Market-driven Development in Horticultural Value Chains

The value chain approach analyses a product’s development from input through production and processing level, transport, trade and marketing, to consumption.

This study adopts the development research approach to find out more about the link between market-driven development and poverty reduction in the horticultural sub-sector using tomatoes and onions as an example.

Despite the fact that earlier work on agriculture concentrated mainly on improving the supply side of the respective value chains e. g. production conditions and output,

8 I.e. even whilst growth rates in the agricultural sector decline, the horticultural sub sector grows.

recent studies have also paid attention to the demand side (DIAO/ DOROSCH 2007;

TSCHIRLEY ET AL. 2004b). Here the value chain analysis concentrates on both ends of the chain corresponding with the two sides of a market.

The development of the domestic markets in Kenya and Tanzania is strongly determined by factors on the supply side, e.g. soils, aridity, specific agricultural knowledge, competition, weather, and market infrastructure as well as on the demand side e. g. increase in population, urbanisation, and income-elasticity. As highly perishable commodities tomatoes face many difficulties during the marketing process which is part of this analysis. Onions are of special interest for the study because of their importance in cross-border trade. Even though transportation is the highest cost factor, trade from Tanzania to Kenya is still profitable. Because of high Kenyan demand and low Tanzania production costs it continues to grow.

Free markets versus regulations

Since ADAM SMITH it has been an article of faithfor many economists that free market forces are the only path to development. In the field of international trade theory DAVID RICARDO proved with his principle of competitive advantage that free trade will improve the lot of all national economies. In order to avoid the stigma of parochialism many economists subscribe to the view of FREDERICK LIST in emphasizing the importance of protectionism in nurturing an economic sector until it has reached a certain level of competitiveness. Government regulations of course not only influence international, but also domestic markets. Investment in hard and soft infrastructure such as roads and education strengthen markets. Road and market fees, as well as the need for business licenses and the enforcement of laws concerning a certain sector are often perceived as constraints.

The agricultural sector in particular, including the horticultural sub-sector, is often highly subsidised and over-regulated by the state because of macro-economic considerations as well as food security. India for example “swallows” 20 % of its federal revenues for agricultural output subsidies (Operationalising Pro-Poor Growth (OPPG) program 2005: 49). The member states of the European Union and other industrialised countries protect their agricultural markets against imports from less developed countries, which have competitive advantages due to lower labour costs and a better climate. Also, developing countries protect their markets against other competitors. Regulations in international and domestic markets not only slow down the market activities of all actors involved but also lead to inefficiencies and corruption. The Kenyan and Tanzanian governments promote free trade among the East African Community member states. Therefore any obstructive regulations are planned to be reduced or at least harmonised. Within the framework of a liberalised global economy, the most challenging question for development policy is how to

make this process more socially inclusive (BMZ 2007). Tomato and onion production, trade, and even transportation have to be analysed according to their exclusiveness.

Not only regulations but also market dominating non-governmental actors could play a major role in protecting domestic markets and also cross-border trade.

For example, if some actors are too weak to react fast enough to market forces, which might exclude them from these markets. Especially in terms of labour rights, consumer protection, and the conservation of the environment government regulations are needed. In the case of cross-border trade in onions the issue of the Kenyan farmers has to be addressed. Market-driven development in tomatoes should not lead governments and consumers to ignore pesticide abuse among the farmers.

Even though market-driven development has the overwhelming advantage that demand is basically initiated and driven by consumer needs and suppliers interest in profit, and not only through state intervention. The value approach looks for instruments to regulate or govern markets that should be guided by including as many stakeholders as possible.

The supply side in the horticultural sub-sector

Concentrating on market forces in horticulture, it has to be said that natural occurrences such as aridity, the composition of soils, and the weather are mainly responsible for creating opportunities and constraints on the supply side of the market. Seasonality strongly influences the supply side of the horticultural sector, especially of the commodities concerned. Tomatoes and onions have demonstrated proven price elasticity, caused by the additional costs the farmers face in the dry, respectively rainy seasons. The supply of onions for example follows the season of the different production sites.

Meeting of supply and demand

Furthermore the importance of market co-ordination and market participation has been highlighted and described as one of the most important constraints responsible for the poor performance of the African agricultural sector (DORWARD ET AL. 2005).

According to estimations by KELLEY AND BYERLEE (2004) some 60 % of the African rural population live in areas of good agricultural potential, but with poor market access. Only 23 % live in areas of good agricultural potential and good market access. 18 % suffer poor market access and poor agricultural potential. Effective marketing is required in order to feed the growing number of urban Africans.

Demand

As mentioned in the previous chapter (2.2) domestic demand in horticulture has increased particularly due to the growing middle-income class. Because the “income

elasticities of demand for fruits and vegetables are generally high” (MUENDO/ TSCHIRLEY 2004c: 2), while the demand for grain products for example is income-inelastic (DIAO/ DOROSH 2007: 288). As long as growth is pro-poor and lifts the poorest out of poverty, it will contribute disproportionately to the domestic demand in the horticultural sub-sector. Market-driven growth in tomatoes and onions as part of the horticultural sub-sector will lead to a further reduction in poverty.