Mobiles; Avatar-for-good; Goldman Sachs v Robin Hood; rickshaws (+judges) v cars and conflict/security: links I liked

February 17, 2010

Natural Resources and Development Strategy after the crisis: useful (but flawed) new World Bank paper

February 17, 2010

Is the spread of supermarkets in poor countries good news or bad?

February 17, 2010
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African supermarketSupermarkets are not just a northern phenomenon, but are spreading fast across the developing world. Some of them arrive from outside, like the giant Tescos outside my hotel on a recent visit to Korea; others are homegrown. Either way, they are having a big impact on the lives and prospects of farmers, large and small. Thomas Reardon at Michigan State University is the guru on this, and in a recent issue of World Development, pulls together a series of case studies from Eastern Europe, Africa, South Asia and China to take stock of where the supermarketization of the world has got to. It’s not open source, I’m afraid, but here are some highlights:

Modern, Western-style supply chains are spreading, along with several other traits, including ‘the shift from public to private standards, from spot market relations to vertical coordination of the supply chain using contracts and market inter-linkages, and shift from local sourcing to sourcing via national, regional, and global networks.’ As with supermarkets in the rich countries, this is all done to cut costs and increase quality. The rise of the supermarkets is one part of a three-pronged ‘agrifood industry restructuring’ that is also transforming the wholesale sector and food processing.

When there’s a choice, companies tend to source from larger farmers and avoid the little guys on grounds of cost, quality and general hassle. However, there are exceptions: companies source from small farmers in contexts where small farmers dominate the agrarian structure. But even then, they prefer to buy from small farmers with access to irrigation, farmers’ associations, farm equipment, and paved roads, rather than the poorest of the poor.

However, where companies need or want to source from small farmers, but the farmers lack access to credit, inputs, or extension, companies sometimes use ‘‘resource-provision contracts” to address those constraints. This kind of ‘contract farming’ is spreading in many countries, and includes both contracts that are exploitative, and others that provide genuine opportunities for small farmers.

Overall, the research for the journal tends to show positive effects on small farmers of inclusion in modern channels, including on incomes and assets of farmers, and positive externalities to the local labor markets (I think that means more and better jobs….), although Reardon wants to see more research based on panel data (i.e. comparing the same households over time), rather than cross-sectional stuff that just compares countries or communities at a single point.

The research concludes that ‘government policy affects the pace and nature of agrifood industryTesco China transformation, and influences the inclusion of small farmers. While there are situations where the transmission effect of food industry transformation to farmers is still relatively weak (such as in China), in many countries the impacts are already emerging. While medium/large farmers are best equipped to face this transformation, even small farmers can be included and improve their lot via the modernizing markets, but their access to non-land assets such as irrigation, access to roads, to association, to greenhouses, and so on, is crucial for this inclusion. In some cases the food industry companies will themselves provide access to these assets (via ‘‘resource-provision contracts”) in order to assure their farm supply base. But there is a significant and substantial and urgent role for governments to provide assets to farmers to ‘‘make the grade” for the successful participation of small farmers in the transforming food economy.’

The implications for small farmers are profound. Supermarkets source the majority of their products locally, and the volumes traded are significant and growing. Domestic markets are central to the livelihoods of small farmers, and supermarkets could potentially expand farmers’ sales. But unless they can meet the supermarkets’ demanding quality and quantity requirements, farmers risk being consigned to the least profitable backwaters of the domestic economy, just as they are currently at the global level.

The rise of food processors and fast food chains in developing countries poses similar challenges. Citing problems of scale and quality, branches of McDonalds and Pizza Hut in Ecuador prefer to import potatoes for French fries, even though the Andes is the original home of the potato. Any NGOs or others trying to support small farmers by helping them achieve ‘power in markets’, by for example forming associations to increase scale and improve quality, had better be aware that they are chasing a moving target.

4 comments

  1. Has anybody looked at the impact on the middlemen of supermarkets in developing countries? I would have thought they were precisely the folk the supermarket was aiming to remove from the chain. Can I confess too some sympathy for middlemen “coyotes” of the coffee trade who are often portrayed as the villains in the fair trade movement. It seems to me they are an important part of the chain , and it’s a bit unfair to replace what they do by an intern on a placement from an northern NGO. Are my sympathies misplaced ?

  2. Ken-

    I think those sympathis are well placed. We’ve been thinking about this alot with our research team that considers public/private sector involvement in linking poor farmers to markets.

    For example, this is especially acute when you consider credit and lending to these growers. As it stands right now there’s just no good solution on how to lend to small farmers (I specifically mean very small, mostly subsitence farmers in dev countries) in a way that will entice/drive private sector involvment via mitigated risk. On a per case basis it can happen, but scaling up is pretty much a nightmare for any kind of global impact or decent finacial returns needed by an investor. Using in-country small/medium enterprises can potentially provide access to credit and business development services for a network of poor farmers – those exact “evil traders” or middlemen that so many love to hate.

    Anyway, it’s something we are actively analyzing, if you’re interested in our work you can read about it here:
    http://gisweb.ciat.cgiar.org/dapablogs/dapa-markets/

    Duncan- engaging! Thanks for a thoughtful summary of Reardon’s recent work.

  3. Has anybody looked at the impact on the middlemen of supermarkets in developing countries? I would have thought they were precisely the folk the supermarket was aiming to remove from the chain. Can I confess too some sympathy for middlemen “coyotes” of the coffee trade who are often portrayed as the villains in the fair trade movement. It seems to me they are an important part of the chain , and it’s a bit unfair to replace what they do by an intern on a placement from an northern NGO. Are my sympathies misplaced ?

    Duncan: You’ve got a point Jessica – vilifying ‘middle men’ is often unfair – supply chains require lots of links to function. the point is the kind of deal available to the people at the sharp end of that chain – the producers and labourers. In order to get a better deal, they may have to negotiate more effectively with traders (middle men), or bypass them altogether (shortening the chain) – probably depends on context.

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