value chains and poverty alleviation

International Training Program: Labor Market Policy in Poverty Alleviation

Maputo24th April, 2012

The Value Chain and Its Role in Poverty Alleviation

Abraham SarfoAgribusiness and Value Chains Consultant

[email protected]

Value Chains & Livelihoods

What’s the difference and why should we care?

WHAT IS THE RATIONALE FOR THE VALUE CHAIN APPROACH?

• Integrating poor households into growing markets

• Empowering poor households to benefit from increasing globalization

• Economic Growth• Poverty Reduction

Value Chain DefinitionsDefinitions….

World Bank 2010: “Chains composed of companies …that interact to supply goods and services are variously referred to as productive chains, value chains, filières, marketing chains, supply chains, or distribution chains. These concepts vary mainly in their focus on specific products or target markets.”… “What they have in common, however, is that they all seek to capture and describe the complex interactions of firms and processes that are needed to create and deliver products to end users.”

IDS Study 2010: “There is a simple element at the heart of value chain analysis. The idea of a chain is a metaphor for connectedness. It highlights the simple point that most goods and services are produced by a complex and sequenced set of activities. In many cases, these activities are split across a number of economic agents (people, enterprises, cooperatives, etc.).How these different economic agents interact matters for development.“

FAO 2007: “we use the term value chain to characterize a system composed by different actors, activities and institutions, all functioning interrelatedly, so as to enable the accomplishment of a common goal”.

Definitions….

USAID 2010: “Series of actors and activities needed to bring a product from production to the final consumer”. “Value chains are a chain of actors but they operate like a system. … We can’t just focus on production without ensuring that there is sufficient processing capacity to absorb increases or w/o ensuring that there is market demand and access to markets”.

Value Chain Definitions

the sequence of related business activities (functions) from the provision of specific inputs for a particular product to primary production, transformation, marketing and up to final consumption

“Value chain” means….

the set of enterprises that performs these functions i.e. the producers, processors, traders and distributors of a particular product

A Generic Definition Of Value Chain

Categories of operators in value chains and their relations

SpecificInputproviders

Farmers,(primaryproducers)

Packers,Agro-industry

Traders(sales pt.)

Basic sequence of functions in an agribusiness value chain

Trade

TransportDistributeSell

Final productSpecificInputs

Provide- equipment- inputs

Production

Grow, harvestProduce theprimary stage etc.

Trans-formation

ClassifyProcessPack

Consumers ofpineapple juice(the market)

The “value chain map”

Categories of operators - in different channels

Seed provision

Production Trans-formation

CommerceTrade

Seed producers

Farmers 1 Companies Traders 1 Market

Concept Of The “Value Chain”

EndProduct

Farmers 2 Traders 2 Market

Private sector Organizationrepresenting the industry

Commodity markets & industry as analytical perspective & framework

Segment 1

Segment 2

Markets do not always develop & function on their own !

The growth potential remains unused, because - public support services are insufficient – or lack altogether- infrastructure is bad- the legal and administrative rules are not appropriate- lack of trust, skills, transparency…

So: When promote value chains ?Market failure

The Market SystemInclusive Market Development along the Value Chain

12

Implementation Approach of M4PPoint of departure is the understanding of poverty as a Symptom:- Analysis of the undelying reasons of poverty in the market system - Design of interventions to change “core functions, rules, supporting functions” of markets – and then - Implementation of market development activities for systemic change

Emerging Models of Value Chain Development

Inclusive value chain models include integrating the poor and smallholder farmer into value chains as producers, enablers and business owners or developing affordable goods and services needed by the poor.

• These value chain models may be developed by entrepreneurs, private sector, and public institutions within existing or new value chains; large or small.

• They may be driven by actors from the country where they are being established or from outside actors, be it from developed or developing nations.

Emerging Models of Value Chain Development

• Sustainable Value ChainsEnviromental Impact• Biodiversity• Climate• Soil Toxcity• Water

Social Impact• Labour Right• Child Labour• Social Context of

Communities

Ecomomic Impacts• Farm Profitability• Livelihood• Value Chain Reselience

Value Chain Approach and Africa Sustainable Development

Food Security……Provide Food for

All……

Environmental Sustainability………..In an environmentally

Sustainable way…….

Value Chain Approach to

Agricultural Design and

Implementation

Economic Opportunity…………….While Generating

Economic Growth and Opportunity………

UNDP’s Private Sector Strategy (2007) focuses on Inclusive Market Development, i.e. markets that include the poor and excluded groups on the demand side as clients and customers and on the supply side as employees, producers and business owners at various points along value chains. Also incorporates environmental sustainability.

17

Under the Inclusive Market Development (IMD) approach, activities focus on developing private sector markets by strengthening the whole market system – enterprises, business relationships, market structures or the business environment. Focus is on Value Chains and Base of the Pyramid markets.

Value Chains, Inclusive Markets and Poverty Alleviation

Inclusive Growth Requires Inclusive Markets

18

What is inclusive growth?

Inclusive growth – requires focusing on both the pace and pattern of growth. Rapid pace / higher rates of growth is necessary for substantial poverty reduction, but not sufficient. To be sustainable over time, growth must also be broad-based across sectors, and inclusive of a large part of the labor force.

Increasingly – also recognized that growth needs to be green. Inclusive growth – economic, environmental, social – Growth must also bring broad benefits – social protection measures

supported by higher growth are important to protect those not directly benefiting

While high growth rates without equality can be achieved, there is evidence that inequality will reduce growth rates in more advanced economies

While high growth can be achieved in early stages of development without

Why are inclusive markets important to inclusive growth?

Market activities generate the bulk of economic growth – in all / most sectors

Market activities can be more or less inclusive and sustainable – growth in market sectors that generate significant jobs, in ways that don’t harm environment

Significant scale and impactDemand driven – know the end marketCommercial viability Systemic, holistic approach - multiple levels Inclusion of stakeholdersPartnership approachAvoid market distortionGovernance and relations between market players – level playing fieldFlexible design, continuous monitoring

Inclusive Markets ApproachGuiding Principles

Inclusive Markets and Poverty Alleviation

20

What is inclusive growth?

Inclusive growth – requires focusing on both the pace and pattern of growth. Rapid pace / higher rates of growth is necessary for substantial poverty reduction, but not sufficient. To be sustainable over time, growth must also be broad-based across sectors, and inclusive of a large part of the labor force.

Increasingly – also recognized that growth needs to be green. Inclusive growth – economic, environmental, social – Growth must also bring broad benefits – social protection measures

supported by higher growth are important to protect those not directly benefiting

While high growth rates without equality can be achieved, there is evidence that inequality will reduce growth rates in more advanced economies

While high growth can be achieved in early stages of development without

Why are inclusive markets important to inclusive growth?

Market activities generate the bulk of economic growth – in all / most sectors

Market activities can be more or less inclusive and sustainable – growth in market sectors that generate significant jobs, in ways that don’t harm environment

The Market SystemInclusive Market Development along the Value Chain

21

Significant scale and impactDemand driven – know the end marketCommercial viability Systemic, holistic approach - multiple levels Inclusion of stakeholdersPartnership approachAvoid market distortionGovernance and relations between market players – level playing fieldFlexible design, continuous monitoring

Value Chains Inclusive Markets Approach

Guiding Principles

Private Sector Engagement

Work with larger “lead firms” in strengthening their supply/value chains and make them more beneficial for development – e.g. through commitment to local sourcing, provision of financial or technical resources to build capacity of their suppliers or distributors, etc.

Engage private sector actors of all sizes in public private dialogue with governments about how to strengthen a specific market sector (i.e. value chain) and address relevant policy issues, how to “green” the specific market sector etc.

Private Sector & Market Development

Provide policy advice and capacity development for governments and public institutions

Support provision of business development services and targeted technical assistance to local private actors in specific market sectors / value chains, partner with technical agencies (UN, DPs NGOs, others) when needed

Support cross-cutting issues such as environment, gender

IMD

Value Chain Inclusive Markets Approach

Private Sector Engagement and Development

23

The Inclusive Markets ApproachRole of Private Sector, Government and

Development Partners

24

Engaging in sound core business operations and value chains;

Innovate, increase productivity, identify opportunity and allocate resources to meet demand.

Complement by providing social / philanthropic investments in capacity building (through UNDP projects);

Engaging in policy dialogue and advocacy.

Support interventions in line with national plans;

Facilitate public-private dialogue and collaboration;

Capacity development;

Providing policy advice relevant to markets

Support integration of social (incl. gender), environmental aspects;

Advocate and support inclusive business approaches

Engaging, leveraging the UN System.

Set the overall policy and regulatory framework;

Capacity to enforce rules

Provide soft & hard infrastructure etc.

Ensure relevant capacities and relevant education / training exists

Good governance, anti-corruption

Commitment to engage with private sector

Private sector role DP role Government role

Many examples show that providing basic goods & services as well as income opportunities to the poor can be a sustainable and profitable business strategy and contribute to human development.

Businesses benefit from including the poor: Demand side:

finding new customers, creating long-term customer loyalty, developing transferable innovations

• Supply side: improving production capacity, getting access to high-quality inputs, expanding customer reach

Profitabil

ity

Participation of the Poor

The poor benefit from participating in markets: access to goods

and services access to income

opportunities as suppliers, employees, distributors and entrepreneurs

increased choice and power

The goods & services provided have a human development impact:

water & sanitation, energy

financial services, ICTs

housing, education, nutrition

Human Development

ImpactSustainability

Inclusive businesses contribute to social & environmental sustainability

clean energy, protection against natural disasters

fight against rural exodus and hyper-urbanization etc.

Inclusive Business

The Inclusive Markets Approach Mutual benefits through mutual contributions

25

Private Sector Engagement

Work with larger “lead firms” in strengthening their supply/value chains and make them more beneficial for development – e.g. through commitment to local sourcing, provision of financial or technical resources to build capacity of their suppliers or distributors, etc.

Engage private sector actors of all sizes in public private dialogue with governments about how to strengthen a specific market sector (i.e. value chain) and address relevant policy issues, how to “green” the specific market sector etc.

Private Sector & Market Development

Provide policy advice and capacity development for governments and public institutions

Support provision of business development services and targeted technical assistance to local private actors in specific market sectors / value chains, partner with technical agencies (UN, NGOs, others) when needed

Support cross-cutting issues such as environment, gender

IMD

Inclusive Markets Approach Private Sector Engagement and Development

26

The Inclusive Markets ApproachRole of Private Sector, Government and DPs

27

Engaging in sound core business operations and value chains;

Innovate, increase productivity, identify opportunity and allocate resources to meet demand.

Complement by providing social / philanthropic investments in capacity building (through UNDP projects);

Engaging in policy dialogue and advocacy.

Support interventions in line with national plans;

Facilitate public-private dialogue and collaboration;

Capacity development;

Providing policy advice relevant to markets

Support integration of social (incl. gender), environmental aspects;

Advocate and support inclusive business approaches

Engaging, leveraging the UN System.

Set the overall policy and regulatory framework;

Capacity to enforce rules

Provide soft & hard infrastructure etc.

Ensure relevant capacities and relevant education / training exists

Good governance, anti-corruption

Commitment to engage with private sector

Private sector role DP role Government role

Many examples show that providing basic goods & services as well as income opportunities to the poor can be a sustainable and profitable business strategy and contribute to human development.

Businesses benefit from including the poor: Demand side:

finding new customers, creating long-term customer loyalty, developing transferable innovations

• Supply side: improving production capacity, getting access to high-quality inputs, expanding customer reach

Profitabil

ity

Participation of the Poor

The poor benefit from participating in markets: access to goods

and services access to income

opportunities as suppliers, employees, distributors and entrepreneurs

increased choice and power

The goods & services provided have a human development impact:

water & sanitation, energy

financial services, ICTs

housing, education, nutrition

Human Development

ImpactSustainability

Inclusive businesses contribute to social & environmental sustainability

clean energy, protection against natural disasters

fight against rural exodus and hyper-urbanization etc.

Inclusive Business

The Inclusive Markets ApproachMutual benefits through mutual contributions

28

• Redundancy– Don’t do it, if its going to happen anyway

• Sequencing – Are there things that need to happen first?

• Sustainability– Are the incentives adequate?– What happens when I leave?– Does it increase learning and benefits?– Does it create win-win relationships?

• Clear Exit Strategies– Am I leaving? If yes, When?– What happens when I leave?– Have I left adequate incentives beyond?

• Resource Allocation– Does it make optimal use of project resources?– What are the trade-offs?

PRINCIPLES OF INTERVENTION/SUSTAINABILITY

1

3

Contents

Methodology of VC analysis

Opportunities and constraints analysis; Summary Characteristics

2 Value chain mapping

Priority value chains: Analysis

Key Question

What are the Key Criteria on which to

base the value chain to be analysed?

Which Value Chains is most important to be

analysed?

Participants Assessment of Value Chain Program

Participants involved in the assessment should have common understanding of the value chain development of the Country/Sub-region

Undertake pre-evaluation exercise in of sub-sectors, product or commodity to Identify key actors and informants to ensure that participants: • Have Relevant Knowledge• Are Adequate representative of the value chain• Try to keep participants number small

4 Steps of Prioritizing Process

•Understanding Criteria •Build on Priority

Step 1

•Weighting of CriteriaStep 2•Identifying a List of Potential ProductsStep 3

•Ranking of Products/ActivitiesStep 4

Step 1: Determine Criteria and Build Understanding

As the key entry point for this analysis is the Smallholder Farmer, food security and poverty alleviation, the criteria for entry and analysis should reflect that.

The priorities of considerations should reflect the smallholder farmer and food security


•Present integration of the smallholder in the market-what are they producing, selling and employment?

•Potential for the activity/product for poverty reduction and food security

•Low barrier for entry for the smallholder farmer

•Low risk•Potential for labor intensive technologyPotential of

the Value Chain to

improve the activities of smallholder

farmers


•Strong domestic, regional and international demand for the product

•Growth potential for the product•Possibility of Scaling Up•Involves many farmers•Potential for leveraging public

investment with Private Investment

Market Potential


•Within the framework of Regional Strategies

•Value Chain Actors have entrepreneurial capacity to achieve improvement

•Environmentally sustainable•Gender, Nutrition and Social

Inclusion of The Vulnerable

Other Criteria

Such As

ValueLinks Modules

Strengthening business linkages

Determining a chain upgrading strategy

Analysing a value chain

Facilitating the chain develop-ment process

ImplementationChain analysisand strategy

MonitoringSetting project boundaries

Selecting a value chain for promotion

Engaging in public- private partnership

Deciding whe-ther to engage in chain pro-motion

Monitoring and managing impact

Financing value chains

Strengthening services in VC

Improving the biz environment of VC

Introducing social, & quality standards

1

0

4

3

2 5

6

7

8

9

10

11

Obligatory

according to priorities

Chain analysis helps to:

The use of chain analysis

1

• Start a process of change • Provide information: Chain analysis is a service for

enterprises and public agencies• Design and prepare a fields of investment• Create a baseline for monitoring

Analytical tools of value chain analysis

Elements of a value chain analysis

Value chain mapping Quantification: Numbers of operators Quantification of markets: Volumes & prices, turnover Geographical spread Market (market segmentation, demand potential) Upgrading opportunities

Economic analysis (production cost, shares of value added)

Summary description of VC characteristics

1

Basic value chain maps visualise…

Contents of value chain maps

• The sequence of production and marketing functions performed

• The value chain „operators“ taking these functions (micro level)

• Vertical business links between the operators• The chain „support service providers“ (meso level)

2

Categories of operators in value chains and their relations

SpecificInputs

Provide- equipment- inputs

Production

GrowHarvestDry etc.

Trans-formation

ClassifyProcessPack

CommerceTrade

TransportDistributeSell

Con-sumption

Consume

Value chain functions

SpecificInputproviders

Primaryproducers

Packers,Industry Traders

(sales pt.)

Consumers (the market)

2

Basic concepts

Packers / Industry

SpecificInputs

Specific input providers

Value chain map

2

Production Primary Producers

Traders


Trans-formation

CommerceTrade

Retail(final sales

point)Retailer

Support ServiceProvider 1

Support ServiceProvider 2

mic

ro Input provision Production Trans-

formation Distribution, sales

Con- sumption

mac

rom

eso

Technical Agencies, Research, Extension

BDS providers, NGOs, Development Partners

Groups, Associations, Organisations

Local Government, Providers of Utilities / Infrastructure

National Government (Line Ministries) & Public Administration

Source: adapted from Hoeffler

The VC System for increased competitiveness

Maize: Generic overview of (typical) VC map

2

Seed supply Maize production Milling WholesaleIntermediate

trade

2

Importers

Seed dealers

Localassemblers

Smallholders (selling surplus)

Intra-regional export

Domestic flour

markets

IndustrialMillers

Retail

Food shops

Commercial farmers

Domesticmarkets

food/feed

Exporters

Wholesale traders

Flourtraders

Traders on food markets

Own con-sumption

This VC map is a simplified overview map, showing the major actors and their relationsit is subject to adaptation according to the specific conditions in each country

Animal feed

markets

feedtraders

Institutional buyers (WFP)

Public programs

country

Maize: Market data and food balance

2

Analysis

Regional export market

Domesticmarkets

On-farm con-

sumption

Retail Price

Imports

Volume producedimported/exported (tons)

Value

Maize (grain)Maize (flour)Maize (feed)

Trade balanceMaize (grain)

Farm gate price Value

Export Price Value

country

Maize: Generic overview of (typical) VC map

2


trade

2

Importers

Seed dealers

Localassemblers


Intra-regional export

Domestic flour

markets

IndustrialMillers

Retail

Food shops

Commercial farmers

Domesticmarkets

food/feed

Exporters

Wholesale traders

Flourtraders


Own con-sumption

This VC map is a simplified overview map, showing the major actors and their relationsit is subject to adaptation according to the specific conditions in each country

Animal feed

markets

feedtraders

Institutional buyers (WFP)

Public programs

country

N = 1000

N = 3,5 Mio

3,2 Mio t

25%

75%


tradeRetail

Institutional structure of maize subsector, Ghana

MoFA

Ghana Grains Council

DP Programs - MOAP, Advance

MoTI22

Criteria

What makes a good map

• Make sure the map has a clear message • Avoid overload of information – not more than 2 or 3

channels at a time. • Separate micro and meso analyses• The map has to be understandable to people who have not

participated in making it!2

Maize: Market & upgrading opportunities

3

Market opportunities

• Growing demand with increasing population & consumption per head• Long-term price trend goes up

Supply potential

• Yields far below potential – can go up with use of fertilizer, seeds• Smallholders reactive to market incentives• …

Leverage points for upgrading

• Stabilizing the agricultural policy and trade framework• Coordinating private and public investment along the value chain•…

2


trade

2 Seed dealers

Localassemblers


Regional export market

Domestic flour

markets

IndustrialMillers

Retail

Food shopsCommercial farmers

Domesticmarkets

Food/feed

Exporters

Wholesale traders

Flourtraders


Own con-sumption

Maize value chain: Typical constraints

High price volatility

Inconsistent & unpredictable political interference (e.g. export bans, tariffs)

Markets

Poor market infrastructure (of storage, assembly markets)Poor roads Grades and standards not defined or not enforcedLack of trade finance

Mistrust between VC operators Weak market coordination, unreliable links high marketing cost

Cross-border trade: Variable trade flowsComplicated intra-regional trade regimes, standards not harmonized

Smallholders:No market infoLack of financeKnowledge gapsLittle use of inputsSoil miningLow yieldsPost-harvest loss

variable supplyhigh production cost

Limited demand,weak private sector

country

Content

Priority value chains: Strategy (ValueLinks module 3)

1 Formulating a VC development strategy - different types of value chains

Providers ofspecific inputs

Primaryproducers

TradersRetailers

Logisticcentres,Industry

The fundamental objective for upgrading

Specificinputs Production Processing Trade

Volume Price Income

… increased value = price obtained * volume sold

The focus may be on volume, on prices or on both

Market

1

6% annual sectoral growth

Primaryproducers

ProcessingIndustry Traders


“Upgrading Solutions”

Association

Horizontal linkages

Technologyproviders

Serviceprovider

Service arrangements

Buyer Credit

Norms & standards

Policies

Vertical linkages

Vertical linkages

1

The upgrading objective

Value added of the industry = prices obtained and/or volumes sold...• for the product (specify type, quality, etc.)• in the ... market (specify segment and product)• increased by ...$$ by ...%, • in the year ... (5 years from now)

By... • reducing cost (of production and/or marketing)• expanding capacity (in different stages of the VC)• penetrating the ...market• improving / innovating the product (quality etc.)

Formulating a strategic objective

1

Classifying Strategies

Ansoff Product-Market Growth matrix

1

Product Development Strategy

Diversification Strategy

Market Penetration Strategy

Market Development Strategy

Products

present

New

Mar

ket

Present New

Typical activities for different commodities

Many VC approaches are typical for specific commoditiesFor example:

1

• Fresh beans, flowers, pineapple for export: organizing farmer groups, standards, certification

• Rubber: contract farming, PPP, financial and technical services

• Maize and other cerealsCommodity exchanges, warehouse receipt systemSeed supply systems, contract farming , e.g. with breweries

• Sheanut organizing farmer groups, market linkage

value chains and poverty alleviation

Business

term value chain

value chains asproducers

value chains livelihoodswhats

heart of value chainanalysis

chain ofactors

marketing chains

supply chains

ordistribution chains