Market-based approaches to food safety
(or what do we get from economics?)
Karl M. Rich, Ph.D.
Norwegian Institute of International Affairs
International Livestock Research Institute
24 April 2012
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Outline
• Motivation
• Review of impacts of animal diseases and zoonoses
• Mechanisms and tools for evaluating incentives for food
safety compliance: a bottom-up approach
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Motivation
What is economics?
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Motivation
• It might be best to explain first what economics is NOT:
– It is NOT just about money…
– It is NOT about accounting …
– It is NOT just about costs …
– It is NOT about getting the number for your grant application …
– And … it doesn’t have to be boring …
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Motivation
• Economics highlights how and why people make choices
under conditions of scarcity and the results of such
choices on society.
• It is about assessing tradeoffs: how do we reconcile
unlimited wants with limited resources?
• It is about behavior and incentives: faced with tradeoffs,
why do people do what they do?
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Where does economics fit into the animal health
world?
• For starters, animal diseases are taking increased
prominence and awareness both in domestic markets
and on the global stage
– Rise in perceptions and fear: emergence of new diseases or
virulent strains of old diseases with potentially dangerous
impacts on human health (think avian flu)
– Rise in globalization: more trade, more potential for the
introduction of pathogens (particularly from LDCs)
– Greater demands from policymakers, particularly in light of new
diseases, budgetary pressures and priorities, etc.
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Where does economics fit into the animal health
world?
• Economics should provide a framework for helping with
improved decision-making
– Increased cost-effectiveness: optimization of spending decisions
and resource allocation
– Understanding of drivers, incentives, and constraints of decision-
makers
– Insights into potential impacts of different policies
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The good, the bad, the ugly
• The good:
– Greater sophistication of economic impact analysis and (partial)
integration of economics with epidemiology
– Institutionalization of cost/benefit thinking
– New institutional economics
• The bad:
– View of economics as a subordinate tool vs. economics as
contextualizing food safety/animal health decisions
• The ugly: “people” as decision makers missing
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Where are the gaps?
• But, you might ask: “well, our models capture what policymakers should
do, right?”
• Yes, but they also approach the world from a command-and-control
perspective: if X then Y must happen
• The problem is that there are always people behind those
decisions, whether in policy, on the farm, or somewhere in between that
influence how well those choices are implemented.
• And, those people have their own incentives, their own tradeoffs they
face.
• Move from normative to positive approaches.
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A veterinarian’s perspective on disease
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An economist’s
view: focus on
the people
behind the
animals, their
incentives, and
constraints
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Where are the gaps?
• Context matters – we need better information on why
actors behave how they do, what their incentives are, and
how they interact.
• Economics matters to unpack these incentives,
quantitatively and qualitatively.
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Where are the gaps?
• If we look at a more complicated case (LDCs), context is
even more critical:
– Actors are diverse
– Governments and institutions have limited capacity
– Sufficient regulations and compliance are lacking
– No data
• In addition, there is not a strong history of using animal
health economics tools in decision making
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Impacts of animal diseases
• What are the potential economic impacts of an animal
disease?
• While many of these are disease-specific, there are some
commonalities
• Example: FMD (based on Perry and Randolph, 2003)
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FMD
Overt disease Disease risk
Household real Macro-economy
income levels - Other sectors (inputs,
-wage earnings trannsport), multiplier effects
-meat expenditures - foreign exchange
National - growth
Containment Tourism - consumer meat prices
and -slaughter & compensation
Sectoral - movement controls
Livestock trade Risk management
- production losses - preventive control (surveillance,
Animal welfare - profit losses (idled fencing, zonation, movement
capacity, timing of sales) controls)
Environmental concerns - maintain DVS capacity
Market Access
To export markets
To local markets
Livestock production Risk management
- production losses (mortality,
Farm household - own control measures
Farm- weight, milk loss, lameness)
(vaccination)
- Treatment, containment costs real income levels - compulsory control measures
level - other profit losses (idled capacity, timing of Household welfare
(movement controls)
sales, price effects)
- traceability
Other income activities Natural resources
- crop production (manure, draught) - land use
- fuel, transport - settlement & migration
Livelihoods
- ecosystem sustainability
-loss of insurance, financial,
social networking functions
-increased vulnerability
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Impacts of animal diseases
• Dimensions of animal disease and food safety impacts:
– Costs
– Prices
– Linkages
– Trade
– Welfare/livelihoods
– Employment
– Public health (DALYs)
• Role of time/space
• Role of context: how systems are organized/governed matters
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Toolkits to analyze food safety impacts
• Mix of quantitative and qualitative approaches needed.
• Qualitative approachescontextualize our systems – they
identify the nature of relationships, trading
mechanisms, organizing behavior – in other words the
incentives for different actors to engage in production and
trade
– Role of value chains
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Why value chains for animal disease analysis?
• Animal disease outbreaks take place in a systems context, with the
risk and spread of disease contingent on measures taken throughout
the chain.
• “Weak links” in the chain may accentuate disease risk, but analysis is
needed to understand who these stakeholders are, how they interact
with others, and why they behave as they do (including their
constraints).
• Utilization in livestock systems and animal health applications
increasing (see Kobayashi 2006 and unpublished FAO work in context
of HPAI), though a lot of analysis is quite ad hoc
• Value chain analysis can also help to inform critical control points in
the chain that accentuate risk
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From Taylor et al. (2008)
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Toolkits to analyze food safety impacts
Quantitative approachestease out specific aspects or subsets of chain-level
impacts AND behavior
• Damage functions: distill impact into single measure linking risk and
expected damage from disease (DALY ++);
• Econometric analysis: willingness-to-pay for food safety;
• Conjoint analysis: identify/distill key food safety/quality attributes
governing decisions along chain;
• Experimental economics: trial innovative incentive mechanisms to
observe behavioral change;
• Systems dynamics/network models: model/simulate the chain as a unit
and conduct ex-ante scenarios of new technologies to observe evolution
of behavior
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Mechanisms to mitigate food safety impacts
• Bottom line: how do we improve the governance of pro-poor
systems?
– Move from ad hoc to more integration (horizontal and vertical)
• Market-based risk mitigating measures:
– Contracts (formal or informal)
– Certification and branding
– Institutional development to support (associations, cooperatives)
• Do costs of integration exceed the benefits – role of impact
analysis
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Two examples
• Developed world: Label Rouge in France
• Developing world: Safe vegetables in Viet Nam
• Contrast: bottom-up vs. top-down approaches
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Example: Label Rouge in France
(Based on Westgren, 1999)
• Label Rouge: labeling program for various products
based on geographical origin (est. 1965 by producers)
• High success of label in the poultry industry (30 percent
of market):
– Price premiums of 100 percent
– High demand growth from consumers
– Strong reputation for delivering reliable, high-quality products
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Example: Label Rouge in France
• How does it work?
– First, an organization called a quality group comprised of
different value chain actors must be established that applies for
the label from a government commission on labels
(ag/commerce)
– The application is extremely detailed and gives plans on how
quality is to be ensured in the value chain
• Full traceability and quality/food safety checkpoints at each stage
of production are required
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Example: Label Rouge in France
• How does it work?
– The application also requires the designation of a third-party in
the private sector (certified by rigorous standards of the
government) to audit the quality group.
– Once approved, the quality group becomes a member of a larger
organization of poultry labels that collects a small fee for market
promotion activities and protection of label.
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Example: Label Rouge in France
• How does it work?
– If quality standards are not met at any stage of the value-chain
(production, distribution, processing), the label is immediately
removed
– Food safety is very high in the sector
• 1-3 percent incidence of Salmonella in Label Rouge compared to 70
percent in industrial poutry
– Label Rouge also allows for producers to brand according to
different images, but signals to consumers a high-quality
product.
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Lessons of Label Rouge
• Organization of the value-chain is key
– All participants play an active role
• Important certification and supervisory roles played by
both the private and public sector
– Government: credible certification, regulation
– Private sector: auditing, marketing, lobbying
• Financial sustainability: role of check-off fee
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Safe vegetables in Viet Nam
(source: VECO 2009)
• Similar to meat, food safety concerns high in vegetable
production – overuse of pesticides, high incidence of
foodborne illnesses
• Government push promoting safe vegetable production
– MARD regulations on residue limits, etc.
– Training in IPM techniques
– Top-down mandates, but requires bottom-uporganization
• Focus mainly on production side, not on chain
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Safe vegetables in Viet Nam
• Regulated production process
– Training requirement (certificate received), though not fully
standardized
– Residue tests
– Use of certain chemicals
– Certification of production area as “safe”
• Independent certification process, including NGOs
• Self-certification allowed too (participatory guarantee systems)
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Safe vegetables in Viet Nam
• Production costs higher (20-30%): lower productivity, higher costs
for certification and infrastructure
• Prices higher too (20-30%) but only a subset of production can be
sold at safe vegetable prices
• Assurance of quality at retail mixed
• Key role for farmer groups – need to strengthen certification,
training, organization
• Key role to improve consumer awareness
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General challenges
• Buy-in/ownership of process throughout chain
• Roles of public and private sectors
• Sustainability
• Enforceability
• Credibility
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