Value chains for development - Introduction

1. Introduction

2. Pro-poor chain development

3. Pro-poor business ventures

 

1. Introduction

Rural livelihoods in low-income countries are being challenged by the globalization and liberalization of the world economy. Open market structures are being transformed into tightly coordinated supply chains between preferred business partners, often dominated by large retailers or food processors. Developing countries are increasingly affected by this process of inclusion-exclusion, as export markets, regional markets and national urban markets become organized along value chain structures. This is having a serious effect on rural economies in the South, where 70% of the world‘s poor live, and where access to these semi-closed networks is creating ”winners" and ”losers". Maximizing the number of ”winners" and reducing poverty requires smallholder participation in supply chains.

International and domestic markets offer an enormous potential for pro-poor growth if small-scale farmers, traders, processors, retailers and other agents in the chain become organized and learn how to cooperate more efficiently. Capacity building in technical upgrading, organizational and managerial development and access to working capital are all required to enhance smallholder participation. New financial services (beyond traditional micro-finance and large-scale project finance) are needed to unleash investments and serve the capital needs of small and medium entrepreneurs in the value chain. Support agencies must better learn how to intervene without creating dependencies, market distortions, or unfeasible business ventures. New modes of cooperation should be sought with innovation systems and local government in order to generate more value-adding and economic spin-off at local level.
Especially financing mechanisms for value chain capacity development of poor segments of society and innovation processes to gain access to markets need much more attention.

The value chain development approach aims at the analysis, design and facilitation of integrated supply chains that are pro-poor. Pro-poor chain development enhances the economic rent of poorer households - that is, the capacity of the poor to upgrade their position in the value chain so that they appropriate a greater share of the returns accruing from the chain. Chain development strategies employ innovative models of cooperation between value chain actors (producers, traders, processors, retailers), non-governmental organizations and public agencies.

2.  Pro-poor chain development

 

What is pro-poor chain development?

Conventional concepts of pro-poor development focus exclusively on income growth, neglecting the non-economic dimensions of poverty and omitting the crux of poverty alleviation - namely to enhance the capacity of people to sustain their well-being. A more adequate concept would state that development is pro-poor only when: 1. it has impacts beyond an increase in the income of the poor: it should also lead to more economic control by the poor, that is, a renewed power balance in the value chain; 2. it strengthens the economic, social and organisational capacities of the poor; this is, of course, a prerequisite for more economic control by the poor.

The increase of control and capacities in the value chain can be conceptualized with the term ‘economic rent’. Economic rent refers to the ability of producers to appropriate areas of value accretion and protect themselves from the competitive pressures that drive down their terms of trade (Kaplinsky and Morris, 2001; Kaplinsky, 1998). In a context of liberalization and globalization, sustainable income growth in LDCs can no longer be based on the efficient use of resources, because competitive forces continually drive down their terms of trade. Sustainable development critically depends on the capacity to identify and appropriate areas of value accretion.

Economic rents arise from the possession of scarce attributes that create (temporary) barriers to entry. Each economic (sub-) sector is marked by an average rate of profit defined by competitive forces. When the entrepreneur introduces what Schumpeter calls a ‘new combination’, he reaps a surplus – this is economic rent. As others copy the innovation the economic rent whittles away and prices fall. This renews the search for a ‘new combination’, either by the same producer or another one, in the continual entrepreneurial pursuit of surplus. Hence, economic rents are dynamic – new rents will be added over time, and existing areas of rent will be eroded through the forces of competition (Kaplinsky and Morris, 2001; Kaplinsky, 1998).

There are a variety of forms of economic rent:

1. Resource rents – access to scarce natural resources and infrastructure

2. Technology rents – having command over scarce technologies

3. Financial rents – access to finance on better terms than competitors

4. Marketing rents – possessing better marketing capabilities and/or brands

5. Knowledge rents – possessing superior information systems

6. Human resource rents – having access to better skills than competitors

7. Organisational rents – possessing superior forms of internal organisation

8. Relational rents – having superior quality relationships with suppliers and customers

9. Policy rents – operating in an environment of efficient government; policy barriers to the entry of competitors

Hence, market (chain) development is pro-poor only when it enhances the economic rent of poor farmers – that is, the capacity of poor farmers to upgrade their position in the value chain so that they appropriate a greater share of the returns accruing from the chain.

How can pro-poor chain development be conceptualized?                                 

The economic rent of poor farmers in the value chain can be conceptualized by assessing changes in their position in the value chain. Two dimensions are key to assessing the position of farmers in the chain (Peppelenbos, 2005; KIT et al., 2006):

1. The types of activities that farmers undertake in the chain;

2. The involvement of farmers in the management of the chain.

3.  Pro-poor business ventures

Ad 1. Chain activities: Farmers may concern themselves only with production; they prepare the land, grow the crop, and harvest the crop when it is mature. But they may also be involved in other chain activities – for example, procuring inputs, drying their crop, sorting and grading, processing, transporting and trading. Being involved in various activities in the chain is known as vertical integration.

Ad 2. Chain management: Farmers may be excluded from any decision-making about management decisions that affect them – even over what crops they grow or what animals they raise. Someone else may make these decisions and then inform the farmers. Or the farmers may have a high degree of control over management: they may be able to decide how much they sell, to whom, and at what price. They may control the definition of grades and standards, the targeting of consumers, the management of innovation, and so on.

How can pro-poor chain development be monitored?

As farmers take on new chain activities and enhance their chain management skills, they gain more control over the value chain, increase their economic rent, and appropriate a greater share of the returns accruing from the value chain. Thus, the impacts of pro-poor value chain development can be monitored in terms of (changes in) farmers’ involvement in chain activities and chain management

What are pro-poor business ventures?

The Royal Tropical Institute (KIT) engages with the private sector to address poverty in low-income countries. This cooperation aims at developing pro-poor business ventures: mediated business partnerships between companies in Europe and small enterprises or farmer organisations in developing countries, which are commercially viable yet support poverty alleviation.

Identifying viable business propositions

KIT has developed an eight-step approach to the development of pro-poor business ventures. The process starts with identifying and screening new business propositions - entrepreneurial ideas that later may be elaborated into bankable business proposals through partnership development and a feasibility study. Not every business proposition merits a detailed feasibility study: in view of costs and the need for efficiency, it is crucial to have a simple, quick and low-cost tool for identifying promising business propositions. KIT has developed a quick scan screening tool for this purpose.

Screening pro-poor business propositions

Pro-poor business ventures must satisfy two key criteria:

1. SUSTAINABILITY - Proposed business ventures will be assessed in terms of their:

• Commercial viability and risk incurrence,

• Contribution to poverty alleviation,

• Impact on the environment;

2. FEASIBILITY - Proposed business ventures will be assessed in terms of:

• Available partnerships,

• Available local capacities,

• Available options for financing.

These two factors - sustainability and feasibility - determine the overall attractiveness of a business proposition and form the basis for KIT’s quick scan.

References:

Kaplinsky, R. (1998), Globalisation, industrialisation and sustainable growth: the pursuit of the Nth rent, IDS Discussion paper 365, Brighton: Institute of Development Studies.

Kaplinsky , R. and M. Morris (2001), A handbook for value market chain research. Canada: IDRC.

KIT, Faida and IIRR (2006), Chain empowerment: supporting African farmers to develop markets. Amsterdam: KIT Royal Tropical Institute.

Peppelenbos, L.P.C. (2005), The Chilean miracle: patrimonialism in a modern free-market democracy, PhD dissertation, Wageningen University.