Karen Isahakyan
June 4, 2012
Causal Links between Local Supply Chain Development Projects and Poverty
Introduction
This briefing note is a literature review that aims to identify and understand transmission links
between supply chain development projects and poverty reduction. It provides examples of
projects and evaluations carried out by different donor agencies or multilateral organizations
which demonstrate this link. The note also provides a snapshot of IFC’s SBA products, such as
Sustainable Community Investment (SCI); Environmental, Social and Trade Standards (EST)
and Farmer and SME Training (FAST) and the portfolio composition by regions. This review
does not attempt to measure or demonstrate the impact of IFC projects.
For the purposes of this review, individuals with incomes below Base of the Pyramid (BOP)
threshold of $8 a day at purchasing power parity (PPP), or lacking access to basic
socioeconomic services are considered poor. 1 The absolute poor are defined as those with
income of less than $1.25 a day at 2005 PPP.2
This review finds that most of the value chain initiative or supply chain improvement projects
funded by donors, multilateral banks or government aid agencies helped to improve access of
the poor to the products and services or better nutrition. In addition, the interventions helped the
poor to increase productivity and sell more products. In some cases revenue of farmers (or the
poor) have increased because of intervention. However, this review did not carry out statistical
analysis to conclude that income of the poor has increased as a direct result of assistance.
Regardless, supply chain development projects appear to be a promising development
intervention.
Supply Chain Development
A supply chain is a system of organizations, people, technology, activities, information and
resources involved in moving a product or service from supplier to customer3. Supply chain
management has become an area of increased focus for large companies as they address
competitive pressures arising from new environmental regulations, rising energy costs, work
place standards, and other consumer and government demands. This has led many
transnational corporations (TNCs) to incorporate eligibility requirements based on sustainability
standards into contractual relationships with local suppliers.
However, many local suppliers are small and medium enterprises (SMEs) that lack the
necessary financial and technical skills to improve social and environmental management and
performance to meet the demand of the TNCs. Moreover, in developing countries, agricultural
value chains are often fragmented, lack investment, fail to include vulnerable groups and are
missing critical linkages. In these countries, farmers often lack the resources for production and
thus rely on input suppliers, traders, larger firms or NGOs to provide inputs, training, and funds
to start cultivation. Many donors and multilateral organizations have stepped in to provide
technical assistance or financial services for small suppliers in order to improve supplier
business performance and credit risk. These interventions are intended to involve the poor in
the supply chain networks and increase their incomes. For example, as potential partners,
1
Xiaolun Sun (2011), Poverty and Poverty Objectives in IFC Context, IFC
Ravallion, Martin, et al (2009), “Dollar a Day Revisited,” Oxford University Press, World Bank Economic Review
Vol. 23 No. 2, p. 163
3
Adopted from Wikipedia, which by far had the most comprehensive yet concise definition
2
1
Karen Isahakyan
June 4, 2012
United Nations Industrial Development Organization (UNIDO) targets TNCs that share the
organization’s inclusive approach to development: a willingness to integrate economic, social,
and environmental dimensions in their business strategies and to cooperate with other players
in the development process4.
Multilateral Organizations and Donors are engaging BOP in their programs
Economic growth is a main driver of poverty alleviation. Increases in productivity and output
create jobs, higher incomes and new income opportunities for the poor5.
Roemer et al (1997) examined the question of whether economic growth tends to reduce
poverty, where poverty is measured by the incomes of the poorest 20% and 40% of a
population. Using data available at the time, the paper shows that an increase in the rate of
GDP growth translates into a one-for-one increase in the growth rate of average incomes of the
poorest 40%. GDP growth of ten percent per year is associated with income growth of ten
percent for the poorest 40% of the population. For the poorest 20% the response elasticity is
0.921; GDP growth of 10% is associated with income growth of 9.21%. These results give
strong support to the proposition that growth in per capita GDP can be a powerful force in
reducing poverty6.
Many donors, NGOs and multilateral organizations design their economic growth programs to
engage the BOP e as consumers or suppliers of products or services. These programs
commonly have poverty reduction objectives (e.g. incomes increased, improved access to
goods/services, etc.) targeted at clearly identified groups (e.g. smallholder farmers). Because
smallholder farmers are the main agricultural producers in many poor regions, they merit special
consideration from organizations seeking to enhance business-led growth. Given adequate
support to overcome the constraints they face, these farmers have significant potential to
increase their productivity and generate potentially substantial economic gains.7
Irz et al (2001) note that a large proportion of the poor are employed directly or indirectly in
agriculture, and argues that agricultural growth can be a key to pro-poor growth and poverty
alleviation, The fact that there are important linkages between the traditional and modern
sectors in developing countries makes agricultural growth an important instrument for
decreasing poverty. Part of the contribution to poverty reduction takes place directly through the
effects of agricultural growth, on farm employment, and profitability. Increases in agricultural
productivity also create greater demand for upstream and downstream non-farm economic
activity, inducing job creation in other sectors8.
4
United Nations Industrial Development Organization (UNIDO) , www.unido.org
United Nations Development Programme“ The MDGs: Everyone’s Business. How inclusive business models
contribute to development and who supports them,” Growing Inclusive Markets Initiative, 2010
6
Roemer, Michael,Kay Gugerty, Mary“Does Economic Growth Reduce Poverty?” Technical Paper, Harvard Institute
for International Development, March 1997
7
“The Next Billions: Business Strategies to Enhance Food Value Chains and Empower the Poor”,World Economic
Forum and the Boston Consulting Group, 2009
8
Irz, Xavier, Lin Lin, Colin Thirtle and Steve Wiggins. 2001. ―Agricultural Productivity Growth and Poverty
Alleviation.‖ Development Policy Review19 (4): 449 – 466, quoted from Dethier, J.,Effenberger, A., “Agriculture
5
2
Karen Isahakyan
June 4, 2012
According to the report "Creating Value for All: Strategies for Doing Business with the Poor” 9,
inclusive business models include the poor at various points in the value chain: on the demand
side as clients and customers, and on the supply side as employees, producers and business
owners. The benefits from inclusive business models go beyond immediate profits and higher
incomes. The term ‘inclusive business’ refers to profitable core business activity that also
tangibly expands opportunities for the poor and disadvantaged in developing countries. Such
business models can engage the poor as employees, suppliers, distributors, consumers and/or
innovators.10Benefits of inclusive business models to private firms include driving innovations,
accessing new markets and strengthening supply chains. The poor benefit from higher
productivity, more sustainable income and greater empowerment11.
United Nations Development Programme (UNDP) Growing Inclusive Markets(GIM) Initiative has
a database of over 1,000 inclusive business models from all regions and sectors. 12 Doing
business with poor people brings them into the marketplace – a critical step in the path out of
poverty –drives innovation, builds markets and creates new growth opportunities for firms and
entrepreneurs. GIM finds that Inclusive business models both produce and reap the benefits of
human development.13
Markets for Poor or Making Markets Work for the Poor (acronyms used are M4P, or MMW4P) is
an approach to poverty reduction that donors such as DFID, SIDA and SDC have been
supporting over the past few years. Funded both by SIDA and UK AID, M4P HUB offers a
database of research and publications on making markets work for poor (MMW4P).14
In 2010, IFC launched a dedicated Inclusive Business (“iBiz”) Models Group to create the tools,
resources, and events that will help investment and advisory staff develop new ways to support
IFC clients entering the base of the pyramid15.
Improving Value Chains provide benefits to the BOP
In developing countries, business linkages with local small-medium enterprises (SMEs) allow
large firms to reduce input costs while increasing specialization and flexibility16. These linkages
and Development: A Brief Review of the Literature”, World Bank, 20119 United Nations Development Programme,
“Creating Value for All: Strategies for Doing Business with the Poor, Growing Inclusive Markets Initiative, 2008
9
United Nations Development Programme, “Creating Value for All: Strategies for Doing Business with the Poor,
Growing Inclusive Markets Initiative, 2008
10
“What is Inclusive Business?”, Business Innovation Facility and Innovations Against Poverty, BIF Briefing Note 1,
April 2011 available at http://api.ning.com/files/xcM8YrOacZTlwl0FcOL7j4Dqn7qMlYIiATTPc8spMq2oZfF90*SRh6ykcHyvOCsyARSQRUKX8AexXvXwB0UuALSYIXS4gD/WhatdowemeanbyInclusiveBusiness.pdf
11
Ibid
12
http://www.growinginclusivemarkets.org/ last accessed on March 29, 2012
13
United Nations Development Programme, “Creating Value for All: Strategies for Doing Business with the Poor,
Growing Inclusive Markets Initiative, 2008
14
http://www.m4phub.org/ ,last accessed March 30, 2012
15
http://www1.ifc.org/wps/wcm/connect/AS_EXT_Content/What%20We%20Do/Advisory%20Services/Inclusive%2
0Business , last accessed March 22, 2012
16
Jenkins, B., A. Akhalkatsi, B. Roberts, and A. Gardiner. 2007. Business Linkages: Lessons, Opportunities and
Challenges. Washington D.C.: International Finance Corporation, International Business Leaders Forum, and The
Fellows of Harvard College.
3
Karen Isahakyan
June 4, 2012
can also increase local integration and “rooting” providing access to local knowledge and by
spurring growth and development in the local SME sector bringing about positive social and
economic impacts in the wider communities.
Actors in a value chain may range from microenterprises to multinational corporations, and
developing a holistic approach to deal with such diverse actors is challenging. However, Stamm
(2011) argues that “while all this [challenges] makes interventions to develop value chains
difficult, the potential of such interventions for local economic development and poverty
reduction is significant’.17 Take for example the “Micro and small enterprise development for
pro-poor growth in Sri Lanka” (short: Enter-Growth) project, which was funded by ILO from 2005
to 2009. Impact assessment carried out by independent evaluators found out that “the project
has achieved the bulk of the indicators at Development Objective [to contribute to the
generation of pro poor economic growth and quality employment for women and men in the
North West and North Central provinces] and… has thus largely met its Immediate Objectives
and made good progress towards the achievement of the Development Objective.18”
Altenburg (2007) puts forward two main reasons why value chain development activities have
become increasingly popular within the donor community since the end of the 1990s19. First the
link between growth – and more specifically private sector development – and poverty reduction
became more evident. As TNCs systematically subdivide their functions, reorganize their
internal corporate structures, concentrate on core competencies, and outsource marginal tasks
and functions, new opportunities present themselves to developing countries which are able to
perform these tasks at lower cost. Donors were thus able to legitimize stronger efforts to support
private sector development. Secondly, increasing openness to trade and foreign direct
investment led to higher competitive pressure on global and domestic markets. Globally
integrated value chains, in which production and trade relationships are much more
coordinated, leaves less space for individual firms to design, produce and market on their own.
Donors have thus realized that it is important to understand how these integrated production
and trade relationships are coordinated and how firms in developing countries can be integrated
to benefit from them. Altenburg (2007) argues that “the question is thus not if, but how to
integrate in value chains in a way that allows for incorporation of a growing number of the
workforce and increasing levels of productivity and incomes20.”
Moreover, Goletti (2005) states that for poor farmers supplying agricultural commodities,
strengthening of value chain linkages improves market access and, through better coordination
and cooperative relationships with buyers, increases their income security. The same holds
when the poor are on the buying side of the value chain. The poor, however, are not only
producers but they are also workers and consumers. Development of medium and large
17
Stamm, A.; Von Drachenfels , C. (2011). Value chain development: Approaches and activities by seven UN
agencies andopportunities for interagency cooperation, International Labour Organization
18
Barlow, S. Kothalawala, J., Van Der Ree, K., “Final Evaluation of Enter-Growth Project Sri Lanka for The ILO Sri
Lanka”, 2009
19
Altenburg, Tilman, “Donor approaches to supporting pro-poor value chains”, Author and German Development
Institure, 2007
20
Ibid, Altenburg, Tilman (2007)
4
Karen Isahakyan
June 4, 2012
agribusiness enterprises will have an indirect effect on the poor through generation of new
employment opportunities. At the same time, agro-enterprise development will increase demand
for agricultural goods which are likely to be produced by poor commercialized farmers.21
However, small-scale, undercapitalized and often under-educated farmers in developing
countries find it particularly difficult to meet the quantity, quality, timeliness and traceability
requirements of the new supply chains and –despite the success of some cooperatives- have
yet to find widely replicable institutional solutions.22
In 2009, the World Economic Forum presented a report on innovative business models that can
improve sustainable food production and help to reduce poverty in developing countries. This
project was based on a broad research survey plus three cross-industry, multi-stakeholder
roundtables conducted in Latin America, Africa and Asia during 2008. The research survey
included review of 60 reports and collection of 200 case studies from primary and secondary
sources. The roundtables provided ground-level insights from practitioners – ranging from
multinational and regional companies to social entrepreneurs – who are pioneering these
business models on the ground. The report highlights commercially viable business models that
have proven effective at strengthening food value chains in developing countries, and offers
recommendations for scaling them up.23
Do Anh Tuan and Cuna (2005) found that the development of cassava value chain in Vietnam
has created significant employment opportunities not only in the cassava/starch production
sector, but also in the emerging starch by-product sector.24
While a majority of the literature highlights direct or indirect benefits of improving value chains
offer the poor, the question of impact (in dollar terms or employment generation) on the absolute
poor still remains unanswered. One of the suggestions to measure income of participants in the
Value Chain (VC), was developed by SNV Netherlands Development Organization and others in
“Making Value Chains Work Better for the Poor: a Toolbook for Practitioners of Value Chain
Analysis”25, which aims to bridge the gap between value chain analysis (VCA) and pro-poor
development. This toolbook focuses on how to apply the concepts of value chain analysis to
understand the impact of the value chains on the poor. Yet, more rigorous methodology should
be developed to that accounts for the counterfactual and attributes outcomes to specific
programs or projects.. For example, randomized control trials, used to measure impact of the
“Millennium Village” project, revealed that “impact on household income was insignificant, and
that the villager in Kenya had grown more food – and eaten it. They became better nourished
but this did not affect the wider economy. Better nutrition is important, but the main goal of the
project is to boost income, and increase investment and economic diversification.26
21
Goletti, F. (2005). Agricultural Commercialization, Value Chains, and Poverty Reduction
Ibid, Goletti, F. (2005).
23
“The Next Billions: Business Strategies to Enhance Food Value Chains and Empower the Poor”, World Economic
Forum and the Boston Consulting Group, 2009
24
Nguyen Do Anh Tuan, Luigi Cuna, “The Participation of the Poor in Agricultural Value Chain: A Case Study of
Cassava”, Asian Development Bank, 2005
25
Cuna,Luigi, Smith, Dominic, et al “Making Value Chains Work Better For The Poor a Toolbook for Practitioners of
Value Chain Analysis “, tool # 5, p. 55
26
“Randomized trials could help show whether aid works”, The Economist, December 3, 2011, p. 92
22
5
Karen Isahakyan
June 4, 2012
IFC local supply chain development projects and poor farmers
Local supply chain development projects in SBA fall under three product offerings: Sustainable
Community Investment (SCI); Environmental, Social and Trade Standards (EST) and Farmer
and SME Training (FAST). 27
The EST portfolio includes 34 active projects, FAST has 59 projects, and SCI: 19 projects28 (see
Appendix A for regional coverage by product). Majority of SCI products are in Latin America and
the Caribbean (LAC) region, while FAST products have the greatest share in Sub-Saharan
Africa (SSA).
The review of select projects suggested by product specialist has also revealed evidence of
transmission links of benefits to the poor in IFC supply chain projects with lead firms. While
projects were able to reach many farmers in the poor communities, there is not enough data on
income change to measure the impact directly attributable to IFC interventions. To further build
evidence around this area IFC would need to incorporate specific indicators in its monitoring
and evaluation (M&E) activities.
IFC develops financial, advisory and capacity building support for value chain sustainability
upgrades. Its approach focuses on providing financial instruments and advice to value chain
financial intermediary partners as well as capacity building for value chain companies.
The critical path begins with the Lead Company incentivizing its supply chain and distributor
partners through stronger contracts, preferred supplier status or better prices. These suppliers
and distributors in turn implement the necessary sustainability upgrades, while financial
intermediaries support the Lead Company and supply chain partners with sustainable financial
solutions. IFC is the facilitator bridging the financing gap and providing capacity building and
other advisory services, as needed.
Benefits of value chain sustainability are realized in the form of reduced operational and
regulatory risks, improved community relations and brand differentiation for Lead Companies.
Meanwhile, supply chain companies stand to improve their profitability and competitiveness,
and financial intermediaries are able to introduce new products, gain new clients29.
By working with Lead Companies the IFC has indirectly helped small farmers and gave them
access to new products (e.g. ECOM Coffee Renovation project in Nicaragua (#580708)30 or
increased sales revenue of participating farmers (e.g. JAINGAP project in India(# 568267)31.
For the DSCL Sugarcane project 32 , the IFC established M&E system for measuring project
results that are directly attributable to IFC intervention. The evaluation found that participating
farmers a 21% yield increase while control farmers had an 11% yield decrease over one year.
27
CSI, EST, FAST Products Deck March 2012. Product Business Case SBA Business Line. Provided by Diana Hristova
(IFC).
28
As of March 16 2012
29
International Finance Corporation (IFC), www.ifc.org
30
580708_AS - PDS Approval and580708_AS Supervision_FY2012Q2. International Finance Corporation, internal
document
31
568267_AS Completion, IFC internal document
32
565187_AS - PDS Approval and 565187_AS Supervision_FY2012Q2, IFC internal documents
6
Karen Isahakyan
June 4, 2012
The project is well on track to improving the productivity of farmers and ultimately increasing
their incomes.33
In India, IFC also assisted JISL to establish simplified GAP standards (JAINGAP) that are
affordable and were adapted by many of its suppliers, who are small farmers (see the case in
Appendix B). By helping JISL to design new standards, and train the farmers to adopt those
standards, IFC indirectly contributed to the increased revenue of farmers who supply agricultural
produce to the company.
Conclusion
The review provided examples of supply chain projects and initiatives carried out by different
donor agencies or multilateral organizations which demonstrated the link with poverty
alleviation. While this brief shows that the casual linkages exist along the value chain, further
studies with statistical analysis of different supply chain projects (implemented by either IFC or
other organizations) is required to test the hypotheses that these interventions increase income
of the poor. Currently, only select projects in IFC portfolio directly track the change in income of
farmers.34Thus, to monitor and evaluate the impact in most of IFC interventions may require
development and/or adoption of a new set of indicators and methodology. It should also be
noted that carrying these evaluations could be a costly exercise.
33
There could be a price drop in the sector pushing more farmers away from sugarcane to other crops. The
project's aim is to increase the yield per hectare thereby making sugarcane a more lucrative crop for the farmers.
However, price fluctuations are outside the project control
34
Personal interview with Alexis Diamond, Senior Evaluation Officer, IFC, March 14, 2012
7
Karen Isahakyan
June 4, 2012
APPENDIX A. PORTFOLIO COMPOSITION OF SCI, FAST, and EST PRODUCCTS35
REGIONAL SHARE OF PRODUCTS BY ACTIVE PORTFOLIO (%
numbers)
100%
13%
90%
80%
42%
63%
70%
60%
43%
31%
56%
65%
73%
4%
5%
SCI #
50%
40%
25%
30%
20%
29%
0%
9%
29%
10%
4%
8%
10%
32%
22%
6%
4%
ECA
LAC
EST #
45%
26%
0%
EAP
FAST #
6%
34%
MENA
SA
Others #
8%
SSA
10%
WORLD
REGIONAL SHARE OF PRODUCTS BY ACTIVE PORTFOLIO ( $)
100%
6%
90%
80%
70%
50%
64%
60%
63%
74%
64%
60%
30%
1%
21%
14%
0%
11%
15%
15%
19%
46%
ECA
56%
6%
11%
34%
19%
1%
1%
EAP
FAST $
2%
0%
35
SCI $
2%
20%
10%
Others $
2%
50%
40%
41%
LAC
MENA
SA
Adopted from data provided by Diana Hristova, IFC, March 2012
8
1%
SSA
WORLD
EST $
Karen Isahakyan
June 4, 2012
APPENDIX A. CASE JAINGAP: a newstandard in India36
Jain Irrigation Systems Ltd. (JISL), based in India, is the largest manufacturer of irrigation
systems worldwide and a leading processor of fruits and vegetables – the world’s largest in
pureed mangos and third-largest in dehydrated onions.
In response to its major buyers’ concerns about food safety and increased interest in farm-level
practices and traceability, JISL is also helping farmers to meet international standards. JISL’s
own farms are GLOBALGAP-certified and the company was considering applying the same
standard to its suppliers. However GLOBAL GAP is costly and IFC suggested starting with
JAINGAP (a subset of the GLOBALGAP criteria) whereby JAIN and its farmers could eventually
move to GLOBALGAP if/when the market demanded it. IFC advisors helped JISL to develop
JAIN standards.
JISL trained a total of 4,162 farmers via JAINGAP exposure and training events of which 1,340
passed JAINGAP certification. Farmers were trained on all aspects of JAINGAP including
worker health and safety and pesticide use as well as other productivity related training.
An independent project evaluation (before and after methodology) noted that the IFC project
had an attributable impact on productivity of mango farmers by 9% (from 4.3 tons/acre to 4.7
tons/acre) while the evaluation noted there was no attributable impact on onion farmers.
Therefore, the total incremental sales revenue of mango farmers by the project endline (who
began the project in yr. 1) was $134,735. This does not include farmers that were incorporated
in year 2 of the project as they were not included in the baseline/endline survey nor does it
include onion farmers.
In addition to the quantitative figures above, the Project has served as a demonstration model
for the sector in India. The JAINGAP approach has been adopted as a stepwise approach for
IndiaGAP. The IFC TL began engaging with Quality Council of India on its role in developing the
IndiaGAP standard, specifically to discuss a potential step-wise approach to certification based
on the JAINGAP model.
36
Source: Jain Standards, project # 568267, IFC, internal documents: 568267_AS - PDS Approval and 568267_AS
Completion
9