Deutsche Gesellschaft fürTechnische Zusammenarbeit (GTZ) GmbH

Module 1 Value Chains for poverty alleviation

Presentation 1.1

Value Chains and Pro-poor Growth

- an introduction

Andreas Springer-Heinze / Michael Schultze

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The specifics of the VC approach

Differences between subsectors in terms of PPG potential ?

VC approach and pro-poor growth

Value Chains & Pro-poor growth

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Contents

4 Choosing a product / a VC to invest in

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Value Chain – a definition

the sequence of productive processes from the provision of specific inputs for a particular product to primary production, transformation, marketing and up to final consumption

“Value chain” means….

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an economic model which combines the selection of a product and the appropriate technology with a form of organizing the actors in order to access the market

an institutional arrangement linking and coordinating producers, processors, traders and distributors of a particular product

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Value Chain: Visualization as “map”

Categories of actors in value chains and their relations

SpecificInputproviders

Primaryproducers Traders

Final Con-sumers

Logisticscentres,Industry

SpecificInputs

Provide- equipment- inputs

Production

Grow, harvestProduce theprimary stage etc.

Trans-formation

ClassifyProcessPack

Trade

TransportDistributeSell

Con-sumption

PrepareConsume

Basic functions

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VC – the institutional side of markets

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Institutional factors in market-led developmentNetworks and contractual arrangements along the VC, Trust & Reputation, Market transaction costs

Collective interests of VC participants Joint marketing, common export interests

Forward and backward linkages

Market institutions Infrastructure, Information, Services, Market finance, contractual security, Standards

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Increasing Significance of VC in world markets

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Globalization of Value ChainsAsian producers integrated as suppliers into GVC,but still in a junior position

Mounting quality requirementsVC are an instrument of quality management

Increasingly integrated VCAs VC organization is a competition factor,costs can be reduced through better logistics

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The need for an integrated vision

The “stupid cow syndrome”:

• Competitiveness of leatherware producers compromised by low quality of leather

• Tanneries complain about the low quality preparation of hides

• Slaughterhouses complain about the quality of cattle• Cattle farmers blame the cows’ habit to scratch, and

hurt, themselves at barbed wire.

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Sectors, Subsectors, Chains, Channels

Textiles & Clothing Agriculture & Food Tourism

e.g. Horticulture:

- French Beans- Tomatos- …

e.g. Hotel Industry:

- Lodges- Resorts- Bed & Breakfast-…

e.g. Clothing:

- Apparel- Knitwear- …

according to marketing and retail system- e.g. brand name apparel sold in specialty stores

according to end product / marketing system

- e.g. table tomatos sold in supermarkets

according to marketing system- e.g. as part of a package offered by tour operators

Hotel Industry

Guided Tours

Theme Parks

Souvenirs…

Clothing

Textiles

Carpets

…

Horticulture

Dairy

MeatFlowers

…

SECTOR

SUB-SECTOR

CHAIN

CHANNEL

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Combining the sectoral and the spatial approach to economic development

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Entry point in particular markets

… activating the growth potential of a product-> Value chain promotion

Entry point at particular locations

… activating the growth potential of the location -> Local/ Rural Economic Development

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Rationale of Promoting VC

Important Aspects of a VC Approach

• Sustainability: Funding of private (as well as public) services out of the VC income

• Creation of linkages / economic structure: Economic development is conceived as increasing division of labour & cooperation between actors (systemic competitiveness)

• Coordination of public and private roles: Combining entrepreneurial development at the micro level with institutional change at the meso- and macro levels

• Self-reliant development: Focus on facilitating of economic development process building on own initiatives

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The specifics of the VC approach

Differences between subsectors in terms of PPG potential ?

VC and pro-poor growth

Value Chains & Pro-poor growth

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Contents

4 Choosing a product / a VC to invest in

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What is “pro-poor growth” ?

Growth is pro-poor, when the income of the poorest (e.g. of the lowest quintile) increases more than the average income.

PPG stresses the need to make the poor participate directly in the economic growth, and does not rely on „trickle down“ processes or social transfers

A generic definition:

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Two dimensions of pro-poor growth

“Pro-poor growth”= greater employment and income of poor people

Economic growth= greater volume sold, higher value products (“the cake grows”)

Poverty alleviation= the poor benefit at least equally or above average from the income generated (poor get their “share of the cake”)

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VC and “pro-poor growth”

Analyzing the conditions for PPG from a VC perspective

Barriers to market entry in specific subsectors: - Market failure related to contractual security/risk, lacking grades and standards, transaction cost- Access to services and resources - Asymmetric information - Ability to deliver, economies of scale- Market power, contractual conditions VC change as response to these constraints: - Organization of small producers, linkages with buyers - “Embedded services”

“Making Markets Work Better for the Poor”a project of ADB and DfID (http://www.markets4poor.org)

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The specifics of the VC approach

Differences between subsectors in terms of PPG potential ?

VC and pro-poor growth

Value Chains & Pro-poor growth

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Contents

4 Choosing a product / a VC to invest in

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The challenge: Identifying the PPG potentialof a particular product market

Traditional markets for agricultural commodities and unprocessed food

Volume: grows slowlyPrice: No value addition, prices under constant pressure

• Focus on productivity improvements of smallholder agriculture - difficult to achieve and difficult to fund• Traditional structures are often too small scale, highly diversified (because of risk aversion), and characterized by high transaction costs (scattered production) • unclear or non-existent land titles prohibit access to finance

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Exploring the PP Growth opportunities

Traditional(domestic) agricultural markets

Traditional export commodities (?)

High-value food products

Non-traditional export products

Agric. products for regional markets

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Change in traditional commodity export markets

Volume: weak growthPrice: highly variable, but decreasing in the long term, due to rapid expansion of production and globalized markets • uncoordinated deliveries of products or produce to (wholesale or spot)-markets are losing importance. • only differentiated products (“identity preserved” coffee, high quality cocoa organic cotton and the like) gain market share

Commodities: coffee, cocoa, cotton etc.

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Growth of domestic urban markets

Volume: grows quickly due to urbanization (7 to 10 % p.a.) Price: due to consumption of higher value products, more value added products

• Changing consumption patterns (vegetables, fruit, meat and dairy products, snacks, drinks)• Increasing importance of processed spices, sauces etc. for food preparation in households• Modern forms of food marketing, such as franchise fast food restaurants • Rise of supermarkets, often facing difficulties in managing and sourcing local supplies

High value food products

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Growth in non-traditional export markets

Volume: small volumes, but constant growth Price: variable, depends on niche

• Certain fashion movements offer new opportunities (wellness trend, e.g. ayurveda, Japanese food (demand for green sea weed). • Production of natural materials (essential oil, wax, resin etc.) requires tight cooperation between producers and international processing companies. • Markets for tropical fruits growing but highly competitive

Exotic products, natural ingredients, ethnic foods

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Assessing the growth potential

Lead Questions:

At what cost can the product be supplied to the consumer?

What are the prospects for demand growth?

Are traders willing to buy more of the product?

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Assessing the pro-poor potential

Lead Questions:

How many producers are currently involved?

Does the product require large scale of production?

Does the product require major capital investment?

Does production and marketing require additional services that can be provided locally?

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Tradeoffs between growth and poverty reduction

(1) Integration into highly competitive markets may have anti-poor implications

• Traditional producers in small scale industry and agriculture may be squeezed out • Allocation of savings and of public funds is shifted towards modern sector of the economy • Liberalization of land markets can lead to “selling out” to commercial farms• Interference of cash crops with food security

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Tradeoffs between growth and poverty reduction

2) High growth rates imply structural change with some winning, others losing

• Modern, efficient producers in agriculture and agribusiness replace less competitive smallholders• Usually the change agents and innovators belong to the non-poor of developing countries

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The specifics of the VC approach

Differences between subsectors in terms of PPG potential ?

VC and pro-poor growth

Value Chains & Pro-poor growth

3

1

Contents

4 Choosing a product / a VC to invest in

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Choosing a subsector to invest in

The choice of products includes to:

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Assess the actual growth potential.

Anticipate/ judge the distribution of the additional income across different groups in society

Consider the resources available for chain promotion (time, money, know-how)

Identify promising opportunities for partnership

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Selecting a chain to promote: Generic Criteria

Growth potential, competitiveness• (unmet) market demand/growth potential/ potential for value-

adding• Comparative advantage in national and export markets

Poverty reduction potential, social benefits• Potential for income creation, • Potential for employment creation, • relevance to the poor, social inclusion, SMEs participating• Relevance to women• Social and ecological standards

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Selecting a chain to promote: Generic Criteria

Outreach• Number of enterprises, number of households, • Regional coverage

Programme-related aspects• Relevance to components of programme, demand of partners• Synergies/ linkages/ cooperation with other programmes • Problems that may be addressed by programme, added value &

own experience that can be contributed• Relevance to mandated area

Prospects of success• Conducive policy environment, • own initiatives of VC partners, commitment• Readiness for change• urgency of interventions

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