the observation that in the real world it is highly unlikelythat any pure mode of coordination will work. When a market does not work, theadequate answer is, in all likelihood, not more market but rather more hierarchy /organisation.In fact, not only do the three types usually appear in some kind of combination,but the functionality of each of the three usually depends on the other two. Forinstance, a market only works when hierarchy is present (in the shape of gov-
  25. 25. Linking Value Chain Promotion and the M4P Concept 21ernment that creates an enabling environment, for instance by securing propertyrights, and in the shape of companies that internalise processes with high trans-action costs) and when networks exist (for instance business networks, which areanother device to minimise transaction costs). Nevertheless, in any given eco-nomic setting, transactions tend to be quite obviously predominantly organised inmarkets, in hierarchies, or in networks. Job placement is a typical example. Somecountries have a sector of for-profit private job placement agencies, i.e. a marketsolution. In other countries, job placement is a government monopoly, i.e. a hier-archy solution. Yet other countries have neither, and job placement is achievedthrough informal communication among business people or within social groups,i.e. a network solution.What is the origin and conceptual background of the three types? Market vs hi-erarchy has been the subject of the classic paper by Ronald Coase1 who asked:Why are there companies? If markets are so efficient, why not organise every-thing via markets, i.e. have only self-employed individuals? The answer is, es-sentially, transaction cost. Organising, say, steel production purely via a market,involving only self-employed individuals, would create significant transactioncosts. Organising it inside a company is the more efficient solution.Coase had companies in mind when he used the term “hierarchy”. However, it iscommon to use the term in a way that not only refers to companies, but alsoother organisations, in particular government.Networks have been conceptually introduced as a third mode of organisation byWalter Powell (1990). He pointed out that networks are not something some-where in between market and hierarchy but rather a distinctive mode of organisa-tion. Networks refers to formal constellations, from strategic alliances to businessassociations, as well as informal constellations, for instance the dense communi-cation networks inside industrial clusters.The important point to make is that there are no other ideal types, i.e. no otherways of organising economic transactions. Any economic transaction is predomi-nantly done in a market, in a hierarchy, or in a network.How does the discussion on M4P relate to the concept of market, hierarchy andnetwork? The conceptual discussion and practical work on M4P has evolvedalong three distinct trajectories. Three distinct schools of thought have emerged:1. The market focus. This perspective is linked to the Commark project in Southern Africa.2 It is aligned with what Altenburg and Drachenfels (2005) have called “the new minimalist approach to private sector development”, where government is supposed to limit itself to creating an enabling environ- ment so that markets can work effectively and efficiently. This perspective has no proper conceptualisation of market failure, and of interventions neces-1 “The nature of the firm”, 19372 Ferrand, Gibson and Scott 2004, Centre for Development and Enterprise 2006
  26. 26. 22 Jörg Meyer-Stamer and Frank Wältring sary to remedy market failure. Markets are expected to work provided that the framework conditions are right, and they are supposed to be by far the most efficient mode of organising economic activities. The Commark documents are quite explicit about the fact that functioning markets are perfectly suffi- cient for a thriving economy, and that hierarchy as in selective government interventions is creating more damage than benefit. Networks do not figure in these documents.2. The markets and hierarchies focus. This perspective is linked to the work of authors like Dorward, Kydd and others on behalf of DFID (Dorward and Kydd 2005, Kydd et al 2004). It is based on insights from agricultural economics. It highlights that fact that it is not necessarily a good idea to rely on markets only, since what appears as a perfect market in theory can be a transaction cost nightmare in practice. Markets with lots of small suppliers and customers are a reality in rural Africa, yet they don’t work very well since it is time con- suming and thus costly for customers to get a comprehensive picture of the variety and quality of produce that is on offer; “... market exchange in Africa is generally ‘costly, cumbersome, time-consuming, and unpredictable’” (Dor- ward and Kydd 2005, 18, quoting Fafchamps 2004). Hierarchies, for instance outgrower systems that are managed by a major company, can turn out to be significantly more wealth creating than markets under such circumstances.3. The markets, hierarchies and network focus. This perspective has emerged from the work of the ADB/DFID project in Vietnam which has over time broadened its focus.3 Regarding hierarchy, it addressed the issue of enabling environment, but it also looked at contract farming, i.e. hierarchy in the private sector. Regarding network, it addressed issues such as collective action.Each of the three schools of thought has it upside and its downside. Market focus: The upside is the sharp focus. One downside that necessarily comes with the focus is the appearance of a one-sided market fundamentalist approach. Another downside of the existing literature is the superficial way in which it deals with market failure and possible ways to address market failure. Market and hierarchy focus: The upside is the more balanced perspective, since this perspective acknowledges the inherent limits of markets. The downside is the negligence of network as the third important mode of organi- sation. Market, hierarchy and network focus: The upside is the coverage of all three modes of organisation, i.e. a holistic perspective that does not a priori judge that one mode is better than the others. The downside is that this focus re- flects an evolutionary process from “Making Market Systems Work for the Poor” to “Making Everything Work for the Poor” which, from a practical per- spective, is a steep task.3 See the papers available at
  27. 27. Linking Value Chain Promotion and the M4P Concept 234.2.1 M4P and P4MAnother important conclusion is that it actually can make sense to look at the waymarkets work, and to address their dysfunctionalities and failures rather than takethem for granted. This is particularly relevant with respect to the poor. It is morethan just a play of words to point out that "making markets work for the poor" isthe opposite of "making poor work for the market". In the past, a common ap-proach in poverty alleviation was to address the poor rather than the marketsthey tried to interact in.A typical example of "P4M" is skills development. The usual idea in skills devel-opment is to upgrade the skills of individuals so that they fit with employers’ re-quirements. Sometimes, this is complemented with "life skills" training in order toenhance the employability of individuals. In other words, the structure andmechanisms of the labour market are taken for granted. The focus is not atchanging the way the market works, but rather at making individuals fit for themarket.Another example of "P4M" is the creation of collateral banks or other mecha-nisms that create securities for potential creditors who cannot fulfil the banksusual requirements regarding collateral, and who thus do not have access to thecapital market. On the other hand, Microfinance is an approach that fits with"M4P" principles. Support for microfinance is based on the insight that the con-ventional capital market often does not work for small producers and poor house-holds.An interim conclusion would be that M4P and P4M are not alternatives but com-plementary approaches. For instance, making the labour market work better forthe poor does not alleviate the need to raise the level of skills and the more gen-eral employability of poor people.It is, however, important not ignore an important dilemma in this respect. Limitingthe perspective to markets alone compromises the “for the poor” ambition, espe-cially if one takes a closer look at the causes of poverty. Poor people are oftenexcluded, which takes us to a finding that appears tautological: Markets don’twork for excluded groups because they are excluded. Markets are embedded innetworks and other societal structures, and poor often don’t benefit from marketsbecause they are marginalised by those structures. Exclusion is a process that isembedded in and reinforced by social structures. Thus, it is important to ac-knowledge that “making markets work for the poor” is not a simple, straightfor-ward task where limited interventions in certain markets will do the trick. It ratherinvolves quite fundamental interventions into societal structures – another steeptask.
  28. 28. 24 Jörg Meyer-Stamer and Frank Wältring4.2.2 Understanding market failureGiven these challenges, it is important to remind oneself that a “making marketswork” approach has persuasive advantages. One of the most important ones isthe intrinsic quality of coordination through markets: Markets work because par-ticipants pursue their self-interest. Hierarchies are facing all sorts of problems,such as the principal-agent problem where the power centre is constantly battlingwith the challenge of making sure that the agents who receive orders or missionsfulfil them in the way the principal wants them to. Networks are also facing allsorts of problems, such as the problem of numbers where a network that involvesa significant number of players creates a huge coordination effort and cost. Mar-kets are coordinated in a decentralised way. They don’t require a coordinationcentre. Markets tend to emerge quite spontaneously – even in places where theframework conditions are decidedly business unfriendly, such as Somalia (Ne-nova and Harford 2004).Moreover, the M4P approach goes beyond the “minimalist approach”. The mini-malist approach tries to create favourable framework conditions and then expectsmarkets to do their miracle in a spontaneous way. The M4P approach acknowl-edges that markets often won’t do that, and that in particular they will not benefitor even exclude the poor. Thus, targeted interventions are necessary to makesure that markets work, and to make sure that they work for the poor. The M4Papproach has so far generated a significant body of research studies that ana-lysed markets and the way they worked, or didn’t work, for the poor. What is onlyslowly emerging is a set of tools that can guide practitioners in their efforts tomake markets work.It is thus a perfectly rational response to opt for a more limited approach, andhere one that relates back to the starting point of the M4P approach, namely theintention to better understand markets, market failure, and practical ways to makemarkets work better. In this respect, the M4P literature is only partially helpfulsince it does not provide a systematic treatment of market failure, i.e. imperfec-tions that keep real world markets from operating in the way assumed by simplemicroeconomics models. The following table gives an overview of the main typesof market failure.Market failure has three main consequences: It generates a low level equilibrium. The examples given in the table explain how market failure issues can reinforce each other and thus keep rural pro- ducers disconnected from markets. Income stays low, investment capacity is low, there is little if any innovation and upgrading, and producers remain mired in poverty. It generates suboptimal delivery of critical investment, for instance into skills development or research and development, thus reinforcing the competitive- ness gap that keeps producers and companies from upgrading so that they might connect with dynamic markets.
  29. 29. Linking Value Chain Promotion and the M4P Concept 25Table 1: Types of market failureType of mar- Example Consequenceket failureNatural Telecommunications in ru- Customers in rural areas pay much highermonopoly ral, thinly populated areas price for telecom services than urban customers, perhaps have no service at all, and suffer from delays in access to in- novative telecom servicesExternal Investment in skills devel- Companies invest less in the skills devel-effects opment (positive external opment of their staff that would be desir- effect) able from a macro perspective Building a cheap high chim- ney instead of installing a Contamination of region by industrial plant filter (negative external ef- fect)Indivisibility Size of a container (mini- Small producers cannot connect to cus- mum 39 cubic meters) that tomers because the don’t produce needs to be filled by supplier enough to fill a containerAsymmetric Information about residual Customers don’t buy fruit or vegetables ifinformation toxics and other contami- they suspect that producers have used nants in fruit and vegetables more agrochemicals than they admit in the absence of sophisti- cated and costly testing equipment Producers who don’t trust the seller don’t buy high yield seeds if they look just like Features of distinct products much cheaper normal seeds that look alikePublic goods Availability of sophisticated Producers can’t convince their customers and costly testing equipment that the level of residual toxics is low, and in a region with small pro- thus can’t sell their products ducers It creates barriers to entry, thus reinforcing monopolies and the high prices and service delivery shortcomings that come with monopolies.Any effort to make market systems work for the poor must be based on a thor-ough understanding of market failure, and not just on market research conductedby A C Nielsen. Analyses must be conducted that investigate the root causes ofmarket failure, since only in this way is it possible to design interventions that gobeyond fumbling with the symptoms of market failure.4.3 Who are “the poor”?The M4P literature is somewhat fuzzy when it comes to defining who is meant by“the poor”. Recent literature has pointed at a number of ways to get a differenti-ated picture of poverty. Let us mention two.
  30. 30. 26 Jörg Meyer-Stamer and Frank Wältring1. Discussions in the SEEP network led to a typology of the poor that addressesthe question: To what extent are the poor likely to be producers that are active inmarkets?Figure 8: The Context of Poverty and Micro-Enterprise Development Source: Eiligmann (2005), 8This perspective looks at poor producers. The main argument is that the desti-tute, i.e. the poorest of the poor, are unlikely to enter into markets as producers. Itis important to note, though, that in the M4P literature, the term “private sector”does not only refer to businesses but actually to all economic actors that are notpublic sector, i.e. all types of producers as well as workers. Nevertheless, theSEEP typology is helpful since it points out that only a part of the poor, namelythose who are close to the poverty line, are likely to enter markets as producers.2. Ravaillon (2004) points out that, even with a narrow concept of poverty, growthwill not automatically benefit the poor. It is crucial to address the geographicaland sectoral pattern of growth (ibid., 16). Poverty is often concentrated in specificregions, in particular rural regions, and in one sector, namely agriculture.This argument is developed in a more detailed way by Janvry and Sadoulet(2004, 4 f.), based on evidence from Latin America:“There is increasing differentiation between two types of locations for rural pov-erty: MRA (marginal rural areas) and FRA (favorable rural areas).Part of the rural poor are geographically concentrated in low population densityMRA (marginal rural areas) defined as areas with either poor agro-ecological en-
  31. 31. Linking Value Chain Promotion and the M4P Concept 27dowments and/or isolated from access to markets and employment centers.These areas consist in: Geographical pockets of poverty: Mexico’s Southern States, Brazil Northeast, Central America’s East Coast regions, and high altitudes in the Altiplano. Indigenous territories: Indigenous communities attached to their homelands in the Altiplano and the East Coast of Central America.The other part of the rural poor are socially diffused in FRA (favorable rural ar-eas) defined as areas with good agro-ecologies and good connections to dy-namic product and/or labor markets. The poor in this context are: Individuals with low asset endowments, especially land, education, and social capital. Individuals with good asset endowments, but lacking opportunities to valorize these assets in the territories where they are located (lack of regional dy- namics, discrimination). Rural youth, elderly people, and disabled individuals for whom social assis- tance programs are needed.”This perspective provides a much more tangible understanding of types of ruralpoverty. The authors’ conclusion is: “These contrasts between favorable and un-favorable areas (and the continuum of conditions in between) points to the rele-vance of a regionally differentiated approach that takes into account this hetero-geneity.” (ibid.) In other words, any pro-poor policy must have a strong territorialfocus.5 How to link M4P and VC analysis: Practical considerationsIn principle, there are two ways to approach the issue of pro-poor, market-oriented value chain analysis:1. Analysis can be conducted as a separate activity.2. Analysis can be conducted as action research.In this section, we will look at each option.5.1 Analysis before actionAn approach where thorough analysis is conducted before any action is taken isbased on an epistemological concept that is mechanistic by nature. It is based onthe assumption that most if not all of the relevant information for a developmental
  32. 32. 28 Jörg Meyer-Stamer and Frank Wältringactivity can be gathered before a strategy is formulated and implemented. Onesuch approach is presented in a recent paper by Kula, Downing and Field (2006)which reflects the current state of thinking in USAID’s microenterprise pro-gramme.Figure 9: The USAID approach to value chain promotion Source: Kula, Downing and Field (2006)An Analysis Before Action approach has its advantages first and foremost froman administrative perspective. It allows for organising planning into a logicalframework, facilitates the planning of the allocation of resources over a period oftime, and appears to define clear milestones which make project managementeasier for administrators who are removed from activities on the ground.In terms of activities on the ground, though, it is difficult to discern the advantagesof an Analysis Before Action approach. It may appear to be logically structured bydelivering information that is necessary for informed decision taking. This, how-ever, can easily turn into an illusion as the Analysis Before Action approach willoften suffer from a specific type of Catch-22, namely the problem that a lot of theinformation that is crucial to define the terms of reference for the researcher whowill conduct the value chain analysis only becomes available through the valuechain analysis said researcher will conduct.In fact, the Analysis Before Action approach suffers from a number of dilemmas: Select VCs before understanding them: In this approach, VCs that are to be promoted are selected early, before representative information is available. Assuming hard budget constraints, it is unrealistic to conduct a comprehen- sive study of all value chains that are relevant for a given regional or national economy. By limiting the number of VCs that are investigated, VCs are not chosen because they have been thoroughly investigated. Instead, VCs are investigated because they have been chosen. Quick-scan vs robust information: The Analysis Before Action approach re- quires substantial resources. As projects tend to suffer from budget limita- tions, there is an incentive for project managers to limit the scope and depth of the analysis, thus conducting something that is more like a quick scan rather than solid research. With a quick scan, though, a random selection of VCs is followed by a collection of random data that lead to a random decision. Management of expectations: Researching value chains is usually based on face-to-face interviews, focus group interviews and workshops. To the extent
  33. 33. Linking Value Chain Promotion and the M4P Concept 29 that actors who need to be interviewed suffer from time constraints, there needs to be an incentive for them to allocate time to the task of being re- searched. In order to persuade them to allocate time, researchers will be tempted to highlight the strong possibility of future promotion activities, per- haps including the availability of grants. Thus, expectations are created among actors inside the value chain which may or may not be realistic, and which in any case can not be managed in a proper way, based on the strat- egy and logical framework of the project, since neither strategy nor logframe exist at this stage.In order to understand how steep the task of conducting a solid analysis beforeany action is, let us have another look at the M4P literature. As quoted in Section3.1, a solid analysis would involve a number of elements. We also give a roughestimate of the number of researcher days that would be needed to conduct eachtask.Table 2: Tasks involved in an M4P / Value Chain analysisTask Estimated daysPoverty reports including household surveys and PPA surveys 200Specific market and transactions studies using participatory and other 50techniques to complement existing poverty data‘Doing Business’ and Investment Climate Surveys 100Trade, production and price data 30Market outcomes and data from the operation of value chains 250The rate and direction of the evolution of key markets for the poor 60Total 690In other words, the Analysis Before Action approach is, first of all, a very seriousincome generation programme for consultants and researchers. Assuming thatone third of those days would involve foreign consultants at a rate of US$ 500 perday, and two thirds domestic consultants at a rate of US$100 per day, the feesalone would amount to a total of US$ 161,000.5.2 Action researchPractical experience shows that successful development programmes are basedon iterative processes, not simple sequences. For instance, in the LEADER pro-gramme to promote development in poor rural regions of the EU, the learningprocess regarding sequencing has been summarised in the way illustrated inFigure 10.
  34. 34. 30 Jörg Meyer-Stamer and Frank WältringFigure 10: The spiral model of sequencing in the EU LEADER programme Source:, presentation LEADER_dia6_en.pdfThis model is based on the insight that ex-ante research will only to some extentreveal the information that is relevant to solve a given problem or realise a givenopportunity. The best way to understand the root cause of a problem is to try tosolve it. This approach leads naturally to action research, i.e. a practice whereanalysis and action are closely intertwined.An approach that introduces a strong pro-poor element into value chain analysisneeds to be based on three key insights:1. It must involve a geographical and sectoral focus that is particularly pro-poor (Ravaillon 2004).2. It needs to analyse markets beyond the lines outlined by Ferrand, Gibson and Scott (2004), i.e. it needs a thorough understanding of market failure.3. It needs to address the complementarity between markets and hierarchies (Dorward and Kydd 2005), as well as looking at networks as highlighted by the literature on global value chains (Schmitz 2005), and it needs to analyse the interaction between the three modes of coordination. This point may ap- pear contrary to the argument developed in Section 4. However, one needs to keep in mind that a value chain per se is a mixture of market-based coordina- tion, hierarchy and network, so that a narrow focus at markets and market failure is implausible.5.2.1 Selecting a target group for a pro-poor value chain promotion projectWhen it comes to selecting target groups who are supposed to benefit from de-velopment interventions, we usually recommend to design mechanisms that lead
  35. 35. Linking Value Chain Promotion and the M4P Concept 31to self-selection, i.e. draft a process where a variety of possible beneficiaries isaddressed and ultimately those benefit who undertake the strongest effort to getinvolved. Unfortunately, this may not be a feasible process when it comes to pro-poor VCP. Pro-poor VCP, like any VCP activity, needs to be based on businessprinciples. When it comes to integrating poor communities into VCs, a self-selection process may mobilise communities who do not really have the potentialto become integrated into VCs. Therefore, it may be recommendable to design aselection process that involves external expertise.A wrong approach to select target groups for pro-poor VCP would be based on asequence of questions like this: Where are the poor? Is there anything they canproduce? Can we train them to improve the quality of their product? And can wethen perhaps connect them to some value chain? This would be the “wouldn’t itbe nice if” approach, as in “wouldn’t it be nice if Ikea sold Bolivian handicraft”.Selecting poor communities and regions, based on their need and their supposedpotential, promoting them and only after that trying to connect them to VCs is asupply-driven approach that will not work.The only way to move a chain is by pulling. In this perspective, we see twopromising approaches to pro-poor VCP.The problem-driven approach: The starting point is the analysis of the realeconomy in a given country, based on the analysis of export data, conversationswith exporters or interviews with buyers at major domestic retailers. The questionis: Which producers in poor communities are connected to national or global VCs,and which of them are only precariously integrated into VCs, so that an effort toupgrade their capability (which must be coordinated with buyers from the outset)is meaningful? A relatively quick fact-finding effort would lead to a list of potentialcandidates in terms of communities, sectors and locations. Addressees for VCPactivities would then be picked from this list on the basis of poverty / pro-poor de-velopment criteria.The opportunity-driven approach: This approach would take the interests ofmajor domestic retailers, exporters or foreign buyers as the point of departure.The question would be: What are the products that you are searching for butcannot find? And to what extent have you identified possible producers in ourcountry that have a basic production capability but are not close enough to anadequate quality and productivity level to qualify for a supplier development pro-gramme that is managed by the buyer? The rationale of this approach would beto help producers, preferably from poor communities, to cross the gap that sepa-rates them from the minimum requirements of major buyers.5.2.2 Launching a pro-poor value chain promotion projectWhat would the initial sequence in a pro-poor value chain initiative look like? Wehave tried to visualise this in Figure 11. In this approach, the first steps are par-ticularly important. They make or break the pro-poor impact of the initiative. The
  36. 36. 32 Jörg Meyer-Stamer and Frank Wältringpro-poor orientation needs be part of the genetic code of the initiative, not some-thing that is just attached like a slogan sticker.Figure 11: Initial Sequence for a Pro-Poor Value Chain InitiativeThe figure does not distinguish between the national-level and the territorial pillarof a VCP initiative. The first four activities (initiating, scoping, assembling re-sources, picturing the value chain) would involve a single process. During the“picturing the value chain” stage the process would go through a bifurcation, afterwhich a national-level process and one or several territorial processes would runat the same time, though not in parallel but rather informing and reinforcing eachother.The following table looks at the particular challenges that exist in terms of assur-ing that the pro-poor perspective is maintained in a satisfactory way. Subse-quently, we will look at each step in more detail.Table 3: How to consistently maintain the pro-poor perspectiveStage ToolsScoping Collect and assess the existing documentation on the structure of povertyAssemble re- Involve individuals with a deep understanding of poverty in the givensources country in the core teamPicturing the value Look for regions and locations where poor producers have a least achain vague potential to be involved in the respective value chainEngaging Conduct workshops in poor communities, using standard PRA toolsstakeholders Make sure that facilitators understand the crucial importance of proper management of expectations at this stage
  37. 37. Linking Value Chain Promotion and the M4P Concept 33Collaborating with As above, plus test the willingness of poor communities in differentstakeholders locations to get seriously involved in a development effort. Never forget that sometimes poverty is a comfort zone. But also address the issue of risk: try to identify communities for whom the risk of fail- ure of the initiative is not existential.Participatory, action Employ a specific variation of a participatory, quick appraisal in lo-oriented research cations with poor producers who may have a potential to be in- volved in the value chain. Make sure that the issue of market failure is covered.Quick-win activities Make sure that there is enough capacity for ongoing facilitation of the implementation of activities in poor communities.Participatory M+E Apply appropriate M+E tools (e.g. no tools that require writing in communities with a high incidence of illiteracy)Adjustment As the approach becomes more robust, try to involve the more complicated, less organised, less risk-tolerant poor communities.Scaling upScopingAt this stage, issues like the geographical and sectoral structure of poverty needto be addressed. The painful discussions that were mentioned above (poor vsvery poor, moderately competitive vs survivalist) must be conducted at this stage,and decisions need to be taken in this respect. However, given the iterativestructure of the overall VCP initiative, it is important to note that there is alwaysroom for adjustment, especially when the practical work shows that certaingroups of poor show more dedication and potential than initially expected.Assemble resourcesThis point not only addresses the mobilisation of funds to conduct the value chaininitiative. It also relates to other resources that are essential, in particular knowl-edge and connections. At this stage, it is crucial to assemble a number of “con-nectors” who can tap into different sources of knowledge, including indigenousand local knowledge (as opposed to relying exclusively on the data presented bynational or regional level poverty assessments).Picturing the value chainAt this stage, the key task is to get a better understanding of the value chain thatis going to be in the focus of the initiative. This does not imply preparing a com-prehensive report that adheres to academic standards. It is perfectly possible topicture a value chain in through two or three well facilitated brief workshops withkey informers where simple yet powerful mapping techniques are used. Mappingtechniques like those in GTZ’s ValueLinks method are extremely useful at this
  38. 38. 34 Jörg Meyer-Stamer and Frank Wältringstage. On top of mapping the elements of the chain, it would be useful to investi-gate market failure at the different stages of the chain.Engaging stakeholdersFor a pro-poor value chain initiative to be successful, a broad set of highly di-verse stakeholders needs to be engaged, from top management in major corpo-rations that are powerful nodes in value chains to poor communities in peripherallocations. Obviously, very different communication approaches have to be usedto engage the different stakeholders: At the level of lead firms, an essential point is to engage with top manage- ment and with supply chain managers, rather than just with the Corporate Social Responsibility department. At the level of local communities, it is essential to interact not only with gov- ernment officials and politicians, but also with communities themselves. Stan- dard PRA tools like Wealth Ranking and Well-Being Ranking can be useful in better understanding local communities.Collaborating with stakeholdersThe purpose of this element is to verify, through discussions with the set ofstakeholders who were initially addressed, that the right stakeholders have beeninvolved. It also involves understanding the goals and objectives, and logic of ac-tion, of the different stakeholders. At the local level, interacting with producersand companies, well-established PRA tools like transects and walkovers areuseful.Participatory, action oriented researchThe purpose of this step is to analyse the value chain and to look for opportuni-ties to integrate (more) poor producers into the value chain. It involves a set ofworkshops with different stakeholders. Though to some extent workshops willaddress relatively homogeneous groups of stakeholders, it is crucial to organiseworkshops that bring together representatives of very different stakeholdergroups, so that key stakeholders get a first-hand understanding of otherstakeholders’ mindset and objectives. Tools that can be used at this stage in-clude ValueLinks mapping, standard PRA and PACA tools, as well as specifictools that look at market structures.A possible angle is to look at barriers to entry, as many instances of market fail-ure will ultimately manifest themselves as barriers to entry. A useful tool to inves-tigate this is a modified version of Michael Porter’s Five Forces Analysis.
  39. 39. Linking Value Chain Promotion and the M4P Concept 35Figure 12The modification refers to the bottom box, which looks at barriers to diversifica-tion (into related products, markets in neighbouring locations, or a closely relatedmarket segment) instead of substituting products. The other four forces are di-rectly related to market power and barriers to entry, i.e. generate informationabout possible market failure. While incumbents may hesitate to highlight the bar-riers to entry they are creating, business people are usually more than happy tocomplain about the barriers to entry they are facing, and this is why the changedbottom box is useful. This tool can be used both in interviews and in workshopswith representatives from a given subsector.Quick-win activitiesSince a value chain addresses businesses, and even very big corporations tendto think in three-month-cycles, it is crucial that quick-win activities are identified inthe research phase which can then swiftly be implemented. When it comes toprioritising activities, the prospect of an activity to improve the integration of poorinto the chain should be applied as one criterion.Moreover, while brainstorming on possible activities, the stakeholders involved inthis exercise should consistently ask themselves: Can whatever we want to do besensibly done via the market (rather than through a hierarchy or a network)? De-velopment practitioners appear to have a natural tendency to opt for hierarchy ornetwork as preferred approaches to addressing problems or opportunities, whichis unfortunate since a market-based solution, where business people pursue anopportunity out of self-interest, is often the most sustainable solution.
  40. 40. 36 Jörg Meyer-Stamer and Frank WältringParticipatory M+EAfter the first round of activities has been implemented, the different stakeholdersneed to be involved in a monitoring and evaluation effort that takes the initiativetowards the second round of activities, thus launching the iterative pattern.Adjustment, scaling upApart from coming up with more (and hopefully better and more effective) activi-ties, it is crucial to look at scaling up. Initial activities will most likely be pilot activi-ties with a limited outreach. Once a given approach appears to be robust, itneeds to be scaled up to reach a bigger group of poor.6 ConclusionM4P and VCP do not fit like hand and glove. Merging them into a single ap-proach is not desirable, since this would imply losing the focus at internationaltransactions in the VCP approach. M4P and VCP can fertilise each other, sinceeach one addresses blind spots of the other: The VCP approach highlights the fact that markets are only one mode of co- ordinating economic transactions, next to hierarchies and networks. While the M4P approach acknowledges this in principle, it is subject to a narrowing down of interventions towards enabling markets without due consideration for hierarchies and markets. The M4P concept highlights the relevance of enabling markets, a fact that VCP projects may lose sight of because they can easily get involved in micro- management of economic transactions. Moreover, the M4P concept empha- sises the importance of directly addressing the poor, something that is not explicit in VCP approaches.Moreover, the M4P approach can fertilise a couple of arenas of technical coop-eration, such as local and regional economic develoment, SME promotion andagricultural development. It also has the potential to generate systemic change.While selective activities such as VCP by their very nature have a limited impact,M4P has the potential to induce change that affects all market participants. It thusmakes a lot of sense to further explore the contributions M4P can make to otherfields of productive sector development.