Previous Page Table of Contents Next Page

Chapter 10. Capital market liberalization and the Latin American agrifood system[148]

10.1 Introduction

This chapter draws attention to the increasingly important role of capital market liberalization (as opposed to the product market liberalization commonly associated with trade liberalization) in shaping the market opportunities for agricultural producers. It draws lessons from experience in Latin America where recent changes in agrifood systems have been dramatic. Caution may be required when generalizing to other developing regions, given the contemporary demographics in Latin America which has a relatively large middle income, and an urbanized consumer population, in a region where policy previously suppressed demand and was ripe for rapid expansion on the liberalization of foreign direct investment (FDI). Whilst similar patterns may be expected in South-East Asia for example, the demographics and income distributions are significantly different in South Asia and sub-Saharan Africa, and the impact of these changes may not be the same at this stage in their development.

Product market trade has been liberalized greatly in Latin America over the past two decades via individual countries’ structural adjustment programmes (SAPs), regional free trade initiatives such as NAFTA and MERCOSUR, and adherence to GATT and WTO. The reforms have been substantial but, as elsewhere in the world, not complete and they are expected to continue (see Chapter 14). However, here it is argued that product market liberalization is only half of the story of trade liberalization, and perhaps not even the more important half in terms of long-term effects on household food security and on the agrifood system: the chain from farm input supply, to farming, to food processing, to wholesale, to retail, and across the product chains. The other half of the story concerns the capital market, and in particular the deep liberalization of capital flows in the form of FDI. Product-market and capital-market liberalization have usually been inextricably linked in the policy reforms (for example in the reforms in Brazil and Argentina and Mexico and NAFTA and MERCOSUR).

This liberalization has spurred a giant river of investment in part of the agrifood system - downstream, in retail, food services, and second-stage processing - very different from the pre-liberalization era when there was a relative trickle of FDI which was found upstream in the chains (in farming and first-stage processing). This change has resulted in a supermarket revolution, and rapid consolidation and multinationalization in the second-stage processing sector.

The effects of this expansion on the agrifood system are described in the following sections.

10.2 Increased foreign direct investment to the export sector

The expansion of trade increased the profitability of exporting and that drew FDI into the agrifood export sectors. Nearly all of the inward investment occurred via mergers and acquisitions rather than the establishment of new firms. This in turn drove two very important changes:

Brazil provides a clear illustration of these changes. In the main export sectors (tobacco, poultry, oranges, orange juice, soybeans, beef, sugar, coffee) the share of multinational firms soared between 1994 and 1998. In tobacco, it increased from 82 to 90 percent, in soybeans from 30 to 48 percent, in pork from 11 to 40 percent, and in poultry, from 8 to 34 percent. Coffee alone did not multinationalize (the share stayed at 10 percent) although Jank points out that expectations are that this will change in the next decade. Brazilian export agribusiness is very concentrated (17 firms controlled 43 percent of exports, 42 firms, 60 percent, 156 firms, 80 percent; but 70 percent of exporters (4000 firms), have 1 percent of exports[149].

10.3 Exclusion of small farmers

A second impact was the substantial exclusion of small farms and firms because of the increase in trade. A number of factors contributed to this.

The main reason for the low levels of participation is the apparently low elasticity of substitution between unskilled labour and the diverse forms of capital required to meet the standards of fruits and vegetables for export, as explained in the next section.

The developing literature on Value Chain Analysis supports this conclusion, suggesting that value chains can act as a barrier to participation in new trade opportunities, but that the benefits of being a participant in the chain can be substantial. Tasks such as chopping, washing and combining vegetables are increasingly being transferred to Africa, for example, and in the process are generating new jobs. However, analyses generally conclude that decisions made at the top of the chain (e.g. in supermarkets) are increasingly defining what other actors in the chain have to do in terms of both the level and consistency of cost, quality, delivery etc. The fact that these factors need to be monitored and deficient performance acted upon, make it is easy to argue the case against obtaining supplies from large numbers of smallholders[151]. Evidence of a shift to sourcing from larger-scale producers is used to support this contention. This is coined as a “simultaneous process of power concentration in importing countries and power deconcentration in producer countries”[152].

Whilst there is evidence of the increasing importance of value chains, it is also important to recognize that the production of some commodities (notably higher value added products) is affected more than others. In discussing prospects for diversification for example, value chains are likely to impact strongly upon the prospects for smallholder entry. There may however be the possibility for smallholders to become integrated into the chains of larger exporters.

10.4 Domestic agrifood system change: foreign direct investment and supermarkets[153]

Latin America has experienced nearly the same increase in the importance in supermarkets in the national retail sector in one decade as the United States experienced in six decades, where supermarkets are now about 70 percent of the retail sector. The share of supermarkets in the national retail sectors of three-quarters of the Latin American economy increased from about 15-20 percent in 1990 to 60 percent in 2000. For the poorest one-quarter of the LAC countries, it increased from 5 percent to about 30 percent over the same decade, and is still rising.

Box 10.1 The share of supermarkets in national food retail sectors of selected LAC countries


from 20 to 70 percent over the 1990s


from 20 to 60 percent over the 1990s


45 percent in 2000


62 percent in 2000

Costa Rica

50 percent in 2000

El Salvador

50 percent in 2000


25 percent in 2001


20 percent in 2000


15 percent in 2001

While supermarkets in the 1970s and 1980s were located in the upper-income neighbourhoods of the largest cities, by the 1990s they were expanding rapidly from those niches into middle class neighbourhoods of big cities, then into intermediate cities, then into towns by 2000.

There has been rapid consolidation and multinationalization of the supermarket sector in Latin America mainly over the past 8 years. Competition for growing markets and increased FDI in the sector, mainly from the leaders Wal-Mart, Carrefour, and Ahold (which are also the top supermarkets in the world), has driven the process. Between 50 and 60 percent of the supermarket sector in Mexico, Brazil, and Argentina (about two-thirds of the Latin American economy) is controlled by four or five firms, three or four of which are multinationals.

Box 10.2 Increased reach of supermarkets

Osorno in southern Chile has three supermarkets on its main plaza, all competing, and nearby Purranque (a town of 25 000 inhabitants) has had its own supermarket for one year. Sixty percent of supermarket sales in Chile are now outside Santiago. Supermarkets have recently been introduced in about 40 percent of the smaller towns in Chile and 30 percent in Costa Rica. Moreover, supermarkets have spread quickly from richer to middle class to poorer neighbourhoods.

Because supermarkets have taken over most of the retail sector in the region, small farms and firms now have to deal with them. Supermarkets are clearly dominant in urban (even town) food markets, and within those, in the most dynamic parts of those markets. Half or more of dairy products and a minority but growing share of fruits and vegetables are being sold through supermarkets. Moreover, whereas urban markets were considered as promising markets for the poor; to sell to these markets now means mainly selling to supermarkets.

Supermarkets are restructuring the agrifood chains from which they buy their products, in several crucial ways.

There are important implications of the above changes for small farms and firms and thus income and employment opportunities. The main point is that there is a huge potential for the supermarket and fast-food revolutions to exclude - or create markets for - small farms and firms. This potential is much greater than the export market one, simply because the export market is smaller than the domestic market for Latin American farmers, and because small farmers are more able to access, and in general more focused on, the domestic food market.

On the other hand, these changes bring the spectre of exclusion of small farmers. A poignant illustration is that of the experience of ASUMPAL, a farmers’ association in Guatemala detailed in Box 10.3.

Box 10.3 Exclusion of small farmers

For several years ASUMPAL, with some 330 members (about 300 small farmers and 30 medium farmers) was producing roma tomatoes for the Guatemala City wholesale market. However, the over-supply of these tomatoes to the market resulted in 2000 in the association shifting to a contract for salad tomatoes with McDonalds of Guatemala. These contracts had strict private standards with respect to size, appearance, shape, safety, colour of the tomatoes, cost, volume of frequent deliveries, packing materials and temperature of delivered product. These requirements implied in turn the need for large investments in drip irrigation, greenhouses, worker hygiene facilities in the fields, and improvements in their trucks and packing sheds. The small farmers of the association found the investments impossible and dropped out. Membership fell from 330 to 30 in one year!

This is not just a Latin American situation: the Ahold supermarket chain in Thailand, Tops, recently cut its 250 vegetable suppliers to 50 and is aiming for 10 best-producers. The changes in procurement systems - with the large increase in scale and the increase in system coordination via private standards of quality and safety - are a double edged sword. On the one hand, they increase the market. But on the other hand, they remove the distinction between the export economy and the domestic economy, because standards and even products from the competition are being injected into the local market from the global market by the supermarkets. The supermarket brings global rules of the game and global competitors into the backyard of the local small farms and firms.

10.5 Conclusion

The long-used and long-cherished conventional distinction between the global/export and the domestic/local market has collapsed. NGOs, donors and governments have cherished the hope that if the going is too tough in the export/global market, the small farm and firm can easily retreat to the local market where standards are lower, and where global competitors do not operate. This is no longer the case. Urban and even small town food markets are now linked to the international economy through the thorough-going presence of supermarkets.

All eyes are on public standards and regulations (with focus on WTO). But at least half of the action in setting the rules of the game is in the domain of private standards set by large multinationals (global and regional) and large domestic firms. The debate needs to open as to what the effects are of these private standards, and how public policy should take them into account, such as harmonizing with them.

In June 2002, CIES (the world association of supermarkets and their main suppliers, with a combined sales figure represented of 2.8 trillion dollars!) met and decided on a global private standard system for food safety for their stores. Would such an initiative have an effect on the farmers of Latin America, selling to the global market, and selling to those same supermarkets or food manufactures that now dominate the food sector in Latin America?

The phenomenon detailed above has been so fast that it has not entered public debate and the policy implications have not been discussed. Much more research and action are needed on this, as well as on how small farms and firms can sell to supermarkets and what investments and training are needed.

Moreover, the extremely rapid rise of fast-food chains in Latin America raises the same sorts of consolidation and multinationalization issues as in the supermarket sector. There are 1581 McDonalds in 2001 in Latin America, and 500 Kentucky Fried Chicken and Pizza Hut outlets in Mexico. This constitutes the start of a fast-food revolution. The effects on the agrifood system are similar to if not more intense than are the effects of the supermarket revolution. Similar changes are also apparent in second stage processing (defined as processed food products for final consumers, such as yoghurts and cheese, breads and noodles).

[148] This chapter is based on a paper by T. Reardon, Product-Market and Capital-Market Trade Liberalization and Food Security in Latin America, presented at the Expert Consultation on Trade and Food Security: Conceptualizing the Linkages. 11-12 July 2002, Rome.
[149] Jank, M.S., Leme, M.F.P., Nassar, A.M. & Faveret-Filho. P. 1999.Concentration and internationalization of Brazilian agribusiness exporters, International Food and Agribusiness Management Review, 2(3/4):359-374.
[150] Carter, M. & Mesbah, D. 1993. Can land market reform mitigate the exclusionary aspects of rapid agro-export growth? World Development, July.
[151] Dolan, C, J Humphrey, and C Harris-Pascal 2000, Horticultural Commodity Chains: The Impact of the UK market on the African fresh vegetable industry. Brighton: IDS.
[152] Fitter, R. and Kaplinsky, K. 2001, Who gains from product rents as the coffee market becomes more differentiated?: A Value Chain Analysis. Brighton: IDS.
[153] Reardon, T. and Berdegue, J. 2002 (forthcoming). Globalization, the rise of supermarkets, and effects on the rural poor in Latin America: overview of issues, findings, and policy implications. Development Policy Review, September.

Previous Page Top of Page Next Page