Inequality and Economic Inclusion

Monday, 01 September 2008

Linking small and marginalised producers to external markets: New ideas for demand-side measures using value chain analysis

  • Year: 2008
  • Organisation: TIPS
  • Author(s): Sandy Lowitt
  • Countries and Regions: South Africa

This executive summary is not presented in the usual manner of summarising the findings of each chapter of the report. The complexity and detail covered in the report, and the nuances in the debates, makes such an option impossible. Rather, a brief overview of the key issues and approaches is presented as a separate think piece.

This study was commissioned by the Presidency as a follow up to the Review of Second Economy Programmes conducted by the Second Economy Strategy Project. In the Review, it was noted that while social delivery programmes targeting poor people had largely been successful and implemented at scale over the past 15 years, the same could not be said for economic programmes aimed at creating market based employment opportunities. Generally, these latter programmes were found by the Review to be highly project focused, not scalable and, as a result, only reached a small number of direct beneficiaries. The Review cited six contributing factors to the modest success of these economic programmes. One of the cited problems was market access for small and marginal enterprises. It was that broad issue which framed this study.

More specifically, the terms of reference required that the study contemplate mechanisms to support a change in the trajectory of small marginalised producers which will lift them out of poverty. This trajectory change is based upon exploring what it would take to shift these producers away from selling to local, thin markets in favour of selling their outputs to external, developed markets – on fair terms. The terms of reference proposed the use of value chain analysis as the theoretical construct upon which the study is based, and very importantly, that it focus on what kinds of systemic-level changes would facilitate such linkages or allow them to take place at scale.

The study is designed to deliver two outputs. The first output is a linkage framework which will guide policymakers, researchers and practitioners in identifying the systemic issues which consistently, across sectors and nations, constrain marginalised producers from entering deeper and more established formal value chains. The identification of these issues, using value chain analysis, provides a list of issues which any policy intervention will need to address. The second output of the study is to stimulate policy debate in this area by suggesting new and novel approaches to possible linkage strategies. Two strategies are presented, although, an infinite number of strategies could emerge from the framework. The terms of reference are clear that the strategies presented in the second output do not need to be developed to the point where they are ready for programmatic roll out, but should rather catalyse debate. In addition, the terms of reference remove the need for the strategies and framework to deal with all areas of second economy production and poverty, because this study sits alongside other work streams all dealing with different aspects of the challenge.

Value chain analysis has been the cornerstone of the study. The appeal of value chain theory to our linkage study is fourfold.

Firstly, value chain analysis emphasises the issues of governance and power in markets which provides us with important information on the advantages and disadvantages of entering a specific value chain and different realities which will be experienced at different links within a given chain. Importantly, governance and power also direct our attention towards understanding how and why barriers to entry are created by value chain controllers and how these inhibit, but also potentially create, opportunities for small and marginalised 5 producers. Understanding how and why barriers are created and who ‘controls’ these barriers is crucial if one wishes to breach or harness such barriers.

The second appealing feature of value chain analysis is that it directly addressed how and why economic and other rents are distributed across a chain. By understanding which activities are ‘well’ rewarded along a chain, and which activities attract poor returns, we are able to develop a feel for which types of activities in the value chain that are likely to attract a return sufficient to positively impact on incomes and returns and which activities are like to result in immiserising growth. This is a crucial point because linking marginalised and small producers to developed value chains is not a guarantee that the livelihoods of such participants will improve. It is possible to increase such linkages without improving income generation or returns to small producers. As such, chain activity and product selection within a given power and governance environment must be carefully considered to ensure that the created linkages do in fact result in improved circumstances for small producers.

The third appealing feature of value chain analysis is that product and/or process upgrading is an intrinsic part of the theory. Firms go to the trouble and expense of implementing governance structures in order to assure themselves of access to the right goods, of the right quality, at the right time. As such, lead firms often see investing in their suppliers as a sound business decision and may either offer embedded services or facilitate the access of suppliers to appropriate upgrading services. The fact that upgrading to meet standards and critical success factors is intimately tied to governance and the exercise of chain power means that at least some of the supply side issues which will need to be dealt with in relation to small, marginalised producers can be dealt with endogenously i.e.: a successful linkage programme will by its nature incorporate some upgrading within the linkage itself, thereby decreasing the need to provide extensive, external supply side support over and above that provided by the core economy linkage partner.

The final appeal of value chain analysis is the fact that it is a demand side approach. For too long, policies, programmes and strategies in South Africa (and the rest of the world) have been supply driven, often resulting in production and productivity improvements in small and marginalised economic activities which do not translate into improved livelihoods; either due to a lack of final demand or low prices/returns earned. By adopting a demand side approach, we improve fundamentally the probability that if a linkage is successfully created, the activities or products of such producers will have an effective market in which to sell their outputs and services at a price that will improve their income and return earning potential.

These four appealing features of value chain analysis have motivated us to use value chain analysis as an appropriate construct on which to base our framework and strategic thinking. Essentially, these features offer us a consistent and rigorous methodology with which to isolate and express the crucial questions that will need to be answered in any attempt to link, at a systemic level, mainstream and marginalised economy players in South Africa.

Using value chain analysis for this study has not, however, been a simple task. Value chain theory is based on investigations of a specific product or sector, in a specific location, with specific actors, at a specific time. It is an empirically driven analysis. In our study, where we are searching for systemic obstacle identification and systemic solutions to obstacles, this sector specific approach creates difficulties in terms of the level of analysis.

To counter this, a framework has been developed, and strategic options compiled, based on cross-cutting issues. The study looked at hundreds of case studies and specific sector value chain analyses undertaken in scores of countries. Surprisingly, the same issues arose time and again. This leant credence to the study’s assertion that, irrespective of sector, some characteristics of lead firms in the mainstream economy, and some characteristics of small producers in the second economy, lead consistently to the same obstacles to successful linkages. As such, we identify these cross-cutting issues as systemic in nature and believe that they reveal the key constraints which must be addressed in order to implement a successful linkage strategy.