TIPS%20DEVELOPMENT%20DIALOGUE%20%20Breaking%20The%20Cycle%20Of%202nd%20Economy%20Poverty:%20Strategic%20Options%20To%20Link%20Marginalized,%20Small%20Producers%20To%201st%20Economy%20Value%20Chains%20

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TIPS DEVELOPMENT DIALOGUEBreaking The Cycle Of
2nd Economy Poverty Strategic Options To Link
Marginalized, Small Producers To 1st Economy
Value ChainsWork in progress Update Sandy
Lowitt25 July 2008
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Project Context

• 15 Year Review of Second Economy
• Key findings
• Delivery of social services has been significant
  and at scale
• Delivery of market based employment opportunities
  has been modest to poor
• Reasons for poor performance of market based
  employment programmes
• Under funding/low appetite for risk
• Lack of advocacy/voice
• Problems with market interfaces
• Project level focus
• Downward raiding

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The market interface problem
External mkt any 1st economy Mkt eg. Local
hotel, urban retailer Provincial processor,
national Wholesaler, export mkt
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What we are trying to accomplish

• Develop a framework and tool kit to analyse
  markets, market interfaces and the distribution
  of income
• Develop a strategy which will support systemic
  change in the interactions between the 1st and
  2nd economies so that marginalized small
  producers can be lifted out of poverty
• Success will constitute sustainable, scalable
  linkages that result in returns to 2nd economy
  participants that are sufficient to lift them out
  of poverty. i.e. not just increased transaction
  but increased transactions where the distribution
  of income supports poverty alleviation

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Theoretical Paradigm

• Chosen to use value chain analysis because
• It emphasizes issues of governance and power
  which create barriers to entry ( and
  opportunities) for 2nd economy producers
• It directly addresses how and why economic and
  other rents are distributed across a chain
• Upgrading is an intrinsic part of its theory and
  hence capacity issues of 2nd economy producers
  can be dealt with endogenously
• It is a demand driven approach which supports
  pull rather than push interventions and strategies

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Theory versus Reality Our approach to bridge the
divide

• FRAMEWORK
• 3 Foundation Chpts
• Value chains
• Product selection
• Linkage options

REAL ON THE GROUND ISSUES

• STRATEGY
• What to do
• How to do it

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Real on the Ground Issues (VC Chpt)
ISSUE IMPLICATION FOR OUR STRATEGY
DEMAND increased importance of large buyers increasing concentration along all points in the value chain increased private and public standards Barriers to entry getting higher Will be harder to access chains Unlikely for 2nd economy producers to service final demand market (look further down the chain)
INCOME DISTRIBUTION returns shifting away from producers towards buyers Will need to select products very carefully (no traditional commodities) Need to select chains/ points of entry with serious upgrading potential
SUPPLY decrease in the no. of handover points increased codification and certification lead firms wish to deal with large competent suppliers Need to deal with aggregation of 2nd economy output upgrading activities at aggregation Need to look at getting lead firms to change their buying preferences
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Real on the Ground Issues (Product Chapter)
ISSUES IMPLICATIONS FOR STRATGEY
Immiserising growth traditional commodity crops face decreasing terms of trade Need to decommoditise commodities, or Need to select non traditional, niche products
The lower the critical success factor bar is the lower the income share distributed to producers Need to find tipping point btw CSF and poverty alleviating Y distribution Need to ensure upgrading is built into the linkage so higher CSFs can be accommodated
Product segmentation is key Need to focus on niche markets. Need to consider credence goods, novel new products, branding, organics , trade marking etc Need to include market maturation/saturation strategy
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Real on the Ground Issues (Product Chapter cont)
ISSUES IMPLICATIONS FOR STRATGEY
Second economy producers do not have the knowledge, skills, expertise to identify and investigate these niches Will need to set up system for product selection and development
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Real on the Ground Issues (Linkages Chapter)
ISSUES IMPLICATIONS FOR STRATEGY
Trust and Relationship Building continuous S a problem, consignment rejection and price changes are problems, extra contractual marketing a problem One to one face to face relationships likely to yield better results than long distance contracting (local traders, lead farmers, processors)
Group Formation fail if vehicle to implement policy, need strong internal cohesion, less likely to succeed if low assets, low educ, weak leadership, impinge on cultural hierach. Pty Ltd preferable to co-ops Large, broad marketing co-ops not the way to go Co-ops based on existing collectives can possibly work Look at alternative structuring of horizontal integration (SAPPI, TSC)
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Real on the Ground Issues (Linkages Chapter cont)
ISSUES IMPLICATIONS FOR STRATEGY
Financing provision of subsidies and direct services to 2nd econ producers lead to dependence unsustainable Look for ways to finance facilitation of desired activity not activity itself.
Scalability what you need to get right to externally catalyze a linkage program is massive. It is not scalable non replicability, no economies of scale, masses of resources and skills needed To get systemic change and massification need to ENDOGENIZE catalytic programmes need to change BUYER BEHAVIOUR
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How to approach developing a strategy?

• Our framework informed our list of on the ground
  real issues
• The aim of the strategy is to find ways to deal
  with these issues ( there are lots of them and
  they are complicated!!)
• Our big point of departure in the strategy is
  that we feel that government and its agencies
  should directly deal with as few of these issues
  as possible and get the private sector to deal
  with them instead.
• Private has the expertise (mkts, methods)
• Private sector is better positioned to deliver on
  ground
• Private sector has experience and skills
• Private sector can provide scalability
• Government should focus on facilitating this
  private sector activity.

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First Prize

• First Prize would be to get the private sector to
  change their buying behaviour i.e. to want to
  source products from small, marginalized 2nd
  economy producers thereby increasing demand and
  competition for their output.
• Could try to force them to change behaviour
  (moral suasion, legislation). Not likely to yield
  good results
• Better option is to make them WANT to change
  their behaviour by incentivizing them to do so
  and assisting them to make the shift.

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Strategy 1 shifting private sector buying
behaviour
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1

• Gov to provide
• services to private
• sector directly in
• areas where PS
• has NO competency
• Setting up co-ops/equi
• Facilitating skills, up
• grades of co-op memb
• Dealing with tribal
• issues hierch issues
• Options
• Specialized limited
• life span SPV, small,
• highly skilled

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Implementing Complementary Strategies ( see Next
slide)

• Provide strong enough
• financial incentive to
• induce required behaviour
• change.
• BEE scorecard and gov tender
• preference system equivalent.
• Options
• 0 rate VAT from 2nd econ prod
• Tax rebate on profits
• Other ?

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Strategy 2 and 3 Complementary Programmes

• Programmes which stand on their own merit, but
  which will aid private sector in increasing
  demand for 2nd economy outputs
• Lead farmer programme link 2nd economy farmers
  to commercial farmers commercial farmer remains
  supplier to lead firms but includes 2nd economy
  producers output with their own. Gov to partner
  with commercial farmers to set up the programme.
• Local Trader Programme Develop more and better
  local traders. Gov to set up programme to support
  development of middlemen (quantity and quality).
  Can create easy first level aggregation for
  private sector by improving conduit.

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Strategy 4 New Product Development

• Stand alone strategy, but may also be service to
  private sector i.e. Strategy 1 (3)
• Government to set up mechanism using existing
  resources ( universities, agri research centers,
  CSIR, private sector consultants) to research and
  develop new products and how to bring them to
  market. E.g. Marula story(new), Kiwi fruit (trade
  marked), coffee (credence, branded)
• Must offer proactive and reactive service,
  programme must provide funding ( possibly on cost
  recovery basis) access to skills ( slate tender)
• Not sure on how to feed outputs of programme into
  the market place i.e. how to implement ( needs
  additional work)

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Strategy 5 Improve government procurement from
2nd economy

• Cannot ask or expect private sector to rise to
  this challenge if government doesnt do the same
• Preferential procurement not happening on the
  ground.
• Several options ( still undeveloped needs work)
• Local trader programme ( strategy 3) should help
  or design it to definitely help
• Marketing co-ops specifically designed to
  service hospitals, schools, SANDF bases
• Specific programme/intervention for companies
  with government catering contracts (stick or
  carrot options available)
• Municipal support programmes to develop above
  options

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A sixth strategy???

• We are receiving some pressure to include a
  strategy to establish marketing co-ops.
• Literature and case studies show them to be
  highly problematic
• We believe the private sector will find a way to
  aggregate that is more efficient than co-ops and
  that the development of local traders and the
  lead farmer programme will also help
• Not sure about this views/opinions??

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Specific area where help/advice is required

• Literature/people who can assist in developing
  product selection information in relation to the
  merits of certain types of crops for 2nd economy
  producers e.g.. High skills in pastoral products
  but limited by land constraints. Field crops and
  industrial crops a no no econs of scale.
  Horticultural crops good but tree based crops
  versus annually sown crops? What are the
  necessary characteristics? Where should the focus
  be?
• Literature/people who can help in unpacking the
  idea of a demand side measure and point towards
  examples where it has and hasnt worked. Seems an
  obvious option but cant find anything on it am
  I missing something big??