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Section 5: Review of the current literature on the NTAE sector


The literature available on the production and trade in high value/non-traditional agricultural products has a relatively narrow focus. It is dominated by an analysis of horticultural (fruit and vegetable) production, with some limited analysis of the cut-flower industry. Analysis of processing is confined principally to the production of "high care" products in the horticultural sector, such as pre-prepared salads and stir fry mixes.

The geographic focus of the literature is mainly the developing countries of sub Saharan Africa. Because of the traditional trading links between these countries and Europe, it is also the case that the end-user focus is on the EU market, and in particular the UK. There is comparatively little analysis of intra-regional trade within SSA or of inter-regional trade beyond the Africa-Europe axis.

Notwithstanding these caveats, the literature reveals a number of common themes and issues. These form the topic headings for the review that follows.


The supply chain for horticultural products has changed markedly in recent years with the evolution of the supermarkets and large retailers as a major buying force. Increasingly, product markets mean supermarkets (UNCTAD, 2002).

In the UK, sales of fresh fruit and vegetables are concentrated in the hands of a small number of retail chains. In the UK, the seven largest food retailing chains now account for 76 percent of fresh fruit and vegetable sales. These large retailers now control 70 percent to 90 percent of fresh produce imports from Africa (Fearne and Hughes, 1998). Wholesale markets remain more important in France as an outlet for fresh produce, but even so supermarkets still account for 40 percent of fresh produce sales (Lambert, 2002). Increasingly, these retailers are global. For example, in most Latin American countries, the top five supermarket chains are global multinationals, mainly the top three food retailers in the world - Royal Ahold, Carrefour and Wal-Mart - but also others such as Casino and Auchan (Reardon, Berdegué and Farringdon, 2002).

Supermarkets have played a decisive role in defining how international trade in fresh fruit and vegetables is structured (Humphrey and Oetero, 2000). In the late 1980s and early 1990s, high value agricultural exports were typically produced by smallholders and exported by locally owned companies to independent importers in Europe.

Several changes have taken place in the supply chain in recent years. At grower level, smallholder production has been replaced, increasingly, by production from larger commercial units. Many exporters have invested upstream in production, for example, half of all produce exported by nine leading fresh vegetable exporters in Kenya and Zimbabwe was produced on their own farms (Dolan, Humphrey and Harris-Pascal, 1999). The number of exporting companies has reduced. Supermarkets no longer buy through the wholesale trade but direct from importers, often known as category managers in the UK (Coote, Greenhalgh and Orchard, 2003). Importers and exporters have forged closer ties, often through mergers, joint ventures or acquisitions, such as that made by Colombian flower exporters in a US-based importer (UNCTAD, 2002).

The combined effect of each of these trends has been to produce a much shorter supply chain, a greater degree of vertical integration, fewer active players (particularly among the exporter and importer categories) and production and exporting on a much larger scale. The supermarkets and large retail buyers have played a key role in the transformation of the supply chain, principally because the demand for product traceability and for high standards of social and environmental compliance have tended to favour the concentration of production and exports in the hands of a few large players (NRI/IDS, 1999).

Homegrown, Kenya's largest horticultural exporter, is an example of a highly vertically integrated company. 90 percent of its crops are grown on its own farms, it controls the storage, cooling and logistics from field to packing station, has a joint venture with an airfreight company and a dedicated importer based in the UK (Dolan, Humphrey and Harris-Pascal, 1999).

This trend towards greater concentration in the supply chain has been reinforced by economic factors. The capital required for investment in post harvest processing and the cool chain, and the need to ensure rapid and reliable exports, have also favoured the emergence of large-scale exporters. Currently, the top five exporters in Kenya and Zimbabwe control over 75 percent of fresh vegetable shipments overseas (Dolan and Humphrey, 2000). The emergence of oligopolies in packing, processing and exports (Jaffee, 1993) has also been necessary to counter-balance the growing concentration among importers/buyers at destination.


The increasing demand for "convenience" among supermarket shoppers in particular, is providing developing countries with opportunities to grade, pre-prepare and package prior to export (Humphrey and Oetero, 2000). Homegrown of Kenya has recently completed a factory for prepared salads. This guarantees that salads are picked, prepared, fully labelled and transported to the supermarket shelves within 48 hours (Dolan, Humphrey and Harris-Pascal, 1999).

In Kenya, the increase in value-added processing (pre-preparation and pre-packing) to produce "high care" products such as salads, prepared vegetables, stir fry mixes etc., has increased f.o.b. export values for fresh vegetables by 250 percent. Exporters report that typical margins range from 0 percent to 2 percent and 2 percent on 4 percent on fine beans and okra, respectively, where these are sold in bulk (loose) in cartons. Margins rise to between 4 percent and 6 percent for topped and tailed beans, 6 percent to 8 percent for podded peas, 10 to 12 percent for sliced runner beans, and from between 12 percent and 14 percent for stir fry mixes. (Jaffee, 2003).

The value-adding that most typifies the fruit, vegetable and cut-flower export sectors, involves comparatively little product transformation or processing. For the most part, it is confined to preparation, packing, bar-coding and labelling. Pushing back these functions onto the origin country has considerable advantages for the supermarkets. For example, these tend to be highly labour-intensive operations and labour is cheaper in countries such as Kenya; it reduces repackaging at destination; and, it places the responsibility for inventory control and traceability in the hands of exporters, many of whom will operate just-in-time delivery systems.

Adding value in this way does require considerable investment by the producer/exporter at origin, not just in technology and equipment but also in management systems. (Dolan and Humphrey, 2000). This is a potential barrier to entry for smaller, less well capitalized producers/exporters and possibly also to new entrants.

Added-value opportunities are not confined solely to additional preparation and packing at origin. There is growing potential for developing value-added versions of conventional fruits and vegetables, principally in the "baby" vegetables and, to a lesser extent, "baby" fruits sector. The US fresh produce industry reports increased demand for baby vegetables, including squashes, carrots, snap peas, French beans, radishes and tomatoes (AmericaFruit, 2002).


5.4.1 Legal vs. commercial standards of compliance

Jaffee (2003), in a review of the compliance requirements for Kenyan vegetables exported to various EU countries and to New Zealand and Australia, draws an important distinction between compliance standards which are legally mandated and those which are a commercial requirement. Broadly speaking, adherence to maximum residue levels (MRLs) of pesticides in food and the possession of a phytosanitary certificate are legal requirements for any exporter. Many other compliance requirements, such as traceability, adherence to good agricultural practice (GAP) and the possession of a hazard analysis and critical control point (HACCP) system are not legally mandated but may be imposed by the buyer.

Thus, exporters targeting UK supermarkets will find themselves subject to a raft of other private grades and standards. Other UK markets, such as the wholesale trade and the Asian vegetable market are much less demanding, particularly with regard to ethical, social and/or environmental standards, but they are declining in importance as an outlet for exporters.

Reardon, Berdegué and Farringdon (2002) comment that public grades and standards are being overtaken by the private grades and standards imposed by the large supermarkets and processors, for example the Nestlé quality assurance standard. All export firms must now have sophisticated quality assurance systems that document seed procurement, planting schedules, agrochemical and fertilizer use/storage, personal hygiene practices etc.

Increasingly, retailers have expanded the standards that exporters must meet, moving beyond procedures to ensure regulatory compliance to addressing broader social, environmental and ethical issues (Dolan and Humphrey, 2000). Exporters are not currently obliged to have an HACCP, neither to meet the Euro Retailer Produce Working Group for Good Agricultural Practice (EUREPGAP) standards, nor to be audited according to the Ethical Trade Initiative, but compliance with some or all of these standards will assist exporters in securing the broadest level of market access (CBI, 2002).

Pesticides legislation

The literature addresses pesticides legislation within importing countries, but focuses in particular on the EU's recent directive,[33] which aims to harmonize the regulations in the EU on maximum (pesticide) residue levels (MRLs) and establish a single list for approved pesticides. There are mixed reports on how this new directive will affect producers in exporting countries.

A study conducted by Smelt and Jager (2002), concluded that trade problems may occur when EU-MRLs are lower than residue levels set in Codex Alimentarius and, in particular, where they are set at the limit of determination (LOD). Exporting countries can escape LOD levels by making a request for an import tolerance; however, for the agro-chemical companies it may not be commercially attractive to do this for the minor crops.

A detailed case-study, which analysed the possible impact on Ethiopia, concluded that the use of pesticides and fertilizers in the production of horticultural products is relatively low. In the case of green beans, the major horticultural export crop, the report concludes that the new EU pesticide legislation will have little or no impact, because the beans are grown during the dry season when the incidence of pests is low.

A recent report on the Egyptian horticultural produce sector concludes that the impact will vary (Eurofruit, 2003). Egypt's largest exporter of grapes and strawberries expects there to be no significant impact on its business. In contrast, the CLRA[34] believes that the new legislation will have a significant impact for two reasons: (i) because the EU's MRLs are tougher than those of Codex and (ii) because a large number of the cheaper pesticides that are manufactured within Egypt will not be permitted.

5.4.2 Meeting compliance standards - new and established producers/exporters

Collinson (2001), reporting on the Kenyan flower industry, reports that growers have little difficulty meeting the social and environmental codes required of them. Equally, Jaffee (2003) reports that, rather than posing an imminent threat to Kenya's fresh vegetable trade, the "racketing" up of private standards by the supermarkets has provided a lifeline to the Kenyan industry at a time of increased competition from other origins such as Morocco and Egypt.

Whilst Kenya's pre-eminence in the high value vegetable export market may be rated a considerable success story, it should be borne in mind that Kenya first began exporting fresh vegetables in the mid 1950s. Since then, the private sector has invested heavily in the technology and infrastructure needed to manage all stages of the supply chain highly efficiently. Collective action by various groups such as the Fresh Produce Exporters' Association of Kenya (FPEAK) and the Kenya Flower Council (KFC) on pesticide use and other codes of practice, and environmental initiatives by the Lake Naivasha Growers Group, have been reinforced by statutory measures adopted by the Government of Kenya.[35]

New entrants to the export market face a daunting challenge. They have to be competitive both on costs and quality with long-established producers and exporters and be able to meet, or at least come close to, the benchmark standards being set by the supermarkets and major retailers.

In Senegal, recently, exporters' compliance with EUREPGAP standards were assessed within the framework of the Agricultural Export Promotion Project (PPEA). Of a total of 15 exporters, two-thirds were less than 50 percent compliant with EUREPGAP production standards; none were fully compliant. Handling standards were even lower: barring two exporters all were less than 60 percent compliant with EUREPGAP.

A recent evaluation of the feasibility of vegetable export production in a sub-Saharan African country, reported that very substantial effort and investment would be needed to improve standards throughout the entire supply chain before buyers for the UK supermarkets would consider it as an origin. There are other potential outlets for the produce, both outside the UK and to the non-supermarket trade. However, it is apparent that the dominance of the supermarkets, and greater competition among exporters of fresh produce, is leading to a general rise of standards across all sectors. A new exporter of fresh produce is unlikely to carve out a long term, viable export market if its standards are substantially below the benchmark set by the major international food retailers and processors.

5.4.3 Meeting the costs of compliance with grades and standards

The costs of meeting the standards demanded by the end-users in the importing markets are high, particularly at the top end of the market. Jaffee (2003), reports that one large Kenyan producer/exporter expects to spend around US$300 000 per annum, or 3 percent of turnover, on annual food safety management costs. The compliance costs for the "high-care" end of the business are much higher (at 5 percent of turnover) than those for the premium, pre-packing business (2 percent) of turnover.

Initial, or start-up, compliance costs are also high. A Kenyan exporter currently supplying the loose (bulk) end of the fresh produce market and exploring the feasibility of pre-packaging of vegetables, estimated that it would cost around US$150 000 to upgrade pack house facilities to meet the British Retail Consortium (BRC) standard, and that further costs would be incurred in recruiting food technology staff and developing HACCP and traceability systems.

Collinson (2001), writing on the Kenyan flower industry reports that the management time to implement compliance, in the form of documentation and record keeping, is one of the biggest costs faced by growers and falls disproportionately on smaller growers. Reardon, Berdegué and Farringdon (2002) claim that increasingly tough grades and standards, and the capital investment needed to meet them, have driven many small firms and farms out of business in developing countries and accelerated the process of concentration.

Certainly, there is a large element of fixed costs in implementing and maintaining high levels of compliance and certification, which favours larger businesses over small and medium scale enterprises. This is tending to drive the rationalization process at the supplier end. At the end-user end of the market, it can be more costly to meet the supermarkets demands for traceability and fully assured foods when dealing with a large number of relatively small producers/exporters at origin. For this reason, importers/category managers tend to favour large scale exporters (NRI/IDS, 1999), so further driving the process of concentration from the buyer end.


Economies of scale and the cost and organizational benefits associated with short, vertically integrated supply chains with a limited number of players, tend to mitigate strongly against small-scale producers and exporters. The situation facing both categories of participant is discussed in more detail in the following two sections.

5.5.1 Small-scale production

Growing fresh produce is not as scale-dependent as many of the traditional agricultural export crops (Humphrey and Oetero, 2000). Furthermore, smallholder-based systems may have distinct benefits over larger farms. For example, crop care is often better, dispersed plots can pose fewer disease problems and the management of a large work-force is not an issue as it is on commercial farms (NRI/IDS, 1999). Jaffee (2003), notes that, in Kenya, smallholders have come to dominate the fruit sector. This is particularly true in the case of mangoes and avocados, where large commercial growers have been unable to maintain profitability.

However, factors such as traceability, the monitoring of social and environmental standards, the transmission of new technology and good agricultural practice, maintenance of the cool chain and general logistics all tend to favour larger scale agricultural operations. In north east Brazil, the investment costs associated with high standards of quality certification made it difficult for smallholders to participate in the export market for mangoes and grapes. Smallholders were much more likely to produce beans, industrial tomatoes, onions and watermelons for the domestic market (Damiani, 1999).

These practical issues are reinforced by the perception among some buyers, particularly the supermarkets that a more concentrated grower base provides for much greater control over the production and distribution process (Dolan and Humphrey, 2000).

Some of the key issues that face smallholder growers include a lack of organization, poor quality, over-supply and a lengthy supply chain operated by middlemen. As a result, rejection rates can be high, farm gate prices low and the impact on poverty reduction limited.

There are examples of smallholders being successfully integrated in the export supply chain. The outgrower model, as developed by Hortico in Zimbabwe and by Homegrown in Kenya, is one such example.

Hortico supports an outgrower network of around 3 000 growers through 19 service centres. Some may have plots of less than one hectare, with irrigation done solely by hand. These centres, which co-ordinate the production and harvesting activities of between 50 and 250 growers, ensure safe pesticide use, product traceability and post-harvest handling systems equal to those of commercial growers. There have been only two incidences of side selling and virtually 100 percent repayment of loans. All commercial and financial risk has been born by the company (NRI/IDS, 1999).

The vegetable supply chain tends to require all produce to be handled through a single pack-shed. In the case of cut-flowers and citrus in Zimbabwe, the product is packed at the out growers' own facilities and delivered as finished product to the exporter (Heri, 2000).

Homegrown in Kenya, operates a similar style outgrower scheme. It has fewer growers than Hortico - 900 currently - and growers' holdings are larger. For example, some growers have holdings of up to 50 hectares and would be more correctly defined as medium scale farms. Homegrown provides high quality seed, extension services through agronomists and crop protection specialists, loans, grading facilities and a charcoal cooler (NRI/IDS, 1999).

Also in Kenya, the Fresh Produce Exporters' Association of Kenya (FPEAK) has been bringing together groups of small farmers to operate as a single commercial entity. The ideal group size is 15 to 20 growers, within a radius of 1 km. These groups use trained "crop scouts" and trained spray operators who undertake all spraying on behalf of growers (IDS/NRI, Workshop 1999). Whilst similar to outgrowing schemes in structure, the group must source and administer credit on its own behalf.

In the flower sector in Zimbabwe, a pool marketing system operates, under which growers consolidate their exports into a single consignment, and sell under one brand name. One such system involves a local syndicate of 50 small growers. Each grower is responsible for production, packing and local transport to the agent's cold-stores at the airport. The agent is responsible for marketing the crop and all onward transport and logistics (Heri, 2000).

Such pool marketing or collective marketing organizations are not uncommon. At the extreme are organizations such as The Capespan Group in South Africa, a public limited company which markets citrus fruit for around 3 000 suppliers, most of whom are shareholders (Eurofruit, 2002). Nevertheless, such organizations are not immune from the pressures of scale, particularly where there is a mix of both small and large growers. For example, The Greenery, a Dutch producer organization marketing tomatoes, peppers, cucumbers and aubergines on behalf of its growers, raised its sales commission, effectively forcing several hundred smaller growers to leave the group and market independently. This yielded immediate cost benefits for larger producers, particularly in lower logistics and marketing costs (Eurofruit, 2002).

5.5.2 Small-scale exporting

Small-scale exporters face a number of problems. Dolan and Humphrey (2000) comment that the need for scale in exporting weighs strongly against the survival of small to medium scale exporters in the supply chain. In Kenya, where over 90 percent of fresh horticultural products are air freighted, securing air cargo space is a priority (Barrett et al, 1999). Large exporters have been able to exercise some control by joint ventures with freight forwarders, but this requires a scale of operation which small exporters do not possess (Dolan and Humphrey, 2000).

The benefits of scale in export logistics are reinforced by the benefits of scale in other aspects of the business. For example, Dolan and Humphrey comment that importers tend to work with exporters in developing new products. Cape gooseberries, king passion and runner beans are all examples of products developed by Zimbabwean exporters in concert with importers. The costs of such product development are borne by the exporters; this means they must be of a sufficient scale to absorb the losses when these are unsuccessful. Similarly, suppliers (i.e. exporters) must participate and pay for the promotional offers which are run by the supermarkets; a practice which works against any exporter without a strong cashflow position.


5.6.1 Freight

The cost of freight typically comprises a major element of the total delivered (c.i.f.) cost of a product. In the case of mangetout from Zimbabwe, the air freight, handling and insurance charges accounted for nearly 50 percent of the total cost of producing, packing and delivering mangetout to Europe (Dolan, Humphrey and Harris-Pascal, 1999). Not surprising, therefore, that for most exporters the availability of airfreight, and its cost, is of critical importance in determining overall export competitiveness. In Malawi, for example, a small export-orientated rose sector virtually collapsed with the withdrawal of air services to the Netherlands (Coote, Greenhalgh and Orchard, 2003).

Sea freight vs. air freight

For ACP countries (COLEACP), there are three main products which are air-freighted: green beans; cut flowers and other vegetables (including Asian, European and exotic). 50 percent of this volume comes from East Africa (Kenya), and this is divided equally between cut flowers and fresh vegetables. The tonnage of products freighted by air from West Africa represents only around one third of that sent from Kenya and is highly fragmented. Principal users include Senegal and Côte d'Ivoire. Bananas, pineapples and citrus dominate the sea freight trade. An estimated 95 percent of all ACP horticultural produce in these three categories is shipped by sea. In addition, there are shipments of lychees (ex Madagascar) and avocados (ex Kenya).

Many of the high value agricultural products that are under discussion have either a very high or fairly high level of perishability. For many origins, transport by air is the only option. Some countries do use trucks for certain products, particularly where they are close to an export market, for example, Mexico into the United States, Morocco into the EU via southern Spain.

Improvements in technology and restrictions on airfreight availability have prompted a number of origins to explore the sea freight option, even for the more perishable products such as table grapes (South Africa and Namibia) and blueberries (Chile). Maintaining product quality with the much longer journey times involved with sea shipments is of critical importance. Various types of controlled atmosphere or specially ventilated containers have assisted those shipping via sea freight.

In Pakistan, for example, one company has invested in grading and storage infrastructure. This has permitted it to increase the shelf-life of its mangoes by 28 days and to utilize sea freight (Eurofruit, 2002). Similarly, a project in Mali, initiated by the Agence pour la Promotion des Filières Agricoles (APROFA), greatly improved in-country supply chain efficiencies, cutting shipment times for mangoes between the packhouse in Sikasso, the port of Abidjan in the neighbouring Cote d'Ivoire and North European ports, from 25 to 12 days (SASKI, 2003).

In Zimbabwe, a joint venture between Zimbabwean growers and the port authority in Beira (Mozambique) has strengthened Zimbabwe's sea freight capability for citrus exports and reduced its dependence on the more distant (and increasingly congested) South African ports (Heri, 2000).

Costs of freight

Jaffee (2003) analyses the cost of freighting green beans and Asian vegetables from origins that compete directly with Kenya in the supply of the European market. Kenya's own (air) freight costs are estimated to be between US$1.50 and US$1.60/kg. In the case of green beans, Kenya's main competitors are Morocco, Egypt, Senegal and Zambia. Only Zambia has similar freight costs to Kenya. The other countries' costs are much lower, ranging from US$0.75/kg to as low as US$0.20/kg for sea shipment ex-Egypt.

A similar picture emerges in the case of Asian vegetables[36] exports. Here, Kenya's main competitors are Ghana, the Dominican Republic and India. Only India, at US$1.50/kg, has costs close to those of Kenya. The other two countries enjoy freight costs ranging from US$0.60/kg to US$1.00/kg.

Freight costs are a strong determinant of a country's export competitiveness. In the face of growing competition from Egypt and Morocco, Kenya has seen its margins contract markedly in the loose (bulk) produce market. Kenya's exporters see little likelihood of their airfreight costs declining relative to those of their competitors and believe that the only viable long term position is to specialize in supplying the premium/high-care end of the market (Jaffee, 2003).

Despite the comments in the previous paragraph, countries with higher freight costs can still remain competitive, providing that all other costs in the supply chain are kept to a minimum. Both Colombia and Chile face much higher freight costs transporting produce to the European market, than do African countries exporting to the same destination. For example, Colombia's air freight costs for cut flowers are estimated to be US$2.75/kg versus US$1.75/kg ex Kenya. Similarly, Chile's sea freight (reefer) costs are US$240 per pallet versus US$130 to US$135 for shipments ex Cameroon and Côte d'Ivoire, respectively.

Freight synergies and critical mass

For similar distances, freight costs are likely to be lower among countries that already have well-developed and frequently-used freight routes, whether these are for air (including passenger) freight or containerized sea freight. Thus, the tourist economy in Kenya has had important spin-offs for the availability of freight for other sectors of the export economy. In Zimbabwe, the recent downturn in the tourism industry, and the consequent reduction in foreign passenger aircraft, has adversely affected the cost and availability of air freight for fresh produce exporters (Heri, 2000).

Once routes are well-established for one product, then it is possible to ship other products. For example, vessels plying the main banana routes (ex Cameroon, Côte d'Ivoire, Windward Islands and the Caribbean/Central Americas region), can offer space for other produce, particularly now that many of the newer generation reefer vessels have refrigerated containers on deck (COLEACP, 1998).

The synergies which are attained from economic growth elsewhere in the economy, such as the tourist sector, tend to work to the disadvantage of the poorest, least developed countries. For example, Ethiopia's passenger flights offer only 50 tonnes of cargo space per week, representing just 5 percent of the space available to Kenyan exporters. Despite opening up the cargo freight market to greater competition, freight companies have yet to establish in Ethiopia because the volumes of export produce are insufficient to justify the investment and the government is reluctant to grant licences to private charter companies (Greenhalgh, personal communication).

The issue of "critical mass" is a recurring theme for new or small-scale exporters within LDCs, in particular. Analysis carried out in Ethiopia suggests that private sector horticultural exports would need to expand rapidly at the outset in order to fully load a weekly charter aircraft. Failure to achieve this volume of exports would result in higher unit freight costs and would undermine the overall profitability of the project (Greenhalgh, personal communication). A case study on a cut flower (rose) business in Ethiopia (UNCTAD, 2002) reinforces this view. The flower producer identified several constraints, including limited air freight capacity.


There is comparatively little literature which links performance at the micro level with macro economic conditions. What has been located is summarized below.

5.7.1 The role of governments in facilitating local and inward investment

The fiscal, monetary and macro policy environment

A stable policy environment can be an essential pre-condition for investors and an important way of lessening risk (Barghouti, Kane and Sorby, 2004). In Zimbabwe, Heri (2000), writing prior to the government's land distribution programme, cites a number of reasons for the growth in the horticultural sector, including the liberalization of foreign exchange controls; export incentives, such as concessionary pre- and post shipment finance schemes and corporate tax savings; and a clear statement of agricultural policy in its Zimbabwe Agricultural Framework: 1995 - 2020. Kenya's development has been enhanced by an open and competitive market for air freight, zero- rated duties on inputs and outputs, and liberalized foreign exchange markets. In Ecuador, the creation of more favourable investment conditions, along with the regional free trade area, encouraged investment by Colombian cut flower producers (Barghouti, Kane and Sorby, 2004).

In contrast, in Senegal, UNCTAD comments that the combination of an overvalued exchange rate, poor infrastructure, credit shortages, lack of competition in capital markets and high import tariffs on essential inputs, have created major impediments to diversification. In Uganda, there have been major constraints to the development of the country's economy including poor infrastructure and support services, low skill levels and lack of financing for SMEs (Barghouti, Kane and Sorby, 2004).

In Ethiopia, the government-owned airline has held a monopoly on freight handling at the main airport and, in the past, this has been criticized for poor service, high handling charges and a lack of responsiveness to exporter needs (Greenhalgh personal communication).

Investment in commercial infrastructure

A recurring theme in the literature is the need for infrastructural investment. It is widely accepted that large-scale infrastructural investment in adequate internal road systems and in port handling facilities or cold storage at airports, cannot be borne by the producers/exporters alone, particularly when industries are still small scale. Coote, Greenhalgh and Orchard (2003) conclude that governments do have a facilitating role in the provision of cold chain and other infrastructure.

Jaffee (1993) comments that whilst the impetus for the development of new production and export industries must come from the private sector, there are a number of examples of successful export sectors which received government assistance in the early stages before they were fully commercialized. Government research and extension was important in the development and adoption of new temperate fruit varieties in Chile. Fundación Chile, the Israel Citrus Marketing Board and the old South African Citrus Board all carried out direct marketing campaigns. In Chile and Israel, common forms of subsidy have been low interest production credits, subsidies on production infrastructure and material inputs, grants and low interest loans for processing and storage facilities.

Coote, Greenhalgh and Orchard (2003) attribute much of the success in the development of the horticultural sector in Zambia to a recent EU-funded export development programme. This provided the Zambia Association for High Value Products and the Zambia Export Growers' Association (ZEGA) with short-term credit for procuring seasonal inputs and financing of airfreight. The Export Board for Zambia has also done a lot to promote and develop NTAEs, backed by a pro-active stance by the government.

Other issues

The issue of land tenure arises in some areas of the literature, particularly in respect of small growers. It is an issue which is not confined to the development of NTAEs, but it is possibly made more acute in this sector because of the higher investment capital required and the risks involved. In Ethiopia, there is considerable uncertainty surrounding the lease of land and the security, or otherwise, that this confers (Greenhalgh, personal communication).

Land tenure arrangements that protect land use rights and encourage investment on a long term basis are important for the development of sustainable farm enterprises. Access to water is also critical to the success of horticultural ventures. In Kenya, households owning land were found to have incomes 38 percent higher than those without land; whilst those with access to irrigation had incomes 50 percent higher than those without water (Barghouti, Kane and Sorby, 2004).


5.8.1 The general context of Foreign Direct Investment (FDI)

Attracting FDI into the agriculture sector, producing for domestic consumption or export markets requires a set of disciplines which are no different from those applying to FDI in other sectors.

The aim of policies for attracting FDI must necessarily be to provide investors with an environment in which they can conduct their business profitably and without incurring unnecessary risks. Experience shows that some of the most important factors considered by investors as they decide on investment location are:[37]

The conditions sought by foreign enterprises are largely equivalent to those that constitute a healthy business environment more generally. However, internationally mobile investors may be more rapidly responsive to changes in business conditions. The most effective actions by host country authorities to meet investors' expectations are:

The usage of tax incentives, financial subsidies and regulatory exemptions directed at attracting foreign investors is no substitute for pursuing the appropriate general policy measures (and focusing on the broader objective of encouraging investment regardless of source). In some circumstances, incentives may serve either as a supplement to an already attractive enabling environment for investment or as a compensation for proven market imperfections that cannot be otherwise addressed (OECD, 2003).

Clearly, the application of these general principals in the agricultural sectors of developing countries is difficult and the results have been spotty.

The way in which agriculture will become integrated within a broader globalized economy is likely to be different from the process in manufacturing. Trans-border institutions are largely absent from primary agriculture. Farming is generally not the province of multinational corporations (MNCs). Most MNCs that exist in the sector are concerned with the supply sector (chemicals, fuel, fertilizer, and feed), the processing activities (e.g. sugar and dairy), and marketing and distribution (e.g. grain handling and selling). Even in the more advanced US agricultural sector the median size of business is still modest by manufacturing standards. Unlike in the automobile sector, complex webs of component suppliers are not likely to emerge. Farmers do buy from other farmers, particularly animal feeds and live animals. Also, food processors purchase their raw materials from farmers, sometimes under medium-term contracts. But only a few goods, such as highly processed foods, are "assembled" from internationally traded components. The path of integration from FDI lies more through the development of the domestic food industry, which may draw agriculture along with it into an international marketplace (Josling and Tangermann, 1998).

5.8.2 The agricultural sector

Because the return on capital in agricultural production has traditionally been rather low, this sector has rarely been a magnet for FDI and will probably continue to fail to attract substantial amounts of foreign capital. In addition, in many countries, foreign ownership of land is restricted, although there are frequently ways around such legislative hurdles.

The more optimistic side of the picture is that FDI in the food processing sector does take place. Although FDI has not been drawn to farm production, there has been some investment in more highly processed foods. It seems that investors prefer the rather more stable conditions of markets for consumer-ready foods. FDI has concentrated in confectionery, soft drinks, dairy and beer in most developing countries, but there is also some FDI in fruits and vegetables. In some cases, FDI can be reckoned to contribute significantly to farm income as well as to the development of marketing habits such as the provision of good quality supplies on a regular basis. The key parameters governing investment are thus access to markets and the degree of market differentiation in the product. In more middle income developing countries investments are already being made, in particular in sub-sectors that produce differentiable products for middle class consumers. In the fruit and vegetable sectors the inputs needed by such processors for the local markets are limited in nature, unlike cereals or other basic foodstuffs (Josling and Tangermann, 1998).

From the point of view of a potential foreign investor, trade and foreign direct investment (FDI) are principal strategies to access foreign markets. As the world becomes increasingly interdependent, the linkages between these two strategies become increasingly important. Processed foods are the fastest growing market for United States agricultural exports and foreign affiliate sales have grown even faster than exports. Historically, exports were the primary means of accessing foreign markets. Foreign direct investment by agribusinesses provides a market access alternative that can be viewed as "tariff jumping." Foreign affiliate sales that stem from FDI are not subject to import tariffs or other trade barriers. For example, in 2000, FDI sales by US processed food companies were five times the amount of US exports--$150 billion versus $30 billion. The relationship between FDI and exports appears to be complementary from developed to developing countries. Thus the MNC benefits from profits made from the investment and some increase in exports as well. Unfortunately, in the fruit and vegetable sector these linkages are unlikely to be found. Most gain will come from exports or local sales of processed product. (Marchant, Manukyan and Koo, 2002).

A review of a few cases of FDI levels in three countries and one region provides some feel for the problems faced and the limited success.

(i) Vietnam

To date some US$ 2.81 billion in FDI has gone into the agricultural or agricultural processing sector in Vietnam. About ten percent has gone into the fruit and vegetable sector, a relatively high figure. Some of this investment has gone into export agriculture for the Asian market, particularly Japan, and for the ethnic Vietnamese market in the United States.

(ii) Costa Rica

FDI inflows to Costa Rica showed high growth rates during the 1990s. The Economic Commission for Latin America and the Caribbean (ECLAC) deemed the country's explicit policy to attract investments to be successful, as it did not only respond to a temporary trend of deregulation, privatization and liberalization. Although the high incidence of FDI contributed to economic growth, its effects have not translated into improvement of the internal economy due to poor linkages between FDI and local activities. Average underemployment remained relatively high at 12.5 percent. FDI has only contributed 7.6 percent of the growth in employment (ECLAC, 2002).

However, agriculture and tourism have been among the sectors contributing to employment growth. Although 68 percent of that growth went into the industrial sector and 4 percent to tourism, agriculture garnered 16 percent of the new jobs coming from FDI. Costa Rica has also enjoyed the presence of banana multinationals for over 100 years. These companies have made major investments in pineapple production, turning the country into a major exporter of fresh pineapples. They have also invested in melon production, processed banana production, mostly for baby foods, and in other processed food production for local and export markets. FDI has also been attracted from smaller investors to fern production for export to the United States of America.

(iii) Bolivia

During the 1990s Bolivia experienced a sharp increase in levels of FDI. FDI statistics, however, indicate that the hydrocarbon sector attracted 40 percent of inflows, the services sector 26 percent, telecommunications and utilities 17 percent and manufacturing 9 percent, while the agricultural sector does not even appear statistically. However, closer examination of the manufacturing sector indicates that 3.3 percent of investment went into food products and beverages. More significantly, 22.8 percent of the production from this investment was exported. In those sectors most attractive to FDI, real wages increased, for example, by 28.3 percent in mining and hydrocarbon extraction, while they declined by 11.9 percent in agriculture. FDI has gone into skill intensive sectors, creating relative shortages of skilled labour, whereas agriculture remains dominated by un-skilled labour and an absence of FDI in actual production. Another interesting point in the Bolivian case is that investment has flowed into the country from neighbouring countries as well as the traditional sources of FDI in the Northern Hemisphere.

(iv) Africa

Many African countries have improved their FDI regulatory frameworks in recent years. Seven countries who have led this reform include Botswana, Equatorial Guinea, Ghana, Mozambique, Namibia, Tunisia and Uganda. By 1996 they were receiving 25 percent of Africa's FDI in spite of only having 10 percent of the continent's GDP (ICC, 2002). Egypt, Morocco and Nigeria have each attracted FDI, along with The United Republic of Tanzania. On closer analysis most of this FDI has gone into the hydrocarbon, mining and manufacturing sectors. However, in Mozambique, where the sugar sector has benefited, and in Morocco, where vegetable production has grown through FDI, there are exceptions.

In Morocco there is considerable investment by farmers and farm groups from Italy and Spain, seeking to lower labour costs on land available for purchase at lower prices or on good lease terms as compared to Europe. Advantageous market access via associate arrangements with the EC have stimulated this investment in high quality market sensitive vegetables and fruits, particularly as transport is generally by truck to markets in Europe.

[33] EU Directive 2000/42/EC implemented on 1st July 2001.
[34] Central Laboratory for Residue Analysis of Pesticides and Heavy Metals in Food.
[35] This includes phytosanitary inspection through KEPHIS, and a national standard for horticultural operations through the Kenya Bureau of Standards (KEBS).
[36] Asian vegetables include karela (bitter melon), dudhi (long squash), fuzzy squash, valore (long bean), turia (Chinese okra), oriental eggplant, lemon grass and others. The UK, because of its large Asian population, is the largest European market, and Kenya its main supplier
[37] OECD (2003).

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