4.2.6. Key Constraints and Promising Strategies in Applying the Value Chain Approach with the Very Poor
Key constraints and promising strategies in applying the value chain approach with the very poor include:
The very poor lack assets and resources relative to others in their communities. They are often less able to access services to help them increase those resources, such as credit. This is true even of microfinance institutions (MFIs); the Consultative Group to Assist the Poor (CGAP) found that "[w]ith rare exceptions, even MFIs dedicated to reaching very poor populations fall short of reaching those at the very bottom."Explanatory factors include lack of collateral, exclusion from other members who view the poor as poor credit risks, the unwillingness of most MFIs to lend to start-ups, and a lack of other non-financial support services (e.g. technical knowledge, market linkages). Non-physical assets such as social relationships, skills and education are often equally important constraints faced by very poor populations. Illiteracy and innumeracy, for instance, are often strong barriers to accessing services and information. Potential strategies to address limited capacity and resources include the following:
- Promote market readiness. Many agencies are incorporating market literacy and market readiness training into their programming with very poor populations. Practical Action, for instance, worked with male and particularly female hibiscus farmers in Southern Sudan to better engage with market opportunities. It recognized that in order to improve weak market relationships, significant capacity building and organization was required of isolated producers who lacked common membership organizations, effective risk mitigation strategies, and awareness of what services were available and how to access them. Activities to strengthen market readiness included the development of village development committees, which represented small groups of producers and facilitated their training. These committees were strengthened so as to legitimately represent even very poor farmers, and particularly women, who despite their role in the value chain were often excluded from decision making. Once organized, extensive exposure visits and training on negotiation skills and marketing helped the committees to engage with other market actors in a way that increased benefits for all market actors.
- Support cross-cutting value chains. Another promising approach is to support access to cross-cutting value chains. Certain products and services, such as transport, packaging, irrigation technologies or agricultural inputs, support diversification and enhance choice because they can be broadly applied. CARE Zimbabwe, for instance, has supported small rural retailers of grocery products to become trained agro-dealers linked to regional wholesalers with finance accounts. The closer availability of inputs has improved access to inputs by farmers who only require a very small quantity and cannot afford the costs of travelling to larger provincial centers. Such approaches empower the poor by turning them into consumers rather than passive recipients of charity.
- Promote local labor sharing. An innovative approach currently being tested is to support small, informal labor groups within communities. Building on the informal groups that exist in many parts of rural Africa, these groups may help to support engagement in value chain activities by providing the labor and motivation to engage in larger projects that are unfeasible for individuals. Save the Children in Mozambique is using such an approach with 'ajuda mutua' (mutual help) groups. Participants report that their participation has resulted in greater food production, diversification of activities, the accomplishment of tasks that were previously not possible without a hired labor force, and the development of stronger bonds with neighbors that can be leveraged in times of need.
- Tailor intervention strategies to assets. Ownership or control of productive assets (e.g. physical, financial, human) is an important contributor to household prosperity and stability. In many rural contexts, land is a critical asset that contributes to food security through both consumption and the sale of surplus. The rural poor typically have less access to or control over land than do the better off, and thus may be inadvertently excluded by projects developing agricultural value chains that work with landowners. The Aga Khan Rural Support Programme (India) has taken such an approach in India, where it is targeting disadvantaged communities (such as scheduled castes) who are defined as poor. These target groups live in areas characterized by extreme heterogeneity of livelihood strategies, incomes, assets and social characteristics and where 60% of residents are not classified as poor. It has found that the programming strategies that are most effective for some groups will not work with others. Reaching the most vulnerable households in particular requires an intentional approach to program design and implementation. AKRSP(I) has consequently tailored its program strategy by researching and identifying important characteristics (e.g. land size, caste) that differentiate types of households and that are relevant for programming, and then developing its strategy on that basis. Its strategy for the development of horticultural value chains reflects this approach; households with available farm land are being shown how to improve field crop production while micro-scale production technologies are being introduced to landless households. 
Although accessing finance is often a necessary strategy to facilitate value chain upgrading, encouraging very poor populations to assume external debt has the potential to create significant harm. More precarious livelihoods strategies and less capacity for loss make very poor populations at greater risk in such arrangements, particularly if they must pledge productive assets (e.g. land title). Potential strategies that can avoid negative outcomes while still improving access to financial services for value chain upgrading include the following:
- Use community-managed microfinance methodologies. Upgrading trajectories that rely on self-financing will reduce risk levels and increase the ability of very poor populations to participate. Community-managed microfinance is oriented to facilitating the secure mobilization of people's own capital, particularly for those that are unable to access formal financial services. The figure below illustrates the capacity of community-managed microfinance to reach populations who are not served by formal institutions such as banks and microfinance institutions. For very poor populations, savings groups are often first used as a vehicle for income smoothing, and subsequently, as amounts grow, for small investments. Debt financing is better used as a subsequent intervention once very poor populations have developed their own capital and have more capacity to handle debt.
Catholic Relief Services (CRS) in Tanzania used this approach by encouraging chick pea farmers to first form small savings groups. These groups accumulated small amounts of capital that was then lent out among group members. Once these groups were well functioning, they were used as platforms for negotiating group sales contracts directly with exporters for higher prices and better terms. A case study of this project found that in comparison with conventional marketing groups that had been created by other NGOs, CRS’s strategy of integrating group asset mobilization into the marketing structure created greater group cohesion. It also increased the participation of poor community members, who had traditionally not participated in joint marketing structures given a need for immediately cash at harvest and an inability to delay sale to access better prices.
- Encourage co-investment or co-financing with other value chain actors. Africare and Cardno’s Community-based Orphan Protection and Empowerment project cultivated linkages between lead firms and caregivers of orphans and vulnerable children across several East African countries. In Uganda, an exporter of dried fruit was willing to sign an MOU to purchase dried fruit for export from caregivers and older orphans and vulnerable children. By establishing and strengthening horizontal linkages through production groups, the caregivers were able to aggregate sufficient volumes to supply the buyer. Critically, this lead firm was willing to invest in its relationship with the groups by constructing and contributing to the cost of solar dryers. Ongoing follow-up and support are now being provided by the lead firm.
Given limited capacity to jeopardize existing assets and consumption patterns, very poor populations will often prioritize strategies that mitigate risk rather than maximize income, and will prefer a diversification of income streams over specialization in one higher return activity. Opportunities with longer payback periods or slower capital rotation are thus much more risky and less likely to be adopted by very poor populations, as investments horizons are often quite short. Empirical evidence backs the correlation between household wealth and willingness to assume risk. Potential strategies to mitigate this risk aversion include the following:
- Support greater and better quality employment opportunities. Relative to self-employment, many vulnerable populations prefer the security, networking and other benefits of steady employment. In many cases, the decision to pursue self-employment is taken due to a lack of other options. Generating employment opportunities can therefore be an effective strategy for value chain initiatives to incorporate very poor populations. ACDI/VOCA’s GMED project in India, for instance, focused on developing opportunities for the marginalized within the solid waste management sector. Whereas engagement in this sector has traditionally attracted harassment and violence, particularly for women, it also provides an easy point of entry for the poorly educated urban poor. The GMED project worked with several municipalities in India to improve the performance and status of the sector by outsourcing to small enterprises. As a consequence, workers previously engaged in the informal sector are now receiving higher wages with greater job security and higher social status. Many of the project clients are also more empowered following the transition.
- Use smart subsidies to buy down risk. It is recognized that the limited subsidies can be an effective tool to reduce the risk of adopting new behaviors or making unproven investments. This is particularly true when working with very poor populations, for whom upgrading may require unacceptably high levels of risk. The Mennonite Economic Development Associates (MEDA) faced strong adversion among farmers, wholesalers and retailers in Zambia to invest in a demonstrably profitable technology: manual water pumps for irrigation. Suppliers did not see a market among smallholders for the equipment and consequently were unwilling to invest in expanding their supply chains and building market demand. Conversely, very poor farmers would not invest in irrigation technologies given the cost and unproven returns. MEDA used a time-bound voucher to subsidize a portion of the cost of purchasing a new water pump from local retailers. Early signs indicate that both farmers and suppliers are beginning to recognize and respond to the potential of the technologies.
- Sequence economic strengthening activities by level of vulnerability. Reflecting the need to build capacity to cope with adversity prior to generating new income opportunities, Family Health International's Regional Outreach Addressing HIV/AIDS through Development Strategies (ROADS) project, that includes economic development partner DAI, has developed a model that has four stages of economic strengthening, as illustrated below. Three of these (savings mobilization, business training, and market access) are available to participants sequentially. Once resilience is built through savings protection and mobilization, community participants are then supported to improve the performance of their microenterprises within existing markets. Focusing on current—usually local—markets is a risk-reduction strategy for vulnerable clients. As microentrepreneurs improve their skills and management capacity, they are assisted to identify and access higher potential markets. Recognizing the food security challenges confronting project participants, technical assistance is provided to savings group members and business training recipients to bolster the productivity of farm plots and kitchen gardens. Importantly, participants self-select their continued participation in the project based upon interest, capacity and other factors. ROADS anticipates variable individual and community progress and interest in upgrading and therefore will provide tailored trainings to groups based on the speed of their progress rather than project timeframes.
- Improve food security. Food insecurity is a strong contributor to risk aversion. Households that face chronic or seasonal food shortages are often unwilling to make longer-term investments that they will need to liquidate in lean periods. Strategies to increase the food security of vulnerable populations are presented here.
The very poor tend to face greater difficulty in accessing health, education, water and other basic services. Cost, distance and poor quality are common barriers. These deficiencies increase the likelihood of negative outcomes (e.g., poor nutrition, illness) that limit the capacity of very poor populations to sustainably engage with value chains. Poor access to water, for instance, can occupy many hours of the day that could otherwise be used for productive purposes. Poor quality health care and sanitation systems increase the portion of the year that is lost to preventable illnesses that lower crop yields and employment earnings. In many cases access constraints have macro-level effects; inadequate protection from malaria, for instance, has a demonstrated impact not only upon the economic outcomes of individuals and also on the aggregate growth levels of affected countries. Potential strategies to mitigate these constraints include the following:
- Identify inefficiencies and market opportunities for social product and service value chains. As with other value chains, applying value chain analysis to social products and services facilitates the identification of constraints and opportunities. Unlike other approaches to benefiting very poor populations, however, the goal of the analysis is not to improve income but rather to improve access to social products and services. Action for Enterprise, for instance, conducted a value chain analysis in Bangladesh of several important health products with limited outreach to vulnerable populations and potential beneficial impacts. The study identified how existing firms could improve outreach of these products, and assessed the impacts of the enabling environment in shaping private sector behavior and incentives.
- Develop alternative delivery mechanisms. Existing delivery channels for social products and services commonly fail to reach very poor populations, who are not prioritized by public service providers given remoteness, low purchasing power, weak political power and other factors. Some agencies have found that improving supply systems for basic services can create powerful impacts upon the capacity of the poor to become or remain economically active. The Mennonite Economic Development Associates (MEDA), for instance, applied the value chain approach to improve the efficiency of malaria net distributions in Tanzania. Mosquito nets that reduce the likelihood of malaria infection had traditionally been provided only through public clinics, with limited outreach and usage levels. MEDA implemented a voucher scheme that was redeemable at private-sector outlets. The voucher mechanism created a rapid response by private entrepreneurs to stock nets even in extremely remote villages that had never before been serviced. The project found that not only were health incomes improved - the total number of people owning a net, for instance, increased from 44% to 66% from 2005 to 2007 - but also that there were substantial economic impacts.
- ↑ S. Hashemi and R. Rosenberg, Graduating the Poorest into Microfinance: Linking Safety Nets and Financial Services, (2006), 2.
- ↑ Practical Action, Learning from Practice: Facilitating Hibiscus Market Systems For Marginalized Women Farmers in Sudan, (2006-2010), 11-12.
- ↑ B. Fowler and D. Panetta, CARE International in Zimbabwe: Improving access to basic financial services and agricultural input and output markets by small-holder farmers in Zimbabwe, (2010).
- ↑ Save the Children, STRIVE Mozambique Project Description and Activities, (2009), 2-3.
- ↑ Aga Khan Rural Support Programme (India), Internal Document, (2010).
- ↑ J. Ledgerwood, Brief on Community-Based Savings Groups: Aga Khan Foundation, (2009), 2.
- ↑ B. Fowler and C. Nelson, Combining Savings Groups with Agricultural Marketing in Tanzania, (2011).
- ↑ Cardno, Early Lessons in Targeting Populations with a Value Chain Approach, (2009) 10-11.
- ↑ E. Dunn, N. Kalaitzandonakes, and C. Valdivia, Risk and the Impacts of Microenterprise Services, (2005), 22.
- ↑ S. Gupta and V. Tripathi, Report of the GMED Urban Services Program in India: A Micro Enterprise Approach, (undated), 14-18.
- ↑ A. Snelgrove and L. Manje, Catalysts of Agricultural Supply Markets: Case for Smart Subsidies in Zambia, (2010).
- ↑ FHI/DAI, LifeWorks Strategic Framework: Coupling Economic Assistance with HIV/AIDS Support on ROADS II, (2010), 11.
- ↑ D. Gollin and C. Zimmermann, Malaria: Disease Impacts and Long-Run Income Differences, (2007) 20.
- ↑ AFE, Final Report: Assessment of Commercial Private Sector for Health Care Products in Bangladesh, (2010).
- ↑ A Kilian et al, Review of delivery strategies for insecticide treated mosquito nets – are we ready for the next phase of malaria control efforts?, (2009) 10.