Linking Value Chain Analysis and the “Making Markets work better for the Poor” Concept

Linking Value Jörg
Meyer-Stamer
Chain Analysis and jms@mesopartner.com

the ““Making Frank Wältring
Markets work fw@mesopartner.com

better for the
Poor”” Concept
Final Version Duisburg and Dortmund
February 2007

Paper prepared for the Pilot Project
“Innovative Approaches to Private
Sector Development”

Content

1 Purpose of this paper 1

2 “Making market systems work better for the poor” and “Value Chain
Promotion”: What is it about? 1

3 Concepts and methodologies 3
3.1 M4P 3
3.1.1 Weaknesses of the M4P approach 6
3.2 Value Chains 7
3.2.1 Types of value chains 8
3.2.2 Value chains and donor interventions 9
3.2.3 Weaknesses of the value chain approach 11
3.3 Interim conclusion 12

4 How to link M4P + VC: Conceptual considerations 13
4.1 Value chains 13
4.1.1 Value chain differentiation 13
4.1.2 Value chain and territory 17
4.1.3 Value chains and markets 19
4.2 Making markets work 20
4.2.1 M4P and P4M 23
4.2.2 Understanding market failure 24
4.3 Who are “the poor”? 25

5 How to link M4P and VC analysis: Practical considerations 27
5.1 Analysis before action 27
5.2 Action research 29
5.2.1 Selecting a target group for a pro-poor value chain promotion project 30
5.2.2 Launching a pro-poor value chain promotion project 31

6 Conclusion 36

7 Bibliography 37

III

Figures

Figure 1: The market concept of the M4P literature .................................................................3

Figure 2: Simplified structure of the pepper and cloves value chains in Sri
Lanka..............................................................................................................................14

Figure 3: Structure of the pepper value chain in Sri Lanka ....................................................15

Figure 4: Downstream part of the cinnamon value chain in Sri Lanka ...................................16

Figure 5: The Commodity Chain of the Knitwear Industry in Santa Catarina,
Brazil ..............................................................................................................................17

Figure 6: The Cluster and the Value Chain perspective.........................................................18

Figure 7: The 2 Pillars of Value Chain Promotion ..................................................................19

Figure 8: The Context of Poverty and Micro-Enterprise Development...................................26

Figure 9: The USAID approach to value chain promotion......................................................28

Figure 10: The spiral model of sequencing in the EU LEADER programme..........................30

Figure 11: Initial Sequence for a Pro-Poor Value Chain Initiative ..........................................32

Figure 12 ................................................................................................................................35

Summary

The main concern in development cooperation today is to achieve a bigger impact on poverty
alleviation. This refers to all arenas, including private sector development. The conceptual
discussion on private sector development has recently addressed the question of how to
create an enabling environment and make markets work, and in particular make markets
work better for the poor. At the same time, practical activities in private sector development
are addressing value chains, something that reflects realities of private companies that are
constantly battling to find markets for their products, and access to markets is often organ-
ised through value chains.

At first glance, the “Making Market Systems Work Better for the Poor” approach (M4P) and
the value chain approach appear to be incompatible. However, a closer look reveals that the
M4P literature paints a differentiated picture of markets, which is informed by the analysis of
real markets, particularly rural markets. It stands for a pragmatic approach that can give im-
portant inputs for conceptual development for value chain approaches. At the same time, it is
important not to merge the M4P and the value chain approaches, since this would compro-
mise many of their respective strengths.

Value chain projects sometimes spend a lot of time and effort on research before going into
practical activities. We suggest that there is little point in introducing M4P into a research-
focused approach to value chain development, since this might lead to enormously complex,
resource-intensive and lengthy research projects. Instead, we suggest a process-oriented
approach to value chain development that involves strong elements of action research. We
suggest that there is a good opportunity to introduce M4P elements into such an approach.

Acknowledgements

This paper has benefit tremendously from the discussions at a workshop in Hanoi in Novem-
ber 2006. We greatfully acknowledge the comments and suggestions made by Alan Johnson
and Dominic Smith (ADB/DFID M4P project), Kees van der Ree, Bas Rozemuller and Marije
Boomsma (ILO), Michael van den Berg (SNV), Ellen Kramer and Khan Nha (GTZ Poverty
Reduction project), and Thomas Finkel, Angelika Hutter, Vu Nhu Quynh and Pham Ngoc
Tram (GTZ SME project). Useful comments on earlier draft versions were given by Sabine
Becker, Shawn Cunningham, Doug Hindson and Peter Richter. The usual disclaimers apply.

1 Purpose of this paper

The initial intention behind this paper was to verify whether it makes sense to
connect the literature on value chain analysis and the literature on “Making mar-
ket systems work better for the poor” (M4P) in order to develop an analytical in-
strument that makes value chain promotion more pro-poor. In the course of the
work it became clear that the M4P concept is work in progress. Thus, this paper
turned out to be a contribution to the evolving conceptualisation of M4P as well. A
draft version of the paper was finished in the first semester of 2006. The concept
outlined in that paper was discussed with M4P and value chain practitioners in a
workshop in Hanoi in November 2006. An M4P-informed value chain analysis
was conducted in December 2006 in Vietnam’s Dak Lak province through the
Vietnamese-German project “Support for Poverty Reduction” which is managed
by the Ministry of Labour, Invalids and Social Affairs (MOLISA) and GTZ.

The paper is organised as follows. Section 2 gives a brief introduction to the two
concepts, and Section 3 has a closer look at them. In Section 4, we discuss con-
ceptual issues involved in the connection between value chain analysis and
making market systems work better for the poor. In Section 5, we outline a practi-
cal approache to analyse value chains in an action-oriented way that is informed
by both approaches.

2 “Making market systems work better for the poor” and “Value Chain
Promotion”: What is it about?

The starting point of this paper are two lines of conceptualisation and develop-
ment practice that have recently started to converge: “Making market systems
work better for the poor (M4P)” and “Value Chain Promotion” (VCP). Both ap-
proaches address the issue of private sector development, including promotion of
small producers in rural areas, from specific angles and against specific patterns
of conceptual evolution.

M4P has evolved from the BDS discussion of the late 1990s. The BDS discus-
sion was based on the observation that the established donor approach for pri-
vate sector development was not particularly effective. One of the main deficien-
cies was the fact that it ignored existing business service markets, and indeed
often created unfair competition to existing service providers through subsidised
governmental business promotion programmes and organisations. The traditional
approach to business development was a typical example of the donor approach
analysed by Pritchett and Woolcock: “need as the problem, supply as the solu-
tion, civil service as the instrument” (Pritchett and Woolcock 2004, 193). With the
BDS approach, the pendulum swung to the other extreme, emphasising the need

2 Jörg Meyer-Stamer and Frank Wältring

for market development yet not clearly defining the role of government in this
process. Today, “BDS market development terminology is fading in favor of vo-
cabulary that explains how market development can help the poor benefit from
economic growth. What was understood as BDS markets are increasingly called
business service markets, commercially viable solutions, or support markets”
(Miehlbradt and McVay 2005, 2). M4P shares with BDS the emphasis on market
development, but it has at the same time a wider and a less clearly defined
scope.

VCP has in recent years evolved from the subsector approach. To some extent it
was driven by practitioners’ insight in the need to connect producers to the mar-
ket, and indeed understanding and verifying the target market before engaging in
upgrading activities with producers and manufacturers. To some extent it is in-
formed by the academic literature on global value chains, i.e. dense networks
that often involve retailers and other big corporations in industrialised countries
and a huge number of suppliers all over the world. The emergence of value
chains is primarily driven by the market. Development practitioners have ob-
served this process and spotted an opportunity. The value chain approach has
received a particularly strong impulse from the discussion on rural and agricul-
tural development, as decreasing transport and communication costs have
stimulated the emergence of value chains that connect producers of fresh fruit
and vegetables, processors and packaging houses in developing countries, and
supermarkets in industrialised countries. Research showed that poor smallhold-
ers can in principle be integrated into such value chains, thus raising the expec-
tation that value chain promotion can have a direct pro-poor effect (Dolan, Hum-
phrey and Harris-Pascal 1999).

At first glance, the rationale for connecting these two approaches may not appear
particularly convincing. First, there seems to be an intrinsic problem with the M4P
approach. Markets are about allocation, not about distribution. While “making
market systems work better” is a plausible proposition, “... for the poor” appar-
ently is not. The M4P literature overcomes this problem by looking at market
systems, i.e. the interaction between markets and other forms of allocation, nota-
bly hierarchy (i.e. through government interventions or by the activities of major
corporations). Moreover, the “better” is not to be understood in the sense of
“better for the poor than for everybody else” but rather in the sense of “better than
so far”. The M4P literature points out that markets are often rigged in a way that
benefits only a small group of already well-off, and that levelling the playing field
creates new opportunities for the not-so-rich.

Second, value chains are not primarily about markets. The literature on global
value chains has pointed out that the main reason why such chains exist is the
fact that the market rarely works properly. Transactions in global value chains
tend to be complex, information can only partially be codified, and suppliers will
often face limitations with respect to their capacity to respond to the requirements
of global buyers (Gereffi, Humphrey and Sturgeon 2005). In other words, global
value chains as relatively stable, coherent structures exist because they are su-
perior to anonymous markets. However, from a development policy angle, global

Linking Value Chain Promotion and the M4P Concept 3

value chains still look much more like market arrangements than like anything
else, and when it comes to promoting value chains one would try to rely on mar-
ket adjustment as much as possible.

3 Concepts and methodologies

3.1 M4P

The M4P approach has been promoted in particular by DFID, SIDA and the Asian
Development Bank. With the M4P approach, they aspire to make their private
sector development approach more pro-poor, thus aligning it with the Millenium
Development Goals.

The market concept of the M4P literature is summarised in the following figure.

Figure 1: The market concept of the M4P literature

Source: Presentation given by Marshall Bear, November 2005

What this figure tries to depict is the fact that the functioning of markets depends
on two sets of factors. Intangible factors (lower semicircle) include formal and in-
formal rules. Tangible factors include infrastructure and other services (upper


semicircle). Both tangible and intangible factors are shaped by government, the
private sector and its organisations, the third sector, and informal networks (outer
circle).

A specific element of M4P in this respect is the focus on institutions. What is
meant by this? Let us quote the explanation given by Ferrand, Gibson and Scott
(2004, 14 f):

“What are the most important formal rules impinging on the market and the poor?
How do they impact on the market?
These include:
Generally applicable rules such as contract, property, consumer protection, weights
and measures, health and safety, competition and tax laws. These are not market-
specific but may be most important in shaping markets.
Sector-specific rules such as banking law, electricity and telecommunications acts
and land use and ownership laws.
Non-statutory regulations such as industry codes of good conduct, quality standards
and registers.
What (and who) are the most important formal mechanisms for enforcement of
rules? How do they impact on the market?
This includes, for example, commercial justice institutions, government systems of regu-
lation, inspection and licensing, inland revenue authorities, company and land registries,
industry regulators, local government tax offices, and self-regulation mechanisms in busi-
ness associations.
What are the most important informal institutions impinging on the market? How
do they impact on the market?
The actual way in which rules are interpreted and applied is often shaped more by social
norms and practices as much as the letter of the law. Where formal rules and their appli-
cation are weak, the business environment is governed by the informal. For example, the
general impracticality of commercial and contract law often means that business transac-
tions become focused within established networks. In Africa, it is recognised widely that
existing networks and trust – arising from particular conditions – is a key hindrance to
trading and to collaborative business arrangements. While in Asia many networks of
small business have developed – to permit flexible production specialisation – in Africa
this is less common. Overall, when the formal rules surrounding markets are weak and
informal institutions are not supportive of business transactions, the environment for mar-
kets is significantly dysfunctional.”

In a development policy perspective, the M4P approach effectively distinguishes
three intervention levels (e.g. DFID 2005):

1. The micro level, where the focus is at creating functioning markets and effec-
tive BDS structures.

2. The meso level, which, though it remains conceptually somewhat fuzzy, con-
sists of para-governmental structures that are funded by external donors and
that substitute defunct or ineffective national government structures in devel-
oping countries.


3. The macro level of generic framework conditions, in particular the legal
framework and the rules and regulation that guide its delivery.

The argument of the M4P concept can be summarised in two points:

Development-oriented interventions need to create effective markets, rather
than distorting or substituting them in the way traditional donor interventions
often did. This point takes the key insight of the BDS approach as its point of
departure and applies it in a more comprehensive manner.

Those market adjustment activities must be prioritised that have a strong pro-
poor effect. The M4P approach emphasises the need for systematic research
in this respect.

The first argument is close to the one made by Meyer-Stamer (2001, 23) who ar-
gues that a significant part of meso-level interventions is temporary in nature and
needs to be designed in a way that does not compromise the phasing-out of in-
terventions as a given market begins to work effectively. The M4P approach ne-
glects the corollary emphasised by Meyer-Stamer, namely that some meso-level
interventions are permanent in nature since the market will never take care of
them; typical examples include, for instance, some activities in the field of quality
assurance, certification, testing and calibration.

In the body of literature on M4P, Dorward and Kydd (2005, 16 ff) relate to this line
of reasoning. They observe that it can be entirely unrealistic, and indeed self-
defeating, to take the principle of making markets work too far. They highlight the
fact that highly fragmented markets can lead to prohibitively high transaction
costs while at the same time creating barriers to entry that reinforce critical bot-
tlenecks. One of the examples they provide is “asset specificity”. If an entrepre-
neur buys a truck to transport mangoes, but it turns out that there are not many
mangoes to be transported, she can still use the truck to transport, say, bricks.
But if an entrepreneur invests in a highly specialised canning operation for man-
goes, the absence of mangoes creates a serious problem. Therefore, in a com-
petitive market with high information cost and little direct communication between
market participants, entrepreneurs may hesitate to invest into anything that dis-
plays a high asset specificity. Dorward and Kydd present hierarchies, be they
government institutions or private sector organisations, as a necessary comple-
ment to markets. The way they conceptualise hierarchies, for instance as corpo-
rations that organise various stages in a value chain or organise outgrower op-
erations, relates to the literature on value chains, though they do not make this
connection explicit.

The M4P approach emphasises the need for analysis. According to DFID (2005,
19), “the M4P approach will draw upon the following types of data:

Poverty reports including household surveys and PPA surveys.

Specific market and transactions studies using participatory and other tech-
niques to complement existing poverty data.


‘Doing Business’ and Investment Climate Surveys.

Trade, production and price data.

Market outcomes and data from the operation of value chains.

The rate and direction of the evolution of key markets for the poor, especially
the:

– process of market deepening and the expansion of the access frontier;

– crossing of key thresholds for participation, outreach, choice, economies
of scale and sustainability; and

– effects of cross market linkages.”

In other words, the M4P approach involves a rather comprehensive effort in con-
ducting studies, more comprehensive indeed than the already quite comprehen-
sive “BDS market assessments” of the recent past.

3.1.1 Weaknesses of the M4P approach

The M4P approach is still at an early stage of conceptual development, and it is
still searching answers to important conceptual as well as practical issues.

Conceptual weaknesses: The market

The key issue in the concept, the market, remains fuzzy. From an economics
perspective, the different types of market failure and the reasons for their exis-
tence are not discussed in a systematic way. Similar to the BDS approach, mar-
kets are discussed in an inductive way, and the analysis of markets is informed
by concepts from a business administration perspective, not a microeconomics
perspective. The M4P discussion may have something to learn from the discus-
sion on privatisation in this respect; for instance, Brücker and Hillebrand (1996)
offer an excellent overview of market failure and options in addressing it. From a
social science perspective, the issue of “embeddedness” of markets (Granovetter
1992) in social structures is something that should be elaborated much stronger
and more consistently in the M4P literature (see also Platteau 1994).

Conceptual weaknesses: The poor

The M4P literature is somewhat blurred when it comes to “the poor”. It neither in-
troduces different levels of poverty, from relative income poverty to absolute des-
titution, nor does it explicitly explain whether it is based on a static or dynamic
concept of poverty. In fact, it avoids one of the prominent concepts in poverty re-


search, namely exclusion. This is somewhat puzzling since “making markets
work for the poor” can to some extent be translated into “integrating poor into
markets”, i.e. taking direct action to address exclusion.

Conceptual weaknesses: Government

In the way it is summarised in the most recent concept paper (DFID 2005), the
M4P concept fails to address the issue of sustainability of intervention vehicles /
structures for market alignment. It establishes high requirements on the effective-
ness of government structures, yet delivers no visible contribution to strengthen-
ing government structures. In fact, existing government structures in partner
countries are effectively sidelined with programmes like ComMark in Southern Af-
rica. In Nigeria, PrOpCom acts like any meso-institution anywhere that has de-
cided to build a powerful value chain on the basis of currently weak, fragmented
structures, very similar to what, say, Scottish Enterprise has done since 1999 in
its “Scottish Food & Drink” initiative, except that at some stage PrOpCom will
terminate, while new types of market failure will continue to emerge.

Practical issues

While emphasising the relevance of market failure and the need for market ad-
justment tools, the M4P literature so far does not provide any tools that would
permit efficient analysis of market failure. A development practitioner who needs
to prepare Terms of Reference for a consultant who is supposed to analyse mar-
ket failure is pretty much left to her own devices. The M4P literature names some
types of market failure, such as public goods and externalities, market power and
economies of scale, asymmetric information, and costs of establishing and en-
forcing agreements (DFID 2005, 6). However, we have not been able to locate a
toolkit that would guide practitioners in identifying market failure, understanding
the underlying reasons, and finding efficient and sustainable means of address-
ing it.

3.2 Value Chains

Both academic research and development practitioners have for a number of
years been addressing “value chains”. A value chain is the sequence of activities
involved in transforming raw materials into a product that is acquired by the final
customer. It includes business activities from the generation of raw materials, to
transforming them into intermediate products, to manufacturing the final product.
It includes business transactions, but also transactions between companies and
governments (e.g. the bureaucracy involved in transborder trade), and transac-
tions between companies and supporting institutions in areas like finance, train-
ing, research and development, metrology and certification, and others.


A value chain can be relatively straightforward, for instance in the case of the or-
ganic vegetable value chain, where rural producers, intermediates and proces-
sors / packaging houses, and wholesalers and retailers are involved. A value
chain can be extremely complex, for instance in the case of a passenger car or a
personal computer, or in fact in footwear or garments, where producers in various
countries across the globe interact.

Value chains exist at the subnational regional level, the national level, and the
global level. In subnational regions, value chains are difficult to distinguish from
“clusters”; in fact, some development agencies use the terms “cluster” and “value
chain” interchangeably. Most of the academic literature on value chains ad-
dresses them at the global level.

How are value chains different from supply chains? They are not. What is differ-
ent is the angle of analysis. The supply chain literature is rooted in industrial en-
gineering faculties and business schools. The guiding question of the supply
chain literature is: How can a company manage its supply chain more efficiently,
and create a competitive advantage through unique and more efficient supply
chain management? Examples for best practice in supply chain management in-
clude retailers like Wal-Mart and Ikea, who are not only capable of spotting low-
price / good quality producers across the globe but also highly skilled in organis-
ing the logistics along their value chain in such a way that cost efficiency is high,
lead times are short, and working capital requirements are low.

The value chain literature is rooted in development studies and sociology. It
started from the observation that agricultural and industrial development proc-
esses in developing countries increasingly are based on interaction with lead
firms in industrialised countries. The concern of this body of literature is not with
the efficiency of lead firms such as Wal-Mart or Ikea but rather with the develop-
ment prospects of companies that are dependent on Wal-Mart or Ikea for their
export sales, and that are thus integrated into the global economy in a dependent
way. The main focus is at the analysis of power structures in the world economy.

3.2.1 Types of value chains

The current state of research on value chains (in particular global value chains,
but its findings to a large extent apply to national-level value chains as well) dis-
tinguishes four types of value chains (Schmitz 2005, 6):

1. “Arm’s length market relations. Buyer and supplier do not need to develop
close relationships because the product is standardised or easily customised.
A range of firms can meet the buyer's requirements. When problems arise
buyers move on to different suppliers.

2. Modular networks. Firms develop information-intensive relationships, divid-
ing essential competences between them. The buyer provides the design and
product specification and highly competent suppliers provide products and


services at short notice to any kind of specification drawing on the specialisa-
tions in their cluster. Information intensity is high, transactional dependence
is low, and confidence in supplier competence is high.

3. Captive networks. In this case, one firm exercises a high degree of control
over other firms in the chain. In garment and footwear chains, buyers often
specify the characteristics of the product to be made by their suppliers, spec-
ify the processes to be followed and inspect that these specifications are fol-
lowed. Typically this occurs when the buyer has doubts about the compe-
tence of the supply chain.

4. Hierarchy. The lead firm takes direct ownership of some operations in the
chain. The case of the intra-firm trade between a trans-national company and
its subsidiaries falls into this category.”

Recent research on global value chains has primarily looked at Type 2 and Type
3 value chains, i.e. value chains that are neither market based nor organised
within a multinational firm. Such value chains exist because the market does not
work (market failure) and an intra-firm setup would involve prohibitive transaction
costs and constant problems with principal-agent issues. Let us look at these two
issues in some more detail:

Market failure: What is traded in global value chains are non-commodity
products, i.e. products that are produced according to specific parameters.
Some of these parameters are specifically defined by the buyer, for instance
designs. A key issue here is that the buyer cannot fully codify its requirements
but needs ongoing communication with the supplier to explain what exactly is
wanted. Other parameters are features such as quality criteria, compliance
with environmental or social standards, and others. So far, experience has
shown that international standards such as ISO 9000, ISO 14000, and SA
8000 cannot guarantee that suppliers meet the requirements of buyers, so
that buyers tend to prefer direct interaction and control.

Hierarchy, transaction cost, principal-agent problems: Over the past two dec-
ades, there has been a strong tendency away from the Chandlerian model of
company evolution, i.e. major integrated corporations, since experience
showed that a model of a company that focused at its core competencies and
outsourced many non-core activities was more efficient. This was due to
lower transaction costs in coordinating inter-company relationships, some-
thing that was more efficient that one integrated company with a bloated in-
ternal bureaucracy, as well as the absence of the principal-agent issues
common in big, spatially scattered corporate organisations.

3.2.2 Value chains and donor interventions

The value chain issue has been taken up be donor agencies, which perceive
them both as a risk and an opportunity. The risk lies in the fact that developing


country producers cannot be integrated into global markets if they cannot meet
the requirements of value chains lead firms regarding cost, quality, certification,
quantity, and timely delivery. The chance lies in the fact that connecting devel-
oping country producers to the world market can be easier if the donor agency
manages to build a direct relationship with a value chain lead firm.

In fact, donors recently have started to work directly with value chains, i.e. by en-
gaging with the lead firms / global buyers, for instance in a number of GTZ-
managed public-private partnership projects. To some extent, this was driven by
a combination of global buyer’s concern with corporate social responsibility (in
particular the desire not to appear as culprits for miserably labour conditions in
sweat shops, or being linked to child labour) and donor organisations’ concern to
improve the productivity levels in companies that are part of value chains so that
they reap greater benefits, including higher wages and better working conditions.

Various donor organisations have formulated approaches for value chain analy-
sis. While having some features in common, existing approaches to value chain
analysis demonstrate a number of specific differences. They are summarised in
the table in Annex 1. Identifying the similarities and differences within existing
value chain analysis approaches does not become obvious by casting a quick
glance. Many of them are integrated into wider market or demand assessments
or integrated into LRED, BDS, Enabling Environment, PPP, BDS or cluster de-
velopment activities.

Similarities in the approaches
There are certain similarities among the different value chain analysis ap-
proaches:

Most of the approaches combine the analysis of the chain with the analysis of
interventions.

The sequence of an analysis usually includes the following steps: identifica-
tion of the subsector, analysis of the chain linkages, analysis of the market,
analysis of potentials, analysis of constraints, analysis of solutions, analysis
of interventions.

Nearly all of the approaches apply criteria that in general are including in-
crease of competitiveness, employment effects and sustainability.

There is a tendency especially in approaches of donors to integrate partici-
patory elements and to use the value chain analysis also to identify potential
partner organisations or lead firms. Often activities that have started at the
governmental level include very study- and less participatory-based ap-
proaches, e.g. to design a national export strategy.

There is a trend towards incremental analysis approaches, often based on
larger baseline studies.


Differences in donor approaches
There are differences with respect to engaging the stakeholders and the target
group, in the way of planning interventions, with regard to the time sequence of
analysis and intervention and in the combination of value chain analysis with
other approaches. Regarding the latter point, it is common to find mixed ap-
proaches that combine and complement value chain analysis with other devel-
opment approaches (Cluster, value chains, PPP, LED, investment promotion,
OD, EE, BDS). Examples are many GTZ projects but also other donor organisa-
tions that follow a systemic approach which goes beyond the focus on interfirm-
linkages and BDS and that analyse interventions in a more integrated cross-
cutting form (e.g. Vietnam, Sri Lanka). Regarding planning and sequencing, there
are two fundamentally different types of approaches:

Incremental approaches that analyse parts of the chain on a continuous base
to identify further opportunities for donor intervention. Many projects that
started with large studies subsequently focused on more specific sub-areas
(e.g. AfE in Bangladesh with the KATALYST project). Other approaches start
already with participatory research that involves different stakeholders
through workshops and interviews (stakeholders usually come from the pol-
icy, social and economic sphere) with the objective to initiate an iterative pro-
cess of planning / implementing / assessing / planning.

Planning approaches that follow a step-by-step procedure from information
gathering, sub-sector selection, identification of constraints, identification of
intervention approaches towards planning and implementing interventions.
These approaches often take longer until they reach implementation. They
often also do not include the stakeholders in the final planning process of in-
terventions (AfE, IDE, …).

Finally, it is noteworthy that while all approaches focus at the need to increase
competitiveness, some are primarily looking at livelihood improvement (e.g. IDE).

3.2.3 Weaknesses of the value chain approach

The academic value chain literature addresses global value chains. It typically
looks at products that are produced in developing countries and consumed in in-
dustrialised countries, from Kenyan fresh vegetables to Mexican blue jeans to
Taiwanese computers. It analyses producers in developing countries that are al-
ready highly competitive; the fact that they are able to consistently satisfy the so-
phisticated demand of leading companies in industrialised countries bears wit-
ness of this. However, only occasionally does the value chain literature trace the
evolution of producers in developing countries and the stages that preceded their
integration into global value chains. The exact mechanisms of how producers in
developing countries become integrated into global value chains are not at all
clear. What exactly happens before producers appear on the radar screen of
global buyers, how first contact is established and how the initial interaction goes
is not well understood. In this respect, the literature is only of limited value to


practitioners who want to upgrade producers in developing countries so that they
appear on the radar screen of global buyers.

In the practitioner literature, there appears to be a tendency to ignore the differ-
ences between Taiwanese computer manufacturers and, say, Guatemalan
handicraft producers. There seems to be an assumption that pretty much any
producer anywhere can in principle be integrated into global value chains. This is
a repetition of a misunderstanding that came up in the discussion on cluster de-
velopment and promotion some years ago, where we have shown that concepts
that have been developed in settings with highly competitive industries cannot
easily be transferred to survivalist sectors (Altenburg and Meyer-Stamer 1999).

3.3 Interim conclusion

Value chain promotion is concerned with competitiveness of producers. It aims at
connecting producers in developing countries with markets, be it nationally or
globally. Value chain promotion, as conducted by donor agencies, is implicitly
pro-poor in that it focuses at groups of producers who will not spontaneously link
up with external buyers because of too wide a gap between their supply capacity
and the demands of buyers, which may be a result of insufficient skills, an unfa-
vourable, peripheral location, a disabling environment, or other factors.

The M4P approach is concerned with market adjustment. It is explicitly pro-poor.
It aims at improving the effectiveness of market mechanisms, so that barriers to
entry are lowered and more economic opportunities are created. Moreover, more
effective markets are expected to lead to lower prices and thus an increase in the
effective purchasing power of poor.

VCP and M4P look at development challenges from different angles. One might
expect M4P to be very generic (though the examples mentioned in the M4P lit-
erature are not), and VCP to be highly specific. However, M4P does not only look
at market adjustment from a macro-economic perspective, in the way the “ena-
bling environment” approach does. It also addresses the micro- and mesolevels.
From this angle, one can argue that VCP and M4P are complementary and can
be connected.

One element that must be highlighted is the fact that the M4P literature explicitly
addresses different markets – not only product markets, but also factor markets,
for instance the labour market. This is an element that only appears in an indirect,
implicit way in the value chain literature and practice. The labour market is un-
doubtedly one of the most important markets in terms of making the economy
more pro-poor. Distortions in the labour market are one of the most important
reasons for persistent marginalisation and poverty (Granovetter 2005), not only in
developing countries but also, for instance, in the U.S. (Rosenfeld 2002). Ad-
dressing the labour market, as well as other factors markets, in VCP in a consis-
tent and systematic way may be a promising way of making it more pro-poor.


So the conclusion is this: M4P can inform VC work, but the two should not be
merged. M4P and VC overlap. M4P covers issues like labour markets, which are
not systematically addressed in VC. VC has an explicit focus at supranational is-
sues, which are beyond the scope of M4P.

4 How to link M4P + VC: Conceptual considerations

In this section we will highlight a number of issues that so far are not adequately
addressed in the M4P and the VCP literature. We will indicate a number of con-
cepts and strands of academic discussion that may help in creating a sounder
foundation for both approaches.

4.1 Value chains

4.1.1 Value chain differentiation

The “value chain” metaphor is valuable in more than one sense. Not only is a
chain a relatively flexible structure that will change its form frequently without
changing the basic structure. There is also one physical feature of a chain: It is
impossible to move it by pushing it. The only way to move a chain is by pulling.

Translating this metaphor takes us to the main difference between VCP and tra-
ditional approaches. The latter often had a tendency to strengthen the supply ca-
pacity of producers and small companies without having a confirmed order, i.e.
they assumed that a market would be available, which sometimes was the case
and often not. VCP starts from an understanding of the final demand and works
its way back through distribution channels to the different stages of production
and manufacturing. That is, proper VCP does this. There are also VCP interven-
tions which effectively are re-labelled sector activities, sometimes based on a
terminological and conceptual confusion around the terms sector, subsector and
value chain:

Among development practitioners, sectors are commonly understood along
the lines of the International Standard Industry Classification, i.e. the food
sector, the metalworking sector, the textile sector, etc. It is also not rare to
find that, for instance, microenterprises are addressed as a sector, and “in-
formal sector” is a firmly established term that indicates yet a different ap-
proach to classification. The different sector definitions reflect different inter-
ests. The ISIC classification is guided by the interest of statistical offices to
organise the complex reality of an economy in a way that is practical for data
collection and presentation. The microenterprise definition is guided by the
interests of policy makers who perceive a type of enterprise to be systemati-
cally disadvantaged and who need criteria to define those businesses that will
benefit, for instance, from simplified tax payments. The informal sector defini-
tion was originally driven by the interest to highlight dismal working conditions


in a particular type of business. None of these definitions makes much sense
in the context of targeted business promotion activities, though.

Subsectors have been defined as “all the firms that buy and sell from each
other in order to supply a particular set of products or services to final con-
sumers” (Lusby and Panlibuton 2002, iv). This definition is somewhere in
between the sector terminology and the value chain concept. At first glance, it
appears to be quite similar to the value chain definition. Unlike the value
chain, though, it does not define economic activities from the perspective of
the final consumer, and this establishes a crucial difference between “sub-
sector” and “value chain”.

From a practitioner’s perspective, proper VCP, based on a genuine effort to un-
derstand the structure of a value chain starting at the final customer, has a big
disadvantage. It tends to involve a hugely complex system that is very difficult to
address for any practical purposes. This is not a new discovery. Long before the
term “value chain” in the way it is used in this paper was coined, when research-
ers were still talking about “networks”, they detected that one “sector” in one re-
gion can involve a variety of different structures that are only loosely interrelated.
Silicon Valley, for instance, is not one value chain but actually several, each with
different final customers, internal structures and challenges regarding upgrading
(Storper and Harrison 1991).

At first glance, a value chain appears to be a very straightforward affair. Simpli-
fied value chain maps usually look like the one depicted in Figure 2.

Figure 2: Simplified structure of the pepper and cloves value chains in Sri
Lanka

This figure is taken from a presentation on the experiences of a GTZ VCP project
in Sri Lanka. A more detailed, yet still simplified map of the pepper value chain
looks as depicted in Figure 3. This and the following figure have been elaborated
in stakeholder workshops of the GTZ Value Chain Project in Sri Lanka.


Figure 3: Structure of the pepper value chain in Sri Lanka


This is still a relative straightforward picture, which is mostly due to the fact that
the distribution channels and final customers of Sri Lankan pepper are not par-
ticularly diversified. Things look quite different for the cinnamon value chain,
which serves quite different final customers.

Figure 4: Downstream part of the cinnamon value chain in Sri Lanka

Cinnamon is not only used as a kitchen spice. It is also an input for the pharma-
ceutical and fragrance industries. So far, Sri Lankan producers have not really
tapped into these markets. But as they will develop a capacity to establish link-
ages with such customers, the map of the Sri Lankan cinnamon value chain will
become significantly more complex, since different needs and demands of final
customers will lead to a segmentation of value chains inside Sri Lanka (which are
not captured in Figure 4).

Similarly, research that we conducted in Brazil in the second half of the 1990s on
a textiles and garments value chain in the Vale do Itajaí region showed a picture
of four distinct patterns of industrial organisation, feeding into five different distri-
bution channels. At first glance, one might have expected one value chain. How-
ever, the reality is much more complex. This has important consequences for any


effort in upgrading, since different segments of the industry have quite different
requirements. In other words, in order to upgrade the textile and garments sector
in this region, one would have to launch not one but several value chain initia-
tives, each of them addressing one specific value chain. Most companies would
only be part of one value chain initiatives, while other players, such as skills de-
velopment or technology institutions, might have to be involved in four or five
value chain initiatives at the same time.

Figure 5: The Commodity Chain of the Knitwear Industry in Santa Catarina,
Brazil

Source: Meyer-Stamer 1998

What is the conclusion from this line of argument? Value chains tend to be highly
complex systems. An effort to analyse them in a systematic way will thus tend to
involve a very significant research effort. It is important to note that not only the
purpose but also the scope of VCP-related research would be different from a
typical academic GVC research project. GVC research focuses at the issue of
power imbalances in the international economy. It often takes individual retailers,
or narrowly defined final customers, as its starting point. A VCP project cannot
afford this kind of focused perspective but rather has to take a much broader
look. A GVC researcher would be satisfied with a paper that investigates the
connections between French fragrance manufacturers and Sri Lankan cinnamon
producers. For somebody who is supposed to do spice value chain promotion in
Sri Lanka, this would only be one piece of a much bigger puzzle. In other words,
value chain initiatives need to be managed carefully so that they don’t get out of
hand.

4.1.2 Value chain and territory

Value chains do not per se have a territorial dimension. Obviously, each element
has a location. But the defining feature of the value chain is the pattern of con-
nection between various producers, services and customers. The following pic-
ture captures this aspect by comparing the value chain approach with the cluster
approach. Cluster promotion and value chain promotion are not profoundly differ-


ent in terms of the objectives and instruments. The main difference is the clear
territorial focus in cluster promotion, whereas VCP involves a functional focus.

Figure 6: The Cluster and the Value Chain perspective

Source: own design

Nevertheless, practical experience seems to indicate that it makes sense to have
a closer look at the territorial dimension of VCP. The purpose of a VCP analysis
is to have a very clear idea regarding the upgrading necessities of local produc-
ers that for whatever reason have become the object of a donor project or a do-
mestic development initiative. The upgrading effort would not relate to some
anonymous market but rather the very specific demands of lead firms in a given
value chain. Integrating domestic firms into global value chains involves two dif-
ferent types of challenges. One of them is related to territorial issues; the other
one are national framework factors.

Regarding national-level factors, one of the issues that often comes up in VCP
projects are supply chain issues. Exports of fresh products are hampered by the
absence of cooling facilities at the main airport. Exports of all sorts of products
are hampered by clumsy and unpredictable procedures at ports. Exporters find it
difficult and/or very costly to have their products tested and certified. Communi-
cation between suppliers and customers suffers from slow and unreliable Internet
connections. Such issues are generic in nature. They need to be addressed at
the national level. They require direct interaction with national ministries, customs
authorities, metrology institutions, and other organisations. For instance, in the
case of the GTZ VCP project in Sri Lanka, one of the major obstacles for organic
vegetable exports was the fact that vegetables were routinely fumigated at the air
cargo facility of Colombo airport. Since a fumigated vegetable is no longer an or-
ganic vegetable, changing this routine was one of the major achievements of the
project.

At the same time, it is essential to work directly with producers. This is where the
territorial angle comes in. In any value chain, it is quite unlikely that producers are


randomly scattered across the country. More likely, they will be concentrated in
certain locations – due to climatic and soil conditions (or coincidence) in agricul-
ture, due to cluster effects in industry and services. Thus, direct interaction with
producers has by nature a strong territorial focus.

As a consequence, it is recommendable to conceptualise VCP as an activity that
rests on two pillars, i.e. national level activities and activities at the territorial level,
at least under those circumstances where the topic of integration in global value
chains, or into sophisticated national value chains, is being addressed.

Figure 7: The 2 Pillars of Value Chain Promotion

Source: own design.

Balancing both things in one programme or project is a challenge. One would
look at one programme with two components, a national-level component and a
territorial component. However, the management of such a programme can eas-
ily get out of hand, especially if it addresses several value chains and thus nu-
merous producer locations. A plausible alternative approach is one where a VCP
project comes in at the national level to bridge the gap between territorial initia-
tives and the external or national market. For instance, the experience of GTZ in
Sri Lanka indicated a win-win game, where the national level VCP project bene-
fited from another GTZ project with a territorial focus and vice versa (Richter
2005). At the same time, the VCP project could easily look for opportunities for
interaction with other projects by other donors (e.g. a USAID spice sector project
in a different part of the country, or an ILO SME promotion project in yet another
part of the country), something that would have been difficult if both projects had
been part of one strictly managed programme.

4.1.3 Value chains and markets

We have already pointed at the fact that value chains exist because real world
markets are quite different from the ideal markets of microeconomics textbooks.
This does not mean, though, that value chains are a substitute for markets. They
are rather a mixture of different modes of coordination, where network-type coor-


dination is a key element yet market coordination and coordination through hier-
archy also play an important role.

From the perspective of promotion activities, the existence of close network rela-
tionships between producers and customers is the point of departure. An analysis
of a given value chain will normally detect parts of the chain that are primarily
market-coordinated, and other parts that are primarily coordinated through hier-
archies. Typical examples of market coordination in a value chain are non-
strategic services or commodity inputs. Typical examples of hierarchical coordi-
nation are on the one hand outgrower systems which are coordinated by major
companies, on the other hand services offered by (typically government-run)
supporting institutions. An analysis of a value chain needs to understand which
types of transactions are predominantly coordinated through networks, markets,
or hierarchies, and to what extent one mode of coordinated might be substituted
through a different, ultimately more efficient mode.

4.2 Making markets work

One of the features of the M4P literature is its close connection to the BDS dis-
cussion and literature. Unfortunately, BDS has never enjoyed an understanding
of markets that was firmly rooted in microeconomics concepts. BDS, and espe-
cially BDS market assessments, are the world of A C Nielsen and Philip Kotler,
not the world of NBER and Joseph Stiglitz. Fortunately, the M4P literature also
draws on other arenas of discussion, such as rural development economics
which have developed insights into the functioning, and the frequent dysfunction-
alities, of markets (Dorward and Kydd 2005). What appears to be a really nice
market in the real world often turns out to be the opposite once closely scruti-
nised. Geertz (1992) has shown that bazaars are rather dysfunctional markets,
where price formation is extremely intransparent and thus the price mechanism,
the best feature the market has to offer, does not work properly. Dorward and
Kydd (2005) point out that atomised agricultural markets in African locations are
creating such high transaction cost that they are ultimately dysfunctional, too.

What is missing in the M4P literature are references to the widely accepted in-
sight that markets are one out of three forms of coordination, the other two being
hierarchies / organisations and networks / communities. While economics re-
search has formulated the market / hierarchy / network trias of modes of coordi-
nation (Powell 1990, OECD 1992), social scientists tend to distinguish market,
organisation and community (e.g. Wiesenthal 2000). What is important in both
strands of theorising is the observation that in the real world it is highly unlikely
that any pure mode of coordination will work. When a market does not work, the
adequate answer is, in all likelihood, not more market but rather more hierarchy /
organisation.

In fact, not only do the three types usually appear in some kind of combination,
but the functionality of each of the three usually depends on the other two. For
instance, a market only works when hierarchy is present (in the shape of gov-


ernment that creates an enabling environment, for instance by securing property
rights, and in the shape of companies that internalise processes with high trans-
action costs) and when networks exist (for instance business networks, which are
another device to minimise transaction costs). Nevertheless, in any given eco-
nomic setting, transactions tend to be quite obviously predominantly organised in
markets, in hierarchies, or in networks. Job placement is a typical example. Some
countries have a sector of for-profit private job placement agencies, i.e. a market
solution. In other countries, job placement is a government monopoly, i.e. a hier-
archy solution. Yet other countries have neither, and job placement is achieved
through informal communication among business people or within social groups,
i.e. a network solution.

What is the origin and conceptual background of the three types? Market vs hi-
erarchy has been the subject of the classic paper by Ronald Coase1 who asked:
Why are there companies? If markets are so efficient, why not organise every-
thing via markets, i.e. have only self-employed individuals? The answer is, es-
sentially, transaction cost. Organising, say, steel production purely via a market,
involving only self-employed individuals, would create significant transaction
costs. Organising it inside a company is the more efficient solution.

Coase had companies in mind when he used the term “hierarchy”. However, it is
common to use the term in a way that not only refers to companies, but also
other organisations, in particular government.

Networks have been conceptually introduced as a third mode of organisation by
Walter Powell (1990). He pointed out that networks are not something some-
where in between market and hierarchy but rather a distinctive mode of organisa-
tion. Networks refers to formal constellations, from strategic alliances to business
associations, as well as informal constellations, for instance the dense communi-
cation networks inside industrial clusters.

The important point to make is that there are no other ideal types, i.e. no other
ways of organising economic transactions. Any economic transaction is predomi-
nantly done in a market, in a hierarchy, or in a network.

How does the discussion on M4P relate to the concept of market, hierarchy and
network? The conceptual discussion and practical work on M4P has evolved
along three distinct trajectories. Three distinct schools of thought have emerged:

1. The market focus. This perspective is linked to the Commark project in
Southern Africa.2 It is aligned with what Altenburg and Drachenfels (2005)
have called “the new minimalist approach to private sector development”,
where government is supposed to limit itself to creating an enabling environ-
ment so that markets can work effectively and efficiently. This perspective
has no proper conceptualisation of market failure, and of interventions neces-

1 “The nature of the firm”, 1937
2 Ferrand, Gibson and Scott 2004, Centre for Development and Enterprise 2006


sary to remedy market failure. Markets are expected to work provided that the
framework conditions are right, and they are supposed to be by far the most
efficient mode of organising economic activities. The Commark documents
are quite explicit about the fact that functioning markets are perfectly suffi-
cient for a thriving economy, and that hierarchy as in selective government
interventions is creating more damage than benefit. Networks do not figure in
these documents.

2. The markets and hierarchies focus. This perspective is linked to the work of
authors like Dorward, Kydd and others on behalf of DFID (Dorward and Kydd
2005, Kydd et al 2004). It is based on insights from agricultural economics. It
highlights that fact that it is not necessarily a good idea to rely on markets
only, since what appears as a perfect market in theory can be a transaction
cost nightmare in practice. Markets with lots of small suppliers and customers
are a reality in rural Africa, yet they don’t work very well since it is time con-
suming and thus costly for customers to get a comprehensive picture of the
variety and quality of produce that is on offer; “... market exchange in Africa is
generally ‘costly, cumbersome, time-consuming, and unpredictable’” (Dor-
ward and Kydd 2005, 18, quoting Fafchamps 2004). Hierarchies, for instance
outgrower systems that are managed by a major company, can turn out to be
significantly more wealth creating than markets under such circumstances.

3. The markets, hierarchies and network focus. This perspective has emerged
from the work of the ADB/DFID project in Vietnam which has over time
broadened its focus.3 Regarding hierarchy, it addressed the issue of enabling
environment, but it also looked at contract farming, i.e. hierarchy in the private
sector. Regarding network, it addressed issues such as collective action.

Each of the three schools of thought has it upside and its downside.

Market focus: The upside is the sharp focus. One downside that necessarily
comes with the focus is the appearance of a one-sided market fundamentalist
approach. Another downside of the existing literature is the superficial way in
which it deals with market failure and possible ways to address market failure.

Market and hierarchy focus: The upside is the more balanced perspective,
since this perspective acknowledges the inherent limits of markets. The
downside is the negligence of network as the third important mode of organi-
sation.

Market, hierarchy and network focus: The upside is the coverage of all three
modes of organisation, i.e. a holistic perspective that does not a priori judge
that one mode is better than the others. The downside is that this focus re-
flects an evolutionary process from “Making Market Systems Work for the
Poor” to “Making Everything Work for the Poor” which, from a practical per-
spective, is a steep task.

3 See the papers available at http://www.markets4poor.org/


4.2.1 M4P and P4M

Another important conclusion is that it actually can make sense to look at the way
markets work, and to address their dysfunctionalities and failures rather than take
them for granted. This is particularly relevant with respect to the poor. It is more
than just a play of words to point out that "making markets work for the poor" is
the opposite of "making poor work for the market". In the past, a common ap-
proach in poverty alleviation was to address the poor rather than the markets
they tried to interact in.

A typical example of "P4M" is skills development. The usual idea in skills devel-
opment is to upgrade the skills of individuals so that they fit with employers’ re-
quirements. Sometimes, this is complemented with "life skills" training in order to
enhance the employability of individuals. In other words, the structure and
mechanisms of the labour market are taken for granted. The focus is not at
changing the way the market works, but rather at making individuals fit for the
market.

Another example of "P4M" is the creation of collateral banks or other mecha-
nisms that create securities for potential creditors who cannot fulfil the banks'
usual requirements regarding collateral, and who thus do not have access to the
capital market. On the other hand, Microfinance is an approach that fits with
"M4P" principles. Support for microfinance is based on the insight that the con-
ventional capital market often does not work for small producers and poor house-
holds.

An interim conclusion would be that M4P and P4M are not alternatives but com-
plementary approaches. For instance, making the labour market work better for
the poor does not alleviate the need to raise the level of skills and the more gen-
eral employability of poor people.

It is, however, important not ignore an important dilemma in this respect. Limiting
the perspective to markets alone compromises the “for the poor” ambition, espe-
cially if one takes a closer look at the causes of poverty. Poor people are often
excluded, which takes us to a finding that appears tautological: Markets don’t
work for excluded groups because they are excluded. Markets are embedded in
networks and other societal structures, and poor often don’t benefit from markets
because they are marginalised by those structures. Exclusion is a process that is
embedded in and reinforced by social structures. Thus, it is important to ac-
knowledge that “making markets work for the poor” is not a simple, straightfor-
ward task where limited interventions in certain markets will do the trick. It rather
involves quite fundamental interventions into societal structures – another steep
task.


4.2.2 Understanding market failure

Given these challenges, it is important to remind oneself that a “making markets
work” approach has persuasive advantages. One of the most important ones is
the intrinsic quality of coordination through markets: Markets work because par-
ticipants pursue their self-interest. Hierarchies are facing all sorts of problems,
such as the principal-agent problem where the power centre is constantly battling
with the challenge of making sure that the agents who receive orders or missions
fulfil them in the way the principal wants them to. Networks are also facing all
sorts of problems, such as the problem of numbers where a network that involves
a significant number of players creates a huge coordination effort and cost. Mar-
kets are coordinated in a decentralised way. They don’t require a coordination
centre. Markets tend to emerge quite spontaneously – even in places where the
framework conditions are decidedly business unfriendly, such as Somalia (Ne-
nova and Harford 2004).

Moreover, the M4P approach goes beyond the “minimalist approach”. The mini-
malist approach tries to create favourable framework conditions and then expects
markets to do their miracle in a spontaneous way. The M4P approach acknowl-
edges that markets often won’t do that, and that in particular they will not benefit
or even exclude the poor. Thus, targeted interventions are necessary to make
sure that markets work, and to make sure that they work for the poor. The M4P
approach has so far generated a significant body of research studies that ana-
lysed markets and the way they worked, or didn’t work, for the poor. What is only
slowly emerging is a set of tools that can guide practitioners in their efforts to
make markets work.

It is thus a perfectly rational response to opt for a more limited approach, and
here one that relates back to the starting point of the M4P approach, namely the
intention to better understand markets, market failure, and practical ways to make
markets work better. In this respect, the M4P literature is only partially helpful
since it does not provide a systematic treatment of market failure, i.e. imperfec-
tions that keep real world markets from operating in the way assumed by simple
microeconomics models. The following table gives an overview of the main types
of market failure.

Market failure has three main consequences:

It generates a low level equilibrium. The examples given in the table explain
how market failure issues can reinforce each other and thus keep rural pro-
ducers disconnected from markets. Income stays low, investment capacity is
low, there is little if any innovation and upgrading, and producers remain
mired in poverty.

It generates suboptimal delivery of critical investment, for instance into skills
development or research and development, thus reinforcing the competitive-
ness gap that keeps producers and companies from upgrading so that they
might connect with dynamic markets.


Table 1: Types of market failure
Type of mar- Example Consequence
ket failure
Natural Telecommunications in ru- Customers in rural areas pay much higher
monopoly ral, thinly populated areas price for telecom services than urban
customers, perhaps have no service at
all, and suffer from delays in access to in-
novative telecom services
External Investment in skills devel- Companies invest less in the skills devel-
effects opment (positive external opment of their staff that would be desir-
effect) able from a macro perspective
Building a cheap high chim-
ney instead of installing a
Contamination of region by industrial plant
filter (negative external ef-
fect)
Indivisibility Size of a container (mini- Small producers cannot connect to cus-
mum 39 cubic meters) that tomers because the don’t produce
needs to be filled by supplier enough to fill a container
Asymmetric Information about residual Customers don’t buy fruit or vegetables if
information toxics and other contami- they suspect that producers have used
nants in fruit and vegetables more agrochemicals than they admit
in the absence of sophisti-
cated and costly testing
equipment Producers who don’t trust the seller don’t
buy high yield seeds if they look just like
Features of distinct products
much cheaper normal seeds
that look alike
Public goods Availability of sophisticated Producers can’t convince their customers
and costly testing equipment that the level of residual toxics is low, and
in a region with small pro- thus can’t sell their products
ducers

It creates barriers to entry, thus reinforcing monopolies and the high prices
and service delivery shortcomings that come with monopolies.

Any effort to make market systems work for the poor must be based on a thor-
ough understanding of market failure, and not just on market research conducted
by A C Nielsen. Analyses must be conducted that investigate the root causes of
market failure, since only in this way is it possible to design interventions that go
beyond fumbling with the symptoms of market failure.

4.3 Who are “the poor”?

The M4P literature is somewhat fuzzy when it comes to defining who is meant by
“the poor”. Recent literature has pointed at a number of ways to get a differenti-
ated picture of poverty. Let us mention two.


1. Discussions in the SEEP network led to a typology of the poor that addresses
the question: To what extent are the poor likely to be producers that are active in
markets?

Figure 8: The Context of Poverty and Micro-Enterprise Development

Source: Eiligmann (2005), 8

This perspective looks at poor producers. The main argument is that the desti-
tute, i.e. the poorest of the poor, are unlikely to enter into markets as producers. It
is important to note, though, that in the M4P literature, the term “private sector”
does not only refer to businesses but actually to all economic actors that are not
public sector, i.e. all types of producers as well as workers. Nevertheless, the
SEEP typology is helpful since it points out that only a part of the poor, namely
those who are close to the poverty line, are likely to enter markets as producers.

2. Ravaillon (2004) points out that, even with a narrow concept of poverty, growth
will not automatically benefit the poor. It is crucial to address the geographical
and sectoral pattern of growth (ibid., 16). Poverty is often concentrated in specific
regions, in particular rural regions, and in one sector, namely agriculture.

This argument is developed in a more detailed way by Janvry and Sadoulet
(2004, 4 f.), based on evidence from Latin America:

“There is increasing differentiation between two types of locations for rural pov-
erty: MRA (marginal rural areas) and FRA (favorable rural areas).

Part of the rural poor are geographically concentrated in low population density
MRA (marginal rural areas) defined as areas with either poor agro-ecological en-


dowments and/or isolated from access to markets and employment centers.
These areas consist in:

Geographical pockets of poverty: Mexico’s Southern States, Brazil Northeast,
Central America’s East Coast regions, and high altitudes in the Altiplano.

Indigenous territories: Indigenous communities attached to their homelands in
the Altiplano and the East Coast of Central America.

The other part of the rural poor are socially diffused in FRA (favorable rural ar-
eas) defined as areas with good agro-ecologies and good connections to dy-
namic product and/or labor markets. The poor in this context are:

Individuals with low asset endowments, especially land, education, and social
capital.

Individuals with good asset endowments, but lacking opportunities to valorize
these assets in the territories where they are located (lack of regional dy-
namics, discrimination).

Rural youth, elderly people, and disabled individuals for whom social assis-
tance programs are needed.”

This perspective provides a much more tangible understanding of types of rural
poverty. The authors’ conclusion is: “These contrasts between favorable and un-
favorable areas (and the continuum of conditions in between) points to the rele-
vance of a regionally differentiated approach that takes into account this hetero-
geneity.” (ibid.) In other words, any pro-poor policy must have a strong territorial
focus.

5 How to link M4P and VC analysis: Practical considerations

In principle, there are two ways to approach the issue of pro-poor, market-
oriented value chain analysis:

1. Analysis can be conducted as a separate activity.

2. Analysis can be conducted as action research.

In this section, we will look at each option.

5.1 Analysis before action

An approach where thorough analysis is conducted before any action is taken is
based on an epistemological concept that is mechanistic by nature. It is based on
the assumption that most if not all of the relevant information for a developmental


activity can be gathered before a strategy is formulated and implemented. One
such approach is presented in a recent paper by Kula, Downing and Field (2006)
which reflects the current state of thinking in USAID’s microenterprise pro-
gramme.

Figure 9: The USAID approach to value chain promotion

Source: Kula, Downing and Field (2006)

An Analysis Before Action approach has its advantages first and foremost from
an administrative perspective. It allows for organising planning into a logical
framework, facilitates the planning of the allocation of resources over a period of
time, and appears to define clear milestones which make project management
easier for administrators who are removed from activities on the ground.

In terms of activities on the ground, though, it is difficult to discern the advantages
of an Analysis Before Action approach. It may appear to be logically structured by
delivering information that is necessary for informed decision taking. This, how-
ever, can easily turn into an illusion as the Analysis Before Action approach will
often suffer from a specific type of Catch-22, namely the problem that a lot of the
information that is crucial to define the terms of reference for the researcher who
will conduct the value chain analysis only becomes available through the value
chain analysis said researcher will conduct.

In fact, the Analysis Before Action approach suffers from a number of dilemmas:

Select VCs before understanding them: In this approach, VCs that are to be
promoted are selected early, before representative information is available.
Assuming hard budget constraints, it is unrealistic to conduct a comprehen-
sive study of all value chains that are relevant for a given regional or national
economy. By limiting the number of VCs that are investigated, VCs are not
chosen because they have been thoroughly investigated. Instead, VCs are
investigated because they have been chosen.

Quick-scan vs robust information: The Analysis Before Action approach re-
quires substantial resources. As projects tend to suffer from budget limita-
tions, there is an incentive for project managers to limit the scope and depth
of the analysis, thus conducting something that is more like a quick scan
rather than solid research. With a quick scan, though, a random selection of
VCs is followed by a collection of random data that lead to a random decision.

Management of expectations: Researching value chains is usually based on
face-to-face interviews, focus group interviews and workshops. To the extent


that actors who need to be interviewed suffer from time constraints, there
needs to be an incentive for them to allocate time to the task of being re-
searched. In order to persuade them to allocate time, researchers will be
tempted to highlight the strong possibility of future promotion activities, per-
haps including the availability of grants. Thus, expectations are created
among actors inside the value chain which may or may not be realistic, and
which in any case can not be managed in a proper way, based on the strat-
egy and logical framework of the project, since neither strategy nor logframe
exist at this stage.

In order to understand how steep the task of conducting a solid analysis before
any action is, let us have another look at the M4P literature. As quoted in Section
3.1, a solid analysis would involve a number of elements. We also give a rough
estimate of the number of researcher days that would be needed to conduct each
task.

Table 2: Tasks involved in an M4P / Value Chain analysis
Task Estimated days
Poverty reports including household surveys and PPA surveys 200
Specific market and transactions studies using participatory and other 50
techniques to complement existing poverty data
‘Doing Business’ and Investment Climate Surveys 100
Trade, production and price data 30
Market outcomes and data from the operation of value chains 250
The rate and direction of the evolution of key markets for the poor 60
Total 690

In other words, the Analysis Before Action approach is, first of all, a very serious
income generation programme for consultants and researchers. Assuming that
one third of those days would involve foreign consultants at a rate of US$ 500 per
day, and two thirds domestic consultants at a rate of US$100 per day, the fees
alone would amount to a total of US$ 161,000.

5.2 Action research

Practical experience shows that successful development programmes are based
on iterative processes, not simple sequences. For instance, in the LEADER pro-
gramme to promote development in poor rural regions of the EU, the learning
process regarding sequencing has been summarised in the way illustrated in
Figure 10.


Figure 10: The spiral model of sequencing in the EU LEADER programme

Source: www.rural-europe.aeidl.be, presentation LEADER_dia6_en.pdf

This model is based on the insight that ex-ante research will only to some extent
reveal the information that is relevant to solve a given problem or realise a given
opportunity. The best way to understand the root cause of a problem is to try to
solve it. This approach leads naturally to action research, i.e. a practice where
analysis and action are closely intertwined.

An approach that introduces a strong pro-poor element into value chain analysis
needs to be based on three key insights:

1. It must involve a geographical and sectoral focus that is particularly pro-poor
(Ravaillon 2004).

2. It needs to analyse markets beyond the lines outlined by Ferrand, Gibson and
Scott (2004), i.e. it needs a thorough understanding of market failure.

3. It needs to address the complementarity between markets and hierarchies
(Dorward and Kydd 2005), as well as looking at networks as highlighted by
the literature on global value chains (Schmitz 2005), and it needs to analyse
the interaction between the three modes of coordination. This point may ap-
pear contrary to the argument developed in Section 4. However, one needs to
keep in mind that a value chain per se is a mixture of market-based coordina-
tion, hierarchy and network, so that a narrow focus at markets and market
failure is implausible.

5.2.1 Selecting a target group for a pro-poor value chain promotion
project

When it comes to selecting target groups who are supposed to benefit from de-
velopment interventions, we usually recommend to design mechanisms that lead


to self-selection, i.e. draft a process where a variety of possible beneficiaries is
addressed and ultimately those benefit who undertake the strongest effort to get
involved. Unfortunately, this may not be a feasible process when it comes to pro-
poor VCP. Pro-poor VCP, like any VCP activity, needs to be based on business
principles. When it comes to integrating poor communities into VCs, a self-
selection process may mobilise communities who do not really have the potential
to become integrated into VCs. Therefore, it may be recommendable to design a
selection process that involves external expertise.

A wrong approach to select target groups for pro-poor VCP would be based on a
sequence of questions like this: Where are the poor? Is there anything they can
produce? Can we train them to improve the quality of their product? And can we
then perhaps connect them to some value chain? This would be the “wouldn’t it
be nice if” approach, as in “wouldn’t it be nice if Ikea sold Bolivian handicraft”.
Selecting poor communities and regions, based on their need and their supposed
potential, promoting them and only after that trying to connect them to VCs is a
supply-driven approach that will not work.

The only way to move a chain is by pulling. In this perspective, we see two
promising approaches to pro-poor VCP.

The problem-driven approach: The starting point is the analysis of the real
economy in a given country, based on the analysis of export data, conversations
with exporters or interviews with buyers at major domestic retailers. The question
is: Which producers in poor communities are connected to national or global VCs,
and which of them are only precariously integrated into VCs, so that an effort to
upgrade their capability (which must be coordinated with buyers from the outset)
is meaningful? A relatively quick fact-finding effort would lead to a list of potential
candidates in terms of communities, sectors and locations. Addressees for VCP
activities would then be picked from this list on the basis of poverty / pro-poor de-
velopment criteria.

The opportunity-driven approach: This approach would take the interests of
major domestic retailers, exporters or foreign buyers as the point of departure.
The question would be: What are the products that you are searching for but
cannot find? And to what extent have you identified possible producers in our
country that have a basic production capability but are not close enough to an
adequate quality and productivity level to qualify for a supplier development pro-
gramme that is managed by the buyer? The rationale of this approach would be
to help producers, preferably from poor communities, to cross the gap that sepa-
rates them from the minimum requirements of major buyers.

5.2.2 Launching a pro-poor value chain promotion project

What would the initial sequence in a pro-poor value chain initiative look like? We
have tried to visualise this in Figure 11. In this approach, the first steps are par-
ticularly important. They make or break the pro-poor impact of the initiative. The


pro-poor orientation needs be part of the genetic code of the initiative, not some-
thing that is just attached like a slogan sticker.

Figure 11: Initial Sequence for a Pro-Poor Value Chain Initiative

The figure does not distinguish between the national-level and the territorial pillar
of a VCP initiative. The first four activities (initiating, scoping, assembling re-
sources, picturing the value chain) would involve a single process. During the
“picturing the value chain” stage the process would go through a bifurcation, after
which a national-level process and one or several territorial processes would run
at the same time, though not in parallel but rather informing and reinforcing each
other.

The following table looks at the particular challenges that exist in terms of assur-
ing that the pro-poor perspective is maintained in a satisfactory way. Subse-
quently, we will look at each step in more detail.

Table 3: How to consistently maintain the pro-poor perspective
Stage Tools
Scoping Collect and assess the existing documentation on the structure of
poverty
Assemble re- Involve individuals with a deep understanding of poverty in the given
sources country in the core team
Picturing the value Look for regions and locations where poor producers have a least a
chain vague potential to be involved in the respective value chain
Engaging Conduct workshops in poor communities, using standard PRA tools
stakeholders
Make sure that facilitators understand the crucial importance of
proper management of expectations at this stage


Collaborating with As above, plus test the willingness of poor communities in different
stakeholders locations to get seriously involved in a development effort. Never
forget that sometimes poverty is a comfort zone. But also address
the issue of risk: try to identify communities for whom the risk of fail-
ure of the initiative is not existential.
Participatory, action Employ a specific variation of a participatory, quick appraisal in lo-
oriented research cations with poor producers who may have a potential to be in-
volved in the value chain. Make sure that the issue of market failure
is covered.
Quick-win activities Make sure that there is enough capacity for ongoing facilitation of
the implementation of activities in poor communities.
Participatory M+E Apply appropriate M+E tools (e.g. no tools that require writing in
communities with a high incidence of illiteracy)
Adjustment As the approach becomes more robust, try to involve the more
complicated, less organised, less risk-tolerant poor communities.
Scaling up

Scoping

At this stage, issues like the geographical and sectoral structure of poverty need
to be addressed. The painful discussions that were mentioned above (poor vs
very poor, moderately competitive vs survivalist) must be conducted at this stage,
and decisions need to be taken in this respect. However, given the iterative
structure of the overall VCP initiative, it is important to note that there is always
room for adjustment, especially when the practical work shows that certain
groups of poor show more dedication and potential than initially expected.

Assemble resources

This point not only addresses the mobilisation of funds to conduct the value chain
initiative. It also relates to other resources that are essential, in particular knowl-
edge and connections. At this stage, it is crucial to assemble a number of “con-
nectors” who can tap into different sources of knowledge, including indigenous
and local knowledge (as opposed to relying exclusively on the data presented by
national or regional level poverty assessments).

Picturing the value chain

At this stage, the key task is to get a better understanding of the value chain that
is going to be in the focus of the initiative. This does not imply preparing a com-
prehensive report that adheres to academic standards. It is perfectly possible to
picture a value chain in through two or three well facilitated brief workshops with
key informers where simple yet powerful mapping techniques are used. Mapping
techniques like those in GTZ’s ValueLinks method are extremely useful at this


stage. On top of mapping the elements of the chain, it would be useful to investi-
gate market failure at the different stages of the chain.

Engaging stakeholders

For a pro-poor value chain initiative to be successful, a broad set of highly di-
verse stakeholders needs to be engaged, from top management in major corpo-
rations that are powerful nodes in value chains to poor communities in peripheral
locations. Obviously, very different communication approaches have to be used
to engage the different stakeholders:

At the level of lead firms, an essential point is to engage with top manage-
ment and with supply chain managers, rather than just with the Corporate
Social Responsibility department.

At the level of local communities, it is essential to interact not only with gov-
ernment officials and politicians, but also with communities themselves. Stan-
dard PRA tools like Wealth Ranking and Well-Being Ranking can be useful in
better understanding local communities.

Collaborating with stakeholders

The purpose of this element is to verify, through discussions with the set of
stakeholders who were initially addressed, that the right stakeholders have been
involved. It also involves understanding the goals and objectives, and logic of ac-
tion, of the different stakeholders. At the local level, interacting with producers
and companies, well-established PRA tools like transects and walkovers are
useful.

Participatory, action oriented research

The purpose of this step is to analyse the value chain and to look for opportuni-
ties to integrate (more) poor producers into the value chain. It involves a set of
workshops with different stakeholders. Though to some extent workshops will
address relatively homogeneous groups of stakeholders, it is crucial to organise
workshops that bring together representatives of very different stakeholder
groups, so that key stakeholders get a first-hand understanding of other
stakeholders’ mindset and objectives. Tools that can be used at this stage in-
clude ValueLinks mapping, standard PRA and PACA tools, as well as specific
tools that look at market structures.

A possible angle is to look at barriers to entry, as many instances of market fail-
ure will ultimately manifest themselves as barriers to entry. A useful tool to inves-
tigate this is a modified version of Michael Porter’s Five Forces Analysis.


Figure 12

The modification refers to the bottom box, which looks at barriers to diversifica-
tion (into related products, markets in neighbouring locations, or a closely related
market segment) instead of substituting products. The other four forces are di-
rectly related to market power and barriers to entry, i.e. generate information
about possible market failure. While incumbents may hesitate to highlight the bar-
riers to entry they are creating, business people are usually more than happy to
complain about the barriers to entry they are facing, and this is why the changed
bottom box is useful. This tool can be used both in interviews and in workshops
with representatives from a given subsector.

Quick-win activities

Since a value chain addresses businesses, and even very big corporations tend
to think in three-month-cycles, it is crucial that quick-win activities are identified in
the research phase which can then swiftly be implemented. When it comes to
prioritising activities, the prospect of an activity to improve the integration of poor
into the chain should be applied as one criterion.

Moreover, while brainstorming on possible activities, the stakeholders involved in
this exercise should consistently ask themselves: Can whatever we want to do be
sensibly done via the market (rather than through a hierarchy or a network)? De-
velopment practitioners appear to have a natural tendency to opt for hierarchy or
network as preferred approaches to addressing problems or opportunities, which
is unfortunate since a market-based solution, where business people pursue an
opportunity out of self-interest, is often the most sustainable solution.


Participatory M+E

After the first round of activities has been implemented, the different stakeholders
need to be involved in a monitoring and evaluation effort that takes the initiative
towards the second round of activities, thus launching the iterative pattern.

Adjustment, scaling up

Apart from coming up with more (and hopefully better and more effective) activi-
ties, it is crucial to look at scaling up. Initial activities will most likely be pilot activi-
ties with a limited outreach. Once a given approach appears to be robust, it
needs to be scaled up to reach a bigger group of poor.

6 Conclusion

M4P and VCP do not fit like hand and glove. Merging them into a single ap-
proach is not desirable, since this would imply losing the focus at international
transactions in the VCP approach. M4P and VCP can fertilise each other, since
each one addresses blind spots of the other:

The VCP approach highlights the fact that markets are only one mode of co-
ordinating economic transactions, next to hierarchies and networks. While the
M4P approach acknowledges this in principle, it is subject to a narrowing
down of interventions towards enabling markets without due consideration for
hierarchies and markets.

The M4P concept highlights the relevance of enabling markets, a fact that
VCP projects may lose sight of because they can easily get involved in micro-
management of economic transactions. Moreover, the M4P concept empha-
sises the importance of directly addressing the poor, something that is not
explicit in VCP approaches.

Moreover, the M4P approach can fertilise a couple of arenas of technical coop-
eration, such as local and regional economic develoment, SME promotion and
agricultural development. It also has the potential to generate systemic change.
While selective activities such as VCP by their very nature have a limited impact,
M4P has the potential to induce change that affects all market participants. It thus
makes a lot of sense to further explore the contributions M4P can make to other
fields of productive sector development.

Linking Value Chain Analysis and the “Making Markets work better for the Poor” Concept

Linking Value Chain Analysis and the “Making Markets work better for the Poor” Concept

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