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Contributions from
the Column
Focus
Lessons learnt from East Asia
Ghana: problems with private sector promotion
Private business as technology partner
Making FDI work for the poor
Benefiting from globalised value chains
05/2005
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Value chain benefits
Businesses in developing countries have to take globalisation into account. Nowadays, markets in rich countries are usually accessed via value chains. If a company wants to survive as a supplier, it has to be reliable, and its products must be of unvarying high quality. In terms of development policy, it makes sense to help enterprises in poor countries to reach that goal.
[ By Rainer Engels ]
Economic growth does not, by itself, reduce poverty. Therefore, development agencies should promote the private sector in a way ensuring that growth reaches as many people as possible (pro-poor growth). In the process, one has to come to terms with a constantly changing environment because of the internationalisation of the markets for goods, services and finance, which affects many industries in developing countries today. Small companies are hardly less affected than large ones.
In major economic sectors, access to rich country markets no longer runs via direct exports, but via integration in value chains organised according to the division of labour. In agriculture as well as the textiles and clothing industry, for example, globally linked supply chains have almost completely replaced the classic, anonymous buyer-seller market. By “value chain”, we mean all production stages a good undergoes – including the associated flows of materials, information and all related services (such as marketing) as well as decision-making. Today, almost 80 percent of global goods trading takes place within such chains. The idea is to take advantage of lower costs by globally integrating production, processing, trading and services (Stamm, 2004).
For the German Development Ministry, the main objective in private sector promotion in Africa is to integrate agro-businesses into value chains (BMZ, 2004). And rightly so. Empirical analyses show that an expanding agricultural sector reduces poverty faster than do the industrial and service sectors. This is so because most poor people live in rural areas and work on farms.
However, primary sector growth turned out much lower than that of other sectors in low and middle income countries in the 1990s. In many developing countries, urban poverty therefore decreased much faster than rural poverty. In general, the share of agriculture in gross domestic product (and its growth) shrinks as a country moves from a rural economy to an urban one. Therefore, long-term development strategies should not be restricted to agriculture, but at the same time promote this structural transformation.
Value chains require stringent management of materials and information. International standards must also be enforced. For instance, some rich country regulators demand that foodstuffs be traceable back to their origin on a particular field or stall (Humphrey, 2005). It would be wrong to view such requirements only as obstacles. They also offer opportunities. For example, German Technical Cooperation (GTZ) helps the fishing industry in Vietnam fulfil standards, thus allowing the country to create value-added . GTZ brought small businesses in the Mekong Delta into contact with a mid-size German importer of fish products. With the support of the association Naturland, which deals in organic goods, guidelines are currently being drafted for the organic production of catfish, and certification is being adapted to the conditions in Vietnam. Organic production is also being launched with a few selected companies in pilot projects. Local processors are being trained in the processing stages required for export. They also received training to uphold quality requirements and the specifications for packing. In addition, GTZ offers assistance for marketing in Germany, for instance, by presenting products at trade fairs. The next step planned is to expand production to include more fisheries and to sell products in German supermarkets.
Competitive advantages
The value chain approach of development cooperation is about benefiting from competitive advantages in the cases of labour-intensive products and niche products unaffected by economies of scale. For partners in poor countries to be able to further expand, institutions involved in training, research and development, standardisation, measurement, and quality control must be supported.
Moreover, the general business environment for production and investment plays an important role. For a value chain in the pharmaceutical sector to work properly, for example, a country has to protect intellectual property rights according to its technological level. Such protection must not be too lax, lest domestic companies shy away from research; on the other hand, it must not be too strict, lest the supply of crucial medicine at affordable prices be restricted. Furthermore, mechanisms for certification and quality inspection have to be effective, and trade in pharma precursors as well as final products should be liberalised. Because of such requirements, development projects that focus on value chains are increasingly integrated in large-scale sector programmes that include other components such as consultation for government bodies and the establishment of industry associations.
The principle behind such support is to get promising industries and companies to the threshold of profitability. Aid projects neither deal with local industries that cannot become profitable nor with industries that already command enough private capital. The goal is to enable businesses to make profits by becoming part of international market dynamics. For example, the production of canned pineapples in Ghana has long been tailored to the European market. Now the goal is to enhance production by focusing on high-quality, fresh goods. Doing so entails a clear increase in value – in this case, less processing will produce greater revenue. On the other hand, the quality requirements are much stricter for fresh goods. All small farmers involved therefore need training. GTZ supports the project by providing special certification systems and helping small farmers to join forces in production and marketing groups with adequate procedures for quality management.
Small businesses have an especially hard time connecting to global markets. They have to join forces with others in order to be able to supply the quantities in demand and to fulfil quality standards required. One strategy that has proven successful, particularly outside agriculture, is to produce for both foreign and local customers in order to gain experience with products of greater quality or enhanced design. Such an approach can increase competitiveness on the world market.
The local market as test case
In this respect, a value chain project of GTZ in Brazil led to interesting results. A number of Brazilian shoemakers were targeting the European market, but only with little success. After a group of entrepreneurs had toured trade fairs for shoemakers in Germany and Italy, they decided to focus on the domestic market and other countries in Latin America and Africa. This strategy allowed them to increase their revenue. However, any supplier who intends to sell products with his own brand on top of providing shoes for other brands will be well advised to only cooperate with mid-sized international companies. Major brand-name sellers normally do not allow suppliers to rise in the value chain.
In the textiles and shoes sector, it is easy to observe how participation in value chains affects jobs and labour conditions (Schmitz, 2005). Suppliers in this sector have created a lot of jobs, especially for women. Due to the attention paid by rich country consumers, labour conditions in internationally connected firms are generally much better than in businesses that only produce for the domestic market of a developing country. For example, global value chains contributed to the creation of 1.6 million jobs in Bangladesh’s garment sector. These jobs are much better paid than those in comparable industries that do not export. Even in the often criticised special economic zones, where labour conditions tend to be worse, businesses pay up to 70 percent more than companies outside these zones (Nadvi, 2004, Kabeer and Mahmoud, 2004, and Nadvi and Thoburn, 2004).
The extent to which the promotion of value chains reduces poverty must be constantly monitored. After all, there are risks. For instance, integration in the global economy may lead to layoffs. This can happen, for example, if products from developing countries are exported via industrialised countries to other developing countries, resulting in tough competition for domestic producers there. This risk is growing as markets become more concentrated in the hands of global wholesalers and retailers.
Dr. Rainer Engels
works for the German Technical Cooperation (GTZ) unit Trade Policy, Trade and Investment Promotion. This essay expresses his personal views.
Rainer.Engels@gtz.de
References
Albert, H., R. Engels, S. Triemer, 2003:
Wertschöpfungsketten in der deutschen Entwicklungszusammenarbeit. Eschborn: GTZ.
http://www.gtz.de/de/dokumente/de-wertschoepfungsketten-ez.pdf
BMZ, 2004: Profilbildung Wirtschaftsförderung in Subsahara-Afrika.
Humphrey, J., 2005:
Shaping Value Chains for Development. Global Value Chains in Agribusiness. Eschborn: GTZ (forthcoming)
Kabeer, N. and Mahmud, S., 2004:
Globalisation, gender and poverty: Bangladeshi women workers in export and local markets, in: Journal of International Development, Vol. 16, No 1
Nadvi, K., 2004:
Globalisation and Poverty: how can global value chain research inform the policy debate?, in: IDS Bulletin, Vol. 35, No. 1
Schmitz, H., 2005:
Using the Global Value Chain Approach for the Promotion of Eco- nomic Development. The Case of Light Industries. Eschborn: GTZ (in preparation)
Stamm, A., 2004:
Value chains for development policy: challenges for trade policy and the promotion of economic development. Concept study. Eschborn: GTZ.
http://www.gtz.de/de/dokumente/en-value-chains-policy.pdf
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