Global Value Chain

Central to the development challenge is the search for sustainable growth, for without this, there is little prospect of meeting the physical, social and emotional needs of the population. But growth in itself is not a sufficient – if it is unevenly distributed, and then there may be little increase in welfare.

Recent experience in the global economy highlights the importance of these growth and distributional issues. On the back of high growth rates associated with globalization, 670m people around the world moved out of conditions of “absolute poverty” between 1990 and 1998. That is, their incomes exceeded $1 per day (measured in 1985 purchasing power parity consumption standards, which take account of living costs in different countries). In historical terms this represents a major advance in human welfare. But there has also been a downside to globalization. Despite the rise in living standards of many, the numbers continuing to live in absolute poverty remain stubbornly large and unchanged, at something over 1.2 billion. Moreover, there is overwhelming evidence that patterns of income distribution within and between countries have become significantly more unequal.

There are essentially two (non-contradictory) ways of meeting these poverty-related concerns. The first is through redistribution, intra-nationally and inter-nationally. Recent experience in Europe illustrates how important this can be, since this is one of the few regions where the distribution of consumption standards has not become markedly more unequal in recent decades despite a worsening in the patterns with which incomes have been distributed. This follows directly from social welfare programs introduced by European governments (Förster and Pearson, 2000). The second path is more direct, and involves enhancing the incomes earned by the poor.

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From the perspective of poor countries, there is little evidence that the redistributional path has been pursued successfully. In terms of the inter-national redistribution of income, the last two decades have seen a weakening of income transfers. And very few developing countries have the political and fiscal capacity to introduce structured programs of intra-national income transfer. Hence, the key challenge is to take steps to directly enhance the income-earning capacities of poor countries and poor groups in poor countries.

Globalization and integration into global product markets have become major elements in this poverty-focused growth agenda. The East Asian economies and China have illustrated how international specialization can provide for scale economies and help producers and economies enter a virtuous circle of capability building. It has largely been through this that so many people have been lifted out of absolute poverty. If the “losers”

in the globalization era had been confined to those who have been excluded from global processes, then the policy conclusions would have been clear – enter the global economy as rapidly as possible and take advantage of these economies of specialization. However, the “losers” in recent decades include those producers who have participated in the global economy, but who have done so in ineffective ways. The key challenge thus confronting policy design and implementation is not whether to participate in global processes, but how to do so in ways which provide for sustainable income growth.

This is of course not a new agenda. The way in which developing countries and poor producers have entered the global economy, and the pattern of their global insertion, have long been a focus of concern. It has now been conclusively shown that their adopted paths of specialization in primary materials have been a major cause (and perhaps even a consequence) of their low levels of income. This is because the terms of trade of these primary products – the prices which they realize compared to the prices paid for developing country manufactured imports – have systematically declined.

The observation of declining terms of trade and the recognition of what this implied for developing economies goes back to the 1950s (Prebisch, 1950; Singer, 1950). From this it was concluded that poor countries and poor producers should shift out of the production of primary materials, industrialize and move into the production of manufactures. Manufactures had characteristically been produced by high-income countries and were the flip side of the declining terms of trade of primary product producers. From this it was widely concluded that developing countries should industrialize and become producers and exporters of manufactures.

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For early entrant, this strategy proved to be highly successful. The newly industrializing economies of East Asia began their transition during the 1960s, and by the turn of the millennium had achieved high standards of living on the back of a sustained push towards industrial development. But by the early 1990s, it was beginning to become evident that this path was not without its dangers. In the same way that primary producers had suffered from low barriers to entry, global overproduction and declining terms of trade. So, similar trends were beginning to become evident in many manufacturing sectors.

The entry of China into global markets – particularly in the manufacturing sector - was particularly important here. Between 1985, when China first became a major exporter, and 1995, the terms of trade of developing country exports of manufactures declined by 20 percent (Wood, 1997). So, even manufacturing is no longer a protected domain – indeed the speed of their declining terms of trade is rapid by comparative standards.

Two major linked conclusions can be drawn from this. The first is fairly obvious and arises directly from the observation of the declining terms of trade of manufactures. It is that the concept of a “commodity” applies to a factor or a product (both goods and services) where there are low barriers to entry, which is subject to intense competition, and hence to declining terms of trade. Because these characteristics were in the past associated uniquely with primary products, they were often characterized as

“commodities”. Yet unskilled labor and many manufactures now exhibit the same tendencies and hence can also be seen as commodities (Kaplinsky, 1993). The development challenge is thus not to move out of “commodities” defined as primary products, but out of all activities which are subject to sustained falls in their terms of trade.

The second relates to the nature and importance of barriers to entry as a factor protecting producers and products from “commoditization”. These can be created by attempts to “fix the market” (for example, through producer or buyer cartels). But barriers can also be created through a process of upgrading. This occurs routinely in high-tech sectors, but there is no intrinsic reason why upgrading cannot also apply in sectors historically characterized by low barriers to entry, including in the agricultural sector? The attempt to reposition Kiwi fruit by New Zealand producers suggests the possibilities which are open in the primary products sector. But what of other primary products?

Drawing on some of the insights offered by value chain analysis, we consider the prospects for decommodifying segments of the coffee market. Coffee is an important emphasizing case in point for two reasons. First, it has a large “footprint” in poor countries, and amongst poor producers in these countries; indeed, it is the second most

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important traded commodity. And, secondly, it is a product which has long been seen as an undifferentiated “commodity”. Yet, as the Nestles Vice President for International Relations points out, “the degree of variety of coffee and the variation in taste is at least as great as that of wine”. Thus, coffee is a product with enormous potential for differentiation. Some decades back substitute products such as wine and mineral water were also marketed as relatively undifferentiated products, but are now sold as highly differentiated lines, with significant premiums for specific products. Are we going to see the same pattern emerging in the case of coffee? And, if so, who will reap the rewards of price differentiation? Will it be the global branders (such as Krafts, Nescafe, Doewe Egberts, Tchibo and Lavazza), global traders (such as Rothfos, E. D. and F. Mann, Volcafe and Cargill), producer governments using export taxes, or will it be the growers?

And is it possible to identify policies which might help to ensure that some or all of these decommodifying gains are reaped directly by poor producers rather than large TNCs?

Three elements of value chain analysis are relevant to this study of the coffee value chain. The first is the mapping of inter-country input-output relations. The second is the analysis of inter-country distributional outcomes, and the third is the role which value chain analysis plays in highlighting the power and governance relations which explain these distributional outcomes. These are complex issues and can only be considered in outline within the confines of this paper Sections 3 and 4 cover respectively the historic commodification and emerging decommodification of the coffee value chain.