Livestock as a pathway out of poverty in Latin America: A policy perspective, U Pica

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Content: LIVESTOCK AS A PATHWAY OUT OF POVERTY IN LATIN AMERICA: A POLICY PERSPECTIVE* U. Pica-Ciamarra1, J. Otte1 Pro-Poor Livestock Policy Initiative (PPLPI), Food and Agriculture Organization (FAO) of the United Nations, Viale delle Terme di Caracalla, 00100 Rome, Italy [email protected] and [email protected] SUMMARY - Rural poverty is widespread in Latin America, and smallholders make up the majority of the rural poor in all countries of the region. Since the land frontier is either closed or could be expanded only at high environmental cost, enhanced productivity and/or returns to their assets is a practical pathway out of poverty. Traditional staples, however, are unlikely to generate enough income to significantly reduce poverty; opportunities are rather offered by "new agriculture", which centres on producing high-value products, satisfying enhanced food safety requirements and product labelling, requiring establishing contracts with supermarkets and agro-exporters, etc. "New agriculture" is usually synonymous with horticultural products, but livestock might be well part of it: the value added obtained through successive transformations of animal products is significant and often higher than in most horticultural and industrial crops. This paper argues that livestock could be a propoor element of "new agriculture" in Latin America. First, a large share of the rural poor keep some livestock; second, the demand for animal food in the region is estimated to increase by almost ѕ by 2030; third, the average Latin American consumer still demands traditional, low-processed food items, so that poor livestock producers are not a priori excluded from the market. The challenge for policy makers is to make good use of these opportunities. Given the dearth of theoretical studies and empirical evidence on pro-poor livestock policies and "new agriculture", this paper presents a policy framework for pro-poor livestock development, and proposes some institutional policies to make livestock part of the "new agriculture" in the Latin American continent. Key words: Poverty, Livestock, Livestock Policies, New Agriculture, Latin America INTRODUCTION Although in the last decades significant progress has been made in reducing rural poverty in Latin America, the poverty incidence remains high in rural areas and fuels urban poverty through migration. Pro-poor rural development might thus contribute to alleviate overall poverty in the region and achieving the Millennium Development Goals. The pathways out of poverty in rural areas are multiple, including agricultural specialization and industrialization, off-farm activities, migration and social transfers. In recent years, diversification of agricultural activities into high-value products is increasingly appreciated as a promising way out of poverty for many rural dwellers (CIAT, 2005; FAO, 2004c). High-value agricultural products are either those having a high-return per unit/input or those going through successive value-adding transformations, such as agro-industrial processing. latin american governments show increasing interest in supporting smallholder diversification and specialization into high value agricultural products, and promote alliances between small livestock holders and other actors in the production / value chains. The objective is to make smallholders benefit from remunerative markets through satisfying food safety and quality standards, labelling products, establishing contracts with traders, processors, supermarkets, agro-industries, agroexporters and, in general, moving-up the supply chain ­ this is the so-called "new agriculture" (Boehlje et al., 1999; Cйspedes and Paz, 2005). Despite remarkable successes, the majority of Latin American smallholders are however excluded from high-value agricultural markets and "new agriculture" (USAID, 2005). One challenge for policy makers is thus to make "new agriculture" benefit * The views and opinions expressed therein are those of the authors and do not necessarily reflect those of FAO. Paper delivered at the Internacional Workshop on `Nuevas oportunidades para sistemas de rumiantes de aptitud lechera y de doble propуsito en Latinoamйrica', Ixtapan de la Sal, 20-30 june 2006.
the largest share of rural poor: this entails implementing rural policies supporting productive activities (e.g. research, extension), as well as policies creating an enabling environment for continuous profitable contracting between small agricultural producers and all actors along the supply chain. The latter are indispensable to scale up "new agriculture", which has so far largely benefited the few rural dwellers receiving technical and/or financial assistance by governments and donors. This paper argues that livestock could be a pro-poor element of "new agriculture" in Latin America, and presents some policy options to make sector development benefit the rural poor widely. The next section highlights the role of livestock as a key component of "new agriculture" in the region. Section three presents a framework to formulate a coherent set of policies allowing small livestock keepers to produce high-value products, which is the conditio sine qua non for the poor smallholders to enter any high-value supply chain and benefit from "new agriculture". Section four identifies some institutional policies necessary to establish livestock production chains centred on smallholders and scale them up to contribute to poverty alleviation significantly. This is not a nostalgia for the "small is beautiful" perspective, but is based on the assumption that livestock supply chains can be efficiently organized in a decentralized manner by exploiting not only the physical labour but also the entrepreneurial skills of rural people ­ two resources largely underutilized in Latin America. Section five presents conclusions arising from the previous sections. LIVESTOCK AND NEW AGRICULTURE IN LATIN AMERICA The United Nations Economic Commission for Latin America and the Caribbean estimates that 222 million people, or 43% of the population, are poor in the region; of these, about 96 million live on less than US$1 a day. The poverty incidence is higher in rural (58%) than urban areas (37%); given that most of people live in towns and cities, the poor are almost equally distributed between rural and urban areas (CEPAL, 2005). Whereas the poverty incidence and the number of poor are what ultimately matters, it is the trend in poverty that counts for policy makers. In the last decade the policy record in dealing with poverty has been to some extent disappointing in Latin America: despite the poverty headcount index having declined since 1994, the total number of poor has increased since then. Rural areas have performed better than urban ones, with a reduction of both relative and absolute poverty, but the main source of gains in reducing the number of rural poor has been in population shifts to cities and towns as opposed to successful rural development (Fig. 1).
Headcount ratios Number of poor
30 1990
1994 Total
2000 Urban
5.0E+07 1990
1994 Total
2000 Urban
Fig. 1. Rural and urban poverty in Latin America, 1994-2004. Elaborated from CEPAL (2005) Panorama Social de Amйrica Latina 2005. CEPAL, Santiago.
Fig. 1 hides heterogeneity among countries. For instance, in the last decade Chile recorded an impressive reduction in relative and absolute poverty: about 19% of the Chileans are poor today, with no significant difference between urban and rural areas. The other Southern Cone countries have been instead severely affected by recent economic crises and political instability, so much that almost 74% of the rural population today is poor in Paraguay. Mexico and Brazil largely followed the trends depicted in Fig. 1, with poverty affecting about 44% and 55% of the rural population respectively. Central American and Andean countries showed little progress in rural poverty reduction in the last
decade, and increases in the rural poverty headcount index have been recorded in Bolivia (79% in 2004), Colombia (61%), Honduras (86%) and Peru (76%) (CEPAL, 2005). This overall picture suggests that pro-poor rural development should be a priority of policy makers in the Latin American region, both because of the higher incidence of poverty in rural areas and the rural underpinning of urban poverty (Echeverria, 2000; de Ferranti et al., 2005; Lewin, 2003). There are three main ways through which the poor can benefit from rural development: first is through offfarm and non-farm employment generation (e.g. agribusiness development); the second mechanism is through increases in the productive assets the poor own (e.g. land); the final channel is by enhanced returns to and productivity of the assets the poor already own (e.g. technological change). Since the majority of the rural poor in Latin America are smallholders and indigenous people living on non-professional agriculture, from about 25% to 30% in Chile, Mexico and Venezuela, to over 60% in Bolivia, Brazil, Panama, Paraguay and Peru (CEPAL, 2005), policies increasing the returns to and productivity of their scarce assets hold promise to contribute to poverty reduction widely. Increasing productivity and returns to traditional staples is unlikely to lead to widespread poverty reduction. Suppose an Andean farmer produces, using manual tools and no chemicals, about 1 ton of grains net per year. About 50 years ago, 100 kg of grains could be sold for 40 (2004 price level): the farmer had to sell 200 kg to renew his productive tools, and was left with about 800 kg to feed a family of four. Twenty years go the same farmer could get only 20 euros per quintal of grains; he had therefore to sell about 4 quintals to restore its essential tools and was left with only 600 kg to feed, inadequately, his family. Finally, today he can sell 100 kg of grains for about 10; he has therefore to sell about 800 kg to renew his agricultural tools and is left with only 200 kg to feed, insufficiently, his dependants (Mazoyer and Roudart, 2004). The case suggests that, whatever the increases in productivity of traditional staples and downward trends in factor input prices, widespread poverty reduction via traditional agriculture is unlikely a best option. As a result, there is growing consensus that agricultural diversification into high-value products might be an effective way to increase agricultural returns and facilitate smallholders escaping poverty: "There are opportunities for developing countries [...] to take advantage of the new scenario for the future of agriculture. This will include moves away from the production of traditional staples, to high value products (including, for example, fruits, vegetables, fish, livestock products, horticulture, etc.)" (CGIAR, 2004, p.5). This implies not only producing high-value products for self-consumption, but also complying with food safety and quality requirements and accessing emergent profitable markets, e.g. through establishing contracts with supermarkets and agro-exporters (e.g. Barghouti et al., 2004; CIAT, 2005; Davis, 2006; Hall, 2005; Weinberger and Lumpkin, 2005). This is the so-called "new agriculture" (Boehlje et al., 1999; CGIAR, 2004; de Janvry and Sadoulet, 2005), which Latin American governments are somewhat promoting through encouraging the establishment of supply and value chain (cadenas productivas, cadenas de valor, alianzas productivas). There are a number of successful instances of high-value product supply chains that have contributed to increased income among small rural producers in Latin America. Examples include smallholder coffee production in Chiapas, broccoli and cauliflower in Guanajuato, and swine raising in Sonora, Mexico; llama fibre production in the Department of Potosi, and parsley production in the Department of Chuquisaca, Bolivia; `maca' tuber exports from the Andean region to North America to be used as a dietary supplement; smallholder grape and codfish exports from Chile; tomato, lettuce, cabbage, cucumber, bell pepper, and spring onions production along the Paranб river in Brazil; snow pea exports from Guatemala; and asparagus exports from Peru (Field et al., 2005; Hernбndez Moreno, 2001; Key and Runsten, 1999; Paz and Gandarillas, 2005; Peсa et al., 2005; Smith et al., 1995; World Bank, 2005a). Though encouraging, these cases are on a relatively small-scale and need to be scaled-up to significantly contribute to poverty alleviation (USAID, 2005). A focus on livestock looks promising to this aim: (i) Traditional livestock products have a high value added given the complexity of their production chain. For instance, the simplest cattle production chain would entail: cattle raising, livestock delivery to holding grounds; stunning/slaughtering; hide removal/de-hairing; evisceration; trimming and carcass washing; boning; chilling; packaging; storing; transporting to wholesalers; distributing to retailers; consumption. These all steps clearly add value to the final product: in Chile, for instance, the 2001 price differential between farm-gate and consumer price was about 290% for beef, pigmeat and poultry, and 190% for milk (FAO / ESCB, 2004). 3
(ii) Although extensive ranches have long been the dominant form of ruminant production in Latin America, and poultry, swine and dairy production are displaying increasing concentration due to standardized available technologies (Delgado et al., 2003; FAO, 2004a; Jarvis, 1986), the majority of the rural poor in the region are small farmers living on non-professional agriculture and tending some livestock. ILRI estimates that about 49% of the rural poor hold livestock in Central America, 15% in Mexico, 39% in the Andean countries, 29% in the Southern Cone countries and 36% in Brazil (Thornton et al., 2002); according to IFAD (2002), the three largest groups of rural poor in Latin America ­ Indigenous communities, small farmers, and subsistence and landless farmers ­ are partly dependent on livestock as part of their livelihoods. (iii) Poor risk-averse smallholders, unless receiving significant external assistance for both production and marketing, are unlikely to start growing high-value crops requiring the use of specialized inputs, constant water applications, and efficient and prompt marketing (Paz and Gandarillas, 2005; Weinberger and Lumpkin, 2005). Compared to most high-value crops, livestock is not an entirely new business for most of the Latin America rural poor (see (ii)). (iv) Production of high value crops is confined to specific agro-ecological zones and farmers in marginal areas, where the land is only suited to grow traditional staples, cannot make a permanent transition to them. On the other hand, since livestock are less constrained by agro-ecological conditions and raised throughout the continent ­ from the Argentinean pampas to the tropical Caribbean coast of Colombia, from the Andean highlands to semi-arid northern Mexico ­ improved use of existing livestock might contribute widely to both increased supply of animal protein and staple production via livestock-crop complementarities. (v) The production of high-value crops mostly targets consumers in developed countries: for instance, horticultural crops account for more than 20% of agricultural export revenues in over half of the Latin American countries ­ this percentage is higher in Chile, Costa Rica, and Peru (USAID, 2005). However, the volatility and competitiveness of international markets, variable sanitary and phytosanitary barriers, and the vulnerability of high-value crops to small weather variations prevent risk-averse smallholders from entering the business (Davis, 2006; Hall, 2005; Weinberger and Lumpkin, 2005). Livestock production mainly targets local consumers ­ in Latin America the 2004 net trade balance for animal products and by-products was about US$ 2 billion vis-а-vis US$ 11.6 billion for fruits and vegetables (FAO, 2006) ­ and increased population, per-capita income growth and urbanization are strongly sustaining the local demand for animal food. According to IFPRI, in Latin America meat demand will grow by 26 to 45 million metric tons, or by 73%, between 1997 and 2020 (Rosegrant et al., 2001); FAO (2002) estimates that meat consumption will increase from 30 million metric tons in 2000 to 55 million in 2030 (+83%), and milk consumption from 56 million to 100 million metric tons (+78%); in value terms, the regional consumption of livestock products will increase by 73%. (vi) Small poor producers operating in imperfect markets are rarely able to satisfy the safety and quality standards demanded by high-income consumers. Despite some notable successes, in fact, the majority of Latin American smallholders still remain excluded from the thriving high-value crop market and, depending on countries, it is possible to record either a gradual or an abrupt shift towards concentration of production in medium-sized farms, with smaller farmers dropping out of the market (Karovkin, 1992; Reardon and Berdeguй, 2002; USAID, 2005). Livestock products not only are largely marketed within the Latin American continent, but the average Latin American consumer still demand low-medium quality and low-level processed food items which can be supplied by small producers. Aho (2004) argues that consumers with an annual income below US$ 2,000 will hardly participate in livestock markets; those with an income between US$ 2,000 and 7,000 will purchase either wet products or inexpensive and partially processed food items; those with an income above US$ 7,000 will demand safe and high-value processed food; finally, consumers having an annual income above US$ 26,000 will look for high-value processed, convenience and healthy products. In Latin America, the average annual per-capita income is about US$ 7,000, ranging from US$ 2,700 in Bolivia to over US$ 13,000 in Argentina (World Bank, 2006). However, given the skewed wealth distribution, the median Latin American consumer will dispose of a significantly lower income. Just consider that the richest 10% of the population holds between 27% (Uruguay) to 45% (Brazil) of total National Income; that the overall income of the richest 10% of the population is 9.5 (Uruguay) to 30.3 (Bolivia) higher than that of the 40% poorest households (CEPAL, 2005). Hence, the majority of Latin 4
American consumers will demand low processed livestock products in the coming years, and smallholders will not be a priori-excluded from this growing market. (vii) Finally, diversification into high-value agricultural crops is considered poverty-reducing because of the labour intensity of production activities. Weinberger and Lumpkin (2005) report of a number of studies showing that production of horticultural crops is two to four times as labour intensive as staple production. Also livestock production is labour intensive compared to staples, especially dairy farming where labour can account up to 85% of total costs (IFCN, 2004). Livestock also generates backward and forward linkages: Huss (1996) speculates that in Latin America a minimum of 3 jobs are generated by each small livestock producer, and that about 17% of the region's total population, or 50% of the total economic active population, is directly or indirectly employed in the sector; more reliable figures from Kenya indicate that the over 600,000 dairy households in the country generate about 365,000 waged jobs (i.e. about 50 full-time wage-labourers per 1,000 litres of milk produced on a daily basis) (SDP, 2004). The above cases (i) to (vii) suggest that improved use of existing livestock resources can certainly contribute to poverty alleviation in rural Latin America, though this does not imply that the povertyreduction returns to investing into smallholder livestock production are higher compared to alternative policy options. There are, however, two generic arguments to sustain smallholder livestock production. The first is that there is ample empirical evidence that poor smallholders are more productive than large farms per unit of land (e.g. Cornia, 1985) and, possibly, per livestock unit. The rationale is that (i) large producers cannot assess labourers' efforts from output level as agricultural production is not perfectly correlated to workers' effort but depends also on stochastic factors (e.g. rainfall patterns); large producers cannot observe how hard agricultural labourers work, as people work alone and at distance from each other; it follows that fixed-wage labourers can resist supervision and, since their remuneration is independent of production level, have incentives to shirk; (ii) small producers are the ultimate beneficiaries of their efforts (so-called residual claimants), as their income is the net value of production level, and thus have all the incentives to exercise the first-best effort1 (Hayami and Otsuka, 1993). So, in case of contract unenforceability, the imperfect substitutability between family and hired labour explains why small producers are more efficient than large ones. In practice, large livestock farms might be more profitable than small ones, but this is either due to market imperfections (e.g. they have privileged access to credit) or to economies of scale in processing and marketing rather than in production.2 The second argument for supporting smallholder livestock production is that the development of large capital intensive production farms, while forcing out of the markets inefficient smallholders, does not always generate enough demand for the displaced labourers, forcing them to urban migration (de Janvry and Sadoulet, 2000). Unfortunately, only a small proportion of them finds productive employment in modern urban industries, and most derive their subsistence from informal economic activities (Fig. 1). Supporting smallholder livestock keepers producing high-value products, therefore, might trigger an "alternative path of economic development" (Hayami, 1998), which is not the self-contained development of the rural sector but is the expansion of small-medium on-farm, off-farm and non-farm agricultural and industrial activities in rural areas, promoting both economic growth and poverty reduction. In conclusion, if good opportunities exist to support the development of the livestock sector, what policies should decision-makers implement to drive the sector towards a pro-poor path? Very simply, Latin American policy makers should design policies allowing smallholders to (i) produce and (ii) commercialize livestock products and by-products competitively. These two sets of policies are interrelated but are dealt with separately as policies supporting access to productive inputs are largely documented, while there is still scant information about how to improve market participation of smallholder livestock producers, especially in light of current adjustments in the food marketing chain. 1 These rationales explain while large agricultural holdings tend to be specialised in the production of one crop (they use capital intensive technology, reduce the numbers of hired labourers and, hence, the probability of shirking), and why seasonal labourers are asked to perform activities whose outcome is easily measurable, such as harvesting and transplanting, while family workers carry out tasks that require care and judgement, such as water control and chemical applications. 2 The concept of returns to scale is ambiguous in livestock production. First, there is no logical underpinning for the available production technology to exhibit increasing returns to scale and, in fact, agricultural production function studies do not offer evidence of any systematic deviation from constant returns to scale (e.g. Sen, 1981); second, livestock production is location specific and, hence, it cannot be scaled-up as the concept of scale would require; third, imperfect markets adversely affect on the cost structure of small livestock keepers erroneously suggesting the existence of economies of scale; fourth, small and large producers make use of different technologies, this implying that different productivity levels reflect a different proportion of factor inputs rather than different scales of operation. 5
POLICY ISSUES IN SMALLHOLDER LIVESTOCK PRODUCTION Smallholder livestock production, i.e. the way livestock keepers combine their factor inputs for both production and consumption purposes, depends on the interplay between macroeconomic, institutional and sector policies. Macroeconomic and institutional policies, which are pan-sectoral and pan-territorial, directly affect smallholders' livelihoods. For instance, hyperinflation obviously does not benefit economic activities in any productive sector, including livestock; a corrupted government, e.g. where officials require businessmen to pay up-front bribes to start an enterprise, clearly lowers investment incentives for livestock entrepreneurs and hinders economic growth. The pro-poor development of the livestock sector requires therefore "good" macroeconomic and institutional policies, such as fiscal prudence and a sustainable budget deficit, a functional role of law, a social insurance system and, in general, a regulatory framework promoting competitive behaviours (Rodrik, 2000). Since the 1980s in Latin America the "Washington Consensus", focusing around liberalization, privatization and macrostability, has been the backbone of macroeconomic policies and, in particular since 1996, the region has been recording improvements in macroeconomic and institutional indicators, as documented by improved fiscal balance and the establishment of regulatory and oversight frameworks for the banking systems, though several countries are still plagued by macroeconomic and institutional weaknesses (Singh, 2005; World Bank, 2006). Good macroeconomic and institutional policies are however necessary but not sufficient to help small livestock holders escaping poverty. For instance, while prices could be stable and fair, the poor livestock keepers may be unable to produce meat and milk satisfying consumer quality standards; while private veterinarians may be efficient and professional, the resource poor might be unable to pay for their services. The recognition that liberalized markets are not necessarily efficient and equitable has recently induced government to design and implement - hesitantly so far - marketsupporting policies allowing poor livestock holders to access basic and subsidiary production inputs. To assess how this policy shift has been impacting on smallholder livestock production, following Dorward et al. (2004) a framework for comparative pro-poor livestock policy analysis is presented. The framework assumes that, given a functional macroeconomic and institutional infrastructure, livestock policies would be pro-poor if they included strategies for: (i) "protecting assets / reducing vulnerability" of poor livestock keepers, i.e. policies supporting access to land, feed/forage, water and risk-coping mechanisms; (ii) "creating conditions for growth", that is policies allowing small livestock holders to access credit and subsidiary inputs to produce beyond survival level; (iii) "coping with growth / responding to changing markets", i.e. policies allowing smallholders to continuously adjust to changing consumer preferences. There is nothing particularly innovative in this framework, as such policies have been widely proposed to support Latin American development (e.g. Echeverria, 2000; Lewin, 2003); the novelty is that the proposed framework focuses on the livestock sector ­ so far largely neglected by policy makers and treated as an appendage to crop-dominated agricultural policies, despite livestock production and marketing technologies significantly differ from those of staples and non-traditional crops.3 Table 1 below summarizes the rationale of this framework, which is then used to briefly assess current Latin American livestock policies. 3 Two evidences on how livestock are marginally considered by policy makers are the following. (i) Standard national agricultural censuses contain basic information about crops grown and livestock owned, and then subsidiary information about crop production technologies, such as number of tractors, of stationary and movable irrigation machines, threshing and winnowing machines, back and big motor sprayers, and hoeing machines. No figures are collected for livestock production technologies (e.g. milking machines) (FAO, 1997). (ii) In 1986 FAO established the Comisiуn de Desarrollo Ganadero para Amйrica Latina y el Caribe (CODELAG), open to all FAO Member Nations and Associate Members in Latin America and the Caribbean, with the responsibility to formulate and support the implementation of consistent livestock policies throughout the region. The Commission has so far met less than ten times, with minimal involvement of national governments, and its resolutions were mostly generic statements. In 2004, however, in order to have the Member Nations play a more active and effective role in the Commission and to accommodate the specificities of each sub-region, it was agreed to establish a Regional Chair for the Commission and four Subregional Vice-Chairs (FAO, 2004b) 6
Table 1. A framework to assess smallholder livestock production policies
The context for livestock policies
policy objectives Creating a conducive macro environment
Policy instruments Macroeconomic policies and institutional reforms
Rationale Sound macroeconomic fundamentals and high quality institutions are positively associated with economic and social indicators of well-being. Macro-micro linkages to the rural economy are e.g. mediated through the inflation rate, the real exchange rate, fiscal policies and ag non-ag terms of trade.
Protecting assets / reducing vulnerability
Creating conditions for growth
Protecting assets and securing access to basic production inputs
Securing access to land, feed and water
Land laws in crop-livestock systems and pastoral areas; forage / feed policies
Inadequate access to land and lack of feed and forage are main developmental constraints for poor livestock producers. The land market is rarely propoor as land prices exceed the present discounted value of income streams derived from farming because of the social/collateral value of land. Even with perfect credit markets only those with accumulated savings can acquire land at market price without curtailing their consumption stream.
Providing insurance and risk coping mechanisms
(Public) ex-ante and / or ex-post risk-coping mechanisms for natural disasters, including animal killer diseases
Variability of returns prevents livestock holders from making efficient use of their resources and leads to overshooting livestock production cycles. Imperfect and asymmetric information and high transaction costs constrain insurance markets.
Increasing production and productivity
Securing access to livestock / animal health services
Public / private distribution/regulation of livestock / animal health services
Securing access to credit and other inputs
Government intervention / regulation to establish propoor financial and input markets
Animal diseases negatively impact on livestock production; livestock holders are often poor, weakly educated and dispersed and unable to effectively demand public and private livestock services. Livestock holders need credit to access production increasing inputs; imperfect and asymmetric information and high transaction costs ration their access to credit and other production inputs as private agents are rarely willing to serve them.
Increasing quality and competitiven ess of products
Promoting provision of public goods: animal health, food safety, environment protection Promoting provision of public goods: research
Public regulation / management of disease surveillance; quarantine; quality control; food safety regulations; animal welfare Public regulation / funding of research centres; public management of public research centres
Some livestock-associated public goods are underprovided by the markets, because of their non-rivalry and non-excludability. These goods are necessary for poor livestock holders not to be crowded out by large competitors and for countries to compete in international markets. Private research centres are likely to invest in profitable breeds/technologies, and poor livestock holders rarely constitute an attractive market for the private sector.
Coping with growth / responding to changing markets
Protecting assets / reducing vulnerability of small livestock holders Policies protecting assets / reducing vulnerability aim at providing poor livestock holders with adequate and secure access to basic production inputs, including (i) access to land, water and feed, and (ii) risk coping mechanisms for natural disasters and price shocks. Uncertainty and market imperfections, in fact, prevent smallholder producers from having secure access to these inputs, which is a necessary condition for efficient resource allocation. For example, in mixed crop-livestock 7
farming systems secure access to land allows farmers to use resources (such as family labour) that in many cases are underused, and encourages lump-sum investments in physical and human capital, with increasing supply of crop residues and stubbles for animals (World Bank, 2003a). Latin American land policies have long attempted to redress the dual agrarian structure of the continent ­ comprising few large and countless small-fragmented farms ­ through expropriating large haciendas to be redistributed to the landless and smallholders. Results have been disappointing, largely for political economy constraints (de Janvry and Sadoulet, 1989). Since the last decade the policy focus has thus shifted towards market mechanisms to promote an equitable and efficient reallocation of land assets. Article 27 of the Mexican Constitution has been amended to prohibit the redistribution of land through governmental expropriation and facilitate the modernization (privatization) of the ejidos (Appendini, 2002); Brazil and Colombia have been implementing marketdriven land reforms to encourage land transfer between willing buyers and willing sellers (Deininger, 2001); with the significant exception of Mexico and Peru, twelve countries have passed norms that "privatize" indigenous communal rights (Griffiths, 2004). While these policies have been dictated by both efficiency and equity objectives, the overall evidence is that land access for poor Latin American livestock keepers remains limited, and in some cases processes of land concentration are ongoing, such as in Paraguay. In effect, liberalized land markets will be pro-poor only if complementary reforms to insure smallholders' competitiveness (e.g. access to credit and output markets) are in place by the time the land market is activated. This, as will be shown below, has been rarely the case in Latin America. Beyond secure access to land (and feed and water) smallholders need to be insured against natural and market risks, as stability of production and prices is a necessary condition for livestock keepers to efficiently allocate resources according to price signals and programme long-run investments. In an unstable environment, in fact, they would show a bias towards food production, use low-risky low-productive technologies, diversify their income sources towards off-farm incomes with low co-variation with agricultural production, accumulate assets that can be easily transformed into cash (including livestock), etc. (de Janvry and Sadoulet, 2005). While price swings are not negative per se, as they can indicate the presence of a frictionless market and induce improved allocation of resources, natural disasters are harmful by definition: in Mexico over the period 19802002 weather related events have damaged over 24 million ha of crops (Saldaсa-Zorrilla et al., 2004). Very rarely, however, have Latin American livestock keepers had access to insurance policies, because governments have not given priority to the issue and/or private and public companies are unwilling to insure highly co-variant and risky agricultural activities. Since the last decade, however, the development of risk-swapping and risk-sharing markets ­ catastrophe bonds and weather market derivates ­ are encouraging some Latin American governments to support the development of an insurance market for agricultural products. In Uruguay, a law is being proposed that would require the government to subsidize up to 60% of farm premiums for a multiple peril insurance policy, introduce an area-yield-insurance-product, and establish a separate emergency disaster fund open to those that have purchased private insurance. Mexico has established a combination of public-private institutions to hedge against disaster risks in agriculture, including FONDEN (Fondo Nacional para Desastres Naturales) to rebuilding public assets; AGROASEMEX (Instituciуn Nacional de Seguros), a public crop insurance company providing subsidy to purchase private crop insurance premiums; FOPREDEN (Fondo para la Prevenciуn de Desastres Naturales) to contributing with 70% to States' natural disaster mitigation projects; FAPRACC (Fondo para Atender a la Poblaciуn Rural Afectada por Contingencias Climatolуgicas) designed to finance rehabilitation programs benefiting poor farmers (Saldaсa-Zorrilla et al., 2004; Wenner and Arias, 2004). In both Uruguay and Mexico these policies are in their very early stages, tend to focus on crops rather than livestock, and few poor farmers are benefiting from them. The majority of small livestock keepers still rely on private on-farm and off-farm insurance strategies, which ultimately reduce profits in the long-run, and on the highly scattered and under-funded postshock public relief and rehabilitation interventions. 8
Creating conditions for growth Access to basic production inputs and insurance would not be sufficient for taking livestock keepers out of poverty as imperfect intertemporal markets and limited access to output markets force the poor into portfolios with low returns. Policies creating conditions for growth are therefore necessary to allow all economic agents, including the poor, to fully exploit gains from livestock demand. These include at least policies providing livestock keepers with secure access to: (i) credit and (ii) secondary inputs, including animal health services. In the last two decades the principal policy reforms in the rural credit markets in Latin America have involved the descaling, elimination or privatization of the public rural development banks that had been the principal suppliers of highly costly and regressive subsidies to small livestock keepers. In Colombia, the Caja Agraria, established in 1931 to provide loans, agricultural inputs and technical advice to farmers was liquidated and replaced with the small and tightly controlled Banco Agrario (Uribe, 2000); in Nicaragua, the 1997 Bank Law provided for the liquidation of the Banco de Desarrollo Nacional, traditionally the main provider of agricultural credit (IMF, 1999); in Mexico, the Banco Nacional de Crйdito Rural closed 300 of its 500 branches, reducing staff from 22,000 in 1988 to 10,000 in 1992 (de Janvry et al., 1997). In general, financial market reforms have had a strongly negative impact on the access of smallholders to credit, because of the more stringent collateral of commercial banks, so much that a recent World Bank report on Latin America argues that lack of access to credit is one of the binding constraints to pro-poor growth in the region (Perry et al., 2006). In the early 1990s the microfinance revolution took place in Latin America and since then has provided some access to credit to the poor livestock keepers. In 1992, the Bolivian NGO PRODEM (Fundaciуn para Promociуn y el Desarrollo de la Microempresa) ­ one of the pioneering microfinance institutions in the region ­ was converted into BancoSol, a regulated commercial bank; in 1995, two small microfinance institutes in Bolivia and El Salvador were transformed into the Caja Los Andes and Financiera Calpiб. At the same time, some regulated commercial banks and financieras (small banks) entered the microfinance business, such as the Banco Solidario in Ecuador and the Banco de Trabajo in Peru; in Guatemala, Bancafй and Banrural have shown that even commercial banks can reach the very poor lacking collaterals through group lending contracts; today commercial banks dominate the microfinance business in Latin America, and provide about 75% of all micro-loans (Ramirez, 2004). Despite these developments, however, only 2.6% of the poor have access to microloans ­ with the notable exceptions of Bolivia and Nicaragua where this proportion is above 20% (Ramirez, 2004) ­ and a joint study of FAO and the University of California, Berkeley (FAO, 2003), concludes that the development of microfinance institutions in Latin America is "chaotic and incomplete" because of lack of a sound institutional underpinning: in most countries a multiplicity of financial institutions operate under different rules and offering both complement and alternative services. Beyond credit, access to secondary inputs and to adequate and affordable animal health and extension services is essential for effective livestock production. In the 1960s and the 1970s Latin American governments built heavily subsidised systems and networks of services delivery, but since the 1980s the rigorous budgetary policies connected to macroeconomic and institutional reforms have been leading to the widespread dismantling of the official animal health services (Zepeda Sein, 1997), sometimes with severe consequences for the livestock industry (see Lopez et al., 2004, for Jamaica). In particular, reforms in the animal health services have been driven by two main thrusts: decentralization and privatization. Local governments ­ which in Argentina, Brazil, Bolivia, Colombia, Mexico and Venezuela account for more than 20% of total public expenditures (IADB, 2002) ­ have been made responsible for livestock disease surveillance, inspection and certification; the remaining animal health services, such as clinical diagnosis and reporting, drugs and vaccines distribution and artificial insemination, have been fully or partially devolved to the market, i.e. to private professionals (Moe, 1997; Nader, 1997; Perez-Trujillo, 1997). As examples, in Mexico, the proportion of graduate veterinarians working in the public sector fell from approximately 85% during the 1970s to 30% in 1998 and to 19% in 2004 (OIE, 2006; Perez-Trujillo, 1997); in 2004 in Bolivia only 12% of the veterinarians worked in the public sector, 5% in Brazil, 9% in Costa Rica, 6% in Guatemala and 16% in Paraguay (OIE, 2006). While both decentralization and privatization are expected to improve access to animal health services for the poor, the empirical evidence is mixed. For instance, in Bolivia livestock diseases are 9
identified as the most significant constraint for approximately 20% of small producers (IFAD, 2004); according to WHO (2006) Cysticercosis/Taeniasis, caused by a parasite living in swine, remains a significant cause of human morbidity and mortality, affecting about 1/1000 of the Latin American population; the Inter-American Institute for Cooperation on Agriculture (IICA, 2002) estimated at less than 40% the capacity of Latin American national agricultural health services to comply with the WTO sanitary and phytosanitary standards. While the causes for this status of affairs are multiple, there are two general issues that affect the effectiveness of livestock service delivery in the region. On the one hand, decentralization programs originate from macro and broad political initiatives rather than from sectoral strategies and thus have not addressed the core issues of public delivery of services ­ namely funds and incentives. Funds are typically limited, e.g. in Mexico the number of public veterinarians has gone down by 40% between 1997 and 2004, in Brazil by 73% and in Paraguay by 48% (OIE, 2006); the institutional mechanisms of service delivery have not been redesigned to provide improved incentives to local government officials ­ for instance, transfers from central government could be allocated to local administrative units according to output-based measures (e.g. animals vaccinated) rather than input-based variables (estimated doses of vaccines). On the other hand, in analogy to banks, private professionals are not willing to provide services to small poor producers unless they can be compensated for the additional transaction costs they will incur; the poor livestock keepers, therefore, are typically rationed in the market for animal health services. Governments have recognized this and a number of innovative approaches are being implemented to increase the capacity of the poor to access animal health services, such as support to paraprofessionals, to community-based animal health workers, government sub-contracting and networking between paraprofessionals and veterinarians. For instance, between 1997 and 2004, the number of paraprofessionals in the veterinary profession has substantially increased in Brazil, Bolivia, Costa Rica, Panama, Paraguay and Peru (OIE, 2006). While there are both successful and unsuccessful examples of these innovative approaches, they are still on a small scale and affected by two general weaknesses. First, since the animal rather than the household has been the main entry point of livestock policies in Latin America, including in the university curricula, not only little is known about the impact of specific endemic, epidemic and zoonotic animal diseases on the livelihoods of the poor, but assessments of policy experiments are mainly based on animal mortality rates rather than household welfare. Second, policies are still driven by the assumption that interventions should change the diversified livestock systems, which characterize smallholder production, into more specialised ones: the focus is thus mainly on specific diseases rather than on the overall health status of the household's animal stock. As suggested by Brathwaite (2005), therefore, Latin American and Caribbean countries should first of all adopt and implement new strategic visions for their animal health services; only then technical services will be truly effective. Coping with growth / responding to changing markets In the long term, given changing consumer preferences and increased market integration, smallholders should be able to respond to market dynamics in order not to be forced out of the livestock business by large competitors. Policies allowing small livestock keepers to respond to changing markets include: (i) pro-poor research activities in animal feeding and breeding to support smallholder production of high quality commodities; (ii) regulatory and extension policies allowing smallholders to satisfy national, regional and international food safety and quality standards. These are goods with a public component and need to be supplied / regulated by the government. In Latin America, agricultural and livestock research activities have been traditionally managed by public research institutions, but macroeconomic and institutional reforms have forced governments to restructure their agricultural research agencies along quasi-private lines, with private companies and foundations increasingly playing a relevant role in livestock research. In Ecuador, livestock research funds are channelled through FUNDAGRO (Fundaciуn para el Desarrollo Agropecuario) that receives both public and private funds; in Peru, five research stations were converted into private foundations; FHIA (Fundaciуn Hondureсa de Investigaciуn Agrнcola) is among the most mature research centres in Honduras; in 1995 private farmers' groups contributed 29% to the total research budget in Colombia; in Ecuador and Mexico private companies accounted for 36% and 28% of all research expenditure (de Janvry et al., 1997; Morales, 1998). Quasi-private institutes are expected to conduct research according to market demand rather than policy initiatives, and thus better contribute to livestock productivity and poverty reduction. However, while administrative autonomy has been achieved in several instances, most semi-private agricultural research centres still receive 80-90% of 10
their funding from the central government, such as in Colombia, Honduras, Guatemala, Mexico, and Panama, and overall they just account for 15% of total current research investments, a level insufficient to cover the cut in public research budgets (Morales, 1998). To improve the effectiveness agricultural research and overcome budget constraints, Latin American countries have created competitive funding mechanisms as an alternative means of allocating research resources, the underpinning idea being that this would reduce the misallocation of funds. In general, research centres should compete for public funds allocated either to basic research projects or to innovation and technology transfer projects leading to the adoption of research findings. In Latin America, in fact, agricultural research and extension activities have been traditionally managed by different, specialized institutions, with the relevant exceptions of the Instituto Nacional de Investigaciones Forestales, Agricolas y Pecuarias (INIFAP) in Mexico and the Instituto Nacional de Tecnologнa Agropecuaria (INTA) in Argentina. While semi-privatized research centres could be more efficient and market responsive vis-а-vis presumably inefficient government agencies, there are good reasons for Public involvement in research activities. First, private research institutes under or mis-supply public goods: vaccines and drugs are typical examples of where markets fail due to ineffective regulation and quality control. Second, in some cases high start-up costs and uncertain outcomes prevent private entrepreneurs from entering the research business. Third, the poor lack the resources and skills to effectively demand for specific research and are rarely considered as potential clients by profit-seeking research centres. Fourth, competitive mechanisms of funds allocation often involve high transactions (e.g. writing and screening proposals) and rent-seeking costs (e.g. policy lobbying), and take research in the direction of more short-term, immediately applicable outcomes. These rationales do not imply that the public sector should lead all or most of pro-poor research activities, but that policy makers should establish guiding principles directing resources towards research benefiting the poor livestock keepers: (i) public funds should be allocated (directly and indirectly, e.g. through competitive bids) towards animals and livestock products where private research is not forthcoming, i.e. products for which producers' groups are not able to generate a market demand; (ii) public funds should be allocated towards livestock products that countries are trading significantly, as in these cases domestic price effects would be minimal and producers could capture the largest benefits; (iii) public funds should be allocated towards non-labour displacing technologies, and in particular on technologies that raise the intensity of labour and land use so as to capitalize on the comparative advantage of smallholders; finally, (iv) since countries are imposing growingly stringent requirements on food imports ­ which cover pesticide residues, contaminants, microbiological parameters, pests, diseases and other hygienic variables ­ funds should be directed towards research not only increasing productivity of smallholders but also their capacity to produce high-quality products satisfying sanitary and phytosanitary national, regional and international standards. In general, sanitary and phytosanitary standards (SPS) are of concern for those Latin American countries traditionally exporting livestock products, such as Argentina, Chile, Uruguay, Paraguay, Brazil and Mexico. For example in 2000-2001, after ten-year absence, food and mouth disease broke out in the River Plate Basin: it infected about 150,000 animals in Argentina with an estimated foregone production of US$ 40 million per month between July 2000 and January 2002; in Uruguay about 77,000 animals were infected and the value of exports fell by 40% (US$ 152 million) (World Bank, 2005a). These are not exceptional cases, as in the last ten years animal and zoonotic diseases have accounted for 40% of concerns raised in the WTO SPS committee (WTO, 2002). SPS issues, however, should be addressed also by non-livestock exporting countries, as in the medium to long-term local consumers will be demanding and willing to pay for safe(r) and high(er)-quality products. It is therefore necessary to develop and implement policies allowing small livestock keepers to comply with stricter safety and quality standards, though it might appear immature to invest resources to this aim given the poverty-emergency that affects a large share of Latin American livestock keepers. However, allowing smallholders to comply with SPS regulations goes beyond technology transfer and is a long-process aimed at changing their cultural approach to production. A policy option could be to take advantage of existing regional economic communities ­ e.g. the Andean Community of Nations (CAN), the Southern Common Market (MERCOSUR) and the Caribbean Community and Common Market (CARICOM) ­ to establish regional sanitary and phytosanitary standards and share resources to develop ways to make the poor livestock keepers complying with them. To our knowledge this is an unexplored policy area. 11
POLICY ISSUES IN SMALLHOLDER LIVESTOCK MARKETING Increasing production efficiency is necessary but not sufficient for smallholders to be competitive in markets; they must also be capable to commercialize livestock products and by-products efficiently. The crucial role of access to output markets, however, has only recently received attention in the development arena, particularly following the abolishment of parastatal marketing agencies and the increased emphasis on diversification towards high-value marketable crops. Three major elements affect smallholders' access to markets. (i) Household micro characteristics, such as their resource endowments and production technology; for instance, de Janvry et al. (1991) argue that a household specific price band between purchase and selling price determines its willingness to participate in the markets. (ii) Meso-infrastructural networks that determine transaction costs to markets for communities/regions; e.g. transport costs obviously differ for villages served by gravelled or allseason roads. (iii) The institutional framework that shapes the relationships among livestock keepers, traders, processors, wholesalers and retailers, i.e. the way through which livestock products and byproducts flow from producers to consumers, on the one hand, and the way through which cash flows from consumers to producers, on the other. To promote smallholder access to markets Latin American governments have largely focused on public actions smoothing differences between household idiosyncratic characteristics, including policies allowing small livestock keepers to produce efficiently (see previous section), and on infrastructural policies, though investments in infrastructure were drastically cut following macroeconomic stabilizations. As a consequence, today less than a third of the Latin America road network is in good condition, with the exception of Argentina (80%) and Guatemala (75%); rural roads are typically in worse conditions, with only 8% in good state in Peru and Ecuador (World Bank, 2005b). On the other hand, Latin American policy makers have mostly neglected to address institutional bottlenecks affecting smallholders' access to markets. In particular, whereas they have put effort to improve the effectiveness of the broader institutional infrastructure, they have disregarded the meso-institutions affecting the relationships among actors in the supply chain and allowing small livestock keepers to access markets at a profit. This dichotomy still affects livestock policy today. Elaborating on Williamson (2000), who distinguishes four typologies of institutions, we propose a five level institutional framework to examine institutional marketing policies in Latin America and derive indications for policy makers. Level 1 is made by the "social-embedded institutions", including norms, customs, mores and traditions. These have largely spontaneous origin, display a great deal of inertia, and might be changed through policies only, if ever, in the very long run. Level 2 is made of what we call "slow-moving institutions", including the government, the bureaucracy, the judiciary system, the forms of property rights, etc.. Level 3 is constituted by what we call "fast-moving institutions", such as rules, decrees and laws governing relations among economic actors. At level 2 and 3 decision makers should implement policies to "get the institutional environment right", i.e. establish the "right" rules of the game. Next is level 4, made of what we call "outcome institutions" i.e. the outcome of the play of the game, including formal and informal transactions/contracts among economic agents. Out-grower and sharecropping contracts are examples of outcome institutions. Finally, at level 5 there are the individual economic actors, including the poor household that, since the path-breaking analysis by Shultz (1964), is considered "poor but efficient" and makes the best possible use of its resources. Levels 4 and 5 combined represent the play of the game and the benchmark against which to assess the effectiveness of institutional marketing policies (level 2 and 3): are the current rules of the game allowing the poor livestock keepers to commercialize their products competitively? Are smallholders able to establish profitable contracts with traders, processors, wholesalers and retailers? Answering these questions require examining the current livestock marketing system in Latin America and its evolution. Following on Berdeguй et al. (2004) ­ who propose a typology of six different supply chains for Central American countries ­ it is possible to identify six different livestock supply chains in Latin America, from pure spot market transactions, where poor livestock keepers play a significant role, to vertical integration, where market transactions are nil and small producers have no role to play. (i) The spot market supply chain relies on simple, largely informal, transactions between several traditional producers, wholesalers and retailers, with poor producers being often themselves the retailers. Slaughter and processing of small stock, including poultry, small ruminants, camelids and 12
pigs can be in fact carried out by the household itself, without the need for intermediaries (Upton et al., 2005). Raw products are sold in wet open-air street (mercados de plaza) and mobile markets (feria libre) which are still popular in Latin America: for instance, there are about 359 street markets in Managua (Schьtz et al., 2004). (ii) A second type of supply chain centres on few processors / wholesalers, such as public slaughterhouses, dealing with a number of smallholders and retailers. In Nicaragua there are 98 municipal slaughterhouses which satisfy minimal food safety requirements, and deal with small rural producers on the one hand, and local butcheries on the other (Schьtz et al., 2004). Sometimes, due to prohibitive transaction costs, small producers cannot access municipal slaughterhouses if not organized in cooperatives. (iii) A third type of supply chain, termed the "decentralized mixed procurement system" by Berdeguй et al. (2004), centres on few wholesalers/processors dealing with a number of smallholder producers, on the one hand, and few large retailers on the hand. This supply chain is dominated by large retailers ­ e.g. SuperSelectos in El Salvador ­ that require relatively high quality standards compared to the typology-two supply chain. Since wholesalers receive pressures for delivering quality livestock and livestock products on time, small poor farmers might be excluded from this chain, as wholesalers prefer dealing only with few specialized producers. (iv) The "centralized passive" supply chain involves a direct relationship between few, mostly large, producers and one large industrial processor, such as San Martнn slaughterhouse in Nicaragua processing up to 400 cattle a day. Traders are bypassed. These arrangements allow defining and enforcing strict safety and quality regulations; contracts are in fact designed so that producers with the highest rates of compliance get rewarded (increased orders) and those with lower rates are `punished' (lower orders). Small producers tend to be excluded either because unable to satisfy safety and quality requirements or because large processors prefer dealing with few large producers to reduce transaction costs. (v) The "centralized pro-active" supply chain is based on a direct relationships between few, mostly large, producers and one large industrial processor, where the latter agrees upon purchasing contracts conditional to technical assistance and training program to suppliers. Food safety and quality standards are very strict. As for the centralized passive supply chain, small producers tend to be excluded. (vi) Finally, the vertically integrated supply chain centralizes from production to wholesale/retail activities, and all transactions are based on managerial decisions rather than price mechanisms, i.e. the market disappears. Examples are largely in the poultry sector, such as Sadia, Perdigгo, Frangosul and Seara poultry breeders in Brazil that account for about 40% of a total of 3.5 billion slaughtered chicken in 2001, and for about 75% of poultry exports (Farias Pereira and Csillag, 2003). Note, however, that vertical integration is not pervasive in agriculture: in the US less than 8% of farm production is from vertically integrated businesses (Hayenga et al., 2000). Whereas the current livestock marketing system still includes small livestock producers, its trend appears biased against smallholders as marketing is increasingly concentrated towards "centralized passive" and "centralized pro-active" supply chains and dominated by large industrial processors and supermarkets. According to Reardon and Berdeguй (2002), in Argentina, Brazil, Chile, Colombia, Costa Rica and Mexico, in 2001 supermarkets had a population weighted average of 60% of food retailing, and about 20 to 40% in all other Latin American countries. And, while traditionally supermarkets were originally located in high-income urban neighbourhoods, in the last ten years stores have been opened in middle-income and poor urban and rural areas as well. Palн supermarkets in Nicaragua, for instance, explicitly targets low-income consumers: stores do not have air conditioning, accept only cash payments, and products are shelved in their transporting boxes (Schьtz et al., 2004). Large processors and supermarkets, that prefer dealing with few specialized and trusted suppliers rather than with several small producers, are thus slowly eroding the traditional supply chain, and concerns are that smallholders will be crowded out of the livestock market; for instance, the World Bank (2003b) has expressed concern with the plight of small-scale producers in 13
emerging economies and forecasts that increased penetration of supermarkets could result in a diminished market for local products.4 If these structural realignments are undeniable and small livestock keepers could certainly be losing, this does not mean that alternative development paths are not viable. Firstly, we have argued that, due to imperfect substitutability between family and wage labour, smallholders are as efficient as, if not more efficient than, large producers. Secondly, Jarvis and Bervejillo (2000) maintain that centralized production chains are not necessarily efficient, such as for example the beef industry in Argentina and Uruguay. Thirdly, Farina et al. (2004, quoted in Berdeguй et al., 2004) show that in Brazil the expansion of supermarkets has not meant that traditional retailers and independent small stores have been displaced. Fourthly, the current trend towards marketing concentration is not exogenously given but determined by the current `rules of the game' that lead to institutions potentially harming smallholders ­ i.e. "centralized passive" and "centralized active" supply chains. Finally, there are instances of win-win contracts between smallholders and large processors/retailers, i.e. of smallholder-based production chains, showing that under some circumstances smallholders can benefit from the demand of high-value livestock products. How to scale these chains up? Smallholder-based livestock production chains have usually originated from projects and strategies ­ i.e. directly managed activities in a ceteris paribus institutional environment ­ rather than from institutional policies ­ i.e. changed rules of the game leading to spontaneous win-win contracts between small producers and large processors/retailers. For instance, the regional association of camelid producers (ARCCA) in the Department of Potosi, Bolivia, was able to sign a contract with a Peruvian spinning factory thanks to the Regional Programme Supporting the Development of South American Camelids (PRORECA) and the Camelid Producers Development Project (UNEPCA) funded by the International Fund for Agricultural Development (IFAD); in Chile, small cattle producers were able to establish profitable contracts with processors thanks to a regional project of the Food and Agriculture Organization (FAO) supporting the establishment of productive alliances (Kцbrich, 2004). Expanding the support of third parties to promote win-win contracts between smallholders and large processors/retailers is certainly not a practical strategy to reduce poverty widely; it would be more promising to examine the process that led to the establishment of smallholder-based supply chains ­ including agendas of meetings, points of discussion and solutions proposed ­ and the characteristics of the signed contracts ­ including rights and duties of parties and penalties in case of breaching. This done, policy makers should have (all) the elements to identify what institutional bottlenecks/market failures the project/programme has helped overcome, and hence could design/adjust existing rules and regulations (level 3 institutions) so as to facilitate spontaneous mutually beneficial contracts between several livestock keepers and large processors and retailers (level 4). Identifying institutional policies (level 3) leading to smallholder based livestock supply chains (level 4) is however not easy. Strategies and projects promoting the establishment of contracts between small livestock producers and large processors/retailers, in fact, are rarely, if ever, designed to derive institutional lessons and are evaluated via the usual parameters, such as number of beneficiaries, changes in their welfare, Economic sustainability of projects and prospects for replicability. Some hints could be however derived from the principal-agent literature that has been extensively used to explain land contracts in rural areas (e.g. Hayami and Otsuka, 1993). The principal agent framework assumes that there are two economic actors willing to transact but having conflicting objectives ­ e.g. the small producer and the processor are willing to cooperate but the former (latter) wishes to sell (purchase) the lowest (highest) quality milk at the highest (lowest) price. If information is perfect ­ i.e. if product quality were assessed quickly and at no cost and/or smallholder's activities perfectly enforceable and observable at no cost ­ the contracting problem would be easy: the principal specifies a price/quality combination and/or the exact actions to be taken by the agent and the associated compensation schedule. However information is imperfect, costly and asymmetric ­ especially in livestock production where level and quality of output depend also on exogenous/uncertain contingencies, such as rainfall pattern, and where products go through successive stages of transformation ­ this providing opportunities for both the principal and the agent to extract an extra-rent from their private information. 4 Controversies surrounding small producers are common in developed countries as well: small poultry growers in the US lament that large industries favour large producers, that they lack bargaining power when negotiating and performing under contracts, and that performance and payments are often determined ambiguously (Pierce and Stewart, 1997). 14
In particular, in case of contracts between agri-processors and small producers, opportunistic behavious can occur before and after the stipulation of the contract. Before the contract is signed, both agents lack information about the `characteristics' of the counter-part. For instance, the processor is not sure whether the small producer is able to deliver on time the agreed quantity/quality of produce; the poor livestock keeper is not sure whether the processor will effectively pay the established price; after the contract is signed, the processor cannot observe whether the smallholder is effectively complying with his duties; the small livestock keeper might sell his produce to a third party offering better conditions; large processors / retailers might not willing to share the benefit of increased market price with their uniformed suppliers. Finally, given "bounded rationality", the contractual terms and penalty clauses against possible violation cannot be stipulated to cover all possible contingencies; and even if contract violation is detected, appeal to mediation by a the third party, such as a court, is often prohibitively costly and time-consuming. In sum, contracting parties confront a number of costs, including (i) search for clients; (ii) screening the potential clients; (iii) negotiation of contracts; (iv) monitoring contract compliance; (v) enforcement of contract in case of breaching. In Latin America, the current rules of the game (level 3 "fast-moving institutions") induce parties to play the game and reduce these costs through establishing "centralized passive" and "centralized active" procurement systems (level 4 "outcome institutions"), which tend to exclude small livestock producers. A large processor/retailer establishing long-term contracts with one or few large producers, in fact, creates a trust-based relationship, reduces screening and monitoring costs, and can itself `punish' the supplier in case of contract breaching, i.e. with reduced orders, and reward it in case of good performance, i.e. with increased orders. If the current rules and play of the game are leading towards a concentration of production and distribution, institutional policies that change these rules might well lead to smallholder-based supply chains, especially as economies of scale in the livestock sector are in the processing and marketing stages rather than in production. In this perspective, Latin American governments could perform a number of tasks. (i) Governments should reduce screening costs for both parties, i.e. should establish open lists of reliable producers and processors / retailers. In general, smallholders, cooperatives and large processing and retailing firms have their own information about the quality/trustworthiness of contracting parties; collecting this information and make it available to all stakeholders in the livestock supply chain could be a first step in this direction. Whereas this could appear an innovative area for policy, governments already manage rosters of professionals, such as veterinaries and specialized extension workers. Note that such a register would also reduce the incentives for opportunistic behaviours for both parties, as those breaching contracts would be included in a "black list" and will have difficulties in finding partners thereafter. (ii) Governments should adjust the bureaucratic costs of negotiating contracts. First there are fixed costs invariant with respect to the transaction ­e.g. paper and fees­ that might induce large firms to deal with one/few suppliers rather than many smallholders; and then costs related to the quantity transacted. Governments might reduce the bureaucratic costs of transactions in general, charge regressive fees in case of multiple contracts and/or progressive fees increasing with the quantity transacted per contract. (iii) Governments should reduce the bargaining costs for both parties. For instance, they might specify, in cooperation with representatives of all stakeholder groups, standard types of contracts that parties may wish to agree upon. These contracts should have a specific focus on profit and risksharing mechanisms, among the most contended issues in bargaining processes. (iv) Governments should level the playing field of contracting, as smallholders are often in a weak bargaining position vis-а-vis large processors/retailers. For instance, contracts should be in written forms, registered (at low / no cost for parties) and also posted publicly in plazas, churches, local government offices, etc. While names of contracting parties could remain anonymous, details of contracts should be publicly available as transparency is one of the core elements of a functioning market. Complement policies would include posting publicly market prices, which small livestock keepers are often not aware of, and have marketing and contracting strategies among the curricula of extension workers. (v) Governments should hinder the creation of monopsony power by processors and retailers, otherwise smallholders' assets would become a source of potentially appropriable quasi-rents having 15
low salvage value outside the bilateral contractual relationship. Would this be the case, furthermore, livestock keepers will cautiously invest in specific assets, thus making sub-optimal investments and partially contributing to economic growth and poverty reduction. Most developed countries have restrictive practices or anti-trust legislations that penalise industry concentration, but the tracking record is not encouraging; Latin American government should consider the possibility of setting up specialized anti-trust authorities in the agri-food sector. (vi) Governments should avoid the creation of monopoly power by smallholders. Countries often support the establishment of farmer's associations to counter-balance the bargaining power of processors / retailers. While this strategy could certainly lead to positive outcome, empowering "too much" producers' organizations might squeeze processors / retailers that, because of their assetspecificity, could prefer to vertically integrate or look for other less organized suppliers. So anti-trust regulations should prevent all actors in the supply chain from assuming a dominant position, including the poor livestock keepers. (vii) Governments should not only improve the efficiency of the judiciary systems, but also support the establishment of rapid, low cost local arenas to resolve conflicts among smallholders and large processors / retailers. Again, a list of all parties involved in disputes should be publicly available so as to reduce the incentives for opportunistic behaviours. The suggested institutional policies are explorative and their theoretical underpinning and empirical feasibility should be subject to rigorous scrutiny. The ultimate objective, however, is not to provide blueprint policy indications, but to show that there are simple and often low-cost institutional policies that can lead to smallholder-based supply chains. Note that the focus is not on the traditional macroinstitutional policies ­ e.g. improving governance effectiveness ­ but on rules and regulations governing the relationships among stakeholders in the supply chain. These rules and regulations have been often overlooked or examined ex-post to explain why the structural realignments in the agri-food chain are biased against smallholders; the real challenge for Latin American policy makers is instead to find how they could be re-shaped ex-ante to facilitate equitable and profitable access to markets for small livestock keepers. CONCLUSIONS Rural poverty is widespread in Latin America, and smallholders make up the majority of the rural poor in all countries of the region. Since the land frontier is either closed or could be expanded only at high environmental cost, enhanced productivity and/or returns to their assets is a practical pathway out poverty. Traditional staples, however, are unlikely to generate enough income to significantly reduce poverty; opportunities are rather offered by "new agriculture", which centres on producing high-value products, satisfying enhanced food safety requirements and product labelling, requiring establishing contracts with supermarkets and agro-exporters, etc. "New agriculture" is usually synonymous with horticultural products, but livestock might be well part of it: the value added obtained through successive transformations of livestock products is significant and often higher than in most horticultural and industrial crops; a large share of the Latin American rural poor depends on livestock as part of their livelihoods; the demand for animal food is increasingly rapidly in the continent. Formulating policies tapping into these opportunities, however, is a challenging task as livestock have been largely neglected by policy makers and development practitioners alike. This paper contributes to the analysis of livestock policies in Latin American in order to identify public actions able to drive sector development on a pro-poor path: it first looks at policies allowing poor livestock keepers to produce efficiently and then at policies allowing smallholders to commercialize their produce efficiently. These policies are strictly intertwined but dealt with separately as, while there is ample documentation of production-supporting policies, information is scattered about policies promoting access to output markets for poor livestock keepers. In order to assess Latin American policies aimed at increasing the capacity of small livestock keepers to produce efficiently, the paper suggests that, given a functional macroeconomic and institutional framework, livestock policies should include strategies for: (i) "protecting assets / reducing vulnerability" of poor livestock keepers, i.e. policies supporting access to land, feed/forage, water and risk-coping mechanisms; (ii) "creating conditions for growth", that is policies allowing small livestock holders to access credit and subsidiary inputs to produce beyond survival level; (iii) "coping with 16
growth / responding to changing markets", i.e. policies allowing smallholders to continuously adjust to changing consumer preferences. In Latin America these policies have been largely dictated by macroeconomic and institutional reforms, focusing around liberalization, macro-stability, privatization and decentralization: land markets have been dynamized, veterinary services privatized, research budgets severely cut. In recent years, the recognition that markets by themselves do not necessarily produce efficient outcome and that market-supporting institutions, including public agencies and their governance, are essential to support pro-poor economic growth, have led Latin American policy makers to design innovative policies to promote smallholder access to productive inputs, including the institutionalization of microfinance institutions, the separation of public and private responsibilities in the delivery of veterinary services, the competitive allocations of public research funds. While these policy shifts are encouraging, they largely follow a trial and error approach as answers to some key questions are still uncertain: what one can do to improve the efficiency of both government and market? What is the right balance between the government and the market? How should that balance change over time as markets improve and the competencies of government change? Despite this overall ignorance, however, it appears that Latin American policy reforms are too cautious, that Latin American policy makers still over spend in private goods and under-spend in public good provisions (Lуpez, 2005), and that more should be spent on anti-poverty programs allowing small livestock keepers to be efficient in their production activities. To examine policies affecting smallholders access to markets, which are interconnected to the capacity of poor livestock keepers to produce efficiently, the paper presents a five-level institutional framework ­ traditionally distinguishing among the rules of the game and the play of the game ­ and argues that the various types of livestock supply chains present in Latin America could be considered as outcomes of the play of the game. A variety of livestock supply chains allowing smallholders to access markets exist in the region, from pure spot markets to fully vertically integrated chains; the overall trend is towards centralized supply chain based on few large processors and large producers dominating the markets and excluding poor smallholders. However, while economies of scale are certainly present in processing and marketing activities, they are not present in livestock production: concentration of production in few large farms is thus not justified on technical grounds; secondly, because of imperfect substitutability between family and hired labour, small producers are ceteris paribus more efficient than large ones: concentration of production in large farms is thus also socially inefficient as there are losses in total production level. Policy makers, therefore, should try to change the rules of the game so that the play of the game could lead to a prevalence of smallholder-based supply chains. The paper argues that an analysis of the successful contracts established ­ in a ceteris paribus institutional environment and with the support of external actors ­ between large processors and smallholders, and a systematic examination of the principal-agent literature could facilitate identifying institutional policies leading to the establishment of smallholder-based supply chains allowing poor livestock keepers to access markets equitably and efficiently. Some institutional policies are suggested, including public actions reducing transaction costs for searching and screening partners, mitigating incentives for opportunistic behaviours, and supporting contract enforceability. Note that the focus is not on high-level macro institutional policies, but on the day-today rules that govern the interrelations among stakeholders in the supply chain. Finally, whereas the paper appears to a-priori defend small livestock producers, this is not a nostalgia for the "small and beautiful" perspective. It is based on the assumption that small farmers are at least as efficient, if not more, than large livestock producers, and that in Latin America the development of large capital intensive production farms and supply chains has rarely generated enough demand for the displaced labourers. It has forced them to urban migration, where only a few have found productive employment in modern urban industries, and most derive their subsistence from informal economic activities. Supporting smallholder livestock keepers, therefore, might trigger an "alternative path of economic development" which is the expansion of small-medium on-farm, offfarm and non-farm agricultural and industrial activities in rural areas, promoting both economic growth and poverty reduction. 17
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Title: Policies to make livestock a pathway out of poverty in Latin America
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