What would ‘thinking small’ look like in global value chains?

by

sticky

The challenges I face are obviously affected by being a small business. Middlemen buy my product and sell it to the big company. They impose their price. (Jose Luis, Nicaragua)

Big business only rarely listen to our needs because they don’t need us (Abdul, Afghanistan)

Whilst it is never as simple as “big” versus “small”, small businesses do describe a view that they are often exploited in their supply chains. The above two views were expressed by small business owners that we talked to in our (second) Think Small research that’s currently underway (see our first Think Small research here). The question is, can Global Value Chains (GVC) ever be beneficial?

The promotion of GVCs has become a hugely popular approach to enterprise development and one which is becoming a bigger focus for donors. The argument for inserting small businesses into GVCs is that this will help them to develop as businesses and thus provide jobs and benefit the economy overall; and ultimately, be good for poverty eradication.

But, given the views of small and micro enterprise (MSE) owners, we think this enthusiasm needs some tempering. It is clear, that the lived experiences of small businesses in GVCs are not automatically positive. Fairtrade research, for example highlights how value does not reach the ‘bottom’, stating;

“…there is clear desire among some to get more value out of their product. From experience, this desire comes from producers’ experience of long-term declining farm gate prices, their sense of powerless in the face of this decline, and, for those with access to the information, a painful knowledge of how their income represents an ever smaller fraction of the final retail price.”

So the question should be how can GVCs be made to benefit MSEs (who generate most of the jobs and a significant proportion of the GDP of developing countries)? Our research has highlighted 3 things that are important to consider towards this end;

1) POWER

The relative power in GVCs can determine whether these will be a negative or positive experience for MSEs. All too often, small business’s lack of voice and power leads to market marginalisation or unfavourable terms on which to do business.

In Zambia small businesses often found that they had to do business on poor terms because they needed customers and had limited options. They were also in a precarious position when things went wrong as they lacked resources, (especially financial) skills and expertise to enforce contracts when agreements were broken. Ultimately, their lack of political, social and economic power kept them trapped in this weaker position.

It’s essential to consider voice and power when inserting MSEs into GVCs to avoid exploitative relationships. Initiatives which seek to improve the bargaining position of MSE suppliers, to reinforce their rights to land and water or to tackle social and political exclusion rather than simply ‘integrating’ them into supply chains have lead to greater benefits for those participating in these GVCs.

2) RISK & VULNERABILITY 

Being included in global markets and supply chains can result in higher risks for MSEs (as the example from Zambia highlights). MSEs are often the most risk sensitive and vulnerable and short term risks can have long term impacts for them. Unfortunately, in some cases, buyers are able to pass risk down the chain, so that the MSE can bear the majority of risk in the bad times, whilst reaping a smaller portion of the gains in the good times. (Vorley & Fox write an interesting, if slightly dated, paper on this).

Initiatives which consider risk and vulnerability, on the other hand, can mean that GVCs can have a much more positive impact on MSEs. There are various activities which could help people cope with risk and so mitigate their vulnerability, for example;

  • Social protection schemes can provide a safety-net when times are difficult.
  • Macro-economic policies can reduce risk and decrease vulnerability of small-scale traders and businesses. Small scale producers and traders in our research talked about the importance of price stability as a tool to help in managing and planning their finances.

3) SUPPLY and DEMAND
Demand is a key consideration which is often neglected in livelihood development programmes but which our research found is a major issue for many MSEs. GVCs can potentially be a really good mechanism in addressing this demand challenge by providing stable and good buyers for MSEs (provided issues of risk and power have been addressed!).

However, GVCs are not the only solution and other, often more appropriate options, should not be neglected.

Focussing on local and regional markets can bring more widespread benefits. MSEs often produce goods and services that are more locally appropriate and are better able to compete at a local than global level. Inserting small businesses into global markets requires intense efforts to meet standards and other demands, and only benefits a small proportion of MSEs. Improving access to and conditions in local and regional markets is more likely to have more widespread benefits more easily. A critical problem in many of these is a lack of demand – quite simply it is harder to sell when most of your customers are poor. Again, social protection can be a way of injecting cash and boosting demand in these local markets. [See footnote: 1] 

Another useful tool in this regard would be encouraging countries to use public procurement to support local businesses or encouraging countries or localities to develop trade and investment strategies that support MSEs and have a local and regional focus and which prevent enclave development.

Supply issues are also a major concern for small businesses. The supply constraints that most MSEs face can make it difficult for them to be inserted into GVC as they can’t provide the goods or services in sufficient quality or quantity to meet the demands of the buyer. Helping MSEs to meet these supply constraints requires comprehensive and proactive support, based on local needs and context. This is often inadequate or neglected in favour of size-blind policy reforms.

These three considerations are essential to making sure that the effects of GVC are positive for small businesses.

With these three considerations in mind, the role of Government can’t be ignored; government needs to play a proactive role if we’re going to see GVCs being more positive for MSEs. They need to play an important role in guiding national development and trade and investment strategies so that MSEs are able to benefit. They also need to play a role in supporting MSEs and facilitating discussions between big and small business to ensure that MSEs are not marginalised.

And so we come back to the voice of a small scale entrepreneur…

Those representing small-scale fishing to the government are the big companies, not us fishermen… and that’s when the fisherman loses. (Edmundo, Nicaragua)

For GVCs to work for small businesses there needs to be change around the three issues raised here. The role and contribution of MSEs in these systems needs to be valued and rewarded fairly. Power, risk and vulnerability need to be addressed and strategies to include them fairly need to consider issues of supply and demand. The benefits of GVCs may not be automatic; but with some work and careful consideration the benefits can be there.

——

[1] These can be beneficial because that injection of money into local markets is likely to stay within that local economy – through people buying local goods and services.  These transfers can stimulate and support the local economy during difficult times and also have significant multiplier effects – the cited Malawian study for example, found that for every $1 transferred; at least an extra $2 was generated within that community. (Davies, S & Davey, J. 2008. “A regional approach to estimating the importance of cash transfers on the market: the case of CTs in Malawi.”)

Tags: , , , , , , , , , , , , ,

4 Responses to “What would ‘thinking small’ look like in global value chains?”

  1. Milford Bateman Says:

    An excellent posting, rightly showing that global value chains are not the solution to poverty that the World Bank, USAID, and others say they are (often on behalf of their rich corporate friends, one might add). I would have liked to have seen two more points raised though (but maybe future postings will cover these points?). First, more about cooperatives as a way for the poor to fully capture value in the global or national supply chain. There are many examples where coops help the poor to capture nearly all of the value, thus promoting both social justice and production efficiency. Second, more about promoting ‘local production and consumption cycles’ as the gradual and better environmental/social justice/economic replacement for global value chains. You could start by critiquing the horrendous cut flower business in so many developing countries (Ecuador, South Africa, Zambia, etc), businesses that use the very best land and water, waste natural resource such as aircraft fuel, produce for the very rich countries while locals go without good food, and the end benefits always go to a tiny elite. Using that same land to promote the local food consumption cycle would produce a far bigger development impact.

    • Sarah Montgomery Says:

      Thanks for these valuable comments Milford – we would agree with the important points you raise. Our Think Small research has found that successful NGO livelihood projects should tackle social and political exclusion; and that forming cooperatives is an effective tool in this regard as these can provide a good mechanism for increasing bargaining power, securing a voice in local decision-making bodies and having a direct say in decision-making by local government. Further, promoting local production and consumption cycles, like promoting local markets over export markets often provide a more appropriate and just alternative and should not be neglected. Perhaps as you suggest future posts should consider these in more detail? Thanks for the suggestion!

  2. Jason Musyoka Says:

    Sarah, yours is an interesting read. The power question is especially a complex one, considering that social agendas (such as giving power and voice to MSEs) are not often seen as economic logic. This is therefore left as a domain which should (as you have rightly suggested) ‘enforced’ by nation States or accelerated by NGOs. In practice, this enforcement could potentially be a conflict zone.

    On a different note, perhaps you could shed more light on what you mean by buyers passing on the risk. My perspective is that, a consumer is the most vulnerable in a value chain process. Unless we are making reference to non-consumer buyers-but then which ones would those be? Also, there will be small businesses which have thrived in GVC processes, and probably graduated to large enterprises in a GVC context. What are their experiences? The latter issue i think would balance out the lessons learnt from GVC processes-from both the loses and the gains, the failures of some and successes of others. Overall though, a refreshing piece.

    • Sarah Montgomery Says:

      Jason, thank you for your comment – you raise some valid points. On the question you raise about buyers; buyers could at times be middlemen or organisations ‘higher’ up the value chain rather than the end consumer. In most instances those who have the most power also have the ability to pass on risks to those who have less power. If, as an example, a small-scale farming enterprise sends produce to an international buyer, and the produce is damaged in transit, the buyer – who has more economic power – in most instances does not have to pay for the damaged produce. The full risk of such a scenario is therefore pushed down to the producer. This can have disastrous effects on people’s livelihoods. Additionally, MSEs and small-scale farming enterprises are normally ‘price-takers’ rather than ‘price setters’ with little power to negotiate a better deal (for a whole range of reasons) in light of this they reap a small portion of the gains within GVCs. See CAFOD’s 2011 ‘Think Small’ report (http://bit.ly/ZmIjGN) for more reading.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s


%d bloggers like this: