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Contract farming and cut flowers: an Ecuadorian export cut flower firm's response to dollarization
Author M R Blumthal and H R Gow
Year 1970
Organization University of Illinois at Urbana-Champaign, USA
The international development community has made a significant strategic policy shift towards the use of high value-added market-driven development initiatives, with contract farming as a mechanism to assist small impoverished farmers to link themselves with international markets. Although contract farming has been in existence for many years as a means of organizing commercial agricultural production of both large-scale and small-scale farmers, its use is still highly debated in the development literature. Recent empirical evidence suggests that contract farming can produce substantial positive direct and indirect economic benefits and horizontal and vertical spillovers when a stable macroeconomic and legal environment is established and coupled with positive foreign direct investment (FDI). Researchers, however, have been unable to determine the relative importance of FDI versus a stable international market linkage as the catalyst for these contractual innovations. During the 1990s, the Ecuadorian export cut flower industry expanded rapidly by exploiting a unique financial arbitrage opportunity provided by the combination of an American dollar-denominated export market, a rapidly depreciating local currency and an inelastic labour market. Exporters profitably exploited the increasing exchange rate between the American dollar and the Sucre. Recognizing that the Sucre was depreciating at a rate of approximately 50 percent per annum, by the end of the 1990s, labour costs quickly became insignificant and most of the industry was highly inefficient. However, the unanticipated dollarization in January 2000 removed this arbitrage and confronted producers with not only American dollar-denominated product markets, but also American dollar-denominated factor markets. Firms were forced to change their production practices and business models in light of the dramatic change in input prices, or exit. The result was a substantial organizational and institutional innovation as firms attempted to identify and develop more efficient business models that provided sustainable competitive advantage within a high labour-cost environment. One of the critical innovations related to the establishment and diffusion of a cut-flower production contract between a medium-sized cut flower producer−exporter and the surrounding small-scale vegetable farmers. This paper evaluates the factors that contributed to the introduction, diffusion and impact of this contract production model.
Publisher Peter J. Batt and Jean-Joseph Cadilhon (eds) Proceedings of International Symposium On Fresh Produce Supply Chain Management, Chiang Mai, Thailand, 2006 pp.246-257
Country Ecuador