Description
One of the most profound changes taking place in the agro-food economy of developing countries is the emergence of agro-industrial enterprises as part of broader processes of agribusiness development. In turn, the transformation of agro-processing from the informal to the formal sector has critical implications for participants along the entire length of the supply chain, from those engaged in agriculture, fisheries and forestry through food retailers and traders to the final consumer.
AGRO-INDUSTRIES FOR DEVELOPMENT
Edited by
Carlos A. da Silva
Doyle Baker
Andrew W. Shepherd
Chakib Jenane
and
Sergio Miranda-da-Cruz
Published by
The Food and Agriculture Organization of
the United Nations
and
The United Nations Industrial Development Organization
by arrangement with
CAB International
AGRO-INDUSTRIES FOR
DEVELOPMENT
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Agro-industries for development / edited by Carlos A. da Silva ... [et al.].
p. cm.
Includes bibliographical references and index.
ISBN 978-1-84593-576-4 (hardback : alk. paper) -- ISBN 978-1-84593-577-1 (pbk. : alk. paper)
1. Agricultural industries--Developing countries. 2. Agriculture--Economic aspects--Developing countries.
3. Economic development--Developing countries. 4. Competition--Developing countries.
I. Da Silva, Carlos A. II. Title.
HD9018.D44A39 2009
338.109172'4–dc22
2009006652
Published jointly by CAB International and FAO. Food and Agriculture Organization of the United Nations
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ISBN: 978 1 84593 576 4 (CABI hardback edition)
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v
Contents
Contributors vii
Foreword ix
Acknowledgements xi
1. Introduction 1
Carlos A. da Silva and Doyle Baker
2. Building the Political Case for Agro-industries and 10
Agribusiness in Developing Countries
Spencer Henson and John Cranfield
3. Agro-industry Trends, Patterns and Development
Impacts 46
John Wilkinson and Rudi Rocha
4. Technologies Shaping the Future 92
Colin Dennis, José Miguel Aguilera and Morton Satin
5. Enabling Environments for Competitive
Agro-industries 136
Ralph Christy, Edward Mabaya, Norbert Wilson, Emelly
Mutambatsere and Nomathemba Mhlanga
6. Business Models That Are Inclusive of Small Farmers 186
Bill Vorley, Mark Lundy and James MacGregor
vi Contents
7. Corporate Social Responsibility for 223
Agro-industries Development
Claudia Genier, Mike Stamp and Marc Pfitzer
8. Annex: Agriculture for Development – Implications 252
for Agro-industries
Alain de Janvry
Index 271
Contributors
José Miguel Aguilera, Professor, Department of Chemical Engineering,
Universidad Católica de Chile, Santiago, Chile
Doyle Baker, Chief, Rural Infrastructure and Agro-Industries Division,
Food and Agriculture Organization of the United Nations, Rome,
Italy
Ralph Christy, Professor, Department of Applied Economics and
Management, Cornell University, Ithaca, New York, USA
John Cranfield, Associate Professor, Department of Food, Agricultural and
Resource Economics, University of Guelph, Ontario, Canada
Carlos A. da Silva, Agribusiness Economist, Rural Infrastructure and Agro-
Industries Division, Food and Agriculture Organization of the United
Nations, Rome, Italy
Colin Dennis, Director General, Campden BRI, Chipping Campden,
Gloucestershire, UK
Claudia Genier, Senior Consultant, FSG Social Impact Advisors, Geneva,
Switzerland
Spencer Henson, Professor, Department of Food, Agricultural and
Resource Economics, University of Guelph, Ontario, Canada
Alain de Janvry, Professor, Agriculture and Resource Economics, University
of California at Berkeley, USA
Mark Lundy, Agroenterprise Specialist, International Center for Tropical
Agriculture (CIAT), Cali, Colombia
Edward Mabaya, Researcher Associate, Department of Applied Economics
and Management, Cornell University, Ithaca, New York, USA
James MacGregor, Researcher, International Institute for Environment
and Development (IIED), London, UK
Nomathemba Mhlanga, PhD Candidate, Department of Applied Economics
and Management, Cornell University, Ithaca, New York, USA
vii
viii Contributors
Emelly Mutambatsere, Evaluation Analyst, African Development Bank,
Tunis, Tunisia
Marc Pfitzer, Managing Director, FSG Social Impact Advisors, Geneva,
Switzerland
Rudi Rocha, PhD Candidate, Department of Economics, Pontifícia
Universidade Católica do Rio de Janeiro, Brazil
Morton Satin, Director of Technical and Regulatory Affairs, Salt Institute,
Alexandria, Virginia, USA
Mike Stamp, Consultant, FSG Social Impact Advisors, Geneva,
Switzerland
Bill Vorley, Head, Sustainable Markets Group, International Institute for
Environment and Development (IIED), London, UK
John Wilkinson, Professor and Researcher, CPDA, Universidade Federal
Rural do Rio de Janeiro, Brazil
Norbert Wilson, Associate Professor, Department of Agricultural Economics,
Auburn University, Auburn, Alabama, USA
Foreword
Developing competitive agro-industries is crucial for generating employment
and income opportunities. It also contributes to enhancing the quality of, and
the demand for, farm products. Agro-industries have the potential to provide
employment for the rural population not only in farming, but also in off-farm
activities such as handling, packaging, processing, transporting and marketing
of food and agricultural products. There are clear indications that agro- industries
are having a significant global impact on economic development and poverty
reduction, in both urban and rural communities. However, the full potential of
agro-industries as an engine for economic development has not yet been real-
ized in many developing countries, especially in Africa.
To address these issues, the Food and Agriculture Organization of the
United Nations (FAO), the United Nations Industrial Development Organization
(UNIDO) and the International Fund for Agricultural Development (IFAD)
organized the first Global Agro-Industries Forum (GAIF) in New Delhi, India,
from 8 to11 April 2008. The Forum developed a shared vision on the factors
critical to the future development of agro-industries, the key factors affecting
their competitiveness, and potential priority action areas. The objectives of the
Forum were threefold: to learn lessons from previous efforts and successes to
develop competitive agro-industries in the developing world; to ensure stronger
collaboration and joint activities among multi-lateral organizations working on
agro-industrialization; and to clarify the distinctive roles of the public sector,
multi-lateral organizations and the private sector in agro-industrial develop-
ment. A related objective was to engage international organizations and finan-
cial institutions into launching initiatives at national and regional levels to foster
agro-industrial development.
FAO, UNIDO and IFAD are committed partners for the development of a
shared vision to maximize the impact of the agro-industrial sector on the liveli-
hoods of those in the developing world. Our agencies are working together to
assist their Member States in creating enabling environments for the develop-
ix
x Foreword
ment of agribusiness, agro-industries and agro-based value chains. We are
doing this through the formulation and implementation of strategies for improv-
ing policies, regulatory frameworks, institutions and services. We are also pro-
moting the incorporation of agro-industrial development strategies into country
level programme frameworks and strategic action plans to assist the poor and
small farmers.
This publication is an outcome of the Global Agro-Industries Forum. It has
evolved through contributions from scholars and development practitioners
aimed at highlighting the current status and future course of agro-industries and
bringing further attention to the valuable contribution that the agro-industrial
sector can make to international development. FAO, UNIDO and IFAD expect
that the materials presented here will help advance the knowledge and enrich
the debate on the role of agro-industries in generating employment, creating
income, and fighting poverty in the developing world.
Jacques Diouf Kandeh K. Yumkella Kanayo Nwanze
Director-General Director-General President
FAO UNIDO IFAD
Acknowledgements
This book has been prepared through a collaborative effort of FAO and
UNIDO, under the technical leadership of Carlos A. da Silva (Agribusiness
Economist, Rural Infrastructure and Agro-Industries Division, FAO), Doyle
Baker (Chief, Rural Infrastructure and Agro-Industries Division, FAO), Andrew
W. Shepherd (Marketing Economist, Rural Infrastructure and Agro-Industries
Division, FAO), Chakib Jenane (Chief of the Agro-Industries Branch, UNIDO)
and Sergio Miranda-da-Cruz (Director, UNIDO Agribusiness Development
Branch).
The editors wish to acknowledge the contributions made by the technical
officers of FAO and UNIDO who participated in the conceptualization of the
book chapters and in their review. Thanks are due to Roberto Cuevas-Garcia,
Stephanie Gallat, Eva Gálvez, David Kahan, Danilo Mejia, Divine Njie, Rosa
Rolle, Maria Pagura, Alexandra Röttger and Gavin Wall, from FAO, as well as
to Karl Schebesta and Sean Peterson, from UNIDO.
We are also grateful to Geoffrey Mrema, Director of the Rural Infrastructure
and Agro-Industries Division, FAO, for his support to this initiative.
The guidance of Rachel Tucker, from FAO’s Electronic Publishing Policy
and Support Branch, during the several stages of the book’s publication pro-
cess is greatly appreciated.
Finally, a special word of thanks is due to the chapter authors, for their
commitment to this project and for their readiness to promptly react to the
editorial comments.
Rome and Vienna,
May 2009
The Editors
xi
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© FAO and UNIDO 2009. Agro-industries for Development (C.A. da Silva et al.) 1
The demand for food and agricultural products is changing in unprecedented
ways. Increases in per capita incomes, higher urbanization and the growing
numbers of women in the workforce engender greater demand for high-value
commodities, processed products and ready-prepared foods. A clear trend
exists towards diets that include more animal products such as fish, meat and
dairy products, which in turn increases the demand for feed grains (FAO,
2007). There is also a growing use of agricultural products, particularly grains
and oil crops, as bioenergy production feedstock. International trade and com-
munications are accelerating changes in demand, leading to convergence of
dietary patterns as well as growing interest in ethnic foods from specific geo-
graphical locations.
The nature and extent of the changing structure of agrifood demand offer
unprecedented opportunities for diversification and value addition in agricul-
ture, particularly in developing countries. As a reflection of changing con-
sumer demand, the 1990s witnessed a diversification of production in
developing countries into non-traditional fruits and vegetables. The share of
developing countries in world trade of non-traditional fruits and vegetables has
increased rapidly in the recent past (FAO, 2007). According to Rabobank,
global processed foods sales per year are estimated at well over US$3 trillion,
or approximately three-quarters of the total food sales internationally
(Rabobank, 2008). While most of these sales are in high-income countries, the
percentages of global manufacturing value addition for the main agro-industry
manufacturing product categories generated by developing countries have
nearly doubled in the last 25 years (FAO, 2007).
The prospects for continued growth in demand for value-added food and
agricultural products constitute an incentive for increased attention to agro-
industries development within the context of economic growth, food security
and poverty-fighting strategies. Agro-industries, here understood as a compo-
nent of the manufacturing sector where value is added to agricultural raw
1 Introduction
CARLOS A. DA SILVA
1
AND DOYLE BAKER
2
1
Agribusiness Economist, Rural Infrastructure and Agro-Industries Division,
FAO, Rome, Italy;
2
Chief, Rural Infrastructure and Agro-Industries
Division, FAO, Rome, Italy
2 C.A. da Silva and D. Baker
materials through processing and handling operations, are known to be effi-
cient engines of growth and development. With their forward and backward
linkages, agro-industries have high multiplier effects in terms of job creation
and value addition. A new dairy processing plant, for instance, creates jobs not
only at its own transformation facilities, but also at dairy farms and in milk col-
lection, farm input supply and product distribution. The demand pull created by
an agro-industrial enterprise stimulates businesses well beyond the closest links
with its direct input suppliers and product buyers; a whole range of ancillary
services and supporting activities in the secondary and tertiary sectors of the
economy are also positively impacted. Because of the generally perishable and
bulky characteristics of agricultural products, many agro-industrial plants and
smaller-scale agro-processing enterprises tend to be located close to their major
sources of raw materials. Consequently, their immediate socio-economic
impacts tend to be exerted in rural areas.
The World Development Report 2008 (World Bank, 2007) called atten-
tion to the fact that some 800 million people are considered poor, subsisting
with incomes of less than US$1 per day. Among the world’s poor, 75% live in
rural areas, having agriculture as a major source of livelihood. Fighting poverty
will require that economic growth and development are brought to rural areas.
Agro-industries, as will be argued in the ensuing chapters of this book, are part
of the answer to this challenge.
The accelerated growth of agro-industries in developing countries also
poses risks in terms of equity, sustainability and inclusiveness. Where there is
unbalanced market power in agrifood chains, value addition and capture can
be concentrated among one or a few chain participants, to the detriment of
the others. Agro-industries will be sustainable only if they are competitive in
terms of costs, prices, operational efficiencies, product offers and other asso-
ciated parameters and only if the prices they are able to pay farmers are
remunerative for those farmers. Establishing and maintaining competitiveness
constitute a particular challenge for small- and medium-scale agro-industrial
enterprises and smaller-scale farmers. Although agro-industries have the
potential to provide a reliable and stable outlet for farm products, the need to
ensure competitiveness favours farmers who are better able to deliver larger
quantities and better quality of products. To the extent that smaller, resource-
poor farmers are left out of supply chains, the socio-economic benefits of
agro-industries are potentially reduced. A need thus exists for policies and
strategies that, while promoting agro-industries, take into account issues of
competitiveness, equity and inclusiveness.
The rapid rise in food prices witnessed in 2007 and 2008 was a stark
reminder that the changing nature of agrifood systems, and how policy makers
respond to the changes, can have immediate humanitarian and political conse-
quences. Agricultural sector and agro-industry adjustments in the 1990s and the
early 2000s contributed to reductions in the supply and international reserves of
staple foods. The global food system did not have the capacity to respond to a
‘perfect storm’ of events that impacted on both short-term supply and demand.
As political consequences of food price spikes and shortages mounted, policy
responses that included export bans further worsened an already unbalanced
Introduction 3
market situation. The food prices crisis, though it has already subsided, points
to the importance of the recent trends in agrifood systems, as well as the need
for sound policies and strategies that enhance the competitiveness and develop-
mental impact of agro-industries.
This book consists of a collection of readings that explore different elem-
ents of the broad issues associated with the development of agro-industries that
are competitive, equitable and inclusive, with a focus on developing countries.
The chapters were commissioned from a number of renowned scholars and
development practitioners by the Food and Agriculture Organization of the
United Nations (FAO), the United Nations Industrial Development Organization
(UNIDO) and the International Fund for Agricultural Development (IFAD) to
form the core of the technical programme of the Global Agro-Industries Forum,
organized by these three agencies in April 2008 in New Delhi, India. The
Global Agro-Industries Forum (GAIF) aimed to develop a shared vision of the
factors critical to future developments of agro-industries, to learn from success
stories in promoting competitive agro-industries in the developing world, to
ensure stronger collaboration and joint activities among multilateral organiza-
tions working on agro-industrialization and to clarify the roles of the private
sector, public sector and multilateral organizations in agro-industrial develop-
ment. A further objective included the engagement of multilateral organizations
and financial institutions in launching initiatives at national and regional levels
to foster agro-industrial development.
The themes covered in this book were subjects for the Forum’s plenary
addresses. The plenary addresses were instrumental in calling attention to the
status of agro-industries in the world, providing analytical insights on key trends
and issues, considering future developments and assessing agro-industry policy
issues and priorities. Following the Global Forum, the plenary addresses were
further developed and are presented here as a sequence of six chapters. In
addition, the keynote address of Professor Alain de Janvry, from the University
of California at Berkeley, is presented as a special annex highlighting aspects of
agribusiness and agro-industry development that were considered in the recent
World Development Report 2008 (World Bank, 2007).
The three chapters following this introduction together provide an over-
view of the main trends, characteristics and impacts of agro-industries in devel-
oping countries. A cross-cutting theme in these chapters is the importance of
viewing agro-industries within the context of the wider restructuring of agrifood
systems. Agro-industrialization is not so much promoted as being seen as a
consequence of external drivers. While there are marked differences among
countries and regions with respect to the degree of structural and organiza-
tional transformation, the processes of agro-industrialization have widespread
and profound impacts. The potential impacts are so significant that the pro-
cesses must be understood and sound policy responses put in place to optimize
potential benefits while mitigating risks. All three chapters provide insights into
the challenges that policy responses need to address.
In Chapter 2, Spencer Henson and John Cranfield, from the University of
Guelph in Canada, characterize the processes of agro-industrialization in devel-
oping countries and build a political case for agro-industries as a driver of
4 C.A. da Silva and D. Baker
growth and development. Henson and Cranfield develop their case around two
main arguments. One cornerstone of their argument is that rapid changes in
agrifood systems are shifting the basis for competitiveness. Increasingly, com-
petitiveness is being determined by factors such as economies of scale, efficien-
cies in logistics, compliance with stringent grades and standards, and capacity
to reach global markets with differentiated products. Henson and Cranfield
observe that countries that have achieved higher integration with global
markets with high-value products, or countries with large high-value domestic
markets, seem to have advanced the most in terms of the contribution of agri-
culture to economic development. Their second argument relates to the perva-
siveness of the impacts of agro-industries. They point to the key distributional
consequences and discuss potential environmental consequences.
The main message of Henson and Cranfield is that countries must think
and act strategically in order to cope with the challenges, starting with the
important strategic choice on how countries and firms position themselves with
respect to market competition. They stress that policy makers need to define
their roles vis-à-vis the private sector and need to establish effective public–
private working relations. Chapter 2 makes it clear that Henson and Cranfield
believe that a key role for the public sector is to create conditions that allow the
development of cost-competitive agro-industries. Some of the key challenges
identified by the authors include improved infrastructure and access to finance,
as well as macro-economic and trade policies that are conducive to investment
and innovation.
The case for agro-industries development is reinforced in Chapter 3, writ-
ten by John Wilkinson and Rudi Rocha, researchers from, respectively, the
Federal Rural University of Rio de Janeiro and the Pontificate Catholic
University of Rio de Janeiro, Brazil. Drawing from an extensive range of statis-
tical data and empirical research sources, the chapter characterizes the contri-
butions of agro-industries to economic development worldwide. Wilkinson and
Rocha particularly emphasize contributions to manufacturing value addition
and employment generation. They point out, however, that it is not possible to
fully appreciate the importance and impacts of agro-industries because much
of the value addition and employment is in the informal sector.
Chapter 3 identifies several structural factors in domestic and global mar-
kets that reinforce the importance of promoting agro-industries in developing
countries. Wilkinson and Rocha present data showing the increasing import-
ance of processed agricultural products in agricultural trade, including in South–
South trade and as a percentage of the food imports by developing countries.
The authors also discuss the recent expansion in markets for differentiated food
products, including fair trade, organic and origin-based products. They acknowl-
edge that focus on these and other non-traditional exports as a strategy for
driving agro-industrial development seems appealing, but is likely to be ham-
pered by market access restrictions, tariff escalation and compliance costs for
meeting increasingly stringent standards established by private organizations
and large-scale buyers.
Wilkinson and Rocha conclude that policies for agro-industry development
should occupy a central position in government strategies. They caution though
Introduction 5
that government strategies must be oriented to market sustainability and be a
component of broader social policies that also aim at food and nutritional
security.
In Chapter 4, the last of the chapters that focus on trends, characteris-
tics and impacts of agro-industries, Colin Dennis (Campden BRI, UK), José
Aguilera (Catholic University of Chile) and Morton Satin (Salt Institute, USA)
discuss technology developments and their implications for agro-industries.
Dennis and colleagues recall several of the trends identified in the preceding
chapters and explain how these are driving technological development. The
main premise of their chapter is that organized food industries and chains
are needed to meet changing consumer requirements and feed expanding
urban populations, and that performance of agricultural and food industries
in turn will be highly dependent on the increased and cost-effective applica-
tion of existing technologies, as well as exploitation of new and innovative
technologies.
The analysis by Dennis, Aguilera and Satin highlights two overarching
challenges in technology development. First, driven by the changes in con-
sumer demand and market requirements, technologies are needed that can
ensure specific food traits (safety, quality, nutritional value, etc.) at all stages
through the life cycle of the end product. Second, because food is moving over
long distances, including internationally, there is a need for technologies and
practices to ensure the safety and quality of products for long periods. The
authors argue that there will be an increasing need to meet sanitary and phyto-
sanitary standards, and to complement technology development with develop-
ment of effective food safety management systems.
The last three chapters turn to the critically important issue of the roles,
responsibilities and actions of public and private sector actors in agro-industries
development. A consistent theme in these chapters, indeed throughout the
book, is that governments have an essential and legitimate role to play. At the
same time, the message of these chapters is that agro-industries development
is essentially a private sector activity. In the light of the developmental trends,
challenges, benefits and risks highlighted in the first set of chapters, govern-
ments cannot be passive observers but they also should not attempt to control
all aspects of agro-industries. Clarification of the roles and responsibilities of
the public and private sectors in agro-industries development is one of the keys
to achieving improved competitiveness and developmental impacts.
Enabling environments for competitive agro-industries are discussed in
Chapter 5, written by Professor Ralph Christy of Cornell University and a team
of collaborators. They argue that fostering competitive agro-industries requires
that conducive business climates, or enabling environments, are in place. They
recall recent efforts to promote reform processes through business climate
assessments, but conclude that these approaches were not designed for the
evaluation of business climates for agro-industrial enterprises.
To provide guidance on agro-industry-focused analyses of business cli-
mates, Christy and co-authors propose a hierarchy of state actions for charac-
terizing and assessing enabling environments for agro-industrial enterprises,
classifying actions as essential enablers, important enablers and useful enablers.
6 C.A. da Silva and D. Baker
The hierarchy, however, is just a starting point. Christy and colleagues argue
that, for effective reform to emerge, a nuanced appreciation of the roles that
public policy makers can play in sustaining competitiveness is needed. The
authors introduce and illustrate an analytical framework for reform processes
framed by two key dimensions, namely the level of risk and uncertainty agro-
industries face when conducting business and the capacity of the state in shap-
ing the environment for business. The authors propose that the framework can
be used to identify suitable policy options for different enabling environment
reform contexts.
The issue of inclusiveness in agro-industries is the focus of Chapter 6,
‘Business Models That Are Inclusive of Small Farmers’, prepared by Bill Vorley,
from the International Institute for the Environment and Development
(IIED, UK), Mark Lundy, from the International Center for Tropical Agriculture
(CIAT, Colombia) and James MacGregor, also from IIED. The authors define
‘business model’ as the way by which a business creates and captures value
within a market network of producers, suppliers and consumers. The chapter
describes a range of business models that improve the inclusiveness, fairness,
durability and financial sustainability of trading relationships between small
farmers and downstream agribusiness (processors, exporters and retailers).
Vorley and co-authors argue that the chief challenge for modern agrifood
businesses in working with small-scale farmers is the difficulty of organizing
supply chains so as to ensure that the benefits of logistics, economies of scale,
traceability and compliance with private sector standards are achieved. They
also contend that despite the difficulties faced, there are sound business rea-
sons for agro-processors, retailers, exporters and other buyers to include small
farmers in the farm-to-consumer value chain. The authors then introduce and
illustrate a typology of organizational models, covering models organized by
the producers themselves, by the end-customer companies or by an intermedi-
ary such as a trader, wholesaler or exporter. They argue that evidence on bene-
fits and impacts of the different models is still weak, and that no single modality
is inherently superior for smallholders.
Vorley and co-authors point out that despite the recent trends towards
increased inclusiveness, the participation of smallholders and SMEs in modern
markets is still more of an exception than the rule. They identify three priorities
for enhancing competitiveness and inclusiveness of smaller-scale sup pliers. The
first is skills development to prepare farmers to be reliable partners and sup-
pliers. The second, returning to the theme addressed by Christy and co-authors,
is business-enabling environments. Vorley and colleagues emphasize the provi-
sion of key infrastructure services, public investments in services such as agri-
cultural research, education and extension, and policies to maintain competitive
markets. The third is for private sector actors to ensure that their procurement
practices work to the benefit, rather than the detriment, of small-scale produc-
ers and suppliers. Vorley and co-authors give several examples of responsible
business practices that can work to the benefit of small-scale suppliers.
The issue of responsible business practices is the subject of Chapter 7,
prepared by Claudia Genier, Mike Stamp and Marc Pfitzer, from FSG Social
Introduction 7
Impact Advisors, Switzerland. The chapter focuses on the concept of corporate
social responsibility (CSR): what CSR means and how it has evolved over the
past decade. The main theme of the chapter is that CSR has become for many
a core business strategy oriented towards competitive advantage, partnerships
along the supply chain, institution building and long-term sustainability. Under
this new perspective, CSR strategies have the potential to increase the inclu-
siveness and competitiveness of agro-industries, creating a more equitable dis-
tribution of benefits along the value chain.
The authors characterize and assess various CSR codes and standards
operating in agricultural value chains. They argue that standards and codes
have helped to improve the quality, safety and traceability of food, but there is
insufficient information to conclude that codes have improved environmental,
social and economic conditions for producers. To the contrary, Genier and
co-authors express concern that the proliferation of standards and codes, as
well as high implementation costs, can lead to the marginalization of small
producers.
One of the main contributions of Genier and co-authors is to expand the
scope of what is generally considered to be corporate responsibility. They
point out that more visionary agrifood companies – recognizing the draw-
backs of reliance on standards and codes – have adopted value chain innov-
ations that seek to expand economic opportunities along entire chains. The
authors review several cases of value chain innovations and conclude that
evidence of impact can be found in the various initiatives in terms of quality,
health and safety improvements, better environmental indicators, higher pro-
ductivity and development impacts. However, they caution that the cases
they appraised remain a minor exception in comparison with the core busi-
ness practices of many agrifood industries, and argue that governments and
civil society have an important role to play in scaling up and replicating value
chain innovations.
All six chapters address in one way or another the fundamental policy
dilemma of agro-industries development: the need to establish and maintain
competitiveness while also addressing the risks to smaller-scale economic actors.
The authors of these chapters do not view policy support to agro- industries as
a choice between competitiveness and developmental impacts, but rather see it
as essential for enhancing both. One of the important contributions of the fol-
lowing chapters is to clarify the challenges being faced and identify strategies
and practical actions to address them.
There are several messages about agro-industries development that cut
across the chapters of this book. One is that governments clearly do have an
important role to play. To enhance competitiveness, enabling policies and insti-
tutions must be put in place and infrastructure must be improved, particularly
rural infrastructure. Recommendations on other specific priorities for establish-
ing enabling environments are made by most of the authors.
Another theme found in all the chapters is that agro-industry firms and
value chain stakeholders must be ready to meet the challenges of changing con-
sumer requirements and market competition. Priority attention should be given
8 C.A. da Silva and D. Baker
to consumer concerns and interests regarding quality, safety, health benefits,
product origin and other attributes. To access higher-valued markets, capacity is
needed to develop, distinguish and certify specific product traits. There is also a
need to improve productivity and efficiency. Systematic attention is required to
build capacity for acquiring and utilizing productivity- enhancing technologies.
The capacity to introduce and apply advanced techniques for supply chain man-
agement and logistics will increasingly become a requirement for competitive-
ness of agro-industries targeting global and regional markets.
An important theme, particularly stressed by Vorley and co-authors and
Genier and co-authors, is that value chains that include smaller-scale pro-
ducers and processors can make good business sense. There nevertheless
are many reasons why firms choose not to work with smaller-scale sup-
pliers. To achieve objectives relating to economic growth and rural develop-
ment, public and private sector initiatives are needed to strengthen business
linkages and support the development of business models that include
smaller-scale producers and processors. The development of inclusive busi-
ness models requires, in turn, concerted efforts to organize smallholders
and build the capacities of farmers to be reliable suppliers. Financial ser-
vices and products that fit the specific conditions of producers, processors
and others in the supply chain are also critical for achieving widespread
developmental impacts.
While the authors present a consistent and coherent overview of agro-
industry drivers, trends, challenges and responses, all are careful to point out
that there is great diversity in circumstances. There is a corresponding need to
ensure that policies and strategies to improve competitiveness and develop-
mental impacts are based on a solid understanding of broader market, con-
sumer and technological trends, as well as the specific conditions of each
country, agro-industry and agricultural value chain.
Finally, it is worth recalling that agro-industries development is such an all-
inclusive and complex process that not all issues could be comprehensively
addressed adequately in a single book or during the GAIF. Several such issues
are briefly touched on in the following chapters, even if not central to the mes-
sage of any single chapter. One issue is the growing urgency to consider
whether and how to work towards the harmonization of national and inter-
national regulatory frameworks. Another issue is the importance of the infor-
mal sector in agro-processing. Environmental consequences of agro-industries
are discussed by Henson and Cranfield but, overall, this volume does not
emphasize this important topic. The chapters do present a convincing case on
the importance of agro-industries in developing countries, and point to some
of the policy priorities for enhancing competitiveness and developmental
impacts. However, this is just a starting point. Issues such as those just identi-
fied make it clear that there remains a great need for additional analysis of
trends and policy responses. FAO, UNIDO and IFAD, the United Nations agen-
cies that organized the GAIF and the contributions to the present book, are
working to fill these gaps, and are committed to promoting international agro-
industrial development that is sustainable, inclusive and equitable.
Introduction 9
References
FAO (2007). Challenges of Agribusiness and
Agro-industries Development, Committee of
Agriculture, Twentieth Session, COAG/
2007/5, Rome, Italy.
Rabobank (2008). The Boom Beyond
Commodities: A New Era Shaping Global
Food and Agribusiness, Hong Kong.
World Bank (2007). World Development
Report 2008 – Agriculture for Develop-
ment, Washington, DC.
10 © FAO and UNIDO 2009. Agro-industries for Development (C.A. da Silva et al.)
Introduction
One of the most profound changes taking place in the agro-food economy
of developing countries is the emergence of agro-industrial enterprises as
part of broader processes of agribusiness development. In turn, the transform-
ation of agro-processing from the informal to the formal sector has critical
implications for participants along the entire length of the supply chain, from
those engaged in agriculture, fisheries and forestry through food retailers and
traders to the final consumer. Potentially, agro-industrialization presents valu-
able opportunities and benefits for developing countries, in terms of overall
processes of industrialization and economic development, export performance,
food safety and quality. At the same time, however, there are potentially adverse
effects on those engaged in informal sector agro-processing enterprises, such
that processes of agro-industrialization must be attuned with overall processes
of economic restructuring. Further, agro-industries are changing on a global
scale, presenting not only new opportunities but also challenges for developing
countries, and suggesting that the future trajectory of agro-industrialization will
be somewhat different than in the past.
The aim of this chapter is to explore the political case for agro-industriali-
zation in developing countries, highlighting both the likely benefits and the
areas where caution is needed, and where critical actions can steer this process
along the most beneficial path. In so doing, the chapter addresses four key
questions:
?
What are the characteristics of the agro-industrial sector?
?
How are the processes of agro-industrialization proceeding and what are
driving these?
2 Building the Political Case
for Agro-industries and
Agribusiness in Developing
Countries
SPENCER HENSON
1
AND JOHN CRANFIELD
2
1
Professor, Department of Food, Agricultural and Resource Economics,
University of Guelph, Ontario, Canada;
2
Associate Professor, Department
of Food, Agricultural and Resource Economics, University of Guelph,
Ontario, Canada
Building the Political Case for Agro-industries 11
?
What impact is agro-industrialization having on developing countries?
?
What are the challenges for developing countries in promoting agro-
industrialization in a manner that is of maximum benefit?
Examples and data are provided to illustrate key points. The chapter concludes
by suggesting notable areas where action is required to ensure that processes
of agro-industrialization proceed unimpeded in developing countries and in a
manner that makes the maximum contribution to overall processes of industri-
alization and economic development.
Nature of the Agro-industrial Sector
The agro-industrial sector is here defined as the subset of the manufacturing
sector that processes raw materials and intermediate products derived from
agriculture, fisheries and forestry. Thus, the agro-industrial sector is taken to
include manufacturers of food, beverages and tobacco, textiles and clothing,
wood products and furniture, paper, paper products and printing, and rubber
and rubber products, as in FAO (1997). In turn, agro-industry forms part of the
broader concept of agribusiness that includes suppliers of inputs to the agricul-
tural, fisheries and forestry sectors and distributors of food and non-food out-
puts from agro-industry.
Most agricultural, fisheries and forestry production is subject to some form
of transformation beyond the farm gate and prior to eventual end use. From
the outset this transformation highlights the critical role that agro-industry plays
in supply chains. At the same time, the roles that agro-industry is playing are
changing over time, and the distinction from other sectors is becoming less
clear as technologies cut across industries (e.g. biotechnology). Moreover, agro-
industries are increasingly using inputs that they have not traditionally employed,
while non-agro-industries are beginning to use raw materials from agriculture,
fisheries and forestry.
The key defining characteristic of the agro-industrial sector is the perish-
able nature of the raw materials it employs, the supply and/or quality of which
can vary significantly over time. Under conditions of uncertain raw material
supply, planning of production and transformation processes and achieving
economies of scale can be fraught with difficulty, especially where there are
very specific quality parameters (e.g. canning of fruits and vegetables). Thus,
there is an incentive for agro-industries to engage in primary production them-
selves (as with plantation systems) or to develop longer-term supply relations
with producers, aimed at improving efficiency in production, securing a reliable
supply, promoting the adoption of varieties that are best suited to processing
operations, and so on.
The manufacture of food products, especially in the context of a develop-
ing country, typically involves a relatively limited range of technologies that do
not differ widely across product categories. In most cases the level of value
added is relatively limited, such that raw materials account for a significant
proportion of end-product prices. In contrast, a great variety of raw materials
12 S. Henson and J. Cranfield
are used in the manufacture of non-food agro-industrial products, while there
are diverse product end uses. The level of transformation undertaken in the
non-food agro-industrial sector is usually considerable, such that the level of
value added is high and raw materials account for a smaller proportion of the
end-product price. Furthermore, a wide variety of technologies are typically
employed both within and across non-food agro-industrial product categories.
Across both the food and non-food agro-industrial sub-sectors, however, there
is a trend towards greater levels of transformation and value addition, and the
employment of more advanced technologies.
While recognizing the broad characteristics of food and non-food agro-
industries in developing countries noted above, the processes involved can vary
from artisan or craft skills to industrial processes, across the informal and for-
mal sectors. Indeed, within any one product sub-sector (e.g. grain milling or the
manufacture of paper) it is possible to observe diverse technologies operating
side by side. Further, there may be significant interlinkages between enterprises
that employ low levels of technology, predominantly in the informal sector, and
those employing more advanced technologies, predominantly in the formal
sector. Examples include the subcontracting of particular functions and/or the
handling of by-products and waste from manufacturing processes. This sug-
gests potentially significant and complex relations between different forms of
business and across the informal and formal sectors, which may also link agro-
industries to other sectors.
The coexistence of the informal and formal sectors is perhaps one of the
key distinguishing features of the agro-industrial sector in developing countries.
While national accounts of most countries largely ignore the economic activi-
ties of the informal sector, in most low-income countries informal or local agro-
processing remains strong. Indeed, ‘informality’ can be considered the norm in
the agro-industrial sector, with formal sector enterprises comprising a relatively
small fraction of the use of agricultural, fisheries and forestry raw materials,
value addition and employment (Sautier et al., 2006). The informal sector
itself, however, represents a highly transitory collection of enterprises, with
rates of firm closure averaging between 9% and 10% annually (Mead, 1994;
Mead and Liedholm, 1998). Indeed, in many cases it is difficult to even concep-
tualize informal agro-processing activities as ‘enterprises’; often individuals may
be involved in multiple business activities that can change from season to sea-
son, and even from hour to hour during the day. As we will see, rather than
representing the establishment of new enterprises and industries, the develop-
ment of the formal agro-industrial sector represents a transition from ‘informal-
ity’ to ‘formality’ as the predominant business form and mode of industry
organization. The economic consequences of the evolution of agro-industries
in developing countries need to be viewed in this context.
Evolution of the Agro-industrial Sector
Since the early 1990s, there has been a rapid process of agro-industrialization
in many developing countries, characterized by the establishment of private
and formal sector firms across an increasing array of food and non-food
Building the Political Case for Agro-industries 13
sectors. In order to understand the nature and consequences of this evolution,
however, it needs to be viewed in the context of the wider restructuring of the
entire agribusiness complex. In this regard we can posit three broad sets of
changes (Reardon, 2007). First, the growth of agro-processing, distribution
and agricultural input provision activities off-farm by agro-industrial firms.
Second, institutional and/or organizational changes to the relations between
agro-industrial firms and primary producers, for example, increasing levels of
vertical integration. Third, changes in the primary production sector in terms
of product composition, technology, sectoral and market structures, etc.
(Reardon and Barrett, 2000). Thus, we can see the growth of the agro-
industrial sector as being integral to profound changes in the entire way in
which the agro-food complex is structured and organized. In turn, this sug-
gests impacts on actors at all levels of the supply chain, from primary produc-
tion to consumption. The framework developed by Reardon and Barrett
(2000) provides a useful lens through which one can understand these proc-
esses of agro- industrialization in developing countries, the factors driving these
processes and their consequences (Figure 1).
Underlying meta-trends
Underlying the evolution of the agro-industrial sector is a broad set of meta-
trends, at both the national and international levels, that condition the way in
which the sector is structured and operates over time. With respect to domestic
markets for the products of agro-industries, population and income growth are
driving changes in food consumption patterns at the broad commodity level,
away from starchy staples and towards meat, dairy products, fruits and veget-
ables, oils and processed grains (see e.g. Cranfield et al., 1998; Pingali and
Khwaja, 2004), reflecting the patterns predicted by Bennett’s law
1
(Table 1).
With increasing urbanization (Figure 2), greater participation of women in the
paid labour force and greater ownership of household appliances (e.g. refriger-
ators and microwave ovens), demand for more highly processed and higher-
value food products with high income elasticities is growing (Figures 3 and 4).
This trend is driving the evolution of the food-processing sector and providing
a mechanism through which enterprises can counteract the downwards pull on
relative food expenditure exerted by Engel’s law.
2
In turn, this leads to an
increased demand for raw materials from primary production, accompanied by
shifts in the types and qualities of raw materials being demanded, which can
generate economic benefits for the agriculture, fisheries and forestry sectors
(Reardon and Barrett, 2000).
Through the 1980s and 1990s, the political economy in which agro-
industries operated changed radically, both nationally in developing countries
and internationally. Agro-industries shifted operations from a predominantly
1
Editors’ notes: Bennett’s law posits that, as income rises, per capita consumption of starchy
food staples falls.
2
Engel’s law states that, as incomes increase, the proportion of income spent on food falls.
14 S. Henson and J. Cranfield
statist model, through structural adjustment and market liberalization, to a focus
on the private sector and establishing conditions that encourage private entre-
preneurial behaviour. This shift has arguably enhanced the opportunities for
private investment in the agro-industrial sector and reduced the costs of cross-
border flows of both goods and capital (Reardon and Barrett, 2000).
We are also observing technological advances both generally (most notably
information and communication technologies) and, specific to the agro-
industrial sector, in primary production (e.g. the application of biotechnology)
Figure 1. Process of agro-industrialization in developing countries. (From Reardon and
Barrett, 2000.)
Meta-trends
Global agro-food
economy changes
Developing
country agro-
industries
Development
indicators
1. Income and
population growth
(Bennett’s &
Engel’s laws)
2. Urbanization and
female
employment
(processed foods)
3. Political economy
change (neoliberal
SAPs, capitalism)
4. Modern
technology (e.g.
information and
biotechnologies)
1. Globalization and
liberalization
(GATT/WTO/FT
as market
opening)
2. Organizational/
institutional
change (vertical
coordination,
contracts, G&S,
property rights,
etc.)
3. Technological
change
(biotechnology,
information,
storage, transport,
drying, etc.)
1. Increase in scale
and concentration
(spatial, sectoral,
firm)
2. Product/sub-sector
composition
change
(horticulture,
processed food,
retail, non-
traditional
products, etc.)
3. Extroversion of
markets and
ownership
(multinationaliz-
ation and export
orientation)
4. Increased use of
coordination/con-
trol mechanisms
5. Increased capital
intensity in
production and
processing
1. Growth in
incomes and output
per capita
(aggregate,
regional, sub-
sectoral)
2. Changes in
poverty and
inequality
3. Employment and
real wages
4. Natural resource
depletion/degrad-
ation or protection
(effluvia, water
use, agricultural
extensification or
intensification,
etc.)
5. Sociocultural
effects (change in
diet, traditions,
decision-making
authority, etc.)
B
u
i
l
d
i
n
g
t
h
e
P
o
l
i
t
i
c
a
l
C
a
s
e
f
o
r
A
g
r
o
-
i
n
d
u
s
t
r
i
e
s
1
5
Table 1. Per capita consumption of food commodities in developing countries by region, 1970 and 2003. (From FAOSTAT; http://faostat.fao.org)
Sub-Saharan Africa Developing Asia Latin America & Caribbean
Food 1970 2003 % Change 1970 2003 % Change 1970 2003 % Change
Cereals (excluding beer) 110.9 123.3 11.1 155.2 163.3 5.2 114.7 129.8 13.1
Starchy roots 164.9 159.7 ?3.2 64.3 45.7 ?28.8 80.5 52.0 ?35.5
Sugar and sweeteners 7.8 11.0 40.5 11.3 17.2 51.9 39.0 47.4 21.7
Pulses 11.3 9.6 ?15.2 8.7 5.7 ?34.1 13.6 11.8 ?13.1
Tree nuts 1.3 0.9 ?30.5 0.43 1.1 165.1 0.5 0.7 36.0
Vegetable oils 5.9 7.6 29.0 3.0 10.1 237.0 6.1 11.4 85.5
Vegetables 31.9 32.4 1.6 45.4 143.2 215.5 35.4 51.0 44.2
Fruits (excluding wine) 58.3 48.3 ?17.2 21.4 49.0 128.6 93.8 98.9 5.5
Alcoholic beverages 42.2 34.9 ?17.2 2.3 13.0 471.4 30.7 42.2 37.5
Meat 12.8 11.4 ?11.0 7.6 27.8 265.6 34.7 59.1 70.4
Milk (excluding butter) 29.9 29.5 ?1.2 20.0 42.4 112.5 84.6 105.9 25.1
Eggs 1.1 1.3 18.7 1.6 8.7 448.4 4.4 8.0 80.9
Fish, seafood 7.9 6.9 ?12.8 6.1 16.1 162.9 7.0 8.5 22.0
16 S. Henson and J. Cranfield
Figure 3. Sales of packaged foods in developing regions, 2002–2007 (US$ billion). (From
Euromonitor data; www.euromonitor.com)
0
50
100
150
200
2002 2003 2004 2005 2006 2007
U
S
$
b
i
l
l
i
o
n
Latin America & Caribbean
Developing Asia & Pacific
Middle East & Africa
2002
0
200
400
600
800
U
S
$
m
i
l
l
i
o
n
1000
1200
1400
1600
2003 2004 2005 2006 2007
India
Thailand
Brazil
Mexico
South Africa
Figure 4. Sales of frozen processed foods in selected developing countries, 2002–2007
(US$ million). (From Euromonitor data; www.euromonitor.com)
and manufacturing sectors (e.g. new processing methods). These technological
advances are serving to create new and unprecedented opportunities for agro-
industrial enterprises in terms of product and process innovations, vertical and
horizontal linkages within supply chains, the functioning of distributional
systems, and so on. However, they also raise the spectre of agro-industrial
Figure 2. Proportion of population in urban areas by country income group, 1990–2004.
(From World Bank World Development Indicators.)
80
70
60
50
40
P
e
r
c
e
n
t
a
g
e
30
20
10
0
1
9
7
0
1
9
7
2
1
9
7
4
1
9
7
6
1
9
7
8
1
9
8
0
1
9
8
2
1
9
8
4
1
9
8
6
1
9
8
8
1
9
9
0
1
9
9
2
1
9
9
4
1
9
9
6
1
9
9
8
2
0
0
0
2
0
0
2
2
0
0
4
Low-income
Lower middle-income
Upper middle-income
Building the Political Case for Agro-industries 17
enterprises being ‘left behind’ if they are unable to gain access to these tech-
nologies in a timely and cost-effective manner.
Alongside changes in domestic demand patterns in developing countries,
shifts in consumption patterns in industrialized countries present potentially
lucrative opportunities for developing country agro-industries, through higher-
value exports. Examples include year-round demand for fresh and semi- processed
fruits and vegetables for which developing countries have an agro-climatic
advantage, and chilled and frozen fish and fishery products. At the same time,
however, consumers in such markets are demanding greater assurances over
food safety and quality, which require investments in more advanced systems of
control through the supply chain.
Changes to the global agro-food economy
En masse, these meta-trends are fostering fundamental changes in agro-food
systems, enhancing productivity and reducing transaction costs and fostering
new modes of competitiveness within and across sectors. For example, the
liberalization of global trade through the World Trade Organization (WTO),
bilateral trade agreements and the preferential market access arrangements
offered to low-income countries (in particular) has opened up higher-value
industrialized country markets to developing country agro-industrial enter-
prises. Further, growth in domestic demand for processed foods provides an
alternative route towards value addition for agro-industrial enterprises. At
the same time, however, more liberal trade in agro-food products is also
exposing domestic agro-industrial enterprises in developing countries to
enhanced competition, both domestically and internationally. In addition,
the challenges associated with this ‘new reality’, including technological
innovation, increased scale of operation, coordination of activities vertically
and horizontally and new institutional forms of governance, such as food
safety and quality standards, intellectual property rights and contracting (see
e.g. Reardon and Barrett, 2000; Henson and Reardon, 2005), require fun-
damental changes in the organization and conduct of agro-industrial enter-
prises and their economic relations with other parts of the agro-food system.
It is far from certain that the successful businesses of the future will be the
‘winners’ from these changes; rather we may see the emergence of new
enterprises that have the competencies required to compete in this more
dynamic and liberal world.
In the case of agro-processed products, we would argue that one of the
most fundamental changes in the governance of supply chains is the increasing
role of grades and standards. In particular, dominant firms are utilizing product
quality attributes as a means of product differentiation and market positioning
(Raikes et al., 2000; Busch and Bain, 2004). Indeed, it is argued that the very
ways in which agro-food markets are structured and operate are increasingly
defined by quality-based competition, while the associated institutional arrange-
ments, both within and outside the supply chain, are crucial to the legitimacy
of the quality attributes embedded in agricultural and food products (Allaire and
18 S. Henson and J. Cranfield
Boyer, 1995; Busch and Bain, 2004; Ponte and Gibbon, 2005; Busch and
Bingen, 2006; Henson, 2007a). The credence nature of many of these
attributes, including the impact of production processes on the environment,
worker welfare, etc., contrasts to the predominant focus on search characteris-
tics in most traditional markets.
In turn, the increasing focus on product safety and quality attributes has
served to enhance the role of formal product and process standards. Standards
are ubiquitous in market economies and play a fundamental role in the organ-
ization of supply chains for most products and services (Busch, 2000; Henson
and Reardon, 2005), including traditional marketing systems. In higher-value
markets, however, formal standards are increasingly the predominant mech-
anism of market and supply chain governance, operating alongside a plethora
of non-codified buyer requirements (e.g. standards related to logistics).
Indeed, standards are often a key vehicle for product differentiation in such
markets (Henson and Reardon, 2005; Henson, 2007b). They also function
as instruments of risk management by standardizing product requirements
over sup pliers, acting to reduce the transaction costs and risks associated
with procurement, in particular where high levels of oversight are required to
ensure food safety and/or quality attributes are delivered. Thus, we see lead-
ing buyers in supply chains (e.g. supermarket chains in industrialized coun-
tries) establishing standards on both an individual (e.g. Tesco Nature’s Choice)
and collective basis (e.g. GLOBALGAP
3
and the BRC Global Standards),
alongside public and quasi-public national and international standards (e.g.
ISO 9000) (Figure 5). Increasingly, certification to such a standard, or set of
standards, is the minimum entry requirement for higher-value markets for
agro-food products, not only in industrialized countries but also in developing
countries’ higher-income markets.
3
Editors’ note: GLOBALGAP is a private sector body that sets voluntary standards for the cer-
tification of agricultural products internationally. The BRC Global Standards were established
by the British Retail Consortium to set out quality and safety requirements for products supplied
to their membership. ISO 9000 refers to a set of quality management standards specified by the
International Organization for Standardization (ISO).
Figure 5. Global certifications to ISO 9000: 2000 in agriculture, fisheries and food
processing, 2000–2004. (From ISO, 2005.)
2001
0
5,000
10,000
15,000
20,000
25,000
30,000
2002 2003 2004
Agriculture &
fisheries
Food processing
Building the Political Case for Agro-industries 19
Restructuring of agro-industries in developing countries
The evolution of the agro-industrial sector is both a response to and an agent
of the induced institutional and technological changes described above (Reardon
and Barrett, 2000). This occurs through shifts in relative product and factor
prices, enhanced flows of capital, transfers of technology and the evolution of
organizational structures and institutions between enterprises and/or across
sectors, etc. More broadly, while retaining distinct features related to the nature
of agricultural products, for example, perishability and protracted production
cycles, the agro-industrial sector in developing countries is evolving in a similar
manner to commodity chains on a global basis (see e.g. Busch, 2000; Reardon
et al., 2003; Busch and Bain, 2004; Fold and Pritchard, 2005; World Bank,
2005). Thus, supply chains are increasingly extending beyond national and
regional boundaries, facilitated in part by new food, communication and trans-
portation technologies and a policy environment that encourages more liberal
international trade (Nadvi and Waltring, 2003; OECD, 2004; Henson and
Reardon, 2005). This is being accompanied by spatial agglomeration and firm
concentration in agro-processing, such that a diminishing number of key eco-
nomic players have power over global agricultural and food markets (Cook and
Chaddad, 2000; Reardon and Barrett, 2000; Viciani et al., 2001; Regmi and
Gehlar, 2005), driving a shift towards buyer-driven supply chains for many
products that are extending internationally with global sourcing and the emer-
gence of multinational actors (Gereffi, 1999; Humphrey and Schmitz, 2001,
2003; Gereffi et al., 2003).
Perhaps the most immediately evident trend in the agro-industrial sector in
developing countries is a shift from the informal to formal sectors and, concur-
rently, increased concentration. Similar trends are observed in primary produc-
tion, most notably in commodities for which there are potentially significant
economies of scale (e.g. forestry and plantation crops). In many developing
countries, agro-industry developed within the framework of existing institu-
tional settings, plant cropping systems and marketing arrangements and norms
that often pre-dated independence (Jaffee and Morton, 1995; Swinnen and
Maertens, 2007). Large-scale and formal agro-industry was driven by the pub-
lic sector in the form of parastatals, some of which were formed out of nation-
alized private enterprises, for example, in grain milling, vegetable canning and
oil palm processing, which operated within a system of state-controlled com-
modity and input distribution. The underlying intention was to create econo-
mies of scale in production, shield farmers from market risks, overcome
perceived gaps in entrepreneurship and force the transfer of resources from
agriculture to nascent industrial sectors (Jaffee and Morton, 1995), often with
donor support. This meant that the agro-industrial sector was frequently
shielded from the competitive pressures that drove consolidation in other parts
of the world.
Many state enterprises in the agro-industrial sector did not flourish for a
whole host of reasons. These included political interference in the manage-
ment of such enterprises in the pursuit of non-commercial objectives, bureau-
cratic burdens, development of structural deficits under conditions of managed
20 S. Henson and J. Cranfield
input supply and output prices, and inadequate investment and access to new
technologies. Through the 1980s, there was a fundamental shift in ‘develop-
ment thinking’ regarding the principal roles of the public and private sectors
that sparked off a radical process of structural reforms. Embedded in these
reforms were efforts to restructure agricultural product and input marketing
systems. In the 1990s, reforms extended to the privatization of state-owned
agro-processing enterprises alongside the liberalization of markets for agricul-
tural and other primary products. The efficacy of these reforms has, however,
been mixed. In many cases state-owned enterprises were privatized under weak
regulatory environments (Jaffee and Morton, 1995), while the slow evolution
of financial markets and ancillary service providers acted to limit access to
finance and inputs, and curtailed efforts to enhance efficiency through invest-
ments in new technologies. Further, processes of privatization were often pro-
tracted and often did not serve to transfer ownership on the basis of commercial
criteria alone. In some cases, the privatization of parastatals has meant that
they have been transferred as single entities into the private sector, while in
others they have been disassembled into smaller operating units prior to sale or
simply withered away, such that a less concentrated market structure has
emerged. Nevertheless, enterprises must now survive in a more liberal environ-
ment where there is a definite thrust towards increased market concentration.
Alongside structural changes in the agro-industrial sector, trends in con-
sumer demand and technological innovation are bringing about shifts in prod-
uct composition (Reardon and Barrett, 2000) at both the primary commodity
and processed product levels, towards sub-sectors where developing countries
have a domestic and/or international competitive advantage. At the same time,
the basis of competitiveness in markets for agro-industrial products is shifting,
threatening the traditional areas of comparative advantage commanded by
developing countries, but also providing new opportunities for enterprises that
have access to the requisite capacities and resources. Broad thrusts in this shift
are towards higher levels of value addition within the agro-industrial sector and
away from traditional commodities and towards non-traditional crops and live-
stock products (e.g. fish, fresh fruits and vegetables, spices).
Broadly, agro-industries in developing countries have been traditionally
based on the utilization of voluminous inputs that have relatively low unit values,
but which are costly to transport. Thus, enterprises within agro-industries
tended to be situated in close proximity to sources of raw materials. This con-
trasts with industries that are less tied to reliable supplies of unprocessed bio-
logical materials, including those that utilize primary processed agricultural,
fisheries and forestry products as inputs into more highly processed products,
which typically locate close to significant markets where the supply of inputs
and capital tends to be more efficient, infrastructure is better, and so on. Indeed,
most agro-industries in developing countries have evolved on the basis of stra-
tegic sources of raw materials; the palm oil sector in parts of sub-Saharan
Africa and Asia is a good example. However, with the shift towards higher-
value products for export and/or domestic markets, where the cost of raw
materials represents a smaller proportion of the end-product price and/or
Building the Political Case for Agro-industries 21
where additional and a wider range of inputs are required (e.g. packaging
and synthetic additives), some of which need to be imported, the advantages
of being located on the basis of raw material supply is less apparent. Thus, we
are seeing a new ‘model’ in terms of the location and competitive position of
agro-industries in developing countries, which in most cases operates alongside
traditional food and non-food agro-industrial sectors.
A further critical factor in the historic competitiveness of agro-industries in
developing countries has been labour costs. Access to a plentiful supply of
cheap labour explains, at least in part, why agro-processing enterprises in
developing countries tend to be less capitalized than their industrialized country
counterparts. While labour costs remain a key element of the competitiveness
of some sub-sectors, for example, the production of semi-prepared fresh vege-
tables in Kenya for export to the European Union, in other sectors capacity
utilization and the ability to meet consumer demands for product safety and
quality are more critical, as in the dairy processing sector. Thus, also in Kenya,
we have seen the emergence of new private sector firms that manufacture
value-added dairy products aimed at particular market niches, including yogurts
containing probiotics. The competitiveness of these enterprises bears little rela-
tion to the level of labour costs.
In many traditional agro-industries, especially those employing capital-
intensive technologies, there are significant economies of scale that require
operation at or near capacity on a continuous basis. This requires a reliable
supply of raw materials, which is readily impeded by significant fluctuations in
agricultural production and/or weak transport infrastructure, such that opera-
tion below capacity is often the norm rather than the exception. There is also
a need for access to sizeable markets that may well exceed domestic demand,
especially in a developing country context where per capita incomes are low
and demand for more highly processed food products is only just emerging.
Thus, agro-industries in developing countries are increasingly facing fierce
competition from global enterprises rather than their regional counterparts.
Countering this trend, however, the establishment of sizeable markets for
higher-value agro-industrial products domestically and/or regionally, coupled
with improvements in basic infrastructure, is providing opportunities for agro-
industrial enterprises in developing countries to compete.
With improved infrastructure, the development of domestic markets for
higher-value food and non-food products, access to improved technologies
and improvements in labour productivity, more advanced agro-industrial enter-
prises are evolving in certain developing countries. Thus, we are observing
increases in capital/ labour ratios such that the competitive position of these
enterprises is less reliant on proximity to supplies of raw materials and/or low
labour costs than is the case with more traditional agro-industrial enterprises.
Such enterprises may be directed at evolving domestic and/or regional
markets, or at export markets in industrialized countries, spurred by access to
trade preferences and broader processes of trade liberalization.
In many developing countries the transformation of the agro-industrial
sector has involved, and in some cases been fundamentally driven by, foreign
22 S. Henson and J. Cranfield
direct investment (FDI), predominantly by multinational corporations. Such
investments have taken the form of acquisitions of (or mergers with) existing
domestic enterprises, of joint ventures or of the establishment of new enter-
prises. While foreign investment is nothing new in many developing countries,
having been a common characteristic of the plantation-processing sector (e.g.
involving Unilever and Del Monte), multinationals are now investing in stand-
alone processing operations, often directed at domestic and regional markets
(e.g. Nestlé and Coca Cola) or the grocery retail sector (e.g. Wal-Mart, Carrefour
and Tesco). In part, such investments reflect an overall trend towards enhanced
flows of FDI (Figure 6) as corporations in industrialized countries look for invest-
ments that have the potential to yield greater returns. Thus, FDI flows to devel-
oping countries, and especially Asia, have grown rapidly over the last 10–15
years (Figure 7). At the same time, FDI flows to the food manufacturing sector
have also increased dramatically (Figure 8), as multinationals are drawn to the
opportunities presented by rapidly expanding markets for higher-value food
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Developed economies
Developing economies
Figure 6. Value of foreign direct investment (FDI) from developed and developing
economies, 1980–2005. (From UNCTAD Foreign Direct Investment Database.)
Figure 7. Value of foreign direct investment (FDI) in developing regions, 1980–2005. (From
UNCTAD Foreign Direct Investment Database.)
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Building the Political Case for Agro-industries 23
0
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Food manufacturing
Agriculture & fisheries
Figure 8. Value of foreign direct investment (FDI) from OECD countries in
agriculture and fisheries and food manufacturing sectors, 1981–2005. (From OECD
International Direct Investment Statistics.)
products. This is illustrated further by the level of cross-border mergers and
acquisitions in certain agro-industrial sectors in developing regions (Table 2).
The increasing flows of FDI to developing countries serve not only to allevi-
ate capital constraints on processes of industrialization (Reardon and Barrett,
2000) but also to facilitate the flow of new technologies and management
practices, and to induce more efficient paths to organizational and institutional
change. Investment flows by agro-industrial enterprises in industrialized coun-
tries can also be an effective mechanism to ‘capture’ more advanced techno-
logies and management systems. At the same time, large inflows of capital
from foreign enterprises can bring about rapid processes of concentration in
agro-industrial sectors and, in due course, significant capital outflows in the
form of expatriated profits. For example, the entry of Nestlé and Unilever into
China, bringing their own proprietary standards for food safety and quality,
induced domestic firms to implement equivalent standards and to adapt their
managerial and marketing systems (Wei and Cacho, 2001; Reardon, 2007). In
turn, leading domestic firms were able to increase their competitiveness in the
domestic market, such that they were able to capture market share at the
expense of the multinationals and weaker domestic enterprises, with the effect
that overall market concentration increased. More generally, the entry of for-
eign competitors can have profound impacts, not only on the agro-processing
sector itself, but also on the entire supply chain; the example of dairy process-
ing in Brazil in Box 1 provides a good illustration.
While processes of transformation in the agro-industrial sector are well-
established in many developing countries, these processes have more recently
been taking place in the context of, and have been further induced by, the
restructuring of food retail markets. Key here is the growth of the supermarket
sector. While supermarkets have long operated in a number of developing
countries, these were generally confined to large cities and focused on upper-
middle or rich consumer segments. However, there is some evidence that a
2
4
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Table 2. Distribution of cross-border mergers and acquisitions in developing regions by sector, 2004–2005 (US$ million).
(From UNCTAD, 2006.)
Africa South, East and South-east Asia West Asia Latin America
Sales Purchases Sales Purchases Sales Purchases Sales Purchases
Sector 2004 2005 2004 2005 2004 2005 2004 2005 2004 2005 2004 2005 2004 2005 2004 2005
Total 4,595 10,509 2,718 15,505 24,193 45,132 19,319 35,349 575 14,134 1,280 18,221 21,840 22,532 11,977 10,179
Primary 3,994 908 1,680 249 421 469 819 4,312 383 111 45 1,333 814 8 881
Manufacturing 68 1,676 529 35 7,386 13,300 4,769 14,805 146 55 922 19 6,560 10,793 8,582 5,492
Food, beverages
and tobacco
46 17 3 1,575 6,256 373 7,040 4,131 5,710 7,786 127
Wood and wood
products
120 452 320 997 162 30
Tertiary 533 7,925 509 15,221 16,385 31,363 13,730 16,222 46 13,968 357 18,157 13,947 10,926 3,322 3,806
Building the Political Case for Agro-industries 25
‘supermarket revolution’ has been under way in certain developing countries
since the early to mid-1990s (Reardon et al., 2007), although with significant
variations across developing regions. The penetration of supermarkets is great-
est in South America, South Africa and East Asia outside China. In these coun-
tries, the growth of supermarkets started in the early 1990s and their average
share in food retail sales grew from around 10–20% in 1990 to 50–60% by the
early 2000s (Reardon and Berdegué, 2002). In a ‘second wave’ of countries,
including Mexico and much of South-east Asia and Central America, the rapid
growth of supermarkets did not occur until the late 1990s and their current
market share is in the region of 30–50%. However, in many other developing
regions, for example, eastern and southern Africa and poorer countries in Asia
and South and Central America, supermarkets are just emerging in major cit-
ies, while their operations tend to be confined to packaged groceries. Indeed,
doubts have been raised about the pace of retail food market restructuring in
these areas (see e.g. Humphrey, 2007), suggesting that supermarkets will
remain the exception rather than the norm in the short to medium term at
least.
The growth of the supermarket sector in developing countries has been
induced by many of the same trends influencing the evolution of the agro-
industrial sector, including changing demand patterns, liberalization of domes-
tic and international food markets and FDI (Reardon, 2007). In turn, the
transformation of the food retail sector is serving to ‘amplify’ these trends and
induce changes in the structure and organization of agro-industrial enterprises
and their downstream relations in supply chains. Thus, as supermarket pro-
curement systems develop and evolve (Reardon et al., 2007), there is demand
for larger supply volumes and competitive advantages from the acquisition of
enhanced skills in food safety and quality standards and supply chain manage-
ment that tend to favour larger enterprises. Indeed, given that processed food
Box 1. Transformation in the dairy processing sector in Brazil.
(From Reardon, 2007.)
The Brazilian Government’s decision to liberalize foreign direct investment (FDI) in
1990 brought about profound and rapid changes to the structure and conduct of
the dairy products sector. The relaxation of restrictions on foreign investment facili-
tated the entry of MD Foods, Parmalat and Royal Numico, alongside new invest-
ments by Nestlé, which had a longer-term foothold in the country. In order to gain
market share these new entrants engaged in aggressive price competition that
had the effect of reducing retail milk prices by 40% over the period 1994–1997. At
the same time, efforts were made to reduce costs throughout the raw milk supply
chain. These efforts included enhanced efficiencies alongside the imposition of
private standards to improve safety and quality in order to promote milk and dairy
product consumption and reduce losses during processing, predominantly through
lower bacterial counts. Within 5 years these standards had been rolled out across
the supply chains of the major dairy processing companies, expelling thousands
of small dairies that were unable to make the required investments in refrigerated
storage vessels.
26 S. Henson and J. Cranfield
products constitute 65% of supermarket food sales in developing countries,
and semi-processed food products account for a further 20–25%, the develop-
ment of the supermarket sector is dependent on appropriate responses by
the food manufacturing sector, at least initially creating conditions of mutual
dependency. However, as supermarkets come to command a greater and
greater share of the retail market for food, and their distribution systems begin
to spread beyond national boundaries, there is a definite shift of power such
that supply chains for processed food products are increasingly buyer (i.e.
retailer) driven.
The evolution of the agro-industrial sector along the lines described above
induces changes in the skill sets required to compete. Modes of management
that predominate in agro-industrial sectors have shifted from the simple coordi-
nation of product flows, management of processing operations and transfer of
ownership, to the implementation of closely attuned systems of production,
processing and distribution that increasingly span the length of the supply
chain, not only nationally but internationally also. While such changes have
been facilitated by technological advances, among other things, they are also
driven by the needs and demands of dominant actors (Dolan et al., 1999;
Dolan and Humphrey, 2000). Existing firms must acquire the related skills in
order to flourish, or face being competed out of the market. In particular, there
is increasingly a premium on management skills (Reardon and Barrett, 2000)
across all of a firm’s operations from raw material procurement, through
processing operations to marketing, and including firm strategy and labour
relations. While multinationals are generally able to import the required skills
from their operations elsewhere, domestic firms must either develop these skills
internally or rely on external service providers. Thus, accompanying processes
of agro-industrialization is the emergence of providers of managerial and other
business services. For example, in coastal Peru, firms provide labour supervi-
sion services over small cotton farmers in return for land collateral under
arrangements that resemble share tenancy contracts (Escobal et al., 2000).
In other cases non-governmental organizations provide such services, acting as
an implicit subsidy supporting processes of agro-industrialization, for example,
by acting as an ‘honest broker’ in establishing supply relations between agro-
processing enterprises and primary producers.
Development of the agro-industrial sector and related changes in the struc-
ture and conduct of markets for food and non-food products can induce con-
siderable changes in vertical relations along supply chains, most notably with
primary producers. Thus, the predominance of spot markets with informal rules
of conduct for many agricultural, fisheries and forestry products is giving way to
more formal and longer-term relationships between agro- industrial enterprises
and suppliers of raw materials. In particular, contracting is becoming a key form
of governance in vertical supply chains, while forms of contracting are chang-
ing. Initially, agro-industrial enterprises tend to employ marketing con tracts that
are relatively informal in nature, or at least are not specified in a written and
legally enforceable instrument. Over time, however, contracts tend to encom-
pass elements of the entire production process and are increasingly codified in
Building the Political Case for Agro-industries 27
written standards and terms of supply. While such contracts act to enhance the
security of raw material supplies for agro- industries, they also provide a mecha-
nism for reducing and redistributing risk along the supply chain. In turn, they
also induce changes in the nature of primary production, typically requiring the
increased use of off-farm inputs. Thus, primary producers are increasingly inte-
grated into the commercial supply chain for both output marketing and input
supply, inducing the evolution of allied supply sectors (seed, fertilizer, etc.).
At the same time, there are pressures towards the consolidation of primary
production, whether through larger farms or collective action on the part of
small farmers, raising the spectre that smallholders will be progressively excluded
from supply chains as agro- industrialization proceeds.
Increasingly tied to contractual relations with raw material suppliers are
quality and safety standards that not only stipulate end-product characteristics
but also define elements of the production process (Henson and Reardon,
2005) as a means to ensure that required processing parameters are complied
with and the requirements of downstream buyers are satisfied. As these stand-
ards are ‘ratcheted up’ over time, there are profound implications for the posi-
tion of small farmers in the supply chain, in terms of both their ability to
participate in supply chains to agro-industrial enterprises and the impact on
rural incomes. As we will see below, the evidence in this regard is marked,
providing instances of exclusion from supply chains, but also examples of small-
scale producers adapting to the changes required and gaining through higher
income as a result.
Despite the very visible and enticing trends towards industrialization of the
agro-processing sector outlined above, in many developing countries (and
especially low-income countries), informal agro-processing remains strong, and
indeed continues to be the predominant locus of agro-processing enterprises
(Sautier et al., 2006). This situation reflects the fact that the entry costs to
informal agro-processing tend to be low, in view of the fact that levels of cap-
italization are typically limited and traditional technologies command only low
levels of human capital that can be acquired relatively easily through appren-
ticeships or other traditional means. Thus, informal agro-processing enterprises
tend to be highly responsive to market demands within the low-income markets
in which they tend to predominate, while innovative capacity tends to be greater
than is often recognized. These characteristics, alongside the numerous capital,
managerial and technological constraints faced by these businesses, are reflected
in the fact that rates of mortality of informal enterprises are high (Mead, 1994;
Mead and Liedholm, 1998).
The degree of structural and organizational transformation of the agro-
industrial sector differs by country and even by regions of a country. In general
terms, agro-industrialization has advanced most in countries that have achieved
the greatest level of integration into global supply chains for higher-value food
and/or non-food products, and/or where domestic high-value markets have
evolved in response to economic, social and demographic change. In the latter
case, this relates to broader processes of economic growth and development,
and thus is typically found in countries with higher per capita incomes. However,
28 S. Henson and J. Cranfield
even in very poor countries with low levels of overall economic development
and where supply chains are predominantly traditional in nature, it is possible
to find ‘enclaves’ where transformed and dynamic agro-industrial sectors exist.
Kenya provides a good example; while the informal sector predominates in
agro-processing, there is a relatively well-developed industrial dairy processing
sector directed at domestic and regional markets and a number of globally
competitive exporters of semi-processed vegetables.
Among poorer countries, including the least-developed countries of sub-
Saharan Africa, agriculture still represents a large proportion of value added
along agro-food supply chains. Traditional supply chains for agro-food prod-
ucts generally predominate and high-value domestic markets are in their
infancy; an indicator of this is the low market penetration of supermarkets in
most countries of sub-Saharan Africa. Usually, the formal agro-processing sec-
tor is small, and may even be stagnating, and there is little or no integration
along the supply chain. There are, however, exceptions to this general rule
(e.g. Zambia and Ghana), where high-value markets are more pronounced due
to foreign investment in food processing and/or supermarkets, significant lev-
els of remittances, burgeoning middle- and high-income groups, etc. Further, in
a number of low-income countries supply chains have been established, pre-
dominantly to supply high-value markets in Europe (such as green beans in
Kenya). However, such supply chains remain the exception rather than the
rule, and operate within a ‘sea’ of fragmented and multilayered traditional mar-
kets that are ‘ruled’ by the informal sector.
In middle-income (and especially upper-middle-income) countries, agri-
culture typically accounts for a small proportion of value added along agro-
food supply chains. Here the process of agro-industrialization is generally
more pronounced and widespread. Urban high-value markets are typically
well developed, sometimes with high levels of supermarket penetration (e.g.
Brazil, Mexico, Malaysia, Egypt and Thailand). In many cases, there is also a
vibrant agro-processing sector that has evolved in response to the growth of
domestic market demand and/or competitive ‘gaps’ in international markets,
for example, for processed foods (as in the case of canned tuna production in
Thailand). A number of these countries are also significant exporters of
higher-value agro-food products and are integrated into the associated global
supply chains. However, supply chains to domestic and international high-
value markets often coexist and operate independently of one another.
Indeed, it is possible to observe a continuum in the level of transformation,
with traditional agro-food sectors predominant in rural markets, while a whole
spectrum of formal and informal sub-sectors supplying domestic markets
exists in between.
Impacts of Processes of Agro-industrialization
Processes of agro-industrialization have widespread and profound impacts at
both micro and macro levels (Figure 1). These include contributions to overall
economic development, alongside changes in rates of poverty linked to the
Building the Political Case for Agro-industries 29
scale and distribution of changes in employment and per capita incomes among
those whose livelihood is linked to the agro-food economy. These processes
also encompass the quality, availability and price of food and non-food prod-
ucts, plus impacts on natural resources and the environment, and sociocultural
implications, among others. Thus, we might reasonably expect there to be
gainers and losers from processes of agro-industrialization, such that there are
likely to be significant distributional consequences of the emergence of an agro-
industrial sector. What is critical in this context is to recognize and promote the
conditions under which agro-industrial enterprises can make a positive and
significant contribution to overall processes of economic development and to
the betterment of the lives of the poorest members of society, while minimizing
any negative externalities and other impacts.
Given that agro-industrialization is but one of the multiple transformations
occurring in agro-food systems in developing countries, as well as globally, attri-
buting observed changes to the development of an industrial agro-processing
sector per se is difficult. Further, these impacts reflect the ongoing dynamics of
development processes, for example, the transformation of a predominantly
informal to a predominantly formal economy, and observations at any point in
time merely provide a ‘snapshot’ that is soon outdated.
The impacts of agro-industrialization on value addition, exports and
employment are treated at length in Chapter 3 of this volume. We will instead
call attention to the effects of agro-industries on two specific aspects: power
relations along the supply chains and environmental consequences of agro-
industrialization.
Impacts on power relations along the supply chain
One of the key concerns related to the processes of consolidation and global-
ization accompanying agro-industrialization is the impact on power relations
along supply chains and the degree to which dominant players, including agro-
processing firms and their purchasing agents, operate in a competitive environ-
ment or are able to exert ‘unfair’ power (Vorley and Fox, 2004). Indeed, some
critics argue that agro-industrialization and related processes of concentration
tend to develop in a mutually reinforcing cycle along agricultural and food sup-
ply chains (Lang, 2003). Thus, as markets for higher-value agro-food products
develop, a limited number of dominant firms tend to emerge that quickly
‘quash’ their smaller competitors in the formal sector while commanding a
progressively greater proportion of the market as the informal sector is
‘squeezed out’. In some cases these dominant enterprises are specific to par-
ticular markets, while in others their influence cuts across many geographical
regions and/or product sectors. There are related concerns about the distribu-
tion of rents along supply chains that are under the influence of such entities
and the scope for primary producers (and especially small-scale farmers and
fishers) to influence the conduct and performance of supply chains and enhance
their share of value added through upgrading (Rabellotti and Schmitz, 1999;
Kaplinsky, 2000; Humphrey and Schmitz, 2001, 2003).
30 S. Henson and J. Cranfield
In the context of many developing countries, the scope for concentration
of markets to bring about ‘abuse’ of market power is exacerbated by the fact
that regulatory controls tend to be weak. Thus, competition policy frameworks
are typically underdeveloped, if present at all, such that there is no legal basis
through which the power of dominant players can be ‘reigned in’. Further,
challenging business conditions (see below) tend to act as barriers to entry,
especially for smaller firms that lack economic and political power to thwart
bureaucratic delays in official and/or legal procedures, such as the enforcement
of contracts.
At the same time, there is a need to consider the ‘counterfactual’ to these
trends towards consolidation of agro-industrial sectors; that is, what would be
the situation along supply chains for agro-food products were there to be no
process of agro-industrialization? Further, the evolution of agro-industries needs
to be viewed in the context of broader processes of transformation in global,
national and rural economies (Reardon and Timmer, 2005). On the one hand,
agro-industrial enterprises play a key role in the evolution of higher-value mar-
kets for agro-food products, which serves to stimulate demand for the products
of primary producers. On the other, in the absence of agro-industries as a key
driver of supply chains for higher-value agro-food products, the power vacuum
might be filled by large multinational traders. The emerging supermarket sector
may also have more command over food supply chains in the absence of large
agro-industries to ‘check’ their market power.
Environmental impacts of agro-industrialization
While the impact of agro-industrialization on the environment has begun to
receive attention in recent years, there is relatively little supporting empirical
evidence on it. Broadly, agro-industrialization usually carries with it an expan-
sion in scale at various levels of the value chain. Expanded scale can come
about through consolidation of existing establishments, new arrangements
with small producers or firms (e.g. out-grower schemes) or new entrants (either
from within the country or multinationals). It is often the case that expanded
scale of operation brings about the adoption of new technologies, organiza-
tional forms and management approaches, which can carry with them pos-
itive environmental effects. These positive effects can be offset, however, by
the degradation of the natural resource base and the production of environ-
mental externalities that prevailing control capacities are unable to manage.
More broadly, it is important to recognize that the impacts of processes of
agro-industrialization as a whole reflect interconnected processes of change at
various levels of agro-industry from production through to distribution. Thus,
Barrett et al. (2001) suggest that we should examine the environmental
impacts of agro-industrialization through three distinct lenses: (1) direct effects
on agriculture and upstream supply industries; (2) direct downstream effects
on processing, distribution and related commercial activities in agro-industrial
supply chains; and (3) indirect effects, such as income growth and other struc-
tural changes.
Building the Political Case for Agro-industries 31
Turning first to the direct effects on agriculture and downstream supply
industries, the increases and transformations in agricultural production that
accompany agro-industrialization have profound implications for land usage.
Increased production often comes about by bringing more marginal and poten-
tially sensitive land into cultivation, thus leading to concerns about deforest ation,
desertification and loss of biodiversity (among others), and/or the impacts of
intensification via the adoption of new technologies on the existing land base.
Evidence suggests mixed environmental effects arising from land expansion
and/or intensification (see e.g. Barbier, 2000; Lee and Barrett, 2000), with the
multifaceted drivers of land use (e.g. other commercial uses and urbanization)
making it difficult to predict the land-use impacts of agro-industrializ ation. For
example, we might see very different outcomes in scenarios where broader
processes of industrialization compete for land than in cases where agro-indus-
trialization occurs in the context of relative plentiful supply of land.
Likewise, the environmental impacts of agro-industrialization vis-à-vis other
agricultural inputs can be both positive and negative. Agro-industrialization can
induce changes in the type and/or level of usage of agrochemicals (see e.g.
Dasgupta et al., 2001), which may be negative if overall usage increases, but
positive if more advanced and safer active ingredients are used, with the overall
impacts dependent on the relative magnitude of these two effects. At the same
time, adoption of technologies leading to capital-for-labour substitution can
reduce employment and generate negative income effects for some, which may
necessitate the use of production practices by food-insecure farmers that are far
from sustainable. However, greater vertical integration via agro- industrialization
can also mean that signals reach producers that otherwise would not be trans-
mitted. For instance, multinationals that procure agricultural product from devel-
oping countries may be sensitive to consumer concerns over environmental
impacts, and thus promote the adoption of environmentally friendly production
practices, often with associated price premiums in niche organic markets (World
Bank, 2005).
Processes of agro-industrialization can have critical effects on the availabil-
ity and quality of water in developing countries. While increases in production
may imply an increase in demand for water, especially if they are associated
with irrigated systems of production, Barrett et al. (2001) suggest that agro-
industrialization often brings about substitution of less water-intensive and
higher-value crops for water-intensive cereals, thus presenting scope for water
conservation. Conversely, some of the major higher-value food exports from
developing countries, for example, fresh fruits and vegetables, require large
volumes of water in their production. This fact has brought about accusations
that, in effect, these countries are exporting ‘virtual water’ (Orr and Chapagain,
2007). Water pollution can become an issue with respect to pesticide use and
(perhaps more importantly) livestock production. Many developing countries
lack the institutions needed to properly develop and implement environmental
governance systems to keep such pollution in check. On the other hand, live-
stock production plays an important role in converting organic matter into
green fertilizer, the use of which leads to reduced application of agro-fertilizers
and can lead to soil nutrient improvements and mulching that reduces water
32 S. Henson and J. Cranfield
losses. Clearly, the net effects of agro-industrialization on water use and quality
are both complex and uncertain, and certainly context-specific.
Broadly, little is known about the environmental effects of direct down-
stream elements of agro-industrialization, although three clear areas of concern
exist: (1) air and water pollution associated with processing and distribution; (2)
levels and nature of post-farm-gate solid waste; and (3) energy use. While agro-
processing is typically one of the most polluting industries in developing coun-
tries (Barrett et al., 2001), it is possible that processes of agro-industrialization
can reduce certain aspects of its ‘environmental load’. This might occur through
the de novo entry of firms with cleaner processing technologies and/or from
technological upgrading by existing firms. Further, economies of scale are
important in the agro-processing sector, with larger scale of operation often
being associated with increased industrial concentration. Both greater scale
and concentration can make it easier to regulate the environmental impacts of
agro-processing operations, with larger firms being easier to monitor and to
take enforcement actions against (Lanjouw, 1997; Jayaraman and Lanjouw,
2000). The trade-off, however, is that scale of operation also creates incentive
for firms to lobby for less strict regulatory controls or, conversely, for larger
(often multinational) firms to lobby for stricter regulations that exclude smaller
(often domestic) firms.
There are a number of potentially detrimental environmental effects asso-
ciated with waste from the agro-processing sector, both in the pre-industrial
and industrial phases. On the one hand, there are the waste materials from
processing operations, some of which may be utilizable as by-products and
others that require disposal. Barrett et al. (2001) note that industrialization of
agro-processing not only creates a new (and often enhanced) stream of waste,
but also distributes this waste away from the point of raw material production
to other locations. The scope for the utilization of waste changes over time and
can be context-specific. For example, new technologies and markets can evolve
that enable waste materials to be used productively. The recent development of
biofuel technologies and new ways in which materials can be transformed for
use as animal feed provide good examples. On the other hand, income growth
and the parallel transformation of agro-industries tend to increase consumption
of packaged food products. Many of these packaging materials are imported
into developing countries and ultimately have to be disposed of in some way.
In many urban areas of developing countries, food packaging materials have
become a major environmental issue, for example, through blocking water
courses and sewage systems.
Processes of agro-industrialization have profound impacts on both the level
of energy uses and the relative importance of different sources of energy, with
often mixed environmental impacts. Broadly, agro-industrialization tends to
lead to substitution of capital for labour, and thus increases the overall demand
for energy. However, net energy savings can occur if commercial-scale process-
ing, with more energy-efficient technologies, replaces less energy-efficient
technologies that would otherwise occur on a smaller (and often informal) scale.
While agro-industrialization will tend to increase the demand for transport and
Building the Political Case for Agro-industries 33
induce greater use of fuel, especially where it implies geographical specializa-
tion, the adoption of more fuel-efficient transport modes could have offsetting
effects. Moreover, given that industrialized processing facilities often locate
near raw material sources, potential energy savings could be realized by ship-
ping finished goods rather than raw materials.
While the direct and multifaceted impacts of the industrialization of agro-
processing are uncertain, potentially the more general and indirect effects are
more critical. Notably, we might reasonably expect the environmental effects
of agro-industrialization to follow the predications of the environmental Kuznets
curve: as developing country incomes grow, environmental degradation will
first increase, reach a peak and then begin to decline, reflecting the adoption
of ‘cleaner’ technologies to abate or remedy negative environmental impacts.
Barrett et al. (2001) suggest that the balance of current evidence points to
increased environmental degradation alongside processes of economic devel-
opment and agro-industrialization, with little indication of a shift to latter parts
of the Kuznets curve. Thus, while the scale effects associated with processes of
agro-industrialization play a role in increased environmental degradation, it
may well be that the adoption of cleaner processing technologies and produc-
tion practices has not progressed to the extent that the detrimental environ-
mental effects are offset.
Challenges Faced with Ongoing Processes
of Agro-industrialization
The foregoing discussions and some later chapters highlight some of the
impacts that agro-industrialization can have on developing countries, outlining
the positive contributions that agro-industrial enterprises can play, but also
some of the detrimental effects. The challenge for developing countries in
steering the development of agro-industrial sectors is to ‘clear the way’ for
private investments that will bring about rapid evolution of agro-food systems,
while laying down conditions that will enable the potential negative conse-
quences to be minimized. This suggests that these challenges lie not only
within the narrow frame of the agro-food sector, and agro-processing in par-
ticular, but in the broader economic and institutional environment in which
industrialization takes place. Below we consider a number of the key chal-
lenges in turn.
Global positioning
The preceding discussion highlighted how ‘the world is changing’. Processes of
agro-industrialization in developing countries are taking place within the con-
text of agro-food systems that are increasingly globalized and themselves under-
going organizational and institutional restructuring. While prevailing trends
can present new opportunities for developing countries in the form of value
34 S. Henson and J. Cranfield
addition, they also pose challenges. Thus, the bases on which developing
country agro-industrial enterprises generally competed in the past are increas-
ingly becoming obsolete, while these enterprises are increasingly facing com-
petition from their global counterparts. At the same time, opportunities for
value addition in this ‘new world’ require new approaches to competitiveness.
Consequently, we are likely to see very different forms of agro-industrial enter-
prise evolve in the future, while existing enterprises that are unable to compete
in this ‘new world’ will shrivel away.
Perhaps the most critical challenge for developing countries is to identify
where their agro-industrial sectors fit into this new ‘global order’. This implies
that the status quo will not suffice. Rather, agro-industries must be driven
primarily by consumer demands, as they filter down through downstream
actors (e.g. supermarket chains and processing enterprises). In many cases
this implies a shift of thinking that is even more radical than that required
when moving away from the statist model of development that prevailed
until the mid-1980s (Jaffee et al., 2003). Indeed, in many cases, agro-
industries, as well as the wider agro-food system, will need an entire reor-
ganization from ‘supply-push’ to ‘demand-pull’, recognizing the primacy of
consumers and dominant downstream buyers. Undoubtedly this poses huge
challenges, and the associated processes of organizational and institutional
restructuring are immense; the more so given the resource and infrastruc-
tural constraints faced by governments and agro-industrial enterprises in
many developing countries.
It is imperative that developing countries recognize the new realities of the
global agro-food economy and identify how they can position existing and/or
new agro-industries within this reality. The challenges presented by the con-
temporary agro-food economy are extremely daunting, especially where costly
processes of restructuring and upgrading are required in order to compete in
both evolving and emerging value chains. At the same time, however, there is
some evidence that the challenges that agro-enterprises are facing, for example,
in order to comply with stricter food safety and quality standards in interna-
tional markets, can act as fundamental catalysts of change and strategic repo-
sitioning (World Bank, 2005; Henson and Jaffee, 2008). Indeed, it is argued
that developing countries are more likely to succeed where there is little or no
‘latitude for poor performance’; that is, where requirements are laid out specifi-
cally and where there is little or no tolerance for deviation from these standards
(Crammer, 1999).
More generally, we can look at the experiences of a number of develop-
ing countries that have been successful in accessing higher-value markets.
Certain countries have managed to add value to traditional agro-food exports
through agro-processing, for example, Côte d’Ivoire (fisheries and wood),
Senegal (fisheries) and Ghana (wood) (Crammer, 1999). Other countries have
diversified diagonally by shifting from traditional primary exports to the
processing of other products, for example, Equatorial Guinea (cocoa to sawn
wood and veneer sheets) and Kenya (from coffee and tea to horticultural and
fisheries products). Much can be learned from these experiences, and also
comparable efforts that have failed.
Building the Political Case for Agro-industries 35
Infrastructural constraints
Preconditions for the development of agro-industries are the necessary trans-
portation, information and communication technologies (ICT) and access to
reliable supplies of key utilities, notably electricity and water. In turn, the infra-
structural constraints under which the agro-industrial sector operates influence
the cost and reliability of the physical movement of raw materials and end
products, efficiency of processing operations, responsiveness to customer
demands, etc. Indeed, alongside prevailing macroeconomic and business con-
ditions, the level, quality and reliability of infrastructure have been shown to be
a critical determinant of export competitiveness for processed agro-food prod-
ucts (Crammer, 1999). Where infrastructural constraints are particularly acute
the additional complexities of processing operations may outweigh the benefits
of diversification away from exports of primary commodities and towards value
addition (Love, 1983).
In many developing countries, and especially low-income countries, infra-
structure tends to be weak. Inherently, this puts agro-industrial enterprises at a
competitive disadvantage to their industrialized country competitors, while also
distorting the competitiveness of developing countries relative to one another
according to the quality of their basic infrastructure. Thus, agro-industrial enter-
prises may face unreliable and costly transportation systems that prevent access
to potentially lucrative markets. Under such conditions we might find poten-
tially competitive agro-processing firms that are unable to access key markets
because of the weakness of transportation systems. Likewise, unreliable and
costly supplies of utilities can prevent agro-processing companies from operat-
ing at or near full capacity utilization.
The existence of weak infrastructure can influence the rate of transition
of the agro-processing sector from informality to formality, and the evolution
of the sector’s structure over time. Thus, the adoption of more advanced
technologies, which is one dimension along which the formal agro-processing
sector competes with often lower-cost informal enterprises, is dependent on
reliable access to electricity and water. Without access to essential inputs and
utilities the agro-processing sector can be caught in an informality ‘trap’.
Further, weak infrastructure tends to favour larger enterprises that have
access to the capital to install their own facilities for generating electricity and
providing potable water, and operate at capacity levels to spread these costs
over a large volume of output. In the longer term, as processes of agro-
industrialization proceed, this can steer the structure of the sector towards
higher levels of concentration.
In addition to basic infrastructure such as roads, electricity, the Internet and
telephones, more specific infrastructural needs of the agro-industries sector
continue to develop. Examples include access to laboratory testing and certifi-
cation services, providers of repair services and new product development
facilities. In many developing countries such infrastructure is weak, such that
compliance with even basic food safety and quality standards can be problem-
atic. Undoubtedly, this acts to impede competitiveness relative to agro- industrial
enterprises that have better access to such services or, at the minimum, increases
36 S. Henson and J. Cranfield
costs as firms are forced to make use of service providers in neighbouring
(or even distant) countries. It can also force sectors into reactive modes of
upgrading capacity when ‘problems strike’ rather than more proactive
approaches that maximize market competitiveness.
Illustrating the critical role of both general and agro-processing-specific
infrastructure to the evolution of the agro-industrial sector, Jaffee and Morton
(1995) highlight how the failure of many large-scale parastatal processing
industries in sub-Saharan Africa can be explained, at least in part, by their
inability to access essential support services (e.g. repair of machinery), and by
their unreliable access to utilities, etc. Indeed, many of these enterprises oper-
ated at well below their level of installed capacity or had ceased operations
altogether, often due to factors that were outside of their control. Arguably,
many of these enterprises would have drifted into bankruptcy if they had not
been provided with protection from governments and/or financial support
from donors.
Access to physical and human capital
With the progressive shift from the informal to formal sectors, and as agro-
processing enterprises attempt to add value and compete with their industri-
alized country counterparts, access to the required physical and human
capital becomes more critical. Indeed, processes of agro-industrialization are
associated with, and at the same time themselves induce, technological
changes along the supply chain, for example, through improved crops and
livestock, new forms of processing and enhanced distribution systems. Such
changes are critical in order to achieve improvements in efficiency, meet the
evolving demands of buyers and consumers and enhance storability and
transportability. Simultaneously, the very nature of these technologies is
changing, as is well illustrated by advances in ICT and the increasing use of
biotechnology.
Agro-industries in developing countries often face significant problems in
gaining access to the technologies and skills they require in order to evolve and
compete in the contemporary agro-food economy, either because these are
not available domestically or because they are costly. In many cases these tech-
nologies are imported, although import taxation regimes, access to foreign
exchange and the exchange rate can act as significant impediments. This
reflects the fact that research and development expenditure in many develop-
ing countries is low. Alternatively, the transfer of physical and human capital
can occur internationally, through linkages with multinational corporations,
technical assistance provided by bilateral or multilateral donors, etc. Indeed,
there is mounting evidence that firms in developing countries can accrue criti-
cal capacities through their interactions with international buyers (Schmitz and
Knorringa, 2000). Critical here is that technologies and skills are ‘appropriate’
to the specific context of the developing country concerned and to the position
of a particular industry and/or enterprise in domestic or global markets.
Thus, for example, a highly sophisticated and costly technology may not be
Building the Political Case for Agro-industries 37
appropriate for a firm or industry that is pursuing a cost leadership strategy.
Further, where technologies are highly product-specific, high levels of asset
specificity can make such investments risky and deter potential investors.
While low levels of capital intensity that result from impediments to access-
ing technologies, alongside labour endowments, are often posited as reasons
for the lack of international competitiveness of developing countries in manu-
factured product exports (Crammer, 1999), there is mounting evidence that the
level of skills per worker (human capital) and land endowments are more critical
for processed primary agricultural products (Wood and Berge, 1997; Wood
and Owens, 1997). This suggests that knowledge-based competitive assets (as
embodied in the labour force) are critical to processes of agro-industrialization
in developing countries. This, in turn, argues for a need for investments in
general and skill-specific education. Indeed, this would seem logical; while
access to technology is critical, no technology can be employed unless there is
the trained workforce to operate it.
Macroeconomic and policy environment
Alongside the specific challenges faced by the agro-industrial sector, all enter-
prises have to operate in the more general macroeconomic, legal and policy
environment. Under conditions of macroeconomic instability, capital invest-
ments with significant sunk costs, as with technologies that are highly product-
specific, are deterred by the inherently greater risk. This situation can then be
further exacerbated with exchange rate misalignments that enhance uncer-
tainty. Where technologies and critical inputs have to be imported, foreign
exchange shortages linked to import licensing and foreign exchange allocation
systems can delay investments or impose additional costs on entrepreneurs,
such as in the form of ‘lobbying’ for foreign exchange.
In many developing countries government policies have been slow to adapt
to the ‘new reality’ of private enterprise. For example, although most countries
have undergone some process of structural adjustment, liberalization of con-
trols on investment and trade is uneven. Further, licensing of businesses remains
common. Variations in the interpretation and implementation of these policies
serve to create uncertainty and add costs (e.g. in the form of bribes) and delays
to business. Such conditions are far from conducive to private investment and
can act to deter foreign firms from investing at all, while discouraging more
risky (but also higher yielding) investments, such as are often associated with
more advanced technologies. These aspects are explored in more detail in
Chapter 5 of this volume.
Business conditions
Although related to the broader policy environment, general business condi-
tions are a specific factor determining the rate and trajectory of the develop-
ment of the agro-industrial sector. Thus, lengthy and costly procedures for the
38 S. Henson and J. Cranfield
legal registration of a business and enforcement of contracts can act as a bar-
rier to the transition of enterprises from the informal to the formal sector
(De Soto, 1989) and provide disincentives for private investment in new enter-
prises. This particularly applies where agro-industries are capital-intensive and
require large initial investments; under such conditions the timely start-up of a
business can be critical for commercial viability.
Table 3 provides selected measures of the business conditions in devel-
oping and industrialized countries. It is immediately apparent that, while
there are significant inter-country differences within any one country income
group, the procedures and time required to start up a business and time
required to enforce a contract are significantly greater in developing coun-
tries, especially in low-income countries. While efforts have been made to
establish regulatory frameworks that are more conducive to business in many
developing countries, bureaucratic inertia and a lack of effort to stamp out
corruption have served to maintain conditions that challenge private
enterprise.
A second element of the conditions required for business is a well- developed
and reliable financial and other business service sector. For example, where the
banking sector is weak, resource mobilization is hampered by low credit repay-
ment rates, which in turn become reflected in higher interest rates, high trans-
action costs and/or political interference. Problems in gaining access to fixed
and/or working capital, including trade credit, are most important for smaller
businesses that tend to lack the required financial resources internally, with the
result that unreliable banking systems can deter the transition from the informal
to formal sector.
Table 3. Indicators of business conditions by country income group, 2006. (From World Bank
World Development Indicators.)
Country/country group
Start-up procedures
to register a
business (number)
Time required
to start a business
(days)
Time required to
enforce a
contract (days)
All developing countries 10.2 54.0 425.6
Low-income countries 10.5 61.5 428.5
Zambia 6.0 35.0 274.0
DRC 13.0 155.0 909.0
Lower-middle-income
countries
10.4 52.2 432.9
Tunisia 9.0 14.0 27.0
Angola 14.0 146.0 1011.0
Upper-middle-income
countries
9.0 42.2 405.0
Turkey 8.0 9.0 330.0
Venezuela 13.0 116.0 445.0
High-income countries 7.1 23.2 277.5
Australia 2.0 2.0 157.0
Slovenia 9.0 60.0 913.0
Building the Political Case for Agro-industries 39
Global trade regimes
While the expansion of domestic demand for higher-value agro-food products
is likely to be an increasing catalyst of processes of agro-industrialization, the
ability of developing countries to supply global markets will remain a critical
issue (Diaz-Bonilla and Reca, 2000). Indeed, it has long been held that a viable
strategy for developing countries towards industrialization is the processing of
primary commodities, which is predominantly the trade in which they are
already engaged (Crammer, 1999). While we have discussed a number of chal-
lenges faced by developing countries in supplying export markets, especially in
view of the rapid evolution of the global agro-food economy, traditional trade
restrictions (e.g. in the form of tariffs and quantitative restrictions) remain a
problem. Indeed, tariff escalation according to the level of processing remains
a reality in many industrialized countries, acting to thwart the ambitions of
developing countries to move up the value chain, as they are being advised by
those very same industrialized countries to do. At the same time, non-tariff
measures, including food safety and quality standards, are creating new chal-
lenges, especially for developing countries that lack the critical food safety and
quality management infrastructure (World Bank, 2005; Henson, 2007a), which
may prevent them from being able to exploit preferential market access as low-
income countries. Ongoing global trade negotiations clearly have a role to play
in addressing this issue.
A secondary impediment to developing countries attempting to access
industrialized (and also developing) country markets for agro-industrial products
is the considerable advantage enjoyed by firms that already have a market pres-
ence, for example, through information networks and market linkages. Indeed,
developing country agro-industrial enterprises can struggle to integrate them-
selves into increasingly sophisticated and integrated global supply chains. This
can mean that considerable time is required for developing country agro-
industries to exploit trade opportunities. It is perhaps not surprising, therefore,
that there has been little change in the countries of sub-Saharan Africa that
dominate exports of non-traditional agricultural and food products, reflecting
the fact that there have been few appreciable new entrants (Henson, 2007b).
We observe similar patterns in the trade of higher-value agricultural and food
products in other parts of the world, suggesting very significant first entrant
advantages.
Strategic thinking
In recent history, agro-industrialization has gone through two broad stages of
development in a developing country context. Prior to the era of structural
adjustment, the public sector played a dominant role in steering the establish-
ment of large-scale and often publicly owned enterprises in the pursuit of rather
dubious objectives, including driving broader processes of industrialization.
While many of these efforts are recognized to have failed, the subsequent phase
has arguably been little better. Thus, in the pursuit of private investment, many
40 S. Henson and J. Cranfield
countries have left the agro-industrial sector to evolve in a laissez-faire manner,
with little or no strategic direction at the sectoral or sub-sectoral level. Indeed,
the liberal agenda pursued by many developing countries has caused uncer-
tainty and confusion over the legitimate role of government.
Too often government has taken a ‘back seat’, by simply observing the
evolution of agro-industries without defining and steering the sector towards
strategic objectives. Indeed, there is a need for developing countries to identify
the most appropriate path for processes of agro-industrialization in their par-
ticular country context. They should identify areas where they can or cannot
compete in domestic and global markets and also establish how the growth of
agro-industries can contribute to economic development through employment
creation, reduction in poverty, reduction in market prices, enhancement of
food safety and quality, environmental protection, etc. Without the adoption of
a strategic approach to agro-industrialization, any contribution to these devel-
opment objectives is largely coincidental. At the same time, there is fear, and
indeed some evidence, that agro-industries are becoming highly concentrated,
crowding out undercapitalized domestic firms and small producers, substituting
domestic equipment for imports and enriching urban elites at the expense of
the rural poor (Jaffee et al., 2003).
The challenge for developing countries is to establish effective working
relations between the public and private sectors in order to define a path for
the development of the agro-industrial sector that does not stifle private incen-
tives, yet brings about broad-based and sustainable growth that creates wealth
and enhanced human well-being. This suggests that government has a legit-
imate role to play, not in directing private sector investments, but instead in
creating conditions that are conducive to private investment and innovation
and steering the development of the sector, in broad terms, in the ‘right direc-
tion’. In turn, this requires that fruitful relations are developed between govern-
ment and private enterprises, on a collective as well as an individual enterprise
level, based on trust and mutual understanding.
The challenges highlighted above suggest that a national strategy for agro-
industrial development is likely to be wide-ranging. However, some of the crit-
ical issues such a strategy might cover are as follows:
?
Work with agro-industries at the sub-sector and sector levels to define plans
to enhance competitiveness in domestic and global markets.
?
Work with large agro-industries to assist small firms and producers to meet
their requirements.
?
Work to eliminate institutional barriers to entry which inhibit entrepre-
neurial dynamism.
?
Ensure effective competition between enterprises in the agro-industrial sec-
tor so as to ensure choice for primary producers and consumers and ‘fair’
prices.
?
Work towards the enhancement of general and sector-specific infrastruc-
ture, working with the private sector where appropriate.
?
Lay down a regulatory framework that facilitates business investment, pro-
motes competition between agro-industrial enterprises and ensures ‘fair’
treatment of consumers and primary producers.
Building the Political Case for Agro-industries 41
?
Make strategic investment in research and development that, rather than
being broad-based, are directed at identified areas of competitive
advantage.
?
Negotiate with international trading partners for market access and tech-
nical assistance directed at competing in markets where a competitive
advantage has been identified.
In developing such strategies there is no need for developing countries to each
start from scratch and to ‘reinvent the wheel’. Developing countries, and the
sectors and firms therein, should be encouraged to share experiences. Bilateral
and multilateral donors and development organizations can play a role in facili-
tating experience sharing and in supporting processes of technology transfer,
while FDI and the trade relations that firms in developing countries have with
international buyers will be of increasing importance to capacity development
at the enterprise level.
Conclusions
This chapter has sought to outline the nature of the process of agro-
industrialization in developing countries and the challenges being faced, most
notably as the global agro-food economy changes in response to a series of
pervasive mega trends. It is evident that the future trajectory of agro-industries
will be quite different to the past and, while developing countries are making
efforts to establish nascent agro-industries, the world around them is changing
rapidly. Certainly, the basis of competitiveness of agro-industries in develop-
ing countries in the future is likely to be somewhat different to the past, requir-
ing the transition of existing enterprises and the adoption of new policies and
approaches to the establishment of enterprises in the future. At the same
time, this ‘new world’ is creating significant opportunities for developing coun-
tries that are able to respond appropriately.
It is evident that agro-industries can (and do) play a fundamental role in
overall processes of industrialization and economic development, although
there are significant (and not always positive) micro impacts and externalities.
For example, while agro-industries present new opportunities for more secure
and better paid employment, the transition from the informal to the formal
sector inevitably involves dramatic changes in the structure of value chains and
associated vertical and horizontal power relations. Thus, agro-industries can
evolve in a manner that acts to exclude smaller formal sector enterprises and
small primary producers, having detrimental structural and livelihood impacts.
Likewise, while agro-industrialization can bring about environmental benefits,
there is also significant scope for negative environmental externalities. This
highlights the need for processes of agro-industrialization to follow an ‘appro-
priate path’, guided by appropriate policies and strategies.
The overall picture painted by this chapter is that the development of agro-
industries in the contemporary context provides opportunities for significant
gains to developing countries, although exploiting the opportunities in a manner
that these gains exceed the losses is far from certain. Certainly, there is a political
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processes of economic and social change. This suggests a gradual approach
rather than a ‘great leap forward’ in promoting the agro-industrial sector (Jaffee
and Morton, 1995). In turn, strategies are needed nationally and internationally
to ensure that developing countries have access to the know ledge and techno-
logies necessary to shift their agro-food sectors from the informal to the formal
sectors. Experiences need to be shared across developing countries so that the
‘same mistakes are not repeated time after time’. The international community
clearly has a role to play here, facilitating cross-border collaboration and access
to markets, alongside the efforts of national governments to lay down conditions
that are conducive to private enterprise, while establishing regulatory frame-
works and policies that guide the evolution of the sector along the ‘right path’.
The future trajectory of agro-industries in developing countries is uncertain.
Yet there are plentiful opportunities and many benefits to be had from agro-
industrialization. However, at the same time, if processes of agro-industrialization
are not guided appropriately, the negative effects, both short term through exclu-
sion of small farmers and informal enterprises and long term through vertical and
horizontal concentrations of supply chains and environmental externalities, could
be considerable. There is a political imperative to plot a positive way forward,
looking at positive and negative experiences and successes and failures to date,
and setting out a strategic direction that serves the needs of developing countries
and the consumers they serve worldwide.
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Introduction
Agro-industry, understood here broadly as postharvest activities involved in the
transformation, preservation and preparation of agricultural production for
intermediary or final consumption, typically increases in importance with
regard to agriculture and occupies a dominant position in manufacturing as
developing countries step up their growth. In all developing countries popula-
tion growth is becoming predominantly an urban phenomenon, increasing the
role of agro-industry in mediating food production and final consumption.
While many long-standing commodity exports have declined in importance,
‘non-traditional’ food exports, especially fruits, horticulture and fish products,
and components of the animal protein complex, have become central to devel-
oping country exports. Whether looked at from the point of the domestic mar-
ket or exports, therefore, agro-industry plays a fundamental role in the creation
of income and employment opportunities in developing countries.
The agro-processing sector covers a broad area of postharvest activities,
comprising artisanal, minimally processed and packaged agricultural raw mater-
ials, the industrial and technology-intensive processing of intermediate goods
and the fabrication of final products derived from agriculture. The hybrid char-
acteristics and heterogeneous features of the agro-processing sector, ranging
from the informal contract relations of poor rural communities to the complex,
transnational activities of global players, suggest the need for caution when
presenting an empirical overview, which is the main objective of this chapter.
1
3 Agro-industry Trends, Patterns
and Development Impacts
JOHN WILKINSON
1
AND RUDI ROCHA
2
1
Professor and Researcher, CPDA, Universidade Federal Rural do Rio
de Janeiro, Brazil;
2
PhD Candidate, Department of Economics, Pontifícia
Universidade Católica do Rio de Janeiro, Brazil
1
The overview initially follows the conventional agro-industry divisions according to the
International Standard Industrial Classification (ISIC – aggregating the 3- and 4-digit levels of
Revision 3), which includes the main sub-sectors of: (i) food and beverages; (ii) tobacco prod-
ucts; (iii) paper and wood products; (iv) textiles, footwear and apparel; (v) leather products; and
Agro-industry Trends, Patterns and Development 47
The agrifood sector can be seen as comprising: (i) products for subsistence
and local markets (basically root crops); (ii) staples for urban domestic markets
(predominantly cereals); (iii) traditional export commodities (coffee, cocoa,
tea, nuts, cotton); (iv) components of animal protein diet (dairy products, oils
and animal feed) and different meat chains (red meat, pigs, poultry) for both
domestic and export markets; (v) fresh or non-traditional products (fruits, hor-
ticulture, flowers, seafood/aquiculture); and (vi) differentiated traditional
exports (fair trade, organics, origin products), which are now oriented also to
domestic markets.
Traditional export commodities are primarily tree crops integrated into
multi-crop family farming systems. Non-traditional, fresh products tend to
demand greater specialization. The latter are particularly associated with labour-
intensive, both in production and postharvest, activities. It is argued that they
are particularly beneficial from the point of view of the trade balance, and that
they tend to offer greater opportunities for capacity building, given the need to
transfer know-how on technical demands related to quality and the nature of
market demand (Athukorala and Sen, 1998). Others argue, on the contrary,
that cheap land and labour are still the key attractions for investing in develop-
ing countries, leading to a ‘race to the bottom’ as countries and regions bid for
investments on the basis of these spurious advantages (Gibbon and Ponte,
2005). Other research suggests that the logistical and quality demands of non-
traditional products are leading to a shift away from smallholders to large-scale
commercial farms (Dolan and Humphrey, 2000). Traditional export commodi-
ties or fresh ‘non-traditional’ products require special quality attributes, which
involve new forms of economic coordination through contracts and supply-
chain management. Here the ‘global value chain’ (GVC) literature is particu-
larly important (Gereffi et al., 2005).
This chapter presents an empirical panorama of the agro-processing sector,
selecting the most recent data for each country and identifying dynamic trends
whenever possible. The core indicators highlighted will be agro-processing pro-
duction and value added, contribution to GDP and participation within the total
manufacturing sector, the level of formal employment, its gender composition
and differences in productivity. With a broader focus on the agrifood system, we
also investigate changes in consumption and international trade patterns.
In the concluding section we place our discussion within a broader consid-
eration of global tendencies, briefly focusing in turn on energy, global warm-
ing, innovation and the emerging institutional and regulatory context governing
global markets. The central implication we draw is that policies for agro- industry
should occupy a central position in developing country strategies and that
domestic initiatives should now receive special attention. We then indicate the
areas that, in our view, should constitute the focus of policy measures.
(vi) rubber products. We will focus particularly on the different divisions of agrifood production/
consumption in order to highlight important features of food-processing, the largest sub-sector,
and the centre of the most dynamic changes in the agro-processing sector during the last
decades.
48 J. Wilkinson and R. Rocha
Panorama: Core Indicators
Methodology
The methodology adopted in this chapter involves an analysis of a country data
set constructed on the basis of the UNIDO Industrial Statistics Database
2005, and organized according to the World Bank classification of high-income
country (HIC), upper-middle-income country (UMIC), lower-middle-income
country (LMIC) and low-income country (LIC). Basic trends in both non-food
and food are presented, but the study as a whole focuses on the food sector.
Data were also drawn from the World Development Report (WDR) 2008
(World Bank, 2007) typology for developing countries, which distinguishes
predominantly agricultural countries, developing countries in transformation
where the urban economy begins to dictate growth in spite of the numerical
superiority of the rural population and urbanized developing countries. Other
data sources drawn on include FAO, ILO, the Confederation of European
Agro-industries (CIAA), UNCTAD, USDA and World Development Indicators.
For the discussion of the major drivers behind the recent transformation in
the agro-industrial sector an extensive literature review was carried out. Of
particular relevance here have been the value chain approaches associated with
Duke University in the USA, the IDS in England and the DIIS in Denmark; the
farm–agribusiness linkages initiatives carried out in all three developing country
continents by FAO; the research into non-traditional food exports undertaken
by Athukorala and colleagues; the African Regional Working Papers of the
World Bank; and research carried out within the framework of CIRAD’s cooper-
ation programmes, together with the research coordinated by RIMISP on
re-governing markets. We have also benefited from numerous individual stud-
ies, in the form of working papers, published articles and books.
Agro-industry production and development impacts
An extended definition of the agro-processing sector, including not only agro-
related industries, but also distribution services and trading activities, would
roughly account for more than one-third of the GDP of Indonesia, Chile, Brazil
and Thailand, and between 20% and 25% of GDP in sub-Saharan countries.
The entire food system, including the production of primary goods and com-
modities, marketing and retailing, would account for more than 50% of the
GDP in developing countries (Jaffee et al., 2003, based on World Bank, FAO
and UNIDO databases).
In order to gather comparable data within a narrower, more industry-
specific perspective, we used only the UNIDO Industrial Statistics Database
2005, selecting countries for which data are available on a consistent basis and
grouping them according to the World Bank country classification by level of
income per capita.
On the basis of this analysis, formal agro-processing participation in the
overall gross product corresponds to around 4.3% in LICs (which include
Agro-industry Trends, Patterns and Development 49
Bangladesh, Ethiopia, Eritrea, India, Mongolia, Senegal and Vietnam) and
about 5% in LMICs and UMICs
2
(see Table 1). Considering the importance of
artisan production and the informal sector in this activity, particularly in LICs,
but generally in the developing world, we can safely interpret this information
as heavily underestimating the real picture.
Within manufacturing or production, the agro-processing sector in devel-
oping countries occupies a relevant place in overall turnover and value added,
particularly for the least- and less-developing countries, though huge hetero-
geneity may exist among them. Considering the group of LICs analysed here,
on average, about 52% of total manufacturing value added corresponds to the
agro-processing sector; for the LMICs and UMICs we find figures of, respect-
ively, 36% and 32%. In agriculture-based countries the contribution of agro-
processing to total manufacturing is 66%, while in transforming and urbanized
countries the figures are, respectively, 38% and 37%.
Based on Jaffee et al. (2003) we calculated the ratio of agribusiness share
over the agriculture share of GDP for a group of selected countries, which
includes a representative sample of sub-Saharan African countries, transform-
ing countries (Indonesia and Thailand), urbanized countries (Latin America and
South Africa) and the USA. Agribusiness provides inputs to farmers and con-
nects them to consumers through the handling, processing, transportation,
marketing and distribution of agricultural products. According to the WDR
(2008), strong synergies can exist between agribusiness, the performance of
agriculture and poverty alleviation: efficient agribusiness can spur agricultural
growth and a strong link between agribusiness and smallholders can reduce
rural poverty. According to FLO (2007), recent trends show that there has
been a rapid increase of production value adding via agribusiness opportunities
relative to primary agricultural production. Demand from agro-processing
increases as does the effective size of the market for agricultural products.
Traders and agro-processing firms furnish crucial inputs and services to the
farm sector, inducing productivity and product quality improvements, stimulat-
ing market growth and innovation throughout the value chains. In this case, the
agribusiness/agriculture ratio captures the degree of productive and commer-
cial development of agro-related activities, the sophistication of agro-industrial
backward and forward linkages, the capacity level of value adding and market
creation, and the importance of distributing and retailing. For agriculture-based
countries, for instance, moving the core economic activities from the farm gate
to the agro-industrial sector and its services may represent productive diversifi-
cation and lead to higher levels of productivity and income generation as well
as higher shares of non-farm employment in rural areas. Above all, at an aggre-
gate level, this ratio may capture the level of structural transformation currently
faced by developing countries, where productivity growth corresponds to a
shifting sector composition of economic activity, a fall in the share of agriculture
2
LIC: Low-income country
LMIC: Lower-middle-income country
UMIC: Upper-middle-income country.
5
0
J
.
W
i
l
k
i
n
s
o
n
a
n
d
R
.
R
o
c
h
a
Table 1. Agro-processing participation and the agribusiness/agriculture ratio.
Year
Agriculture
share of
GDP
a
(1)
Agribusiness
share of
GDP
a
(2) (2)/(1) Ratio
% Agro-
processing
sector in GDP
b
% Food-
processing
and beverages
in total
manufacturing
b
% Agro-
processing
in total
manufacturing
b
Cameroon 0.40 0.17 0.43 – – –
Côte d’Ivoire 0.28 0.26 0.93 – – –
Ethiopia 2002 0.56 0.30 0.54 0.053 0.49 0.69
Eritrea 2001 – – – 0.047 0.45 0.64
Ghana 0.44 0.19 0.43 – – –
Kenya 0.26 0.23 0.88 – – –
Nigeria 0.42 0.16 0.38 – – –
Tanzania 0.32 0.21 0.66 – – –
Uganda 0.41 0.23 0.56 – – –
Agriculture-
based
countries
0.39 0.22 0.57 0.050 0.468 0.664
Bangladesh 1998 – – – 0.036 0.10 –
Mongolia 2000 – – – – 0.49 –
Vietnam 2000 – – – 0.058 0.25 0.41
India 2001 – – – 0.022 0.11 0.27
Indonesia 2002 0.20 0.33 1.65 0.066 0.11 0.42
Morocco 2001 – – – – 0.20 –
Philippines 1999 – – – – 0.18 –
Senegal 2002 – – – 0.033 0.37 0.50
Thailand 1998 0.11 0.43 3.91 – 0.25 –
A
g
r
o
-
i
n
d
u
s
t
r
y
T
r
e
n
d
s
,
P
a
t
t
e
r
n
s
a
n
d
D
e
v
e
l
o
p
m
e
n
t
5
1
Egypt, Arab Rep. 2002 – – – 0.022 0.18 0.30
Zimbabwe 0.18 0.21 1.17 – – –
Transforming
countries
0.16 0.32 1.98 0.040 0.224 0.381
Bolivia 1998 – – – 0.056 0.34 0.42
Brazil 2002 0.08 0.30 3.75 – 0.18 –
Bulgaria 2002 – – – – 0.14 –
Argentina 1999 0.11 0.29 2.64 – 0.28 –
Chile 0.09 0.34 3.78 – – –
Czech Republic 1999 – – – – 0.09 –
Hungary 2000 – – – – 0.14 –
Mexico 2000 0.09 0.27 3.00 0.037 0.24 0.35
Oman 1997 – – – 0.092 0.18 0.23
Russian
Federation
2002 – – – – 0.19 –
South Africa 1996 0.04 0.16 4.00 – 0.15 –
Uruguay 2000 – – – 0.054 0.31 0.49
Urbanized
countries
0.08 0.27 3.32 0.060 0.203 0.375
USA 0.01 0.13 13.00 – – –
Unweighted
average
LICs 0.043 0.32 0.52
LMICs 0.055 0.20 0.36
UMICs 0.051 0.20 0.33
a
Source: Jaffee et al. (2003) for agriculture and agribusiness share of GDP. Agribusiness combines the value added for agro-related industries and that
of agricultural trade and distribution.
b
UNIDO Industrial Statistics Database (2005) for agro-processing data with respective year.
Unweighted averages consider all information available in each column.
52 J. Wilkinson and R. Rocha
and increasing transfers of capital and labour from agriculture towards expand-
ing agro-industrial and related service sectors.
In the USA agribusiness contributes 13 times more to GDP than pure
agricultural activities. In urbanized developing countries, following the WDR
typology, this ratio remains at 3.3, whereas in transforming countries it falls
below 2 and in agriculture-based countries it is only 0.6. More fundamentally,
and not surprisingly, this ratio is highly correlated with basic measures of socio-
economic development. Low indices of human development are directly related
to low ratios of agribusiness-to-agriculture development. Socio-economic
catch-up, on the other hand, can be highly and positively correlated with levels
of economic growth passed on from agriculture to agro-related manufacturing
and service activities (Figure 1).
According to the WDR, growth in rural non-farm employment is in many
cases an important factor in rural poverty alleviation and remains closely linked
to improvements in agriculture. Rural trade and transport, often of food, would
represent about 30% of rural non-farm employment.
3
The direction of causal-
ity, however, is conditional on specific circumstances. Some estimates for rural
China highlight the effects of growth on farming rather than on non-farming
activities, with less evidence of reverse linkages. On the other hand, with urban-
ization becoming an almost generalized worldwide trend, growth in rural non-
farm employment occurs independently of agriculture performance. When
capital and products are mobile, investors search for low-wage opportunities in
areas that have not increased their incomes through higher agricultural product-
ivity. There are also generally areas that are closer to primary agricultural inputs.
3
The report identifies a high correlation between the ratio of food-processing to agricultural
value added and income per capita for a sample of developing countries.
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0
Human Development Index - HDI
Agribusiness/agriculture ratio
Higher correlation for low HDI countries
Mostly agriculture-based
countries
USA
Mostly urbanized
countries
Figure 1. Correlation between human development and the agribusiness/
agriculture ratio.
Agro-industry Trends, Patterns and Development 53
For instance, urban overcrowding and higher labour costs have stimulated
urban-to-rural subcontracting in East Asia, both for domestic consumption and
for export. In this case, although relatively few of the poor gain access to non-
farm jobs in rural areas, higher labour demand would indirectly put upward
pressure on agricultural wages.
Production: basic stylized facts within agro-processing
Within agro-industry, food-processing and beverages are by far the most
important sub-sector in terms of value added, accounting for more than 50%
of the total formal agro-processing sector in LICs and LMICs, and more than
60% in UMICs (see Figure 2). For the African countries included in Table 1,
Ethiopia, Eritrea and Senegal, food and beverages represent more than 70%
of agro-industry value added and roughly 30–50% of total manufacturing. On
the one hand, tobacco and textiles have played an important role in Asian and
Middle-Eastern countries, while wood, paper and rubber production are heavily
concentrated in Asian countries. Leather products, on the other hand, repre-
sent only a marginal share in the total agro-processing value added. According
to FAO (2007), throughout the past 25 years, the shares of global manufactur-
ing value addition for food, beverages, tobacco and textiles (which are the main
agro-industry manufacturing product categories tracked by UNIDO) generated
by developing countries have almost doubled. For textiles, developing countries
accounted for 22% of manufacturing value added in 1980, but more than 40%
in 2005. The increase was the greatest for tobacco, reaching 44% of global
value addition in 2005. In order to focus on sub-sectors that make up almost
Figure 2. Agro-processing sector composition in terms of value added, by group of
developing countries.
0
10
20
30
40
50
60
70
80
90
100
Low income
P
e
r
c
e
n
t
a
g
e
Lower middle income Upper middle income
Food & beverages
Tobacco Textiles
Leather products and footwear
Paper, wood and paper products Rubber and plastic products
54 J. Wilkinson and R. Rocha
all the agro-processing value added in LICs, the chapter will concentrate on
textiles, tobacco and, above all, food and beverages.
Considering specifically the food-processing sub-sector, Figure 3 shows
that processed meat, fish, fruits, vegetables and fats, and bakery, macaroni,
chocolate and others represent together 70–75% of the total value added.
Grains are relatively more important for LICs and dairy products for HICs.
Food industries in emerging countries are undergoing considerable expansion,
particularly in Latin America and Asia. Brazilian and Chinese food production
recorded double-digit growth rates (16% and 22%, respectively) from 2001 to
2004 (CIAA, 2006). According to FAO (2007), there are large differences
among developing regions in the distribution of formal sector agro-industry
value added. Latin American countries accounted for nearly 43% of food and
beverages value addition in 2003 and countries of South and South-east Asia
for 39%. African countries, however, contributed less than 10%.
The textile, clothing, leather and footwear sub-sectors are among the most
globalized activities of the agro-processing sector. As a result of this globaliza-
tion process, the speed of which has increased in the last 2 decades, world
distribution of production, trade and employment has changed dramatically
over the years, and is likely to change even more given the recent phasing out
of the Agreement on Textiles and Clothing (WTO, 2007).
Labour productivity
Productivity levels within agro-industry are heterogeneous, ranging from low
for textiles and wood products to extremely high for tobacco products. When
compared to agricultural or general manufacturing standards, agro-industry
approaches industrial averages or even reaches relatively higher productivity
levels, as is the case for food and beverages in LICs and MICs (Table 2).
0
10
20
30
40
50
60
70
80
90
100
High income
P
e
r
c
e
n
t
a
g
e
Upper middle income Lower middle income Low income
Processed meat, fish, fruit, veg & fats Bakery, macaroni, chocolate and others Dairy Grains
Figure 3. Food-processing sub-sector composition in terms of value added.
A
g
r
o
-
i
n
d
u
s
t
r
y
T
r
e
n
d
s
,
P
a
t
t
e
r
n
s
a
n
d
D
e
v
e
l
o
p
m
e
n
t
5
5
Table 2. Labour productivity in agro-industry (value added over number of workers, average in current US$).
Year
a
Food &
beverages
a
Tobacco
products
a
Textiles
a
Wood
products
a
Paper
and paper
products
a
Rubber
and plastic
products
a
Total
manufacturing
a
Agricultural
productivity
b
Bangladesh 1998 2,939 40,192 862 1,437 2,007 1,967 2,066 308
Ethiopia 2002 7,756 23,674 1,215 – 3,178 6,162 4,696 149
India 2001 3,192 1,754 2,667 1,801 4,631 5,525 5,053 381
Mongolia 2000 2,695 – 2,580 1,059 759 – 1,619 684
Senegal 2002 11,952 35,459 4,863 10,569 13,113 9,805 13,843 249
Vietnam 2000 3,146 – – – – – 2,841 290
Unweighted
average – LICs
5,280 25,270 2,437 3,716 4,737 5,865 5,020 344
Brazil 2002 18,047 59,865 10,368 7,730 34,801 13,587 19,559 2,790
Bulgaria 2002 2,782 4,969 2,607 1,838 2,399 3,093 2,864 6,313
Indonesia 2002 6,206 9,553 4,532 5,117 16,355 3,419 7,056 556
Morocco 2001 11,523 255,815 7,001 6,061 17,561 9,910 11,657 1,515
Philippines 1999 26,423 56,854 7,310 5,572 15,053 10,942 16,065 1,017
Thailand 1998 10,499 1,996 5,484 3,261 9,929 6,043 8,276 586
Egypt 2002 6,028 9,722 1,878 2,812 9,047 3,891 6,883 1,975
Unweighted
average
– LMICs
11,644 56,968 5,597 4,627 15,021 7,270 10,337 2,107
Argentina 1999 33,255 71,516 21,468 15,909 35,255 29,750 33,843 9,272
Czech Republic 1999 10,872 – 6,864 7,539 11,640 11,595 9,758 4,564
Hungary 2000 9,942 38,988 5,412 5,374 14,208 10,810 11,436 5,080
Mexico 2000 39,964 254,613 14,779 12,259 43,248 23,767 41,156 2,704
South Africa 2001 10,789 – – – – – 9,329 2,391
Uruguay 2000 25,698 311,406 20,412 18,099 34,452 19,356 35,651 6,743
Unweighted
average
– UMICs
21,753 169,130 13,787 11,836 27,761 19,056 23,529 5,126
a
UNIDO Industrial Statistics Database 2005 for agro-processing data with respective year, in current US$.
b
Source: WDR (2008), data for 2001–2003, US$ 2000 prices.
56 J. Wilkinson and R. Rocha
The fact that productivity levels for food processing are above the manu-
facturing average not only complements the patterns identifying the sector as
one of the largest industrial activities in LICs and MICs in terms of value adding,
but also confirms it as one of the most efficient economic sectors in least-
developed countries and the one that pushes the manufacturing sector towards
higher levels of technical capabilities and value-adding achievements. Table 3
shows that dairy products present the highest labour productivity levels in LICs
and LMICs, while grains occupy this position in UMICs, as well as in HICs.
Employment, informality and gender composition
According to the ILO, on average, 60% of the workers in the food and bever-
age industry in developing countries are employed in the informal economy,
occupying jobs that are often precarious in terms of social protection. A major
problem here is the absence of comparable statistics. Following the ILO esti-
mates and considering only countries where official statistics are available and
on the basis that data cover only the formal economy, we may have some 22
million people employed globally in the food and drink industries.
4
Both the
ILO and the UNIDO statistics confirm a decline of employment in the food and
drink industry in many developed countries, often as a result of the relocation
of processing operations to developing and transition economies. On the other
hand, there has been strong growth in employment in some developing coun-
tries (Thailand, Mexico, the Philippines) while other countries (e.g. South
Africa) have experienced a sharp fall in recent years (ILO, 2007).
Many high-value agrifood and non-food chains are characterized by increas-
ing levels of female participation (Dolan and Sorby, 2003). In the Dominican
Republic, women comprise roughly 50% of the labour force employed in horti-
culture processing (Raynolds, 1998). In Mexico, 89–90% of employees in pack-
aging are women (Barrón, 1999). In Kenya and Zambia, over 65% of workers
in horticulture pack-houses and farms are women (Barrientos et al., 2001;
Table 3. Productivity in the food-processing sector (value added per worker, average in
current US$). (Based on the UNIDO Industrial Statistics Database 2005. Countries within
each category are the same as presented in Table 1.)
Processed meat,
fish, fruits,
vegetables and fats Dairy Grains
Others: bakery,
macaroni,
chocolate, etc.
Food-
processing
sector
Total
manufacturing
LIC 3,830 9,418 6,388 4,395 4,937 4,804
LMI 15,941 21,090 15,587 10,605 15,083 15,694
UMI 18,023 21,855 29,308 17,919 18,296 23,076
HIC 46,675 71,439 87,569 61,433 55,408 57,738
4
Based on LABORSTA. More information at: http://www.ilo.org/public/english/dialogue/sector/
sectors/food/emp.htm.
Agro-industry Trends, Patterns and Development 57
Dolan and Sutherland, 2002). Women represent 91% of horticultural workers
in Zimbabwe (AEAA, 2002). In Chilean fruit production, female employment
increased almost 300% between 1982 and 1992, an impressive pattern when
compared to a national growth rate of 70% for the female labour force
(Barrientos, 1997). In Brazil, 65% of workers in fruit production were women in
the mid-1990s (Collins, 2000). In horticulture, the highest levels of female par-
ticipation have been documented in the cut flower sector. In Tanzania, Ecuador,
Kenya and Uganda, women represent respectively 57%, 70%, 75% and 85%
of workers (Blowfield et al., 1998; Palan and Palan, 1999; Asea and Kaija,
2000; Dijkstra, 2001). Poultry processing is another labour-intensive activity
and absorbs high levels of female workers. In 2000, 80% of employees in
Thailand’s Cargill subsidiary, Sun Valley, were women – a proportion similar to
that found in other poultry processors (Lawler and Atmananda, 1999).
Dolan and Sorby (2003) argue that flexible labour follows gender-based
patterns, with women allocated to more vulnerable forms of work (casual, tem-
porary and seasonal), and men concentrated in the fewer permanent jobs. In
most activities, there is strong gender segmentation in both production and
processing, reinforced by prevailing gender stereotypes. Women are con sidered
to have higher skills for tasks requiring manual dexterity and patience, such as
harvesting, sorting, grading, de-boning and packaging. Men, for their part, are
seen to have superior physical strength, supervisory capacity and mechanical
skills.
According to ILO (2005), the participation of female workers in the cloth-
ing and textile industries is above the manufacturing average and significantly
higher for the clothing sector. Women are often young and low skilled. The
share of female employment in clothing is considered to be more than 89% in
Cambodia, 80% in Bangladesh and 82% in Sri Lanka. Female participation in
India and Turkey is below 50%, while in Guatemala it reaches around half of
total employment. Female participation in textiles is generally lower, below
50%, with the exception of Cambodia (76%) and Sri Lanka (61%).
The role of the rural non-farm economy
5
According to the WDR around 75% of the poor in developing countries live in
rural areas, 2.1 billion living on less than US$2 a day and 880 million on less
than US$1 a day. Although agriculture remains at the productive centre of
most rural economies, labelling them as purely agricultural is clearly inaccurate.
For developing countries as a whole, non-farm earnings account for 30–45%
of rural household income. This is not only a large share in absolute terms but
increases over time, constituting a complement to agricultural wages and an
instrument for risk diversification and the evening out of consumption patterns.
With low capital requirements and undemanding local marketing channels, the
rural non-farm economy offers opportunities for poor households, small-scale
5
Based mainly on Haggblade et al. (2005).
58 J. Wilkinson and R. Rocha
farmers and other smallholders, representing a potentially important instru-
ment for poverty alleviation in rural areas.
Haggblade et al. (2005) argue that the rural non-farm economy plays an
important role in the process of structural transformation, during which the
share of agriculture in national output declines and transfers of capital and
labour drive a corresponding rise in manufacturing and services, particularly
those related to agro-industry. Here, therefore, we have a key for the under-
standing of many of the processes driving overall economic growth and poverty
reduction in least developed countries.
The rural non-farm economy is a heterogeneous set of trading, agro-
processing, manufacturing, commercial and service activities, ranging from
part-time artisanal entrepreneurs to large-scale industrial plants operated by
multinational firms. Some clear compositional patterns can be identified spa-
tially, with home-based cottage industries, small-scale retailers and basic farm
equipment repair services predominating in rural areas while factories, traders
and transport facilities, public administration offices, schooling, health clinics
and other services are concentrated in small towns.
In terms of sector composition, rural industries account for only 20–25%
of rural non-farm employment (see Table 4), consisting mostly of occupations
in agro-industries. Indirectly, however, other activities such as commerce and
retailing, construction, transport and trade are typically associated with agro-
related manufactures and agribusiness.
Agriculture evidently has a direct influence on the size and structure of the
rural non-farm economy since it accounts for the largest share of employment,
value addition and raw material supplies. Haggblade et al. (2005) discuss two
main scenarios for the dynamic relation between agriculture and the rural non-
farm economy. On the one hand, where new technologies and modern farm
inputs are available there would be productivity surpluses and increasing oppor-
tunities for trade, capital accumulation and value addition. A dynamic agriculture
fuels economic growth in the rural non-farm sector through a number of link-
ages. It requires inputs, such as seeds, fertilizer, credit, machinery, marketing and
processing facilities, which create an increasing demand for non-farm enterprises
that provide such goods and services. Still, some non-farm activities, initially
undertaken by farm households for self-consumption, spin off as full-time com-
mercial enterprises, while others, particularly labour-intensive household manu-
facturing, die out in rural areas, displaced by imports from cheaper urban
factories. This demise of low-productivity household manufacturing as well as
changes in consumption patterns towards modern urban-related habits would, in
part, explain why employment in services and commerce often increases faster
in rural areas than local manufacturing and small-scale agro-processing plants.
Consumption patterns of processed food and beverages
As presented previously, processed food and beverage products account, on
average, for almost 50% of total agro-processing value added in developing
countries, and occupy an even more relevant place in the overall manufacturing
A
g
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t
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T
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d
s
,
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n
s
a
n
d
D
e
v
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l
o
p
m
e
n
t
5
9
Table 4. Composition of rural non-farm employment by region. (From Haggblade et al., 2005.)
Rural non-farm employment shares
Non-farm share
of rural
workforce
Women’s share of
rural non-farm
employment Manufacturing
Trade &
transport
a
Financial and
personal
services
b
Construction,
utilities, mining
and others
c
Total rural
non-farm
Africa 10.9 25.3 23.1 21.9 24.5 30.4 100
Asia 24.8 20.1 27.7 26.3 31.5 14.4 100
Latin America 35.9 27.5 19.5 19.6 27.3 33.5 100
West Asia and
North Africa
22.4 11.3 22.9 21.7 32 23.2 100
a
Trade and transport include wholesale and retail trade, transport and storage.
b
Other services include insurance and community and social services.
c
Others include quarrying and other non-classified activity.
60 J. Wilkinson and R. Rocha
value added of LICs. We now focus on consumption trends, the primary driving
force of the agro-processing sector and its most dynamic feature. The following
discussion presents recent trends in consumption patterns with particular atten-
tion given to the changing composition and growth rates of consumption in
developing countries.
Global sales of food and beverages were estimated at US$4 trillion
6
in
2002, around 80% of which corresponded to processed food and beverages
(US$3.2 trillion) with over 40% accounted for by the food service sector.
Within the retail sector US$531 billion of food sales corresponded to fresh
products, while US$1.7 trillion were made up of processed foodstuffs – about
US$1.1 trillion of which was packaged food with beverages amounting to
US$641 billion (Gehlhar and Regmi, 2005). Expenditure on processed food
and beverages approached US$4.8 trillion in 2007, which is 57% higher
when compared to that of 2001, indicating a recent average annual growth
rate of 7% (ILO, 2007).
Following the calculations of Gehlhar and Regmi (2005) based on
Euromonitor (2003), food consumption in HICs accounted for over 60% of
packaged food sales in the world and half of total food expenditures. In 2002,
per capita retail sales of packaged food in these countries were US$979, more
than 15 times the value found in the case of the LICs, which was some US$63.
In spite of this very low level of expenditure we find that the share of food in
total expenditures is more than 40% in LICs, mostly on non-packaged food
(see Figure 4). With rising incomes, relative expenditure on food share declines,
although the share of processed food in total food expenditures increases.
According to FAO (2001) (Food balance sheets 1999–2001), large differ-
ences in calorie consumption patterns between developed and developing
Low income
0
10
20
30
40
50
P
e
r
c
e
n
t
a
g
e
Food share of total expenditures declines while processed food
share of food expenditures increases with income, 2002
Low middle
income
Upper middle
income
High income
Non-packaged
Packaged
Figure 4. Food share of total expenditures by group of countries (2002). (From
Gehlhar and Regmi, 2005, based on Euromonitor.)
6
One trillion = 1,000,000,000,000.
Agro-industry Trends, Patterns and Development 61
countries are also found – 3261 versus 2675 calories per capita per day,
respectively. As regards diet composition, meat, milk and dairy products
account for only 5% of total calories consumed per day in developing coun-
tries, while they amount to around 19% in the developed world. Cereals, on
the other hand, account for 53% of calories consumed in developing countries,
against 31% in developed countries (see Figure 5). Also, according to Gehlhar
and Regmi (2005, p. 10), the number of products purchased at retail outlets is
greater for wealthier countries, reflecting the increased demand for variety as
incomes increase. The top five product categories account for 71% of proc-
essed food retail sales for Mexico and 74% for India, but only 48% for the USA
and 47% for the UK. The authors point out that, as the demand for processed
foods and beverages (soft drinks) is also driven by the demand for higher qual-
ity, the items consumed by countries at different income levels reflect different
levels of demand for services embodied in the products. For example, ready-to-
eat meals account for about 4% of total retail sales in the USA and the UK, but
only 0.06% in Mexico and 0.55% in China. On the other hand, intermediate
products, such as fats and oils, while accounting for over 7% of total processed
food retail sales in India, 13% in Indonesia and 5% or more in many developing
countries, account for less than 2% of retail sales in HICs.
In spite of relatively low levels of consumer expenditure on processed food
and beverages in developing countries, these figures are changing rapidly.
Between 1996 and 2002, while retail sales of packaged foods have grown at
about 2% or 3% per year in HICs, they have grown much faster among devel-
oping countries, ranging from 7% in UMICs to 28% in LMICs and 13% in
LICs. In developed countries, growth in food consumption and beverages is
expected to rise mainly from slow rates of population growth rather than from
increases in per capita consumption. On the other hand, as a result of increases
in population, income and per capita food consumption, developing countries
are expected to account for most future increases in processed food consump-
tion. In this context, the high processed food consumption growth rate observed
in MICs, mainly driven by urbanized economies, may soon be paralleled by
China, Thailand, the Philippines, Indonesia, Vietnam and India.
Figure 5. Consumption: composition of calories per capita per day.
30.9%
4.1%
12.8%
0.9%
13.9%
10.2%
8.7%
18.6%
Developing world
53.6%
5.6%
7.5%
2.3%
10.7%
6.6%
2.8%
10.9%
Cereals
Roots and tubers
Sugar
Pulses, dry
Vegetable oils, oil crops
Meat
Milk and dairy, excl. butter
Other food
Developed world
62 J. Wilkinson and R. Rocha
Income and population growth are immediate determinants of increasing
processed food consumption and the upgrading of diets towards variety and
quality. Population growth in a context of urbanization brings changes in food
consumption based on distance and time constraints, placing a premium on
food preservation and convenience. In developing countries, consumers whose
diets have been low-value, carbohydrate-rich cereals increase their expend-
itures on higher-value meats, fruits and vegetables. Consumers in developed
countries and the middle classes in developing countries are shifting their diets
towards foods that reflect not only increases in the nutrient value of the food
basket, but also the value-added services embodied in the products (Gehlhar
and Regmi, 2005).
Increasing sales of ready-to-eat meals, convenience food and food services
have also been promoted by further demographic and social changes, including
the increasing participation of women in the labour market, the ageing of the
population and the rising importance of single-person households. International
tourism and more culturally diverse societies, as a result of international migra-
tion, are also leading to changes in food tastes and higher demand for ethnic
products (ILO, 2007). Processed foodstuffs and soft drinks carry a component
of prestige, which makes them attractive to consumers. Preoccupations with
health issues and food safety further the demand for modified (diet, enriched)
products. Also, Gehlhar and Regmi (2005) highlight the importance of increases
in income on the acquisitions of refrigerators (which may lead to greater house-
hold purchases of perishable food products and frozen, ready-to-eat foodstuffs)
and microwave ovens (increasing the consumption of prepared foods and retail
sales of ready meals). While concerns for health have been a major innovation
driver (diet, light) in the food industry, the correlation between increased con-
sumption of processed foods and obesity and food-related illnesses in both
developed and developing countries has drawn attention to high levels of fats,
sugar and oils in processed and, especially, convenience foods. In addition,
recent research suggests that these levels increase in the case of cheaper
brands, reinforcing the association between poverty and obesity.
7
International trade: agricultural products, processed food
and other high-value agrifood items
In terms of international trade many important trends have occurred during the
last decades in the agricultural sector. We will mainly focus on points of relative
consensus in relation to recent trends. First, despite natural comparative advan-
tages and due primarily to protective trade regimes and distorted tariffs in
developed markets, developing countries have still the same market share in
world agricultural trade as they had in the 1980s. Second, trade composition
has changed dramatically, as a result of stagnant markets for traditional com-
modities and expanding demand for fruits, vegetables, fisheries and beverages.
7
These issues were discussed at length at the FAO Technical Workshop: Globalization of food
systems: impacts on food security and nutrition, Rome, October 2003.
Agro-industry Trends, Patterns and Development 63
Other relevant compositional trends include the increasing share of processed
products in agricultural trade and growing South–South trade flows. Third, we
highlight the small share of traded processed food compared to overall world
sales. An important corollary here is the strong domestic bias of food consump-
tion, which favours FDI rather than trade.
According to Aksoy’s (2005) calculations, the market share of developing
countries in world agricultural trade in 2000–2001 was around 36%, a slightly
lower figure when compared to that of 1980–1981 (see Table 5). This per-
formance would be worse without the increase in trade among developing
countries during the 1990s. Agricultural trade among these countries has been
characterized by its heterogeneity. Trade expanded in the case of LICs, primar-
ily driven by imports from other developing countries. As a group, MICs have
performed worse, although selected countries are becoming major exporters,
such as Argentina, Brazil and Thailand. The increasing presence of Argentina
and Brazil in export markets is particularly notable. Brazil’s export perform-
ance is mostly concentrated on sugar, oilseeds and meats, while Argentina’s
also covers cereals and dairy products. Other emerging exporters in develop-
ing and transition economies include Russia and the Ukraine for coarse grains,
Vietnam and Thailand for rice, Indonesia and Thailand for vegetable oils and
Thailand, Malaysia, India and China for poultry (OCDE and FAO, 2007). On
the other hand, UMICs in East Asia are becoming major importers.
Nevertheless, flows among developed countries still represent the dominant
tendency in global agricultural trade, accounting for 50% of the total, with
60% of this being conducted within trading blocs such as the European Union
(EU) and NAF TA.
With the recent explosive growth of China, India and other large develop-
ing countries, there has been a sharp increase in commodity exports from
middle-income developing countries based on the animal protein complex
(meats, animal feed and, more recently, dairy products), leading to a greater
proportion of South–South flows in world trade. At the same time, South–
South trade has involved an increase in imports (especially poultry) into the
LICs, which threatens the ability of these countries to develop their domestic
agro-industrial base in this sub-sector. In fact, trade statistics reveal that since
the mid-1980s, in South–South trade, primary commodities have played a
Table 5. Shares of developing and developed countries in world agricultural exports.
(From Aksoy, 2005, based on COMTRADE.)
Developing countries Industrial countries
1980–1981 1990–1991 2000–2001 1980–1981 1990–1991 2000–2001
To developing
countries
13.4% 10.5% 13.7% 18.9% 14.5% 15.6%
To industrial
countries
24.3% 22.4% 22.4% 43.4% 52.5% 48.3%
Total 37.8% 33.0% 36.1% 62.0% 67.0% 63.9%
64 J. Wilkinson and R. Rocha
more important role than in South–North trade. In 2003, the major exporters
of agricultural products within South–South trade were China (11.5% of total
agricultural South–South exports), Argentina (10.6%), Brazil (10.2%), Malaysia
(9.6%), Thailand (8.2%), Indonesia (6.5%) and India (5.5%). The top ten export-
ers accounted for more than 70% of total agricultural South–South exports.
The major importers were China (18%), Hong Kong (7.4%), Republic of Korea
(7.2%), India (6.1%), Malaysia (4.2%) and Brazil (3.9%), with the top ten
importers accounting for 60% of total agricultural imports (UNCTAD, 2005).
Although aggregate export shares have been steady for developed and
developing countries throughout the last 2 decades, agricultural trade has been
marked by dramatic commodity composition changes. Exports of high-value
agricultural and processed food products, such as fresh and processed fruits,
vegetables and fisheries, have expanded significantly, stimulated by changing
consumer tastes and advances in production, transport and other supply chain
technologies. Trade performance in traditional commodities, however, has
declined as has the share of these products in developing country agricultural
exports (Henson, 2006).
The change in the composition of agricultural exports in developed and
developing countries in the last 2 decades is presented in Table 6. Non-traditional
and other processed products expanded their participation in global exports,
from around 31% in 1980–1981 to 50% in 2000–2001, while the share of
tropical and temperate products declined from 69% to 50%. Among the worst
performances, textile fibres (mostly cotton) and sugar and confectionery have
lost 50% of their shares and the global participation of grains has declined 40%.
This result is fuelled by even larger losses in developing country exports.
Fisheries and beverages, on the other hand, have presented the highest growth
rates. According to Aksoy (2005), traditional products such as coffee, cocoa
and tea, which have received most of the attention in the literature, now account
for less than 20% of the exports of developing countries. Given current agri-
cultural export patterns, more attention should now be paid to the expanding
trade among developing countries, particularly in temperate zone products such
as milk, grains and meats.
According to FAO (2004a, p. 14), imports by developing countries increased
rapidly during the 1970s, grew more slowly during the 1980s and accelerated
again throughout the 1990s. The food trade surplus of US$1 billion for devel-
oping countries became a deficit of more than US$11 billion during the period.
In particular, UNCTAD (2006) points out that, although food exports consti-
tuted 13.6% of the least developed countries’ total exports in 2000–2003, the
overwhelming majority of these countries were net food-importing countries,
with food imports averaging almost one-fifth of their total imports. Much of this
deficit corresponds to processed food imports, given that in developing coun-
tries around 65–70% of total food imports in 2002 were for processed prod-
ucts. According to FAO (2004a), the economic performance of individual
developing countries played an important role in determining how fast they
increased their food imports during the 1990s. Countries that recorded strong
economic growth increased food imports more quickly. Rapid growth in the
agriculture sector had the opposite effect. Where agricultural value added per
capita grew more quickly, food imports generally did not. These trends may
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t
6
5
Table 6. The structure of agricultural exports in world trade (percentage of total world trade). (From Aksoy, 2005, based on COMTRADE.)
Developing countries exports Industrial countries exports World exports
1980–1981 1990–1991 2000–2001 1980–1981 1990–1991 2000–2001 1980–1981 1990–1991 2000–2001
Tropical products
Coffee, cocoa and tea, raw
and processed
18.3 11 8.5 2.5 2.9 3.6 8.5 5.6 5.4
Nuts and spices 2.4 2.7 2.8 0.7 0.7 0.8 1.3 1.3 1.5
Textiles, fibres 8 6.2 3.3 4.5 3.9 2.6 5.9 4.7 2.8
Sugar and confectionary 10.5 4.6 4.3 3.9 2.8 2.3 6.4 3.4 3.1
Subtotal 39.2 24.4 18.9 11.6 10.3 9.3 22 14.9 12.7
Temperate products
Meat, fresh and processed 7.2 8.3 6 14.8 15.7 15.4 11.9 13.2 12
Milk and milk products 0.3 0.7 1.1 7.9 7.9 7.6 5 5.5 5.2
Grains, raw and processed 9.3 4.9 7 21.6 13.8 11.6 16.9 10.9 9.9
Animal feed 7.5 7.9 8.5 7.7 5.1 5.3 7.7 6 6.4
Edible oil and oilseeds 4.6 5.7 5.5 4.8 4.4 4.4 4.7 4.8 4.8
Subtotal 28.8 27.5 28.1 56.9 46.8 44.2 46.3 40.4 38.3
Seafood, fruits and vegetables
Seafood, fresh and
processed
6.9 15.9 19.4 5.5 8.2 8 6 10.8 12.2
Fruits, vegetables and cut
flowers
14.7 22.2 21.5 13.1 17.2 17.3 13.7 18.9 18.9
Subtotal 21.6 38.2 41 18.7 25.5 25.4 19.8 29.7 31
Other processed products
Tobacco and cigarettes 2.6 3.1 3.3 3 4.2 4.8 2.8 3.8 4.2
Beverages, alcoholic and
non-alcoholic
1.1 1.8 3.6 6.9 9.5 11.5 4.7 6.9 8.6
Other products and
processed food
6.7 5 5.2 3 3.8 5 4.4 4.2 5.1
Subtotal 10.4 9.9 12.1 12.8 17.5 21.2 11.9 15 17.9
Total 100 100 100 100 100 100 100 100 100
66 J. Wilkinson and R. Rocha
suggest that, although an export-led strategy may be appropriate for selected
individual developing countries, domestic variables play an important role in
preventing food trade deficits.
The increasing importance of processed agricultural products is a long-
term trend observed across regions and countries. The share of final agricul-
tural products in global agricultural trade increased from 27% in 1980–1981
to 38% in 2000–2001, varying from 10% in LICs to 45% in HICs. According
to Wilkinson and Rocha (2006), the share of processed food in food exports
rose between 1989–1991 and 2002 in all country groups (see Table 7). For
HICs, this share increased from 62% to 71%, while figures for UMICs
(53–64%) and LMICs (54–62%) have followed an even more pronounced
upward trend.
8
A closer look at the data reveals, however, that, in reality,
there are only a few UMICs and LMICs responsible for a large share of global
food-processing exports, i.e. Argentina, Brazil, Chile, Indonesia, Malaysia,
Thailand and Turkey.
Despite the increasing share of processed food in global agricultural
trade, only 10% of processed food sales globally are traded products. Although
consumer demand for processed food continues to grow globally, growth in
8
Data from the FAO Statistical yearbook 2004.
Table 7. Share of food and processed food in trade (in percentages: unweighted average).
(From Wilkinson and Rocha, 2006, based on FAO Statistical yearbook 2004 (FAO, 2004a) ).
LIC LMI UMI HIC
1989/1991 2002 1989/1991 2002 1989/1991 2002 1989/1991 2002
Share of food in
total imports
17.4 16.3 13.3 11.7 10.4 9.2 7.4 6
Share of food in
total exports
19.2 14.2 22 13.7 22.8 14 6.2 4.6
Share of
processed
food in total
imports
12.8 11.3 8.3 7.4 6.8 6.4 4.4 3.9
Share of
processed
food in total
exports
5.2 4.5 14.3 8.9 10.7 8.2 3.7 3.1
Share of
processed
food in food
imports
72.3 67.7 60.3 63.6 63.3 67.9 61.1 67.3
Share of
processed
food in food
exports
35.6 38.9 54.5 61.6 53.3 63.6 62.3 71.3
Figures for 1989–1991 do not include the former USSR.
Agro-industry Trends, Patterns and Development 67
processed food trade has generally stalled since the mid-1990s, while the
share of food in total trade has fallen. According to Athukorala and Jayasuriya
(2003), the share of processed food in total exports has globally dropped
from 8.5% in 1970 to 6.5% in 1990 and 5.8% in 1999 – when processed
food exports amounted to US$212.6 billion from developed countries and
only US$81.8 billion from developing countries.
In 2006, exports of textiles and clothing were worth US$530 billion, about
4.6% of total world exports (WTO statistics, 2008). Around 59% corresponded
to clothing exports, which make up an increasing share of total textile and
clothing trade. In terms of development impacts, there are two important fea-
tures. First, developing countries account for roughly 50% of world textile
exports and almost 75% of world clothing exports. Second, as shown in Table
8, in a number of developing countries, textiles and clothing account for the
major share of exports, reaching 75–85% of total trade in the case of Pakistan
and Bangladesh (ILO, 2005).
With regard to imports, for decades textiles and clothing were subject to
the extensive use of quotas by the major importing countries. As stated in the
Agreement on Textiles and Clothing (ATC), this system was gradually phased
out to 2005. According to the WTO Report (2007), structural changes in the
world trade of textiles and clothing continue apace. While China’s exports
continued to gain market share, exporters from developed countries and those
from advanced developing economies in East Asia have lost market share,
together with major suppliers from Central America and the Mediterranean
region. Some smaller suppliers have expanded their textiles and clothing
exports even faster than China and the share of least developed countries in
imports by the USA and the EU increased sharply in 2006.
Table 8. Share of textiles and clothing in total exports for selected
countries (in percentages, 2003). (From ILO, 2007, based on
United Nations Commodity Trade Database – COMTRADE.)
Textiles Clothing Total
Macao, China 0.90 89.90 90.80
Bangladesh 8.70 76.50 85.20
Pakistan 47.70 26.30 74.00
Hong Kong, China 4.90 52.50 57.40
Mauritius 4.20 52.60 56.90
Sri Lanka 4.00 51.60 55.60
Nepal 16.50 34.50 51.00
Morocco 1.50 32.50 34.00
Macedonia, FYR 3.20 30.00 33.20
Madagascar 2.30 30.80 33.10
Turkey 11.00 21.70 32.70
Romania 2.60 23.20 25.70
China 6.30 11.90 18.20
Cambodia – 80.00 –
Guatemala – 42.00 –
68 J. Wilkinson and R. Rocha
Complementary Stylized Facts
Foreign direct investment
Foreign direct investment (FDI) has grown much faster than trade in the last
2 decades (Senauer and Venturini, 2004). According to UNCTAD (2006), in
2004 world FDI inward flows regarding the food, beverages and tobacco indus-
try were estimated at US$278 billion, an impressive figure when compared to
total world food exports for that year, estimated at US$630 billion (WTO
Statistics Database (WTO, 2008) ), or to total agricultural products exports of
US$786 billion.
Only a minor share of world agrifood FDI inward flows, around 14% in
2004, has been directed to developing countries but their impact on host food
systems has been profound. Food and beverage manufacturers, long present in
many developing countries, are rapidly expanding their operations, and exports
now represent only a partial strategy for gaining market share. The choice
between exports and FDI has been subject to much discussion and will be taken
up in more detail in the next section. A distinction should be made between
primary processing and final food activities. The former tend to be located
close to the raw material, whether this is in the rural areas, in the case of com-
modity exports, or by the port, in the case of imports. Final foods, on the other
hand, tend to be manufactured close to the consumer market, given the specifi-
city of food regulations and eating habits. FDI has been particularly attracted by
the growing urban food markets of developing countries.
Non-traditional products for export, based on the advantages of location
combined with the demand for freshness, have created a new dynamic to the
extent that postharvest activities have to be carried out in situ. While this has
led to flows of FDI, it has also given rise to a hybrid form, which is neither
trade nor FDI and has been described as the consolidation of Global Value
Chains (GVCs), often governed by large-scale retail. Within this dynamic the
action of many autonomous agents is coordinated by the demands of the end
buyer, who may or may not engage in direct investments but will specify and
closely monitor the conditions of production. The literature on GVCs will be
discussed in more detail in the following section.
The participation of small and medium enterprises (SMEs)
and industrial concentration trends
A dynamic agribusiness sector linking farmers to consumers can be a major
driver of growth in the agricultural and the rural non-farm sectors, particularly
offering opportunities for the rural poor. Market structure trends and the role
assigned to small-scale operators, however, will be crucial throughout this
process.
Agribusiness enterprises are mostly small scale, located in rural towns and
headed by households with other complementary sources of income. Medium
and large firms are mainly urban based, taking advantage of economies of scale
and better infrastructure, while large enterprises are often vertically and
Agro-industry Trends, Patterns and Development 69
horizontally integrated multinational corporations. The term SME encompasses
a collection of firms with wide differences in organizational and marketing cap-
abilities and technology, but which are mostly labour-intensive. In developing
countries, although SMEs have typically operated on an informal basis, incur-
ring high transaction costs and suffering from a lack of scale, they account for
a large share of the number of firms and jobs, contributing a significant share
of total value added to the agro-industrial sector.
Experiences in Brazil, Chile, Kenya, Mexico, South Africa, Taiwan and
Thailand have demonstrated the potential of agro-based SMEs for employment
generation, value adding, food security, poverty alleviation, improvement of
farm and rural non-farm income and the living standards among the rural poor
more generally. In Africa, where a weakening of public services has resulted in
some dysfunctional input and output markets and a partial breakdown in the
delivery of agricultural services to small-scale farmers, local agro-enterprises
are increasingly filling crucial institutional gaps, particularly for commercial
crops (Freeman and Estrada-Valle, 2003).
On the other hand, increasing agribusiness concentration and market dis-
placement of smallholders may hamper the poverty impact of agro-industries
development. The structure of agribusiness has changed significantly and its
performance has been highly dynamic, particularly enhanced by changing
demand patterns and rapid technological, organizational and institutional inno-
vations. According to the World Bank (2007), the sector faces two major chal-
lenges when considering development impacts – market forces do not of
themselves ensure competitiveness; nor do they guarantee smallholder partici-
pation – both of which are essential if agricultural growth is to be linked to
overall development and rural poverty reduction.
Scale economies and the globalization of agro-processing markets have
consolidated multinational operations along the different GVCs. Food-
processing firms are integrated backward into primary product handling and
forward into supply chains dominated by global retailers, such as increasingly
bypassing smallholders in traditional and local markets. In addition to concen-
tration within sectors, strategic alliances across sectors are becoming common,
as between the genetics inputs industry and primary agricultural processing.
With higher industry concentration market competitiveness may decline
and can lead to higher spreads between what consumers pay and what produ-
cers receive. Three companies control more than 80% of the world market for
tea. Some 25 million farmers and farm workers produce coffee, but the inter-
national coffee traders have a CR4
9
of 40%, and coffee roasters 45%. The
share of the retail price retained by coffee-producing countries declined from
one-third in the early 1990s to only 10% in 2002, while the value of retail sales
doubled.
10
The rapid concentration of retailing in Europe and the USA, where
three or four firms often control 60% or more of food retail, has in its turn
accelerated concentration in the final foods sector, with many market segments
now being dominated by two or three firms. The rapid growth of urban food
demand in developing countries is leading to this same model.
9
Four firm concentration rates, i.e. the market share of the four largest companies.
10
See World Bank (2007), Focus D.
70 J. Wilkinson and R. Rocha
In spite of these trends, SMEs have remained crucial in developed country
food systems and are likely to be even more important in the developing coun-
try context given the importance of informal supply systems. SMEs are dom-
inant in traditional agrifood activities, which escape the effects of scale and new
quality demands. Local supplies are favoured where roads are inadequate, in
areas of low population density and where modern distribution systems are
now in place. SMEs are also emerging, however, in response to new market
niches that demand innovation and entrepreneurialism. Greater outsourcing on
the part of retail and food-processing firms is, similarly, opening up opportun-
ities for small suppliers, often integrated into GVCs. More ambitiously, SMEs,
organized in networks or clusters along the lines of the industrial districts of
Italy, have been identified and are being promoted in many developing coun-
tries, often as a link in GVCs. And, finally, SMEs are emerging to the extent
that new markets value products and production processes typically (although
not exclusively) associated with family farming (Wilkinson, 2004).
Organics, fair trade and origin products
New high-value markets for food and other agricultural products that embody
specific certified quality attributes, such as organics, fair trade and origin prod-
ucts, have increasingly become relevant in developed countries and some middle-
income developing countries. With high rates of demand growth, these markets
are regarded as potentially lucrative opportunities for exports of non-traditional
products from developing countries (Henson, 2006).
Following Henson’s (2006) survey, the world market for organic food and
drink products in 2005 was estimated at US$24 billion, the EU accounting for
52% and the USA for 42%, together corresponding to almost 95% of global
sales, roughly 40% of which was imported. Organic production in the EU accounts
for 4% of total European farmland and is heavily subsidized (60% of organic land
is included in policy support programmes). Around 0.2% of total farmland in the
USA is under organic production. According to Dimitri and Oberholtzer (USDA
Amber Waves, 2006), despite larger organic product sales in the EU, annual per
capita retail sales in 2003 were nearly equal for both regions, approximately
US$34 in the EU and US$36 in the USA. The sector’s current growth rate is
estimated at between 8% and 12% per year in Europe and 14–20% in the USA,
a slower pace than that found during the 1990s, when it was around 20–30%.
There is evidence that the rate of market expansion is slowing down further and
that markets may become saturated in the near future (Henson, 2006).
Certified fair trade products have their origin in the developing world and
demand reveals the interest of consumers in developed countries in the conditions
under which agricultural products are produced and reach the retail market. Under
fair trade, certified producers may receive premium prices for their products when
compared to conventional producers. For instance, in Mali producers have
received 70% more from selling cotton under fair trade rules and in Senegal they
received 40% more (FLO, 2007). According to the World Bank (2007), however,
recent studies confirm that the costs and margins for coffee sold through fair trade
Agro-industry Trends, Patterns and Development 71
are high and that intermediaries receive the larger share of the price premium.
One estimate is that farmers receive only 43% of the price premium paid by the
consumer for fair trade roasted coffee and 42% for soluble coffee. The higher cost
of processing and marketing would be partly explained by the diseconomies of
scale related to small volumes and high costs, mostly associated with certification
of supply chain actors, membership fees, advertising and campaigning.
Estimated retail sales of fair trade products in 2006 were roughly €1.6 billion,
42% higher than in 2005, but still an insignificant share of global food sales.
Coffee and cocoa, traditional export commodities, have experienced the highest
sale growth rates, at around 53% and 93%, respectively, between 2005 and 2006.
According to FLO (2007), fair trade standards exist for food products such as tea,
coffee, cocoa, honey, juices, wine grapes, fresh and dried fruits and vegetables,
nuts and spices and non-food products such as flowers, plants and seed cotton.
Both organics and fair trade products have been identified as new export
opportunities for developing countries. Nevertheless, as a corollary of the emer-
gence of large middle-class markets in developing countries, both organic and
fair trade are now also directing their attention to the domestic market. These
categories of products can now be found not only in specialized shops, but also
in the modern retail sector, which is now dominant in much of Latin America and
expanding rapidly in Asia and a few countries of Africa (Raynolds et al., 2007).
In a similar vein, ‘origin-based’ products are being promoted in developing
countries. These often have their inspiration in the denominated origin prod-
ucts associated with Europe, now incorporated within the framework of
TRIPS.
11
In the developing country context, however, many new features are
incorporated – indigenous products, non-food products and products associ-
ated with the values of sustainability. The territorial association of origin prod-
ucts may also be more fluid and often on a much larger scale. To the extent that
origin products are seen to offer market potential, they interest all classes of
producer and in the developing country context the extent to which this niche
will provide differential opportunities for small producers is not clear. CIRAD
has been particularly active in the promotion of origin products in developing
countries (Van de Kop, et al., 2007)
Trade costs and the elasticity of substitution
We have called attention to the importance of FDI rather than trade, by high-
lighting the need for final food product industries to be close to the consumer
market. Distorted tariff regimes, quotas and other trade barriers have also been
identified as factors limiting trade flows. Here we complement this picture with
two other features that impact trade and may reinforce the bias towards pro-
duction close to the market.
First, evidence on trade costs breaks down into two major categories: costs
imposed by policy (tariffs, quotas and the like) and costs imposed by the envir-
onment, such as transportation, insurance against various hazards and time
11
Trade-related Aspects of Intellectual Property Rights.
72 J. Wilkinson and R. Rocha
Table 9. Commodity distribution of freight rates (as percentage of imports, aggregated over
all partners). (From Hummels, 1999.)
Average freight rate
USA Argentina Brazil Chile Paraguay Uruguay
New
Zealand
Food and live animals 14.1 21.6 23.1 21.9 12.8 7.4 15.4
Live animals 21.1 37.7 40.5 42.1 10.9 18.2 21.8
Meat and meat
products
9.7 13.6 17.8 21.9 12.4 5.3 15.7
Dairy products 9.9 16.8 15.7 17.8 12 7.1 12.6
Fish 13.2 23.6 20.3 24.6 13 8.3 14
Cereals 14 23.3 27.9 27.9 13.4 9.1 20
Vegetables and fruits 17.4 23.7 24.7 21.7 12.6 7 16.9
Sugars 12.7 20.6 21.7 18.6 13.1 8.7 14.1
Coffee, tea 10.8 18 19.8 20.2 12.5 5.2 12.1
Beverages and tobacco 14.4 20.6 18.3 18.2 12.8 8 14
Crude materials 15.1 20.5 20.1 23.1 12 8.3 20.6
Minerals, fuels, lubricants 15.7 20.5 20.3 24.9 13.8 9.2 18.7
Animal and vegetable
oils, fats
10.6 17.4 17.6 16.6 11.7 5 12
Chemicals 9 12.3 14 14.4 12.4 4.7 13
Manufacturing goods 10.3 15.5 17.7 14.7 13.3 7.9 13.1
Machinery and transport
equipment
5.7 11.2 11.5 11.3 13.5 7.3 9.6
costs. There is another category of trade costs, associated with information
barriers and contract enforcement, although this is not directly measured. More
specifically, we focus on transport costs, which include freight charges and
insurance, which is customarily included in the freight charge. Indirect trans-
port costs include holding costs for the goods in transit, inventory cost due to
compensating the variability of delivery dates and preparation costs associated
with shipment size (Anderson and van Wincoop, 2004).
Hummels (1999) provides empirical evidence on the level and variation of
freight and tariff rates at disaggregated commodity levels, including for imports
into the USA, New Zealand and five Latin American countries (Argentina,
Brazil, Chile, Paraguay and Uruguay) in 1994.
12
According to the author, clear
patterns emerge. First, freight rates are lower for manufactured goods than for
commodities. Rates are higher for agro-industry products, particularly for fruits
and vegetables, cereals and crude fertilizers, among others. Second, landlocked
Paraguay stands out as having exceptionally high freight rates; this may be an
extremely important feature for LICs in sub-Saharan Africa and Central Asia.
Illustrating these patterns, Table 9 displays ad-valorem freight rates, calculated
as unweighted average rates of all observations within a two-digit SITC com-
modity group.
12
In each case, data on import values, quantities (weights) and freight and insurance charges
for each entering shipment are collected by customs officials.
Agro-industry Trends, Patterns and Development 73
Another fundamental feature impacting trade is the elasticity of import
demand with respect to price and relative to the overall domestic consumption
basket. Trefler and Lai (1999) present estimates over 1972–1992 for 28 indus-
trial sectors in 36 countries. According to the authors’ estimation, the agro-
industrial sector generally presents low elasticities, such as 2.5 for food products,
1.9 for tobacco, 3.5 for textiles, 3.7 for beverages and 2.9 for wood products –
all estimates much lower than the industrial average. Other interesting facts
regard the negative correlation between the elasticity of import demand and
import tariffs, as well as a significant negative correlation between the elasticity
and the degree of market competition, usually implying that high elasticities are
associated with markets dominated by less perfectly competitive industries.
Obstfeld and Rogoff (2000) argue that trade costs, including border costs
such as tariff and non-tariff barriers, need not to be implausibly large to gener-
ate observed home bias consumption. According to them, such a bias may be
generated by the interaction between preferences, trade costs and the elasticity
of substitution between domestic and foreign goods.
13
Consumption home bias
in agro-industry products may, therefore, be mainly promoted by relatively
higher tariff and non-tariff costs, which would compensate lower elasticities of
substitution.
Access to credit and industrial sector development
Rajan and Zingales (1998) ask whether industrial sectors that are relatively
more in need of credit and external funding develop disproportionately faster
in countries with more developed financial markets. They find this hypothesis
to be true in a large sample of countries over the 1980s. The empirical strategy
consisted of identifying an industry’s need for external finance (defined as the
difference between investments and cash generated from operations) from data
on US firms. Under the assumption that capital markets in the USA are rela-
tively frictionless, this method allowed the identification of the industry’s tech-
nological demand for credit. Under the further and stronger assumption that
such technological demand structure carries over to other countries, they exam-
ined whether industries that are more dependent on external financing grow
relatively faster in countries that a priori were more financially developed.
For instance, the authors argue that, in countries that are less financially
developed, an industrial sector such as drugs and pharmaceuticals, which
heavily requires external funding, should grow relatively more slowly than the
tobacco sector, which requires little external funding. In Malaysia, a relatively
advanced country in terms of financial markets, drugs and pharmaceuticals
had grown at a 4% higher annual real rate than tobacco. In Chile, which was
in the sample’s lowest quartile of financial development, drugs grew at a
13
A suggestive rule of thumb for calculating home bias consumption derived from a microeco-
nomic model consists of the formula (1?t)
1?q
, where t represents the level of trade costs, and
q the elasticity of substitution. For instance, with t = 25% and q = 6, the ratio of home expen-
ditures on imports relative to domestic goods would be roughly 4.2, or, equivalently, the home
bias would be around 80%.
74 J. Wilkinson and R. Rocha
2.5% lower rate than tobacco. Their estimates also show that, in general,
financial development has almost twice the economic effect on the increase
of the number of establishments as it has on the growth of the average size
of establishments.
According to the authors’ estimates on the patterns of external financing
across industries in the USA during the 1980s, the agro-processing sub-sec-
tors are among the industries that least require external funding for growth,
particularly when compared to sectors such as electric machinery, radio, office
and computers, drugs and pharmaceuticals. This information, although dated,
brings added support for the relevance of the agro-industry sector for eco-
nomic growth and employment opportunities in those developing countries
generally associated with low levels of financial development. Agro-industry
sub-sectors are relatively less dependent on external funding and access to
credit, an argument that supports the findings on the sector’s large contribu-
tion to total manufacturing value added, employment and overall turnover in
developing countries.
Major Drivers of Competitiveness
The revolution introduced by the concept of agribusiness or agro-industry, first
in the USA in the 1960s (Davis and Goldberg, 1957) and then in Europe
(Mollard, 1978) and Latin America (Vigorito, 1978) in the late 1970s involved
a fundamental rejection and revision of the traditional three sectors approach
(agriculture, industry and services) to economic analysis. Agricultural activities
now occupied an intermediary space whose processes were dependent on
industrial inputs and whose products were the objects of industrial refashioning.
To the extent that agriculture was now seen through the lens of industry, how-
ever, the agricultural space was understood to be increasingly residual, con-
trolled and undermined by technological advances. In this light, the persistence
of the small farmer sector could be reinterpreted as a consequence of this
undermining of the autonomy of the agricultural space, which made it uninter-
esting for capitalist investment except in exceptional circumstances. Within this
framework, biotechnologies could be seen as the final nail in the coffin, since
agricultural products would become increasingly independent of specific soil
and weather conditions and in some cases could even be reproduced industri-
ally via fermentation (Goodman et al., 1987).
While many elements of this analysis remain valid it was an excessively
production/technology push vision, which did not take into account another
revolution in process at the same time, at the level of demand.
14
Seen initially
as an industrial strategy of differentiation and segmentation in response to the
stagnation of commodity-based food demand, consumption came to assume
14
The renewed dynamic of commodity markets in the light of strong, sustained economic
growth in large developing countries represents the clearest continuation of this dynamic and
not surprisingly it is in this context that the first generation of biotechnology products has found
its place.
Agro-industry Trends, Patterns and Development 75
more complex value traits. Some of these emerging values corresponded to
broad demographic trends (ageing of the population, changes in the organiza-
tion of family life) or new institutional contexts (shift in the public–private bal-
ance in questions of health and focus on prevention rather than intervention).
Others, however, were less predictable, such as the sustained opposition to
the application of genetic engineering. Perhaps most surprising of all, agricul-
tural and artisanal rather than agro-industrial products became the norm for
food quality, albeit with increasing deference to ‘industrial standards’. As a
result, the values of space and place have redefined agriculture’s relationship
with industry (and services, as we shall see), and the latter’s inputs and
processes have now to enhance rather than annul the ‘natural’ values of the
agricultural product.
FDI and the role of demand
Reforms in the regulatory environment for market access and investment,
together with the revolution in communications and logistics, have transformed
the above-mentioned values of space and place into new forms of competitive
advantage for developing countries. Some new global social movements, e.g.
Via Campesina, and agro-ecologists have seen this as an opportunity to recap-
ture the autonomy of agriculture in an unorthodox return to the three sectors
approach to economic life. If, however, we integrate the market implications of
the new ‘quality turn’ into an extended version of the agro-industry conceptual
framework, now incorporating services, the possibilities for harnessing this new
competitive advantage to broader development strategies become evident.
Within this scenario developing countries have a dual advantage. Their
agricultural resources are more versatile and productive for a whole range of
highly valued products in the global market. At the same time, a combination
of population growth and urbanization is already making their domestic mar-
kets the most dynamic poles of the global system and they should continue to
be so for the next 2 or 3 decades at least. If these structural advantages are
to be transformed into the basis of sustained development strategies, how-
ever, the complex processes of globalization and transnationalization will
have to be negotiated: how to combine market access with the consolidation
of a domestic agrifood base which builds on the resources of small farmers
and small-scale urban food operators; how to attract FDI in ways which com-
plement and promote, rather than ‘crowd out’ domestic agrifood system
actors; how to ensure that the incoming FDI and domestic initiatives respect
environmental sustainability and do not lead to a ‘race to the bottom’; and
how to ensure a growing share in value added in global chains (the ‘upgrad-
ing’ challenge) where value is increasingly concentrated at the point of con-
sumption. This challenge becomes sharper to the extent that we are dealing
with value added in the consumer service sector. Here, upgrading must go
beyond the notion of incorporating postharvest activities and explore forms
of equity participation as in some successful initiatives within the fair trade
movement (Wilkinson, 2007).
76 J. Wilkinson and R. Rocha
South–South trade
The emergence of the South as a global consumption pole has led to two import-
ant new developments. In the first place, there has been an increasing flow of
South–South trade (over 50% of Brazil’s agricultural trade is now with other
developing countries). This has been accompanied by a growth in South–South
FDI and, to a lesser extent, in South–North investment as developing countries’
consumer and export potential is reflected in the emergence of Southern
transnationals. The South–South axis has been promoted by the growth of the
animal protein complex. Here we are dealing with a comparatively small number
of MICs, who are increasingly challenging the long-time hegemony of the USA,
some European countries and even Australia and New Zealand.
The components of the animal protein complex, it should be noted, are
very different from those of the ‘non-traditional’ exports sector. Agriculturally,
with the exception still of poultry and pigs, they are land extensive and capital
intensive and industrially scale is a precondition of competitiveness. This is the
world of the global commodity traders, which will find new forms of expansion,
again in the developing world, with the emergence of global biofuels markets.
Hogs, but especially poultry, are an exception within this complex to the extent
that they have been the privileged basis of small or medium farmer contract
arrangements with agribusiness. Poultry, in particular, has become the para-
digm for discussions on contract forms of coordination. Research has diverged
sharply on the benefits accruing to small farmers but it is notable that this sec-
tor has emerged as an important component of the domestic agrifood system
in many developing countries (Little and Watts, 1994; Eaton and Shepherd,
2001; Birthal et al., 2005). Even if income returns are comparatively attractive
the opportunities of upgrading for primary producers in this value chain are
quite limited given the scale intensity of the slaughter and processing stages.
15
Nevertheless, domestic firms and cooperatives control many poultry sectors in
developing countries. With the market reforms, however, developing country
poultry production has shown itself to be vulnerable to imports, with the par-
ticularity that these now often come from other developing countries. This
problem has been particularly acute in some sub-Saharan African countries and
points to likely tensions within the developing country bloc as South–South
trade flows gain in importance.
The Non-traditional Sector and Interpretations:
Global Value Chain and Discovery Costs
The non-traditional sector appears to be moving to a large commercial farm
model with a small farmer fringe on a subcontracting basis or to supply the
domestic market. To the extent that this segment assumes greater importance,
15
Artisan options have opened up with the emergence of free range, organic niches but even
here scale is beginning to impose itself.
Agro-industry Trends, Patterns and Development 77
the farm worker, particularly it would seem the female farm worker, replaces
the integrated small farmer of the poultry model. Much research has identified
precarious working conditions in the non-traditional sector. At the same time,
attention has been drawn to the beneficial effects of new social and environ-
mental standards governing access to developed country markets, leading to
considerable on-the-job training and the implementation of at least domestic
minimum wages and health and safety regulations. Adjustment to a model that
tends to consolidate development poles based on entrepreneurial wage-based
agriculture may prove difficult to assimilate in developing countries where the
strength of small farmer social movements has led to an institutional frame-
work favouring small farmer strategies.
The literature on the non-traditional sector is broadly divided into two
approaches. The GVC analytical framework widely adopted in cooperation
programmes and by many national governments in developing countries tends
to see the issue in terms of supplier zones linking with a predefined demand
from buyer-driven GVCs (Humphrey, 2005). The strategic question then
becomes that of identifying the conditions under which ‘upgrading’ may occur,
which in the agro-industrial context would mean at least exporting ready-to-eat
produce. The upgrading in question, however, is reactive, responding to the
opportunities opened up by the global chain leader. Without adopting a GVCs
approach other analysts of non-traditional exports have also emphasized the
learning opportunities that emerge in an export sector finely attuned to varying
market demands (Athukorala and Sen, 1998). Other authors have tried to
refine the GVC analysis to take into account the specific features of natural
resource value chains and have incorporated a sectoral approach based on
Pavitt’s now classic typology (Pietrobello and Rabelotti, 2006).
16
The results
here, which point to the key role of public sector research, highlight the import-
ance of public policy for the success of upgrading.
A second approach has focused less on the training and management
aspects of non-traditional exports and more on the entrepreneurial challenges.
This research has been inspired by the Hausmann and Rodrik (2003) hypoth-
esis of ‘discovery costs’ in a developing country context. The argument is that
while the new product or process is generally already known in the developed
country context, where it is often protected by patents, there are a great many
uncertainties with regard to the conditions of production in developing coun-
tries and the associated ‘discovery costs’ must be borne without the benefit of
protection from imitative competition. The correct balancing of individual and
welfare benefits, it is argued, points to the need for a more active intervention
of the State. Research in Latin America, which explored these hypotheses in a
considerable number of cases in eight countries, questioned the centrality of
‘production costs’, but reinforced the import ance of a range of information
costs requiring the provision of public goods (Sánchez et al., 2006). In addition,
16
Rather than organizing industry into product groups, Pavitt’s taxonomy identifies four
categories of industry from the point of view of technical change and innovation – supply domi-
nated, scale intensive, specialized suppliers and science-based firms.
78 J. Wilkinson and R. Rocha
the case studies repeatedly drew attention to the key role of entrepreneurial
initiative in the context of considerable uncertainty and risk. Various niche
markets have been developed independently of any pre-existing value chains,
such as blueberries in Argentina, sturgeon/caviar in Uruguay, and flowers in
both Colombia and Ecuador, which have depended on innovating entrepre-
neurs. Independent initiatives of this kind require considerable financial
resources and varied social and business networks. They are not, therefore, the
likely products of a small farmer cooperative. It may be, however, that such
initiatives are less likely today as the globalization and transnationalization of
retailing absorb an increasing range of market niches (Wilkinson, 2007).
For authors who focus on the centrality of non-traditional exports for
growth strategies, the central issues become those of market access and ‘com-
pliance’ costs. It should be recognized, however, that tariff escalation and tariff
peaks are still major obstacles to strategies of upgrading. Nevertheless, stand-
ards have become the predominant mechanism for regulating minimum
requirements in global quality markets. Both the nature of these markets (spe-
cific quality features) and their global character in a context of transition from
national and regional to global regulatory regimes have led to a complex mix of
private (individual and collective) and public standards. While there is a consen-
sus on the need for standards, their definition and evolution often appear arbi-
trary, opening up the suspicion of new forms of protectionism. The costs of
quality barriers have been widely disputed. Evidence suggests that the majority
of freight rejections relate to old-style quality issues (sanitary in the US and
basic residue levels in the EU). Furthermore, it has been shown that the costs
of compliance, although onerous, have been more than compensated by the
gains from subsequent access, as in the case of shrimp exports from Bangladesh
(Jaffee and Henson, 2004). Nevertheless, commercial standards can be
extremely harmful, particularly for small countries dependent on a reduced
number of export items (Oyejide, 2000). Research has called for a greater
participation in the definition of standards within the different global forums,
although this has been questioned as being technically and financially unrealis-
tic for most countries (Athukorala and Jayasuriya, 2003). Rather, it has been
argued that developing countries should concentrate on the specific conditions
for compliance and negotiate their implementation with the help of various
international cooperation programmes dedicated to this goal.
A less sanguine interpretation of the increasing importance of
processed food exports from developing countries has been developed by
environmentally oriented research, which would see this tendency as part of
a broader movement either to export ‘dirty’ industries to, or deplete the
resources of, countries with less rigorous legislative and regulatory controls.
The fishing industry has particularly come under attack. A United Nations
Environmental Agency Report (UNEP, 2001) warned of the dangers of
selling rights to fishing stocks under the pressure for short-term export earn-
ings, particularly when developed countries are subsidizing their fishing
vessels. Research and social movements have also drawn attention to the
environmental impact of aquaculture, particularly acute in the case of shrimp
production (Wilkinson, 2006).
Agro-industry Trends, Patterns and Development 79
Retail, FDI and market redesigning
As a counterpart to the research on non-traditional exports, other research
programmes have focused on the transnationalization of the commercial circuits
in developing countries, through the increasing presence of global retail compa-
nies in their domestic markets (Reardon et al., 2003). This research has focused
on the systemic impact of global retailing to the extent that it is geared not only
to the middle classes and the metropolitan centres, but also to the broad mass
of urban consumers. The global food industry leaders, such as Nestlé and
Unilever, have recently adopted a similar orientation to the low-income consum-
ers of developing countries, as these have increasingly adopted modern retail
shopping habits. The thesis of this research on the transnationalization of retail-
ing is that the same system of quality and logistical standards is now redefining
the conditions of access to the domestic markets of developing countries. If, as
we have seen, the small farmer has difficulty in integrating into non-traditional
export chains, he now also faces the same problems in accessing domestic,
urban markets. Retailers are tending to set up their own distribution centres
based on selected suppliers. These new circuits, in their turn, have a knock-on
effect, leading to the modernization of traditional wholesale and outdoor mar-
kets, closing the door on those who are unable to adapt.
The speed and extent of these changes in developing countries have been
challenged (Humphrey, 2006). In a number of Latin American countries, vari-
ous transnationals have been unable to consolidate their presence and domestic
or regional companies have strengthened their position. It may be, of course,
that local retailers increasingly adopt similar standards to the global players as a
condition of continuing competitiveness. On the other hand, there is consider-
able heterogeneity with clear gradations in quality demand. Some authors spec-
ulate that as basic quality improves retailers may shift back to traditional supply
systems. In some major developing countries, such as India, foreign retailers are
only now being allowed to gain a foothold. In much of Africa, it is the informal
sector that predominates even in the large cities (Sautier et al., 2007). In Brazil,
global food industry companies, facilitated by new logistical technology, are
focusing more on small outlets in an attempt to counter the buying power of
large retailers. In India, there are preemptive moves to strengthen traditional
distribution networks prior to the entry of global retailers.
While special attention has rightly been given to the importance of retail
FDI since it involves redesigning the organization of food systems as a whole in
developing countries, incoming FDI into developing countries has been particu-
larly pronounced in food-processing and services. We mentioned earlier that
the food industry, to the extent that it deals in final food products, tends to situ-
ate itself close to the relevant consumer markets. Trade, therefore, is propor-
tionately less important than FDI compared with other industrial sectors and
investments are diffused in accordance with consumer concentration. Nestlé,
Unilever and other global food companies are typically present in as many as
150 countries. During the 1980s and 1990s most developing countries adjusted
their legislation and regulations to attract foreign investment, which it was
thought would enhance their export competitiveness. While this has been the
80 J. Wilkinson and R. Rocha
case with the grain traders in the Southern Cone
17
and also for the ‘maquila’
18
industry in Mexico, food industry investment has generally been motivated by
the dynamism of developing country domestic markets.
19
Green field invest-
ment has primarily been restricted to regions of new export growth, as in the
case of the crushing oil seed industry in the Mercosur. The food industry, for its
part, has preferred mergers and acquisitions in consolidated oligopoly markets,
relying on financial clout and global brands. With the recent turn, however, to
low-income consumers, foreign firms have begun to operate in more competi-
tive markets.
Whether foreign firms rely on imports of raw materials, equipment or
human capital seems to depend on the conditions prevailing in the host country.
Often, initial import dependence is replaced by local supplies once tech nical
conditions are met. The degree to which FDI promotes rather than ‘crowds out’
the growth of domestic firms would also seem to be quite variable. While not
necessarily bringing state-of-the-art technology in either products or processes,
the incoming flow of FDI has tended to coincide with increased productivity and
product diversification. This may, however, as has been observed, be due more
to the new conditions of global market competition rather than the presence of
foreign companies in the host country. Large developing countries such as
China and India have placed various forms of restriction on FDI. In India, it has
been explicitly excluded from certain sectors including, until very recently, the
retail sector. In China, there has been a requirement for FDI to associate with
domestic firms. An interesting series of case studies in China has also docu-
mented the way domestic firms have adjusted to the presence of FDI, reposi-
tioning themselves competitively within the local and regional market on the
basis of closer knowledge of local food preparation and eating practices. The
cultural specificity of food practices would seem to be promoting proportion-
ately greater location of R&D in developing countries when compared with FDI
in other industrial sectors.
While in the 1980s and 1990s the priority of developing countries was to
attract FDI at all costs, the concern now is increasingly with more nuanced pol-
icies directing FDI to previously defined priority sectors. This is in line with a
broader appreciation of the role of public policies in promoting development.
As we have indicated earlier, a novel feature of FDI is the increasing presence
of investments from developing countries both in the South and the North and
the emergence of Southern food transnationals. This tendency is likely to
become more pronounced in the coming decades as a result of strong sus-
tained growth in developing country domestic markets. This will be particularly
the case in Asia where conditions governing the flows of FDI have in the past
been more restrictive.
A new wave of FDI, primarily directed also to the South, is now being
stimulated by the priority being given to the development of biofuels. This surge
17
Generally defined as Southern Brazil, Argentina, Chile, Uruguay and Paraguay.
18
An industry that assembles parts imported duty-free for re-export to the country of origin.
19
Japan, where FDI has been largely motivated by a strategy of re-exporting to its own domestic
market, would be an exception here.
Agro-industry Trends, Patterns and Development 81
promises to revert the century-long specialization of agriculture towards food
production. There are some indications, particularly in the case of ethanol, that
the general intention is to create a separate global biofuels market. Initially,
however, there is likely to be greater instability in crop prices, which is already
making itself evident, and the accompanying food inflation will have differential
impacts on producers/consumers and importers/exporters. The reintegration of
energy into the basic ‘functions’ of agriculture has been welcomed by some as
providing the opportunity for a new model of decentralized growth for develop-
ing countries (Sachs, 2006). Others argue that this will lead to renewed emphasis
on the South’s role as commodity crop exporter for the northern markets, sub-
stituting the traditional tropical commodities now in crisis (Seedling, 2007).
While the global traders and agrochemicals firms are heavily involved in
these biofuel investments, FDI here is notable for the presence of new sectors.
These include the automobile and petrochemical industries and extend to
investment funds and finance firms, with Merril Lynch, Stark, Goldman Sachs,
Soros, Rabobank and Barclays all being directly involved in the construction of
biofuels plants. In addition, and this may also represent a shift from the model
of contract coordination to the older ‘colonial’ pattern, investments include the
purchase of agricultural lands for the production of agro-energy. Southern FDI
is also engaged, particularly in Africa, a key target of biofuels investors, where
the presence of Brazilian, Indian and Chinese FDI is increasingly evident. Given
the importance of biofuels investments and the dual function of many crops,
both food and energy production must be integrated into agro-industrial devel-
opment strategies.
Traditional exports, commodities and downgrading
This potential reversion for the South to a commodity vocation within the
emerging global biofuels markets is ominous in the light of the prolonged crisis
in tropical export agro-industrial commodities. In some instances there has
been a recycling out of these crops into non-traditional exports, as in the case
of Kenya and, certainly in terms of revenue, ‘non-traditionals’ as a whole now
overshadow the returns from tea, cocoa, coffee and cotton. Nevertheless, non-
traditional products are often located in different regions and different coun-
tries, generating income and employment for different actors. Non-traditional
activities tend to be more specialized, differing from the tree crop export cul-
ture, which was developed in synergy with subsistence production and produ-
cing crops for local markets. While the traditional sector continues to involve
much broader numbers of workers/producers and their families in the develop-
ing world (10 million in cocoa and more than 20 million in coffee) farmers have
at least some protection in their other crops.
While non-traditional crops involve a valorization of the agricultural and
rural phases of production with corresponding opportunities for negotiating,
not always successfully, greater shares in value added, traditional crops have
experienced an inverse tendency. Not only has there been deterioration in
the value of the raw material, but the value added has been concentrated at
82 J. Wilkinson and R. Rocha
the service end of the chain, as in the explosion of the coffee shop culture.
Representatives of the sector claim that producer country shares in global value
of the coffee chain have declined from some 30% to 10%.
The value chain literature identifies a process of ‘trading down’,
20
rather
than ‘upgrading’. Research has highlighted the continuing importance of global
traders in the conduct of traditional commodity (and other) GVCs, leading them
to posit the ‘bipolar’ coordination of GVCs in which economic power within
the chain is negotiated between traders and confectioners. Since the end of
commodity agreements producer countries have lost control over stocks and
have suffered competition from new entrants (such as Vietnam in the case of
coffee). At the same time, new blending techniques and/or new processing
techniques have enabled the use of lower-quality raw materials in both cocoa
and coffee. In sharp contrast to non-traditional products, therefore, these com-
modities have suffered from ‘downgrading’.
The huge numbers of farming families who depend on coffee in many dif-
ferent developing countries and the lack of perspective for upgrading within the
chain provoked the emergence of a ‘new economic social movement’, the Fair
Trade movement, which frontally challenged the justice of existing patterns of
remuneration within the chain. This movement has had a striking impact – with
some 600,000 families now covered by Fair Trade contracts in coffee – and has
been reinforced to the extent that corporate social responsibility has become
generalized within business. As a result, most global players in the chain, after
years of resistance, have now endorsed (for whatever motives) the principles of
the movement. At the same time, within the market, Fair Trade occupies a qual-
ity niche. We will not dwell here on the tensions within the movement and dif-
ferent evaluations of its dynamic. The important new phenomenon, which the
movement reflects, is that social justice is now beginning to be seen as a quality
factor from the standpoint of consumption.
A similar tendency can be seen in the emergence of a complementary
movement around geographical indications (GIs), which in the developing
world context (as a result of incorporation into the TRIPS agreements), are
currently being applied to the production of these commodities. Some coffee-
producing regions in Brazil and Colombia already have this status, as has
Roibus tea in South Africa and Darjeeling tea in India. Here, again, the notion
of quality is associated with social and cultural values relating to collective local
development. To the extent that it anchors these qualities also in characteris-
tics of the product, which are seen to depend on the particularities of the
locale, however, it approximates to the revalorization of the rural and agricul-
tural products and processes referred to in the case of ‘non-traditionals’. While
GIs defend social and cultural objectives through the claim for unique quality
status, Fair Trade's goal is for the universalization of new criteria of redistri-
butive justice within traditional commodity chains. Both strategies involve a
20
See Gibbon and Ponte, Trading down: Africa, value chains and the global economy (2005).
This position is close to the ‘immiserating growth’ hypothesis of Bhagwati and more generally
the approach adopted by ECLA (Prebisch), whose more recent formulation was the ‘spurious
growth’ scenario.
Agro-industry Trends, Patterns and Development 83
de-commoditization of the chain, which now depends on new forms of coor-
dination (certification, seals, auditing).
Cocoa is moving towards a similar situation, but on the basis of a differ-
ent dynamic, which is analysed by Fold (2002). Cocoa depends on forest
regions, which are becoming scarce with accelerating deforestation. A low-
quality strategy is therefore no longer sustainable, since the fundamental
problem is the threat of irreversible declining supplies. The need to promote
small farmer commitment to the renovation of cocoa production has led to a
joint endeavour by processors and chocolate manufacturers, called the
International Cocoa Initiative. The visibility of this programme and the explicit
commitment of industry mark a rupture with the anonymity of the commodity
market. In this context, civic concerns over child labour and labour conditions
more generally must be taken on board and the ‘bipolar’ leadership of the
GVC has had to be amplified to include international NGOs who are now
involved in the Initiative. Fold concludes his analysis by calling attention to the
way this International Cocoa Initiative has had the unintended consequence
of introducing modern contract relations into this traditional commodity
export sector.
Expanding urban markets
While most of the literature on development strategies has concentrated on the
new export market opportunities within the historic South/North axis, FDI and
trade is increasingly geared to the potential of the expanding urban markets in
the South. Various research programmes and cooperation activities have
focused on the actual and potential role of these domestic markets as the key
for employment and income generation along the expanding agrifood chains,
as they adapt to new producer–consumer relations. Particularly in the case of
horticulture, the urban domestic markets have been shown to be five times as
important in the case of Latin America (Reardon and Berdegué, 2003), and
similar estimates have been reported in the case of developing countries in Asia
and Africa (Shepherd, 2007). The retail research, which we have discussed
above, however, has also cautioned that the corollary of transnationalization in
function of the domestic markets of developing countries is the progressive
internalization of quality and logistical standards before applied only to exports.
Deregulation and the integration of developing country markets into global
trade and investments also mean that the growth of the domestic market does
not automatically revert to benefits in employment and income generation for
domestic food producers and processors. As we have seen, LDCs have become
on average significant net food importers.
In many low-income agricultural LDCs, the urban food system exhibits a
dual structure. On the one hand, we have the large-scale processing of, gener-
ally imported, grains, milk and other products, mostly located in the country’s
ports and capital cities. The bulk of urban consumption, however, depends on a
myriad of informal distribution and processing chains, primarily drawing on
each region’s small farming sectors and their traditional foods. This informal
84 J. Wilkinson and R. Rocha
sector can account for as much as 80% of urban food consumption. The import-
ance of this phenomenon and the need for appropriate institutional adjustments
has been recognized in a paper by the African desk of the World Bank, which
warns against the generalized imposition of standards, which ‘could marginalize
the important informal food delivery system and put special burdens on small
food enterprises’ (Jaffee et al., 2003, p. 24).
An illustrative research study carried out by CIRAD (Sautier et al., 2007)
captures well the importance of this informal sector and particularly the key
role of women in food-processing and catering services. The authors argue that
urbanization does not lead to a sharp change in the nature of the foods con-
sumed although the conditions of their supply are radically changed. Extensive
social and ethnic networks maintain links between urban and rural dwellers and
become the vehicle for adapting local foods to the urban context. In this pro-
cess, previously untraded products, such as the cassava couscous ‘attiéké’ –
which was only known in specific regions of the Côte d’Ivoire and is now traded
in many Central African countries – become transformed from subsistence
crops into components of the new urban diet.
In Dakar, Senegal, the number of urban cereals mills increased by 63%
between 1990 and 1997; 339 informal service mills were identified and it was
estimated that these artisan mills accounted for over 90% of the urban millet
market. The World Bank report, previously referred to, also makes a comple-
mentary evaluation of transformations in the urban food-processing sector in
the wake of the winding down of marketing boards and their processing oli-
gopolies. The report argues that ‘small-scale grain, oilseed, bakery and other
operations (are) taking market share from the formerly dominant players and
the latter (are) having to innovate their product lines and backward and for-
ward linkages to survive, let alone prosper’ (Jaffee et al., 2003, p. 14). The
CIRAD study, for its part, reports a survey conducted in Garoua, a secondary
city of some 230,000 inhabitants in the Cameroon: ‘A total of 1,647 small
and micro commercial agrifood enterprises were identified, consisting of 866
food-processing units and 781 food preparing units (catering and street foods).’
They note that being labour-intensive and decentralized these activities are
important sources of employment and income for the poor, particularly for
women, who managed 82% of these activities.
Farm–agribusiness linkages
The adjustment of developing country farming systems to the opportunities
and challenges of their urban markets has been a central concern of inter-
national cooperation programmes including the FAO initiative ‘Strengthening
farm–agribusiness linkages’ carried out in the three continents (FAO, 2004b).
Since the 1990s, in the wake of the dismantling of many forms of domestic
State intervention, national cooperation, the UN system and NGO networks
have all focused on the micro-determinants of adjusting to market demand.
Business management training, market research, innovative micro-financing
and organizational promotion have all been harnessed to the goal of enabling
traditional farmers to benefit from the income and employment opportunities
Agro-industry Trends, Patterns and Development 85
opened up by urban food demand. These are precisely the enabling measures
needed to transform rather than marginalize the informal sector, which at
present plays a strategic role in domestic food supply systems. Methodologies
and training programmes have been developed on all these issues, together
with the identification of numerous ‘success stories’. Nevertheless, the balance
sheet is mixed (Shepherd, 2007).
The strengthening of traditional practices may initially be decisive in
increasing food and nutritional security, but their long-term sustainability will
depend on the degree to which they can be transformed into market assets.
Value-added strategies based on tradition and locality, however, are successful
to the extent that they are understood to be, if not unique, at least special. For
most producers and producer groups, therefore, a focus on the dynamic prod-
ucts of urban food demand and an adaptation to the new conditions of access
(management, marketing, logistics, quality) will provide the best conditions for
success in many developing countries, particularly those where small farmer
systems predominate. Whatever their successes, however, the microtargeting
and support of specific producer groups is only relevant from a strategic per-
spective to the extent that it has a much broader ripple effect. In addition,
therefore, to the perennial problems of reduplication, capacity substitution
and hidden or not so hidden subsidies, which are either disproportional to the
results achieved or unsustainable once removed, it is not clear that such a
project focus can, of itself, provide the launching pad for agrifood develop-
ment strategies.
It is increasingly recognized that the provision of public goods, and a pro-
active role for governments, is a necessary complement to the micro-focus on
producer groups. There are no substitutes for adequate communication and
information services, technical assistance and appropriate physical infrastruc-
ture. On their own, however, these latter services can favour specific producer
groups to the detriment of others and may transform land-use patterns, leading
to the marginalization of traditional actors. Both types of policies, therefore,
are necessary, but their balance depends on the specific situation in each coun-
try, region and locality. International cooperation, therefore, cannot substitute
for ‘embedded’ policy-enacting capacity, which in many cases means a renewed
focus on the rebuilding of government competences.
Conclusions and Future Perspectives
Throughout this chapter we have seen that there are strong structural factors –
in relation to both global and domestic markets – favouring the promotion of
agro-industry in developing countries. The focus on non-traditional export
products tends to revalue the natural climatic advantages of tropical and semi-
tropical countries. In addition, the combined pressures of civil society social
movements and advances in corporate social responsibility standards may well
counter the ‘trading down’ effects of cheap wages and slack environmental
regulation. Although the perspectives of long-term buoyant domestic demand,
in a context of overall growth, will certainly lead to more imports, they will also
provide a sustained stimulus to the development of domestic supply systems.
86 J. Wilkinson and R. Rocha
These combined advantages of developing countries have, as we have
seen, increased inflows of FDI, whose potential benefits need, however, to be
guaranteed by judicious policy measures. The force of developing country
agro-industry can be seen in its increasing participation in South–South trade
and investment flows. New contract relations are replacing spot markets, not
only in the case of non-traditional products, but also in traditional tropical
commodity exports, thus providing a more favourable environment for nego-
tiating minimum social, economic and environmental standards.
The key challenges lie in the negotiation of ‘upgrading’ when primary pro-
duction is inserted into GVCs, in establishing a level playing field in services,
training and infrastructure for generalized competitive participation and in pro-
moting an environment favourable to innovative risk-taking. Modernizing strat-
egies for competitiveness should, however, be tempered by the recognition that
tradition and the world of artisanal production and style-of-life consumption
have an impact on increasing demand.
A strong case has been put forward for the employment and income bene-
fits accruing to non-traditional exports with their labour-intensive, postharvest
activities heavily biased towards female labour. A similar argument has been
advanced for the spillover effects for non-agricultural rural employment of inte-
grating small farmer communities into domestic markets. We have also seen,
however, that many markets based on new quality and logistical standards pro-
vide formidable entry barriers to small farming and have tended to strengthen
larger commercial farms where the small-scale farmer is at best reinserted as a
wage labourer. These trends vary considerably from country to country and
region to region but point to the need both for renewed attention to the impli-
cations of wage-labour agro-industry for rural development and for a discussion
on ways of conditioning new investments on the adoption of measures of social
inclusion along the lines of the Brazilian biodiesel programme.
21
In spite of the favourable structural factors discussed above, issues relating
to energy, global warming, innovation and the institutional and regulatory con-
text all impose high levels of uncertainty with regard to long-term trends.
We have already discussed how one scenario for biofuels would involve an
unprecedented expansion of large-scale, wage-labour farming on all three con-
tinents. On the other hand, the costs of petroleum-based inputs open up com-
petitive niches for labour-intensive, low-input or organic farming systems.
Global warming would seem particularly to threaten developing countries,
from both floods and drought. Such threats, however, are not reserved to devel-
oping countries. One consequence has been the renewed attention to the
development of drought-resistant varieties in genetic research. It now seems
likely that advances here will be more rapid than originally projected as greater
21
Different from Brazil’s ethanol programme, the biodiesel initiative is specifically geared to
involve the family farm sector not only as suppliers of raw material, but also in the production
of crude oil. To achieve this the programme is designed to promote the sources of oil, which
are most appropriate to each regional bioma. In addition, to participate in the programme
biodiesel firms must obtain a social certificate which guarantees that they are purchasing the
percentage of raw material from the family farming sector specified for each region (Wilkinson
and Herrera, 2008).
Agro-industry Trends, Patterns and Development 87
resources are dedicated to this research. Developing countries, particularly in
Africa, may well be important beneficiaries of such research, which may also shift
perspectives on the acceptability of biotechnology and genetic engineering.
While changes in the institutional and regulatory climate have been unac-
ceptably slow from the developing country perspective, as the impasse in the
Doha round has made clear, many in Europe and the USA are already adapt-
ing to a ‘post-commodity’ farming scenario based on high-value products. To
the extent that this develops, aided also by parallel movements in favour of
local produce and against ‘food-miles’, the developed countries may become
stronger competitors in the ‘non-traditional’ areas, which have until now pro-
vided such favourable perspectives for developing countries. Such a considera-
tion reinforces the importance of gearing agro-industry strategies to the
domestic urban food markets of developing countries.
Throughout this chapter it has been argued that agro-industry is the deci-
sive component of the food system, intermediating raw material production in
the rural context and consumption in the urban milieu. In addition, we have
seen that its income, employment and location effects transform agro-industry
into a powerful vector of broader development strategies. Our first conclusion,
therefore, would be that policies for agro-industry should occupy a central pos-
ition in government strategies. In addition, we have shown that agro-industry is
a complex phenomenon involving global and domestic supply chains increas-
ingly governed by contract, varied production systems, with different income
and employment consequences, regulatory systems, research and develop-
ment, FDI and international negotiations on quality, access and subsidies.
Developing countries themselves are extremely varied in their natural and
human resources and increasingly heterogeneous in their levels of economic
development, making policy prescription hazardous. Nevertheless, some gen-
eral policy implications can be drawn for developing countries from the differ-
ent issues analysed throughout this chapter.
The first conclusion is that government-level initiative must now be given
special attention. Second, however, it is clear from all we have discussed that
policy must be oriented to market sustainability even when the values being
transacted are traditional practices. Third, markets themselves are the objects
of economic, social and environmental negotiation and regulation involving
both public and private actors. Fourth, agro-industrial policies should also be a
component of social policies aimed at food and nutritional security.
Last but not least, this chapter gathers empirical information from a great
number of data sets, academic articles and books, multilateral agencies, NGOs,
international forums and other web sites. In many cases minimum methodo-
logical uniformity was only achieved to the detriment of the number of coun-
tries surveyed, restricting our samples to only a very few countries. Important
platforms such as that of the ILO or even the UNIDO Industrial Statistics
Database suffer from the limited number of observations and generally do not
allow for consistent inferences regarding absolute levels of the economic aggre-
gates. There is evident scope here for cooperation among multilateral agencies
since in many circumstances the same statistics appear for different years in
different data sets, with different methodological approaches and, consequently,
distinct results.
88 J. Wilkinson and R. Rocha
With these provisos in mind this chapter has highlighted the following
areas as the privileged focus of policy initiatives:
?
strategic policy on agro-industrial competitiveness;
?
support for SMEs through capacity building, clustering and technology
transfer;
?
recognition of the key role of the informal sector and the need for appro-
priate enabling instruments; proactive policies in relation to FDI;
?
policies for inclusion of small-scale farmers and agro-producers in contract
supply chains;
?
provision of public goods with a view to levelling the competitive playing
field; participation in development of technical and monitoring services for
achieving market access;
?
provision of services for building up capabilities for sustainable market
access; development of consumer protection policies;
?
active role in harmonizing and ensuring the transparency of quality stand-
ards; measures to ensure that agro-industrial development is compatible
with environmental and social sustainability to avoid ‘the race to the bot-
tom’ trap as well as negotiation of standards and conditions of access in
international forums.
Many of these policies will be best developed within the framework of concrete
and effective international cooperation.
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Background
We live in a time of great social, economic and technological changes. While
close to one billion people suffer from hunger or under-nutrition and another
two billion exist on the borderline of barely acceptable nutrition, the potential
for dramatically improving the economic status and food situation in develop-
ing countries has never been greater. Expected changes in income and demo-
graphics will lead to greater consumption of meat, dairy products, fruits,
vegetables and edible oils, resulting in a growing demand for raw agricultural
products. More consumers will have the economic status and changed lifestyle
which leads to the purchase of more processed and packaged food and an
increasing variety of convenience and luxury food items but does not necessar-
ily increase the demand for raw agricultural commodities. The number of cur-
rent low-income consumers lifted out of poverty will be the most important
determinant of the future global demand for food. The World Bank estimates
that the number of people in developing countries living in households with
incomes above US$16,000 per year will rise from 352 million in 2000 to 2.1
billion by 2030.
The ability of agricultural and food industries to continue to respond to the
undoubtedly substantial increase in demand in future decades will be highly
dependent on the increased application of existing technologies as well as the
exploitation of new and innovative technologies. By 2050, the world demand
for food will double, driven by the predicted population growth and the pro-
jected broad-based economic growth, which will lift low-income consumers out
of poverty.
The development of the agrifood industry will obviously vary in different
regions of the world depending on current levels of sophistication with
respect to the production, preservation and processing of agricultural com-
modities. Providing enough food for vulnerable groups of the population and
4 Technologies Shaping
the Future
COLIN DENNIS,
1
JOSÉ MIGUEL AGUILERA
2
AND MORTON SATIN
3
1
Director General, Campden BRI, Chipping Campden, Gloucestershire, UK;
2
Professor, Department of Chemical Engineering, Universidad Católica de
Chile, Santiago, Chile;
3
Director of Technical and Regulatory Affairs, Salt
Institute, Alexandria, Virginia, USA
Technologies Shaping the Future 93
strengthening the competitiveness of the small farmers are probably the first
priorities in developing and emerging countries. The focus will be on improv-
ing agricultural practices and on postharvest preservation technologies.
With changing demographic conditions and food demand there will also be
increasing need for the design and development of efficient integrated systems
of food production, processing, preservation and distribution from rural pro-
ducers to expanding and diversifying urban populations in developing and
emerging countries. In addition, the general shift towards increased meat con-
sumption in developed and emerging countries is the greatest food transition
of modern times. It is predicted that the world’s livestock could eat as much
grain as four billion people can by 2050 (Moynagh and Worseley, 2008).
In developed countries with well-developed urban populations there is con-
tinuing desire for greater added value and convenience of food production in
response to the social and lifestyle changes (e.g. less time available for food
preparation and greater disposable income) and an increased desire to con-
sume foods which assist in disease prevention and healthy ageing.
The need for the exploitation of technologies is further emphasized by the
fact that arable land and fresh water are not distributed around the world in the
same proportions as is the population. For example, there are many barriers
for Asia or the Middle East to be self-sufficient in food. With population growth,
urbanization and broad-based economic development, food consumption in
less-developed countries will outstrip their production capacity and will thus
become larger net importers. This, in turn, will require appropriate transport
and distribution systems.
It is well recognized that future food production will be constrained by land
and water availability. There is, at most, 12% more arable land available that
is not currently forested or subject to erosion or desertification. The area of
land in farm production could only be expanded significantly by substantial
destruction of forests and loss of wildlife habitat, biodiversity and carbon
sequestration capacity. This is unacceptable from the viewpoint of environ-
mental and natural resources protection. The only environmentally sustainable
alternative is to at least double the productivity on the fertile, non-erodible
soils already in crop production. In some areas land may be used in novel
ways, for example, China’s paddies produce two-thirds of the world’s pond
fish. During the 1990s, the country almost doubled yields per acre by growing
multiple types of fish in the same pond (Moynagh and Worseley, 2008). In the
near future, more fish may come from aquaculture than ocean fishing. It could
be an effective way for people in poor countries to obtain the nutrients they
desperately need.
Agriculture is not only the largest user of water (70% of fresh water) but
also the largest waster of water. With rapid urbanization, cities are likely to
outbid agriculture for available water. Thus, there will be a need for the world’s
farmers to face the challenge of doubling food production using less water than
they are today.
Future strategies must not be restricted to ensuring food availability for all
simply in terms of calories, but must also deliver sufficient quantities of safe whole-
some food that contributes to a healthy diet. Strategies need to be considered
94 C. Dennis et al.
in the context of progressive economic development and the associated urbani-
zation. These will have consequences for the dietary patterns of lifestyles of
individuals. Changes in diets, patterns of work and leisure are already contri-
buting to the causal factors underlying non-communicable diseases, even in the
poorer countries. Technological development therefore has a major role to
play in shaping the future of food production, preservation and supply and
delivery of food to the world’s consumers.
This chapter considers the various drivers for technological change before
discussing the range of technologies that will undoubtedly have a substantial
impact on the development of the agro-food industry in developing, emerging
and developed countries. These include specific processing and packaging
technologies as well as the cross-cutting nature of generic technologies such as
biotechnology, bioinformatics, nanotechnology and information and commu-
nication technology. Such technologies are discussed with respect to delivering
health and well-being, ensuring food safety and contributing to more sustain-
able food supply in a competitive global market. Emphasis is given to the fact
that technologies are not applied in isolation, but require commitment and
investment from the private sector in a political environment where public pol-
icies stimulate entrepreneurship. This involves the availability of an appropri-
ately educated and trained workforce, fiscal incentives for R&D and innovation
and international regulations that are not unnecessary barriers to trade.
Drivers of Technological Change
Social
The attitude of consumers towards food and agriculture is heavily dependent
on the availability and abundance of food in its various forms. In those parts of
the world where the scarcity of food is such that individuals have only sufficient
to satisfy their very basic calorific intake or are malnourished and suffer hunger,
there is little thought given to the source of the food or its safety and quality.
However, in those parts of the world where there is a plentiful supply, many
consumers feel passionately about their food, its method of production, quality,
origin and effect on their health, as well as its price. In no other industrial sector
are there so many factors contributing to a direct consumer involvement in the
products delivered. This provides both an enormous challenge and a huge
responsibility for the agrifood industry.
In the past two decades or so most developed countries have seen a dra-
matic rise in concerns among their citizens over the quality and safety and
long-term health effects of their food. A number of safety issues related to the
food supply chain (local, national and international) have provided legitimate
background for consumer groups to demand political action. For example, in
Europe national food safety (food standards) agencies or authorities have been
established, in addition to the European Food Safety Authority (Podger, 2005),
to oversee the implementation of the regulatory framework, with a specific
emphasis on safety in the broadest sense.
Technologies Shaping the Future 95
Apart from safety, consumers are increasingly concerned about the origin
of their food not only in terms of locality (region and country), but also about
issues around animal welfare, environmental impact, organic production and
fair trade (see Figure 1). Consumers increasingly have to make decisions about
whether to purchase locally produced food versus imported products providing
an all-year-round supply of, for example, fresh fruits and vegetables. The pur-
chase of imported products often provides an opportunity for affluent con-
sumers to support developing economies by purchasing their products. However,
transporting food products over long distances (the ‘food miles’ debate) has
stimulated much discussion on possible negative effects on the environment.
Consumers increasingly demand that food producers assure them that
their ethical and environmental concerns are reflected in products. But, while
all of the above factors play a part in putting pressures on the market for
change, consumers remain very price-sensitive and seek solutions that are
affordable. The need to embrace these diverse consumer concerns, yet provide
foods that are affordable, places challenging constraints on the market and on
the potential for innovation. Unlike all other categories of consumer products,
where the consumer welcomes innovations and the application of scientific and
technological developments, the outputs from science and technology with
food products are often viewed with suspicion and the challenge to the industry
is to communicate effectively the consumer benefits of scientific development.
Waste reduction or
prevention
Reuse
Recycling
Waste recovery
options
Composting
Reduced energy
usage
Life cycle analysis
Reduced fat,
sugar, salt
Enriched in fibre
Antioxidants
Protective compounds
Lower energy density
Satiety enhancing
Modified functionality
Bioavailability
Consumer acceptance,
safe, convenient, choice,
fair trade, organic, animal welfare,
origin and provenance, price
Final product
Processing &
packaging
Raw materials & ingredients
Agricultural production
Modified agronomic practices,
especially with respect to
irrigation and water and soil
management
Reduced chemical
inputs
Improved & faster
breeding
Figure 1. Future food production and processing trends.
96 C. Dennis et al.
In both developing and developed economies, consumers’ increasing desire
for choice, convenience and added value is continuing to influence the techno-
logical basis of the agrifood industry. This trend also includes the increasing
number of meals consumed outside the home. In addition, the marked demo-
graphic changes (ageing populations) will influence the type of food required,
the way it is packaged and the nutritional composition so as to contribute to
healthy ageing. Increased urbanization in many developing economies will also
pose challenges in relation to storage and distribution and the increased mobil-
ization of different nationalities around the world will provide opportunities for
even greater diversity of products to meet the different cultural needs. Changes
in eating patterns from traditional diets to western-style foods and eating away
from home (e.g. fast foods) will also be affected by rising incomes and the fact
that more women are entering the workforce, leaving less time for food prep-
aration at home.
Economic
Food security is not a new concern for countries that have battled political
instability, droughts or wars. But for the first time since the early 1970s, when
there were global food shortages, the issue of food availability is starting to
concern more stable nations as well, especially as this will undoubtedly impact
on food-price inflation (Anon., 2007f). There will be a permanent increase in
demand for agricultural commodities in Asia, as the richer populations in
China and India demand more protein. Demands for agricultural products
from the biofuel industry, which is on course to consume about 30% of the US
maize crop by 2010, will continue to have a major impact. These develop-
ments will underpin prices for the medium term. FAO estimates that these
structural new trends will push the cost of agricultural commodities in the next
decade between 20% and 50% above their last 10-year average. This will be
a problem for economies where food represents a significant share of their
import payments. FAO has forecast that lower-income ‘food-deficit’ countries
will spend more than US$28 billion on importing cereals in 2009, double
what they spent in 2002.
Several economic-related factors will influence both which technologies are
applied in the future and where they are applied. Postharvest losses of foods –
physical, nutritional and in market value – are inherent to a business dealing
with perishable materials. Reducing postharvest losses by controlling tempera-
ture and moisture of stored grains, improved containers, packaging and cold
chain maintenance of fish and horticultural perishables could, potentially, add
to the global food supply and to the revenues of small farmers.
In many developing economies, there are tremendous opportunities for
adding value in the country of origin of the raw materials. There is much greater
opportunity for integration of the agrifood sector and the development of the
organized food-processing sector in such countries. For example, new emerg-
ing economies such as in China, India and Brazil are seeing export growth of
value-added products, while the value of exports as a percentage of the value
Technologies Shaping the Future 97
of total world exports in food and drink products in both the USA and the
European Union (EU) has declined by 30% and 15%, respectively (Anon.,
2007a).
Key economic issues which will continue to affect the development of
organized processed food industries are cost and availability of raw materials;
labour availability and costs; rate of return on capital investment; transport
costs and availability of distribution infrastructure; costs of obtaining regulatory
approval for a new technology, ingredient or food; and cost of compliance with
national and international regulatory frameworks.
Political
With the increased globalization of the agrifood industry, regulatory frame-
works with respect to international trade have a fundamental part to play,
especially with respect to food safety. The principle of equivalence in food
safety has become an important issue impacting on international trade in foods
(Anon., 2007c). At this level, considerable effort is being directed to achieving
agreement in the concept of equivalence as it applies to food safety manage-
ment systems, i.e. does the management of food safety in one country achieve
or ensure the same level of protection as food safety management systems in a
second country?
Equivalence of food safety measures is recognized in the World Trade
Organization (WTO) Agreement on the Application of Sanitary and
Phytosanitary Measures (SPS Agreement) and the Agreement on Technical
Barriers to Trade (TBT Agreement). Both agreements require member coun-
tries to ensure that their food safety measures are objective, science-based,
consistent and harmonized with international standards, where they exist.
Because measures can take many forms, WTO member countries are encour-
aged to accept other countries’ measures and regulations as being equivalent,
provided they have satisfied these alternative measures and that the regulations
meet their appropriate level of protection (ALOP) or public health goals. The
ALOP, which is the responsibility of national legislators, may not be the same
for all countries. The WTO has recently created the SPS Information
Management System (SPS IMS), a database for searching for information on
WTO member governments’ sanitary and phytosanitary measures, which
include food safety and animal and plant health and safety.
The Codex Alimentarius Commission (Codex), the international food
standards setting body, is moving to better articulate the concept of equivalence
and its application to food safety. The Codex Committee on Food Import and
Export Inspection and Certification Systems (CCFICS) has developed guide-
lines for the judgement and development of equivalence of sanitary measures
associated with food inspection and certification systems.
For food processors and food regulation authorities, there is also the need
to determine the equivalence of different food safety measures, i.e. the ability
of alternative technologies to achieve the same level of health protection by,
for example, destroying or inhibiting pathogenic micro-organisms. The focus
98 C. Dennis et al.
is on comparing existing approved measures, which are presumed to achieve
a level of risk acceptable to the community, with alternative food safety
measures.
Public policies with respect to food, diet and health will undoubtedly be a
major driver for the agrifood industry in the future and will influence the need
for technological development. Such policies could include intervention in
relation to health claims in advertising, especially that targeted at children, and
the way national governments respond to the need to resolve issues of obesity
and being overweight, which is now occurring across all age and ethnic groups
in both genders and across all socio-economic classes (‘globesity’) (Anon.,
2007e).
Other political influences relate to public policies with respect to support of
research and development and innovation or incentives to encourage industry
to invest in new technologies. Similarly, policies with respect to encouraging
education in science, technology and engineering will be a major influence on
skilled and trained people essential for technological development. However,
the commercial exploitation of new technologies will also depend on the cul-
ture of entrepreneurship and risk taking within a country or in individual com-
panies and the public policies which encourage enterprise.
Environmental
There will be increasing pressures on the agrifood industry both from public
policies and commercial need in relation to environmental issues throughout
the food supply chain. These will include the need for lower and optimized use
of fertilizers, pesticides, herbicides and fungicides according to weather condi-
tions, growing season and soil types.
All the predictions on the consequences of climate change suggest that
water availability is set to become a key issue around the world, with the associ-
ated major consequences for agricultural production and food processing. Such
scarcity of water will strongly influence the use and methods of irrigation, plant
breeding (e.g. drought resistance), water recycling and reuse in food production
and processing systems.
Another environmental consideration that will influence development in
the agrifood industry is that of waste (see Figure 1). A commonly adopted
waste management hierarchy is waste reduction and prevention, reuse, recy-
cling, other recovery options (including bioenergy) and, lastly, safe and envi-
ronmentally sound disposal. All of these aspects will increasingly drive food
production and processing systems in the future. The aim will be to develop
and adopt production systems that are productive, sustainable and least bur-
densome on the environment. Thus, there will be increasing pressure to reduce
emissions with respect to food processing and to decrease the carbon foot-
print of different systems. However, in order to target the appropriate part of
the food supply chain and appropriate technologies, considerably more object-
ive data from relevant life cycle analyses from farm to fork are required (Foster
et al., 2006).
Technologies Shaping the Future 99
Technical and scientific
In addition to the above market-pull factors, technological development in the
agrifood sector will also be shaped by current and future outputs from scientific
and technological research and development.
For example, the desire to minimize the environmental impact of agri-
culture will focus attention on the potential benefits from greater applica-
tion of integrated farm management, including emphasis on integrated
nutrient management, which aims to increase the use of all nutrient sources
(soil resources, mineral fertilizers, organic manures, recyclable wastes and
biofertilizers). Similarly, decision support systems built around knowledge of
the effect of agronomic conditions on plant growth and the onset and
spread of pests and disease will be increasingly used together with satellite
technology to optimize the application of fertilizers and pesticides or herbi-
cides on specific crops.
Another major area of science that will drive technological development is
that of nutrition. Research and development will continue to provide an
improved understanding of the interaction between human psychology and
physiology and food and drink. Important aspects include the following:
?
Understanding of food structure and its influence on human physiology
and nutrition. For example, it is now recognized that particle size, the
structure of the food matrix and the proportion of amylose and amylopec-
tin in foods can have a significant impact on blood glucose levels when
food is ingested.
?
Role of food constituents and food viscosity on energy intake. Greater
knowledge on satiety may well offer the possibility of providing foods which
assist in lowering energy intake and associated weight control.
?
Production, formulation and separation of bioactive components and the
effect of processing and delivery mechanisms on bioavailability as part of a
normal diet.
Developments in material sciences will continue to enable the production of
new materials for packaging, with the likely emphasis to be on biodegradable
and compostable materials consistent with the sustainability agenda. Other
developments are likely to focus on lighter weighting, recyclability and enhance-
ments to consumer use, especially responding to changing demographics and
meeting the needs of an ageing population.
Continued developments in automation and robotics will enable greater
integration and automation of highly value-added, large-scale processing lines.
Such developments will be enhanced by developments in vision and other non-
invasive sensor systems which are integrated into feedback process control
loops to ensure greater process reliability, product consistency and reduced
waste or reworking of materials. Many such developments will be dependent
on outputs from the basic sciences linked to the ability to store, mine and visu-
alize large data sets.
As summarized in Figure 2, technologies that shape the future will have
to contribute to safety and quality, especially in relation to nutrition, and
100 C. Dennis et al.
sustainability (economic, social and environmental), while being competitive
and complying with an international regulatory framework as part of increas-
ing international trade.
Technologies for the Future
This section provides an overview of technologies that are likely to impact on
a range of agro-industries in both developed and developing countries in the
next 20–30 years, given the key drivers of the food industry and current global
trends. Consumers’ requirements largely condition the industry response in the
use of technology. Improved convenience, higher quality and the demand for
safer, healthier, fresher and more natural products have elicited a trend towards
milder processing or combination of treatments, use of fewer additives and
reduced packaging, among others. In addition, concerns about the environ-
ment and the use of energy are imposing new challenges to food-processing
technologies.
Food-processing technologies
It is not easy to classify food technologies in a simple and succinct way that is
at the same time technically rigorous. Figure 3 shows the scheme used in this
chapter. There are, of course, other ways of classifying these technologies and
of selecting them for given country-specific needs (van Boekel, 1998; Bruin
HEALTH &
WELL-BEING
Contribute to
disease prevention
and healthy ageing
COMPETITIVENESS
Production efficiency
and costs
Product match to
market need
SUSTAINABILITY
Optimize resource
use to reduce waste
and energy
SAFETY
Essential &
non-negotiable
NATIONAL &
INTERNATIONAL
REGULATIONS AND
FOOD CONTROL
Underpin international
trade
Figure 2. Drivers for technologies shaping the future.
Technologies Shaping the Future 101
and Jongen, 2003). In developing countries many agricultural raw materials
and fresh products are bought in nearby local markets and consumed at home
without major processing as is the case of most fruits, vegetables, nuts and
legumes and tubers (dotted line). Major staple foods that provide the bulk of
calories in traditional diets of these countries are harvested, dried and stored,
and undergo only cleaning and milling operations before consumption (e.g.
rice, maize). Tuber and root staples, most notably potatoes and sweet potatoes,
store well for extended periods and are peeled and cooked at home. Some
components of crops are selectively fractionated and separated by industrial
processing, becoming major ingredients of processed foods (e.g. wheat flour,
oils and sugar) or high-value additives and flavourings. However, in industrial-
ized societies and large urban centres in developing countries, most foods that
reach the table have undergone some form of preservation to extend their shelf
life and/or transformation to improve convenience and taste. The bulk of the
processed foods industry involves fabricating foods by mixing, transformation
and structuring technologies. Most foods experience some form of storage and
packaging before distribution, which in advanced societies and large urban
centres may be quite sophisticated.
For the three billion people presently living on less than US$2 per day,
those technologies leading to increased agricultural output of staple foods,
together with wider availability of storage facilities and improved postharvest
practices, will contribute to their increased access to high-quality and safe
food.
Annex 1, based on Figure 3, summarizes our views as to which technologies
are likely to have a large impact in the agribusiness sector, with an emphasis on
novel or emerging food technologies. As will be seen from Annex 1, many well-
established technologies continue to undergo developments with the aim of
improving product quality and processing and energy efficiency, while at the
GENERIC TECHNOLOGIES
• Biotechnology
• Bioinformatics
• Nanotechnology
• Energy-saving technologies
• Waste-conversion technologies
• Sensor and analytical technologies
• Robotic and automation
technologies
• Information technologies
Consumers
Packaging
Transformation/structuring
Thermal/non-thermal
preservation
Separation/ingredients
Water activity
control
Heating/
cooling/
freezing
Raw materials
Storage/distribution
Figure 3. Scheme adopted to group technologies according to their main impact in the
agrifood chain.
102 C. Dennis et al.
same time maintaining or improving the level of assurance of product safety. For
example, in the traditional processing area of pasteurization and sterilization sig-
nificant developments in the manufacture of expanded heat transfer surface per
unit volume are occurring. One of the fundamental parts of a heat exchanger is
the surface area for heat transfer. Significant advances are being achieved.
Modern manufacturing techniques, such as direct laser deposition (DLD), allow
complete freedom of 3D design and manufacture, with surface areas of
10,000 m
2
/m
3
achievable (Schwendner et al., 2001; Unocic and Dupont, 2003).
New construction materials are being explored, such as polymer films instead of
stainless steel. The result will be smaller heat exchangers for a given heat load,
and at lower build costs. One of the first applications being investigated in the
food industry is for recovering waste process energy from food factories.
Biotechnology
Experience to date suggests that biotechnology, if well managed, can be a
major contributor to meeting future needs with respect to producing not only
crops which are better adapted to a wider range of climatic and soil conditions
(drought, salinity, acidity, extreme temperatures), but also crops that have traits
for higher and better quality output (FAO, 2000). Modern biotechnology is not
limited to the much publicized (and often controversial) activity of producing
genetically modified organisms by genetic engineering, but encompasses activi-
ties such as tissue culture, marker-assisted selection (potentially extremely
important for improving the efficiency of traditional breeding) and the more
general areas of genomics, proteomics and metabolomics.
Second-generation genetically modified crops are expected to produce
crops with higher levels of needed micronutrients, better quality proteins or
crops with modified oils, fats and starches, to improve processing and digest-
ibility. Developments will also undoubtedly occur which allow the production of
specific functional foods or an enhanced level of bioactive compounds such as
antioxidants.
However, the commercialization, promotion and diffusion of genetic modi-
fication will be tempered by concerns about the longer-term impacts and pos-
sible risks with respect to human health (toxicity, allergenicity) or for the
environment (e.g. spread of pest resistance to weeds) and natural resources
(modification of habitats). As indicated earlier the degree of caution any society
will have about these developments depends on the societal preferences about
their perceived risk and benefits (Thomson, 2002).
Bioinformatics
Bioinformatics is a powerful discipline that uses computing power to analyse
biological data. As yet the full potential of bioinformatics has not been uti-
lized by the agrifood sector; however, with a greater use of high-throughput
technologies (microarrays, mass spectrometry) and the expansion of relevant
Technologies Shaping the Future 103
databases (see Annex 2 and Figure 4) this situation is likely to change. There are
several areas where bioinformatics will prove invaluable to the food industry,
including DNA and protein analysis for food authenticity, traceability and prod-
uct development through the use of genetic markers (quantitative trait loci) in
breeding programmes (Dooley, 2007). The newly emerging discipline of nutri-
tional genomics, which uses many of the high-throughput techniques described
above to improve the study of nutritional science and food technology, will also
benefit from an increasing awareness and use of bioinformatics in the agrifood
sector. Bioinformatics for protein analysis will be of benefit in terms of improv-
ing the understanding of protein properties during product manufacture; iden-
tifying pro teins with specific functional properties, e.g. enzymatic function,
identifying potential allergenic proteins or detecting potential bioactive peptides
within protein breakdown products. Microbial analysis using bioinformatic tools
will also be beneficial to the food industry for rapid pathogen identification and
the development of beneficial microbial species for use in food manufacture. All
these areas will benefit from increased speed, accuracy and automation brought
about by bioinformatic tools that link laboratory-based technologies with ana-
lytical methods or reference databases. These will be of advantage to food pro-
ducers, retailers, consumers and regulatory authorities, who all wish to ensure
that high standards of product quality are maintained.
Further uptake of bioinformatics within the food industry is going to require
an increased application of existing techniques along with the active development
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Figure 4. Growth of the National Center for Bioinformatic Information (NCBI)
I database from 1991 to 2006. The total number of sequences (in millions) deposited
in the GenBank (light grey) or protein (dark grey) databases is shown on the y-axis.
104 C. Dennis et al.
of specific food-related bioinformatic tools. Although many bioinformatic tech-
niques can be transferred across from other industries, especially pharmaceuti-
cals, food by its natural complexity is a unique matrix, which will require unique
methods of analysis. For example, the analysis of the effect of a drug is basi-
cally a binary system whereby one drug is administered and the resulting change
is measured. Food, on the other hand, is a composite material, so it is not easy
to determine if the observed changes are due to the specific ingredient of inter-
est, other ingredients in the product, the interaction between ingredients or
other foods being consumed. Developing approaches to overcome these types
of problems will ensure that the application of bioinformatics to the food indus-
try will provide an exciting prospect for those involved.
Nanotechnology
Nanotechnology refers to the engineering of functional systems at the molecular
scale. The prospect of the wide-scale use of products of evolutionary
nanotechnology in food has engendered much debate. The concern is, if
changing the size of materials can lead to radical, albeit useful properties, how
size will affect other properties and, in particular, the potential toxicity of such
materials. Although the products of nanotechnology intended for food con-
sumption are likely to be classified as novel products and require testing and
clearance, there are concerns, particularly in the areas of food contact materi-
als, that there could be inadvertent release and ingestion of nanoparticles of
undetermined toxicity. Such concerns need to be addressed, because the ulti-
mate success of products based on nanotechnology will depend on consumer
acceptance. The recent explosion in the general availability of products derived
by nanotechnology makes it almost certain that nanotechnology will have both
direct and indirect impacts on the agrifood industry (Anon., 2007d). Recent
nano-based products include the following:
?
Nanoparticles of carotenoids that can be dispersed in water, allowing them
to be added to fruit drinks, providing improved bioavailability.
?
A synthetic lycopene has been affirmed GRAS (‘generally recognized as
safe’) under US FDA procedures.
?
Nano-sized micellar systems containing canola oil that are claimed to pro-
vide delivery systems for a range of materials such as vitamins, minerals or
phytochemicals.
?
A wide range of nanoceutical products containing nanocages or nanoclus-
ters that act as delivery vehicles, e.g. a chocolate drink claimed to be suf-
ficiently sweet without added sugar or sweeteners.
?
Nano-based mineral supplements, e.g. a Chinese Nanotea claimed to
improve selenium uptake by one order of magnitude.
?
Patented ‘nanodrop’ delivery systems, designed to administer encapsulated
materials, such as vitamins, transmucosally, rather than through conven-
tional delivery systems such as pills, liquids or capsules.
?
An increasingly large number of mineral supplements such as nano-silver
or nano-gold.
Technologies Shaping the Future 105
Potential future benefits from the application of the products of nanoscience
and nanotechnology in the agrifood sector include application and effective-
ness of agrochemicals, enhanced uptake and bioavailability of bioactive food
ingredients, development of new tastes, flavours and textures and active and
intelligent packaging, including new types of labelling, which aid traceability of
products. There is also currently research on ‘smart’ surfaces that could, for
example, detect bacterial contamination and react to combat infection.
Although many of these materials contain nanoparticles, they are generally
regarded as safe, provided their use does not lead to the release and injection
of these particles. Concern has been expressed over the long-term fate and
disposal of these materials, which might then lead to release of nanoparticles
into the environment. These types of concerns will continue to stimulate debate
on the labelling, approval, traceability and regulation of these nano-materials.
Food and packaging waste
With the increased emphasis on optimizing the use of natural resources and
reducing or at least using waste, the EU has adopted a five-stage waste man-
agement hierarchy for use by industries in all EU states (see Figure 5).
Although waste reduction or prevention, reuse and recycling have been
key aspects of cost reduction in manufacture for many years (Anon., 2006),
there is now considerable interest in the possibility of creating energy from
food and packaging waste (Anon., 2007b).
There are a range of technologies for the conversion of food waste to
usable fuel or energy. The technologies differ in their stages of development,
current commercial applicability, the scale at which they operate, the type of
waste that can be processed and the form of energy produced. Although fur-
ther developments are required, wider uptake in the food and drink industry
would assist in reducing waste, increasing energy efficiency and contributing to
future environmental and economic sustainability.
Waste reduction or prevention
Reuse
Recycling
Other recovery options – including
energy recovery
Safe and environmentally sound
disposal
LOWEST PRIORITY
Figure 5. Waste management hierarchy.
106 C. Dennis et al.
Bioethanol production is currently a high-profile technology, particularly in
the context of the ‘food versus fuel’ debate. The food industry has raised con-
cerns that the growth of the bioethanol industry, and its use of energy crops,
will have serious implications for the global food market as the two industries
compete for the same commodities. This is especially true in countries where
maize or cereals are used as feedstock. It would seem, therefore, that there is a
need to divert the bioethanol industry away from the use of crops that could
potentially be used for food, and towards the use of industrial waste materials
as feedstock. For example, a Finnish energy company has established a pilot
ethanol plant using waste produced on site at a Finnish food-processing com-
pany. Research should have the ultimate objective of widening the range of
feedstock that can be used. Enzyme technology may be developed to improve
the speed and efficiency of conversion of cellulosic wastes to a fermentable
state, and genetic modification may result in the development of strains cap-
able of yielding greater concentrations of ethanol in a shorter time than is cur-
rently achievable.
For biomass to fuel processes, the various challenges are the effect of mois-
ture, waste types and composition and the inclusion of packaging materials on
the efficiency of the process and the quality of fuel produced. A significant
project is under way by a poultry processor in the USA to set up an on-site
facility for converting animal by-product waste to synthetic crude oil. If success-
ful, this technology could be applied to large meat and poultry processors
elsewhere.
Anaerobic digestion is a relatively mature technology, for which the major-
ity of fundamental research was carried out by the 1980s. Development work
now focuses on areas such as effective pasteurization of digestates and the
cleaning and upgrading of biogas. Novel reactor designs also allow scaling
down and continuous running of the process. Design considerations should
also take into account the inherent difficulties in controlling the anaerobic
digestion process and sensors and monitoring systems developed that allow
close control of feedstock processes according to the compositions of gases
that are produced. Standard cultures for inoculating anaerobic digestion pro-
cesses may be an area for research that would allow the processes to be better
controlled. The use of manure, feeds and agricultural waste in biogas systems
to produce electricity for village and small agro-industries in developing coun-
tries, through integrated rural bioenergy systems, is a promising development.
The conversion of waste oils and fats to biodiesel by transesterification is
well developed and practised. Areas for research may, however, lie in the clean-
ing and treatment of both feedstock and the biodiesel product through filtration
and dehydration.
Thermal techniques like gasification and pyrolysis produce fuels that are
combusted soon after generation and the energy used as heat or for power
generation. Incineration of biomass results in a high amount of heat that must
be utilized immediately. The most effective way of utilizing the heat energy
from thermal techniques is through a combined heat and power (CHP) system.
The UK government has identified CHP as one of the best technologies to
implement for the country to fulfil its commitments to greenhouse gas emissions
Technologies Shaping the Future 107
under the Kyoto protocol. CHP increases the overall energy efficiency as it can
co-generate both electrical power and heat energy. Energy efficiencies have
been reported as high as 70–75% compared to the efficiency of sourcing heat
and power separately, which are both around 30–40% efficient. Other co-
generation systems, such as regeneration, are also gaining in popularity, as the
drive for more efficient use of energy continues. Trigeneration systems are an
extension of CHP processes as they provide the option of producing refriger-
ation using the heat in an absorption chilling process. This is particularly useful
where refrigeration is a high operational priority and where excess heat may
have no particular function and would otherwise go to waste.
While there is an awareness of technologies for converting waste to energy
among relevant personnel in the food and drink industry, there is a general
feeling that the technologies on the market are large-scale and unsuitable for
the needs of individual companies. This is particularly serious for small and
medium enterprises (SMEs) in developing countries. Small-scale or bespoke
systems tend to be priced too highly and outweigh the benefits that they would
offer in terms of energy and waste disposal savings. This scenario is likely to
continue until the demand for such systems increases and brings down prices.
Alternatively, there is the possibility of groups of neighbouring production sites
collaborating on projects to establish centralized plants.
Waste-to-energy conversion systems and their operating parameters are
generally tailored to the type and composition of the waste stream that they
are designed to process. It is therefore advantageous if production processes
continuously generate waste that is of a uniform composition. Processes that
generate waste intermittently or that operate multi-product production lines
may not realize the full benefits that a waste-to-energy system has the poten-
tial to offer.
Information technologies
In today’s global economy, the ability to leverage information is critical to
achieving competitiveness. The adoption of information and communication
technologies is occurring at an incredible pace and will provide the core of
potential for new entrepreneurs. For example, cell phones are now ubiquitous
throughout Africa.
Access to these technologies removes constraining barriers between the
entrepreneur and the marketplace. For the first time, the ability to connect
directly to the markets allows the entrepreneur to achieve what had previously
taken several intermediaries to deliver. At a very low cost an entrepreneur can
set up a presentable web site that can influence buyers from around the globe.
Of course, the entrepreneur has to be able to consistently deliver the quantity
and quality of goods agreed upon in any contractual arrangement, but the fact
is that there is now more direct contact between buyer and seller than ever
before.
Organic coffee serves as an excellent example of the sort of niche markets
that can profitably be accessed through the Internet. Through modern Internet
108 C. Dennis et al.
auctions, farmers and processors have been able to achieve very significant
sales volumes and prices. Previously, coffee inevitably changed hands many
times between the producer and the buyer. In fact, most coffee sold today still
moves under the old trader system. However, more and more coffee is moving
directly. In 2007, the highest price paid for coffee was US$130 per pound for
100 lbs (US$13,000) of Panamanian coffee from a smallholder plantation
through an Internet auction.
Potential for Technologies to Deliver Benefit in Different
Development Scenarios
Health and well-being
Food technologies in years ahead will be increasingly targeted at providing
health and well-being to consumers. To emphasize this trend, it is appropriate
to add a new axis to the traditional food chain. When properly signalled by
consumers’ needs, the chain produces a flow of foods from the ‘farm’ to the
table (mouth). Figure 6 captures this concept in a simple way.
This paradigmatic shift can be illustrated by reference to the flow of nutri-
ents. Although the global average per capita consumption of food has risen by
17% over the last 30 years, to ?2800 kcal per day, the world still faces familiar
problems of hunger and micronutrient deficiencies, but now accompanied by
the ubiquitous presence of overweight people and obesity. This is also true for
Consumer Food chain
Energy and the environment
(sustainability)
More foods
Nutrients
Safety
Quality
Preservation
Structuring
Ingredients
Delivering safe
foods
Convenience
Information
Analytical technologies
Assessment of quality and safety
Commercial competitiveness
Production
Raw
materials
Processing
Packaging/
Distribution
Brain
Food perception
Enjoyment
Preferences, attitudes
Mouth
Texture
Flavour
Eating quality
Gut
Gut health
Satiety
Bioavailability
Body
Nutrition & health
Vitality
Weight control
Figure 6. The two axes shaping the targets of food technologies for the next decades.
Technologies Shaping the Future 109
many developing countries. Increased food availability only makes sense when
evaluated with respect to the impact on individuals, as it may have positive or
negative effects. Moreover, there is increasing evidence that nutrients present
in a food (i.e. as listed in food composition tables) may not be totally available
for absorption in the gut. Also, absorption varies drastically (e.g. by up to 70%)
for the same food depending, for example, on processing conditions and pres-
ence of other components in the diet. In many cases, processed foods show
improved nutrient bioavailability when compared to raw or fresh foods that
only suffer mastication prior to ingestion (Parada and Aguilera, 2007). The
concept of nutrition and the impact of technologies may change, as we learn
more about the fate of food components after ingestion (‘food processing inside
the consumer’).
Food safety
Contaminated foods represent one of the most ubiquitous health problems in
the world. They not only result in increased morbidity and mortality, but are also
a major contributing factor to reduced economic productivity in many countries.
The illnesses contracted from contaminated foods are generally caused by micro-
organisms (bacteria, viruses, moulds and their toxins), parasites, drug and pesti-
cide residues, environmental pollutants (such as heavy metals, dioxine) and
unconventional agents (e.g. bovine spongiform encephalopathy – BSE). They
usually result in conditions such as diarrhoea, gastrointestinal pain, vomiting and
headaches and, in the most serious cases, death. Worldwide, food pathogens
have been estimated to cause 70% of the approximately 1.5 billion (10
9
) cases
of diarrhoea and three million deaths of children under the age of 3.
Because of their magnitude, very few countries have the ability and infra-
structure to monitor the incidence of foodborne diseases. The Centers for
Disease Control and Prevention in Atlanta (CDC) estimates that the number of
cases of foodborne diseases in the USA is now equivalent to about 30% of the
population per year. Although long-term chronic sequelae are characteristic of
many foodborne diseases, they have not received the same degree of attention
that the primary, acute symptoms have. Most foodborne disease victims and
their physicians are happy to get over the short-term effects and seldom worry
about future consequences.
Because of the difficulty in calculating the impact of long-term sequelae
upon the health care system, they are seldom considered when determining
the full impact of foodborne diseases. Long-term chronic effects are also over-
looked simply because the data on them are not systematically collected and,
as a result, it is difficult to link them directly to an originating cause. In fact, the
significance of long-term sequelae is only beginning to be considered more
comprehensively and the conclusions indicate that they can be very serious.
Foodborne diseases have been implicated in many subsequent health disorders
(Bula et al., 1995; Smith, 1995; Stanley, 1996). Long-term chronic sequelae
can destroy an individual’s morale and quality of life and often result in measur-
able changes in personality.
110 C. Dennis et al.
In developing countries food safety has some specific implications beyond
those listed above. Populations in these countries are particularly at risk because
they do not have adequate supplies of safe water, appropriate waste disposal
systems and access to refrigeration. Their low incomes preclude paying the
extra cost involved in reducing food safety risks and countries may have only
limited capacity to control the safety of foods. It is quite obvious that most
efforts should be directed at avoiding the entrance of contamination sources
into the food chain. In the second place, small-scale food industries and house-
holds should be advised on the critical points involving food safety risks during
manufacturing or food preparation at home. Even a traditional technology like
fermentation that normally contributes to food safety in developing countries
where refrigeration is not available needs the implementation of a hazard anal-
ysis and critical control points (HACCP) system (Motarjemi, 2002).
There are some technological options that reduce the risk of contaminated
foods. Irradiation is particularly suited to inactivate pathogens and parasites
from fresh and dry foods, but its use depends on consumers’ perception of
irradiated foods. Other technologies are actively being explored for food decon-
tamination, among them ozone treatment, pulsed and UV light and the use of
electrolysed water. Physical, chemical or microbiological technologies can be
used to detoxify grain and oilseed cakes by destroying, modifying or absorbing
the mycotoxins so as to reduce or eliminate their toxic effects.
The application of appropriate technologies must be accompanied by
good management and good hygiene practice along the supply chain as pre-
requisites to an appropriate HACCP and traceability system. These, together
with training and education of personnel, provide the essential components of
a food safety management system (see Figure 7). The extent of such a system
and its degree of complexity will depend on the size and complexity of the
operation in question. However, the basic principles must be applied in all
sizes of operation, whether relating to food retailing or the food service or
catering sector.
Increased concern about food safety will affect developing countries in two
major aspects. First, their exports will be exposed to increasingly demanding
food safety standards from Codex Alimentarius and by unilateral requests from
individual importers. Second, attitudes and standards in vogue in the developed
world will spill over to the local market (Pinstrup-Andersen, 2000). A new form
of protectionism may arise in which the high quality and safety standards
imposed by importing countries may not be accommodated rapidly by local
production technologies or guaranteed by local analytical capabilities, leading
to an increased level of rejections at the entry ports.
Developing countries exporting fish and shellfish, as well as fresh fruits and
vegetables, are likely to experience a more stringent inspection at the entry
ports due to negative episodes involving food safety. For example, consumers
in the USA have expressed their concerns over the fact that currently the FDA
only inspects 1.2% of all imported seafood, which means that large quantities
of contaminated products may be reaching the supermarket. Moreover, even if
the problem regarding the safety of an imported food has been overcome, the
credibility of the exporting country to produce safe food may be at stake, thus
Technologies Shaping the Future 111
affecting the volume of its food exports. For this reason alone, developing
countries should consider implementing or strengthening their foodborne dis-
ease control, investigation and surveillance systems.
Sustainability
Historically, the concern for the environment was not a matter of great appeal
in the pursuit of economic gain. Throughout the centuries, large areas of the
globe were laid waste as a result of mismanagement of resources. During the
latter half of the 20th century, it became increasingly apparent that the earth
was rapidly running out of the ability to support its burgeoning population.
Following the UN World Commission on Environment and Development in
1987, the concept of sustainable development, the employment of socio-
ecological processes that match the realization of human needs while at the
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112 C. Dennis et al.
same time preserving the quality of the global environment, became a generally
accepted understanding.
The current status of economic development among countries was not the
result of this view of sustainability. Natural resources, often usurped from other
less powerful countries, were callously exploited and the environment boldly
compromised in the rush to develop wealth. In some parts of the world this
abuse is still taking place. Indeed, it is difficult for those that have not yet
achieved an adequate level of economic development to accept the notion that
global concerns for the environment will have to be respected, even though
they may serve as a short-term constraint to growth. It makes it that much
more challenging for developing countries to create an enabling environment
and promulgate policies that will support the entrepreneurial sector.
The term sustainability also reflects a business concept related to the main-
tenance of a competitive position. The phrase ‘Sustainable Competitive
Advantage’ or SCA was coined in 1985 by Michael Porter (Porter, 1985) and
addressed as a potential strategy for the agro-industrial sector in developing
countries development by FAO in 1986. The goal of SCA is to have entrepre-
neurs develop unique value-creation strategies that separate them from the
competition. When first discussed in the context of agro-industries for develop-
ing countries, a number of constraints were readily apparent. Government
policies seldom introduced incentives for entrepreneurial creativity. On the
contrary, most policies stifled creativity. Very little effort went into coordinating
agricultural production with agro-industrial processing; indeed, in most coun-
tries, the Ministries of Agriculture and Industry were competing agencies with
very little interaction. Agro-industrial processors had little access to markets
and competitive raw material resources. Within most developing countries and
generally within the United Nations agencies, the overriding attitude was that it
was the goal of agro-industry to serve the farmers of the developing world,
despite the fact that, as a separate sector in the developed world, agro-industry
far outstripped agriculture in terms of economic output and employment.
Thus, two different concepts of sustainability are at work in the creation of
policies in support of the agro-industrial sector in developing countries: one,
which manages access to raw materials and imposes controls upon unsuitable
processing practices, in order to maintain the integrity of the environment and
protect natural resources; and another, which requires an understanding of the
competitive nature of the agro-industrial sector and the unique role of the entre-
preneur. New technologies and new trade paradigms have a tendency to level
the playing field – after that it is up to the players. Rational policies, a consistent
approach and an enabling environment are what entrepreneurs require to com-
pete successfully and be sustainable.
Competitiveness
Much has changed in the last 15 years. The globalization of the economy and
the creation of the WTO have subjected small entrepreneurs to vastly greater
markets that are becoming more visible and accessible. The wealthy developed
Technologies Shaping the Future 113
markets are becoming more aware of processed goods available from develop-
ing countries. To supplement this, the growing sensitivity of consumers is moti-
vating them to purchase products they perceive to be compatible with the
classical concepts of social responsibility and environmental sustainability. This
enhanced form of consumption is a large and growing sector. It includes high-
quality commodities, such as selected or organic produce, value-added conveni-
ence foods, fair trade and environmentally responsive (e.g. bird-sensitive,
shade-grown) products. Technologies such as irradiation are permitting exotic
fruits and vegetables to travel much greater distances to reach profitable markets
than they have in the past.
In light of these new developments, the more traditional ideas of competi-
tiveness, such as economies of scale, may have to be reconsidered. Our con-
cept of the comparative ability of an entrepreneur to sell and supply goods or
services to a given market must consider how rapidly these markets are chang-
ing as well as how crucial changes to technologies have flattened the world and
levelled the playing field for entrepreneurs. This is particularly the case for
niche markets such as for organic foods.
One of the best indicators of how successful organic foods have been is
that they have gone way beyond foods for human consumption and can now
be found everywhere – even in the pet food markets. These types of pur-
chasing patterns are all based on the notion that people want to express
their individuality and there is no better way to do this than to indulge their
specific tastes in foods and beverages. People also want to live a longer and
better life and are suspicious of factory foods that contain many additives,
even if their governments vouch for the safety of these foods. Of course, this
is bad news for large processors, because their business depends on cost-
effectiveness of food production, which, in turn, is the result of efficiencies
obtained through large volume production. Large volume production, on the
other hand, is not very suitable for an individual’s specific preferences,
which, of course, are better served by small operators. Historically, France
and Italy have always been known as countries where you can find the best
foods. It is not by chance that large multinational food companies are not
nearly as popular on those markets as the thousands of domestic smaller
manufacturers.
Twenty years ago, the number of different producers of juices and wines in
the USA was quite limited. These days, that landscape has changed dramat-
ically. Literally dozens of different organic juice manufacturers (including several
local ones) are selling to supermarkets, and hundreds of new small-scale winer-
ies are serving the desires of consumers – not to mention the multiplicity of
imported wines from small foreign operations.
Our current understanding of nutrition recommends that we consume
between 5 and 10 servings of fruits and vegetables per day. Although, there is
usually a variety of fruits and vegetables available from local agriculture, con-
sumers are broadening their horizons in the search for alternatives to conven-
tional fruits such as apples, pears, peaches and bananas. The phenomenal
growth in the market for mangoes is an excellent example of this. It is very
likely that we will see the same thing in markets for many other tropical fruits.
114 C. Dennis et al.
And tropical fruits are not limited to the fresh varieties. Preserved fruits, by can-
ning, by infusion with sugar or by drying, are also niche markets to look for-
ward to. These products do not necessarily go only to individual consumers, but
also to small manufacturers who want to include them as exotic ingredients in
their baked goods or mixed cereal products. These changes are providing
small-scale entrepreneurs in developing countries an ability to compete with far
greater effectiveness than they have ever experienced before.
Technologies fostering agro-industrial development
The importance of technologies discussed in Section 3 is that they add value to
raw materials or existing products. The value added may vary from incremental
(e.g. a better package) to a radical change in production technology (e.g. a
nano-based product). This is relevant in the sense that the impact of techno-
logies should not be judged by the sophistication involved but by its relevance
to better match the needs imposed by the final markets. Based on targets
depicted in Figure 6, some major technology-based events that are likely to
have a future impact on policies that foster agro-industrial development are
presented in Table 1.
Conditions for successful adoption of food technologies
Technologies are not applied in vacuo; they are implemented by private
entrepreneurs that sense a stable and propitious environment for their long-
term investments. Under favourable conditions, the time frame in which the
impact of food technologies can be fully realized may be only 10–15 years.
For example, the Chilean salmon industry evolved from a quasi-artisan indus-
try in the early 1990s to a world-class player in only 15 years; exports of
farmed salmon in 2006 were US$ 2200 million. This figure represents one-
half to one-third of the gross national income of three countries in the region.
The role of governments in providing the human technical resources and the
adequate regulatory framework must not be underestimated. There are other
issues that also affect the adoption of technology, such as the support by
equipment manufacturers and the availability of local technical personnel to
implement and run the technology. In low-income and emerging countries
the government can play a crucial role in providing support for new adopters
of a technology.
In general, food policies as applied to technology tend to provide an
enabling environment for food-processing entrepreneurs, create fiscal incen-
tives for innovation, supply the necessary infrastructure for entrepreneurship
and promote the adequate backward (e.g. financial support to SMEs, risk
capital and information about future markets) and forward linkages (e.g. inter-
national promotion, ‘ country’ brand).
The direct access to markets through information and communication
technologies is probably the most important new development in recent history
Technologies Shaping the Future 115
Table 1. Technical implications for policy to foster agro-industrial development based on the
identified technological trends.
Trends Technical implications
Need for more foods, driven
by rising incomes
Reduction of postharvest losses by improved storage
and better marketing channels
Adoption of processing technologies that foster the
supply of processed raw materials
Demand for high-quality
and safe foods
Adoption of novel technologies that preserve freshness
and supply better taste and flavour
Critical evaluation of emerging preservation
technologies as to their equivalent effectiveness
compared to proven technologies
Consumption of internationally
traded foods
Development of appropriate traceability systems based
on information technologies (ITs)
Adoption of non-destructive inspection technologies for
quality control
Creation or strengthening of a regulatory framework
attuned with international agencies
Foods for health and well-being Design foods for the gut (e.g. functional foods) and the
brain (gastronomy)
Select processing technologies that preserve nutrients,
secure functionality and provide a high bioavailability
Increased markets for
organic products
Adoption of organic production systems and presence
of reliable certification organizations
Adapt preservation processes and packages that
are non-invasive and replace synthetic additives by
natural ones
Exports of value-added
products
Develop human resources, technical infrastructure and
technology transfer capabilities
Build infrastructure and distribution chains for
refrigerated and frozen products
Cater to niches that require specific processed products
(fresh and dried exotic fruits, etc.); strengthen quality
management capacity
Environmental concerns Strengthening of integrated management systems
Adoption of life cycle assessment as evaluation criterion
of impact of processing technologies
Globalization of market
information by the Internet
Widen access to wireless communication technologies
in rural areas and improve command of foreign
languages at school level
Knowledge-based food
industries and biorefineries
Strengthen the Science and Technology base at
universities and national research institutes
Apply advances in biotechnology and keep abreast of
developments in nanotechnologies
116 C. Dennis et al.
for entrepreneurs. However, the potential to capitalize on this will largely be
dependent upon the economic policies that are or are not in place. Government
policies may be based upon a number of realities and business principles:
?
No technology (processing or information/communications) will flourish in
an economic environment not prepared to support it.
?
It is the entrepreneur who takes the greatest risk and should receive the
greatest reward if profits are achieved.
?
It is a very competitive world and, in anticipation of an initial, non-profita-
ble period, policy support has to endure a certain amount of ‘staying’
power (often up to 5 years) until profits start to flow. Grace periods in
loans, for instance, can be made to address this issue.
?
The entrepreneur’s chief task is to make a profit – everything else is sec-
ondary to that goal.
?
Policies in support of successful entrepreneurs will have the consequent
benefit of generating employment and collecting taxes that can be put to
social use.
Policy makers in developing countries interested in fostering entrance into food
export markets should be aware that competing in these markets requires the
use of production technologies that are of the same standard as those issued in
the receiving (usually high-income) countries. To become and stay as major
players in export markets, technological policies should address also the follow-
ing complementary issues:
?
Availability of well-trained local technical personnel with command of inter-
nationally spoken languages to run the production and processing aspects,
as well as marketing operations. This imposes added competences to be
built through the educational (technical and university levels) and continu-
ing education system.
?
A basic science and technology and innovation system that provides sup-
port to the local industry and promotes the entrance of new small and
medium entrepreneurs into the business. This local talent is at present
most probably located in universities and government research institutes.
Specialized centres for adaptation, demonstration and transfer of techno-
logies in areas with validated market potential will have to be implemented
and sustained through time for the support of small and medium agro-
industries (as is now the case with agricultural research units).
?
Geographical associations in the form of interconnected technology clus-
ters where suppliers, food processors, government agencies and institu-
tions such as universities, research centres and trade associations merge to
empower the innovation process.
?
A basic infrastructure for roads, ports and connectivity (communications)
that links producers and consumers inside the country and across the
globe.
?
A central regulatory food authority that protects consumers’ interests
locally and abroad and assures that food produced and exported meets the
highest standards of food safety and hygiene.
Technologies Shaping the Future 117
Just as agro-industrial entrepreneurs are forced to operate in a competitive
environment, so must farmers and all actors along food chains be forced to do
so. Farmers have to be prepared to provide agro-industry with the right prod-
uct at the right time at the right price. In order for farmers to get a better
understanding of the risks and benefits of today’s access to expanded markets,
cooperative and partnership systems and arrangements between themselves
and processors should be encouraged. This will allow for a more coordinated
supply chain and will greatly increase overall competitiveness.
Because of the competitive nature of international trade, it is critical that
governments take part in and send their most qualified people as negotiators
to international fora such as the Codex Alimentarius Commission. Although
these meetings generally revolve around technical matters such as standards
and analysis, because of the litigious nature of the proceedings and the implica-
tions for fairer trade, consideration must be given to representation by highly
trained negotiators and well-briefed legal people who understand the long-term
significance of trade standards for their country. The subject of these meetings
may be technical, but the consequences are definitely economic.
At the present time, the opportunities for developing country entrepre-
neurs to effectively compete in international agro-industrial trade are greater
than ever. The spirit of entrepreneurship is alive and vibrant in developing
countries. The use of modern scientific and information technologies
accompanied by the supportive policies and instruments that will create an
enabling environment will allow this spirit to flourish and benefit everyone
in the country.
Conclusions
As observed in the initial section of this chapter, changes are taking place in the
nature of food demand and in the socio-demographics that drive them. To face
this changing world, we have developed an extraordinary set of new techno-
logies that have the potential to produce food when it has never been produced
before and in greater quantities than hitherto imagined. With little vision, one
can picture the genetic manipulation of plants in order to grow them on previ-
ously non-arable land and under hydroponic conditions with quantum increase
in quality and output. Likewise, our output of meat and fish has increased dra-
matically due to new management systems. Global warming must be moni-
tored with extreme precision and is dramatically injuring many countries.
International information exchange has developed to an extent that we can
truly say we live in a global village. Political divisions will become less and less
significant, as people from all parts of the world become empowered with the
ability to communicate directly with one another. We are on the cusp of a revo-
lution in the global movement of goods and services that would have been
impossible to imagine a decade ago.
With reference to the movement of food, technologies and systems with the
ability to support extended distribution chains will become increasingly impor-
tant. Ready access to foods from around the world will have consequences
118 C. Dennis et al.
for the dietary patterns of all individuals. As we have seen, together with the
movement of goods and people, there is a distinct possibility of creating pan-
demics through the parallel movement of infectious diseases. This makes the
promulgation and implementation of internationally harmonized high-quality
standards imperative, such as those of the Codex Alimentarius.
For those countries whose economies allow consumers to think beyond the
cost of food, they often incorporate social, ethical and environmental dimen-
sions into their choices. These supra-economic dimensions of food may vary in
different countries. While increasing global interactions may, in time, bring a
certain degree of harmonization to these dimensions, they do provide an
opportunity for producers and processors to fill specific market niches.
As more and more developed country economies move from a manufac-
turing to a service economy, food processing will relocate to transition and
rapidly emerging developing countries. Food-processing entrepreneurs in
developing countries will gain greater access to both niche and mainstream
markets. In both cases this will require the growth of a regulatory and distribu-
tion environment that can deliver product of the desired quality, on time and at
the right price. This will require considerable investment for the development
of production and distribution infrastructure along with the training of techni-
cians, managers and regulators.
The international movement of goods necessitates significantly greater
attention to food safety. While the SPS and TBT Agreements are predicated
upon science-based international standards, individual countries may opt for
differing levels of protection depending on their particular requirements.
However, because so many goods will be entering the flows of international
trade, harmonization of science-based safety standards is likely to take place.
This will have a profound impact upon food production and processing policies
and practices, as well as on the technical and managerial training required to
carry them out.
Future food production will face increasing challenges from a number of
seemingly contradictory imperatives. The first is the need to produce more
food with assured safety and increasing consumer appeal. However, this has to
be accomplished in an atmosphere of increasing responsibility for maintaining
the environment for future generations. All production must be sustainable, so
the former freedom to use pesticides and fertilizers with little concern for the
environment has been significantly curtailed. On top of that there are growing
markets for products that no longer reflect the efficiencies of mass production.
Thus organic, bird-safe, dolphin-safe and fair trade products are making major
gains in high-end markets.
This will lead to a two-tiered food production system. It may allow smaller
entrepreneurs, who do not have the capital to invest in large-scale production,
to compete effectively on a smaller scale.
Regardless of the scale of agriculture employed, the environment will play
an increasingly critical role in production. Global warming may result in changes
to water availability, which will require adjustments in agricultural technology as
well as broadening the scale of desalination to include impaired ground waters
in addition to sea water. This latter technology will require the development of
Technologies Shaping the Future 119
alternative energy sources, such as osmotic pressure power generation. The
importance of agricultural waste management will favour the development of
production systems that are least burdensome to the environment.
There is little doubt that biotechnology will become a major contributor to
future production and processing technologies. The technology will not only
focus on improving quantitative outputs, but will also be put to work to produce
crops with higher levels of beneficial nutrients, such as antioxidants that are
able to withstand longer distribution chains and harsh processing conditions.
Our knowledge of human genetics and nutrition continues to make funda-
mental contributions to improved health and disease prevention. The simulta-
neous analysis of genetic make-up and nutrient need will result in foods designed
to meet a wider range of products focused upon health and well-being. Advances
in the disciplines of genomics, proteomics, bioinformatics, nutritional dynamics
and the nanosciences will be incorporated in foods that meet the individualized
needs of people with specific genetic make-ups, occupational and lifestyle
choices and stages in life. The technologies that will shape the future of the
agriculture, fisheries and food sectors will provide greater safety, be more
socially and environmentally responsible, provide the elements of better health
and maintain a higher quality of the products’ extended lifespan than any pre-
ceding goods.
Among the food technologies that are expected to play a major role in the
future of food processing will be preservation techniques based upon steriliza-
tion and pasteurization; non-thermal technologies, such as irradiation and
ultra-high-pressure processing; technologies that control water activity includ-
ing microwave and freeze-drying, hurdle technologies and minimal processing;
those based upon the extraction and isolation of specific food components,
such as antioxidants, flavours, specialized lipids and other functional ingredi-
ents. Agricultural products may be bioengineered to produce large outputs of
these specific materials and modern extractive technologies, such as supercriti-
cal extraction, will be employed to yield healthier, higher-quality products with
a reduced negative impact on the environment.
Texture, mouthfeel and friability are among the sensations most evident
to consumers. Optimizing these characteristics requires technologies designed to
ensure specific food structures at all stages of production and in the finished
product throughout its life cycle. Advancements in emulsification and gelation
will utilize complex interactions of proteins, lipids, carbohydrates and water to
develop flow, viscosity, tensile strength and plasticity to arrive at the most
appealing textures.
Reduced barriers to trade have opened the way to much longer distribution
chains requiring products that will maintain safe hygienic quality for longer
periods and will meet all the sanitary and phytosanitary needs of importing
countries. The traditional technologies of heat treatment will be supplemented
by cold processing methods such as ultra-high-pressure processing and ionizing
radiation, both of which are capable of producing products of the highest qual-
ity. These technologies will become increasingly important as the recognition
for the need to significantly increase our consumption of fruits and vegetables
becomes more apparent.
120 C. Dennis et al.
In order to meet future demands for longer shelf life, food will be main-
tained in optimum condition through developments in packaging materials and
in modifications to the atmosphere immediately surrounding the products.
While the technology itself is not new, there have been recent developments
that have resulted in significant improvements in reducing microbial spoilage,
as well as detrimental enzyme and chemical activities. Different combinations
of oxygen, carbon dioxide, nitrogen and ethylene at differing levels of humidity
are used to alter package atmospheres.
More recently, research has focused upon employing various types of
packaging materials to be active, intelligent or interactive in atmosphere man-
agement. Such packaging can enhance the quality or safety and impart desir-
able characteristics to the food by altering atmosphere permeability through
sensing and response to changes in the ambient environment.
As food products become increasingly focused on providing health and
well-being, additional dimensions to the traditional food chain must be consid-
ered. As knowledge of the complex interactions of digestion develops, we will
gain a more comprehensive view of the whole diet. The interactions between
various nutrients, the role of various fibres in governing bioavailability and mod-
erating water balance between the gut and the renal system, and the contribu-
tion of essential micronutrients by intestinal micro-organisms will all factor into
future understanding of nutrition.
Product and technology selection will, to a large extent, be an extension of
a country’s agronomic potential coupled with the state of its economic develop-
ment. For less-developed countries, the focus will remain upon establishing a
functional and efficient food chain, largely to serve local and national needs. As
development and potential increase, more advanced technologies and distribu-
tion systems will be employed.
In order to support the successful growth of food industries, policy mak-
ers will have to provide entrepreneurs with an enabling environment. Where
possible, infrastructure development, encouragement of cross-chain busi-
ness linkages and economic incentives should be established to stimulate
growth. A food science and technology innovation system based upon a
country’s natural endowments and potential competitive advantage must be
supported along with a regulatory food authority to protect the interests of
consumers and to assist national entrepreneurs in gaining access to interna-
tional markets.
Industrial development policy should not add to the risk of entrepreneurs,
but encourage the application of sound, proven methods for the production of
useful goods. It is important to consider sustainability in context and carefully
adjust its significance within the hierarchy of imperatives weighted to achieve
rational and successful industrial development. The globalization of the econ-
omy and the creation of the WTO have provided entrepreneurs vastly greater
markets. In light of these new developments, policies must support entrepre-
neurial competitiveness in rapidly changing markets.
While we have seen the great cache of physical, chemical and biological
technologies available to entrepreneurs for the production and processing of
foods, perhaps the greatest tool available to them is the explosion of informa-
tion and communication technologies. While food-processing technology has
Technologies Shaping the Future 121
empowered entrepreneurs to produce products of higher quality, convenience
and market potential, information and communication technology has pro-
vided the direct access and connections to promote and sell them.
For the first time, entrepreneurs in developing countries have a very strong
potential to access international markets with an unprecedented degree of
independence. However, the potential to capitalize on this will largely be con-
tingent upon the economic policies that are in place. Such policies must pro-
vide strong support to the country’s entrepreneurial base. When properly
implemented, these policies will have the consequent benefit of generating
employment and general economic development, which all will benefit from.
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Annex 1: Food Processing and Preservation Technologies Shaping the Future.
Preservation technologies. Food preservation technologies delivering products that are microbiologically safe and of high quality over their
defined shelf life will continue to be of the utmost importance. Several non-thermal technologies hold this promise, particularly those in which
preservation effects are delivered through ‘transparent’ packaging. To achieve superior products, reduced costs and increased energy
efficiency, often more than one preservation method (e.g. combination technologies) will need to be applied. Environmental effects,
convenience and safety issues will add increasing demands on packaged products.
Heat pasteurization and sterilization of foods
Technologies Current status Potential developments and factors
Thermal processing:
Microbial load reduction is
affected by thermal action
(Holdworth and
Simpson, 2008)
Canned foods enjoy an excellent record
as affordable, convenient and safe. UHT-sterilized
liquid foods delivered in laminated carton
packaging are well established around the world
Canning continues to be exposed to public
scrutiny due to energy and environmental
considerations. Expansion of HTST
alternatives for better quality and nutrient
retention. Developments in retort systems to
increase container agitation for increased
heat transfer and reduced processing times
Retortable pouches: Use of
flexible Al foil/plastic laminates
instead of tin cans
Technology has been around for 4 decades
as an alternative to canning with minor
commercial impact. The reduced heating
time due to the slender profile results in
better-quality sterilized foods
New laminates, higher capacity production
lines and improved seal reliability are
required. Lighter weight should save energy
during transport
Aseptic processing: Sterile
product filled under aseptic
conditions
Presently mostly limited to sterilization of liquid
foods, including those containing food particles.
Aseptic bulk storage and transport are important
technologies in international trade
Extension to semi-solid foods by new heating
technologies. Increased use of lighter weight
and less-expensive packaging. Improved
heat exchanger design to increase process
efficiency and save energy
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Non-thermal technologies for pasteurization and sterilization of foods
Technologies Current status Potential developments and factors
Ionizing radiation (IR): Effect
caused by a highly penetrating
form of energy that damages
DNA of cells
Technology established and legal in many countries.
Widely used for disinfection of dried produce
(e.g. spices) and prevention of sprouting/
disinfection. Recent applications include
checking of emerging pathogens (Farkas, 2006).
Limited acceptability in supermarket foods
Applications to eliminate infectious food
pathogens and parasites and to extend the
shelf life of many perishable foods will
depend on risk assessment by regulatory
agencies and consumer attitudes towards IR
Ultra-high pressure (UHP):
Subjecting packaged foods to
pressures up to 800 MPa
Texture, flavour and nutrient retention of
UHP foods is normally better that those
of thermally processed products. Used
commercially in a few niches for
pasteurization (juices, guacamole,
oysters) due to high costs
UHP processing of a wider range of products
will depend on the reduction of capital costs,
and more efficient continuous systems. UHP
sterilization is expected (Master et al., 2004).
New packaging materials needed
Pulsed electric fields (PEF):
High-voltage pulses induce
membrane breakdown
in cells
Demonstrated mainly to inactivate food-poisoning
micro-organisms in liquid foods. Commercial
application of PEF for juices with superior flavour
quality reported recently (Clark, 2006)
Applied for pasteurization of liquid foods,
providing adequate safety and improved
quality
Pulsed light (PL): Use of short
pulses rich in UV-C light
Lethal photochemical effects on micro-organisms
known for decades. Only two companies are
presently producing PL disinfection systems
(Gomez-López et al., 2007)
Role in substitution of chemical disinfectants
that may be harmful to humans and cause
ecological problems. Used for surface
decontamination, potential for application to
packaging. Problems to be solved: heating
spots and effects on nutrients
Biological preservation: Use of
bacterial metabolites
Food-grade bacteriocins proven to inhibit many
pathogenic and spoilage micro-organisms
(e.g. in minimally processed foods)
New ‘natural’ bacteriocins are approved.
Applications for short-term preservation
(e.g. raw milk in less developing
countries – LDCs), or pasteurization if
followed by thermal or other non-thermal
treatment
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Annex 1: Continued.
Technologies that control water activity. Control of the water activity of foods has been widely practised as a means of stabilizing raw
materials and processed products that are stored under ambient conditions. Dried products and ingredients are a food category on their own
(e.g. baked and pasta products, dried fruits, instant powders, spices). Since heating for water removal requires energy and alters quality,
milder alternative methods have been developed. A range of products are stabilized at intermediate moisture contents by control of the water
activity via partial water removal, addition of solutes (sugar or salt), adjustment of pH and/or addition of preservatives.
Technologies Current status Potential developments
Dehydration: Means of
preserving food in a stable and
safe condition by drastically
reducing the water activity
Widely used technology spanning from sun-drying
to controlled, cabinet-drying. Applied to a wide
range of foods. Extensively used in LDCs to
process local fruits, vegetables, fish and meat
Improvements in drying technologies for
energy savings (Strumillo, 2006).
High-quality drying, a major alternative
for SMEs in LDCs to add value to raw
materials. Growth in demand for
high-quality dehydrated fruits and
vegetables (Zhang et al., 2006)
Spray drying: Transforming a
liquid feed into a dry
free-flowing powder using
hot air
Still unchallenged drying technology for liquid foods
(milk, extracts) resulting in many convenient
products (Barbosa-Cánovas and Vega-Mercado,
1996)
Applications in the natural extracts and
functional food industries are likely to
increase. Alternative for encapsulation
of valuable ingredients. Appropriate for
SMEs in LDCs
Freeze-drying (FD): Removing
water from the frozen state
(ice) under vacuum
Recognized as the best drying technology for
high-quality food products and preservation of
cell viability (e.g. drying of probiotics). Process is
slow, energy demanding and expensive
New niches for premium dried foods with better
colour and flavour, particularly fruits
and vegetables (e.g. use in breakfast
cereals, gourmet soups). Developments in
low vacuum (atmospheric) FD
Microwave drying: Focusing
energy directly into the interior
of the products
Already used in a number of non-food industries,
provides shortened drying times, reduced costs
and high product quality. Successfully adopted
for drying of pasta products
Applications in food industries that require
short drying times and higher throughput
at the expense of higher capital and
energy costs
Other drying methods Novel forms of drying, such as the use of
radio-frequency, super-heated steam and heat
pump drying, are actively being investigated
Improved drying technologies (hybrid
technologies) for energy savings and better
quality foods with higher market value
(Chua and Chou, 2005)
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Osmotic dehydration: Use of
concentrated solutions to
remove significant amounts
of water
Extensively researched in the past 2 decades, yet
few industrial applications (restricted to fruit
pieces) (Raoult-Wack, 1994). Suggested as a
pre-drying step for fruits (using sugar solutions)
and vegetables
Attractive low-tech method but requires proper
handling of waste solutions. Overall energy
efficiency and environmental impact need
evaluation. Impregnation of nutrients and
flavours
Concentration: Partial removal
of water from liquid foods by
evaporation
Well-established technology as a cost-effective
pre-drying step in dehydration of liquid foods.
Utilized for bulk transport of frozen concentrated
juices
Alternatives to evaporation may find increased
applications in high-quality foods with
improved aroma and flavour. Examples:
freeze-concentration, pervaporation
Hurdle technologies:
Combination of several
preservation factors at
low levels
Traditional preservation technologies that yield
ambient-stable, intermediate moisture fruits,
processed meats and dairy products (Leistner
and Gould, 2002)
Possibilities for novel products using mild
heating technologies and ‘natural’ preserva-
tives (spices or herbs). Pre-processing
alternative for bulk storage of fruits and
vegetables in LDCs
Minimal processing (MP)
technologies: Shelf-stable
fresh foods with minor changes
in freshness
Minimal processing technologies for fruits and
vegetables may include a washing/disinfection
step followed by addition of inhibitors of adverse
reactions and modified atmosphere packaging
(Ahvenainen, 2000; Artes and Allende, 2005)
Favoured by increased demand for fresh-like
fruits and vegetables for healthy nutrition,
convenience and quality. Alternative disin-
fectants (antioxidants, ozone, irradiation,
organic acids, etc.) and packaging options
come into scene (Rico et al., 2007)
Heating/cooling/freezing. Heating technologies are increasingly aimed at delivering energy directly into the product. Fast removal of latent
(freezing) and sensible heat from products after thermal processing on the spot (chilling) or after harvest or capture (e.g. aquatic foods) is
receiving increased attention, may require use of sustainable energy alternatives. As is the case of other preservation methods, major
impacts on food quality and safety are expected when several of these technologies become integrated simultaneously or sequentially into
processing lines.
Technologies Current status Potential developments
Microwave (MW) heating:
MWs penetrate within a food,
heating the interior more
rapidly
Applications already extensive in home appliances.
Although moderately used industrially (e.g. in
food tempering) MW volumetric heating often
provides a higher quality product, increased
production rates and energy savings that may
offset higher capital costs
Combination of MW and conventional heating
will become increasingly important for
energy- and time-consuming processes
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Annex 1: Continued.
Ohmic (OH), infrared (IR) and
radio-frequency heating
These and other heating technologies have been
investigated for sterilization/pasteurization,
drying, roasting, etc. Some are implemented on
a commercial scale: IR heating in Japan (Sakai
and Hanzawa, 1994) and OH for sterilization of
particulate food products
Consolidation of emerging heating
technologies is expected. Most of them
provide superior quality foods in specific
applications (e.g. pasteurization of viscous
products). High potential in combination with
other heating methods (e.g. drying)
Vacuum cooling (VC) Vacuum (evaporative) cooling is presently used
mostly for fast pre-cooling of horticultural
products to promote extension of shelf life and
improvement of product quality and safety
Integration of VC to processing of other foods
(e.g. ready meals) to improve safety is
attractive, but requires assessment of
possible adverse effects on product quality
(Zheng and Sun, 2004)
Chilling: Rapid lowering of the
temperature of foods to less
than 8°C
Applications range from raw materials (fruits/
vegetables, fish, meat) to prepared foods
(e.g. sous-vide). High-quality, convenient chilled
prepared foods are growing at the expense of the
frozen food category. Chilled products require
delicate temperature control
New systems engineered for fast cooling of
produce and fish (e.g. slurry ice systems)
likely to find applications for export markets.
Need improved logistics for temperature
control throughout the distribution chain
Freezing: Drastic reduction of
temperature below ?18°C with
conversion of water into ice
Frozen products are amply recognized as healthy,
safe and convenient. Growth in some segments
(seafood, IQF berries) is offset by decline in
others (ready meals). Market opportunities arise
in LDCs as incomes increase and distribution
networks of frozen foods become available
Opportunities for SMEs in high growth seg-
ments of frozen fruits (e.g. berries) and
vegetables. Faster freezing rates for higher
quality using cryogenic fluids. Pressure-
freezing appears attractive for high-quality
(but expensive) frozen foods (Sanz and
Otero, 2005)
Separation and Ingredients Technologies. Several processes are used to release valuable components from raw materials, separate them
from the original matrix and produce concentrated/purified products in an appropriate form (concentrates or powders). Small- and medium-
size industries in LDCs have a major opportunity to market extracts of bioactives from lower quality fresh raw materials and by-products for
the functional foods market. Progress in separations science will lead to economically feasible processes that make available refined and
functional food ingredients to replace or complement traditional raw materials.
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Separation technologies
Technologies Current status Potential developments
Pre-extraction processes:
Controlled disintegration of
cellular tissue for efficient
release of components
Grinding and pressing are conventional
technologies in the sugar, oil and protein
industries as well as in small operations
Prevalence for technologies proving a faster,
more efficient and/or selective release using,
for example, enzymes, ultrasound, HP, MW,
extrusion, PEF (Wang and Weller, 2006)
Extraction processes: Liquid
extraction of solutes from solid
substrates using water or
organic solvents
Conventional technology to face limitations on type
of solvents that can be used to extract foods and
contents of residual solvents
Use of aqueous solvents (e.g. water/ethanol) in
oil extraction, applications of membrane
technology to recover water or other
solvents; more efficient use of solvents
Supercritical extraction (SCE):
Extraction with compressed
gases having high diffusivity
and solvent capacity
Interest in SCE using carbon dioxide for safety and
processing (fractionation). Presently used to
decaffeinate coffee and tea, and in the extraction
of hops. High capital costs involved
Superior quality flavours, spices and essential
oils by SCE have been extensively studied
and some products are in the market
(Brunner, 2005). Potential exists for the
isolation of natural preservatives (Reglero
et al., 2005). Other applications in
detoxification
Membrane separation (MS):
Use of porous membranes to
fractionate food components
Membrane technology (micro-, ultra- and
nanofiltration) already established in many food
industries. Ample availability of membranes
(e.g. pore sizes) and absence of heating provide
unique opportunities for fractionation
Larger demand for more convenient and
purified functional ingredients (e.g. fraction-
ated whey proteins) (Kulozik, 2008). More
stringent regulation for cleaner effluents from
processing plants
Chromatography: Separation at
molecular level by affinity
or size
A powerful separation technique already used at
large scale to separate glucose from fructose
Novel and cheaper sorbent materials could
greatly advance applications of chromato-
graphic separations in the food industry
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Annex 1: Continued.
Ingredients technologies
Technologies Current status Potential developments
Product technologies:
Conventional technologies
leading to food extracts
Extracts are convenient, standardized and
concentrated forms of ingredients. Conventional
technologies for production of concentrates and
dry powders well known around the world. Some
emerging countries have a long tradition of
exporting plant and algal extracts (e.g. India)
Conventional extracts may become valorized
when transformed into high-quality ingredi-
ents. Functional plant extracts and nutraceu-
ticals are in high demand by the prepared
food and cosmetic industries. Market niches
offer added opportunities
Microencapsulation:
Components trapped within an
edible matrix (wall) and
delivered as small particles
Conventional encapsulation (e.g. liquid flavours)
already familiar in the food industry. New
microencapsulation technologies provide
chemical protection and functionality to valuable
compounds (e.g. a liquid flavour) and to
beneficial bacterial cells (e.g. probiotics)
(Holmgren, 2006)
Microencapsulation technology advances at
fast pace in designing encapsulating
matrices (solid or liquid) for specific types of
fat-soluble, water-soluble compounds and
bioactives. Use in tailoring nutrient delivery
systems (Augustin and Sanguansri, 2008)
Transformation (Conversion) and Structuring Technologies. The bulk of the processed foods industry involves transformation and
structuring of food components during the production process. Dairy products, baked goods, processed meats, snacks, sauces and
dressings, among others, are structured products. This is the most important category of processed foods in terms of the size of the industry
(Bruin and Jongen, 2003).
Technologies Current status Potential developments
Emulsification: Dispersing
immiscible phases as fine
droplets within a continuous
phase
Many structured foods are emulsions formed by
mechanical shearing devices such as high-speed
agitators and homogenizers (e.g. mayonnaise,
salad dressings, etc.)
Membrane emulsification may find increased
application to form stable emulsions with
lower energy consumption and less use of
surfactants
Extrusion: Use of a screw
extruder to continuously cook,
pasteurize and shape starchy
flours and protein meals into
dried products
Established technology around the world.
Advantages are versatility in use, energy
efficiency, high productivity, low operational costs
and absence of wastes and pollutants
Extrusion is likely to increase its importance in
LDCs to produce pre-cooked flours, infant
foods, fish feeds, etc. Applications in SMEs
(e.g. precooking, decontamination, etc.) may
only require low-cost versions of extruders
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Gelation: Trapping abundant
water in semi-solid foods
using hydrocolloids
Gels already important products in the dairy, meat
and fish industries, and in gastronomy. The
source of gelling materials is expanding
Gelation may become important in the design
of new food structures, dietetic foods (e.g.
reduced calorie foods, control of satiety) and
delivery systems
Frying: Immersing food pieces
in hot oil (deep-fat frying) to
impart unique textures and
flavours to foods
Used extensively worldwide in snacks production,
food outlets (including street vendors in LDCs)
and at home. Fried products are high-calorie
foods due to oil absorption during frying
Concern about calorie density, type of fats, the
generation of toxic acrylamides and poly-
meric substances, and interest in preserving
the nutrient content, flavour and colour of
raw materials are likely to change frying
operations (e.g. vacuum frying)
Enzymic processing: Promoting
the action of natural or added
enzymes for process
improvement and product
functionality
Well-understood and extensively used technology
in the dairy, juice, sweeteners, starch and flavour
industries, where enzymic processing has proven
to be cost-effective
Natural and GMO-derived commercial
enzymes for biotransformation of fats,
carbohydrates and proteins. Improved
enzymic reactors for biotransformations,
cross-linking enzymes for food structure
build-up
Micro-engineering: Use of
devices developed for
microtechnologies
Microdevices or arrangements of capillaries or
channels <1 mm that deal with small amounts of
fluids (10
?6
–10
?9
l) are currently only available at
laboratory scale
Microfluidic devices have potential to signifi-
cantly change the fabrication of dispersed
food systems (emulsions and foams)
(Skurtys and Aguilera, 2008). Possible
applications in the design of analytical
devices
Nanotechnologies: Emerging
technologies to manipulate
materials, devices and
products at dimensions in the
order 10–100 nm
Great hopes but so far few products and
applications. Already consumer groups worry
about safety and environmental impact of
nanotech products to be used in foods
If present concerns are overcome food
nanotechnology is likely to have a major
impact in areas such as smart sensors in
packaging, self-cleaning surfaces, encapsu-
lated delivery systems, nanoemulsions and
food nanoparticles (Sanguansri and
Augustin, 2006; Lee et al., 2008)
continued
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Annex 1: Continued.
Packaging technologies. Packaging technologies will aim at providing added protection and information to consumers while reducing the
amount of packaging used, promote recycling and facilitate disposal. Increased use of novel, environmentally friendly materials derived from
natural sources (e.g. bio-based packaging) is expected. Package safety from migrating substances will continue to be of concern. Most
packagers in LDCs are SMEs looking for new technologies offering reliability and lower processing costs.
Technologies Current status Potential developments
Active packaging: Package,
product and the environment
interact to extend shelf life
Several active components already in use (sachets
or ‘in the wall’) to improve safety and sensory
quality (ethylene and O
2
scavengers, antioxidant
and antimicrobial emitters, etc.)
Introduction of novel active components (e.g.
nanoparticles, enzymes, etc.), but should
overcome higher cost, legislative restrictions,
consumer safety and environmental impacts
(Vermeiren et al., 1999; Lopez-Rubio et al.,
2006)
Intelligent packaging:
Packaging detects, senses,
records and provides
information about the contents
(Yam et al., 2005)
Truly ‘intelligent’ packaging still at the concept
level. Often confused with smart packaging
(see below)
Among others, it is expected that packaging
could detect and signal the presence of
microbiological growth in packaged foods
(safety) or aromas (quality)
Smart packaging: Packages
with attached devices that can
store and transmit data
Already in use for logistics (barcodes,
radio-frequency identification devices – RFID)
and consumer information (time–temperature
indicators – TTI)
Need of less-expensive devices for wide use in
traceability, improved logistics and added
convenience (e.g. appliances interacting with
encoded information for food preparation)
Edible barriers and films: Starch,
protein and fat-based barriers
and films that protect products
Emerging alternatives to stabilize some fresh and
processed foods to satisfy consumers’ demands
for longer shelf-life products (Bourlieu et al.,
2008)
Wide-ranging applications (e.g. to prevent
moisture migration and microbial contamina-
tion) in many food categories. Type and
availability of effective films will expand
Modified atmosphere
packaging (MAP): Altering the
gases surrounding a product
or commodity to extend the
storage life
MAP extends shelf life and preserves the high
quality of foodstuffs. Concerns about safety due
to growth of pathogenic bacteria and in quality
due to fermentation
Expected to increase in use since it benefits
consumers (e.g. more stable fresh products)
and provides greater flexibility in production
and within the distribution chain
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New packaging materials:
Mostly related to biodegradable
and bio-based materials
(BBM) and composites
Few commercial BBM for food packaging
(starch- and microbial polymer-based) presently
available. PLA and PHB hampered by cost and
low performance
Future of BBM associated with performance
(barrier), processing and cost. Provide much
lesser environmental impact than plastics.
Nano-biocomposites develop in an uncertain
scenario (Sorrentino et al., 2007)
Storage and distribution technologies. Postharvest losses in developing countries may be reduced by controlling the temperature and/or
moisture of grains, horticultural produce and fish. Transfer of simple technologies, adoption of better practices at farm level and improved
marketing channels are crucial. A major contribution to food authenticity and traceability is expected to come from in-line inspection using
non-destructive, non-invasive spectroscopic and imaging techniques. Efficiency and traceability in distribution systems stimulate use of
robotics and information technologies (ITs).
Technologies Current status Potential developments
Storage systems Conditions for minimizing physical and quality
losses of food raw materials after harvests are
well established
Improved packaging materials and containers.
Underground sealed storage of grains.
Storage under gas atmospheres (nitrogen,
ozone, etc.)
Cold storage and transport:
Transport and storage at
reduced temperature (frozen
and chilled foods)
An established technology in the developed world
that uses a network of storage facilities served by
millions of refrigerated road vehicles (James and
James, 2006)
Developing countries implement the infrastruc-
ture for the refrigerated/frozen food chain
aimed at export markets. Advances in
monitoring in-transit and stored products
by IT
Robotics: Use of robots in the
production and distribution
processes
Robots used in specific production systems
(e.g. confectionery industry), and in areas of
materials handling and secondary/tertiary
packaging operations (Wallin, 1997). Challenge
in delicate nature of many food materials
Holds out a promise of reducing costs by
increased consistency, more efficient
production and reducing labour costs. May
also find applications in hostile production
environments
In-, on-, at-line quality control:
Application of non-destructive
non-invasive technologies for
quality control
Spectroscopic techniques and electromagnetic
probing demonstrating opportunities for fast
on-line analysis of food components and
detection of surface and internal defects
Advances need to be made to bring down the
costs of these devices so that they become
affordable for continuous, on-line quality
monitoring by the food industry (Scotter,
1997; Sun, 2004; Cen and He, 2007)
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Annex 2: Summary of Bioinformatic Databases
Database name Type of information Uses of information Database host Web site URL
a
NCBI GenBank &
PubMed
DNA sequences (GenBank);
protein sequences;
genome structure;
publications
Species, gene &
protein ID; genomic
comparison
National Centre for
Bioinformatic
Information
www.ncbi.nlm.nih.gov/
DDBJ (DNA DataBank
of Japan)
DNA (as GenBank) Species & gene ID;
genomic comparison
National Institute of
Genetics
www.ddbj.nig.ac.jp/
EMBL (European
Molecular Biology
Laboratory)
DNA (as GenBank), protein
sequences; microarrays;
bioinformatic tools
Species ID; microarray
analysis; protein
function & structure
European
Bioinformatics
Institute
www.ebi.ac.uk/embl/
FishTrace Cytochrome b & rhodopsine
gene sequences from
200+ European fish species
Fish species ID JRC – Joint Research
Centre, Italy
(EU consortium)
www.fishtrace.org
FishBase General information on
30,000 world fish
species
Fish classification, uses,
habitat, identification,
images, genetics on
fishes
Consultative Group
on International
Agricultural
Research (CGIAR)
www.fishbase.org/
search.php
Gramene Rice, maize & grasses
gene, protein &
metabolite info
Marker (QTL) ID; traits;
genetic diversity of
grasses
US collaboration www.gramene.org/
GrainGenes Wheat, barley (cereals)
gene, protein &
metabolite info
Marker (QTL) ID; traits;
genetic diversity of
cereals
USDA (US Department
of Agriculture.)
(US consortium)
wheat.pw.usda.gov/
GG2/index.shtml
OlivTrack Olive genetic markers Olive oil traceability University of Parma
(EU consortium)
www.dsa.unipr.it/foodhealth/
oliv-track/index.html
PLEXdB database Plant & plant pathogen
gene expression data
Plant functional
genomics; microarray
data from maize, barley,
grape, rice & tomato
Iowa State University
(US consortium)
www.plexdb.org/index.php
ArkDB Genetic information on
12+ farmed species
QTL mapping of animal,
bird & fish species for
breeding
Roslin Institute www.thearkdb.org/
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Livestock Genome
Mapping
Programmes
Genetic information on
six livestock species
QTL mapping of animal,
bird & fish species for
breeding.
INRA, France locus.jouy.inra.fr/cgi-bin/
bovmap/livestock.pl
NAGRP (National
Animal Genome
Research Program)
Genomic information from
various livestock species
QTL mapping of animal,
bird, fish & crustacean
species for breeding
USDA (US consortium) www.csrees.usda.gov/nea/
animals/in_focus/an_
breeding_if_nagrp.html
Animal genomics
community web site
Compendium of databases
from 14 animal species
Database searches for
animal genetics
information
Iowa State University www.animalgenome.org/
community/other.html
Organism-Specific
Genome Databases
Compendium of
eukaryote, prokaryote
& viral databases
Database searches for
animal, plant, fungal,
microbial & viral info
University of California restools.sdsc.edu/biotools/
biotools10.html
Sanger Institute Genome sequences Genome mapping &
sequence comparison
Sanger Institute www.sanger.ac.uk/Projects/
The J. Craig Venter
Institute (JCVI)
Compendium of
microbial, fungal &
plant genetic info
Functional genomics;
QTL & genome mapping;
sequence comparison
J. Craig Venter Institute www.tigr.org/
www.jcvi.org
MICADO (Microbial
Advanced Database
Organization)
Microbial genomes Gene mapping &
functional analysis
INRA, France genome.jouy.inra.fr/cgi-bin/
micado/index.cgi
Barcode of Life DNA sequences of the
cytochrome oxidase
subunit 1 (COI) gene
Taxonomic classification;
sample identification
National Museum of
Natural History, USA
www.barcoding.si.edu/
www.barcodinglife.org/
views/login.php?&
HapMap project Database of human genes Gene expression;
genetic variation & markers
Cold Spring Harbor
Laboratories, USA
(international
consortium)
www.hapmap.org
a
All databases accessed on 13-05-09.
136 © FAO and UNIDO 2009. Agro-industries for Development (C.A. da Silva et al.)
Introduction
In the most recent decades, developing nations have focused predominantly on
economic prescriptions for ‘getting markets right’ by adjusting macroeconomic
policy, privatizing state-owned enterprises and opening domestic markets to
international trade in agricultural commodities and currencies. The implicit
assumptions are that ‘structural adjustment programmes’ will attract foreign
capital through the domestic and international private sectors, thereby making
domestic industries more competitive. As a result, a large part of economic
development policy has centred on creating ‘enabl ing environments’ for which
capital would then be attracted to invest in both general market-based solutions
and specific firm strategies that contribute to the economic growth and devel-
opment goals of the nation. The effectiveness of those policies has varied as
the interrelationships among macroeconomic policies, firm strategy and social
goals all hinge on different analytical frameworks.
A defining characteristic of most developing economies is the relative
importance of agriculture in their national economies and consequently the
design of alternative strategies employed to achieve national goals. The green
revolution fuelled rapid growth of agricultural productivity in Asia and this,
coupled with investments in infrastructure, reduced rural poverty dramat-
ically. Advances in economic development in Latin America, however,
occurred in a tiered policy structure that favoured promoting value added,
agriculture-based industries and niche products for export markets with con-
vertible foreign currencies. While Asia and Latin America identified strategies
to stimulate economic development, sub-Saharan Africa (SSA) placed greater
emphasis on the political economy at the expense of economic growth and
development, thereby leaving fewer resources to overcome key rural economic
5 Enabling Environments for
Competitive Agro-industries
RALPH CHRISTY,
1
EDWARD MABAYA,
2
NORBERT WILSON,
3
EMELLY MUTAMBATSERE
4
AND NOMATHEMBA MHLANGA
5
1
Professor, Department of Applied Economics and Management, Cornell
University, Ithaca, New York, USA;
2
Researcher Associate, Department
of Applied Economics and Management, Cornell University, Ithaca, New
York, USA;
3
Associate Professor, Department of Agricultural Economics,
Auburn University, Auburn, Alabama, USA;
4
Evaluation Analyst, African
Development Bank, Tunis, Tunisia;
5
PhD Candidate, Department of Applied
Economics and Management, Cornell University, Ithaca, New York, USA
Enabling Environments for Competitive Agro-industries 137
development problems such as persistent poverty, shortage of preventive
health care, fragmented infrastructure and food insecurity. The gap between
the national economies in SSA countries and those of developed countries
has widened, while the gap has narrowed for the emerging and competing
regions of Latin America and South-east Asia. What has become abundantly
clear in this post-structural adjustment era is that institutions matter. The reli-
ance on markets in achieving policy goals requires developing nations to
invest in institutions and services that will allow markets to function well in a
global economy.
Translating market-based policies in a global economy into desired social
and economic ends requires a fundamental shift in thinking about a corner-
stone concept, comparative advantage, which explains international trade, to
an expanded understanding of global markets that is based on competitiveness.
Today nations are advancing policies to enable firms and industries to gain a
competitive advantage in global markets, as opposed to the conventional
(Ricardian and Heckscher-Olin-Samuelson) international trade frameworks. In
the literature, the concept of competitive advantage has a number of distinct
meanings. Herein, we use the concept in a manner similar to that defined by
the Organization for Economic Cooperation and Development (OECD) as ‘the
degree to which, under open market conditions, a country can produce goods
and services that meet the test of foreign competition, while simultaneously
maintaining and expanding domestic real income’ (OECD, 1992, p. 237). An
important aspect of the concept of competitive advantage lies in the efforts of
many organizations to provide measures of an enabling economic environment
to foster competitiveness.
For policy makers identification of those elements is complicated by an
underlying feature of the globalization process – the rapidity of change
occurring within and across national economies. The globalization process
has the potential to benefit emerging economies, as proven by the remark-
able rates of economic growth in many parts of the world. This process has
fused the theoretical stages of economic development and raised the pre-
mium on the traditional, sequential approach, which holds that the state
must first create an enabling environment, which is then followed by private-
sector investments. Emerging market governments are investing in the neces-
sary components to foster economic stability, including infrastructure, open
telecommunication markets and Internet-based distance learning pro-
grammes while, at the same time, competition for capital, driven by the
rapidity of the globalization process, is causing multinational corporations to
aggressively seek opportunities to capture higher returns. As a result, the
private sector in many cases is not necessarily waiting for an enabling envir-
onment to be created by the state. Rather, it is working in partnership with
governments to develop a suitable environment, while simultaneously pursu-
ing market opportunities.
Efforts by policy makers to measure competitiveness, enhance enabling
environments and comprehend the rapidity of change in domestic and global
economies have given rise to three fundamental questions, which are addressed
sequentially in this chapter:
138 R. Christy et al.
1. How well do measures of business climate by international organizations
and research institutions relate to the competitiveness of mostly agricultural
economies?
2. If current measures are inadequate, what are the essential factors underlying
agro-industry competitiveness in developing countries?
3. How can we reform the public process, in the context of radical change, to
develop and enact creative policies to improve the relative competitiveness of
agro-industries in emerging markets?
Business Climate Assessments
How well do measures of business climate by international organizations
and research institutions relate to the competitiveness of agrarian
economies?
The assessment of business climate (or environment) dates back to the late
1970s, when the World Economic Forum started publishing the Global
Competitiveness Report, with the assessment and ranking of economic com-
petitiveness for 16 European and North American countries. The level of interest
in these climate assessments grew considerably from then on, particularly in the
past decade, as increased globalization created demand for methods of providing
signals to investors interested in foreign direct investment (FDI). In add ition to this
main use, business climate assessments have also been seen as a way of inspiring
reform, a direct result of the ranking system used in these analyses. In most
cases, focus is placed on those economies whose rankings have improved sub-
stantially from one year to another through special mention in case studies or
reform awards. The assessment of business climates is usually accompanied by
recommendations on which procedures to reform, the adequacy of which for
agribusiness and agro-industries will be discussed later in this chapter. A general
overview and appraisal of business climate measures is presented next.
The interest in business climate assessments has resulted in a proliferation
of measures to quantify the suitability of given economic environments for sus-
tainable business development. Figure 1 presents the chronological order of the
1970 1980 1990 2000 2010
1979: World Economic
Forum’s Global
Competitiveness Report
2001: UNCTAD’s
Investment Compass
2004: World Economic
Forum’s Global
Competitiveness Index
2006: OECD’s Policy
Framework for
Investments
2003: World Bank’s Ease
of Doing Business
1995: World Bank’s
Investment Climate
Surveys
Figure 1. Timeline of competitiveness and investment climate assessment
frameworks.
Enabling Environments for Competitive Agro-industries 139
various competitiveness and investment climate indices that have been devel-
oped over the last 3 decades. Major international organizations now produce
and publish one or more indices for use in measuring the level of competitive-
ness. The most widely monitored and applied indices are the Ease of Doing
Business Index (World Bank, 2003) and the Global Competitiveness Index (GCI)
(World Economic Forum, 2004). Several others also exist, including the World
Economic Forum’s Growth Competitiveness, Current Competitiveness and
Business Competitiveness indices; the United Nations Conference on Trade and
Development’s (UNCTAD) Investment Compass (IC), Global Investments
Prospects Assessment and Inward FDI Performance Index; the Policy Framework
for Investments (OECD, 2006); and Investment Climate Surveys (World Bank,
1995). Instruments such as governance indices also are thought to be good
indicators of investment climate, and they, too, are used to study how institu-
tional environments impact on business performance. The next subsections
discuss these measures in greater detail and provide a critique of the measures
with specific attention paid to the appropriateness of their use in the agribusi-
ness industry (summarized in Table 1).
Ease of Doing Business Index
The Ease of Doing Business Index is a relative measure of how well the busi-
ness climate facilitates efficiency in ten stages of a business’s life, i.e. starting a
business, dealing with licences, employing workers, registering property, get-
ting credit, protecting investors, paying taxes, trading across borders, enforcing
contracts and closing a business. The index is calculated from a three-stage
process that involves the following:
?
ranking of the various components of each stage according to a predeter-
mined scoring framework as outlined in Appendix 1;
?
computation of the stage-level ranking, defined as the average of the per-
centile rankings of the stage’s component indicators; and
?
computation of the overall business climate ranking for the country – the
average of the percentile rankings of each of the ten stages.
The final country score, which describes its position in the percentile ranking
relative to other world economies, will take a value between 1 and the total
number of countries included in the assessment. Appendix 2 shows an exam-
ple of how the Ease of Doing Business Index was computed for Egypt, the top
economic reformer in 2006/07 according to World Bank’s (2007) Doing
Business 2008 report.
One of the main merits of the Ease of Doing Business Index is that it cov-
ers, in depth, most regulations directly affecting business operation. It is a good
attempt to determine what regulation constitutes binding constraints, which
reform packages are most effective and how these issues are shaped by the
country context. A few limitations can also be identified. First, the assessment
is limited in scope to cover only those regulations directly linked to business
operations, but it says little about the effects of other (often equally important)
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Table 1. Competitiveness assessment frameworks and their limitations.
Index and year established
(source and coverage) Key strengths
Limitations in assessing agro-industry
competitiveness
1979: World Economic Forum’s
Global Competitiveness Report
Holistic – considers policies, factor endowments,
and institutions
Does not inform policy at industry or
sectoral level
125–131 countries Adjusted for each country’s level of economic development Fails to capture value chain components
1988: UNCTAD’s Inward
FDI Performance Index
Uses 3-year periods to offset annual fluctuations
in the data
Does not inform policy at industry or
sectoral level
141 countries Captures influence of all factors other than
market size
Neglects domestic investment, hence
key components of agro-industries
1995: World Bank’s Investment
Climate Surveys
50 countries
Adapted to country context and sector priorities
Covers business perceptions
Small sample sizes limit global
comparisons
Places emphasis on foreign investment
2001: UNCTAD’s
Investment Compass
Focuses on both availability and quality
of infrastructure
Does not inform policy at industry
or sectoral level
Land tenure central to the analysis Fails to capture value chain components
Considers objectives of investors and policy makers
2003: World Bank’s Ease
of Doing Business Index
178 countries
Highly comprehensive – covers major business
considerations from inception to folding
of operations
Disregards broader business
environment, e.g. macro economic
fundamentals
Provides an excellent assessment of regulatory framework Biased in favour of formal establishments
Allows inter-country comparisons Is not sector-specific
2004: World Economic Forum’s
Business Competitive Index
Examines firm-level efficiency Intensive data requirements
121 countries
2004: World Economic Forum’s
Global Competitiveness Index
Holistic – considers policies, factor endowments,
and institutions
Does not inform policy at industry
or sectoral level
131 countries Adjusted for each country’s level of economic development Fails to capture value chain components
2006: OECD’s Policy
Frameworks for Investment
Provides a policy evaluation criterion
Directly targets policy makers
Focused on foreign investment
Is not sector-specific
Highlights key areas for private-sector-led
growth-enabling proactive policies
Enabling Environments for Competitive Agro-industries 141
policies and institutional arrangements, such as the effect of macroeconomic
policies, quality of infrastructure, proximity to markets, security of property,
gender biases in business regulations and transparency of government procure-
ment. In its country ranking the index is biased in favour of formal industries,
as higher rankings tend to be associated with economies that experience more
formal sector growth, more jobs and a shrinking share of the economy in the
informal sector. Moreover, although conclusions drawn from the analysis are
taken as non-sector-specific, to make the data comparable across countries,
the Ease of Doing Business Index refers to specific types of business – drawing
data from a limited liability company operating in the largest business city.
Sectors lying outside this class are excluded, even though these may constitute
larger proportions of business activity in specific countries. No direct assess-
ment is made of the quality of downstream or upstream market environments,
and their subsequent impact on the efficiency of business operations at manu-
facturing level (the index’s target).
Global Competitiveness Index
Global competitiveness assessments have been performed by the World
Economic Forum since 1979 and have evolved over the years in tune with the
changing international environment. The most recent development, the GCI,
resulted from the work of Xavier Sala-i-Martin in 2004 (World Economic
Forum, 2004). In addition to the GCI, the World Economic Forum has pro-
duced three other measures of competitiveness: the Growth Competitiveness,
Current Competitiveness and Business Competitiveness indices, discussed
briefly below. The GCI provides an overview of critical drivers of productivity
and competitiveness, categorized into nine pillars: institutions, infrastructure,
macroeconomy, health and primary education, higher education and training,
market efficiency, technological readiness, business sophistication and innova-
tion. Data from the Executive Opinion Survey, combined with hard data, are
used to rank countries on each component of the index. The pillars can be
integrated into three broad categories, namely basic requirements, efficiency
enhancers, and innovation and sophistication, as specified in Appendix 3.
The GCI is computed for a sample of 125 countries of varying degrees of
economic progress. To highlight the differences in policy priorities for econo-
mies at different levels of economic progress, the index is designed so that it
assigns higher weight to those pillars key to the specific phase/position of a
particular national economy. For factor-driven economies (countries that com-
pete based on factor endowments), for example, more weight is given to basic
requirements relative to efficiency enhancers, and much less to innovation.
Innovation-driven economies, on the other hand, compete with new and unique
products and therefore rely more on innovation and sophistication factors for
competitiveness. The division of countries into the three broad categories (or
stages of development) is explained in Box 1.
One of the major advantages of the GCI is its holistic nature, stemming
from understanding national competitiveness as a set of factors, policies and
142 R. Christy et al.
institutions that determine the level of productivity in a country. Productivity
implies making better use of scarce resources; therefore, competitive econo-
mies are expected to experience higher growth rates (World Economic Forum,
2006). Unlike the Ease of Doing Business Index, which focuses only on those
factors directly affecting the business environment, the GCI also recognizes the
importance of the macroeconomic environment, human development, market
efficiency, technology and innovation in developing and sustaining global com-
petitiveness. These differences give rise to different competitiveness ranks.
Note that, while Singapore ranks first in 2006 according to the Ease of Doing
Business Index, lower rankings in health, education and business sophistication
push it to the fifth position in the GCI ranking, where Switzerland ranks first.
The GCI’s component rankings also are modified according to each country’s
level of economic development, thus avoiding the ‘one-size-fits-all’ pitfall com-
mon to most competitiveness ranking criteria.
The main limitations of the index are, first, that it focuses on macroeco-
nomic features and offers no industry or sector-specific appraisal of the operat-
ing environments. Second, the discussion on market efficiency fails to capture
the critical value chain components that enhance or hinder competitiveness in
any given industry. Third, the issue of geographic location of firms and proxim-
ity to markets also remains unaddressed.
The Growth Competitiveness Index
The Growth Competitiveness Index is a characterization of a set of institu-
tions and economic policies that support high rates of economic growth over
the medium term, i.e. over the coming 5 years. The index is based upon a
country’s performance in three areas (sub-indices): level of technology, qual-
ity of public institutions and macroeconomic conditions related to growth.
Dividing world economies according to innovation into core and non-core
economies (patenting is used as a measure of innovation capacity), the index
Box 1. Weighting according to stage of development. (From World Economic
Forum, 2006.)
GDP per
capita (US$)
Basic
requirements
(%)
Efficiency
enhancers
(%)
Innovation
factors (%)
Factor driven <2,000 50 40 10
Transition from
stage 1 to 2
2,000–3,000
Efficiency driven 3,000–9,000 40 50 10
Transition from stage
2 to stage 3
9,000–17,000
Innovation driven >17,000 30 40 30
Enabling Environments for Competitive Agro-industries 143
assigns different weights to factors within the sub-indices for economies with
different innovation capacities. For example, for core economies, weights
of ½, ¼ and ¼ are assigned to technology, quality of public institutions and
macroeconomic conditions, respectively, whereas weights of
1
/3 each are
assigned to the three sub-indices for non-core economies. The GCI, which
grew directly from the Growth Competitiveness Index, attempts to incorpo-
rate many factors that drive productivity into a broader measure of competi-
tiveness. The World Economic Forum currently publishes both indices.
Current Competitiveness Index
The Current Competitiveness Index (CCI) evaluates the underlying conditions
that define current level of productivity (World Economic Forum, 2000). It uses
macroeconomic indicators to estimate the set of institutions, market structures
and economic policies supportive of high current levels of prosperity, thus giv-
ing an indication of the effectiveness with which an economy utilizes its current
stock of resources. The CCI is based upon two sub-indices that focus on firm
sophistication and qualities associated with the national business environment,
drawing on a complex array of variables with a demonstrated statistical relation-
ship to gross domestic product (GDP) per capita. The additional value of this
index is that it goes beyond examination of aggregate variables to capture the
microeconomic conditions that support a high level of sustainable productivity.
The CCI was a precursor to the Business Competitiveness Index (BCI), dis-
cussed below.
The Business Competitiveness Index
The BCI developed by Michael E. Porter ranks countries by their microeco-
nomic competitiveness. The focus on the microeconomy emerges from the
realization that, although sound macro policies create potential for improving
national prosperity, wealth is created by firms, and it is the efficiency with which
firms operate that drives firm, industry and national competitiveness. The BCI
thus highlights, in detail, the microeconomic underpinnings of competitiveness,
emphasizing a range of company-specific factors conducive to improving effi-
ciency and productivity (World Economic Forum, 2007). Competitive strengths
and weaknesses are identified in terms of a country’s business environment
conditions and a firm’s operations and strategies. These features are then used
to assess the sustainability path of the country’s current prosperity.
Productivity is thought to be driven at the micro level by the sophistication
with which locally based firms compete and by the quality of the micro-business
environment in which they operate. The BCI is based upon two sub-indices
that focus on these two foundations. Factors that drive company strategy
include production processes, staff training, marketing, capacity of innovation,
branding and value chain, whereas those that affect business environment
include factor conditions, demand conditions, nature of related and support
144 R. Christy et al.
industries, firm strategy and domestic rivalry (see Appendix 4). The factors that
affect microeconomic business environment can be summarized into the
‘national diamond’ as characterized in Figure 2. Because the impact of indi-
vidual factors or variables is difficult to isolate, the common factor analysis is
used to compute the sub-indices, which are then averaged to obtain the overall
BCI value. Variable data are obtained primarily from the Executive Opinion
Survey; quantitative measures are used where data are available, e.g. for pat-
enting rates and Internet and cellular telephone penetration. Due to data inten-
sity, the BCI is currently published for only 121 countries.
As a measure of competitiveness, the BCI has the clear advantage of focus-
ing on the local business environment, the environment of primary relevance to
firms. The Index is based upon the realization that, whereas broad macroeco-
nomic circumstances are able to provide the opportunity to create wealth, they
do not themselves create wealth, making them only necessary but not sufficient
conditions for competitiveness (Porter, 2004). The BCI computation framework
enables also rigorous assessment of firm-level and country competitive strengths
and weaknesses, thereby unmasking underlying factors affecting economic
growth. Additionally, the framework recognizes differences in challenges
Figure 2. The microeconomic business environment. (From Porter, 2004.)
Related and supporting industries
Context for firm strategy and rivalry
Factor (input) conditions
Presence of high-quality, specialized inputs
available to firms
• Human resources
• Capital resources
• Physical infrastructure
• Administrative infrastructure
• Information infrastructure
• Scientific and technological infrastructure
• Natural resources
• Access to capable, locally based
suppliers and firms in related
fields
• Presence of clusters instead of
isolated industries
Demand conditions
• Sophisticated and demanding
local customer(s)
• Local customer needs that
anticipate those elsewhere
• Unusual local demand in special-
ized segments that can be served
nationally and globally
• A local context and rules that
encourage investment and
sustained upgrading (e.g.
intellectual property protection)
• Meritocratic incentive systems
across institutions
• Open and vigorous competition
among locally based rivals
Enabling Environments for Competitive Agro-industries 145
and opportunities faced by economies at different levels of development,
accounting for these in the assessment of competitiveness through the focus on
the local environment.
The main limitation of the BIC is that it is ultimately an aggregated national
index. Although the underlying data can be broken down to individual firms,
industries and sectors (the index is computed using data drawn from over 7000
business surveys), no industry or sector-specific conclusions are drawn.
Competitiveness is benchmarked to GDP per capita: the adopted measure of
‘national prosperity’, with the objective of understanding, for each nation,
those microconditions significantly correlated to higher levels of prosperity.
Also, the analysis is data intensive; imperfect data are often employed present-
ing an analytical challenge to the econometric modelling process.
Investment Compass
The IC, an innovation of UNCTAD, is a benchmarking tool specifically designed
for developing countries for use in analysing the main economic and policy
determinants that affect the investment environment. The database at present
covers 55 developing countries. The IC comprises six key factors thought to
influence the investment environment: resource assets, infrastructure, operating
costs, economic performance and governance, taxation and incentives, and
regulatory framework. The construction of the compass follows a multistage
quantification process in which the key indicators are broken down into groups
of variables, also broken down to measurable indicators (see Appendix 5). Each
indicator is then assessed according to a rating system that takes values between
1 and 100. To obtain indicator ratings, a normalization process is used that
involves fixing the minimum and maximum possible nominal values for each
indicator and, through scaling, converts the nominal values to the 1–100 scale.
The simple arithmetic average is used to aggregate the relevant normalized
indicators into variables, and the variables into the key areas. Data on indicators
are obtained from UNCTAD-administered special national surveys, foreign
investment questionnaires and international statistics databases.
Like the Ease of Doing Business Index and the GCI, the IC provides an
inter-country comparison according to performance in all investment areas.
Additionally, the compass makes horizontal comparisons for each key area
between countries, as well as vertical comparisons of performance in each
key area for a given country. The key areas can be categorized according to
ease of reform through policy action, from least responsive to policy action
(resource assets) to most responsive (regulatory framework). Classification
can also be made according to distinct objectives as viewed by policy mak-
ers, namely, production and employment, export development and techno-
logical ‘catch-up’ objectives, or according to investor objectives as viewed
by foreign investors, i.e. domestic market-seeking, resource- or asset- seeking
and export-oriented objectives.
Compared with other measures of business climate attractiveness, the IC
highlights some indicators of greater significance to developing and transition
146 R. Christy et al.
economies. First, it addresses the effect of resource assets, particularly the
effect of availability of raw materials such as minerals, agricultural commodities
and energy reserves. The presence of a rich resource base can be important for
explaining investment in areas where other determinants of business climate
attractiveness are weak. Second, it addresses land ownership and transfer, spe-
cifically regulations pertaining to ownership of customary land and the nature
of land titles. This approach is thought to have an impact on influencing market
entry. Third, the IC considers the effect that the presence of preferential trade
agreements with major markets has on investment decisions, an issue of par-
ticular importance when considering the flow of foreign investment to develop-
ing economies, and of importance to the agriculture sector. In terms of
infrastructure, the compass highlights quality and access to the basic forms of
infrastructure: access to water, mobile phones and road networks, which tend
to be of greater relevance to developing countries.
Inward FDI Performance Index
The Inward FDI Performance Index is one of several indices produced by
UNCTAD to measure how well economies perform in attracting foreign invest-
ments. It is calculated as the ratio of a country’s share in global foreign direct
investment (FDI) inflows to its share in global GDP; an index value greater than
1 implies that the country receives more FDI than its relative economic size.
The index thus captures the influence on FDI of all factors other than market
size, e.g. business climate, economic and political stability and presence of
natural resources. The index is computed as a 3-year average to smooth out
annual fluctuation in investment flows, dates back to 1988, and currently cov-
ers 141 countries. UNCTAD has published the Inward FDI Performance Index
in the World Investment Report since 2001, together with other indices
including the Inward FDI Potential Index and Outward FDI Performance Index.
The Report, benefiting from investment data obtained from such sources as the
World Investment Prospects Survey (1995 to date), provides a more detailed
account of investment patterns as well as the driving forces behind observed
investment trends.
UNCTAD also produces the Global Investment Prospectus Assessment
(GIPA), a measure of the short- and medium-term prospects for foreign invest-
ment at the global, regional and industry levels. GIPA serves the same objective
as the Policy Framework for Investment (described below), that is, to equip
governments and, in this case, businesses with an instrument for proactive
development of policies and strategies to influence future flows of investment.
Employing data from three global surveys of transnational corporations, FDI
experts and investment analysts, the assessment also evaluates evolving trends
in strategies of transnational corporations, as well as FDI policies.
The FDI indices have the advantage that they employ easily accessible
data and uncomplicated computation methods. The main limitation lies in
the foreign investment focus, as opposed to an assessment of factors rele-
vant to industry development in general. As indirect measures of business
Enabling Environments for Competitive Agro-industries 147
climate attractiveness, the FDI performance indices per se can only tell us
where FDI tends to flow, without fully explaining the determinants or causal
factors. Also, these are aggregated national indices that are neither industry-
nor sector-specific.
Policy Framework for Investment
The Policy Framework for Investment was developed as an instrument for guid-
ing policy reforms in critical areas of a country’s economic environment – to
mobilize private investments that support economic growth (OECD, 2006).
The framework proposes guidelines on policy issues to be considered for
reform by governments interested in creating an attractive environment for
private-sector investments. Following the UN Monterrey Consensus on
Financing for Development, the framework identifies ten policy areas as having
the strongest impact on the investment environment: investment policy, invest-
ment promotion and facilitation, trade policy, competition policy, tax policy,
corporate governance, policies for promoting responsible business conduct,
human resource development, infrastructure and financial sector development
and public governance. The guiding principles or logic and the specific issues
to be addressed in each policy arena are summarized in Appendix 6.
The application of the framework is guided by three principles: (i) policy
coherence; (ii) a transparent approach to policy formulation and implementa-
tion; and (iii) regular evaluation of the impact of existing and proposed policies
on the investment environment. As a result, policy questions are designed to
ensure an integrated approach to policy and investment environment interac-
tion, to reduce uncertainty and risk for investors and to evaluate how well
government policies uphold established good business practices.
The Policy Framework for Investment occupies a special niche in the busi-
ness climate evaluation literature. Unlike the Ease of Doing Business Index or
GCI, whose target audience is investors, the Policy Framework for Investment
directly targets policy makers and attempts to equip them to focus on areas
likely to produce the highest gains in private-sector growth. The framework, at
present, does not attempt to rank economies according to current perform-
ance in addressing the outlined policy issues, but rather provides criteria through
which governments can evaluate and improve the performance of their poli-
cies. In this strength also lies the main limitation of the Framework that it is
simply a strategic approach for policy development – not an assessment tool.
Thus, the Framework per se cannot be used to evaluate how conducive a coun-
try’s policy environment is in facilitating or promoting investment relative to
other competing investment destinations.
An important feature of the Policy Framework, observed to some extent in
the first two policy fields, is that it focuses on those policy reforms necessary to
attract foreign investments rather than those necessary to develop the private
sector in general. Although these are usually consistent, the focus of the
Framework speaks also to the ultimate goal of undergoing reform: to attract
foreign investment.
148 R. Christy et al.
Investment Climate Surveys
The Investment Climate Surveys are a production of the World Bank’s
Investment Climate Unit and a continuation of the World Bank’s work from the
mid-1990s to generate statistical information for formal investment climate
assessments. The surveys use companies as the sampling unit and employ a
written questionnaire administered through face-to-face interviews with com-
pany heads. Although surveys are generally adapted to the country context in
sectors of coverage or thematic scope, depending on local priorities in policy
reform and policy research, a core structure is maintained for consistency and
comparability with international benchmarks. A standard sampling procedure
is employed that involves using the business establishment (rather than the firm
per se) as the unit of analysis, thus ensuring that each country covers a mini-
mum set of common sectors and that within each country the major growth
industries are adequately represented.
The written questionnaire comprises 12–15 sections of standard questions,
11 of which are core (see Appendix 7). The questions are meant to generate
three types of information: (i) firm-specific characteristics; (ii) the profile of the
investment climate in which the firm operates; and (iii) the productivity level of
the firm. The logic is that, by controlling for firm-specific characteristics, the
data generated from surveys can effectively be used to assess the isolated influ-
ence of climate deficiencies on industry performance. Investment climate pro-
filing provides information on those indicators that can be mapped to
performance indicators, whereas productivity data are used to compute per-
formance indicators.
Because of the wealth of information sought and the size of the sample in
each country, ranging from 200 to 1500 firms, a limited number of surveys are
performed each year (current World Bank target lies at 20 per year), making
annual global comparisons of investment climate on the basis of survey data
impossible. Generally, survey data are used to rate a given country’s investment
climate against predetermined global data. For that reason, surveys have to
date been used to collect investment climate data for developing and emerging
economies in North Africa, SSA, South-east Asia and Latin America. Climate
survey statistics are ultimately used in formal assessments of investment cli-
mate, and are available online to analysts.
Limitations of conventional frameworks as measures
of competitiveness in agro-industries
For appropriate application of the different indices of business climate assess-
ment, it is important to understand the underlying assumptions, the data used
and the index computation methods. The discussion of business environment
assessments presented in this section reveals some cross-cutting features of the
existing methods, and the strengths and limitations of these methods in assess-
ing agro-industry competitiveness are summarized in Table 1.
Enabling Environments for Competitive Agro-industries 149
The assessment reveals that the business climate is generally described at
national level to focus on macro-level determinants of investment attractive-
ness. As a result, the effect of local variations in access to (or application and
enforcement of) the national determinants is not captured. Further, the local
business environment is the relevant environment in which the business oper-
ates, and is therefore the environment of interest for competitiveness assess-
ment. The BCI comes close to addressing this limitation except that, although
analyses are focused on microdeterminants of competitiveness, conclusions are
still made at the national level.
Likewise, for industries with unique characteristics, the value chain traits
become as important as, if not more important than, broad national ones in
determining competitiveness. To the extent that the industry is global, nation-
specific descriptions of competitiveness are less important than, say, local value
chain coordination and the extent to which these value chains are integrated
into the global value chain. In this case, stimulating supply response, strength-
ening supporting markets and strengthening end-market demand become criti-
cal in creating and sustaining competitiveness. We argue that these features are
apparent in the agribusiness sector.
In the agribusiness sector, ‘climate’ issues such as condition and type of
downstream markets, proximity to markets, compliance with sanitary and phy-
tosanitary standards, the presence of subsidies in local and foreign markets,
prevailing food security policies, rural infrastructure, farmland ownership struc-
tures, and geographic and climatic conditions can substantially influence profit-
ability. Proximity to input and output markets, for example, is especially
important for the agribusiness industry, given the higher level of perishability
and bulkiness of products. In emerging markets, quality of infrastructure such
as road networks is important for the same reasons, particularly for the effect
on accessibility of farming enterprises that are both input suppliers and con-
sumers of products from the agroprocessing industry. Regarding property
rights, emphasis is required on state property leasing rights, or the reform of
state ownership of properties such as land, biotechnology institutions or agri-
cultural marketing institutions, which are important when considering down-
stream industry efficiency for agroprocessing industries. Given these unique
characteristics, a case can be made for a specialized method of describing the
competitive environment for agribusiness firms.
The Nature of Enabling Environments for Agro-industries
Essential factors underlying agro-industry competitiveness
in developing countries
One of the most fundamental issues a government must address in formulating
policies in a global economy is to define its own role in fostering economic
progress. The role of the state, at its most basic level, calls for the provision of
laws that define property rights, enforce contracts and resolve disputes. In this
150 R. Christy et al.
sense, without state action, markets could not exist. Governments can play an
even larger role by investing in infrastructure that contributes to the efficient
functioning of markets. In Figure 3, we identify a hierarchy of enabling needs
that a government can consider in addressing its role in advancing economic
progress. The nine enablers were derived from proceedings of two FAO
regional workshops (Eastern Europe and Latin America) on ‘Comparative
Appraisals of Enabling Environments’. The proposed hierarchy divides state
actions into three levels of activities that characterize and assess enabling envi-
ronments for agro-industrial enterprises. At the base of our pyramid, the state
must provide essential enablers that will make possible the function of markets
and enterprises. In this category we place items such as rule of law (e.g. con-
tract enforcement, property rights), provision of infrastructure and a conducive
trade policy. So-called important enablers are second-order activities that the
state can and often does provide, such as finance, transportation and informa-
tion. Finally, we define useful enablers as sufficient but not necessary condi-
tions to include grades and standards, linking small farmers to formal markets
and business development services. In the following section, we discuss each of
the enablers starting at the bottom of the pyramid with essential enablers and
moving up to important and useful enablers.
Essential enablers
Land tenure and property rights
Land is one of the most important assets for people throughout the world. It
constitutes the most significant part of the assets base for the rural and urban
poor – especially in developing countries where farming is the main source of
livelihood. Secure land tenure and property rights are as central to peace and
Necessary
conditions
Sufficient
conditions
Useful enablers
Business linkages
Business development services
Ease of doing business
Important enablers
Financial services
Research and development
Standards and regulations
Essential enablers
Trade policy
Infrastucture
Land tenure and property rights
Figure 3. Hierarchy of enabling needs for agro-industry competitiveness.
Enabling Environments for Competitive Agro-industries 151
stability as are rule of law, good government and economic development. From
an economic standpoint, land is a ‘keystone factor’ of production for economic
activities. Traditional economic theory assumes exclusive, transferable and
enforceable property rights in land when considering it as a factor of produc-
tion. Given these assumptions, resource endowments, preferences and tech-
nology are sufficient pillars of the traditional economic theory to take into
consideration. In developing countries, where these assumptions do not hold,
omitting institutions, the fourth pillar, from the economic analyses could be
misleading. In this case, institutional arrangements, in particular property
rights, need to be specified.
Property rights are an essential class of institutional arrangement. Property
as a social institution implies a system of relations between individuals. It involves
rights, duties, powers, privileges, etc., of certain kinds. Thus, property rights
define the use, control and transfer of assets, including land; which of them are
lawfully viewed as exclusive; and who has these exclusive rights. Property rights
also include enforcement mechanisms to resolve disputes and defend rights.
Quality of law enforcement is more important than mere existence of laws.
Property rights may also have both temporal and spatial dimensions. There are
four basic categories of property rights in land: open access, communal prop-
erty, private property and state property. Under open access, no exclusive rights
are assigned, normally resulting in land degradation. In the case of communal
property, exclusive rights are assigned to a group of individuals, whereas under
state property the public sector is responsible for managing the land. Finally,
under private property, an individual is assigned exclusive rights (Feder and
Feeny, 1991).
Systems of ownership rights in land have effects on incentives to use land
efficiently and to invest in land conservation and improvement. A robust land
ownership system creates powerful incentives for value addition on land, espe-
cially where land is scarce or contestable. Establishment and enforcement of
these systems, however, are not cost-free. Legal procedures that define pro-
perty rights and enforcement mechanisms may be very complex and require
various types of documents and affidavits, which increase transaction costs.
These transaction costs may offset the benefits from enhanced property rights
when land is abundant. As theory and empirical evidence suggest, however,
when land becomes scarce or technological changes create new investment
opportunities, the provision of ownership rights and enforcement mechanisms
has the ability to enhance land productivity.
In developing countries, where land may be used as collateral, asymmetric
information and uncertainty also play a central role in both formal and informal
credit markets. Improving transparency and information on land ownership
rights, in particular transfer rights, reduces uncertainty, risk aversion and the
‘moral hazard’ problems typically associated with rural credit markets.
Availability of land title and institutional mechanisms to resolve disputes affects
the willingness of creditors to loan when land is used as collateral. Furthermore,
existence of formal procedures for registering liens in land titles represents an
important enforcement mechanism that provides additional incentives to credi-
tors to make loans. A well-functioning land ownership system also facilitates
152 R. Christy et al.
risk taking and innovation. This tends to be very important in rural areas,
where people tend to be conservative and risk averse. Thus, systems of owner-
ship rights that increase incentives for efficient use of land also stimulate a
more efficient credit market (Feder and Feeny, 1991). As mentioned earlier,
institutional arrangements to put in place systems of property rights are not
cost-free. Transaction costs arising from these institutional arrangements may
well offset their benefits and exclude the poor.
Infrastructure
Since the mid-1980s, evidence of the increasing concern and debate about the
impact of infrastructure on economic development has surfaced in a large
number of empirical studies. Infrastructure is defined to include the sectors of
transportation, water and sanitation, electric power, communications and irri-
gation. Those sectors represent a large portfolio of expenditures in most coun-
tries, with a range from one-third to one-half of public investment, or 3–6% of
GDP. Much of the formal research on the effects of infrastructure has exam-
ined macroeconomic or industry-wide variables. Usually, they all find that infra-
structure has a significant and positive effect on economic growth. More recent
studies have approached this empirical question by using micro-level data,
avoiding the problem with externalities.
The positive impacts from infrastructure are not derived from investments
in physical facilities, but rather from the services generated. Four conditions are
necessary to realize these impacts on economic development:
1. The basic macroeconomic climate should be conducive to an efficient allo-
cation of resources.
2. Infrastructure projects can raise the returns to other resources only when a
sufficient complement of other resources exists; infrastructure investments can-
not create economic potential, only develop it.
3. Infrastructure activities that have the most significant and durable benefits in
terms of production and consumption are those that provide the degree of reli-
ability and quality of services desired by users.
4. Infrastructure is more likely to be economically efficient, and to have favour-
able impacts on the environment, when it is subject to user charges.
The impact on international competitiveness is quite direct. Inadequate infrastruc-
ture cripples the ability of countries and industries to engage in international trade.
Increased globalization has resulted not only from economic factors such as trade
policy and the integration of financial markets, but also from major advances in
communication, information technologies and transportation. Those infrastruc-
ture investments are linked to productivity and to aggregate sales (Peters, 1992).
Trade policies
Trade policies play a critical role in determining industrial competitiveness
through two main avenues: first, directly, through the impact on the cost of pro-
duction and the price of commodities and products; and second, indirectly,
through the impact on market access and on global market trends. The first of
Enabling Environments for Competitive Agro-industries 153
these routes is, to some extent, within the control of national policy makers, who
can strategically exploit policy instruments to direct creation of competitive
advantages or to reinforce existing ones. The second is within the control of only
those nations with enough global market power in specific industries, or, more
commonly, is subject to the lobbying powers of those market players who con-
trol the largest global market share. In either case, trade policies may facilitate
increased firm-level productivity; they may also severely stunt industry growth.
Conventional assessments of the business environment address trade poli-
cies to a limited extent, often focusing narrowly on the impact of tariffs and
costs of trade on business profitability. In practice, however, trade control
instruments may take numerous forms, ranging from direct taxes and quantity
controls, to indirect instruments such as monetary policy and technical meas-
ures. In the agribusiness sector, the debate is further complicated by the pres-
ence of sector-specific characteristics with respect to market organization and
trade patterns. We discuss here sector traits pertaining to market access, mar-
ket power and preferential trade agreements. As the discussion shows, these
unique characteristics of the agriculture sector call for specialized analysis meth-
ods in business environment assessment.
Market access regulation, a major globalization challenge of this decade,
has been shown to have, in specific cases, significant impacts on industry prof-
its and growth. In the agriculture sector, non-economic (sometimes irrational)
motivations for trade protection are fairly high, access of agricultural goods into
major world markets is severely restricted by the presence of subsidies and
world market prices are substantially distorted. In some cases, legitimate trade-
monitoring measures (e.g. sanitary and phytosanitary standards) have been
used to restrict entry. Market access has also been restricted through tariff
escalation, an instrument employed to protect or develop one’s manufacturing
industry using inexpensive raw material imports. Those forms of trade barriers
in local or foreign markets are important in explaining international differences
in competitiveness of specific subsectors.
Government intervention in agricultural commodity marketing has histori-
cally been quite high, evidenced by the presence of state-owned commodity
marketing boards and various forms of price controls (direct controls, subsidies
and market supply restrictions). The agriculture sector is one of the few sectors
in which producer associations are not only legal in most countries, but also
prevalent and sometimes encouraged. Export boards with autonomous export
authority also exist for specific products in both developed and developing
economies. As a result, global and local agricultural markets are distorted by
the presence of big players, with implications on business competitiveness.
However, this trend or ability is being dramatically curtailed.
The agriculture sector, apart from other natural resource sectors, is a large
player in north–south preferential trade arrangements (PTAs). Notwithstanding
the potential openness gains, these trade arrangements can also distort market
incentives. In many cases, PTAs develop demand for specific commodities,
hence foster competitiveness and industrial growth for those commodity sec-
tors. Assessment of agribusiness climates, therefore, ought to highlight such
trading arrangements.
154 R. Christy et al.
Policies, tariffs and quotas for imported products
Trade and domestic support policies related to import of competing products are
areas of contention between many countries, as seen in the World Trade
Organization. Many WTO member states argue in favour of some reductions in
trade restrictions and domestic support, but there is little consensus on the rate
of reduction, commodities to be affected and special and differential treatment.
The distortions caused by these policies potentially hamper the ability of agribusi-
nesses in emerging markets to be as productive and as profitable as possible.
Considering the years of policy analysis conducted by OECD and the World
Bank, developed economies have had relatively high tariffs and domestic sup-
port for agricultural products relative to developing economies. As the recent
case of the USA versus Brazil suggests, at least in cotton markets, these poli-
cies have put emerging economies like Brazil’s at a disadvantage in interna-
tional markets.
A concern about global competition in light of agricultural policies is that
the competition is not fair. Since some countries, especially developed coun-
tries, are using trade and domestic policies to protect and/or promote their
products, developing countries should do the same. The policies of developed
countries may limit the opportunities of emerging economies. Retaliatory
trade or domestic support policies, however, are not an ideal response to pol-
icies of other countries. Given the budgets of many large, developed countries,
the outcome of policy competition is that smaller developing countries will be
unable to compete. Instead, the Brazilian example exemplifies an approach
that developing countries should consider: if the policies of other countries are
unfair, challenge them in the appropriate dispute settlement bodies. As recent
events have shown, developing countries can use the WTO and other interna-
tional bodies to their advantage to bring about change.
‘If you can’t beat them, join them’ is an adage that should not be followed
as it relates to agricultural policy and trade. One way for developing countries
to ‘join them’ is by using policies to promote domestic industries under the
guise of promoting an infant industry. The old infant industry idea is simply
that – old and, worse, debilitating. The infant industry argument suggests that
countries could be competitive in a particular industry if only the countries were
able to provide appropriate protection through trade and domestic support
policies so that the infant can mature. The problem with the infant industry
idea is that once policies are in place they are hard to remove. The infant rarely
is considered to have grown old enough for protections to be removed. Like a
child who is never allowed to mature by an overly protective parent, the infant
industry struggles to become efficient and competitive in global markets because
the protection of the government prevents maturation. Infant industry policies
often promote and foster inefficiencies. If the infant industry produces an input
for a domestic agribusiness, the inefficiencies, often seen as increased costs,
will transfer to the agribusiness. For governments to create an enabling envi-
ronment, they must create policies that promote efficiency through investment
with technology transfers. Internal investments are longer-term goals, but in
time they will generate great benefits. Competition will promote great efficien-
cies, which will promote industries that thrive.
Enabling Environments for Competitive Agro-industries 155
Important enablers
Norms, standards, regulations and services related to production
Among the greatest benefits and challenges of globalization is the meeting of
different cultures. One expression of this meeting of cultures is the differences
of opinions as they relate to norms, standards, regulations and services related
to production, processing and distribution of agrifood products. Because of
history, perception of national identity, religion, etc., citizens of different
countries have different conceptions of food and its role in their lives. For
example, Europeans who want traceability of food products back to the farm
of origin have been deeply influenced by food scares. That interest is not dif-
ferent from that of the US producer who produces genetically modified soy-
beans and believes that, because science has generated this product and the
US government has approved its use, GM soybeans are safe and beneficial.
Consumers and producers in other regions of the world do not necessarily
share those perspectives. In particular, some nations’ approach to animal wel-
fare and GM products are adamantly opposed by others. These generaliza-
tions point to the varying views that consumers have of norms and
standards.
Diversity of perspectives provides a complex environment for agro-
enterprises. If all of the norms and standards were on a single continuum of
relative restrictiveness, an agro-enterprise could simply produce at the higher
standard and sell products to all at that higher standard. But standards and
norms may not fall on a single continuum of restrictiveness. Consider an agri-
food firm that distributes nationally and exports to two different countries. One
country prescribes a maximum residue level that the firm’s product must sat-
isfy. Another country demands that the agribusiness firm assure that the pro-
duct is produced in a manner deemed equitable, as determined by the grocery
store purchasing the product. Finally, on the domestic market, the agribusiness
firm must achieve a high quality standard because local consumers are familiar
with the product and are particular about its quality. The first problem is how
to manage different standards for different customers. The achievement of one
standard may be in conflict with the achievement of the others, at least in the
short run. To sell the same product to all three markets may be costly, because
a market may not be interested in the standards of the other markets. Above
all, the cost of achieving all of the norms and standards of the three different
markets may be prohibitive.
Countries change standards. Agro-enterprises must keep abreast of the
various quality and hygiene standard changes. According to the WTO’s Sanitary
and Phytosanitary Agreement, countries are obliged to notify exporters of
changing standards that fall under the purview of that agreement via enquiry
points. However, every norm and standard do not fall under the purview of the
Sanitary and Phytosanitary Agreement. Additionally, firms face not only the
standards of the countries that import the products, but also the standards
imposed by importing firms, especially food retailers. In this complex web of
standards, governments can create enabling environments to assist agricultural
producers and other agrifood chain stakeholders, by providing any information
156 R. Christy et al.
that can keep firms aware of changing standards. Governments can also pro-
vide financial and technical assistance to meet the standards of importers; in
addition to supporting research institutes and product marketing institutes.
Using the mechanisms of the WTO and other international organizations, gov-
ernments can access resources to help firms meet new standards.
Research and development
Agricultural research has long been recognized as critical to increasing agricul-
tural productivity and thereby reducing extreme poverty and hunger (Ruttan,
1975; Herdt, 2009). Equally important but less accredited is the role of agri-
cultural research in establishing and maintaining the competitiveness of the
agro-industrial sector. Numerous examples showcase how technology can
reverse a competitive advantage bestowed by nature. For example, Israel’s
agricultural exports (currently valued at approximately US$600 million annu-
ally) continue to grow despite the country’s near-desert conditions. Technologies
for most non-agricultural industries may be transferred between countries –
usually from developed to developing countries – with minimal or no adjust-
ments, thereby allowing for the much-acclaimed ‘technological leapfrog’ by
developing countries. For agro-industries, however, culturally specific food
consumption patterns, coupled with diverse agro-ecological conditions, may
limit the scope of technology transfer. This specificity underscores the impor-
tance of agricultural research in creating an enabling environment for agro-
industries.
The structure and context of agricultural research have changed signifi-
cantly over the last 2 decades. Table 2 shows the annual growth rate of global
public agricultural research expenditures from 1976 to 1996. Three key
trends are worth pointing out. First, the growth rate of agricultural research
expenditures has declined globally in both developing and developed countries
since the mid-1970s. Second, while developing countries’ growth rates were,
on average, higher than those of developed countries, the Asia and Pacific
region had the highest growth rates followed by the Middle East and North
Table 2. Annual growth rate (%) of global public agricultural research expenditures,
1976–1996. (From Pardey and Beintema, 2001.)
Region 1976–1981 1981–1986 1986–1991 1991–1996 1976–1996
Developing countries 7.0 3.9 3.9 3.6 4.5
Sub-Saharan Africa 1.7 1.4 0.5 ?0.2 1.5
China 7.8 8.9 2.8 5.5 5.2
Asia and Pacific, excluding
China
8.2 5.1 7.5 4.4 6.5
Latin America and the
Caribbean
9.5 0.5 0.4 2.9 2.5
Middle East and North Africa 7.4 4.0 4.2 3.5 4.8
Developed countries 2.5 1.9 2.2 0.2 1.9
Total 4.5 2.9 3.0 2.0 3.2
Enabling Environments for Competitive Agro-industries 157
Africa. Third, SSA countries had the poorest performance, with an average
annual growth rate of only 1.5% for the period of analysis and actual decline
in the early 1990s.
Agricultural research expenditures by the private sector are large and grow-
ing, especially in developed countries. Figure 4 shows the breakdown of agri-
cultural research expenditures by funding sources in 1995. For developed
countries, private-sector expenditure in agricultural research (US$10.8 billion)
has outstripped public expenditure (US$10.2 billion), whereas in developing
countries agricultural research is still very much the domain of the public sector
(US$11.5 billion in the public sector versus US$0.7 billion in the private
sector).
Given the prominence of public funding and public research institutions
(mostly national agricultural research organizations (NAROs) and the Con-
sultative Group of International Agricultural Research (CGIAR) ) in develop-
ing countries, emphasis should be placed on bridging the gap between
research and commercialization in order to enhance competitiveness of the
entire agro-industry value chain. As currently structured, a distinct discon-
nect exists in agro-industry value chains for most developing countries. This
is the gap between product development (undertaken mostly by public
research institutions) and commercialization (mostly by private agribusiness
firms). Numerous techno logies have been developed through publicly funded
NAROs and CGIAR research centres, such as the International Maize and
Wheat Improvement Center, International Crops Research Institute for the
Semi-arid Tropics, International Institute of Tropical Agriculture and
International Potato Center. Most of these technologies are still ‘sitting on
the shelves’ while the private sector is struggling to commercialize a limited
range of outdated technologies.
If agricultural research is to enhance agro-industry competitiveness in
developing countries, policy makers should focus on identifying ways to better
0
2
4
6
Developed countries
Agricultural research expenditures (US$ billion in 1995)
Developing countries
Private Public
8
10
12
14
Figure 4. Agricultural research expenditures, 1995. (From Pardey and
Beintema, 2001.)
158 R. Christy et al.
coordinate the flow of agricultural technology from public discovery to private use.
In accomplishing this objective some important questions should be addressed:
?
What are the key barriers (cost- and non-cost-related) to technology trans-
fer between public research institutions and private seed companies?
?
What are the sources of institutional innovation in promoting successful
public–private partnerships?
?
What is the role of the policy and regulatory framework in impeding or
accelerating technology development and transfer?
Financial services for agro-industries
Access to finance is one of the key constraints to agro-industrial development
and success. Firms in the agricultural sector often have difficulty in accessing
capital for either new ventures or expansion of existing business as they are
perceived to be high-risk
1
businesses with low returns. As a result, an agribusi-
ness portfolio is not an attractive option for investors who tend to have an
appetite for high returns if high risk (and a narrow inter-temporal investment
horizon) is involved. Importantly, the risk profile of agribusinesses differs from
that of other sectors in that the former are faced with both inter- and intra-
marketing year price and production risks. These risks have further been pro-
pelled by the increased globalization of the free trade in agricultural commodities.
The agribusiness credit crunch is further exacerbated by most bankers’ igno-
rance of the sector, which increases the chance of loan applications being dis-
missed entirely on the perception of low profitability. To this end, there exists
a dire need to create an enabling environment for the provision of financial
services to the sector.
Though prevalent in developing countries, the problem of accessing finance
is not confined to these countries as it was an issue at some point for industrial-
ized countries as well. For instance, concerned with farm credit, the US gov-
ernment established a farm credit system in 1916, which is currently
administered by the Farm Service Agency of the US Department of Agriculture.
The extensions of this programme and supportive legislature have been funda-
mental to the development of the US agro-industry.
The intangible nature of financial services requires a strong regulatory envi-
ronment for financial markets to develop and function effectively. As a result,
in the short term governments need to take the lead in building confidence,
trust and stability among participants in these markets. One way of doing so
would be to act as guarantor for loans to the agro-industry. In the long term,
well-defined property rights, particularly in farming, would be crucial to enable
use of real estate as collateral in accessing traditional financial markets. It may
be necessary to build a farm credit system following the US model. Overall, the
evolution of financial markets for agriculture has been observed to parallel gen-
eral financial market development; hence a necessary condition for the former
is functionality of the latter.
1
Risks inherent in agribusiness include changes in climate (drought, flooding), price volatility
and production variability.
Enabling Environments for Competitive Agro-industries 159
Since agro-industries are a high-risk but relatively low-margin segment of
the economy, their success will require innovative and flexible ways of hedging
against risk. One means of reducing price risk would be through the use of
commodity futures exchange markets. Proper functioning of a futures market
depends on enforceability of contracts and a dependable information system.
Crop insurance, on the other hand, would be instrumental in mitigating pro-
duction risks due to natural catastrophes.
While creating an enabling environment for agribusiness finance, special
attention needs to be accorded to small- to medium-sized agribusiness entities
considered too small to access traditional capital markets, but too large to
depend entirely on personal or family savings. Agribusiness entities in this size
category are increasingly becoming important to developing country govern-
ments ever mindful of the need to ensure food security for their populations.
Useful enablers
Ease of Doing Business
One of the functions of governments is to regulate economic activities to reduce
inefficiencies arising from market failures, in order to improve economic and
social outcomes of specific countries. Regulations, however, have to be done in
less costly and burdensome ways to facilitate doing business and to attract
investments that promote economic development and ultimately reduce pov-
erty. Governments around the world have implemented macro economic
reforms to attract foreign capital through the domestic and international pri-
vate sectors, thereby making domestic industries more competitive. Since
2004, those governments’ reforms have been considerably influenced by the
World Bank’s Doing Business project, because countries want to improve their
rank in the Ease of Doing Business Index so as to provide signals to investors
interested in FDI. In spite of the implementation of those reforms, vibrant pri-
vate-sector engagement in specific economies remains limited, poverty rates
are high and growth continues to be static in a number of countries.
Although macroeconomic policies are undoubtedly important to promote
economic development, it is now widely recognized that the quality of business
regulation and institutional arrangements to enforce it are determinants of eco-
nomic prosperity. Findings of Ease of Doing Business show that a hypothetical
improvement of all aspects of the Doing Business indicators to a level com-
mensurate with the top quartile of countries is associated with an estimated
1.4–2.2 percentage points in annual economic growth, whereas a similar
improvement in macroeconomic and education indicators results in 0.4–1.0
percentage points in growth. Ease of Doing Business consistently indicates that
countries with excessive regulation for doing business and weak property rights
generally have lower labour productivity, higher poverty rate, more exclusion
of the poor from doing business, slower economic growth rate, lower human
development indicators and higher levels in the incidence of corruption.
Countries would benefit from simplifying their regulations for doing business in
two ways. First, entrepreneurs not only would spend less time dealing with
160 R. Christy et al.
government regulations (e.g. business licensing and registering, contract
enforcement and resolving disputes), but would also focus their energies on
producing and marketing their goods and services. Second, governments would
spend fewer resources regulating and more providing basic public goods such
as infrastructure to improve economic and social outcomes.
The Doing Business project (World Bank, 2007) reports that Sweden, a
top-10 country in Ease of Doing Business, spends US$7 billion a year, or 8% of
the government budget, and employs an estimated 100,000 government offi-
cials to deal with business regulations. If Sweden cuts expenditures on the
administrative burden by 15%, the savings would amount to 1.2–1.8% of the
total government expenditures, or approximately half of the public health
budget. The data analysed in Doing Business highlight that reducing the number
of procedures to only those truly necessary (statistical, tax and social security
registration), abolishing the minimum capital requirement and using the latest
technology to make the registration process electronic have produced excellent
results in Canada, Honduras, Mexico, Pakistan and Vietnam. Those reforms
may be difficult to implement because political will in government and private
sectors may differ, but they have beneficial effects beyond business entry. Cross-
country evidence has shown that the countries that have the greatest need for
entrepreneurs (to create jobs and to promote growth) – poor countries – put the
most regulatory obstacles in their way.
Business development services
Successful investments in small- to medium-sized enterprises must be paired
with appropriate firm/ business management assistance and access to value-
added business networks in emerging markets. Although investors worldwide
are pursuing investments in emerging markets, studies have confirmed those
efforts to be particularly challenging.
Business development services draw upon formal qualification in areas
such as finance, accounting, marketing management, economics, law and
other technical expertise. Aside from an academic grounding in one or more
of these disciplines, however, possibly a more essential prerequisite, and one to
which the industry refers, is experiential knowledge. As the term suggests, it is
the knowledge obtained from actual experience (‘learning by doing’). How one
obtains such knowledge, e.g. through structured mentoring by and/or informal
consultation with more seasoned professionals, is especially important since
many services do not require prior formal qualification in a ‘closed’ profession
such as accounting, engineering, law or architecture. Finally, provision of these
services will often draw, but only selectively and for limited periods, on particu-
lar domain expertise and knowledge. For example, vetting of a proposed
investment in an agribusiness company will require expert ‘technical knowl-
edge’ of the product in question, including issues such as plant breeding,
processing, packaging and certification, among others.
Formal academic and professional qualifications are often, but not always,
a necessary condition for undertaking a particular service. More important,
especially for undertaking critical services within the investment cycle, is
experiential knowledge, often confused with domain expertise. The latter
Enabling Environments for Competitive Agro-industries 161
refers to expert knowledge, which, as noted earlier, may be needed to pro-
vide various services associated with the investment cycle. One such example
is technical knowledge of processes for producing high-quality food products.
Clearly, it is needed to evaluate proposed investment in a plant producing
such a product. What proved equally significant in terms of appraising the
investment was the supervisors’ and managers’ accumulated experience,
through past jobs, in operating and maintaining the equipment in question,
as well as other processing-related activities.
The international donor community and national governments have
attempted to strengthen business management services, especially those pro-
vided by local professionals. Broadly speaking, their efforts fall into three cat-
egories: (i) increasing the supply of providers; (ii) stimulating the demand for
various services; and (iii) addressing issues of both supply and demand within
the parameters set by specific investments.
Donors and state agencies have promoted small- and medium-sized enter-
prises in three different areas: financial services, business development services
and government-mediated business environment. An immediate motivation is
the desire for a higher degree of self-financing because of cutbacks in support
from government and private givers. This objective, however, also coincides
with growing realization of the need for commercial acumen and expertise to
fulfil their corporate aim of improving the lives of poor and disadvantaged peo-
ple in the countries in which they are operating. Indeed, some have been
severely criticized for past, ill-informed interventions that, far from improving
the lot of poor farmers, have actually worsened it. Overall, there is increased
realization that a market-based approach is much more likely to improve the
living standards of those people the organization is seeking to assist.
Business linkages
Linkages for large agribusinesses in the supply chain are both horizontal (i.e.
between enterprises that are on the same level of the supply chain) and vertical
(i.e. between enterprises that are on different levels of the supply chain). Most
horizontal linkages pertain to large and small agro-industries, while vertical link-
ages pertain to large agro-industries, farmer groups and buyer networks. Of the
two, horizontal linkages are less common due to the lack of incentives for large
agro-industries to pursue such relationships. Large industries may subcontract to
their smaller counterparts in order to satisfy a market opportunity. Such arrange-
ments may not have indirect spillover effects like the transfer of technology and
information. Alternatively, large agro-industries may jointly bid for contracts
with smaller firms and, in so doing, increase their access to markets.
On the other hand, vertical linkages are more beneficial to both parties
(large agribusinesses and farmer groups), because in most cases they entail long-
term direct and indirect benefits. Large agro-industries pursue linkages with
farmers or farmer groups in order to access a steady supply of raw materials.
The extent of these linkages may vary from a ‘one-time’ engagement to a long-
term contractual relationship. In the latter case, the large firm may invest in
training farmers in the production of a particular agricultural commodity; fur-
ther, it may also provide capital for the purchase of agricultural inputs. The goal
162 R. Christy et al.
of such a relationship is to ensure a steady supply of a desired or specified prod-
uct for the large firm. Farmers, in turn, derive benefit from this relationship.
First and foremost, they now have a steady market for their farm output, and
therefore a steady income stream. In addition, they have acquired farm manage-
ment skills that enable them to produce a quality product. This is to farmers’
advantage – should the business relationship with the large firm cease, farmers
are competitive enough to pursue relationships with other firms. Further, farm-
ers now have access to technologies in the form of improved inputs like seeds
and fertilizers that should improve their productivity and profitability.
Vertical linkages should be encouraged by public policy makers because
they have the potential to eradicate poverty at the smallholder farm level
through income generation. Specifically, policy support should be directed
towards the formation of farmer groups so as to reduce the risk of insufficient
supply. In addition, farmer groups are better equipped than individual farmers
to negotiate favourable contract terms with large agribusinesses. The business
relationship is economically attractive only if farmers realize higher profits than
they would have had they pursued alternative markets.
Reforming Enabling Environments
How can we reform the public process, in the context of radical change, to
creatively enact policies that improve the relative competitiveness of agro-
industries in emerging markets?
As discussed in the literature, ‘economic reform’ is the process by which
emerging economies are transformed from state-led to market-driven princi-
ples with the goal of advancing economic prosperity. This view puts the gov-
ernment as the primary driver of the reform process with measures that, in
sequence, include privatization, tax reform, fiscal discipline, trade liberalization,
deregulation of economic activities, price liberalization, decontrol of interest
and exchange rates, elimination of state subsidies and enforcement of intellec-
tual property rights. Because of the rapidity of globalization, however, we
observe a more parallel reform process, one in which state and private sectors
act in concert to create an enabling environment. Therefore, in this chapter we
take a more ‘nuanced view’ of the reform process, capturing a more dynamic
(i.e. one that goes through multiple phases) and inclusive process in which the
private sector can play a leading role in certain cases. Further, we acknowledge
the wide diversity of experiences in transitional economies over the last 2 dec-
ades emanating from different starting points, economic structures, the con-
duct of both private and public stakeholders and the desired outcomes. The
central role of the agricultural sector, coupled with a long history of state con-
trol, places agricultural market reform at the centre of most economic liberali-
zation efforts in transitional economies. For brevity, we focus on agricultural
sector reform, although of course the agricultural sector exists and evolves in a
more dynamic and broader macroeconomic environment.
Like most other private enterprises, agricultural firms tend to be risk
averse. Consequently, they require a higher rate of return (a risk premium)
Enabling Environments for Competitive Agro-industries 163
before they can invest in a risky environment. From the perspective of a
private agribusiness enterprise seeking to maximize expected profits, the
enablers discussed in the preceding section can be seen as ways to augment
the expected profit function by altering the production functions, the input
and output prices, and lowering the risk and uncertainty.
2
A key distinguish-
ing feature of the agricultural sector, compared with other sectors of the
economy, is the high prevalence of risk and uncertainty that result from both
natural and human-made phenomena. While some sources of risk are com-
mon to all businesses, others are unique to agribusinesses.
Governments in most transition economies have played a key role in shap-
ing the process and outcomes of economic reform, but, in reality, they have
varying degrees of ‘capacity’ that limits their ability to influence the environ-
ment in which private enterprise operates. Despite the premise of ‘rolling back
state involvement’ as the basis for agricultural reform, we recognize the essen-
tial role of the state in advancing essential enablers, important enablers and
useful enablers that target agro-industries.
Presented in Figure 5, our model for analysing the agricultural sector
reform process in developing countries is centred on two key variables, risk and
capacity. We use those variables to formulate a matrix. Along the vertical axis
2
Frank H. Knight (1921) was the first to distinguish between ‘risk’ and ‘uncertainty’. Risk refers
to situations in which the decision maker can assign mathematical probabilities to the random-
ness of an event based on past experiences. In contrast, uncertainty refers to situations when
this randomness ‘cannot’ be expressed in terms of specific mathematical probabilities.
Enforce grades
and standards
Maintain
competiveness
Promote
innovative
institutions
Develop
essential
enablers
• Scenario 1
• e.g. Uganda seed
sector
• Scenario 2
• e.g. Malawi
subsidy programme
• Scenario 4
• e.g. Food processors
in South Africa
• Scenario 3
• e.g. Rise of
supermarkets
High risk
Low risk
Low
capacity
High
capacity
Figure 5. Agricultural sector reform in developing countries.
164 R. Christy et al.
we map the level of risk and uncertainty agricultural enterprises face when
conducting business (investing, starting and expanding agribusinesses). This
risk variable summarizes the attractiveness of the ‘business climate’ from the
point of view of current and potential agribusiness investors. Along the hori-
zontal axis we map the level of ‘capacity’ the state has in shaping the environ-
ment for business, usually but not exclusively exerted through the ministry of
agriculture. Many of the elements required to create an enabling environment
for agro-industries are outside the usual mandate of many ministries of agricul-
ture. Realizing this limitation allows for more careful scenario planning that
takes into account the unique context facing each country. From this matrix,
four stylized cases for reforming the agricultural sector emerge. In the bottom
right quadrant, scenario 1, we encounter an environment that is risky and has
high state capacity. Scenario 2 in the lower left quadrant describes an environ-
ment that is risky and has low state capacity (promote innovative institutions).
Continuing clockwise, in scenario 3 we have an environment that is low risk
and has low state capacity (enforce grades and standards) and finally in
scenario 4 the environment is low risk and has high state capacity (maintain
competitiveness). Below, we discuss each of these four ‘stylized scenarios’ using
country- and sector-specific examples.
Scenario 1: High risk and high capacity
If the state has high capacity and the economy is uncertain, then the state
encourages private-sector investment by clearly defining the ‘rules of the
game’. Such rules would include all ‘essential enablers’ identified in the hier-
archy of enablers pyramid (see Figure 3). A good example of a successful
agro-industry under high control and high risk is Uganda’s vibrant seed
industry (see Box 2). In 1994, the government led a significant transition
from a seed system monopolized by the government at all levels (research,
production, processing, distribution and extension services) and made way
for the private sector by enacting the Agricultural Seeds and Plant Statute
(Muhhuku, 2002). The statute provided for ‘the promotion, regulation and
control of plant breeding and variety release, multiplication, conditioning,
marketing, importing and quality assurance of seeds and other planting
materials’ through the National Seed Industry Authority, the National Seed
Certification Services and the Variety Release Committee (Government
of Uganda, 1994). Currently, Uganda has a highly competitive private-
sector-led seed industry in which local, regional and multinational seed com-
panies produce and distribute seeds in both domestic and East African
markets (mostly Sudan and Tanzania).
Scenario 2: High risk and low capacity
Perhaps the least attractive investment climate for agro-industries is the one
characterized by limited government capacity and high risk. This scenario
applies to many of the least developed countries. In most cases the state lacks
the resources or commitment to create the essential enablers. Policies and
regulations are ill defined and/or unenforced. If there is strong comparative
advantage based on natural endowments, however, some agro-industries have
Enabling Environments for Competitive Agro-industries 165
Box 2. Seed industry reform in Uganda.
During the past 5 years the Government of Uganda has launched a number of important
programmes, at the core of which agriculture is given high priority. Most notable is the 2000
Poverty Eradication Action Plan, which includes the Plan for the Modernization of Agriculture
(PMA). Under the PMA, the government is focusing on the National Agricultural Advisory
Services (research and technology development, education, marketing and agroprocessing
and natural resource management), which aims to develop an agricultural service delivery
system that is client-oriented, i.e. where farmers can determine the services they need. The
government also recognizes that an important factor in improving agricultural productivity
and production is the use of modern inputs, including seeds.
Uganda has made important progress towards economic growth and poverty reduction
since the late 1980s. In the 1990s, annual gross domestic product (GDP) growth climbed
steadily to 6.9% from a 3% per annum growth rate in the 1980s. This impressive growth
appears to be linked to the set of economic policies that advanced structural adjustments
within the economy. The government liberalization of the foreign exchange rate was a sig-
nificant economic reform that provided incentives to major sectors of the economy: agricul-
ture, industry, trade and tourism. Despite the economic growth record, concerns about the
macroeconomic environment still exist. According to an International Center for Soil Fertility
and Agricultural Development report (IFDC, 2003), the economic environment remains
unfriendly because of the continuous depreciation of the Ugandan shilling, high interest
rates and limited access to finance.
In line with the overall government policy, the government of Uganda fully liberalized
the seed industry in the early 1990s, and privatized its operations in 1993. By 2005, six
new private seed companies had entered the market. In addition to Uganda Seed Project,
the private seed companies operating in the country are East African Seed Company, Farm
Inputs Care Center, Harvest Farm Seeds, Kenya Seeds, Nalweyo Seed Company Ltd and
Victoria Seeds Ltd. Seed Co. International from Zimbabwe and Pannar Seed Company from
South Africa have also had their seeds tested and adopted in Uganda through distributors.
The National Agricultural Research Organization (NARO) is responsible for the produc-
tion of both breeder seed and foundation seed. Currently, agricultural research is fragmented.
The research facilities are financially constrained and as a result the operation of the breed-
ing programme is affected. In a competitive, liberalized market, seed companies compete on
the strength of their breeding programmes and their ability to introduce new and improved
varieties. The relationship between NARO and the seed companies is evolving.
The regional harmonization of seed laws and regulations for East African countries
(Kenya, Tanzania and Uganda) that is currently under way has opened national borders for
regional seed trade. For private seed companies, the harmonization will present new oppor-
tunities (expanded markets) and challenges (increased competition).
performed well under these environments. The case of gum arabic
3
from Sudan
is a stark example. World trade in gum arabic was estimated to be US$90 mil-
lion in 2000, with 56% of the traded volume coming from Sudan, and much
of the remainder from Chad and Nigeria (Cecil, 2005). While these countries
possess the natural resource, their governments have done little to create an
enabling environment for the gum arabic industry.
3
Gum arabic, a natural gum also called gum acacia, is a substance that is taken from two sub-
Saharan species of the acacia tree, Acacia senegal and A. seyal. It is used primarily in the food
industry as a stabilizer and is a key ingredient in soft drinks (Fennema, 1996).
166 R. Christy et al.
If the state has limited capacity, and the economy is uncertain, then the
state should provide incentives for creative institutional innovations, like private–
public partnerships, civil society organizations, non-governmental organizations
and perhaps corporate social responsibility (Box 3).
Box 3. Agricultural input supply programme in Malawi.
Agriculture is the mainstay of the economy of Malawi, where 90% of the population lives in
rural areas and more than 70% heavily depends on farming for livelihood. Agriculture con-
tributes about 38% of the gross domestic product (GDP), accounts for 80% of export earn-
ings and employs 80% of the country’s workforce. Maize is the dominant staple food, while
tobacco, sugar, coffee and tea are important cash crops. Smallholder farmers cultivate
nearly 80% of the total cultivated area in the country and devote 85% of their cultivated land
to maize production. Agriculture is characterized by low use of purchased-input technolo-
gies, high land pressure due to an increasing population growth, periodic flooding and
droughts, and continuous cropping of the same land area with little replenishment of the
nutrients, leading to decreasing soil fertility. Adoption of higher-yielding seed varieties and
fertilizers, better crop management and better water control are critical for improving agri-
cultural productivity in the country.
The Government of Malawi (GOM), as other governments in southern Africa, has imple-
mented a number of input interventions to increase agricultural productivity and food secu-
rity to ultimately reduce poverty. Major agricultural input interventions include the Starter
Pack Program (SPP), the Targeted Input Program (TIP) and the Fertilizer Subsidy Program
(FSP). GOM, the European Union and the Department for International Development (DFID)
among other donors have been jointly funding these agricultural input interventions.
In 1998, the GOM initiated a ‘free’ SPP aimed at stimulating use of fertilizers and improved
seeds of cereals and legumes to raise national output to reduce food imports. In addition to
supporting extension services, under the auspices of the SPP, fertilizers and improved seeds
of cereals and legumes were supplied free-of-charge to smallholder farmers. The SPP had a
country-wide coverage and resulted in a significant increase in agricultural production, reduc-
ing production deficits. Its financial and economic viability, however, has never been compre-
hensively evaluated. Thus, the effectiveness of the SPP has been questioned.
In response to extreme drought and low agricultural productivity in early 2005, the GOM
introduced a universal FSP in replacement of the TIP during the 2005/06 agricultural sea-
son. The FSP favours poor farmers with the land and human resources to use fertilizer
efficiently, when they could not otherwise afford to buy enough fertilizer and improved seed.
The FSP focuses on maize as a food crop and tobacco as a cash crop. Thus, two subsidy
fertilizer packages are distributed country-wide: one for maize and the other for tobacco.
Due to large amounts of cross-border trade, vouchers are to be used to effectively target
Malawian smallholder farmers as opposed to neighbouring countries’ farmers. Vouchers of
different colours are issued depending on the fertilizer package to be redeemed. Also, the
subsidized price to be paid by the beneficiary is indicated on the voucher to avoid fraud and
ambiguity. Maize farmers pay lower subsidized fertilizer price than tobacco farmers. On
average, the GOM subsidize about 76% of the commercial price of fertilizers. In addition to
fertilizer vouchers, farmers are entitled to receive a maize seed bag for free once they
redeem their fertilizer vouchers.
In the 2006/07 agricultural season, almost 1.5 million farmers received vouchers for the
purchase of 150,000 t of fertilizers and two million farmers received vouchers for free maize
seeds. The Ministry of Agriculture and Food Security allocates over 50% of its budget to
continued
Enabling Environments for Competitive Agro-industries 167
Scenario 3: Low risk and low capacity
In scenario 3, the state has relatively little capacity, and the economy has a
greater degree of certainty. Due to the low-risk environment, the private sector
will emerge to exploit any economic and commercial opportunities available in
the agricultural sector. The state should focus on facilitative policy measures
that seek to provide public goods. Policies that fall under this category include
collection and dissemination of market information, standardization of product
grades and their enforcement, standardization of weight and volume measures,
and setting and enforcing standards and laws to protect consumers and the
environment. Due to the public good dimensions that are associated with these
types of services, we envision that they will be provided by government agen-
cies at public expense.
The rise of supermarkets in developing countries (East and South-east Asia,
Latin America and a number of countries in SSA) epitomizes this scenario (see
Box 4). Some key lessons on reforming the agricultural sector can be drawn from
this case study. First, transformation of the agro-industry does not require all
enablers to be in place before the private sector can invest. Instead, some push
factors in developed countries, coupled with the prospects for higher margins in
developing countries, can attract FDI. Second, the sequencing of the reform
process (usually framed with government playing the lead and the private sector
following) can be reversed (government adapting to meet the needs of the private
sector), and in most cases takes place as a complex and dynamic process with
checks, balances, negotiations and feedback loops between the private and pub-
lic sectors. Third, once a sector of the agro-industry builds critical mass, the pri-
vate sector often evolves to fill in the gaps in the facilitative measures that are not
provided by government (e.g. setting up and enforcing grades and standards).
Scenario 4: Low risk and high capacity
In scenario 4, the state experiences improved capacity and the economy has
lower risk. This scenario often arises at the end of a successful reform process.
The role of government should be limited to measures that maintain and sus-
tain competitiveness through the provision of public goods, enforcement of
antitrust regulations and protection of intellectual property rights (Box 5).
Box 3. Continued.
implementation of the FSP. No comprehensive evaluation has been conducted on the imple-
mentation and impact of the FSP, but it has bolstered agricultural output, increasing food sec-
urity. In combination with favourable rains, the FSP has significantly contributed to increases in
maize production. It has also increased smallholder farmers’ access to fertilizer and to improved
maize seed. Although Malawi was experiencing grain deficits in 2005, in 2006, the country
produced an estimated surplus of 1.2 million tonnes of maize. Part of this surplus was exported
to Zimbabwe, Swaziland and Lesotho, raising smallholder farmers’ income. It is worth noting
that these input interventions have considerably reduced farmers’ demand for agricultural
inputs from the private sector, shrinking private-sector participation in agricultural input and
output markets.
168 R. Christy et al.
Box 4. The rise of supermarkets in transition economies. (Adapted from Reardon
et al., 2004.)
The rapid rise of supermarket chains in developing countries has transformed the market
structure, participant conduct and economic performance of agrifood systems in Africa,
Asia (excluding Japan) and Latin America (Reardon et al., 2004). Intense competition in
home markets, coupled with much higher profit margins in developing countries, spurred
the flow of foreign direct investment (FDI) from American and European supermarket chains
(Gutman, 2002). The liberalization of the retail sector in most transition economies in the
1990s also created new opportunities for investments.
In Latin America, the share of supermarket sales as a percentage of national food retail
sales grew from 10–20% in 1990 to about 50–60% at the turn of the millennium (Reardon
et al., 2004). The supermarket growth trend in East and South-east Asia has been generally
similar to that of Latin America with China topping both size (US$55 billion in 2003) and the
growth rate (30–40% annual growth in 2003) (Hu et al., 2004). Central and Eastern Europe
(CEE) has seen three phases of penetration by supermarkets. First came northern CEE
(Czech Republic, Hungary, Poland and Slovakia), in the mid-1990s, where the share of
supermarkets in food retail had risen to 40–50% by 2004. The second phase was in south-
ern CEE (Bulgaria, Croatia, Romania and Slovenia), where the share grew to 25–30% in
2004 and continues to grow rapidly. The third phase was in Eastern Europe, ‘where income
and urbanization conditions were present for a takeoff but policy reforms lagged, so that the
share in Russia, for example, is still only 10%’ (Reardon et al., 2004). In SSA, the supermar-
kets trend is in the early stages, with South Africa and Kenya leading the field and expand-
ing in their respective regions of the continent.
As noted by Reardon et al. (2004), supermarket chains in developing countries have been
shifting over the past few years away from the old wholesale procurement model towards a
new model in order to close the gap between their supplies and their needs. The four key
pillars of a new kind of procurement system are: (i) specialized procurement agents, or
‘specialized/dedicated wholesalers’; (ii) centralized procurement through distribution cen-
tres, as well as regionalization of procurement; (iii) assured and consistent supply through
‘preferred suppliers’; and (iv) high-quality and increasingly safe products through private
standards imposed on suppliers. The first three pillars require an organizational change in
procurement, while the fourth has resulted in institutional change in the agro-industry value
chain.
Box 5. Collusion in South Africa’s milling industry.
The South African wheat-to-bread value chain comprises farmers, millers, bakers, retailers
and consumers in successive stages of value addition. This value chain is currently charac-
terized by high degrees of concentration, especially in the processing (milling and baking)
sector. The baking industry is the major client of the wheat milling industry and most of the
major millers have vertically integrated with the industrial plant bakeries (National Agricultural
Marketing Council, 2003). Illustrative of the relatively high levels of concentration, currently,
four main milling companies account for 87% of the total milling capacity in South Africa,
while in the baking sector approximately 80% of the bread production is in the hands of six
large baking companies or groups. These levels of concentration are primarily a result of
measures during the period of regulated marketing that restricted the registration of millers
and bakers (National Agricultural Marketing Council, 2003).
continued
Enabling Environments for Competitive Agro-industries 169
Box 5. Continued.
During 1997, the South African wheat-to-bread value chain came under fire because of
collusion in fixing the prices of bread in South Africa. During December 2007, independent
bread distributors in the Western Cape province of South Africa lodged a complaint with the
National Department of Trade and Industry’s Competition Commission that bakeries owned
by three of the big milling and baking companies had unjustifiably raised prices by between
30c and 35c a loaf a week before Christmas. This behaviour raised suspicion of anticompeti-
tive conduct and the Competition Commission referred the case to the Competition Tribunal
for investigation (Seria, 2007). When the Competition Commission referred the case Premier
Foods applied for the Competition Commission’s leniency programme. Premier Foods pro-
vided the Competition Commission with the details of meetings with its competitors, at which
national price increases and discounts were discussed. The result was that the company
escaped being penalized for contravening the Competition Act (Act 89 of 1998) for anticom-
petitive behaviour by colluding to fix the price of bread (Crotty, 2007; Seria, 2007).
With the investigation of anticompetitive behaviour under way, Tiger Brands, another big
milling and baking company, immediately undertook to cooperate with the Competition
Commission. As part of their cooperation Tiger Brands instituted a wider, national and inde-
pendent investigation into its milling and baking operations by commissioning a commercial
law firm, forensic auditors and economic consultants to investigate the matter. Although the
independent investigations found no evidence of abnormal pricing or of consumers being
adversely affected the investigation did find evidence of meetings between Tiger Brands
employees and the employees of competitors (Seria, 2007). These meetings amounted to
anticompetitive activity expressly prohibited by the Competition Act (Act 89 of 1998). Tiger
Brands consequently admitted that the activities of certain employees had contravened the
Competition Act (Act 89 of 1998). These activities amounted to collusion, along with other
millers and bakers, to fix the price of bread in the Western Cape. The Competition
Commission consequently fined Tiger Brands R98.8m and granted the company leniency
against prosecution subject to agreeing to assist the Competition Commission with investi-
gations into possible collusion among millers and bakers (Crotty, 2007). The fine imposed
on Tiger Brands represented 5.7% of their bread sales during 2007 (Seria, 2007).
Conclusions
Agro-industries are an engine for growth in rural economies and the agro-
industrial sector plays a central role in the economic development of low- and
middle-income countries. The rise of global markets based on competitive
advantage is, however, increasingly forcing policy makers to make assessments
of the ‘enabling environment’ for agro-industries. After an evaluation of selected
measures and indexes of an enabling environment we conclude that standard
measures, both macro and micro, are inadequate for evaluating the competi-
tiveness of agro-industries within emerging economies.
Further, we find that agro-industry exhibits unique characteristics that dis-
tinguish it from the wider economy, while simultaneously vast segments of the
food and fibre markets are becoming well integrated into the general econ-
omy. Distinguishing characteristics of agro-industries are embedded in the
type and nature of risk inherent in the sector. In formulating public policies to
mitigate against such uncertainties, thereby creating an enabling environment,
170 R. Christy et al.
we established a hierarchy of enabling needs for agro-industry competitiveness
to inform public policy makers. We then went beyond this linear hierarchy to
discuss the dynamic role of the state based on sector risk and capacity that
must be considered in reforming public policy.
In recent decades, agrifood markets globally have experienced rapid
change. This dynamic environment has raised the premium on traditional pol-
icy approaches to the sector, where ‘getting agriculture moving’ is now being
replaced with ‘making markets work’ to sustain economic progress. Previously,
ministers of agriculture were myopically focused on increasing on-farm produc-
tivity without paying closer attention to the enabling environment that addressed
the competitiveness of the sector. While there is wide variation across countries
and sectors, a ‘one size fits all’ strategy would be inappropriate to advance
a reform agenda for the agrifood industries in developing countries. For effec-
tive reform to emerge, we therefore advocate a more nuanced appreciation of
the role public policy makers can play in sustaining competitiveness.
Creative public policy in this dynamic global economy seeks to sustain
efficient and equitable outcomes for the agrifood sector that call for govern-
ment to develop essential enablers, promote innovative institutions, advance
facilitative policies and maintain competitiveness. We recognize that, while
agriculture is unique, it too must exist in a wider national economy. Therefore,
our list of specific policy measures that are essential, important and useful to
the agro-industry of developing counties must be coordinated with the wider
national macroeconomic policy framework.
Establishing the ‘rules of the game’ in the form of property rights, espe-
cially in the case of deeds for physical and intellectual property, is a critical
aspect of an enabling environment for agro-industries. Included as an essential
enabler is contract enforcement. Given the rise of contract farming, vertical
coordination and supply chain management of large food companies, effi-
ciency and equity in the sector are undermined without strong laws to ensure
the transaction implied within contracts in agriculture. The disadvantaged small
farmer engaged in contract farming can become an efficient player in the mar-
ket with strong laws that enforce contracts made with large agro-industries, and
likewise companies that offer contracts can be assured of delivery of goods and
services. Enforcement of contracts used by agro-industries is, however, part
and parcel of ‘the rule of law’ established by any nation. Therefore, ministries
of agriculture must aggressively and urgently expand such legal remedies to a
wider set of transitions in rural areas.
Rural areas within emerging economies are often confronted with highly
risky environments and weak public institutions. Under such circumstances, seg-
ments of the economy can exhibit market failure in the face of state failure. The
private sector does not develop an appetite for investing in such environments,
and the state lacks capacity to improve this environment such that inward invest-
ments could be made. The promotion of innovative institutions is critical to
enhancing the bargaining power of farmers. The position of farmers in the
market needs strengthening in most countries. Investment in farmers’ associa-
tions can reduce transaction costs, enhance bargaining with suppliers and stimu-
late on-farm production.
Enabling Environments for Competitive Agro-industries 171
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Appendix 1. Ease of Doing Business indicators. (From World Bank, 2007.)
Business stage Indicator Measures
Starting a
business
Procedures (number)
Time (days)
Number of procedures required to start a business
Total amount of time required to complete all procedures
Cost (% of income per capita) Logistics costs as a percentage of annual income per capita
Minimum capital (% of income
per capita)
Paid-in minimum capital requirement as percentage of annual income per capita
Dealing with
licences
Procedures (number) All procedures required for a business in the construction industry to build a
standardized warehouse
Time (days) Number of calendar days required to complete licensing procedures
Cost (% of income per capita) Official costs as a percentage of the country’s annual income per capita
Employing
workers
Difficulty of hiring index (0–100) If fixed contracts are prohibited for permanent tasks, maximum cumulative duration
of fixed-term contracts, ratio of minimum wage to average value added per worker
(using a 42-year-old, non-executive, full-time, male employee as model worker)
Rigidity of hours index (0–100) Restrictions with regard to workweek hours, night work, weekend work and vacation
days
Difficulty of firing index (0–100) Restrictions with regard to basis and procedure for terminating employment, laws
pertaining to reassignment options and priority rules
Rigidity of employment
index (0–100)
Average of the three sub-indices above
Non-wage labour cost (% of salary) All social security payments and payroll taxes for the fiscal year
Firing cost (weeks of salary) Cost of advance notice requirements, severance payments and penalties due when
terminating a redundant worker
Registering
property
Procedure (number) Number of procedures required to register or transfer property (standardized to
land and building of 50 times income per capita value, under same ownership for
10 years)
Time (days) Total amount of time required for property registration
Cost (% of property value) Official costs associated with property registration as a percentage of property value
Getting credit Strength of legal rights
index (0–10)
Extent to which collateral and bankruptcy laws protect rights of borrowers and
lenders, thus facilitate lending
Depth of credit information
index (0–6)
Rules affecting the scope, accessibility and quality of credit information available on
borrowers
continued
1
7
4
R
.
C
h
r
i
s
t
y
e
t
a
l
.
Appendix 1. Continued.
Public registry coverage
(% of adults)
Number of individuals and firms listed in a public credit registry, current information
on repayment history, unpaid debt and outstanding credit
Private bureau coverage
(% of adults)
Number of individuals and firms listed by private credit bureaus with current
information on repayment history, unpaid debt and outstanding credit
Protecting
investors
Extent of disclosure index (0–10) Disclosure of related-party transactions (firm standardized to publicly traded
corporate buyer, a food manufacturer)
Extent of director liability
index (0–10)
Clear obligations and codes of conduct for company directors and managers, and
the shareholders’ ability to successfully sue in case of fraud or bad faith
Ease of shareholder suits
index (0–10)
Easy access to the courts when investors are harmed (availability of documentation
and witnesses from the firm during trial)
Strength of investor protection
index (0–10)
Average of the three sub-indices above
Paying taxes Payments (number per year) Total number of taxes and contributions paid (including corporate income tax, VAT,
social contributions and taxes on labour, property and property transfer, dividends,
capital gains, financial transactions, waste collection, vehicles, roads) for a
standardized manufacturing company
Time (h per year) Time required to comply with three major taxes: income taxes, VAT and labour taxes
Total tax rate (% of profit) Total taxes as percentage of commercial profits
Trading across
borders
Documents to export/import
(number)
Trading documents to be filed (for a standardized 100+ employee firm exporting
>10% of sales; product is traded in a dry cargo, 20 ft full container load)
Time to export/import (days) Time needed to comply with export and import requirements
Cost of export/import
(US$ per container)
Cross-border trade costs per container, including all fees associated with completing
the procedures to trade (excludes tariffs and trade taxes)
Enforcing
contracts
Procedures (number)
Time (days)
Number of litigation procedures necessary to resolve a commercial dispute
Time required to resolve a contract dispute in court, i.e. from case filing to payment
Cost (% of claim) Cost of court and attorney fees as percentage of amount claimed
Closing a
business
Time (years)
Cost (% of estate)
Time required to liquidate unviable businesses
Cost of liquidation as percentage of estate value
Recovery rate (cents on the dollar) Proportion of loan recovered by creditors through the bankruptcy proceedings
Enabling Environments for Competitive Agro-industries 175
Appendix 2. Doing business in Egypt, 2006/07. (From World Bank, 2007.)
Components In-stage rank World rank
1. Starting a business Procedures (7) 55 126
Time (9 days)
Cost (28.6% of income
per capita)
Minimum capital (12.9%)
2. Dealing with licences Procedures (28) 163
Time (249 days)
Cost (474.9% of income
per capita)
3. Employing workers Difficulty of hiring (0/100) 108
Rigidity of hours (20/100)
Difficulty of firing index (60/100)
Rigidity of employment
index (27/100)
Non-wage labour cost
(25% of salary)
Firing cost (132 weeks of salary)
4. Registering property Procedures (7) 101
Time (193 days)
Cost (1% of property value)
5. Getting credit Strength of legal rights (1/10) 115
Depth of credit info index (4/6)
Public registry coverage (1.6%
of adults)
Private bureau coverage
(missing % of adults)
6. Protecting investors Disclosure index (7/10) 83
Director liability index (3/10)
Ease of shareholder suits
index (5/10)
Investor protection index (5.0/10)
7. Paying taxes Procedures (36) 150
Time (711 h per year)
Cost (47.9% of profit)
8. Trading across borders Documents to export/import (6/7) 26
Time to export/import (15/7)
Cost of export/import
($714/$729 per container)
9. Enforcing contracts Procedures (42) 145
Time (1010 days)
Cost (25.3% of claim)
10. Closing a business Time (4.2 years) 125
Cost (22% of estate)
Recovery rate (16.6 cents on
the dollar)
176 R. Christy et al.
Computation Procedure
Consider the ease of property registration in Egypt in the 2006/07 period:
registration entailed completing seven different procedures, a process that took
at least 193 days and would cost an equivalent of 1% of the value of the prop-
erty to be registered. For each of these values, Egypt is ranked against other
world economies and assigned a percentile ranking of 58.7%, 86.4% and
11.8%, respectively. Taking a simple average of these values gives the stage-
level percentile ranking of 52.3% for Egypt’s property registration processes.
The same process is repeated for each of the business life stages, to produce 10
stage-level percentile rankings (these easily can be translated into a 1–178 rank-
ing relative to other countries’ performance in performing the same operations
as indicated above for Egypt), whose simple average is the country-level percen-
tile ranking. This percentile ranking is used to assign an Ease of Doing Business
position for Egypt in the world economy, in this case, 126 out of 178.
Appendix 3. The Global Competitiveness Index (GCI). (From World Economic Forum, 2006.)
Competitiveness
pillar Measures Components
Basic requirements
Institutions Rules that shape incentives
and define the way
economic agents interact
in an economy
Public institutions: public-sector
accountability, efficiency,
transparency; independence of
judiciary; respect of property rights;
government inefficiency; levels of
public security
Private institutions: corporate ethics;
accountability
Infrastructure Quality of physical
infrastructure, i.e.
energy, transport and
telecommunications
Overall infrastructure quality; railway
infrastructure development; quality
of port infrastructure; quality of air
transport infrastructure; quality of
electricity supply; telephone lines
Macroeconomy Level of macroeconomic
stability
Fiscal indicators (government deficit,
national savings rate, inflation,
interest rates, government debt);
trade-weighted real effective
exchange rate
Efficiency enhancers
Health and education Quality of primary health
and education
Health: medium-term business impact
of malaria, tuberculosis and HIV/
AIDS; infant mortality;
life expectancy; TB prevalence;
malaria prevalence; HIV prevalence
Education: primary school enrolment
continued
Enabling Environments for Competitive Agro-industries 177
Appendix 3. Continued.
Competitiveness
pillar Measures Components
Higher education Quality of educational
system
Secondary and tertiary enrolment
rates; quality of education as
assessed by business community
(quality of science, maths and
management schools); availability
of specialized training for
workforce
Market efficiency Extent to which goods,
labour and finance are
allocated efficiently for
maximum productivity
Goods: market openness, level of
distortive government intervention;
market size
Labour: cooperation in
employer–employee relations;
flexibility of labour regulations;
extent of gender bias in the
workplace
Financial: access to credit; quality
of capital; soundness of banking
sector
Technological
readiness
Agility with which an
economy adopts existing
technologies to enhance
the productivity of its
industries
Availability of information
and communications
technologies (ICTs) and
other technologies;
aggressiveness of firm
adoption of new technologies;
FDI and technology transfer;
cellular telephones;
Internet users;
personal computers
Innovation and sophistication
factors
Business
sophistication
Ability of business leaders
to manage companies
efficiently
Quantity and quality of local
suppliers, level of development of
production processes, extent to
which companies are turning out
the most sophisticated products,
networks and supporting
industries
Innovation Extent of design and
development of
cutting-edge products
and processes
Business investment in research
and development; quality of
scientific research; extent of
collaboration in research
between universities and
industries; protection of
intellectual property
178 R. Christy et al.
Appendix 4. Components of the Business Competitiveness Index (BCI). (From Porter, 2004.)
I. Company operations and strategy
Production process sophistication
Nature of competitive advantage
Extent of staff training
Willingness to delegate authority
Capacity of innovation
Company spending on research and development
Value chain presence
Breadth of international markets
Degree of customer orientation
Control of international distribution
Extent of branding
Reliance on professional management
Extent of incentive compensation
Extent of regional sales
Prevalence of foreign technology licensing
II. National business environment
(a) Factor conditions
Physical infrastructure
Administrative infrastructure
Human resources
Technology infrastructure
Capital markets
(b) Demand conditions
Buyer sophistication
Sophistication of local buyers, products and processes
Government procurement of advanced technology products
Presence of demanding regulatory standards
Laws relating to information and communications technologies (ICTs)
Stringency of environmental regulations
(c) Related and supporting industries
Local supplier quality
State of cluster development
Local availability of process machinery
Local availability of specialized research and training services
Extent of collaboration among clusters
Local supplier quantity
Local availability of components and parts
(d) Context for firm strategy and rivalry
Incentives: extent of distortive government subsidies
Favouritism in decisions of government officials
Cooperation in labour–employer relations
Efficacy of corporate boards
Intellectual property protection
Protection of minority shareholder interests
Regulation of securities exchanges
Effectiveness of bankruptcy laws
continued
Enabling Environments for Competitive Agro-industries 179
Appendix 4. Continued.
Competition: hidden trade barriers
Intensity of local competition
Extent of locally based competitors
Effectiveness of antitrust policy
Decentralization of corporate activity
Business costs of corruption
Costs of importing foreign equipment
Centralization of economic policy making
Prevalence of mergers and acquisitions
Foreign ownership restrictions
Appendix 5. Components of the Investment Compass (IC). (From UNCTAD web site http://
compass.unctad.org/Page1.egml?country1=&country2=®ion=&sessioncontext=
246934608&object=SC.app.objects.methodology.)
Key area Variables Indicators
Resource assets Human capital School enrolment in tertiary
Science and engineering students
Illiteracy rate
Production of minerals
Availability of raw
materials
Production of agricultural
commodities
Energy reserves
Market size GDP (purchasing power parity)
(PPP)
Per capita income (PPP)
Effective market size
Total population
Infrastructure ICT Internet hosts
Internet users
Mobile phones
Telephone main lines
Basic infrastructure Air transport freight
Water access
Electricity transmission and
distribution losses
Electricity production
Port activity
Road network
Railway freight
Operating costs Labour costs Monthly wage for professional work
Monthly wage for administrative
work
Monthly wage for technical work
Monthly wage for clerical work
continued
180 R. Christy et al.
Appendix 5. Continued
Key area Variables Indicators
Business costs Rental office costs
International telecommunications
charge
Local telecommunications charge
Electricity charge
Economic performance
and governance
Macroeconomic
performance
Unemployment rate
Government surplus/deficit
Current account balance
Inflation
Real economic growth
Governance Creditworthiness rating
Human development index
Regulatory quality
Rule of law
Government effectiveness
Political stability
Voice and accountability
Taxation and incentives Business and professional
services (present
value of tax)
Business and professional services
(direct and indirect)
Information and
communications
technology (present
value of tax) (PV tax)
ICT (direct and indirect)
Tourism (PV tax) Tourism (direct and indirect)
Manufacturing (PV tax) Manufacturing (direct and indirect)
Regulatory framework Entry Standards of treatment
Land ownership and transfer
Openness of main sectors to FDI
Operation Performance requirements
Preferential trade arrangements
with major markets
Labour market regulation
Foreign workforce regulations
Foreign exchange regulation on
current operations
Size of regional/integrated trade
area
Import duties
Protection and exit Number of taxation treaties signed
Number of bilateral investment
treaties signed
Liquidation and expropriation
Dispute settlement
E
n
a
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l
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n
v
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o
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Appendix 6. Components of the Policy Framework for Investment. (From Organization for Economic Cooperation and Development, 2006.)
Policy field Rationale Major issues
Investment policy Quality of investment policies directly
influences investment decision, driven
by principles including transparency,
property protection and non-discrimination
Enforcement, transparency, accessibility of laws and regulations
Efficient ownership registration of property
Protection of intellectual property
Effective contract enforcement
Effective compensation expropriation
Non-discrimination principle
Implementation of international arbitration instruments
Investment
promotion
and facilitation
Provide aim to correct for market failures
and leverage the strong point of a
country’s investment environment
Government strategy for sound business environment
Establishing and adequately funding investment promotion agency
Streamlining administrative procedures for new investments
Maintaining dialogue with investors
Evaluating costs and benefits of investment incentives
Facilitating investment linkages between businesses
Trade policy Support more and better-quality investment
by expanding opportunities to reap scale
economies and by facilitating integration
into global supply chains
Reducing border costs and inefficiencies
Reducing trade policy uncertainty
Participation in international trade agreements
Review of trade policy to reduce distortions
Impact of trade policy on input prices
Alternative means of achieving public policy objectives
Targeting policy to attract investment towards weak sectors
Competition
policy
Favours innovation and contributes to
conditions conducive to new investment
Clear, transparent, non-discrimination competition policy
Are competition authorities adequately resourced?
Ability to address anticompetitive practices
Capacity to evaluate impact on market entry of other policies
Capacity to evaluate the costs and benefits of industrial policies
Role of competition authorities in case of privatization
Extent of cooperation in international competition issues
continued
1
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C
h
r
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s
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t
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Appendix 6. Continued.
Policy field Rationale Major issues
Tax policy Level of tax burden and design and
administration of tax policy influence
business costs and returns on
investment
Average tax burden on domestic profits, accounting for statutory
provisions, tax-planning opportunities and compliance costs
Tax burden consistent with investment attraction strategy
Tax burden consistent with goals and objectives of tax system
Neutrality of tax system to nationality of investor, firm size, age of
business entity, ownership structure, industry sector, location
Consistency of main tax provisions with international norms
Presence of unintended tax opportunities resulting from targeted tax
incentives, and their impact on cost-effectiveness of system
Tax expenditure account reporting and use of sunset clauses to
inform and manage the budget process
Extent of tax treaty network and presence of strategies to counter
abusive cross-border tax-planning strategies
Corporate
governance
Influences confidence in investors, cost of
capital, overall functioning of financial
markets and development of more
sustainable sources of financing
Presence of coherent, consistent regulatory framework backed with
effective enforcement
Extent to which framework ensures equitable treatment of shareholders
Institutional structure for legal redress in case of violation of
shareholder rights
Procedures and institutions for shareholder empowerment
Standards and procedures for timely, reliable and relevant disclosure
Does framework ensure effective monitoring of management by the board?
Voluntary incentives and training to encourage and develop a good
corporate governance culture
Has national corporate governance system been reviewed?
For state-owned enterprises, extent of government interference in
management and market operations
Policies for
promoting
responsible
business
conduct
Good conduct policies (respecting human
rights, environmental protection, labour
relations and financial accountability)
help attract enterprises that contribute
to sustainable development
Extent to which responsibilities ascribed to the business
sector are clear
Steps taken to communicate responsible business behaviour to investors
Presence of framework to support company disclosures about
business operations
E
n
a
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l
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E
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1
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3
continued
Government support of company efforts to comply with the law
Government role in strengthening the base case for responsible conduct
Government participation in intergovernmental cooperation
to promote international principles for responsible business
Human resource
development
Policies that develop and maintain a skilled,
adaptable and healthy population and
ensure the full and productive
deployment of human resources, thus a
favourable investment environment
Presence of coherent and comprehensive human resource
development policy framework
Strategies for increased participation in basic schooling and to
improve the quality of instruction so as to leverage assets
Incentives for individuals to invest in higher education and
lifelong learning
Extent to which government promotes training programmes and
evaluates effectiveness of investment environment
Presence of coherent strategy to tackle the spread of pandemic diseases
Mechanisms to promote and enforce core labour standards
Extent to which labour market regulations support job creation and
the government’s investment attraction strategy
Steps taken to unwind unduly restrictive practices covering the
deployment of workers from investing enterprises
Programmes to assist large-scale labour adjustment
Steps to ensure that labour regulations support an
adaptable workforce
Infrastructure and
financial sector
development
Ensure scarce resources are channelled
to the most promising projects and
address bottlenecks that limit private
investment
Processes used to evaluate infrastructure investment needs
Measures adopted to uphold transparency and procedural
fairness in bidding for infrastructure development contracts
Market access for potential investors in telecommunications
and extent of competition
Access to electricity services on a least-cost basis for a wide
range of users
Processes for development and maintenance of transport infrastructure
Investment needs and private-sector involvement in water management
Capacity of financial sector and quality of regulatory framework
Laws and regulations governing credit access
1
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h
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Appendix 6. Continued.
Policy field Rationale Major issues
Public
governance
Regulatory quality and public-sector
integrity important for establishing
credibility with investors and for reaping
development benefits of investments
Presence of a coherent and comprehensive regulatory
reform framework
Mechanisms for managing and coordinating regulatory reforms
across different levels of government
Extent to which regulatory impact assessments are used to
evaluate the consequences of economic regulations for the
investment environment
Public consultation mechanisms and procedures established to
improve regulatory quality
Extent to which the administrative burdens on investors are
measured and qualified
Extent to which international anticorruption and integrity
standards have been implemented in national legislation
Extent to which institutions and procedures ensure transparent,
effective and consistent enforcement of anticorruption laws and
regulations
Existence of review mechanisms to assess the performance of
laws and regulations on anticorruption and integrity
Government participation in international initiatives aimed at fighting
corruption and improving public-sector integrity
E
n
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Appendix 7. Components of the core questionnaire for Investment Climate Surveys. (From World Bank web site.)
Section Issues
1. General information Age of enterprise, legal status, ownership, number of operating facilities, main product line, other income-gener-
ating activities
2. Sales and supplies Share of local market, percentage of sale into different markets, source of inputs, days of inventory at hand,
supply delivery delays, competitors in domestic market
3. Investment climate
constraints on the firm
Severity of obstacles in telecommunications, electricity, transport, access to land, tax rates, tax administration,
customs and trade regulations, labour regulations, skills and education of available workers, business licensing
and operating permits, access to financing, cost of financing, economic and regulatory policy uncertainty,
macroeconomic instability, corruption, crime, anticompetitive or informal practices, conflict resolution
4. Infrastructure
and services
Frequency and duration of service interruptions, average utility costs, access to computer and the Internet,
affiliation to chamber of commerce and services received, quality and affordability of business services
5. Finance Contribution to working capital and new investments of finances from different sources (e.g. internal funds, loans,
investment funds, rental income), access to credit or overdraft facilities, interest rate on loans, frequency of
external auditor reviews
6. Business–government
relations
Efficiency of government in delivering services, consistency and predictability of officials’ interpretation of regula-
tions, days to import/export, restrictiveness of labour regulations, time spent complying with regulations, bribes
as percentage of annual sales, percentage of sales reported for taxes, influence on national laws and regula-
tions of lobbying efforts by various entities (firms, business associations, labour unions, local government)
7. Conflict resolution
and legal environment
Confidence in judicial system, proportion of sales on credit, percentage of sale to government and state-owned
enterprises, time spent in payment dispute resolution, proportion of disputes resolved by court action
8. Crime Percentage of sale spent on security and protection payments, losses due to theft, vandalism or arson, share of
crimes reported to the police and share solved
9. Capacity, innovation,
learning
Average capacity utilization, rate of growth in sales, share of profits reinvested, range of products, use of
technology from foreign-owned firms, position on technology relative to competitors, innovation initiatives
recently taken by firm, ways of acquiring technological innovations, sources of pressure to reduce production
costs and to develop new products and services
10. Labour relations Average number of workers, education levels, total compensation, proportion of foreign employees, time spent
recruiting, formal training offered to employees, percentage of unionized workforce, frequency of labour
disputes, proportion of female employees, level of top management experience
11. Productivity Total sales; input costs; market value of production; energy costs; manpower costs; interest charges and financial
fees; spending on new assets; value of assets sold; amount spent on rentals, leases and licences; amount
spent on research and development; net value of assets; value of liabilities
186 © FAO and UNIDO 2009. Agro-industries for Development (C.A. da Silva et al.)
Introduction
Small-scale farmers, who form the bedrock for global agrifood supply, are
faced with markets in an unprecedented state of flux. Domestic markets are
undergoing rapid but uneven modernization, and higher value and export mar-
kets are increasingly the preserve of larger-scale suppliers.
The modernization of domestic markets, particularly in Latin America and
Asia, has been driven by a wave of investments in emerging economies by
domestic and transnational food manufacturers and retailers over the past
two decades. Combined with rising urbanization, and changes in consumer
preferences and purchasing power, these have led to a growth of modern
organized food retailing, which has outpaced the growth of per-capita GDP by
a factor of 3–5 (Reardon and Huang, 2008).
These changes are generating intense policy debate, particularly regarding
the opportunities facing small farmers and the rural poor. The 2008 World
Bank World Development Report (WDR) (World Bank, 2007b) notes that in
transforming economies, where the majority of the rural poor live, ‘the rising
urban–rural income gap accompanied by unfulfilled expectations creates politi-
cal tensions. Growth in agriculture and the rural non-farm economy is needed
6 Business Models That Are
Inclusive of Small Farmers
*
BILL VORLEY,
1
MARK LUNDY
2
AND JAMES MACGREGOR
3
1
Head, Sustainable Markets Group, International Institute for Environment and
Development (IIED), London, UK;
2
Agroenterprise Specialist, International
Center for Tropical Agriculture, CIAT, Cali, Colombia;
3
Researcher,
International Institute for Environment and Development (IIED), London, UK
* This chapter draws heavily on the work of the Regoverning Markets consortium (www.
regoverningmarkets.org) and the associated international conference ‘Inclusive Business in
Agrifood Markets: Evidence and Action’ held in Beijing on 5–6 March 2008. Contributions are
also acknowledged from the ‘New Business Models for Sustainable Trade’ project led by the
Sustainable Food Laboratory and Rainforest Alliance, ‘Inclusion of small producers in value
chains’ – a partnership between Cordaid, Vredeseilanden and IIED; and framework funding
to IIED from the Swedish International Development Agency (SIDA). Comments on an earlier
draft by Jose Reijter (Cordaid) are gratefully acknowledged.
Business Models for Small Farmers 187
to reduce rural poverty and narrow the urban–rural divide.’ Those political ten-
sions are clear in India, where the fragmented US$350 billion retail industry is
forecast to double in size by 2015, and where modernization and liberalization
of retail foreign direct investment (FDI) have given rise to heightened invest-
ment coupled with significant protest and policy push-back.
Market modernization can offer increased economic opportunities for pro-
ducers, consumers, entrepreneurs and other actors in the food chain. These
opportunities include a reduction in entry barriers to traditionally protected
industries, which are further leveraged by clearer information, less capture by
elites, stronger access to services and the potential for entrepreneurial farmers
to combine resources and realize the collective worth of their land. In some
areas, new market entrants are stimulating competition for farmers’ produce,
helping to increase the value retained in rural economies. For example, the
laws which entrenched a monopoly of wholesale markets in India have been
amended in at least 14 states, allowing retailers and their agents to procure
directly from farmers.
1
Enforced intermediation through wholesale commission
agents had previously hidden the final buyer from farmers.
But there are also risks in opening up markets, where domestic businesses
may be by-passed by cheaper imports and where costly market entry require-
ments favour the better-resourced. These features, which have long been
understood in export markets, are becoming a feature of domestic markets in
emerging economies as regional trade becomes easier.
If the benefits of modernization and globalization are patchy, and do not
reach to the ‘bottom of the pyramid’ to deliver a growth and equity ‘win–win’,
then prospects for meeting the Millennium Development Goals (MDGs) by
2015 are remote. The 2008 WDR calls for action in response to the modern-
ization of procurement systems in integrated supply chains and supermarkets,
so that small-scale farmers can share in these growth opportunities.
The failure of major retailers to take such a combined ‘growth with equity’
approach was bemoaned by the late Robert Davies, former CEO of the
International Business Leaders Forum (IBLF). He asked: ‘Why are the clever-
est logistics and supply chain operators and service companies known in busi-
ness history sometimes so inept at . . . adapting their business model to the
sensitivities of emerging markets?’ (Davies, 2007) Part of the answer – and the
subject of this chapter – lies in the development of business models which are
both inclusive of small-scale producers and also address the need for proces-
sors and retailers to manage costs and risks.
Here we define inclusive business models as those which do not leave
behind small-scale farmers and in which the voices and needs of those actors
in rural areas in developing countries are recognized. Such models have been
variously described as ‘Inclusive Business’ (WBCSD and SNV, 2008; www.
inclusivebusiness.org), ‘Mutually Beneficial Partnerships’ (FAO and CIFOR,
2002) and ‘inclusive capitalism’ (Hart, 2007).
1
See ‘Modern retail offers wide choice, farmers want to exercise it all’. Livemint.com/Wall
Street Journal 11 February 2008.
188 B. Vorley et al.
The chapter describes a range of business models for inclusive market
development within the context of agrifood restructuring and modernization. It
focuses specifically on models that improve the inclusiveness, fairness, durabil-
ity and financial sustainability of trading relationships between small farmers on
the one hand and downstream agribusiness (processors, exporters and retail-
ers) on the other. It also alerts us to the needs of external providers, such as
financiers and training agents. The gap in basic services in rural economies,
such as appropriate extension and credit, needs to be bridged before FDI can
live up to its promises. While we do address what producers need to do to
compete in modern dynamic markets, and the role of facilitating public policy,
our focus in this chapter is more on the buyers and their role as partners in
development.
Business Models and Inclusive Market Development
What is a business model?
A business model is the way by which a business creates and captures value
within a market network of producers, suppliers and consumers, or, in short,
‘what a company does and how it makes money from doing it’ (MIT Sloan
2
).
The business model concept is linked to business strategy (the process of
business model design) and business operations (the implementation of a com-
pany’s business model into organizational structures and systems). Osterwalder
(2006) breaks business models into their constituent elements that create costs
and value, using the template in Figure 1.
This template shows the importance of market differentiation (building a
‘value proposition’) and cost management to the success of any business
model.
2
http://process.mit.edu/Info/eModels.asp
Success or
failure
Cost
structure
Revenue
streams
Customer
segment
Distribution
channel
Value
proposition
(products and
services)
Value
configuration
(activities and
resources)
Core
capabilities
Partner
network
Customer
relationship
Figure 1. Template of a business model. (Adapted from Osterwalder, 2006.)
Business Models for Small Farmers 189
In modern agrifood retail, market differentiation is built on consumer assur-
ance, high standards for food quality and safety, year-round availability and,
sometimes, lower prices that are communicated to consumers through own
brands.
It follows that the partner network – the supply chain and its coordination –
is a vitally important source of competitive advantage. It also follows that the
model is highly sensitive to any addition of costs and risks, and it is around this
apex that the question of market inclusivity ultimately revolves.
There are perceived to be high transaction costs and increased risks with
purchasing from large numbers of fragmented small-scale farmers. Small-scale
farmers are also perceived to be less reliable in honouring trading agreements,
because they do not have the technical skills and technologies to produce the
right products at the right time (quality, timeliness and consistency). Common
business practice sees buyers typically seeking out large-scale suppliers (Box 1)
and areas favoured by agribusiness, such as zones involved in export produc-
tion. This is particularly easy in a dualistic farm structure such as that found in
South Africa (Box 2).
From the perspective of producers and their organizations, there may
be good reasons to avoid trading with the modern agrifood system. With
low and inconsistent production volumes, dispersed production, weak
negotiation pos itions, limited capacity to upgrade and meet formal market
Box 1. Carrefour’s quality line in China. (From Hu and Xia, 2007.)
Among the supermarkets in China, Carrefour is characterized by marketing fresh
foods. With the rising consciousness of consumers on safety of food, the demand
for high-quality and safe food has increased. Carrefour started in 1999 to sell a
‘green’ food supply line under its own brand with the ‘Quality Food Carrefour’ logo.
These lines represent an innovation in the purchasing system within the Chinese
context, where Carrefour carries out integrated management of the entire supply
chain, with full traceability. Other retailers are following suit. To date, cooperators of
the Carrefour quality line are all larger-scale, rather than the small-scale farmers
who account for more than 90% of the agricultural population in China.
Box 2. From wholesale to preferred supplier: Shoprite.
Shoprite, a leading South African retailer, relied on sourcing from wholesale mar-
kets in 1992 for 70% of its produce. In 1992, Freshmark, a wholly owned special-
ized and dedicated wholesaler, started to form ‘preferred supplier’ relationships
with large commercial farmers (from whom it sources the majority of its produce),
as well as some large wholesalers and some medium- and smaller-scale farmers.
By 2006, it had 700 such preferred suppliers (a few for each main product), and
sourced 90% of its produce from them and 10% from the wholesale markets. The
shift to using preferred suppliers was facilitated in South Africa by the sharply dual-
istic farm sector structure. Freshmark has ‘followed’ Shoprite into other African
countries, but is still sourcing much of its produce from South Africa.
190 B. Vorley et al.
requirements and poor access to information, technology and finance, the
transaction costs for farmers to link with the modern sector are daunting.
And despite significant investments of time and resources, market access is
still not guaranteed.
Ultimately, the type of partner network and choice of business model will
depend on the nature of the product (perishable, differentiated or branded pro d-
uct or bulk commodity) and the nature of the end buyer (branded retailer,
wholesaler, etc.), which determine the nature of economic dependency between
chain actors. A collaborative partner network is much more important with
perishable commodities such as fresh vegetables, dairy and meat, which require
traceability and have higher food safety risk profiles (Sporleder et al., 2005).
The same applies to the growing number of certified products, such as Fairtrade
and organics. Jan Van Roekel of the Agro-Chain Competence Foundation
goes as far as to say: ‘In the future, agrifood producers, processors and retailers
will no longer compete as individual entities. Rather, they will collaborate as a
strategic value chain and compete with other value chains in the market place’
(Bouma, 2005).
Crucially for the discussion of inclusion of small-scale farmers, these col-
laborative partner networks, with co-investment and knowledge sharing between
producers, suppliers, processors and retailers, are usually built around a small
number of preferred suppliers. Adapted business models are called for, whereby
small-scale farmers can cooperate to compete as one single sup plier, and where
their customers are responsive to the realities of smallholder production.
Adapting business models
When agrifood business models are transplanted from industrialized countries
to countries with large agriculture-dependent populations the unintended con-
sequences for the rural economy can potentially be very significant.
In the two largest ‘transforming’ countries,
3
China and India, 40–60% of
the workforce is engaged in agriculture, i.e. over 640 million people in total. In
Thailand, Turkey and Morocco this figure is 40–50% of the workforce, while
in Romania and Honduras agriculture still accounts for one-third of employ-
ment. The small-scale retail sector also faces major challenges. The Indian retail
sector, dominated by 15 million very small independent kirana stores, employs
42 million people, the second biggest employer after agriculture. In addition to
the lack of inclusiveness and poor awareness of rural economic realities of exist-
ing business models, there are other unintended and accidental outcomes. For
example, the private standards that buyers have deemed necessary and efficient
solutions can compound exclusion of small suppliers given that the costs of such
systems are a function of production volume. Put simply, high volume makes
standards feasible because the cost per unit of product is low. For many small-
3
One of agriculture’s three worlds, according to WDR 2008, in which agriculture contributes
less to growth, but poverty remains overwhelmingly rural.
Business Models for Small Farmers 191
holders, however, volumes are low and the unit cost for standards is high.
This mix can lead to situations where it is financially impossible for smallholders
to cover the cost of implementing and maintaining such standards.
It is clear that new business models are needed that afford opportunity in
terms of small-farmer inclusion and equity and that do not exclude efficient
farmers, while promoting business efficiencies. There are potential efficiency
gains in developing locally adapted business models that build on the compara-
tive advantage of smallholders, in terms of land, price, farm management,
quality and innovation. According to the template of business models above,
any adjustments in pursuit of greater inclusiveness must not undermine the
most sensitive elements of a model – the cost structure, the value proposition
and the integrity and safety of the product – especially when managing supply
from large numbers of small producers.
What Is the Business Case for Adjusting Business
Models in Favour of Smallholders?
The first section has described how the business model of the organized agri-
food sector is generally built on the value proposition of consumer assurance,
high standards for food quality and safety, low prices and reliability of supply.
It sets out the biggest challenge for modern agrifood business to work with
small-scale farmers as being to organize supply to deliver the benefits of logis-
tics, economies of scale, traceability and private sector standards.
While the business case for trading with small-scale producers is being
called into question, experience in the field suggests that a convincing busi-
ness case for models that are inclusive of small-scale producers can be made
beyond efforts to promote corporate social responsibility (CSR), based pri-
marily on securing supply and reducing costs. Table 1 provides a summary
of the arguments for and against sourcing strategies built with small-scale
producers.
Securing supply
Securing consistent supply is especially critical in supply-constrained and vola-
tile conditions, such as those currently characterizing global agrifood markets.
A shift from a buyer’s to a seller’s market implies that suppliers will need to
ensure that they can meet their obligations to retailer or processor customers
in the face of considerable uncertainty. A diversified supplier base, including
small-scale producers, can contribute to improved security of supply.
Retail buyers and processors may also seek to by-pass markets where large
traders have a stranglehold. This was the situation in Pakistan where a milk
processor, Haleeb Foods Limited, worked around the large and well-established
milk traders by securing a small-farmer supply base.
192 B. Vorley et al.
An even stronger business case for linking with small-scale producers is
where there is a scarcity of alternative suppliers, whether due to the charac-
teristics of the product (seasonality, labour requirements, locality), a shortage
of land for large-scale domestic or own-business production, a lack of a
medium- or large-scale supply base (e.g. the dairy sector in India or Poland)
or where there is demand in remote areas away from main distribution chan-
nels (Box 4).
Small-scale producers can also have a comparative advantage in terms of
produce quality, innovation, costs and farm management. Indeed, in exports of
fresh vegetables from Africa to the UK and from Central America to the USA,
it is the premium quality products such as French beans and peas that are
sourced from smallholders.
New business opportunities
Small-scale producers are themselves a new business opportunity. In India
retailers can now buy directly from farmers rather than operating through the
government-controlled Agricultural Product Marketing Committee (APMC)
wholesale markets. New models of rural retail are emerging, such as the Hariyali
Kisaan Bazaar, which combines a ‘bottom of the pyramid’ approach to both
the input and output sides of the farm-to-consumer value chain, and is dis-
cussed further in this chapter. This is an extension of the approach advocated
by Prahalad and Hart (2002), which argues that corporations can make consid-
erable profits by designing new business models and products to target the four
billion poorest people who make up the base of the economic pyramid.
Table 1. The business case for and against procuring from small-scale producers.
For Against
• Smallholders’ comparative advantages
(premium quality, access to land, etc.)
• securing supply in volatile markets, spreading
portfolio geographically, reducing risk of
undersupply as well as localized pest and
disease problems
• new business, clients for other products and
services (base of pyramid)
• new technologies available (efficient low-scale
processing equipment, information technologies
for coordination and lower cost traceability)
• capacity to ramp up or ramp down production
without incurring fixed costs (contract farming)
• access to donor assistance
• corporate responsibility
• community goodwill
• political capital
Costs and risks in organizing
supply from dispersed
producers:
• quantity
• quality
• consistency
• safety
• traceability
• compliance with rising
standards
• packaging
• loyalty and fulfilment of
commitments by farmers
• negotiation time and costs
• political opposition to
commercialization of
peasant agriculture
Business Models for Small Farmers 193
Community goodwill
Working with small-scale farmers is also a means to build community goodwill,
contributing to a company’s licence to operate. Buying locally from smallhold-
ers may be part of a company’s socially responsible strategy and becomes an
advertising slogan in the highly competitive environment in which it operates.
Customers are aware of and may value local procurement from small-scale
farmers in the community as long as the produce is of a good quality. The case
study from South Africa (Box 3) reported that the retailer organized for farmers
to be present in the store on certain Fridays to promote its small-scale farmer
procurement among the consumers.
Other examples of supermarkets working with small-scale producers
include programmes by Carrefour in Indonesia, through which dialogue is
established between farmers and buyers to ensure increased quality, the devel-
opment of a ‘Best Supplier’ prize and the waiving of listing fees.
4
In Guatemala,
Wal-Mart has recently initiated a programme with an international NGO, Mercy
Corps, and the financial service provider AGIL Foundation (Fundación Apoyo
a la Generación de Ingresos Locales) to facilitate the entry of 600 farmers to its
supply base over the next 3 years. The goal of this programme is to guarantee
supplies of speciality products as Wal-Mart expands in the region. Finally, in
Mozambique Shoprite, in collaboration with the IFAD Markets Support
Box 3. Securing supply in remote regions.
Tanzania: Given the remoteness of tourist hotels, local supply from small-scale
farmers is much less costly, especially during the rainy season when road trans-
portation from outside the area is not always possible. Furthermore, the local sup-
ply has a promotional value in the tourist trade as a support to local communities,
coupled with the encouragement of environmentally sound production (Mafuru
et al., 2007)
South Africa: In contrast to the centralized fresh produce procurement sys-
tems of South African retailers, who rely on preferred commercial suppliers, there
are also innovative procurement schemes. Two rural-based supermarket chain
stores in the Limpopo Province source fresh vegetables locally from small-scale
farmers. By 2004, the Thohoyandou SPAR store was procuring approximately
30% of its vegetables from about 27 small-scale farmers. These farmers are sup-
ported by interest-free loans to selected farmers, a guaranteed market, farm visits
and training on required quality standards. The remoteness of the supermarkets
from the central distribution centres, the stores’ operation in rural areas, reduced
transportation costs and meeting freshness requirements, as well as being seen
to contribute to community development, were the drivers for supporting the
development of this local procurement scheme from small-scale farmers (Bienabe
et al., 2007).
Box 3. Securing supply in remote regions.
Tanzania: Given the remoteness of tourist hotels, local supply from small-scale
farmers is much less costly, especially during the rainy season when road trans-
portation from outside the area is not always possible. Furthermore, the local sup-
ply has a promotional value in the tourist trade as a support to local communities,
coupled with the encouragement of environmentally sound production (Mafuru
et al., 2007).
South Africa: In contrast to the centralized fresh produce procurement sys-
tems of South African retailers who rely on preferred commercial suppliers, there
are also innovative procurement schemes. Two rural-based supermarket chain
stores in the Limpopo Province source fresh vegetables locally from small-scale
farmers. By 2004, the Thohoyandou SPAR store was procuring approximately
30% of its vegetables from about 27 small-scale farmers. These farmers are sup-
ported by interest-free loans to selected farmers, a guaranteed market, farm visits
and training on required quality standards. The remoteness of the supermarkets
from the central distribution centres, the stores’ operation in rural areas, reduced
transportation costs and meeting freshness requirements, as well as being seen
to contribute to community development, were the drivers for supporting the
development of this local procurement scheme from small-scale farmers (Bienabe
and Vermeulen, 2007).
4
‘Carrefour Indonesia takes part in SME programme.’ www.planetretail.net 1 August 2007.
194 B. Vorley et al.
Programme (PAMA), has supported the development of small-scale farmers in
Boane. Based on this work, Shoprite now sources 25% of its fresh fruit and
vegetable needs locally rather than importing from South Africa.
Despite the increasing interest of buyers to work with small farmers, ques-
tions remain about the depth of this commitment due to the fragmentary nature
of some of these programmes. In Guatemala, for example, Wal-Mart execu-
tives have been important allies in the development of a line of personal care
products based on medicinal plant extracts produced by indigenous communi-
ties in the municipality of Totonicapán. Despite this support, buyers and store-
level display managers continue to obstruct the entry of these products in
specific stores. The waiving of formal product registry by Wal-Mart executives
has been used as an argument by lower-level staff for not including the product
in display plans for specific stores, thus effectively keeping the products off the
shelves despite high-level support (Lundy and Fujisaka, 2008). This example
highlights the tensions and inconsistencies between executive desires and day-
to-day business practices. Firms interested in promoting inclusive business
models need to pay specific attention to the consistency of both their messages
and their practice.
Corporate social responsibility
As discussed in Chapter 7 (this volume), which focuses on the theme of
‘corporate social responsibility’, an increasing number of companies report on
their commitments to the development agenda to their customers and share-
holders within a wider ‘corporate responsibility’ framework. The role of busi-
ness as a partner in development has been a growing element of the CSR
agenda, especially since the World Summit on Sustainable Development in
2002. It is now promulgated by a number of business platforms such as the
World Business Council for Sustainable Development (WBCSD) and the
Sustainable Agriculture Initiative (SAI), and by a number of UN agencies includ-
ing UNDP and UNIDO. We are now at a point where ‘inclusive business’ and
CSR concepts are being differentiated. CSR, with its emphasis on labour and
environmental standards and supplier codes, has been poor at addressing
market inclusion, and is often weakly mainstreamed across business. The UN
Global Compact, which is the largest global corporate citizenship initiative,
has ten principles that address human rights, labour standards, environment
and anti-corruption, but do not address the role of business in supporting the
position of primary producers. Some individual businesses and industries have
gone further.
A commitment to the development agenda can defend a market. This has
been evident recently in the UK, where airfreight of fresh produce from Africa
was defended against a strong environmental critique through a clear demon-
stration of the importance of the trade to rural livelihoods (Garside et al.,
2007). However, it remains unclear how significant the commitment is, and
whether these early actions will be followed up by the buyers, consumers or
governments.
Business Models for Small Farmers 195
What Are the Various Models That Have Emerged for Linking
Small-scale Farmers to Agribusiness and Changing Markets?
The preceding section elaborates the business case for inclusion. However, this
will be insufficient to trigger widespread adoption of inclusive business models
unless the risks and costs are addressed. Key to overcoming the costs and risks
are producer coordination, market coordination and intermediation, service
and finance provision, information and knowledge management and buyer
behaviour. In this section we address producer coordination and market coord-
ination of small-scale producers.
Organization of production is central to overcoming the costs associated
with dispersion of producers, diseconomies of scale, poor access to informa-
tion, technology and finance, inconsistent volume and quality, lack of traceabil-
ity and management of risk. In view of lower transaction costs and the possibility
of more effective capacity transfer, private companies often prefer to work with
organized farmers rather than individuals despite the increased bargaining
power that groups can enjoy. Production may be organized by the producers
themselves, by the end customer companies or by an intermediary such as an
NGO, trader, wholesaler or exporter (Table 2) in a range of direct or indirect
market linkages categorized by Shepherd (2007). Organization might be lay-
ered, with buyers operating a continuum from preferred suppliers to top-up
suppliers, with an attendant spread of objectives. Typically, success depends on
communication flows and constant innovation on both sides.
Model development
Where market linkages are initiated by existing actors, they tend to build on
informal structures in which traders or farmer-traders play a critical role not
only to connect farmers to markets but also as de facto service providers. In
Table 2. Typical organization of smallholder production.
Type Driver Objective
Producer-driven Small-scale producers themselves • New markets
• higher market price
• stabilize market position
Large farmers • Extra supply volumes
Buyer-driven Processors • Assure supply
Exporters
Retailers
Intermediary-driven Traders, wholesalers and other
traditional market actors
• Supply more discerning
customers
NGOs and other support agencies • ‘Make markets work for
the poor’
National and local governments, e.g. via
‘Dragon Head’ companies in China
• Regional development
196 B. Vorley et al.
many cases the trader is a member of the rural community and has specialized
knowledge, information, assets and contacts to facilitate not only commercial
ties but also social support in times of crisis. Informal linkage models are com-
mon throughout the world but little understood. Certainly, knowledge on how
to develop business models that leverage these informal linkage systems is
scarce. These models rarely receive support from development interventions or
attention from researchers due to their informal nature and a strong bias against
traders in many development organizations. This is unfortunate, as these mod-
els hold important information and lessons for sustainable market linkages and
service provision, especially in areas with weak formal farmer organization.
Work in Colombia by one of the authors showed that traders are capable
of extending market linkage services to smallholder farmers in a sustainable
fashion when credit is provided (CIAT and CIPASLA, 2006). In some cases,
aspects of trader-driven approaches are adapted by the private sector in lead-
farmer models, such as those detailed in Honduras (Agropyme, 2006). A key
finding is that informal market linkages are a form of cooperation or quasi-
cooperation among farmers. For instance, informal moneylenders often hold
extensive information about the needs, weaknesses and strengths of their cus-
tomers, which moneylenders can leverage through supplying or by informing
suppliers. Importantly, these forms of linkage/quasi-cooperation are the build-
ing blocks for formalized cooperatives.
A more traditional approach is small-farmer organization induced by
external agents or a combination of external actors and small farmers. Processes
of induced organizations start from the assumption that existing market link-
ages are not effective either in terms of efficiency or in terms of equity and that
new skills and knowledge need to be developed to facilitate favourable market
linkages for smallholders. These interventions are often led by development
organizations and supported by donors although examples of private sector
initiatives of induced organization, such as contract farming and outgrower
schemes, also exist. Recent work raises doubts as to the sustainability of these
induced organizations supported by development actors due to pressures to
avoid failure (Berdegué, 2001), non-sustainable business practices (Hellin et al.,
2007; Shepherd, 2007) and inherent inefficiencies in the intervention model
(Berdegué et al., 2008a).
Despite the possibly poor performance of induced farmer business organ-
izations led by NGOs and the public sector, there are cases where such inter-
ventions are effective especially where the facilitating organization has a strong
business development focus. Of critical importance is a clear and consistent
focus on the business case for the intervention as well as a timeline after which
external support will cease. An example of this is the work carried out by the
Presidential Commission for Local Development in Guatemala, which focuses
on building ‘business ecosystems’ to support specific market opportunities. The
Commission identifies and links key service providers to the supply chain as
for-profit businesses rather than with donor subsidies. The resulting products
and services incorporate support costs as part of their overall pricing structure,
thus aligning incentives along the chain and increasing the possibility of success
as a business (Lundy and Fujisaka, 2008).
Business Models for Small Farmers 197
Regardless of whether or not the model selected is based on existing actors
and skills or is induced, these models can be grouped depending on the focus
they accord to diverse actors in the chain. Existing models tend to fall into three
general categories: (i) those that focus on developing and supporting producer
organizations; (ii) those that focus on specialized intermediaries; and (iii) those
that are driven by buyers. Despite the differences in entry points and emphasis,
all the models seek to connect actors to facilitate effective market integration.
Producer-driven models
Producer-driven models such as cooperatives and farmer-owned businesses
have had a mixed record of providing members with economic benefits in
terms of access to dynamic markets. Research in eight countries (Reardon and
Huang, 2008) found that membership of producer organizations was correl-
ated with participation in modern markets in only half of the countries; in the
rest the correlation was not significant or was negative. This is indicative of the
very diverse roles of producer organizations, from political lobbying to provid-
ing channels for government subsidies. Marketing cooperatives are rare, and
members typically remain oriented to the traditional commodity markets. In
cases such as Honduras, where they do exist, agribusiness has been averse to
purchasing from cooperatives due to slow decision making and limited entre-
preneurial focus (Agropyme, 2006).
But collective action remains an important strategy to increase small-scale
producer participation in emerging modern markets and to generate sustained
commercial flows of high-quality products. Effective business organization is
critical. Economic- and business-focused producer organizations differ from
welfare organizations in their entrepreneurial orientation and capacities, and
may build on existing informal networks of farmers and traders, as well as sup-
port from buyers or other chain actors. Business-oriented cooperatives and
employee-ownership models in Europe and North America provide some
insights on how this may be achieved but much remains to be learned from
existing informal network models common throughout the developing world.
An intriguing, if incipient, case is that of Mabeli S.A., a community-owned
essential oils corporation in highland Guatemala, where 51% of shares are held
by a community development corporation and 49% by producers of the firm’s
raw materials (Lundy and Fujisaka, 2008).
With regard to organizations that are driven and owned by small-scale pro-
ducers, such as Cuatro Pinos in Guatemala (Box 4) and NorminVeggies
(Concepcion et al., 2006; Box 9) in the Philippines, a rich range of models
exists to allow organizations of producers to collectively market despite mem-
bership heterogeneity (in terms of land and non-land assets), which can other-
wise lead to conflicts of interest within an organization. These management
models balance member inclusion and group competitiveness, and involve dif-
ferentiation of membership to cope with the range of landholdings, wealth,
education, etc. These include quasi-membership arrangements and top-up sup-
pliers, or clusters around lead farmers, whereby financially independent growers
198 B. Vorley et al.
Box 4. Cuatro Pinos, Guatemala. (From Lundy, 2007.)
Cuatro Pinos is a successful cooperative with nearly 30 years of experience in the
vegetable export business. Recently, the cooperative has succeeded in opening
large markets for several fresh vegetable products in the USA through an alliance
with a specialized wholesaler and several retailers. Existing demand significantly
outstrips the capacity of cooperative members, requiring the integration of new
producers, organizations and geographies. To achieve this, Cuatro Pinos identifies
existing farmer groups, including associations, cooperatives and lead-farmer net-
works, in favourable environmental niches, works with them to test production
schemes and then contracts those that show an ability to meet quantity and quality
targets. The cooperative signs a legally binding contract with the producer group,
which specifies quantity, quality and a production schedule, as well as providing a
fixed annual price for the product. Credit in the form of inputs and technical assist-
ance is provided. This is later discounted from the first few product deliveries.
Cuatro Pinos provides business and organizational support to its partner organ-
izations to increase their efficiency and access additional funding from diverse
sources for development activities. In 2006, Cuatro Pinos partners successfully
raised US$1.7 million for investments in irrigation, packing sheds, education and
housing. Through this model Cuatro Pinos has achieved an annual growth rate of
50% in vegetable exports over the past 3 years and expanded from 560 member
producers to a network of more than 2000 families. Nearly all the new producers
in the network are from regions with higher than national average poverty levels
and with limited access to land.
create market opportunities for small-scale farmers. Any member differentiation
can be a challenge to the cooperative ethos of equality and equity.
Despite the success of Cuatro Pinos and other models, these remain the
exception rather than the rule in producer-driven models. Common limitations
in farmer organizations include an excessive focus on democratic governance,
which, in many cases, leads to effective leaders being replaced every 12–24
months as stipulated by by-laws. This is avoided in the case of Cuatro Pinos by
having a professional management team that reports to the elected Cooperative
board but is not subject to annual or biannual elections.
Buyer-driven models
Buyer-driven models seek efficiencies in the chain to the benefit of processing
and retail. There are some very promising cases where the necessity of organ-
izing supply from a small farm base, often the case with milk procurement, for
example, has led to sustained inclusion of small-scale farms.
The classic model is where the buyer integrates backwards and coordinates
production (see Boxes 2, 3, 5 and 6). Both the producer and buyer ends of
value chains usually want to ‘cut out the middleman’ and want more competi-
tive buying markets in order to make a shift from a dependency on traditional
wholesale markets in pursuit of value, improved quality and product assurance.
Business Models for Small Farmers 199
Box 6. MA’s Tropical Food Processing (Pvt) Ltd, Sri Lanka. (From Samaratunga,
2007.)
MA’s Tropical Food Processing (Pvt) Ltd, established in 1987, is a family-owned
spice processing enterprise in Sri Lanka, which has shifted its focus to a central-
ized procurement system. The centralization process has increased the efficiency
of procurement through the reduction of the coordination cost.
Procurement is centred on the Regional Agribusiness and Perennial Crop
Initiatives and Development (Pvt) Ltd (RAPID), which is responsible for the back-
ward integration of the company’s activities in the supply chain and for delivering
its social responsibilities to the region. It provides extension services to the farmers
on production, record keeping and postharvest practices, organic certification,
supply of high-quality planting material and intermediation of commercial credit
from banks. It assures continuous supply of raw material at the right time in the
right quantity and quality and ‘eliminates non-essential intermediaries’ from their
supply chain. It has resulted in improved information flow among the supply chain
segments while reducing the marketing risk faced by both the company and
farmers.
The company sets its own private standards, which facilitate the standardization
of the products procured from different suppliers and differentiate the company’s
products from competitors. Further, the company offers farmers a considerable
adjustment period to bring the produce up to the standards and pays premium
prices to farmers who meet those standards. The company focuses on moving
towards logistic improvements in the supply chain by introducing new operations,
which have not existed earlier in the areas of grading, processing, packaging,
labelling, trademarking, etc. Those practices have made the company more com-
petitive in the local and international markets, enabling its products to satisfy the
newly emerging trends in consumer preferences.
Box 5. Dimitar Madzarov in Bulgaria. (From Bachev and Manolov, 2007.)
The private Bulgarian dairy processing firm, Dimitar Madzarov Ltd, has increased
by a factor of 20 its daily processing of milk, sourced from over 1000 small farms,
half of which have fewer than five cows. The firm has successfully met all the
requirements to continue selling its dairy products in a demanding and highly com-
petitive market. Part of the success of Madzarov in building a reliable milk procure-
ment system has to do with the high frequency of payment to its small-scale farmer
suppliers. In the case of the smallest farmers, the firm goes as far as advancing
payment. Access to this source of timely and reliable financing is considered by the
farmers to be of greater importance than the price received for their milk.
Direct procurement is often presented as a win–win–win for customers, busi-
ness and producers. Improved information flow among the supply chain seg-
ments can also help reduce the marketing risk faced by both the company and
the farmers. Another reason for businesses to organize their own supply base
is the lack of collective action by producers, often due to suspicion of coopera-
tives or laws that insulate producers from the market by obliging farmers to
200 B. Vorley et al.
trade through local government-controlled wholesale markets, such as the
APMC Act (law governing the marketing of agricultural products) in many
Indian states and the Wholesale Markets Law in Turkey.
Another example of a buyer-driven model from Sri Lanka is the supermar-
ket company Food City. This retailer has a high market penetration for food by
South Asian standards (15%), with nearly 120 stores, and a focus on middle-
and low-income consumers. Like MA’s (Box 6), the management of Food City
has a strong commitment to the reduction of rural poverty through its role as
purchaser of quality products. The company has made investments in back-
ward linkages (fruit, vegetable, rice and milk) and food processing (meats, ice
cream and processed fruits and vegetables). Food City is now looking at regional
expansion in Pakistan and Bangladesh.
Given the difficulties faced by producers in Turkey to organize themselves,
the few cases of successful direct relations between supermarkets and producer
organizations are largely implemented and promoted by supermarkets. For
example, Migros Türk achieved direct sourcing with the Narlidere Village
Development Cooperative in the Bursa region where others failed, only because
of its historical background and its anchoring within the Turkish agrifood chain.
Migros invests in capacity building of its supply cooperatives’ staff and supports
production management, thus going far beyond the incentives comprised of
formal contracts (Lemeilleur and Tozanli, 2006).
‘Contract farming’ can be successfully used by businesses to link small-
scale producers to modern markets where capital, technology and market
access constitute key limiting factors (Eaton and Shepherd, 2001; FAO, 2008).
Contracts provide benefits to traders and processors by removing the risk of
periodic shortages and volatile prices, which can be costly if they are servicing
large downstream contracts written in advance of a season (Hayami and Otsuka,
1993), or by allowing access to land, which may not be available to expand
plantation-scale production. Contract farming can also be an effective mech-
anism for risk management, because a well-run contract scheme with proven
production technology and guaranteed markets can help reduce risks normally
faced by unorganized farmers, as seen in the case of Cuatro Pinos in Guatemala
in Box 4. For farmers with small landholdings, a contract can also be used as
guarantee for loans; there are a growing number of providers of finance, such
as Root Capital,
5
who are prepared to provide cash flow credit to smallholders
who have secure contracts in place.
Organization of producers is just as important for contract farming as
management, and enforcement of contracts with individual smallholders is not
viable. Research from the Indian Punjab shows that companies involved in con-
tract farming prefer to work with medium- and large-scale producers to reduce
their transaction costs and ensure quality standards (Sharma, 2007). Enforcement
of contracts with small-scale producers is a thorny issue, especially when market
prices exceed the contracted price. Often, having market ‘contacts’ with whom
5
Root Capital is active in 29 countries in Latin America, Eastern and Western Africa and Asia
(http://www.rootcapital.org/where_we_work.php).
Business Models for Small Farmers 201
agreements can be brokered with a reasonable expectation of compliance is
more important than a legally binding but difficult to enforce formal contract.
Contract farming can be an intermediate step in the commercialization of
small-farmer production, as farmers innovate and reconnect with more trad-
itional system of brokers, but on their own terms. This, for example, is the case
with potato production in northern Thailand (Wiboonpongse et al., 2007).
Models of intermediation
Integrating forward (for producers) or backward (for retailers or processors) is
time-demanding and expensive. Business models transferred from the elite
retail-driven chains may be as inappropriate for agribusiness as they are for
small-scale producers. Despite the attractions of ‘cutting out the middleman’,
organizing direct procurement can have high transaction costs for private
players, and have mixed outcomes. In Mexico, Wal-Mart recently tried to buy
strawberries direct from the farmers, but withdrew due to high costs (Berdegué
et al., 2008b). Given these costs, a business model that works with chain
intermediaries, either traditional or new, can offer the opportunity to be profit-
able in highly competitive, price-sensitive markets.
It is much easier for retailers setting up in emerging economies to procure
from traditional wholesalers, and leave the wholesaler to grade for physical
quality, unless there are strong market incentives for retailers to guarantee
product quality, consistency, safety and traceability. This explains the relative
scarcity of evidence of farm-level restructuring and the type of model described
in Box 1 in developing and emerging economies (Reardon and Huang, 2008).
In Chinese horticulture, where the market is characterized by 50 million auto-
nomous producers, selling on spot terms through five million small traders,
where the retail market is very competitive and few companies are making
money, and where the majority of customers are not willing to pay for top-class
produce, the economics of backward integration are particularly daunting.
Although many supermarkets profess to be putting vertical coordination in
place, the majority of trade is via traditional traders.
There are, however, some very promising models of upgraded or new
intermediaries that are introducing food safety, consistent quality, year-round
supply and innovation, at a competitive price. Private companies are emerg-
ing as important intermediaries that enable small-scale farmers to supply to
supermarkets, as exemplified by Bimandiri in Indonesia (Box 7) and Hortifruti
in Honduras (Box 8). Another example is the production network for hot
peppers managed by the export firm, Hugo Restrepo and Company, in
Colombia and Peru. Under this model, the firm provides services to farmers,
such as access to seeds, drip irrigation technology and technical assistance,
as well as a guaranteed market via contracts to participating producers, pro-
ducer organizations and clients involving quality control and guaranteed vol-
umes (Ochoa and Lundy, 2001). While this is not an exclusively smallholder
model, it shows the range of services that a specialized intermediary organ-
ization can provide.
202 B. Vorley et al.
As is clear from the examples of Bimandiri, Hortifruti and Hugo Restrepo,
models of intermediation include a strong dose of service provision, including
finance – usually by the intermediary organization or specialized providers – to
balance both the needs of small-scale farmers and the realities of emerging
modern markets in terms of quality and volume. For example, the Los Angeles
Salad Company, which works as a wholesaler between Cuatro Pinos in
Guatemala and the retailer Costco in the USA, not only helps to market prod-
ucts and provides logistics support in the USA, but also provides technical
assistance in product quality, access to innovations in packaging and packaging
technology and assistance in new product development. LA Salad also helps
facilitate production planning and manages over- or underproduction in coord-
ination with other producer regions. Without the provision of these services,
the ability of Cuatro Pinos to sell consistently to Costco would be much lower.
These new intermediaries are characterized by increased knowledge manage-
ment (to improve chain coordination and quality), closer links to buyers and
Box 7. Specialized wholesaler: Bimandiri in Indonesia. (From Sandredo, 2006;
World Bank, 2007a.)
The Bimandiri company in Indonesia, which has changed from a traditional whole-
saler to a supplier of vegetables and fruits mainly to Carrefour, is an example of a
specialized intermediary. Bimandiri encourages farmers to cooperate in producer
organizations and works with those groups on the basis of agreed quantities. The
company has worked closely with its producer organizations, supplying technical
assistance and credit, in order to assure quality standards and consistent volumes
for its retailer client. Bimandiri has maintained preferred suppliers lists but moved
away from a close extension role. It continues to implement transparent negotiated
producer prices.
Box 8. Lead-farmer networks with Hortifruti Honduras. (From Agropyme, 2006;
Lundy, 2007.)
Hortifruti is the specialized wholesaler for fresh fruits and vegetables for Wal-Mart
in Central America. The company works with a variety of suppliers for vegetables
in Honduras and Nicaragua, often purchasing product from existing farmer coop-
eratives. However, it has experienced significant difficulties with these farmer
organizations in terms of lengthy decision-making processes. As a result, Hortifruti
Honduras has developed and promoted a ‘lead-farmer’ model of organization
through which it identifies and builds the capacity of farmers who can meet its
quality needs in a consistent fashion. After demonstrating such capacity, lead
farmers receive larger and larger orders for product or new products and are
invited to work with neighbouring farmers to meet this demand. Lead farmers pro-
vide access to technology, technical assistance and market access to their net-
work of neighbours as part of a bundle of production and marketing services. The
cost of these services is recouped via the sales margin to Hortifruti. The expansion
of this model depends on the identification of new lead farmers. Early results indi-
cate that it is low-cost, scaleable and sustainable.
Business Models for Small Farmers 203
incentives for product and process upgrading. This can be an important new
role for NGOs, though there is a growing appreciation of the efficiency benefits
of upgrading existing intermediaries.
A new generation of commercial intermediary in India is demonstrating that
service provision can itself be a profitable part of the business model, which can
trigger inclusive growth. The rural retailer, Hariyali Kisaan Bazaar, which is part
of the DSCL conglomerate, sells agri-inputs and consumer goods through its
chain of centres, which also serve as a common platform for providers of finan-
cial services, health services, etc. The Haryali centres are procurement hubs for
farm outputs, providing buyback and warehousing (Bell et al., 2007b; Gupta,
2008), and thus creating multiple revenue streams based on transparent and
effective participation in input as well as output value chains. Each Hariyali store
has a catchment radius of 20–25 km, comprising about 15–20,000 farming
families. They aim to provide producers with ‘urban amenities in rural areas’,
easy availability of quality products at ‘city-like’ fair prices and, through IT, pro-
vide commodity prices and commodity futures, as well as ATM access and
weather forecasts. On the procurement side, they create linkages between pro-
ducers and processors, exporters and retailers.
There are examples of producer organizations adding their own commer-
cial intermediary, in the form of consolidation and marketing units (Box 9).
Box 9. Normincorp in Mindanao, Philippines. (From Concepcion et al., 2006.)
Farmers of the Northern Mindanao Vegetable Producers’ Association, NorminVeggies,
are able to successfully participate in dynamic vegetable chains primarily because
of the organizational structure they chose in order to respond to the market chal-
lenges. This involves a corporation, Normincorp, which gives them the agility needed
for each development in the supply chain. Normincorp’s formation signified a new
development in marketing for small farmers. While established as a stock corpora-
tion, Normincorp functions more like a cooperative and has a social enterprise char-
acter. It was set up and operated with a keen business sense, and also with full
empathy for the small farmers. As market facilitator, Normincorp saw to it that pro-
duction was programmed by farmer clusters with their respective cluster leaders,
according to marketing plans, that quality farm and postharvest management could
be done by each farmer in the cluster, and that coordination could be provided for the
sequence of activities that include order taking, outshipment logistics, billing/charg-
ing, collection and remittance to the farmers. For these services, Normincorp earns
a market facilitation fee based on the value of the sale and uses the income to cover
the marketing management overhead.
Normincorp is not a trading company. Rather, it is a market facilitator linking
the farmer through his or her cluster directly to the buyer. The farmer is given the
buyer’s price, and he/she is therefore accountable for the product and retains own-
ership of the product up to the point of sale. This encourages the farmer to supply
the best quality since the price is given to him/her and all sales are remitted directly
after deducting the market facilitation fee, which is based on the quantity of
accepted vegetables. Conversely, all rejects are individually charged to the con-
cerned farmer. Labelling of products per farm or farmer provides this traceability.
204 B. Vorley et al.
Working with this new generation of ‘doubly specialized intermediaries’
(which are both business-oriented and development-motivated) such as
Normincorp is an area that appears to offer the greatest potential for linking
large business with small-scale producers.
Much more common at present are market-oriented but traditional traders
taking steps to improve quality in their supply chains, where suppliers produce
to the traders’ specifications (crop management, harvesting, packaging, etc.),
and where the traders invest in supplier training and other investments. A very
interesting example of a butterhead lettuce supplier to Ho Chi Minh City in
Vietnam has been identified by Cadilhon (2006). The farmer collectors who
supply the intermediary train farmers to grow and harvest high-quality lettuce.
Through this collaboration, and through investments and forward planning with
regular suppliers, the intermediary only gets high-quality product. In China,
agricultural brokers and traders were denigrated for several decades and the
government tried to ban them, but without success. The government realized
the vital role that an agricultural brokers’ association can play as a bridge between
small farmers and outside markets, and in contributing to farmers’ incomes and
rural development. It therefore adopted a new strategy designed to organize
them and regulate their activities after the economic reform (Shudon, 2008).
Export-oriented companies setting up in new supplier countries almost
always rely on intermediation to simplify decision making, reduce risk and
lower transaction costs.
Alternative trade models
Alternative trade models cover a range of initiatives that make use of third-
party certifications to monitor compliance with selected indicators valued by
diverse members of the supply chain. Chapter 7 (this volume) looks at this issue
in depth, particularly at how standards line up with issues related to CSR.
Alternative trade models can be divided by their principal focus. In the chapter
on CSR, the authors identify four categories based on the principal goals of the
standard: (i) environment; (ii) social; (iii) benefits to the local economy and com-
munity; and (iv) food safety and quality. For the purposes of this chapter, we
will briefly discuss standards that seek to promote benefits to the local economy
and community and how they seek to resolve the issue of business models. We
use Fairtrade as a model of what is, admittedly, a much wider pool of alterna-
tive trade standards.
6
Of the existing alternative trade models, perhaps the best known is
the Fairtrade movement, which has the objective of creating opportunities for
6
Other relevant standards that speak to small-farmer viability include SCS-001, Basel Criteria
for Responsible Soy, Rainforest Alliance, the Roundtable on Sustainable Palm Oil and the SAI
Principals and Practices for Sustainable Production. However, many certification schemes do
not contain elements of business models which may be considered as central to inclusion of
small-scale producers, such as transparency (including transparency of how the certification
premium is allocated), collective action, durability of trading relationships, etc.
Business Models for Small Farmers 205
economically disadvantaged producers as its strategic intent. Is there then, in
Fairtrade, a shortcut to inclusive markets? Is Fairtrade a valid business model
for large companies to translate into their mainstream trading, or at least a
source of elements for new business models?
Fairtrade has at its core the concept of ‘fairer’ pricing that gives growers in
developing countries a better price for their work and gives longer term stability
to producer–buyer trading relationships. The umbrella organization Fairtrade
Labelling Organizations International (FLO) stipulates two sets of generic pro-
ducer standards, one for small farmers and one for workers on plantations and
in factories. The first set applies to smallholders organized in cooperatives or
other organizations with a democratic, participative structure. The second set
applies to organized workers whose employers pay decent wages, guarantee
the right to join trade unions and provide good housing where relevant. On
plantations and in factories, minimum health and safety as well as environmen-
tal standards must be complied with, and no child or forced labour may occur.
As Fairtrade is also about development, the generic standards distinguish
between minimum requirements, which producers must meet to be certified as
Fairtrade, and progress requirements that encourage producer organizations to
continuously improve working conditions and product quality, to increase the
environmental sustainability of their activities and to invest in the development
of the organizations and their producers/workers.
The standards stipulate that traders have to:
?
pay a price to producers that covers the costs of sustainable production
and living;
?
pay a premium that producers can invest in development;
?
partially pay in advance, when producers ask for it;
?
sign contracts that allow for long-term planning and sustainable production
practices.
Finally, there are a few product-specific Fairtrade standards for each product
that determine such things as minimum quality, price and processing require-
ments. These have to be complied with.
Some elements of the Fairtrade model – such as commitment to long-term
trading relationships – are cornerstones of inclusive business. But, as a business
model for wider application, there are a number of limitations, some of which
are easier to resolve than others. There are deep tensions between the small-
holder and plantation standards, and the lack of a clear definition of ‘disadvan-
taged producers and workers’ based on access to markets as well as income. In
contrast to pricing models which are based on a combination of market condi-
tions and product quality, Fairtrade floor prices are fixed by FLO, and have
proven slow to change even in sectors where significant market price increases
have occurred, such as coffee.
For many large companies, Fairtrade accounts for a small proportion of
their overall purchases. Many food retailers have positioned Fairtrade as an
up-market niche, as a test of their customers’ willingness to pay for ‘non-
exploitative’ trading with primary producers, rather than as a corporate stand-
ard and a means to transform their mainstream businesses (Tallontire and
206 B. Vorley et al.
Vorley, 2005). Even within the Fairtrade movement, questions are being asked
about whether the purchase of certified Fairtrade goods is an effective way of
achieving systemic fairness in trade. These groups are investing in other
approaches such as in schemes to facilitate improved access to conventional
markets for marginalized producers, and lobbying on codes of practice on
retailer–supplier trade relations.
How Are These Models Impacting on Smallholders?
Impacts of different business models on smallholder farmers vary depending
on the model employed and the way this is implemented by the chain actors.
As the business axiom states, ‘you can’t manage what you don’t measure’
and increasing attention is being paid to the development of tools to assess
the impacts and sustainability of diverse business models. The paper on
Inclusive Business by the World Business Council for Sustainable Develop-
ment and SNV Netherlands Development Organization (WBCSD and SNV,
2008) distinguishes between direct economic benefits, indirect economic
benefits and broader social benefits. Recent academic work highlights consider-
able attempts at developing metrics for supply chains but none has been fully
implemented (Aramyan et al., 2006). The area of key performance indica-
tors for supply chains remains under development and is limited by a lack of
transparency and cooperation among supply chain actors (Van der Vorst,
2006). Despite these limitations, it is clear that business models have both
quantifiable and qualitative impacts on smallholder farmers. Both categories
need to be measured and assessed to understand the effects of the business
model on rural populations.
The first category comprises key quantifiable indicators, which are
focused on measuring chain-wide evolution. Those indicators relevant to small-
holders include production volumes, product quality, net income, distribution of
income among smallholders, within households and along the supply chain, as
well as the distribution of costs associated with risk mitigation and manage-
ment. These indicators can be complemented with additional quantitative
measures that assess the overall ‘health’ of the supply chain, such as market
position and penetration, profitability as compared to similar chains and trends
in volume and prices.
A second critical area of impact assessment focuses on qualitative or
skills-based indicators. While difficult to quantify, advances in skills and rela-
tionships underpin and sustain gains shown in quantifiable indicators such as
income and profit. Key skills related to the quality of the trading relationship
focus on negotiation, the construction of sustainable commercial relationships
and the governance functions of the chain itself. For chains linked to dynamic
market segments, additional attention should be paid to issues related to prod-
uct and process upgrading and collective innovation as the chain adapts to
increasingly demanding market conditions. While this process does not occur
fully at the farmer level, the existence of this skill set is critical for continuing
competitiveness of the overall system. Unlocking innovation and opportunities
Business Models for Small Farmers 207
for smallholders is a critical element of impact since this leads to benefits that
help drive farmer incentives for inclusion.
Changes achieved through producer organization models can improve
negotiating skills and enhance access to service provision. Models of producer-
driven vertical integration – either becoming co-owner of a supply chain or one
of its segments in pursuit of value-added – can make sense when built on a
business mentality. However, this downstream ownership route may not always
compare well to investments in building a network of specialized actors to
achieve similar goals. For instance, research in Africa provides interesting evi-
dence in this regard, showing that many of the benefits achieved by relatively
autonomous smallholder-owned and managed cooperatives can be captured by
more dependent, i.e. less highly trained and skilled, groups if appropriate links
are developed with other market actors (Stringfellow et al., 1997). The differ-
ence between choosing a strategy of vertical integration versus horizontal
cooperation may, therefore, boil down more to costs (money and time) than
notably different outcomes.
Some arrangements to sustain the inclusion of all members while maintain-
ing the competitiveness of the organization, such as lead-farmer clusters, which
accept differentiation within an organization based on assets, are a significant
and challenging departure from the original cooperative ethos of equal treat-
ment for all members. Cuatro Pinos (Box 4) exemplifies this tension. Despite
the success achieved in expanding a supply network by nearly 400% while
maintaining high product quality, the final distribution of benefits is still skewed
towards cooperative members as opposed to non-members, even though non-
members provide up to 80% of product volume in some categories. Farmers
who do not happen to live in the seven communities where the cooperative
was founded 30 years ago are not allowed to become members. This means
that they cannot access profit-sharing mechanisms developed by the coopera-
tive, which provide significant additional income to producers at the end of the
year. Cuatro Pinos’ management is aware of this issue and is seeking to resolve
it through service provision and increased prices and/or volumes from non-
cooperative members. However, it is members themselves who would need to
reform their organizational rules to allow the inclusion of new members (Lundy
et al., 2006). To date, this has not happened.
Models focused on intermediation drive change through processes of
negotiation among actors. They achieve efficiency gains through greater
organization along the whole chain through improved information flow and
shared standards. The distribution of additional benefits along the chain needs
to be negotiated and care exercised in not allowing the intermediary actor to
extract additional benefits based on information asymmetries. The develop-
ment of transparent pricing mechanisms is an important tool to reduce this
risk. For example, in Indonesia, the specialized wholesaler Bimandiri (Box 7),
which supplies fruits and vegetables to Carrefour, operates a transparent mar-
gin system to cover its participation in the system. All actors know the final
prices and the intermediary margin, thus avoiding windfall profits for the inter-
mediary organization when market conditions improve and providing an incen-
tive to increase volumes. In other cases, prices are set based on crop models
208 B. Vorley et al.
on a yearly basis. This can be done with producer participation, such as in
Cuatro Pinos in Guatemala, or a non-participatory fashion, such as in the case
of Hugo Restrepo and Company in Colombia. Regardless of how prices are
set, clarity on how prices reflect production costs, relative risks and returns is
critical to assure greater equity along the chain.
Buyer-driven models affect smallholders through the application of (often
strict) norms and standards relating to quality and volume. They tend to push
processes of functional improvement up the supply chain, often with limited
incentives to compliance beyond continued participation in the market. Because
of their proximity to the end buyers, these models can identify consumer trends
and can provide clear incentives for market-driven product and process upgrad-
ing. Additional benefits tend to accrue to buyers and care should be taken to
achieve transparent assessments of gains and meet equity concerns.
Cases of inclusion driven by private businesses are characterized by small
farmers having less say in the governance of the chain and by less capacity
building of small-scale suppliers beyond production and postharvest manage-
ment. Where a buyer organizes a network of producers from a corporate
responsibility ethic, the risk is more one of paternalism and dependence. On the
other hand, case study analysis (Berdegué et al., 2008a) found no evidence that
in such situations small farmers will have lower direct economic benefits, at least
in the short run. Also, under these conditions small farmers do not need to incur
the costs of coordination or of collective action. In the case of MA’s in Sri
Lanka, there were clear income benefits for smallholder suppliers (Box 10).
A buyer-driven network can be managed through using the transparent
pricing strategies highlighted above as well as the incorporation, where possi-
ble, of incentives based on quality. For example, the US speciality coffee com-
pany Intelligentsia Coffee and Tea manages a ‘direct relationship’ quality-based
model with producers. This model prices coffee based on its cup quality, with
payment going directly to the producer. Additional services needed to move
coffee from the farm to the US market are contracted by Intelligentsia directly
and not discounted from the farmer price (New York Times, 22 June 2006).
A drawback of buyer-driven models for producers is the frequent demand
for exclusivity. From a processor or retailer perspective, a supply chain is a
source of competitive advantage, and they will seek to exclude competitors and
prevent suppliers from ‘side-selling’. Because a buyer has invested in the supply
network, and because the buyer needs to be able to fulfil contractual obligations
for specific volumes to its customers, it will demand exclusivity from its small-
holder suppliers. This can be frustrating for producers, who do not see trans-
parency in how prices are set, or in how quality discounts are often determined.
The Kenyan supermarket Uchumi makes a point of not demanding exclusivity
from its smallholder suppliers. Another way around this issue is to have prices
set weekly rather than fixed at the start of the season, to reduce discrepancies
between contract and market prices (Box 11).
Alternative trade models, especially Fairtrade, have demonstrated success
in benefits transfer and consumer acceptance. None the less, an important
percentage of the Fairtrade premium resides with certification and coordinating
agencies. Gross margin at retail level is much higher than at other levels of the
Business Models for Small Farmers 209
Box 10. Impact assessment of MA’s procurement system, Sri Lanka. (From
Samaratunga, 2007.)
An impact assessment of the smallholder procurement system established by MA’s Tropical
(Box 6) showed clear improvements in corporate income, volume of trade, assets, farm
income, employment creation and non-monetary benefits while ensuring a greater degree
of inclusion of small farmers in the new supply chain. With inclusion in the company’s supply
chain, the farmers achieved a premium price for better quality products, price stability, a
spread of income throughout the year, and services such as extension, credit facilities and
marketing risk minimization.
Average yearly per acre income comparison (Rs/acre/year)
Farmers supplying to MA’s 98,000
Non-supplying farmers 48,000
Price comparison between MA’s and village trader (Rs/kg)
Cinnamon Nutmeg Cloves Pepper Citronella
MA’s 675 300 580 180 22
Village trader 550 150 360 125 12
This model has been in existence as a sustainable system for about a decade while
increasing its capacity for greater inclusion of farmers. The company has not yet reached its
potential capacity.
However, there is some evidence of exclusion through the higher transport charges,
delayed payments, use of cheques as the mode of payment and the low production cap acity
of the company. Even though the company has initiated an informal farmer organization,
lack of coordination and poor structure have excluded a certain stratum of farmers from the
system. Lack of quality consciousness and credit-bound relationships with the village trad-
ers also have some form of correlation with the exclusion of farmers from the chain.
Greater inclusion can be attained by creating an arrangement for the transport cost to be
borne by the company or farmer organization and by introducing a liquid mode of
payments.
Box 11. Adjusting payment terms: Vegpro in Kenya. (From Bell et al., 2007a.)
In common with other leading exporters of fresh vegetables from Kenya, Vegpro divides
production between its own farms and smallholder outgrowers, which it relies on for crops
that are not well suited to plantation production, such as peas. In 2007, Vegpro was pur-
chasing most of its snow peas from 3500 smallholder farmers organized into 50 self-help
groups. Despite the coordination offered by the self-help group structure, it is no small task
to ensure consistent volumes, quality and standards across 3500 farmers. Vegpro had pre-
viously been paying farmers a fixed year-round price that exceeded the average market
price over the course of the year. When the market price was below the fixed price, farmers
had been content to sell to Vegpro, submitting volumes that apparently included uncertified
produce from their neighbours. But, when the market price rose, farmers in need of cash
would side-sell to local traders. Vegpro reduced side-selling by employing field supervisors
and switching from annual fixed prices to weekly prices set in relation to the market price.
210 B. Vorley et al.
value chain. Consequently, it has been argued that consumers of Fairtrade
products are supporting the shareholders of the international retailers more
than the actual smallholder target groups. Incentives for product improvement
and innovation have been traditionally weak, with limited feedback regarding
consumer trends and demands beyond that covered by certification.
None of the above business models is inherently superior for smallhold-
ers, with the possible exception of classical Fairtrade. To initiate processes
quickly, intermediary or buyer-driven models are useful as they provide turn-
key solutions and somewhat lower risk. In the medium term, however, the
promotion of stronger producer organizations may build greater resilience
and increased participation in chain governance, especially if combined with
specialized intermediaries.
The selection of a specific model or elements from various models is highly
dependent on market conditions, participating actors and their knowledge and
skills and the existence (or not) of support agencies and policies. As market link-
ages evolve, models need to adapt to respond to changing market conditions as
well as in the relationships between the participating actors. Approaches need
to be piloted for specific locations, products, conditions and markets in order to
better understand how to update current models, and which forms of best prac-
tice need to be adapted to help support sustainable impact for smallholders.
What Can Be Done to Help Prepare
Smallholders to Participate?
What needs to happen at the farm level and in supply chains to support the
participation of small-scale farmers in dynamic and more profitable market
segments, from a business model perspective?
According to a study of 35 successful farmer-owned rural businesses in
Latin America (Camacho et al., 2007), producer organizations follow a sim-
ilar trajectory of skill development that includes capacities focused on: (i)
market linkages for goods and services; (ii) increased internal and bridging
social capital; and (iii) the development of professional management capaci-
ties. The development of these skills requires access to effective business
support services, effective alliances with other chain actors and an effective
enabling environment.
Support services may be technical, managerial or financial in nature, pro-
vided by diverse types of formal and informal service providers. But they share
several common factors: (i) a focus on effective solutions to bottlenecks that
cause exclusion; (ii) a business orientation to guarantee sustainability over time;
(iii) flexibility linked to client needs; and (iv) provision by operators close to the
clients. The topic has been covered in depth in the Business Development
Services (BDS) literature.
7
For many smallholders, service provision between
commercial actors, known as embedded services, holds promise in that these
services depend on commercial incentives rather than public subsidies.
7
www.bdsknowledge.org
Business Models for Small Farmers 211
Financial services are crucial for farmers to access dynamic markets and
sustain their participation in them. As supermarkets and processors tend to
pay only after a certain period (often 45 days or more), there needs to be a
mechanism to bring liquidity into the supply chain. In addition to working cap-
ital provision, other financial services such as cash flow finance, in which the
commercial relationship rather than collateral assets guarantee the loan, can
be arranged as three-way agreements among buyer, producer and finance
institution. The informal moneylender is likely to guard customer information
on risk and viability. One option is to transform the moneylender into a bank
worker. This has been proposed by some NGOs and external funders, but
there has been patchy success with this. A version of this transformation
rewards knowledge and innovation by the moneylender through private sector
arrangements.
There are often good reasons for a lack of embedded services in rural
areas. Successful services rely on knowing the customer well and research
shows that this knowledge is difficult for non-residents to obtain or interpret.
The use of tools that strengthen the capacities of informal service providers to
identify, provide and improve their embedded services in rural areas is of criti-
cal importance.
A crucial point in times of high and volatile market prices is the develop-
ment of models of reciprocal responsibility between buyers and producers. As
prices and demand rise, producer organizations will be tempted to break con-
tracts and side-sell committed volumes to other buyers offering higher prices.
This might generate additional income in the short term, but it is critical to
recognize that sustainable relationships can generate additional negotiation
power in the long run. In addition, sustainable relationships lay the groundwork
for the development of joint ventures for new product development and co-
investment. Opportunistic behaviour works directly against this possibility.
The above interventions must link to a suitable enabling environment, the
components of which are described in more detail in the section ‘What are the
Priorities for the Public Sector?’ and in Chapter 5 (this volume) as well.
What Do Business Partners Have to Consider and Do in Order
to Work Successfully with Smallholders?
We have seen in the first section that the biggest challenge for large businesses
to work with small-scale farmers is that of organizing supply. Without a means
to reduce transaction costs, ensure due diligence and ensure that trading agree-
ments are honoured, they will see smallholder suppliers as a threat to their
‘value proposition’. In the section ‘What Is the Business Case for Adjusting
Business Models in Favour of Smallholders?’ we saw that there are many exam-
ples of companies organizing their own supply base and setting up producer
groups, especially where there is a lack of collective producer action. But organ-
izing direct procurement is costly for private players, and such efforts are likely
to remain as small CSR pilot projects. Where there has been positive business
action, it has largely focused on niche export markets to the north rather than
212 B. Vorley et al.
the much more pressing challenge of inclusive development within ‘transform-
ing economies’ where 80% of the world’s rural poor live.
Opportunity lies in the ‘Partner network’ part of the business model tem-
plate in Figure 1. Much private sector policy is rooted in the procurement-
profit philosophy, without extending this approach to co-investment or
partnership win–wins. A suggested refocusing of private sector innovation and
incentives on sustainable supply from small-farmer networks has the potential
to unleash the best of all worlds.
Upgrading mainstream procurement
Much can be done by businesses to upgrade mainstream procurement within
their existing model to ensure that their procurement practices work to the
benefit, rather than detriment, of small-scale producers and suppliers. The clear
business incentives are continued access to supply, option to be the ‘buyer of
choice’, access to better quality supply and a social licence to operate. Points
of focus here are coherence between corporate policies and actual procure-
ment practices, through adjustment of reward systems for buyers, and through
senior management buy-in. A reorientation of training and development aware-
ness of buyers is a first priority. The asymmetries of market power between
sellers and buyers have, until recent food price rises, allowed retailers to simul-
taneously extract both lower prices and higher standards from suppliers.
Traidcraft’s reports on purchasing practices are an excellent source of further
information (e.g. CIPS and Traidcraft, 2008). Payment terms and contracts
can be adjusted to the realities of smallholder production without compromis-
ing commercial imperatives (Boxes 11 and 12). Buyers are quick to criticize
‘side-selling’, but may readily engage in ‘side-buying’, procuring opportunistic-
ally outside of established supplier networks for short-term profit.
Frequent and consistent access to information on market trends, projected
volumes and production technology, in addition to shared decision making in
regard to chain rules and price structures, is also critical. Better forecasting and
planning can reduce some of the pressures on suppliers that drive poor work-
ing practices and casualization of labour.
Box 12. Adjusting contracts: Postobon in Colombia. (From Espinal et al., 2005.)
One way to handle the problem of side-selling is through specific agreements that
recognize opportunities and include them openly in negotiations. In Colombia,
demand for tropical fruit pulp exceeds supply. As a result, the private sector firm
Postobon began offering annual contracts to smallholder blackberry farmers that
contained two market condition-related clauses. In times of high market prices (a
seller’s market), producers were allowed to sell up to 20% of their total volume to
other buyers principally for the fresh market. In times of low market prices (a buyer’s
market), Postobon was allowed to purchase up to 20% of its total volume from non-
contracted suppliers. These agreements explicitly recognized the pressure for
opportunistic behaviour and identified mechanisms to manage them.
Business Models for Small Farmers 213
There are also models of inclusive procurement, built on preferential
sourcing from small-scale producers and family farmers and their organiza-
tions. For example, Carrefour Indonesia has established a dialogue with SME
suppliers of fresh food (vegetables, fish), household equipment and textiles, to
improve product quality and packaging and improve their shelf access, in part
by waiving the listing fee normally charged to companies waiting to sell to the
chain. Similarly, Wal-Mart, Honduras, has established the ‘Una Mano para
Crecer’ (‘Help to Grow’) programme for SMEs.
Part of a commitment to inclusive procurement should look at alternatives
to paternalistic supply systems and demands of supplier exclusivity. While it is
tempting to want to ‘cut out the middleman’, chain intermediaries often are
vital in linking smallholders to dynamic markets, and are of particular import-
ance to the poorest farmers and to those located further away from the mar-
kets and the main roads. There is much for food processors and retailers to do
to cultivate efficient intermediaries, including those set up through producers’
own initiatives, rather than seeking to eliminate them from the chain.
Better standards
The issue of private sector standards is also central to pro-smallholder business
models. GLOBALGAP is now a passport to the most demanding export mar-
kets, but many compliance costs are not a function of the volume of production,
but are per-farm costs, thus pushing up the per unit cost of compliance for small-
scale producers. This applies as much to standards for ‘sustainability’ as to those
for food safety and traceability. A lack of coordination between schemes means
farmers certified to multiple standards must pay for separate audits. There are
pro-smallholder approaches to standards, including group certification and com-
bined audits, as well as the use of local certification agencies, but also more
fundamentally the participatory development of standards, involving the farmers
who will have to implement them – the ‘standards takers’ – from the outset.
Pan-industry initiatives
Not all aspects of business models are competitive. Much can be achieved
through industry collaboration to create an environment for more inclusive
markets. Cross-industry codes of conduct established by the business sector
and regulated by them, for example, in Argentina (Box 13) can provide much
needed oversight of trading relationships at the domestic level.
What Are the Priorities for the Public Sector?
Innovative business models can make a positive difference in terms of inclu-
sion. The role of public policy is not a primary focus of this chapter. But it is
important to note the potential of proactive policies – including infrastructure,
214 B. Vorley et al.
finance and support services – to stimulate and support those types of business
models which are more inclusive and that are also good business. There is a
vitally important role for the public sector to facilitate successful alliances
between smallholders and larger business, especially if successful small initia-
tives are to be scaled up.
The enabling environment
8
A priority area of intervention is that of the enabling environment. Recent work
by the World Bank on agricultural innovation systems identifies a range of
options to support an enabling environment that promotes innovation. Key
findings from this work include the importance of using targeted public and
private research investments to resolve technological bottlenecks in the supply
chain, the inclusion of social and environmental sustainability criteria, a focus
on outcomes in terms of poverty reduction and a focus on collaboration among
actors as a driver of competitiveness (World Bank, 2006). The consistent provi-
sion of key infrastructure services (roads, water, electricity and communica-
tions) is a central element of an enabling environment, as are relevant public
policies to maintain a competitive market, oversee the working of contract laws
and contractual enforcement, and oversee FDI and taxation.
Investment in traditional and wholesale markets is clearly an important
priority for public policy. Where wholesale markets fail to keep up with changes
in retail – especially the supermarket revolution – they can fall into decay.
Traditional markets can be a bridge for small-scale farmers to increase their
capacity and to eventually link to modern markets. Successful upgrading and
modernization of wholesale markets and their procurement networks also
Box 13. Best commercial practices code in Argentina. (From Brom, 2007.)
Rapid investment by global and regional retail players in Argentina in the late
1990s created fierce competition with local retail investors creating a trading envir-
onment unsatisfactory to small companies, a poor bargaining position for many
and complaints at all levels. The choices faced by the sector were either to develop
a private code or to submit to government legislation. The Food and Beverages
Manufacturing Association (COPAL) and the Argentine Supermarkets Chamber
(CAS) worked together with reference to evidence and experience from across the
globe to develop a private code of practice, which was signed in June 2000. Since
then supplementary rules have been added and the approach shared with many
countries in the region and indeed worldwide. Similar private sector codes have,
for example, been developed and adopted in Colombia and Mexico. Seven years
on, there has been significant improvement in both free and fair practice and thus
competitiveness. The culture and way of doing business have changed with a dra-
matic decline in cases submitted for mediation or arbitration.
8
See also Chapter 5, this volume.
Business Models for Small Farmers 215
require upgrading and modernizing of their primary clients – the traditional
retail sector – if they are to remain crucial players favouring inclusion of small-
scale producers.
Where land is unequally distributed, as in South Africa, this becomes a
significant determinant of market inclusion as the modern market will always
seek to source from the large farm sector. Under these conditions of dualistic
farm structure, inclusion attempts will be working against gravity, and public
policy has a vital role.
Donors are increasingly interested in facilitating the bridge between the
majority of small-scale producers and modern markets. Businesses can develop
effective initiatives in partnership with governments, donors and NGOs, and
can learn as much from the successes and failures of development agencies and
NGOs as the latter can learn from business. For example, the self-service
wholesale operator METRO Cash & Carry is working with the Vietnam Ministry
of Trade and the German development agency, GTZ, to support development
of Vietnam’s distribution network. However, until these donor-supported initia-
tives are scaled up and become self-supporting, the question of tokenism and
long-term sustainability remains. As an alternative approach, a number of
donors have in place business challenge funds. The Africa Enterprise Challenge
Fund, the Financial Deepening Challenge Fund and the USAID Global
Development Alliance offer the opportunity for innovative business models
within inclusive agrifood markets to be both explored and developed.
At some point governments must balance equity and efficiency, despite the
compelling case to support the huge numbers of small- and micro-scale farms.
The costs of inclusion and exclusion must be evaluated in considering policy
options. Evaluation of future scenarios should attempt to include estimates of
these costs in order to provide additional insights to the real costs and benefits
of the policy options. Case study evidence suggests that inclusion into restruc-
tured markets may be unsustainable for the ‘poorest of the poor’. There is a
lack of data to inform resource allocation and thus, for example, the threshold
for support. Such thresholds can be a minimum size of farms, but may also
include non-land triggers such as completion of training or membership of a
producer organization.
Partnership facilitation and chain-wide learning
A key pattern in successful linkages between small-scale farmers and dynamic
markets is the collaborative arrangement between: (i) trained and organized
farmers; (ii) a receptive business sector; and (iii) conducive public policies and
programmes (Figure 2). Such arrangements may benefit from specialized part-
nership facilitation. Innovation in building inclusive markets is greatly enhanced
when business actors within the market chain engage along the whole chain,
together with indirect businesses (input suppliers, etc.), and with relevant public
institutions. If interventions are made without coordination, they can lead to
market distortions instead of market development, potentially flooding markets
and supporting inefficient production systems.
216 B. Vorley et al.
The development of collaboration among actors requires linking actors in
ways that facilitate discussions and information exchange among them.
Examples of how this can work include chain-wide committees facilitated by
Ministries of Agriculture, ‘inter-professional’ or commodity associations formed
by the chain partners (Shepherd and Cadilhon, 2009), and the use of public–
private partnerships. Difficult issues such as power and knowledge asymmetries
need to be carefully managed to avoid excluding weaker members of the chain.
Examples include work in Colombia
9
and Honduras, as well as a link between
the Centre for Agricultural Policy and Agribusiness Studies (CAPAS) at
Padjadjaran University in Indonesia and Carrefour Indonesia. A memorandum
of strategic cooperation between the two involves developing a supply chain
model involving small-scale suppliers, development of new agricultural prod-
ucts, transfer of know-how and channelling of products to the Carrefour quality
line programme.
Encouraging procurement from small and family-scale farmers
Apart from providing an enabling environment and appropriate services, there
are examples of specific policy innovations to encourage procurement from
small and family-scale farmers:
?
The biofuels Social Seal in Brazil is a promising example of a tool to
improve the equity of the ‘biofuels revolution’ by providing the downstream
biodiesel industry with incentives to source their feedstock from smallhold-
ers and family farmers (Abramovay and Magalhães, 2007).
?
Private–public partnerships in Michoacán, Mexico, have been organized to
coordinate the production and marketing of avocados built around phyto-
sanitary standards (Medina and Aguirre, 2007).
?
The use of policy pressure or incentives to agribusiness and retail for pro-
poor procurement, such as requiring supermarkets to provide adequate
space in their shelves for small-scale farmers’ products.
Facilitating public
sector
Partnership
facilitation
Trained/
empowered
farmers
Receptive business
sector
Figure 2. Foundations of sustainable market linkages between small-scale
producers and agribusiness. (From: Berdegué et al., 2008a.)
9
http://www.agrocadenas.gov.co.
Business Models for Small Farmers 217
?
A supplier ombudsman with an independent regulatory role to oversee the
way in which powerful buyers such as supermarkets engage with their sup-
pliers has been established in Australia.
Closing Comments
There is a sound business case for securing and enhancing small-scale produ cers’
inclusion, which can bring both economic and wider development gains. This
requires that appropriate business models are applied and, where applic able,
that this is done in partnership with producers, the public sector, inter mediaries
and development agencies. Two big challenges are evident when seeking to
apply inclusive models to developing country economies dominated by small-
scale producers, either for domestic retailing and processing, or for exporting.
The first is organizing and upgrading supply from a dispersed producer base.
The second is traceability and quality assurance. Through attention to the ‘part-
ner network’ in the business model framework (Figure 1), the value proposition
of modern agrifood business and cost structure can be maintained or even
strengthened by building in inclusion of small-scale producers and suppliers.
Successful models tend to evolve towards a common set of principles
(Hobbs et al., 2000). These include: (i) greater information and knowledge
flows; (ii) a focus on differentiated products; (iii) an orientation towards market
demands; and (iv) chain-wide organizational structures that recognize the inter-
dependence of actors and facilitate collaborative problem solving. The sum of
these principles is systemic competitiveness, which is based not only on the
efficiencies of individual actors but also on collective efficiencies. The classic
business model schematic in Figure 1, which describes the individual firm,
therefore needs to be revisited to reflect how chain actors can collaborate to
build a chain-wide model that balances risk, responsibilities and benefits along
the chain while not undermining competitiveness.
The business models concept is especially useful in helping business to
understand the reach of downstream decisions on how value is created or lost
by supply chain actors, including smallholders. But business models that work
for more inclusive market development are not exclusively about procurement.
The approach compels us to look to effective alliances and linkages by all chain
participants. This rarely occurs spontaneously, given the often adversarial rela-
tionships that characterize commercial links in the agrifood sector. As a result,
specific actions to clarify and develop plans for collective action at the chain
scale are needed. Some good tools can be found in participatory chain analysis
and upgrading manuals (Lundy et al., 2006; Vermeulen et al., 2008).
Another benefit of the business models concept is that it forces us to
rethink CSR. The contemporary approach to CSR, with its emphasis on sup-
plier codes and compliance, has been marginal to the issue of addressing the
position of primary producers. Imposing pro-poor and inclusive procurement
on suppliers, with the usual tools of supplier standards and compliance, will
not bring about more inclusive markets. Nevertheless, there is a valid debate
in rural development about the relative contribution of smallholder production
218 B. Vorley et al.
versus plantation wage labour to the rural economy and to poverty reduction.
Many wage labourers are the poorest of the poor, what OECD-DAC refer to
as Rural World 4 and Rural World 5 (OECD, 2006). The approaches to CSR
and business and development have themselves diverged, with ‘ethical’ being
focused on compliance approaches to labour standards, while ‘fair’ focuses on
small-scale producers.
Another debate is between the importance of ‘modern’ and ‘traditional’
markets. Many of the models developed around modern restructured chains
apply equally well to local and ‘traditional’ markets. Some emerging modern
markets are extremely small, niche and donor-influenced, and a distraction
from the priorities of broad-based rural development. Furthermore, even very
progressive modern procurement systems can be exclusionary. Producers,
intermediaries, buyers and support agencies must evaluate their options very
carefully; there may be better rewards in the traditional markets, thanks to the
high volume and less stringent standards. We need to know more about the
applicability of new business models to trade with traditional markets.
This leads to the importance of acknowledging the risks of the ‘new busi-
ness model’ concept. It is an open question whether new business models will
benefit the poorest, and, if they do, whether they will ever be sustainable. Over-
reliance on markets coupled with voluntary pro-poor initiatives by business
misses the point of market governance, whereby genuinely effective business
models work best in a strongly supportive policy environment for both produ-
cers who want to connect to those chains and those who cannot. Policy atten-
tion will always be required to prevent persistent and engrained abuse of power
in asymmetric power relations. Business models do not resolve other key issues
such as infrastructure investments that may be critical to upgrade excluded
producers. These ‘hidden costs of inclusion’ are not well accounted for in busi-
ness models, but failure to include them limits the effects of even the most
progressive approaches on the rural economy.
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Introduction
The world can embrace new roles for business in society but achieving progress
still requires major and sustained investment from all sectors. This simple fact
certainly holds true when considering the agrifood industry’s initiatives to
improve conditions around food value chains, even if it is at times ignored. At
one extreme, companies promote ‘responsible’ practices that only well-resourced
value chain partners can implement; at the other, businesses work hand in hand
with other sectors to achieve change that benefits the poor. Similarly, the public
sector seems at times unable or unwilling to invest in food value chains as
engines of national growth. In other situations it has built on the power of busi-
ness innovations to reap economic and social benefits beyond the interests of
individual companies. This review of corporate social responsibility (CSR) in the
agrifood sector provides a landscape of opportunity won and lost and encour-
ages the most promising strategies and collaborative approaches.
There is increased attention to the engagement of business in society.
There is growing recognition that private enterprise that operates on an inter-
national scale must help find solutions to global problems. Governments, non-
governmental organizations (NGOs) and the media have put large companies
in the spotlight to account for the social consequences of their activities. As a
result, CSR has emerged as an important area of action for large companies
globally. For the agrifood sector, which is dependent on natural, human and
physical resources, responsible innovation is increasingly being viewed by firms
as a corporate and strategic necessity to ensure long-term sustainability.
Few industries have the potential to contribute to development progress
on the same scale as the agrifood industry. Its value chains involve millions of
7 Corporate Social Responsibility
for Agro-industries
Development
*
CLAUDIA GENIER,
1
MIKE STAMP
2
AND MARC PFITZER
3
1
Senior Consultant, FSG Social Impact Advisors, Geneva, Switzerland;
2
Consultant, FSG Social Impact Advisors, Geneva, Switzerland;
3
Managing
Director, FSG Social Impact Advisors, Geneva, Switzerland
* This chapter was prepared with support from Nestlé and with assistance from the Sustainable
Agriculture Initiative (SAI) Platform and the Sustainable Food Laboratories.
224 C. Genier et al.
people, from farm input providers to consumers, with many from developing
countries. A relatively small number of companies have the ability to affect the
lives of millions of people and their use of natural resources. Yet the agrifood
sector today faces critical challenges: global food demand is due to double in
the coming 25 years, requiring an equivalent increase in agricultural produc-
tion. The growth in demand increases the potential to capture value from agri-
culture and food production, and could offer large numbers of small-scale
producers an opportunity to improve their livelihoods. For this to occur, how-
ever, a fair share of the value generated by agrifood chains needs to be cap-
tured upstream at the producer level. Particularly in countries where agriculture
is a major source of GDP growth, the agrifood industry is of critical importance
in fighting poverty and achieving progress towards the Millennium Development
Goals (MDGs). The emergence of CSR has played a significant role in stretch-
ing the boundaries of action of corporations towards these objectives.
Many companies have engaged in CSR for defensive reasons. While some
companies view CSR principally as a public relations tool based on traditional
philanthropy, others use it to prevent negative media publicity by imposing
‘ethical’ codes of conduct within their value chains. Increasingly, too, they
cooperate with competitors in the same industry in an effort to set common
values, spread risks and shape opinion.
This approach has historical precedence. The knee-jerk reaction of criti-
cism for poor standards has been to ‘fix the problem’ and to ask business part-
ners in the value chain to do the same. Driven by concerns about food safety,
voluntary standards and codes have proliferated into a long list of competing
norms, which progressively included a broader set of environmental and social
concerns. On the positive side, these norms represent a new frontier of prac-
tices leading to more sustainable agrifood value chains;
1
their impact on devel-
opment objectives, however, is less clear. Standards and codes help achieve
progress when they are adopted; yet adoption requires considerable and tai-
lored investment in farmers’ aspirations, skills, capital and context. Well-
resourced value chain partners (in richer countries) can more easily adopt new
practices without external support. Poor rural communities, on the other hand,
may find it significantly more challenging to join these ‘responsible’ supply
chains without assistance.
A growing number of leading companies, of which some are featured in
this chapter, take a broader view of CSR. They see an opportunity to create
‘shared value’ through their activities and investments, benefiting all stakehold-
ers in the agrifood value chain including (but not limited to) themselves, as well
as the society in which they operate. This motivates such companies to foster
stronger ties with local producers, suppliers and communities. Approached in
this more strategic and proactive way, CSR can become part of a company’s
long-term competitive advantage by creating more favourable conditions
for business. Such ‘integrated’ strategies combine business reengineering and
strategic social investments: the first, to change how business is conducted; and
the second, to improve the context in which such innovations are delivered.
1
For a more detailed description of corporate innovations in socially responsible behaviour as
a moving frontier, see Martin (2002).
Corporate Social Responsibility for Agro-industries 225
Looking at such ‘proactive’ examples from the agrifood sector, we find
that corporate initiatives that go deep into rural areas with appropriate
resources to transform food value chains tend to present more tangible eco-
nomic and social benefits than those based on a more defensive view of CSR.
Direct investment in communities, as seen through specific case studies and
value chain innovations featured in this chapter, enables companies to recon-
cile their supply chain priorities with community development and environ-
mental gains. These examples are compelling, but alone will not add up to the
development of competitive and sustainable national agrifood sectors: projects
typically reach select communities for specific objectives of interest to spon-
soring companies. What is left are ingredients for scale-up, which must be
nurtured by the public sector and civil society as promoters of implementation
at national levels.
This chapter examines the principal dynamics created by the defensive and
proactive strands of CSR in the agrifood sector.
Approach
This chapter explores the CSR initiatives of agrifood companies that have
potential to:
?
preserve and improve the natural environment and community welfare; and
?
increase the inclusiveness and competitiveness of agrifood companies.
As primary research, the chapter builds on an analysis of a number of stand-
ards and codes, as well as several case studies of value chain innovations driven
by companies for business and/or philanthropic reasons. It further integrates
secondary research from relevant publications on sustainable agriculture.
To understand the current state of standards and codes as tools to promote
sustainable agriculture, and the impact they have had, an extensive literature
review was conducted and 14 schemes selected for detailed analysis from a list
of over 100 (see Annex 1). In addition, ideas and hypotheses were tested with
external experts from the agrifood industry, standards organizations and the
non-profit sector.
The review of over 40 projects conducted by corporate members of the
Sustainable Agriculture Initiative (SAI) Platform was followed by in-depth
research into seven case studies, which increased our understanding of value
chain innovations in the agrifood industry.
In addition, nine experts from five multinational companies were inter-
viewed by telephone. Secondary research included a review of relevant reports,
studies and articles from various sources.
The research examines the two prevailing modes of action at the forefront
of agrifood companies’ CSR agendas: the roll-out of standards and codes, and
value chain innovations. It explores the motivations for implementing such
initiatives, and their effectiveness. The chapter further explores the role that
government and civil society can play to make CSR a more effective tool in
the development of agrifood chains that are equitable and inclusive, as well as
competitive.
226 C. Genier et al.
Standards and Codes: Use of CSR for Risk Management
Agrifood companies use standards and codes as tools to promote sustainable
development through their supply chains by influencing suppliers to adopt
more environmentally and socially responsible practices. All standards consist
of a series of criteria, or rules, with which third-party suppliers are asked to
comply (though the number, content and stringency of these criteria can vary
substantially between schemes). In many cases, they represent an attempt to
bridge the gap between legal and social norms in producer and consumer
countries and, particularly on social issues, they may be developed in response
to perceived weaknesses in laws and law enforcement.
Companies are motivated to roll out standards and codes for several rea-
sons. First, standards and codes increase the control they can exercise over their
supply chains in a cost-effective way (at least for the company), in order to man-
age risks relating to food safety and corporate reputation. In an industry with
such a high degree of exposure to consumers, this control is very important: a
company whose food products are contaminated, or whose suppliers exploit
child labour, can suffer serious reputational damage. Moreover, legislation passed
in Europe, Japan and the USA in the early 1990s requires retailers to conduct
‘due diligence’ on food safety; companies that cannot demonstrate that their
products are safe to eat may not be allowed to sell to these markets at all.
Standards and codes are also important to validate claims of sustainability
made for marketing purposes – particularly when they are associated with a
label or a charter mark. This has been historically important for niche schemes,
such as Fairtrade or Organic produce, which must justify higher prices to con-
sumers. Today, companies are increasingly incorporating sustainability claims
into mainstream brand strategies. One noteworthy example is Unilever’s deci-
sion to ensure all of its Lipton and PG Tips brand tea is certified by the Rainforest
Alliance by 2015 (see case study 6 in Annex 2).
For companies that have decided to take action on sustainable develop-
ment through their supply chains, there are a number of pragmatic, opera-
tional reasons for choosing standards and codes over other modes of action.
Most import ant among these is that the approach is well understood. The earli-
est schemes relating to food safety have been in existence for more than 2
decades. During that time, managers have had ample opportunity to build up
experience on how they work and how to implement them on a large scale. As
more companies have taken specific action on sustainability, the pool of knowl-
edge in this area has grown further. Managers can access information and
support from colleagues and competitors (e.g. through industry platforms such
as SAI), as well as from specialized firms such as consultants and IT providers.
Schemes also provide companies with a ready-made ‘to-do’ list of good
practices, allowing them to quickly and easily identify the specific changes they
hope to induce.
Companies typically adopt two approaches to implement standards and
codes. In some cases – Fairtrade, for example – producers are offered an incen-
tive scheme such as a price premium or guaranteed purchasing agreement if
they meet the criteria, or work towards doing so. In others, a market entry
Corporate Social Responsibility for Agro-industries 227
‘stick’ is applied; producers that cannot or do not comply within a given time
period are excluded. These approaches may be combined, depending on both
the schemes themselves and the companies that use them. There is some evi-
dence that, particularly in mainstream/mass market supply chains, the ‘stick’
approach predominates (Rotherham, 2005).
The current situation
In recent years, standards and codes have proliferated. Over 100 different
schemes covering various aspects of sustainable development can be found by
carrying out a simple web search. Their origin explains this complex
landscape.
Food safety considerations were amplified in the late 1980s and early
1990s when, after a series of health scares, regulation was passed in
European countries, Japan and the USA requiring retailers and, by exten-
sion, manufacturers to conduct ‘due diligence’ against contamination. A par-
allel movement saw specialist schemes focused on sustainable development
emerging under the leadership of NGOs and social enterprises such as the
Utz Kapeh Foundation. In recent years, the worlds of food safety and sus-
tainable development have moved closer together. The rise of consumer and
activist pressure for more sustainable food production has led many schemes
that initially focused on quality and food safety to expand to other sustaina-
bility-related issues. Companies saw opportunities to use sustainability as a
marketing attribute; illustrated, for example, by Nestlé’s Fairtrade-labelled
‘Partner’s Blend’ coffee, or Anheuser-Busch’s entry into the organic beer
market.
Many companies have developed their own proprietary schemes, aimed at
their suppliers. More recently, thinking has evolved from seeking to ‘take on
the world alone’ to a recognition of the need for cross-industry collaboration.
There is some evidence that companies are moving away from an in-house
approach to adopt independent, third-party frameworks. In 2003, for exam-
ple, Chiquita applied a proprietary code of conduct; today 100% of Chiquita’s
owned plantations are certified compliant with GLOBALGAP, the Rainforest
Alliance and SA8000.
2
Partly in response to these trends, the number of independent, third-party
standards and codes is increasing. Many are designed specifically for the agri-
food industry, and have been developed and backed by governments, NGOs,
2
Editors’ note: As we indicated in Chapter 2 (this volume) GLOBALGAP is a private sector
body that sets voluntary standards for the certification of agricultural products internationally.
The Rainforest Alliance sets standards for environmental and social community sustainabil-
ity. SA8000 refers to Social Accountability International’s system for managing ethical work-
place conditions in global supply chains. The Ethical Trade Initiative identifies and promotes
good practices in the implementation of codes of conduct regarding labour standards. ISO
14002 is one of the sets of environmental management systems specified by the International
Organization for Standardization (ISO).
228 C. Genier et al.
industry consortia or private organizations. The basic business model of many
of these schemes is to build legitimacy and revenue through widespread adop-
tion. Privately owned schemes rely on income from royalties, consultancy fees
or franchising rights, while NGOs and government-backed frameworks need to
demonstrate certain levels of uptake in order to continue to receive funding.
The more general standards and codes, such as those of the Ethical Trading
Initiative, SA8000 and ISO 14002, do not rely only on the agrifood industry
for survival.
Detailed analysis of 14 schemes
Fourteen independent, third-party standards and codes have been analysed in
detail, yielding a number of insights. While each covered a slightly different set
of issues, it was possible to map the main areas that schemes aim to address,
across four basic categories:
?
Environmental criteria focus on:
– ecosystems and biodiversity (e.g. provisions to protect virgin
forest);
– natural resource inputs (e.g. water use, soil quality);
– man-made inputs (e.g. agrochemicals, pest control, GMOs);
– energy use and GHG emissions;
– waste management;
– production practices (e.g. crop rotations, site selection, animal
welfare, overfishing).
?
Criteria on labour conditions can be grouped into:
– occupational health and safety;
– terms of employment (e.g. pay, hours, contracts, regularity of
work);
– human rights in the workplace (e.g. right of association, rights for
casual workers, no forced or child labour, non-discrimination);
– general employee and family welfare (e.g. housing, access to educa-
tion and healthcare);
– energy use and GHG emissions;
– waste management;
– production practices (e.g. crop rotations, site selection, animal
welfare, overfishing).
?
Criteria relating to the benefits to the local economy/community
include:
– producers’ economic viability;
– flow of economic benefits to workers and the local economy;
– social and economic rights of others (e.g. indigenous land rights,
local consultation);
– business ethics (e.g. fair dealing, no corruption, market
transparency);
– education and role modelling (e.g. open days).
Corporate Social Responsibility for Agro-industries 229
?
Lastly, sustainable agriculture standards and codes may set down require-
ments on food safety and quality, in particular:
– traceability;
– hygienic production and handling;
– quality of inputs (seeds, feeds, etc.);
– quality management systems.
In addition to criteria based on some combination of these categories, all of the
standards and codes studied include requirements relating to general manage-
ment issues, such as record keeping or planning, and to compliance with the
scheme itself.
Table 1 displays how each covers the respective issues.
3
3
Note that simply covering the same issues does not necessarily mean that standards are
equivalent: see Annex 1 for further discussion.
Environment
Utz Certified
EISA
SAI Principles & Practices
for Sustainable
Production (Cereals)
IDF/FAO Guide to Good
Dairy Farming Practice
Fairtrade Standards
SA8000
Roundtable on
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Basel criteria for Respon-
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Marine Stewardship
Council
Common Code for the
Coffee Community
Ethical Trading Initiative
SCS-001
Rainforest Alliance/SAN
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Table 1. Comparison of issue coverage of 14 independent standards and codes.
230 C. Genier et al.
Equally interesting are the areas that standards and codes do not seem to
address. None addressed gender issues and, aside from a footnote in the intro-
duction to SCS-001 expressing a desire to incorporate nutrient density into a
future version of the standard, none addressed the issue of food security.
Additionally, only four schemes made any provision for the economic viability
of producers themselves, though this is also arguably implicit in the structure of
the Fairtrade scheme.
Where standards and codes do not seem to explicitly differentiate is around
contextual conditions. The environmental effects of particular practices can
vary dramatically depending on the weather, time of year, soil type, level of
water depletion within a river basin and many other factors; yet no schemes
could be found that took account of such differences, even when specifying
particular processes. Similarly, what makes sense for large, well-resourced
farms may be meaningless for smallholders. Some schemes, such as the Ethical
Trading Initiative, Fairtrade and the Basel Criteria, have begun to develop
altered or slimmed-down versions aimed at smaller producers, but this is not yet
the norm.
It is also important to bear in mind that the fact that a particular scheme
incorporates criteria on a wider range of issues does not necessarily mean it is
better. Indeed, one major concern that became clear during the research for
this chapter was the lack of evidence as to whether particular standards and
codes are effective at all on any given issue.
Challenges going forward
The fact that the agrifood industry is investing so heavily in standards and codes
that seek to address sustainability issues is encouraging, and demonstrates an
important shift in companies’ willingness to engage on such topics. Nevertheless,
challenges are faced by all parties in harnessing this activity to drive sustainable
development.
Lack of impact assessment
While there is a growing body of literature on the (indirect) economic impact of
mainstream standards and codes on producers and rural communities, particu-
larly in developing countries, there is surprisingly little evidence of whether or
not they have a significant positive impact on environmental, labour or com-
munity development issues.
The handful of studies that consider the direct impact of specific standards
and codes on producers, rural communities and the environment suggests that
they are more effective on observable issues (i.e. those that do not require sub-
jective or culturally specific judgements to determine compliance or progress)
that do not vary much according to context, though there is too little informa-
tion to fully validate this hypothesis. For example, the 2006 impact assessment
of the Ethical Trading Initiative found that application of that code had had a
major impact on workers’ health and safety (Barrientos and Smith, 2006). This
topic primarily concerns tangible issues such as the existence of procedures
Corporate Social Responsibility for Agro-industries 231
and officers, safe use of chemicals and the quality of drinking water, all of which
can be directly observed and are fairly universal in scope. By contrast, almost
no change was found in, for example, freedom of association, reflecting the
fact that such matters are very difficult to assess and are highly dependent on
contextual factors like cultural norms and forms of local and national govern-
ments. A study of Zambian exporters’ views of GLOBALGAP, conducted by
the Natural Resources Institute, points to a similar conclusion: improvements
were particularly cited on workers’ health and safety, traceability and food
safety (Graffham and Vorley, 2005).
Current evidence suggests that the question of impact assessment has not
yet been satisfactorily resolved. The SAI Platform has started work on develop-
ing a cost–benefit tool to assess different schemes, and a number of papers,
including, notably, one from the ISEAL Alliance, have called for more system-
atic impact assessment. As yet, though, such efforts seem still to be at an early
stage of development.
In many instances, therefore, it is not clear whether standards and codes
are an effective tool for promoting sustainable development at all (though, of
course, it is important to remember that there is also insufficient evidence to
declare them ineffective). This lack of impact data means that schemes are
evolving and competing with each other in a vacuum: companies select which
schemes to implement (and governments and civil society select which ones to
endorse) based on attributes such as reach, credibility and business friendliness,
but not effectiveness. As a result, scheme developers have little incentive to
calibrate and focus their criteria to provide the best return on investment, or to
adapt their approach in light of new research.
Lack of mutual recognition
In seeking to reach scale, independent standards and codes are increasingly in
direct competition with each other, and efforts to rationalize and harmonize the
landscape through mutual recognition of schemes have been limited. There
have been some attempts to establish equivalence between non-proprietary
schemes, such as GLOBALGAP’s initiative to compare itself with government-
backed national standards. Governments and international organic associ-
ations
4
have made some progress in harmonizing the various national organic
schemes. However, for the most part, it is probable that this activity is driven
more by a desire to establish dominance than to rationalize the field. There are
few examples of independent third-party schemes benchmarking themselves
against each other.
As a result, producers and consumers are faced with a large number of
different labels and options for certification, all of which claim to do a similar
job, but with slightly different emphases. The resulting confusion can lead to
consumer cynicism or indifference, reducing companies’ opportunity to claw
back their investment through higher prices (and hence the incentive to invest
4
The International Organic Accreditation Service (IOAS); the International Federation of
Organic Agriculture Movements (IFOAM).
232 C. Genier et al.
in the first place). Furthermore, producers that supply more than one company
may be pulled in different directions, magnifying the perceived risks to the
producer of ‘backing the wrong horse’, and making it more likely that they will
either follow several methods half-heartedly or do nothing at all. Conversely,
there is some evidence (from the ETI impact report) that when all buyers are
pulling in the same direction the likelihood of more sustainable practices gain-
ing traction increases (Barrientos and Smith, 2006).
One-size-fits-all solutions
In terms of content, there is a tension between the reach of schemes in terms
of products, issues and geographies covered, and the level of detail into which
they can go while remaining relevant. Farming practices are highly contextual:
soil conditions may change from one side of a field to the other; actions that
may save water in one river basin may have no impact in another; and freedom
of association may be very important in the context of a large estate, but irrele-
vant to a family-run smallholding. Yet standards and codes are inherently inflex-
ible and schemes, especially independent ones, need to achieve some degree of
scale in order to be credible to consumers and financially viable.
This inflexibility leads to a further concern. The way many standards and
codes work, as a kind of pass or fail test of sustainability, is at odds with many
of the actual issues encompassed, which tend to change over time, and for
which ‘success’ may not be clearly defined or agreed upon. Sustainable devel-
opment may be better thought about in terms of continuous improvement
rather than ‘right’ and ‘wrong’ answers. Our understanding of what this means
on specific issues, and how it translates into action, can change rapidly as new
information comes to light.
Implementation costs for small-scale producers
On the economic side, widespread implementation of standards and codes
seems to accelerate vertical coordination in supply chains (i.e. more production
is for specific customers rather than for the open market) and the consolidation
of producers into fewer, larger entities. Evidence suggests that this restructuring
of the rural economy is an integral part of wider economic development, as the
best producers continue to farm larger areas more efficiently, while the major-
ity of the population move to other and for them, more lucrative forms of
economic activity (World Bank, 2007).
What is striking is the speed at which this transition occurs when standards
and codes are applied. Maertens and Swinnen (2007) studied the economic
impact of the roll-out of the origine Sénégal label on fruit and vegetable pro-
ducers in Senegal between 2000 and 2005. During this period, the number of
small-scale growers with export contracts fell by 72%, and the three largest
exporters increased their market share from less than half to 66% of all
exports.
Such developments are primarily because implementing standards and
codes is very expensive for producers. Asfaw et al. (2007) estimate the
first year costs for a small Kenyan bean grower to implement EurepGAP
(now GLOBALGAP) as part of a consortium to be around 37,000 Kenyan
Corporate Social Responsibility for Agro-industries 233
shillings (KSh),
5
of which around 6500 KSh are recurring costs; the same study
puts farmers’ average gross annual income from export vegetables at 33,864
KSh (Asfaw et al., 2007). Graffham and Vorley (2005) paint an even starker
picture: they estimate that without donor support, first year EurepGAP imple-
mentation costs can amount to as much as 160% of annual income for small-
holders with 0.2–0.6 ha of land. Clearly, large and well-resourced producers
are much better able to absorb such costs, and so have a strong advantage
when standards and codes are used as a market entry criterion.
Given that the World Development Report 2008 (World Bank, 2007)
describes competitiveness and smallholder participation as ‘essential to link
agricultural growth to development’, the reader would be forgiven for con-
cluding that standards and codes are an economic ‘bad’ in development
terms. However, the picture is more nuanced than this. For example, the
same Maertens and Swinnen study concluded that while origine Sénégal was
bad news for small contract farmers, it in fact represented a net gain for the
economy overall as export production increased from 9000 t in 2000 to
16,000 t in 2005. Moreover, while smallholders lost out, the very poorest
rural households, without access to sufficient land or skills to participate in
the export market, may have gained by being able to find employment on
large estates. In addition, some of the smallholders survived by diversifying
into other activities.
There is also some evidence that this acceleration of economic restructur-
ing may be due to the way standards and codes are applied, as opposed to
anything inherent in them as a tool. A recent study of Lecofruit, a fruit and
vegetable exporter in Madagascar that buys high-quality, certified beans and
peas from some 10,000 smallholders (each farming around 1 ha), found signifi-
cant benefits for growers, including improved productivity (not just for export
crops, but for staples such as rice), greater income stability and shorter lean
periods (Minten et al., 2005). However, Lecofruit did not simply apply a stand-
ard in isolation as a purchasing criterion, but included it in a deliberate policy
to engage with smallholders that also encompassed long-term micro-contracts,
access to 300 agricultural extension workers, information on composting pro-
cedures and loans of seeds and fertilizers to be repaid in kind. The Lecofruit
example shows that it is possible to implement a standard or code without
excluding small-scale producers, but only as just one part of a wider, ongoing
package of intensive support.
Even where there is a clear willingness to implement a specific scheme,
suppliers may lack access to the infrastructure and resources needed to do so,
particularly in developing countries. Standards and codes require significant
investments in supporting infrastructure: reliable and well-regarded inspection
and accreditation capacity is needed; extensive training is required, including
poorly educated or illiterate producers; materials such as specialist clothing or
IT equipment may not be available locally. As we have seen, implementing a
scheme can be expensive for producers, too, and this risks driving cash-strapped
farmers out of business entirely. Simply subsidizing this cost may not be the
5
US$1 = 66.9 KSh on 1 November 2007.
234 C. Genier et al.
answer: evidence from Kenya suggests that donor financing of implementation
has distorted the market for inspection and accreditation services, with local
suppliers charging up to four times as much as their European equivalents
(Graffham and Vorley, 2005).
Value Chain Innovations
Although a one-size-fits-all approach to sustainable development based on the
wide application of a particular standard or code may indeed work for com-
panies that have well-resourced suppliers, the more visionary agrifood compa-
nies are also starting to realize its limitations. They are adopting innovative
approaches to CSR that take a more holistic view of the agrifood value chain
and are tailored to comprehensively address specific key issues and situations.
Most of these initiatives are designed in multi-stakeholder partnerships (includ-
ing private and public sector players) to meet common objectives, and are
rarely imposed by companies as the leading player. Such initiatives usually start
as pilot projects, with the aim of scaling up those that are successful.
Rationale, approach and challenges
Corporate value chain innovations are not a new phenomenon. Nestlé, for
example, has been active in India since the early 1960s in the Moga district,
not just by opening a dairy factory, but also by encouraging the systematic
development of milk production, injecting knowledge and technologies into the
system.
6
The company’s effort had a multiplier effect on the development of
the region. Unilever, too, started an SAI based on economic, social and envir-
onmental dimensions roughly 50 years ago. What is new in recent years is the
multiplication of such transformative projects, their level of ambition and their
positioning within broader CSR activities.
The rationale for investing in value chain innovations can have multiple
origins. The company may be trying to stay competitive by emphasizing qual-
ity, safety, traceability to small-scale farm operations, local processing, produc-
tion and distribution and measurable environmental and social benefits. The
business case for such innovations is typically aimed at securing the availability
of raw materials while improving a community’s environment, capturing value
through vertical integration and sharing it more equitably with producers.
Two main approaches to value chain innovations can be observed: a bilat-
eral buyer or producer initiative and a multi-stakeholder partnership model
involving e.g. farmers’ associations, small and medium enterprises (SMEs), the
public sector and civil society (a majority of cases). Typically, the more multi-
faceted the ambitions, the more stakeholders tend to be directly involved in the
initiatives. Participation can entail knowledge sharing, endorsement and pro-
motion, implementation or scale-up.
6
Collection centres were set up, farmers were trained, clean drinking water was provided to
schools and many more activities took place.
Corporate Social Responsibility for Agro-industries 235
Pilot projects tend to concentrate on one crop, one farm production sys-
tem or one supply chain, and strive for a combination of technical, financial
and educational transfer, as well as capacity building. Figure 1 shows the focus
of value chain innovations undertaken by member companies of the SAI
Platform, a food industry body supporting the development of sustainable agri-
culture.
8
Initiatives are distributed fairly equally between Europe, Asia, Africa
and Latin America. Half of the projects target the dairy and coffee industry,
while the rest deal with vegetables, fruits, cereals, oils and tea. Seventy-five per
cent of all projects cover environmental aspects (water, soil, forest, air, biodiver-
sity, ecology); nearly half include social and community aspects (including gen-
der and child labour), and an equal amount look at the farm production system.
One-third of all projects aim at improving revenues of producers. Issues like
health and safety, quality and energy are tackled specifically by only a minority
of projects.
33
18
13
10
8
28
Dairy,
milk
Coffee
Tea,
infusions
Cereals,
oils
Vegetables
Fruits
23
25
23
5
25
Europe
Africa
RoW
Asia
Latin America
28%
10%
20%
8%
15%
13%
5%
13%
20%
30%
None/n.a.
Other
Companies
Industry associations
Research institutes
Development agencies
Foundations
NGOs
Public sector
Farmers' associations
Geographic distribution of programmes
N = 40, in per cent
Crops or products*
N = 40, in per cent
Stakeholder involvement** Issues addressed
** In addition to farmers, growers, producers
N = 40, programmes with no, one or multiple partners
5%
15%
33%
40%
8%
43%
75%
Energy
Quality
Revenue increase
Farm prod. system
Health & safety
Social/community
Environment
N = 40, per cent of programmes tackling a certain issue
* Few programmes with more than one crop/product
Figure 1. Programme focus of SAI Platform member companies.
7
(From SAI Platform
Mapping, 2007. Mapping by FSG Social Impact Advisors, 2007.)
7
Covering programmes from two-thirds of SAI Platform members (i.e. 14 companies out of 22).
8
Founded by the global agrifood companies Danone, Nestlé and Unilever, it has 22 members
today.
236 C. Genier et al.
A vast majority of projects are launched in partnership: 30% involve farmer
associations, 20% the public sector, nearly 20% development agencies or foun-
dations, nearly 30% NGOs or research institutes and nearly 30% other com-
panies or industry associations.
In the last few years, industry or multi-stakeholder dialogues have encour-
aged corporate innovation on sustainable agrifood value chains and the
exchange of good practices. In addition to the SAI Platform, the Sustainable
Food Lab is a multi-stakeholder initiative to bring sustainability to mainstream
food systems. Agrifood companies, NGOs and others are working together to
find innovative ways of addressing persistent problems; such as poverty, in
producer nations. The Stone Barns Sustainable Agri-Philanthropy Initiative
(Schumacher et al., 2004) is another forum, which has convened major actors
to discuss their philanthropic practices.
9
While case studies selected to illustrate value chain innovations cannot
cover the full range of innovative projects launched worldwide, they neverthe-
less provide concrete insight into how these proactive CSR initiatives shape up.
Table 2 provides an overview of the cases detailed in Annex 2. The cases cover
three continents (Africa, Asia and Latin America) and several product segments
(dairy, crops, fruits and vegetables, tea), present different multi-stakeholder
partnerships initiated by six global agri-business players and various intensities
of public sector involvement, and cover the entire agrifood value chain (from
pre-production to distribution).
While innovations often do embrace the entire value chain, most are
demand-driven (i.e. initiated by manufacturers and retailers
10
) and focus on
producers, SMEs in the supply chain and economic development at community
level. Figure 2 provides a schematic view of supply chain players and illustrates
the value chain coverage of each case study.
Before discussing the nature of impact and effectiveness achieved by the
specific case studies (Annex 2), it is worth isolating their innovation component:
?
In India, SABMiller and Cargill partnered with a foundation in Rajasthan
and received the support of regional authorities to lay the ground for devel-
oping a viable barley malt industry in the state.
?
In China, Nestlé facilitated an innovative approach for its milk suppliers in
Shuangcheng, in north-eastern China during the period 2004–2007, to
convert the manure from dairy cattle into biogas, to be used for cooking,
heating and electricity generation. From the very beginning, the initiative
was endorsed and strongly supported by the local authorities, and received
further support from the central Chinese government. Chinese authorities
are now replicating and scaling up the approach nationwide and extending
it to pig farms.
9
It was shown that only a minority of philanthropic giving by agri-businesses was related
to their core business, e.g. agriculture systems in developing countries. The vast majority is
devoted to community improvements in developed countries.
10
When asked in surveys, consumers indicate caring about traceability and sustainability;
however, the buying behaviour of a large majority signals that price still dictates their choice.
C
o
r
p
o
r
a
t
e
S
o
c
i
a
l
R
e
s
p
o
n
s
i
b
i
l
i
t
y
f
o
r
A
g
r
o
-
i
n
d
u
s
t
r
i
e
s
2
3
7
Table 2. Case profiles.
Company Product/focus Purpose Value chain coverage Partners
Public sector
involvement
Brazil: Syngenta Water recovery Philanthropic contribution
to improving farmers’
environment
Pre-production
(initiated by supplier
of input factors)
Cooperatives,
regional authorities
Moderate (promotion,
scale-up)
China: Nestlé Dairy Biogas production from
manure, reducing
environmental impact
of farming
Production, facilitated
by manufacturer/
distributor
Local authorities,
central government
Strong (driving,
funding, scale-up)
India: Reliance
Retail
Fresh fruits &
vegetables
Direct sourcing from
farmers; share value
Distribution,
trading, retail
Farmers (collection
centres)
Minimal (legislative
framework, licences)
India: SABMiller/
Cargill
Barley Secure local high-quality
production, improve
smallholders income
Production,
trading, processor/
manufacturer driven
Morarka Foundation,
public sector
Strong (facilitation,
agri-research,
seeds, licences)
Tanzania: Unilever Allanblackia Set up commercial
supply chain for
little-known product
Production, processing,
sales (including
finding purchaser)
NGOs, research
institutes,
development
agencies
Moderate
(agri-research,
tree nurseries,
endorsement)
Kenya: Unilever Tea Certification of sustainable
production, signal to
market with oversupply
Production, trading,
manufacturing,
marketing, retail
(demand driven)
Producer association,
development
agency
Minimal (smallholder
support,
accompanying
measures)
Bangladesh:
Grameen Danone
Dairy (yogurt) Set up supply chain
adapted for local
conditions (poor
segments of society)
Production, transport,
manufacturing,
distribution
Joint venture
between Danone
and Grameen
Bangladesh
Minimal (licences)
238 C. Genier et al.
?
With its philanthropic project ‘Agua Viva’, Syngenta has since 2004
contributed to the recovery of over 2100 water heads in Brazil. In
collaboration with local cooperatives, Syngenta is providing technical
assistance and know-how to farmers to recover their endangered and
polluted water heads. As a result, springs are sanitized and protected,
the quality of water increases and the water supply is secured for local
communities. This project has been a tremendous success locally, win-
ning praise from the Brazilian authorities, as well as both national and
international awards.
?
Reliance Retail India are directly sourcing fresh agricultural produce from
thousands of farmers through collection centres. They are providing a
guaranteed market for the farmers’ produce, reducing transaction costs
and training them in better and more sustainable farming practices. This
initiative has resulted in increased income and upgraded skills for the farm-
ers, a reduction in spoilage of produce (by up to 35%), and better quality
products for Reliance retail stores. The exclusion from the supply chain of
traditional traders, however, led to protests, raising the question of how to
evolve potentially obsolete supply chain structures.
?
Unilever is working with the Rainforest Alliance to certify tea purchased for
its leading Lipton brand by 2015. As the world’s largest tea buyer, Unilever
intends to send growers a clear signal in favour of sustainable tea produc-
tion, emphasizing a long-term business model carried by quality rather
than by quantity in a market characterized by oversupply.
Suppliers
(pre-production)
Syngenta
case
Producers
Consumers
Retailers
(distribution)
Trading companies
Processors
& manufac-
turers
(Food and
food service
companies)
G
r
a
m
e
e
n
D
a
n
o
n
e
c
a
s
e
R
e
l
i
a
n
c
e
R
e
t
a
i
l
c
a
s
e
N
e
s
t
l
é
c
a
s
e
S
A
B
M
i
l
l
e
r
&
C
a
r
g
i
l
l
c
a
s
e
U
n
i
l
e
v
e
r
A
B
c
a
s
e
U
n
i
l
e
v
e
r
t
e
a
c
a
s
e
Figure 2. Case study coverage of main supply chain groups. (Adapted from
SAI Platform.)
Corporate Social Responsibility for Agro-industries 239
?
The traditional approach to expanding an international business in emerg-
ing markets is to target segments likely to find a company’s product com-
petitive. Because traditional brands and modes of production are adapted
to high-purchasing-power countries, this strategy typically limits develop-
ing country sales to the wealthiest customers. Danone Grameen is turning
this logic upside down in Bangladesh, rethinking the entire value chain for
yogurt production and marketing so that it employs and serves the poorest
segments of society.
Evidence of impact can be found in the various initiatives in terms of quality,
health and safety improvements, better environmental indicators, higher pro-
ductivity and economic development, i.e. income growth and diversification, as
well as job creation:
?
Quality and productivity: in Rajasthan, farmers participating in SABMiller’s
programme increased significantly their barley yield, by 20% (even if it can-
not directly be attributed to the initiative). Over a 2-year period, involved
districts achieved an average yield of 33.3%, while the average of Rajasthan
state was 13.2%. The quality increased as well, from feed-grade to malt
quality. Again in India, Reliance Retail has brought improved quality to its
retail stores by collecting fresh fruits and vegetables directly from the pro-
ducers: spoilage of produce has been reduced by up to 35%.
?
Health and safety, environmental indicators: in Brazil, Syngenta has con-
tributed to the health and sustainable water supply of around 2700 families
and their livestock by recovering around 2000 endangered or contami-
nated fountainheads in Brazil since 2004. In China, the biogas project with
thousands of generators installed, allowed a reduction in the risk of water
contamination by improperly stored manure from dairy farms.
?
Income growth, diversification and job creation: in Tanzania, the creation of
a supply chain for Allanblackia (AB) provides an additional source of income
for farmers. The average AB earning per farmer per year has increased
from US$60 to US$140 for 6000 farmers, and should reach US$500 by
2016 for 25,000 farmers. In addition, 45 full-time positions have been cre-
ated for managing the buying centres. In Bangladesh, the Grameen Danone
joint venture predicts that 1000 livestock and distribution jobs will be cre-
ated. In China, the biogas produced from manure allows dairy farmers to
cook three hot meals per day from this new energy source.
Although these value chain innovations clearly show impact, as long as they
remain in pilot phase, they are only ‘pockets of social progress’ that remain
minor in comparison with the core business of agrifood industries, or with
large-scale initiatives from NGOs and multilateral agencies. To expand their
benefit for society, they require scaling up and integration into national agri-
food competitiveness policy.
Such a scaling-up process requires considerable resources. Management
time is needed to plan the replication, adapt the approach to a larger scale or
a different context (e.g. a new country), learn from strengths and weaknesses
of the original project, and convince players along the value chain to adopt new
practices.
240 C. Genier et al.
Companies, donors and governments all have a role to play in contributing
directly with resources (funds, production factors, capacity building, etc.), or in
helping to find other funding sources. Capacity building is often needed at farm
level, for logistics, processing and even branding and marketing of produce.
Production factors (seeds, plants, etc.) also need to be supplied in sufficient
quantities. To scale up a pilot project into a meaningful improvement can
require considerable time, even several years in some cases.
In order to be sustainable over time, value chain innovations also need to
be grounded in a solid business case, i.e. at some given point (though not
immediately) they need to be viable on their own, without additional financial
support. If the innovation disappears as soon as project funding ceases, it can-
not be considered successful.
This does not mean that value chain innovations are unsustainable as such,
but rather that integration of innovation at community, district and national
levels needs to be managed and planned carefully for benefits to accrue to an
extent where national growth indicators can be affected.
The Role of the Government and Civil Society
CSR initiatives are led and implemented primarily by agrifood companies them-
selves. None the less, governments and civil society have an important role to
play in harnessing the growth in CSR activities for sustainable development of
the agrifood sector. They can create the conditions for that growth to continue,
both by helping companies to act responsibly and by building an enabling
environment.
Multilateral organizations and development agencies are also taking a keen
interest in CSR: the UN Global Compact and the Global Reporting Initiative
are examples of high-profile public sector initiatives that monitor company
performance and publish results globally. Moreover, the emergence of industry
platforms and multi-stakeholder bodies, such as the SAI Platform, the
Sustainable Food Laboratory and the Ethical Trading Initiative, is one of the
most striking recent trends in the agrifood sector and presents a potential new
force in the facilitation and documentation of CSR practices.
Standards and codes
Multilateral agencies, governments, industry platforms and civil society need to
work together to harmonize standards and codes and make their implementa-
tion more accessible and effective. This should be done through measuring and
publishing data that will inform impact assessment and help schemes become
more locally relevant. Governments can further ensure that good practices are
replicated by endorsing those schemes which are most effective. Such endorse-
ments are a key factor in the competition between independent schemes (e.g.
Kenya’s adoption of GLOBALGAP as a basis for its own national standard).
Additionally, industry associations with support from government and NGOs
Corporate Social Responsibility for Agro-industries 241
can offer technical assistance to producers, such as training and extension
services, and strengthen the local certification and accreditation infrastructure.
Finally, governments can play a role in managing the economic effects of
standards and codes on small-scale producers.
Value chain innovations
For value chain innovations, governments, local authorities and civil society can
smooth the progress and magnify the impact of initiatives in three ways: by
creating an enabling environment (adapting legislation, investing in market
infrastructure); by participating in pilot projects (facilitating access to production
factors such as trial seeds, providing logistical support and playing a facilitator
role); and by taking an active role in their scale-up (endorsing replication, co-
financing, building capacity and actively participating in industry platforms).
The role taken on by the authorities of Rajasthan offers an example of such
active public sector participation, as does the engagement of Chinese author-
ities in the biogas project facilitated by Nestlé.
The Regoverning Markets Programme
11
is an example of a supportive
public sector/civil society initiative. Its aim is to provide strategic advice and
guidance to the public sector, agrifood chain actors and civil society organiza-
tions including economic organizations of producers on approaches that can
anticipate and manage the impacts of the dynamic changes in local and regional
food markets. The programme emphasizes analysis of the food industry seg-
ments, i.e. retailing, processing and wholesaling.
Smoothing economic transition
All developing and transition economies have seen significant reductions in the
number of people employed in agriculture and corresponding increases in pro-
ductivity. This points to a key long-term role for governments and civil society:
helping small farmers to diversify their income sources as well as facilitating a
smooth transition out of agriculture. Policy priorities should include creating
rural off-farm jobs, increasing accessibility to education and training and pro-
viding ‘safety nets’ to the chronically poor. The example of Unilever’s applic-
ation of a sustainability standard to Lipton tea highlights the need for government
in facilitating this transition (see case 6 in Annex 2).
Conclusions and Recommendations
Two types of initiatives have emerged at the forefront of agrifood companies’
CSR agendas: standards and codes, and value chain innovations. The initia-
tives profiled show considerable promise in increasing the sustainability of the
11
www.regoverningmarkets.org.
242 C. Genier et al.
agrifood sector. However, key challenges in improving their effectiveness
remain, such as dealing with the lack of equivalence between different stand-
ards and codes, as well as developing more context-specific initiatives that
effectively encourage the participation of smallholders in global supply chains.
The increase in corporate activity aimed at benefiting society over the last
2 decades, as evidenced by the rise in CSR, has been accompanied by a keener
interest from governments and civil society. In addition, the emergence of
industry platforms and multi-stakeholder bodies is one of the most striking
recent trends in the agrifood sector, and has the potential to become a power-
ful force in the facilitation and documentation of CSR practices.
The research has highlighted four concrete areas that require attention
from industry, civil society, governments and multilateral agencies:
?
First, there is a need to collaborate and invest at the international level to
make standards and codes more effective, efficient and accessible through
an agenda of impact assessment, mutual recognition and know ledge trans-
fer. As the industry has strongly promoted such standards it would be logical
to embed such a process among its champions, such as the SAI Platform
and the Sustainable Food Laboratory, while maintaining a close dialogue
with civil society, multilateral agencies and other interested stakeholders.
These facilities form the hub of leading companies and are connected to
crop-specific groups working on standards and codes, as well as on value
chain innovations. Funded through corporate membership fees, they do
not, however, presently have the resources to orchestrate a comprehensive
agenda of standards and codes alignment, and to provide knowledge trans-
fer on a global scale. Recognition and support as hubs of progress might
also help assemble a broader membership of companies, including agricul-
tural technology providers, food manufacturers and retailers.
?
Second, multiple-stakeholder agro-industry platforms and sector councils
at the national level are required to coordinate and monitor implementa-
tion of standards, codes and value chain innovations, for mutual support
and the sharing of good practices. These might be linked to the interna-
tional industry platforms mentioned above, mirroring, for example, the
structure of the World Business Council for Sustainable Development and
its national councils. The role of these national facilities is to facilitate the
local integration of value chain innovation into national agrifood competi-
tiveness policies and the work of national agricultural extension ser vices.
National platforms need to exist to bring local corporate entities together
with national policy makers and civil society with the aim to facilitate
adoption of standards and codes for relevant crops and producers at
national levels and to proactively identify and support the scale-up of high-
potential innovations that help poorer suppliers join higher value supply
chains.
?
Third, national governments, multilateral organizations and donors should
proactively identify and support the scale-up of high-potential innovations,
including facilitating the adoption of standards and codes by specific pro-
ducer groups where this could be beneficial. While CSR innovation in the
Corporate Social Responsibility for Agro-industries 243
agrifood sector is being led primarily by agrifood companies, the public sec-
tor plays an essential role in facilitating their engagement with producers,
creating an enabling environment and expanding lessons from pilot projects
to national and international levels.
?
Fourth, the evidence points to a key long-term role for governments and
civil society in helping diversify small farmers’ income sources, including
off-farm work, and facilitating their gradual transition out of agriculture
into other economic sectors.
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Asfaw, S., D. Mithöfer and H. Waibel
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market Standards Having on Devel-
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Value Horticultural Products? Evidence
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Barrientos, S. and S. Smith (2006) The ETI
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FSG Impact Advisors (2007) SAI Platform
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ISEAL Alliance (2006) ISEAL Code of
Good Practice for Setting Social and
Environmental Standards.
Maertens, M. and J. Swinnen (2007) Trade,
Standards and Poverty: Evidence from
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Minten, B., L. Randrianarison and J. Swinnen
(2005) Global Retail Chains and Poor
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Rotherham, T. (2005) The Trade and
Environmental Effects of Ecolabels:
Assessment and Response, UNEP.
Schumacher, A., A. Hance, B. Wells, N.
Agarwal and N. de Beaufort (2004) Stone
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Useful Websites
?
www.agrifoodstandards.net
?
www.regoverningmarkets.org
?
www.saiplatform.org
?
www.sustainablefoodlab.org
244 C. Genier et al.
Annex 1: Further Comparative Analysis of Standards and Codes
In general, the most important area of differentiation between schemes seems to
be the product or product category focused on, such as seafood, dairy, fruits and
vegetables. In addition to the product-specific schemes, many of which are among
the more recent arrivals on the scene, the majority of proprietary and ‘general’
sustainable agriculture standards and codes (e.g. SCS-001) include modules that
relate to individual products or product categories. There is some variation by
geography, too: in some cases this is intentionally designed into a scheme. For
example, the EISA-integrated farming framework explicitly targets European
farmers. For other examples, geographic reach is limited to areas where the tar-
get crop is produced, or where inspection and accreditation infrastructure exists.
For most of the schemes analysed, changes in understanding of sustainable
development are reflected through periodic updates. These revisions seem to be
led more by expert panels than by wide consultation with producers. While
some schemes discuss the need for farms to demonstrate improvement between
audits, only three mentioned continuous improvement as a specific criterion or
method of incorporating new thinking: the Basel Criteria for Responsible Soy
Production; the Roundtable on Sustainable Palm Oil; and the SAI Platform
Principles and Practices for the Sustainable Production of Cereals. The primary
reliance on expert leadership also seems somewhat at odds with best practice in
standard setting identified by the ISEAL Alliance, a group of standard-setting
and compliance organizations, which recommends that ‘Standard-setting organ-
izations . . . identify parties that will be directly affected by the standard and
proactively seek their contributions’ (ISEAL, 2006).
Furthermore, wide variances were found between the stringency and spe-
cificity of criteria from different frameworks relating to the same issue. In gen-
eral, five basic levels of specificity can be identified:
?
characterizing what compliance looks like (e.g. ‘farm provides a healthy
and safe working environment’);
?
requiring compliance with relevant local laws (e.g. ‘local health and safety
regulations to be adhered to’);
?
requiring a policy or plan to be drawn up (e.g. ‘farm shall have a health and
safety policy’);
?
suggesting or stipulating a specific process or set of processes be followed
(e.g. ‘relevant fire safety equipment to be installed in all buildings’);
?
setting quantitative performance criteria (e.g. ‘fewer than two accidents
per 100 employees per year’).
Which level of specificity is appropriate in which circumstances will vary mar-
kedly according to the context in which the scheme is applied and the method
which is used to apply it (e.g. it may not be helpful to specify performance
criteria on issues that may not be readily measured).
Most of the standards and codes analysed also have different grades of cri-
teria, including a core of baseline provisions that must be complied with in full,
and others which may be only partially met, or which only require producers to
set out how they intend to work towards meeting them, over a given period.
Corporate Social Responsibility for Agro-industries 245
Annex 2: Selected Cases
Case 1: SABMiller and Cargill improving barley production in India with partners
Since 2005, SABMiller and Cargill have been working together with the Government of
Rajasthan, the Morarka Foundation and local farmers to support the development of a via-
ble barley malt industry to supply local breweries.
SABMiller has ten breweries in India. The malt group of Cargill’s food division works in
partnership with it to grow malting barley. Rajasthan produces around 430,000 t of barley a
year. The barley has been of poor quality with variable kernel size and high moisture con-
tent. Irregular yields are due to poor quality seeds, low rate of germination or low pest
resistance.
A malt barley development programme, called ‘Saanjhi Unnati’ (SU), was created, with
government agencies playing a significant role. The SU programme strives to build a long-
term reliable source of locally grown malt barley and to test new strains of barley bringing
better yield and quality. A key component of the programme was the creation of SU centres.
These provide certified seeds, agricultural skills training, procurement services and other
support.
SABMiller acts as the main coordinator and monitors the project. Cargill assists in all
operational aspects, manages the SU centres through franchisees, sells seed and trains
farmers. The Morarka Foundation facilitates social mobilization and interaction between
local communities, SU management and operations staff. Rajasthan approves licences and
provides infrastructure and support for the programme. The government also promotes the
SU concept through its extension organizations, for example, by raising awareness of the
benefits of certified seeds.
When the programme started, a publicity campaign was launched to raise the awareness
among 20,000 local barley farmers, using a variety of communication tools including ‘jeep
campaigns’, farmer meetings and leafleting. This led to a recruitment drive inviting farmers
to join the SU programme. Participating farmers bought certified seeds from the SU centres
and received access to personalized and group extension services.
Programme costs are estimated at between $92,000 and $156,000 per year for the first
3 years. The programme is not expected to become self-sustaining in the near term, and
may need continued investment for an additional 3 years. In 2008, the 12 SU centres were
supporting over 6000 farmers. The centres have distributed 500 t of certified seeds and
expect to procure 16,000 t of barley in the first season. Around 60% of farmers who took the
seeds sold barley back to the centres.
In the latest harvest, the yield was over 20% higher, although it is difficult to estimate the
share that can be directly attributed to SU. Nevertheless, over a 2-year period, SU districts
achieved an average yield increase of 33.3%, while the average for Rajasthan was 14.2%.
Average thousand corn weight (TCW), a measure of malt extract, has gone up from 37 to
43.5 g since the SU programme was introduced.
Farmers were initially reluctant to accept seeds provided by SU. The government played
a key role by publicizing the programme through extension activities and by lending credibil-
ity to it, assuaging farmers’ doubts. Because farmers are price-sensitive, it proved important
to ensure that the SU price consistently beat the open market price.
In the next 5 years, seeds from the seed development programme will be progressively
distributed to farmers. Over the same time, SABMiller India expects to achieve 50% of total
barley procurement from the SU programme, up from 10% in 2007.
246 C. Genier et al.
Case 2: Nestlé facilitating the production of biogas in China
Nestlé facilitated an innovative approach for its milk suppliers in Shuangcheng in north-
eastern China during the period 2004–2007, to convert the manure from dairy cattle into
biogas to be used for cooking, heating and electricity generation. From the very beginning,
the initiative was endorsed and strongly supported by the local authorities, and received
further support from the central government. Chinese authorities are now replicating and
scaling up the approach nationwide and extending it to pig farms.
While the strong demand for milk in China has had important economic benefit for the dairy
farmers, it has also produced a new environmental challenge: how to manage the manure
generated by dairy cows. Traditionally, most farmers compost manure outside the farm wall
and apply it to the fields in spring and autumn. With the increasing number of cows, the hand-
ling needed revision.
The China Biogas project is part of the wider Sustainable Agriculture Initiative Nestlé
(SAIN) launched in 2000 to optimize the supply chain from ‘farm to factory’ by improving
efficiency, better managing risks and supporting sustainable agriculture. In China, Nestlé
aspired to help its suppliers store manure in an appropriate manner, thereby reducing the
risk of contaminating groundwater. Equally important, it wanted to create value for the farm-
ers by converting manure into biogas for domestic usage, replacing the maize stems used
by many families as domestic fuel.
Nestlé initially identified cheap, adequately sized biogas digesters as a possible solution.
A key step was then to identify and convince a local ‘champion’ that would be willing to
carry this project on the government side. In 2004 and 2005, trials of a small manure stor-
age system with a capacity of 8 m
3
proved to work even during the cold winter of ?30°C.
The initiative was endorsed and strongly supported by the local authorities, and received
further support from the central government. In order to demonstrate this technology, the
Chinese authorities agreed that 74 Nestlé demonstration farms would be equipped with
such a unit, and on-site training would take place during and after construction. Nestlé has
played an active ‘facilitator’ role, creating awareness and stimulating demand from farmers
to have such systems, and linking these farmers with construction teams.
The scale-up of the initiative was realized through the engagement of several partners,
primarily from the public sector. The local government financed the establishment of five
construction teams to replicate the approach. The central government provided the tech nical
drawings, sealant, pipes, filters, cooking stoves and further equipment. In return, farmers
were asked for a one-off payment to cover the construction material (cement, bricks).
Currently, there are 4000 small biogas digesters (8 m
3
) in Shuangcheng on an equal
number of farms generating energy for the cooking stove. The new method of cooking has
led to cost savings for farmers’ families and better handling of manure. The annual cost for
using methane gas bottles for an average household is RMB 400, which is just equivalent
to the total investment of the biogas digester. Farm manure is now more effectively used and
the remains are used as fertilizers. This decreases the need for synthetic fertilizers, which
require non-renewable energy for their production.
The cooperation between Nestlé and Chinese authorities is a good example of how such
projects can truly realize their potential. Biogas digesters are now available to dairy and pig
farmers across China. Between now and 2010, additional biogas digesters will be con-
structed at a rate of 1000 digesters per year by each of five construction teams.
Corporate Social Responsibility for Agro-industries 247
Case 3: Syngenta recovering water springs in Brazil
With its philanthropic project ‘Agua Viva’, Syngenta has contributed to the recovery of over
2100 water heads in Brazil. In collaboration with local cooperatives, Syngenta is providing
technical assistance and know-how to farmers to recover their endangered and polluted
water heads. As a result, springs are sanitized and protected, the quality of water increases
and the water supply is secured for local communities.
Deforestation, agriculture and population growth have contributed to lowering freshwa-
ter reserves in most agriculture-based communities in Brazil. In this context, it is particu-
larly important to reduce freshwater pollution. Farmers within the project area use
fountainheads, which are natural springs, as sources of fresh water, both for domestic
use and for important economic activities such as poultry, swine and cattle ranching.
However, such fountainheads, if not properly looked after, are prone to several types of
contamination.
‘Agua Viva’ started in 2004 in southern Brazil in collaboration with the farmer cooperative
Coopavel. The project was run on the ground by a specialized technician with support from
a water analysis laboratory. Fountainheads can be recuperated with simple and economical
practices: all that is needed is rocks, a few kilograms of cement, plastic tarpaulin, short sec-
tions of PVC tubing and a little manual labour. However, the process requires efficient tech-
nical and environmental knowledge. The water spring recovery process takes typically
6 hours at a total cost of US$195 per fountainhead.
In the next phase, the approach was scaled up in several waves. ‘Project multipliers’ were
trained to support 33 municipalities in the semi-arid north-eastern region of Alagoas, in
partnership with the local Carpil Cooperative. In 2007, a major collaboration was agreed
with the coffee cooperative in Guaxupè (Minas Gerais).
Recently, the project has evolved in a new direction as fountainheads are now regis-
tered in collaboration with the local government. In a recent pilot ‘Agua Viva’ is supporting
the registration of water springs through GPS satellite positioning. The project is evolving
into a partnership with the local government. This latest development truly aims to secure
the water mines for the future generations and will help the authorities enforce the laws.
The project has won public acknowledgement on several occasions, including two awards:
for being the ‘best environmental project’ developed in Brazil in 2004, under the ‘Innovation’
category awarded by ANDEF (Brazilian Crop Life); and as an ‘outstanding environmental
project’, awarded by the Brazil–German Chamber of Commerce in 2005.
Since 2004, 2114 fountainheads have been recuperated, benefiting over 2700 families
and their livestock. The improved water quality and sustainability of the springs generate
rapid and direct results in the area of health and well-being. This is underlined by the large
interest and demand in the targeted regions: waiting lists have formed to be part of the
initiative.
The ‘Agua Viva’ project was able to make a difference with limited funds through a com-
bination of technological know-how and close collaboration with local actors. This approach
has not only allowed for contact to be established with recipient farmers and credibility to be
built, but also for the sustainability of the project through the recruitment of a local ‘cham-
pion’ to take responsibility for e.g. the regular light maintenance required.
248 C. Genier et al.
Case 4: Reliance India sourcing directly from local farmers
Reliance Retail is directly sourcing fresh agricultural produce from thousands of farmers
through collection centres (CCs). The company is providing a guaranteed market for the
farmers’ produce, reducing transaction costs and training them in better and more sustain-
able farming practices. This initiative has resulted in increased income and upgraded skills
for the farmers, a reduction in spoilage of produce by up to 35% and better quality products
for Reliance retail stores.
Until recently, under regulations in place since the 1960s, all produce had to pass through
state markets (mandis) with the intention to ensure ‘fair’ prices for the farmers and to reduce
hoarding of agricultural produce during food shortages. While this regulation was phased
out a few years ago, most retailers continued to procure their supplies using mandis.
In November 2006, Reliance Industries Limited entered the retail business with ‘Reliance
Fresh’ stores. A key challenge was to source a supply of fresh produce for its stores of suf-
ficient quality. Reliance created rural CCs across India where farmers could sell their fresh
crops, fruits and vegetables locally. Through CCs, Reliance is pursuing the strategy of build-
ing an integrated business model that sources agricultural produce directly from the small
farmers in Indian villages. To make this business model work and improve the quality of
produce sourced through the initiative, the company is building human capital through
education.
Before establishing a CC, Reliance raises awareness of its activities in surrounding vil-
lages and provides training on how to cultivate the desired products. Reliance also distrib-
utes seeds or saplings from Reliance-owned nurseries. CCs maintain farmer contact lists
and call on them when they are looking to procure specific crops. By 2007 Reliance was
operating around 160 CCs across India, with each CC buying produce from villages within
a 15 km radius. During the harvest season, farmers bring their produce to the CC every day.
Their product is weighed electronically and farmers are quoted a price matching the mandi’s
price. Reliance guarantees that it will purchase all produce delivered (which mandis do not)
and the handling fees are approximately 50% lower than the mandis’. For higher-quality
produce, farmers are offered a price premium. CCs load produce into plastic crates and
label them to allow traceability. Reliance uses its own fleet of trucks to transfer fresh produce
daily from CCs to regional processing and distribution centres, which then distribute it to
Reliance Fresh stores. The produce is delivered on time and the spoilage is reduced to less
than 5%.
Reliance is putting mechanisms in place, such as farmer interviews, to measure the
impact of its direct farmer procurement in a systematic fashion. While the results are by no
means exhaustive, they do provide evidence of the positive impact of the local sourcing
efforts. Farmers receive a fair weighting and price and on-the-spot cash for their produce,
and have improved the quality and efficiency of their production due to the price premium
offered for higher-quality produce and the training offered by the CCs on efficient and sus-
tainable agriculture techniques. More aware of differences in the quality of their produce,
farmers are investing in seeds and inputs to grow higher-quality produce.
CCs demonstrate a step towards sharing value with smallholders by sourcing directly
from the farmer communities. They allowed Reliance to gain relevant experience working
with farmers, in view of implementing a more ambitious Rural Business Hubs concept. The
exclusion from the supply chain of traditional intermediaries, however, led to protests, rais-
ing the question of how to evolve potentially obsolete supply chain structures.
Corporate Social Responsibility for Agro-industries 249
Case 5: Unilever and partners building up a supply chain for Allanblackia (AB) oil
In Tanzania, Unilever was one of several organizations that partnered to establish a locally
owned supply chain for AB oil, a new raw material to be used in margarines and spreads.
Called Project Novella, the initiative is increasing income for farmers cultivating AB trees,
generating jobs in the supply chain and preserving the biodiversity of the region.
Learning from an improved understanding of the impact of producing palm oil, Unilever is
expecting that AB oil will also be used in the production of margarine. The AB tree is com-
monly found in parts of West, Central and East Africa. Unilever has conducted extensive
research on the properties of AB oil and established new applications in manufacturing
spreads and soaps. The oil’s unique properties allow lower saturated fat versions of marga-
rine. While AB oil is used by the local population, it is not produced commercially. Unilever’s
challenge is to source the volumes required to manufacture products from the new crop.
The company has partnered with several NGOs, international organizations and govern-
ment agencies in Tanzania to commercially produce food-grade AB oil.
Project Novella’s main objective is to set up a new supply chain, sourcing AB seeds from
local, community-based farmers. The project also aims to build human capital by training the
farmers to produce high-quality AB in an environmentally sustainable manner. Multiple local
NGOs, international organizations and government agencies have partnered with Unilever
to implement the project. Challenges include local capacity building, social mobil ization and
change, research and technical training in sustainable domestication and plant propagation.
Additionally, Unilever believes that, to make the model viable in the long run, the supply
chain has to be owned by local farmers, small enterprises and communities.
Over the 4 years that Project Novella has been operating, the collaboration has made
significant progress in creating a five-step supply chain. Farmers and groups in the villages
are engaged in collecting AB seeds from their farms, drying the seeds and weighing and
selling the product to collection centres throughout the harvest season. Seeds are then
taken to a local crusher, who received support from Novella to upgrade his factory to pro-
duce food-grade oil. The AB oil is then transported to Europe. Unilever has guaranteed
farmers a fixed price per kilogram of seeds, and has pledged to pay an attractive premium
price for AB oil until the full economies of scale take effect in or before 2012. NGOs have
raised awareness of the economic benefits of growing trees, and trained farmers and village
associations on domestication. They have also helped villagers register as economic groups,
giving them access to training and the opportunity to sell their produce to Unilever. As of
2006, 6000 farmers were involved in the programme; the average earnings per farmer per
year increased from £30 to £70; 45 full-time jobs managing the buying centres were created
and 650 t of AB seeds produced. By the end of 2007, over 20,000 AB trees had been
planted, most produced by rural, community-owned nurseries. By 2016, more than 25,000
farmers should be able to earn more than £200 per year farming AB, in addition to their
other economic activities.
While the project has been successful, a growing supply chain will have to be estab-
lished and made sustainable. Local ownership, active capacity building of the farmers,
investment in research capabilities and improvement of business practices are some of the
factors that are expected to contribute to the supply chain’s sustainability and viability. The
project is currently being replicated by Novella teams in Ghana and Nigeria. Moving for-
ward will require attracting skilled people who can guide the process, as well as the funding
to finance tree production and training for farmers on how to integrate AB into their current
farm activities.
250 C. Genier et al.
Case 6: Unilever committing to purchase certi?ed tea for its key brands
Unilever is working with the Rainforest Alliance to certify all tea purchased for its Lipton
brand by 2015. As the world’s largest tea buyer, Unilever intends to send growers a clear
signal in favour of sustainable tea production, emphasizing a long-term business model
based on quality rather than on quantity in a market characterized by oversupply.
The tea sector is suffering from oversupply, with prices having dropped by 35% in 25
years. This situation has stabilized in the last few years; however, there are barriers to tea
producers exiting the industry. Tea bushes live for over 100 years, and many farmers in
developing countries have little knowledge of or access to alternative sources of income.
Unilever buys around 300,000 t of tea per year, or 12% of the world tea supply. Its own tea
estates in Kenya supply 20% of the company’s needs, while the rest is bought from other
suppliers: around 750 big estates and one million small farms. Overall, two million people
are directly involved in Unilever’s tea supply chain.
Unilever did not want to simply launch a niche product, but to move the whole market.
Certification was identified as the way to roll out the standards to the rest of the supply chain
and credibly tell the story to the consumer. After discussing with three potential partners, the
Rainforest Alliance was chosen by Unilever for conducting the external tea certification. The
Alliance focuses on farm management aspects and its approach is comprehensive and
applicable both to large estates and to smallholders and foresees collaboration with local
organizations. The tea certification allows a market-driven increase in tea prices of 10–15%.
The intention to certify tea was announced by Unilever in May 2007; in July, its Kenyan
estate was certified, as well as one supplier.
The Rainforest Alliance developed tea certification criteria building upon non-crop-specific
aspects (about 80% of all the criteria) and adding crop-specific aspects (remaining 20%). In
addition, a country-specific component is taken into account by collaborating with local
stakeholders. Every estate the Rainforest Alliance certifies is visited once a year to check
that it is maintaining standards.
Unilever expects larger estates to show interest and take steps towards certification. For
smallholders, typically delivering ‘premium quality tea’, a PPP was set up to promote and
accelerate the movement towards sustainable tea production. Smallholders will receive
support from the Rainforest Alliance, which will train them in farm management, prior to
initial inspection. Over time, it is expected that they will save on input factors (e.g. pesti-
cides). DfID is providing GBP 500,000 financing for this part of the tea certification. The
Kenyan Tea Development Agency (KTDA), which represents the growers, is collaborating
with local farmers. In Kenya, around 430,000 smallholders are expected to become part of
the initiative, including smallholders not supplying Unilever.
Historically, tea was not in the focus of the Kenyan authorities, since this sector was
strong in the country. However, recent developments suggest that more attention is being
turned towards the tea industry. The public sector is looking at various ways to promote the
tea sector through supporting upcoming schemes, like the Rainforest Alliance certification.
One area where support is needed is in the diversification of income for tea growers. The
government and multilateral donors might want to think about how to support those produ-
cers who cannot meet the standards and provide them opportunities to transition to other
areas of economic activity.
Corporate Social Responsibility for Agro-industries 251
Case 7: Grameen Danone setting up yogurt production in Bangladesh
The traditional approach to developing an international business in emerging markets is to
target segments in which a company’s product is likely to be competitive. This strategy typ-
ically limits developing country markets to the wealthiest customers. Following another
approach, Danone Grameen is rethinking the entire value chain for yogurt production and
marketing so that it employs and serves the poorest segments of society.
Danone has partnered with Grameen Bangladesh to deliver a quality, nutritious product
to the ‘base of the pyramid’. Its three objectives are to provide children suffering from nutri-
tional deficiencies with a low-priced yogurt adapted to their nutritional needs, to create jobs
around an economically viable and scaleable business model, and to preserve the
environment.
The Global Alliance for Improved Nutrition (GAIN) is a critical actor in the joint venture,
validating the benefits of the nutrient-enhanced yogurt for children.
For Danone, creating Grameen Danone Foods Ltd is consistent with its strategy to deliver
health through nutrition. For Grameen, the joint venture is a natural addition to its existing
portfolio of for-profit and non-profit enterprises serving the poor in Bangladesh. The Danone
Grameen joint venture leverages Grameen’s extensive reach and credibility in rural com-
munities. The partnership provides GAIN with an avenue to pursue its mission of providing
essential micronutrients to populations in need, leveraging both public and private food
distribution channels.
Danone Grameen is addressing all essential components of the value chain, from agri-
cultural production of milk to yogurt manufacturing and product distribution. Upstream, the
objective is to promote local milk supply, particularly through the development of micro-
farms. Danone is using its experience to raise quality and productivity standards. The com-
pany is building local agronomic capacity by training local NGOs that can then work with
farmers. Danone is also helping to establish a supply chain that prevents deterioration of
milk in Bangladesh’s hot climate.
At the centre of the value chain, Danone has designed a completely new factory set-up,
which favours employment over costly technologies, without jeopardizing product quality.
Downstream, the joint venture is relying on the extensive network of ‘Grameen Ladies’ for
door-to-door sales along existing local retail channels. The goal is to keep distribution to a
radius of 30 km around the factory to minimize environmental impacts associated with trans-
port. However, the model introduces new challenges for the Grameen Ladies as yogurt
distribution differs considerably from micro-lending or provision of telecom services, their
existing activities.
Danone Grameen has invested significant effort in creating a product suitable for the
market. The ‘Shakti doi’ (energy) yogurt is made of fresh milk and sugar and is enhanced
with micronutrients (including e.g. vitamins, iron, iodine, zinc). It is cheaper than other
yogurts and conceived to be in line with what low-income people can afford.
While much of the project has yet to unfold, the partners predict that over 1000 livestock
and distribution jobs will be created (30 factory jobs were created in the pilot factory). Thus,
employment impact will occur principally upstream and downstream in the value chain.
While the venture is off to a promising start, the viability of the model has yet to be estab-
lished; it is particularly challenging to operate a full value chain that relies solely on an
extremely low-cost product. There is very little additional economic value to be captured in
the market to finance the substantial investments required. The recently rising milk prices
are further putting the business model under pressure.
252 © FAO and UNIDO 2009. Agro-industries for Development (C.A. da Silva et al.)
Introduction
Every year the World Bank prepares the World Development Report (WDR)
and, significantly, in 2008 the WDR focused on agriculture. The title selected for
the report, Agriculture for Development, suggests that agriculture should be
seen not only as a sector of economic activity but also as a means for the promo-
tion of human welfare, food security, poverty reduction and environmental man-
agement. The WDR was developed in a highly collaborative fashion, including
inputs from agencies such as FAO, IFAD and UNIDO, and involving consulta-
tions with many governments and organizations. It thus represents a broad
understanding of the state of the art on the issues discussed. This chapter revisits
some of the conclusions of the Report, with emphasis on the interface between
agriculture and agro-industries in the process of development. Drawing from the
Report, the focus of the chapter is on agro-industries and on what can be done
to promote agro-industries within the context of agricultural development.
In 2008, agriculture was in the headlines, if for the wrong reasons. A cover
of the magazine The Economist, for instance, gave prominence to the issue of
rising food prices and the end of cheap food. Another issue of the same publi-
cation called attention to the rising disparities between urban and rural incomes
and the political tensions this phenomenon created.
There are many reasons why agriculture has been in the headlines. It is
enough to open newspapers every day to see that there is mounting concern
with the issue of sharply rising food prices and with what this implies for food
insecurity and the rise of hunger. Rising rural–urban income disparities are a
source of political tensions. India, China and many of the rapidly growing coun-
tries find themselves with a large rural population being left behind and demand-
8 Annex: Agriculture for
Development – Implications
for Agro-industries*
ALAIN DE JANVRY
Professor, Agriculture and Resource Economics, University of California,
Berkeley, USA
* Transcription of Alain de Janvry’s keynote speech on ‘Agriculture for Development–Implications
for Agro-industries’ delivered at the Global Agro-industries Forum, New Delhi, India, April 2008.
Annex 253
ing greater attention. The Millennium Development Goals (MDGs) will not be
met in many parts of the world. Because 75% of the world’s poor live in rural
areas, meeting the MDGs inevitably requires giving greater attention to agricul-
ture as a source of income for the poor. Threats to the survival of the family
farm and excessively rapid migration to the cities, leading to overcrowding and
unemployment, are also important concerns. New demands on agriculture for
better-quality foods, rapidly rising consumer demand for animal and fish prod-
ucts and concern about the environment all create visibility for agriculture in
development. Some recent health epidemics have been closely related to issues
of water and proximity to animals, creating important links between agriculture
and health. Finally, and very importantly, there is the issue of climate change,
to which agriculture contributes importantly and from which agriculture already
suffers, with particular impact on the poorest rural inhabitants.
Agriculture has been in the headlines and, as a consequence, it is timely to
talk about how to make the most of agriculture for development. A particular
concern is how countries can benefit from the links between agriculture and
agro-industrial development and how agro-industry can contribute to economic
development.
It is instructive to note how the WDR approached the issue of focusing on
agriculture as a development driver. One basic concern was that of heterogene-
ity of conditions: since the world is vast and diverse, there are different ways of
looking at the role of agriculture for development in different parts of the globe.
Another concern was that there are many pathways out of poverty, some of
which include agro-industry as an important element. A general conclusion,
however, is that the potential that agriculture has to contribute to development
has been vastly underused, especially in the last 25 years. Yet there are oppor-
tunities to do better and, as a consequence, we must identify those opportuni-
ties, confront the challenges associated with them and then ask ourselves: what
are the policy entry points that can mobilize this potential in the context of the
new opportunities and the new challenges? What are the conditions for success
and what can we do to make it happen? Will the world go back to business as
usual, continuing to neglect agriculture as an instrument for development? Or
can agriculture be seriously used for development and make a real difference
for growth in low-income countries, poverty reduction and greater environ-
mental sustainability? It is a matter of urgency now: with agriculture in the
headlines, there is no time to waste in finding out how to focus on agriculture
and agro-industry more effectively as engines for development.
How Has Agriculture Served the Cause of Development?
To understand the roles of agriculture in development, it is necessary to look at
the structural transformations as illustrated by the relationship between gross
domestic product (GDP) per capita and the share of agriculture and agribusi-
ness in GDP (Figure 1).
The horizontal axis of the graph presents GDP per capita and the vertical axis
presents the shares of GDP for particular sectors. We know that the import ance
254 A. de Janvry
of agriculture declines as GDP per capita increases from, say, 50% at low levels of
income to approximately 5% at high levels of income. But the interesting aspect
to notice is the trajectory for agribusiness (agro-industry and related services). What
can be seen in Figure 1 is that the share of agribusiness is not declining – in fact,
it is rising, tending to decline only later on, at higher levels of GDP per capita. As
incomes rise, agribusiness becomes much more important than agriculture.
Obviously, other sectors of industry are going to emerge, but the agribusiness sec-
tor, including all the services and activities linked to agriculture, is typically a very
important part of the emergence of industry. Indeed, as shown in Figure 2, the
Figure 1. The structural transformation: a declining share of agriculture in GDP, but a high
and rising share of agribusiness as per capita income rises.
Malaysia
Argentina
Agriculture
Agribusiness
Thailand
Indonesia
Nigeria
400 1100
GDP per capita, 2000 US$ (log scale)
P
e
r
c
e
n
t
a
g
e
s
h
a
r
e
o
f
G
D
P
3000 8100 150
0
10
20
30
40
50
60
Kenya
Côte d’lvoire
Uganda
Brazil
Chile
Agriculture
Agribusiness
Figure 2. The structural transformation: value added in food processing is rising relative to
value added in agriculture.
2,000
IND
IDN
EGY
THA
PER
COL
ZAF
MYS
HUN
MEX
ARG
SVK
TUR
BOL
ZWE
ROM
BRA
IRN ECU
UGA
BGD
MWI
SEN
PHL
MAR
4,000
GDP per capita, constant 2000 US$
6,000 8,000 0
0
0.2
0.4
0.6
F
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NPL
Annex 255
share of value added in food processing in relation to the share of value added in
agriculture is of increasing importance as GDP per capita rises. Hence, it is impor-
tant to think of agriculture not as a declining industry, but as supporting the emer-
gence and growth of an industrial sector.
Acknowledging the fact that the world is quite heterogeneous, the WDR
utilizes a country typology, as depicted in Figure 3. On the horizontal axis,
the share of total poverty located in rural areas is presented. This share can
be very high in countries like China, where about 95% of total poverty is
found in rural areas, or in India, where it reaches some 80%. On the vertical
axis, we have the share of growth attributed to the agriculture sector during
the last 25 years. This framework gives us three categories of countries, each
with a different policy agenda in using agriculture for development. The first
category is the agriculture-based countries. These are largely the sub-Saharan
African countries, where agriculture is an important source of growth and
most of the poverty is rural, with poor households dependent on agriculture.
For these countries, the main policy problem is to accelerate agricultural
growth. The second category is the transforming countries, where growth
has accelerated in other sectors of the economy and agriculture is no longer
a major source of GDP growth, but most of the poverty remains rural. This
includes countries such as India, China, Morocco and Indonesia. For these
countries, the main policy problem is the rising income disparity between
rural and urban sectors, and the persistence of deeply entrenched rural pov-
erty. The third category is the urbanized countries, where agriculture makes
a low contribution to GDP growth (although the share of agribusiness is typi-
cally larger), but where some 30–40% of poverty remains rural. For these
Figure 3. The three worlds of agriculture.
256 A. de Janvry
countries, the main policy issue is that of social inclusion of smallholders into
the set of competitive farms. Do these countries want an agriculture that
leaves room for a competitive sector of family farms, or an agriculture with
mainly large farms and a labour market that becomes the instrument for pov-
erty reduction?
There are three functions that agriculture can fulfil for development. First,
agriculture can be the lead sector to trigger economic growth, particularly in
the agriculture-based countries. Second, it is an important source of livelihoods.
As we have seen, 75% of the world’s poverty is rural. For most of the world’s
poor, agriculture is the main source of livelihoods and hence it has to be mobi-
lized for that purpose. Third, agriculture is a very large user of natural resources
and the way it uses resources has global impacts. Since global impacts have an
important influence on agriculture, the links between agriculture and the envir-
onment have to be taken into account very closely.
There are many success stories in terms of these three functions. Agriculture-
based countries for which agriculture is a source of growth include most of the
sub-Saharan African countries, but also Paraguay and many Central American
and Caribbean countries. Agriculture, in most situations, is the sector that has
greater competitive advantage. Since agro-industry is a very significant way of
adding value to agricultural products, it offers an important way to transit
towards industrialization, whereby countries industrialize based on competitive
advantage in agrifood processing and value addition and then increasingly
move away from this source of competitive advantage by creating new sources
that lead to industrial development, with a declining share of GDP coming from
agriculture. This has happened, for example, in Chile and Malaysia, leading to
acceleration of growth.
In terms of sources of livelihoods, there are important success stories
as illustrated in Figure 4, which depicts the cases of India on the left and
China on the right. The rising curve shows cereal yields, while the declining
curve shows the rural poverty rate. Clearly, there is a high negative correla-
tion between the two.
Figure 4. In India (left panel) and China (right panel): cereal yields and rural poverty rates.
2.4
1980 1983 1986 1989 1992
Years
1995 1998 2001
4.6
4.7
4.8
4.9
5.0
5.1
5.2
5.3
2.9
3.4
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1959 1963 1967 1971 1975
Years
1979
Yields
(right axis)
Yields
(right axis)
Rural P0
(left axis)
Rural P0
(left axis)
1983 1987 1991
4
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f
a
v
e
r
a
g
e
f
a
r
m
o
u
t
p
u
t
p
e
r
a
c
r
e
4
4.2
Annex 257
These cases can be contrasted with what has been happening in other
parts of the world, such as sub-Saharan Africa, where yields remained static
and poverty persistent.
To further this argument, it is helpful to calculate how much income gain
can be obtained, for different segments of the income distribution curve, from
GDP growth originating in agriculture or in the rest of the economy. In Figure 5,
the ten deciles of the distribution of income are shown on the horizontal axis,
calculated from aggregated data from 42 countries (WDR 2008). The curve
with triangles shows the income gain for each of those deciles coming from
GDP growth originating in agriculture versus the curve with lozenges when
GDP growth originates in the rest of the economy. It can be seen that, for the
50% poorest, the gains in income are much larger (on the order of 2–3 times)
when growth originates from agriculture than when it originates from the other
sectors of the economy.
This has significant implications for world poverty. Since 75% of world
poverty is rural and since agriculture is the main source of income for these
poor, then income derived from agriculture and agro-industry is a very effective
means to reduce poverty. Moreover, as we have seen, agro-industry does offer
a path towards industrial growth.
As can be seen in Figure 6, there exist in fact a number of pathways out of
poverty. A policy agenda can thus be derived as to how to use agriculture and
agro-industry as instruments to promote development.
The framework presented in Figure 6 shows that the main pathways out of
poverty are via farming, the rural labour market and migration. Farming house-
holds consist of commercial smallholders, households that are in transition
from subsistence farming to commercialization and the large subsistence farm-
ing economy. Each of these three groups requires different policy interven-
tions, or differentiated policy packages that can cater to their specific needs.
Agriculture
Non-
agriculture
?2
0
2
4
6
8
Lowest 2 3 4 5 6 7 8 9 Highest
Expenditure deciles
E
x
p
e
n
d
i
t
u
r
e
g
a
i
n
s
i
n
d
u
c
e
d
b
y
1
%
G
D
P
g
r
o
w
t
h
(
%
)
Figure 5. Income gains by expenditure deciles (from poorest to richest) due to GDP
growth originating in agriculture (triangles) and non-agriculture (lozenges).
258 A. de Janvry
The rural labour market has two interrelated components. On the one
hand, there is the agriculture labour market, which can be a way out of poverty,
but also often a way of remaining in poverty. We know that agriculture labour
markets tend to be quite harsh, informal, seasonal and often involve extensive
participation by children. Since many of the poorest people in the world depend
on agricultural employment for their subsistence, considerably more can be
done to make the agriculture labour market into an instrument to move popula-
tions out of poverty.
On the other hand, and very importantly, there is the rural non-farm econ-
omy. This consists of a whole set of industries, ranging from small to medium
and large firms that are engaged in forward and backward linkages with agri-
culture, catering to consumer demands that lead to agricultural incomes. Their
location is quite often in rural areas, where they provide complementary sources
of income and employment to rural households.
The rural non-farm economy is another very important instrument for pov-
erty reduction. It has been widely observed that, where you have successful
smallholder farming, it is usually complemented by a successful rural non-farm
economy. In this context, rural households tend to be diversified, participating
not only in farming activities, but also in employment and investment in the
rural non-farm economy. Significantly, to a very large extent the non-farm
economy is composed of agribusinesses, agro-industries and agro-services
linked to agriculture.
Finally, there is the issue of migration. Population growth will force many
to move out of agriculture, as there is not enough room for employment in
agriculture for a rapidly growing labour force. Over time absolute employment
6. Subsistence
farming
Pathways out of
poverty:
farming, labour,
migration
Transition
to market
Demand for
ag products
3. Efficient markets,
value chains,
agro-industry
4. Commercial
smallholders
$
$
$
$
Social assistance
5. Transition
to market:
commercialization
1. ‘World’ category
2. Policy framework
Demand for
ag products
Rural labour market:
7. Agriculture
8. Rural non-farm
9. Migration
Figure 6. Multiple pathways out of poverty and policy agenda.
Annex 259
in agriculture will inevitably decline. Yet, even though migration can be an
important pathway out of poverty, it should be noted that in order to maximize
the potential of its economic and social benefits, a precondition exists: there
has to be a significant investment in the quality of the rural labour force in
terms of health and education, so that the labour force can successfully migrate
to other employment opportunities beyond agriculture.
To summarize, there are three pathways out of poverty – self-employment
in farming, the rural labour market and migration. The farming-based pathway
builds on smallholder competitiveness, i.e. a smallholder sector able to success-
fully compete on markets. Rural labour markets comprise agriculture and the
rural non-farm economy, including, significantly, agro-industry. The migration
pathway, on the other hand, requires preparedness. There is still a need to
consider the large subsistence farming sector. Ways out of subsistence farming
include two major options. First, farmers can become commercial smallholders
via increased commercialization, increased access to assets and increased
capacities for entrepreneurship. Second, farmers can move into the labour
markets, but this requires added skills, especially if a household member is to
enter the rural non-farm economy.
Supporting all elements considered in the framework depicted in Figure 6
are efficient markets, value chains, agro-industries and the links to the general
policy framework as well as which of the ‘three worlds’ a particular country
belongs to, in accordance with the typology established earlier. These consid-
erations provide nine entry points that can be used to set an agriculture-for-
development agenda:
1. The ‘world’ category to which the country belongs.
2. The policy framework.
3. Efficient markets and value chains.
4. Commercial smallholders.
5. Commercialization from subsistence to market-oriented smallholders.
6. The whole subsistence economy and what can be done in terms of social
assistance.
7. The rural labour market, which includes agriculture.
8. The rural non-farm economy with agro-industry, agro-business and agro-
services.
9. Migration.
We can use these nine entry points to propose agendas as to how to approach
and enhance agriculture and agribusiness for development in particular country
settings.
Agriculture for Development and the Nature
of Public Spending and Donor Support
It has been noted that 75% of the world’s poor are rural. Yet only 4% of the
official development assistance (ODA) and 4% of public spending in sub- Saharan
Africa goes to agriculture. These figures suggest that there is a lack of
260 A. de Janvry
correspondence between the objective of poverty reduction and the instruments
that are being used to reduce poverty, namely public investment and ODA. This
is an important observation made in the WDR, which leads to the question as to
what then can be done to have agriculture as a development engine.
The data analysed by the WDR show that there is indeed under-investment
in agriculture The left-hand panel of Figure 7 shows that agriculture as a share
of GDP is about 30% in the agriculture-based countries. None the less, it can
be seen in the right-hand panel that public expenditure going to agriculture, as
a percentage of GDP, is only 4% in these countries.
The New Partnership for Africa’s Development (NEPAD) has set a goal of
10% for the share of the national budgets that should be allocated to agricul-
ture. From 10% to 12% is what India was apportioning to agriculture at the
time of the green revolution. By the same token, 10–12% is what China has
been allocating for supporting its ‘household responsibility system’. As such,
the figure of 10–12% has become a useful benchmark as to how much public
spending there should be as a share of the national budgets and we observe
that many poor countries are way below this. Moreover, there is not only the
issue of quantity, but also that of quality. Many countries have seen a drift in
their public expenditures on agriculture towards subsidies and away from public
investments. In India, for example, 75% of public expenditure goes to subsid ies
(electricity for pumping water, fertilizers, etc.), while only 25% goes to public
investment. This has a huge opportunity cost in terms of possible alternative
public spending targeting agriculture and rural people, such as research and
development, infrastructure for agriculture or health and education for rural
populations. Needless to say, decisions on the quality of public spending are a
question of a country’s political economy.
Agricultural-based countries spend relatively too little on
agriculture (and R&D)
Ag GDP/GDP
29
16
10
0
5
10
15
20
25
30
35
Agriculture-based Transforming Urbanized
P
e
r
c
e
n
t
a
g
e
0
2
4
6
8
10
12
14
Agriculture-based Transforming Urbanized
P
e
r
c
e
n
t
a
g
e
Public spending on Ag (% of Ag GDP)
Spending on Ag R&D (% of Ag GDP)
Figure 7. Public expenditure in agriculture is low in the agriculture-based countries, while the
share of agriculture in GDP is high.
Annex 261
Agriculture for Development: the New Opportunities
Fortunately, there are new opportunities to make better use of agriculture for
development than in the recent past. They include a ‘new agriculture’, with
dynamic demand, high-value activities, non-traditional exports and ability to add
value to commodities in agribusiness. The markets have changed, agricultural
product prices are rising and opportunities for investment exist. Price transmis-
sion has to happen between markets and farmers, but clearly this is a time when
we see unique incentives being provided to the agricultural sector. The big chal-
lenge will be to make investments in agriculture favourable, not only for growth,
but also for poverty reduction and for environmental sustainability. New oppor-
tunities also come from numerous institutional and technological innovations.
India has been a leader in this respect, using information technology for exten-
sion, linking farmers to markets and for information provision about innova-
tions in terms of use of new seeds and pest control. Finally, and very significantly
in terms of new opportunities, we now face an agricultural sector that is quite
different from, say, 25 years ago, the last time that the World Bank focused on
agriculture in the World Development Report. The private sector has now a
very important role to play, not only in terms of agribusiness and value addition,
but also through direct engagement in agricultural production. Producer organ-
izations play an increasingly important role for service and advocacy. Despite
the limitations to deliver what they ideally should to their membership, producer
organizations are rapidly emerging and consolidating.
The new actors and the ways of doing business in agriculture call for a new
role for the state and for new ways for governments to become engaged with
the private sector and with civil society organizations in different forms of part-
nerships. Public–private partnerships (PPP), in which a more proactive state
engages with the private sector and civil society organizations in promoting
new initiatives, offer plenty of interesting opportunities that have to be better
explored and understood.
Some of the new opportunities offered by a dynamic demand for agrifoods
are illustrated in Figure 8, with data from India. In the left-hand panel, it can be
0
10
20
30
40
50
Cereals &
pulses
Meat, eggs,
fish, milk &
milk
products
Sugar &
edible oils
Fruits, veg
&
beverages
%
S
h
a
r
e
o
f
f
o
o
d
e
x
p
e
n
d
i
t
u
r
e
s
0
200
400
600
800
1000
1200
1400
1600
1800
Meat &
meat
products
Fruit &
vegetables
Coffee &
tea
Fish &
fish
products
E
x
p
o
r
t
s
,
$
m
i
l
l
i
o
n
(
2
0
0
0
p
r
i
c
e
s
)
1990
2006
1987/88
2005/
Figure 8. India: rising consumer demand and exports for high-value products.
262 A. de Janvry
Figure 9. A rising share of supermarkets in retail food as income per capita rises.
0
0
10
20
30
40
50
60
70
80
S
h
a
r
e
o
f
s
u
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m
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r
k
e
t
s
i
n
r
e
t
a
i
l
f
o
o
d
5
India
Bangladesh
China
Nicaragua
Kenya
Bulgaria
Indonesia
Guatemala
Ecuador
Costa Rica
Colombia
Philippines
Thailand
Mexico
Chile
S. Africa
Argentina
Czech Republic
France
Brazil
United Kingdom
United States
Korea, Rep. of
10 15 20
GDP per capita, thousand PPP $
25 30 35 40 45
seen that the share of cereals and pulses in consumer expenditures has been
declining in the country, while the share of high-value products, meat and eggs,
sugar and oils, and fruits and vegetables has been increasing. The graph in the
right panel shows the significant increase in exports of high-value products
from India.
Figure 9 shows the rise of supermarkets as food retailers as incomes rise,
for a cross-section of countries. It can be seen that, increasingly, the nature of
demand is being transformed by the emergence of the supermarket economy.
Supermarkets tend to impose their own quality and safety standards, and hence
they impose tremendous challenges on the way smallholder farmers need to
organize in order to deliver the kinds of produce that supermarkets want to put
on their shelves. The rise of supermarkets represents both opportunity and a
challenge. While the potential for smallholder producers to capture rapidly
expanding markets exists, there is also a risk that they might be cut off from
access to their traditional urban consumers, as supermarkets can also procure
internationally or from larger-scale farmers.
The potential poverty reduction effects of non-traditional exports can be
illustrated from a study of bean exports from Senegal to France (Figure 10). In
the left panel, we can see the rapid rise of the total number of participants in
export sales between 1991 and 2005. We also see two interesting curves,
respectively representing the number of smallholders operating under contract
farming agreements with exporters and the number of estate farm workers.
Over time, the pattern has been one of smallholders being displaced by estate
workers. A question can then be asked as to what high-value agro-exports can
do to contribute to the goal of poverty reduction.
Annex 263
In the right-hand panel, the poverty rate is shown in the darker shaded
bars, while the extreme poverty rate is represented in the lighter ones. Poverty
rates are higher for the non-participants, suggesting that export markets con-
tribute to raise farmer incomes. Comparing the two classes of producers, it can
be seen that estate farm workers have gained from participation, but less so
than their contract farmer counterparts. Increasingly, medium to large farms
with hired workers tend to displace smaller farms, which can be competitive
players if they are effectively organized. The key issue of concern thus becomes
the role of the labour market and whether it can provide incomes to estate farm
workers that can offer them a pathway out of poverty. This empirical evidence
highlights the importance not only of competitiveness of a smallholder sector,
but also of an agricultural labour market that can afford working conditions that
allow people to move out of poverty.
Figure 11 shows the difference in employment across different countries
between two types of farm enterprise: cereal production and high-value prod-
ucts (vegetables). The data are expressed by the number of labour days per
hectare for cereals and vegetables, which are respectively shown by the light
and dark shaded bars. The figure illustrates well the tremendous gain in employ-
ment that happens in the shift from cereals to vegetables.
High-value crops are quite effective in creating employment opportunities.
To promote this type of agricultural enterprise, a better investment climate is
needed that offers incentives to invest in high-value crops and comprises insti-
tutional innovations such as effective producer organizations, contract farming
and PPP. Also important are improved sanitary and phytosanitary regulations.
These are all areas for which the public sector has an important role to play, as
a complement to what the private sector can do.
Other opportunities for a renewed focus in agriculture for development are
offered by the recent phenomenon of rising commodity prices. Figure 12
shows that the price of wheat, for instance, has more than doubled in the last
Poverty
Extreme poverty
Total participants
2005 Non-
participants
Estate farm
workers
Contract
farmers
2003 2001
Estate farm workers
Contract farmers
1999 1997 1995
Share of participating households:
contract farmers and estate workers Incidence of poverty according
to form of participation
1993 1991
0
10
20
30
40
0
60
S
h
a
r
e
o
f
h
o
u
s
e
h
o
l
d
s
(
%
)
40
20
S
h
a
r
e
o
f
p
a
r
t
i
c
i
p
a
t
i
n
g
h
o
u
s
e
h
o
l
d
s
(
%
)
Figure 10. French bean exports and poverty in Senegal. (From Maertens and Swinnen, 2006.)
264 A. de Janvry
0
India
Cereals
Vegetables
Philippines Lao PDR
Vietnam
(southern)
Bangladesh Cambodia
Vietnam
(northern)
50
100
150
200
250
300
A
v
e
r
a
g
e
n
u
m
b
e
r
o
f
l
a
b
o
u
r
d
a
y
s
p
e
r
h
e
c
t
a
r
e
350
400
450
500
Figure 11. Labour intensity of vegetable production relative to cereals.
$
2
5
p
e
r
b
u
s
h
e
l
Monthly average
prices received
by US farmers
Adjusted for
inflation
February 08
$10.40
20
15
10
5
0
1967 1970s
Unadjusted
1980s 1990s 2000s
Figure 12. A sharp rise in the price of wheat.
3 years, creating both opportunities for producers with a marketed surplus, and
major challenges for net buyers, which include not only the urban population
and landless rural people, but also a surprisingly large share of smallholders.
Figure 13 shows the shares of total employment in the rural non-farm
economy by type of economic activity in different regions. In the case of sub-
Saharan Africa, significant employment comes from retailing. Next is South
Asia, where the services and manufacturing sectors are much more important.
This is where the agribusiness and agro-services sectors come into play, creat-
ing employment opportunities in the rural sector, which then complements
what the farming sector can offer to rural households.
Annex 265
0
Sub-
Saharan
Africa
South Asia East Asia
& Pacific
Middle East
& North Africa
Europe &
Central Asia
Latin
America &
Caribbean
20
40
60
80
100
P
e
r
c
e
n
t
a
g
e
o
f
t
o
t
a
l
n
o
n
-
f
a
r
m
e
m
p
l
o
y
m
e
n
t
Retail, wage
Retail, self
Services, wage
Services, self
Manufacturing, wage
Manufacturing, self
Construction, wage
Construction, self
Figure 13. A diversified rural non-farm economy.
0
1 2 3 4–5 6–10
Number of workers in firm
11–100 >100
100
200
300
400
T
o
t
a
l
w
o
r
k
e
r
s
,
t
h
o
u
s
a
n
d
s
0
400
800
1200
1600
V
a
l
u
e
a
d
d
e
d
p
e
r
w
o
r
k
e
r
,
U
S
$
Family labour Paid workers Median value added per worker
Figure 14. Employment and labour productivity in the rural non-farm economy by size of firm.
To characterize employment in the rural non-farm economy, Figure 14
shows the value added per worker in Indonesia for firms that range from very
small (only one worker) to very large (more than 100 workers). The dark shaded
bars represent employment of family labour. Hence, in the small firms are
found mainly family workers but larger firms increasingly have paid workers.
However, the important observation to be inferred from the figure is the
value added per worker across firm sizes. Firms with three or less employees
tend to have very low labour productivity, which only increases in the medium-
scale and larger firms. This has important implications for agro-industries. Smaller
firms are, on average, really sources of hidden unemployment, while medium
266 A. de Janvry
and larger firms are really the ones that are productive and able to deliver com-
petitive levels of wages and better working conditions to their employees. As
such, care must be taken when describing the rural non-farm economy and the
opportunities it offers for poverty reduction, as the sector is highly heterogene-
ous, with many low-productivity activities existing in small firms.
Agriculture for Development: the New Challenges to Be Met
One of the biggest challenges facing the role of agriculture for development is
the political economy of public expenditure. Quantitatively there is a need to
increase public investment, while qualitatively there should be a move away
from subsidies. Not all subsidies are necessarily bad, but many fail to support
productivity gains.
A second challenge is that, in many countries, there is a considerable lack
of definition with regard to the relative roles of the market and the state, with
the conflicts and inefficiencies that this brings about. There is not one solution
as to what should be done by the private sector and the market versus what
should be done by the state. However, what is important is that the ‘rules of the
game’ must be clear and that policies are followed consistently.
A third challenge is to make agricultural growth more pro-poor. There are
tremendous market incentives, but who is going to respond to them? Is it going
to be basically large farms using mechanized production methods, or will an
important share of the response come from smallholders? Is investment going
to be labour intensive? Can we reconcile the responses to the new market
incentives with development objectives such as poverty reduction and improved
environmental management?
Finally, there is the rising challenge of environmental sustainability – water
scarcity, land degradation and climate change. Furthermore, there are a number
of global issues that affect each country’s ability to use agriculture for develop-
ment. The Doha Round of trade negotiations must progress. Genetically modi-
fied organisms (GMOs) may offer opportunities that have not been fully explored
in terms of smallholder farming and nutritional value. Biofuels can be import-
ant but, except for Brazil and a few similar countries, they are, at the moment,
sufficiently efficient neither in terms of cost-effectiveness nor in terms of CO
2
savings. There is a need to invest in identification of a new generation of bio-
fuels that can be more environmentally and economically viable. Subsidies to
ethanol in the OECD countries are destabilizing the world food situation, with
a high cost for the poor when they have irrelevant benefits for the rich.
Policy Entry Points in Having Agriculture and
Agro-industry as Focuses for Development
To identify policy entry points in focusing on agriculture for development, let
us go back to the nine-point agenda we considered when discussing the frame-
work presented in Figure 6. The first step is to recognize that the ‘worlds’ of
Annex 267
agriculture differ and that agriculture fulfils different functions in each ‘world’.
Countries need to identify which world they are in: agriculture-based, trans-
forming or urbanized. Agriculture has different functions to fulfil in each of
these categories. It can be a source of growth, it can address the problems of
income disparities and poverty and it can be a means for economic inclusion,
with smallholders achieving competitiveness and remaining as actors in the
agrifood chains.
Second, policy options are different in a context of high food prices and of
high-value products and agro-transformation. Clearly, the issue of supply
response is back on the policy agenda. For the last 50 years, which witnessed
steadily declining food prices, the focus of international development agencies
was more on the consumer side, i.e. on promoting access to food and to
sources of better nutrition. Renewed importance is now being attached to the
supply side, for the simple reason that prices are rising and, as such, produc-
tion has to increase. Countries are concerned with how to mobilize productivity
gains through improved infrastructure and institutions that can support value
addition in agriculture and agro-industry.
Urban consumers and the landless in rural areas are affected negatively by
high food prices. However, most of the world’s poor farmers are also net buy-
ers of food and not net sellers. Hence, they are negatively affected by the rise
in food prices. As a result, when there is a situation of rapidly rising food prices,
we should not assume that all farmers will be positively affected. This is impor-
tant, because they are typically very difficult to be reached by social assistance
programmes, such as food aid or cash transfers.
For the third group of countries, issues related to market access, value
chains and agro-industries become particularly relevant. Transaction costs
are too high on many markets, particularly in sub-Saharan Africa. There is
insufficient value addition in agribusiness. In many agro-industries, especially
in the international market, there is a very rapidly rising degree of concen-
tration, which is of concern in terms of market efficiency. One example in
this regard is that of the coffee sector, which has been booming in terms of
adding value, but where both the relative share and the absolute value of the
market revenues remaining in producing countries have been decreasing
over time. A second issue is smallholder access to agro-industry. Smallholders
relate better to small and medium enterprises than they do to large enter-
prises. It is important to understand how to create incentives to allow small
and medium enterprises to enter the industry and compete and in that
respect the investment climate is a relevant consideration. Enabling condi-
tions are needed, such as functioning markets, access to financial services
and institutions for contracting and risk-sharing. The role of PPP to promote
investment may be important. The state can be proactive in initiating PPP,
in particular with small and medium enterprises in the agro-industrial sector,
in order to facilitate entry and achieve competitiveness. With regard to the
role of labour practices, the Chilean model is considered a successful
approach to poverty reduction that is based on employment conditions in
the agro-industrial sector, such as year-round employment achieved through
product diversification. Regulations were enacted that do not discourage
268 A. de Janvry
employment, protect workers and allow work conditions that are conducive
to poverty reduction.
The next element on the nine-point agenda is smallholder competitiveness
and here there are two important dimensions. One is that there is still a missing
dimension to the green revolution, with Africa not having experienced a quan-
tum jump in yields equivalent to that which occurred in Asia. The Asian exper-
ience with the green revolution is well known, but for it to be reproduced
elsewhere requires careful adaptation of the Asian experience. Clearly, the
conditions in Africa are different. Farming systems are much more heteroge-
neous and there are many more crops that have to be dealt with. Markets have
to be put into place and institutions have to be created, all at the same time as
the technology that can support the green revolution is provided. Second is the
key role of a high-value revolution in agriculture and the fact that many coun-
tries are moving towards it, but quite often not as rapidly as they could be and
often with limited smallholder participation. India is a case in point with tre-
mendous potential to place itself in international markets of high-value com-
modities and to supply the emerging middle-income domestic consumer
market, which is urban based and likely to be increasingly serviced by super-
markets. Yet progress is taking place slowly, due to lack of adequate infrastruc-
ture, poor supportive institutions and producer organizations that are poorly
developed to allow smallholders to be part of the high-value revolution.
Next on the agenda is family farming in transition to commercialization,
i.e. taking households out of subsistence farming and into the market. Greater
attention is needed to subsistence farming, which requires different types of
support in order to improve the resilience and the capacity of the farming sys-
tems to achieve food security.
The rural labour market is potentially a very important pathway out of
poverty, because, as we have seen, many of the poorest rural people in the
world are actually in the agricultural labour force. But these markets are often
not properly regulated and not functioning adequately if they are to achieve
poverty reduction.
The rural non-farm economy, presenting employment and investment
opportunities, is a further element in the agenda. Here, there are basically
three policy entry points for discussion. First is the rural investment climate in
all of its dimensions, which needs to be carefully understood. Second is the new
role of the state in terms of PPP. Third is the role of clusters and a territorial
approach, which can coordinate public support and public–private investments
at the level of specific regions. Under these circumstances agro-industries can
develop competitive advantages that are based on the comparative advantages
of agriculture and on cross-firm spillovers to enhance their competitiveness.
The final element in our list is investing in rural people. There has been
massive under-investment in rural people in terms of health, education and
gender equity, and it is no surprise that, as a consequence, as labour moves out
of agriculture, it is unable to find good employment opportunities.
In sum, there are basically three main messages. The first is the tremen-
dous importance and potential for the promotion of smallholder competitive-
ness in high-value activities, in addition to the more traditional focus on food
Annex 269
grains. For competitiveness to be achieved, the development of proper institu-
tions, infrastructure and organizations will be required The second is rural
employment in high-value activities, or the role of the rural labour market and
how wage labour will play a role in the transformation of agriculture. The third
is value added in agro-industries and the need to explore, quite carefully, the
conditions that can be put into place in order to favour the emergence of these
enterprises, especially medium-size ones that are highly employment intensive,
using labour in a way that is both remunerative and conducive to leading work-
ers out of poverty.
How to Make It Happen? Conditions for Success
What is the likelihood that agriculture and agro-industry will now be used more
effectively for development than they have been over the last 20 years? Basically
there are four conditions that should hold in order for this to happen. The first
is awareness: governments and development agencies need to better under-
stand what agriculture can do for development. This has, to a large extent,
been forgotten over the past 2 decades, when we shifted towards an urban-
based development model, an industry-based model of development or towards
high-tech services such as in India. And yet, although we see wealth creation,
we also witness continued mass poverty in rural areas and the growth of rural–
urban disparities, with an underuse of the potential that agriculture has for
poverty reduction.
Second are the possibilities to invest public resources in agriculture com-
petitively, not only for growth, but also for poverty reduction and sustainability.
As we have seen, there are important new market, technological and institu-
tional opportunities for agriculture, but these incentives to invest need to be
reconciled with what they can do for development, namely poverty reduction
and sustainability.
The last two conditions are the biggest challenges. The first is how do we
invest successfully in agriculture as an engine for development? If governments
and international development agencies need to focus on agriculture for devel-
opment, how should they do it? With the food crisis creating opportunities for
political support, the World Bank, the Bill and Melinda Gates Foundation, the
Rockefeller Foundation, FAO, IFAD and many bilateral development agencies
promoting investments in agriculture are then asking: what are the options?
How do we invest successfully in agriculture for development? The old ways
will not work: the present context is different, and the traditional approaches
did not work for Africa. There is thus a need for new ideas, a need for experi-
menting with innovative ways of using agriculture for development, such as
decentralization policies, participatory approaches, strengthening community
roles, reinforcing the important roles of the public sector, promoting PPP,
increasing the focus on women in agriculture, reshaping the investment cli-
mate, strengthening producer organizations, seeking value addition in agribusi-
ness, and so on. Agriculture has tremendous potential to promote development,
but it is not infallible.
270 A. de Janvry
The final condition is the need to develop capacities. In order for agricul-
ture to be effectively used for development, we need to build capacities, espe-
cially in terms of entrepreneurship. It is not easy to invest in high-value activities;
it is not simple to invest in small or medium agro-industries; it takes entrepre-
neurship, business skills and education, which have usually not been provided
adequately by schools in the rural sector. Second, small farmers or small entre-
preneurs will not succeed alone: they need to work with producer organiza-
tions; they need to cooperate in order to compete successfully; and hence they
also need leadership and analytical and managerial capacities at the level of
their organizations. Third, we have seen that the state has a very important role
to play: you cannot have a successful agriculture-for-development programme
without an active and supportive state. The investment climate will be managed
by the state but, for this, the state has to have a good understanding of what
the private sector needs in order to be successful in investing in agriculture and
agro-industry. Governance for agriculture needs to be redefined and the role of
ministries of agriculture needs to be rethought. They have usually been badly
affected by structural adjustment: resources have declined and functions have
been redefined, but we have not seen enough adjustments regarding the kinds
of skills and organizational structure they should have. And, finally, there has
to be support at the international level. No country can now succeed alone in
using agriculture for development; there are too many international dimensions
that have to be understood and supported. Thus, international support and
coordination are essential and, for this, capacities have to be developed also at
the level of international organizations.
References
Maertens, M. and Swinnen, F.M. (2006) Trade,
Standards and Poverty: Evidence from
Senegal. LICOS Centre for Institutions and
Economic Performance and Department
of Economics, University of Leuven.
World Bank (2007) World Development Report
2008: Agriculture for Development.
Washington, DC.
Ravaillon, M., Chen, S. and Sangraula, P.
(2007) New evidence on the urbanization
of global poverty. Background paper for
the world development report 2008. The
World Bank, Washington, DC.
Index
Acquisitions and mergers 24, 80
Advertising 98
Agribusiness/agriculture ratio 49–52,
50–51, 52
Agriculture
as driver of development 255,
256–257, 261, 271–272
private sector involvement 268
productivity 166–167, 239, 247
public spending 261–262, 262,
268
workforce 190, 260, 265, 265,
266
Agriculture-based countries 257, 258
Agro-industrial sector
business competitiveness
factors 149–162
components 46–47, 53, 53–54
defining characteristics 11–12, 169
financing 73–74, 158–159
industrialization process 14
challenges 33–41, 75, 96–97,
112
changes and evolution 12–27,
74
geographical variation 27–28
impacts 28–33, 258
restructuring 19–28, 34, 69,
186–188, 232
technology impacts 100–108, 101,
117–121, 124–133
underlying meta-trends 13–17, 29,
92–94, 95, 115
Agrochemicals 31, 98
Agronomy 99
Allanblackia (AB) oil 239, 251
Anaerobic digestion 106
Animal protein complex 63, 76
Aquaculture 78, 93
Bakery businesses 54, 84, 168–169
Banking resources 38, 158–159, 211
Barley (malt) 236, 239, 247
Bennett’s law 13
Beverages see Food and drink processing
sector
Biofuels 80–81, 86, 96, 216, 268
see also Energy, generation from
waste
Bioinformatics 102–104, 103, 134–135
Biotechnology 74, 102
Brazil
‘Agua Viva’ Syngenta project 238,
239, 249
biodiesel programme 86, 216
dairy processing 25
international trade policies 76, 154
Page numbers in bold type refer to figures, tables and boxed text.
271
272 Index
Brokers see Intermediation
Business Competitiveness Index
(BCI) 143–145, 178–179
Business conditions
development services 160–161,
210–211
government support 116–117,
163–166, 196
linkages 161–162, 195–206, 234
sustainability of 215–216, 216
start-up 37–38
Business indicators
Business Competitiveness Index
(BCI) 143–145, 178–179
Current Competitiveness Index
(CCI) 143
Ease of Doing Business Index 139,
141, 159, 173–176
Global Competitiveness Index
(GCI) 141–142, 176–177
Global Investment Prospectus
Assessment (GIPA) 146
Growth Competitiveness
Index 142–143
Investment Compass (IC) 145–146,
179–180
Inward FDI Performance
Index 146–147
Buyers, services to producers 199,
201–203, 250
see also Procurement
Calorie consumption 60–61, 61
Certification 17–18, 18, 97, 167, 213
CGIAR (Consultative Group of
International Agricultural
Research) centres 157
China
aquaculture in paddies 93
biogas initiative 236, 239, 241,
248
FDI effects and regulation 23, 80,
189
traditional trader/producer
links 201, 204
Classification of countries, economic 48,
141, 142, 257, 257
Climate change 86–87, 98
Clothing industry see Textiles and
clothing
Cocoa 83
Codes of practice see Standards and
codes
Codex Alimentarius Commission 97,
110, 117
Coffee 69, 70–71, 82, 107–108,
208
Combined heat and power (CHP)
systems 106–107
Commodities
price rises 265–266, 266
shifting composition trends 20, 34,
62–64, 65
impacts on development
47, 76
traditional 81–83
transport costs 72
Community investment 224–225
Competitiveness
assessments, economic 138,
138–139, 140
comparative advantage 116–117,
137
drivers of 4, 74–85, 143–144,
144
effect of expanding markets 17, 21,
34, 112–114
limitations of measures 140,
148–149
see also Business indicators;
Enabling environments
Concentration, agro-industrial 69, 168,
269
Consumers
changing demands 7–8, 93,
113–114, 263, 263–264
cultural differences 155
as drivers of development 34,
74–75, 94–96, 95, 236
home bias 73
processed food consumption 16,
58, 60–62
sustainability/ethical demands 95,
194, 227
Contract farming 26–27, 161–162,
200, 264–265
flexibility and enforcement 170,
200–201, 212
Convenience foods 62
Cooperatives 197–198, 198,
202, 207
Index 273
Corporate Social Responsibility
(CSR) 6–7, 223–225
and consumer demands 113, 194
standards and codes 204, 226–230
value chain innovations 234–240
Corruption 37, 38
Cottage industries 58
Credit access 73–74, 158–159, 196
Crop improvement 102
Cuatro Pinos cooperative
(Guatemala) 197–198, 198,
202, 207
Current Competitiveness Index (CCI) 143
Dairy processing 21, 25, 199, 253
Danone Grameen (Bangladesh) nutrition
project 239, 253
Data sources, economic 48, 87, 141,
145, 148
Development stages see Classification of
countries, economic
Diet
calorie consumption 60–61, 61
composition patterns 1, 13, 15,
61–62, 93–94
see also Nutrition, human
Domestic markets 79, 83–85, 186–187
Ease of Doing Business Index 139, 141,
159, 173–176
computed example
(Egypt) 175–176
Economic reform 162–169
Education 98
Elasticities of substitution 73
Electricity supply 35
Employment
agricultural workforce 190, 260,
265, 265, 266
job creation 4, 239, 241
rural non-farm 52–53, 56–58, 59,
266–268, 267
see also Labour
Enabling environments 5–6, 150,
214–215, 241
essential 150–154, 164
important 155–159
reform of 162–169, 163
useful 159–162
Energy
electricity supply 35
generation from waste 105–107,
236, 239, 241, 248
use 32–33
Engel’s law 13
Entrepreneurial skills, capacity-
building 272
Environment
challenges 98
impacts of agro-industry 4, 30–33,
78
protection 93, 111–112
sustainability objectives 228, 268
Equity 75, 186–187, 191, 208
Ethanol 81, 86, 106, 268
Ethical Trading Initiative 227, 230–231
Expenditure, in relation to income
food share 60, 60
on packaged/processed
foods 60–62
Export markets 17, 28, 34
non-traditional 263, 264
Fairtrade products 70–71, 82,
204–206, 208, 210
Farmers
associations and organizations 170,
197–198, 202, 207
contracts with agro-industries 26–27,
161–162, 200
employment patterns 76–77,
264–265
family, commercialization 84–85,
259, 261, 270
integrated farm management 99
see also Smallholders
Financial services 38, 158–159, 211
Fish, as export commodity 64, 110,
114, 263
see also Aquaculture
Food and drink processing sector
consumption trends 16, 58,
60–62
employment patterns 56–57, 84
labour productivity 54–56, 55, 56
new technologies 100–108
value added production 53–54, 54,
256, 257
‘Food miles’ issue 95, 194
274 Index
Food safety and quality
consumer demands 94, 226
of novel products 104–105
and public health 109–111, 111,
227
regulatory frameworks 97–98, 110,
227, 229
see also Standards and codes
Food security 96, 166–167, 230
Foreign direct investment (FDI) 21–23
to different agro-industrial
sectors 23
in different developing regions 22
impacts 25, 68, 75
performance indices 146–147
sources 22, 81, 138
and state policies 79–80, 167
Foreign exchange 37
Freight rates, by commodity 72
Frozen processed foods, sales of 16
Funding, sources 73–74, 158–159
Gender, workforce 56–57, 84, 230
Genetic engineering 75, 102, 155
Geographical indications (GIs) see Origin
products
Global Agro-Industries Forum, 2008
(GAIF) 3, 8
keynote address 3, 254–272
Global Competitiveness Index
(GCI) 141–142, 176–177
Global Investment Prospectus
Assessment (GIPA) 146
Global value chains (GVCs) 47, 68, 70,
75, 77
Global warming see Climate change
GlobalGAP 18, 213, 227, 231
Globalization
effect on competition 17–18,
33–34, 112–113
multinational operations 69, 78
rapidity of change 54, 137
Governments, role in agro-industrial
development
business support 116–117,
163–166, 196
challenges and competency 37,
39–40, 85, 112, 154
private/public sector balance 5,
167, 242–243, 263
regulatory functions 97–98,
149–150, 159–160,
240–241
strategic planning 40–41, 87,
136–137
support for small farmers 166–167,
213–217, 269–270
trade policies 152–154
see also Law enforcement; Policy
frameworks; Public spending
Grameen Danone (Bangladesh) nutrition
project 239, 253
Green revolution 262, 270
Gross Domestic Product (GDP)
compared to agricultural
spending 262, 262
contribution of agro-
industries 48–52, 50–51,
255–257, 256
Growth Competitiveness Index
142–143
Gum arabic trade 165
Hazard Analysis and Critical Control
Points (HACCP) systems 110
Health
and diet 62, 93–94, 108–109
disorders 109
protection measures 97–98, 227,
239, 249
Heat exchangers 102
Human Development Index (HDI) 52
Illnesses, food-related 109
Imports, tariffs and quotas 154
Inclusiveness 2, 6, 8, 233
business case for 187–191
see also Equity; Sustainability
Income
disparity, rural/urban 40, 257
growth, contribution of agricultural
GDP 259, 259
India
domestic retail procurement 187,
192, 203, 238, 250
malt barley improvement
programme 236, 239, 247
Indicators, development 38, 48–67
see also Business indicators
Index 275
Industrialization see Agro-industrial
sector, industrialization process
Informal sector 56
enterprises 12, 27
in food distribution 83–84, 85,
195–196
Information technology 107–108, 114,
116, 263
Infrastructure 35–36, 152
Ingredients, separation
techniques 128–130
Innovation 77–78, 98
scaling up 239–240
in supply chain initiatives 234–240
Intermediation 201–204, 203,
207–208, 213
Internet
use in trade 107–108
website lists 222, 245
Investment
disincentives 37, 38, 158
sources 73–74, 158–159
see also Foreign direct investment
(FDI); Public spending
Investment Climate Surveys 148, 185
Investment Compass (IC) 145–146,
179–180
Job creation 4, 239, 241
Kenya
financial support for
smallholders 208, 209,
232–233
new export markets 21, 28, 34
sustainable tea production 252
Kuznets curve 33
Labour
costs 21, 53
market, rural 260–261, 265, 265,
270
productivity 54–56, 267, 267–268
regional and product
analysis 55, 56
working conditions 77, 83, 228
see also Employment
Land ownership 150–152
Land use 31
productivity 93, 239, 247
Law enforcement 167, 168–169,
170, 226
costs 151
Loans see Credit access
Location 20–21, 33, 68
Macroeconomic environment 37,
136–138
Malawi, agricultural
productivity 166–167
Malt production 236, 239, 247
Management skills 26, 160–161
Manufacturing production, total
agro-processing contribution 49,
51–52
food and beverages contribution 53
Marketing models
alternative, with specialized
standards 204–206, 208,
210
business model definition 188, 188
buyer-driven 198–201, 208
impact assessment 206–207, 209
with intermediaries 201–204, 203,
207–208, 213
producer-driven 197–198, 207
Markets
access regulation 30, 79–80
domestic 79, 83–85, 186–187
export 17, 28, 34
local produce 101
wholesale 198–200, 201–202,
202, 207–208, 214–215
Mergers and acquisitions,
international 24, 80
Microeconomic environment 143–144,
144
Migration, from agricultural
labour 260–261
Millennium Development Goals
(MDGs) 187, 224, 255
Multilateral agencies/organizations 240,
242
Multinational companies 22–23, 30, 79
Nanotechnology 104–105
Niche markets 31, 114, 205–206, 226
276 Index
Non-governmental organizations
(NGOs) 26, 83, 196
Nutrition, human 99, 108–109, 113
Obesity 62, 98
Organic products 31, 70–71, 113, 231
Origin products 71, 82
Packaged foods 16, 32, 60–62
Packaging research 99, 132–133
Parastatals 19–20, 36
Pasteurization/sterilization 102,
124–125
Perishability, food 11, 96, 101, 133
Policy Framework for Investments 147,
181–184
Policy frameworks 88, 170, 268–271
innovation support 77, 114, 116
market regulation 30, 79–80, 153
Regoverning Markets
programme 186, 241
Pollution 32
Population growth 61–62, 92
Post-harvest losses see Perishability, food
Poverty
alleviation pathways 259–261,
260, 265, 268
agri-business growth 49, 69
rural non-farm employment
52–53, 57–58
value chain innovation 239, 253
future projection 92
impact of business models 217–218
rural 2, 254–255, 257–259, 258
Preferential trade agreements
(PTAs) 153, 190
South African retailing 189, 193
Preservation methods, food 124–128
Prices, food
2007/8 rises 2–3, 254
effects of change, in supply
chain 212, 212, 269
fixing 169
Private sector
agricultural involvement 268
enterprise climate 14, 40, 167,
269, 270
private/public links 156–158,
242–243, 263
social responsiblity 223–225, 236
standards and codes
implementation 213, 214,
226–227
see also Small and medium
enterprises (SMEs)
Privatization 20, 164, 165
Processed food and drink
consumption 16, 58, 60–62
technologies 99, 100–102,
130–131
trade 66, 66–67
Procurement
direct 192, 198–200, 199, 238
inclusive 212–213
from intermediaries 187, 201, 213
security of supply 191–192, 193
see also Buyers, services to
producers; Wholesale
markets
Producers see Farmers; Food and drink
processing sector; Smallholders
Productivity improvement 93,
239, 247
Property rights 150–152, 170
Provenance see Origin products
Public–private partnerships (PPP) 263,
269, 270
Public sector see Governments, role in
agro-industrial development
Public spending
agriculture 261–262, 262, 268
infrastructure 152
research 156, 156–158
Purchasing see Procurement
Quality and safety standards 17–18, 34,
226–227
see also Standards and codes
Quotas see Trade, barriers
Raw materials, supply of 11
Regulations, business 159–160
Research and development, support
for 98, 156–158, 157
Retailing 79, 189, 190
private sector codes of practice 213,
214, 226–227
see also Supermarkets
Index 277
Risks, in agri-business 158–159,
162–164, 226–234
Rural economy, non-farm 57–58
Saanjhi Unnati (SU) barley
programme 247
Scaling up, of innovations 239–240
Scientific research 99, 103–104
Service provider access 35–36, 38
Side-selling 208, 209, 212
Skills development 36–37, 160–161, 210
Small and medium enterprises
(SMEs) 107, 159
retail (kirana stores) 190
rural 58, 68–70
urban 84
Smallholders
access to markets 69, 79, 269
compliance with standards 27, 230
contract farming 27, 200–201,
264–265
government support 166–167,
208, 209, 269–270
production objectives 195,
195–198
supply chain comparative
advantage 191–192, 192
support services from traders
201–204, 233
trading costs and risks 189–190,
192, 207–210, 232–234
Sourcing see Procurement
South Africa
milling and baking
industry 168–169
supplier/retailer relationships 189,
193, 193, 215
South-South trade 63–64, 76
Standards and codes
alignment/equivalence 97–98,
155–156, 227–228,
231–232, 242
certification 17–18, 18, 97, 167,
213
costs of compliance 78, 213,
232–234
coverage of sustainability
issues 228–230, 229, 232
development impacts 27, 34,
110–111, 117, 224
government endorsement
240–241
impact assessment 230–231,
246
private sector implementation 213,
214, 226–227
specialized, for niche markets
204–206, 226
State enterprises see Parastatals
State policies see Governments, role in
agro-industrial development
Sterilization/pasteurization 102,
124–125
Strategic planning 39–42, 40–41, 87,
136–137
see also Policy frameworks
Subsidies, agricultural 166–167
Supermarkets
community goodwill
initiatives 193–194
market penetration 23, 25–26,
168, 264, 264
purchasing policies 200, 201
quality lines 189
Supply chains
concentration of power 29–30
established global 39
partner networks 117, 189–190,
211–212, 215–216
position of smallholders
189–192, 207–210,
232–234
pros and cons of Fairtrade
205–206, 208, 210
sustainable relationships 25–27,
210–211, 234–240
case studies 237, 238,
247–253
traditional 28, 79, 195–196,
201, 204
Sustainability 111–112
of business interventions 196
multi-stakeholder partnerships
234–236, 237
tea production 238, 252
Sustainable Agriculture Initiative
(SAI) 225, 248
analysis of programme 235,
235–236
Sustainable Competitive Advantage
(SCA) 112
278 Index
Tariffs 39, 78, 154
Tea 69, 82, 238, 252
Technology
access to 36, 114
benefit potential 108–117
Technology (continued)
capacity building 36–37,
116–117
development 5, 14, 16–17
drivers of change 100, 108
economic 96–97
environmental 98
political 97–98
social 94–96
technical and scientific 99–100
food-processing 99, 100–102,
130–131
information and communication
(ICT) 107–108, 114, 116,
263
public/private transfer 156–158
Textiles and clothing 54, 57, 67, 67
Trade
agricultural market share 62,
63, 63
barriers 71, 73, 78, 153
costs 71–73
deficit/surplus, food 64, 66, 96
global regimes 39, 62, 63,
136–137
impact of Internet 107–108
South–South flows 63–64, 76
state policies 17, 152–154
Traders see Intermediation
Transforming countries 257
Transport
costs 35, 71–72, 72
‘food miles’ debate 95, 194
Uganda, seed industry 164, 165
UNCTAD (United Nations Conference
on Trade and Development),
economic analyses 145–147,
179–180
Urbanization
domestic market expansion 83–85,
186–187
effect on consumption 62
and labour demand 52–53
population changes 13, 16
Urbanized countries 257
Value addition 1–2, 4
consumer demand for products 263,
263
food and non-food sectors
compared 12
technology contributions 114, 115
Waste management 32, 98, 105,
105–107
Water
availability and demand 31–32, 35,
93, 98
supply protection 238, 239, 249
Websites 222, 245
Wholesale markets 198–200, 214–215
specialized, examples 201–202,
202, 207–208
Women see Gender, workforce
Workforce see Employment; Gender,
workforce
World Bank
Doing Business project 159–160
economic classification of
countries 48, 257
surveys 148, 185
World Development Report 2008
(WDR) 2, 186–187, 233,
254–255, 262
World Economic Forum 138, 139, 141
World Trade Organization (WTO) 17,
97, 154
doc_264694374.pdf
One of the most profound changes taking place in the agro-food economy of developing countries is the emergence of agro-industrial enterprises as part of broader processes of agribusiness development. In turn, the transformation of agro-processing from the informal to the formal sector has critical implications for participants along the entire length of the supply chain, from those engaged in agriculture, fisheries and forestry through food retailers and traders to the final consumer.
AGRO-INDUSTRIES FOR DEVELOPMENT
Edited by
Carlos A. da Silva
Doyle Baker
Andrew W. Shepherd
Chakib Jenane
and
Sergio Miranda-da-Cruz
Published by
The Food and Agriculture Organization of
the United Nations
and
The United Nations Industrial Development Organization
by arrangement with
CAB International
AGRO-INDUSTRIES FOR
DEVELOPMENT
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Agro-industries for development / edited by Carlos A. da Silva ... [et al.].
p. cm.
Includes bibliographical references and index.
ISBN 978-1-84593-576-4 (hardback : alk. paper) -- ISBN 978-1-84593-577-1 (pbk. : alk. paper)
1. Agricultural industries--Developing countries. 2. Agriculture--Economic aspects--Developing countries.
3. Economic development--Developing countries. 4. Competition--Developing countries.
I. Da Silva, Carlos A. II. Title.
HD9018.D44A39 2009
338.109172'4–dc22
2009006652
Published jointly by CAB International and FAO. Food and Agriculture Organization of the United Nations
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ISBN: 978 1 84593 576 4 (CABI hardback edition)
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v
Contents
Contributors vii
Foreword ix
Acknowledgements xi
1. Introduction 1
Carlos A. da Silva and Doyle Baker
2. Building the Political Case for Agro-industries and 10
Agribusiness in Developing Countries
Spencer Henson and John Cranfield
3. Agro-industry Trends, Patterns and Development
Impacts 46
John Wilkinson and Rudi Rocha
4. Technologies Shaping the Future 92
Colin Dennis, José Miguel Aguilera and Morton Satin
5. Enabling Environments for Competitive
Agro-industries 136
Ralph Christy, Edward Mabaya, Norbert Wilson, Emelly
Mutambatsere and Nomathemba Mhlanga
6. Business Models That Are Inclusive of Small Farmers 186
Bill Vorley, Mark Lundy and James MacGregor
vi Contents
7. Corporate Social Responsibility for 223
Agro-industries Development
Claudia Genier, Mike Stamp and Marc Pfitzer
8. Annex: Agriculture for Development – Implications 252
for Agro-industries
Alain de Janvry
Index 271
Contributors
José Miguel Aguilera, Professor, Department of Chemical Engineering,
Universidad Católica de Chile, Santiago, Chile
Doyle Baker, Chief, Rural Infrastructure and Agro-Industries Division,
Food and Agriculture Organization of the United Nations, Rome,
Italy
Ralph Christy, Professor, Department of Applied Economics and
Management, Cornell University, Ithaca, New York, USA
John Cranfield, Associate Professor, Department of Food, Agricultural and
Resource Economics, University of Guelph, Ontario, Canada
Carlos A. da Silva, Agribusiness Economist, Rural Infrastructure and Agro-
Industries Division, Food and Agriculture Organization of the United
Nations, Rome, Italy
Colin Dennis, Director General, Campden BRI, Chipping Campden,
Gloucestershire, UK
Claudia Genier, Senior Consultant, FSG Social Impact Advisors, Geneva,
Switzerland
Spencer Henson, Professor, Department of Food, Agricultural and
Resource Economics, University of Guelph, Ontario, Canada
Alain de Janvry, Professor, Agriculture and Resource Economics, University
of California at Berkeley, USA
Mark Lundy, Agroenterprise Specialist, International Center for Tropical
Agriculture (CIAT), Cali, Colombia
Edward Mabaya, Researcher Associate, Department of Applied Economics
and Management, Cornell University, Ithaca, New York, USA
James MacGregor, Researcher, International Institute for Environment
and Development (IIED), London, UK
Nomathemba Mhlanga, PhD Candidate, Department of Applied Economics
and Management, Cornell University, Ithaca, New York, USA
vii
viii Contributors
Emelly Mutambatsere, Evaluation Analyst, African Development Bank,
Tunis, Tunisia
Marc Pfitzer, Managing Director, FSG Social Impact Advisors, Geneva,
Switzerland
Rudi Rocha, PhD Candidate, Department of Economics, Pontifícia
Universidade Católica do Rio de Janeiro, Brazil
Morton Satin, Director of Technical and Regulatory Affairs, Salt Institute,
Alexandria, Virginia, USA
Mike Stamp, Consultant, FSG Social Impact Advisors, Geneva,
Switzerland
Bill Vorley, Head, Sustainable Markets Group, International Institute for
Environment and Development (IIED), London, UK
John Wilkinson, Professor and Researcher, CPDA, Universidade Federal
Rural do Rio de Janeiro, Brazil
Norbert Wilson, Associate Professor, Department of Agricultural Economics,
Auburn University, Auburn, Alabama, USA
Foreword
Developing competitive agro-industries is crucial for generating employment
and income opportunities. It also contributes to enhancing the quality of, and
the demand for, farm products. Agro-industries have the potential to provide
employment for the rural population not only in farming, but also in off-farm
activities such as handling, packaging, processing, transporting and marketing
of food and agricultural products. There are clear indications that agro- industries
are having a significant global impact on economic development and poverty
reduction, in both urban and rural communities. However, the full potential of
agro-industries as an engine for economic development has not yet been real-
ized in many developing countries, especially in Africa.
To address these issues, the Food and Agriculture Organization of the
United Nations (FAO), the United Nations Industrial Development Organization
(UNIDO) and the International Fund for Agricultural Development (IFAD)
organized the first Global Agro-Industries Forum (GAIF) in New Delhi, India,
from 8 to11 April 2008. The Forum developed a shared vision on the factors
critical to the future development of agro-industries, the key factors affecting
their competitiveness, and potential priority action areas. The objectives of the
Forum were threefold: to learn lessons from previous efforts and successes to
develop competitive agro-industries in the developing world; to ensure stronger
collaboration and joint activities among multi-lateral organizations working on
agro-industrialization; and to clarify the distinctive roles of the public sector,
multi-lateral organizations and the private sector in agro-industrial develop-
ment. A related objective was to engage international organizations and finan-
cial institutions into launching initiatives at national and regional levels to foster
agro-industrial development.
FAO, UNIDO and IFAD are committed partners for the development of a
shared vision to maximize the impact of the agro-industrial sector on the liveli-
hoods of those in the developing world. Our agencies are working together to
assist their Member States in creating enabling environments for the develop-
ix
x Foreword
ment of agribusiness, agro-industries and agro-based value chains. We are
doing this through the formulation and implementation of strategies for improv-
ing policies, regulatory frameworks, institutions and services. We are also pro-
moting the incorporation of agro-industrial development strategies into country
level programme frameworks and strategic action plans to assist the poor and
small farmers.
This publication is an outcome of the Global Agro-Industries Forum. It has
evolved through contributions from scholars and development practitioners
aimed at highlighting the current status and future course of agro-industries and
bringing further attention to the valuable contribution that the agro-industrial
sector can make to international development. FAO, UNIDO and IFAD expect
that the materials presented here will help advance the knowledge and enrich
the debate on the role of agro-industries in generating employment, creating
income, and fighting poverty in the developing world.
Jacques Diouf Kandeh K. Yumkella Kanayo Nwanze
Director-General Director-General President
FAO UNIDO IFAD
Acknowledgements
This book has been prepared through a collaborative effort of FAO and
UNIDO, under the technical leadership of Carlos A. da Silva (Agribusiness
Economist, Rural Infrastructure and Agro-Industries Division, FAO), Doyle
Baker (Chief, Rural Infrastructure and Agro-Industries Division, FAO), Andrew
W. Shepherd (Marketing Economist, Rural Infrastructure and Agro-Industries
Division, FAO), Chakib Jenane (Chief of the Agro-Industries Branch, UNIDO)
and Sergio Miranda-da-Cruz (Director, UNIDO Agribusiness Development
Branch).
The editors wish to acknowledge the contributions made by the technical
officers of FAO and UNIDO who participated in the conceptualization of the
book chapters and in their review. Thanks are due to Roberto Cuevas-Garcia,
Stephanie Gallat, Eva Gálvez, David Kahan, Danilo Mejia, Divine Njie, Rosa
Rolle, Maria Pagura, Alexandra Röttger and Gavin Wall, from FAO, as well as
to Karl Schebesta and Sean Peterson, from UNIDO.
We are also grateful to Geoffrey Mrema, Director of the Rural Infrastructure
and Agro-Industries Division, FAO, for his support to this initiative.
The guidance of Rachel Tucker, from FAO’s Electronic Publishing Policy
and Support Branch, during the several stages of the book’s publication pro-
cess is greatly appreciated.
Finally, a special word of thanks is due to the chapter authors, for their
commitment to this project and for their readiness to promptly react to the
editorial comments.
Rome and Vienna,
May 2009
The Editors
xi
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© FAO and UNIDO 2009. Agro-industries for Development (C.A. da Silva et al.) 1
The demand for food and agricultural products is changing in unprecedented
ways. Increases in per capita incomes, higher urbanization and the growing
numbers of women in the workforce engender greater demand for high-value
commodities, processed products and ready-prepared foods. A clear trend
exists towards diets that include more animal products such as fish, meat and
dairy products, which in turn increases the demand for feed grains (FAO,
2007). There is also a growing use of agricultural products, particularly grains
and oil crops, as bioenergy production feedstock. International trade and com-
munications are accelerating changes in demand, leading to convergence of
dietary patterns as well as growing interest in ethnic foods from specific geo-
graphical locations.
The nature and extent of the changing structure of agrifood demand offer
unprecedented opportunities for diversification and value addition in agricul-
ture, particularly in developing countries. As a reflection of changing con-
sumer demand, the 1990s witnessed a diversification of production in
developing countries into non-traditional fruits and vegetables. The share of
developing countries in world trade of non-traditional fruits and vegetables has
increased rapidly in the recent past (FAO, 2007). According to Rabobank,
global processed foods sales per year are estimated at well over US$3 trillion,
or approximately three-quarters of the total food sales internationally
(Rabobank, 2008). While most of these sales are in high-income countries, the
percentages of global manufacturing value addition for the main agro-industry
manufacturing product categories generated by developing countries have
nearly doubled in the last 25 years (FAO, 2007).
The prospects for continued growth in demand for value-added food and
agricultural products constitute an incentive for increased attention to agro-
industries development within the context of economic growth, food security
and poverty-fighting strategies. Agro-industries, here understood as a compo-
nent of the manufacturing sector where value is added to agricultural raw
1 Introduction
CARLOS A. DA SILVA
1
AND DOYLE BAKER
2
1
Agribusiness Economist, Rural Infrastructure and Agro-Industries Division,
FAO, Rome, Italy;
2
Chief, Rural Infrastructure and Agro-Industries
Division, FAO, Rome, Italy
2 C.A. da Silva and D. Baker
materials through processing and handling operations, are known to be effi-
cient engines of growth and development. With their forward and backward
linkages, agro-industries have high multiplier effects in terms of job creation
and value addition. A new dairy processing plant, for instance, creates jobs not
only at its own transformation facilities, but also at dairy farms and in milk col-
lection, farm input supply and product distribution. The demand pull created by
an agro-industrial enterprise stimulates businesses well beyond the closest links
with its direct input suppliers and product buyers; a whole range of ancillary
services and supporting activities in the secondary and tertiary sectors of the
economy are also positively impacted. Because of the generally perishable and
bulky characteristics of agricultural products, many agro-industrial plants and
smaller-scale agro-processing enterprises tend to be located close to their major
sources of raw materials. Consequently, their immediate socio-economic
impacts tend to be exerted in rural areas.
The World Development Report 2008 (World Bank, 2007) called atten-
tion to the fact that some 800 million people are considered poor, subsisting
with incomes of less than US$1 per day. Among the world’s poor, 75% live in
rural areas, having agriculture as a major source of livelihood. Fighting poverty
will require that economic growth and development are brought to rural areas.
Agro-industries, as will be argued in the ensuing chapters of this book, are part
of the answer to this challenge.
The accelerated growth of agro-industries in developing countries also
poses risks in terms of equity, sustainability and inclusiveness. Where there is
unbalanced market power in agrifood chains, value addition and capture can
be concentrated among one or a few chain participants, to the detriment of
the others. Agro-industries will be sustainable only if they are competitive in
terms of costs, prices, operational efficiencies, product offers and other asso-
ciated parameters and only if the prices they are able to pay farmers are
remunerative for those farmers. Establishing and maintaining competitiveness
constitute a particular challenge for small- and medium-scale agro-industrial
enterprises and smaller-scale farmers. Although agro-industries have the
potential to provide a reliable and stable outlet for farm products, the need to
ensure competitiveness favours farmers who are better able to deliver larger
quantities and better quality of products. To the extent that smaller, resource-
poor farmers are left out of supply chains, the socio-economic benefits of
agro-industries are potentially reduced. A need thus exists for policies and
strategies that, while promoting agro-industries, take into account issues of
competitiveness, equity and inclusiveness.
The rapid rise in food prices witnessed in 2007 and 2008 was a stark
reminder that the changing nature of agrifood systems, and how policy makers
respond to the changes, can have immediate humanitarian and political conse-
quences. Agricultural sector and agro-industry adjustments in the 1990s and the
early 2000s contributed to reductions in the supply and international reserves of
staple foods. The global food system did not have the capacity to respond to a
‘perfect storm’ of events that impacted on both short-term supply and demand.
As political consequences of food price spikes and shortages mounted, policy
responses that included export bans further worsened an already unbalanced
Introduction 3
market situation. The food prices crisis, though it has already subsided, points
to the importance of the recent trends in agrifood systems, as well as the need
for sound policies and strategies that enhance the competitiveness and develop-
mental impact of agro-industries.
This book consists of a collection of readings that explore different elem-
ents of the broad issues associated with the development of agro-industries that
are competitive, equitable and inclusive, with a focus on developing countries.
The chapters were commissioned from a number of renowned scholars and
development practitioners by the Food and Agriculture Organization of the
United Nations (FAO), the United Nations Industrial Development Organization
(UNIDO) and the International Fund for Agricultural Development (IFAD) to
form the core of the technical programme of the Global Agro-Industries Forum,
organized by these three agencies in April 2008 in New Delhi, India. The
Global Agro-Industries Forum (GAIF) aimed to develop a shared vision of the
factors critical to future developments of agro-industries, to learn from success
stories in promoting competitive agro-industries in the developing world, to
ensure stronger collaboration and joint activities among multilateral organiza-
tions working on agro-industrialization and to clarify the roles of the private
sector, public sector and multilateral organizations in agro-industrial develop-
ment. A further objective included the engagement of multilateral organizations
and financial institutions in launching initiatives at national and regional levels
to foster agro-industrial development.
The themes covered in this book were subjects for the Forum’s plenary
addresses. The plenary addresses were instrumental in calling attention to the
status of agro-industries in the world, providing analytical insights on key trends
and issues, considering future developments and assessing agro-industry policy
issues and priorities. Following the Global Forum, the plenary addresses were
further developed and are presented here as a sequence of six chapters. In
addition, the keynote address of Professor Alain de Janvry, from the University
of California at Berkeley, is presented as a special annex highlighting aspects of
agribusiness and agro-industry development that were considered in the recent
World Development Report 2008 (World Bank, 2007).
The three chapters following this introduction together provide an over-
view of the main trends, characteristics and impacts of agro-industries in devel-
oping countries. A cross-cutting theme in these chapters is the importance of
viewing agro-industries within the context of the wider restructuring of agrifood
systems. Agro-industrialization is not so much promoted as being seen as a
consequence of external drivers. While there are marked differences among
countries and regions with respect to the degree of structural and organiza-
tional transformation, the processes of agro-industrialization have widespread
and profound impacts. The potential impacts are so significant that the pro-
cesses must be understood and sound policy responses put in place to optimize
potential benefits while mitigating risks. All three chapters provide insights into
the challenges that policy responses need to address.
In Chapter 2, Spencer Henson and John Cranfield, from the University of
Guelph in Canada, characterize the processes of agro-industrialization in devel-
oping countries and build a political case for agro-industries as a driver of
4 C.A. da Silva and D. Baker
growth and development. Henson and Cranfield develop their case around two
main arguments. One cornerstone of their argument is that rapid changes in
agrifood systems are shifting the basis for competitiveness. Increasingly, com-
petitiveness is being determined by factors such as economies of scale, efficien-
cies in logistics, compliance with stringent grades and standards, and capacity
to reach global markets with differentiated products. Henson and Cranfield
observe that countries that have achieved higher integration with global
markets with high-value products, or countries with large high-value domestic
markets, seem to have advanced the most in terms of the contribution of agri-
culture to economic development. Their second argument relates to the perva-
siveness of the impacts of agro-industries. They point to the key distributional
consequences and discuss potential environmental consequences.
The main message of Henson and Cranfield is that countries must think
and act strategically in order to cope with the challenges, starting with the
important strategic choice on how countries and firms position themselves with
respect to market competition. They stress that policy makers need to define
their roles vis-à-vis the private sector and need to establish effective public–
private working relations. Chapter 2 makes it clear that Henson and Cranfield
believe that a key role for the public sector is to create conditions that allow the
development of cost-competitive agro-industries. Some of the key challenges
identified by the authors include improved infrastructure and access to finance,
as well as macro-economic and trade policies that are conducive to investment
and innovation.
The case for agro-industries development is reinforced in Chapter 3, writ-
ten by John Wilkinson and Rudi Rocha, researchers from, respectively, the
Federal Rural University of Rio de Janeiro and the Pontificate Catholic
University of Rio de Janeiro, Brazil. Drawing from an extensive range of statis-
tical data and empirical research sources, the chapter characterizes the contri-
butions of agro-industries to economic development worldwide. Wilkinson and
Rocha particularly emphasize contributions to manufacturing value addition
and employment generation. They point out, however, that it is not possible to
fully appreciate the importance and impacts of agro-industries because much
of the value addition and employment is in the informal sector.
Chapter 3 identifies several structural factors in domestic and global mar-
kets that reinforce the importance of promoting agro-industries in developing
countries. Wilkinson and Rocha present data showing the increasing import-
ance of processed agricultural products in agricultural trade, including in South–
South trade and as a percentage of the food imports by developing countries.
The authors also discuss the recent expansion in markets for differentiated food
products, including fair trade, organic and origin-based products. They acknowl-
edge that focus on these and other non-traditional exports as a strategy for
driving agro-industrial development seems appealing, but is likely to be ham-
pered by market access restrictions, tariff escalation and compliance costs for
meeting increasingly stringent standards established by private organizations
and large-scale buyers.
Wilkinson and Rocha conclude that policies for agro-industry development
should occupy a central position in government strategies. They caution though
Introduction 5
that government strategies must be oriented to market sustainability and be a
component of broader social policies that also aim at food and nutritional
security.
In Chapter 4, the last of the chapters that focus on trends, characteris-
tics and impacts of agro-industries, Colin Dennis (Campden BRI, UK), José
Aguilera (Catholic University of Chile) and Morton Satin (Salt Institute, USA)
discuss technology developments and their implications for agro-industries.
Dennis and colleagues recall several of the trends identified in the preceding
chapters and explain how these are driving technological development. The
main premise of their chapter is that organized food industries and chains
are needed to meet changing consumer requirements and feed expanding
urban populations, and that performance of agricultural and food industries
in turn will be highly dependent on the increased and cost-effective applica-
tion of existing technologies, as well as exploitation of new and innovative
technologies.
The analysis by Dennis, Aguilera and Satin highlights two overarching
challenges in technology development. First, driven by the changes in con-
sumer demand and market requirements, technologies are needed that can
ensure specific food traits (safety, quality, nutritional value, etc.) at all stages
through the life cycle of the end product. Second, because food is moving over
long distances, including internationally, there is a need for technologies and
practices to ensure the safety and quality of products for long periods. The
authors argue that there will be an increasing need to meet sanitary and phyto-
sanitary standards, and to complement technology development with develop-
ment of effective food safety management systems.
The last three chapters turn to the critically important issue of the roles,
responsibilities and actions of public and private sector actors in agro-industries
development. A consistent theme in these chapters, indeed throughout the
book, is that governments have an essential and legitimate role to play. At the
same time, the message of these chapters is that agro-industries development
is essentially a private sector activity. In the light of the developmental trends,
challenges, benefits and risks highlighted in the first set of chapters, govern-
ments cannot be passive observers but they also should not attempt to control
all aspects of agro-industries. Clarification of the roles and responsibilities of
the public and private sectors in agro-industries development is one of the keys
to achieving improved competitiveness and developmental impacts.
Enabling environments for competitive agro-industries are discussed in
Chapter 5, written by Professor Ralph Christy of Cornell University and a team
of collaborators. They argue that fostering competitive agro-industries requires
that conducive business climates, or enabling environments, are in place. They
recall recent efforts to promote reform processes through business climate
assessments, but conclude that these approaches were not designed for the
evaluation of business climates for agro-industrial enterprises.
To provide guidance on agro-industry-focused analyses of business cli-
mates, Christy and co-authors propose a hierarchy of state actions for charac-
terizing and assessing enabling environments for agro-industrial enterprises,
classifying actions as essential enablers, important enablers and useful enablers.
6 C.A. da Silva and D. Baker
The hierarchy, however, is just a starting point. Christy and colleagues argue
that, for effective reform to emerge, a nuanced appreciation of the roles that
public policy makers can play in sustaining competitiveness is needed. The
authors introduce and illustrate an analytical framework for reform processes
framed by two key dimensions, namely the level of risk and uncertainty agro-
industries face when conducting business and the capacity of the state in shap-
ing the environment for business. The authors propose that the framework can
be used to identify suitable policy options for different enabling environment
reform contexts.
The issue of inclusiveness in agro-industries is the focus of Chapter 6,
‘Business Models That Are Inclusive of Small Farmers’, prepared by Bill Vorley,
from the International Institute for the Environment and Development
(IIED, UK), Mark Lundy, from the International Center for Tropical Agriculture
(CIAT, Colombia) and James MacGregor, also from IIED. The authors define
‘business model’ as the way by which a business creates and captures value
within a market network of producers, suppliers and consumers. The chapter
describes a range of business models that improve the inclusiveness, fairness,
durability and financial sustainability of trading relationships between small
farmers and downstream agribusiness (processors, exporters and retailers).
Vorley and co-authors argue that the chief challenge for modern agrifood
businesses in working with small-scale farmers is the difficulty of organizing
supply chains so as to ensure that the benefits of logistics, economies of scale,
traceability and compliance with private sector standards are achieved. They
also contend that despite the difficulties faced, there are sound business rea-
sons for agro-processors, retailers, exporters and other buyers to include small
farmers in the farm-to-consumer value chain. The authors then introduce and
illustrate a typology of organizational models, covering models organized by
the producers themselves, by the end-customer companies or by an intermedi-
ary such as a trader, wholesaler or exporter. They argue that evidence on bene-
fits and impacts of the different models is still weak, and that no single modality
is inherently superior for smallholders.
Vorley and co-authors point out that despite the recent trends towards
increased inclusiveness, the participation of smallholders and SMEs in modern
markets is still more of an exception than the rule. They identify three priorities
for enhancing competitiveness and inclusiveness of smaller-scale sup pliers. The
first is skills development to prepare farmers to be reliable partners and sup-
pliers. The second, returning to the theme addressed by Christy and co-authors,
is business-enabling environments. Vorley and colleagues emphasize the provi-
sion of key infrastructure services, public investments in services such as agri-
cultural research, education and extension, and policies to maintain competitive
markets. The third is for private sector actors to ensure that their procurement
practices work to the benefit, rather than the detriment, of small-scale produc-
ers and suppliers. Vorley and co-authors give several examples of responsible
business practices that can work to the benefit of small-scale suppliers.
The issue of responsible business practices is the subject of Chapter 7,
prepared by Claudia Genier, Mike Stamp and Marc Pfitzer, from FSG Social
Introduction 7
Impact Advisors, Switzerland. The chapter focuses on the concept of corporate
social responsibility (CSR): what CSR means and how it has evolved over the
past decade. The main theme of the chapter is that CSR has become for many
a core business strategy oriented towards competitive advantage, partnerships
along the supply chain, institution building and long-term sustainability. Under
this new perspective, CSR strategies have the potential to increase the inclu-
siveness and competitiveness of agro-industries, creating a more equitable dis-
tribution of benefits along the value chain.
The authors characterize and assess various CSR codes and standards
operating in agricultural value chains. They argue that standards and codes
have helped to improve the quality, safety and traceability of food, but there is
insufficient information to conclude that codes have improved environmental,
social and economic conditions for producers. To the contrary, Genier and
co-authors express concern that the proliferation of standards and codes, as
well as high implementation costs, can lead to the marginalization of small
producers.
One of the main contributions of Genier and co-authors is to expand the
scope of what is generally considered to be corporate responsibility. They
point out that more visionary agrifood companies – recognizing the draw-
backs of reliance on standards and codes – have adopted value chain innov-
ations that seek to expand economic opportunities along entire chains. The
authors review several cases of value chain innovations and conclude that
evidence of impact can be found in the various initiatives in terms of quality,
health and safety improvements, better environmental indicators, higher pro-
ductivity and development impacts. However, they caution that the cases
they appraised remain a minor exception in comparison with the core busi-
ness practices of many agrifood industries, and argue that governments and
civil society have an important role to play in scaling up and replicating value
chain innovations.
All six chapters address in one way or another the fundamental policy
dilemma of agro-industries development: the need to establish and maintain
competitiveness while also addressing the risks to smaller-scale economic actors.
The authors of these chapters do not view policy support to agro- industries as
a choice between competitiveness and developmental impacts, but rather see it
as essential for enhancing both. One of the important contributions of the fol-
lowing chapters is to clarify the challenges being faced and identify strategies
and practical actions to address them.
There are several messages about agro-industries development that cut
across the chapters of this book. One is that governments clearly do have an
important role to play. To enhance competitiveness, enabling policies and insti-
tutions must be put in place and infrastructure must be improved, particularly
rural infrastructure. Recommendations on other specific priorities for establish-
ing enabling environments are made by most of the authors.
Another theme found in all the chapters is that agro-industry firms and
value chain stakeholders must be ready to meet the challenges of changing con-
sumer requirements and market competition. Priority attention should be given
8 C.A. da Silva and D. Baker
to consumer concerns and interests regarding quality, safety, health benefits,
product origin and other attributes. To access higher-valued markets, capacity is
needed to develop, distinguish and certify specific product traits. There is also a
need to improve productivity and efficiency. Systematic attention is required to
build capacity for acquiring and utilizing productivity- enhancing technologies.
The capacity to introduce and apply advanced techniques for supply chain man-
agement and logistics will increasingly become a requirement for competitive-
ness of agro-industries targeting global and regional markets.
An important theme, particularly stressed by Vorley and co-authors and
Genier and co-authors, is that value chains that include smaller-scale pro-
ducers and processors can make good business sense. There nevertheless
are many reasons why firms choose not to work with smaller-scale sup-
pliers. To achieve objectives relating to economic growth and rural develop-
ment, public and private sector initiatives are needed to strengthen business
linkages and support the development of business models that include
smaller-scale producers and processors. The development of inclusive busi-
ness models requires, in turn, concerted efforts to organize smallholders
and build the capacities of farmers to be reliable suppliers. Financial ser-
vices and products that fit the specific conditions of producers, processors
and others in the supply chain are also critical for achieving widespread
developmental impacts.
While the authors present a consistent and coherent overview of agro-
industry drivers, trends, challenges and responses, all are careful to point out
that there is great diversity in circumstances. There is a corresponding need to
ensure that policies and strategies to improve competitiveness and develop-
mental impacts are based on a solid understanding of broader market, con-
sumer and technological trends, as well as the specific conditions of each
country, agro-industry and agricultural value chain.
Finally, it is worth recalling that agro-industries development is such an all-
inclusive and complex process that not all issues could be comprehensively
addressed adequately in a single book or during the GAIF. Several such issues
are briefly touched on in the following chapters, even if not central to the mes-
sage of any single chapter. One issue is the growing urgency to consider
whether and how to work towards the harmonization of national and inter-
national regulatory frameworks. Another issue is the importance of the infor-
mal sector in agro-processing. Environmental consequences of agro-industries
are discussed by Henson and Cranfield but, overall, this volume does not
emphasize this important topic. The chapters do present a convincing case on
the importance of agro-industries in developing countries, and point to some
of the policy priorities for enhancing competitiveness and developmental
impacts. However, this is just a starting point. Issues such as those just identi-
fied make it clear that there remains a great need for additional analysis of
trends and policy responses. FAO, UNIDO and IFAD, the United Nations agen-
cies that organized the GAIF and the contributions to the present book, are
working to fill these gaps, and are committed to promoting international agro-
industrial development that is sustainable, inclusive and equitable.
Introduction 9
References
FAO (2007). Challenges of Agribusiness and
Agro-industries Development, Committee of
Agriculture, Twentieth Session, COAG/
2007/5, Rome, Italy.
Rabobank (2008). The Boom Beyond
Commodities: A New Era Shaping Global
Food and Agribusiness, Hong Kong.
World Bank (2007). World Development
Report 2008 – Agriculture for Develop-
ment, Washington, DC.
10 © FAO and UNIDO 2009. Agro-industries for Development (C.A. da Silva et al.)
Introduction
One of the most profound changes taking place in the agro-food economy
of developing countries is the emergence of agro-industrial enterprises as
part of broader processes of agribusiness development. In turn, the transform-
ation of agro-processing from the informal to the formal sector has critical
implications for participants along the entire length of the supply chain, from
those engaged in agriculture, fisheries and forestry through food retailers and
traders to the final consumer. Potentially, agro-industrialization presents valu-
able opportunities and benefits for developing countries, in terms of overall
processes of industrialization and economic development, export performance,
food safety and quality. At the same time, however, there are potentially adverse
effects on those engaged in informal sector agro-processing enterprises, such
that processes of agro-industrialization must be attuned with overall processes
of economic restructuring. Further, agro-industries are changing on a global
scale, presenting not only new opportunities but also challenges for developing
countries, and suggesting that the future trajectory of agro-industrialization will
be somewhat different than in the past.
The aim of this chapter is to explore the political case for agro-industriali-
zation in developing countries, highlighting both the likely benefits and the
areas where caution is needed, and where critical actions can steer this process
along the most beneficial path. In so doing, the chapter addresses four key
questions:
?
What are the characteristics of the agro-industrial sector?
?
How are the processes of agro-industrialization proceeding and what are
driving these?
2 Building the Political Case
for Agro-industries and
Agribusiness in Developing
Countries
SPENCER HENSON
1
AND JOHN CRANFIELD
2
1
Professor, Department of Food, Agricultural and Resource Economics,
University of Guelph, Ontario, Canada;
2
Associate Professor, Department
of Food, Agricultural and Resource Economics, University of Guelph,
Ontario, Canada
Building the Political Case for Agro-industries 11
?
What impact is agro-industrialization having on developing countries?
?
What are the challenges for developing countries in promoting agro-
industrialization in a manner that is of maximum benefit?
Examples and data are provided to illustrate key points. The chapter concludes
by suggesting notable areas where action is required to ensure that processes
of agro-industrialization proceed unimpeded in developing countries and in a
manner that makes the maximum contribution to overall processes of industri-
alization and economic development.
Nature of the Agro-industrial Sector
The agro-industrial sector is here defined as the subset of the manufacturing
sector that processes raw materials and intermediate products derived from
agriculture, fisheries and forestry. Thus, the agro-industrial sector is taken to
include manufacturers of food, beverages and tobacco, textiles and clothing,
wood products and furniture, paper, paper products and printing, and rubber
and rubber products, as in FAO (1997). In turn, agro-industry forms part of the
broader concept of agribusiness that includes suppliers of inputs to the agricul-
tural, fisheries and forestry sectors and distributors of food and non-food out-
puts from agro-industry.
Most agricultural, fisheries and forestry production is subject to some form
of transformation beyond the farm gate and prior to eventual end use. From
the outset this transformation highlights the critical role that agro-industry plays
in supply chains. At the same time, the roles that agro-industry is playing are
changing over time, and the distinction from other sectors is becoming less
clear as technologies cut across industries (e.g. biotechnology). Moreover, agro-
industries are increasingly using inputs that they have not traditionally employed,
while non-agro-industries are beginning to use raw materials from agriculture,
fisheries and forestry.
The key defining characteristic of the agro-industrial sector is the perish-
able nature of the raw materials it employs, the supply and/or quality of which
can vary significantly over time. Under conditions of uncertain raw material
supply, planning of production and transformation processes and achieving
economies of scale can be fraught with difficulty, especially where there are
very specific quality parameters (e.g. canning of fruits and vegetables). Thus,
there is an incentive for agro-industries to engage in primary production them-
selves (as with plantation systems) or to develop longer-term supply relations
with producers, aimed at improving efficiency in production, securing a reliable
supply, promoting the adoption of varieties that are best suited to processing
operations, and so on.
The manufacture of food products, especially in the context of a develop-
ing country, typically involves a relatively limited range of technologies that do
not differ widely across product categories. In most cases the level of value
added is relatively limited, such that raw materials account for a significant
proportion of end-product prices. In contrast, a great variety of raw materials
12 S. Henson and J. Cranfield
are used in the manufacture of non-food agro-industrial products, while there
are diverse product end uses. The level of transformation undertaken in the
non-food agro-industrial sector is usually considerable, such that the level of
value added is high and raw materials account for a smaller proportion of the
end-product price. Furthermore, a wide variety of technologies are typically
employed both within and across non-food agro-industrial product categories.
Across both the food and non-food agro-industrial sub-sectors, however, there
is a trend towards greater levels of transformation and value addition, and the
employment of more advanced technologies.
While recognizing the broad characteristics of food and non-food agro-
industries in developing countries noted above, the processes involved can vary
from artisan or craft skills to industrial processes, across the informal and for-
mal sectors. Indeed, within any one product sub-sector (e.g. grain milling or the
manufacture of paper) it is possible to observe diverse technologies operating
side by side. Further, there may be significant interlinkages between enterprises
that employ low levels of technology, predominantly in the informal sector, and
those employing more advanced technologies, predominantly in the formal
sector. Examples include the subcontracting of particular functions and/or the
handling of by-products and waste from manufacturing processes. This sug-
gests potentially significant and complex relations between different forms of
business and across the informal and formal sectors, which may also link agro-
industries to other sectors.
The coexistence of the informal and formal sectors is perhaps one of the
key distinguishing features of the agro-industrial sector in developing countries.
While national accounts of most countries largely ignore the economic activi-
ties of the informal sector, in most low-income countries informal or local agro-
processing remains strong. Indeed, ‘informality’ can be considered the norm in
the agro-industrial sector, with formal sector enterprises comprising a relatively
small fraction of the use of agricultural, fisheries and forestry raw materials,
value addition and employment (Sautier et al., 2006). The informal sector
itself, however, represents a highly transitory collection of enterprises, with
rates of firm closure averaging between 9% and 10% annually (Mead, 1994;
Mead and Liedholm, 1998). Indeed, in many cases it is difficult to even concep-
tualize informal agro-processing activities as ‘enterprises’; often individuals may
be involved in multiple business activities that can change from season to sea-
son, and even from hour to hour during the day. As we will see, rather than
representing the establishment of new enterprises and industries, the develop-
ment of the formal agro-industrial sector represents a transition from ‘informal-
ity’ to ‘formality’ as the predominant business form and mode of industry
organization. The economic consequences of the evolution of agro-industries
in developing countries need to be viewed in this context.
Evolution of the Agro-industrial Sector
Since the early 1990s, there has been a rapid process of agro-industrialization
in many developing countries, characterized by the establishment of private
and formal sector firms across an increasing array of food and non-food
Building the Political Case for Agro-industries 13
sectors. In order to understand the nature and consequences of this evolution,
however, it needs to be viewed in the context of the wider restructuring of the
entire agribusiness complex. In this regard we can posit three broad sets of
changes (Reardon, 2007). First, the growth of agro-processing, distribution
and agricultural input provision activities off-farm by agro-industrial firms.
Second, institutional and/or organizational changes to the relations between
agro-industrial firms and primary producers, for example, increasing levels of
vertical integration. Third, changes in the primary production sector in terms
of product composition, technology, sectoral and market structures, etc.
(Reardon and Barrett, 2000). Thus, we can see the growth of the agro-
industrial sector as being integral to profound changes in the entire way in
which the agro-food complex is structured and organized. In turn, this sug-
gests impacts on actors at all levels of the supply chain, from primary produc-
tion to consumption. The framework developed by Reardon and Barrett
(2000) provides a useful lens through which one can understand these proc-
esses of agro- industrialization in developing countries, the factors driving these
processes and their consequences (Figure 1).
Underlying meta-trends
Underlying the evolution of the agro-industrial sector is a broad set of meta-
trends, at both the national and international levels, that condition the way in
which the sector is structured and operates over time. With respect to domestic
markets for the products of agro-industries, population and income growth are
driving changes in food consumption patterns at the broad commodity level,
away from starchy staples and towards meat, dairy products, fruits and veget-
ables, oils and processed grains (see e.g. Cranfield et al., 1998; Pingali and
Khwaja, 2004), reflecting the patterns predicted by Bennett’s law
1
(Table 1).
With increasing urbanization (Figure 2), greater participation of women in the
paid labour force and greater ownership of household appliances (e.g. refriger-
ators and microwave ovens), demand for more highly processed and higher-
value food products with high income elasticities is growing (Figures 3 and 4).
This trend is driving the evolution of the food-processing sector and providing
a mechanism through which enterprises can counteract the downwards pull on
relative food expenditure exerted by Engel’s law.
2
In turn, this leads to an
increased demand for raw materials from primary production, accompanied by
shifts in the types and qualities of raw materials being demanded, which can
generate economic benefits for the agriculture, fisheries and forestry sectors
(Reardon and Barrett, 2000).
Through the 1980s and 1990s, the political economy in which agro-
industries operated changed radically, both nationally in developing countries
and internationally. Agro-industries shifted operations from a predominantly
1
Editors’ notes: Bennett’s law posits that, as income rises, per capita consumption of starchy
food staples falls.
2
Engel’s law states that, as incomes increase, the proportion of income spent on food falls.
14 S. Henson and J. Cranfield
statist model, through structural adjustment and market liberalization, to a focus
on the private sector and establishing conditions that encourage private entre-
preneurial behaviour. This shift has arguably enhanced the opportunities for
private investment in the agro-industrial sector and reduced the costs of cross-
border flows of both goods and capital (Reardon and Barrett, 2000).
We are also observing technological advances both generally (most notably
information and communication technologies) and, specific to the agro-
industrial sector, in primary production (e.g. the application of biotechnology)
Figure 1. Process of agro-industrialization in developing countries. (From Reardon and
Barrett, 2000.)
Meta-trends
Global agro-food
economy changes
Developing
country agro-
industries
Development
indicators
1. Income and
population growth
(Bennett’s &
Engel’s laws)
2. Urbanization and
female
employment
(processed foods)
3. Political economy
change (neoliberal
SAPs, capitalism)
4. Modern
technology (e.g.
information and
biotechnologies)
1. Globalization and
liberalization
(GATT/WTO/FT
as market
opening)
2. Organizational/
institutional
change (vertical
coordination,
contracts, G&S,
property rights,
etc.)
3. Technological
change
(biotechnology,
information,
storage, transport,
drying, etc.)
1. Increase in scale
and concentration
(spatial, sectoral,
firm)
2. Product/sub-sector
composition
change
(horticulture,
processed food,
retail, non-
traditional
products, etc.)
3. Extroversion of
markets and
ownership
(multinationaliz-
ation and export
orientation)
4. Increased use of
coordination/con-
trol mechanisms
5. Increased capital
intensity in
production and
processing
1. Growth in
incomes and output
per capita
(aggregate,
regional, sub-
sectoral)
2. Changes in
poverty and
inequality
3. Employment and
real wages
4. Natural resource
depletion/degrad-
ation or protection
(effluvia, water
use, agricultural
extensification or
intensification,
etc.)
5. Sociocultural
effects (change in
diet, traditions,
decision-making
authority, etc.)
B
u
i
l
d
i
n
g
t
h
e
P
o
l
i
t
i
c
a
l
C
a
s
e
f
o
r
A
g
r
o
-
i
n
d
u
s
t
r
i
e
s
1
5
Table 1. Per capita consumption of food commodities in developing countries by region, 1970 and 2003. (From FAOSTAT; http://faostat.fao.org)
Sub-Saharan Africa Developing Asia Latin America & Caribbean
Food 1970 2003 % Change 1970 2003 % Change 1970 2003 % Change
Cereals (excluding beer) 110.9 123.3 11.1 155.2 163.3 5.2 114.7 129.8 13.1
Starchy roots 164.9 159.7 ?3.2 64.3 45.7 ?28.8 80.5 52.0 ?35.5
Sugar and sweeteners 7.8 11.0 40.5 11.3 17.2 51.9 39.0 47.4 21.7
Pulses 11.3 9.6 ?15.2 8.7 5.7 ?34.1 13.6 11.8 ?13.1
Tree nuts 1.3 0.9 ?30.5 0.43 1.1 165.1 0.5 0.7 36.0
Vegetable oils 5.9 7.6 29.0 3.0 10.1 237.0 6.1 11.4 85.5
Vegetables 31.9 32.4 1.6 45.4 143.2 215.5 35.4 51.0 44.2
Fruits (excluding wine) 58.3 48.3 ?17.2 21.4 49.0 128.6 93.8 98.9 5.5
Alcoholic beverages 42.2 34.9 ?17.2 2.3 13.0 471.4 30.7 42.2 37.5
Meat 12.8 11.4 ?11.0 7.6 27.8 265.6 34.7 59.1 70.4
Milk (excluding butter) 29.9 29.5 ?1.2 20.0 42.4 112.5 84.6 105.9 25.1
Eggs 1.1 1.3 18.7 1.6 8.7 448.4 4.4 8.0 80.9
Fish, seafood 7.9 6.9 ?12.8 6.1 16.1 162.9 7.0 8.5 22.0
16 S. Henson and J. Cranfield
Figure 3. Sales of packaged foods in developing regions, 2002–2007 (US$ billion). (From
Euromonitor data; www.euromonitor.com)
0
50
100
150
200
2002 2003 2004 2005 2006 2007
U
S
$
b
i
l
l
i
o
n
Latin America & Caribbean
Developing Asia & Pacific
Middle East & Africa
2002
0
200
400
600
800
U
S
$
m
i
l
l
i
o
n
1000
1200
1400
1600
2003 2004 2005 2006 2007
India
Thailand
Brazil
Mexico
South Africa
Figure 4. Sales of frozen processed foods in selected developing countries, 2002–2007
(US$ million). (From Euromonitor data; www.euromonitor.com)
and manufacturing sectors (e.g. new processing methods). These technological
advances are serving to create new and unprecedented opportunities for agro-
industrial enterprises in terms of product and process innovations, vertical and
horizontal linkages within supply chains, the functioning of distributional
systems, and so on. However, they also raise the spectre of agro-industrial
Figure 2. Proportion of population in urban areas by country income group, 1990–2004.
(From World Bank World Development Indicators.)
80
70
60
50
40
P
e
r
c
e
n
t
a
g
e
30
20
10
0
1
9
7
0
1
9
7
2
1
9
7
4
1
9
7
6
1
9
7
8
1
9
8
0
1
9
8
2
1
9
8
4
1
9
8
6
1
9
8
8
1
9
9
0
1
9
9
2
1
9
9
4
1
9
9
6
1
9
9
8
2
0
0
0
2
0
0
2
2
0
0
4
Low-income
Lower middle-income
Upper middle-income
Building the Political Case for Agro-industries 17
enterprises being ‘left behind’ if they are unable to gain access to these tech-
nologies in a timely and cost-effective manner.
Alongside changes in domestic demand patterns in developing countries,
shifts in consumption patterns in industrialized countries present potentially
lucrative opportunities for developing country agro-industries, through higher-
value exports. Examples include year-round demand for fresh and semi- processed
fruits and vegetables for which developing countries have an agro-climatic
advantage, and chilled and frozen fish and fishery products. At the same time,
however, consumers in such markets are demanding greater assurances over
food safety and quality, which require investments in more advanced systems of
control through the supply chain.
Changes to the global agro-food economy
En masse, these meta-trends are fostering fundamental changes in agro-food
systems, enhancing productivity and reducing transaction costs and fostering
new modes of competitiveness within and across sectors. For example, the
liberalization of global trade through the World Trade Organization (WTO),
bilateral trade agreements and the preferential market access arrangements
offered to low-income countries (in particular) has opened up higher-value
industrialized country markets to developing country agro-industrial enter-
prises. Further, growth in domestic demand for processed foods provides an
alternative route towards value addition for agro-industrial enterprises. At
the same time, however, more liberal trade in agro-food products is also
exposing domestic agro-industrial enterprises in developing countries to
enhanced competition, both domestically and internationally. In addition,
the challenges associated with this ‘new reality’, including technological
innovation, increased scale of operation, coordination of activities vertically
and horizontally and new institutional forms of governance, such as food
safety and quality standards, intellectual property rights and contracting (see
e.g. Reardon and Barrett, 2000; Henson and Reardon, 2005), require fun-
damental changes in the organization and conduct of agro-industrial enter-
prises and their economic relations with other parts of the agro-food system.
It is far from certain that the successful businesses of the future will be the
‘winners’ from these changes; rather we may see the emergence of new
enterprises that have the competencies required to compete in this more
dynamic and liberal world.
In the case of agro-processed products, we would argue that one of the
most fundamental changes in the governance of supply chains is the increasing
role of grades and standards. In particular, dominant firms are utilizing product
quality attributes as a means of product differentiation and market positioning
(Raikes et al., 2000; Busch and Bain, 2004). Indeed, it is argued that the very
ways in which agro-food markets are structured and operate are increasingly
defined by quality-based competition, while the associated institutional arrange-
ments, both within and outside the supply chain, are crucial to the legitimacy
of the quality attributes embedded in agricultural and food products (Allaire and
18 S. Henson and J. Cranfield
Boyer, 1995; Busch and Bain, 2004; Ponte and Gibbon, 2005; Busch and
Bingen, 2006; Henson, 2007a). The credence nature of many of these
attributes, including the impact of production processes on the environment,
worker welfare, etc., contrasts to the predominant focus on search characteris-
tics in most traditional markets.
In turn, the increasing focus on product safety and quality attributes has
served to enhance the role of formal product and process standards. Standards
are ubiquitous in market economies and play a fundamental role in the organ-
ization of supply chains for most products and services (Busch, 2000; Henson
and Reardon, 2005), including traditional marketing systems. In higher-value
markets, however, formal standards are increasingly the predominant mech-
anism of market and supply chain governance, operating alongside a plethora
of non-codified buyer requirements (e.g. standards related to logistics).
Indeed, standards are often a key vehicle for product differentiation in such
markets (Henson and Reardon, 2005; Henson, 2007b). They also function
as instruments of risk management by standardizing product requirements
over sup pliers, acting to reduce the transaction costs and risks associated
with procurement, in particular where high levels of oversight are required to
ensure food safety and/or quality attributes are delivered. Thus, we see lead-
ing buyers in supply chains (e.g. supermarket chains in industrialized coun-
tries) establishing standards on both an individual (e.g. Tesco Nature’s Choice)
and collective basis (e.g. GLOBALGAP
3
and the BRC Global Standards),
alongside public and quasi-public national and international standards (e.g.
ISO 9000) (Figure 5). Increasingly, certification to such a standard, or set of
standards, is the minimum entry requirement for higher-value markets for
agro-food products, not only in industrialized countries but also in developing
countries’ higher-income markets.
3
Editors’ note: GLOBALGAP is a private sector body that sets voluntary standards for the cer-
tification of agricultural products internationally. The BRC Global Standards were established
by the British Retail Consortium to set out quality and safety requirements for products supplied
to their membership. ISO 9000 refers to a set of quality management standards specified by the
International Organization for Standardization (ISO).
Figure 5. Global certifications to ISO 9000: 2000 in agriculture, fisheries and food
processing, 2000–2004. (From ISO, 2005.)
2001
0
5,000
10,000
15,000
20,000
25,000
30,000
2002 2003 2004
Agriculture &
fisheries
Food processing
Building the Political Case for Agro-industries 19
Restructuring of agro-industries in developing countries
The evolution of the agro-industrial sector is both a response to and an agent
of the induced institutional and technological changes described above (Reardon
and Barrett, 2000). This occurs through shifts in relative product and factor
prices, enhanced flows of capital, transfers of technology and the evolution of
organizational structures and institutions between enterprises and/or across
sectors, etc. More broadly, while retaining distinct features related to the nature
of agricultural products, for example, perishability and protracted production
cycles, the agro-industrial sector in developing countries is evolving in a similar
manner to commodity chains on a global basis (see e.g. Busch, 2000; Reardon
et al., 2003; Busch and Bain, 2004; Fold and Pritchard, 2005; World Bank,
2005). Thus, supply chains are increasingly extending beyond national and
regional boundaries, facilitated in part by new food, communication and trans-
portation technologies and a policy environment that encourages more liberal
international trade (Nadvi and Waltring, 2003; OECD, 2004; Henson and
Reardon, 2005). This is being accompanied by spatial agglomeration and firm
concentration in agro-processing, such that a diminishing number of key eco-
nomic players have power over global agricultural and food markets (Cook and
Chaddad, 2000; Reardon and Barrett, 2000; Viciani et al., 2001; Regmi and
Gehlar, 2005), driving a shift towards buyer-driven supply chains for many
products that are extending internationally with global sourcing and the emer-
gence of multinational actors (Gereffi, 1999; Humphrey and Schmitz, 2001,
2003; Gereffi et al., 2003).
Perhaps the most immediately evident trend in the agro-industrial sector in
developing countries is a shift from the informal to formal sectors and, concur-
rently, increased concentration. Similar trends are observed in primary produc-
tion, most notably in commodities for which there are potentially significant
economies of scale (e.g. forestry and plantation crops). In many developing
countries, agro-industry developed within the framework of existing institu-
tional settings, plant cropping systems and marketing arrangements and norms
that often pre-dated independence (Jaffee and Morton, 1995; Swinnen and
Maertens, 2007). Large-scale and formal agro-industry was driven by the pub-
lic sector in the form of parastatals, some of which were formed out of nation-
alized private enterprises, for example, in grain milling, vegetable canning and
oil palm processing, which operated within a system of state-controlled com-
modity and input distribution. The underlying intention was to create econo-
mies of scale in production, shield farmers from market risks, overcome
perceived gaps in entrepreneurship and force the transfer of resources from
agriculture to nascent industrial sectors (Jaffee and Morton, 1995), often with
donor support. This meant that the agro-industrial sector was frequently
shielded from the competitive pressures that drove consolidation in other parts
of the world.
Many state enterprises in the agro-industrial sector did not flourish for a
whole host of reasons. These included political interference in the manage-
ment of such enterprises in the pursuit of non-commercial objectives, bureau-
cratic burdens, development of structural deficits under conditions of managed
20 S. Henson and J. Cranfield
input supply and output prices, and inadequate investment and access to new
technologies. Through the 1980s, there was a fundamental shift in ‘develop-
ment thinking’ regarding the principal roles of the public and private sectors
that sparked off a radical process of structural reforms. Embedded in these
reforms were efforts to restructure agricultural product and input marketing
systems. In the 1990s, reforms extended to the privatization of state-owned
agro-processing enterprises alongside the liberalization of markets for agricul-
tural and other primary products. The efficacy of these reforms has, however,
been mixed. In many cases state-owned enterprises were privatized under weak
regulatory environments (Jaffee and Morton, 1995), while the slow evolution
of financial markets and ancillary service providers acted to limit access to
finance and inputs, and curtailed efforts to enhance efficiency through invest-
ments in new technologies. Further, processes of privatization were often pro-
tracted and often did not serve to transfer ownership on the basis of commercial
criteria alone. In some cases, the privatization of parastatals has meant that
they have been transferred as single entities into the private sector, while in
others they have been disassembled into smaller operating units prior to sale or
simply withered away, such that a less concentrated market structure has
emerged. Nevertheless, enterprises must now survive in a more liberal environ-
ment where there is a definite thrust towards increased market concentration.
Alongside structural changes in the agro-industrial sector, trends in con-
sumer demand and technological innovation are bringing about shifts in prod-
uct composition (Reardon and Barrett, 2000) at both the primary commodity
and processed product levels, towards sub-sectors where developing countries
have a domestic and/or international competitive advantage. At the same time,
the basis of competitiveness in markets for agro-industrial products is shifting,
threatening the traditional areas of comparative advantage commanded by
developing countries, but also providing new opportunities for enterprises that
have access to the requisite capacities and resources. Broad thrusts in this shift
are towards higher levels of value addition within the agro-industrial sector and
away from traditional commodities and towards non-traditional crops and live-
stock products (e.g. fish, fresh fruits and vegetables, spices).
Broadly, agro-industries in developing countries have been traditionally
based on the utilization of voluminous inputs that have relatively low unit values,
but which are costly to transport. Thus, enterprises within agro-industries
tended to be situated in close proximity to sources of raw materials. This con-
trasts with industries that are less tied to reliable supplies of unprocessed bio-
logical materials, including those that utilize primary processed agricultural,
fisheries and forestry products as inputs into more highly processed products,
which typically locate close to significant markets where the supply of inputs
and capital tends to be more efficient, infrastructure is better, and so on. Indeed,
most agro-industries in developing countries have evolved on the basis of stra-
tegic sources of raw materials; the palm oil sector in parts of sub-Saharan
Africa and Asia is a good example. However, with the shift towards higher-
value products for export and/or domestic markets, where the cost of raw
materials represents a smaller proportion of the end-product price and/or
Building the Political Case for Agro-industries 21
where additional and a wider range of inputs are required (e.g. packaging
and synthetic additives), some of which need to be imported, the advantages
of being located on the basis of raw material supply is less apparent. Thus, we
are seeing a new ‘model’ in terms of the location and competitive position of
agro-industries in developing countries, which in most cases operates alongside
traditional food and non-food agro-industrial sectors.
A further critical factor in the historic competitiveness of agro-industries in
developing countries has been labour costs. Access to a plentiful supply of
cheap labour explains, at least in part, why agro-processing enterprises in
developing countries tend to be less capitalized than their industrialized country
counterparts. While labour costs remain a key element of the competitiveness
of some sub-sectors, for example, the production of semi-prepared fresh vege-
tables in Kenya for export to the European Union, in other sectors capacity
utilization and the ability to meet consumer demands for product safety and
quality are more critical, as in the dairy processing sector. Thus, also in Kenya,
we have seen the emergence of new private sector firms that manufacture
value-added dairy products aimed at particular market niches, including yogurts
containing probiotics. The competitiveness of these enterprises bears little rela-
tion to the level of labour costs.
In many traditional agro-industries, especially those employing capital-
intensive technologies, there are significant economies of scale that require
operation at or near capacity on a continuous basis. This requires a reliable
supply of raw materials, which is readily impeded by significant fluctuations in
agricultural production and/or weak transport infrastructure, such that opera-
tion below capacity is often the norm rather than the exception. There is also
a need for access to sizeable markets that may well exceed domestic demand,
especially in a developing country context where per capita incomes are low
and demand for more highly processed food products is only just emerging.
Thus, agro-industries in developing countries are increasingly facing fierce
competition from global enterprises rather than their regional counterparts.
Countering this trend, however, the establishment of sizeable markets for
higher-value agro-industrial products domestically and/or regionally, coupled
with improvements in basic infrastructure, is providing opportunities for agro-
industrial enterprises in developing countries to compete.
With improved infrastructure, the development of domestic markets for
higher-value food and non-food products, access to improved technologies
and improvements in labour productivity, more advanced agro-industrial enter-
prises are evolving in certain developing countries. Thus, we are observing
increases in capital/ labour ratios such that the competitive position of these
enterprises is less reliant on proximity to supplies of raw materials and/or low
labour costs than is the case with more traditional agro-industrial enterprises.
Such enterprises may be directed at evolving domestic and/or regional
markets, or at export markets in industrialized countries, spurred by access to
trade preferences and broader processes of trade liberalization.
In many developing countries the transformation of the agro-industrial
sector has involved, and in some cases been fundamentally driven by, foreign
22 S. Henson and J. Cranfield
direct investment (FDI), predominantly by multinational corporations. Such
investments have taken the form of acquisitions of (or mergers with) existing
domestic enterprises, of joint ventures or of the establishment of new enter-
prises. While foreign investment is nothing new in many developing countries,
having been a common characteristic of the plantation-processing sector (e.g.
involving Unilever and Del Monte), multinationals are now investing in stand-
alone processing operations, often directed at domestic and regional markets
(e.g. Nestlé and Coca Cola) or the grocery retail sector (e.g. Wal-Mart, Carrefour
and Tesco). In part, such investments reflect an overall trend towards enhanced
flows of FDI (Figure 6) as corporations in industrialized countries look for invest-
ments that have the potential to yield greater returns. Thus, FDI flows to devel-
oping countries, and especially Asia, have grown rapidly over the last 10–15
years (Figure 7). At the same time, FDI flows to the food manufacturing sector
have also increased dramatically (Figure 8), as multinationals are drawn to the
opportunities presented by rapidly expanding markets for higher-value food
0
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1200
Developed economies
Developing economies
Figure 6. Value of foreign direct investment (FDI) from developed and developing
economies, 1980–2005. (From UNCTAD Foreign Direct Investment Database.)
Figure 7. Value of foreign direct investment (FDI) in developing regions, 1980–2005. (From
UNCTAD Foreign Direct Investment Database.)
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Asia (excluding China)
Building the Political Case for Agro-industries 23
0
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Food manufacturing
Agriculture & fisheries
Figure 8. Value of foreign direct investment (FDI) from OECD countries in
agriculture and fisheries and food manufacturing sectors, 1981–2005. (From OECD
International Direct Investment Statistics.)
products. This is illustrated further by the level of cross-border mergers and
acquisitions in certain agro-industrial sectors in developing regions (Table 2).
The increasing flows of FDI to developing countries serve not only to allevi-
ate capital constraints on processes of industrialization (Reardon and Barrett,
2000) but also to facilitate the flow of new technologies and management
practices, and to induce more efficient paths to organizational and institutional
change. Investment flows by agro-industrial enterprises in industrialized coun-
tries can also be an effective mechanism to ‘capture’ more advanced techno-
logies and management systems. At the same time, large inflows of capital
from foreign enterprises can bring about rapid processes of concentration in
agro-industrial sectors and, in due course, significant capital outflows in the
form of expatriated profits. For example, the entry of Nestlé and Unilever into
China, bringing their own proprietary standards for food safety and quality,
induced domestic firms to implement equivalent standards and to adapt their
managerial and marketing systems (Wei and Cacho, 2001; Reardon, 2007). In
turn, leading domestic firms were able to increase their competitiveness in the
domestic market, such that they were able to capture market share at the
expense of the multinationals and weaker domestic enterprises, with the effect
that overall market concentration increased. More generally, the entry of for-
eign competitors can have profound impacts, not only on the agro-processing
sector itself, but also on the entire supply chain; the example of dairy process-
ing in Brazil in Box 1 provides a good illustration.
While processes of transformation in the agro-industrial sector are well-
established in many developing countries, these processes have more recently
been taking place in the context of, and have been further induced by, the
restructuring of food retail markets. Key here is the growth of the supermarket
sector. While supermarkets have long operated in a number of developing
countries, these were generally confined to large cities and focused on upper-
middle or rich consumer segments. However, there is some evidence that a
2
4
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.
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Table 2. Distribution of cross-border mergers and acquisitions in developing regions by sector, 2004–2005 (US$ million).
(From UNCTAD, 2006.)
Africa South, East and South-east Asia West Asia Latin America
Sales Purchases Sales Purchases Sales Purchases Sales Purchases
Sector 2004 2005 2004 2005 2004 2005 2004 2005 2004 2005 2004 2005 2004 2005 2004 2005
Total 4,595 10,509 2,718 15,505 24,193 45,132 19,319 35,349 575 14,134 1,280 18,221 21,840 22,532 11,977 10,179
Primary 3,994 908 1,680 249 421 469 819 4,312 383 111 45 1,333 814 8 881
Manufacturing 68 1,676 529 35 7,386 13,300 4,769 14,805 146 55 922 19 6,560 10,793 8,582 5,492
Food, beverages
and tobacco
46 17 3 1,575 6,256 373 7,040 4,131 5,710 7,786 127
Wood and wood
products
120 452 320 997 162 30
Tertiary 533 7,925 509 15,221 16,385 31,363 13,730 16,222 46 13,968 357 18,157 13,947 10,926 3,322 3,806
Building the Political Case for Agro-industries 25
‘supermarket revolution’ has been under way in certain developing countries
since the early to mid-1990s (Reardon et al., 2007), although with significant
variations across developing regions. The penetration of supermarkets is great-
est in South America, South Africa and East Asia outside China. In these coun-
tries, the growth of supermarkets started in the early 1990s and their average
share in food retail sales grew from around 10–20% in 1990 to 50–60% by the
early 2000s (Reardon and Berdegué, 2002). In a ‘second wave’ of countries,
including Mexico and much of South-east Asia and Central America, the rapid
growth of supermarkets did not occur until the late 1990s and their current
market share is in the region of 30–50%. However, in many other developing
regions, for example, eastern and southern Africa and poorer countries in Asia
and South and Central America, supermarkets are just emerging in major cit-
ies, while their operations tend to be confined to packaged groceries. Indeed,
doubts have been raised about the pace of retail food market restructuring in
these areas (see e.g. Humphrey, 2007), suggesting that supermarkets will
remain the exception rather than the norm in the short to medium term at
least.
The growth of the supermarket sector in developing countries has been
induced by many of the same trends influencing the evolution of the agro-
industrial sector, including changing demand patterns, liberalization of domes-
tic and international food markets and FDI (Reardon, 2007). In turn, the
transformation of the food retail sector is serving to ‘amplify’ these trends and
induce changes in the structure and organization of agro-industrial enterprises
and their downstream relations in supply chains. Thus, as supermarket pro-
curement systems develop and evolve (Reardon et al., 2007), there is demand
for larger supply volumes and competitive advantages from the acquisition of
enhanced skills in food safety and quality standards and supply chain manage-
ment that tend to favour larger enterprises. Indeed, given that processed food
Box 1. Transformation in the dairy processing sector in Brazil.
(From Reardon, 2007.)
The Brazilian Government’s decision to liberalize foreign direct investment (FDI) in
1990 brought about profound and rapid changes to the structure and conduct of
the dairy products sector. The relaxation of restrictions on foreign investment facili-
tated the entry of MD Foods, Parmalat and Royal Numico, alongside new invest-
ments by Nestlé, which had a longer-term foothold in the country. In order to gain
market share these new entrants engaged in aggressive price competition that
had the effect of reducing retail milk prices by 40% over the period 1994–1997. At
the same time, efforts were made to reduce costs throughout the raw milk supply
chain. These efforts included enhanced efficiencies alongside the imposition of
private standards to improve safety and quality in order to promote milk and dairy
product consumption and reduce losses during processing, predominantly through
lower bacterial counts. Within 5 years these standards had been rolled out across
the supply chains of the major dairy processing companies, expelling thousands
of small dairies that were unable to make the required investments in refrigerated
storage vessels.
26 S. Henson and J. Cranfield
products constitute 65% of supermarket food sales in developing countries,
and semi-processed food products account for a further 20–25%, the develop-
ment of the supermarket sector is dependent on appropriate responses by
the food manufacturing sector, at least initially creating conditions of mutual
dependency. However, as supermarkets come to command a greater and
greater share of the retail market for food, and their distribution systems begin
to spread beyond national boundaries, there is a definite shift of power such
that supply chains for processed food products are increasingly buyer (i.e.
retailer) driven.
The evolution of the agro-industrial sector along the lines described above
induces changes in the skill sets required to compete. Modes of management
that predominate in agro-industrial sectors have shifted from the simple coordi-
nation of product flows, management of processing operations and transfer of
ownership, to the implementation of closely attuned systems of production,
processing and distribution that increasingly span the length of the supply
chain, not only nationally but internationally also. While such changes have
been facilitated by technological advances, among other things, they are also
driven by the needs and demands of dominant actors (Dolan et al., 1999;
Dolan and Humphrey, 2000). Existing firms must acquire the related skills in
order to flourish, or face being competed out of the market. In particular, there
is increasingly a premium on management skills (Reardon and Barrett, 2000)
across all of a firm’s operations from raw material procurement, through
processing operations to marketing, and including firm strategy and labour
relations. While multinationals are generally able to import the required skills
from their operations elsewhere, domestic firms must either develop these skills
internally or rely on external service providers. Thus, accompanying processes
of agro-industrialization is the emergence of providers of managerial and other
business services. For example, in coastal Peru, firms provide labour supervi-
sion services over small cotton farmers in return for land collateral under
arrangements that resemble share tenancy contracts (Escobal et al., 2000).
In other cases non-governmental organizations provide such services, acting as
an implicit subsidy supporting processes of agro-industrialization, for example,
by acting as an ‘honest broker’ in establishing supply relations between agro-
processing enterprises and primary producers.
Development of the agro-industrial sector and related changes in the struc-
ture and conduct of markets for food and non-food products can induce con-
siderable changes in vertical relations along supply chains, most notably with
primary producers. Thus, the predominance of spot markets with informal rules
of conduct for many agricultural, fisheries and forestry products is giving way to
more formal and longer-term relationships between agro- industrial enterprises
and suppliers of raw materials. In particular, contracting is becoming a key form
of governance in vertical supply chains, while forms of contracting are chang-
ing. Initially, agro-industrial enterprises tend to employ marketing con tracts that
are relatively informal in nature, or at least are not specified in a written and
legally enforceable instrument. Over time, however, contracts tend to encom-
pass elements of the entire production process and are increasingly codified in
Building the Political Case for Agro-industries 27
written standards and terms of supply. While such contracts act to enhance the
security of raw material supplies for agro- industries, they also provide a mecha-
nism for reducing and redistributing risk along the supply chain. In turn, they
also induce changes in the nature of primary production, typically requiring the
increased use of off-farm inputs. Thus, primary producers are increasingly inte-
grated into the commercial supply chain for both output marketing and input
supply, inducing the evolution of allied supply sectors (seed, fertilizer, etc.).
At the same time, there are pressures towards the consolidation of primary
production, whether through larger farms or collective action on the part of
small farmers, raising the spectre that smallholders will be progressively excluded
from supply chains as agro- industrialization proceeds.
Increasingly tied to contractual relations with raw material suppliers are
quality and safety standards that not only stipulate end-product characteristics
but also define elements of the production process (Henson and Reardon,
2005) as a means to ensure that required processing parameters are complied
with and the requirements of downstream buyers are satisfied. As these stand-
ards are ‘ratcheted up’ over time, there are profound implications for the posi-
tion of small farmers in the supply chain, in terms of both their ability to
participate in supply chains to agro-industrial enterprises and the impact on
rural incomes. As we will see below, the evidence in this regard is marked,
providing instances of exclusion from supply chains, but also examples of small-
scale producers adapting to the changes required and gaining through higher
income as a result.
Despite the very visible and enticing trends towards industrialization of the
agro-processing sector outlined above, in many developing countries (and
especially low-income countries), informal agro-processing remains strong, and
indeed continues to be the predominant locus of agro-processing enterprises
(Sautier et al., 2006). This situation reflects the fact that the entry costs to
informal agro-processing tend to be low, in view of the fact that levels of cap-
italization are typically limited and traditional technologies command only low
levels of human capital that can be acquired relatively easily through appren-
ticeships or other traditional means. Thus, informal agro-processing enterprises
tend to be highly responsive to market demands within the low-income markets
in which they tend to predominate, while innovative capacity tends to be greater
than is often recognized. These characteristics, alongside the numerous capital,
managerial and technological constraints faced by these businesses, are reflected
in the fact that rates of mortality of informal enterprises are high (Mead, 1994;
Mead and Liedholm, 1998).
The degree of structural and organizational transformation of the agro-
industrial sector differs by country and even by regions of a country. In general
terms, agro-industrialization has advanced most in countries that have achieved
the greatest level of integration into global supply chains for higher-value food
and/or non-food products, and/or where domestic high-value markets have
evolved in response to economic, social and demographic change. In the latter
case, this relates to broader processes of economic growth and development,
and thus is typically found in countries with higher per capita incomes. However,
28 S. Henson and J. Cranfield
even in very poor countries with low levels of overall economic development
and where supply chains are predominantly traditional in nature, it is possible
to find ‘enclaves’ where transformed and dynamic agro-industrial sectors exist.
Kenya provides a good example; while the informal sector predominates in
agro-processing, there is a relatively well-developed industrial dairy processing
sector directed at domestic and regional markets and a number of globally
competitive exporters of semi-processed vegetables.
Among poorer countries, including the least-developed countries of sub-
Saharan Africa, agriculture still represents a large proportion of value added
along agro-food supply chains. Traditional supply chains for agro-food prod-
ucts generally predominate and high-value domestic markets are in their
infancy; an indicator of this is the low market penetration of supermarkets in
most countries of sub-Saharan Africa. Usually, the formal agro-processing sec-
tor is small, and may even be stagnating, and there is little or no integration
along the supply chain. There are, however, exceptions to this general rule
(e.g. Zambia and Ghana), where high-value markets are more pronounced due
to foreign investment in food processing and/or supermarkets, significant lev-
els of remittances, burgeoning middle- and high-income groups, etc. Further, in
a number of low-income countries supply chains have been established, pre-
dominantly to supply high-value markets in Europe (such as green beans in
Kenya). However, such supply chains remain the exception rather than the
rule, and operate within a ‘sea’ of fragmented and multilayered traditional mar-
kets that are ‘ruled’ by the informal sector.
In middle-income (and especially upper-middle-income) countries, agri-
culture typically accounts for a small proportion of value added along agro-
food supply chains. Here the process of agro-industrialization is generally
more pronounced and widespread. Urban high-value markets are typically
well developed, sometimes with high levels of supermarket penetration (e.g.
Brazil, Mexico, Malaysia, Egypt and Thailand). In many cases, there is also a
vibrant agro-processing sector that has evolved in response to the growth of
domestic market demand and/or competitive ‘gaps’ in international markets,
for example, for processed foods (as in the case of canned tuna production in
Thailand). A number of these countries are also significant exporters of
higher-value agro-food products and are integrated into the associated global
supply chains. However, supply chains to domestic and international high-
value markets often coexist and operate independently of one another.
Indeed, it is possible to observe a continuum in the level of transformation,
with traditional agro-food sectors predominant in rural markets, while a whole
spectrum of formal and informal sub-sectors supplying domestic markets
exists in between.
Impacts of Processes of Agro-industrialization
Processes of agro-industrialization have widespread and profound impacts at
both micro and macro levels (Figure 1). These include contributions to overall
economic development, alongside changes in rates of poverty linked to the
Building the Political Case for Agro-industries 29
scale and distribution of changes in employment and per capita incomes among
those whose livelihood is linked to the agro-food economy. These processes
also encompass the quality, availability and price of food and non-food prod-
ucts, plus impacts on natural resources and the environment, and sociocultural
implications, among others. Thus, we might reasonably expect there to be
gainers and losers from processes of agro-industrialization, such that there are
likely to be significant distributional consequences of the emergence of an agro-
industrial sector. What is critical in this context is to recognize and promote the
conditions under which agro-industrial enterprises can make a positive and
significant contribution to overall processes of economic development and to
the betterment of the lives of the poorest members of society, while minimizing
any negative externalities and other impacts.
Given that agro-industrialization is but one of the multiple transformations
occurring in agro-food systems in developing countries, as well as globally, attri-
buting observed changes to the development of an industrial agro-processing
sector per se is difficult. Further, these impacts reflect the ongoing dynamics of
development processes, for example, the transformation of a predominantly
informal to a predominantly formal economy, and observations at any point in
time merely provide a ‘snapshot’ that is soon outdated.
The impacts of agro-industrialization on value addition, exports and
employment are treated at length in Chapter 3 of this volume. We will instead
call attention to the effects of agro-industries on two specific aspects: power
relations along the supply chains and environmental consequences of agro-
industrialization.
Impacts on power relations along the supply chain
One of the key concerns related to the processes of consolidation and global-
ization accompanying agro-industrialization is the impact on power relations
along supply chains and the degree to which dominant players, including agro-
processing firms and their purchasing agents, operate in a competitive environ-
ment or are able to exert ‘unfair’ power (Vorley and Fox, 2004). Indeed, some
critics argue that agro-industrialization and related processes of concentration
tend to develop in a mutually reinforcing cycle along agricultural and food sup-
ply chains (Lang, 2003). Thus, as markets for higher-value agro-food products
develop, a limited number of dominant firms tend to emerge that quickly
‘quash’ their smaller competitors in the formal sector while commanding a
progressively greater proportion of the market as the informal sector is
‘squeezed out’. In some cases these dominant enterprises are specific to par-
ticular markets, while in others their influence cuts across many geographical
regions and/or product sectors. There are related concerns about the distribu-
tion of rents along supply chains that are under the influence of such entities
and the scope for primary producers (and especially small-scale farmers and
fishers) to influence the conduct and performance of supply chains and enhance
their share of value added through upgrading (Rabellotti and Schmitz, 1999;
Kaplinsky, 2000; Humphrey and Schmitz, 2001, 2003).
30 S. Henson and J. Cranfield
In the context of many developing countries, the scope for concentration
of markets to bring about ‘abuse’ of market power is exacerbated by the fact
that regulatory controls tend to be weak. Thus, competition policy frameworks
are typically underdeveloped, if present at all, such that there is no legal basis
through which the power of dominant players can be ‘reigned in’. Further,
challenging business conditions (see below) tend to act as barriers to entry,
especially for smaller firms that lack economic and political power to thwart
bureaucratic delays in official and/or legal procedures, such as the enforcement
of contracts.
At the same time, there is a need to consider the ‘counterfactual’ to these
trends towards consolidation of agro-industrial sectors; that is, what would be
the situation along supply chains for agro-food products were there to be no
process of agro-industrialization? Further, the evolution of agro-industries needs
to be viewed in the context of broader processes of transformation in global,
national and rural economies (Reardon and Timmer, 2005). On the one hand,
agro-industrial enterprises play a key role in the evolution of higher-value mar-
kets for agro-food products, which serves to stimulate demand for the products
of primary producers. On the other, in the absence of agro-industries as a key
driver of supply chains for higher-value agro-food products, the power vacuum
might be filled by large multinational traders. The emerging supermarket sector
may also have more command over food supply chains in the absence of large
agro-industries to ‘check’ their market power.
Environmental impacts of agro-industrialization
While the impact of agro-industrialization on the environment has begun to
receive attention in recent years, there is relatively little supporting empirical
evidence on it. Broadly, agro-industrialization usually carries with it an expan-
sion in scale at various levels of the value chain. Expanded scale can come
about through consolidation of existing establishments, new arrangements
with small producers or firms (e.g. out-grower schemes) or new entrants (either
from within the country or multinationals). It is often the case that expanded
scale of operation brings about the adoption of new technologies, organiza-
tional forms and management approaches, which can carry with them pos-
itive environmental effects. These positive effects can be offset, however, by
the degradation of the natural resource base and the production of environ-
mental externalities that prevailing control capacities are unable to manage.
More broadly, it is important to recognize that the impacts of processes of
agro-industrialization as a whole reflect interconnected processes of change at
various levels of agro-industry from production through to distribution. Thus,
Barrett et al. (2001) suggest that we should examine the environmental
impacts of agro-industrialization through three distinct lenses: (1) direct effects
on agriculture and upstream supply industries; (2) direct downstream effects
on processing, distribution and related commercial activities in agro-industrial
supply chains; and (3) indirect effects, such as income growth and other struc-
tural changes.
Building the Political Case for Agro-industries 31
Turning first to the direct effects on agriculture and downstream supply
industries, the increases and transformations in agricultural production that
accompany agro-industrialization have profound implications for land usage.
Increased production often comes about by bringing more marginal and poten-
tially sensitive land into cultivation, thus leading to concerns about deforest ation,
desertification and loss of biodiversity (among others), and/or the impacts of
intensification via the adoption of new technologies on the existing land base.
Evidence suggests mixed environmental effects arising from land expansion
and/or intensification (see e.g. Barbier, 2000; Lee and Barrett, 2000), with the
multifaceted drivers of land use (e.g. other commercial uses and urbanization)
making it difficult to predict the land-use impacts of agro-industrializ ation. For
example, we might see very different outcomes in scenarios where broader
processes of industrialization compete for land than in cases where agro-indus-
trialization occurs in the context of relative plentiful supply of land.
Likewise, the environmental impacts of agro-industrialization vis-à-vis other
agricultural inputs can be both positive and negative. Agro-industrialization can
induce changes in the type and/or level of usage of agrochemicals (see e.g.
Dasgupta et al., 2001), which may be negative if overall usage increases, but
positive if more advanced and safer active ingredients are used, with the overall
impacts dependent on the relative magnitude of these two effects. At the same
time, adoption of technologies leading to capital-for-labour substitution can
reduce employment and generate negative income effects for some, which may
necessitate the use of production practices by food-insecure farmers that are far
from sustainable. However, greater vertical integration via agro- industrialization
can also mean that signals reach producers that otherwise would not be trans-
mitted. For instance, multinationals that procure agricultural product from devel-
oping countries may be sensitive to consumer concerns over environmental
impacts, and thus promote the adoption of environmentally friendly production
practices, often with associated price premiums in niche organic markets (World
Bank, 2005).
Processes of agro-industrialization can have critical effects on the availabil-
ity and quality of water in developing countries. While increases in production
may imply an increase in demand for water, especially if they are associated
with irrigated systems of production, Barrett et al. (2001) suggest that agro-
industrialization often brings about substitution of less water-intensive and
higher-value crops for water-intensive cereals, thus presenting scope for water
conservation. Conversely, some of the major higher-value food exports from
developing countries, for example, fresh fruits and vegetables, require large
volumes of water in their production. This fact has brought about accusations
that, in effect, these countries are exporting ‘virtual water’ (Orr and Chapagain,
2007). Water pollution can become an issue with respect to pesticide use and
(perhaps more importantly) livestock production. Many developing countries
lack the institutions needed to properly develop and implement environmental
governance systems to keep such pollution in check. On the other hand, live-
stock production plays an important role in converting organic matter into
green fertilizer, the use of which leads to reduced application of agro-fertilizers
and can lead to soil nutrient improvements and mulching that reduces water
32 S. Henson and J. Cranfield
losses. Clearly, the net effects of agro-industrialization on water use and quality
are both complex and uncertain, and certainly context-specific.
Broadly, little is known about the environmental effects of direct down-
stream elements of agro-industrialization, although three clear areas of concern
exist: (1) air and water pollution associated with processing and distribution; (2)
levels and nature of post-farm-gate solid waste; and (3) energy use. While agro-
processing is typically one of the most polluting industries in developing coun-
tries (Barrett et al., 2001), it is possible that processes of agro-industrialization
can reduce certain aspects of its ‘environmental load’. This might occur through
the de novo entry of firms with cleaner processing technologies and/or from
technological upgrading by existing firms. Further, economies of scale are
important in the agro-processing sector, with larger scale of operation often
being associated with increased industrial concentration. Both greater scale
and concentration can make it easier to regulate the environmental impacts of
agro-processing operations, with larger firms being easier to monitor and to
take enforcement actions against (Lanjouw, 1997; Jayaraman and Lanjouw,
2000). The trade-off, however, is that scale of operation also creates incentive
for firms to lobby for less strict regulatory controls or, conversely, for larger
(often multinational) firms to lobby for stricter regulations that exclude smaller
(often domestic) firms.
There are a number of potentially detrimental environmental effects asso-
ciated with waste from the agro-processing sector, both in the pre-industrial
and industrial phases. On the one hand, there are the waste materials from
processing operations, some of which may be utilizable as by-products and
others that require disposal. Barrett et al. (2001) note that industrialization of
agro-processing not only creates a new (and often enhanced) stream of waste,
but also distributes this waste away from the point of raw material production
to other locations. The scope for the utilization of waste changes over time and
can be context-specific. For example, new technologies and markets can evolve
that enable waste materials to be used productively. The recent development of
biofuel technologies and new ways in which materials can be transformed for
use as animal feed provide good examples. On the other hand, income growth
and the parallel transformation of agro-industries tend to increase consumption
of packaged food products. Many of these packaging materials are imported
into developing countries and ultimately have to be disposed of in some way.
In many urban areas of developing countries, food packaging materials have
become a major environmental issue, for example, through blocking water
courses and sewage systems.
Processes of agro-industrialization have profound impacts on both the level
of energy uses and the relative importance of different sources of energy, with
often mixed environmental impacts. Broadly, agro-industrialization tends to
lead to substitution of capital for labour, and thus increases the overall demand
for energy. However, net energy savings can occur if commercial-scale process-
ing, with more energy-efficient technologies, replaces less energy-efficient
technologies that would otherwise occur on a smaller (and often informal) scale.
While agro-industrialization will tend to increase the demand for transport and
Building the Political Case for Agro-industries 33
induce greater use of fuel, especially where it implies geographical specializa-
tion, the adoption of more fuel-efficient transport modes could have offsetting
effects. Moreover, given that industrialized processing facilities often locate
near raw material sources, potential energy savings could be realized by ship-
ping finished goods rather than raw materials.
While the direct and multifaceted impacts of the industrialization of agro-
processing are uncertain, potentially the more general and indirect effects are
more critical. Notably, we might reasonably expect the environmental effects
of agro-industrialization to follow the predications of the environmental Kuznets
curve: as developing country incomes grow, environmental degradation will
first increase, reach a peak and then begin to decline, reflecting the adoption
of ‘cleaner’ technologies to abate or remedy negative environmental impacts.
Barrett et al. (2001) suggest that the balance of current evidence points to
increased environmental degradation alongside processes of economic devel-
opment and agro-industrialization, with little indication of a shift to latter parts
of the Kuznets curve. Thus, while the scale effects associated with processes of
agro-industrialization play a role in increased environmental degradation, it
may well be that the adoption of cleaner processing technologies and produc-
tion practices has not progressed to the extent that the detrimental environ-
mental effects are offset.
Challenges Faced with Ongoing Processes
of Agro-industrialization
The foregoing discussions and some later chapters highlight some of the
impacts that agro-industrialization can have on developing countries, outlining
the positive contributions that agro-industrial enterprises can play, but also
some of the detrimental effects. The challenge for developing countries in
steering the development of agro-industrial sectors is to ‘clear the way’ for
private investments that will bring about rapid evolution of agro-food systems,
while laying down conditions that will enable the potential negative conse-
quences to be minimized. This suggests that these challenges lie not only
within the narrow frame of the agro-food sector, and agro-processing in par-
ticular, but in the broader economic and institutional environment in which
industrialization takes place. Below we consider a number of the key chal-
lenges in turn.
Global positioning
The preceding discussion highlighted how ‘the world is changing’. Processes of
agro-industrialization in developing countries are taking place within the con-
text of agro-food systems that are increasingly globalized and themselves under-
going organizational and institutional restructuring. While prevailing trends
can present new opportunities for developing countries in the form of value
34 S. Henson and J. Cranfield
addition, they also pose challenges. Thus, the bases on which developing
country agro-industrial enterprises generally competed in the past are increas-
ingly becoming obsolete, while these enterprises are increasingly facing com-
petition from their global counterparts. At the same time, opportunities for
value addition in this ‘new world’ require new approaches to competitiveness.
Consequently, we are likely to see very different forms of agro-industrial enter-
prise evolve in the future, while existing enterprises that are unable to compete
in this ‘new world’ will shrivel away.
Perhaps the most critical challenge for developing countries is to identify
where their agro-industrial sectors fit into this new ‘global order’. This implies
that the status quo will not suffice. Rather, agro-industries must be driven
primarily by consumer demands, as they filter down through downstream
actors (e.g. supermarket chains and processing enterprises). In many cases
this implies a shift of thinking that is even more radical than that required
when moving away from the statist model of development that prevailed
until the mid-1980s (Jaffee et al., 2003). Indeed, in many cases, agro-
industries, as well as the wider agro-food system, will need an entire reor-
ganization from ‘supply-push’ to ‘demand-pull’, recognizing the primacy of
consumers and dominant downstream buyers. Undoubtedly this poses huge
challenges, and the associated processes of organizational and institutional
restructuring are immense; the more so given the resource and infrastruc-
tural constraints faced by governments and agro-industrial enterprises in
many developing countries.
It is imperative that developing countries recognize the new realities of the
global agro-food economy and identify how they can position existing and/or
new agro-industries within this reality. The challenges presented by the con-
temporary agro-food economy are extremely daunting, especially where costly
processes of restructuring and upgrading are required in order to compete in
both evolving and emerging value chains. At the same time, however, there is
some evidence that the challenges that agro-enterprises are facing, for example,
in order to comply with stricter food safety and quality standards in interna-
tional markets, can act as fundamental catalysts of change and strategic repo-
sitioning (World Bank, 2005; Henson and Jaffee, 2008). Indeed, it is argued
that developing countries are more likely to succeed where there is little or no
‘latitude for poor performance’; that is, where requirements are laid out specifi-
cally and where there is little or no tolerance for deviation from these standards
(Crammer, 1999).
More generally, we can look at the experiences of a number of develop-
ing countries that have been successful in accessing higher-value markets.
Certain countries have managed to add value to traditional agro-food exports
through agro-processing, for example, Côte d’Ivoire (fisheries and wood),
Senegal (fisheries) and Ghana (wood) (Crammer, 1999). Other countries have
diversified diagonally by shifting from traditional primary exports to the
processing of other products, for example, Equatorial Guinea (cocoa to sawn
wood and veneer sheets) and Kenya (from coffee and tea to horticultural and
fisheries products). Much can be learned from these experiences, and also
comparable efforts that have failed.
Building the Political Case for Agro-industries 35
Infrastructural constraints
Preconditions for the development of agro-industries are the necessary trans-
portation, information and communication technologies (ICT) and access to
reliable supplies of key utilities, notably electricity and water. In turn, the infra-
structural constraints under which the agro-industrial sector operates influence
the cost and reliability of the physical movement of raw materials and end
products, efficiency of processing operations, responsiveness to customer
demands, etc. Indeed, alongside prevailing macroeconomic and business con-
ditions, the level, quality and reliability of infrastructure have been shown to be
a critical determinant of export competitiveness for processed agro-food prod-
ucts (Crammer, 1999). Where infrastructural constraints are particularly acute
the additional complexities of processing operations may outweigh the benefits
of diversification away from exports of primary commodities and towards value
addition (Love, 1983).
In many developing countries, and especially low-income countries, infra-
structure tends to be weak. Inherently, this puts agro-industrial enterprises at a
competitive disadvantage to their industrialized country competitors, while also
distorting the competitiveness of developing countries relative to one another
according to the quality of their basic infrastructure. Thus, agro-industrial enter-
prises may face unreliable and costly transportation systems that prevent access
to potentially lucrative markets. Under such conditions we might find poten-
tially competitive agro-processing firms that are unable to access key markets
because of the weakness of transportation systems. Likewise, unreliable and
costly supplies of utilities can prevent agro-processing companies from operat-
ing at or near full capacity utilization.
The existence of weak infrastructure can influence the rate of transition
of the agro-processing sector from informality to formality, and the evolution
of the sector’s structure over time. Thus, the adoption of more advanced
technologies, which is one dimension along which the formal agro-processing
sector competes with often lower-cost informal enterprises, is dependent on
reliable access to electricity and water. Without access to essential inputs and
utilities the agro-processing sector can be caught in an informality ‘trap’.
Further, weak infrastructure tends to favour larger enterprises that have
access to the capital to install their own facilities for generating electricity and
providing potable water, and operate at capacity levels to spread these costs
over a large volume of output. In the longer term, as processes of agro-
industrialization proceed, this can steer the structure of the sector towards
higher levels of concentration.
In addition to basic infrastructure such as roads, electricity, the Internet and
telephones, more specific infrastructural needs of the agro-industries sector
continue to develop. Examples include access to laboratory testing and certifi-
cation services, providers of repair services and new product development
facilities. In many developing countries such infrastructure is weak, such that
compliance with even basic food safety and quality standards can be problem-
atic. Undoubtedly, this acts to impede competitiveness relative to agro- industrial
enterprises that have better access to such services or, at the minimum, increases
36 S. Henson and J. Cranfield
costs as firms are forced to make use of service providers in neighbouring
(or even distant) countries. It can also force sectors into reactive modes of
upgrading capacity when ‘problems strike’ rather than more proactive
approaches that maximize market competitiveness.
Illustrating the critical role of both general and agro-processing-specific
infrastructure to the evolution of the agro-industrial sector, Jaffee and Morton
(1995) highlight how the failure of many large-scale parastatal processing
industries in sub-Saharan Africa can be explained, at least in part, by their
inability to access essential support services (e.g. repair of machinery), and by
their unreliable access to utilities, etc. Indeed, many of these enterprises oper-
ated at well below their level of installed capacity or had ceased operations
altogether, often due to factors that were outside of their control. Arguably,
many of these enterprises would have drifted into bankruptcy if they had not
been provided with protection from governments and/or financial support
from donors.
Access to physical and human capital
With the progressive shift from the informal to formal sectors, and as agro-
processing enterprises attempt to add value and compete with their industri-
alized country counterparts, access to the required physical and human
capital becomes more critical. Indeed, processes of agro-industrialization are
associated with, and at the same time themselves induce, technological
changes along the supply chain, for example, through improved crops and
livestock, new forms of processing and enhanced distribution systems. Such
changes are critical in order to achieve improvements in efficiency, meet the
evolving demands of buyers and consumers and enhance storability and
transportability. Simultaneously, the very nature of these technologies is
changing, as is well illustrated by advances in ICT and the increasing use of
biotechnology.
Agro-industries in developing countries often face significant problems in
gaining access to the technologies and skills they require in order to evolve and
compete in the contemporary agro-food economy, either because these are
not available domestically or because they are costly. In many cases these tech-
nologies are imported, although import taxation regimes, access to foreign
exchange and the exchange rate can act as significant impediments. This
reflects the fact that research and development expenditure in many develop-
ing countries is low. Alternatively, the transfer of physical and human capital
can occur internationally, through linkages with multinational corporations,
technical assistance provided by bilateral or multilateral donors, etc. Indeed,
there is mounting evidence that firms in developing countries can accrue criti-
cal capacities through their interactions with international buyers (Schmitz and
Knorringa, 2000). Critical here is that technologies and skills are ‘appropriate’
to the specific context of the developing country concerned and to the position
of a particular industry and/or enterprise in domestic or global markets.
Thus, for example, a highly sophisticated and costly technology may not be
Building the Political Case for Agro-industries 37
appropriate for a firm or industry that is pursuing a cost leadership strategy.
Further, where technologies are highly product-specific, high levels of asset
specificity can make such investments risky and deter potential investors.
While low levels of capital intensity that result from impediments to access-
ing technologies, alongside labour endowments, are often posited as reasons
for the lack of international competitiveness of developing countries in manu-
factured product exports (Crammer, 1999), there is mounting evidence that the
level of skills per worker (human capital) and land endowments are more critical
for processed primary agricultural products (Wood and Berge, 1997; Wood
and Owens, 1997). This suggests that knowledge-based competitive assets (as
embodied in the labour force) are critical to processes of agro-industrialization
in developing countries. This, in turn, argues for a need for investments in
general and skill-specific education. Indeed, this would seem logical; while
access to technology is critical, no technology can be employed unless there is
the trained workforce to operate it.
Macroeconomic and policy environment
Alongside the specific challenges faced by the agro-industrial sector, all enter-
prises have to operate in the more general macroeconomic, legal and policy
environment. Under conditions of macroeconomic instability, capital invest-
ments with significant sunk costs, as with technologies that are highly product-
specific, are deterred by the inherently greater risk. This situation can then be
further exacerbated with exchange rate misalignments that enhance uncer-
tainty. Where technologies and critical inputs have to be imported, foreign
exchange shortages linked to import licensing and foreign exchange allocation
systems can delay investments or impose additional costs on entrepreneurs,
such as in the form of ‘lobbying’ for foreign exchange.
In many developing countries government policies have been slow to adapt
to the ‘new reality’ of private enterprise. For example, although most countries
have undergone some process of structural adjustment, liberalization of con-
trols on investment and trade is uneven. Further, licensing of businesses remains
common. Variations in the interpretation and implementation of these policies
serve to create uncertainty and add costs (e.g. in the form of bribes) and delays
to business. Such conditions are far from conducive to private investment and
can act to deter foreign firms from investing at all, while discouraging more
risky (but also higher yielding) investments, such as are often associated with
more advanced technologies. These aspects are explored in more detail in
Chapter 5 of this volume.
Business conditions
Although related to the broader policy environment, general business condi-
tions are a specific factor determining the rate and trajectory of the develop-
ment of the agro-industrial sector. Thus, lengthy and costly procedures for the
38 S. Henson and J. Cranfield
legal registration of a business and enforcement of contracts can act as a bar-
rier to the transition of enterprises from the informal to the formal sector
(De Soto, 1989) and provide disincentives for private investment in new enter-
prises. This particularly applies where agro-industries are capital-intensive and
require large initial investments; under such conditions the timely start-up of a
business can be critical for commercial viability.
Table 3 provides selected measures of the business conditions in devel-
oping and industrialized countries. It is immediately apparent that, while
there are significant inter-country differences within any one country income
group, the procedures and time required to start up a business and time
required to enforce a contract are significantly greater in developing coun-
tries, especially in low-income countries. While efforts have been made to
establish regulatory frameworks that are more conducive to business in many
developing countries, bureaucratic inertia and a lack of effort to stamp out
corruption have served to maintain conditions that challenge private
enterprise.
A second element of the conditions required for business is a well- developed
and reliable financial and other business service sector. For example, where the
banking sector is weak, resource mobilization is hampered by low credit repay-
ment rates, which in turn become reflected in higher interest rates, high trans-
action costs and/or political interference. Problems in gaining access to fixed
and/or working capital, including trade credit, are most important for smaller
businesses that tend to lack the required financial resources internally, with the
result that unreliable banking systems can deter the transition from the informal
to formal sector.
Table 3. Indicators of business conditions by country income group, 2006. (From World Bank
World Development Indicators.)
Country/country group
Start-up procedures
to register a
business (number)
Time required
to start a business
(days)
Time required to
enforce a
contract (days)
All developing countries 10.2 54.0 425.6
Low-income countries 10.5 61.5 428.5
Zambia 6.0 35.0 274.0
DRC 13.0 155.0 909.0
Lower-middle-income
countries
10.4 52.2 432.9
Tunisia 9.0 14.0 27.0
Angola 14.0 146.0 1011.0
Upper-middle-income
countries
9.0 42.2 405.0
Turkey 8.0 9.0 330.0
Venezuela 13.0 116.0 445.0
High-income countries 7.1 23.2 277.5
Australia 2.0 2.0 157.0
Slovenia 9.0 60.0 913.0
Building the Political Case for Agro-industries 39
Global trade regimes
While the expansion of domestic demand for higher-value agro-food products
is likely to be an increasing catalyst of processes of agro-industrialization, the
ability of developing countries to supply global markets will remain a critical
issue (Diaz-Bonilla and Reca, 2000). Indeed, it has long been held that a viable
strategy for developing countries towards industrialization is the processing of
primary commodities, which is predominantly the trade in which they are
already engaged (Crammer, 1999). While we have discussed a number of chal-
lenges faced by developing countries in supplying export markets, especially in
view of the rapid evolution of the global agro-food economy, traditional trade
restrictions (e.g. in the form of tariffs and quantitative restrictions) remain a
problem. Indeed, tariff escalation according to the level of processing remains
a reality in many industrialized countries, acting to thwart the ambitions of
developing countries to move up the value chain, as they are being advised by
those very same industrialized countries to do. At the same time, non-tariff
measures, including food safety and quality standards, are creating new chal-
lenges, especially for developing countries that lack the critical food safety and
quality management infrastructure (World Bank, 2005; Henson, 2007a), which
may prevent them from being able to exploit preferential market access as low-
income countries. Ongoing global trade negotiations clearly have a role to play
in addressing this issue.
A secondary impediment to developing countries attempting to access
industrialized (and also developing) country markets for agro-industrial products
is the considerable advantage enjoyed by firms that already have a market pres-
ence, for example, through information networks and market linkages. Indeed,
developing country agro-industrial enterprises can struggle to integrate them-
selves into increasingly sophisticated and integrated global supply chains. This
can mean that considerable time is required for developing country agro-
industries to exploit trade opportunities. It is perhaps not surprising, therefore,
that there has been little change in the countries of sub-Saharan Africa that
dominate exports of non-traditional agricultural and food products, reflecting
the fact that there have been few appreciable new entrants (Henson, 2007b).
We observe similar patterns in the trade of higher-value agricultural and food
products in other parts of the world, suggesting very significant first entrant
advantages.
Strategic thinking
In recent history, agro-industrialization has gone through two broad stages of
development in a developing country context. Prior to the era of structural
adjustment, the public sector played a dominant role in steering the establish-
ment of large-scale and often publicly owned enterprises in the pursuit of rather
dubious objectives, including driving broader processes of industrialization.
While many of these efforts are recognized to have failed, the subsequent phase
has arguably been little better. Thus, in the pursuit of private investment, many
40 S. Henson and J. Cranfield
countries have left the agro-industrial sector to evolve in a laissez-faire manner,
with little or no strategic direction at the sectoral or sub-sectoral level. Indeed,
the liberal agenda pursued by many developing countries has caused uncer-
tainty and confusion over the legitimate role of government.
Too often government has taken a ‘back seat’, by simply observing the
evolution of agro-industries without defining and steering the sector towards
strategic objectives. Indeed, there is a need for developing countries to identify
the most appropriate path for processes of agro-industrialization in their par-
ticular country context. They should identify areas where they can or cannot
compete in domestic and global markets and also establish how the growth of
agro-industries can contribute to economic development through employment
creation, reduction in poverty, reduction in market prices, enhancement of
food safety and quality, environmental protection, etc. Without the adoption of
a strategic approach to agro-industrialization, any contribution to these devel-
opment objectives is largely coincidental. At the same time, there is fear, and
indeed some evidence, that agro-industries are becoming highly concentrated,
crowding out undercapitalized domestic firms and small producers, substituting
domestic equipment for imports and enriching urban elites at the expense of
the rural poor (Jaffee et al., 2003).
The challenge for developing countries is to establish effective working
relations between the public and private sectors in order to define a path for
the development of the agro-industrial sector that does not stifle private incen-
tives, yet brings about broad-based and sustainable growth that creates wealth
and enhanced human well-being. This suggests that government has a legit-
imate role to play, not in directing private sector investments, but instead in
creating conditions that are conducive to private investment and innovation
and steering the development of the sector, in broad terms, in the ‘right direc-
tion’. In turn, this requires that fruitful relations are developed between govern-
ment and private enterprises, on a collective as well as an individual enterprise
level, based on trust and mutual understanding.
The challenges highlighted above suggest that a national strategy for agro-
industrial development is likely to be wide-ranging. However, some of the crit-
ical issues such a strategy might cover are as follows:
?
Work with agro-industries at the sub-sector and sector levels to define plans
to enhance competitiveness in domestic and global markets.
?
Work with large agro-industries to assist small firms and producers to meet
their requirements.
?
Work to eliminate institutional barriers to entry which inhibit entrepre-
neurial dynamism.
?
Ensure effective competition between enterprises in the agro-industrial sec-
tor so as to ensure choice for primary producers and consumers and ‘fair’
prices.
?
Work towards the enhancement of general and sector-specific infrastruc-
ture, working with the private sector where appropriate.
?
Lay down a regulatory framework that facilitates business investment, pro-
motes competition between agro-industrial enterprises and ensures ‘fair’
treatment of consumers and primary producers.
Building the Political Case for Agro-industries 41
?
Make strategic investment in research and development that, rather than
being broad-based, are directed at identified areas of competitive
advantage.
?
Negotiate with international trading partners for market access and tech-
nical assistance directed at competing in markets where a competitive
advantage has been identified.
In developing such strategies there is no need for developing countries to each
start from scratch and to ‘reinvent the wheel’. Developing countries, and the
sectors and firms therein, should be encouraged to share experiences. Bilateral
and multilateral donors and development organizations can play a role in facili-
tating experience sharing and in supporting processes of technology transfer,
while FDI and the trade relations that firms in developing countries have with
international buyers will be of increasing importance to capacity development
at the enterprise level.
Conclusions
This chapter has sought to outline the nature of the process of agro-
industrialization in developing countries and the challenges being faced, most
notably as the global agro-food economy changes in response to a series of
pervasive mega trends. It is evident that the future trajectory of agro-industries
will be quite different to the past and, while developing countries are making
efforts to establish nascent agro-industries, the world around them is changing
rapidly. Certainly, the basis of competitiveness of agro-industries in develop-
ing countries in the future is likely to be somewhat different to the past, requir-
ing the transition of existing enterprises and the adoption of new policies and
approaches to the establishment of enterprises in the future. At the same
time, this ‘new world’ is creating significant opportunities for developing coun-
tries that are able to respond appropriately.
It is evident that agro-industries can (and do) play a fundamental role in
overall processes of industrialization and economic development, although
there are significant (and not always positive) micro impacts and externalities.
For example, while agro-industries present new opportunities for more secure
and better paid employment, the transition from the informal to the formal
sector inevitably involves dramatic changes in the structure of value chains and
associated vertical and horizontal power relations. Thus, agro-industries can
evolve in a manner that acts to exclude smaller formal sector enterprises and
small primary producers, having detrimental structural and livelihood impacts.
Likewise, while agro-industrialization can bring about environmental benefits,
there is also significant scope for negative environmental externalities. This
highlights the need for processes of agro-industrialization to follow an ‘appro-
priate path’, guided by appropriate policies and strategies.
The overall picture painted by this chapter is that the development of agro-
industries in the contemporary context provides opportunities for significant
gains to developing countries, although exploiting the opportunities in a manner
that these gains exceed the losses is far from certain. Certainly, there is a political
42 S. Henson and J. Cranfield
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and setting out a strategic direction that serves the needs of developing countries
and the consumers they serve worldwide.
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46 © FAO and UNIDO 2009. Agro-industries for Development (C.A. da Silva et al.)
Introduction
Agro-industry, understood here broadly as postharvest activities involved in the
transformation, preservation and preparation of agricultural production for
intermediary or final consumption, typically increases in importance with
regard to agriculture and occupies a dominant position in manufacturing as
developing countries step up their growth. In all developing countries popula-
tion growth is becoming predominantly an urban phenomenon, increasing the
role of agro-industry in mediating food production and final consumption.
While many long-standing commodity exports have declined in importance,
‘non-traditional’ food exports, especially fruits, horticulture and fish products,
and components of the animal protein complex, have become central to devel-
oping country exports. Whether looked at from the point of the domestic mar-
ket or exports, therefore, agro-industry plays a fundamental role in the creation
of income and employment opportunities in developing countries.
The agro-processing sector covers a broad area of postharvest activities,
comprising artisanal, minimally processed and packaged agricultural raw mater-
ials, the industrial and technology-intensive processing of intermediate goods
and the fabrication of final products derived from agriculture. The hybrid char-
acteristics and heterogeneous features of the agro-processing sector, ranging
from the informal contract relations of poor rural communities to the complex,
transnational activities of global players, suggest the need for caution when
presenting an empirical overview, which is the main objective of this chapter.
1
3 Agro-industry Trends, Patterns
and Development Impacts
JOHN WILKINSON
1
AND RUDI ROCHA
2
1
Professor and Researcher, CPDA, Universidade Federal Rural do Rio
de Janeiro, Brazil;
2
PhD Candidate, Department of Economics, Pontifícia
Universidade Católica do Rio de Janeiro, Brazil
1
The overview initially follows the conventional agro-industry divisions according to the
International Standard Industrial Classification (ISIC – aggregating the 3- and 4-digit levels of
Revision 3), which includes the main sub-sectors of: (i) food and beverages; (ii) tobacco prod-
ucts; (iii) paper and wood products; (iv) textiles, footwear and apparel; (v) leather products; and
Agro-industry Trends, Patterns and Development 47
The agrifood sector can be seen as comprising: (i) products for subsistence
and local markets (basically root crops); (ii) staples for urban domestic markets
(predominantly cereals); (iii) traditional export commodities (coffee, cocoa,
tea, nuts, cotton); (iv) components of animal protein diet (dairy products, oils
and animal feed) and different meat chains (red meat, pigs, poultry) for both
domestic and export markets; (v) fresh or non-traditional products (fruits, hor-
ticulture, flowers, seafood/aquiculture); and (vi) differentiated traditional
exports (fair trade, organics, origin products), which are now oriented also to
domestic markets.
Traditional export commodities are primarily tree crops integrated into
multi-crop family farming systems. Non-traditional, fresh products tend to
demand greater specialization. The latter are particularly associated with labour-
intensive, both in production and postharvest, activities. It is argued that they
are particularly beneficial from the point of view of the trade balance, and that
they tend to offer greater opportunities for capacity building, given the need to
transfer know-how on technical demands related to quality and the nature of
market demand (Athukorala and Sen, 1998). Others argue, on the contrary,
that cheap land and labour are still the key attractions for investing in develop-
ing countries, leading to a ‘race to the bottom’ as countries and regions bid for
investments on the basis of these spurious advantages (Gibbon and Ponte,
2005). Other research suggests that the logistical and quality demands of non-
traditional products are leading to a shift away from smallholders to large-scale
commercial farms (Dolan and Humphrey, 2000). Traditional export commodi-
ties or fresh ‘non-traditional’ products require special quality attributes, which
involve new forms of economic coordination through contracts and supply-
chain management. Here the ‘global value chain’ (GVC) literature is particu-
larly important (Gereffi et al., 2005).
This chapter presents an empirical panorama of the agro-processing sector,
selecting the most recent data for each country and identifying dynamic trends
whenever possible. The core indicators highlighted will be agro-processing pro-
duction and value added, contribution to GDP and participation within the total
manufacturing sector, the level of formal employment, its gender composition
and differences in productivity. With a broader focus on the agrifood system, we
also investigate changes in consumption and international trade patterns.
In the concluding section we place our discussion within a broader consid-
eration of global tendencies, briefly focusing in turn on energy, global warm-
ing, innovation and the emerging institutional and regulatory context governing
global markets. The central implication we draw is that policies for agro- industry
should occupy a central position in developing country strategies and that
domestic initiatives should now receive special attention. We then indicate the
areas that, in our view, should constitute the focus of policy measures.
(vi) rubber products. We will focus particularly on the different divisions of agrifood production/
consumption in order to highlight important features of food-processing, the largest sub-sector,
and the centre of the most dynamic changes in the agro-processing sector during the last
decades.
48 J. Wilkinson and R. Rocha
Panorama: Core Indicators
Methodology
The methodology adopted in this chapter involves an analysis of a country data
set constructed on the basis of the UNIDO Industrial Statistics Database
2005, and organized according to the World Bank classification of high-income
country (HIC), upper-middle-income country (UMIC), lower-middle-income
country (LMIC) and low-income country (LIC). Basic trends in both non-food
and food are presented, but the study as a whole focuses on the food sector.
Data were also drawn from the World Development Report (WDR) 2008
(World Bank, 2007) typology for developing countries, which distinguishes
predominantly agricultural countries, developing countries in transformation
where the urban economy begins to dictate growth in spite of the numerical
superiority of the rural population and urbanized developing countries. Other
data sources drawn on include FAO, ILO, the Confederation of European
Agro-industries (CIAA), UNCTAD, USDA and World Development Indicators.
For the discussion of the major drivers behind the recent transformation in
the agro-industrial sector an extensive literature review was carried out. Of
particular relevance here have been the value chain approaches associated with
Duke University in the USA, the IDS in England and the DIIS in Denmark; the
farm–agribusiness linkages initiatives carried out in all three developing country
continents by FAO; the research into non-traditional food exports undertaken
by Athukorala and colleagues; the African Regional Working Papers of the
World Bank; and research carried out within the framework of CIRAD’s cooper-
ation programmes, together with the research coordinated by RIMISP on
re-governing markets. We have also benefited from numerous individual stud-
ies, in the form of working papers, published articles and books.
Agro-industry production and development impacts
An extended definition of the agro-processing sector, including not only agro-
related industries, but also distribution services and trading activities, would
roughly account for more than one-third of the GDP of Indonesia, Chile, Brazil
and Thailand, and between 20% and 25% of GDP in sub-Saharan countries.
The entire food system, including the production of primary goods and com-
modities, marketing and retailing, would account for more than 50% of the
GDP in developing countries (Jaffee et al., 2003, based on World Bank, FAO
and UNIDO databases).
In order to gather comparable data within a narrower, more industry-
specific perspective, we used only the UNIDO Industrial Statistics Database
2005, selecting countries for which data are available on a consistent basis and
grouping them according to the World Bank country classification by level of
income per capita.
On the basis of this analysis, formal agro-processing participation in the
overall gross product corresponds to around 4.3% in LICs (which include
Agro-industry Trends, Patterns and Development 49
Bangladesh, Ethiopia, Eritrea, India, Mongolia, Senegal and Vietnam) and
about 5% in LMICs and UMICs
2
(see Table 1). Considering the importance of
artisan production and the informal sector in this activity, particularly in LICs,
but generally in the developing world, we can safely interpret this information
as heavily underestimating the real picture.
Within manufacturing or production, the agro-processing sector in devel-
oping countries occupies a relevant place in overall turnover and value added,
particularly for the least- and less-developing countries, though huge hetero-
geneity may exist among them. Considering the group of LICs analysed here,
on average, about 52% of total manufacturing value added corresponds to the
agro-processing sector; for the LMICs and UMICs we find figures of, respect-
ively, 36% and 32%. In agriculture-based countries the contribution of agro-
processing to total manufacturing is 66%, while in transforming and urbanized
countries the figures are, respectively, 38% and 37%.
Based on Jaffee et al. (2003) we calculated the ratio of agribusiness share
over the agriculture share of GDP for a group of selected countries, which
includes a representative sample of sub-Saharan African countries, transform-
ing countries (Indonesia and Thailand), urbanized countries (Latin America and
South Africa) and the USA. Agribusiness provides inputs to farmers and con-
nects them to consumers through the handling, processing, transportation,
marketing and distribution of agricultural products. According to the WDR
(2008), strong synergies can exist between agribusiness, the performance of
agriculture and poverty alleviation: efficient agribusiness can spur agricultural
growth and a strong link between agribusiness and smallholders can reduce
rural poverty. According to FLO (2007), recent trends show that there has
been a rapid increase of production value adding via agribusiness opportunities
relative to primary agricultural production. Demand from agro-processing
increases as does the effective size of the market for agricultural products.
Traders and agro-processing firms furnish crucial inputs and services to the
farm sector, inducing productivity and product quality improvements, stimulat-
ing market growth and innovation throughout the value chains. In this case, the
agribusiness/agriculture ratio captures the degree of productive and commer-
cial development of agro-related activities, the sophistication of agro-industrial
backward and forward linkages, the capacity level of value adding and market
creation, and the importance of distributing and retailing. For agriculture-based
countries, for instance, moving the core economic activities from the farm gate
to the agro-industrial sector and its services may represent productive diversifi-
cation and lead to higher levels of productivity and income generation as well
as higher shares of non-farm employment in rural areas. Above all, at an aggre-
gate level, this ratio may capture the level of structural transformation currently
faced by developing countries, where productivity growth corresponds to a
shifting sector composition of economic activity, a fall in the share of agriculture
2
LIC: Low-income country
LMIC: Lower-middle-income country
UMIC: Upper-middle-income country.
5
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Table 1. Agro-processing participation and the agribusiness/agriculture ratio.
Year
Agriculture
share of
GDP
a
(1)
Agribusiness
share of
GDP
a
(2) (2)/(1) Ratio
% Agro-
processing
sector in GDP
b
% Food-
processing
and beverages
in total
manufacturing
b
% Agro-
processing
in total
manufacturing
b
Cameroon 0.40 0.17 0.43 – – –
Côte d’Ivoire 0.28 0.26 0.93 – – –
Ethiopia 2002 0.56 0.30 0.54 0.053 0.49 0.69
Eritrea 2001 – – – 0.047 0.45 0.64
Ghana 0.44 0.19 0.43 – – –
Kenya 0.26 0.23 0.88 – – –
Nigeria 0.42 0.16 0.38 – – –
Tanzania 0.32 0.21 0.66 – – –
Uganda 0.41 0.23 0.56 – – –
Agriculture-
based
countries
0.39 0.22 0.57 0.050 0.468 0.664
Bangladesh 1998 – – – 0.036 0.10 –
Mongolia 2000 – – – – 0.49 –
Vietnam 2000 – – – 0.058 0.25 0.41
India 2001 – – – 0.022 0.11 0.27
Indonesia 2002 0.20 0.33 1.65 0.066 0.11 0.42
Morocco 2001 – – – – 0.20 –
Philippines 1999 – – – – 0.18 –
Senegal 2002 – – – 0.033 0.37 0.50
Thailand 1998 0.11 0.43 3.91 – 0.25 –
A
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5
1
Egypt, Arab Rep. 2002 – – – 0.022 0.18 0.30
Zimbabwe 0.18 0.21 1.17 – – –
Transforming
countries
0.16 0.32 1.98 0.040 0.224 0.381
Bolivia 1998 – – – 0.056 0.34 0.42
Brazil 2002 0.08 0.30 3.75 – 0.18 –
Bulgaria 2002 – – – – 0.14 –
Argentina 1999 0.11 0.29 2.64 – 0.28 –
Chile 0.09 0.34 3.78 – – –
Czech Republic 1999 – – – – 0.09 –
Hungary 2000 – – – – 0.14 –
Mexico 2000 0.09 0.27 3.00 0.037 0.24 0.35
Oman 1997 – – – 0.092 0.18 0.23
Russian
Federation
2002 – – – – 0.19 –
South Africa 1996 0.04 0.16 4.00 – 0.15 –
Uruguay 2000 – – – 0.054 0.31 0.49
Urbanized
countries
0.08 0.27 3.32 0.060 0.203 0.375
USA 0.01 0.13 13.00 – – –
Unweighted
average
LICs 0.043 0.32 0.52
LMICs 0.055 0.20 0.36
UMICs 0.051 0.20 0.33
a
Source: Jaffee et al. (2003) for agriculture and agribusiness share of GDP. Agribusiness combines the value added for agro-related industries and that
of agricultural trade and distribution.
b
UNIDO Industrial Statistics Database (2005) for agro-processing data with respective year.
Unweighted averages consider all information available in each column.
52 J. Wilkinson and R. Rocha
and increasing transfers of capital and labour from agriculture towards expand-
ing agro-industrial and related service sectors.
In the USA agribusiness contributes 13 times more to GDP than pure
agricultural activities. In urbanized developing countries, following the WDR
typology, this ratio remains at 3.3, whereas in transforming countries it falls
below 2 and in agriculture-based countries it is only 0.6. More fundamentally,
and not surprisingly, this ratio is highly correlated with basic measures of socio-
economic development. Low indices of human development are directly related
to low ratios of agribusiness-to-agriculture development. Socio-economic
catch-up, on the other hand, can be highly and positively correlated with levels
of economic growth passed on from agriculture to agro-related manufacturing
and service activities (Figure 1).
According to the WDR, growth in rural non-farm employment is in many
cases an important factor in rural poverty alleviation and remains closely linked
to improvements in agriculture. Rural trade and transport, often of food, would
represent about 30% of rural non-farm employment.
3
The direction of causal-
ity, however, is conditional on specific circumstances. Some estimates for rural
China highlight the effects of growth on farming rather than on non-farming
activities, with less evidence of reverse linkages. On the other hand, with urban-
ization becoming an almost generalized worldwide trend, growth in rural non-
farm employment occurs independently of agriculture performance. When
capital and products are mobile, investors search for low-wage opportunities in
areas that have not increased their incomes through higher agricultural product-
ivity. There are also generally areas that are closer to primary agricultural inputs.
3
The report identifies a high correlation between the ratio of food-processing to agricultural
value added and income per capita for a sample of developing countries.
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0
Human Development Index - HDI
Agribusiness/agriculture ratio
Higher correlation for low HDI countries
Mostly agriculture-based
countries
USA
Mostly urbanized
countries
Figure 1. Correlation between human development and the agribusiness/
agriculture ratio.
Agro-industry Trends, Patterns and Development 53
For instance, urban overcrowding and higher labour costs have stimulated
urban-to-rural subcontracting in East Asia, both for domestic consumption and
for export. In this case, although relatively few of the poor gain access to non-
farm jobs in rural areas, higher labour demand would indirectly put upward
pressure on agricultural wages.
Production: basic stylized facts within agro-processing
Within agro-industry, food-processing and beverages are by far the most
important sub-sector in terms of value added, accounting for more than 50%
of the total formal agro-processing sector in LICs and LMICs, and more than
60% in UMICs (see Figure 2). For the African countries included in Table 1,
Ethiopia, Eritrea and Senegal, food and beverages represent more than 70%
of agro-industry value added and roughly 30–50% of total manufacturing. On
the one hand, tobacco and textiles have played an important role in Asian and
Middle-Eastern countries, while wood, paper and rubber production are heavily
concentrated in Asian countries. Leather products, on the other hand, repre-
sent only a marginal share in the total agro-processing value added. According
to FAO (2007), throughout the past 25 years, the shares of global manufactur-
ing value addition for food, beverages, tobacco and textiles (which are the main
agro-industry manufacturing product categories tracked by UNIDO) generated
by developing countries have almost doubled. For textiles, developing countries
accounted for 22% of manufacturing value added in 1980, but more than 40%
in 2005. The increase was the greatest for tobacco, reaching 44% of global
value addition in 2005. In order to focus on sub-sectors that make up almost
Figure 2. Agro-processing sector composition in terms of value added, by group of
developing countries.
0
10
20
30
40
50
60
70
80
90
100
Low income
P
e
r
c
e
n
t
a
g
e
Lower middle income Upper middle income
Food & beverages
Tobacco Textiles
Leather products and footwear
Paper, wood and paper products Rubber and plastic products
54 J. Wilkinson and R. Rocha
all the agro-processing value added in LICs, the chapter will concentrate on
textiles, tobacco and, above all, food and beverages.
Considering specifically the food-processing sub-sector, Figure 3 shows
that processed meat, fish, fruits, vegetables and fats, and bakery, macaroni,
chocolate and others represent together 70–75% of the total value added.
Grains are relatively more important for LICs and dairy products for HICs.
Food industries in emerging countries are undergoing considerable expansion,
particularly in Latin America and Asia. Brazilian and Chinese food production
recorded double-digit growth rates (16% and 22%, respectively) from 2001 to
2004 (CIAA, 2006). According to FAO (2007), there are large differences
among developing regions in the distribution of formal sector agro-industry
value added. Latin American countries accounted for nearly 43% of food and
beverages value addition in 2003 and countries of South and South-east Asia
for 39%. African countries, however, contributed less than 10%.
The textile, clothing, leather and footwear sub-sectors are among the most
globalized activities of the agro-processing sector. As a result of this globaliza-
tion process, the speed of which has increased in the last 2 decades, world
distribution of production, trade and employment has changed dramatically
over the years, and is likely to change even more given the recent phasing out
of the Agreement on Textiles and Clothing (WTO, 2007).
Labour productivity
Productivity levels within agro-industry are heterogeneous, ranging from low
for textiles and wood products to extremely high for tobacco products. When
compared to agricultural or general manufacturing standards, agro-industry
approaches industrial averages or even reaches relatively higher productivity
levels, as is the case for food and beverages in LICs and MICs (Table 2).
0
10
20
30
40
50
60
70
80
90
100
High income
P
e
r
c
e
n
t
a
g
e
Upper middle income Lower middle income Low income
Processed meat, fish, fruit, veg & fats Bakery, macaroni, chocolate and others Dairy Grains
Figure 3. Food-processing sub-sector composition in terms of value added.
A
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e
v
e
l
o
p
m
e
n
t
5
5
Table 2. Labour productivity in agro-industry (value added over number of workers, average in current US$).
Year
a
Food &
beverages
a
Tobacco
products
a
Textiles
a
Wood
products
a
Paper
and paper
products
a
Rubber
and plastic
products
a
Total
manufacturing
a
Agricultural
productivity
b
Bangladesh 1998 2,939 40,192 862 1,437 2,007 1,967 2,066 308
Ethiopia 2002 7,756 23,674 1,215 – 3,178 6,162 4,696 149
India 2001 3,192 1,754 2,667 1,801 4,631 5,525 5,053 381
Mongolia 2000 2,695 – 2,580 1,059 759 – 1,619 684
Senegal 2002 11,952 35,459 4,863 10,569 13,113 9,805 13,843 249
Vietnam 2000 3,146 – – – – – 2,841 290
Unweighted
average – LICs
5,280 25,270 2,437 3,716 4,737 5,865 5,020 344
Brazil 2002 18,047 59,865 10,368 7,730 34,801 13,587 19,559 2,790
Bulgaria 2002 2,782 4,969 2,607 1,838 2,399 3,093 2,864 6,313
Indonesia 2002 6,206 9,553 4,532 5,117 16,355 3,419 7,056 556
Morocco 2001 11,523 255,815 7,001 6,061 17,561 9,910 11,657 1,515
Philippines 1999 26,423 56,854 7,310 5,572 15,053 10,942 16,065 1,017
Thailand 1998 10,499 1,996 5,484 3,261 9,929 6,043 8,276 586
Egypt 2002 6,028 9,722 1,878 2,812 9,047 3,891 6,883 1,975
Unweighted
average
– LMICs
11,644 56,968 5,597 4,627 15,021 7,270 10,337 2,107
Argentina 1999 33,255 71,516 21,468 15,909 35,255 29,750 33,843 9,272
Czech Republic 1999 10,872 – 6,864 7,539 11,640 11,595 9,758 4,564
Hungary 2000 9,942 38,988 5,412 5,374 14,208 10,810 11,436 5,080
Mexico 2000 39,964 254,613 14,779 12,259 43,248 23,767 41,156 2,704
South Africa 2001 10,789 – – – – – 9,329 2,391
Uruguay 2000 25,698 311,406 20,412 18,099 34,452 19,356 35,651 6,743
Unweighted
average
– UMICs
21,753 169,130 13,787 11,836 27,761 19,056 23,529 5,126
a
UNIDO Industrial Statistics Database 2005 for agro-processing data with respective year, in current US$.
b
Source: WDR (2008), data for 2001–2003, US$ 2000 prices.
56 J. Wilkinson and R. Rocha
The fact that productivity levels for food processing are above the manu-
facturing average not only complements the patterns identifying the sector as
one of the largest industrial activities in LICs and MICs in terms of value adding,
but also confirms it as one of the most efficient economic sectors in least-
developed countries and the one that pushes the manufacturing sector towards
higher levels of technical capabilities and value-adding achievements. Table 3
shows that dairy products present the highest labour productivity levels in LICs
and LMICs, while grains occupy this position in UMICs, as well as in HICs.
Employment, informality and gender composition
According to the ILO, on average, 60% of the workers in the food and bever-
age industry in developing countries are employed in the informal economy,
occupying jobs that are often precarious in terms of social protection. A major
problem here is the absence of comparable statistics. Following the ILO esti-
mates and considering only countries where official statistics are available and
on the basis that data cover only the formal economy, we may have some 22
million people employed globally in the food and drink industries.
4
Both the
ILO and the UNIDO statistics confirm a decline of employment in the food and
drink industry in many developed countries, often as a result of the relocation
of processing operations to developing and transition economies. On the other
hand, there has been strong growth in employment in some developing coun-
tries (Thailand, Mexico, the Philippines) while other countries (e.g. South
Africa) have experienced a sharp fall in recent years (ILO, 2007).
Many high-value agrifood and non-food chains are characterized by increas-
ing levels of female participation (Dolan and Sorby, 2003). In the Dominican
Republic, women comprise roughly 50% of the labour force employed in horti-
culture processing (Raynolds, 1998). In Mexico, 89–90% of employees in pack-
aging are women (Barrón, 1999). In Kenya and Zambia, over 65% of workers
in horticulture pack-houses and farms are women (Barrientos et al., 2001;
Table 3. Productivity in the food-processing sector (value added per worker, average in
current US$). (Based on the UNIDO Industrial Statistics Database 2005. Countries within
each category are the same as presented in Table 1.)
Processed meat,
fish, fruits,
vegetables and fats Dairy Grains
Others: bakery,
macaroni,
chocolate, etc.
Food-
processing
sector
Total
manufacturing
LIC 3,830 9,418 6,388 4,395 4,937 4,804
LMI 15,941 21,090 15,587 10,605 15,083 15,694
UMI 18,023 21,855 29,308 17,919 18,296 23,076
HIC 46,675 71,439 87,569 61,433 55,408 57,738
4
Based on LABORSTA. More information at: http://www.ilo.org/public/english/dialogue/sector/
sectors/food/emp.htm.
Agro-industry Trends, Patterns and Development 57
Dolan and Sutherland, 2002). Women represent 91% of horticultural workers
in Zimbabwe (AEAA, 2002). In Chilean fruit production, female employment
increased almost 300% between 1982 and 1992, an impressive pattern when
compared to a national growth rate of 70% for the female labour force
(Barrientos, 1997). In Brazil, 65% of workers in fruit production were women in
the mid-1990s (Collins, 2000). In horticulture, the highest levels of female par-
ticipation have been documented in the cut flower sector. In Tanzania, Ecuador,
Kenya and Uganda, women represent respectively 57%, 70%, 75% and 85%
of workers (Blowfield et al., 1998; Palan and Palan, 1999; Asea and Kaija,
2000; Dijkstra, 2001). Poultry processing is another labour-intensive activity
and absorbs high levels of female workers. In 2000, 80% of employees in
Thailand’s Cargill subsidiary, Sun Valley, were women – a proportion similar to
that found in other poultry processors (Lawler and Atmananda, 1999).
Dolan and Sorby (2003) argue that flexible labour follows gender-based
patterns, with women allocated to more vulnerable forms of work (casual, tem-
porary and seasonal), and men concentrated in the fewer permanent jobs. In
most activities, there is strong gender segmentation in both production and
processing, reinforced by prevailing gender stereotypes. Women are con sidered
to have higher skills for tasks requiring manual dexterity and patience, such as
harvesting, sorting, grading, de-boning and packaging. Men, for their part, are
seen to have superior physical strength, supervisory capacity and mechanical
skills.
According to ILO (2005), the participation of female workers in the cloth-
ing and textile industries is above the manufacturing average and significantly
higher for the clothing sector. Women are often young and low skilled. The
share of female employment in clothing is considered to be more than 89% in
Cambodia, 80% in Bangladesh and 82% in Sri Lanka. Female participation in
India and Turkey is below 50%, while in Guatemala it reaches around half of
total employment. Female participation in textiles is generally lower, below
50%, with the exception of Cambodia (76%) and Sri Lanka (61%).
The role of the rural non-farm economy
5
According to the WDR around 75% of the poor in developing countries live in
rural areas, 2.1 billion living on less than US$2 a day and 880 million on less
than US$1 a day. Although agriculture remains at the productive centre of
most rural economies, labelling them as purely agricultural is clearly inaccurate.
For developing countries as a whole, non-farm earnings account for 30–45%
of rural household income. This is not only a large share in absolute terms but
increases over time, constituting a complement to agricultural wages and an
instrument for risk diversification and the evening out of consumption patterns.
With low capital requirements and undemanding local marketing channels, the
rural non-farm economy offers opportunities for poor households, small-scale
5
Based mainly on Haggblade et al. (2005).
58 J. Wilkinson and R. Rocha
farmers and other smallholders, representing a potentially important instru-
ment for poverty alleviation in rural areas.
Haggblade et al. (2005) argue that the rural non-farm economy plays an
important role in the process of structural transformation, during which the
share of agriculture in national output declines and transfers of capital and
labour drive a corresponding rise in manufacturing and services, particularly
those related to agro-industry. Here, therefore, we have a key for the under-
standing of many of the processes driving overall economic growth and poverty
reduction in least developed countries.
The rural non-farm economy is a heterogeneous set of trading, agro-
processing, manufacturing, commercial and service activities, ranging from
part-time artisanal entrepreneurs to large-scale industrial plants operated by
multinational firms. Some clear compositional patterns can be identified spa-
tially, with home-based cottage industries, small-scale retailers and basic farm
equipment repair services predominating in rural areas while factories, traders
and transport facilities, public administration offices, schooling, health clinics
and other services are concentrated in small towns.
In terms of sector composition, rural industries account for only 20–25%
of rural non-farm employment (see Table 4), consisting mostly of occupations
in agro-industries. Indirectly, however, other activities such as commerce and
retailing, construction, transport and trade are typically associated with agro-
related manufactures and agribusiness.
Agriculture evidently has a direct influence on the size and structure of the
rural non-farm economy since it accounts for the largest share of employment,
value addition and raw material supplies. Haggblade et al. (2005) discuss two
main scenarios for the dynamic relation between agriculture and the rural non-
farm economy. On the one hand, where new technologies and modern farm
inputs are available there would be productivity surpluses and increasing oppor-
tunities for trade, capital accumulation and value addition. A dynamic agriculture
fuels economic growth in the rural non-farm sector through a number of link-
ages. It requires inputs, such as seeds, fertilizer, credit, machinery, marketing and
processing facilities, which create an increasing demand for non-farm enterprises
that provide such goods and services. Still, some non-farm activities, initially
undertaken by farm households for self-consumption, spin off as full-time com-
mercial enterprises, while others, particularly labour-intensive household manu-
facturing, die out in rural areas, displaced by imports from cheaper urban
factories. This demise of low-productivity household manufacturing as well as
changes in consumption patterns towards modern urban-related habits would, in
part, explain why employment in services and commerce often increases faster
in rural areas than local manufacturing and small-scale agro-processing plants.
Consumption patterns of processed food and beverages
As presented previously, processed food and beverage products account, on
average, for almost 50% of total agro-processing value added in developing
countries, and occupy an even more relevant place in the overall manufacturing
A
g
r
o
-
i
n
d
u
s
t
r
y
T
r
e
n
d
s
,
P
a
t
t
e
r
n
s
a
n
d
D
e
v
e
l
o
p
m
e
n
t
5
9
Table 4. Composition of rural non-farm employment by region. (From Haggblade et al., 2005.)
Rural non-farm employment shares
Non-farm share
of rural
workforce
Women’s share of
rural non-farm
employment Manufacturing
Trade &
transport
a
Financial and
personal
services
b
Construction,
utilities, mining
and others
c
Total rural
non-farm
Africa 10.9 25.3 23.1 21.9 24.5 30.4 100
Asia 24.8 20.1 27.7 26.3 31.5 14.4 100
Latin America 35.9 27.5 19.5 19.6 27.3 33.5 100
West Asia and
North Africa
22.4 11.3 22.9 21.7 32 23.2 100
a
Trade and transport include wholesale and retail trade, transport and storage.
b
Other services include insurance and community and social services.
c
Others include quarrying and other non-classified activity.
60 J. Wilkinson and R. Rocha
value added of LICs. We now focus on consumption trends, the primary driving
force of the agro-processing sector and its most dynamic feature. The following
discussion presents recent trends in consumption patterns with particular atten-
tion given to the changing composition and growth rates of consumption in
developing countries.
Global sales of food and beverages were estimated at US$4 trillion
6
in
2002, around 80% of which corresponded to processed food and beverages
(US$3.2 trillion) with over 40% accounted for by the food service sector.
Within the retail sector US$531 billion of food sales corresponded to fresh
products, while US$1.7 trillion were made up of processed foodstuffs – about
US$1.1 trillion of which was packaged food with beverages amounting to
US$641 billion (Gehlhar and Regmi, 2005). Expenditure on processed food
and beverages approached US$4.8 trillion in 2007, which is 57% higher
when compared to that of 2001, indicating a recent average annual growth
rate of 7% (ILO, 2007).
Following the calculations of Gehlhar and Regmi (2005) based on
Euromonitor (2003), food consumption in HICs accounted for over 60% of
packaged food sales in the world and half of total food expenditures. In 2002,
per capita retail sales of packaged food in these countries were US$979, more
than 15 times the value found in the case of the LICs, which was some US$63.
In spite of this very low level of expenditure we find that the share of food in
total expenditures is more than 40% in LICs, mostly on non-packaged food
(see Figure 4). With rising incomes, relative expenditure on food share declines,
although the share of processed food in total food expenditures increases.
According to FAO (2001) (Food balance sheets 1999–2001), large differ-
ences in calorie consumption patterns between developed and developing
Low income
0
10
20
30
40
50
P
e
r
c
e
n
t
a
g
e
Food share of total expenditures declines while processed food
share of food expenditures increases with income, 2002
Low middle
income
Upper middle
income
High income
Non-packaged
Packaged
Figure 4. Food share of total expenditures by group of countries (2002). (From
Gehlhar and Regmi, 2005, based on Euromonitor.)
6
One trillion = 1,000,000,000,000.
Agro-industry Trends, Patterns and Development 61
countries are also found – 3261 versus 2675 calories per capita per day,
respectively. As regards diet composition, meat, milk and dairy products
account for only 5% of total calories consumed per day in developing coun-
tries, while they amount to around 19% in the developed world. Cereals, on
the other hand, account for 53% of calories consumed in developing countries,
against 31% in developed countries (see Figure 5). Also, according to Gehlhar
and Regmi (2005, p. 10), the number of products purchased at retail outlets is
greater for wealthier countries, reflecting the increased demand for variety as
incomes increase. The top five product categories account for 71% of proc-
essed food retail sales for Mexico and 74% for India, but only 48% for the USA
and 47% for the UK. The authors point out that, as the demand for processed
foods and beverages (soft drinks) is also driven by the demand for higher qual-
ity, the items consumed by countries at different income levels reflect different
levels of demand for services embodied in the products. For example, ready-to-
eat meals account for about 4% of total retail sales in the USA and the UK, but
only 0.06% in Mexico and 0.55% in China. On the other hand, intermediate
products, such as fats and oils, while accounting for over 7% of total processed
food retail sales in India, 13% in Indonesia and 5% or more in many developing
countries, account for less than 2% of retail sales in HICs.
In spite of relatively low levels of consumer expenditure on processed food
and beverages in developing countries, these figures are changing rapidly.
Between 1996 and 2002, while retail sales of packaged foods have grown at
about 2% or 3% per year in HICs, they have grown much faster among devel-
oping countries, ranging from 7% in UMICs to 28% in LMICs and 13% in
LICs. In developed countries, growth in food consumption and beverages is
expected to rise mainly from slow rates of population growth rather than from
increases in per capita consumption. On the other hand, as a result of increases
in population, income and per capita food consumption, developing countries
are expected to account for most future increases in processed food consump-
tion. In this context, the high processed food consumption growth rate observed
in MICs, mainly driven by urbanized economies, may soon be paralleled by
China, Thailand, the Philippines, Indonesia, Vietnam and India.
Figure 5. Consumption: composition of calories per capita per day.
30.9%
4.1%
12.8%
0.9%
13.9%
10.2%
8.7%
18.6%
Developing world
53.6%
5.6%
7.5%
2.3%
10.7%
6.6%
2.8%
10.9%
Cereals
Roots and tubers
Sugar
Pulses, dry
Vegetable oils, oil crops
Meat
Milk and dairy, excl. butter
Other food
Developed world
62 J. Wilkinson and R. Rocha
Income and population growth are immediate determinants of increasing
processed food consumption and the upgrading of diets towards variety and
quality. Population growth in a context of urbanization brings changes in food
consumption based on distance and time constraints, placing a premium on
food preservation and convenience. In developing countries, consumers whose
diets have been low-value, carbohydrate-rich cereals increase their expend-
itures on higher-value meats, fruits and vegetables. Consumers in developed
countries and the middle classes in developing countries are shifting their diets
towards foods that reflect not only increases in the nutrient value of the food
basket, but also the value-added services embodied in the products (Gehlhar
and Regmi, 2005).
Increasing sales of ready-to-eat meals, convenience food and food services
have also been promoted by further demographic and social changes, including
the increasing participation of women in the labour market, the ageing of the
population and the rising importance of single-person households. International
tourism and more culturally diverse societies, as a result of international migra-
tion, are also leading to changes in food tastes and higher demand for ethnic
products (ILO, 2007). Processed foodstuffs and soft drinks carry a component
of prestige, which makes them attractive to consumers. Preoccupations with
health issues and food safety further the demand for modified (diet, enriched)
products. Also, Gehlhar and Regmi (2005) highlight the importance of increases
in income on the acquisitions of refrigerators (which may lead to greater house-
hold purchases of perishable food products and frozen, ready-to-eat foodstuffs)
and microwave ovens (increasing the consumption of prepared foods and retail
sales of ready meals). While concerns for health have been a major innovation
driver (diet, light) in the food industry, the correlation between increased con-
sumption of processed foods and obesity and food-related illnesses in both
developed and developing countries has drawn attention to high levels of fats,
sugar and oils in processed and, especially, convenience foods. In addition,
recent research suggests that these levels increase in the case of cheaper
brands, reinforcing the association between poverty and obesity.
7
International trade: agricultural products, processed food
and other high-value agrifood items
In terms of international trade many important trends have occurred during the
last decades in the agricultural sector. We will mainly focus on points of relative
consensus in relation to recent trends. First, despite natural comparative advan-
tages and due primarily to protective trade regimes and distorted tariffs in
developed markets, developing countries have still the same market share in
world agricultural trade as they had in the 1980s. Second, trade composition
has changed dramatically, as a result of stagnant markets for traditional com-
modities and expanding demand for fruits, vegetables, fisheries and beverages.
7
These issues were discussed at length at the FAO Technical Workshop: Globalization of food
systems: impacts on food security and nutrition, Rome, October 2003.
Agro-industry Trends, Patterns and Development 63
Other relevant compositional trends include the increasing share of processed
products in agricultural trade and growing South–South trade flows. Third, we
highlight the small share of traded processed food compared to overall world
sales. An important corollary here is the strong domestic bias of food consump-
tion, which favours FDI rather than trade.
According to Aksoy’s (2005) calculations, the market share of developing
countries in world agricultural trade in 2000–2001 was around 36%, a slightly
lower figure when compared to that of 1980–1981 (see Table 5). This per-
formance would be worse without the increase in trade among developing
countries during the 1990s. Agricultural trade among these countries has been
characterized by its heterogeneity. Trade expanded in the case of LICs, primar-
ily driven by imports from other developing countries. As a group, MICs have
performed worse, although selected countries are becoming major exporters,
such as Argentina, Brazil and Thailand. The increasing presence of Argentina
and Brazil in export markets is particularly notable. Brazil’s export perform-
ance is mostly concentrated on sugar, oilseeds and meats, while Argentina’s
also covers cereals and dairy products. Other emerging exporters in develop-
ing and transition economies include Russia and the Ukraine for coarse grains,
Vietnam and Thailand for rice, Indonesia and Thailand for vegetable oils and
Thailand, Malaysia, India and China for poultry (OCDE and FAO, 2007). On
the other hand, UMICs in East Asia are becoming major importers.
Nevertheless, flows among developed countries still represent the dominant
tendency in global agricultural trade, accounting for 50% of the total, with
60% of this being conducted within trading blocs such as the European Union
(EU) and NAF TA.
With the recent explosive growth of China, India and other large develop-
ing countries, there has been a sharp increase in commodity exports from
middle-income developing countries based on the animal protein complex
(meats, animal feed and, more recently, dairy products), leading to a greater
proportion of South–South flows in world trade. At the same time, South–
South trade has involved an increase in imports (especially poultry) into the
LICs, which threatens the ability of these countries to develop their domestic
agro-industrial base in this sub-sector. In fact, trade statistics reveal that since
the mid-1980s, in South–South trade, primary commodities have played a
Table 5. Shares of developing and developed countries in world agricultural exports.
(From Aksoy, 2005, based on COMTRADE.)
Developing countries Industrial countries
1980–1981 1990–1991 2000–2001 1980–1981 1990–1991 2000–2001
To developing
countries
13.4% 10.5% 13.7% 18.9% 14.5% 15.6%
To industrial
countries
24.3% 22.4% 22.4% 43.4% 52.5% 48.3%
Total 37.8% 33.0% 36.1% 62.0% 67.0% 63.9%
64 J. Wilkinson and R. Rocha
more important role than in South–North trade. In 2003, the major exporters
of agricultural products within South–South trade were China (11.5% of total
agricultural South–South exports), Argentina (10.6%), Brazil (10.2%), Malaysia
(9.6%), Thailand (8.2%), Indonesia (6.5%) and India (5.5%). The top ten export-
ers accounted for more than 70% of total agricultural South–South exports.
The major importers were China (18%), Hong Kong (7.4%), Republic of Korea
(7.2%), India (6.1%), Malaysia (4.2%) and Brazil (3.9%), with the top ten
importers accounting for 60% of total agricultural imports (UNCTAD, 2005).
Although aggregate export shares have been steady for developed and
developing countries throughout the last 2 decades, agricultural trade has been
marked by dramatic commodity composition changes. Exports of high-value
agricultural and processed food products, such as fresh and processed fruits,
vegetables and fisheries, have expanded significantly, stimulated by changing
consumer tastes and advances in production, transport and other supply chain
technologies. Trade performance in traditional commodities, however, has
declined as has the share of these products in developing country agricultural
exports (Henson, 2006).
The change in the composition of agricultural exports in developed and
developing countries in the last 2 decades is presented in Table 6. Non-traditional
and other processed products expanded their participation in global exports,
from around 31% in 1980–1981 to 50% in 2000–2001, while the share of
tropical and temperate products declined from 69% to 50%. Among the worst
performances, textile fibres (mostly cotton) and sugar and confectionery have
lost 50% of their shares and the global participation of grains has declined 40%.
This result is fuelled by even larger losses in developing country exports.
Fisheries and beverages, on the other hand, have presented the highest growth
rates. According to Aksoy (2005), traditional products such as coffee, cocoa
and tea, which have received most of the attention in the literature, now account
for less than 20% of the exports of developing countries. Given current agri-
cultural export patterns, more attention should now be paid to the expanding
trade among developing countries, particularly in temperate zone products such
as milk, grains and meats.
According to FAO (2004a, p. 14), imports by developing countries increased
rapidly during the 1970s, grew more slowly during the 1980s and accelerated
again throughout the 1990s. The food trade surplus of US$1 billion for devel-
oping countries became a deficit of more than US$11 billion during the period.
In particular, UNCTAD (2006) points out that, although food exports consti-
tuted 13.6% of the least developed countries’ total exports in 2000–2003, the
overwhelming majority of these countries were net food-importing countries,
with food imports averaging almost one-fifth of their total imports. Much of this
deficit corresponds to processed food imports, given that in developing coun-
tries around 65–70% of total food imports in 2002 were for processed prod-
ucts. According to FAO (2004a), the economic performance of individual
developing countries played an important role in determining how fast they
increased their food imports during the 1990s. Countries that recorded strong
economic growth increased food imports more quickly. Rapid growth in the
agriculture sector had the opposite effect. Where agricultural value added per
capita grew more quickly, food imports generally did not. These trends may
A
g
r
o
-
i
n
d
u
s
t
r
y
T
r
e
n
d
s
,
P
a
t
t
e
r
n
s
a
n
d
D
e
v
e
l
o
p
m
e
n
t
6
5
Table 6. The structure of agricultural exports in world trade (percentage of total world trade). (From Aksoy, 2005, based on COMTRADE.)
Developing countries exports Industrial countries exports World exports
1980–1981 1990–1991 2000–2001 1980–1981 1990–1991 2000–2001 1980–1981 1990–1991 2000–2001
Tropical products
Coffee, cocoa and tea, raw
and processed
18.3 11 8.5 2.5 2.9 3.6 8.5 5.6 5.4
Nuts and spices 2.4 2.7 2.8 0.7 0.7 0.8 1.3 1.3 1.5
Textiles, fibres 8 6.2 3.3 4.5 3.9 2.6 5.9 4.7 2.8
Sugar and confectionary 10.5 4.6 4.3 3.9 2.8 2.3 6.4 3.4 3.1
Subtotal 39.2 24.4 18.9 11.6 10.3 9.3 22 14.9 12.7
Temperate products
Meat, fresh and processed 7.2 8.3 6 14.8 15.7 15.4 11.9 13.2 12
Milk and milk products 0.3 0.7 1.1 7.9 7.9 7.6 5 5.5 5.2
Grains, raw and processed 9.3 4.9 7 21.6 13.8 11.6 16.9 10.9 9.9
Animal feed 7.5 7.9 8.5 7.7 5.1 5.3 7.7 6 6.4
Edible oil and oilseeds 4.6 5.7 5.5 4.8 4.4 4.4 4.7 4.8 4.8
Subtotal 28.8 27.5 28.1 56.9 46.8 44.2 46.3 40.4 38.3
Seafood, fruits and vegetables
Seafood, fresh and
processed
6.9 15.9 19.4 5.5 8.2 8 6 10.8 12.2
Fruits, vegetables and cut
flowers
14.7 22.2 21.5 13.1 17.2 17.3 13.7 18.9 18.9
Subtotal 21.6 38.2 41 18.7 25.5 25.4 19.8 29.7 31
Other processed products
Tobacco and cigarettes 2.6 3.1 3.3 3 4.2 4.8 2.8 3.8 4.2
Beverages, alcoholic and
non-alcoholic
1.1 1.8 3.6 6.9 9.5 11.5 4.7 6.9 8.6
Other products and
processed food
6.7 5 5.2 3 3.8 5 4.4 4.2 5.1
Subtotal 10.4 9.9 12.1 12.8 17.5 21.2 11.9 15 17.9
Total 100 100 100 100 100 100 100 100 100
66 J. Wilkinson and R. Rocha
suggest that, although an export-led strategy may be appropriate for selected
individual developing countries, domestic variables play an important role in
preventing food trade deficits.
The increasing importance of processed agricultural products is a long-
term trend observed across regions and countries. The share of final agricul-
tural products in global agricultural trade increased from 27% in 1980–1981
to 38% in 2000–2001, varying from 10% in LICs to 45% in HICs. According
to Wilkinson and Rocha (2006), the share of processed food in food exports
rose between 1989–1991 and 2002 in all country groups (see Table 7). For
HICs, this share increased from 62% to 71%, while figures for UMICs
(53–64%) and LMICs (54–62%) have followed an even more pronounced
upward trend.
8
A closer look at the data reveals, however, that, in reality,
there are only a few UMICs and LMICs responsible for a large share of global
food-processing exports, i.e. Argentina, Brazil, Chile, Indonesia, Malaysia,
Thailand and Turkey.
Despite the increasing share of processed food in global agricultural
trade, only 10% of processed food sales globally are traded products. Although
consumer demand for processed food continues to grow globally, growth in
8
Data from the FAO Statistical yearbook 2004.
Table 7. Share of food and processed food in trade (in percentages: unweighted average).
(From Wilkinson and Rocha, 2006, based on FAO Statistical yearbook 2004 (FAO, 2004a) ).
LIC LMI UMI HIC
1989/1991 2002 1989/1991 2002 1989/1991 2002 1989/1991 2002
Share of food in
total imports
17.4 16.3 13.3 11.7 10.4 9.2 7.4 6
Share of food in
total exports
19.2 14.2 22 13.7 22.8 14 6.2 4.6
Share of
processed
food in total
imports
12.8 11.3 8.3 7.4 6.8 6.4 4.4 3.9
Share of
processed
food in total
exports
5.2 4.5 14.3 8.9 10.7 8.2 3.7 3.1
Share of
processed
food in food
imports
72.3 67.7 60.3 63.6 63.3 67.9 61.1 67.3
Share of
processed
food in food
exports
35.6 38.9 54.5 61.6 53.3 63.6 62.3 71.3
Figures for 1989–1991 do not include the former USSR.
Agro-industry Trends, Patterns and Development 67
processed food trade has generally stalled since the mid-1990s, while the
share of food in total trade has fallen. According to Athukorala and Jayasuriya
(2003), the share of processed food in total exports has globally dropped
from 8.5% in 1970 to 6.5% in 1990 and 5.8% in 1999 – when processed
food exports amounted to US$212.6 billion from developed countries and
only US$81.8 billion from developing countries.
In 2006, exports of textiles and clothing were worth US$530 billion, about
4.6% of total world exports (WTO statistics, 2008). Around 59% corresponded
to clothing exports, which make up an increasing share of total textile and
clothing trade. In terms of development impacts, there are two important fea-
tures. First, developing countries account for roughly 50% of world textile
exports and almost 75% of world clothing exports. Second, as shown in Table
8, in a number of developing countries, textiles and clothing account for the
major share of exports, reaching 75–85% of total trade in the case of Pakistan
and Bangladesh (ILO, 2005).
With regard to imports, for decades textiles and clothing were subject to
the extensive use of quotas by the major importing countries. As stated in the
Agreement on Textiles and Clothing (ATC), this system was gradually phased
out to 2005. According to the WTO Report (2007), structural changes in the
world trade of textiles and clothing continue apace. While China’s exports
continued to gain market share, exporters from developed countries and those
from advanced developing economies in East Asia have lost market share,
together with major suppliers from Central America and the Mediterranean
region. Some smaller suppliers have expanded their textiles and clothing
exports even faster than China and the share of least developed countries in
imports by the USA and the EU increased sharply in 2006.
Table 8. Share of textiles and clothing in total exports for selected
countries (in percentages, 2003). (From ILO, 2007, based on
United Nations Commodity Trade Database – COMTRADE.)
Textiles Clothing Total
Macao, China 0.90 89.90 90.80
Bangladesh 8.70 76.50 85.20
Pakistan 47.70 26.30 74.00
Hong Kong, China 4.90 52.50 57.40
Mauritius 4.20 52.60 56.90
Sri Lanka 4.00 51.60 55.60
Nepal 16.50 34.50 51.00
Morocco 1.50 32.50 34.00
Macedonia, FYR 3.20 30.00 33.20
Madagascar 2.30 30.80 33.10
Turkey 11.00 21.70 32.70
Romania 2.60 23.20 25.70
China 6.30 11.90 18.20
Cambodia – 80.00 –
Guatemala – 42.00 –
68 J. Wilkinson and R. Rocha
Complementary Stylized Facts
Foreign direct investment
Foreign direct investment (FDI) has grown much faster than trade in the last
2 decades (Senauer and Venturini, 2004). According to UNCTAD (2006), in
2004 world FDI inward flows regarding the food, beverages and tobacco indus-
try were estimated at US$278 billion, an impressive figure when compared to
total world food exports for that year, estimated at US$630 billion (WTO
Statistics Database (WTO, 2008) ), or to total agricultural products exports of
US$786 billion.
Only a minor share of world agrifood FDI inward flows, around 14% in
2004, has been directed to developing countries but their impact on host food
systems has been profound. Food and beverage manufacturers, long present in
many developing countries, are rapidly expanding their operations, and exports
now represent only a partial strategy for gaining market share. The choice
between exports and FDI has been subject to much discussion and will be taken
up in more detail in the next section. A distinction should be made between
primary processing and final food activities. The former tend to be located
close to the raw material, whether this is in the rural areas, in the case of com-
modity exports, or by the port, in the case of imports. Final foods, on the other
hand, tend to be manufactured close to the consumer market, given the specifi-
city of food regulations and eating habits. FDI has been particularly attracted by
the growing urban food markets of developing countries.
Non-traditional products for export, based on the advantages of location
combined with the demand for freshness, have created a new dynamic to the
extent that postharvest activities have to be carried out in situ. While this has
led to flows of FDI, it has also given rise to a hybrid form, which is neither
trade nor FDI and has been described as the consolidation of Global Value
Chains (GVCs), often governed by large-scale retail. Within this dynamic the
action of many autonomous agents is coordinated by the demands of the end
buyer, who may or may not engage in direct investments but will specify and
closely monitor the conditions of production. The literature on GVCs will be
discussed in more detail in the following section.
The participation of small and medium enterprises (SMEs)
and industrial concentration trends
A dynamic agribusiness sector linking farmers to consumers can be a major
driver of growth in the agricultural and the rural non-farm sectors, particularly
offering opportunities for the rural poor. Market structure trends and the role
assigned to small-scale operators, however, will be crucial throughout this
process.
Agribusiness enterprises are mostly small scale, located in rural towns and
headed by households with other complementary sources of income. Medium
and large firms are mainly urban based, taking advantage of economies of scale
and better infrastructure, while large enterprises are often vertically and
Agro-industry Trends, Patterns and Development 69
horizontally integrated multinational corporations. The term SME encompasses
a collection of firms with wide differences in organizational and marketing cap-
abilities and technology, but which are mostly labour-intensive. In developing
countries, although SMEs have typically operated on an informal basis, incur-
ring high transaction costs and suffering from a lack of scale, they account for
a large share of the number of firms and jobs, contributing a significant share
of total value added to the agro-industrial sector.
Experiences in Brazil, Chile, Kenya, Mexico, South Africa, Taiwan and
Thailand have demonstrated the potential of agro-based SMEs for employment
generation, value adding, food security, poverty alleviation, improvement of
farm and rural non-farm income and the living standards among the rural poor
more generally. In Africa, where a weakening of public services has resulted in
some dysfunctional input and output markets and a partial breakdown in the
delivery of agricultural services to small-scale farmers, local agro-enterprises
are increasingly filling crucial institutional gaps, particularly for commercial
crops (Freeman and Estrada-Valle, 2003).
On the other hand, increasing agribusiness concentration and market dis-
placement of smallholders may hamper the poverty impact of agro-industries
development. The structure of agribusiness has changed significantly and its
performance has been highly dynamic, particularly enhanced by changing
demand patterns and rapid technological, organizational and institutional inno-
vations. According to the World Bank (2007), the sector faces two major chal-
lenges when considering development impacts – market forces do not of
themselves ensure competitiveness; nor do they guarantee smallholder partici-
pation – both of which are essential if agricultural growth is to be linked to
overall development and rural poverty reduction.
Scale economies and the globalization of agro-processing markets have
consolidated multinational operations along the different GVCs. Food-
processing firms are integrated backward into primary product handling and
forward into supply chains dominated by global retailers, such as increasingly
bypassing smallholders in traditional and local markets. In addition to concen-
tration within sectors, strategic alliances across sectors are becoming common,
as between the genetics inputs industry and primary agricultural processing.
With higher industry concentration market competitiveness may decline
and can lead to higher spreads between what consumers pay and what produ-
cers receive. Three companies control more than 80% of the world market for
tea. Some 25 million farmers and farm workers produce coffee, but the inter-
national coffee traders have a CR4
9
of 40%, and coffee roasters 45%. The
share of the retail price retained by coffee-producing countries declined from
one-third in the early 1990s to only 10% in 2002, while the value of retail sales
doubled.
10
The rapid concentration of retailing in Europe and the USA, where
three or four firms often control 60% or more of food retail, has in its turn
accelerated concentration in the final foods sector, with many market segments
now being dominated by two or three firms. The rapid growth of urban food
demand in developing countries is leading to this same model.
9
Four firm concentration rates, i.e. the market share of the four largest companies.
10
See World Bank (2007), Focus D.
70 J. Wilkinson and R. Rocha
In spite of these trends, SMEs have remained crucial in developed country
food systems and are likely to be even more important in the developing coun-
try context given the importance of informal supply systems. SMEs are dom-
inant in traditional agrifood activities, which escape the effects of scale and new
quality demands. Local supplies are favoured where roads are inadequate, in
areas of low population density and where modern distribution systems are
now in place. SMEs are also emerging, however, in response to new market
niches that demand innovation and entrepreneurialism. Greater outsourcing on
the part of retail and food-processing firms is, similarly, opening up opportun-
ities for small suppliers, often integrated into GVCs. More ambitiously, SMEs,
organized in networks or clusters along the lines of the industrial districts of
Italy, have been identified and are being promoted in many developing coun-
tries, often as a link in GVCs. And, finally, SMEs are emerging to the extent
that new markets value products and production processes typically (although
not exclusively) associated with family farming (Wilkinson, 2004).
Organics, fair trade and origin products
New high-value markets for food and other agricultural products that embody
specific certified quality attributes, such as organics, fair trade and origin prod-
ucts, have increasingly become relevant in developed countries and some middle-
income developing countries. With high rates of demand growth, these markets
are regarded as potentially lucrative opportunities for exports of non-traditional
products from developing countries (Henson, 2006).
Following Henson’s (2006) survey, the world market for organic food and
drink products in 2005 was estimated at US$24 billion, the EU accounting for
52% and the USA for 42%, together corresponding to almost 95% of global
sales, roughly 40% of which was imported. Organic production in the EU accounts
for 4% of total European farmland and is heavily subsidized (60% of organic land
is included in policy support programmes). Around 0.2% of total farmland in the
USA is under organic production. According to Dimitri and Oberholtzer (USDA
Amber Waves, 2006), despite larger organic product sales in the EU, annual per
capita retail sales in 2003 were nearly equal for both regions, approximately
US$34 in the EU and US$36 in the USA. The sector’s current growth rate is
estimated at between 8% and 12% per year in Europe and 14–20% in the USA,
a slower pace than that found during the 1990s, when it was around 20–30%.
There is evidence that the rate of market expansion is slowing down further and
that markets may become saturated in the near future (Henson, 2006).
Certified fair trade products have their origin in the developing world and
demand reveals the interest of consumers in developed countries in the conditions
under which agricultural products are produced and reach the retail market. Under
fair trade, certified producers may receive premium prices for their products when
compared to conventional producers. For instance, in Mali producers have
received 70% more from selling cotton under fair trade rules and in Senegal they
received 40% more (FLO, 2007). According to the World Bank (2007), however,
recent studies confirm that the costs and margins for coffee sold through fair trade
Agro-industry Trends, Patterns and Development 71
are high and that intermediaries receive the larger share of the price premium.
One estimate is that farmers receive only 43% of the price premium paid by the
consumer for fair trade roasted coffee and 42% for soluble coffee. The higher cost
of processing and marketing would be partly explained by the diseconomies of
scale related to small volumes and high costs, mostly associated with certification
of supply chain actors, membership fees, advertising and campaigning.
Estimated retail sales of fair trade products in 2006 were roughly €1.6 billion,
42% higher than in 2005, but still an insignificant share of global food sales.
Coffee and cocoa, traditional export commodities, have experienced the highest
sale growth rates, at around 53% and 93%, respectively, between 2005 and 2006.
According to FLO (2007), fair trade standards exist for food products such as tea,
coffee, cocoa, honey, juices, wine grapes, fresh and dried fruits and vegetables,
nuts and spices and non-food products such as flowers, plants and seed cotton.
Both organics and fair trade products have been identified as new export
opportunities for developing countries. Nevertheless, as a corollary of the emer-
gence of large middle-class markets in developing countries, both organic and
fair trade are now also directing their attention to the domestic market. These
categories of products can now be found not only in specialized shops, but also
in the modern retail sector, which is now dominant in much of Latin America and
expanding rapidly in Asia and a few countries of Africa (Raynolds et al., 2007).
In a similar vein, ‘origin-based’ products are being promoted in developing
countries. These often have their inspiration in the denominated origin prod-
ucts associated with Europe, now incorporated within the framework of
TRIPS.
11
In the developing country context, however, many new features are
incorporated – indigenous products, non-food products and products associ-
ated with the values of sustainability. The territorial association of origin prod-
ucts may also be more fluid and often on a much larger scale. To the extent that
origin products are seen to offer market potential, they interest all classes of
producer and in the developing country context the extent to which this niche
will provide differential opportunities for small producers is not clear. CIRAD
has been particularly active in the promotion of origin products in developing
countries (Van de Kop, et al., 2007)
Trade costs and the elasticity of substitution
We have called attention to the importance of FDI rather than trade, by high-
lighting the need for final food product industries to be close to the consumer
market. Distorted tariff regimes, quotas and other trade barriers have also been
identified as factors limiting trade flows. Here we complement this picture with
two other features that impact trade and may reinforce the bias towards pro-
duction close to the market.
First, evidence on trade costs breaks down into two major categories: costs
imposed by policy (tariffs, quotas and the like) and costs imposed by the envir-
onment, such as transportation, insurance against various hazards and time
11
Trade-related Aspects of Intellectual Property Rights.
72 J. Wilkinson and R. Rocha
Table 9. Commodity distribution of freight rates (as percentage of imports, aggregated over
all partners). (From Hummels, 1999.)
Average freight rate
USA Argentina Brazil Chile Paraguay Uruguay
New
Zealand
Food and live animals 14.1 21.6 23.1 21.9 12.8 7.4 15.4
Live animals 21.1 37.7 40.5 42.1 10.9 18.2 21.8
Meat and meat
products
9.7 13.6 17.8 21.9 12.4 5.3 15.7
Dairy products 9.9 16.8 15.7 17.8 12 7.1 12.6
Fish 13.2 23.6 20.3 24.6 13 8.3 14
Cereals 14 23.3 27.9 27.9 13.4 9.1 20
Vegetables and fruits 17.4 23.7 24.7 21.7 12.6 7 16.9
Sugars 12.7 20.6 21.7 18.6 13.1 8.7 14.1
Coffee, tea 10.8 18 19.8 20.2 12.5 5.2 12.1
Beverages and tobacco 14.4 20.6 18.3 18.2 12.8 8 14
Crude materials 15.1 20.5 20.1 23.1 12 8.3 20.6
Minerals, fuels, lubricants 15.7 20.5 20.3 24.9 13.8 9.2 18.7
Animal and vegetable
oils, fats
10.6 17.4 17.6 16.6 11.7 5 12
Chemicals 9 12.3 14 14.4 12.4 4.7 13
Manufacturing goods 10.3 15.5 17.7 14.7 13.3 7.9 13.1
Machinery and transport
equipment
5.7 11.2 11.5 11.3 13.5 7.3 9.6
costs. There is another category of trade costs, associated with information
barriers and contract enforcement, although this is not directly measured. More
specifically, we focus on transport costs, which include freight charges and
insurance, which is customarily included in the freight charge. Indirect trans-
port costs include holding costs for the goods in transit, inventory cost due to
compensating the variability of delivery dates and preparation costs associated
with shipment size (Anderson and van Wincoop, 2004).
Hummels (1999) provides empirical evidence on the level and variation of
freight and tariff rates at disaggregated commodity levels, including for imports
into the USA, New Zealand and five Latin American countries (Argentina,
Brazil, Chile, Paraguay and Uruguay) in 1994.
12
According to the author, clear
patterns emerge. First, freight rates are lower for manufactured goods than for
commodities. Rates are higher for agro-industry products, particularly for fruits
and vegetables, cereals and crude fertilizers, among others. Second, landlocked
Paraguay stands out as having exceptionally high freight rates; this may be an
extremely important feature for LICs in sub-Saharan Africa and Central Asia.
Illustrating these patterns, Table 9 displays ad-valorem freight rates, calculated
as unweighted average rates of all observations within a two-digit SITC com-
modity group.
12
In each case, data on import values, quantities (weights) and freight and insurance charges
for each entering shipment are collected by customs officials.
Agro-industry Trends, Patterns and Development 73
Another fundamental feature impacting trade is the elasticity of import
demand with respect to price and relative to the overall domestic consumption
basket. Trefler and Lai (1999) present estimates over 1972–1992 for 28 indus-
trial sectors in 36 countries. According to the authors’ estimation, the agro-
industrial sector generally presents low elasticities, such as 2.5 for food products,
1.9 for tobacco, 3.5 for textiles, 3.7 for beverages and 2.9 for wood products –
all estimates much lower than the industrial average. Other interesting facts
regard the negative correlation between the elasticity of import demand and
import tariffs, as well as a significant negative correlation between the elasticity
and the degree of market competition, usually implying that high elasticities are
associated with markets dominated by less perfectly competitive industries.
Obstfeld and Rogoff (2000) argue that trade costs, including border costs
such as tariff and non-tariff barriers, need not to be implausibly large to gener-
ate observed home bias consumption. According to them, such a bias may be
generated by the interaction between preferences, trade costs and the elasticity
of substitution between domestic and foreign goods.
13
Consumption home bias
in agro-industry products may, therefore, be mainly promoted by relatively
higher tariff and non-tariff costs, which would compensate lower elasticities of
substitution.
Access to credit and industrial sector development
Rajan and Zingales (1998) ask whether industrial sectors that are relatively
more in need of credit and external funding develop disproportionately faster
in countries with more developed financial markets. They find this hypothesis
to be true in a large sample of countries over the 1980s. The empirical strategy
consisted of identifying an industry’s need for external finance (defined as the
difference between investments and cash generated from operations) from data
on US firms. Under the assumption that capital markets in the USA are rela-
tively frictionless, this method allowed the identification of the industry’s tech-
nological demand for credit. Under the further and stronger assumption that
such technological demand structure carries over to other countries, they exam-
ined whether industries that are more dependent on external financing grow
relatively faster in countries that a priori were more financially developed.
For instance, the authors argue that, in countries that are less financially
developed, an industrial sector such as drugs and pharmaceuticals, which
heavily requires external funding, should grow relatively more slowly than the
tobacco sector, which requires little external funding. In Malaysia, a relatively
advanced country in terms of financial markets, drugs and pharmaceuticals
had grown at a 4% higher annual real rate than tobacco. In Chile, which was
in the sample’s lowest quartile of financial development, drugs grew at a
13
A suggestive rule of thumb for calculating home bias consumption derived from a microeco-
nomic model consists of the formula (1?t)
1?q
, where t represents the level of trade costs, and
q the elasticity of substitution. For instance, with t = 25% and q = 6, the ratio of home expen-
ditures on imports relative to domestic goods would be roughly 4.2, or, equivalently, the home
bias would be around 80%.
74 J. Wilkinson and R. Rocha
2.5% lower rate than tobacco. Their estimates also show that, in general,
financial development has almost twice the economic effect on the increase
of the number of establishments as it has on the growth of the average size
of establishments.
According to the authors’ estimates on the patterns of external financing
across industries in the USA during the 1980s, the agro-processing sub-sec-
tors are among the industries that least require external funding for growth,
particularly when compared to sectors such as electric machinery, radio, office
and computers, drugs and pharmaceuticals. This information, although dated,
brings added support for the relevance of the agro-industry sector for eco-
nomic growth and employment opportunities in those developing countries
generally associated with low levels of financial development. Agro-industry
sub-sectors are relatively less dependent on external funding and access to
credit, an argument that supports the findings on the sector’s large contribu-
tion to total manufacturing value added, employment and overall turnover in
developing countries.
Major Drivers of Competitiveness
The revolution introduced by the concept of agribusiness or agro-industry, first
in the USA in the 1960s (Davis and Goldberg, 1957) and then in Europe
(Mollard, 1978) and Latin America (Vigorito, 1978) in the late 1970s involved
a fundamental rejection and revision of the traditional three sectors approach
(agriculture, industry and services) to economic analysis. Agricultural activities
now occupied an intermediary space whose processes were dependent on
industrial inputs and whose products were the objects of industrial refashioning.
To the extent that agriculture was now seen through the lens of industry, how-
ever, the agricultural space was understood to be increasingly residual, con-
trolled and undermined by technological advances. In this light, the persistence
of the small farmer sector could be reinterpreted as a consequence of this
undermining of the autonomy of the agricultural space, which made it uninter-
esting for capitalist investment except in exceptional circumstances. Within this
framework, biotechnologies could be seen as the final nail in the coffin, since
agricultural products would become increasingly independent of specific soil
and weather conditions and in some cases could even be reproduced industri-
ally via fermentation (Goodman et al., 1987).
While many elements of this analysis remain valid it was an excessively
production/technology push vision, which did not take into account another
revolution in process at the same time, at the level of demand.
14
Seen initially
as an industrial strategy of differentiation and segmentation in response to the
stagnation of commodity-based food demand, consumption came to assume
14
The renewed dynamic of commodity markets in the light of strong, sustained economic
growth in large developing countries represents the clearest continuation of this dynamic and
not surprisingly it is in this context that the first generation of biotechnology products has found
its place.
Agro-industry Trends, Patterns and Development 75
more complex value traits. Some of these emerging values corresponded to
broad demographic trends (ageing of the population, changes in the organiza-
tion of family life) or new institutional contexts (shift in the public–private bal-
ance in questions of health and focus on prevention rather than intervention).
Others, however, were less predictable, such as the sustained opposition to
the application of genetic engineering. Perhaps most surprising of all, agricul-
tural and artisanal rather than agro-industrial products became the norm for
food quality, albeit with increasing deference to ‘industrial standards’. As a
result, the values of space and place have redefined agriculture’s relationship
with industry (and services, as we shall see), and the latter’s inputs and
processes have now to enhance rather than annul the ‘natural’ values of the
agricultural product.
FDI and the role of demand
Reforms in the regulatory environment for market access and investment,
together with the revolution in communications and logistics, have transformed
the above-mentioned values of space and place into new forms of competitive
advantage for developing countries. Some new global social movements, e.g.
Via Campesina, and agro-ecologists have seen this as an opportunity to recap-
ture the autonomy of agriculture in an unorthodox return to the three sectors
approach to economic life. If, however, we integrate the market implications of
the new ‘quality turn’ into an extended version of the agro-industry conceptual
framework, now incorporating services, the possibilities for harnessing this new
competitive advantage to broader development strategies become evident.
Within this scenario developing countries have a dual advantage. Their
agricultural resources are more versatile and productive for a whole range of
highly valued products in the global market. At the same time, a combination
of population growth and urbanization is already making their domestic mar-
kets the most dynamic poles of the global system and they should continue to
be so for the next 2 or 3 decades at least. If these structural advantages are
to be transformed into the basis of sustained development strategies, how-
ever, the complex processes of globalization and transnationalization will
have to be negotiated: how to combine market access with the consolidation
of a domestic agrifood base which builds on the resources of small farmers
and small-scale urban food operators; how to attract FDI in ways which com-
plement and promote, rather than ‘crowd out’ domestic agrifood system
actors; how to ensure that the incoming FDI and domestic initiatives respect
environmental sustainability and do not lead to a ‘race to the bottom’; and
how to ensure a growing share in value added in global chains (the ‘upgrad-
ing’ challenge) where value is increasingly concentrated at the point of con-
sumption. This challenge becomes sharper to the extent that we are dealing
with value added in the consumer service sector. Here, upgrading must go
beyond the notion of incorporating postharvest activities and explore forms
of equity participation as in some successful initiatives within the fair trade
movement (Wilkinson, 2007).
76 J. Wilkinson and R. Rocha
South–South trade
The emergence of the South as a global consumption pole has led to two import-
ant new developments. In the first place, there has been an increasing flow of
South–South trade (over 50% of Brazil’s agricultural trade is now with other
developing countries). This has been accompanied by a growth in South–South
FDI and, to a lesser extent, in South–North investment as developing countries’
consumer and export potential is reflected in the emergence of Southern
transnationals. The South–South axis has been promoted by the growth of the
animal protein complex. Here we are dealing with a comparatively small number
of MICs, who are increasingly challenging the long-time hegemony of the USA,
some European countries and even Australia and New Zealand.
The components of the animal protein complex, it should be noted, are
very different from those of the ‘non-traditional’ exports sector. Agriculturally,
with the exception still of poultry and pigs, they are land extensive and capital
intensive and industrially scale is a precondition of competitiveness. This is the
world of the global commodity traders, which will find new forms of expansion,
again in the developing world, with the emergence of global biofuels markets.
Hogs, but especially poultry, are an exception within this complex to the extent
that they have been the privileged basis of small or medium farmer contract
arrangements with agribusiness. Poultry, in particular, has become the para-
digm for discussions on contract forms of coordination. Research has diverged
sharply on the benefits accruing to small farmers but it is notable that this sec-
tor has emerged as an important component of the domestic agrifood system
in many developing countries (Little and Watts, 1994; Eaton and Shepherd,
2001; Birthal et al., 2005). Even if income returns are comparatively attractive
the opportunities of upgrading for primary producers in this value chain are
quite limited given the scale intensity of the slaughter and processing stages.
15
Nevertheless, domestic firms and cooperatives control many poultry sectors in
developing countries. With the market reforms, however, developing country
poultry production has shown itself to be vulnerable to imports, with the par-
ticularity that these now often come from other developing countries. This
problem has been particularly acute in some sub-Saharan African countries and
points to likely tensions within the developing country bloc as South–South
trade flows gain in importance.
The Non-traditional Sector and Interpretations:
Global Value Chain and Discovery Costs
The non-traditional sector appears to be moving to a large commercial farm
model with a small farmer fringe on a subcontracting basis or to supply the
domestic market. To the extent that this segment assumes greater importance,
15
Artisan options have opened up with the emergence of free range, organic niches but even
here scale is beginning to impose itself.
Agro-industry Trends, Patterns and Development 77
the farm worker, particularly it would seem the female farm worker, replaces
the integrated small farmer of the poultry model. Much research has identified
precarious working conditions in the non-traditional sector. At the same time,
attention has been drawn to the beneficial effects of new social and environ-
mental standards governing access to developed country markets, leading to
considerable on-the-job training and the implementation of at least domestic
minimum wages and health and safety regulations. Adjustment to a model that
tends to consolidate development poles based on entrepreneurial wage-based
agriculture may prove difficult to assimilate in developing countries where the
strength of small farmer social movements has led to an institutional frame-
work favouring small farmer strategies.
The literature on the non-traditional sector is broadly divided into two
approaches. The GVC analytical framework widely adopted in cooperation
programmes and by many national governments in developing countries tends
to see the issue in terms of supplier zones linking with a predefined demand
from buyer-driven GVCs (Humphrey, 2005). The strategic question then
becomes that of identifying the conditions under which ‘upgrading’ may occur,
which in the agro-industrial context would mean at least exporting ready-to-eat
produce. The upgrading in question, however, is reactive, responding to the
opportunities opened up by the global chain leader. Without adopting a GVCs
approach other analysts of non-traditional exports have also emphasized the
learning opportunities that emerge in an export sector finely attuned to varying
market demands (Athukorala and Sen, 1998). Other authors have tried to
refine the GVC analysis to take into account the specific features of natural
resource value chains and have incorporated a sectoral approach based on
Pavitt’s now classic typology (Pietrobello and Rabelotti, 2006).
16
The results
here, which point to the key role of public sector research, highlight the import-
ance of public policy for the success of upgrading.
A second approach has focused less on the training and management
aspects of non-traditional exports and more on the entrepreneurial challenges.
This research has been inspired by the Hausmann and Rodrik (2003) hypoth-
esis of ‘discovery costs’ in a developing country context. The argument is that
while the new product or process is generally already known in the developed
country context, where it is often protected by patents, there are a great many
uncertainties with regard to the conditions of production in developing coun-
tries and the associated ‘discovery costs’ must be borne without the benefit of
protection from imitative competition. The correct balancing of individual and
welfare benefits, it is argued, points to the need for a more active intervention
of the State. Research in Latin America, which explored these hypotheses in a
considerable number of cases in eight countries, questioned the centrality of
‘production costs’, but reinforced the import ance of a range of information
costs requiring the provision of public goods (Sánchez et al., 2006). In addition,
16
Rather than organizing industry into product groups, Pavitt’s taxonomy identifies four
categories of industry from the point of view of technical change and innovation – supply domi-
nated, scale intensive, specialized suppliers and science-based firms.
78 J. Wilkinson and R. Rocha
the case studies repeatedly drew attention to the key role of entrepreneurial
initiative in the context of considerable uncertainty and risk. Various niche
markets have been developed independently of any pre-existing value chains,
such as blueberries in Argentina, sturgeon/caviar in Uruguay, and flowers in
both Colombia and Ecuador, which have depended on innovating entrepre-
neurs. Independent initiatives of this kind require considerable financial
resources and varied social and business networks. They are not, therefore, the
likely products of a small farmer cooperative. It may be, however, that such
initiatives are less likely today as the globalization and transnationalization of
retailing absorb an increasing range of market niches (Wilkinson, 2007).
For authors who focus on the centrality of non-traditional exports for
growth strategies, the central issues become those of market access and ‘com-
pliance’ costs. It should be recognized, however, that tariff escalation and tariff
peaks are still major obstacles to strategies of upgrading. Nevertheless, stand-
ards have become the predominant mechanism for regulating minimum
requirements in global quality markets. Both the nature of these markets (spe-
cific quality features) and their global character in a context of transition from
national and regional to global regulatory regimes have led to a complex mix of
private (individual and collective) and public standards. While there is a consen-
sus on the need for standards, their definition and evolution often appear arbi-
trary, opening up the suspicion of new forms of protectionism. The costs of
quality barriers have been widely disputed. Evidence suggests that the majority
of freight rejections relate to old-style quality issues (sanitary in the US and
basic residue levels in the EU). Furthermore, it has been shown that the costs
of compliance, although onerous, have been more than compensated by the
gains from subsequent access, as in the case of shrimp exports from Bangladesh
(Jaffee and Henson, 2004). Nevertheless, commercial standards can be
extremely harmful, particularly for small countries dependent on a reduced
number of export items (Oyejide, 2000). Research has called for a greater
participation in the definition of standards within the different global forums,
although this has been questioned as being technically and financially unrealis-
tic for most countries (Athukorala and Jayasuriya, 2003). Rather, it has been
argued that developing countries should concentrate on the specific conditions
for compliance and negotiate their implementation with the help of various
international cooperation programmes dedicated to this goal.
A less sanguine interpretation of the increasing importance of
processed food exports from developing countries has been developed by
environmentally oriented research, which would see this tendency as part of
a broader movement either to export ‘dirty’ industries to, or deplete the
resources of, countries with less rigorous legislative and regulatory controls.
The fishing industry has particularly come under attack. A United Nations
Environmental Agency Report (UNEP, 2001) warned of the dangers of
selling rights to fishing stocks under the pressure for short-term export earn-
ings, particularly when developed countries are subsidizing their fishing
vessels. Research and social movements have also drawn attention to the
environmental impact of aquaculture, particularly acute in the case of shrimp
production (Wilkinson, 2006).
Agro-industry Trends, Patterns and Development 79
Retail, FDI and market redesigning
As a counterpart to the research on non-traditional exports, other research
programmes have focused on the transnationalization of the commercial circuits
in developing countries, through the increasing presence of global retail compa-
nies in their domestic markets (Reardon et al., 2003). This research has focused
on the systemic impact of global retailing to the extent that it is geared not only
to the middle classes and the metropolitan centres, but also to the broad mass
of urban consumers. The global food industry leaders, such as Nestlé and
Unilever, have recently adopted a similar orientation to the low-income consum-
ers of developing countries, as these have increasingly adopted modern retail
shopping habits. The thesis of this research on the transnationalization of retail-
ing is that the same system of quality and logistical standards is now redefining
the conditions of access to the domestic markets of developing countries. If, as
we have seen, the small farmer has difficulty in integrating into non-traditional
export chains, he now also faces the same problems in accessing domestic,
urban markets. Retailers are tending to set up their own distribution centres
based on selected suppliers. These new circuits, in their turn, have a knock-on
effect, leading to the modernization of traditional wholesale and outdoor mar-
kets, closing the door on those who are unable to adapt.
The speed and extent of these changes in developing countries have been
challenged (Humphrey, 2006). In a number of Latin American countries, vari-
ous transnationals have been unable to consolidate their presence and domestic
or regional companies have strengthened their position. It may be, of course,
that local retailers increasingly adopt similar standards to the global players as a
condition of continuing competitiveness. On the other hand, there is consider-
able heterogeneity with clear gradations in quality demand. Some authors spec-
ulate that as basic quality improves retailers may shift back to traditional supply
systems. In some major developing countries, such as India, foreign retailers are
only now being allowed to gain a foothold. In much of Africa, it is the informal
sector that predominates even in the large cities (Sautier et al., 2007). In Brazil,
global food industry companies, facilitated by new logistical technology, are
focusing more on small outlets in an attempt to counter the buying power of
large retailers. In India, there are preemptive moves to strengthen traditional
distribution networks prior to the entry of global retailers.
While special attention has rightly been given to the importance of retail
FDI since it involves redesigning the organization of food systems as a whole in
developing countries, incoming FDI into developing countries has been particu-
larly pronounced in food-processing and services. We mentioned earlier that
the food industry, to the extent that it deals in final food products, tends to situ-
ate itself close to the relevant consumer markets. Trade, therefore, is propor-
tionately less important than FDI compared with other industrial sectors and
investments are diffused in accordance with consumer concentration. Nestlé,
Unilever and other global food companies are typically present in as many as
150 countries. During the 1980s and 1990s most developing countries adjusted
their legislation and regulations to attract foreign investment, which it was
thought would enhance their export competitiveness. While this has been the
80 J. Wilkinson and R. Rocha
case with the grain traders in the Southern Cone
17
and also for the ‘maquila’
18
industry in Mexico, food industry investment has generally been motivated by
the dynamism of developing country domestic markets.
19
Green field invest-
ment has primarily been restricted to regions of new export growth, as in the
case of the crushing oil seed industry in the Mercosur. The food industry, for its
part, has preferred mergers and acquisitions in consolidated oligopoly markets,
relying on financial clout and global brands. With the recent turn, however, to
low-income consumers, foreign firms have begun to operate in more competi-
tive markets.
Whether foreign firms rely on imports of raw materials, equipment or
human capital seems to depend on the conditions prevailing in the host country.
Often, initial import dependence is replaced by local supplies once tech nical
conditions are met. The degree to which FDI promotes rather than ‘crowds out’
the growth of domestic firms would also seem to be quite variable. While not
necessarily bringing state-of-the-art technology in either products or processes,
the incoming flow of FDI has tended to coincide with increased productivity and
product diversification. This may, however, as has been observed, be due more
to the new conditions of global market competition rather than the presence of
foreign companies in the host country. Large developing countries such as
China and India have placed various forms of restriction on FDI. In India, it has
been explicitly excluded from certain sectors including, until very recently, the
retail sector. In China, there has been a requirement for FDI to associate with
domestic firms. An interesting series of case studies in China has also docu-
mented the way domestic firms have adjusted to the presence of FDI, reposi-
tioning themselves competitively within the local and regional market on the
basis of closer knowledge of local food preparation and eating practices. The
cultural specificity of food practices would seem to be promoting proportion-
ately greater location of R&D in developing countries when compared with FDI
in other industrial sectors.
While in the 1980s and 1990s the priority of developing countries was to
attract FDI at all costs, the concern now is increasingly with more nuanced pol-
icies directing FDI to previously defined priority sectors. This is in line with a
broader appreciation of the role of public policies in promoting development.
As we have indicated earlier, a novel feature of FDI is the increasing presence
of investments from developing countries both in the South and the North and
the emergence of Southern food transnationals. This tendency is likely to
become more pronounced in the coming decades as a result of strong sus-
tained growth in developing country domestic markets. This will be particularly
the case in Asia where conditions governing the flows of FDI have in the past
been more restrictive.
A new wave of FDI, primarily directed also to the South, is now being
stimulated by the priority being given to the development of biofuels. This surge
17
Generally defined as Southern Brazil, Argentina, Chile, Uruguay and Paraguay.
18
An industry that assembles parts imported duty-free for re-export to the country of origin.
19
Japan, where FDI has been largely motivated by a strategy of re-exporting to its own domestic
market, would be an exception here.
Agro-industry Trends, Patterns and Development 81
promises to revert the century-long specialization of agriculture towards food
production. There are some indications, particularly in the case of ethanol, that
the general intention is to create a separate global biofuels market. Initially,
however, there is likely to be greater instability in crop prices, which is already
making itself evident, and the accompanying food inflation will have differential
impacts on producers/consumers and importers/exporters. The reintegration of
energy into the basic ‘functions’ of agriculture has been welcomed by some as
providing the opportunity for a new model of decentralized growth for develop-
ing countries (Sachs, 2006). Others argue that this will lead to renewed emphasis
on the South’s role as commodity crop exporter for the northern markets, sub-
stituting the traditional tropical commodities now in crisis (Seedling, 2007).
While the global traders and agrochemicals firms are heavily involved in
these biofuel investments, FDI here is notable for the presence of new sectors.
These include the automobile and petrochemical industries and extend to
investment funds and finance firms, with Merril Lynch, Stark, Goldman Sachs,
Soros, Rabobank and Barclays all being directly involved in the construction of
biofuels plants. In addition, and this may also represent a shift from the model
of contract coordination to the older ‘colonial’ pattern, investments include the
purchase of agricultural lands for the production of agro-energy. Southern FDI
is also engaged, particularly in Africa, a key target of biofuels investors, where
the presence of Brazilian, Indian and Chinese FDI is increasingly evident. Given
the importance of biofuels investments and the dual function of many crops,
both food and energy production must be integrated into agro-industrial devel-
opment strategies.
Traditional exports, commodities and downgrading
This potential reversion for the South to a commodity vocation within the
emerging global biofuels markets is ominous in the light of the prolonged crisis
in tropical export agro-industrial commodities. In some instances there has
been a recycling out of these crops into non-traditional exports, as in the case
of Kenya and, certainly in terms of revenue, ‘non-traditionals’ as a whole now
overshadow the returns from tea, cocoa, coffee and cotton. Nevertheless, non-
traditional products are often located in different regions and different coun-
tries, generating income and employment for different actors. Non-traditional
activities tend to be more specialized, differing from the tree crop export cul-
ture, which was developed in synergy with subsistence production and produ-
cing crops for local markets. While the traditional sector continues to involve
much broader numbers of workers/producers and their families in the develop-
ing world (10 million in cocoa and more than 20 million in coffee) farmers have
at least some protection in their other crops.
While non-traditional crops involve a valorization of the agricultural and
rural phases of production with corresponding opportunities for negotiating,
not always successfully, greater shares in value added, traditional crops have
experienced an inverse tendency. Not only has there been deterioration in
the value of the raw material, but the value added has been concentrated at
82 J. Wilkinson and R. Rocha
the service end of the chain, as in the explosion of the coffee shop culture.
Representatives of the sector claim that producer country shares in global value
of the coffee chain have declined from some 30% to 10%.
The value chain literature identifies a process of ‘trading down’,
20
rather
than ‘upgrading’. Research has highlighted the continuing importance of global
traders in the conduct of traditional commodity (and other) GVCs, leading them
to posit the ‘bipolar’ coordination of GVCs in which economic power within
the chain is negotiated between traders and confectioners. Since the end of
commodity agreements producer countries have lost control over stocks and
have suffered competition from new entrants (such as Vietnam in the case of
coffee). At the same time, new blending techniques and/or new processing
techniques have enabled the use of lower-quality raw materials in both cocoa
and coffee. In sharp contrast to non-traditional products, therefore, these com-
modities have suffered from ‘downgrading’.
The huge numbers of farming families who depend on coffee in many dif-
ferent developing countries and the lack of perspective for upgrading within the
chain provoked the emergence of a ‘new economic social movement’, the Fair
Trade movement, which frontally challenged the justice of existing patterns of
remuneration within the chain. This movement has had a striking impact – with
some 600,000 families now covered by Fair Trade contracts in coffee – and has
been reinforced to the extent that corporate social responsibility has become
generalized within business. As a result, most global players in the chain, after
years of resistance, have now endorsed (for whatever motives) the principles of
the movement. At the same time, within the market, Fair Trade occupies a qual-
ity niche. We will not dwell here on the tensions within the movement and dif-
ferent evaluations of its dynamic. The important new phenomenon, which the
movement reflects, is that social justice is now beginning to be seen as a quality
factor from the standpoint of consumption.
A similar tendency can be seen in the emergence of a complementary
movement around geographical indications (GIs), which in the developing
world context (as a result of incorporation into the TRIPS agreements), are
currently being applied to the production of these commodities. Some coffee-
producing regions in Brazil and Colombia already have this status, as has
Roibus tea in South Africa and Darjeeling tea in India. Here, again, the notion
of quality is associated with social and cultural values relating to collective local
development. To the extent that it anchors these qualities also in characteris-
tics of the product, which are seen to depend on the particularities of the
locale, however, it approximates to the revalorization of the rural and agricul-
tural products and processes referred to in the case of ‘non-traditionals’. While
GIs defend social and cultural objectives through the claim for unique quality
status, Fair Trade's goal is for the universalization of new criteria of redistri-
butive justice within traditional commodity chains. Both strategies involve a
20
See Gibbon and Ponte, Trading down: Africa, value chains and the global economy (2005).
This position is close to the ‘immiserating growth’ hypothesis of Bhagwati and more generally
the approach adopted by ECLA (Prebisch), whose more recent formulation was the ‘spurious
growth’ scenario.
Agro-industry Trends, Patterns and Development 83
de-commoditization of the chain, which now depends on new forms of coor-
dination (certification, seals, auditing).
Cocoa is moving towards a similar situation, but on the basis of a differ-
ent dynamic, which is analysed by Fold (2002). Cocoa depends on forest
regions, which are becoming scarce with accelerating deforestation. A low-
quality strategy is therefore no longer sustainable, since the fundamental
problem is the threat of irreversible declining supplies. The need to promote
small farmer commitment to the renovation of cocoa production has led to a
joint endeavour by processors and chocolate manufacturers, called the
International Cocoa Initiative. The visibility of this programme and the explicit
commitment of industry mark a rupture with the anonymity of the commodity
market. In this context, civic concerns over child labour and labour conditions
more generally must be taken on board and the ‘bipolar’ leadership of the
GVC has had to be amplified to include international NGOs who are now
involved in the Initiative. Fold concludes his analysis by calling attention to the
way this International Cocoa Initiative has had the unintended consequence
of introducing modern contract relations into this traditional commodity
export sector.
Expanding urban markets
While most of the literature on development strategies has concentrated on the
new export market opportunities within the historic South/North axis, FDI and
trade is increasingly geared to the potential of the expanding urban markets in
the South. Various research programmes and cooperation activities have
focused on the actual and potential role of these domestic markets as the key
for employment and income generation along the expanding agrifood chains,
as they adapt to new producer–consumer relations. Particularly in the case of
horticulture, the urban domestic markets have been shown to be five times as
important in the case of Latin America (Reardon and Berdegué, 2003), and
similar estimates have been reported in the case of developing countries in Asia
and Africa (Shepherd, 2007). The retail research, which we have discussed
above, however, has also cautioned that the corollary of transnationalization in
function of the domestic markets of developing countries is the progressive
internalization of quality and logistical standards before applied only to exports.
Deregulation and the integration of developing country markets into global
trade and investments also mean that the growth of the domestic market does
not automatically revert to benefits in employment and income generation for
domestic food producers and processors. As we have seen, LDCs have become
on average significant net food importers.
In many low-income agricultural LDCs, the urban food system exhibits a
dual structure. On the one hand, we have the large-scale processing of, gener-
ally imported, grains, milk and other products, mostly located in the country’s
ports and capital cities. The bulk of urban consumption, however, depends on a
myriad of informal distribution and processing chains, primarily drawing on
each region’s small farming sectors and their traditional foods. This informal
84 J. Wilkinson and R. Rocha
sector can account for as much as 80% of urban food consumption. The import-
ance of this phenomenon and the need for appropriate institutional adjustments
has been recognized in a paper by the African desk of the World Bank, which
warns against the generalized imposition of standards, which ‘could marginalize
the important informal food delivery system and put special burdens on small
food enterprises’ (Jaffee et al., 2003, p. 24).
An illustrative research study carried out by CIRAD (Sautier et al., 2007)
captures well the importance of this informal sector and particularly the key
role of women in food-processing and catering services. The authors argue that
urbanization does not lead to a sharp change in the nature of the foods con-
sumed although the conditions of their supply are radically changed. Extensive
social and ethnic networks maintain links between urban and rural dwellers and
become the vehicle for adapting local foods to the urban context. In this pro-
cess, previously untraded products, such as the cassava couscous ‘attiéké’ –
which was only known in specific regions of the Côte d’Ivoire and is now traded
in many Central African countries – become transformed from subsistence
crops into components of the new urban diet.
In Dakar, Senegal, the number of urban cereals mills increased by 63%
between 1990 and 1997; 339 informal service mills were identified and it was
estimated that these artisan mills accounted for over 90% of the urban millet
market. The World Bank report, previously referred to, also makes a comple-
mentary evaluation of transformations in the urban food-processing sector in
the wake of the winding down of marketing boards and their processing oli-
gopolies. The report argues that ‘small-scale grain, oilseed, bakery and other
operations (are) taking market share from the formerly dominant players and
the latter (are) having to innovate their product lines and backward and for-
ward linkages to survive, let alone prosper’ (Jaffee et al., 2003, p. 14). The
CIRAD study, for its part, reports a survey conducted in Garoua, a secondary
city of some 230,000 inhabitants in the Cameroon: ‘A total of 1,647 small
and micro commercial agrifood enterprises were identified, consisting of 866
food-processing units and 781 food preparing units (catering and street foods).’
They note that being labour-intensive and decentralized these activities are
important sources of employment and income for the poor, particularly for
women, who managed 82% of these activities.
Farm–agribusiness linkages
The adjustment of developing country farming systems to the opportunities
and challenges of their urban markets has been a central concern of inter-
national cooperation programmes including the FAO initiative ‘Strengthening
farm–agribusiness linkages’ carried out in the three continents (FAO, 2004b).
Since the 1990s, in the wake of the dismantling of many forms of domestic
State intervention, national cooperation, the UN system and NGO networks
have all focused on the micro-determinants of adjusting to market demand.
Business management training, market research, innovative micro-financing
and organizational promotion have all been harnessed to the goal of enabling
traditional farmers to benefit from the income and employment opportunities
Agro-industry Trends, Patterns and Development 85
opened up by urban food demand. These are precisely the enabling measures
needed to transform rather than marginalize the informal sector, which at
present plays a strategic role in domestic food supply systems. Methodologies
and training programmes have been developed on all these issues, together
with the identification of numerous ‘success stories’. Nevertheless, the balance
sheet is mixed (Shepherd, 2007).
The strengthening of traditional practices may initially be decisive in
increasing food and nutritional security, but their long-term sustainability will
depend on the degree to which they can be transformed into market assets.
Value-added strategies based on tradition and locality, however, are successful
to the extent that they are understood to be, if not unique, at least special. For
most producers and producer groups, therefore, a focus on the dynamic prod-
ucts of urban food demand and an adaptation to the new conditions of access
(management, marketing, logistics, quality) will provide the best conditions for
success in many developing countries, particularly those where small farmer
systems predominate. Whatever their successes, however, the microtargeting
and support of specific producer groups is only relevant from a strategic per-
spective to the extent that it has a much broader ripple effect. In addition,
therefore, to the perennial problems of reduplication, capacity substitution
and hidden or not so hidden subsidies, which are either disproportional to the
results achieved or unsustainable once removed, it is not clear that such a
project focus can, of itself, provide the launching pad for agrifood develop-
ment strategies.
It is increasingly recognized that the provision of public goods, and a pro-
active role for governments, is a necessary complement to the micro-focus on
producer groups. There are no substitutes for adequate communication and
information services, technical assistance and appropriate physical infrastruc-
ture. On their own, however, these latter services can favour specific producer
groups to the detriment of others and may transform land-use patterns, leading
to the marginalization of traditional actors. Both types of policies, therefore,
are necessary, but their balance depends on the specific situation in each coun-
try, region and locality. International cooperation, therefore, cannot substitute
for ‘embedded’ policy-enacting capacity, which in many cases means a renewed
focus on the rebuilding of government competences.
Conclusions and Future Perspectives
Throughout this chapter we have seen that there are strong structural factors –
in relation to both global and domestic markets – favouring the promotion of
agro-industry in developing countries. The focus on non-traditional export
products tends to revalue the natural climatic advantages of tropical and semi-
tropical countries. In addition, the combined pressures of civil society social
movements and advances in corporate social responsibility standards may well
counter the ‘trading down’ effects of cheap wages and slack environmental
regulation. Although the perspectives of long-term buoyant domestic demand,
in a context of overall growth, will certainly lead to more imports, they will also
provide a sustained stimulus to the development of domestic supply systems.
86 J. Wilkinson and R. Rocha
These combined advantages of developing countries have, as we have
seen, increased inflows of FDI, whose potential benefits need, however, to be
guaranteed by judicious policy measures. The force of developing country
agro-industry can be seen in its increasing participation in South–South trade
and investment flows. New contract relations are replacing spot markets, not
only in the case of non-traditional products, but also in traditional tropical
commodity exports, thus providing a more favourable environment for nego-
tiating minimum social, economic and environmental standards.
The key challenges lie in the negotiation of ‘upgrading’ when primary pro-
duction is inserted into GVCs, in establishing a level playing field in services,
training and infrastructure for generalized competitive participation and in pro-
moting an environment favourable to innovative risk-taking. Modernizing strat-
egies for competitiveness should, however, be tempered by the recognition that
tradition and the world of artisanal production and style-of-life consumption
have an impact on increasing demand.
A strong case has been put forward for the employment and income bene-
fits accruing to non-traditional exports with their labour-intensive, postharvest
activities heavily biased towards female labour. A similar argument has been
advanced for the spillover effects for non-agricultural rural employment of inte-
grating small farmer communities into domestic markets. We have also seen,
however, that many markets based on new quality and logistical standards pro-
vide formidable entry barriers to small farming and have tended to strengthen
larger commercial farms where the small-scale farmer is at best reinserted as a
wage labourer. These trends vary considerably from country to country and
region to region but point to the need both for renewed attention to the impli-
cations of wage-labour agro-industry for rural development and for a discussion
on ways of conditioning new investments on the adoption of measures of social
inclusion along the lines of the Brazilian biodiesel programme.
21
In spite of the favourable structural factors discussed above, issues relating
to energy, global warming, innovation and the institutional and regulatory con-
text all impose high levels of uncertainty with regard to long-term trends.
We have already discussed how one scenario for biofuels would involve an
unprecedented expansion of large-scale, wage-labour farming on all three con-
tinents. On the other hand, the costs of petroleum-based inputs open up com-
petitive niches for labour-intensive, low-input or organic farming systems.
Global warming would seem particularly to threaten developing countries,
from both floods and drought. Such threats, however, are not reserved to devel-
oping countries. One consequence has been the renewed attention to the
development of drought-resistant varieties in genetic research. It now seems
likely that advances here will be more rapid than originally projected as greater
21
Different from Brazil’s ethanol programme, the biodiesel initiative is specifically geared to
involve the family farm sector not only as suppliers of raw material, but also in the production
of crude oil. To achieve this the programme is designed to promote the sources of oil, which
are most appropriate to each regional bioma. In addition, to participate in the programme
biodiesel firms must obtain a social certificate which guarantees that they are purchasing the
percentage of raw material from the family farming sector specified for each region (Wilkinson
and Herrera, 2008).
Agro-industry Trends, Patterns and Development 87
resources are dedicated to this research. Developing countries, particularly in
Africa, may well be important beneficiaries of such research, which may also shift
perspectives on the acceptability of biotechnology and genetic engineering.
While changes in the institutional and regulatory climate have been unac-
ceptably slow from the developing country perspective, as the impasse in the
Doha round has made clear, many in Europe and the USA are already adapt-
ing to a ‘post-commodity’ farming scenario based on high-value products. To
the extent that this develops, aided also by parallel movements in favour of
local produce and against ‘food-miles’, the developed countries may become
stronger competitors in the ‘non-traditional’ areas, which have until now pro-
vided such favourable perspectives for developing countries. Such a considera-
tion reinforces the importance of gearing agro-industry strategies to the
domestic urban food markets of developing countries.
Throughout this chapter it has been argued that agro-industry is the deci-
sive component of the food system, intermediating raw material production in
the rural context and consumption in the urban milieu. In addition, we have
seen that its income, employment and location effects transform agro-industry
into a powerful vector of broader development strategies. Our first conclusion,
therefore, would be that policies for agro-industry should occupy a central pos-
ition in government strategies. In addition, we have shown that agro-industry is
a complex phenomenon involving global and domestic supply chains increas-
ingly governed by contract, varied production systems, with different income
and employment consequences, regulatory systems, research and develop-
ment, FDI and international negotiations on quality, access and subsidies.
Developing countries themselves are extremely varied in their natural and
human resources and increasingly heterogeneous in their levels of economic
development, making policy prescription hazardous. Nevertheless, some gen-
eral policy implications can be drawn for developing countries from the differ-
ent issues analysed throughout this chapter.
The first conclusion is that government-level initiative must now be given
special attention. Second, however, it is clear from all we have discussed that
policy must be oriented to market sustainability even when the values being
transacted are traditional practices. Third, markets themselves are the objects
of economic, social and environmental negotiation and regulation involving
both public and private actors. Fourth, agro-industrial policies should also be a
component of social policies aimed at food and nutritional security.
Last but not least, this chapter gathers empirical information from a great
number of data sets, academic articles and books, multilateral agencies, NGOs,
international forums and other web sites. In many cases minimum methodo-
logical uniformity was only achieved to the detriment of the number of coun-
tries surveyed, restricting our samples to only a very few countries. Important
platforms such as that of the ILO or even the UNIDO Industrial Statistics
Database suffer from the limited number of observations and generally do not
allow for consistent inferences regarding absolute levels of the economic aggre-
gates. There is evident scope here for cooperation among multilateral agencies
since in many circumstances the same statistics appear for different years in
different data sets, with different methodological approaches and, consequently,
distinct results.
88 J. Wilkinson and R. Rocha
With these provisos in mind this chapter has highlighted the following
areas as the privileged focus of policy initiatives:
?
strategic policy on agro-industrial competitiveness;
?
support for SMEs through capacity building, clustering and technology
transfer;
?
recognition of the key role of the informal sector and the need for appro-
priate enabling instruments; proactive policies in relation to FDI;
?
policies for inclusion of small-scale farmers and agro-producers in contract
supply chains;
?
provision of public goods with a view to levelling the competitive playing
field; participation in development of technical and monitoring services for
achieving market access;
?
provision of services for building up capabilities for sustainable market
access; development of consumer protection policies;
?
active role in harmonizing and ensuring the transparency of quality stand-
ards; measures to ensure that agro-industrial development is compatible
with environmental and social sustainability to avoid ‘the race to the bot-
tom’ trap as well as negotiation of standards and conditions of access in
international forums.
Many of these policies will be best developed within the framework of concrete
and effective international cooperation.
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Background
We live in a time of great social, economic and technological changes. While
close to one billion people suffer from hunger or under-nutrition and another
two billion exist on the borderline of barely acceptable nutrition, the potential
for dramatically improving the economic status and food situation in develop-
ing countries has never been greater. Expected changes in income and demo-
graphics will lead to greater consumption of meat, dairy products, fruits,
vegetables and edible oils, resulting in a growing demand for raw agricultural
products. More consumers will have the economic status and changed lifestyle
which leads to the purchase of more processed and packaged food and an
increasing variety of convenience and luxury food items but does not necessar-
ily increase the demand for raw agricultural commodities. The number of cur-
rent low-income consumers lifted out of poverty will be the most important
determinant of the future global demand for food. The World Bank estimates
that the number of people in developing countries living in households with
incomes above US$16,000 per year will rise from 352 million in 2000 to 2.1
billion by 2030.
The ability of agricultural and food industries to continue to respond to the
undoubtedly substantial increase in demand in future decades will be highly
dependent on the increased application of existing technologies as well as the
exploitation of new and innovative technologies. By 2050, the world demand
for food will double, driven by the predicted population growth and the pro-
jected broad-based economic growth, which will lift low-income consumers out
of poverty.
The development of the agrifood industry will obviously vary in different
regions of the world depending on current levels of sophistication with
respect to the production, preservation and processing of agricultural com-
modities. Providing enough food for vulnerable groups of the population and
4 Technologies Shaping
the Future
COLIN DENNIS,
1
JOSÉ MIGUEL AGUILERA
2
AND MORTON SATIN
3
1
Director General, Campden BRI, Chipping Campden, Gloucestershire, UK;
2
Professor, Department of Chemical Engineering, Universidad Católica de
Chile, Santiago, Chile;
3
Director of Technical and Regulatory Affairs, Salt
Institute, Alexandria, Virginia, USA
Technologies Shaping the Future 93
strengthening the competitiveness of the small farmers are probably the first
priorities in developing and emerging countries. The focus will be on improv-
ing agricultural practices and on postharvest preservation technologies.
With changing demographic conditions and food demand there will also be
increasing need for the design and development of efficient integrated systems
of food production, processing, preservation and distribution from rural pro-
ducers to expanding and diversifying urban populations in developing and
emerging countries. In addition, the general shift towards increased meat con-
sumption in developed and emerging countries is the greatest food transition
of modern times. It is predicted that the world’s livestock could eat as much
grain as four billion people can by 2050 (Moynagh and Worseley, 2008).
In developed countries with well-developed urban populations there is con-
tinuing desire for greater added value and convenience of food production in
response to the social and lifestyle changes (e.g. less time available for food
preparation and greater disposable income) and an increased desire to con-
sume foods which assist in disease prevention and healthy ageing.
The need for the exploitation of technologies is further emphasized by the
fact that arable land and fresh water are not distributed around the world in the
same proportions as is the population. For example, there are many barriers
for Asia or the Middle East to be self-sufficient in food. With population growth,
urbanization and broad-based economic development, food consumption in
less-developed countries will outstrip their production capacity and will thus
become larger net importers. This, in turn, will require appropriate transport
and distribution systems.
It is well recognized that future food production will be constrained by land
and water availability. There is, at most, 12% more arable land available that
is not currently forested or subject to erosion or desertification. The area of
land in farm production could only be expanded significantly by substantial
destruction of forests and loss of wildlife habitat, biodiversity and carbon
sequestration capacity. This is unacceptable from the viewpoint of environ-
mental and natural resources protection. The only environmentally sustainable
alternative is to at least double the productivity on the fertile, non-erodible
soils already in crop production. In some areas land may be used in novel
ways, for example, China’s paddies produce two-thirds of the world’s pond
fish. During the 1990s, the country almost doubled yields per acre by growing
multiple types of fish in the same pond (Moynagh and Worseley, 2008). In the
near future, more fish may come from aquaculture than ocean fishing. It could
be an effective way for people in poor countries to obtain the nutrients they
desperately need.
Agriculture is not only the largest user of water (70% of fresh water) but
also the largest waster of water. With rapid urbanization, cities are likely to
outbid agriculture for available water. Thus, there will be a need for the world’s
farmers to face the challenge of doubling food production using less water than
they are today.
Future strategies must not be restricted to ensuring food availability for all
simply in terms of calories, but must also deliver sufficient quantities of safe whole-
some food that contributes to a healthy diet. Strategies need to be considered
94 C. Dennis et al.
in the context of progressive economic development and the associated urbani-
zation. These will have consequences for the dietary patterns of lifestyles of
individuals. Changes in diets, patterns of work and leisure are already contri-
buting to the causal factors underlying non-communicable diseases, even in the
poorer countries. Technological development therefore has a major role to
play in shaping the future of food production, preservation and supply and
delivery of food to the world’s consumers.
This chapter considers the various drivers for technological change before
discussing the range of technologies that will undoubtedly have a substantial
impact on the development of the agro-food industry in developing, emerging
and developed countries. These include specific processing and packaging
technologies as well as the cross-cutting nature of generic technologies such as
biotechnology, bioinformatics, nanotechnology and information and commu-
nication technology. Such technologies are discussed with respect to delivering
health and well-being, ensuring food safety and contributing to more sustain-
able food supply in a competitive global market. Emphasis is given to the fact
that technologies are not applied in isolation, but require commitment and
investment from the private sector in a political environment where public pol-
icies stimulate entrepreneurship. This involves the availability of an appropri-
ately educated and trained workforce, fiscal incentives for R&D and innovation
and international regulations that are not unnecessary barriers to trade.
Drivers of Technological Change
Social
The attitude of consumers towards food and agriculture is heavily dependent
on the availability and abundance of food in its various forms. In those parts of
the world where the scarcity of food is such that individuals have only sufficient
to satisfy their very basic calorific intake or are malnourished and suffer hunger,
there is little thought given to the source of the food or its safety and quality.
However, in those parts of the world where there is a plentiful supply, many
consumers feel passionately about their food, its method of production, quality,
origin and effect on their health, as well as its price. In no other industrial sector
are there so many factors contributing to a direct consumer involvement in the
products delivered. This provides both an enormous challenge and a huge
responsibility for the agrifood industry.
In the past two decades or so most developed countries have seen a dra-
matic rise in concerns among their citizens over the quality and safety and
long-term health effects of their food. A number of safety issues related to the
food supply chain (local, national and international) have provided legitimate
background for consumer groups to demand political action. For example, in
Europe national food safety (food standards) agencies or authorities have been
established, in addition to the European Food Safety Authority (Podger, 2005),
to oversee the implementation of the regulatory framework, with a specific
emphasis on safety in the broadest sense.
Technologies Shaping the Future 95
Apart from safety, consumers are increasingly concerned about the origin
of their food not only in terms of locality (region and country), but also about
issues around animal welfare, environmental impact, organic production and
fair trade (see Figure 1). Consumers increasingly have to make decisions about
whether to purchase locally produced food versus imported products providing
an all-year-round supply of, for example, fresh fruits and vegetables. The pur-
chase of imported products often provides an opportunity for affluent con-
sumers to support developing economies by purchasing their products. However,
transporting food products over long distances (the ‘food miles’ debate) has
stimulated much discussion on possible negative effects on the environment.
Consumers increasingly demand that food producers assure them that
their ethical and environmental concerns are reflected in products. But, while
all of the above factors play a part in putting pressures on the market for
change, consumers remain very price-sensitive and seek solutions that are
affordable. The need to embrace these diverse consumer concerns, yet provide
foods that are affordable, places challenging constraints on the market and on
the potential for innovation. Unlike all other categories of consumer products,
where the consumer welcomes innovations and the application of scientific and
technological developments, the outputs from science and technology with
food products are often viewed with suspicion and the challenge to the industry
is to communicate effectively the consumer benefits of scientific development.
Waste reduction or
prevention
Reuse
Recycling
Waste recovery
options
Composting
Reduced energy
usage
Life cycle analysis
Reduced fat,
sugar, salt
Enriched in fibre
Antioxidants
Protective compounds
Lower energy density
Satiety enhancing
Modified functionality
Bioavailability
Consumer acceptance,
safe, convenient, choice,
fair trade, organic, animal welfare,
origin and provenance, price
Final product
Processing &
packaging
Raw materials & ingredients
Agricultural production
Modified agronomic practices,
especially with respect to
irrigation and water and soil
management
Reduced chemical
inputs
Improved & faster
breeding
Figure 1. Future food production and processing trends.
96 C. Dennis et al.
In both developing and developed economies, consumers’ increasing desire
for choice, convenience and added value is continuing to influence the techno-
logical basis of the agrifood industry. This trend also includes the increasing
number of meals consumed outside the home. In addition, the marked demo-
graphic changes (ageing populations) will influence the type of food required,
the way it is packaged and the nutritional composition so as to contribute to
healthy ageing. Increased urbanization in many developing economies will also
pose challenges in relation to storage and distribution and the increased mobil-
ization of different nationalities around the world will provide opportunities for
even greater diversity of products to meet the different cultural needs. Changes
in eating patterns from traditional diets to western-style foods and eating away
from home (e.g. fast foods) will also be affected by rising incomes and the fact
that more women are entering the workforce, leaving less time for food prep-
aration at home.
Economic
Food security is not a new concern for countries that have battled political
instability, droughts or wars. But for the first time since the early 1970s, when
there were global food shortages, the issue of food availability is starting to
concern more stable nations as well, especially as this will undoubtedly impact
on food-price inflation (Anon., 2007f). There will be a permanent increase in
demand for agricultural commodities in Asia, as the richer populations in
China and India demand more protein. Demands for agricultural products
from the biofuel industry, which is on course to consume about 30% of the US
maize crop by 2010, will continue to have a major impact. These develop-
ments will underpin prices for the medium term. FAO estimates that these
structural new trends will push the cost of agricultural commodities in the next
decade between 20% and 50% above their last 10-year average. This will be
a problem for economies where food represents a significant share of their
import payments. FAO has forecast that lower-income ‘food-deficit’ countries
will spend more than US$28 billion on importing cereals in 2009, double
what they spent in 2002.
Several economic-related factors will influence both which technologies are
applied in the future and where they are applied. Postharvest losses of foods –
physical, nutritional and in market value – are inherent to a business dealing
with perishable materials. Reducing postharvest losses by controlling tempera-
ture and moisture of stored grains, improved containers, packaging and cold
chain maintenance of fish and horticultural perishables could, potentially, add
to the global food supply and to the revenues of small farmers.
In many developing economies, there are tremendous opportunities for
adding value in the country of origin of the raw materials. There is much greater
opportunity for integration of the agrifood sector and the development of the
organized food-processing sector in such countries. For example, new emerg-
ing economies such as in China, India and Brazil are seeing export growth of
value-added products, while the value of exports as a percentage of the value
Technologies Shaping the Future 97
of total world exports in food and drink products in both the USA and the
European Union (EU) has declined by 30% and 15%, respectively (Anon.,
2007a).
Key economic issues which will continue to affect the development of
organized processed food industries are cost and availability of raw materials;
labour availability and costs; rate of return on capital investment; transport
costs and availability of distribution infrastructure; costs of obtaining regulatory
approval for a new technology, ingredient or food; and cost of compliance with
national and international regulatory frameworks.
Political
With the increased globalization of the agrifood industry, regulatory frame-
works with respect to international trade have a fundamental part to play,
especially with respect to food safety. The principle of equivalence in food
safety has become an important issue impacting on international trade in foods
(Anon., 2007c). At this level, considerable effort is being directed to achieving
agreement in the concept of equivalence as it applies to food safety manage-
ment systems, i.e. does the management of food safety in one country achieve
or ensure the same level of protection as food safety management systems in a
second country?
Equivalence of food safety measures is recognized in the World Trade
Organization (WTO) Agreement on the Application of Sanitary and
Phytosanitary Measures (SPS Agreement) and the Agreement on Technical
Barriers to Trade (TBT Agreement). Both agreements require member coun-
tries to ensure that their food safety measures are objective, science-based,
consistent and harmonized with international standards, where they exist.
Because measures can take many forms, WTO member countries are encour-
aged to accept other countries’ measures and regulations as being equivalent,
provided they have satisfied these alternative measures and that the regulations
meet their appropriate level of protection (ALOP) or public health goals. The
ALOP, which is the responsibility of national legislators, may not be the same
for all countries. The WTO has recently created the SPS Information
Management System (SPS IMS), a database for searching for information on
WTO member governments’ sanitary and phytosanitary measures, which
include food safety and animal and plant health and safety.
The Codex Alimentarius Commission (Codex), the international food
standards setting body, is moving to better articulate the concept of equivalence
and its application to food safety. The Codex Committee on Food Import and
Export Inspection and Certification Systems (CCFICS) has developed guide-
lines for the judgement and development of equivalence of sanitary measures
associated with food inspection and certification systems.
For food processors and food regulation authorities, there is also the need
to determine the equivalence of different food safety measures, i.e. the ability
of alternative technologies to achieve the same level of health protection by,
for example, destroying or inhibiting pathogenic micro-organisms. The focus
98 C. Dennis et al.
is on comparing existing approved measures, which are presumed to achieve
a level of risk acceptable to the community, with alternative food safety
measures.
Public policies with respect to food, diet and health will undoubtedly be a
major driver for the agrifood industry in the future and will influence the need
for technological development. Such policies could include intervention in
relation to health claims in advertising, especially that targeted at children, and
the way national governments respond to the need to resolve issues of obesity
and being overweight, which is now occurring across all age and ethnic groups
in both genders and across all socio-economic classes (‘globesity’) (Anon.,
2007e).
Other political influences relate to public policies with respect to support of
research and development and innovation or incentives to encourage industry
to invest in new technologies. Similarly, policies with respect to encouraging
education in science, technology and engineering will be a major influence on
skilled and trained people essential for technological development. However,
the commercial exploitation of new technologies will also depend on the cul-
ture of entrepreneurship and risk taking within a country or in individual com-
panies and the public policies which encourage enterprise.
Environmental
There will be increasing pressures on the agrifood industry both from public
policies and commercial need in relation to environmental issues throughout
the food supply chain. These will include the need for lower and optimized use
of fertilizers, pesticides, herbicides and fungicides according to weather condi-
tions, growing season and soil types.
All the predictions on the consequences of climate change suggest that
water availability is set to become a key issue around the world, with the associ-
ated major consequences for agricultural production and food processing. Such
scarcity of water will strongly influence the use and methods of irrigation, plant
breeding (e.g. drought resistance), water recycling and reuse in food production
and processing systems.
Another environmental consideration that will influence development in
the agrifood industry is that of waste (see Figure 1). A commonly adopted
waste management hierarchy is waste reduction and prevention, reuse, recy-
cling, other recovery options (including bioenergy) and, lastly, safe and envi-
ronmentally sound disposal. All of these aspects will increasingly drive food
production and processing systems in the future. The aim will be to develop
and adopt production systems that are productive, sustainable and least bur-
densome on the environment. Thus, there will be increasing pressure to reduce
emissions with respect to food processing and to decrease the carbon foot-
print of different systems. However, in order to target the appropriate part of
the food supply chain and appropriate technologies, considerably more object-
ive data from relevant life cycle analyses from farm to fork are required (Foster
et al., 2006).
Technologies Shaping the Future 99
Technical and scientific
In addition to the above market-pull factors, technological development in the
agrifood sector will also be shaped by current and future outputs from scientific
and technological research and development.
For example, the desire to minimize the environmental impact of agri-
culture will focus attention on the potential benefits from greater applica-
tion of integrated farm management, including emphasis on integrated
nutrient management, which aims to increase the use of all nutrient sources
(soil resources, mineral fertilizers, organic manures, recyclable wastes and
biofertilizers). Similarly, decision support systems built around knowledge of
the effect of agronomic conditions on plant growth and the onset and
spread of pests and disease will be increasingly used together with satellite
technology to optimize the application of fertilizers and pesticides or herbi-
cides on specific crops.
Another major area of science that will drive technological development is
that of nutrition. Research and development will continue to provide an
improved understanding of the interaction between human psychology and
physiology and food and drink. Important aspects include the following:
?
Understanding of food structure and its influence on human physiology
and nutrition. For example, it is now recognized that particle size, the
structure of the food matrix and the proportion of amylose and amylopec-
tin in foods can have a significant impact on blood glucose levels when
food is ingested.
?
Role of food constituents and food viscosity on energy intake. Greater
knowledge on satiety may well offer the possibility of providing foods which
assist in lowering energy intake and associated weight control.
?
Production, formulation and separation of bioactive components and the
effect of processing and delivery mechanisms on bioavailability as part of a
normal diet.
Developments in material sciences will continue to enable the production of
new materials for packaging, with the likely emphasis to be on biodegradable
and compostable materials consistent with the sustainability agenda. Other
developments are likely to focus on lighter weighting, recyclability and enhance-
ments to consumer use, especially responding to changing demographics and
meeting the needs of an ageing population.
Continued developments in automation and robotics will enable greater
integration and automation of highly value-added, large-scale processing lines.
Such developments will be enhanced by developments in vision and other non-
invasive sensor systems which are integrated into feedback process control
loops to ensure greater process reliability, product consistency and reduced
waste or reworking of materials. Many such developments will be dependent
on outputs from the basic sciences linked to the ability to store, mine and visu-
alize large data sets.
As summarized in Figure 2, technologies that shape the future will have
to contribute to safety and quality, especially in relation to nutrition, and
100 C. Dennis et al.
sustainability (economic, social and environmental), while being competitive
and complying with an international regulatory framework as part of increas-
ing international trade.
Technologies for the Future
This section provides an overview of technologies that are likely to impact on
a range of agro-industries in both developed and developing countries in the
next 20–30 years, given the key drivers of the food industry and current global
trends. Consumers’ requirements largely condition the industry response in the
use of technology. Improved convenience, higher quality and the demand for
safer, healthier, fresher and more natural products have elicited a trend towards
milder processing or combination of treatments, use of fewer additives and
reduced packaging, among others. In addition, concerns about the environ-
ment and the use of energy are imposing new challenges to food-processing
technologies.
Food-processing technologies
It is not easy to classify food technologies in a simple and succinct way that is
at the same time technically rigorous. Figure 3 shows the scheme used in this
chapter. There are, of course, other ways of classifying these technologies and
of selecting them for given country-specific needs (van Boekel, 1998; Bruin
HEALTH &
WELL-BEING
Contribute to
disease prevention
and healthy ageing
COMPETITIVENESS
Production efficiency
and costs
Product match to
market need
SUSTAINABILITY
Optimize resource
use to reduce waste
and energy
SAFETY
Essential &
non-negotiable
NATIONAL &
INTERNATIONAL
REGULATIONS AND
FOOD CONTROL
Underpin international
trade
Figure 2. Drivers for technologies shaping the future.
Technologies Shaping the Future 101
and Jongen, 2003). In developing countries many agricultural raw materials
and fresh products are bought in nearby local markets and consumed at home
without major processing as is the case of most fruits, vegetables, nuts and
legumes and tubers (dotted line). Major staple foods that provide the bulk of
calories in traditional diets of these countries are harvested, dried and stored,
and undergo only cleaning and milling operations before consumption (e.g.
rice, maize). Tuber and root staples, most notably potatoes and sweet potatoes,
store well for extended periods and are peeled and cooked at home. Some
components of crops are selectively fractionated and separated by industrial
processing, becoming major ingredients of processed foods (e.g. wheat flour,
oils and sugar) or high-value additives and flavourings. However, in industrial-
ized societies and large urban centres in developing countries, most foods that
reach the table have undergone some form of preservation to extend their shelf
life and/or transformation to improve convenience and taste. The bulk of the
processed foods industry involves fabricating foods by mixing, transformation
and structuring technologies. Most foods experience some form of storage and
packaging before distribution, which in advanced societies and large urban
centres may be quite sophisticated.
For the three billion people presently living on less than US$2 per day,
those technologies leading to increased agricultural output of staple foods,
together with wider availability of storage facilities and improved postharvest
practices, will contribute to their increased access to high-quality and safe
food.
Annex 1, based on Figure 3, summarizes our views as to which technologies
are likely to have a large impact in the agribusiness sector, with an emphasis on
novel or emerging food technologies. As will be seen from Annex 1, many well-
established technologies continue to undergo developments with the aim of
improving product quality and processing and energy efficiency, while at the
GENERIC TECHNOLOGIES
• Biotechnology
• Bioinformatics
• Nanotechnology
• Energy-saving technologies
• Waste-conversion technologies
• Sensor and analytical technologies
• Robotic and automation
technologies
• Information technologies
Consumers
Packaging
Transformation/structuring
Thermal/non-thermal
preservation
Separation/ingredients
Water activity
control
Heating/
cooling/
freezing
Raw materials
Storage/distribution
Figure 3. Scheme adopted to group technologies according to their main impact in the
agrifood chain.
102 C. Dennis et al.
same time maintaining or improving the level of assurance of product safety. For
example, in the traditional processing area of pasteurization and sterilization sig-
nificant developments in the manufacture of expanded heat transfer surface per
unit volume are occurring. One of the fundamental parts of a heat exchanger is
the surface area for heat transfer. Significant advances are being achieved.
Modern manufacturing techniques, such as direct laser deposition (DLD), allow
complete freedom of 3D design and manufacture, with surface areas of
10,000 m
2
/m
3
achievable (Schwendner et al., 2001; Unocic and Dupont, 2003).
New construction materials are being explored, such as polymer films instead of
stainless steel. The result will be smaller heat exchangers for a given heat load,
and at lower build costs. One of the first applications being investigated in the
food industry is for recovering waste process energy from food factories.
Biotechnology
Experience to date suggests that biotechnology, if well managed, can be a
major contributor to meeting future needs with respect to producing not only
crops which are better adapted to a wider range of climatic and soil conditions
(drought, salinity, acidity, extreme temperatures), but also crops that have traits
for higher and better quality output (FAO, 2000). Modern biotechnology is not
limited to the much publicized (and often controversial) activity of producing
genetically modified organisms by genetic engineering, but encompasses activi-
ties such as tissue culture, marker-assisted selection (potentially extremely
important for improving the efficiency of traditional breeding) and the more
general areas of genomics, proteomics and metabolomics.
Second-generation genetically modified crops are expected to produce
crops with higher levels of needed micronutrients, better quality proteins or
crops with modified oils, fats and starches, to improve processing and digest-
ibility. Developments will also undoubtedly occur which allow the production of
specific functional foods or an enhanced level of bioactive compounds such as
antioxidants.
However, the commercialization, promotion and diffusion of genetic modi-
fication will be tempered by concerns about the longer-term impacts and pos-
sible risks with respect to human health (toxicity, allergenicity) or for the
environment (e.g. spread of pest resistance to weeds) and natural resources
(modification of habitats). As indicated earlier the degree of caution any society
will have about these developments depends on the societal preferences about
their perceived risk and benefits (Thomson, 2002).
Bioinformatics
Bioinformatics is a powerful discipline that uses computing power to analyse
biological data. As yet the full potential of bioinformatics has not been uti-
lized by the agrifood sector; however, with a greater use of high-throughput
technologies (microarrays, mass spectrometry) and the expansion of relevant
Technologies Shaping the Future 103
databases (see Annex 2 and Figure 4) this situation is likely to change. There are
several areas where bioinformatics will prove invaluable to the food industry,
including DNA and protein analysis for food authenticity, traceability and prod-
uct development through the use of genetic markers (quantitative trait loci) in
breeding programmes (Dooley, 2007). The newly emerging discipline of nutri-
tional genomics, which uses many of the high-throughput techniques described
above to improve the study of nutritional science and food technology, will also
benefit from an increasing awareness and use of bioinformatics in the agrifood
sector. Bioinformatics for protein analysis will be of benefit in terms of improv-
ing the understanding of protein properties during product manufacture; iden-
tifying pro teins with specific functional properties, e.g. enzymatic function,
identifying potential allergenic proteins or detecting potential bioactive peptides
within protein breakdown products. Microbial analysis using bioinformatic tools
will also be beneficial to the food industry for rapid pathogen identification and
the development of beneficial microbial species for use in food manufacture. All
these areas will benefit from increased speed, accuracy and automation brought
about by bioinformatic tools that link laboratory-based technologies with ana-
lytical methods or reference databases. These will be of advantage to food pro-
ducers, retailers, consumers and regulatory authorities, who all wish to ensure
that high standards of product quality are maintained.
Further uptake of bioinformatics within the food industry is going to require
an increased application of existing techniques along with the active development
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Figure 4. Growth of the National Center for Bioinformatic Information (NCBI)
I database from 1991 to 2006. The total number of sequences (in millions) deposited
in the GenBank (light grey) or protein (dark grey) databases is shown on the y-axis.
104 C. Dennis et al.
of specific food-related bioinformatic tools. Although many bioinformatic tech-
niques can be transferred across from other industries, especially pharmaceuti-
cals, food by its natural complexity is a unique matrix, which will require unique
methods of analysis. For example, the analysis of the effect of a drug is basi-
cally a binary system whereby one drug is administered and the resulting change
is measured. Food, on the other hand, is a composite material, so it is not easy
to determine if the observed changes are due to the specific ingredient of inter-
est, other ingredients in the product, the interaction between ingredients or
other foods being consumed. Developing approaches to overcome these types
of problems will ensure that the application of bioinformatics to the food indus-
try will provide an exciting prospect for those involved.
Nanotechnology
Nanotechnology refers to the engineering of functional systems at the molecular
scale. The prospect of the wide-scale use of products of evolutionary
nanotechnology in food has engendered much debate. The concern is, if
changing the size of materials can lead to radical, albeit useful properties, how
size will affect other properties and, in particular, the potential toxicity of such
materials. Although the products of nanotechnology intended for food con-
sumption are likely to be classified as novel products and require testing and
clearance, there are concerns, particularly in the areas of food contact materi-
als, that there could be inadvertent release and ingestion of nanoparticles of
undetermined toxicity. Such concerns need to be addressed, because the ulti-
mate success of products based on nanotechnology will depend on consumer
acceptance. The recent explosion in the general availability of products derived
by nanotechnology makes it almost certain that nanotechnology will have both
direct and indirect impacts on the agrifood industry (Anon., 2007d). Recent
nano-based products include the following:
?
Nanoparticles of carotenoids that can be dispersed in water, allowing them
to be added to fruit drinks, providing improved bioavailability.
?
A synthetic lycopene has been affirmed GRAS (‘generally recognized as
safe’) under US FDA procedures.
?
Nano-sized micellar systems containing canola oil that are claimed to pro-
vide delivery systems for a range of materials such as vitamins, minerals or
phytochemicals.
?
A wide range of nanoceutical products containing nanocages or nanoclus-
ters that act as delivery vehicles, e.g. a chocolate drink claimed to be suf-
ficiently sweet without added sugar or sweeteners.
?
Nano-based mineral supplements, e.g. a Chinese Nanotea claimed to
improve selenium uptake by one order of magnitude.
?
Patented ‘nanodrop’ delivery systems, designed to administer encapsulated
materials, such as vitamins, transmucosally, rather than through conven-
tional delivery systems such as pills, liquids or capsules.
?
An increasingly large number of mineral supplements such as nano-silver
or nano-gold.
Technologies Shaping the Future 105
Potential future benefits from the application of the products of nanoscience
and nanotechnology in the agrifood sector include application and effective-
ness of agrochemicals, enhanced uptake and bioavailability of bioactive food
ingredients, development of new tastes, flavours and textures and active and
intelligent packaging, including new types of labelling, which aid traceability of
products. There is also currently research on ‘smart’ surfaces that could, for
example, detect bacterial contamination and react to combat infection.
Although many of these materials contain nanoparticles, they are generally
regarded as safe, provided their use does not lead to the release and injection
of these particles. Concern has been expressed over the long-term fate and
disposal of these materials, which might then lead to release of nanoparticles
into the environment. These types of concerns will continue to stimulate debate
on the labelling, approval, traceability and regulation of these nano-materials.
Food and packaging waste
With the increased emphasis on optimizing the use of natural resources and
reducing or at least using waste, the EU has adopted a five-stage waste man-
agement hierarchy for use by industries in all EU states (see Figure 5).
Although waste reduction or prevention, reuse and recycling have been
key aspects of cost reduction in manufacture for many years (Anon., 2006),
there is now considerable interest in the possibility of creating energy from
food and packaging waste (Anon., 2007b).
There are a range of technologies for the conversion of food waste to
usable fuel or energy. The technologies differ in their stages of development,
current commercial applicability, the scale at which they operate, the type of
waste that can be processed and the form of energy produced. Although fur-
ther developments are required, wider uptake in the food and drink industry
would assist in reducing waste, increasing energy efficiency and contributing to
future environmental and economic sustainability.
Waste reduction or prevention
Reuse
Recycling
Other recovery options – including
energy recovery
Safe and environmentally sound
disposal
LOWEST PRIORITY
Figure 5. Waste management hierarchy.
106 C. Dennis et al.
Bioethanol production is currently a high-profile technology, particularly in
the context of the ‘food versus fuel’ debate. The food industry has raised con-
cerns that the growth of the bioethanol industry, and its use of energy crops,
will have serious implications for the global food market as the two industries
compete for the same commodities. This is especially true in countries where
maize or cereals are used as feedstock. It would seem, therefore, that there is a
need to divert the bioethanol industry away from the use of crops that could
potentially be used for food, and towards the use of industrial waste materials
as feedstock. For example, a Finnish energy company has established a pilot
ethanol plant using waste produced on site at a Finnish food-processing com-
pany. Research should have the ultimate objective of widening the range of
feedstock that can be used. Enzyme technology may be developed to improve
the speed and efficiency of conversion of cellulosic wastes to a fermentable
state, and genetic modification may result in the development of strains cap-
able of yielding greater concentrations of ethanol in a shorter time than is cur-
rently achievable.
For biomass to fuel processes, the various challenges are the effect of mois-
ture, waste types and composition and the inclusion of packaging materials on
the efficiency of the process and the quality of fuel produced. A significant
project is under way by a poultry processor in the USA to set up an on-site
facility for converting animal by-product waste to synthetic crude oil. If success-
ful, this technology could be applied to large meat and poultry processors
elsewhere.
Anaerobic digestion is a relatively mature technology, for which the major-
ity of fundamental research was carried out by the 1980s. Development work
now focuses on areas such as effective pasteurization of digestates and the
cleaning and upgrading of biogas. Novel reactor designs also allow scaling
down and continuous running of the process. Design considerations should
also take into account the inherent difficulties in controlling the anaerobic
digestion process and sensors and monitoring systems developed that allow
close control of feedstock processes according to the compositions of gases
that are produced. Standard cultures for inoculating anaerobic digestion pro-
cesses may be an area for research that would allow the processes to be better
controlled. The use of manure, feeds and agricultural waste in biogas systems
to produce electricity for village and small agro-industries in developing coun-
tries, through integrated rural bioenergy systems, is a promising development.
The conversion of waste oils and fats to biodiesel by transesterification is
well developed and practised. Areas for research may, however, lie in the clean-
ing and treatment of both feedstock and the biodiesel product through filtration
and dehydration.
Thermal techniques like gasification and pyrolysis produce fuels that are
combusted soon after generation and the energy used as heat or for power
generation. Incineration of biomass results in a high amount of heat that must
be utilized immediately. The most effective way of utilizing the heat energy
from thermal techniques is through a combined heat and power (CHP) system.
The UK government has identified CHP as one of the best technologies to
implement for the country to fulfil its commitments to greenhouse gas emissions
Technologies Shaping the Future 107
under the Kyoto protocol. CHP increases the overall energy efficiency as it can
co-generate both electrical power and heat energy. Energy efficiencies have
been reported as high as 70–75% compared to the efficiency of sourcing heat
and power separately, which are both around 30–40% efficient. Other co-
generation systems, such as regeneration, are also gaining in popularity, as the
drive for more efficient use of energy continues. Trigeneration systems are an
extension of CHP processes as they provide the option of producing refriger-
ation using the heat in an absorption chilling process. This is particularly useful
where refrigeration is a high operational priority and where excess heat may
have no particular function and would otherwise go to waste.
While there is an awareness of technologies for converting waste to energy
among relevant personnel in the food and drink industry, there is a general
feeling that the technologies on the market are large-scale and unsuitable for
the needs of individual companies. This is particularly serious for small and
medium enterprises (SMEs) in developing countries. Small-scale or bespoke
systems tend to be priced too highly and outweigh the benefits that they would
offer in terms of energy and waste disposal savings. This scenario is likely to
continue until the demand for such systems increases and brings down prices.
Alternatively, there is the possibility of groups of neighbouring production sites
collaborating on projects to establish centralized plants.
Waste-to-energy conversion systems and their operating parameters are
generally tailored to the type and composition of the waste stream that they
are designed to process. It is therefore advantageous if production processes
continuously generate waste that is of a uniform composition. Processes that
generate waste intermittently or that operate multi-product production lines
may not realize the full benefits that a waste-to-energy system has the poten-
tial to offer.
Information technologies
In today’s global economy, the ability to leverage information is critical to
achieving competitiveness. The adoption of information and communication
technologies is occurring at an incredible pace and will provide the core of
potential for new entrepreneurs. For example, cell phones are now ubiquitous
throughout Africa.
Access to these technologies removes constraining barriers between the
entrepreneur and the marketplace. For the first time, the ability to connect
directly to the markets allows the entrepreneur to achieve what had previously
taken several intermediaries to deliver. At a very low cost an entrepreneur can
set up a presentable web site that can influence buyers from around the globe.
Of course, the entrepreneur has to be able to consistently deliver the quantity
and quality of goods agreed upon in any contractual arrangement, but the fact
is that there is now more direct contact between buyer and seller than ever
before.
Organic coffee serves as an excellent example of the sort of niche markets
that can profitably be accessed through the Internet. Through modern Internet
108 C. Dennis et al.
auctions, farmers and processors have been able to achieve very significant
sales volumes and prices. Previously, coffee inevitably changed hands many
times between the producer and the buyer. In fact, most coffee sold today still
moves under the old trader system. However, more and more coffee is moving
directly. In 2007, the highest price paid for coffee was US$130 per pound for
100 lbs (US$13,000) of Panamanian coffee from a smallholder plantation
through an Internet auction.
Potential for Technologies to Deliver Benefit in Different
Development Scenarios
Health and well-being
Food technologies in years ahead will be increasingly targeted at providing
health and well-being to consumers. To emphasize this trend, it is appropriate
to add a new axis to the traditional food chain. When properly signalled by
consumers’ needs, the chain produces a flow of foods from the ‘farm’ to the
table (mouth). Figure 6 captures this concept in a simple way.
This paradigmatic shift can be illustrated by reference to the flow of nutri-
ents. Although the global average per capita consumption of food has risen by
17% over the last 30 years, to ?2800 kcal per day, the world still faces familiar
problems of hunger and micronutrient deficiencies, but now accompanied by
the ubiquitous presence of overweight people and obesity. This is also true for
Consumer Food chain
Energy and the environment
(sustainability)
More foods
Nutrients
Safety
Quality
Preservation
Structuring
Ingredients
Delivering safe
foods
Convenience
Information
Analytical technologies
Assessment of quality and safety
Commercial competitiveness
Production
Raw
materials
Processing
Packaging/
Distribution
Brain
Food perception
Enjoyment
Preferences, attitudes
Mouth
Texture
Flavour
Eating quality
Gut
Gut health
Satiety
Bioavailability
Body
Nutrition & health
Vitality
Weight control
Figure 6. The two axes shaping the targets of food technologies for the next decades.
Technologies Shaping the Future 109
many developing countries. Increased food availability only makes sense when
evaluated with respect to the impact on individuals, as it may have positive or
negative effects. Moreover, there is increasing evidence that nutrients present
in a food (i.e. as listed in food composition tables) may not be totally available
for absorption in the gut. Also, absorption varies drastically (e.g. by up to 70%)
for the same food depending, for example, on processing conditions and pres-
ence of other components in the diet. In many cases, processed foods show
improved nutrient bioavailability when compared to raw or fresh foods that
only suffer mastication prior to ingestion (Parada and Aguilera, 2007). The
concept of nutrition and the impact of technologies may change, as we learn
more about the fate of food components after ingestion (‘food processing inside
the consumer’).
Food safety
Contaminated foods represent one of the most ubiquitous health problems in
the world. They not only result in increased morbidity and mortality, but are also
a major contributing factor to reduced economic productivity in many countries.
The illnesses contracted from contaminated foods are generally caused by micro-
organisms (bacteria, viruses, moulds and their toxins), parasites, drug and pesti-
cide residues, environmental pollutants (such as heavy metals, dioxine) and
unconventional agents (e.g. bovine spongiform encephalopathy – BSE). They
usually result in conditions such as diarrhoea, gastrointestinal pain, vomiting and
headaches and, in the most serious cases, death. Worldwide, food pathogens
have been estimated to cause 70% of the approximately 1.5 billion (10
9
) cases
of diarrhoea and three million deaths of children under the age of 3.
Because of their magnitude, very few countries have the ability and infra-
structure to monitor the incidence of foodborne diseases. The Centers for
Disease Control and Prevention in Atlanta (CDC) estimates that the number of
cases of foodborne diseases in the USA is now equivalent to about 30% of the
population per year. Although long-term chronic sequelae are characteristic of
many foodborne diseases, they have not received the same degree of attention
that the primary, acute symptoms have. Most foodborne disease victims and
their physicians are happy to get over the short-term effects and seldom worry
about future consequences.
Because of the difficulty in calculating the impact of long-term sequelae
upon the health care system, they are seldom considered when determining
the full impact of foodborne diseases. Long-term chronic effects are also over-
looked simply because the data on them are not systematically collected and,
as a result, it is difficult to link them directly to an originating cause. In fact, the
significance of long-term sequelae is only beginning to be considered more
comprehensively and the conclusions indicate that they can be very serious.
Foodborne diseases have been implicated in many subsequent health disorders
(Bula et al., 1995; Smith, 1995; Stanley, 1996). Long-term chronic sequelae
can destroy an individual’s morale and quality of life and often result in measur-
able changes in personality.
110 C. Dennis et al.
In developing countries food safety has some specific implications beyond
those listed above. Populations in these countries are particularly at risk because
they do not have adequate supplies of safe water, appropriate waste disposal
systems and access to refrigeration. Their low incomes preclude paying the
extra cost involved in reducing food safety risks and countries may have only
limited capacity to control the safety of foods. It is quite obvious that most
efforts should be directed at avoiding the entrance of contamination sources
into the food chain. In the second place, small-scale food industries and house-
holds should be advised on the critical points involving food safety risks during
manufacturing or food preparation at home. Even a traditional technology like
fermentation that normally contributes to food safety in developing countries
where refrigeration is not available needs the implementation of a hazard anal-
ysis and critical control points (HACCP) system (Motarjemi, 2002).
There are some technological options that reduce the risk of contaminated
foods. Irradiation is particularly suited to inactivate pathogens and parasites
from fresh and dry foods, but its use depends on consumers’ perception of
irradiated foods. Other technologies are actively being explored for food decon-
tamination, among them ozone treatment, pulsed and UV light and the use of
electrolysed water. Physical, chemical or microbiological technologies can be
used to detoxify grain and oilseed cakes by destroying, modifying or absorbing
the mycotoxins so as to reduce or eliminate their toxic effects.
The application of appropriate technologies must be accompanied by
good management and good hygiene practice along the supply chain as pre-
requisites to an appropriate HACCP and traceability system. These, together
with training and education of personnel, provide the essential components of
a food safety management system (see Figure 7). The extent of such a system
and its degree of complexity will depend on the size and complexity of the
operation in question. However, the basic principles must be applied in all
sizes of operation, whether relating to food retailing or the food service or
catering sector.
Increased concern about food safety will affect developing countries in two
major aspects. First, their exports will be exposed to increasingly demanding
food safety standards from Codex Alimentarius and by unilateral requests from
individual importers. Second, attitudes and standards in vogue in the developed
world will spill over to the local market (Pinstrup-Andersen, 2000). A new form
of protectionism may arise in which the high quality and safety standards
imposed by importing countries may not be accommodated rapidly by local
production technologies or guaranteed by local analytical capabilities, leading
to an increased level of rejections at the entry ports.
Developing countries exporting fish and shellfish, as well as fresh fruits and
vegetables, are likely to experience a more stringent inspection at the entry
ports due to negative episodes involving food safety. For example, consumers
in the USA have expressed their concerns over the fact that currently the FDA
only inspects 1.2% of all imported seafood, which means that large quantities
of contaminated products may be reaching the supermarket. Moreover, even if
the problem regarding the safety of an imported food has been overcome, the
credibility of the exporting country to produce safe food may be at stake, thus
Technologies Shaping the Future 111
affecting the volume of its food exports. For this reason alone, developing
countries should consider implementing or strengthening their foodborne dis-
ease control, investigation and surveillance systems.
Sustainability
Historically, the concern for the environment was not a matter of great appeal
in the pursuit of economic gain. Throughout the centuries, large areas of the
globe were laid waste as a result of mismanagement of resources. During the
latter half of the 20th century, it became increasingly apparent that the earth
was rapidly running out of the ability to support its burgeoning population.
Following the UN World Commission on Environment and Development in
1987, the concept of sustainable development, the employment of socio-
ecological processes that match the realization of human needs while at the
Crop & animal
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112 C. Dennis et al.
same time preserving the quality of the global environment, became a generally
accepted understanding.
The current status of economic development among countries was not the
result of this view of sustainability. Natural resources, often usurped from other
less powerful countries, were callously exploited and the environment boldly
compromised in the rush to develop wealth. In some parts of the world this
abuse is still taking place. Indeed, it is difficult for those that have not yet
achieved an adequate level of economic development to accept the notion that
global concerns for the environment will have to be respected, even though
they may serve as a short-term constraint to growth. It makes it that much
more challenging for developing countries to create an enabling environment
and promulgate policies that will support the entrepreneurial sector.
The term sustainability also reflects a business concept related to the main-
tenance of a competitive position. The phrase ‘Sustainable Competitive
Advantage’ or SCA was coined in 1985 by Michael Porter (Porter, 1985) and
addressed as a potential strategy for the agro-industrial sector in developing
countries development by FAO in 1986. The goal of SCA is to have entrepre-
neurs develop unique value-creation strategies that separate them from the
competition. When first discussed in the context of agro-industries for develop-
ing countries, a number of constraints were readily apparent. Government
policies seldom introduced incentives for entrepreneurial creativity. On the
contrary, most policies stifled creativity. Very little effort went into coordinating
agricultural production with agro-industrial processing; indeed, in most coun-
tries, the Ministries of Agriculture and Industry were competing agencies with
very little interaction. Agro-industrial processors had little access to markets
and competitive raw material resources. Within most developing countries and
generally within the United Nations agencies, the overriding attitude was that it
was the goal of agro-industry to serve the farmers of the developing world,
despite the fact that, as a separate sector in the developed world, agro-industry
far outstripped agriculture in terms of economic output and employment.
Thus, two different concepts of sustainability are at work in the creation of
policies in support of the agro-industrial sector in developing countries: one,
which manages access to raw materials and imposes controls upon unsuitable
processing practices, in order to maintain the integrity of the environment and
protect natural resources; and another, which requires an understanding of the
competitive nature of the agro-industrial sector and the unique role of the entre-
preneur. New technologies and new trade paradigms have a tendency to level
the playing field – after that it is up to the players. Rational policies, a consistent
approach and an enabling environment are what entrepreneurs require to com-
pete successfully and be sustainable.
Competitiveness
Much has changed in the last 15 years. The globalization of the economy and
the creation of the WTO have subjected small entrepreneurs to vastly greater
markets that are becoming more visible and accessible. The wealthy developed
Technologies Shaping the Future 113
markets are becoming more aware of processed goods available from develop-
ing countries. To supplement this, the growing sensitivity of consumers is moti-
vating them to purchase products they perceive to be compatible with the
classical concepts of social responsibility and environmental sustainability. This
enhanced form of consumption is a large and growing sector. It includes high-
quality commodities, such as selected or organic produce, value-added conveni-
ence foods, fair trade and environmentally responsive (e.g. bird-sensitive,
shade-grown) products. Technologies such as irradiation are permitting exotic
fruits and vegetables to travel much greater distances to reach profitable markets
than they have in the past.
In light of these new developments, the more traditional ideas of competi-
tiveness, such as economies of scale, may have to be reconsidered. Our con-
cept of the comparative ability of an entrepreneur to sell and supply goods or
services to a given market must consider how rapidly these markets are chang-
ing as well as how crucial changes to technologies have flattened the world and
levelled the playing field for entrepreneurs. This is particularly the case for
niche markets such as for organic foods.
One of the best indicators of how successful organic foods have been is
that they have gone way beyond foods for human consumption and can now
be found everywhere – even in the pet food markets. These types of pur-
chasing patterns are all based on the notion that people want to express
their individuality and there is no better way to do this than to indulge their
specific tastes in foods and beverages. People also want to live a longer and
better life and are suspicious of factory foods that contain many additives,
even if their governments vouch for the safety of these foods. Of course, this
is bad news for large processors, because their business depends on cost-
effectiveness of food production, which, in turn, is the result of efficiencies
obtained through large volume production. Large volume production, on the
other hand, is not very suitable for an individual’s specific preferences,
which, of course, are better served by small operators. Historically, France
and Italy have always been known as countries where you can find the best
foods. It is not by chance that large multinational food companies are not
nearly as popular on those markets as the thousands of domestic smaller
manufacturers.
Twenty years ago, the number of different producers of juices and wines in
the USA was quite limited. These days, that landscape has changed dramat-
ically. Literally dozens of different organic juice manufacturers (including several
local ones) are selling to supermarkets, and hundreds of new small-scale winer-
ies are serving the desires of consumers – not to mention the multiplicity of
imported wines from small foreign operations.
Our current understanding of nutrition recommends that we consume
between 5 and 10 servings of fruits and vegetables per day. Although, there is
usually a variety of fruits and vegetables available from local agriculture, con-
sumers are broadening their horizons in the search for alternatives to conven-
tional fruits such as apples, pears, peaches and bananas. The phenomenal
growth in the market for mangoes is an excellent example of this. It is very
likely that we will see the same thing in markets for many other tropical fruits.
114 C. Dennis et al.
And tropical fruits are not limited to the fresh varieties. Preserved fruits, by can-
ning, by infusion with sugar or by drying, are also niche markets to look for-
ward to. These products do not necessarily go only to individual consumers, but
also to small manufacturers who want to include them as exotic ingredients in
their baked goods or mixed cereal products. These changes are providing
small-scale entrepreneurs in developing countries an ability to compete with far
greater effectiveness than they have ever experienced before.
Technologies fostering agro-industrial development
The importance of technologies discussed in Section 3 is that they add value to
raw materials or existing products. The value added may vary from incremental
(e.g. a better package) to a radical change in production technology (e.g. a
nano-based product). This is relevant in the sense that the impact of techno-
logies should not be judged by the sophistication involved but by its relevance
to better match the needs imposed by the final markets. Based on targets
depicted in Figure 6, some major technology-based events that are likely to
have a future impact on policies that foster agro-industrial development are
presented in Table 1.
Conditions for successful adoption of food technologies
Technologies are not applied in vacuo; they are implemented by private
entrepreneurs that sense a stable and propitious environment for their long-
term investments. Under favourable conditions, the time frame in which the
impact of food technologies can be fully realized may be only 10–15 years.
For example, the Chilean salmon industry evolved from a quasi-artisan indus-
try in the early 1990s to a world-class player in only 15 years; exports of
farmed salmon in 2006 were US$ 2200 million. This figure represents one-
half to one-third of the gross national income of three countries in the region.
The role of governments in providing the human technical resources and the
adequate regulatory framework must not be underestimated. There are other
issues that also affect the adoption of technology, such as the support by
equipment manufacturers and the availability of local technical personnel to
implement and run the technology. In low-income and emerging countries
the government can play a crucial role in providing support for new adopters
of a technology.
In general, food policies as applied to technology tend to provide an
enabling environment for food-processing entrepreneurs, create fiscal incen-
tives for innovation, supply the necessary infrastructure for entrepreneurship
and promote the adequate backward (e.g. financial support to SMEs, risk
capital and information about future markets) and forward linkages (e.g. inter-
national promotion, ‘ country’ brand).
The direct access to markets through information and communication
technologies is probably the most important new development in recent history
Technologies Shaping the Future 115
Table 1. Technical implications for policy to foster agro-industrial development based on the
identified technological trends.
Trends Technical implications
Need for more foods, driven
by rising incomes
Reduction of postharvest losses by improved storage
and better marketing channels
Adoption of processing technologies that foster the
supply of processed raw materials
Demand for high-quality
and safe foods
Adoption of novel technologies that preserve freshness
and supply better taste and flavour
Critical evaluation of emerging preservation
technologies as to their equivalent effectiveness
compared to proven technologies
Consumption of internationally
traded foods
Development of appropriate traceability systems based
on information technologies (ITs)
Adoption of non-destructive inspection technologies for
quality control
Creation or strengthening of a regulatory framework
attuned with international agencies
Foods for health and well-being Design foods for the gut (e.g. functional foods) and the
brain (gastronomy)
Select processing technologies that preserve nutrients,
secure functionality and provide a high bioavailability
Increased markets for
organic products
Adoption of organic production systems and presence
of reliable certification organizations
Adapt preservation processes and packages that
are non-invasive and replace synthetic additives by
natural ones
Exports of value-added
products
Develop human resources, technical infrastructure and
technology transfer capabilities
Build infrastructure and distribution chains for
refrigerated and frozen products
Cater to niches that require specific processed products
(fresh and dried exotic fruits, etc.); strengthen quality
management capacity
Environmental concerns Strengthening of integrated management systems
Adoption of life cycle assessment as evaluation criterion
of impact of processing technologies
Globalization of market
information by the Internet
Widen access to wireless communication technologies
in rural areas and improve command of foreign
languages at school level
Knowledge-based food
industries and biorefineries
Strengthen the Science and Technology base at
universities and national research institutes
Apply advances in biotechnology and keep abreast of
developments in nanotechnologies
116 C. Dennis et al.
for entrepreneurs. However, the potential to capitalize on this will largely be
dependent upon the economic policies that are or are not in place. Government
policies may be based upon a number of realities and business principles:
?
No technology (processing or information/communications) will flourish in
an economic environment not prepared to support it.
?
It is the entrepreneur who takes the greatest risk and should receive the
greatest reward if profits are achieved.
?
It is a very competitive world and, in anticipation of an initial, non-profita-
ble period, policy support has to endure a certain amount of ‘staying’
power (often up to 5 years) until profits start to flow. Grace periods in
loans, for instance, can be made to address this issue.
?
The entrepreneur’s chief task is to make a profit – everything else is sec-
ondary to that goal.
?
Policies in support of successful entrepreneurs will have the consequent
benefit of generating employment and collecting taxes that can be put to
social use.
Policy makers in developing countries interested in fostering entrance into food
export markets should be aware that competing in these markets requires the
use of production technologies that are of the same standard as those issued in
the receiving (usually high-income) countries. To become and stay as major
players in export markets, technological policies should address also the follow-
ing complementary issues:
?
Availability of well-trained local technical personnel with command of inter-
nationally spoken languages to run the production and processing aspects,
as well as marketing operations. This imposes added competences to be
built through the educational (technical and university levels) and continu-
ing education system.
?
A basic science and technology and innovation system that provides sup-
port to the local industry and promotes the entrance of new small and
medium entrepreneurs into the business. This local talent is at present
most probably located in universities and government research institutes.
Specialized centres for adaptation, demonstration and transfer of techno-
logies in areas with validated market potential will have to be implemented
and sustained through time for the support of small and medium agro-
industries (as is now the case with agricultural research units).
?
Geographical associations in the form of interconnected technology clus-
ters where suppliers, food processors, government agencies and institu-
tions such as universities, research centres and trade associations merge to
empower the innovation process.
?
A basic infrastructure for roads, ports and connectivity (communications)
that links producers and consumers inside the country and across the
globe.
?
A central regulatory food authority that protects consumers’ interests
locally and abroad and assures that food produced and exported meets the
highest standards of food safety and hygiene.
Technologies Shaping the Future 117
Just as agro-industrial entrepreneurs are forced to operate in a competitive
environment, so must farmers and all actors along food chains be forced to do
so. Farmers have to be prepared to provide agro-industry with the right prod-
uct at the right time at the right price. In order for farmers to get a better
understanding of the risks and benefits of today’s access to expanded markets,
cooperative and partnership systems and arrangements between themselves
and processors should be encouraged. This will allow for a more coordinated
supply chain and will greatly increase overall competitiveness.
Because of the competitive nature of international trade, it is critical that
governments take part in and send their most qualified people as negotiators
to international fora such as the Codex Alimentarius Commission. Although
these meetings generally revolve around technical matters such as standards
and analysis, because of the litigious nature of the proceedings and the implica-
tions for fairer trade, consideration must be given to representation by highly
trained negotiators and well-briefed legal people who understand the long-term
significance of trade standards for their country. The subject of these meetings
may be technical, but the consequences are definitely economic.
At the present time, the opportunities for developing country entrepre-
neurs to effectively compete in international agro-industrial trade are greater
than ever. The spirit of entrepreneurship is alive and vibrant in developing
countries. The use of modern scientific and information technologies
accompanied by the supportive policies and instruments that will create an
enabling environment will allow this spirit to flourish and benefit everyone
in the country.
Conclusions
As observed in the initial section of this chapter, changes are taking place in the
nature of food demand and in the socio-demographics that drive them. To face
this changing world, we have developed an extraordinary set of new techno-
logies that have the potential to produce food when it has never been produced
before and in greater quantities than hitherto imagined. With little vision, one
can picture the genetic manipulation of plants in order to grow them on previ-
ously non-arable land and under hydroponic conditions with quantum increase
in quality and output. Likewise, our output of meat and fish has increased dra-
matically due to new management systems. Global warming must be moni-
tored with extreme precision and is dramatically injuring many countries.
International information exchange has developed to an extent that we can
truly say we live in a global village. Political divisions will become less and less
significant, as people from all parts of the world become empowered with the
ability to communicate directly with one another. We are on the cusp of a revo-
lution in the global movement of goods and services that would have been
impossible to imagine a decade ago.
With reference to the movement of food, technologies and systems with the
ability to support extended distribution chains will become increasingly impor-
tant. Ready access to foods from around the world will have consequences
118 C. Dennis et al.
for the dietary patterns of all individuals. As we have seen, together with the
movement of goods and people, there is a distinct possibility of creating pan-
demics through the parallel movement of infectious diseases. This makes the
promulgation and implementation of internationally harmonized high-quality
standards imperative, such as those of the Codex Alimentarius.
For those countries whose economies allow consumers to think beyond the
cost of food, they often incorporate social, ethical and environmental dimen-
sions into their choices. These supra-economic dimensions of food may vary in
different countries. While increasing global interactions may, in time, bring a
certain degree of harmonization to these dimensions, they do provide an
opportunity for producers and processors to fill specific market niches.
As more and more developed country economies move from a manufac-
turing to a service economy, food processing will relocate to transition and
rapidly emerging developing countries. Food-processing entrepreneurs in
developing countries will gain greater access to both niche and mainstream
markets. In both cases this will require the growth of a regulatory and distribu-
tion environment that can deliver product of the desired quality, on time and at
the right price. This will require considerable investment for the development
of production and distribution infrastructure along with the training of techni-
cians, managers and regulators.
The international movement of goods necessitates significantly greater
attention to food safety. While the SPS and TBT Agreements are predicated
upon science-based international standards, individual countries may opt for
differing levels of protection depending on their particular requirements.
However, because so many goods will be entering the flows of international
trade, harmonization of science-based safety standards is likely to take place.
This will have a profound impact upon food production and processing policies
and practices, as well as on the technical and managerial training required to
carry them out.
Future food production will face increasing challenges from a number of
seemingly contradictory imperatives. The first is the need to produce more
food with assured safety and increasing consumer appeal. However, this has to
be accomplished in an atmosphere of increasing responsibility for maintaining
the environment for future generations. All production must be sustainable, so
the former freedom to use pesticides and fertilizers with little concern for the
environment has been significantly curtailed. On top of that there are growing
markets for products that no longer reflect the efficiencies of mass production.
Thus organic, bird-safe, dolphin-safe and fair trade products are making major
gains in high-end markets.
This will lead to a two-tiered food production system. It may allow smaller
entrepreneurs, who do not have the capital to invest in large-scale production,
to compete effectively on a smaller scale.
Regardless of the scale of agriculture employed, the environment will play
an increasingly critical role in production. Global warming may result in changes
to water availability, which will require adjustments in agricultural technology as
well as broadening the scale of desalination to include impaired ground waters
in addition to sea water. This latter technology will require the development of
Technologies Shaping the Future 119
alternative energy sources, such as osmotic pressure power generation. The
importance of agricultural waste management will favour the development of
production systems that are least burdensome to the environment.
There is little doubt that biotechnology will become a major contributor to
future production and processing technologies. The technology will not only
focus on improving quantitative outputs, but will also be put to work to produce
crops with higher levels of beneficial nutrients, such as antioxidants that are
able to withstand longer distribution chains and harsh processing conditions.
Our knowledge of human genetics and nutrition continues to make funda-
mental contributions to improved health and disease prevention. The simulta-
neous analysis of genetic make-up and nutrient need will result in foods designed
to meet a wider range of products focused upon health and well-being. Advances
in the disciplines of genomics, proteomics, bioinformatics, nutritional dynamics
and the nanosciences will be incorporated in foods that meet the individualized
needs of people with specific genetic make-ups, occupational and lifestyle
choices and stages in life. The technologies that will shape the future of the
agriculture, fisheries and food sectors will provide greater safety, be more
socially and environmentally responsible, provide the elements of better health
and maintain a higher quality of the products’ extended lifespan than any pre-
ceding goods.
Among the food technologies that are expected to play a major role in the
future of food processing will be preservation techniques based upon steriliza-
tion and pasteurization; non-thermal technologies, such as irradiation and
ultra-high-pressure processing; technologies that control water activity includ-
ing microwave and freeze-drying, hurdle technologies and minimal processing;
those based upon the extraction and isolation of specific food components,
such as antioxidants, flavours, specialized lipids and other functional ingredi-
ents. Agricultural products may be bioengineered to produce large outputs of
these specific materials and modern extractive technologies, such as supercriti-
cal extraction, will be employed to yield healthier, higher-quality products with
a reduced negative impact on the environment.
Texture, mouthfeel and friability are among the sensations most evident
to consumers. Optimizing these characteristics requires technologies designed to
ensure specific food structures at all stages of production and in the finished
product throughout its life cycle. Advancements in emulsification and gelation
will utilize complex interactions of proteins, lipids, carbohydrates and water to
develop flow, viscosity, tensile strength and plasticity to arrive at the most
appealing textures.
Reduced barriers to trade have opened the way to much longer distribution
chains requiring products that will maintain safe hygienic quality for longer
periods and will meet all the sanitary and phytosanitary needs of importing
countries. The traditional technologies of heat treatment will be supplemented
by cold processing methods such as ultra-high-pressure processing and ionizing
radiation, both of which are capable of producing products of the highest qual-
ity. These technologies will become increasingly important as the recognition
for the need to significantly increase our consumption of fruits and vegetables
becomes more apparent.
120 C. Dennis et al.
In order to meet future demands for longer shelf life, food will be main-
tained in optimum condition through developments in packaging materials and
in modifications to the atmosphere immediately surrounding the products.
While the technology itself is not new, there have been recent developments
that have resulted in significant improvements in reducing microbial spoilage,
as well as detrimental enzyme and chemical activities. Different combinations
of oxygen, carbon dioxide, nitrogen and ethylene at differing levels of humidity
are used to alter package atmospheres.
More recently, research has focused upon employing various types of
packaging materials to be active, intelligent or interactive in atmosphere man-
agement. Such packaging can enhance the quality or safety and impart desir-
able characteristics to the food by altering atmosphere permeability through
sensing and response to changes in the ambient environment.
As food products become increasingly focused on providing health and
well-being, additional dimensions to the traditional food chain must be consid-
ered. As knowledge of the complex interactions of digestion develops, we will
gain a more comprehensive view of the whole diet. The interactions between
various nutrients, the role of various fibres in governing bioavailability and mod-
erating water balance between the gut and the renal system, and the contribu-
tion of essential micronutrients by intestinal micro-organisms will all factor into
future understanding of nutrition.
Product and technology selection will, to a large extent, be an extension of
a country’s agronomic potential coupled with the state of its economic develop-
ment. For less-developed countries, the focus will remain upon establishing a
functional and efficient food chain, largely to serve local and national needs. As
development and potential increase, more advanced technologies and distribu-
tion systems will be employed.
In order to support the successful growth of food industries, policy mak-
ers will have to provide entrepreneurs with an enabling environment. Where
possible, infrastructure development, encouragement of cross-chain busi-
ness linkages and economic incentives should be established to stimulate
growth. A food science and technology innovation system based upon a
country’s natural endowments and potential competitive advantage must be
supported along with a regulatory food authority to protect the interests of
consumers and to assist national entrepreneurs in gaining access to interna-
tional markets.
Industrial development policy should not add to the risk of entrepreneurs,
but encourage the application of sound, proven methods for the production of
useful goods. It is important to consider sustainability in context and carefully
adjust its significance within the hierarchy of imperatives weighted to achieve
rational and successful industrial development. The globalization of the econ-
omy and the creation of the WTO have provided entrepreneurs vastly greater
markets. In light of these new developments, policies must support entrepre-
neurial competitiveness in rapidly changing markets.
While we have seen the great cache of physical, chemical and biological
technologies available to entrepreneurs for the production and processing of
foods, perhaps the greatest tool available to them is the explosion of informa-
tion and communication technologies. While food-processing technology has
Technologies Shaping the Future 121
empowered entrepreneurs to produce products of higher quality, convenience
and market potential, information and communication technology has pro-
vided the direct access and connections to promote and sell them.
For the first time, entrepreneurs in developing countries have a very strong
potential to access international markets with an unprecedented degree of
independence. However, the potential to capitalize on this will largely be con-
tingent upon the economic policies that are in place. Such policies must pro-
vide strong support to the country’s entrepreneurial base. When properly
implemented, these policies will have the consequent benefit of generating
employment and general economic development, which all will benefit from.
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Annex 1: Food Processing and Preservation Technologies Shaping the Future.
Preservation technologies. Food preservation technologies delivering products that are microbiologically safe and of high quality over their
defined shelf life will continue to be of the utmost importance. Several non-thermal technologies hold this promise, particularly those in which
preservation effects are delivered through ‘transparent’ packaging. To achieve superior products, reduced costs and increased energy
efficiency, often more than one preservation method (e.g. combination technologies) will need to be applied. Environmental effects,
convenience and safety issues will add increasing demands on packaged products.
Heat pasteurization and sterilization of foods
Technologies Current status Potential developments and factors
Thermal processing:
Microbial load reduction is
affected by thermal action
(Holdworth and
Simpson, 2008)
Canned foods enjoy an excellent record
as affordable, convenient and safe. UHT-sterilized
liquid foods delivered in laminated carton
packaging are well established around the world
Canning continues to be exposed to public
scrutiny due to energy and environmental
considerations. Expansion of HTST
alternatives for better quality and nutrient
retention. Developments in retort systems to
increase container agitation for increased
heat transfer and reduced processing times
Retortable pouches: Use of
flexible Al foil/plastic laminates
instead of tin cans
Technology has been around for 4 decades
as an alternative to canning with minor
commercial impact. The reduced heating
time due to the slender profile results in
better-quality sterilized foods
New laminates, higher capacity production
lines and improved seal reliability are
required. Lighter weight should save energy
during transport
Aseptic processing: Sterile
product filled under aseptic
conditions
Presently mostly limited to sterilization of liquid
foods, including those containing food particles.
Aseptic bulk storage and transport are important
technologies in international trade
Extension to semi-solid foods by new heating
technologies. Increased use of lighter weight
and less-expensive packaging. Improved
heat exchanger design to increase process
efficiency and save energy
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Non-thermal technologies for pasteurization and sterilization of foods
Technologies Current status Potential developments and factors
Ionizing radiation (IR): Effect
caused by a highly penetrating
form of energy that damages
DNA of cells
Technology established and legal in many countries.
Widely used for disinfection of dried produce
(e.g. spices) and prevention of sprouting/
disinfection. Recent applications include
checking of emerging pathogens (Farkas, 2006).
Limited acceptability in supermarket foods
Applications to eliminate infectious food
pathogens and parasites and to extend the
shelf life of many perishable foods will
depend on risk assessment by regulatory
agencies and consumer attitudes towards IR
Ultra-high pressure (UHP):
Subjecting packaged foods to
pressures up to 800 MPa
Texture, flavour and nutrient retention of
UHP foods is normally better that those
of thermally processed products. Used
commercially in a few niches for
pasteurization (juices, guacamole,
oysters) due to high costs
UHP processing of a wider range of products
will depend on the reduction of capital costs,
and more efficient continuous systems. UHP
sterilization is expected (Master et al., 2004).
New packaging materials needed
Pulsed electric fields (PEF):
High-voltage pulses induce
membrane breakdown
in cells
Demonstrated mainly to inactivate food-poisoning
micro-organisms in liquid foods. Commercial
application of PEF for juices with superior flavour
quality reported recently (Clark, 2006)
Applied for pasteurization of liquid foods,
providing adequate safety and improved
quality
Pulsed light (PL): Use of short
pulses rich in UV-C light
Lethal photochemical effects on micro-organisms
known for decades. Only two companies are
presently producing PL disinfection systems
(Gomez-López et al., 2007)
Role in substitution of chemical disinfectants
that may be harmful to humans and cause
ecological problems. Used for surface
decontamination, potential for application to
packaging. Problems to be solved: heating
spots and effects on nutrients
Biological preservation: Use of
bacterial metabolites
Food-grade bacteriocins proven to inhibit many
pathogenic and spoilage micro-organisms
(e.g. in minimally processed foods)
New ‘natural’ bacteriocins are approved.
Applications for short-term preservation
(e.g. raw milk in less developing
countries – LDCs), or pasteurization if
followed by thermal or other non-thermal
treatment
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Annex 1: Continued.
Technologies that control water activity. Control of the water activity of foods has been widely practised as a means of stabilizing raw
materials and processed products that are stored under ambient conditions. Dried products and ingredients are a food category on their own
(e.g. baked and pasta products, dried fruits, instant powders, spices). Since heating for water removal requires energy and alters quality,
milder alternative methods have been developed. A range of products are stabilized at intermediate moisture contents by control of the water
activity via partial water removal, addition of solutes (sugar or salt), adjustment of pH and/or addition of preservatives.
Technologies Current status Potential developments
Dehydration: Means of
preserving food in a stable and
safe condition by drastically
reducing the water activity
Widely used technology spanning from sun-drying
to controlled, cabinet-drying. Applied to a wide
range of foods. Extensively used in LDCs to
process local fruits, vegetables, fish and meat
Improvements in drying technologies for
energy savings (Strumillo, 2006).
High-quality drying, a major alternative
for SMEs in LDCs to add value to raw
materials. Growth in demand for
high-quality dehydrated fruits and
vegetables (Zhang et al., 2006)
Spray drying: Transforming a
liquid feed into a dry
free-flowing powder using
hot air
Still unchallenged drying technology for liquid foods
(milk, extracts) resulting in many convenient
products (Barbosa-Cánovas and Vega-Mercado,
1996)
Applications in the natural extracts and
functional food industries are likely to
increase. Alternative for encapsulation
of valuable ingredients. Appropriate for
SMEs in LDCs
Freeze-drying (FD): Removing
water from the frozen state
(ice) under vacuum
Recognized as the best drying technology for
high-quality food products and preservation of
cell viability (e.g. drying of probiotics). Process is
slow, energy demanding and expensive
New niches for premium dried foods with better
colour and flavour, particularly fruits
and vegetables (e.g. use in breakfast
cereals, gourmet soups). Developments in
low vacuum (atmospheric) FD
Microwave drying: Focusing
energy directly into the interior
of the products
Already used in a number of non-food industries,
provides shortened drying times, reduced costs
and high product quality. Successfully adopted
for drying of pasta products
Applications in food industries that require
short drying times and higher throughput
at the expense of higher capital and
energy costs
Other drying methods Novel forms of drying, such as the use of
radio-frequency, super-heated steam and heat
pump drying, are actively being investigated
Improved drying technologies (hybrid
technologies) for energy savings and better
quality foods with higher market value
(Chua and Chou, 2005)
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Osmotic dehydration: Use of
concentrated solutions to
remove significant amounts
of water
Extensively researched in the past 2 decades, yet
few industrial applications (restricted to fruit
pieces) (Raoult-Wack, 1994). Suggested as a
pre-drying step for fruits (using sugar solutions)
and vegetables
Attractive low-tech method but requires proper
handling of waste solutions. Overall energy
efficiency and environmental impact need
evaluation. Impregnation of nutrients and
flavours
Concentration: Partial removal
of water from liquid foods by
evaporation
Well-established technology as a cost-effective
pre-drying step in dehydration of liquid foods.
Utilized for bulk transport of frozen concentrated
juices
Alternatives to evaporation may find increased
applications in high-quality foods with
improved aroma and flavour. Examples:
freeze-concentration, pervaporation
Hurdle technologies:
Combination of several
preservation factors at
low levels
Traditional preservation technologies that yield
ambient-stable, intermediate moisture fruits,
processed meats and dairy products (Leistner
and Gould, 2002)
Possibilities for novel products using mild
heating technologies and ‘natural’ preserva-
tives (spices or herbs). Pre-processing
alternative for bulk storage of fruits and
vegetables in LDCs
Minimal processing (MP)
technologies: Shelf-stable
fresh foods with minor changes
in freshness
Minimal processing technologies for fruits and
vegetables may include a washing/disinfection
step followed by addition of inhibitors of adverse
reactions and modified atmosphere packaging
(Ahvenainen, 2000; Artes and Allende, 2005)
Favoured by increased demand for fresh-like
fruits and vegetables for healthy nutrition,
convenience and quality. Alternative disin-
fectants (antioxidants, ozone, irradiation,
organic acids, etc.) and packaging options
come into scene (Rico et al., 2007)
Heating/cooling/freezing. Heating technologies are increasingly aimed at delivering energy directly into the product. Fast removal of latent
(freezing) and sensible heat from products after thermal processing on the spot (chilling) or after harvest or capture (e.g. aquatic foods) is
receiving increased attention, may require use of sustainable energy alternatives. As is the case of other preservation methods, major
impacts on food quality and safety are expected when several of these technologies become integrated simultaneously or sequentially into
processing lines.
Technologies Current status Potential developments
Microwave (MW) heating:
MWs penetrate within a food,
heating the interior more
rapidly
Applications already extensive in home appliances.
Although moderately used industrially (e.g. in
food tempering) MW volumetric heating often
provides a higher quality product, increased
production rates and energy savings that may
offset higher capital costs
Combination of MW and conventional heating
will become increasingly important for
energy- and time-consuming processes
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Annex 1: Continued.
Ohmic (OH), infrared (IR) and
radio-frequency heating
These and other heating technologies have been
investigated for sterilization/pasteurization,
drying, roasting, etc. Some are implemented on
a commercial scale: IR heating in Japan (Sakai
and Hanzawa, 1994) and OH for sterilization of
particulate food products
Consolidation of emerging heating
technologies is expected. Most of them
provide superior quality foods in specific
applications (e.g. pasteurization of viscous
products). High potential in combination with
other heating methods (e.g. drying)
Vacuum cooling (VC) Vacuum (evaporative) cooling is presently used
mostly for fast pre-cooling of horticultural
products to promote extension of shelf life and
improvement of product quality and safety
Integration of VC to processing of other foods
(e.g. ready meals) to improve safety is
attractive, but requires assessment of
possible adverse effects on product quality
(Zheng and Sun, 2004)
Chilling: Rapid lowering of the
temperature of foods to less
than 8°C
Applications range from raw materials (fruits/
vegetables, fish, meat) to prepared foods
(e.g. sous-vide). High-quality, convenient chilled
prepared foods are growing at the expense of the
frozen food category. Chilled products require
delicate temperature control
New systems engineered for fast cooling of
produce and fish (e.g. slurry ice systems)
likely to find applications for export markets.
Need improved logistics for temperature
control throughout the distribution chain
Freezing: Drastic reduction of
temperature below ?18°C with
conversion of water into ice
Frozen products are amply recognized as healthy,
safe and convenient. Growth in some segments
(seafood, IQF berries) is offset by decline in
others (ready meals). Market opportunities arise
in LDCs as incomes increase and distribution
networks of frozen foods become available
Opportunities for SMEs in high growth seg-
ments of frozen fruits (e.g. berries) and
vegetables. Faster freezing rates for higher
quality using cryogenic fluids. Pressure-
freezing appears attractive for high-quality
(but expensive) frozen foods (Sanz and
Otero, 2005)
Separation and Ingredients Technologies. Several processes are used to release valuable components from raw materials, separate them
from the original matrix and produce concentrated/purified products in an appropriate form (concentrates or powders). Small- and medium-
size industries in LDCs have a major opportunity to market extracts of bioactives from lower quality fresh raw materials and by-products for
the functional foods market. Progress in separations science will lead to economically feasible processes that make available refined and
functional food ingredients to replace or complement traditional raw materials.
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Separation technologies
Technologies Current status Potential developments
Pre-extraction processes:
Controlled disintegration of
cellular tissue for efficient
release of components
Grinding and pressing are conventional
technologies in the sugar, oil and protein
industries as well as in small operations
Prevalence for technologies proving a faster,
more efficient and/or selective release using,
for example, enzymes, ultrasound, HP, MW,
extrusion, PEF (Wang and Weller, 2006)
Extraction processes: Liquid
extraction of solutes from solid
substrates using water or
organic solvents
Conventional technology to face limitations on type
of solvents that can be used to extract foods and
contents of residual solvents
Use of aqueous solvents (e.g. water/ethanol) in
oil extraction, applications of membrane
technology to recover water or other
solvents; more efficient use of solvents
Supercritical extraction (SCE):
Extraction with compressed
gases having high diffusivity
and solvent capacity
Interest in SCE using carbon dioxide for safety and
processing (fractionation). Presently used to
decaffeinate coffee and tea, and in the extraction
of hops. High capital costs involved
Superior quality flavours, spices and essential
oils by SCE have been extensively studied
and some products are in the market
(Brunner, 2005). Potential exists for the
isolation of natural preservatives (Reglero
et al., 2005). Other applications in
detoxification
Membrane separation (MS):
Use of porous membranes to
fractionate food components
Membrane technology (micro-, ultra- and
nanofiltration) already established in many food
industries. Ample availability of membranes
(e.g. pore sizes) and absence of heating provide
unique opportunities for fractionation
Larger demand for more convenient and
purified functional ingredients (e.g. fraction-
ated whey proteins) (Kulozik, 2008). More
stringent regulation for cleaner effluents from
processing plants
Chromatography: Separation at
molecular level by affinity
or size
A powerful separation technique already used at
large scale to separate glucose from fructose
Novel and cheaper sorbent materials could
greatly advance applications of chromato-
graphic separations in the food industry
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Annex 1: Continued.
Ingredients technologies
Technologies Current status Potential developments
Product technologies:
Conventional technologies
leading to food extracts
Extracts are convenient, standardized and
concentrated forms of ingredients. Conventional
technologies for production of concentrates and
dry powders well known around the world. Some
emerging countries have a long tradition of
exporting plant and algal extracts (e.g. India)
Conventional extracts may become valorized
when transformed into high-quality ingredi-
ents. Functional plant extracts and nutraceu-
ticals are in high demand by the prepared
food and cosmetic industries. Market niches
offer added opportunities
Microencapsulation:
Components trapped within an
edible matrix (wall) and
delivered as small particles
Conventional encapsulation (e.g. liquid flavours)
already familiar in the food industry. New
microencapsulation technologies provide
chemical protection and functionality to valuable
compounds (e.g. a liquid flavour) and to
beneficial bacterial cells (e.g. probiotics)
(Holmgren, 2006)
Microencapsulation technology advances at
fast pace in designing encapsulating
matrices (solid or liquid) for specific types of
fat-soluble, water-soluble compounds and
bioactives. Use in tailoring nutrient delivery
systems (Augustin and Sanguansri, 2008)
Transformation (Conversion) and Structuring Technologies. The bulk of the processed foods industry involves transformation and
structuring of food components during the production process. Dairy products, baked goods, processed meats, snacks, sauces and
dressings, among others, are structured products. This is the most important category of processed foods in terms of the size of the industry
(Bruin and Jongen, 2003).
Technologies Current status Potential developments
Emulsification: Dispersing
immiscible phases as fine
droplets within a continuous
phase
Many structured foods are emulsions formed by
mechanical shearing devices such as high-speed
agitators and homogenizers (e.g. mayonnaise,
salad dressings, etc.)
Membrane emulsification may find increased
application to form stable emulsions with
lower energy consumption and less use of
surfactants
Extrusion: Use of a screw
extruder to continuously cook,
pasteurize and shape starchy
flours and protein meals into
dried products
Established technology around the world.
Advantages are versatility in use, energy
efficiency, high productivity, low operational costs
and absence of wastes and pollutants
Extrusion is likely to increase its importance in
LDCs to produce pre-cooked flours, infant
foods, fish feeds, etc. Applications in SMEs
(e.g. precooking, decontamination, etc.) may
only require low-cost versions of extruders
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Gelation: Trapping abundant
water in semi-solid foods
using hydrocolloids
Gels already important products in the dairy, meat
and fish industries, and in gastronomy. The
source of gelling materials is expanding
Gelation may become important in the design
of new food structures, dietetic foods (e.g.
reduced calorie foods, control of satiety) and
delivery systems
Frying: Immersing food pieces
in hot oil (deep-fat frying) to
impart unique textures and
flavours to foods
Used extensively worldwide in snacks production,
food outlets (including street vendors in LDCs)
and at home. Fried products are high-calorie
foods due to oil absorption during frying
Concern about calorie density, type of fats, the
generation of toxic acrylamides and poly-
meric substances, and interest in preserving
the nutrient content, flavour and colour of
raw materials are likely to change frying
operations (e.g. vacuum frying)
Enzymic processing: Promoting
the action of natural or added
enzymes for process
improvement and product
functionality
Well-understood and extensively used technology
in the dairy, juice, sweeteners, starch and flavour
industries, where enzymic processing has proven
to be cost-effective
Natural and GMO-derived commercial
enzymes for biotransformation of fats,
carbohydrates and proteins. Improved
enzymic reactors for biotransformations,
cross-linking enzymes for food structure
build-up
Micro-engineering: Use of
devices developed for
microtechnologies
Microdevices or arrangements of capillaries or
channels <1 mm that deal with small amounts of
fluids (10
?6
–10
?9
l) are currently only available at
laboratory scale
Microfluidic devices have potential to signifi-
cantly change the fabrication of dispersed
food systems (emulsions and foams)
(Skurtys and Aguilera, 2008). Possible
applications in the design of analytical
devices
Nanotechnologies: Emerging
technologies to manipulate
materials, devices and
products at dimensions in the
order 10–100 nm
Great hopes but so far few products and
applications. Already consumer groups worry
about safety and environmental impact of
nanotech products to be used in foods
If present concerns are overcome food
nanotechnology is likely to have a major
impact in areas such as smart sensors in
packaging, self-cleaning surfaces, encapsu-
lated delivery systems, nanoemulsions and
food nanoparticles (Sanguansri and
Augustin, 2006; Lee et al., 2008)
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Annex 1: Continued.
Packaging technologies. Packaging technologies will aim at providing added protection and information to consumers while reducing the
amount of packaging used, promote recycling and facilitate disposal. Increased use of novel, environmentally friendly materials derived from
natural sources (e.g. bio-based packaging) is expected. Package safety from migrating substances will continue to be of concern. Most
packagers in LDCs are SMEs looking for new technologies offering reliability and lower processing costs.
Technologies Current status Potential developments
Active packaging: Package,
product and the environment
interact to extend shelf life
Several active components already in use (sachets
or ‘in the wall’) to improve safety and sensory
quality (ethylene and O
2
scavengers, antioxidant
and antimicrobial emitters, etc.)
Introduction of novel active components (e.g.
nanoparticles, enzymes, etc.), but should
overcome higher cost, legislative restrictions,
consumer safety and environmental impacts
(Vermeiren et al., 1999; Lopez-Rubio et al.,
2006)
Intelligent packaging:
Packaging detects, senses,
records and provides
information about the contents
(Yam et al., 2005)
Truly ‘intelligent’ packaging still at the concept
level. Often confused with smart packaging
(see below)
Among others, it is expected that packaging
could detect and signal the presence of
microbiological growth in packaged foods
(safety) or aromas (quality)
Smart packaging: Packages
with attached devices that can
store and transmit data
Already in use for logistics (barcodes,
radio-frequency identification devices – RFID)
and consumer information (time–temperature
indicators – TTI)
Need of less-expensive devices for wide use in
traceability, improved logistics and added
convenience (e.g. appliances interacting with
encoded information for food preparation)
Edible barriers and films: Starch,
protein and fat-based barriers
and films that protect products
Emerging alternatives to stabilize some fresh and
processed foods to satisfy consumers’ demands
for longer shelf-life products (Bourlieu et al.,
2008)
Wide-ranging applications (e.g. to prevent
moisture migration and microbial contamina-
tion) in many food categories. Type and
availability of effective films will expand
Modified atmosphere
packaging (MAP): Altering the
gases surrounding a product
or commodity to extend the
storage life
MAP extends shelf life and preserves the high
quality of foodstuffs. Concerns about safety due
to growth of pathogenic bacteria and in quality
due to fermentation
Expected to increase in use since it benefits
consumers (e.g. more stable fresh products)
and provides greater flexibility in production
and within the distribution chain
T
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3
3
New packaging materials:
Mostly related to biodegradable
and bio-based materials
(BBM) and composites
Few commercial BBM for food packaging
(starch- and microbial polymer-based) presently
available. PLA and PHB hampered by cost and
low performance
Future of BBM associated with performance
(barrier), processing and cost. Provide much
lesser environmental impact than plastics.
Nano-biocomposites develop in an uncertain
scenario (Sorrentino et al., 2007)
Storage and distribution technologies. Postharvest losses in developing countries may be reduced by controlling the temperature and/or
moisture of grains, horticultural produce and fish. Transfer of simple technologies, adoption of better practices at farm level and improved
marketing channels are crucial. A major contribution to food authenticity and traceability is expected to come from in-line inspection using
non-destructive, non-invasive spectroscopic and imaging techniques. Efficiency and traceability in distribution systems stimulate use of
robotics and information technologies (ITs).
Technologies Current status Potential developments
Storage systems Conditions for minimizing physical and quality
losses of food raw materials after harvests are
well established
Improved packaging materials and containers.
Underground sealed storage of grains.
Storage under gas atmospheres (nitrogen,
ozone, etc.)
Cold storage and transport:
Transport and storage at
reduced temperature (frozen
and chilled foods)
An established technology in the developed world
that uses a network of storage facilities served by
millions of refrigerated road vehicles (James and
James, 2006)
Developing countries implement the infrastruc-
ture for the refrigerated/frozen food chain
aimed at export markets. Advances in
monitoring in-transit and stored products
by IT
Robotics: Use of robots in the
production and distribution
processes
Robots used in specific production systems
(e.g. confectionery industry), and in areas of
materials handling and secondary/tertiary
packaging operations (Wallin, 1997). Challenge
in delicate nature of many food materials
Holds out a promise of reducing costs by
increased consistency, more efficient
production and reducing labour costs. May
also find applications in hostile production
environments
In-, on-, at-line quality control:
Application of non-destructive
non-invasive technologies for
quality control
Spectroscopic techniques and electromagnetic
probing demonstrating opportunities for fast
on-line analysis of food components and
detection of surface and internal defects
Advances need to be made to bring down the
costs of these devices so that they become
affordable for continuous, on-line quality
monitoring by the food industry (Scotter,
1997; Sun, 2004; Cen and He, 2007)
1
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Annex 2: Summary of Bioinformatic Databases
Database name Type of information Uses of information Database host Web site URL
a
NCBI GenBank &
PubMed
DNA sequences (GenBank);
protein sequences;
genome structure;
publications
Species, gene &
protein ID; genomic
comparison
National Centre for
Bioinformatic
Information
www.ncbi.nlm.nih.gov/
DDBJ (DNA DataBank
of Japan)
DNA (as GenBank) Species & gene ID;
genomic comparison
National Institute of
Genetics
www.ddbj.nig.ac.jp/
EMBL (European
Molecular Biology
Laboratory)
DNA (as GenBank), protein
sequences; microarrays;
bioinformatic tools
Species ID; microarray
analysis; protein
function & structure
European
Bioinformatics
Institute
www.ebi.ac.uk/embl/
FishTrace Cytochrome b & rhodopsine
gene sequences from
200+ European fish species
Fish species ID JRC – Joint Research
Centre, Italy
(EU consortium)
www.fishtrace.org
FishBase General information on
30,000 world fish
species
Fish classification, uses,
habitat, identification,
images, genetics on
fishes
Consultative Group
on International
Agricultural
Research (CGIAR)
www.fishbase.org/
search.php
Gramene Rice, maize & grasses
gene, protein &
metabolite info
Marker (QTL) ID; traits;
genetic diversity of
grasses
US collaboration www.gramene.org/
GrainGenes Wheat, barley (cereals)
gene, protein &
metabolite info
Marker (QTL) ID; traits;
genetic diversity of
cereals
USDA (US Department
of Agriculture.)
(US consortium)
wheat.pw.usda.gov/
GG2/index.shtml
OlivTrack Olive genetic markers Olive oil traceability University of Parma
(EU consortium)
www.dsa.unipr.it/foodhealth/
oliv-track/index.html
PLEXdB database Plant & plant pathogen
gene expression data
Plant functional
genomics; microarray
data from maize, barley,
grape, rice & tomato
Iowa State University
(US consortium)
www.plexdb.org/index.php
ArkDB Genetic information on
12+ farmed species
QTL mapping of animal,
bird & fish species for
breeding
Roslin Institute www.thearkdb.org/
T
e
c
h
n
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l
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g
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s
S
h
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p
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n
g
t
h
e
F
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t
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e
1
3
5
Livestock Genome
Mapping
Programmes
Genetic information on
six livestock species
QTL mapping of animal,
bird & fish species for
breeding.
INRA, France locus.jouy.inra.fr/cgi-bin/
bovmap/livestock.pl
NAGRP (National
Animal Genome
Research Program)
Genomic information from
various livestock species
QTL mapping of animal,
bird, fish & crustacean
species for breeding
USDA (US consortium) www.csrees.usda.gov/nea/
animals/in_focus/an_
breeding_if_nagrp.html
Animal genomics
community web site
Compendium of databases
from 14 animal species
Database searches for
animal genetics
information
Iowa State University www.animalgenome.org/
community/other.html
Organism-Specific
Genome Databases
Compendium of
eukaryote, prokaryote
& viral databases
Database searches for
animal, plant, fungal,
microbial & viral info
University of California restools.sdsc.edu/biotools/
biotools10.html
Sanger Institute Genome sequences Genome mapping &
sequence comparison
Sanger Institute www.sanger.ac.uk/Projects/
The J. Craig Venter
Institute (JCVI)
Compendium of
microbial, fungal &
plant genetic info
Functional genomics;
QTL & genome mapping;
sequence comparison
J. Craig Venter Institute www.tigr.org/
www.jcvi.org
MICADO (Microbial
Advanced Database
Organization)
Microbial genomes Gene mapping &
functional analysis
INRA, France genome.jouy.inra.fr/cgi-bin/
micado/index.cgi
Barcode of Life DNA sequences of the
cytochrome oxidase
subunit 1 (COI) gene
Taxonomic classification;
sample identification
National Museum of
Natural History, USA
www.barcoding.si.edu/
www.barcodinglife.org/
views/login.php?&
HapMap project Database of human genes Gene expression;
genetic variation & markers
Cold Spring Harbor
Laboratories, USA
(international
consortium)
www.hapmap.org
a
All databases accessed on 13-05-09.
136 © FAO and UNIDO 2009. Agro-industries for Development (C.A. da Silva et al.)
Introduction
In the most recent decades, developing nations have focused predominantly on
economic prescriptions for ‘getting markets right’ by adjusting macroeconomic
policy, privatizing state-owned enterprises and opening domestic markets to
international trade in agricultural commodities and currencies. The implicit
assumptions are that ‘structural adjustment programmes’ will attract foreign
capital through the domestic and international private sectors, thereby making
domestic industries more competitive. As a result, a large part of economic
development policy has centred on creating ‘enabl ing environments’ for which
capital would then be attracted to invest in both general market-based solutions
and specific firm strategies that contribute to the economic growth and devel-
opment goals of the nation. The effectiveness of those policies has varied as
the interrelationships among macroeconomic policies, firm strategy and social
goals all hinge on different analytical frameworks.
A defining characteristic of most developing economies is the relative
importance of agriculture in their national economies and consequently the
design of alternative strategies employed to achieve national goals. The green
revolution fuelled rapid growth of agricultural productivity in Asia and this,
coupled with investments in infrastructure, reduced rural poverty dramat-
ically. Advances in economic development in Latin America, however,
occurred in a tiered policy structure that favoured promoting value added,
agriculture-based industries and niche products for export markets with con-
vertible foreign currencies. While Asia and Latin America identified strategies
to stimulate economic development, sub-Saharan Africa (SSA) placed greater
emphasis on the political economy at the expense of economic growth and
development, thereby leaving fewer resources to overcome key rural economic
5 Enabling Environments for
Competitive Agro-industries
RALPH CHRISTY,
1
EDWARD MABAYA,
2
NORBERT WILSON,
3
EMELLY MUTAMBATSERE
4
AND NOMATHEMBA MHLANGA
5
1
Professor, Department of Applied Economics and Management, Cornell
University, Ithaca, New York, USA;
2
Researcher Associate, Department
of Applied Economics and Management, Cornell University, Ithaca, New
York, USA;
3
Associate Professor, Department of Agricultural Economics,
Auburn University, Auburn, Alabama, USA;
4
Evaluation Analyst, African
Development Bank, Tunis, Tunisia;
5
PhD Candidate, Department of Applied
Economics and Management, Cornell University, Ithaca, New York, USA
Enabling Environments for Competitive Agro-industries 137
development problems such as persistent poverty, shortage of preventive
health care, fragmented infrastructure and food insecurity. The gap between
the national economies in SSA countries and those of developed countries
has widened, while the gap has narrowed for the emerging and competing
regions of Latin America and South-east Asia. What has become abundantly
clear in this post-structural adjustment era is that institutions matter. The reli-
ance on markets in achieving policy goals requires developing nations to
invest in institutions and services that will allow markets to function well in a
global economy.
Translating market-based policies in a global economy into desired social
and economic ends requires a fundamental shift in thinking about a corner-
stone concept, comparative advantage, which explains international trade, to
an expanded understanding of global markets that is based on competitiveness.
Today nations are advancing policies to enable firms and industries to gain a
competitive advantage in global markets, as opposed to the conventional
(Ricardian and Heckscher-Olin-Samuelson) international trade frameworks. In
the literature, the concept of competitive advantage has a number of distinct
meanings. Herein, we use the concept in a manner similar to that defined by
the Organization for Economic Cooperation and Development (OECD) as ‘the
degree to which, under open market conditions, a country can produce goods
and services that meet the test of foreign competition, while simultaneously
maintaining and expanding domestic real income’ (OECD, 1992, p. 237). An
important aspect of the concept of competitive advantage lies in the efforts of
many organizations to provide measures of an enabling economic environment
to foster competitiveness.
For policy makers identification of those elements is complicated by an
underlying feature of the globalization process – the rapidity of change
occurring within and across national economies. The globalization process
has the potential to benefit emerging economies, as proven by the remark-
able rates of economic growth in many parts of the world. This process has
fused the theoretical stages of economic development and raised the pre-
mium on the traditional, sequential approach, which holds that the state
must first create an enabling environment, which is then followed by private-
sector investments. Emerging market governments are investing in the neces-
sary components to foster economic stability, including infrastructure, open
telecommunication markets and Internet-based distance learning pro-
grammes while, at the same time, competition for capital, driven by the
rapidity of the globalization process, is causing multinational corporations to
aggressively seek opportunities to capture higher returns. As a result, the
private sector in many cases is not necessarily waiting for an enabling envir-
onment to be created by the state. Rather, it is working in partnership with
governments to develop a suitable environment, while simultaneously pursu-
ing market opportunities.
Efforts by policy makers to measure competitiveness, enhance enabling
environments and comprehend the rapidity of change in domestic and global
economies have given rise to three fundamental questions, which are addressed
sequentially in this chapter:
138 R. Christy et al.
1. How well do measures of business climate by international organizations
and research institutions relate to the competitiveness of mostly agricultural
economies?
2. If current measures are inadequate, what are the essential factors underlying
agro-industry competitiveness in developing countries?
3. How can we reform the public process, in the context of radical change, to
develop and enact creative policies to improve the relative competitiveness of
agro-industries in emerging markets?
Business Climate Assessments
How well do measures of business climate by international organizations
and research institutions relate to the competitiveness of agrarian
economies?
The assessment of business climate (or environment) dates back to the late
1970s, when the World Economic Forum started publishing the Global
Competitiveness Report, with the assessment and ranking of economic com-
petitiveness for 16 European and North American countries. The level of interest
in these climate assessments grew considerably from then on, particularly in the
past decade, as increased globalization created demand for methods of providing
signals to investors interested in foreign direct investment (FDI). In add ition to this
main use, business climate assessments have also been seen as a way of inspiring
reform, a direct result of the ranking system used in these analyses. In most
cases, focus is placed on those economies whose rankings have improved sub-
stantially from one year to another through special mention in case studies or
reform awards. The assessment of business climates is usually accompanied by
recommendations on which procedures to reform, the adequacy of which for
agribusiness and agro-industries will be discussed later in this chapter. A general
overview and appraisal of business climate measures is presented next.
The interest in business climate assessments has resulted in a proliferation
of measures to quantify the suitability of given economic environments for sus-
tainable business development. Figure 1 presents the chronological order of the
1970 1980 1990 2000 2010
1979: World Economic
Forum’s Global
Competitiveness Report
2001: UNCTAD’s
Investment Compass
2004: World Economic
Forum’s Global
Competitiveness Index
2006: OECD’s Policy
Framework for
Investments
2003: World Bank’s Ease
of Doing Business
1995: World Bank’s
Investment Climate
Surveys
Figure 1. Timeline of competitiveness and investment climate assessment
frameworks.
Enabling Environments for Competitive Agro-industries 139
various competitiveness and investment climate indices that have been devel-
oped over the last 3 decades. Major international organizations now produce
and publish one or more indices for use in measuring the level of competitive-
ness. The most widely monitored and applied indices are the Ease of Doing
Business Index (World Bank, 2003) and the Global Competitiveness Index (GCI)
(World Economic Forum, 2004). Several others also exist, including the World
Economic Forum’s Growth Competitiveness, Current Competitiveness and
Business Competitiveness indices; the United Nations Conference on Trade and
Development’s (UNCTAD) Investment Compass (IC), Global Investments
Prospects Assessment and Inward FDI Performance Index; the Policy Framework
for Investments (OECD, 2006); and Investment Climate Surveys (World Bank,
1995). Instruments such as governance indices also are thought to be good
indicators of investment climate, and they, too, are used to study how institu-
tional environments impact on business performance. The next subsections
discuss these measures in greater detail and provide a critique of the measures
with specific attention paid to the appropriateness of their use in the agribusi-
ness industry (summarized in Table 1).
Ease of Doing Business Index
The Ease of Doing Business Index is a relative measure of how well the busi-
ness climate facilitates efficiency in ten stages of a business’s life, i.e. starting a
business, dealing with licences, employing workers, registering property, get-
ting credit, protecting investors, paying taxes, trading across borders, enforcing
contracts and closing a business. The index is calculated from a three-stage
process that involves the following:
?
ranking of the various components of each stage according to a predeter-
mined scoring framework as outlined in Appendix 1;
?
computation of the stage-level ranking, defined as the average of the per-
centile rankings of the stage’s component indicators; and
?
computation of the overall business climate ranking for the country – the
average of the percentile rankings of each of the ten stages.
The final country score, which describes its position in the percentile ranking
relative to other world economies, will take a value between 1 and the total
number of countries included in the assessment. Appendix 2 shows an exam-
ple of how the Ease of Doing Business Index was computed for Egypt, the top
economic reformer in 2006/07 according to World Bank’s (2007) Doing
Business 2008 report.
One of the main merits of the Ease of Doing Business Index is that it cov-
ers, in depth, most regulations directly affecting business operation. It is a good
attempt to determine what regulation constitutes binding constraints, which
reform packages are most effective and how these issues are shaped by the
country context. A few limitations can also be identified. First, the assessment
is limited in scope to cover only those regulations directly linked to business
operations, but it says little about the effects of other (often equally important)
1
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Table 1. Competitiveness assessment frameworks and their limitations.
Index and year established
(source and coverage) Key strengths
Limitations in assessing agro-industry
competitiveness
1979: World Economic Forum’s
Global Competitiveness Report
Holistic – considers policies, factor endowments,
and institutions
Does not inform policy at industry or
sectoral level
125–131 countries Adjusted for each country’s level of economic development Fails to capture value chain components
1988: UNCTAD’s Inward
FDI Performance Index
Uses 3-year periods to offset annual fluctuations
in the data
Does not inform policy at industry or
sectoral level
141 countries Captures influence of all factors other than
market size
Neglects domestic investment, hence
key components of agro-industries
1995: World Bank’s Investment
Climate Surveys
50 countries
Adapted to country context and sector priorities
Covers business perceptions
Small sample sizes limit global
comparisons
Places emphasis on foreign investment
2001: UNCTAD’s
Investment Compass
Focuses on both availability and quality
of infrastructure
Does not inform policy at industry
or sectoral level
Land tenure central to the analysis Fails to capture value chain components
Considers objectives of investors and policy makers
2003: World Bank’s Ease
of Doing Business Index
178 countries
Highly comprehensive – covers major business
considerations from inception to folding
of operations
Disregards broader business
environment, e.g. macro economic
fundamentals
Provides an excellent assessment of regulatory framework Biased in favour of formal establishments
Allows inter-country comparisons Is not sector-specific
2004: World Economic Forum’s
Business Competitive Index
Examines firm-level efficiency Intensive data requirements
121 countries
2004: World Economic Forum’s
Global Competitiveness Index
Holistic – considers policies, factor endowments,
and institutions
Does not inform policy at industry
or sectoral level
131 countries Adjusted for each country’s level of economic development Fails to capture value chain components
2006: OECD’s Policy
Frameworks for Investment
Provides a policy evaluation criterion
Directly targets policy makers
Focused on foreign investment
Is not sector-specific
Highlights key areas for private-sector-led
growth-enabling proactive policies
Enabling Environments for Competitive Agro-industries 141
policies and institutional arrangements, such as the effect of macroeconomic
policies, quality of infrastructure, proximity to markets, security of property,
gender biases in business regulations and transparency of government procure-
ment. In its country ranking the index is biased in favour of formal industries,
as higher rankings tend to be associated with economies that experience more
formal sector growth, more jobs and a shrinking share of the economy in the
informal sector. Moreover, although conclusions drawn from the analysis are
taken as non-sector-specific, to make the data comparable across countries,
the Ease of Doing Business Index refers to specific types of business – drawing
data from a limited liability company operating in the largest business city.
Sectors lying outside this class are excluded, even though these may constitute
larger proportions of business activity in specific countries. No direct assess-
ment is made of the quality of downstream or upstream market environments,
and their subsequent impact on the efficiency of business operations at manu-
facturing level (the index’s target).
Global Competitiveness Index
Global competitiveness assessments have been performed by the World
Economic Forum since 1979 and have evolved over the years in tune with the
changing international environment. The most recent development, the GCI,
resulted from the work of Xavier Sala-i-Martin in 2004 (World Economic
Forum, 2004). In addition to the GCI, the World Economic Forum has pro-
duced three other measures of competitiveness: the Growth Competitiveness,
Current Competitiveness and Business Competitiveness indices, discussed
briefly below. The GCI provides an overview of critical drivers of productivity
and competitiveness, categorized into nine pillars: institutions, infrastructure,
macroeconomy, health and primary education, higher education and training,
market efficiency, technological readiness, business sophistication and innova-
tion. Data from the Executive Opinion Survey, combined with hard data, are
used to rank countries on each component of the index. The pillars can be
integrated into three broad categories, namely basic requirements, efficiency
enhancers, and innovation and sophistication, as specified in Appendix 3.
The GCI is computed for a sample of 125 countries of varying degrees of
economic progress. To highlight the differences in policy priorities for econo-
mies at different levels of economic progress, the index is designed so that it
assigns higher weight to those pillars key to the specific phase/position of a
particular national economy. For factor-driven economies (countries that com-
pete based on factor endowments), for example, more weight is given to basic
requirements relative to efficiency enhancers, and much less to innovation.
Innovation-driven economies, on the other hand, compete with new and unique
products and therefore rely more on innovation and sophistication factors for
competitiveness. The division of countries into the three broad categories (or
stages of development) is explained in Box 1.
One of the major advantages of the GCI is its holistic nature, stemming
from understanding national competitiveness as a set of factors, policies and
142 R. Christy et al.
institutions that determine the level of productivity in a country. Productivity
implies making better use of scarce resources; therefore, competitive econo-
mies are expected to experience higher growth rates (World Economic Forum,
2006). Unlike the Ease of Doing Business Index, which focuses only on those
factors directly affecting the business environment, the GCI also recognizes the
importance of the macroeconomic environment, human development, market
efficiency, technology and innovation in developing and sustaining global com-
petitiveness. These differences give rise to different competitiveness ranks.
Note that, while Singapore ranks first in 2006 according to the Ease of Doing
Business Index, lower rankings in health, education and business sophistication
push it to the fifth position in the GCI ranking, where Switzerland ranks first.
The GCI’s component rankings also are modified according to each country’s
level of economic development, thus avoiding the ‘one-size-fits-all’ pitfall com-
mon to most competitiveness ranking criteria.
The main limitations of the index are, first, that it focuses on macroeco-
nomic features and offers no industry or sector-specific appraisal of the operat-
ing environments. Second, the discussion on market efficiency fails to capture
the critical value chain components that enhance or hinder competitiveness in
any given industry. Third, the issue of geographic location of firms and proxim-
ity to markets also remains unaddressed.
The Growth Competitiveness Index
The Growth Competitiveness Index is a characterization of a set of institu-
tions and economic policies that support high rates of economic growth over
the medium term, i.e. over the coming 5 years. The index is based upon a
country’s performance in three areas (sub-indices): level of technology, qual-
ity of public institutions and macroeconomic conditions related to growth.
Dividing world economies according to innovation into core and non-core
economies (patenting is used as a measure of innovation capacity), the index
Box 1. Weighting according to stage of development. (From World Economic
Forum, 2006.)
GDP per
capita (US$)
Basic
requirements
(%)
Efficiency
enhancers
(%)
Innovation
factors (%)
Factor driven <2,000 50 40 10
Transition from
stage 1 to 2
2,000–3,000
Efficiency driven 3,000–9,000 40 50 10
Transition from stage
2 to stage 3
9,000–17,000
Innovation driven >17,000 30 40 30
Enabling Environments for Competitive Agro-industries 143
assigns different weights to factors within the sub-indices for economies with
different innovation capacities. For example, for core economies, weights
of ½, ¼ and ¼ are assigned to technology, quality of public institutions and
macroeconomic conditions, respectively, whereas weights of
1
/3 each are
assigned to the three sub-indices for non-core economies. The GCI, which
grew directly from the Growth Competitiveness Index, attempts to incorpo-
rate many factors that drive productivity into a broader measure of competi-
tiveness. The World Economic Forum currently publishes both indices.
Current Competitiveness Index
The Current Competitiveness Index (CCI) evaluates the underlying conditions
that define current level of productivity (World Economic Forum, 2000). It uses
macroeconomic indicators to estimate the set of institutions, market structures
and economic policies supportive of high current levels of prosperity, thus giv-
ing an indication of the effectiveness with which an economy utilizes its current
stock of resources. The CCI is based upon two sub-indices that focus on firm
sophistication and qualities associated with the national business environment,
drawing on a complex array of variables with a demonstrated statistical relation-
ship to gross domestic product (GDP) per capita. The additional value of this
index is that it goes beyond examination of aggregate variables to capture the
microeconomic conditions that support a high level of sustainable productivity.
The CCI was a precursor to the Business Competitiveness Index (BCI), dis-
cussed below.
The Business Competitiveness Index
The BCI developed by Michael E. Porter ranks countries by their microeco-
nomic competitiveness. The focus on the microeconomy emerges from the
realization that, although sound macro policies create potential for improving
national prosperity, wealth is created by firms, and it is the efficiency with which
firms operate that drives firm, industry and national competitiveness. The BCI
thus highlights, in detail, the microeconomic underpinnings of competitiveness,
emphasizing a range of company-specific factors conducive to improving effi-
ciency and productivity (World Economic Forum, 2007). Competitive strengths
and weaknesses are identified in terms of a country’s business environment
conditions and a firm’s operations and strategies. These features are then used
to assess the sustainability path of the country’s current prosperity.
Productivity is thought to be driven at the micro level by the sophistication
with which locally based firms compete and by the quality of the micro-business
environment in which they operate. The BCI is based upon two sub-indices
that focus on these two foundations. Factors that drive company strategy
include production processes, staff training, marketing, capacity of innovation,
branding and value chain, whereas those that affect business environment
include factor conditions, demand conditions, nature of related and support
144 R. Christy et al.
industries, firm strategy and domestic rivalry (see Appendix 4). The factors that
affect microeconomic business environment can be summarized into the
‘national diamond’ as characterized in Figure 2. Because the impact of indi-
vidual factors or variables is difficult to isolate, the common factor analysis is
used to compute the sub-indices, which are then averaged to obtain the overall
BCI value. Variable data are obtained primarily from the Executive Opinion
Survey; quantitative measures are used where data are available, e.g. for pat-
enting rates and Internet and cellular telephone penetration. Due to data inten-
sity, the BCI is currently published for only 121 countries.
As a measure of competitiveness, the BCI has the clear advantage of focus-
ing on the local business environment, the environment of primary relevance to
firms. The Index is based upon the realization that, whereas broad macroeco-
nomic circumstances are able to provide the opportunity to create wealth, they
do not themselves create wealth, making them only necessary but not sufficient
conditions for competitiveness (Porter, 2004). The BCI computation framework
enables also rigorous assessment of firm-level and country competitive strengths
and weaknesses, thereby unmasking underlying factors affecting economic
growth. Additionally, the framework recognizes differences in challenges
Figure 2. The microeconomic business environment. (From Porter, 2004.)
Related and supporting industries
Context for firm strategy and rivalry
Factor (input) conditions
Presence of high-quality, specialized inputs
available to firms
• Human resources
• Capital resources
• Physical infrastructure
• Administrative infrastructure
• Information infrastructure
• Scientific and technological infrastructure
• Natural resources
• Access to capable, locally based
suppliers and firms in related
fields
• Presence of clusters instead of
isolated industries
Demand conditions
• Sophisticated and demanding
local customer(s)
• Local customer needs that
anticipate those elsewhere
• Unusual local demand in special-
ized segments that can be served
nationally and globally
• A local context and rules that
encourage investment and
sustained upgrading (e.g.
intellectual property protection)
• Meritocratic incentive systems
across institutions
• Open and vigorous competition
among locally based rivals
Enabling Environments for Competitive Agro-industries 145
and opportunities faced by economies at different levels of development,
accounting for these in the assessment of competitiveness through the focus on
the local environment.
The main limitation of the BIC is that it is ultimately an aggregated national
index. Although the underlying data can be broken down to individual firms,
industries and sectors (the index is computed using data drawn from over 7000
business surveys), no industry or sector-specific conclusions are drawn.
Competitiveness is benchmarked to GDP per capita: the adopted measure of
‘national prosperity’, with the objective of understanding, for each nation,
those microconditions significantly correlated to higher levels of prosperity.
Also, the analysis is data intensive; imperfect data are often employed present-
ing an analytical challenge to the econometric modelling process.
Investment Compass
The IC, an innovation of UNCTAD, is a benchmarking tool specifically designed
for developing countries for use in analysing the main economic and policy
determinants that affect the investment environment. The database at present
covers 55 developing countries. The IC comprises six key factors thought to
influence the investment environment: resource assets, infrastructure, operating
costs, economic performance and governance, taxation and incentives, and
regulatory framework. The construction of the compass follows a multistage
quantification process in which the key indicators are broken down into groups
of variables, also broken down to measurable indicators (see Appendix 5). Each
indicator is then assessed according to a rating system that takes values between
1 and 100. To obtain indicator ratings, a normalization process is used that
involves fixing the minimum and maximum possible nominal values for each
indicator and, through scaling, converts the nominal values to the 1–100 scale.
The simple arithmetic average is used to aggregate the relevant normalized
indicators into variables, and the variables into the key areas. Data on indicators
are obtained from UNCTAD-administered special national surveys, foreign
investment questionnaires and international statistics databases.
Like the Ease of Doing Business Index and the GCI, the IC provides an
inter-country comparison according to performance in all investment areas.
Additionally, the compass makes horizontal comparisons for each key area
between countries, as well as vertical comparisons of performance in each
key area for a given country. The key areas can be categorized according to
ease of reform through policy action, from least responsive to policy action
(resource assets) to most responsive (regulatory framework). Classification
can also be made according to distinct objectives as viewed by policy mak-
ers, namely, production and employment, export development and techno-
logical ‘catch-up’ objectives, or according to investor objectives as viewed
by foreign investors, i.e. domestic market-seeking, resource- or asset- seeking
and export-oriented objectives.
Compared with other measures of business climate attractiveness, the IC
highlights some indicators of greater significance to developing and transition
146 R. Christy et al.
economies. First, it addresses the effect of resource assets, particularly the
effect of availability of raw materials such as minerals, agricultural commodities
and energy reserves. The presence of a rich resource base can be important for
explaining investment in areas where other determinants of business climate
attractiveness are weak. Second, it addresses land ownership and transfer, spe-
cifically regulations pertaining to ownership of customary land and the nature
of land titles. This approach is thought to have an impact on influencing market
entry. Third, the IC considers the effect that the presence of preferential trade
agreements with major markets has on investment decisions, an issue of par-
ticular importance when considering the flow of foreign investment to develop-
ing economies, and of importance to the agriculture sector. In terms of
infrastructure, the compass highlights quality and access to the basic forms of
infrastructure: access to water, mobile phones and road networks, which tend
to be of greater relevance to developing countries.
Inward FDI Performance Index
The Inward FDI Performance Index is one of several indices produced by
UNCTAD to measure how well economies perform in attracting foreign invest-
ments. It is calculated as the ratio of a country’s share in global foreign direct
investment (FDI) inflows to its share in global GDP; an index value greater than
1 implies that the country receives more FDI than its relative economic size.
The index thus captures the influence on FDI of all factors other than market
size, e.g. business climate, economic and political stability and presence of
natural resources. The index is computed as a 3-year average to smooth out
annual fluctuation in investment flows, dates back to 1988, and currently cov-
ers 141 countries. UNCTAD has published the Inward FDI Performance Index
in the World Investment Report since 2001, together with other indices
including the Inward FDI Potential Index and Outward FDI Performance Index.
The Report, benefiting from investment data obtained from such sources as the
World Investment Prospects Survey (1995 to date), provides a more detailed
account of investment patterns as well as the driving forces behind observed
investment trends.
UNCTAD also produces the Global Investment Prospectus Assessment
(GIPA), a measure of the short- and medium-term prospects for foreign invest-
ment at the global, regional and industry levels. GIPA serves the same objective
as the Policy Framework for Investment (described below), that is, to equip
governments and, in this case, businesses with an instrument for proactive
development of policies and strategies to influence future flows of investment.
Employing data from three global surveys of transnational corporations, FDI
experts and investment analysts, the assessment also evaluates evolving trends
in strategies of transnational corporations, as well as FDI policies.
The FDI indices have the advantage that they employ easily accessible
data and uncomplicated computation methods. The main limitation lies in
the foreign investment focus, as opposed to an assessment of factors rele-
vant to industry development in general. As indirect measures of business
Enabling Environments for Competitive Agro-industries 147
climate attractiveness, the FDI performance indices per se can only tell us
where FDI tends to flow, without fully explaining the determinants or causal
factors. Also, these are aggregated national indices that are neither industry-
nor sector-specific.
Policy Framework for Investment
The Policy Framework for Investment was developed as an instrument for guid-
ing policy reforms in critical areas of a country’s economic environment – to
mobilize private investments that support economic growth (OECD, 2006).
The framework proposes guidelines on policy issues to be considered for
reform by governments interested in creating an attractive environment for
private-sector investments. Following the UN Monterrey Consensus on
Financing for Development, the framework identifies ten policy areas as having
the strongest impact on the investment environment: investment policy, invest-
ment promotion and facilitation, trade policy, competition policy, tax policy,
corporate governance, policies for promoting responsible business conduct,
human resource development, infrastructure and financial sector development
and public governance. The guiding principles or logic and the specific issues
to be addressed in each policy arena are summarized in Appendix 6.
The application of the framework is guided by three principles: (i) policy
coherence; (ii) a transparent approach to policy formulation and implementa-
tion; and (iii) regular evaluation of the impact of existing and proposed policies
on the investment environment. As a result, policy questions are designed to
ensure an integrated approach to policy and investment environment interac-
tion, to reduce uncertainty and risk for investors and to evaluate how well
government policies uphold established good business practices.
The Policy Framework for Investment occupies a special niche in the busi-
ness climate evaluation literature. Unlike the Ease of Doing Business Index or
GCI, whose target audience is investors, the Policy Framework for Investment
directly targets policy makers and attempts to equip them to focus on areas
likely to produce the highest gains in private-sector growth. The framework, at
present, does not attempt to rank economies according to current perform-
ance in addressing the outlined policy issues, but rather provides criteria through
which governments can evaluate and improve the performance of their poli-
cies. In this strength also lies the main limitation of the Framework that it is
simply a strategic approach for policy development – not an assessment tool.
Thus, the Framework per se cannot be used to evaluate how conducive a coun-
try’s policy environment is in facilitating or promoting investment relative to
other competing investment destinations.
An important feature of the Policy Framework, observed to some extent in
the first two policy fields, is that it focuses on those policy reforms necessary to
attract foreign investments rather than those necessary to develop the private
sector in general. Although these are usually consistent, the focus of the
Framework speaks also to the ultimate goal of undergoing reform: to attract
foreign investment.
148 R. Christy et al.
Investment Climate Surveys
The Investment Climate Surveys are a production of the World Bank’s
Investment Climate Unit and a continuation of the World Bank’s work from the
mid-1990s to generate statistical information for formal investment climate
assessments. The surveys use companies as the sampling unit and employ a
written questionnaire administered through face-to-face interviews with com-
pany heads. Although surveys are generally adapted to the country context in
sectors of coverage or thematic scope, depending on local priorities in policy
reform and policy research, a core structure is maintained for consistency and
comparability with international benchmarks. A standard sampling procedure
is employed that involves using the business establishment (rather than the firm
per se) as the unit of analysis, thus ensuring that each country covers a mini-
mum set of common sectors and that within each country the major growth
industries are adequately represented.
The written questionnaire comprises 12–15 sections of standard questions,
11 of which are core (see Appendix 7). The questions are meant to generate
three types of information: (i) firm-specific characteristics; (ii) the profile of the
investment climate in which the firm operates; and (iii) the productivity level of
the firm. The logic is that, by controlling for firm-specific characteristics, the
data generated from surveys can effectively be used to assess the isolated influ-
ence of climate deficiencies on industry performance. Investment climate pro-
filing provides information on those indicators that can be mapped to
performance indicators, whereas productivity data are used to compute per-
formance indicators.
Because of the wealth of information sought and the size of the sample in
each country, ranging from 200 to 1500 firms, a limited number of surveys are
performed each year (current World Bank target lies at 20 per year), making
annual global comparisons of investment climate on the basis of survey data
impossible. Generally, survey data are used to rate a given country’s investment
climate against predetermined global data. For that reason, surveys have to
date been used to collect investment climate data for developing and emerging
economies in North Africa, SSA, South-east Asia and Latin America. Climate
survey statistics are ultimately used in formal assessments of investment cli-
mate, and are available online to analysts.
Limitations of conventional frameworks as measures
of competitiveness in agro-industries
For appropriate application of the different indices of business climate assess-
ment, it is important to understand the underlying assumptions, the data used
and the index computation methods. The discussion of business environment
assessments presented in this section reveals some cross-cutting features of the
existing methods, and the strengths and limitations of these methods in assess-
ing agro-industry competitiveness are summarized in Table 1.
Enabling Environments for Competitive Agro-industries 149
The assessment reveals that the business climate is generally described at
national level to focus on macro-level determinants of investment attractive-
ness. As a result, the effect of local variations in access to (or application and
enforcement of) the national determinants is not captured. Further, the local
business environment is the relevant environment in which the business oper-
ates, and is therefore the environment of interest for competitiveness assess-
ment. The BCI comes close to addressing this limitation except that, although
analyses are focused on microdeterminants of competitiveness, conclusions are
still made at the national level.
Likewise, for industries with unique characteristics, the value chain traits
become as important as, if not more important than, broad national ones in
determining competitiveness. To the extent that the industry is global, nation-
specific descriptions of competitiveness are less important than, say, local value
chain coordination and the extent to which these value chains are integrated
into the global value chain. In this case, stimulating supply response, strength-
ening supporting markets and strengthening end-market demand become criti-
cal in creating and sustaining competitiveness. We argue that these features are
apparent in the agribusiness sector.
In the agribusiness sector, ‘climate’ issues such as condition and type of
downstream markets, proximity to markets, compliance with sanitary and phy-
tosanitary standards, the presence of subsidies in local and foreign markets,
prevailing food security policies, rural infrastructure, farmland ownership struc-
tures, and geographic and climatic conditions can substantially influence profit-
ability. Proximity to input and output markets, for example, is especially
important for the agribusiness industry, given the higher level of perishability
and bulkiness of products. In emerging markets, quality of infrastructure such
as road networks is important for the same reasons, particularly for the effect
on accessibility of farming enterprises that are both input suppliers and con-
sumers of products from the agroprocessing industry. Regarding property
rights, emphasis is required on state property leasing rights, or the reform of
state ownership of properties such as land, biotechnology institutions or agri-
cultural marketing institutions, which are important when considering down-
stream industry efficiency for agroprocessing industries. Given these unique
characteristics, a case can be made for a specialized method of describing the
competitive environment for agribusiness firms.
The Nature of Enabling Environments for Agro-industries
Essential factors underlying agro-industry competitiveness
in developing countries
One of the most fundamental issues a government must address in formulating
policies in a global economy is to define its own role in fostering economic
progress. The role of the state, at its most basic level, calls for the provision of
laws that define property rights, enforce contracts and resolve disputes. In this
150 R. Christy et al.
sense, without state action, markets could not exist. Governments can play an
even larger role by investing in infrastructure that contributes to the efficient
functioning of markets. In Figure 3, we identify a hierarchy of enabling needs
that a government can consider in addressing its role in advancing economic
progress. The nine enablers were derived from proceedings of two FAO
regional workshops (Eastern Europe and Latin America) on ‘Comparative
Appraisals of Enabling Environments’. The proposed hierarchy divides state
actions into three levels of activities that characterize and assess enabling envi-
ronments for agro-industrial enterprises. At the base of our pyramid, the state
must provide essential enablers that will make possible the function of markets
and enterprises. In this category we place items such as rule of law (e.g. con-
tract enforcement, property rights), provision of infrastructure and a conducive
trade policy. So-called important enablers are second-order activities that the
state can and often does provide, such as finance, transportation and informa-
tion. Finally, we define useful enablers as sufficient but not necessary condi-
tions to include grades and standards, linking small farmers to formal markets
and business development services. In the following section, we discuss each of
the enablers starting at the bottom of the pyramid with essential enablers and
moving up to important and useful enablers.
Essential enablers
Land tenure and property rights
Land is one of the most important assets for people throughout the world. It
constitutes the most significant part of the assets base for the rural and urban
poor – especially in developing countries where farming is the main source of
livelihood. Secure land tenure and property rights are as central to peace and
Necessary
conditions
Sufficient
conditions
Useful enablers
Business linkages
Business development services
Ease of doing business
Important enablers
Financial services
Research and development
Standards and regulations
Essential enablers
Trade policy
Infrastucture
Land tenure and property rights
Figure 3. Hierarchy of enabling needs for agro-industry competitiveness.
Enabling Environments for Competitive Agro-industries 151
stability as are rule of law, good government and economic development. From
an economic standpoint, land is a ‘keystone factor’ of production for economic
activities. Traditional economic theory assumes exclusive, transferable and
enforceable property rights in land when considering it as a factor of produc-
tion. Given these assumptions, resource endowments, preferences and tech-
nology are sufficient pillars of the traditional economic theory to take into
consideration. In developing countries, where these assumptions do not hold,
omitting institutions, the fourth pillar, from the economic analyses could be
misleading. In this case, institutional arrangements, in particular property
rights, need to be specified.
Property rights are an essential class of institutional arrangement. Property
as a social institution implies a system of relations between individuals. It involves
rights, duties, powers, privileges, etc., of certain kinds. Thus, property rights
define the use, control and transfer of assets, including land; which of them are
lawfully viewed as exclusive; and who has these exclusive rights. Property rights
also include enforcement mechanisms to resolve disputes and defend rights.
Quality of law enforcement is more important than mere existence of laws.
Property rights may also have both temporal and spatial dimensions. There are
four basic categories of property rights in land: open access, communal prop-
erty, private property and state property. Under open access, no exclusive rights
are assigned, normally resulting in land degradation. In the case of communal
property, exclusive rights are assigned to a group of individuals, whereas under
state property the public sector is responsible for managing the land. Finally,
under private property, an individual is assigned exclusive rights (Feder and
Feeny, 1991).
Systems of ownership rights in land have effects on incentives to use land
efficiently and to invest in land conservation and improvement. A robust land
ownership system creates powerful incentives for value addition on land, espe-
cially where land is scarce or contestable. Establishment and enforcement of
these systems, however, are not cost-free. Legal procedures that define pro-
perty rights and enforcement mechanisms may be very complex and require
various types of documents and affidavits, which increase transaction costs.
These transaction costs may offset the benefits from enhanced property rights
when land is abundant. As theory and empirical evidence suggest, however,
when land becomes scarce or technological changes create new investment
opportunities, the provision of ownership rights and enforcement mechanisms
has the ability to enhance land productivity.
In developing countries, where land may be used as collateral, asymmetric
information and uncertainty also play a central role in both formal and informal
credit markets. Improving transparency and information on land ownership
rights, in particular transfer rights, reduces uncertainty, risk aversion and the
‘moral hazard’ problems typically associated with rural credit markets.
Availability of land title and institutional mechanisms to resolve disputes affects
the willingness of creditors to loan when land is used as collateral. Furthermore,
existence of formal procedures for registering liens in land titles represents an
important enforcement mechanism that provides additional incentives to credi-
tors to make loans. A well-functioning land ownership system also facilitates
152 R. Christy et al.
risk taking and innovation. This tends to be very important in rural areas,
where people tend to be conservative and risk averse. Thus, systems of owner-
ship rights that increase incentives for efficient use of land also stimulate a
more efficient credit market (Feder and Feeny, 1991). As mentioned earlier,
institutional arrangements to put in place systems of property rights are not
cost-free. Transaction costs arising from these institutional arrangements may
well offset their benefits and exclude the poor.
Infrastructure
Since the mid-1980s, evidence of the increasing concern and debate about the
impact of infrastructure on economic development has surfaced in a large
number of empirical studies. Infrastructure is defined to include the sectors of
transportation, water and sanitation, electric power, communications and irri-
gation. Those sectors represent a large portfolio of expenditures in most coun-
tries, with a range from one-third to one-half of public investment, or 3–6% of
GDP. Much of the formal research on the effects of infrastructure has exam-
ined macroeconomic or industry-wide variables. Usually, they all find that infra-
structure has a significant and positive effect on economic growth. More recent
studies have approached this empirical question by using micro-level data,
avoiding the problem with externalities.
The positive impacts from infrastructure are not derived from investments
in physical facilities, but rather from the services generated. Four conditions are
necessary to realize these impacts on economic development:
1. The basic macroeconomic climate should be conducive to an efficient allo-
cation of resources.
2. Infrastructure projects can raise the returns to other resources only when a
sufficient complement of other resources exists; infrastructure investments can-
not create economic potential, only develop it.
3. Infrastructure activities that have the most significant and durable benefits in
terms of production and consumption are those that provide the degree of reli-
ability and quality of services desired by users.
4. Infrastructure is more likely to be economically efficient, and to have favour-
able impacts on the environment, when it is subject to user charges.
The impact on international competitiveness is quite direct. Inadequate infrastruc-
ture cripples the ability of countries and industries to engage in international trade.
Increased globalization has resulted not only from economic factors such as trade
policy and the integration of financial markets, but also from major advances in
communication, information technologies and transportation. Those infrastruc-
ture investments are linked to productivity and to aggregate sales (Peters, 1992).
Trade policies
Trade policies play a critical role in determining industrial competitiveness
through two main avenues: first, directly, through the impact on the cost of pro-
duction and the price of commodities and products; and second, indirectly,
through the impact on market access and on global market trends. The first of
Enabling Environments for Competitive Agro-industries 153
these routes is, to some extent, within the control of national policy makers, who
can strategically exploit policy instruments to direct creation of competitive
advantages or to reinforce existing ones. The second is within the control of only
those nations with enough global market power in specific industries, or, more
commonly, is subject to the lobbying powers of those market players who con-
trol the largest global market share. In either case, trade policies may facilitate
increased firm-level productivity; they may also severely stunt industry growth.
Conventional assessments of the business environment address trade poli-
cies to a limited extent, often focusing narrowly on the impact of tariffs and
costs of trade on business profitability. In practice, however, trade control
instruments may take numerous forms, ranging from direct taxes and quantity
controls, to indirect instruments such as monetary policy and technical meas-
ures. In the agribusiness sector, the debate is further complicated by the pres-
ence of sector-specific characteristics with respect to market organization and
trade patterns. We discuss here sector traits pertaining to market access, mar-
ket power and preferential trade agreements. As the discussion shows, these
unique characteristics of the agriculture sector call for specialized analysis meth-
ods in business environment assessment.
Market access regulation, a major globalization challenge of this decade,
has been shown to have, in specific cases, significant impacts on industry prof-
its and growth. In the agriculture sector, non-economic (sometimes irrational)
motivations for trade protection are fairly high, access of agricultural goods into
major world markets is severely restricted by the presence of subsidies and
world market prices are substantially distorted. In some cases, legitimate trade-
monitoring measures (e.g. sanitary and phytosanitary standards) have been
used to restrict entry. Market access has also been restricted through tariff
escalation, an instrument employed to protect or develop one’s manufacturing
industry using inexpensive raw material imports. Those forms of trade barriers
in local or foreign markets are important in explaining international differences
in competitiveness of specific subsectors.
Government intervention in agricultural commodity marketing has histori-
cally been quite high, evidenced by the presence of state-owned commodity
marketing boards and various forms of price controls (direct controls, subsidies
and market supply restrictions). The agriculture sector is one of the few sectors
in which producer associations are not only legal in most countries, but also
prevalent and sometimes encouraged. Export boards with autonomous export
authority also exist for specific products in both developed and developing
economies. As a result, global and local agricultural markets are distorted by
the presence of big players, with implications on business competitiveness.
However, this trend or ability is being dramatically curtailed.
The agriculture sector, apart from other natural resource sectors, is a large
player in north–south preferential trade arrangements (PTAs). Notwithstanding
the potential openness gains, these trade arrangements can also distort market
incentives. In many cases, PTAs develop demand for specific commodities,
hence foster competitiveness and industrial growth for those commodity sec-
tors. Assessment of agribusiness climates, therefore, ought to highlight such
trading arrangements.
154 R. Christy et al.
Policies, tariffs and quotas for imported products
Trade and domestic support policies related to import of competing products are
areas of contention between many countries, as seen in the World Trade
Organization. Many WTO member states argue in favour of some reductions in
trade restrictions and domestic support, but there is little consensus on the rate
of reduction, commodities to be affected and special and differential treatment.
The distortions caused by these policies potentially hamper the ability of agribusi-
nesses in emerging markets to be as productive and as profitable as possible.
Considering the years of policy analysis conducted by OECD and the World
Bank, developed economies have had relatively high tariffs and domestic sup-
port for agricultural products relative to developing economies. As the recent
case of the USA versus Brazil suggests, at least in cotton markets, these poli-
cies have put emerging economies like Brazil’s at a disadvantage in interna-
tional markets.
A concern about global competition in light of agricultural policies is that
the competition is not fair. Since some countries, especially developed coun-
tries, are using trade and domestic policies to protect and/or promote their
products, developing countries should do the same. The policies of developed
countries may limit the opportunities of emerging economies. Retaliatory
trade or domestic support policies, however, are not an ideal response to pol-
icies of other countries. Given the budgets of many large, developed countries,
the outcome of policy competition is that smaller developing countries will be
unable to compete. Instead, the Brazilian example exemplifies an approach
that developing countries should consider: if the policies of other countries are
unfair, challenge them in the appropriate dispute settlement bodies. As recent
events have shown, developing countries can use the WTO and other interna-
tional bodies to their advantage to bring about change.
‘If you can’t beat them, join them’ is an adage that should not be followed
as it relates to agricultural policy and trade. One way for developing countries
to ‘join them’ is by using policies to promote domestic industries under the
guise of promoting an infant industry. The old infant industry idea is simply
that – old and, worse, debilitating. The infant industry argument suggests that
countries could be competitive in a particular industry if only the countries were
able to provide appropriate protection through trade and domestic support
policies so that the infant can mature. The problem with the infant industry
idea is that once policies are in place they are hard to remove. The infant rarely
is considered to have grown old enough for protections to be removed. Like a
child who is never allowed to mature by an overly protective parent, the infant
industry struggles to become efficient and competitive in global markets because
the protection of the government prevents maturation. Infant industry policies
often promote and foster inefficiencies. If the infant industry produces an input
for a domestic agribusiness, the inefficiencies, often seen as increased costs,
will transfer to the agribusiness. For governments to create an enabling envi-
ronment, they must create policies that promote efficiency through investment
with technology transfers. Internal investments are longer-term goals, but in
time they will generate great benefits. Competition will promote great efficien-
cies, which will promote industries that thrive.
Enabling Environments for Competitive Agro-industries 155
Important enablers
Norms, standards, regulations and services related to production
Among the greatest benefits and challenges of globalization is the meeting of
different cultures. One expression of this meeting of cultures is the differences
of opinions as they relate to norms, standards, regulations and services related
to production, processing and distribution of agrifood products. Because of
history, perception of national identity, religion, etc., citizens of different
countries have different conceptions of food and its role in their lives. For
example, Europeans who want traceability of food products back to the farm
of origin have been deeply influenced by food scares. That interest is not dif-
ferent from that of the US producer who produces genetically modified soy-
beans and believes that, because science has generated this product and the
US government has approved its use, GM soybeans are safe and beneficial.
Consumers and producers in other regions of the world do not necessarily
share those perspectives. In particular, some nations’ approach to animal wel-
fare and GM products are adamantly opposed by others. These generaliza-
tions point to the varying views that consumers have of norms and
standards.
Diversity of perspectives provides a complex environment for agro-
enterprises. If all of the norms and standards were on a single continuum of
relative restrictiveness, an agro-enterprise could simply produce at the higher
standard and sell products to all at that higher standard. But standards and
norms may not fall on a single continuum of restrictiveness. Consider an agri-
food firm that distributes nationally and exports to two different countries. One
country prescribes a maximum residue level that the firm’s product must sat-
isfy. Another country demands that the agribusiness firm assure that the pro-
duct is produced in a manner deemed equitable, as determined by the grocery
store purchasing the product. Finally, on the domestic market, the agribusiness
firm must achieve a high quality standard because local consumers are familiar
with the product and are particular about its quality. The first problem is how
to manage different standards for different customers. The achievement of one
standard may be in conflict with the achievement of the others, at least in the
short run. To sell the same product to all three markets may be costly, because
a market may not be interested in the standards of the other markets. Above
all, the cost of achieving all of the norms and standards of the three different
markets may be prohibitive.
Countries change standards. Agro-enterprises must keep abreast of the
various quality and hygiene standard changes. According to the WTO’s Sanitary
and Phytosanitary Agreement, countries are obliged to notify exporters of
changing standards that fall under the purview of that agreement via enquiry
points. However, every norm and standard do not fall under the purview of the
Sanitary and Phytosanitary Agreement. Additionally, firms face not only the
standards of the countries that import the products, but also the standards
imposed by importing firms, especially food retailers. In this complex web of
standards, governments can create enabling environments to assist agricultural
producers and other agrifood chain stakeholders, by providing any information
156 R. Christy et al.
that can keep firms aware of changing standards. Governments can also pro-
vide financial and technical assistance to meet the standards of importers; in
addition to supporting research institutes and product marketing institutes.
Using the mechanisms of the WTO and other international organizations, gov-
ernments can access resources to help firms meet new standards.
Research and development
Agricultural research has long been recognized as critical to increasing agricul-
tural productivity and thereby reducing extreme poverty and hunger (Ruttan,
1975; Herdt, 2009). Equally important but less accredited is the role of agri-
cultural research in establishing and maintaining the competitiveness of the
agro-industrial sector. Numerous examples showcase how technology can
reverse a competitive advantage bestowed by nature. For example, Israel’s
agricultural exports (currently valued at approximately US$600 million annu-
ally) continue to grow despite the country’s near-desert conditions. Technologies
for most non-agricultural industries may be transferred between countries –
usually from developed to developing countries – with minimal or no adjust-
ments, thereby allowing for the much-acclaimed ‘technological leapfrog’ by
developing countries. For agro-industries, however, culturally specific food
consumption patterns, coupled with diverse agro-ecological conditions, may
limit the scope of technology transfer. This specificity underscores the impor-
tance of agricultural research in creating an enabling environment for agro-
industries.
The structure and context of agricultural research have changed signifi-
cantly over the last 2 decades. Table 2 shows the annual growth rate of global
public agricultural research expenditures from 1976 to 1996. Three key
trends are worth pointing out. First, the growth rate of agricultural research
expenditures has declined globally in both developing and developed countries
since the mid-1970s. Second, while developing countries’ growth rates were,
on average, higher than those of developed countries, the Asia and Pacific
region had the highest growth rates followed by the Middle East and North
Table 2. Annual growth rate (%) of global public agricultural research expenditures,
1976–1996. (From Pardey and Beintema, 2001.)
Region 1976–1981 1981–1986 1986–1991 1991–1996 1976–1996
Developing countries 7.0 3.9 3.9 3.6 4.5
Sub-Saharan Africa 1.7 1.4 0.5 ?0.2 1.5
China 7.8 8.9 2.8 5.5 5.2
Asia and Pacific, excluding
China
8.2 5.1 7.5 4.4 6.5
Latin America and the
Caribbean
9.5 0.5 0.4 2.9 2.5
Middle East and North Africa 7.4 4.0 4.2 3.5 4.8
Developed countries 2.5 1.9 2.2 0.2 1.9
Total 4.5 2.9 3.0 2.0 3.2
Enabling Environments for Competitive Agro-industries 157
Africa. Third, SSA countries had the poorest performance, with an average
annual growth rate of only 1.5% for the period of analysis and actual decline
in the early 1990s.
Agricultural research expenditures by the private sector are large and grow-
ing, especially in developed countries. Figure 4 shows the breakdown of agri-
cultural research expenditures by funding sources in 1995. For developed
countries, private-sector expenditure in agricultural research (US$10.8 billion)
has outstripped public expenditure (US$10.2 billion), whereas in developing
countries agricultural research is still very much the domain of the public sector
(US$11.5 billion in the public sector versus US$0.7 billion in the private
sector).
Given the prominence of public funding and public research institutions
(mostly national agricultural research organizations (NAROs) and the Con-
sultative Group of International Agricultural Research (CGIAR) ) in develop-
ing countries, emphasis should be placed on bridging the gap between
research and commercialization in order to enhance competitiveness of the
entire agro-industry value chain. As currently structured, a distinct discon-
nect exists in agro-industry value chains for most developing countries. This
is the gap between product development (undertaken mostly by public
research institutions) and commercialization (mostly by private agribusiness
firms). Numerous techno logies have been developed through publicly funded
NAROs and CGIAR research centres, such as the International Maize and
Wheat Improvement Center, International Crops Research Institute for the
Semi-arid Tropics, International Institute of Tropical Agriculture and
International Potato Center. Most of these technologies are still ‘sitting on
the shelves’ while the private sector is struggling to commercialize a limited
range of outdated technologies.
If agricultural research is to enhance agro-industry competitiveness in
developing countries, policy makers should focus on identifying ways to better
0
2
4
6
Developed countries
Agricultural research expenditures (US$ billion in 1995)
Developing countries
Private Public
8
10
12
14
Figure 4. Agricultural research expenditures, 1995. (From Pardey and
Beintema, 2001.)
158 R. Christy et al.
coordinate the flow of agricultural technology from public discovery to private use.
In accomplishing this objective some important questions should be addressed:
?
What are the key barriers (cost- and non-cost-related) to technology trans-
fer between public research institutions and private seed companies?
?
What are the sources of institutional innovation in promoting successful
public–private partnerships?
?
What is the role of the policy and regulatory framework in impeding or
accelerating technology development and transfer?
Financial services for agro-industries
Access to finance is one of the key constraints to agro-industrial development
and success. Firms in the agricultural sector often have difficulty in accessing
capital for either new ventures or expansion of existing business as they are
perceived to be high-risk
1
businesses with low returns. As a result, an agribusi-
ness portfolio is not an attractive option for investors who tend to have an
appetite for high returns if high risk (and a narrow inter-temporal investment
horizon) is involved. Importantly, the risk profile of agribusinesses differs from
that of other sectors in that the former are faced with both inter- and intra-
marketing year price and production risks. These risks have further been pro-
pelled by the increased globalization of the free trade in agricultural commodities.
The agribusiness credit crunch is further exacerbated by most bankers’ igno-
rance of the sector, which increases the chance of loan applications being dis-
missed entirely on the perception of low profitability. To this end, there exists
a dire need to create an enabling environment for the provision of financial
services to the sector.
Though prevalent in developing countries, the problem of accessing finance
is not confined to these countries as it was an issue at some point for industrial-
ized countries as well. For instance, concerned with farm credit, the US gov-
ernment established a farm credit system in 1916, which is currently
administered by the Farm Service Agency of the US Department of Agriculture.
The extensions of this programme and supportive legislature have been funda-
mental to the development of the US agro-industry.
The intangible nature of financial services requires a strong regulatory envi-
ronment for financial markets to develop and function effectively. As a result,
in the short term governments need to take the lead in building confidence,
trust and stability among participants in these markets. One way of doing so
would be to act as guarantor for loans to the agro-industry. In the long term,
well-defined property rights, particularly in farming, would be crucial to enable
use of real estate as collateral in accessing traditional financial markets. It may
be necessary to build a farm credit system following the US model. Overall, the
evolution of financial markets for agriculture has been observed to parallel gen-
eral financial market development; hence a necessary condition for the former
is functionality of the latter.
1
Risks inherent in agribusiness include changes in climate (drought, flooding), price volatility
and production variability.
Enabling Environments for Competitive Agro-industries 159
Since agro-industries are a high-risk but relatively low-margin segment of
the economy, their success will require innovative and flexible ways of hedging
against risk. One means of reducing price risk would be through the use of
commodity futures exchange markets. Proper functioning of a futures market
depends on enforceability of contracts and a dependable information system.
Crop insurance, on the other hand, would be instrumental in mitigating pro-
duction risks due to natural catastrophes.
While creating an enabling environment for agribusiness finance, special
attention needs to be accorded to small- to medium-sized agribusiness entities
considered too small to access traditional capital markets, but too large to
depend entirely on personal or family savings. Agribusiness entities in this size
category are increasingly becoming important to developing country govern-
ments ever mindful of the need to ensure food security for their populations.
Useful enablers
Ease of Doing Business
One of the functions of governments is to regulate economic activities to reduce
inefficiencies arising from market failures, in order to improve economic and
social outcomes of specific countries. Regulations, however, have to be done in
less costly and burdensome ways to facilitate doing business and to attract
investments that promote economic development and ultimately reduce pov-
erty. Governments around the world have implemented macro economic
reforms to attract foreign capital through the domestic and international pri-
vate sectors, thereby making domestic industries more competitive. Since
2004, those governments’ reforms have been considerably influenced by the
World Bank’s Doing Business project, because countries want to improve their
rank in the Ease of Doing Business Index so as to provide signals to investors
interested in FDI. In spite of the implementation of those reforms, vibrant pri-
vate-sector engagement in specific economies remains limited, poverty rates
are high and growth continues to be static in a number of countries.
Although macroeconomic policies are undoubtedly important to promote
economic development, it is now widely recognized that the quality of business
regulation and institutional arrangements to enforce it are determinants of eco-
nomic prosperity. Findings of Ease of Doing Business show that a hypothetical
improvement of all aspects of the Doing Business indicators to a level com-
mensurate with the top quartile of countries is associated with an estimated
1.4–2.2 percentage points in annual economic growth, whereas a similar
improvement in macroeconomic and education indicators results in 0.4–1.0
percentage points in growth. Ease of Doing Business consistently indicates that
countries with excessive regulation for doing business and weak property rights
generally have lower labour productivity, higher poverty rate, more exclusion
of the poor from doing business, slower economic growth rate, lower human
development indicators and higher levels in the incidence of corruption.
Countries would benefit from simplifying their regulations for doing business in
two ways. First, entrepreneurs not only would spend less time dealing with
160 R. Christy et al.
government regulations (e.g. business licensing and registering, contract
enforcement and resolving disputes), but would also focus their energies on
producing and marketing their goods and services. Second, governments would
spend fewer resources regulating and more providing basic public goods such
as infrastructure to improve economic and social outcomes.
The Doing Business project (World Bank, 2007) reports that Sweden, a
top-10 country in Ease of Doing Business, spends US$7 billion a year, or 8% of
the government budget, and employs an estimated 100,000 government offi-
cials to deal with business regulations. If Sweden cuts expenditures on the
administrative burden by 15%, the savings would amount to 1.2–1.8% of the
total government expenditures, or approximately half of the public health
budget. The data analysed in Doing Business highlight that reducing the number
of procedures to only those truly necessary (statistical, tax and social security
registration), abolishing the minimum capital requirement and using the latest
technology to make the registration process electronic have produced excellent
results in Canada, Honduras, Mexico, Pakistan and Vietnam. Those reforms
may be difficult to implement because political will in government and private
sectors may differ, but they have beneficial effects beyond business entry. Cross-
country evidence has shown that the countries that have the greatest need for
entrepreneurs (to create jobs and to promote growth) – poor countries – put the
most regulatory obstacles in their way.
Business development services
Successful investments in small- to medium-sized enterprises must be paired
with appropriate firm/ business management assistance and access to value-
added business networks in emerging markets. Although investors worldwide
are pursuing investments in emerging markets, studies have confirmed those
efforts to be particularly challenging.
Business development services draw upon formal qualification in areas
such as finance, accounting, marketing management, economics, law and
other technical expertise. Aside from an academic grounding in one or more
of these disciplines, however, possibly a more essential prerequisite, and one to
which the industry refers, is experiential knowledge. As the term suggests, it is
the knowledge obtained from actual experience (‘learning by doing’). How one
obtains such knowledge, e.g. through structured mentoring by and/or informal
consultation with more seasoned professionals, is especially important since
many services do not require prior formal qualification in a ‘closed’ profession
such as accounting, engineering, law or architecture. Finally, provision of these
services will often draw, but only selectively and for limited periods, on particu-
lar domain expertise and knowledge. For example, vetting of a proposed
investment in an agribusiness company will require expert ‘technical knowl-
edge’ of the product in question, including issues such as plant breeding,
processing, packaging and certification, among others.
Formal academic and professional qualifications are often, but not always,
a necessary condition for undertaking a particular service. More important,
especially for undertaking critical services within the investment cycle, is
experiential knowledge, often confused with domain expertise. The latter
Enabling Environments for Competitive Agro-industries 161
refers to expert knowledge, which, as noted earlier, may be needed to pro-
vide various services associated with the investment cycle. One such example
is technical knowledge of processes for producing high-quality food products.
Clearly, it is needed to evaluate proposed investment in a plant producing
such a product. What proved equally significant in terms of appraising the
investment was the supervisors’ and managers’ accumulated experience,
through past jobs, in operating and maintaining the equipment in question,
as well as other processing-related activities.
The international donor community and national governments have
attempted to strengthen business management services, especially those pro-
vided by local professionals. Broadly speaking, their efforts fall into three cat-
egories: (i) increasing the supply of providers; (ii) stimulating the demand for
various services; and (iii) addressing issues of both supply and demand within
the parameters set by specific investments.
Donors and state agencies have promoted small- and medium-sized enter-
prises in three different areas: financial services, business development services
and government-mediated business environment. An immediate motivation is
the desire for a higher degree of self-financing because of cutbacks in support
from government and private givers. This objective, however, also coincides
with growing realization of the need for commercial acumen and expertise to
fulfil their corporate aim of improving the lives of poor and disadvantaged peo-
ple in the countries in which they are operating. Indeed, some have been
severely criticized for past, ill-informed interventions that, far from improving
the lot of poor farmers, have actually worsened it. Overall, there is increased
realization that a market-based approach is much more likely to improve the
living standards of those people the organization is seeking to assist.
Business linkages
Linkages for large agribusinesses in the supply chain are both horizontal (i.e.
between enterprises that are on the same level of the supply chain) and vertical
(i.e. between enterprises that are on different levels of the supply chain). Most
horizontal linkages pertain to large and small agro-industries, while vertical link-
ages pertain to large agro-industries, farmer groups and buyer networks. Of the
two, horizontal linkages are less common due to the lack of incentives for large
agro-industries to pursue such relationships. Large industries may subcontract to
their smaller counterparts in order to satisfy a market opportunity. Such arrange-
ments may not have indirect spillover effects like the transfer of technology and
information. Alternatively, large agro-industries may jointly bid for contracts
with smaller firms and, in so doing, increase their access to markets.
On the other hand, vertical linkages are more beneficial to both parties
(large agribusinesses and farmer groups), because in most cases they entail long-
term direct and indirect benefits. Large agro-industries pursue linkages with
farmers or farmer groups in order to access a steady supply of raw materials.
The extent of these linkages may vary from a ‘one-time’ engagement to a long-
term contractual relationship. In the latter case, the large firm may invest in
training farmers in the production of a particular agricultural commodity; fur-
ther, it may also provide capital for the purchase of agricultural inputs. The goal
162 R. Christy et al.
of such a relationship is to ensure a steady supply of a desired or specified prod-
uct for the large firm. Farmers, in turn, derive benefit from this relationship.
First and foremost, they now have a steady market for their farm output, and
therefore a steady income stream. In addition, they have acquired farm manage-
ment skills that enable them to produce a quality product. This is to farmers’
advantage – should the business relationship with the large firm cease, farmers
are competitive enough to pursue relationships with other firms. Further, farm-
ers now have access to technologies in the form of improved inputs like seeds
and fertilizers that should improve their productivity and profitability.
Vertical linkages should be encouraged by public policy makers because
they have the potential to eradicate poverty at the smallholder farm level
through income generation. Specifically, policy support should be directed
towards the formation of farmer groups so as to reduce the risk of insufficient
supply. In addition, farmer groups are better equipped than individual farmers
to negotiate favourable contract terms with large agribusinesses. The business
relationship is economically attractive only if farmers realize higher profits than
they would have had they pursued alternative markets.
Reforming Enabling Environments
How can we reform the public process, in the context of radical change, to
creatively enact policies that improve the relative competitiveness of agro-
industries in emerging markets?
As discussed in the literature, ‘economic reform’ is the process by which
emerging economies are transformed from state-led to market-driven princi-
ples with the goal of advancing economic prosperity. This view puts the gov-
ernment as the primary driver of the reform process with measures that, in
sequence, include privatization, tax reform, fiscal discipline, trade liberalization,
deregulation of economic activities, price liberalization, decontrol of interest
and exchange rates, elimination of state subsidies and enforcement of intellec-
tual property rights. Because of the rapidity of globalization, however, we
observe a more parallel reform process, one in which state and private sectors
act in concert to create an enabling environment. Therefore, in this chapter we
take a more ‘nuanced view’ of the reform process, capturing a more dynamic
(i.e. one that goes through multiple phases) and inclusive process in which the
private sector can play a leading role in certain cases. Further, we acknowledge
the wide diversity of experiences in transitional economies over the last 2 dec-
ades emanating from different starting points, economic structures, the con-
duct of both private and public stakeholders and the desired outcomes. The
central role of the agricultural sector, coupled with a long history of state con-
trol, places agricultural market reform at the centre of most economic liberali-
zation efforts in transitional economies. For brevity, we focus on agricultural
sector reform, although of course the agricultural sector exists and evolves in a
more dynamic and broader macroeconomic environment.
Like most other private enterprises, agricultural firms tend to be risk
averse. Consequently, they require a higher rate of return (a risk premium)
Enabling Environments for Competitive Agro-industries 163
before they can invest in a risky environment. From the perspective of a
private agribusiness enterprise seeking to maximize expected profits, the
enablers discussed in the preceding section can be seen as ways to augment
the expected profit function by altering the production functions, the input
and output prices, and lowering the risk and uncertainty.
2
A key distinguish-
ing feature of the agricultural sector, compared with other sectors of the
economy, is the high prevalence of risk and uncertainty that result from both
natural and human-made phenomena. While some sources of risk are com-
mon to all businesses, others are unique to agribusinesses.
Governments in most transition economies have played a key role in shap-
ing the process and outcomes of economic reform, but, in reality, they have
varying degrees of ‘capacity’ that limits their ability to influence the environ-
ment in which private enterprise operates. Despite the premise of ‘rolling back
state involvement’ as the basis for agricultural reform, we recognize the essen-
tial role of the state in advancing essential enablers, important enablers and
useful enablers that target agro-industries.
Presented in Figure 5, our model for analysing the agricultural sector
reform process in developing countries is centred on two key variables, risk and
capacity. We use those variables to formulate a matrix. Along the vertical axis
2
Frank H. Knight (1921) was the first to distinguish between ‘risk’ and ‘uncertainty’. Risk refers
to situations in which the decision maker can assign mathematical probabilities to the random-
ness of an event based on past experiences. In contrast, uncertainty refers to situations when
this randomness ‘cannot’ be expressed in terms of specific mathematical probabilities.
Enforce grades
and standards
Maintain
competiveness
Promote
innovative
institutions
Develop
essential
enablers
• Scenario 1
• e.g. Uganda seed
sector
• Scenario 2
• e.g. Malawi
subsidy programme
• Scenario 4
• e.g. Food processors
in South Africa
• Scenario 3
• e.g. Rise of
supermarkets
High risk
Low risk
Low
capacity
High
capacity
Figure 5. Agricultural sector reform in developing countries.
164 R. Christy et al.
we map the level of risk and uncertainty agricultural enterprises face when
conducting business (investing, starting and expanding agribusinesses). This
risk variable summarizes the attractiveness of the ‘business climate’ from the
point of view of current and potential agribusiness investors. Along the hori-
zontal axis we map the level of ‘capacity’ the state has in shaping the environ-
ment for business, usually but not exclusively exerted through the ministry of
agriculture. Many of the elements required to create an enabling environment
for agro-industries are outside the usual mandate of many ministries of agricul-
ture. Realizing this limitation allows for more careful scenario planning that
takes into account the unique context facing each country. From this matrix,
four stylized cases for reforming the agricultural sector emerge. In the bottom
right quadrant, scenario 1, we encounter an environment that is risky and has
high state capacity. Scenario 2 in the lower left quadrant describes an environ-
ment that is risky and has low state capacity (promote innovative institutions).
Continuing clockwise, in scenario 3 we have an environment that is low risk
and has low state capacity (enforce grades and standards) and finally in
scenario 4 the environment is low risk and has high state capacity (maintain
competitiveness). Below, we discuss each of these four ‘stylized scenarios’ using
country- and sector-specific examples.
Scenario 1: High risk and high capacity
If the state has high capacity and the economy is uncertain, then the state
encourages private-sector investment by clearly defining the ‘rules of the
game’. Such rules would include all ‘essential enablers’ identified in the hier-
archy of enablers pyramid (see Figure 3). A good example of a successful
agro-industry under high control and high risk is Uganda’s vibrant seed
industry (see Box 2). In 1994, the government led a significant transition
from a seed system monopolized by the government at all levels (research,
production, processing, distribution and extension services) and made way
for the private sector by enacting the Agricultural Seeds and Plant Statute
(Muhhuku, 2002). The statute provided for ‘the promotion, regulation and
control of plant breeding and variety release, multiplication, conditioning,
marketing, importing and quality assurance of seeds and other planting
materials’ through the National Seed Industry Authority, the National Seed
Certification Services and the Variety Release Committee (Government
of Uganda, 1994). Currently, Uganda has a highly competitive private-
sector-led seed industry in which local, regional and multinational seed com-
panies produce and distribute seeds in both domestic and East African
markets (mostly Sudan and Tanzania).
Scenario 2: High risk and low capacity
Perhaps the least attractive investment climate for agro-industries is the one
characterized by limited government capacity and high risk. This scenario
applies to many of the least developed countries. In most cases the state lacks
the resources or commitment to create the essential enablers. Policies and
regulations are ill defined and/or unenforced. If there is strong comparative
advantage based on natural endowments, however, some agro-industries have
Enabling Environments for Competitive Agro-industries 165
Box 2. Seed industry reform in Uganda.
During the past 5 years the Government of Uganda has launched a number of important
programmes, at the core of which agriculture is given high priority. Most notable is the 2000
Poverty Eradication Action Plan, which includes the Plan for the Modernization of Agriculture
(PMA). Under the PMA, the government is focusing on the National Agricultural Advisory
Services (research and technology development, education, marketing and agroprocessing
and natural resource management), which aims to develop an agricultural service delivery
system that is client-oriented, i.e. where farmers can determine the services they need. The
government also recognizes that an important factor in improving agricultural productivity
and production is the use of modern inputs, including seeds.
Uganda has made important progress towards economic growth and poverty reduction
since the late 1980s. In the 1990s, annual gross domestic product (GDP) growth climbed
steadily to 6.9% from a 3% per annum growth rate in the 1980s. This impressive growth
appears to be linked to the set of economic policies that advanced structural adjustments
within the economy. The government liberalization of the foreign exchange rate was a sig-
nificant economic reform that provided incentives to major sectors of the economy: agricul-
ture, industry, trade and tourism. Despite the economic growth record, concerns about the
macroeconomic environment still exist. According to an International Center for Soil Fertility
and Agricultural Development report (IFDC, 2003), the economic environment remains
unfriendly because of the continuous depreciation of the Ugandan shilling, high interest
rates and limited access to finance.
In line with the overall government policy, the government of Uganda fully liberalized
the seed industry in the early 1990s, and privatized its operations in 1993. By 2005, six
new private seed companies had entered the market. In addition to Uganda Seed Project,
the private seed companies operating in the country are East African Seed Company, Farm
Inputs Care Center, Harvest Farm Seeds, Kenya Seeds, Nalweyo Seed Company Ltd and
Victoria Seeds Ltd. Seed Co. International from Zimbabwe and Pannar Seed Company from
South Africa have also had their seeds tested and adopted in Uganda through distributors.
The National Agricultural Research Organization (NARO) is responsible for the produc-
tion of both breeder seed and foundation seed. Currently, agricultural research is fragmented.
The research facilities are financially constrained and as a result the operation of the breed-
ing programme is affected. In a competitive, liberalized market, seed companies compete on
the strength of their breeding programmes and their ability to introduce new and improved
varieties. The relationship between NARO and the seed companies is evolving.
The regional harmonization of seed laws and regulations for East African countries
(Kenya, Tanzania and Uganda) that is currently under way has opened national borders for
regional seed trade. For private seed companies, the harmonization will present new oppor-
tunities (expanded markets) and challenges (increased competition).
performed well under these environments. The case of gum arabic
3
from Sudan
is a stark example. World trade in gum arabic was estimated to be US$90 mil-
lion in 2000, with 56% of the traded volume coming from Sudan, and much
of the remainder from Chad and Nigeria (Cecil, 2005). While these countries
possess the natural resource, their governments have done little to create an
enabling environment for the gum arabic industry.
3
Gum arabic, a natural gum also called gum acacia, is a substance that is taken from two sub-
Saharan species of the acacia tree, Acacia senegal and A. seyal. It is used primarily in the food
industry as a stabilizer and is a key ingredient in soft drinks (Fennema, 1996).
166 R. Christy et al.
If the state has limited capacity, and the economy is uncertain, then the
state should provide incentives for creative institutional innovations, like private–
public partnerships, civil society organizations, non-governmental organizations
and perhaps corporate social responsibility (Box 3).
Box 3. Agricultural input supply programme in Malawi.
Agriculture is the mainstay of the economy of Malawi, where 90% of the population lives in
rural areas and more than 70% heavily depends on farming for livelihood. Agriculture con-
tributes about 38% of the gross domestic product (GDP), accounts for 80% of export earn-
ings and employs 80% of the country’s workforce. Maize is the dominant staple food, while
tobacco, sugar, coffee and tea are important cash crops. Smallholder farmers cultivate
nearly 80% of the total cultivated area in the country and devote 85% of their cultivated land
to maize production. Agriculture is characterized by low use of purchased-input technolo-
gies, high land pressure due to an increasing population growth, periodic flooding and
droughts, and continuous cropping of the same land area with little replenishment of the
nutrients, leading to decreasing soil fertility. Adoption of higher-yielding seed varieties and
fertilizers, better crop management and better water control are critical for improving agri-
cultural productivity in the country.
The Government of Malawi (GOM), as other governments in southern Africa, has imple-
mented a number of input interventions to increase agricultural productivity and food secu-
rity to ultimately reduce poverty. Major agricultural input interventions include the Starter
Pack Program (SPP), the Targeted Input Program (TIP) and the Fertilizer Subsidy Program
(FSP). GOM, the European Union and the Department for International Development (DFID)
among other donors have been jointly funding these agricultural input interventions.
In 1998, the GOM initiated a ‘free’ SPP aimed at stimulating use of fertilizers and improved
seeds of cereals and legumes to raise national output to reduce food imports. In addition to
supporting extension services, under the auspices of the SPP, fertilizers and improved seeds
of cereals and legumes were supplied free-of-charge to smallholder farmers. The SPP had a
country-wide coverage and resulted in a significant increase in agricultural production, reduc-
ing production deficits. Its financial and economic viability, however, has never been compre-
hensively evaluated. Thus, the effectiveness of the SPP has been questioned.
In response to extreme drought and low agricultural productivity in early 2005, the GOM
introduced a universal FSP in replacement of the TIP during the 2005/06 agricultural sea-
son. The FSP favours poor farmers with the land and human resources to use fertilizer
efficiently, when they could not otherwise afford to buy enough fertilizer and improved seed.
The FSP focuses on maize as a food crop and tobacco as a cash crop. Thus, two subsidy
fertilizer packages are distributed country-wide: one for maize and the other for tobacco.
Due to large amounts of cross-border trade, vouchers are to be used to effectively target
Malawian smallholder farmers as opposed to neighbouring countries’ farmers. Vouchers of
different colours are issued depending on the fertilizer package to be redeemed. Also, the
subsidized price to be paid by the beneficiary is indicated on the voucher to avoid fraud and
ambiguity. Maize farmers pay lower subsidized fertilizer price than tobacco farmers. On
average, the GOM subsidize about 76% of the commercial price of fertilizers. In addition to
fertilizer vouchers, farmers are entitled to receive a maize seed bag for free once they
redeem their fertilizer vouchers.
In the 2006/07 agricultural season, almost 1.5 million farmers received vouchers for the
purchase of 150,000 t of fertilizers and two million farmers received vouchers for free maize
seeds. The Ministry of Agriculture and Food Security allocates over 50% of its budget to
continued
Enabling Environments for Competitive Agro-industries 167
Scenario 3: Low risk and low capacity
In scenario 3, the state has relatively little capacity, and the economy has a
greater degree of certainty. Due to the low-risk environment, the private sector
will emerge to exploit any economic and commercial opportunities available in
the agricultural sector. The state should focus on facilitative policy measures
that seek to provide public goods. Policies that fall under this category include
collection and dissemination of market information, standardization of product
grades and their enforcement, standardization of weight and volume measures,
and setting and enforcing standards and laws to protect consumers and the
environment. Due to the public good dimensions that are associated with these
types of services, we envision that they will be provided by government agen-
cies at public expense.
The rise of supermarkets in developing countries (East and South-east Asia,
Latin America and a number of countries in SSA) epitomizes this scenario (see
Box 4). Some key lessons on reforming the agricultural sector can be drawn from
this case study. First, transformation of the agro-industry does not require all
enablers to be in place before the private sector can invest. Instead, some push
factors in developed countries, coupled with the prospects for higher margins in
developing countries, can attract FDI. Second, the sequencing of the reform
process (usually framed with government playing the lead and the private sector
following) can be reversed (government adapting to meet the needs of the private
sector), and in most cases takes place as a complex and dynamic process with
checks, balances, negotiations and feedback loops between the private and pub-
lic sectors. Third, once a sector of the agro-industry builds critical mass, the pri-
vate sector often evolves to fill in the gaps in the facilitative measures that are not
provided by government (e.g. setting up and enforcing grades and standards).
Scenario 4: Low risk and high capacity
In scenario 4, the state experiences improved capacity and the economy has
lower risk. This scenario often arises at the end of a successful reform process.
The role of government should be limited to measures that maintain and sus-
tain competitiveness through the provision of public goods, enforcement of
antitrust regulations and protection of intellectual property rights (Box 5).
Box 3. Continued.
implementation of the FSP. No comprehensive evaluation has been conducted on the imple-
mentation and impact of the FSP, but it has bolstered agricultural output, increasing food sec-
urity. In combination with favourable rains, the FSP has significantly contributed to increases in
maize production. It has also increased smallholder farmers’ access to fertilizer and to improved
maize seed. Although Malawi was experiencing grain deficits in 2005, in 2006, the country
produced an estimated surplus of 1.2 million tonnes of maize. Part of this surplus was exported
to Zimbabwe, Swaziland and Lesotho, raising smallholder farmers’ income. It is worth noting
that these input interventions have considerably reduced farmers’ demand for agricultural
inputs from the private sector, shrinking private-sector participation in agricultural input and
output markets.
168 R. Christy et al.
Box 4. The rise of supermarkets in transition economies. (Adapted from Reardon
et al., 2004.)
The rapid rise of supermarket chains in developing countries has transformed the market
structure, participant conduct and economic performance of agrifood systems in Africa,
Asia (excluding Japan) and Latin America (Reardon et al., 2004). Intense competition in
home markets, coupled with much higher profit margins in developing countries, spurred
the flow of foreign direct investment (FDI) from American and European supermarket chains
(Gutman, 2002). The liberalization of the retail sector in most transition economies in the
1990s also created new opportunities for investments.
In Latin America, the share of supermarket sales as a percentage of national food retail
sales grew from 10–20% in 1990 to about 50–60% at the turn of the millennium (Reardon
et al., 2004). The supermarket growth trend in East and South-east Asia has been generally
similar to that of Latin America with China topping both size (US$55 billion in 2003) and the
growth rate (30–40% annual growth in 2003) (Hu et al., 2004). Central and Eastern Europe
(CEE) has seen three phases of penetration by supermarkets. First came northern CEE
(Czech Republic, Hungary, Poland and Slovakia), in the mid-1990s, where the share of
supermarkets in food retail had risen to 40–50% by 2004. The second phase was in south-
ern CEE (Bulgaria, Croatia, Romania and Slovenia), where the share grew to 25–30% in
2004 and continues to grow rapidly. The third phase was in Eastern Europe, ‘where income
and urbanization conditions were present for a takeoff but policy reforms lagged, so that the
share in Russia, for example, is still only 10%’ (Reardon et al., 2004). In SSA, the supermar-
kets trend is in the early stages, with South Africa and Kenya leading the field and expand-
ing in their respective regions of the continent.
As noted by Reardon et al. (2004), supermarket chains in developing countries have been
shifting over the past few years away from the old wholesale procurement model towards a
new model in order to close the gap between their supplies and their needs. The four key
pillars of a new kind of procurement system are: (i) specialized procurement agents, or
‘specialized/dedicated wholesalers’; (ii) centralized procurement through distribution cen-
tres, as well as regionalization of procurement; (iii) assured and consistent supply through
‘preferred suppliers’; and (iv) high-quality and increasingly safe products through private
standards imposed on suppliers. The first three pillars require an organizational change in
procurement, while the fourth has resulted in institutional change in the agro-industry value
chain.
Box 5. Collusion in South Africa’s milling industry.
The South African wheat-to-bread value chain comprises farmers, millers, bakers, retailers
and consumers in successive stages of value addition. This value chain is currently charac-
terized by high degrees of concentration, especially in the processing (milling and baking)
sector. The baking industry is the major client of the wheat milling industry and most of the
major millers have vertically integrated with the industrial plant bakeries (National Agricultural
Marketing Council, 2003). Illustrative of the relatively high levels of concentration, currently,
four main milling companies account for 87% of the total milling capacity in South Africa,
while in the baking sector approximately 80% of the bread production is in the hands of six
large baking companies or groups. These levels of concentration are primarily a result of
measures during the period of regulated marketing that restricted the registration of millers
and bakers (National Agricultural Marketing Council, 2003).
continued
Enabling Environments for Competitive Agro-industries 169
Box 5. Continued.
During 1997, the South African wheat-to-bread value chain came under fire because of
collusion in fixing the prices of bread in South Africa. During December 2007, independent
bread distributors in the Western Cape province of South Africa lodged a complaint with the
National Department of Trade and Industry’s Competition Commission that bakeries owned
by three of the big milling and baking companies had unjustifiably raised prices by between
30c and 35c a loaf a week before Christmas. This behaviour raised suspicion of anticompeti-
tive conduct and the Competition Commission referred the case to the Competition Tribunal
for investigation (Seria, 2007). When the Competition Commission referred the case Premier
Foods applied for the Competition Commission’s leniency programme. Premier Foods pro-
vided the Competition Commission with the details of meetings with its competitors, at which
national price increases and discounts were discussed. The result was that the company
escaped being penalized for contravening the Competition Act (Act 89 of 1998) for anticom-
petitive behaviour by colluding to fix the price of bread (Crotty, 2007; Seria, 2007).
With the investigation of anticompetitive behaviour under way, Tiger Brands, another big
milling and baking company, immediately undertook to cooperate with the Competition
Commission. As part of their cooperation Tiger Brands instituted a wider, national and inde-
pendent investigation into its milling and baking operations by commissioning a commercial
law firm, forensic auditors and economic consultants to investigate the matter. Although the
independent investigations found no evidence of abnormal pricing or of consumers being
adversely affected the investigation did find evidence of meetings between Tiger Brands
employees and the employees of competitors (Seria, 2007). These meetings amounted to
anticompetitive activity expressly prohibited by the Competition Act (Act 89 of 1998). Tiger
Brands consequently admitted that the activities of certain employees had contravened the
Competition Act (Act 89 of 1998). These activities amounted to collusion, along with other
millers and bakers, to fix the price of bread in the Western Cape. The Competition
Commission consequently fined Tiger Brands R98.8m and granted the company leniency
against prosecution subject to agreeing to assist the Competition Commission with investi-
gations into possible collusion among millers and bakers (Crotty, 2007). The fine imposed
on Tiger Brands represented 5.7% of their bread sales during 2007 (Seria, 2007).
Conclusions
Agro-industries are an engine for growth in rural economies and the agro-
industrial sector plays a central role in the economic development of low- and
middle-income countries. The rise of global markets based on competitive
advantage is, however, increasingly forcing policy makers to make assessments
of the ‘enabling environment’ for agro-industries. After an evaluation of selected
measures and indexes of an enabling environment we conclude that standard
measures, both macro and micro, are inadequate for evaluating the competi-
tiveness of agro-industries within emerging economies.
Further, we find that agro-industry exhibits unique characteristics that dis-
tinguish it from the wider economy, while simultaneously vast segments of the
food and fibre markets are becoming well integrated into the general econ-
omy. Distinguishing characteristics of agro-industries are embedded in the
type and nature of risk inherent in the sector. In formulating public policies to
mitigate against such uncertainties, thereby creating an enabling environment,
170 R. Christy et al.
we established a hierarchy of enabling needs for agro-industry competitiveness
to inform public policy makers. We then went beyond this linear hierarchy to
discuss the dynamic role of the state based on sector risk and capacity that
must be considered in reforming public policy.
In recent decades, agrifood markets globally have experienced rapid
change. This dynamic environment has raised the premium on traditional pol-
icy approaches to the sector, where ‘getting agriculture moving’ is now being
replaced with ‘making markets work’ to sustain economic progress. Previously,
ministers of agriculture were myopically focused on increasing on-farm produc-
tivity without paying closer attention to the enabling environment that addressed
the competitiveness of the sector. While there is wide variation across countries
and sectors, a ‘one size fits all’ strategy would be inappropriate to advance
a reform agenda for the agrifood industries in developing countries. For effec-
tive reform to emerge, we therefore advocate a more nuanced appreciation of
the role public policy makers can play in sustaining competitiveness.
Creative public policy in this dynamic global economy seeks to sustain
efficient and equitable outcomes for the agrifood sector that call for govern-
ment to develop essential enablers, promote innovative institutions, advance
facilitative policies and maintain competitiveness. We recognize that, while
agriculture is unique, it too must exist in a wider national economy. Therefore,
our list of specific policy measures that are essential, important and useful to
the agro-industry of developing counties must be coordinated with the wider
national macroeconomic policy framework.
Establishing the ‘rules of the game’ in the form of property rights, espe-
cially in the case of deeds for physical and intellectual property, is a critical
aspect of an enabling environment for agro-industries. Included as an essential
enabler is contract enforcement. Given the rise of contract farming, vertical
coordination and supply chain management of large food companies, effi-
ciency and equity in the sector are undermined without strong laws to ensure
the transaction implied within contracts in agriculture. The disadvantaged small
farmer engaged in contract farming can become an efficient player in the mar-
ket with strong laws that enforce contracts made with large agro-industries, and
likewise companies that offer contracts can be assured of delivery of goods and
services. Enforcement of contracts used by agro-industries is, however, part
and parcel of ‘the rule of law’ established by any nation. Therefore, ministries
of agriculture must aggressively and urgently expand such legal remedies to a
wider set of transitions in rural areas.
Rural areas within emerging economies are often confronted with highly
risky environments and weak public institutions. Under such circumstances, seg-
ments of the economy can exhibit market failure in the face of state failure. The
private sector does not develop an appetite for investing in such environments,
and the state lacks capacity to improve this environment such that inward invest-
ments could be made. The promotion of innovative institutions is critical to
enhancing the bargaining power of farmers. The position of farmers in the
market needs strengthening in most countries. Investment in farmers’ associa-
tions can reduce transaction costs, enhance bargaining with suppliers and stimu-
late on-farm production.
Enabling Environments for Competitive Agro-industries 171
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Appendix 1. Ease of Doing Business indicators. (From World Bank, 2007.)
Business stage Indicator Measures
Starting a
business
Procedures (number)
Time (days)
Number of procedures required to start a business
Total amount of time required to complete all procedures
Cost (% of income per capita) Logistics costs as a percentage of annual income per capita
Minimum capital (% of income
per capita)
Paid-in minimum capital requirement as percentage of annual income per capita
Dealing with
licences
Procedures (number) All procedures required for a business in the construction industry to build a
standardized warehouse
Time (days) Number of calendar days required to complete licensing procedures
Cost (% of income per capita) Official costs as a percentage of the country’s annual income per capita
Employing
workers
Difficulty of hiring index (0–100) If fixed contracts are prohibited for permanent tasks, maximum cumulative duration
of fixed-term contracts, ratio of minimum wage to average value added per worker
(using a 42-year-old, non-executive, full-time, male employee as model worker)
Rigidity of hours index (0–100) Restrictions with regard to workweek hours, night work, weekend work and vacation
days
Difficulty of firing index (0–100) Restrictions with regard to basis and procedure for terminating employment, laws
pertaining to reassignment options and priority rules
Rigidity of employment
index (0–100)
Average of the three sub-indices above
Non-wage labour cost (% of salary) All social security payments and payroll taxes for the fiscal year
Firing cost (weeks of salary) Cost of advance notice requirements, severance payments and penalties due when
terminating a redundant worker
Registering
property
Procedure (number) Number of procedures required to register or transfer property (standardized to
land and building of 50 times income per capita value, under same ownership for
10 years)
Time (days) Total amount of time required for property registration
Cost (% of property value) Official costs associated with property registration as a percentage of property value
Getting credit Strength of legal rights
index (0–10)
Extent to which collateral and bankruptcy laws protect rights of borrowers and
lenders, thus facilitate lending
Depth of credit information
index (0–6)
Rules affecting the scope, accessibility and quality of credit information available on
borrowers
continued
1
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Appendix 1. Continued.
Public registry coverage
(% of adults)
Number of individuals and firms listed in a public credit registry, current information
on repayment history, unpaid debt and outstanding credit
Private bureau coverage
(% of adults)
Number of individuals and firms listed by private credit bureaus with current
information on repayment history, unpaid debt and outstanding credit
Protecting
investors
Extent of disclosure index (0–10) Disclosure of related-party transactions (firm standardized to publicly traded
corporate buyer, a food manufacturer)
Extent of director liability
index (0–10)
Clear obligations and codes of conduct for company directors and managers, and
the shareholders’ ability to successfully sue in case of fraud or bad faith
Ease of shareholder suits
index (0–10)
Easy access to the courts when investors are harmed (availability of documentation
and witnesses from the firm during trial)
Strength of investor protection
index (0–10)
Average of the three sub-indices above
Paying taxes Payments (number per year) Total number of taxes and contributions paid (including corporate income tax, VAT,
social contributions and taxes on labour, property and property transfer, dividends,
capital gains, financial transactions, waste collection, vehicles, roads) for a
standardized manufacturing company
Time (h per year) Time required to comply with three major taxes: income taxes, VAT and labour taxes
Total tax rate (% of profit) Total taxes as percentage of commercial profits
Trading across
borders
Documents to export/import
(number)
Trading documents to be filed (for a standardized 100+ employee firm exporting
>10% of sales; product is traded in a dry cargo, 20 ft full container load)
Time to export/import (days) Time needed to comply with export and import requirements
Cost of export/import
(US$ per container)
Cross-border trade costs per container, including all fees associated with completing
the procedures to trade (excludes tariffs and trade taxes)
Enforcing
contracts
Procedures (number)
Time (days)
Number of litigation procedures necessary to resolve a commercial dispute
Time required to resolve a contract dispute in court, i.e. from case filing to payment
Cost (% of claim) Cost of court and attorney fees as percentage of amount claimed
Closing a
business
Time (years)
Cost (% of estate)
Time required to liquidate unviable businesses
Cost of liquidation as percentage of estate value
Recovery rate (cents on the dollar) Proportion of loan recovered by creditors through the bankruptcy proceedings
Enabling Environments for Competitive Agro-industries 175
Appendix 2. Doing business in Egypt, 2006/07. (From World Bank, 2007.)
Components In-stage rank World rank
1. Starting a business Procedures (7) 55 126
Time (9 days)
Cost (28.6% of income
per capita)
Minimum capital (12.9%)
2. Dealing with licences Procedures (28) 163
Time (249 days)
Cost (474.9% of income
per capita)
3. Employing workers Difficulty of hiring (0/100) 108
Rigidity of hours (20/100)
Difficulty of firing index (60/100)
Rigidity of employment
index (27/100)
Non-wage labour cost
(25% of salary)
Firing cost (132 weeks of salary)
4. Registering property Procedures (7) 101
Time (193 days)
Cost (1% of property value)
5. Getting credit Strength of legal rights (1/10) 115
Depth of credit info index (4/6)
Public registry coverage (1.6%
of adults)
Private bureau coverage
(missing % of adults)
6. Protecting investors Disclosure index (7/10) 83
Director liability index (3/10)
Ease of shareholder suits
index (5/10)
Investor protection index (5.0/10)
7. Paying taxes Procedures (36) 150
Time (711 h per year)
Cost (47.9% of profit)
8. Trading across borders Documents to export/import (6/7) 26
Time to export/import (15/7)
Cost of export/import
($714/$729 per container)
9. Enforcing contracts Procedures (42) 145
Time (1010 days)
Cost (25.3% of claim)
10. Closing a business Time (4.2 years) 125
Cost (22% of estate)
Recovery rate (16.6 cents on
the dollar)
176 R. Christy et al.
Computation Procedure
Consider the ease of property registration in Egypt in the 2006/07 period:
registration entailed completing seven different procedures, a process that took
at least 193 days and would cost an equivalent of 1% of the value of the prop-
erty to be registered. For each of these values, Egypt is ranked against other
world economies and assigned a percentile ranking of 58.7%, 86.4% and
11.8%, respectively. Taking a simple average of these values gives the stage-
level percentile ranking of 52.3% for Egypt’s property registration processes.
The same process is repeated for each of the business life stages, to produce 10
stage-level percentile rankings (these easily can be translated into a 1–178 rank-
ing relative to other countries’ performance in performing the same operations
as indicated above for Egypt), whose simple average is the country-level percen-
tile ranking. This percentile ranking is used to assign an Ease of Doing Business
position for Egypt in the world economy, in this case, 126 out of 178.
Appendix 3. The Global Competitiveness Index (GCI). (From World Economic Forum, 2006.)
Competitiveness
pillar Measures Components
Basic requirements
Institutions Rules that shape incentives
and define the way
economic agents interact
in an economy
Public institutions: public-sector
accountability, efficiency,
transparency; independence of
judiciary; respect of property rights;
government inefficiency; levels of
public security
Private institutions: corporate ethics;
accountability
Infrastructure Quality of physical
infrastructure, i.e.
energy, transport and
telecommunications
Overall infrastructure quality; railway
infrastructure development; quality
of port infrastructure; quality of air
transport infrastructure; quality of
electricity supply; telephone lines
Macroeconomy Level of macroeconomic
stability
Fiscal indicators (government deficit,
national savings rate, inflation,
interest rates, government debt);
trade-weighted real effective
exchange rate
Efficiency enhancers
Health and education Quality of primary health
and education
Health: medium-term business impact
of malaria, tuberculosis and HIV/
AIDS; infant mortality;
life expectancy; TB prevalence;
malaria prevalence; HIV prevalence
Education: primary school enrolment
continued
Enabling Environments for Competitive Agro-industries 177
Appendix 3. Continued.
Competitiveness
pillar Measures Components
Higher education Quality of educational
system
Secondary and tertiary enrolment
rates; quality of education as
assessed by business community
(quality of science, maths and
management schools); availability
of specialized training for
workforce
Market efficiency Extent to which goods,
labour and finance are
allocated efficiently for
maximum productivity
Goods: market openness, level of
distortive government intervention;
market size
Labour: cooperation in
employer–employee relations;
flexibility of labour regulations;
extent of gender bias in the
workplace
Financial: access to credit; quality
of capital; soundness of banking
sector
Technological
readiness
Agility with which an
economy adopts existing
technologies to enhance
the productivity of its
industries
Availability of information
and communications
technologies (ICTs) and
other technologies;
aggressiveness of firm
adoption of new technologies;
FDI and technology transfer;
cellular telephones;
Internet users;
personal computers
Innovation and sophistication
factors
Business
sophistication
Ability of business leaders
to manage companies
efficiently
Quantity and quality of local
suppliers, level of development of
production processes, extent to
which companies are turning out
the most sophisticated products,
networks and supporting
industries
Innovation Extent of design and
development of
cutting-edge products
and processes
Business investment in research
and development; quality of
scientific research; extent of
collaboration in research
between universities and
industries; protection of
intellectual property
178 R. Christy et al.
Appendix 4. Components of the Business Competitiveness Index (BCI). (From Porter, 2004.)
I. Company operations and strategy
Production process sophistication
Nature of competitive advantage
Extent of staff training
Willingness to delegate authority
Capacity of innovation
Company spending on research and development
Value chain presence
Breadth of international markets
Degree of customer orientation
Control of international distribution
Extent of branding
Reliance on professional management
Extent of incentive compensation
Extent of regional sales
Prevalence of foreign technology licensing
II. National business environment
(a) Factor conditions
Physical infrastructure
Administrative infrastructure
Human resources
Technology infrastructure
Capital markets
(b) Demand conditions
Buyer sophistication
Sophistication of local buyers, products and processes
Government procurement of advanced technology products
Presence of demanding regulatory standards
Laws relating to information and communications technologies (ICTs)
Stringency of environmental regulations
(c) Related and supporting industries
Local supplier quality
State of cluster development
Local availability of process machinery
Local availability of specialized research and training services
Extent of collaboration among clusters
Local supplier quantity
Local availability of components and parts
(d) Context for firm strategy and rivalry
Incentives: extent of distortive government subsidies
Favouritism in decisions of government officials
Cooperation in labour–employer relations
Efficacy of corporate boards
Intellectual property protection
Protection of minority shareholder interests
Regulation of securities exchanges
Effectiveness of bankruptcy laws
continued
Enabling Environments for Competitive Agro-industries 179
Appendix 4. Continued.
Competition: hidden trade barriers
Intensity of local competition
Extent of locally based competitors
Effectiveness of antitrust policy
Decentralization of corporate activity
Business costs of corruption
Costs of importing foreign equipment
Centralization of economic policy making
Prevalence of mergers and acquisitions
Foreign ownership restrictions
Appendix 5. Components of the Investment Compass (IC). (From UNCTAD web site http://
compass.unctad.org/Page1.egml?country1=&country2=®ion=&sessioncontext=
246934608&object=SC.app.objects.methodology.)
Key area Variables Indicators
Resource assets Human capital School enrolment in tertiary
Science and engineering students
Illiteracy rate
Production of minerals
Availability of raw
materials
Production of agricultural
commodities
Energy reserves
Market size GDP (purchasing power parity)
(PPP)
Per capita income (PPP)
Effective market size
Total population
Infrastructure ICT Internet hosts
Internet users
Mobile phones
Telephone main lines
Basic infrastructure Air transport freight
Water access
Electricity transmission and
distribution losses
Electricity production
Port activity
Road network
Railway freight
Operating costs Labour costs Monthly wage for professional work
Monthly wage for administrative
work
Monthly wage for technical work
Monthly wage for clerical work
continued
180 R. Christy et al.
Appendix 5. Continued
Key area Variables Indicators
Business costs Rental office costs
International telecommunications
charge
Local telecommunications charge
Electricity charge
Economic performance
and governance
Macroeconomic
performance
Unemployment rate
Government surplus/deficit
Current account balance
Inflation
Real economic growth
Governance Creditworthiness rating
Human development index
Regulatory quality
Rule of law
Government effectiveness
Political stability
Voice and accountability
Taxation and incentives Business and professional
services (present
value of tax)
Business and professional services
(direct and indirect)
Information and
communications
technology (present
value of tax) (PV tax)
ICT (direct and indirect)
Tourism (PV tax) Tourism (direct and indirect)
Manufacturing (PV tax) Manufacturing (direct and indirect)
Regulatory framework Entry Standards of treatment
Land ownership and transfer
Openness of main sectors to FDI
Operation Performance requirements
Preferential trade arrangements
with major markets
Labour market regulation
Foreign workforce regulations
Foreign exchange regulation on
current operations
Size of regional/integrated trade
area
Import duties
Protection and exit Number of taxation treaties signed
Number of bilateral investment
treaties signed
Liquidation and expropriation
Dispute settlement
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Appendix 6. Components of the Policy Framework for Investment. (From Organization for Economic Cooperation and Development, 2006.)
Policy field Rationale Major issues
Investment policy Quality of investment policies directly
influences investment decision, driven
by principles including transparency,
property protection and non-discrimination
Enforcement, transparency, accessibility of laws and regulations
Efficient ownership registration of property
Protection of intellectual property
Effective contract enforcement
Effective compensation expropriation
Non-discrimination principle
Implementation of international arbitration instruments
Investment
promotion
and facilitation
Provide aim to correct for market failures
and leverage the strong point of a
country’s investment environment
Government strategy for sound business environment
Establishing and adequately funding investment promotion agency
Streamlining administrative procedures for new investments
Maintaining dialogue with investors
Evaluating costs and benefits of investment incentives
Facilitating investment linkages between businesses
Trade policy Support more and better-quality investment
by expanding opportunities to reap scale
economies and by facilitating integration
into global supply chains
Reducing border costs and inefficiencies
Reducing trade policy uncertainty
Participation in international trade agreements
Review of trade policy to reduce distortions
Impact of trade policy on input prices
Alternative means of achieving public policy objectives
Targeting policy to attract investment towards weak sectors
Competition
policy
Favours innovation and contributes to
conditions conducive to new investment
Clear, transparent, non-discrimination competition policy
Are competition authorities adequately resourced?
Ability to address anticompetitive practices
Capacity to evaluate impact on market entry of other policies
Capacity to evaluate the costs and benefits of industrial policies
Role of competition authorities in case of privatization
Extent of cooperation in international competition issues
continued
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h
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y
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Appendix 6. Continued.
Policy field Rationale Major issues
Tax policy Level of tax burden and design and
administration of tax policy influence
business costs and returns on
investment
Average tax burden on domestic profits, accounting for statutory
provisions, tax-planning opportunities and compliance costs
Tax burden consistent with investment attraction strategy
Tax burden consistent with goals and objectives of tax system
Neutrality of tax system to nationality of investor, firm size, age of
business entity, ownership structure, industry sector, location
Consistency of main tax provisions with international norms
Presence of unintended tax opportunities resulting from targeted tax
incentives, and their impact on cost-effectiveness of system
Tax expenditure account reporting and use of sunset clauses to
inform and manage the budget process
Extent of tax treaty network and presence of strategies to counter
abusive cross-border tax-planning strategies
Corporate
governance
Influences confidence in investors, cost of
capital, overall functioning of financial
markets and development of more
sustainable sources of financing
Presence of coherent, consistent regulatory framework backed with
effective enforcement
Extent to which framework ensures equitable treatment of shareholders
Institutional structure for legal redress in case of violation of
shareholder rights
Procedures and institutions for shareholder empowerment
Standards and procedures for timely, reliable and relevant disclosure
Does framework ensure effective monitoring of management by the board?
Voluntary incentives and training to encourage and develop a good
corporate governance culture
Has national corporate governance system been reviewed?
For state-owned enterprises, extent of government interference in
management and market operations
Policies for
promoting
responsible
business
conduct
Good conduct policies (respecting human
rights, environmental protection, labour
relations and financial accountability)
help attract enterprises that contribute
to sustainable development
Extent to which responsibilities ascribed to the business
sector are clear
Steps taken to communicate responsible business behaviour to investors
Presence of framework to support company disclosures about
business operations
E
n
a
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l
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n
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E
n
v
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o
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p
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A
g
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o
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i
e
s
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3
continued
Government support of company efforts to comply with the law
Government role in strengthening the base case for responsible conduct
Government participation in intergovernmental cooperation
to promote international principles for responsible business
Human resource
development
Policies that develop and maintain a skilled,
adaptable and healthy population and
ensure the full and productive
deployment of human resources, thus a
favourable investment environment
Presence of coherent and comprehensive human resource
development policy framework
Strategies for increased participation in basic schooling and to
improve the quality of instruction so as to leverage assets
Incentives for individuals to invest in higher education and
lifelong learning
Extent to which government promotes training programmes and
evaluates effectiveness of investment environment
Presence of coherent strategy to tackle the spread of pandemic diseases
Mechanisms to promote and enforce core labour standards
Extent to which labour market regulations support job creation and
the government’s investment attraction strategy
Steps taken to unwind unduly restrictive practices covering the
deployment of workers from investing enterprises
Programmes to assist large-scale labour adjustment
Steps to ensure that labour regulations support an
adaptable workforce
Infrastructure and
financial sector
development
Ensure scarce resources are channelled
to the most promising projects and
address bottlenecks that limit private
investment
Processes used to evaluate infrastructure investment needs
Measures adopted to uphold transparency and procedural
fairness in bidding for infrastructure development contracts
Market access for potential investors in telecommunications
and extent of competition
Access to electricity services on a least-cost basis for a wide
range of users
Processes for development and maintenance of transport infrastructure
Investment needs and private-sector involvement in water management
Capacity of financial sector and quality of regulatory framework
Laws and regulations governing credit access
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Appendix 6. Continued.
Policy field Rationale Major issues
Public
governance
Regulatory quality and public-sector
integrity important for establishing
credibility with investors and for reaping
development benefits of investments
Presence of a coherent and comprehensive regulatory
reform framework
Mechanisms for managing and coordinating regulatory reforms
across different levels of government
Extent to which regulatory impact assessments are used to
evaluate the consequences of economic regulations for the
investment environment
Public consultation mechanisms and procedures established to
improve regulatory quality
Extent to which the administrative burdens on investors are
measured and qualified
Extent to which international anticorruption and integrity
standards have been implemented in national legislation
Extent to which institutions and procedures ensure transparent,
effective and consistent enforcement of anticorruption laws and
regulations
Existence of review mechanisms to assess the performance of
laws and regulations on anticorruption and integrity
Government participation in international initiatives aimed at fighting
corruption and improving public-sector integrity
E
n
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l
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E
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Appendix 7. Components of the core questionnaire for Investment Climate Surveys. (From World Bank web site.)
Section Issues
1. General information Age of enterprise, legal status, ownership, number of operating facilities, main product line, other income-gener-
ating activities
2. Sales and supplies Share of local market, percentage of sale into different markets, source of inputs, days of inventory at hand,
supply delivery delays, competitors in domestic market
3. Investment climate
constraints on the firm
Severity of obstacles in telecommunications, electricity, transport, access to land, tax rates, tax administration,
customs and trade regulations, labour regulations, skills and education of available workers, business licensing
and operating permits, access to financing, cost of financing, economic and regulatory policy uncertainty,
macroeconomic instability, corruption, crime, anticompetitive or informal practices, conflict resolution
4. Infrastructure
and services
Frequency and duration of service interruptions, average utility costs, access to computer and the Internet,
affiliation to chamber of commerce and services received, quality and affordability of business services
5. Finance Contribution to working capital and new investments of finances from different sources (e.g. internal funds, loans,
investment funds, rental income), access to credit or overdraft facilities, interest rate on loans, frequency of
external auditor reviews
6. Business–government
relations
Efficiency of government in delivering services, consistency and predictability of officials’ interpretation of regula-
tions, days to import/export, restrictiveness of labour regulations, time spent complying with regulations, bribes
as percentage of annual sales, percentage of sales reported for taxes, influence on national laws and regula-
tions of lobbying efforts by various entities (firms, business associations, labour unions, local government)
7. Conflict resolution
and legal environment
Confidence in judicial system, proportion of sales on credit, percentage of sale to government and state-owned
enterprises, time spent in payment dispute resolution, proportion of disputes resolved by court action
8. Crime Percentage of sale spent on security and protection payments, losses due to theft, vandalism or arson, share of
crimes reported to the police and share solved
9. Capacity, innovation,
learning
Average capacity utilization, rate of growth in sales, share of profits reinvested, range of products, use of
technology from foreign-owned firms, position on technology relative to competitors, innovation initiatives
recently taken by firm, ways of acquiring technological innovations, sources of pressure to reduce production
costs and to develop new products and services
10. Labour relations Average number of workers, education levels, total compensation, proportion of foreign employees, time spent
recruiting, formal training offered to employees, percentage of unionized workforce, frequency of labour
disputes, proportion of female employees, level of top management experience
11. Productivity Total sales; input costs; market value of production; energy costs; manpower costs; interest charges and financial
fees; spending on new assets; value of assets sold; amount spent on rentals, leases and licences; amount
spent on research and development; net value of assets; value of liabilities
186 © FAO and UNIDO 2009. Agro-industries for Development (C.A. da Silva et al.)
Introduction
Small-scale farmers, who form the bedrock for global agrifood supply, are
faced with markets in an unprecedented state of flux. Domestic markets are
undergoing rapid but uneven modernization, and higher value and export mar-
kets are increasingly the preserve of larger-scale suppliers.
The modernization of domestic markets, particularly in Latin America and
Asia, has been driven by a wave of investments in emerging economies by
domestic and transnational food manufacturers and retailers over the past
two decades. Combined with rising urbanization, and changes in consumer
preferences and purchasing power, these have led to a growth of modern
organized food retailing, which has outpaced the growth of per-capita GDP by
a factor of 3–5 (Reardon and Huang, 2008).
These changes are generating intense policy debate, particularly regarding
the opportunities facing small farmers and the rural poor. The 2008 World
Bank World Development Report (WDR) (World Bank, 2007b) notes that in
transforming economies, where the majority of the rural poor live, ‘the rising
urban–rural income gap accompanied by unfulfilled expectations creates politi-
cal tensions. Growth in agriculture and the rural non-farm economy is needed
6 Business Models That Are
Inclusive of Small Farmers
*
BILL VORLEY,
1
MARK LUNDY
2
AND JAMES MACGREGOR
3
1
Head, Sustainable Markets Group, International Institute for Environment and
Development (IIED), London, UK;
2
Agroenterprise Specialist, International
Center for Tropical Agriculture, CIAT, Cali, Colombia;
3
Researcher,
International Institute for Environment and Development (IIED), London, UK
* This chapter draws heavily on the work of the Regoverning Markets consortium (www.
regoverningmarkets.org) and the associated international conference ‘Inclusive Business in
Agrifood Markets: Evidence and Action’ held in Beijing on 5–6 March 2008. Contributions are
also acknowledged from the ‘New Business Models for Sustainable Trade’ project led by the
Sustainable Food Laboratory and Rainforest Alliance, ‘Inclusion of small producers in value
chains’ – a partnership between Cordaid, Vredeseilanden and IIED; and framework funding
to IIED from the Swedish International Development Agency (SIDA). Comments on an earlier
draft by Jose Reijter (Cordaid) are gratefully acknowledged.
Business Models for Small Farmers 187
to reduce rural poverty and narrow the urban–rural divide.’ Those political ten-
sions are clear in India, where the fragmented US$350 billion retail industry is
forecast to double in size by 2015, and where modernization and liberalization
of retail foreign direct investment (FDI) have given rise to heightened invest-
ment coupled with significant protest and policy push-back.
Market modernization can offer increased economic opportunities for pro-
ducers, consumers, entrepreneurs and other actors in the food chain. These
opportunities include a reduction in entry barriers to traditionally protected
industries, which are further leveraged by clearer information, less capture by
elites, stronger access to services and the potential for entrepreneurial farmers
to combine resources and realize the collective worth of their land. In some
areas, new market entrants are stimulating competition for farmers’ produce,
helping to increase the value retained in rural economies. For example, the
laws which entrenched a monopoly of wholesale markets in India have been
amended in at least 14 states, allowing retailers and their agents to procure
directly from farmers.
1
Enforced intermediation through wholesale commission
agents had previously hidden the final buyer from farmers.
But there are also risks in opening up markets, where domestic businesses
may be by-passed by cheaper imports and where costly market entry require-
ments favour the better-resourced. These features, which have long been
understood in export markets, are becoming a feature of domestic markets in
emerging economies as regional trade becomes easier.
If the benefits of modernization and globalization are patchy, and do not
reach to the ‘bottom of the pyramid’ to deliver a growth and equity ‘win–win’,
then prospects for meeting the Millennium Development Goals (MDGs) by
2015 are remote. The 2008 WDR calls for action in response to the modern-
ization of procurement systems in integrated supply chains and supermarkets,
so that small-scale farmers can share in these growth opportunities.
The failure of major retailers to take such a combined ‘growth with equity’
approach was bemoaned by the late Robert Davies, former CEO of the
International Business Leaders Forum (IBLF). He asked: ‘Why are the clever-
est logistics and supply chain operators and service companies known in busi-
ness history sometimes so inept at . . . adapting their business model to the
sensitivities of emerging markets?’ (Davies, 2007) Part of the answer – and the
subject of this chapter – lies in the development of business models which are
both inclusive of small-scale producers and also address the need for proces-
sors and retailers to manage costs and risks.
Here we define inclusive business models as those which do not leave
behind small-scale farmers and in which the voices and needs of those actors
in rural areas in developing countries are recognized. Such models have been
variously described as ‘Inclusive Business’ (WBCSD and SNV, 2008; www.
inclusivebusiness.org), ‘Mutually Beneficial Partnerships’ (FAO and CIFOR,
2002) and ‘inclusive capitalism’ (Hart, 2007).
1
See ‘Modern retail offers wide choice, farmers want to exercise it all’. Livemint.com/Wall
Street Journal 11 February 2008.
188 B. Vorley et al.
The chapter describes a range of business models for inclusive market
development within the context of agrifood restructuring and modernization. It
focuses specifically on models that improve the inclusiveness, fairness, durabil-
ity and financial sustainability of trading relationships between small farmers on
the one hand and downstream agribusiness (processors, exporters and retail-
ers) on the other. It also alerts us to the needs of external providers, such as
financiers and training agents. The gap in basic services in rural economies,
such as appropriate extension and credit, needs to be bridged before FDI can
live up to its promises. While we do address what producers need to do to
compete in modern dynamic markets, and the role of facilitating public policy,
our focus in this chapter is more on the buyers and their role as partners in
development.
Business Models and Inclusive Market Development
What is a business model?
A business model is the way by which a business creates and captures value
within a market network of producers, suppliers and consumers, or, in short,
‘what a company does and how it makes money from doing it’ (MIT Sloan
2
).
The business model concept is linked to business strategy (the process of
business model design) and business operations (the implementation of a com-
pany’s business model into organizational structures and systems). Osterwalder
(2006) breaks business models into their constituent elements that create costs
and value, using the template in Figure 1.
This template shows the importance of market differentiation (building a
‘value proposition’) and cost management to the success of any business
model.
2
http://process.mit.edu/Info/eModels.asp
Success or
failure
Cost
structure
Revenue
streams
Customer
segment
Distribution
channel
Value
proposition
(products and
services)
Value
configuration
(activities and
resources)
Core
capabilities
Partner
network
Customer
relationship
Figure 1. Template of a business model. (Adapted from Osterwalder, 2006.)
Business Models for Small Farmers 189
In modern agrifood retail, market differentiation is built on consumer assur-
ance, high standards for food quality and safety, year-round availability and,
sometimes, lower prices that are communicated to consumers through own
brands.
It follows that the partner network – the supply chain and its coordination –
is a vitally important source of competitive advantage. It also follows that the
model is highly sensitive to any addition of costs and risks, and it is around this
apex that the question of market inclusivity ultimately revolves.
There are perceived to be high transaction costs and increased risks with
purchasing from large numbers of fragmented small-scale farmers. Small-scale
farmers are also perceived to be less reliable in honouring trading agreements,
because they do not have the technical skills and technologies to produce the
right products at the right time (quality, timeliness and consistency). Common
business practice sees buyers typically seeking out large-scale suppliers (Box 1)
and areas favoured by agribusiness, such as zones involved in export produc-
tion. This is particularly easy in a dualistic farm structure such as that found in
South Africa (Box 2).
From the perspective of producers and their organizations, there may
be good reasons to avoid trading with the modern agrifood system. With
low and inconsistent production volumes, dispersed production, weak
negotiation pos itions, limited capacity to upgrade and meet formal market
Box 1. Carrefour’s quality line in China. (From Hu and Xia, 2007.)
Among the supermarkets in China, Carrefour is characterized by marketing fresh
foods. With the rising consciousness of consumers on safety of food, the demand
for high-quality and safe food has increased. Carrefour started in 1999 to sell a
‘green’ food supply line under its own brand with the ‘Quality Food Carrefour’ logo.
These lines represent an innovation in the purchasing system within the Chinese
context, where Carrefour carries out integrated management of the entire supply
chain, with full traceability. Other retailers are following suit. To date, cooperators of
the Carrefour quality line are all larger-scale, rather than the small-scale farmers
who account for more than 90% of the agricultural population in China.
Box 2. From wholesale to preferred supplier: Shoprite.
Shoprite, a leading South African retailer, relied on sourcing from wholesale mar-
kets in 1992 for 70% of its produce. In 1992, Freshmark, a wholly owned special-
ized and dedicated wholesaler, started to form ‘preferred supplier’ relationships
with large commercial farmers (from whom it sources the majority of its produce),
as well as some large wholesalers and some medium- and smaller-scale farmers.
By 2006, it had 700 such preferred suppliers (a few for each main product), and
sourced 90% of its produce from them and 10% from the wholesale markets. The
shift to using preferred suppliers was facilitated in South Africa by the sharply dual-
istic farm sector structure. Freshmark has ‘followed’ Shoprite into other African
countries, but is still sourcing much of its produce from South Africa.
190 B. Vorley et al.
requirements and poor access to information, technology and finance, the
transaction costs for farmers to link with the modern sector are daunting.
And despite significant investments of time and resources, market access is
still not guaranteed.
Ultimately, the type of partner network and choice of business model will
depend on the nature of the product (perishable, differentiated or branded pro d-
uct or bulk commodity) and the nature of the end buyer (branded retailer,
wholesaler, etc.), which determine the nature of economic dependency between
chain actors. A collaborative partner network is much more important with
perishable commodities such as fresh vegetables, dairy and meat, which require
traceability and have higher food safety risk profiles (Sporleder et al., 2005).
The same applies to the growing number of certified products, such as Fairtrade
and organics. Jan Van Roekel of the Agro-Chain Competence Foundation
goes as far as to say: ‘In the future, agrifood producers, processors and retailers
will no longer compete as individual entities. Rather, they will collaborate as a
strategic value chain and compete with other value chains in the market place’
(Bouma, 2005).
Crucially for the discussion of inclusion of small-scale farmers, these col-
laborative partner networks, with co-investment and knowledge sharing between
producers, suppliers, processors and retailers, are usually built around a small
number of preferred suppliers. Adapted business models are called for, whereby
small-scale farmers can cooperate to compete as one single sup plier, and where
their customers are responsive to the realities of smallholder production.
Adapting business models
When agrifood business models are transplanted from industrialized countries
to countries with large agriculture-dependent populations the unintended con-
sequences for the rural economy can potentially be very significant.
In the two largest ‘transforming’ countries,
3
China and India, 40–60% of
the workforce is engaged in agriculture, i.e. over 640 million people in total. In
Thailand, Turkey and Morocco this figure is 40–50% of the workforce, while
in Romania and Honduras agriculture still accounts for one-third of employ-
ment. The small-scale retail sector also faces major challenges. The Indian retail
sector, dominated by 15 million very small independent kirana stores, employs
42 million people, the second biggest employer after agriculture. In addition to
the lack of inclusiveness and poor awareness of rural economic realities of exist-
ing business models, there are other unintended and accidental outcomes. For
example, the private standards that buyers have deemed necessary and efficient
solutions can compound exclusion of small suppliers given that the costs of such
systems are a function of production volume. Put simply, high volume makes
standards feasible because the cost per unit of product is low. For many small-
3
One of agriculture’s three worlds, according to WDR 2008, in which agriculture contributes
less to growth, but poverty remains overwhelmingly rural.
Business Models for Small Farmers 191
holders, however, volumes are low and the unit cost for standards is high.
This mix can lead to situations where it is financially impossible for smallholders
to cover the cost of implementing and maintaining such standards.
It is clear that new business models are needed that afford opportunity in
terms of small-farmer inclusion and equity and that do not exclude efficient
farmers, while promoting business efficiencies. There are potential efficiency
gains in developing locally adapted business models that build on the compara-
tive advantage of smallholders, in terms of land, price, farm management,
quality and innovation. According to the template of business models above,
any adjustments in pursuit of greater inclusiveness must not undermine the
most sensitive elements of a model – the cost structure, the value proposition
and the integrity and safety of the product – especially when managing supply
from large numbers of small producers.
What Is the Business Case for Adjusting Business
Models in Favour of Smallholders?
The first section has described how the business model of the organized agri-
food sector is generally built on the value proposition of consumer assurance,
high standards for food quality and safety, low prices and reliability of supply.
It sets out the biggest challenge for modern agrifood business to work with
small-scale farmers as being to organize supply to deliver the benefits of logis-
tics, economies of scale, traceability and private sector standards.
While the business case for trading with small-scale producers is being
called into question, experience in the field suggests that a convincing busi-
ness case for models that are inclusive of small-scale producers can be made
beyond efforts to promote corporate social responsibility (CSR), based pri-
marily on securing supply and reducing costs. Table 1 provides a summary
of the arguments for and against sourcing strategies built with small-scale
producers.
Securing supply
Securing consistent supply is especially critical in supply-constrained and vola-
tile conditions, such as those currently characterizing global agrifood markets.
A shift from a buyer’s to a seller’s market implies that suppliers will need to
ensure that they can meet their obligations to retailer or processor customers
in the face of considerable uncertainty. A diversified supplier base, including
small-scale producers, can contribute to improved security of supply.
Retail buyers and processors may also seek to by-pass markets where large
traders have a stranglehold. This was the situation in Pakistan where a milk
processor, Haleeb Foods Limited, worked around the large and well-established
milk traders by securing a small-farmer supply base.
192 B. Vorley et al.
An even stronger business case for linking with small-scale producers is
where there is a scarcity of alternative suppliers, whether due to the charac-
teristics of the product (seasonality, labour requirements, locality), a shortage
of land for large-scale domestic or own-business production, a lack of a
medium- or large-scale supply base (e.g. the dairy sector in India or Poland)
or where there is demand in remote areas away from main distribution chan-
nels (Box 4).
Small-scale producers can also have a comparative advantage in terms of
produce quality, innovation, costs and farm management. Indeed, in exports of
fresh vegetables from Africa to the UK and from Central America to the USA,
it is the premium quality products such as French beans and peas that are
sourced from smallholders.
New business opportunities
Small-scale producers are themselves a new business opportunity. In India
retailers can now buy directly from farmers rather than operating through the
government-controlled Agricultural Product Marketing Committee (APMC)
wholesale markets. New models of rural retail are emerging, such as the Hariyali
Kisaan Bazaar, which combines a ‘bottom of the pyramid’ approach to both
the input and output sides of the farm-to-consumer value chain, and is dis-
cussed further in this chapter. This is an extension of the approach advocated
by Prahalad and Hart (2002), which argues that corporations can make consid-
erable profits by designing new business models and products to target the four
billion poorest people who make up the base of the economic pyramid.
Table 1. The business case for and against procuring from small-scale producers.
For Against
• Smallholders’ comparative advantages
(premium quality, access to land, etc.)
• securing supply in volatile markets, spreading
portfolio geographically, reducing risk of
undersupply as well as localized pest and
disease problems
• new business, clients for other products and
services (base of pyramid)
• new technologies available (efficient low-scale
processing equipment, information technologies
for coordination and lower cost traceability)
• capacity to ramp up or ramp down production
without incurring fixed costs (contract farming)
• access to donor assistance
• corporate responsibility
• community goodwill
• political capital
Costs and risks in organizing
supply from dispersed
producers:
• quantity
• quality
• consistency
• safety
• traceability
• compliance with rising
standards
• packaging
• loyalty and fulfilment of
commitments by farmers
• negotiation time and costs
• political opposition to
commercialization of
peasant agriculture
Business Models for Small Farmers 193
Community goodwill
Working with small-scale farmers is also a means to build community goodwill,
contributing to a company’s licence to operate. Buying locally from smallhold-
ers may be part of a company’s socially responsible strategy and becomes an
advertising slogan in the highly competitive environment in which it operates.
Customers are aware of and may value local procurement from small-scale
farmers in the community as long as the produce is of a good quality. The case
study from South Africa (Box 3) reported that the retailer organized for farmers
to be present in the store on certain Fridays to promote its small-scale farmer
procurement among the consumers.
Other examples of supermarkets working with small-scale producers
include programmes by Carrefour in Indonesia, through which dialogue is
established between farmers and buyers to ensure increased quality, the devel-
opment of a ‘Best Supplier’ prize and the waiving of listing fees.
4
In Guatemala,
Wal-Mart has recently initiated a programme with an international NGO, Mercy
Corps, and the financial service provider AGIL Foundation (Fundación Apoyo
a la Generación de Ingresos Locales) to facilitate the entry of 600 farmers to its
supply base over the next 3 years. The goal of this programme is to guarantee
supplies of speciality products as Wal-Mart expands in the region. Finally, in
Mozambique Shoprite, in collaboration with the IFAD Markets Support
Box 3. Securing supply in remote regions.
Tanzania: Given the remoteness of tourist hotels, local supply from small-scale
farmers is much less costly, especially during the rainy season when road trans-
portation from outside the area is not always possible. Furthermore, the local sup-
ply has a promotional value in the tourist trade as a support to local communities,
coupled with the encouragement of environmentally sound production (Mafuru
et al., 2007)
South Africa: In contrast to the centralized fresh produce procurement sys-
tems of South African retailers, who rely on preferred commercial suppliers, there
are also innovative procurement schemes. Two rural-based supermarket chain
stores in the Limpopo Province source fresh vegetables locally from small-scale
farmers. By 2004, the Thohoyandou SPAR store was procuring approximately
30% of its vegetables from about 27 small-scale farmers. These farmers are sup-
ported by interest-free loans to selected farmers, a guaranteed market, farm visits
and training on required quality standards. The remoteness of the supermarkets
from the central distribution centres, the stores’ operation in rural areas, reduced
transportation costs and meeting freshness requirements, as well as being seen
to contribute to community development, were the drivers for supporting the
development of this local procurement scheme from small-scale farmers (Bienabe
et al., 2007).
Box 3. Securing supply in remote regions.
Tanzania: Given the remoteness of tourist hotels, local supply from small-scale
farmers is much less costly, especially during the rainy season when road trans-
portation from outside the area is not always possible. Furthermore, the local sup-
ply has a promotional value in the tourist trade as a support to local communities,
coupled with the encouragement of environmentally sound production (Mafuru
et al., 2007).
South Africa: In contrast to the centralized fresh produce procurement sys-
tems of South African retailers who rely on preferred commercial suppliers, there
are also innovative procurement schemes. Two rural-based supermarket chain
stores in the Limpopo Province source fresh vegetables locally from small-scale
farmers. By 2004, the Thohoyandou SPAR store was procuring approximately
30% of its vegetables from about 27 small-scale farmers. These farmers are sup-
ported by interest-free loans to selected farmers, a guaranteed market, farm visits
and training on required quality standards. The remoteness of the supermarkets
from the central distribution centres, the stores’ operation in rural areas, reduced
transportation costs and meeting freshness requirements, as well as being seen
to contribute to community development, were the drivers for supporting the
development of this local procurement scheme from small-scale farmers (Bienabe
and Vermeulen, 2007).
4
‘Carrefour Indonesia takes part in SME programme.’ www.planetretail.net 1 August 2007.
194 B. Vorley et al.
Programme (PAMA), has supported the development of small-scale farmers in
Boane. Based on this work, Shoprite now sources 25% of its fresh fruit and
vegetable needs locally rather than importing from South Africa.
Despite the increasing interest of buyers to work with small farmers, ques-
tions remain about the depth of this commitment due to the fragmentary nature
of some of these programmes. In Guatemala, for example, Wal-Mart execu-
tives have been important allies in the development of a line of personal care
products based on medicinal plant extracts produced by indigenous communi-
ties in the municipality of Totonicapán. Despite this support, buyers and store-
level display managers continue to obstruct the entry of these products in
specific stores. The waiving of formal product registry by Wal-Mart executives
has been used as an argument by lower-level staff for not including the product
in display plans for specific stores, thus effectively keeping the products off the
shelves despite high-level support (Lundy and Fujisaka, 2008). This example
highlights the tensions and inconsistencies between executive desires and day-
to-day business practices. Firms interested in promoting inclusive business
models need to pay specific attention to the consistency of both their messages
and their practice.
Corporate social responsibility
As discussed in Chapter 7 (this volume), which focuses on the theme of
‘corporate social responsibility’, an increasing number of companies report on
their commitments to the development agenda to their customers and share-
holders within a wider ‘corporate responsibility’ framework. The role of busi-
ness as a partner in development has been a growing element of the CSR
agenda, especially since the World Summit on Sustainable Development in
2002. It is now promulgated by a number of business platforms such as the
World Business Council for Sustainable Development (WBCSD) and the
Sustainable Agriculture Initiative (SAI), and by a number of UN agencies includ-
ing UNDP and UNIDO. We are now at a point where ‘inclusive business’ and
CSR concepts are being differentiated. CSR, with its emphasis on labour and
environmental standards and supplier codes, has been poor at addressing
market inclusion, and is often weakly mainstreamed across business. The UN
Global Compact, which is the largest global corporate citizenship initiative,
has ten principles that address human rights, labour standards, environment
and anti-corruption, but do not address the role of business in supporting the
position of primary producers. Some individual businesses and industries have
gone further.
A commitment to the development agenda can defend a market. This has
been evident recently in the UK, where airfreight of fresh produce from Africa
was defended against a strong environmental critique through a clear demon-
stration of the importance of the trade to rural livelihoods (Garside et al.,
2007). However, it remains unclear how significant the commitment is, and
whether these early actions will be followed up by the buyers, consumers or
governments.
Business Models for Small Farmers 195
What Are the Various Models That Have Emerged for Linking
Small-scale Farmers to Agribusiness and Changing Markets?
The preceding section elaborates the business case for inclusion. However, this
will be insufficient to trigger widespread adoption of inclusive business models
unless the risks and costs are addressed. Key to overcoming the costs and risks
are producer coordination, market coordination and intermediation, service
and finance provision, information and knowledge management and buyer
behaviour. In this section we address producer coordination and market coord-
ination of small-scale producers.
Organization of production is central to overcoming the costs associated
with dispersion of producers, diseconomies of scale, poor access to informa-
tion, technology and finance, inconsistent volume and quality, lack of traceabil-
ity and management of risk. In view of lower transaction costs and the possibility
of more effective capacity transfer, private companies often prefer to work with
organized farmers rather than individuals despite the increased bargaining
power that groups can enjoy. Production may be organized by the producers
themselves, by the end customer companies or by an intermediary such as an
NGO, trader, wholesaler or exporter (Table 2) in a range of direct or indirect
market linkages categorized by Shepherd (2007). Organization might be lay-
ered, with buyers operating a continuum from preferred suppliers to top-up
suppliers, with an attendant spread of objectives. Typically, success depends on
communication flows and constant innovation on both sides.
Model development
Where market linkages are initiated by existing actors, they tend to build on
informal structures in which traders or farmer-traders play a critical role not
only to connect farmers to markets but also as de facto service providers. In
Table 2. Typical organization of smallholder production.
Type Driver Objective
Producer-driven Small-scale producers themselves • New markets
• higher market price
• stabilize market position
Large farmers • Extra supply volumes
Buyer-driven Processors • Assure supply
Exporters
Retailers
Intermediary-driven Traders, wholesalers and other
traditional market actors
• Supply more discerning
customers
NGOs and other support agencies • ‘Make markets work for
the poor’
National and local governments, e.g. via
‘Dragon Head’ companies in China
• Regional development
196 B. Vorley et al.
many cases the trader is a member of the rural community and has specialized
knowledge, information, assets and contacts to facilitate not only commercial
ties but also social support in times of crisis. Informal linkage models are com-
mon throughout the world but little understood. Certainly, knowledge on how
to develop business models that leverage these informal linkage systems is
scarce. These models rarely receive support from development interventions or
attention from researchers due to their informal nature and a strong bias against
traders in many development organizations. This is unfortunate, as these mod-
els hold important information and lessons for sustainable market linkages and
service provision, especially in areas with weak formal farmer organization.
Work in Colombia by one of the authors showed that traders are capable
of extending market linkage services to smallholder farmers in a sustainable
fashion when credit is provided (CIAT and CIPASLA, 2006). In some cases,
aspects of trader-driven approaches are adapted by the private sector in lead-
farmer models, such as those detailed in Honduras (Agropyme, 2006). A key
finding is that informal market linkages are a form of cooperation or quasi-
cooperation among farmers. For instance, informal moneylenders often hold
extensive information about the needs, weaknesses and strengths of their cus-
tomers, which moneylenders can leverage through supplying or by informing
suppliers. Importantly, these forms of linkage/quasi-cooperation are the build-
ing blocks for formalized cooperatives.
A more traditional approach is small-farmer organization induced by
external agents or a combination of external actors and small farmers. Processes
of induced organizations start from the assumption that existing market link-
ages are not effective either in terms of efficiency or in terms of equity and that
new skills and knowledge need to be developed to facilitate favourable market
linkages for smallholders. These interventions are often led by development
organizations and supported by donors although examples of private sector
initiatives of induced organization, such as contract farming and outgrower
schemes, also exist. Recent work raises doubts as to the sustainability of these
induced organizations supported by development actors due to pressures to
avoid failure (Berdegué, 2001), non-sustainable business practices (Hellin et al.,
2007; Shepherd, 2007) and inherent inefficiencies in the intervention model
(Berdegué et al., 2008a).
Despite the possibly poor performance of induced farmer business organ-
izations led by NGOs and the public sector, there are cases where such inter-
ventions are effective especially where the facilitating organization has a strong
business development focus. Of critical importance is a clear and consistent
focus on the business case for the intervention as well as a timeline after which
external support will cease. An example of this is the work carried out by the
Presidential Commission for Local Development in Guatemala, which focuses
on building ‘business ecosystems’ to support specific market opportunities. The
Commission identifies and links key service providers to the supply chain as
for-profit businesses rather than with donor subsidies. The resulting products
and services incorporate support costs as part of their overall pricing structure,
thus aligning incentives along the chain and increasing the possibility of success
as a business (Lundy and Fujisaka, 2008).
Business Models for Small Farmers 197
Regardless of whether or not the model selected is based on existing actors
and skills or is induced, these models can be grouped depending on the focus
they accord to diverse actors in the chain. Existing models tend to fall into three
general categories: (i) those that focus on developing and supporting producer
organizations; (ii) those that focus on specialized intermediaries; and (iii) those
that are driven by buyers. Despite the differences in entry points and emphasis,
all the models seek to connect actors to facilitate effective market integration.
Producer-driven models
Producer-driven models such as cooperatives and farmer-owned businesses
have had a mixed record of providing members with economic benefits in
terms of access to dynamic markets. Research in eight countries (Reardon and
Huang, 2008) found that membership of producer organizations was correl-
ated with participation in modern markets in only half of the countries; in the
rest the correlation was not significant or was negative. This is indicative of the
very diverse roles of producer organizations, from political lobbying to provid-
ing channels for government subsidies. Marketing cooperatives are rare, and
members typically remain oriented to the traditional commodity markets. In
cases such as Honduras, where they do exist, agribusiness has been averse to
purchasing from cooperatives due to slow decision making and limited entre-
preneurial focus (Agropyme, 2006).
But collective action remains an important strategy to increase small-scale
producer participation in emerging modern markets and to generate sustained
commercial flows of high-quality products. Effective business organization is
critical. Economic- and business-focused producer organizations differ from
welfare organizations in their entrepreneurial orientation and capacities, and
may build on existing informal networks of farmers and traders, as well as sup-
port from buyers or other chain actors. Business-oriented cooperatives and
employee-ownership models in Europe and North America provide some
insights on how this may be achieved but much remains to be learned from
existing informal network models common throughout the developing world.
An intriguing, if incipient, case is that of Mabeli S.A., a community-owned
essential oils corporation in highland Guatemala, where 51% of shares are held
by a community development corporation and 49% by producers of the firm’s
raw materials (Lundy and Fujisaka, 2008).
With regard to organizations that are driven and owned by small-scale pro-
ducers, such as Cuatro Pinos in Guatemala (Box 4) and NorminVeggies
(Concepcion et al., 2006; Box 9) in the Philippines, a rich range of models
exists to allow organizations of producers to collectively market despite mem-
bership heterogeneity (in terms of land and non-land assets), which can other-
wise lead to conflicts of interest within an organization. These management
models balance member inclusion and group competitiveness, and involve dif-
ferentiation of membership to cope with the range of landholdings, wealth,
education, etc. These include quasi-membership arrangements and top-up sup-
pliers, or clusters around lead farmers, whereby financially independent growers
198 B. Vorley et al.
Box 4. Cuatro Pinos, Guatemala. (From Lundy, 2007.)
Cuatro Pinos is a successful cooperative with nearly 30 years of experience in the
vegetable export business. Recently, the cooperative has succeeded in opening
large markets for several fresh vegetable products in the USA through an alliance
with a specialized wholesaler and several retailers. Existing demand significantly
outstrips the capacity of cooperative members, requiring the integration of new
producers, organizations and geographies. To achieve this, Cuatro Pinos identifies
existing farmer groups, including associations, cooperatives and lead-farmer net-
works, in favourable environmental niches, works with them to test production
schemes and then contracts those that show an ability to meet quantity and quality
targets. The cooperative signs a legally binding contract with the producer group,
which specifies quantity, quality and a production schedule, as well as providing a
fixed annual price for the product. Credit in the form of inputs and technical assist-
ance is provided. This is later discounted from the first few product deliveries.
Cuatro Pinos provides business and organizational support to its partner organ-
izations to increase their efficiency and access additional funding from diverse
sources for development activities. In 2006, Cuatro Pinos partners successfully
raised US$1.7 million for investments in irrigation, packing sheds, education and
housing. Through this model Cuatro Pinos has achieved an annual growth rate of
50% in vegetable exports over the past 3 years and expanded from 560 member
producers to a network of more than 2000 families. Nearly all the new producers
in the network are from regions with higher than national average poverty levels
and with limited access to land.
create market opportunities for small-scale farmers. Any member differentiation
can be a challenge to the cooperative ethos of equality and equity.
Despite the success of Cuatro Pinos and other models, these remain the
exception rather than the rule in producer-driven models. Common limitations
in farmer organizations include an excessive focus on democratic governance,
which, in many cases, leads to effective leaders being replaced every 12–24
months as stipulated by by-laws. This is avoided in the case of Cuatro Pinos by
having a professional management team that reports to the elected Cooperative
board but is not subject to annual or biannual elections.
Buyer-driven models
Buyer-driven models seek efficiencies in the chain to the benefit of processing
and retail. There are some very promising cases where the necessity of organ-
izing supply from a small farm base, often the case with milk procurement, for
example, has led to sustained inclusion of small-scale farms.
The classic model is where the buyer integrates backwards and coordinates
production (see Boxes 2, 3, 5 and 6). Both the producer and buyer ends of
value chains usually want to ‘cut out the middleman’ and want more competi-
tive buying markets in order to make a shift from a dependency on traditional
wholesale markets in pursuit of value, improved quality and product assurance.
Business Models for Small Farmers 199
Box 6. MA’s Tropical Food Processing (Pvt) Ltd, Sri Lanka. (From Samaratunga,
2007.)
MA’s Tropical Food Processing (Pvt) Ltd, established in 1987, is a family-owned
spice processing enterprise in Sri Lanka, which has shifted its focus to a central-
ized procurement system. The centralization process has increased the efficiency
of procurement through the reduction of the coordination cost.
Procurement is centred on the Regional Agribusiness and Perennial Crop
Initiatives and Development (Pvt) Ltd (RAPID), which is responsible for the back-
ward integration of the company’s activities in the supply chain and for delivering
its social responsibilities to the region. It provides extension services to the farmers
on production, record keeping and postharvest practices, organic certification,
supply of high-quality planting material and intermediation of commercial credit
from banks. It assures continuous supply of raw material at the right time in the
right quantity and quality and ‘eliminates non-essential intermediaries’ from their
supply chain. It has resulted in improved information flow among the supply chain
segments while reducing the marketing risk faced by both the company and
farmers.
The company sets its own private standards, which facilitate the standardization
of the products procured from different suppliers and differentiate the company’s
products from competitors. Further, the company offers farmers a considerable
adjustment period to bring the produce up to the standards and pays premium
prices to farmers who meet those standards. The company focuses on moving
towards logistic improvements in the supply chain by introducing new operations,
which have not existed earlier in the areas of grading, processing, packaging,
labelling, trademarking, etc. Those practices have made the company more com-
petitive in the local and international markets, enabling its products to satisfy the
newly emerging trends in consumer preferences.
Box 5. Dimitar Madzarov in Bulgaria. (From Bachev and Manolov, 2007.)
The private Bulgarian dairy processing firm, Dimitar Madzarov Ltd, has increased
by a factor of 20 its daily processing of milk, sourced from over 1000 small farms,
half of which have fewer than five cows. The firm has successfully met all the
requirements to continue selling its dairy products in a demanding and highly com-
petitive market. Part of the success of Madzarov in building a reliable milk procure-
ment system has to do with the high frequency of payment to its small-scale farmer
suppliers. In the case of the smallest farmers, the firm goes as far as advancing
payment. Access to this source of timely and reliable financing is considered by the
farmers to be of greater importance than the price received for their milk.
Direct procurement is often presented as a win–win–win for customers, busi-
ness and producers. Improved information flow among the supply chain seg-
ments can also help reduce the marketing risk faced by both the company and
the farmers. Another reason for businesses to organize their own supply base
is the lack of collective action by producers, often due to suspicion of coopera-
tives or laws that insulate producers from the market by obliging farmers to
200 B. Vorley et al.
trade through local government-controlled wholesale markets, such as the
APMC Act (law governing the marketing of agricultural products) in many
Indian states and the Wholesale Markets Law in Turkey.
Another example of a buyer-driven model from Sri Lanka is the supermar-
ket company Food City. This retailer has a high market penetration for food by
South Asian standards (15%), with nearly 120 stores, and a focus on middle-
and low-income consumers. Like MA’s (Box 6), the management of Food City
has a strong commitment to the reduction of rural poverty through its role as
purchaser of quality products. The company has made investments in back-
ward linkages (fruit, vegetable, rice and milk) and food processing (meats, ice
cream and processed fruits and vegetables). Food City is now looking at regional
expansion in Pakistan and Bangladesh.
Given the difficulties faced by producers in Turkey to organize themselves,
the few cases of successful direct relations between supermarkets and producer
organizations are largely implemented and promoted by supermarkets. For
example, Migros Türk achieved direct sourcing with the Narlidere Village
Development Cooperative in the Bursa region where others failed, only because
of its historical background and its anchoring within the Turkish agrifood chain.
Migros invests in capacity building of its supply cooperatives’ staff and supports
production management, thus going far beyond the incentives comprised of
formal contracts (Lemeilleur and Tozanli, 2006).
‘Contract farming’ can be successfully used by businesses to link small-
scale producers to modern markets where capital, technology and market
access constitute key limiting factors (Eaton and Shepherd, 2001; FAO, 2008).
Contracts provide benefits to traders and processors by removing the risk of
periodic shortages and volatile prices, which can be costly if they are servicing
large downstream contracts written in advance of a season (Hayami and Otsuka,
1993), or by allowing access to land, which may not be available to expand
plantation-scale production. Contract farming can also be an effective mech-
anism for risk management, because a well-run contract scheme with proven
production technology and guaranteed markets can help reduce risks normally
faced by unorganized farmers, as seen in the case of Cuatro Pinos in Guatemala
in Box 4. For farmers with small landholdings, a contract can also be used as
guarantee for loans; there are a growing number of providers of finance, such
as Root Capital,
5
who are prepared to provide cash flow credit to smallholders
who have secure contracts in place.
Organization of producers is just as important for contract farming as
management, and enforcement of contracts with individual smallholders is not
viable. Research from the Indian Punjab shows that companies involved in con-
tract farming prefer to work with medium- and large-scale producers to reduce
their transaction costs and ensure quality standards (Sharma, 2007). Enforcement
of contracts with small-scale producers is a thorny issue, especially when market
prices exceed the contracted price. Often, having market ‘contacts’ with whom
5
Root Capital is active in 29 countries in Latin America, Eastern and Western Africa and Asia
(http://www.rootcapital.org/where_we_work.php).
Business Models for Small Farmers 201
agreements can be brokered with a reasonable expectation of compliance is
more important than a legally binding but difficult to enforce formal contract.
Contract farming can be an intermediate step in the commercialization of
small-farmer production, as farmers innovate and reconnect with more trad-
itional system of brokers, but on their own terms. This, for example, is the case
with potato production in northern Thailand (Wiboonpongse et al., 2007).
Models of intermediation
Integrating forward (for producers) or backward (for retailers or processors) is
time-demanding and expensive. Business models transferred from the elite
retail-driven chains may be as inappropriate for agribusiness as they are for
small-scale producers. Despite the attractions of ‘cutting out the middleman’,
organizing direct procurement can have high transaction costs for private
players, and have mixed outcomes. In Mexico, Wal-Mart recently tried to buy
strawberries direct from the farmers, but withdrew due to high costs (Berdegué
et al., 2008b). Given these costs, a business model that works with chain
intermediaries, either traditional or new, can offer the opportunity to be profit-
able in highly competitive, price-sensitive markets.
It is much easier for retailers setting up in emerging economies to procure
from traditional wholesalers, and leave the wholesaler to grade for physical
quality, unless there are strong market incentives for retailers to guarantee
product quality, consistency, safety and traceability. This explains the relative
scarcity of evidence of farm-level restructuring and the type of model described
in Box 1 in developing and emerging economies (Reardon and Huang, 2008).
In Chinese horticulture, where the market is characterized by 50 million auto-
nomous producers, selling on spot terms through five million small traders,
where the retail market is very competitive and few companies are making
money, and where the majority of customers are not willing to pay for top-class
produce, the economics of backward integration are particularly daunting.
Although many supermarkets profess to be putting vertical coordination in
place, the majority of trade is via traditional traders.
There are, however, some very promising models of upgraded or new
intermediaries that are introducing food safety, consistent quality, year-round
supply and innovation, at a competitive price. Private companies are emerg-
ing as important intermediaries that enable small-scale farmers to supply to
supermarkets, as exemplified by Bimandiri in Indonesia (Box 7) and Hortifruti
in Honduras (Box 8). Another example is the production network for hot
peppers managed by the export firm, Hugo Restrepo and Company, in
Colombia and Peru. Under this model, the firm provides services to farmers,
such as access to seeds, drip irrigation technology and technical assistance,
as well as a guaranteed market via contracts to participating producers, pro-
ducer organizations and clients involving quality control and guaranteed vol-
umes (Ochoa and Lundy, 2001). While this is not an exclusively smallholder
model, it shows the range of services that a specialized intermediary organ-
ization can provide.
202 B. Vorley et al.
As is clear from the examples of Bimandiri, Hortifruti and Hugo Restrepo,
models of intermediation include a strong dose of service provision, including
finance – usually by the intermediary organization or specialized providers – to
balance both the needs of small-scale farmers and the realities of emerging
modern markets in terms of quality and volume. For example, the Los Angeles
Salad Company, which works as a wholesaler between Cuatro Pinos in
Guatemala and the retailer Costco in the USA, not only helps to market prod-
ucts and provides logistics support in the USA, but also provides technical
assistance in product quality, access to innovations in packaging and packaging
technology and assistance in new product development. LA Salad also helps
facilitate production planning and manages over- or underproduction in coord-
ination with other producer regions. Without the provision of these services,
the ability of Cuatro Pinos to sell consistently to Costco would be much lower.
These new intermediaries are characterized by increased knowledge manage-
ment (to improve chain coordination and quality), closer links to buyers and
Box 7. Specialized wholesaler: Bimandiri in Indonesia. (From Sandredo, 2006;
World Bank, 2007a.)
The Bimandiri company in Indonesia, which has changed from a traditional whole-
saler to a supplier of vegetables and fruits mainly to Carrefour, is an example of a
specialized intermediary. Bimandiri encourages farmers to cooperate in producer
organizations and works with those groups on the basis of agreed quantities. The
company has worked closely with its producer organizations, supplying technical
assistance and credit, in order to assure quality standards and consistent volumes
for its retailer client. Bimandiri has maintained preferred suppliers lists but moved
away from a close extension role. It continues to implement transparent negotiated
producer prices.
Box 8. Lead-farmer networks with Hortifruti Honduras. (From Agropyme, 2006;
Lundy, 2007.)
Hortifruti is the specialized wholesaler for fresh fruits and vegetables for Wal-Mart
in Central America. The company works with a variety of suppliers for vegetables
in Honduras and Nicaragua, often purchasing product from existing farmer coop-
eratives. However, it has experienced significant difficulties with these farmer
organizations in terms of lengthy decision-making processes. As a result, Hortifruti
Honduras has developed and promoted a ‘lead-farmer’ model of organization
through which it identifies and builds the capacity of farmers who can meet its
quality needs in a consistent fashion. After demonstrating such capacity, lead
farmers receive larger and larger orders for product or new products and are
invited to work with neighbouring farmers to meet this demand. Lead farmers pro-
vide access to technology, technical assistance and market access to their net-
work of neighbours as part of a bundle of production and marketing services. The
cost of these services is recouped via the sales margin to Hortifruti. The expansion
of this model depends on the identification of new lead farmers. Early results indi-
cate that it is low-cost, scaleable and sustainable.
Business Models for Small Farmers 203
incentives for product and process upgrading. This can be an important new
role for NGOs, though there is a growing appreciation of the efficiency benefits
of upgrading existing intermediaries.
A new generation of commercial intermediary in India is demonstrating that
service provision can itself be a profitable part of the business model, which can
trigger inclusive growth. The rural retailer, Hariyali Kisaan Bazaar, which is part
of the DSCL conglomerate, sells agri-inputs and consumer goods through its
chain of centres, which also serve as a common platform for providers of finan-
cial services, health services, etc. The Haryali centres are procurement hubs for
farm outputs, providing buyback and warehousing (Bell et al., 2007b; Gupta,
2008), and thus creating multiple revenue streams based on transparent and
effective participation in input as well as output value chains. Each Hariyali store
has a catchment radius of 20–25 km, comprising about 15–20,000 farming
families. They aim to provide producers with ‘urban amenities in rural areas’,
easy availability of quality products at ‘city-like’ fair prices and, through IT, pro-
vide commodity prices and commodity futures, as well as ATM access and
weather forecasts. On the procurement side, they create linkages between pro-
ducers and processors, exporters and retailers.
There are examples of producer organizations adding their own commer-
cial intermediary, in the form of consolidation and marketing units (Box 9).
Box 9. Normincorp in Mindanao, Philippines. (From Concepcion et al., 2006.)
Farmers of the Northern Mindanao Vegetable Producers’ Association, NorminVeggies,
are able to successfully participate in dynamic vegetable chains primarily because
of the organizational structure they chose in order to respond to the market chal-
lenges. This involves a corporation, Normincorp, which gives them the agility needed
for each development in the supply chain. Normincorp’s formation signified a new
development in marketing for small farmers. While established as a stock corpora-
tion, Normincorp functions more like a cooperative and has a social enterprise char-
acter. It was set up and operated with a keen business sense, and also with full
empathy for the small farmers. As market facilitator, Normincorp saw to it that pro-
duction was programmed by farmer clusters with their respective cluster leaders,
according to marketing plans, that quality farm and postharvest management could
be done by each farmer in the cluster, and that coordination could be provided for the
sequence of activities that include order taking, outshipment logistics, billing/charg-
ing, collection and remittance to the farmers. For these services, Normincorp earns
a market facilitation fee based on the value of the sale and uses the income to cover
the marketing management overhead.
Normincorp is not a trading company. Rather, it is a market facilitator linking
the farmer through his or her cluster directly to the buyer. The farmer is given the
buyer’s price, and he/she is therefore accountable for the product and retains own-
ership of the product up to the point of sale. This encourages the farmer to supply
the best quality since the price is given to him/her and all sales are remitted directly
after deducting the market facilitation fee, which is based on the quantity of
accepted vegetables. Conversely, all rejects are individually charged to the con-
cerned farmer. Labelling of products per farm or farmer provides this traceability.
204 B. Vorley et al.
Working with this new generation of ‘doubly specialized intermediaries’
(which are both business-oriented and development-motivated) such as
Normincorp is an area that appears to offer the greatest potential for linking
large business with small-scale producers.
Much more common at present are market-oriented but traditional traders
taking steps to improve quality in their supply chains, where suppliers produce
to the traders’ specifications (crop management, harvesting, packaging, etc.),
and where the traders invest in supplier training and other investments. A very
interesting example of a butterhead lettuce supplier to Ho Chi Minh City in
Vietnam has been identified by Cadilhon (2006). The farmer collectors who
supply the intermediary train farmers to grow and harvest high-quality lettuce.
Through this collaboration, and through investments and forward planning with
regular suppliers, the intermediary only gets high-quality product. In China,
agricultural brokers and traders were denigrated for several decades and the
government tried to ban them, but without success. The government realized
the vital role that an agricultural brokers’ association can play as a bridge between
small farmers and outside markets, and in contributing to farmers’ incomes and
rural development. It therefore adopted a new strategy designed to organize
them and regulate their activities after the economic reform (Shudon, 2008).
Export-oriented companies setting up in new supplier countries almost
always rely on intermediation to simplify decision making, reduce risk and
lower transaction costs.
Alternative trade models
Alternative trade models cover a range of initiatives that make use of third-
party certifications to monitor compliance with selected indicators valued by
diverse members of the supply chain. Chapter 7 (this volume) looks at this issue
in depth, particularly at how standards line up with issues related to CSR.
Alternative trade models can be divided by their principal focus. In the chapter
on CSR, the authors identify four categories based on the principal goals of the
standard: (i) environment; (ii) social; (iii) benefits to the local economy and com-
munity; and (iv) food safety and quality. For the purposes of this chapter, we
will briefly discuss standards that seek to promote benefits to the local economy
and community and how they seek to resolve the issue of business models. We
use Fairtrade as a model of what is, admittedly, a much wider pool of alterna-
tive trade standards.
6
Of the existing alternative trade models, perhaps the best known is
the Fairtrade movement, which has the objective of creating opportunities for
6
Other relevant standards that speak to small-farmer viability include SCS-001, Basel Criteria
for Responsible Soy, Rainforest Alliance, the Roundtable on Sustainable Palm Oil and the SAI
Principals and Practices for Sustainable Production. However, many certification schemes do
not contain elements of business models which may be considered as central to inclusion of
small-scale producers, such as transparency (including transparency of how the certification
premium is allocated), collective action, durability of trading relationships, etc.
Business Models for Small Farmers 205
economically disadvantaged producers as its strategic intent. Is there then, in
Fairtrade, a shortcut to inclusive markets? Is Fairtrade a valid business model
for large companies to translate into their mainstream trading, or at least a
source of elements for new business models?
Fairtrade has at its core the concept of ‘fairer’ pricing that gives growers in
developing countries a better price for their work and gives longer term stability
to producer–buyer trading relationships. The umbrella organization Fairtrade
Labelling Organizations International (FLO) stipulates two sets of generic pro-
ducer standards, one for small farmers and one for workers on plantations and
in factories. The first set applies to smallholders organized in cooperatives or
other organizations with a democratic, participative structure. The second set
applies to organized workers whose employers pay decent wages, guarantee
the right to join trade unions and provide good housing where relevant. On
plantations and in factories, minimum health and safety as well as environmen-
tal standards must be complied with, and no child or forced labour may occur.
As Fairtrade is also about development, the generic standards distinguish
between minimum requirements, which producers must meet to be certified as
Fairtrade, and progress requirements that encourage producer organizations to
continuously improve working conditions and product quality, to increase the
environmental sustainability of their activities and to invest in the development
of the organizations and their producers/workers.
The standards stipulate that traders have to:
?
pay a price to producers that covers the costs of sustainable production
and living;
?
pay a premium that producers can invest in development;
?
partially pay in advance, when producers ask for it;
?
sign contracts that allow for long-term planning and sustainable production
practices.
Finally, there are a few product-specific Fairtrade standards for each product
that determine such things as minimum quality, price and processing require-
ments. These have to be complied with.
Some elements of the Fairtrade model – such as commitment to long-term
trading relationships – are cornerstones of inclusive business. But, as a business
model for wider application, there are a number of limitations, some of which
are easier to resolve than others. There are deep tensions between the small-
holder and plantation standards, and the lack of a clear definition of ‘disadvan-
taged producers and workers’ based on access to markets as well as income. In
contrast to pricing models which are based on a combination of market condi-
tions and product quality, Fairtrade floor prices are fixed by FLO, and have
proven slow to change even in sectors where significant market price increases
have occurred, such as coffee.
For many large companies, Fairtrade accounts for a small proportion of
their overall purchases. Many food retailers have positioned Fairtrade as an
up-market niche, as a test of their customers’ willingness to pay for ‘non-
exploitative’ trading with primary producers, rather than as a corporate stand-
ard and a means to transform their mainstream businesses (Tallontire and
206 B. Vorley et al.
Vorley, 2005). Even within the Fairtrade movement, questions are being asked
about whether the purchase of certified Fairtrade goods is an effective way of
achieving systemic fairness in trade. These groups are investing in other
approaches such as in schemes to facilitate improved access to conventional
markets for marginalized producers, and lobbying on codes of practice on
retailer–supplier trade relations.
How Are These Models Impacting on Smallholders?
Impacts of different business models on smallholder farmers vary depending
on the model employed and the way this is implemented by the chain actors.
As the business axiom states, ‘you can’t manage what you don’t measure’
and increasing attention is being paid to the development of tools to assess
the impacts and sustainability of diverse business models. The paper on
Inclusive Business by the World Business Council for Sustainable Develop-
ment and SNV Netherlands Development Organization (WBCSD and SNV,
2008) distinguishes between direct economic benefits, indirect economic
benefits and broader social benefits. Recent academic work highlights consider-
able attempts at developing metrics for supply chains but none has been fully
implemented (Aramyan et al., 2006). The area of key performance indica-
tors for supply chains remains under development and is limited by a lack of
transparency and cooperation among supply chain actors (Van der Vorst,
2006). Despite these limitations, it is clear that business models have both
quantifiable and qualitative impacts on smallholder farmers. Both categories
need to be measured and assessed to understand the effects of the business
model on rural populations.
The first category comprises key quantifiable indicators, which are
focused on measuring chain-wide evolution. Those indicators relevant to small-
holders include production volumes, product quality, net income, distribution of
income among smallholders, within households and along the supply chain, as
well as the distribution of costs associated with risk mitigation and manage-
ment. These indicators can be complemented with additional quantitative
measures that assess the overall ‘health’ of the supply chain, such as market
position and penetration, profitability as compared to similar chains and trends
in volume and prices.
A second critical area of impact assessment focuses on qualitative or
skills-based indicators. While difficult to quantify, advances in skills and rela-
tionships underpin and sustain gains shown in quantifiable indicators such as
income and profit. Key skills related to the quality of the trading relationship
focus on negotiation, the construction of sustainable commercial relationships
and the governance functions of the chain itself. For chains linked to dynamic
market segments, additional attention should be paid to issues related to prod-
uct and process upgrading and collective innovation as the chain adapts to
increasingly demanding market conditions. While this process does not occur
fully at the farmer level, the existence of this skill set is critical for continuing
competitiveness of the overall system. Unlocking innovation and opportunities
Business Models for Small Farmers 207
for smallholders is a critical element of impact since this leads to benefits that
help drive farmer incentives for inclusion.
Changes achieved through producer organization models can improve
negotiating skills and enhance access to service provision. Models of producer-
driven vertical integration – either becoming co-owner of a supply chain or one
of its segments in pursuit of value-added – can make sense when built on a
business mentality. However, this downstream ownership route may not always
compare well to investments in building a network of specialized actors to
achieve similar goals. For instance, research in Africa provides interesting evi-
dence in this regard, showing that many of the benefits achieved by relatively
autonomous smallholder-owned and managed cooperatives can be captured by
more dependent, i.e. less highly trained and skilled, groups if appropriate links
are developed with other market actors (Stringfellow et al., 1997). The differ-
ence between choosing a strategy of vertical integration versus horizontal
cooperation may, therefore, boil down more to costs (money and time) than
notably different outcomes.
Some arrangements to sustain the inclusion of all members while maintain-
ing the competitiveness of the organization, such as lead-farmer clusters, which
accept differentiation within an organization based on assets, are a significant
and challenging departure from the original cooperative ethos of equal treat-
ment for all members. Cuatro Pinos (Box 4) exemplifies this tension. Despite
the success achieved in expanding a supply network by nearly 400% while
maintaining high product quality, the final distribution of benefits is still skewed
towards cooperative members as opposed to non-members, even though non-
members provide up to 80% of product volume in some categories. Farmers
who do not happen to live in the seven communities where the cooperative
was founded 30 years ago are not allowed to become members. This means
that they cannot access profit-sharing mechanisms developed by the coopera-
tive, which provide significant additional income to producers at the end of the
year. Cuatro Pinos’ management is aware of this issue and is seeking to resolve
it through service provision and increased prices and/or volumes from non-
cooperative members. However, it is members themselves who would need to
reform their organizational rules to allow the inclusion of new members (Lundy
et al., 2006). To date, this has not happened.
Models focused on intermediation drive change through processes of
negotiation among actors. They achieve efficiency gains through greater
organization along the whole chain through improved information flow and
shared standards. The distribution of additional benefits along the chain needs
to be negotiated and care exercised in not allowing the intermediary actor to
extract additional benefits based on information asymmetries. The develop-
ment of transparent pricing mechanisms is an important tool to reduce this
risk. For example, in Indonesia, the specialized wholesaler Bimandiri (Box 7),
which supplies fruits and vegetables to Carrefour, operates a transparent mar-
gin system to cover its participation in the system. All actors know the final
prices and the intermediary margin, thus avoiding windfall profits for the inter-
mediary organization when market conditions improve and providing an incen-
tive to increase volumes. In other cases, prices are set based on crop models
208 B. Vorley et al.
on a yearly basis. This can be done with producer participation, such as in
Cuatro Pinos in Guatemala, or a non-participatory fashion, such as in the case
of Hugo Restrepo and Company in Colombia. Regardless of how prices are
set, clarity on how prices reflect production costs, relative risks and returns is
critical to assure greater equity along the chain.
Buyer-driven models affect smallholders through the application of (often
strict) norms and standards relating to quality and volume. They tend to push
processes of functional improvement up the supply chain, often with limited
incentives to compliance beyond continued participation in the market. Because
of their proximity to the end buyers, these models can identify consumer trends
and can provide clear incentives for market-driven product and process upgrad-
ing. Additional benefits tend to accrue to buyers and care should be taken to
achieve transparent assessments of gains and meet equity concerns.
Cases of inclusion driven by private businesses are characterized by small
farmers having less say in the governance of the chain and by less capacity
building of small-scale suppliers beyond production and postharvest manage-
ment. Where a buyer organizes a network of producers from a corporate
responsibility ethic, the risk is more one of paternalism and dependence. On the
other hand, case study analysis (Berdegué et al., 2008a) found no evidence that
in such situations small farmers will have lower direct economic benefits, at least
in the short run. Also, under these conditions small farmers do not need to incur
the costs of coordination or of collective action. In the case of MA’s in Sri
Lanka, there were clear income benefits for smallholder suppliers (Box 10).
A buyer-driven network can be managed through using the transparent
pricing strategies highlighted above as well as the incorporation, where possi-
ble, of incentives based on quality. For example, the US speciality coffee com-
pany Intelligentsia Coffee and Tea manages a ‘direct relationship’ quality-based
model with producers. This model prices coffee based on its cup quality, with
payment going directly to the producer. Additional services needed to move
coffee from the farm to the US market are contracted by Intelligentsia directly
and not discounted from the farmer price (New York Times, 22 June 2006).
A drawback of buyer-driven models for producers is the frequent demand
for exclusivity. From a processor or retailer perspective, a supply chain is a
source of competitive advantage, and they will seek to exclude competitors and
prevent suppliers from ‘side-selling’. Because a buyer has invested in the supply
network, and because the buyer needs to be able to fulfil contractual obligations
for specific volumes to its customers, it will demand exclusivity from its small-
holder suppliers. This can be frustrating for producers, who do not see trans-
parency in how prices are set, or in how quality discounts are often determined.
The Kenyan supermarket Uchumi makes a point of not demanding exclusivity
from its smallholder suppliers. Another way around this issue is to have prices
set weekly rather than fixed at the start of the season, to reduce discrepancies
between contract and market prices (Box 11).
Alternative trade models, especially Fairtrade, have demonstrated success
in benefits transfer and consumer acceptance. None the less, an important
percentage of the Fairtrade premium resides with certification and coordinating
agencies. Gross margin at retail level is much higher than at other levels of the
Business Models for Small Farmers 209
Box 10. Impact assessment of MA’s procurement system, Sri Lanka. (From
Samaratunga, 2007.)
An impact assessment of the smallholder procurement system established by MA’s Tropical
(Box 6) showed clear improvements in corporate income, volume of trade, assets, farm
income, employment creation and non-monetary benefits while ensuring a greater degree
of inclusion of small farmers in the new supply chain. With inclusion in the company’s supply
chain, the farmers achieved a premium price for better quality products, price stability, a
spread of income throughout the year, and services such as extension, credit facilities and
marketing risk minimization.
Average yearly per acre income comparison (Rs/acre/year)
Farmers supplying to MA’s 98,000
Non-supplying farmers 48,000
Price comparison between MA’s and village trader (Rs/kg)
Cinnamon Nutmeg Cloves Pepper Citronella
MA’s 675 300 580 180 22
Village trader 550 150 360 125 12
This model has been in existence as a sustainable system for about a decade while
increasing its capacity for greater inclusion of farmers. The company has not yet reached its
potential capacity.
However, there is some evidence of exclusion through the higher transport charges,
delayed payments, use of cheques as the mode of payment and the low production cap acity
of the company. Even though the company has initiated an informal farmer organization,
lack of coordination and poor structure have excluded a certain stratum of farmers from the
system. Lack of quality consciousness and credit-bound relationships with the village trad-
ers also have some form of correlation with the exclusion of farmers from the chain.
Greater inclusion can be attained by creating an arrangement for the transport cost to be
borne by the company or farmer organization and by introducing a liquid mode of
payments.
Box 11. Adjusting payment terms: Vegpro in Kenya. (From Bell et al., 2007a.)
In common with other leading exporters of fresh vegetables from Kenya, Vegpro divides
production between its own farms and smallholder outgrowers, which it relies on for crops
that are not well suited to plantation production, such as peas. In 2007, Vegpro was pur-
chasing most of its snow peas from 3500 smallholder farmers organized into 50 self-help
groups. Despite the coordination offered by the self-help group structure, it is no small task
to ensure consistent volumes, quality and standards across 3500 farmers. Vegpro had pre-
viously been paying farmers a fixed year-round price that exceeded the average market
price over the course of the year. When the market price was below the fixed price, farmers
had been content to sell to Vegpro, submitting volumes that apparently included uncertified
produce from their neighbours. But, when the market price rose, farmers in need of cash
would side-sell to local traders. Vegpro reduced side-selling by employing field supervisors
and switching from annual fixed prices to weekly prices set in relation to the market price.
210 B. Vorley et al.
value chain. Consequently, it has been argued that consumers of Fairtrade
products are supporting the shareholders of the international retailers more
than the actual smallholder target groups. Incentives for product improvement
and innovation have been traditionally weak, with limited feedback regarding
consumer trends and demands beyond that covered by certification.
None of the above business models is inherently superior for smallhold-
ers, with the possible exception of classical Fairtrade. To initiate processes
quickly, intermediary or buyer-driven models are useful as they provide turn-
key solutions and somewhat lower risk. In the medium term, however, the
promotion of stronger producer organizations may build greater resilience
and increased participation in chain governance, especially if combined with
specialized intermediaries.
The selection of a specific model or elements from various models is highly
dependent on market conditions, participating actors and their knowledge and
skills and the existence (or not) of support agencies and policies. As market link-
ages evolve, models need to adapt to respond to changing market conditions as
well as in the relationships between the participating actors. Approaches need
to be piloted for specific locations, products, conditions and markets in order to
better understand how to update current models, and which forms of best prac-
tice need to be adapted to help support sustainable impact for smallholders.
What Can Be Done to Help Prepare
Smallholders to Participate?
What needs to happen at the farm level and in supply chains to support the
participation of small-scale farmers in dynamic and more profitable market
segments, from a business model perspective?
According to a study of 35 successful farmer-owned rural businesses in
Latin America (Camacho et al., 2007), producer organizations follow a sim-
ilar trajectory of skill development that includes capacities focused on: (i)
market linkages for goods and services; (ii) increased internal and bridging
social capital; and (iii) the development of professional management capaci-
ties. The development of these skills requires access to effective business
support services, effective alliances with other chain actors and an effective
enabling environment.
Support services may be technical, managerial or financial in nature, pro-
vided by diverse types of formal and informal service providers. But they share
several common factors: (i) a focus on effective solutions to bottlenecks that
cause exclusion; (ii) a business orientation to guarantee sustainability over time;
(iii) flexibility linked to client needs; and (iv) provision by operators close to the
clients. The topic has been covered in depth in the Business Development
Services (BDS) literature.
7
For many smallholders, service provision between
commercial actors, known as embedded services, holds promise in that these
services depend on commercial incentives rather than public subsidies.
7
www.bdsknowledge.org
Business Models for Small Farmers 211
Financial services are crucial for farmers to access dynamic markets and
sustain their participation in them. As supermarkets and processors tend to
pay only after a certain period (often 45 days or more), there needs to be a
mechanism to bring liquidity into the supply chain. In addition to working cap-
ital provision, other financial services such as cash flow finance, in which the
commercial relationship rather than collateral assets guarantee the loan, can
be arranged as three-way agreements among buyer, producer and finance
institution. The informal moneylender is likely to guard customer information
on risk and viability. One option is to transform the moneylender into a bank
worker. This has been proposed by some NGOs and external funders, but
there has been patchy success with this. A version of this transformation
rewards knowledge and innovation by the moneylender through private sector
arrangements.
There are often good reasons for a lack of embedded services in rural
areas. Successful services rely on knowing the customer well and research
shows that this knowledge is difficult for non-residents to obtain or interpret.
The use of tools that strengthen the capacities of informal service providers to
identify, provide and improve their embedded services in rural areas is of criti-
cal importance.
A crucial point in times of high and volatile market prices is the develop-
ment of models of reciprocal responsibility between buyers and producers. As
prices and demand rise, producer organizations will be tempted to break con-
tracts and side-sell committed volumes to other buyers offering higher prices.
This might generate additional income in the short term, but it is critical to
recognize that sustainable relationships can generate additional negotiation
power in the long run. In addition, sustainable relationships lay the groundwork
for the development of joint ventures for new product development and co-
investment. Opportunistic behaviour works directly against this possibility.
The above interventions must link to a suitable enabling environment, the
components of which are described in more detail in the section ‘What are the
Priorities for the Public Sector?’ and in Chapter 5 (this volume) as well.
What Do Business Partners Have to Consider and Do in Order
to Work Successfully with Smallholders?
We have seen in the first section that the biggest challenge for large businesses
to work with small-scale farmers is that of organizing supply. Without a means
to reduce transaction costs, ensure due diligence and ensure that trading agree-
ments are honoured, they will see smallholder suppliers as a threat to their
‘value proposition’. In the section ‘What Is the Business Case for Adjusting
Business Models in Favour of Smallholders?’ we saw that there are many exam-
ples of companies organizing their own supply base and setting up producer
groups, especially where there is a lack of collective producer action. But organ-
izing direct procurement is costly for private players, and such efforts are likely
to remain as small CSR pilot projects. Where there has been positive business
action, it has largely focused on niche export markets to the north rather than
212 B. Vorley et al.
the much more pressing challenge of inclusive development within ‘transform-
ing economies’ where 80% of the world’s rural poor live.
Opportunity lies in the ‘Partner network’ part of the business model tem-
plate in Figure 1. Much private sector policy is rooted in the procurement-
profit philosophy, without extending this approach to co-investment or
partnership win–wins. A suggested refocusing of private sector innovation and
incentives on sustainable supply from small-farmer networks has the potential
to unleash the best of all worlds.
Upgrading mainstream procurement
Much can be done by businesses to upgrade mainstream procurement within
their existing model to ensure that their procurement practices work to the
benefit, rather than detriment, of small-scale producers and suppliers. The clear
business incentives are continued access to supply, option to be the ‘buyer of
choice’, access to better quality supply and a social licence to operate. Points
of focus here are coherence between corporate policies and actual procure-
ment practices, through adjustment of reward systems for buyers, and through
senior management buy-in. A reorientation of training and development aware-
ness of buyers is a first priority. The asymmetries of market power between
sellers and buyers have, until recent food price rises, allowed retailers to simul-
taneously extract both lower prices and higher standards from suppliers.
Traidcraft’s reports on purchasing practices are an excellent source of further
information (e.g. CIPS and Traidcraft, 2008). Payment terms and contracts
can be adjusted to the realities of smallholder production without compromis-
ing commercial imperatives (Boxes 11 and 12). Buyers are quick to criticize
‘side-selling’, but may readily engage in ‘side-buying’, procuring opportunistic-
ally outside of established supplier networks for short-term profit.
Frequent and consistent access to information on market trends, projected
volumes and production technology, in addition to shared decision making in
regard to chain rules and price structures, is also critical. Better forecasting and
planning can reduce some of the pressures on suppliers that drive poor work-
ing practices and casualization of labour.
Box 12. Adjusting contracts: Postobon in Colombia. (From Espinal et al., 2005.)
One way to handle the problem of side-selling is through specific agreements that
recognize opportunities and include them openly in negotiations. In Colombia,
demand for tropical fruit pulp exceeds supply. As a result, the private sector firm
Postobon began offering annual contracts to smallholder blackberry farmers that
contained two market condition-related clauses. In times of high market prices (a
seller’s market), producers were allowed to sell up to 20% of their total volume to
other buyers principally for the fresh market. In times of low market prices (a buyer’s
market), Postobon was allowed to purchase up to 20% of its total volume from non-
contracted suppliers. These agreements explicitly recognized the pressure for
opportunistic behaviour and identified mechanisms to manage them.
Business Models for Small Farmers 213
There are also models of inclusive procurement, built on preferential
sourcing from small-scale producers and family farmers and their organiza-
tions. For example, Carrefour Indonesia has established a dialogue with SME
suppliers of fresh food (vegetables, fish), household equipment and textiles, to
improve product quality and packaging and improve their shelf access, in part
by waiving the listing fee normally charged to companies waiting to sell to the
chain. Similarly, Wal-Mart, Honduras, has established the ‘Una Mano para
Crecer’ (‘Help to Grow’) programme for SMEs.
Part of a commitment to inclusive procurement should look at alternatives
to paternalistic supply systems and demands of supplier exclusivity. While it is
tempting to want to ‘cut out the middleman’, chain intermediaries often are
vital in linking smallholders to dynamic markets, and are of particular import-
ance to the poorest farmers and to those located further away from the mar-
kets and the main roads. There is much for food processors and retailers to do
to cultivate efficient intermediaries, including those set up through producers’
own initiatives, rather than seeking to eliminate them from the chain.
Better standards
The issue of private sector standards is also central to pro-smallholder business
models. GLOBALGAP is now a passport to the most demanding export mar-
kets, but many compliance costs are not a function of the volume of production,
but are per-farm costs, thus pushing up the per unit cost of compliance for small-
scale producers. This applies as much to standards for ‘sustainability’ as to those
for food safety and traceability. A lack of coordination between schemes means
farmers certified to multiple standards must pay for separate audits. There are
pro-smallholder approaches to standards, including group certification and com-
bined audits, as well as the use of local certification agencies, but also more
fundamentally the participatory development of standards, involving the farmers
who will have to implement them – the ‘standards takers’ – from the outset.
Pan-industry initiatives
Not all aspects of business models are competitive. Much can be achieved
through industry collaboration to create an environment for more inclusive
markets. Cross-industry codes of conduct established by the business sector
and regulated by them, for example, in Argentina (Box 13) can provide much
needed oversight of trading relationships at the domestic level.
What Are the Priorities for the Public Sector?
Innovative business models can make a positive difference in terms of inclu-
sion. The role of public policy is not a primary focus of this chapter. But it is
important to note the potential of proactive policies – including infrastructure,
214 B. Vorley et al.
finance and support services – to stimulate and support those types of business
models which are more inclusive and that are also good business. There is a
vitally important role for the public sector to facilitate successful alliances
between smallholders and larger business, especially if successful small initia-
tives are to be scaled up.
The enabling environment
8
A priority area of intervention is that of the enabling environment. Recent work
by the World Bank on agricultural innovation systems identifies a range of
options to support an enabling environment that promotes innovation. Key
findings from this work include the importance of using targeted public and
private research investments to resolve technological bottlenecks in the supply
chain, the inclusion of social and environmental sustainability criteria, a focus
on outcomes in terms of poverty reduction and a focus on collaboration among
actors as a driver of competitiveness (World Bank, 2006). The consistent provi-
sion of key infrastructure services (roads, water, electricity and communica-
tions) is a central element of an enabling environment, as are relevant public
policies to maintain a competitive market, oversee the working of contract laws
and contractual enforcement, and oversee FDI and taxation.
Investment in traditional and wholesale markets is clearly an important
priority for public policy. Where wholesale markets fail to keep up with changes
in retail – especially the supermarket revolution – they can fall into decay.
Traditional markets can be a bridge for small-scale farmers to increase their
capacity and to eventually link to modern markets. Successful upgrading and
modernization of wholesale markets and their procurement networks also
Box 13. Best commercial practices code in Argentina. (From Brom, 2007.)
Rapid investment by global and regional retail players in Argentina in the late
1990s created fierce competition with local retail investors creating a trading envir-
onment unsatisfactory to small companies, a poor bargaining position for many
and complaints at all levels. The choices faced by the sector were either to develop
a private code or to submit to government legislation. The Food and Beverages
Manufacturing Association (COPAL) and the Argentine Supermarkets Chamber
(CAS) worked together with reference to evidence and experience from across the
globe to develop a private code of practice, which was signed in June 2000. Since
then supplementary rules have been added and the approach shared with many
countries in the region and indeed worldwide. Similar private sector codes have,
for example, been developed and adopted in Colombia and Mexico. Seven years
on, there has been significant improvement in both free and fair practice and thus
competitiveness. The culture and way of doing business have changed with a dra-
matic decline in cases submitted for mediation or arbitration.
8
See also Chapter 5, this volume.
Business Models for Small Farmers 215
require upgrading and modernizing of their primary clients – the traditional
retail sector – if they are to remain crucial players favouring inclusion of small-
scale producers.
Where land is unequally distributed, as in South Africa, this becomes a
significant determinant of market inclusion as the modern market will always
seek to source from the large farm sector. Under these conditions of dualistic
farm structure, inclusion attempts will be working against gravity, and public
policy has a vital role.
Donors are increasingly interested in facilitating the bridge between the
majority of small-scale producers and modern markets. Businesses can develop
effective initiatives in partnership with governments, donors and NGOs, and
can learn as much from the successes and failures of development agencies and
NGOs as the latter can learn from business. For example, the self-service
wholesale operator METRO Cash & Carry is working with the Vietnam Ministry
of Trade and the German development agency, GTZ, to support development
of Vietnam’s distribution network. However, until these donor-supported initia-
tives are scaled up and become self-supporting, the question of tokenism and
long-term sustainability remains. As an alternative approach, a number of
donors have in place business challenge funds. The Africa Enterprise Challenge
Fund, the Financial Deepening Challenge Fund and the USAID Global
Development Alliance offer the opportunity for innovative business models
within inclusive agrifood markets to be both explored and developed.
At some point governments must balance equity and efficiency, despite the
compelling case to support the huge numbers of small- and micro-scale farms.
The costs of inclusion and exclusion must be evaluated in considering policy
options. Evaluation of future scenarios should attempt to include estimates of
these costs in order to provide additional insights to the real costs and benefits
of the policy options. Case study evidence suggests that inclusion into restruc-
tured markets may be unsustainable for the ‘poorest of the poor’. There is a
lack of data to inform resource allocation and thus, for example, the threshold
for support. Such thresholds can be a minimum size of farms, but may also
include non-land triggers such as completion of training or membership of a
producer organization.
Partnership facilitation and chain-wide learning
A key pattern in successful linkages between small-scale farmers and dynamic
markets is the collaborative arrangement between: (i) trained and organized
farmers; (ii) a receptive business sector; and (iii) conducive public policies and
programmes (Figure 2). Such arrangements may benefit from specialized part-
nership facilitation. Innovation in building inclusive markets is greatly enhanced
when business actors within the market chain engage along the whole chain,
together with indirect businesses (input suppliers, etc.), and with relevant public
institutions. If interventions are made without coordination, they can lead to
market distortions instead of market development, potentially flooding markets
and supporting inefficient production systems.
216 B. Vorley et al.
The development of collaboration among actors requires linking actors in
ways that facilitate discussions and information exchange among them.
Examples of how this can work include chain-wide committees facilitated by
Ministries of Agriculture, ‘inter-professional’ or commodity associations formed
by the chain partners (Shepherd and Cadilhon, 2009), and the use of public–
private partnerships. Difficult issues such as power and knowledge asymmetries
need to be carefully managed to avoid excluding weaker members of the chain.
Examples include work in Colombia
9
and Honduras, as well as a link between
the Centre for Agricultural Policy and Agribusiness Studies (CAPAS) at
Padjadjaran University in Indonesia and Carrefour Indonesia. A memorandum
of strategic cooperation between the two involves developing a supply chain
model involving small-scale suppliers, development of new agricultural prod-
ucts, transfer of know-how and channelling of products to the Carrefour quality
line programme.
Encouraging procurement from small and family-scale farmers
Apart from providing an enabling environment and appropriate services, there
are examples of specific policy innovations to encourage procurement from
small and family-scale farmers:
?
The biofuels Social Seal in Brazil is a promising example of a tool to
improve the equity of the ‘biofuels revolution’ by providing the downstream
biodiesel industry with incentives to source their feedstock from smallhold-
ers and family farmers (Abramovay and Magalhães, 2007).
?
Private–public partnerships in Michoacán, Mexico, have been organized to
coordinate the production and marketing of avocados built around phyto-
sanitary standards (Medina and Aguirre, 2007).
?
The use of policy pressure or incentives to agribusiness and retail for pro-
poor procurement, such as requiring supermarkets to provide adequate
space in their shelves for small-scale farmers’ products.
Facilitating public
sector
Partnership
facilitation
Trained/
empowered
farmers
Receptive business
sector
Figure 2. Foundations of sustainable market linkages between small-scale
producers and agribusiness. (From: Berdegué et al., 2008a.)
9
http://www.agrocadenas.gov.co.
Business Models for Small Farmers 217
?
A supplier ombudsman with an independent regulatory role to oversee the
way in which powerful buyers such as supermarkets engage with their sup-
pliers has been established in Australia.
Closing Comments
There is a sound business case for securing and enhancing small-scale produ cers’
inclusion, which can bring both economic and wider development gains. This
requires that appropriate business models are applied and, where applic able,
that this is done in partnership with producers, the public sector, inter mediaries
and development agencies. Two big challenges are evident when seeking to
apply inclusive models to developing country economies dominated by small-
scale producers, either for domestic retailing and processing, or for exporting.
The first is organizing and upgrading supply from a dispersed producer base.
The second is traceability and quality assurance. Through attention to the ‘part-
ner network’ in the business model framework (Figure 1), the value proposition
of modern agrifood business and cost structure can be maintained or even
strengthened by building in inclusion of small-scale producers and suppliers.
Successful models tend to evolve towards a common set of principles
(Hobbs et al., 2000). These include: (i) greater information and knowledge
flows; (ii) a focus on differentiated products; (iii) an orientation towards market
demands; and (iv) chain-wide organizational structures that recognize the inter-
dependence of actors and facilitate collaborative problem solving. The sum of
these principles is systemic competitiveness, which is based not only on the
efficiencies of individual actors but also on collective efficiencies. The classic
business model schematic in Figure 1, which describes the individual firm,
therefore needs to be revisited to reflect how chain actors can collaborate to
build a chain-wide model that balances risk, responsibilities and benefits along
the chain while not undermining competitiveness.
The business models concept is especially useful in helping business to
understand the reach of downstream decisions on how value is created or lost
by supply chain actors, including smallholders. But business models that work
for more inclusive market development are not exclusively about procurement.
The approach compels us to look to effective alliances and linkages by all chain
participants. This rarely occurs spontaneously, given the often adversarial rela-
tionships that characterize commercial links in the agrifood sector. As a result,
specific actions to clarify and develop plans for collective action at the chain
scale are needed. Some good tools can be found in participatory chain analysis
and upgrading manuals (Lundy et al., 2006; Vermeulen et al., 2008).
Another benefit of the business models concept is that it forces us to
rethink CSR. The contemporary approach to CSR, with its emphasis on sup-
plier codes and compliance, has been marginal to the issue of addressing the
position of primary producers. Imposing pro-poor and inclusive procurement
on suppliers, with the usual tools of supplier standards and compliance, will
not bring about more inclusive markets. Nevertheless, there is a valid debate
in rural development about the relative contribution of smallholder production
218 B. Vorley et al.
versus plantation wage labour to the rural economy and to poverty reduction.
Many wage labourers are the poorest of the poor, what OECD-DAC refer to
as Rural World 4 and Rural World 5 (OECD, 2006). The approaches to CSR
and business and development have themselves diverged, with ‘ethical’ being
focused on compliance approaches to labour standards, while ‘fair’ focuses on
small-scale producers.
Another debate is between the importance of ‘modern’ and ‘traditional’
markets. Many of the models developed around modern restructured chains
apply equally well to local and ‘traditional’ markets. Some emerging modern
markets are extremely small, niche and donor-influenced, and a distraction
from the priorities of broad-based rural development. Furthermore, even very
progressive modern procurement systems can be exclusionary. Producers,
intermediaries, buyers and support agencies must evaluate their options very
carefully; there may be better rewards in the traditional markets, thanks to the
high volume and less stringent standards. We need to know more about the
applicability of new business models to trade with traditional markets.
This leads to the importance of acknowledging the risks of the ‘new busi-
ness model’ concept. It is an open question whether new business models will
benefit the poorest, and, if they do, whether they will ever be sustainable. Over-
reliance on markets coupled with voluntary pro-poor initiatives by business
misses the point of market governance, whereby genuinely effective business
models work best in a strongly supportive policy environment for both produ-
cers who want to connect to those chains and those who cannot. Policy atten-
tion will always be required to prevent persistent and engrained abuse of power
in asymmetric power relations. Business models do not resolve other key issues
such as infrastructure investments that may be critical to upgrade excluded
producers. These ‘hidden costs of inclusion’ are not well accounted for in busi-
ness models, but failure to include them limits the effects of even the most
progressive approaches on the rural economy.
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Introduction
The world can embrace new roles for business in society but achieving progress
still requires major and sustained investment from all sectors. This simple fact
certainly holds true when considering the agrifood industry’s initiatives to
improve conditions around food value chains, even if it is at times ignored. At
one extreme, companies promote ‘responsible’ practices that only well-resourced
value chain partners can implement; at the other, businesses work hand in hand
with other sectors to achieve change that benefits the poor. Similarly, the public
sector seems at times unable or unwilling to invest in food value chains as
engines of national growth. In other situations it has built on the power of busi-
ness innovations to reap economic and social benefits beyond the interests of
individual companies. This review of corporate social responsibility (CSR) in the
agrifood sector provides a landscape of opportunity won and lost and encour-
ages the most promising strategies and collaborative approaches.
There is increased attention to the engagement of business in society.
There is growing recognition that private enterprise that operates on an inter-
national scale must help find solutions to global problems. Governments, non-
governmental organizations (NGOs) and the media have put large companies
in the spotlight to account for the social consequences of their activities. As a
result, CSR has emerged as an important area of action for large companies
globally. For the agrifood sector, which is dependent on natural, human and
physical resources, responsible innovation is increasingly being viewed by firms
as a corporate and strategic necessity to ensure long-term sustainability.
Few industries have the potential to contribute to development progress
on the same scale as the agrifood industry. Its value chains involve millions of
7 Corporate Social Responsibility
for Agro-industries
Development
*
CLAUDIA GENIER,
1
MIKE STAMP
2
AND MARC PFITZER
3
1
Senior Consultant, FSG Social Impact Advisors, Geneva, Switzerland;
2
Consultant, FSG Social Impact Advisors, Geneva, Switzerland;
3
Managing
Director, FSG Social Impact Advisors, Geneva, Switzerland
* This chapter was prepared with support from Nestlé and with assistance from the Sustainable
Agriculture Initiative (SAI) Platform and the Sustainable Food Laboratories.
224 C. Genier et al.
people, from farm input providers to consumers, with many from developing
countries. A relatively small number of companies have the ability to affect the
lives of millions of people and their use of natural resources. Yet the agrifood
sector today faces critical challenges: global food demand is due to double in
the coming 25 years, requiring an equivalent increase in agricultural produc-
tion. The growth in demand increases the potential to capture value from agri-
culture and food production, and could offer large numbers of small-scale
producers an opportunity to improve their livelihoods. For this to occur, how-
ever, a fair share of the value generated by agrifood chains needs to be cap-
tured upstream at the producer level. Particularly in countries where agriculture
is a major source of GDP growth, the agrifood industry is of critical importance
in fighting poverty and achieving progress towards the Millennium Development
Goals (MDGs). The emergence of CSR has played a significant role in stretch-
ing the boundaries of action of corporations towards these objectives.
Many companies have engaged in CSR for defensive reasons. While some
companies view CSR principally as a public relations tool based on traditional
philanthropy, others use it to prevent negative media publicity by imposing
‘ethical’ codes of conduct within their value chains. Increasingly, too, they
cooperate with competitors in the same industry in an effort to set common
values, spread risks and shape opinion.
This approach has historical precedence. The knee-jerk reaction of criti-
cism for poor standards has been to ‘fix the problem’ and to ask business part-
ners in the value chain to do the same. Driven by concerns about food safety,
voluntary standards and codes have proliferated into a long list of competing
norms, which progressively included a broader set of environmental and social
concerns. On the positive side, these norms represent a new frontier of prac-
tices leading to more sustainable agrifood value chains;
1
their impact on devel-
opment objectives, however, is less clear. Standards and codes help achieve
progress when they are adopted; yet adoption requires considerable and tai-
lored investment in farmers’ aspirations, skills, capital and context. Well-
resourced value chain partners (in richer countries) can more easily adopt new
practices without external support. Poor rural communities, on the other hand,
may find it significantly more challenging to join these ‘responsible’ supply
chains without assistance.
A growing number of leading companies, of which some are featured in
this chapter, take a broader view of CSR. They see an opportunity to create
‘shared value’ through their activities and investments, benefiting all stakehold-
ers in the agrifood value chain including (but not limited to) themselves, as well
as the society in which they operate. This motivates such companies to foster
stronger ties with local producers, suppliers and communities. Approached in
this more strategic and proactive way, CSR can become part of a company’s
long-term competitive advantage by creating more favourable conditions
for business. Such ‘integrated’ strategies combine business reengineering and
strategic social investments: the first, to change how business is conducted; and
the second, to improve the context in which such innovations are delivered.
1
For a more detailed description of corporate innovations in socially responsible behaviour as
a moving frontier, see Martin (2002).
Corporate Social Responsibility for Agro-industries 225
Looking at such ‘proactive’ examples from the agrifood sector, we find
that corporate initiatives that go deep into rural areas with appropriate
resources to transform food value chains tend to present more tangible eco-
nomic and social benefits than those based on a more defensive view of CSR.
Direct investment in communities, as seen through specific case studies and
value chain innovations featured in this chapter, enables companies to recon-
cile their supply chain priorities with community development and environ-
mental gains. These examples are compelling, but alone will not add up to the
development of competitive and sustainable national agrifood sectors: projects
typically reach select communities for specific objectives of interest to spon-
soring companies. What is left are ingredients for scale-up, which must be
nurtured by the public sector and civil society as promoters of implementation
at national levels.
This chapter examines the principal dynamics created by the defensive and
proactive strands of CSR in the agrifood sector.
Approach
This chapter explores the CSR initiatives of agrifood companies that have
potential to:
?
preserve and improve the natural environment and community welfare; and
?
increase the inclusiveness and competitiveness of agrifood companies.
As primary research, the chapter builds on an analysis of a number of stand-
ards and codes, as well as several case studies of value chain innovations driven
by companies for business and/or philanthropic reasons. It further integrates
secondary research from relevant publications on sustainable agriculture.
To understand the current state of standards and codes as tools to promote
sustainable agriculture, and the impact they have had, an extensive literature
review was conducted and 14 schemes selected for detailed analysis from a list
of over 100 (see Annex 1). In addition, ideas and hypotheses were tested with
external experts from the agrifood industry, standards organizations and the
non-profit sector.
The review of over 40 projects conducted by corporate members of the
Sustainable Agriculture Initiative (SAI) Platform was followed by in-depth
research into seven case studies, which increased our understanding of value
chain innovations in the agrifood industry.
In addition, nine experts from five multinational companies were inter-
viewed by telephone. Secondary research included a review of relevant reports,
studies and articles from various sources.
The research examines the two prevailing modes of action at the forefront
of agrifood companies’ CSR agendas: the roll-out of standards and codes, and
value chain innovations. It explores the motivations for implementing such
initiatives, and their effectiveness. The chapter further explores the role that
government and civil society can play to make CSR a more effective tool in
the development of agrifood chains that are equitable and inclusive, as well as
competitive.
226 C. Genier et al.
Standards and Codes: Use of CSR for Risk Management
Agrifood companies use standards and codes as tools to promote sustainable
development through their supply chains by influencing suppliers to adopt
more environmentally and socially responsible practices. All standards consist
of a series of criteria, or rules, with which third-party suppliers are asked to
comply (though the number, content and stringency of these criteria can vary
substantially between schemes). In many cases, they represent an attempt to
bridge the gap between legal and social norms in producer and consumer
countries and, particularly on social issues, they may be developed in response
to perceived weaknesses in laws and law enforcement.
Companies are motivated to roll out standards and codes for several rea-
sons. First, standards and codes increase the control they can exercise over their
supply chains in a cost-effective way (at least for the company), in order to man-
age risks relating to food safety and corporate reputation. In an industry with
such a high degree of exposure to consumers, this control is very important: a
company whose food products are contaminated, or whose suppliers exploit
child labour, can suffer serious reputational damage. Moreover, legislation passed
in Europe, Japan and the USA in the early 1990s requires retailers to conduct
‘due diligence’ on food safety; companies that cannot demonstrate that their
products are safe to eat may not be allowed to sell to these markets at all.
Standards and codes are also important to validate claims of sustainability
made for marketing purposes – particularly when they are associated with a
label or a charter mark. This has been historically important for niche schemes,
such as Fairtrade or Organic produce, which must justify higher prices to con-
sumers. Today, companies are increasingly incorporating sustainability claims
into mainstream brand strategies. One noteworthy example is Unilever’s deci-
sion to ensure all of its Lipton and PG Tips brand tea is certified by the Rainforest
Alliance by 2015 (see case study 6 in Annex 2).
For companies that have decided to take action on sustainable develop-
ment through their supply chains, there are a number of pragmatic, opera-
tional reasons for choosing standards and codes over other modes of action.
Most import ant among these is that the approach is well understood. The earli-
est schemes relating to food safety have been in existence for more than 2
decades. During that time, managers have had ample opportunity to build up
experience on how they work and how to implement them on a large scale. As
more companies have taken specific action on sustainability, the pool of knowl-
edge in this area has grown further. Managers can access information and
support from colleagues and competitors (e.g. through industry platforms such
as SAI), as well as from specialized firms such as consultants and IT providers.
Schemes also provide companies with a ready-made ‘to-do’ list of good
practices, allowing them to quickly and easily identify the specific changes they
hope to induce.
Companies typically adopt two approaches to implement standards and
codes. In some cases – Fairtrade, for example – producers are offered an incen-
tive scheme such as a price premium or guaranteed purchasing agreement if
they meet the criteria, or work towards doing so. In others, a market entry
Corporate Social Responsibility for Agro-industries 227
‘stick’ is applied; producers that cannot or do not comply within a given time
period are excluded. These approaches may be combined, depending on both
the schemes themselves and the companies that use them. There is some evi-
dence that, particularly in mainstream/mass market supply chains, the ‘stick’
approach predominates (Rotherham, 2005).
The current situation
In recent years, standards and codes have proliferated. Over 100 different
schemes covering various aspects of sustainable development can be found by
carrying out a simple web search. Their origin explains this complex
landscape.
Food safety considerations were amplified in the late 1980s and early
1990s when, after a series of health scares, regulation was passed in
European countries, Japan and the USA requiring retailers and, by exten-
sion, manufacturers to conduct ‘due diligence’ against contamination. A par-
allel movement saw specialist schemes focused on sustainable development
emerging under the leadership of NGOs and social enterprises such as the
Utz Kapeh Foundation. In recent years, the worlds of food safety and sus-
tainable development have moved closer together. The rise of consumer and
activist pressure for more sustainable food production has led many schemes
that initially focused on quality and food safety to expand to other sustaina-
bility-related issues. Companies saw opportunities to use sustainability as a
marketing attribute; illustrated, for example, by Nestlé’s Fairtrade-labelled
‘Partner’s Blend’ coffee, or Anheuser-Busch’s entry into the organic beer
market.
Many companies have developed their own proprietary schemes, aimed at
their suppliers. More recently, thinking has evolved from seeking to ‘take on
the world alone’ to a recognition of the need for cross-industry collaboration.
There is some evidence that companies are moving away from an in-house
approach to adopt independent, third-party frameworks. In 2003, for exam-
ple, Chiquita applied a proprietary code of conduct; today 100% of Chiquita’s
owned plantations are certified compliant with GLOBALGAP, the Rainforest
Alliance and SA8000.
2
Partly in response to these trends, the number of independent, third-party
standards and codes is increasing. Many are designed specifically for the agri-
food industry, and have been developed and backed by governments, NGOs,
2
Editors’ note: As we indicated in Chapter 2 (this volume) GLOBALGAP is a private sector
body that sets voluntary standards for the certification of agricultural products internationally.
The Rainforest Alliance sets standards for environmental and social community sustainabil-
ity. SA8000 refers to Social Accountability International’s system for managing ethical work-
place conditions in global supply chains. The Ethical Trade Initiative identifies and promotes
good practices in the implementation of codes of conduct regarding labour standards. ISO
14002 is one of the sets of environmental management systems specified by the International
Organization for Standardization (ISO).
228 C. Genier et al.
industry consortia or private organizations. The basic business model of many
of these schemes is to build legitimacy and revenue through widespread adop-
tion. Privately owned schemes rely on income from royalties, consultancy fees
or franchising rights, while NGOs and government-backed frameworks need to
demonstrate certain levels of uptake in order to continue to receive funding.
The more general standards and codes, such as those of the Ethical Trading
Initiative, SA8000 and ISO 14002, do not rely only on the agrifood industry
for survival.
Detailed analysis of 14 schemes
Fourteen independent, third-party standards and codes have been analysed in
detail, yielding a number of insights. While each covered a slightly different set
of issues, it was possible to map the main areas that schemes aim to address,
across four basic categories:
?
Environmental criteria focus on:
– ecosystems and biodiversity (e.g. provisions to protect virgin
forest);
– natural resource inputs (e.g. water use, soil quality);
– man-made inputs (e.g. agrochemicals, pest control, GMOs);
– energy use and GHG emissions;
– waste management;
– production practices (e.g. crop rotations, site selection, animal
welfare, overfishing).
?
Criteria on labour conditions can be grouped into:
– occupational health and safety;
– terms of employment (e.g. pay, hours, contracts, regularity of
work);
– human rights in the workplace (e.g. right of association, rights for
casual workers, no forced or child labour, non-discrimination);
– general employee and family welfare (e.g. housing, access to educa-
tion and healthcare);
– energy use and GHG emissions;
– waste management;
– production practices (e.g. crop rotations, site selection, animal
welfare, overfishing).
?
Criteria relating to the benefits to the local economy/community
include:
– producers’ economic viability;
– flow of economic benefits to workers and the local economy;
– social and economic rights of others (e.g. indigenous land rights,
local consultation);
– business ethics (e.g. fair dealing, no corruption, market
transparency);
– education and role modelling (e.g. open days).
Corporate Social Responsibility for Agro-industries 229
?
Lastly, sustainable agriculture standards and codes may set down require-
ments on food safety and quality, in particular:
– traceability;
– hygienic production and handling;
– quality of inputs (seeds, feeds, etc.);
– quality management systems.
In addition to criteria based on some combination of these categories, all of the
standards and codes studied include requirements relating to general manage-
ment issues, such as record keeping or planning, and to compliance with the
scheme itself.
Table 1 displays how each covers the respective issues.
3
3
Note that simply covering the same issues does not necessarily mean that standards are
equivalent: see Annex 1 for further discussion.
Environment
Utz Certified
EISA
SAI Principles & Practices
for Sustainable
Production (Cereals)
IDF/FAO Guide to Good
Dairy Farming Practice
Fairtrade Standards
SA8000
Roundtable on
Sustainable Palm oil
Basel criteria for Respon-
sible Soy Production
Marine Stewardship
Council
Common Code for the
Coffee Community
Ethical Trading Initiative
SCS-001
Rainforest Alliance/SAN
GLOBALGAP
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benefits
Food safety
and quality
Table 1. Comparison of issue coverage of 14 independent standards and codes.
230 C. Genier et al.
Equally interesting are the areas that standards and codes do not seem to
address. None addressed gender issues and, aside from a footnote in the intro-
duction to SCS-001 expressing a desire to incorporate nutrient density into a
future version of the standard, none addressed the issue of food security.
Additionally, only four schemes made any provision for the economic viability
of producers themselves, though this is also arguably implicit in the structure of
the Fairtrade scheme.
Where standards and codes do not seem to explicitly differentiate is around
contextual conditions. The environmental effects of particular practices can
vary dramatically depending on the weather, time of year, soil type, level of
water depletion within a river basin and many other factors; yet no schemes
could be found that took account of such differences, even when specifying
particular processes. Similarly, what makes sense for large, well-resourced
farms may be meaningless for smallholders. Some schemes, such as the Ethical
Trading Initiative, Fairtrade and the Basel Criteria, have begun to develop
altered or slimmed-down versions aimed at smaller producers, but this is not yet
the norm.
It is also important to bear in mind that the fact that a particular scheme
incorporates criteria on a wider range of issues does not necessarily mean it is
better. Indeed, one major concern that became clear during the research for
this chapter was the lack of evidence as to whether particular standards and
codes are effective at all on any given issue.
Challenges going forward
The fact that the agrifood industry is investing so heavily in standards and codes
that seek to address sustainability issues is encouraging, and demonstrates an
important shift in companies’ willingness to engage on such topics. Nevertheless,
challenges are faced by all parties in harnessing this activity to drive sustainable
development.
Lack of impact assessment
While there is a growing body of literature on the (indirect) economic impact of
mainstream standards and codes on producers and rural communities, particu-
larly in developing countries, there is surprisingly little evidence of whether or
not they have a significant positive impact on environmental, labour or com-
munity development issues.
The handful of studies that consider the direct impact of specific standards
and codes on producers, rural communities and the environment suggests that
they are more effective on observable issues (i.e. those that do not require sub-
jective or culturally specific judgements to determine compliance or progress)
that do not vary much according to context, though there is too little informa-
tion to fully validate this hypothesis. For example, the 2006 impact assessment
of the Ethical Trading Initiative found that application of that code had had a
major impact on workers’ health and safety (Barrientos and Smith, 2006). This
topic primarily concerns tangible issues such as the existence of procedures
Corporate Social Responsibility for Agro-industries 231
and officers, safe use of chemicals and the quality of drinking water, all of which
can be directly observed and are fairly universal in scope. By contrast, almost
no change was found in, for example, freedom of association, reflecting the
fact that such matters are very difficult to assess and are highly dependent on
contextual factors like cultural norms and forms of local and national govern-
ments. A study of Zambian exporters’ views of GLOBALGAP, conducted by
the Natural Resources Institute, points to a similar conclusion: improvements
were particularly cited on workers’ health and safety, traceability and food
safety (Graffham and Vorley, 2005).
Current evidence suggests that the question of impact assessment has not
yet been satisfactorily resolved. The SAI Platform has started work on develop-
ing a cost–benefit tool to assess different schemes, and a number of papers,
including, notably, one from the ISEAL Alliance, have called for more system-
atic impact assessment. As yet, though, such efforts seem still to be at an early
stage of development.
In many instances, therefore, it is not clear whether standards and codes
are an effective tool for promoting sustainable development at all (though, of
course, it is important to remember that there is also insufficient evidence to
declare them ineffective). This lack of impact data means that schemes are
evolving and competing with each other in a vacuum: companies select which
schemes to implement (and governments and civil society select which ones to
endorse) based on attributes such as reach, credibility and business friendliness,
but not effectiveness. As a result, scheme developers have little incentive to
calibrate and focus their criteria to provide the best return on investment, or to
adapt their approach in light of new research.
Lack of mutual recognition
In seeking to reach scale, independent standards and codes are increasingly in
direct competition with each other, and efforts to rationalize and harmonize the
landscape through mutual recognition of schemes have been limited. There
have been some attempts to establish equivalence between non-proprietary
schemes, such as GLOBALGAP’s initiative to compare itself with government-
backed national standards. Governments and international organic associ-
ations
4
have made some progress in harmonizing the various national organic
schemes. However, for the most part, it is probable that this activity is driven
more by a desire to establish dominance than to rationalize the field. There are
few examples of independent third-party schemes benchmarking themselves
against each other.
As a result, producers and consumers are faced with a large number of
different labels and options for certification, all of which claim to do a similar
job, but with slightly different emphases. The resulting confusion can lead to
consumer cynicism or indifference, reducing companies’ opportunity to claw
back their investment through higher prices (and hence the incentive to invest
4
The International Organic Accreditation Service (IOAS); the International Federation of
Organic Agriculture Movements (IFOAM).
232 C. Genier et al.
in the first place). Furthermore, producers that supply more than one company
may be pulled in different directions, magnifying the perceived risks to the
producer of ‘backing the wrong horse’, and making it more likely that they will
either follow several methods half-heartedly or do nothing at all. Conversely,
there is some evidence (from the ETI impact report) that when all buyers are
pulling in the same direction the likelihood of more sustainable practices gain-
ing traction increases (Barrientos and Smith, 2006).
One-size-fits-all solutions
In terms of content, there is a tension between the reach of schemes in terms
of products, issues and geographies covered, and the level of detail into which
they can go while remaining relevant. Farming practices are highly contextual:
soil conditions may change from one side of a field to the other; actions that
may save water in one river basin may have no impact in another; and freedom
of association may be very important in the context of a large estate, but irrele-
vant to a family-run smallholding. Yet standards and codes are inherently inflex-
ible and schemes, especially independent ones, need to achieve some degree of
scale in order to be credible to consumers and financially viable.
This inflexibility leads to a further concern. The way many standards and
codes work, as a kind of pass or fail test of sustainability, is at odds with many
of the actual issues encompassed, which tend to change over time, and for
which ‘success’ may not be clearly defined or agreed upon. Sustainable devel-
opment may be better thought about in terms of continuous improvement
rather than ‘right’ and ‘wrong’ answers. Our understanding of what this means
on specific issues, and how it translates into action, can change rapidly as new
information comes to light.
Implementation costs for small-scale producers
On the economic side, widespread implementation of standards and codes
seems to accelerate vertical coordination in supply chains (i.e. more production
is for specific customers rather than for the open market) and the consolidation
of producers into fewer, larger entities. Evidence suggests that this restructuring
of the rural economy is an integral part of wider economic development, as the
best producers continue to farm larger areas more efficiently, while the major-
ity of the population move to other and for them, more lucrative forms of
economic activity (World Bank, 2007).
What is striking is the speed at which this transition occurs when standards
and codes are applied. Maertens and Swinnen (2007) studied the economic
impact of the roll-out of the origine Sénégal label on fruit and vegetable pro-
ducers in Senegal between 2000 and 2005. During this period, the number of
small-scale growers with export contracts fell by 72%, and the three largest
exporters increased their market share from less than half to 66% of all
exports.
Such developments are primarily because implementing standards and
codes is very expensive for producers. Asfaw et al. (2007) estimate the
first year costs for a small Kenyan bean grower to implement EurepGAP
(now GLOBALGAP) as part of a consortium to be around 37,000 Kenyan
Corporate Social Responsibility for Agro-industries 233
shillings (KSh),
5
of which around 6500 KSh are recurring costs; the same study
puts farmers’ average gross annual income from export vegetables at 33,864
KSh (Asfaw et al., 2007). Graffham and Vorley (2005) paint an even starker
picture: they estimate that without donor support, first year EurepGAP imple-
mentation costs can amount to as much as 160% of annual income for small-
holders with 0.2–0.6 ha of land. Clearly, large and well-resourced producers
are much better able to absorb such costs, and so have a strong advantage
when standards and codes are used as a market entry criterion.
Given that the World Development Report 2008 (World Bank, 2007)
describes competitiveness and smallholder participation as ‘essential to link
agricultural growth to development’, the reader would be forgiven for con-
cluding that standards and codes are an economic ‘bad’ in development
terms. However, the picture is more nuanced than this. For example, the
same Maertens and Swinnen study concluded that while origine Sénégal was
bad news for small contract farmers, it in fact represented a net gain for the
economy overall as export production increased from 9000 t in 2000 to
16,000 t in 2005. Moreover, while smallholders lost out, the very poorest
rural households, without access to sufficient land or skills to participate in
the export market, may have gained by being able to find employment on
large estates. In addition, some of the smallholders survived by diversifying
into other activities.
There is also some evidence that this acceleration of economic restructur-
ing may be due to the way standards and codes are applied, as opposed to
anything inherent in them as a tool. A recent study of Lecofruit, a fruit and
vegetable exporter in Madagascar that buys high-quality, certified beans and
peas from some 10,000 smallholders (each farming around 1 ha), found signifi-
cant benefits for growers, including improved productivity (not just for export
crops, but for staples such as rice), greater income stability and shorter lean
periods (Minten et al., 2005). However, Lecofruit did not simply apply a stand-
ard in isolation as a purchasing criterion, but included it in a deliberate policy
to engage with smallholders that also encompassed long-term micro-contracts,
access to 300 agricultural extension workers, information on composting pro-
cedures and loans of seeds and fertilizers to be repaid in kind. The Lecofruit
example shows that it is possible to implement a standard or code without
excluding small-scale producers, but only as just one part of a wider, ongoing
package of intensive support.
Even where there is a clear willingness to implement a specific scheme,
suppliers may lack access to the infrastructure and resources needed to do so,
particularly in developing countries. Standards and codes require significant
investments in supporting infrastructure: reliable and well-regarded inspection
and accreditation capacity is needed; extensive training is required, including
poorly educated or illiterate producers; materials such as specialist clothing or
IT equipment may not be available locally. As we have seen, implementing a
scheme can be expensive for producers, too, and this risks driving cash-strapped
farmers out of business entirely. Simply subsidizing this cost may not be the
5
US$1 = 66.9 KSh on 1 November 2007.
234 C. Genier et al.
answer: evidence from Kenya suggests that donor financing of implementation
has distorted the market for inspection and accreditation services, with local
suppliers charging up to four times as much as their European equivalents
(Graffham and Vorley, 2005).
Value Chain Innovations
Although a one-size-fits-all approach to sustainable development based on the
wide application of a particular standard or code may indeed work for com-
panies that have well-resourced suppliers, the more visionary agrifood compa-
nies are also starting to realize its limitations. They are adopting innovative
approaches to CSR that take a more holistic view of the agrifood value chain
and are tailored to comprehensively address specific key issues and situations.
Most of these initiatives are designed in multi-stakeholder partnerships (includ-
ing private and public sector players) to meet common objectives, and are
rarely imposed by companies as the leading player. Such initiatives usually start
as pilot projects, with the aim of scaling up those that are successful.
Rationale, approach and challenges
Corporate value chain innovations are not a new phenomenon. Nestlé, for
example, has been active in India since the early 1960s in the Moga district,
not just by opening a dairy factory, but also by encouraging the systematic
development of milk production, injecting knowledge and technologies into the
system.
6
The company’s effort had a multiplier effect on the development of
the region. Unilever, too, started an SAI based on economic, social and envir-
onmental dimensions roughly 50 years ago. What is new in recent years is the
multiplication of such transformative projects, their level of ambition and their
positioning within broader CSR activities.
The rationale for investing in value chain innovations can have multiple
origins. The company may be trying to stay competitive by emphasizing qual-
ity, safety, traceability to small-scale farm operations, local processing, produc-
tion and distribution and measurable environmental and social benefits. The
business case for such innovations is typically aimed at securing the availability
of raw materials while improving a community’s environment, capturing value
through vertical integration and sharing it more equitably with producers.
Two main approaches to value chain innovations can be observed: a bilat-
eral buyer or producer initiative and a multi-stakeholder partnership model
involving e.g. farmers’ associations, small and medium enterprises (SMEs), the
public sector and civil society (a majority of cases). Typically, the more multi-
faceted the ambitions, the more stakeholders tend to be directly involved in the
initiatives. Participation can entail knowledge sharing, endorsement and pro-
motion, implementation or scale-up.
6
Collection centres were set up, farmers were trained, clean drinking water was provided to
schools and many more activities took place.
Corporate Social Responsibility for Agro-industries 235
Pilot projects tend to concentrate on one crop, one farm production sys-
tem or one supply chain, and strive for a combination of technical, financial
and educational transfer, as well as capacity building. Figure 1 shows the focus
of value chain innovations undertaken by member companies of the SAI
Platform, a food industry body supporting the development of sustainable agri-
culture.
8
Initiatives are distributed fairly equally between Europe, Asia, Africa
and Latin America. Half of the projects target the dairy and coffee industry,
while the rest deal with vegetables, fruits, cereals, oils and tea. Seventy-five per
cent of all projects cover environmental aspects (water, soil, forest, air, biodiver-
sity, ecology); nearly half include social and community aspects (including gen-
der and child labour), and an equal amount look at the farm production system.
One-third of all projects aim at improving revenues of producers. Issues like
health and safety, quality and energy are tackled specifically by only a minority
of projects.
33
18
13
10
8
28
Dairy,
milk
Coffee
Tea,
infusions
Cereals,
oils
Vegetables
Fruits
23
25
23
5
25
Europe
Africa
RoW
Asia
Latin America
28%
10%
20%
8%
15%
13%
5%
13%
20%
30%
None/n.a.
Other
Companies
Industry associations
Research institutes
Development agencies
Foundations
NGOs
Public sector
Farmers' associations
Geographic distribution of programmes
N = 40, in per cent
Crops or products*
N = 40, in per cent
Stakeholder involvement** Issues addressed
** In addition to farmers, growers, producers
N = 40, programmes with no, one or multiple partners
5%
15%
33%
40%
8%
43%
75%
Energy
Quality
Revenue increase
Farm prod. system
Health & safety
Social/community
Environment
N = 40, per cent of programmes tackling a certain issue
* Few programmes with more than one crop/product
Figure 1. Programme focus of SAI Platform member companies.
7
(From SAI Platform
Mapping, 2007. Mapping by FSG Social Impact Advisors, 2007.)
7
Covering programmes from two-thirds of SAI Platform members (i.e. 14 companies out of 22).
8
Founded by the global agrifood companies Danone, Nestlé and Unilever, it has 22 members
today.
236 C. Genier et al.
A vast majority of projects are launched in partnership: 30% involve farmer
associations, 20% the public sector, nearly 20% development agencies or foun-
dations, nearly 30% NGOs or research institutes and nearly 30% other com-
panies or industry associations.
In the last few years, industry or multi-stakeholder dialogues have encour-
aged corporate innovation on sustainable agrifood value chains and the
exchange of good practices. In addition to the SAI Platform, the Sustainable
Food Lab is a multi-stakeholder initiative to bring sustainability to mainstream
food systems. Agrifood companies, NGOs and others are working together to
find innovative ways of addressing persistent problems; such as poverty, in
producer nations. The Stone Barns Sustainable Agri-Philanthropy Initiative
(Schumacher et al., 2004) is another forum, which has convened major actors
to discuss their philanthropic practices.
9
While case studies selected to illustrate value chain innovations cannot
cover the full range of innovative projects launched worldwide, they neverthe-
less provide concrete insight into how these proactive CSR initiatives shape up.
Table 2 provides an overview of the cases detailed in Annex 2. The cases cover
three continents (Africa, Asia and Latin America) and several product segments
(dairy, crops, fruits and vegetables, tea), present different multi-stakeholder
partnerships initiated by six global agri-business players and various intensities
of public sector involvement, and cover the entire agrifood value chain (from
pre-production to distribution).
While innovations often do embrace the entire value chain, most are
demand-driven (i.e. initiated by manufacturers and retailers
10
) and focus on
producers, SMEs in the supply chain and economic development at community
level. Figure 2 provides a schematic view of supply chain players and illustrates
the value chain coverage of each case study.
Before discussing the nature of impact and effectiveness achieved by the
specific case studies (Annex 2), it is worth isolating their innovation component:
?
In India, SABMiller and Cargill partnered with a foundation in Rajasthan
and received the support of regional authorities to lay the ground for devel-
oping a viable barley malt industry in the state.
?
In China, Nestlé facilitated an innovative approach for its milk suppliers in
Shuangcheng, in north-eastern China during the period 2004–2007, to
convert the manure from dairy cattle into biogas, to be used for cooking,
heating and electricity generation. From the very beginning, the initiative
was endorsed and strongly supported by the local authorities, and received
further support from the central Chinese government. Chinese authorities
are now replicating and scaling up the approach nationwide and extending
it to pig farms.
9
It was shown that only a minority of philanthropic giving by agri-businesses was related
to their core business, e.g. agriculture systems in developing countries. The vast majority is
devoted to community improvements in developed countries.
10
When asked in surveys, consumers indicate caring about traceability and sustainability;
however, the buying behaviour of a large majority signals that price still dictates their choice.
C
o
r
p
o
r
a
t
e
S
o
c
i
a
l
R
e
s
p
o
n
s
i
b
i
l
i
t
y
f
o
r
A
g
r
o
-
i
n
d
u
s
t
r
i
e
s
2
3
7
Table 2. Case profiles.
Company Product/focus Purpose Value chain coverage Partners
Public sector
involvement
Brazil: Syngenta Water recovery Philanthropic contribution
to improving farmers’
environment
Pre-production
(initiated by supplier
of input factors)
Cooperatives,
regional authorities
Moderate (promotion,
scale-up)
China: Nestlé Dairy Biogas production from
manure, reducing
environmental impact
of farming
Production, facilitated
by manufacturer/
distributor
Local authorities,
central government
Strong (driving,
funding, scale-up)
India: Reliance
Retail
Fresh fruits &
vegetables
Direct sourcing from
farmers; share value
Distribution,
trading, retail
Farmers (collection
centres)
Minimal (legislative
framework, licences)
India: SABMiller/
Cargill
Barley Secure local high-quality
production, improve
smallholders income
Production,
trading, processor/
manufacturer driven
Morarka Foundation,
public sector
Strong (facilitation,
agri-research,
seeds, licences)
Tanzania: Unilever Allanblackia Set up commercial
supply chain for
little-known product
Production, processing,
sales (including
finding purchaser)
NGOs, research
institutes,
development
agencies
Moderate
(agri-research,
tree nurseries,
endorsement)
Kenya: Unilever Tea Certification of sustainable
production, signal to
market with oversupply
Production, trading,
manufacturing,
marketing, retail
(demand driven)
Producer association,
development
agency
Minimal (smallholder
support,
accompanying
measures)
Bangladesh:
Grameen Danone
Dairy (yogurt) Set up supply chain
adapted for local
conditions (poor
segments of society)
Production, transport,
manufacturing,
distribution
Joint venture
between Danone
and Grameen
Bangladesh
Minimal (licences)
238 C. Genier et al.
?
With its philanthropic project ‘Agua Viva’, Syngenta has since 2004
contributed to the recovery of over 2100 water heads in Brazil. In
collaboration with local cooperatives, Syngenta is providing technical
assistance and know-how to farmers to recover their endangered and
polluted water heads. As a result, springs are sanitized and protected,
the quality of water increases and the water supply is secured for local
communities. This project has been a tremendous success locally, win-
ning praise from the Brazilian authorities, as well as both national and
international awards.
?
Reliance Retail India are directly sourcing fresh agricultural produce from
thousands of farmers through collection centres. They are providing a
guaranteed market for the farmers’ produce, reducing transaction costs
and training them in better and more sustainable farming practices. This
initiative has resulted in increased income and upgraded skills for the farm-
ers, a reduction in spoilage of produce (by up to 35%), and better quality
products for Reliance retail stores. The exclusion from the supply chain of
traditional traders, however, led to protests, raising the question of how to
evolve potentially obsolete supply chain structures.
?
Unilever is working with the Rainforest Alliance to certify tea purchased for
its leading Lipton brand by 2015. As the world’s largest tea buyer, Unilever
intends to send growers a clear signal in favour of sustainable tea produc-
tion, emphasizing a long-term business model carried by quality rather
than by quantity in a market characterized by oversupply.
Suppliers
(pre-production)
Syngenta
case
Producers
Consumers
Retailers
(distribution)
Trading companies
Processors
& manufac-
turers
(Food and
food service
companies)
G
r
a
m
e
e
n
D
a
n
o
n
e
c
a
s
e
R
e
l
i
a
n
c
e
R
e
t
a
i
l
c
a
s
e
N
e
s
t
l
é
c
a
s
e
S
A
B
M
i
l
l
e
r
&
C
a
r
g
i
l
l
c
a
s
e
U
n
i
l
e
v
e
r
A
B
c
a
s
e
U
n
i
l
e
v
e
r
t
e
a
c
a
s
e
Figure 2. Case study coverage of main supply chain groups. (Adapted from
SAI Platform.)
Corporate Social Responsibility for Agro-industries 239
?
The traditional approach to expanding an international business in emerg-
ing markets is to target segments likely to find a company’s product com-
petitive. Because traditional brands and modes of production are adapted
to high-purchasing-power countries, this strategy typically limits develop-
ing country sales to the wealthiest customers. Danone Grameen is turning
this logic upside down in Bangladesh, rethinking the entire value chain for
yogurt production and marketing so that it employs and serves the poorest
segments of society.
Evidence of impact can be found in the various initiatives in terms of quality,
health and safety improvements, better environmental indicators, higher pro-
ductivity and economic development, i.e. income growth and diversification, as
well as job creation:
?
Quality and productivity: in Rajasthan, farmers participating in SABMiller’s
programme increased significantly their barley yield, by 20% (even if it can-
not directly be attributed to the initiative). Over a 2-year period, involved
districts achieved an average yield of 33.3%, while the average of Rajasthan
state was 13.2%. The quality increased as well, from feed-grade to malt
quality. Again in India, Reliance Retail has brought improved quality to its
retail stores by collecting fresh fruits and vegetables directly from the pro-
ducers: spoilage of produce has been reduced by up to 35%.
?
Health and safety, environmental indicators: in Brazil, Syngenta has con-
tributed to the health and sustainable water supply of around 2700 families
and their livestock by recovering around 2000 endangered or contami-
nated fountainheads in Brazil since 2004. In China, the biogas project with
thousands of generators installed, allowed a reduction in the risk of water
contamination by improperly stored manure from dairy farms.
?
Income growth, diversification and job creation: in Tanzania, the creation of
a supply chain for Allanblackia (AB) provides an additional source of income
for farmers. The average AB earning per farmer per year has increased
from US$60 to US$140 for 6000 farmers, and should reach US$500 by
2016 for 25,000 farmers. In addition, 45 full-time positions have been cre-
ated for managing the buying centres. In Bangladesh, the Grameen Danone
joint venture predicts that 1000 livestock and distribution jobs will be cre-
ated. In China, the biogas produced from manure allows dairy farmers to
cook three hot meals per day from this new energy source.
Although these value chain innovations clearly show impact, as long as they
remain in pilot phase, they are only ‘pockets of social progress’ that remain
minor in comparison with the core business of agrifood industries, or with
large-scale initiatives from NGOs and multilateral agencies. To expand their
benefit for society, they require scaling up and integration into national agri-
food competitiveness policy.
Such a scaling-up process requires considerable resources. Management
time is needed to plan the replication, adapt the approach to a larger scale or
a different context (e.g. a new country), learn from strengths and weaknesses
of the original project, and convince players along the value chain to adopt new
practices.
240 C. Genier et al.
Companies, donors and governments all have a role to play in contributing
directly with resources (funds, production factors, capacity building, etc.), or in
helping to find other funding sources. Capacity building is often needed at farm
level, for logistics, processing and even branding and marketing of produce.
Production factors (seeds, plants, etc.) also need to be supplied in sufficient
quantities. To scale up a pilot project into a meaningful improvement can
require considerable time, even several years in some cases.
In order to be sustainable over time, value chain innovations also need to
be grounded in a solid business case, i.e. at some given point (though not
immediately) they need to be viable on their own, without additional financial
support. If the innovation disappears as soon as project funding ceases, it can-
not be considered successful.
This does not mean that value chain innovations are unsustainable as such,
but rather that integration of innovation at community, district and national
levels needs to be managed and planned carefully for benefits to accrue to an
extent where national growth indicators can be affected.
The Role of the Government and Civil Society
CSR initiatives are led and implemented primarily by agrifood companies them-
selves. None the less, governments and civil society have an important role to
play in harnessing the growth in CSR activities for sustainable development of
the agrifood sector. They can create the conditions for that growth to continue,
both by helping companies to act responsibly and by building an enabling
environment.
Multilateral organizations and development agencies are also taking a keen
interest in CSR: the UN Global Compact and the Global Reporting Initiative
are examples of high-profile public sector initiatives that monitor company
performance and publish results globally. Moreover, the emergence of industry
platforms and multi-stakeholder bodies, such as the SAI Platform, the
Sustainable Food Laboratory and the Ethical Trading Initiative, is one of the
most striking recent trends in the agrifood sector and presents a potential new
force in the facilitation and documentation of CSR practices.
Standards and codes
Multilateral agencies, governments, industry platforms and civil society need to
work together to harmonize standards and codes and make their implementa-
tion more accessible and effective. This should be done through measuring and
publishing data that will inform impact assessment and help schemes become
more locally relevant. Governments can further ensure that good practices are
replicated by endorsing those schemes which are most effective. Such endorse-
ments are a key factor in the competition between independent schemes (e.g.
Kenya’s adoption of GLOBALGAP as a basis for its own national standard).
Additionally, industry associations with support from government and NGOs
Corporate Social Responsibility for Agro-industries 241
can offer technical assistance to producers, such as training and extension
services, and strengthen the local certification and accreditation infrastructure.
Finally, governments can play a role in managing the economic effects of
standards and codes on small-scale producers.
Value chain innovations
For value chain innovations, governments, local authorities and civil society can
smooth the progress and magnify the impact of initiatives in three ways: by
creating an enabling environment (adapting legislation, investing in market
infrastructure); by participating in pilot projects (facilitating access to production
factors such as trial seeds, providing logistical support and playing a facilitator
role); and by taking an active role in their scale-up (endorsing replication, co-
financing, building capacity and actively participating in industry platforms).
The role taken on by the authorities of Rajasthan offers an example of such
active public sector participation, as does the engagement of Chinese author-
ities in the biogas project facilitated by Nestlé.
The Regoverning Markets Programme
11
is an example of a supportive
public sector/civil society initiative. Its aim is to provide strategic advice and
guidance to the public sector, agrifood chain actors and civil society organiza-
tions including economic organizations of producers on approaches that can
anticipate and manage the impacts of the dynamic changes in local and regional
food markets. The programme emphasizes analysis of the food industry seg-
ments, i.e. retailing, processing and wholesaling.
Smoothing economic transition
All developing and transition economies have seen significant reductions in the
number of people employed in agriculture and corresponding increases in pro-
ductivity. This points to a key long-term role for governments and civil society:
helping small farmers to diversify their income sources as well as facilitating a
smooth transition out of agriculture. Policy priorities should include creating
rural off-farm jobs, increasing accessibility to education and training and pro-
viding ‘safety nets’ to the chronically poor. The example of Unilever’s applic-
ation of a sustainability standard to Lipton tea highlights the need for government
in facilitating this transition (see case 6 in Annex 2).
Conclusions and Recommendations
Two types of initiatives have emerged at the forefront of agrifood companies’
CSR agendas: standards and codes, and value chain innovations. The initia-
tives profiled show considerable promise in increasing the sustainability of the
11
www.regoverningmarkets.org.
242 C. Genier et al.
agrifood sector. However, key challenges in improving their effectiveness
remain, such as dealing with the lack of equivalence between different stand-
ards and codes, as well as developing more context-specific initiatives that
effectively encourage the participation of smallholders in global supply chains.
The increase in corporate activity aimed at benefiting society over the last
2 decades, as evidenced by the rise in CSR, has been accompanied by a keener
interest from governments and civil society. In addition, the emergence of
industry platforms and multi-stakeholder bodies is one of the most striking
recent trends in the agrifood sector, and has the potential to become a power-
ful force in the facilitation and documentation of CSR practices.
The research has highlighted four concrete areas that require attention
from industry, civil society, governments and multilateral agencies:
?
First, there is a need to collaborate and invest at the international level to
make standards and codes more effective, efficient and accessible through
an agenda of impact assessment, mutual recognition and know ledge trans-
fer. As the industry has strongly promoted such standards it would be logical
to embed such a process among its champions, such as the SAI Platform
and the Sustainable Food Laboratory, while maintaining a close dialogue
with civil society, multilateral agencies and other interested stakeholders.
These facilities form the hub of leading companies and are connected to
crop-specific groups working on standards and codes, as well as on value
chain innovations. Funded through corporate membership fees, they do
not, however, presently have the resources to orchestrate a comprehensive
agenda of standards and codes alignment, and to provide knowledge trans-
fer on a global scale. Recognition and support as hubs of progress might
also help assemble a broader membership of companies, including agricul-
tural technology providers, food manufacturers and retailers.
?
Second, multiple-stakeholder agro-industry platforms and sector councils
at the national level are required to coordinate and monitor implementa-
tion of standards, codes and value chain innovations, for mutual support
and the sharing of good practices. These might be linked to the interna-
tional industry platforms mentioned above, mirroring, for example, the
structure of the World Business Council for Sustainable Development and
its national councils. The role of these national facilities is to facilitate the
local integration of value chain innovation into national agrifood competi-
tiveness policies and the work of national agricultural extension ser vices.
National platforms need to exist to bring local corporate entities together
with national policy makers and civil society with the aim to facilitate
adoption of standards and codes for relevant crops and producers at
national levels and to proactively identify and support the scale-up of high-
potential innovations that help poorer suppliers join higher value supply
chains.
?
Third, national governments, multilateral organizations and donors should
proactively identify and support the scale-up of high-potential innovations,
including facilitating the adoption of standards and codes by specific pro-
ducer groups where this could be beneficial. While CSR innovation in the
Corporate Social Responsibility for Agro-industries 243
agrifood sector is being led primarily by agrifood companies, the public sec-
tor plays an essential role in facilitating their engagement with producers,
creating an enabling environment and expanding lessons from pilot projects
to national and international levels.
?
Fourth, the evidence points to a key long-term role for governments and
civil society in helping diversify small farmers’ income sources, including
off-farm work, and facilitating their gradual transition out of agriculture
into other economic sectors.
References
Asfaw, S., D. Mithöfer and H. Waibel
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market Standards Having on Devel-
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Value Horticultural Products? Evidence
from Kenya, Leibniz University of
Hanover.
Barrientos, S. and S. Smith (2006) The ETI
Code of Labour Practice: Do Workers
Really Benefit? Institute of Development
Studies, University of Sussex.
FSG Impact Advisors (2007) SAI Platform
Mapping, unpublished document. Geneva,
Switzerland.
Graffham, A. and B. Vorley (2005) Standards
Compliance: Experience of Impact of EU
Private & Public Sector Standards on
Fresh Produce Growers & Exporters in
Sub-Saharan Africa, NRI/IIED.
ISEAL Alliance (2006) ISEAL Code of
Good Practice for Setting Social and
Environmental Standards.
Maertens, M. and J. Swinnen (2007) Trade,
Standards and Poverty: Evidence from
Senegal (revised version), Catholic
University of Leuven.
Minten, B., L. Randrianarison and J. Swinnen
(2005) Global Retail Chains and Poor
Farmers: Evidence from Madagascar,
Catholic University of Leuven.
Rotherham, T. (2005) The Trade and
Environmental Effects of Ecolabels:
Assessment and Response, UNEP.
Schumacher, A., A. Hance, B. Wells, N.
Agarwal and N. de Beaufort (2004) Stone
Barns Sustainable Agri-Philanthropy
Initiative: Current Status and Projects, W.
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Vorley, B. (2003) Food, Inc.: Corporate
Concentration from Farm to Consumer,
UK Food Group.
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Useful Websites
?
www.agrifoodstandards.net
?
www.regoverningmarkets.org
?
www.saiplatform.org
?
www.sustainablefoodlab.org
244 C. Genier et al.
Annex 1: Further Comparative Analysis of Standards and Codes
In general, the most important area of differentiation between schemes seems to
be the product or product category focused on, such as seafood, dairy, fruits and
vegetables. In addition to the product-specific schemes, many of which are among
the more recent arrivals on the scene, the majority of proprietary and ‘general’
sustainable agriculture standards and codes (e.g. SCS-001) include modules that
relate to individual products or product categories. There is some variation by
geography, too: in some cases this is intentionally designed into a scheme. For
example, the EISA-integrated farming framework explicitly targets European
farmers. For other examples, geographic reach is limited to areas where the tar-
get crop is produced, or where inspection and accreditation infrastructure exists.
For most of the schemes analysed, changes in understanding of sustainable
development are reflected through periodic updates. These revisions seem to be
led more by expert panels than by wide consultation with producers. While
some schemes discuss the need for farms to demonstrate improvement between
audits, only three mentioned continuous improvement as a specific criterion or
method of incorporating new thinking: the Basel Criteria for Responsible Soy
Production; the Roundtable on Sustainable Palm Oil; and the SAI Platform
Principles and Practices for the Sustainable Production of Cereals. The primary
reliance on expert leadership also seems somewhat at odds with best practice in
standard setting identified by the ISEAL Alliance, a group of standard-setting
and compliance organizations, which recommends that ‘Standard-setting organ-
izations . . . identify parties that will be directly affected by the standard and
proactively seek their contributions’ (ISEAL, 2006).
Furthermore, wide variances were found between the stringency and spe-
cificity of criteria from different frameworks relating to the same issue. In gen-
eral, five basic levels of specificity can be identified:
?
characterizing what compliance looks like (e.g. ‘farm provides a healthy
and safe working environment’);
?
requiring compliance with relevant local laws (e.g. ‘local health and safety
regulations to be adhered to’);
?
requiring a policy or plan to be drawn up (e.g. ‘farm shall have a health and
safety policy’);
?
suggesting or stipulating a specific process or set of processes be followed
(e.g. ‘relevant fire safety equipment to be installed in all buildings’);
?
setting quantitative performance criteria (e.g. ‘fewer than two accidents
per 100 employees per year’).
Which level of specificity is appropriate in which circumstances will vary mar-
kedly according to the context in which the scheme is applied and the method
which is used to apply it (e.g. it may not be helpful to specify performance
criteria on issues that may not be readily measured).
Most of the standards and codes analysed also have different grades of cri-
teria, including a core of baseline provisions that must be complied with in full,
and others which may be only partially met, or which only require producers to
set out how they intend to work towards meeting them, over a given period.
Corporate Social Responsibility for Agro-industries 245
Annex 2: Selected Cases
Case 1: SABMiller and Cargill improving barley production in India with partners
Since 2005, SABMiller and Cargill have been working together with the Government of
Rajasthan, the Morarka Foundation and local farmers to support the development of a via-
ble barley malt industry to supply local breweries.
SABMiller has ten breweries in India. The malt group of Cargill’s food division works in
partnership with it to grow malting barley. Rajasthan produces around 430,000 t of barley a
year. The barley has been of poor quality with variable kernel size and high moisture con-
tent. Irregular yields are due to poor quality seeds, low rate of germination or low pest
resistance.
A malt barley development programme, called ‘Saanjhi Unnati’ (SU), was created, with
government agencies playing a significant role. The SU programme strives to build a long-
term reliable source of locally grown malt barley and to test new strains of barley bringing
better yield and quality. A key component of the programme was the creation of SU centres.
These provide certified seeds, agricultural skills training, procurement services and other
support.
SABMiller acts as the main coordinator and monitors the project. Cargill assists in all
operational aspects, manages the SU centres through franchisees, sells seed and trains
farmers. The Morarka Foundation facilitates social mobilization and interaction between
local communities, SU management and operations staff. Rajasthan approves licences and
provides infrastructure and support for the programme. The government also promotes the
SU concept through its extension organizations, for example, by raising awareness of the
benefits of certified seeds.
When the programme started, a publicity campaign was launched to raise the awareness
among 20,000 local barley farmers, using a variety of communication tools including ‘jeep
campaigns’, farmer meetings and leafleting. This led to a recruitment drive inviting farmers
to join the SU programme. Participating farmers bought certified seeds from the SU centres
and received access to personalized and group extension services.
Programme costs are estimated at between $92,000 and $156,000 per year for the first
3 years. The programme is not expected to become self-sustaining in the near term, and
may need continued investment for an additional 3 years. In 2008, the 12 SU centres were
supporting over 6000 farmers. The centres have distributed 500 t of certified seeds and
expect to procure 16,000 t of barley in the first season. Around 60% of farmers who took the
seeds sold barley back to the centres.
In the latest harvest, the yield was over 20% higher, although it is difficult to estimate the
share that can be directly attributed to SU. Nevertheless, over a 2-year period, SU districts
achieved an average yield increase of 33.3%, while the average for Rajasthan was 14.2%.
Average thousand corn weight (TCW), a measure of malt extract, has gone up from 37 to
43.5 g since the SU programme was introduced.
Farmers were initially reluctant to accept seeds provided by SU. The government played
a key role by publicizing the programme through extension activities and by lending credibil-
ity to it, assuaging farmers’ doubts. Because farmers are price-sensitive, it proved important
to ensure that the SU price consistently beat the open market price.
In the next 5 years, seeds from the seed development programme will be progressively
distributed to farmers. Over the same time, SABMiller India expects to achieve 50% of total
barley procurement from the SU programme, up from 10% in 2007.
246 C. Genier et al.
Case 2: Nestlé facilitating the production of biogas in China
Nestlé facilitated an innovative approach for its milk suppliers in Shuangcheng in north-
eastern China during the period 2004–2007, to convert the manure from dairy cattle into
biogas to be used for cooking, heating and electricity generation. From the very beginning,
the initiative was endorsed and strongly supported by the local authorities, and received
further support from the central government. Chinese authorities are now replicating and
scaling up the approach nationwide and extending it to pig farms.
While the strong demand for milk in China has had important economic benefit for the dairy
farmers, it has also produced a new environmental challenge: how to manage the manure
generated by dairy cows. Traditionally, most farmers compost manure outside the farm wall
and apply it to the fields in spring and autumn. With the increasing number of cows, the hand-
ling needed revision.
The China Biogas project is part of the wider Sustainable Agriculture Initiative Nestlé
(SAIN) launched in 2000 to optimize the supply chain from ‘farm to factory’ by improving
efficiency, better managing risks and supporting sustainable agriculture. In China, Nestlé
aspired to help its suppliers store manure in an appropriate manner, thereby reducing the
risk of contaminating groundwater. Equally important, it wanted to create value for the farm-
ers by converting manure into biogas for domestic usage, replacing the maize stems used
by many families as domestic fuel.
Nestlé initially identified cheap, adequately sized biogas digesters as a possible solution.
A key step was then to identify and convince a local ‘champion’ that would be willing to
carry this project on the government side. In 2004 and 2005, trials of a small manure stor-
age system with a capacity of 8 m
3
proved to work even during the cold winter of ?30°C.
The initiative was endorsed and strongly supported by the local authorities, and received
further support from the central government. In order to demonstrate this technology, the
Chinese authorities agreed that 74 Nestlé demonstration farms would be equipped with
such a unit, and on-site training would take place during and after construction. Nestlé has
played an active ‘facilitator’ role, creating awareness and stimulating demand from farmers
to have such systems, and linking these farmers with construction teams.
The scale-up of the initiative was realized through the engagement of several partners,
primarily from the public sector. The local government financed the establishment of five
construction teams to replicate the approach. The central government provided the tech nical
drawings, sealant, pipes, filters, cooking stoves and further equipment. In return, farmers
were asked for a one-off payment to cover the construction material (cement, bricks).
Currently, there are 4000 small biogas digesters (8 m
3
) in Shuangcheng on an equal
number of farms generating energy for the cooking stove. The new method of cooking has
led to cost savings for farmers’ families and better handling of manure. The annual cost for
using methane gas bottles for an average household is RMB 400, which is just equivalent
to the total investment of the biogas digester. Farm manure is now more effectively used and
the remains are used as fertilizers. This decreases the need for synthetic fertilizers, which
require non-renewable energy for their production.
The cooperation between Nestlé and Chinese authorities is a good example of how such
projects can truly realize their potential. Biogas digesters are now available to dairy and pig
farmers across China. Between now and 2010, additional biogas digesters will be con-
structed at a rate of 1000 digesters per year by each of five construction teams.
Corporate Social Responsibility for Agro-industries 247
Case 3: Syngenta recovering water springs in Brazil
With its philanthropic project ‘Agua Viva’, Syngenta has contributed to the recovery of over
2100 water heads in Brazil. In collaboration with local cooperatives, Syngenta is providing
technical assistance and know-how to farmers to recover their endangered and polluted
water heads. As a result, springs are sanitized and protected, the quality of water increases
and the water supply is secured for local communities.
Deforestation, agriculture and population growth have contributed to lowering freshwa-
ter reserves in most agriculture-based communities in Brazil. In this context, it is particu-
larly important to reduce freshwater pollution. Farmers within the project area use
fountainheads, which are natural springs, as sources of fresh water, both for domestic
use and for important economic activities such as poultry, swine and cattle ranching.
However, such fountainheads, if not properly looked after, are prone to several types of
contamination.
‘Agua Viva’ started in 2004 in southern Brazil in collaboration with the farmer cooperative
Coopavel. The project was run on the ground by a specialized technician with support from
a water analysis laboratory. Fountainheads can be recuperated with simple and economical
practices: all that is needed is rocks, a few kilograms of cement, plastic tarpaulin, short sec-
tions of PVC tubing and a little manual labour. However, the process requires efficient tech-
nical and environmental knowledge. The water spring recovery process takes typically
6 hours at a total cost of US$195 per fountainhead.
In the next phase, the approach was scaled up in several waves. ‘Project multipliers’ were
trained to support 33 municipalities in the semi-arid north-eastern region of Alagoas, in
partnership with the local Carpil Cooperative. In 2007, a major collaboration was agreed
with the coffee cooperative in Guaxupè (Minas Gerais).
Recently, the project has evolved in a new direction as fountainheads are now regis-
tered in collaboration with the local government. In a recent pilot ‘Agua Viva’ is supporting
the registration of water springs through GPS satellite positioning. The project is evolving
into a partnership with the local government. This latest development truly aims to secure
the water mines for the future generations and will help the authorities enforce the laws.
The project has won public acknowledgement on several occasions, including two awards:
for being the ‘best environmental project’ developed in Brazil in 2004, under the ‘Innovation’
category awarded by ANDEF (Brazilian Crop Life); and as an ‘outstanding environmental
project’, awarded by the Brazil–German Chamber of Commerce in 2005.
Since 2004, 2114 fountainheads have been recuperated, benefiting over 2700 families
and their livestock. The improved water quality and sustainability of the springs generate
rapid and direct results in the area of health and well-being. This is underlined by the large
interest and demand in the targeted regions: waiting lists have formed to be part of the
initiative.
The ‘Agua Viva’ project was able to make a difference with limited funds through a com-
bination of technological know-how and close collaboration with local actors. This approach
has not only allowed for contact to be established with recipient farmers and credibility to be
built, but also for the sustainability of the project through the recruitment of a local ‘cham-
pion’ to take responsibility for e.g. the regular light maintenance required.
248 C. Genier et al.
Case 4: Reliance India sourcing directly from local farmers
Reliance Retail is directly sourcing fresh agricultural produce from thousands of farmers
through collection centres (CCs). The company is providing a guaranteed market for the
farmers’ produce, reducing transaction costs and training them in better and more sustain-
able farming practices. This initiative has resulted in increased income and upgraded skills
for the farmers, a reduction in spoilage of produce by up to 35% and better quality products
for Reliance retail stores.
Until recently, under regulations in place since the 1960s, all produce had to pass through
state markets (mandis) with the intention to ensure ‘fair’ prices for the farmers and to reduce
hoarding of agricultural produce during food shortages. While this regulation was phased
out a few years ago, most retailers continued to procure their supplies using mandis.
In November 2006, Reliance Industries Limited entered the retail business with ‘Reliance
Fresh’ stores. A key challenge was to source a supply of fresh produce for its stores of suf-
ficient quality. Reliance created rural CCs across India where farmers could sell their fresh
crops, fruits and vegetables locally. Through CCs, Reliance is pursuing the strategy of build-
ing an integrated business model that sources agricultural produce directly from the small
farmers in Indian villages. To make this business model work and improve the quality of
produce sourced through the initiative, the company is building human capital through
education.
Before establishing a CC, Reliance raises awareness of its activities in surrounding vil-
lages and provides training on how to cultivate the desired products. Reliance also distrib-
utes seeds or saplings from Reliance-owned nurseries. CCs maintain farmer contact lists
and call on them when they are looking to procure specific crops. By 2007 Reliance was
operating around 160 CCs across India, with each CC buying produce from villages within
a 15 km radius. During the harvest season, farmers bring their produce to the CC every day.
Their product is weighed electronically and farmers are quoted a price matching the mandi’s
price. Reliance guarantees that it will purchase all produce delivered (which mandis do not)
and the handling fees are approximately 50% lower than the mandis’. For higher-quality
produce, farmers are offered a price premium. CCs load produce into plastic crates and
label them to allow traceability. Reliance uses its own fleet of trucks to transfer fresh produce
daily from CCs to regional processing and distribution centres, which then distribute it to
Reliance Fresh stores. The produce is delivered on time and the spoilage is reduced to less
than 5%.
Reliance is putting mechanisms in place, such as farmer interviews, to measure the
impact of its direct farmer procurement in a systematic fashion. While the results are by no
means exhaustive, they do provide evidence of the positive impact of the local sourcing
efforts. Farmers receive a fair weighting and price and on-the-spot cash for their produce,
and have improved the quality and efficiency of their production due to the price premium
offered for higher-quality produce and the training offered by the CCs on efficient and sus-
tainable agriculture techniques. More aware of differences in the quality of their produce,
farmers are investing in seeds and inputs to grow higher-quality produce.
CCs demonstrate a step towards sharing value with smallholders by sourcing directly
from the farmer communities. They allowed Reliance to gain relevant experience working
with farmers, in view of implementing a more ambitious Rural Business Hubs concept. The
exclusion from the supply chain of traditional intermediaries, however, led to protests, rais-
ing the question of how to evolve potentially obsolete supply chain structures.
Corporate Social Responsibility for Agro-industries 249
Case 5: Unilever and partners building up a supply chain for Allanblackia (AB) oil
In Tanzania, Unilever was one of several organizations that partnered to establish a locally
owned supply chain for AB oil, a new raw material to be used in margarines and spreads.
Called Project Novella, the initiative is increasing income for farmers cultivating AB trees,
generating jobs in the supply chain and preserving the biodiversity of the region.
Learning from an improved understanding of the impact of producing palm oil, Unilever is
expecting that AB oil will also be used in the production of margarine. The AB tree is com-
monly found in parts of West, Central and East Africa. Unilever has conducted extensive
research on the properties of AB oil and established new applications in manufacturing
spreads and soaps. The oil’s unique properties allow lower saturated fat versions of marga-
rine. While AB oil is used by the local population, it is not produced commercially. Unilever’s
challenge is to source the volumes required to manufacture products from the new crop.
The company has partnered with several NGOs, international organizations and govern-
ment agencies in Tanzania to commercially produce food-grade AB oil.
Project Novella’s main objective is to set up a new supply chain, sourcing AB seeds from
local, community-based farmers. The project also aims to build human capital by training the
farmers to produce high-quality AB in an environmentally sustainable manner. Multiple local
NGOs, international organizations and government agencies have partnered with Unilever
to implement the project. Challenges include local capacity building, social mobil ization and
change, research and technical training in sustainable domestication and plant propagation.
Additionally, Unilever believes that, to make the model viable in the long run, the supply
chain has to be owned by local farmers, small enterprises and communities.
Over the 4 years that Project Novella has been operating, the collaboration has made
significant progress in creating a five-step supply chain. Farmers and groups in the villages
are engaged in collecting AB seeds from their farms, drying the seeds and weighing and
selling the product to collection centres throughout the harvest season. Seeds are then
taken to a local crusher, who received support from Novella to upgrade his factory to pro-
duce food-grade oil. The AB oil is then transported to Europe. Unilever has guaranteed
farmers a fixed price per kilogram of seeds, and has pledged to pay an attractive premium
price for AB oil until the full economies of scale take effect in or before 2012. NGOs have
raised awareness of the economic benefits of growing trees, and trained farmers and village
associations on domestication. They have also helped villagers register as economic groups,
giving them access to training and the opportunity to sell their produce to Unilever. As of
2006, 6000 farmers were involved in the programme; the average earnings per farmer per
year increased from £30 to £70; 45 full-time jobs managing the buying centres were created
and 650 t of AB seeds produced. By the end of 2007, over 20,000 AB trees had been
planted, most produced by rural, community-owned nurseries. By 2016, more than 25,000
farmers should be able to earn more than £200 per year farming AB, in addition to their
other economic activities.
While the project has been successful, a growing supply chain will have to be estab-
lished and made sustainable. Local ownership, active capacity building of the farmers,
investment in research capabilities and improvement of business practices are some of the
factors that are expected to contribute to the supply chain’s sustainability and viability. The
project is currently being replicated by Novella teams in Ghana and Nigeria. Moving for-
ward will require attracting skilled people who can guide the process, as well as the funding
to finance tree production and training for farmers on how to integrate AB into their current
farm activities.
250 C. Genier et al.
Case 6: Unilever committing to purchase certi?ed tea for its key brands
Unilever is working with the Rainforest Alliance to certify all tea purchased for its Lipton
brand by 2015. As the world’s largest tea buyer, Unilever intends to send growers a clear
signal in favour of sustainable tea production, emphasizing a long-term business model
based on quality rather than on quantity in a market characterized by oversupply.
The tea sector is suffering from oversupply, with prices having dropped by 35% in 25
years. This situation has stabilized in the last few years; however, there are barriers to tea
producers exiting the industry. Tea bushes live for over 100 years, and many farmers in
developing countries have little knowledge of or access to alternative sources of income.
Unilever buys around 300,000 t of tea per year, or 12% of the world tea supply. Its own tea
estates in Kenya supply 20% of the company’s needs, while the rest is bought from other
suppliers: around 750 big estates and one million small farms. Overall, two million people
are directly involved in Unilever’s tea supply chain.
Unilever did not want to simply launch a niche product, but to move the whole market.
Certification was identified as the way to roll out the standards to the rest of the supply chain
and credibly tell the story to the consumer. After discussing with three potential partners, the
Rainforest Alliance was chosen by Unilever for conducting the external tea certification. The
Alliance focuses on farm management aspects and its approach is comprehensive and
applicable both to large estates and to smallholders and foresees collaboration with local
organizations. The tea certification allows a market-driven increase in tea prices of 10–15%.
The intention to certify tea was announced by Unilever in May 2007; in July, its Kenyan
estate was certified, as well as one supplier.
The Rainforest Alliance developed tea certification criteria building upon non-crop-specific
aspects (about 80% of all the criteria) and adding crop-specific aspects (remaining 20%). In
addition, a country-specific component is taken into account by collaborating with local
stakeholders. Every estate the Rainforest Alliance certifies is visited once a year to check
that it is maintaining standards.
Unilever expects larger estates to show interest and take steps towards certification. For
smallholders, typically delivering ‘premium quality tea’, a PPP was set up to promote and
accelerate the movement towards sustainable tea production. Smallholders will receive
support from the Rainforest Alliance, which will train them in farm management, prior to
initial inspection. Over time, it is expected that they will save on input factors (e.g. pesti-
cides). DfID is providing GBP 500,000 financing for this part of the tea certification. The
Kenyan Tea Development Agency (KTDA), which represents the growers, is collaborating
with local farmers. In Kenya, around 430,000 smallholders are expected to become part of
the initiative, including smallholders not supplying Unilever.
Historically, tea was not in the focus of the Kenyan authorities, since this sector was
strong in the country. However, recent developments suggest that more attention is being
turned towards the tea industry. The public sector is looking at various ways to promote the
tea sector through supporting upcoming schemes, like the Rainforest Alliance certification.
One area where support is needed is in the diversification of income for tea growers. The
government and multilateral donors might want to think about how to support those produ-
cers who cannot meet the standards and provide them opportunities to transition to other
areas of economic activity.
Corporate Social Responsibility for Agro-industries 251
Case 7: Grameen Danone setting up yogurt production in Bangladesh
The traditional approach to developing an international business in emerging markets is to
target segments in which a company’s product is likely to be competitive. This strategy typ-
ically limits developing country markets to the wealthiest customers. Following another
approach, Danone Grameen is rethinking the entire value chain for yogurt production and
marketing so that it employs and serves the poorest segments of society.
Danone has partnered with Grameen Bangladesh to deliver a quality, nutritious product
to the ‘base of the pyramid’. Its three objectives are to provide children suffering from nutri-
tional deficiencies with a low-priced yogurt adapted to their nutritional needs, to create jobs
around an economically viable and scaleable business model, and to preserve the
environment.
The Global Alliance for Improved Nutrition (GAIN) is a critical actor in the joint venture,
validating the benefits of the nutrient-enhanced yogurt for children.
For Danone, creating Grameen Danone Foods Ltd is consistent with its strategy to deliver
health through nutrition. For Grameen, the joint venture is a natural addition to its existing
portfolio of for-profit and non-profit enterprises serving the poor in Bangladesh. The Danone
Grameen joint venture leverages Grameen’s extensive reach and credibility in rural com-
munities. The partnership provides GAIN with an avenue to pursue its mission of providing
essential micronutrients to populations in need, leveraging both public and private food
distribution channels.
Danone Grameen is addressing all essential components of the value chain, from agri-
cultural production of milk to yogurt manufacturing and product distribution. Upstream, the
objective is to promote local milk supply, particularly through the development of micro-
farms. Danone is using its experience to raise quality and productivity standards. The com-
pany is building local agronomic capacity by training local NGOs that can then work with
farmers. Danone is also helping to establish a supply chain that prevents deterioration of
milk in Bangladesh’s hot climate.
At the centre of the value chain, Danone has designed a completely new factory set-up,
which favours employment over costly technologies, without jeopardizing product quality.
Downstream, the joint venture is relying on the extensive network of ‘Grameen Ladies’ for
door-to-door sales along existing local retail channels. The goal is to keep distribution to a
radius of 30 km around the factory to minimize environmental impacts associated with trans-
port. However, the model introduces new challenges for the Grameen Ladies as yogurt
distribution differs considerably from micro-lending or provision of telecom services, their
existing activities.
Danone Grameen has invested significant effort in creating a product suitable for the
market. The ‘Shakti doi’ (energy) yogurt is made of fresh milk and sugar and is enhanced
with micronutrients (including e.g. vitamins, iron, iodine, zinc). It is cheaper than other
yogurts and conceived to be in line with what low-income people can afford.
While much of the project has yet to unfold, the partners predict that over 1000 livestock
and distribution jobs will be created (30 factory jobs were created in the pilot factory). Thus,
employment impact will occur principally upstream and downstream in the value chain.
While the venture is off to a promising start, the viability of the model has yet to be estab-
lished; it is particularly challenging to operate a full value chain that relies solely on an
extremely low-cost product. There is very little additional economic value to be captured in
the market to finance the substantial investments required. The recently rising milk prices
are further putting the business model under pressure.
252 © FAO and UNIDO 2009. Agro-industries for Development (C.A. da Silva et al.)
Introduction
Every year the World Bank prepares the World Development Report (WDR)
and, significantly, in 2008 the WDR focused on agriculture. The title selected for
the report, Agriculture for Development, suggests that agriculture should be
seen not only as a sector of economic activity but also as a means for the promo-
tion of human welfare, food security, poverty reduction and environmental man-
agement. The WDR was developed in a highly collaborative fashion, including
inputs from agencies such as FAO, IFAD and UNIDO, and involving consulta-
tions with many governments and organizations. It thus represents a broad
understanding of the state of the art on the issues discussed. This chapter revisits
some of the conclusions of the Report, with emphasis on the interface between
agriculture and agro-industries in the process of development. Drawing from the
Report, the focus of the chapter is on agro-industries and on what can be done
to promote agro-industries within the context of agricultural development.
In 2008, agriculture was in the headlines, if for the wrong reasons. A cover
of the magazine The Economist, for instance, gave prominence to the issue of
rising food prices and the end of cheap food. Another issue of the same publi-
cation called attention to the rising disparities between urban and rural incomes
and the political tensions this phenomenon created.
There are many reasons why agriculture has been in the headlines. It is
enough to open newspapers every day to see that there is mounting concern
with the issue of sharply rising food prices and with what this implies for food
insecurity and the rise of hunger. Rising rural–urban income disparities are a
source of political tensions. India, China and many of the rapidly growing coun-
tries find themselves with a large rural population being left behind and demand-
8 Annex: Agriculture for
Development – Implications
for Agro-industries*
ALAIN DE JANVRY
Professor, Agriculture and Resource Economics, University of California,
Berkeley, USA
* Transcription of Alain de Janvry’s keynote speech on ‘Agriculture for Development–Implications
for Agro-industries’ delivered at the Global Agro-industries Forum, New Delhi, India, April 2008.
Annex 253
ing greater attention. The Millennium Development Goals (MDGs) will not be
met in many parts of the world. Because 75% of the world’s poor live in rural
areas, meeting the MDGs inevitably requires giving greater attention to agricul-
ture as a source of income for the poor. Threats to the survival of the family
farm and excessively rapid migration to the cities, leading to overcrowding and
unemployment, are also important concerns. New demands on agriculture for
better-quality foods, rapidly rising consumer demand for animal and fish prod-
ucts and concern about the environment all create visibility for agriculture in
development. Some recent health epidemics have been closely related to issues
of water and proximity to animals, creating important links between agriculture
and health. Finally, and very importantly, there is the issue of climate change,
to which agriculture contributes importantly and from which agriculture already
suffers, with particular impact on the poorest rural inhabitants.
Agriculture has been in the headlines and, as a consequence, it is timely to
talk about how to make the most of agriculture for development. A particular
concern is how countries can benefit from the links between agriculture and
agro-industrial development and how agro-industry can contribute to economic
development.
It is instructive to note how the WDR approached the issue of focusing on
agriculture as a development driver. One basic concern was that of heterogene-
ity of conditions: since the world is vast and diverse, there are different ways of
looking at the role of agriculture for development in different parts of the globe.
Another concern was that there are many pathways out of poverty, some of
which include agro-industry as an important element. A general conclusion,
however, is that the potential that agriculture has to contribute to development
has been vastly underused, especially in the last 25 years. Yet there are oppor-
tunities to do better and, as a consequence, we must identify those opportuni-
ties, confront the challenges associated with them and then ask ourselves: what
are the policy entry points that can mobilize this potential in the context of the
new opportunities and the new challenges? What are the conditions for success
and what can we do to make it happen? Will the world go back to business as
usual, continuing to neglect agriculture as an instrument for development? Or
can agriculture be seriously used for development and make a real difference
for growth in low-income countries, poverty reduction and greater environ-
mental sustainability? It is a matter of urgency now: with agriculture in the
headlines, there is no time to waste in finding out how to focus on agriculture
and agro-industry more effectively as engines for development.
How Has Agriculture Served the Cause of Development?
To understand the roles of agriculture in development, it is necessary to look at
the structural transformations as illustrated by the relationship between gross
domestic product (GDP) per capita and the share of agriculture and agribusi-
ness in GDP (Figure 1).
The horizontal axis of the graph presents GDP per capita and the vertical axis
presents the shares of GDP for particular sectors. We know that the import ance
254 A. de Janvry
of agriculture declines as GDP per capita increases from, say, 50% at low levels of
income to approximately 5% at high levels of income. But the interesting aspect
to notice is the trajectory for agribusiness (agro-industry and related services). What
can be seen in Figure 1 is that the share of agribusiness is not declining – in fact,
it is rising, tending to decline only later on, at higher levels of GDP per capita. As
incomes rise, agribusiness becomes much more important than agriculture.
Obviously, other sectors of industry are going to emerge, but the agribusiness sec-
tor, including all the services and activities linked to agriculture, is typically a very
important part of the emergence of industry. Indeed, as shown in Figure 2, the
Figure 1. The structural transformation: a declining share of agriculture in GDP, but a high
and rising share of agribusiness as per capita income rises.
Malaysia
Argentina
Agriculture
Agribusiness
Thailand
Indonesia
Nigeria
400 1100
GDP per capita, 2000 US$ (log scale)
P
e
r
c
e
n
t
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3000 8100 150
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10
20
30
40
50
60
Kenya
Côte d’lvoire
Uganda
Brazil
Chile
Agriculture
Agribusiness
Figure 2. The structural transformation: value added in food processing is rising relative to
value added in agriculture.
2,000
IND
IDN
EGY
THA
PER
COL
ZAF
MYS
HUN
MEX
ARG
SVK
TUR
BOL
ZWE
ROM
BRA
IRN ECU
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BGD
MWI
SEN
PHL
MAR
4,000
GDP per capita, constant 2000 US$
6,000 8,000 0
0
0.2
0.4
0.6
F
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NPL
Annex 255
share of value added in food processing in relation to the share of value added in
agriculture is of increasing importance as GDP per capita rises. Hence, it is impor-
tant to think of agriculture not as a declining industry, but as supporting the emer-
gence and growth of an industrial sector.
Acknowledging the fact that the world is quite heterogeneous, the WDR
utilizes a country typology, as depicted in Figure 3. On the horizontal axis,
the share of total poverty located in rural areas is presented. This share can
be very high in countries like China, where about 95% of total poverty is
found in rural areas, or in India, where it reaches some 80%. On the vertical
axis, we have the share of growth attributed to the agriculture sector during
the last 25 years. This framework gives us three categories of countries, each
with a different policy agenda in using agriculture for development. The first
category is the agriculture-based countries. These are largely the sub-Saharan
African countries, where agriculture is an important source of growth and
most of the poverty is rural, with poor households dependent on agriculture.
For these countries, the main policy problem is to accelerate agricultural
growth. The second category is the transforming countries, where growth
has accelerated in other sectors of the economy and agriculture is no longer
a major source of GDP growth, but most of the poverty remains rural. This
includes countries such as India, China, Morocco and Indonesia. For these
countries, the main policy problem is the rising income disparity between
rural and urban sectors, and the persistence of deeply entrenched rural pov-
erty. The third category is the urbanized countries, where agriculture makes
a low contribution to GDP growth (although the share of agribusiness is typi-
cally larger), but where some 30–40% of poverty remains rural. For these
Figure 3. The three worlds of agriculture.
256 A. de Janvry
countries, the main policy issue is that of social inclusion of smallholders into
the set of competitive farms. Do these countries want an agriculture that
leaves room for a competitive sector of family farms, or an agriculture with
mainly large farms and a labour market that becomes the instrument for pov-
erty reduction?
There are three functions that agriculture can fulfil for development. First,
agriculture can be the lead sector to trigger economic growth, particularly in
the agriculture-based countries. Second, it is an important source of livelihoods.
As we have seen, 75% of the world’s poverty is rural. For most of the world’s
poor, agriculture is the main source of livelihoods and hence it has to be mobi-
lized for that purpose. Third, agriculture is a very large user of natural resources
and the way it uses resources has global impacts. Since global impacts have an
important influence on agriculture, the links between agriculture and the envir-
onment have to be taken into account very closely.
There are many success stories in terms of these three functions. Agriculture-
based countries for which agriculture is a source of growth include most of the
sub-Saharan African countries, but also Paraguay and many Central American
and Caribbean countries. Agriculture, in most situations, is the sector that has
greater competitive advantage. Since agro-industry is a very significant way of
adding value to agricultural products, it offers an important way to transit
towards industrialization, whereby countries industrialize based on competitive
advantage in agrifood processing and value addition and then increasingly
move away from this source of competitive advantage by creating new sources
that lead to industrial development, with a declining share of GDP coming from
agriculture. This has happened, for example, in Chile and Malaysia, leading to
acceleration of growth.
In terms of sources of livelihoods, there are important success stories
as illustrated in Figure 4, which depicts the cases of India on the left and
China on the right. The rising curve shows cereal yields, while the declining
curve shows the rural poverty rate. Clearly, there is a high negative correla-
tion between the two.
Figure 4. In India (left panel) and China (right panel): cereal yields and rural poverty rates.
2.4
1980 1983 1986 1989 1992
Years
1995 1998 2001
4.6
4.7
4.8
4.9
5.0
5.1
5.2
5.3
2.9
3.4
L
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3.9
4.4
3.4
1959 1963 1967 1971 1975
Years
1979
Yields
(right axis)
Yields
(right axis)
Rural P0
(left axis)
Rural P0
(left axis)
1983 1987 1991
4
5.2
5
4.8
4.6
4.4
4.2
3.6
3.8
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4.2
Annex 257
These cases can be contrasted with what has been happening in other
parts of the world, such as sub-Saharan Africa, where yields remained static
and poverty persistent.
To further this argument, it is helpful to calculate how much income gain
can be obtained, for different segments of the income distribution curve, from
GDP growth originating in agriculture or in the rest of the economy. In Figure 5,
the ten deciles of the distribution of income are shown on the horizontal axis,
calculated from aggregated data from 42 countries (WDR 2008). The curve
with triangles shows the income gain for each of those deciles coming from
GDP growth originating in agriculture versus the curve with lozenges when
GDP growth originates in the rest of the economy. It can be seen that, for the
50% poorest, the gains in income are much larger (on the order of 2–3 times)
when growth originates from agriculture than when it originates from the other
sectors of the economy.
This has significant implications for world poverty. Since 75% of world
poverty is rural and since agriculture is the main source of income for these
poor, then income derived from agriculture and agro-industry is a very effective
means to reduce poverty. Moreover, as we have seen, agro-industry does offer
a path towards industrial growth.
As can be seen in Figure 6, there exist in fact a number of pathways out of
poverty. A policy agenda can thus be derived as to how to use agriculture and
agro-industry as instruments to promote development.
The framework presented in Figure 6 shows that the main pathways out of
poverty are via farming, the rural labour market and migration. Farming house-
holds consist of commercial smallholders, households that are in transition
from subsistence farming to commercialization and the large subsistence farm-
ing economy. Each of these three groups requires different policy interven-
tions, or differentiated policy packages that can cater to their specific needs.
Agriculture
Non-
agriculture
?2
0
2
4
6
8
Lowest 2 3 4 5 6 7 8 9 Highest
Expenditure deciles
E
x
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(
%
)
Figure 5. Income gains by expenditure deciles (from poorest to richest) due to GDP
growth originating in agriculture (triangles) and non-agriculture (lozenges).
258 A. de Janvry
The rural labour market has two interrelated components. On the one
hand, there is the agriculture labour market, which can be a way out of poverty,
but also often a way of remaining in poverty. We know that agriculture labour
markets tend to be quite harsh, informal, seasonal and often involve extensive
participation by children. Since many of the poorest people in the world depend
on agricultural employment for their subsistence, considerably more can be
done to make the agriculture labour market into an instrument to move popula-
tions out of poverty.
On the other hand, and very importantly, there is the rural non-farm econ-
omy. This consists of a whole set of industries, ranging from small to medium
and large firms that are engaged in forward and backward linkages with agri-
culture, catering to consumer demands that lead to agricultural incomes. Their
location is quite often in rural areas, where they provide complementary sources
of income and employment to rural households.
The rural non-farm economy is another very important instrument for pov-
erty reduction. It has been widely observed that, where you have successful
smallholder farming, it is usually complemented by a successful rural non-farm
economy. In this context, rural households tend to be diversified, participating
not only in farming activities, but also in employment and investment in the
rural non-farm economy. Significantly, to a very large extent the non-farm
economy is composed of agribusinesses, agro-industries and agro-services
linked to agriculture.
Finally, there is the issue of migration. Population growth will force many
to move out of agriculture, as there is not enough room for employment in
agriculture for a rapidly growing labour force. Over time absolute employment
6. Subsistence
farming
Pathways out of
poverty:
farming, labour,
migration
Transition
to market
Demand for
ag products
3. Efficient markets,
value chains,
agro-industry
4. Commercial
smallholders
$
$
$
$
Social assistance
5. Transition
to market:
commercialization
1. ‘World’ category
2. Policy framework
Demand for
ag products
Rural labour market:
7. Agriculture
8. Rural non-farm
9. Migration
Figure 6. Multiple pathways out of poverty and policy agenda.
Annex 259
in agriculture will inevitably decline. Yet, even though migration can be an
important pathway out of poverty, it should be noted that in order to maximize
the potential of its economic and social benefits, a precondition exists: there
has to be a significant investment in the quality of the rural labour force in
terms of health and education, so that the labour force can successfully migrate
to other employment opportunities beyond agriculture.
To summarize, there are three pathways out of poverty – self-employment
in farming, the rural labour market and migration. The farming-based pathway
builds on smallholder competitiveness, i.e. a smallholder sector able to success-
fully compete on markets. Rural labour markets comprise agriculture and the
rural non-farm economy, including, significantly, agro-industry. The migration
pathway, on the other hand, requires preparedness. There is still a need to
consider the large subsistence farming sector. Ways out of subsistence farming
include two major options. First, farmers can become commercial smallholders
via increased commercialization, increased access to assets and increased
capacities for entrepreneurship. Second, farmers can move into the labour
markets, but this requires added skills, especially if a household member is to
enter the rural non-farm economy.
Supporting all elements considered in the framework depicted in Figure 6
are efficient markets, value chains, agro-industries and the links to the general
policy framework as well as which of the ‘three worlds’ a particular country
belongs to, in accordance with the typology established earlier. These consid-
erations provide nine entry points that can be used to set an agriculture-for-
development agenda:
1. The ‘world’ category to which the country belongs.
2. The policy framework.
3. Efficient markets and value chains.
4. Commercial smallholders.
5. Commercialization from subsistence to market-oriented smallholders.
6. The whole subsistence economy and what can be done in terms of social
assistance.
7. The rural labour market, which includes agriculture.
8. The rural non-farm economy with agro-industry, agro-business and agro-
services.
9. Migration.
We can use these nine entry points to propose agendas as to how to approach
and enhance agriculture and agribusiness for development in particular country
settings.
Agriculture for Development and the Nature
of Public Spending and Donor Support
It has been noted that 75% of the world’s poor are rural. Yet only 4% of the
official development assistance (ODA) and 4% of public spending in sub- Saharan
Africa goes to agriculture. These figures suggest that there is a lack of
260 A. de Janvry
correspondence between the objective of poverty reduction and the instruments
that are being used to reduce poverty, namely public investment and ODA. This
is an important observation made in the WDR, which leads to the question as to
what then can be done to have agriculture as a development engine.
The data analysed by the WDR show that there is indeed under-investment
in agriculture The left-hand panel of Figure 7 shows that agriculture as a share
of GDP is about 30% in the agriculture-based countries. None the less, it can
be seen in the right-hand panel that public expenditure going to agriculture, as
a percentage of GDP, is only 4% in these countries.
The New Partnership for Africa’s Development (NEPAD) has set a goal of
10% for the share of the national budgets that should be allocated to agricul-
ture. From 10% to 12% is what India was apportioning to agriculture at the
time of the green revolution. By the same token, 10–12% is what China has
been allocating for supporting its ‘household responsibility system’. As such,
the figure of 10–12% has become a useful benchmark as to how much public
spending there should be as a share of the national budgets and we observe
that many poor countries are way below this. Moreover, there is not only the
issue of quantity, but also that of quality. Many countries have seen a drift in
their public expenditures on agriculture towards subsidies and away from public
investments. In India, for example, 75% of public expenditure goes to subsid ies
(electricity for pumping water, fertilizers, etc.), while only 25% goes to public
investment. This has a huge opportunity cost in terms of possible alternative
public spending targeting agriculture and rural people, such as research and
development, infrastructure for agriculture or health and education for rural
populations. Needless to say, decisions on the quality of public spending are a
question of a country’s political economy.
Agricultural-based countries spend relatively too little on
agriculture (and R&D)
Ag GDP/GDP
29
16
10
0
5
10
15
20
25
30
35
Agriculture-based Transforming Urbanized
P
e
r
c
e
n
t
a
g
e
0
2
4
6
8
10
12
14
Agriculture-based Transforming Urbanized
P
e
r
c
e
n
t
a
g
e
Public spending on Ag (% of Ag GDP)
Spending on Ag R&D (% of Ag GDP)
Figure 7. Public expenditure in agriculture is low in the agriculture-based countries, while the
share of agriculture in GDP is high.
Annex 261
Agriculture for Development: the New Opportunities
Fortunately, there are new opportunities to make better use of agriculture for
development than in the recent past. They include a ‘new agriculture’, with
dynamic demand, high-value activities, non-traditional exports and ability to add
value to commodities in agribusiness. The markets have changed, agricultural
product prices are rising and opportunities for investment exist. Price transmis-
sion has to happen between markets and farmers, but clearly this is a time when
we see unique incentives being provided to the agricultural sector. The big chal-
lenge will be to make investments in agriculture favourable, not only for growth,
but also for poverty reduction and for environmental sustainability. New oppor-
tunities also come from numerous institutional and technological innovations.
India has been a leader in this respect, using information technology for exten-
sion, linking farmers to markets and for information provision about innova-
tions in terms of use of new seeds and pest control. Finally, and very significantly
in terms of new opportunities, we now face an agricultural sector that is quite
different from, say, 25 years ago, the last time that the World Bank focused on
agriculture in the World Development Report. The private sector has now a
very important role to play, not only in terms of agribusiness and value addition,
but also through direct engagement in agricultural production. Producer organ-
izations play an increasingly important role for service and advocacy. Despite
the limitations to deliver what they ideally should to their membership, producer
organizations are rapidly emerging and consolidating.
The new actors and the ways of doing business in agriculture call for a new
role for the state and for new ways for governments to become engaged with
the private sector and with civil society organizations in different forms of part-
nerships. Public–private partnerships (PPP), in which a more proactive state
engages with the private sector and civil society organizations in promoting
new initiatives, offer plenty of interesting opportunities that have to be better
explored and understood.
Some of the new opportunities offered by a dynamic demand for agrifoods
are illustrated in Figure 8, with data from India. In the left-hand panel, it can be
0
10
20
30
40
50
Cereals &
pulses
Meat, eggs,
fish, milk &
milk
products
Sugar &
edible oils
Fruits, veg
&
beverages
%
S
h
a
r
e
o
f
f
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e
x
p
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n
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i
t
u
r
e
s
0
200
400
600
800
1000
1200
1400
1600
1800
Meat &
meat
products
Fruit &
vegetables
Coffee &
tea
Fish &
fish
products
E
x
p
o
r
t
s
,
$
m
i
l
l
i
o
n
(
2
0
0
0
p
r
i
c
e
s
)
1990
2006
1987/88
2005/
Figure 8. India: rising consumer demand and exports for high-value products.
262 A. de Janvry
Figure 9. A rising share of supermarkets in retail food as income per capita rises.
0
0
10
20
30
40
50
60
70
80
S
h
a
r
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p
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o
o
d
5
India
Bangladesh
China
Nicaragua
Kenya
Bulgaria
Indonesia
Guatemala
Ecuador
Costa Rica
Colombia
Philippines
Thailand
Mexico
Chile
S. Africa
Argentina
Czech Republic
France
Brazil
United Kingdom
United States
Korea, Rep. of
10 15 20
GDP per capita, thousand PPP $
25 30 35 40 45
seen that the share of cereals and pulses in consumer expenditures has been
declining in the country, while the share of high-value products, meat and eggs,
sugar and oils, and fruits and vegetables has been increasing. The graph in the
right panel shows the significant increase in exports of high-value products
from India.
Figure 9 shows the rise of supermarkets as food retailers as incomes rise,
for a cross-section of countries. It can be seen that, increasingly, the nature of
demand is being transformed by the emergence of the supermarket economy.
Supermarkets tend to impose their own quality and safety standards, and hence
they impose tremendous challenges on the way smallholder farmers need to
organize in order to deliver the kinds of produce that supermarkets want to put
on their shelves. The rise of supermarkets represents both opportunity and a
challenge. While the potential for smallholder producers to capture rapidly
expanding markets exists, there is also a risk that they might be cut off from
access to their traditional urban consumers, as supermarkets can also procure
internationally or from larger-scale farmers.
The potential poverty reduction effects of non-traditional exports can be
illustrated from a study of bean exports from Senegal to France (Figure 10). In
the left panel, we can see the rapid rise of the total number of participants in
export sales between 1991 and 2005. We also see two interesting curves,
respectively representing the number of smallholders operating under contract
farming agreements with exporters and the number of estate farm workers.
Over time, the pattern has been one of smallholders being displaced by estate
workers. A question can then be asked as to what high-value agro-exports can
do to contribute to the goal of poverty reduction.
Annex 263
In the right-hand panel, the poverty rate is shown in the darker shaded
bars, while the extreme poverty rate is represented in the lighter ones. Poverty
rates are higher for the non-participants, suggesting that export markets con-
tribute to raise farmer incomes. Comparing the two classes of producers, it can
be seen that estate farm workers have gained from participation, but less so
than their contract farmer counterparts. Increasingly, medium to large farms
with hired workers tend to displace smaller farms, which can be competitive
players if they are effectively organized. The key issue of concern thus becomes
the role of the labour market and whether it can provide incomes to estate farm
workers that can offer them a pathway out of poverty. This empirical evidence
highlights the importance not only of competitiveness of a smallholder sector,
but also of an agricultural labour market that can afford working conditions that
allow people to move out of poverty.
Figure 11 shows the difference in employment across different countries
between two types of farm enterprise: cereal production and high-value prod-
ucts (vegetables). The data are expressed by the number of labour days per
hectare for cereals and vegetables, which are respectively shown by the light
and dark shaded bars. The figure illustrates well the tremendous gain in employ-
ment that happens in the shift from cereals to vegetables.
High-value crops are quite effective in creating employment opportunities.
To promote this type of agricultural enterprise, a better investment climate is
needed that offers incentives to invest in high-value crops and comprises insti-
tutional innovations such as effective producer organizations, contract farming
and PPP. Also important are improved sanitary and phytosanitary regulations.
These are all areas for which the public sector has an important role to play, as
a complement to what the private sector can do.
Other opportunities for a renewed focus in agriculture for development are
offered by the recent phenomenon of rising commodity prices. Figure 12
shows that the price of wheat, for instance, has more than doubled in the last
Poverty
Extreme poverty
Total participants
2005 Non-
participants
Estate farm
workers
Contract
farmers
2003 2001
Estate farm workers
Contract farmers
1999 1997 1995
Share of participating households:
contract farmers and estate workers Incidence of poverty according
to form of participation
1993 1991
0
10
20
30
40
0
60
S
h
a
r
e
o
f
h
o
u
s
e
h
o
l
d
s
(
%
)
40
20
S
h
a
r
e
o
f
p
a
r
t
i
c
i
p
a
t
i
n
g
h
o
u
s
e
h
o
l
d
s
(
%
)
Figure 10. French bean exports and poverty in Senegal. (From Maertens and Swinnen, 2006.)
264 A. de Janvry
0
India
Cereals
Vegetables
Philippines Lao PDR
Vietnam
(southern)
Bangladesh Cambodia
Vietnam
(northern)
50
100
150
200
250
300
A
v
e
r
a
g
e
n
u
m
b
e
r
o
f
l
a
b
o
u
r
d
a
y
s
p
e
r
h
e
c
t
a
r
e
350
400
450
500
Figure 11. Labour intensity of vegetable production relative to cereals.
$
2
5
p
e
r
b
u
s
h
e
l
Monthly average
prices received
by US farmers
Adjusted for
inflation
February 08
$10.40
20
15
10
5
0
1967 1970s
Unadjusted
1980s 1990s 2000s
Figure 12. A sharp rise in the price of wheat.
3 years, creating both opportunities for producers with a marketed surplus, and
major challenges for net buyers, which include not only the urban population
and landless rural people, but also a surprisingly large share of smallholders.
Figure 13 shows the shares of total employment in the rural non-farm
economy by type of economic activity in different regions. In the case of sub-
Saharan Africa, significant employment comes from retailing. Next is South
Asia, where the services and manufacturing sectors are much more important.
This is where the agribusiness and agro-services sectors come into play, creat-
ing employment opportunities in the rural sector, which then complements
what the farming sector can offer to rural households.
Annex 265
0
Sub-
Saharan
Africa
South Asia East Asia
& Pacific
Middle East
& North Africa
Europe &
Central Asia
Latin
America &
Caribbean
20
40
60
80
100
P
e
r
c
e
n
t
a
g
e
o
f
t
o
t
a
l
n
o
n
-
f
a
r
m
e
m
p
l
o
y
m
e
n
t
Retail, wage
Retail, self
Services, wage
Services, self
Manufacturing, wage
Manufacturing, self
Construction, wage
Construction, self
Figure 13. A diversified rural non-farm economy.
0
1 2 3 4–5 6–10
Number of workers in firm
11–100 >100
100
200
300
400
T
o
t
a
l
w
o
r
k
e
r
s
,
t
h
o
u
s
a
n
d
s
0
400
800
1200
1600
V
a
l
u
e
a
d
d
e
d
p
e
r
w
o
r
k
e
r
,
U
S
$
Family labour Paid workers Median value added per worker
Figure 14. Employment and labour productivity in the rural non-farm economy by size of firm.
To characterize employment in the rural non-farm economy, Figure 14
shows the value added per worker in Indonesia for firms that range from very
small (only one worker) to very large (more than 100 workers). The dark shaded
bars represent employment of family labour. Hence, in the small firms are
found mainly family workers but larger firms increasingly have paid workers.
However, the important observation to be inferred from the figure is the
value added per worker across firm sizes. Firms with three or less employees
tend to have very low labour productivity, which only increases in the medium-
scale and larger firms. This has important implications for agro-industries. Smaller
firms are, on average, really sources of hidden unemployment, while medium
266 A. de Janvry
and larger firms are really the ones that are productive and able to deliver com-
petitive levels of wages and better working conditions to their employees. As
such, care must be taken when describing the rural non-farm economy and the
opportunities it offers for poverty reduction, as the sector is highly heterogene-
ous, with many low-productivity activities existing in small firms.
Agriculture for Development: the New Challenges to Be Met
One of the biggest challenges facing the role of agriculture for development is
the political economy of public expenditure. Quantitatively there is a need to
increase public investment, while qualitatively there should be a move away
from subsidies. Not all subsidies are necessarily bad, but many fail to support
productivity gains.
A second challenge is that, in many countries, there is a considerable lack
of definition with regard to the relative roles of the market and the state, with
the conflicts and inefficiencies that this brings about. There is not one solution
as to what should be done by the private sector and the market versus what
should be done by the state. However, what is important is that the ‘rules of the
game’ must be clear and that policies are followed consistently.
A third challenge is to make agricultural growth more pro-poor. There are
tremendous market incentives, but who is going to respond to them? Is it going
to be basically large farms using mechanized production methods, or will an
important share of the response come from smallholders? Is investment going
to be labour intensive? Can we reconcile the responses to the new market
incentives with development objectives such as poverty reduction and improved
environmental management?
Finally, there is the rising challenge of environmental sustainability – water
scarcity, land degradation and climate change. Furthermore, there are a number
of global issues that affect each country’s ability to use agriculture for develop-
ment. The Doha Round of trade negotiations must progress. Genetically modi-
fied organisms (GMOs) may offer opportunities that have not been fully explored
in terms of smallholder farming and nutritional value. Biofuels can be import-
ant but, except for Brazil and a few similar countries, they are, at the moment,
sufficiently efficient neither in terms of cost-effectiveness nor in terms of CO
2
savings. There is a need to invest in identification of a new generation of bio-
fuels that can be more environmentally and economically viable. Subsidies to
ethanol in the OECD countries are destabilizing the world food situation, with
a high cost for the poor when they have irrelevant benefits for the rich.
Policy Entry Points in Having Agriculture and
Agro-industry as Focuses for Development
To identify policy entry points in focusing on agriculture for development, let
us go back to the nine-point agenda we considered when discussing the frame-
work presented in Figure 6. The first step is to recognize that the ‘worlds’ of
Annex 267
agriculture differ and that agriculture fulfils different functions in each ‘world’.
Countries need to identify which world they are in: agriculture-based, trans-
forming or urbanized. Agriculture has different functions to fulfil in each of
these categories. It can be a source of growth, it can address the problems of
income disparities and poverty and it can be a means for economic inclusion,
with smallholders achieving competitiveness and remaining as actors in the
agrifood chains.
Second, policy options are different in a context of high food prices and of
high-value products and agro-transformation. Clearly, the issue of supply
response is back on the policy agenda. For the last 50 years, which witnessed
steadily declining food prices, the focus of international development agencies
was more on the consumer side, i.e. on promoting access to food and to
sources of better nutrition. Renewed importance is now being attached to the
supply side, for the simple reason that prices are rising and, as such, produc-
tion has to increase. Countries are concerned with how to mobilize productivity
gains through improved infrastructure and institutions that can support value
addition in agriculture and agro-industry.
Urban consumers and the landless in rural areas are affected negatively by
high food prices. However, most of the world’s poor farmers are also net buy-
ers of food and not net sellers. Hence, they are negatively affected by the rise
in food prices. As a result, when there is a situation of rapidly rising food prices,
we should not assume that all farmers will be positively affected. This is impor-
tant, because they are typically very difficult to be reached by social assistance
programmes, such as food aid or cash transfers.
For the third group of countries, issues related to market access, value
chains and agro-industries become particularly relevant. Transaction costs
are too high on many markets, particularly in sub-Saharan Africa. There is
insufficient value addition in agribusiness. In many agro-industries, especially
in the international market, there is a very rapidly rising degree of concen-
tration, which is of concern in terms of market efficiency. One example in
this regard is that of the coffee sector, which has been booming in terms of
adding value, but where both the relative share and the absolute value of the
market revenues remaining in producing countries have been decreasing
over time. A second issue is smallholder access to agro-industry. Smallholders
relate better to small and medium enterprises than they do to large enter-
prises. It is important to understand how to create incentives to allow small
and medium enterprises to enter the industry and compete and in that
respect the investment climate is a relevant consideration. Enabling condi-
tions are needed, such as functioning markets, access to financial services
and institutions for contracting and risk-sharing. The role of PPP to promote
investment may be important. The state can be proactive in initiating PPP,
in particular with small and medium enterprises in the agro-industrial sector,
in order to facilitate entry and achieve competitiveness. With regard to the
role of labour practices, the Chilean model is considered a successful
approach to poverty reduction that is based on employment conditions in
the agro-industrial sector, such as year-round employment achieved through
product diversification. Regulations were enacted that do not discourage
268 A. de Janvry
employment, protect workers and allow work conditions that are conducive
to poverty reduction.
The next element on the nine-point agenda is smallholder competitiveness
and here there are two important dimensions. One is that there is still a missing
dimension to the green revolution, with Africa not having experienced a quan-
tum jump in yields equivalent to that which occurred in Asia. The Asian exper-
ience with the green revolution is well known, but for it to be reproduced
elsewhere requires careful adaptation of the Asian experience. Clearly, the
conditions in Africa are different. Farming systems are much more heteroge-
neous and there are many more crops that have to be dealt with. Markets have
to be put into place and institutions have to be created, all at the same time as
the technology that can support the green revolution is provided. Second is the
key role of a high-value revolution in agriculture and the fact that many coun-
tries are moving towards it, but quite often not as rapidly as they could be and
often with limited smallholder participation. India is a case in point with tre-
mendous potential to place itself in international markets of high-value com-
modities and to supply the emerging middle-income domestic consumer
market, which is urban based and likely to be increasingly serviced by super-
markets. Yet progress is taking place slowly, due to lack of adequate infrastruc-
ture, poor supportive institutions and producer organizations that are poorly
developed to allow smallholders to be part of the high-value revolution.
Next on the agenda is family farming in transition to commercialization,
i.e. taking households out of subsistence farming and into the market. Greater
attention is needed to subsistence farming, which requires different types of
support in order to improve the resilience and the capacity of the farming sys-
tems to achieve food security.
The rural labour market is potentially a very important pathway out of
poverty, because, as we have seen, many of the poorest rural people in the
world are actually in the agricultural labour force. But these markets are often
not properly regulated and not functioning adequately if they are to achieve
poverty reduction.
The rural non-farm economy, presenting employment and investment
opportunities, is a further element in the agenda. Here, there are basically
three policy entry points for discussion. First is the rural investment climate in
all of its dimensions, which needs to be carefully understood. Second is the new
role of the state in terms of PPP. Third is the role of clusters and a territorial
approach, which can coordinate public support and public–private investments
at the level of specific regions. Under these circumstances agro-industries can
develop competitive advantages that are based on the comparative advantages
of agriculture and on cross-firm spillovers to enhance their competitiveness.
The final element in our list is investing in rural people. There has been
massive under-investment in rural people in terms of health, education and
gender equity, and it is no surprise that, as a consequence, as labour moves out
of agriculture, it is unable to find good employment opportunities.
In sum, there are basically three main messages. The first is the tremen-
dous importance and potential for the promotion of smallholder competitive-
ness in high-value activities, in addition to the more traditional focus on food
Annex 269
grains. For competitiveness to be achieved, the development of proper institu-
tions, infrastructure and organizations will be required The second is rural
employment in high-value activities, or the role of the rural labour market and
how wage labour will play a role in the transformation of agriculture. The third
is value added in agro-industries and the need to explore, quite carefully, the
conditions that can be put into place in order to favour the emergence of these
enterprises, especially medium-size ones that are highly employment intensive,
using labour in a way that is both remunerative and conducive to leading work-
ers out of poverty.
How to Make It Happen? Conditions for Success
What is the likelihood that agriculture and agro-industry will now be used more
effectively for development than they have been over the last 20 years? Basically
there are four conditions that should hold in order for this to happen. The first
is awareness: governments and development agencies need to better under-
stand what agriculture can do for development. This has, to a large extent,
been forgotten over the past 2 decades, when we shifted towards an urban-
based development model, an industry-based model of development or towards
high-tech services such as in India. And yet, although we see wealth creation,
we also witness continued mass poverty in rural areas and the growth of rural–
urban disparities, with an underuse of the potential that agriculture has for
poverty reduction.
Second are the possibilities to invest public resources in agriculture com-
petitively, not only for growth, but also for poverty reduction and sustainability.
As we have seen, there are important new market, technological and institu-
tional opportunities for agriculture, but these incentives to invest need to be
reconciled with what they can do for development, namely poverty reduction
and sustainability.
The last two conditions are the biggest challenges. The first is how do we
invest successfully in agriculture as an engine for development? If governments
and international development agencies need to focus on agriculture for devel-
opment, how should they do it? With the food crisis creating opportunities for
political support, the World Bank, the Bill and Melinda Gates Foundation, the
Rockefeller Foundation, FAO, IFAD and many bilateral development agencies
promoting investments in agriculture are then asking: what are the options?
How do we invest successfully in agriculture for development? The old ways
will not work: the present context is different, and the traditional approaches
did not work for Africa. There is thus a need for new ideas, a need for experi-
menting with innovative ways of using agriculture for development, such as
decentralization policies, participatory approaches, strengthening community
roles, reinforcing the important roles of the public sector, promoting PPP,
increasing the focus on women in agriculture, reshaping the investment cli-
mate, strengthening producer organizations, seeking value addition in agribusi-
ness, and so on. Agriculture has tremendous potential to promote development,
but it is not infallible.
270 A. de Janvry
The final condition is the need to develop capacities. In order for agricul-
ture to be effectively used for development, we need to build capacities, espe-
cially in terms of entrepreneurship. It is not easy to invest in high-value activities;
it is not simple to invest in small or medium agro-industries; it takes entrepre-
neurship, business skills and education, which have usually not been provided
adequately by schools in the rural sector. Second, small farmers or small entre-
preneurs will not succeed alone: they need to work with producer organiza-
tions; they need to cooperate in order to compete successfully; and hence they
also need leadership and analytical and managerial capacities at the level of
their organizations. Third, we have seen that the state has a very important role
to play: you cannot have a successful agriculture-for-development programme
without an active and supportive state. The investment climate will be managed
by the state but, for this, the state has to have a good understanding of what
the private sector needs in order to be successful in investing in agriculture and
agro-industry. Governance for agriculture needs to be redefined and the role of
ministries of agriculture needs to be rethought. They have usually been badly
affected by structural adjustment: resources have declined and functions have
been redefined, but we have not seen enough adjustments regarding the kinds
of skills and organizational structure they should have. And, finally, there has
to be support at the international level. No country can now succeed alone in
using agriculture for development; there are too many international dimensions
that have to be understood and supported. Thus, international support and
coordination are essential and, for this, capacities have to be developed also at
the level of international organizations.
References
Maertens, M. and Swinnen, F.M. (2006) Trade,
Standards and Poverty: Evidence from
Senegal. LICOS Centre for Institutions and
Economic Performance and Department
of Economics, University of Leuven.
World Bank (2007) World Development Report
2008: Agriculture for Development.
Washington, DC.
Ravaillon, M., Chen, S. and Sangraula, P.
(2007) New evidence on the urbanization
of global poverty. Background paper for
the world development report 2008. The
World Bank, Washington, DC.
Index
Acquisitions and mergers 24, 80
Advertising 98
Agribusiness/agriculture ratio 49–52,
50–51, 52
Agriculture
as driver of development 255,
256–257, 261, 271–272
private sector involvement 268
productivity 166–167, 239, 247
public spending 261–262, 262,
268
workforce 190, 260, 265, 265,
266
Agriculture-based countries 257, 258
Agro-industrial sector
business competitiveness
factors 149–162
components 46–47, 53, 53–54
defining characteristics 11–12, 169
financing 73–74, 158–159
industrialization process 14
challenges 33–41, 75, 96–97,
112
changes and evolution 12–27,
74
geographical variation 27–28
impacts 28–33, 258
restructuring 19–28, 34, 69,
186–188, 232
technology impacts 100–108, 101,
117–121, 124–133
underlying meta-trends 13–17, 29,
92–94, 95, 115
Agrochemicals 31, 98
Agronomy 99
Allanblackia (AB) oil 239, 251
Anaerobic digestion 106
Animal protein complex 63, 76
Aquaculture 78, 93
Bakery businesses 54, 84, 168–169
Banking resources 38, 158–159, 211
Barley (malt) 236, 239, 247
Bennett’s law 13
Beverages see Food and drink processing
sector
Biofuels 80–81, 86, 96, 216, 268
see also Energy, generation from
waste
Bioinformatics 102–104, 103, 134–135
Biotechnology 74, 102
Brazil
‘Agua Viva’ Syngenta project 238,
239, 249
biodiesel programme 86, 216
dairy processing 25
international trade policies 76, 154
Page numbers in bold type refer to figures, tables and boxed text.
271
272 Index
Brokers see Intermediation
Business Competitiveness Index
(BCI) 143–145, 178–179
Business conditions
development services 160–161,
210–211
government support 116–117,
163–166, 196
linkages 161–162, 195–206, 234
sustainability of 215–216, 216
start-up 37–38
Business indicators
Business Competitiveness Index
(BCI) 143–145, 178–179
Current Competitiveness Index
(CCI) 143
Ease of Doing Business Index 139,
141, 159, 173–176
Global Competitiveness Index
(GCI) 141–142, 176–177
Global Investment Prospectus
Assessment (GIPA) 146
Growth Competitiveness
Index 142–143
Investment Compass (IC) 145–146,
179–180
Inward FDI Performance
Index 146–147
Buyers, services to producers 199,
201–203, 250
see also Procurement
Calorie consumption 60–61, 61
Certification 17–18, 18, 97, 167, 213
CGIAR (Consultative Group of
International Agricultural
Research) centres 157
China
aquaculture in paddies 93
biogas initiative 236, 239, 241,
248
FDI effects and regulation 23, 80,
189
traditional trader/producer
links 201, 204
Classification of countries, economic 48,
141, 142, 257, 257
Climate change 86–87, 98
Clothing industry see Textiles and
clothing
Cocoa 83
Codes of practice see Standards and
codes
Codex Alimentarius Commission 97,
110, 117
Coffee 69, 70–71, 82, 107–108,
208
Combined heat and power (CHP)
systems 106–107
Commodities
price rises 265–266, 266
shifting composition trends 20, 34,
62–64, 65
impacts on development
47, 76
traditional 81–83
transport costs 72
Community investment 224–225
Competitiveness
assessments, economic 138,
138–139, 140
comparative advantage 116–117,
137
drivers of 4, 74–85, 143–144,
144
effect of expanding markets 17, 21,
34, 112–114
limitations of measures 140,
148–149
see also Business indicators;
Enabling environments
Concentration, agro-industrial 69, 168,
269
Consumers
changing demands 7–8, 93,
113–114, 263, 263–264
cultural differences 155
as drivers of development 34,
74–75, 94–96, 95, 236
home bias 73
processed food consumption 16,
58, 60–62
sustainability/ethical demands 95,
194, 227
Contract farming 26–27, 161–162,
200, 264–265
flexibility and enforcement 170,
200–201, 212
Convenience foods 62
Cooperatives 197–198, 198,
202, 207
Index 273
Corporate Social Responsibility
(CSR) 6–7, 223–225
and consumer demands 113, 194
standards and codes 204, 226–230
value chain innovations 234–240
Corruption 37, 38
Cottage industries 58
Credit access 73–74, 158–159, 196
Crop improvement 102
Cuatro Pinos cooperative
(Guatemala) 197–198, 198,
202, 207
Current Competitiveness Index (CCI) 143
Dairy processing 21, 25, 199, 253
Danone Grameen (Bangladesh) nutrition
project 239, 253
Data sources, economic 48, 87, 141,
145, 148
Development stages see Classification of
countries, economic
Diet
calorie consumption 60–61, 61
composition patterns 1, 13, 15,
61–62, 93–94
see also Nutrition, human
Domestic markets 79, 83–85, 186–187
Ease of Doing Business Index 139, 141,
159, 173–176
computed example
(Egypt) 175–176
Economic reform 162–169
Education 98
Elasticities of substitution 73
Electricity supply 35
Employment
agricultural workforce 190, 260,
265, 265, 266
job creation 4, 239, 241
rural non-farm 52–53, 56–58, 59,
266–268, 267
see also Labour
Enabling environments 5–6, 150,
214–215, 241
essential 150–154, 164
important 155–159
reform of 162–169, 163
useful 159–162
Energy
electricity supply 35
generation from waste 105–107,
236, 239, 241, 248
use 32–33
Engel’s law 13
Entrepreneurial skills, capacity-
building 272
Environment
challenges 98
impacts of agro-industry 4, 30–33,
78
protection 93, 111–112
sustainability objectives 228, 268
Equity 75, 186–187, 191, 208
Ethanol 81, 86, 106, 268
Ethical Trading Initiative 227, 230–231
Expenditure, in relation to income
food share 60, 60
on packaged/processed
foods 60–62
Export markets 17, 28, 34
non-traditional 263, 264
Fairtrade products 70–71, 82,
204–206, 208, 210
Farmers
associations and organizations 170,
197–198, 202, 207
contracts with agro-industries 26–27,
161–162, 200
employment patterns 76–77,
264–265
family, commercialization 84–85,
259, 261, 270
integrated farm management 99
see also Smallholders
Financial services 38, 158–159, 211
Fish, as export commodity 64, 110,
114, 263
see also Aquaculture
Food and drink processing sector
consumption trends 16, 58,
60–62
employment patterns 56–57, 84
labour productivity 54–56, 55, 56
new technologies 100–108
value added production 53–54, 54,
256, 257
‘Food miles’ issue 95, 194
274 Index
Food safety and quality
consumer demands 94, 226
of novel products 104–105
and public health 109–111, 111,
227
regulatory frameworks 97–98, 110,
227, 229
see also Standards and codes
Food security 96, 166–167, 230
Foreign direct investment (FDI) 21–23
to different agro-industrial
sectors 23
in different developing regions 22
impacts 25, 68, 75
performance indices 146–147
sources 22, 81, 138
and state policies 79–80, 167
Foreign exchange 37
Freight rates, by commodity 72
Frozen processed foods, sales of 16
Funding, sources 73–74, 158–159
Gender, workforce 56–57, 84, 230
Genetic engineering 75, 102, 155
Geographical indications (GIs) see Origin
products
Global Agro-Industries Forum, 2008
(GAIF) 3, 8
keynote address 3, 254–272
Global Competitiveness Index
(GCI) 141–142, 176–177
Global Investment Prospectus
Assessment (GIPA) 146
Global value chains (GVCs) 47, 68, 70,
75, 77
Global warming see Climate change
GlobalGAP 18, 213, 227, 231
Globalization
effect on competition 17–18,
33–34, 112–113
multinational operations 69, 78
rapidity of change 54, 137
Governments, role in agro-industrial
development
business support 116–117,
163–166, 196
challenges and competency 37,
39–40, 85, 112, 154
private/public sector balance 5,
167, 242–243, 263
regulatory functions 97–98,
149–150, 159–160,
240–241
strategic planning 40–41, 87,
136–137
support for small farmers 166–167,
213–217, 269–270
trade policies 152–154
see also Law enforcement; Policy
frameworks; Public spending
Grameen Danone (Bangladesh) nutrition
project 239, 253
Green revolution 262, 270
Gross Domestic Product (GDP)
compared to agricultural
spending 262, 262
contribution of agro-
industries 48–52, 50–51,
255–257, 256
Growth Competitiveness Index
142–143
Gum arabic trade 165
Hazard Analysis and Critical Control
Points (HACCP) systems 110
Health
and diet 62, 93–94, 108–109
disorders 109
protection measures 97–98, 227,
239, 249
Heat exchangers 102
Human Development Index (HDI) 52
Illnesses, food-related 109
Imports, tariffs and quotas 154
Inclusiveness 2, 6, 8, 233
business case for 187–191
see also Equity; Sustainability
Income
disparity, rural/urban 40, 257
growth, contribution of agricultural
GDP 259, 259
India
domestic retail procurement 187,
192, 203, 238, 250
malt barley improvement
programme 236, 239, 247
Indicators, development 38, 48–67
see also Business indicators
Index 275
Industrialization see Agro-industrial
sector, industrialization process
Informal sector 56
enterprises 12, 27
in food distribution 83–84, 85,
195–196
Information technology 107–108, 114,
116, 263
Infrastructure 35–36, 152
Ingredients, separation
techniques 128–130
Innovation 77–78, 98
scaling up 239–240
in supply chain initiatives 234–240
Intermediation 201–204, 203,
207–208, 213
Internet
use in trade 107–108
website lists 222, 245
Investment
disincentives 37, 38, 158
sources 73–74, 158–159
see also Foreign direct investment
(FDI); Public spending
Investment Climate Surveys 148, 185
Investment Compass (IC) 145–146,
179–180
Job creation 4, 239, 241
Kenya
financial support for
smallholders 208, 209,
232–233
new export markets 21, 28, 34
sustainable tea production 252
Kuznets curve 33
Labour
costs 21, 53
market, rural 260–261, 265, 265,
270
productivity 54–56, 267, 267–268
regional and product
analysis 55, 56
working conditions 77, 83, 228
see also Employment
Land ownership 150–152
Land use 31
productivity 93, 239, 247
Law enforcement 167, 168–169,
170, 226
costs 151
Loans see Credit access
Location 20–21, 33, 68
Macroeconomic environment 37,
136–138
Malawi, agricultural
productivity 166–167
Malt production 236, 239, 247
Management skills 26, 160–161
Manufacturing production, total
agro-processing contribution 49,
51–52
food and beverages contribution 53
Marketing models
alternative, with specialized
standards 204–206, 208,
210
business model definition 188, 188
buyer-driven 198–201, 208
impact assessment 206–207, 209
with intermediaries 201–204, 203,
207–208, 213
producer-driven 197–198, 207
Markets
access regulation 30, 79–80
domestic 79, 83–85, 186–187
export 17, 28, 34
local produce 101
wholesale 198–200, 201–202,
202, 207–208, 214–215
Mergers and acquisitions,
international 24, 80
Microeconomic environment 143–144,
144
Migration, from agricultural
labour 260–261
Millennium Development Goals
(MDGs) 187, 224, 255
Multilateral agencies/organizations 240,
242
Multinational companies 22–23, 30, 79
Nanotechnology 104–105
Niche markets 31, 114, 205–206, 226
276 Index
Non-governmental organizations
(NGOs) 26, 83, 196
Nutrition, human 99, 108–109, 113
Obesity 62, 98
Organic products 31, 70–71, 113, 231
Origin products 71, 82
Packaged foods 16, 32, 60–62
Packaging research 99, 132–133
Parastatals 19–20, 36
Pasteurization/sterilization 102,
124–125
Perishability, food 11, 96, 101, 133
Policy Framework for Investments 147,
181–184
Policy frameworks 88, 170, 268–271
innovation support 77, 114, 116
market regulation 30, 79–80, 153
Regoverning Markets
programme 186, 241
Pollution 32
Population growth 61–62, 92
Post-harvest losses see Perishability, food
Poverty
alleviation pathways 259–261,
260, 265, 268
agri-business growth 49, 69
rural non-farm employment
52–53, 57–58
value chain innovation 239, 253
future projection 92
impact of business models 217–218
rural 2, 254–255, 257–259, 258
Preferential trade agreements
(PTAs) 153, 190
South African retailing 189, 193
Preservation methods, food 124–128
Prices, food
2007/8 rises 2–3, 254
effects of change, in supply
chain 212, 212, 269
fixing 169
Private sector
agricultural involvement 268
enterprise climate 14, 40, 167,
269, 270
private/public links 156–158,
242–243, 263
social responsiblity 223–225, 236
standards and codes
implementation 213, 214,
226–227
see also Small and medium
enterprises (SMEs)
Privatization 20, 164, 165
Processed food and drink
consumption 16, 58, 60–62
technologies 99, 100–102,
130–131
trade 66, 66–67
Procurement
direct 192, 198–200, 199, 238
inclusive 212–213
from intermediaries 187, 201, 213
security of supply 191–192, 193
see also Buyers, services to
producers; Wholesale
markets
Producers see Farmers; Food and drink
processing sector; Smallholders
Productivity improvement 93,
239, 247
Property rights 150–152, 170
Provenance see Origin products
Public–private partnerships (PPP) 263,
269, 270
Public sector see Governments, role in
agro-industrial development
Public spending
agriculture 261–262, 262, 268
infrastructure 152
research 156, 156–158
Purchasing see Procurement
Quality and safety standards 17–18, 34,
226–227
see also Standards and codes
Quotas see Trade, barriers
Raw materials, supply of 11
Regulations, business 159–160
Research and development, support
for 98, 156–158, 157
Retailing 79, 189, 190
private sector codes of practice 213,
214, 226–227
see also Supermarkets
Index 277
Risks, in agri-business 158–159,
162–164, 226–234
Rural economy, non-farm 57–58
Saanjhi Unnati (SU) barley
programme 247
Scaling up, of innovations 239–240
Scientific research 99, 103–104
Service provider access 35–36, 38
Side-selling 208, 209, 212
Skills development 36–37, 160–161, 210
Small and medium enterprises
(SMEs) 107, 159
retail (kirana stores) 190
rural 58, 68–70
urban 84
Smallholders
access to markets 69, 79, 269
compliance with standards 27, 230
contract farming 27, 200–201,
264–265
government support 166–167,
208, 209, 269–270
production objectives 195,
195–198
supply chain comparative
advantage 191–192, 192
support services from traders
201–204, 233
trading costs and risks 189–190,
192, 207–210, 232–234
Sourcing see Procurement
South Africa
milling and baking
industry 168–169
supplier/retailer relationships 189,
193, 193, 215
South-South trade 63–64, 76
Standards and codes
alignment/equivalence 97–98,
155–156, 227–228,
231–232, 242
certification 17–18, 18, 97, 167,
213
costs of compliance 78, 213,
232–234
coverage of sustainability
issues 228–230, 229, 232
development impacts 27, 34,
110–111, 117, 224
government endorsement
240–241
impact assessment 230–231,
246
private sector implementation 213,
214, 226–227
specialized, for niche markets
204–206, 226
State enterprises see Parastatals
State policies see Governments, role in
agro-industrial development
Sterilization/pasteurization 102,
124–125
Strategic planning 39–42, 40–41, 87,
136–137
see also Policy frameworks
Subsidies, agricultural 166–167
Supermarkets
community goodwill
initiatives 193–194
market penetration 23, 25–26,
168, 264, 264
purchasing policies 200, 201
quality lines 189
Supply chains
concentration of power 29–30
established global 39
partner networks 117, 189–190,
211–212, 215–216
position of smallholders
189–192, 207–210,
232–234
pros and cons of Fairtrade
205–206, 208, 210
sustainable relationships 25–27,
210–211, 234–240
case studies 237, 238,
247–253
traditional 28, 79, 195–196,
201, 204
Sustainability 111–112
of business interventions 196
multi-stakeholder partnerships
234–236, 237
tea production 238, 252
Sustainable Agriculture Initiative
(SAI) 225, 248
analysis of programme 235,
235–236
Sustainable Competitive Advantage
(SCA) 112
278 Index
Tariffs 39, 78, 154
Tea 69, 82, 238, 252
Technology
access to 36, 114
benefit potential 108–117
Technology (continued)
capacity building 36–37,
116–117
development 5, 14, 16–17
drivers of change 100, 108
economic 96–97
environmental 98
political 97–98
social 94–96
technical and scientific 99–100
food-processing 99, 100–102,
130–131
information and communication
(ICT) 107–108, 114, 116,
263
public/private transfer 156–158
Textiles and clothing 54, 57, 67, 67
Trade
agricultural market share 62,
63, 63
barriers 71, 73, 78, 153
costs 71–73
deficit/surplus, food 64, 66, 96
global regimes 39, 62, 63,
136–137
impact of Internet 107–108
South–South flows 63–64, 76
state policies 17, 152–154
Traders see Intermediation
Transforming countries 257
Transport
costs 35, 71–72, 72
‘food miles’ debate 95, 194
Uganda, seed industry 164, 165
UNCTAD (United Nations Conference
on Trade and Development),
economic analyses 145–147,
179–180
Urbanization
domestic market expansion 83–85,
186–187
effect on consumption 62
and labour demand 52–53
population changes 13, 16
Urbanized countries 257
Value addition 1–2, 4
consumer demand for products 263,
263
food and non-food sectors
compared 12
technology contributions 114, 115
Waste management 32, 98, 105,
105–107
Water
availability and demand 31–32, 35,
93, 98
supply protection 238, 239, 249
Websites 222, 245
Wholesale markets 198–200, 214–215
specialized, examples 201–202,
202, 207–208
Women see Gender, workforce
Workforce see Employment; Gender,
workforce
World Bank
Doing Business project 159–160
economic classification of
countries 48, 257
surveys 148, 185
World Development Report 2008
(WDR) 2, 186–187, 233,
254–255, 262
World Economic Forum 138, 139, 141
World Trade Organization (WTO) 17,
97, 154
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