Cover_Wytse.pdf 1 8/12/15 11:54 Strange bedfellows? Big business meets small farmer C M Y CM MY CY CMY K Wytse Vellema ISBN 978-9-0598984-9-3 201 9 789059 898493 5 FACULTEIT BIO-INGENIEURSWETENSCHAPPEN Foar myn pake, Durk Vellema (7 februari 1928 - 16 februari 2013) Cover illustration: “The unveiling” pencil and gouache on bookcover PeDeJee https://pedejee.wordpress.com Promotor: Prof. dr. ir. Marijke D’Haese Department of Agricultural Economics Ghent University Dean: Prof. dr. ir. Marc Van Meirvenne Rector: Prof. dr. Anne de Paepe Strange bedfellows? Big business meets small farmer Thesis submitted in fulfillment of the requirements for the degree of Doctor (PhD) in Applied Biological Sciences This thesis will be defended in public on Friday 18 December 2015 at 16.00 by Wytse Vellema Preface It all started with a big bang, approximately 14 billion years ago. While continents drifted, life started to form, slowly. Some of the first evidence of life on earth is dated between 3.5 to 4.1 billion years ago.1 Nevertheless, it would still be a long time before humans first came along. Humans split off from the apes around 7 million years ago, first walked upright about 4 million years ago, and started using primitive tools 2.5 million years ago. Our direct ancestor, homo erectus, came into being around 1.7 million years ago and started spreading out of Africa around 1 million years ago. Sometime after that - nobody knows when exactly - homo sapiens evolved, and spread all over the world.2 For more than 99% of the time that modern humans exist, we were living in small bands of hunter-gatherers, semi-sedentary or sedentary in regions with abundant natural resources, but usually migratory. This all changed with the invention of farming, approximately 10,000 years ago. Farming allowed humans to sustain dense populations in small areas and develop societies. In these initial societies the family was the cornerstone. Production took place within and for the family. However, as farming became more productive societies became larger. Larger societies needed rulers, which needed to be fed from the surplus production of others. In addition, farming required productive assets, and hence protection of property rights. While migratory hunter-gatherers owned only as much as they could carry, the sedentary life-style made possible by the invention of farming allowed for capital accumulation.3 It is therefore not surprising that Adam Smith describes this development in the first book ever written on economics (1776).4 He distinguished four evolutionary stages in the history of civilization: the hunting and pastoral periods of pre-feudal, nomadic cultures, then the farming stage, and finally the commercial era. Smith sees the development of civil society as protection of property rights. While Smith’s view is naturally coloured by the lens of his period and incomplete when it comes to the history of human development, it does bring home an important point. Without farming there is no property, and hence no economics. The success of farming made human and economic development possible. Given the rate at which the world population is growing, we will rely more than ever before on increases in farm productivity to feed the world. It is only through the exchange of farming knowledge that it is possible to achieve the productivity required for the world to sustain such a large human population. Agricultural development is human development. 5 Notes 1 The dates for the origin of life are taken from two scientific publications: Bell, E.A., Boehnke, P., Harrison, T.M., Mao, W.L., 2015. Potentially biogenic carbon preserved in a 4.1 billion-year-old zircon. Proceedings of the National Academy of Sciences 112, 14518-14521 and Schopf, J.W., Kudryavtsev, A.B., Agresti, D.G., Wdowiak, T.J., Czaja, A.D., 2002. Laser-Raman imagery of Earth’s earliest fossils. Nature 416, 73-76. 2 Boyle, K., Boyle, K.V., Bar-Yosef, O., Stringer, C., 2007. Rethinking the Human Revolution: New Behavioural and Biological Perspectives on the Origin and Dispersal of Modern Humans. McDonald Institute for Archaeological Research. 3 The section on early human societies is based on Diamond, J., 2005. Guns, germs, and steel. Vintage, London, UK.. 4 Smith, A., 1776. An inquiry into the nature and causes of the wealth of nations. University of Chicago Press, Chicago, USA. 6 Members of the jury Prof. dr. ir. P. Boeckx (Chairperson) Department of Applied Analytical and Physical Chemistry, Ghent University Prof. dr. C. Lachat (Secretary) Department of Food Safety and Food Quality, Ghent University Prof. dr. ir. M. D’Haese (Promoter) Department of Agricultural Economics, Ghent University Dr. D. Boselie (Reading committee) Senior Manager Learning and Innovation, Sustainable Trade Initiative Prof. dr. C. P. J. Burger (Reading committee) Department of Development Economics, Wageningen University Prof. dr. N. Poole (Reading committee) Centre for Development, Environment and Policy, University of London Prof. dr. K. Schoors (Reading committee) Department of General Economics, Ghent University 7 8 Summary Big business has long been able to avoid dealing directly with small farmers. The high fixed costs of transactions makes dealing with many small farms far costlier than dealing with a few larger farms, leading to a dual system of capitalized large farms delivering to heavily regulated modern supply chains on the one hand, and small farms depending primarily on family labour delivering to local markets on the other. This situation is changing. A rapidly growing and urbanising world population requires agricultural production to increase and become integrated into modern supply chains. Taking more land into use is no longer an option: agricultural activity already covers every nook and cranny of the arable part of the earth. Therefore, increasing output is only possible by increasing productivity on existing agricultural land. The land where potential productivity gains are largest is in the hands of small farmers in low and middle income countries. Most of these farmers do not have the resources or access to credit to close the productivity gap on their own; linking with modern supply chains might prove an opportunity to overcome these limitations and consequently increase their income. The question is how. The transaction linking small-scale farmers to the next level in the supply chain is called an inclusion mechanism. In the first part of the thesis, the focus was on inclusive business models, a broad subset of inclusion mechanisms. Ten case studies from Burundi, Ethiopia, Kenya, Mozambique, and South Africa with governance structures ranging from almost spot markets to complete vertical integration were analysed using transaction cost theory. In chapter 2, Williamson’s transaction characteristics and Ménard’s dimensions of hybrids were used to analyse the extent to which existing theory can explain the type and specific form taken by inclusive business models. Results show that although transaction cost theory is a useful starting point for analysing inclusive business models, it is not yet able to perfectly explain the specific form they take, their ‘personality’. Financial constraints of participating small-scale farmers was identified as one of the factors which might help to explain this personality. How exactly financial constraints of farmers affected the personality of inclusive business models was analysed in chapter 3. More specifically, the effect of the combination of firm investment and appropriability hazard on the level and type of safeguards contained within the governance structure was investigated. All studied business models were operating in the context of a weak institutional environment, meaning the local justice system could not be relied upon to cost-effectively mediate conflicts between firm and farmers. In combination with the financial constraints of farmers, this meant that firms had to make the largest share of the investment in the model and find some other way to control 9 appropriability hazard – the risk of opportunistic behaviour by farmers. Results show that the level of firm investment and the level of safeguards go hand in hand: more investment means more safeguards. However, when appropriability hazard is high, investment is not made in the first place, and a governance structure is adopted which is closer to a take-it-or-leave-it market transaction. The second part of the thesis focused on measurement of the farm-level impact of inclusion mechanisms. Since small farmers are often poor, the public sector has an interest in finding out the poverty alleviation potential of inclusion mechanisms, to determine if it is worthwhile to invest in them. Unfortunately, measuring this impact is far from straightforward. It requires careful thinking about how and what to measure. In chapter 4 a common measure of impact, the Household Dietary Diversity Score (HDDS), was analysed using household-level data from over 1,000 small farmers on both sides of the border of Colombia and Ecuador. Rasch analysis was used to determine to what extent the indicator was validly measuring food security, one of the outcome targets set in the Millennium Development Goals. Results show that for the sample as a whole, the indicator was not valid. Further analysis showed that its performance could be improved by taking local dietary patterns into account and discarding groups which for particular sub-populations showed abnormal behaviour. Even then, the extent to which the indicator was actually measuring food security was questionable. Although indicators are a popular method to assess the impact of inclusion mechanisms, there is a risk that such an approach misses broader behavioural impacts. That such broader impacts exist was shown in chapter 5, in which the impact of coffee certification and its corresponding access to specialty coffee markets on the behaviour of small-scale farmers close to the poverty line in the south of Colombia was investigated.