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Economic development

Adding value

Trade and production worldwide are increasingly conducted in more or less firmly established value chains. In Berlin, experts discussed how companies from developing countries can get positioned as suppliers.

The farmer who sells part of his harvest at the local market rather than consuming it all himself generates an added value – one which the buyer may then enhance by turning the fruits of the field into a dish on a restaurant menu. In other words, value chains start where subsistence economy ends.

But a broad definition like that has a drawback: it makes programmes for creating and developing value chains indistinguishable from private-sector promotion. So, to become useful as an analytical tool or a basis for policy-making, the term needs to be defined more closely. That, at any rate, is what Tilman Altenburg of the German Development Institute GDI told an international conference in Berlin in late May. The point of promoting value chains, he said, is not only to overcome the stagnation of a subsistence economy; it is to create suppliers in developing countries for local, national and – above all – international production and trading chains. Creating such supply chains overlaps with private-sector promotion but calls for setting specific priorities. In value chains, for example, participating companies can differ greatly in terms of power. Therefore, businesses supplying the chain need to be empowered to defend their interests when dealing with big multinational customers.

In the eyes of Nestlé, the world’s biggest food group, which sources commodities from many developing countries, the most important task for the state is to ensure a business-friendly environment. “There is no need for grand plans or strategies to position companies in value chains,” says Hans Jöhr, corporate head of agricutlture at the Swiss company’s headquarters. What matters, he believes, is a good environment in which businesses can grow. The ultimate arbiters of success or failure, anyway, are the market and the consumers.

The policy-makers assembled in Berlin took a somewhat different view. Most called for the kind of approach that has been propagated for years by the United Nations Conference on Trade and Development. UNCTAD wants governments to pursue an active industrial policy, and regulate investment to strengthen domestic businesses, encouraging foreign companies to cooperate with them. But to avoid the mistakes of earlier industrial policies, a strategy of this kind needs to be coordinated with the private sector. This point was made by Cornelia Richter of GTZ, who sees public private partnerships (PPPs) as a good place to start.

Jeanne Downing of the US development agency USAID reckoned that what was needed was a “vision” for industrial development geared to the poor. However, extending international legal protection for intellectual property and deregulating investment – two goals pursued by the European Union and United States in bilateral trade agreements with developing countries – present new hurdles for realising such a vision. The tiger economies of Southeast Asia, often held up as shining examples in this context, had more room for political manoeuvre than the giants of world trade want to tolerate today.

According to GDI scholar Altenburg, disassociating value chains from private-sector promotion reveals trade-offs that are often conveniently overlooked – for example, the conflict between poverty reduction and efficiency. Not every small business can be turned into an efficient supplier. Stefan Denzler of Switzerland’s Development Cooperation Directorate claims there is a segment of “non-competitive poor” who can never be involved in projects promoting value chains. “A potato farmer in Peru who is 200 km away from the next main road cannot be transformed into a supplier for McDonald’s.”

Maybe not, retorts John Horton of the Inter-American Development Bank, but that does not make him a hopeless case deserving of no support. For the Peruvian potato farmer, the broad definition of value chain should still be applied: what he needs first of all is to rise above subsistence farming and generate added value at a local market. (ell)