4.1.1. Essential Issues to Consider

The Role of Markets

Projects driven by market opportunities must take into account the demands of specific market segments. For instance, when farmers know what they can sell — the type of commodity (baby, large, fresh, dried, etc.), the price, the quantity, potential buyers, local or other markets — they can meet the demand. If agriculture cooperatives can access detailed information on food crops (current market prices, the type of processing that customers want, etc.), they can capitalize on higher prices and demand for staples such as rice or cassava in conflict-affected urban areas. Likewise, construction companies can compete for contracts to rebuild or meet supply needs if they have intelligence on who, what, when and how much is needed. Obtaining this market information often requires direct engagement with buyers. Evidence suggests that projects that avoid this direct engagement, either because of logistical and budgetary constraints or staff discomfort in interacting with buyers, achieve weak economic results. Not only do these project implementers lack the information and relationships required for sales, sudden changes in market demand or competitor behavior can take them by surprise.

In conflict and post-conflict environments, markets are destroyed, severely disrupted or not performing well, and it can be difficult to identify market drivers in such circumstances. However, like nature, markets abhor a vacuum and where there is need, there usually is opportunity. The overarching lesson of the value chain approach is that it is critical to understand and engage the system within which poor producers operate in order to successfully and sustainably link them to economic opportunities in profitable markets. This is particularly relevant in post-conflict contexts. Working with a range of markets — local, national, regional and export — can reduce risk for small producers and local businesses and enable them to participate in the economic development of their communities and nation. For example, when the banana industry in Mindanao, an island in the Philippines still emerging from the second oldest civil conflict in the world, was facing significant competitiveness and quality challenges, the Cardava Banana Value Chain Project undertook work with three chains: chips for export; snack foods and dishes for restaurants, schools and street vendors; and fresh bananas for the Manila market and for export. The goal was to increase the price and quality competitiveness of the industry and promote broad-based growth that would benefit poor farmers and microenterprises.

Upgrading pre-conflict industries can achieve relatively quick results, drawing on locally-available skill sets and, where possible, market systems and productive assets. In Afghanistan the export of fresh grapes showed a positive risk-reward balance due to a thriving but under-supplied domestic market for them and long experience in grape production and marketing. The domestic market provided risk protection during the trial and error period of breaking into a new market and the export market showed the potential to earn 400 percent of current returns if the systems and product could be upgraded successfully and export barriers overcome. Although working with fresh grapes did not guarantee a successful program due to many challenges, it did provide a real market opportunity to explore in more detail.

The Policy Environment

A value chain analysis conducted in a conflict-affected context should examine existing policies and identify which ones do not exist to determine how the lack of a policy will affect recovery and development efforts. Policies and regulations can determine whether or not a program operating in such an environment succeeds: While some businesses can flourish in an environment nearly devoid of policies and laws (such as has occurred in telecommunications in Somalia), in other cases, such as several former Soviet republics, the lack of regulatory clarity can paralyze.

Governments in a conflict or post-conflict situation may enforce or change policies in unanticipated ways, which can have an impact on the success of planned business or recovery activities. Understanding the dynamics of the enabling environment and the risks programs may face can help them to mitigate (or avoid) this type of problem.

For example,^[1] an innovative bottom-up approach used in Bosnia and Herzegovina successfully overcame a lack of political will and capacity by mobilizing the local business community to identify concrete legislative changes and advocate for their adoption and implementation. By delivering fast results — 50 reforms in 150 days — the initiative won the confidence of entrepreneurs and empowered them to institutionalize permanent grassroots reform committees. The force of the lobby group created political will by putting public pressure on politicians to do their part to enact reforms.

Transportation, Mobility and Security

If the challenges of transportation, mobility and security are beyond the scope and capacity of project implementers, producers or other businesses, a project may need to be modified. For example, when project staff in Kosovo found that poor roads made the cost of collecting and transporting milk to export markets 250 percent higher than it was for regional competitors, they re-focused the project on domestic markets.^[2]

If a critical commodity for relief practitioners is blocked, a value chain analysis may be the best way to understand the entire system, identify alternatives or enlist help from the government or donors in solving the problem.

Business Relationships

In all contexts, healthy linkages between firms are at the center of successful value chains. In conflict environments, however, linkages are often fragile or non-existent. Reestablishing these linkages requires rebuilding trust, which can be a time- and resource-intensive task. Mistrust may lead to incorrect assumptions about the role certain value chain actors play or their contribution to the industry, thereby weakening development efforts. For example, it is common to hear that traders or wholesale agents are “not giving farmers a good price”. However, further investigation may show that these relationships are not necessarily exploitative. The wholesale agents may indeed perform a useful function by allowing farmers to choose the convenience of selling to an agent at the farm gate over transporting goods to the main market themselves, knowing that the fees the traders charge for this service are fair and appropriate. Trust grows as all parties understand, acknowledge and respect the role each plays in the chain.

In Liberia, the Agriculture for Children’s Empowerment (ACE) project is facilitating the integration of poor, mostly young smallholder farmers into emerging commercial value chains by helping them improve their production practices; building input supplier, broker and buyer capacity; and assisting private sector agricultural firms to participate in cultural and community events as a way of building trust. While the facilitative approach is time-consuming and does not produce immediate results, there is progress. Input providers who used to work only with large farmers and showed little interest in developing long-term relationships are now offering extension services to and working with the smallholders. Understanding the importance of building trust between small producers and the other key chain actors supplying the market, the project facilitated a pilot contract farming scheme and negotiated memoranda of understanding with major produce buyers to help these young farmers bridge a domestic supply gap and grow the high-value horticulture crops that urban consumers want.^[3]

Support Services

Planning for the delivery of support services is an integral part of developing a successful value chain program. Value chains do not operate in a vacuum; businesses depend on the services that keep them functioning and competitive, from agricultural inputs and warehousing for a range of crops to transportation systems, electricity and communications. Conflict and instability can have huge negative consequences on these services, and this in turn has a direct, usually negative impact on business.

The financial and technical support services critical to high performance in value chains are also often weak or missing in conflict-affected environments. While many MFIs operating in mainstream environments demonstrate that a social objective does not necessarily impinge on profitability, evidence shows that those working in conflict-affected environments have yet to achieve the level of scale and efficiency needed to counter the added costs of introducing subsidized components. To help resolve this and other constraints, projects may partner with other development programs working to rebuild damaged financial, education and other sectors. Where possible, though, projects should attempt to identify local providers and work with them to develop and supply needed services. For example, when the lack of access to finance hampered development of Rwanda's growing specialty coffee industry, the Agribusiness Development Assistance to Rwanda Project worked with USAID and the Rwandan government to set up a Development Credit Authority (DCA) guarantee facility with a national bank that could provide participants with credit to upgrade their products and processes.^[4] Go to Value Chain Finance to read more about this topic.

Programs can also work with particular value chain actors such as buyers or input suppliers to provide embedded services such as loans, inputs or training. In northern Uganda, for example, a cotton company provided smallholders with seeds, tools and organic pesticide packages and deducted the cost of this in-kind credit from what it paid farmers for their cotton at harvest.^[5] At the same time, programs should look for ways to increase competition for supplying these services to small farmers and avoid creating a long-term monopoly position for a single company, if possible.

Until recently, technologies such as mobile phones and internet access were cost-prohibitive or unavailable to poor and remote populations. Manufacturers are now targeting the growing market demand in developing countries and creating cheaper, sturdier and more energy-efficient products and applications specifically for those consumers. Additionally, wireless connectivity and business models for those with low cash flows are making internet access easier and less expensive to extend to previously unserved areas.

Also in Rwanda, coffee cooperative farmers had difficulty navigating new relationships with international buyers. The buyers were accustomed to direct email communication with suppliers about orders, shipments and visits, and they expected quick response times. The introduction of simple email communication via a mobile phone network was enough to solve this major constraint, strengthen the buyer-cooperative relationship and enable producers to better meet buyers’ needs. Go to the Information and Communications Technology page to read more about ICT and how economic development practitioners are using cell phones, hand-held computers, bar coding and other technologies in a range of contexts. For more on special considerations for using ICT in conflict-affected situations, see ICT for Conflict-affected Environments.

Footnotes

1. ↑ World Bank Policy Research Working Paper No. 3390 (August 2004): Investment Climate Reform: Going the Last Mile: The Bulldozer Initiative in Bosnia and Herzegovina, by Benjamin Herzberg
2. ↑ Chemonics International, Kosovo Dairy Value Chain, 2007
3. ↑ ACDI/VOCA, First-time Buyers: Facilitating Integration of the Very Poor into Emerging Commercial Value Chains in Liberia, Breakfast Seminar, 2010
4. ↑ Chemonics International, Restoring Hope Through Economic Opportunity, Agribusiness Development Assistance to Rwanda Project Final Report, 2006
5. ↑ International Rescue Committee, Uganda Cotton Case Study, 2008