3.1.2. Selection Problems

The following is a list of potential problems that can lead a policymaker, donor or implementing agency to direct resources to a suboptimal value chain.

Selecting favorite industries. Selecting the favorite industry of a donor, agent or policymaker--irrespective of the results of the value chain selection process--is a surprisingly common practice. Program managers’ familiarity and comfort with a particular industry, or a policymaker’s preference for a particular industry for political reasons, can result in suboptimal growth and reduced benefits on intended beneficiaries.

Temporary trade policies. Selecting industries based on preferential but temporary trade policies--for example, apparel investments based only on AGOA opportunities or sugar exports to the EU--can be short-sighted. It is critical in assessing the potential competitiveness of a particular industry to be aware of the trade policy environment: its terms, conditions and expiration, and how the policy will impact the industry before development resources are invested.

Insufficient attention to the business enabling environment. The business enabling environment plays a key role in fostering or limiting potential competitiveness. Constraints and opportunities relating to infrastructure, the workforce, laws and policies and business culture should not be underestimated.

Favoring growth over impact. Some industries, such as extractive or specific high-tech industries, have high growth potential but provide little opportunity for broad impact and employment.

Favoring impact over growth. This may lead to the selection of an industry employing a high proportion of the poor but with no potential for growth. The compelling moral imperative of alleviating poverty often leads donors to direct resources to supporting firms and industries with very little potential to sustain growth and income. While there is a strong rationale for targeting resources based on short-term disaster, hunger and poverty mitigation strategies, these are unlikely to result in sustainable growth in incomes, welfare and poverty reduction. This is related to the following concern.

Prioritizing cross-cutting criteria over the potential for competitiveness. In many instances, cross-cutting objectives may have a political importance that is equal to or greater than the commitment to economic growth. Prioritizing these at the expense of a particular industry’s competitiveness potential can result in public investment in industries that are unable to sustain growth in incomes and employment.

Failing to compare one value chain to another. Assessing an industry’s competitiveness has both an absolute and a relative aspect. In a world with limited donor resources to support economic growth, it is important to pick an industry that is likely to have the greatest impact on growth and employment; this requires comparing different industries.

Failing to assess a value chain both regionally and globally. In a liberalized global marketplace, firms and industries must compete with like industries in other countries even more than with their neighbors. Understanding factors that affect the competitiveness of like industries in other countries is an essential part of the competitiveness analysis, but one that is often left out of the value chain selection process.

Focusing on previous investments or selecting an industry where there has been a significant investment regardless of its competitiveness potential. Many formerly centrally planned economies have industries with substantial but often obsolete investment in infrastructure. Governments encouraged privatization and investment in these industries without assessing each industry’s competitiveness potential in a global marketplace. The quality of existing infrastructure to support the industry is an important element of, but not the driving decision point in, determining the potential competitiveness of an industry.