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PART III

THE AGROPROCESSING INDUSTRY AND ECONOMIC DEVELOPMENT


THE AGROPROCESSING INDUSTRY AND ECONOMIC DEVELOPMENT

INTRODUCTION

Agriculture and industry have traditionally been viewed as two separate sectors both in terms of their characteristics and their role in economic growth. Agriculture has been considered the hallmark of the first stage of development, while the degree of industrialization has been taken to be the most relevant indicator of a country’s progress along the development path. Moreover, the proper strategy for growth has often been conceived as one of a more or less gradual shift from agriculture to industry, with the onus on agriculture to finance the shift in the first stage.

This view, however, no longer appears to be appropriate. On the one hand, the role of agriculture in the process of development has been reappraised and revalued from the point of view of its contribution to industrialization and its importance for harmonious development and political and economic stability. On the other hand, agriculture itself has become a form of industry, as technology, vertical integration, marketing and consumer preferences have evolved along lines that closely follow the profile of comparable industrial sectors, often of notable complexity and richness of variety and scope. This has meant that the deployment of resources in agriculture has become increasingly responsive to market forces and increasingly integrated in the network of industrial interdependencies. Agricultural products are shaped by technologies of growing complexity, and they incorporate the results of major research and development efforts as well as increasingly sophisticated individual and collective preferences regarding nutrition, health and the environment. While one can still distinguish the phase of production of raw materials from the processing and transformation phase, often this distinction is blurred by the complexity of technology and the extent of vertical integration: the industrialization of agriculture and development of agroprocessing industries is thus a joint process which is generating an entirely new type of industrial sector.

This chapter attempts to review some of these issues and assess the actual and potential role of the agroprocessing industry in economic development. It starts by discussing the definition of the sector and reviewing some of the statistical evidence of its economic importance worldwide. It then moves on to a discussion of the role that the agroprocessing industry can play in economic development in the developing countries, before reviewing how conditions for agro-industrial development are currently changing worldwide as a result of changing trade policies and regimes and the evolution of both technology and food consumption patterns. The chapter then underlines the growing internationalization of agroprocessing activities, in particular through the increasing importance of international capital activities, and the role played by multinational corporations in this process. Finally, it discusses elements of a conducive policy environment for promoting the agroprocessing industry and for ensuring that the sector can provide the optimum contribution to economic development.

AGROPROCESSING INDUSTRY: DEFINITION AND DIMENSIONS

Types of agroprocessing

A common and traditional definition of agroprocessing industry refers to the subset of manufacturing that processes raw materials and intermediate products derived from the agricultural sector. Agroprocessing industry thus means transforming products originating from agriculture, forestry and fisheries.

Indeed, a very large part of agricultural production undergoes some degree of transformation between harvesting and final use. The industries that use agricultural, fishery and forest products as raw materials comprise a very varied group. They range from simple preservation (such as sun drying) and operations closely related to harvesting to the production, by modern, capital-intensive methods, of such articles as textiles, pulp and paper.

The food industries are much more homogeneous and are easier to classify than the non-food industries since their products all have the same end use. Most preservation techniques, for example, are basically similar over a whole range of perishable food products, whether they be fruit, vegetables, milk, meat or fish. In fact, the processing of the more perishable food products is to a large extent for the purpose of preservation.

Non-food industries, in contrast to the food industries, have a wide variety of end uses. Almost all non-food agricultural products require a high degree of processing. Much more markedly than with the food industries, there is usually a definite sequence of operations, leading through various intermediate products before reaching the final product. Because of the value added at each of these successive stages of processing, the proportion of the total cost represented by the original raw material diminishes steadily. A further feature of the non-food industries is that many of them now increasingly use synthetics and other artificial substitutes (especially fibres) in combination with natural raw materials.

Another useful classification of agroprocessing industry is in upstream and downstream industries. Upstream industries are engaged in the initial processing of agricultural commodities. Examples are rice and flour milling, leather tanning, cotton ginning, oil pressing, saw milling and fish canning. Downstream industries undertake further manufacturing operations on intermediate products made from agricultural materials. Examples are bread, biscuit and noodle making, textile spinning and weaving; paper production; clothing and footwear manufacturing; and rubber manufactures.

A further specification is related to the nature of the production process which, in many cases, can range from craft to industrial organization. For example, in some developing countries the same good may be produced both by handloom weavers working in their own home and by large textile factories that have sophisticated machinery and complex systems of organization and that produce a range of industrial products for the domestic and external markets. In such cases, it can be misleading to define agroprocessing industry just on the basis of the goods produced because only the second method of production mentioned has industrial characteristics.

Today, however, it is becoming even more difficult to provide a precise demarcation of what should be considered an agro-industrial activity: the impact of innovation processes and new technologies suggests a widening of the range of agro-industry1 inputs that could be considered, including biotechnological and synthetic products, for example. This implies that agro-industry today continues to process simple agricultural goods while also transforming highly sophisticated industrial inputs that are often the result of considerable investments in research, technology and innovation. Corresponding to this growing complexity of inputs is an increasing range of transformation processes, characterized by physical and chemical alteration and aimed at improving the marketability of raw materials according to the final end use.

All these factors – the growing complexity of inputs, the impact of innovation processes and new technologies, the sophistication and the growing range of the transformation processes – makes it increasingly difficult to draw a clear distinction between what should be considered strictly industry and what can be classified as agro-industry.

According to the traditional classification of the UN International Standard Industrial Classification of All Economic Activities (ISIC), which is quite rigid but useful for statistical purposes, agro-industrial production is present in many manufacturing sectors: 3.1 Manufacture of Food, Beverages and Tobacco; 3.2 Textile, Wearing Apparel and Leather Industries; 3.3 Manufacture of Wood and Wood Products, Including Furniture; 3.4 Manufacture of Paper and Paper products, Printing and Publishing; 3.5.5 Manufacture of rubber products. Although this chapter is about all these areas of agro-industry, it often focuses on the particularly important group of food, beverages and tobacco.

TABLE 3

Share of agro-industries in total manufacturing value added1 in selected country groups, 1980 and 19942

Country groups Food, beverages, tobacco

(3.1)

Textiles, clothing, leather, footwear

(3.2)

Wood products, furniture

(3.3)

Paper & products, printing

(3.4)

Rubber products

(3.5.5)

All agro-industry

(3.1-3.4, 3.5.5)


1980

1994

1980

1994

1980

1994

1980

1994

1980

1994

1980

1994

Industrialized countries 13.3

12.6

8.3

5.7

3.6

3.1

7.9

8.9

1.2

1.1

34.3

31.4

EC

11.9

13.5

8.5

6.0 3.7

3.4

6.8

7.6

1.3

1.1

32.2

31.6

Japan

11.3

9.4

7.2

4.3

4.4

2.3

8.8

9.2

1.4

1.2

33.1

26.4

North America

13.7

11.9

6.4

4.8

2.8

3.0

11.4

11.3

1.0

1.1

35.3

32.1

Eastern Europe and CIS

20.8

20.5 14.4

13.7

2.7

3.2

2.2

1.8

1.4

1.1

41.5

40.3

Developing countries

18.2

17.7

15.2

11.4

2.8

2.2

4.3

4.6

1.5

1.7

42.0

37.6

NIEs3

15.1

14.5

15.0

10.8

2.4

1.6

4.5

5.0

1.6

1.8

38.6

33.7

Second-generation NIEs4 23.5

19.7

16.2

13.0

3.2

3.8

3.3

3.8

2.0

2.2

48.2

42.5

Note: ISIC classifications in parentheses. 1 At constant 1990 prices. 2 1993 for developing countries. 3 NIEs = Argentina, Brazil, Mexico, former Yugoslavia, Hong Kong, India, the Republic of Korea, Singapore and Taiwan Province of China. 4 Second-generation NIEs = Morocco, Tunisia, Chile, Turkey, Indonesia, Malaysia, the Philippines and Thailand. Source: UNIDO. 1997. International Yearbook of Industrial Statistics 1997. Vienna.

Agroprocessing industry in figures

Table 3 shows the contribution of agro-industries to total manufacturing value added (MVA) in selected country groups in 1980 and 1993-94, based on the broad ISIC classification outlined above. Even in the most advanced economies, these industries represent a large part of total industrial activity. In industrialized countries, while primary agriculture accounts for a very small proportion of total output, the various industries derived from agricultural transformation represented nearly one-third of total MVA in 1994. The share is even higher (37.6 percent) in developing countries, where agro-industry is often the main industrial activity and a major contributor to production, export earnings and employment. However, the share of agro-industries has dropped by around three to four percentage points in both developing and industrialized countries since 1980, slightly more in the former and slightly less in the latter.

The major component of agro-industrial activities in both industrialized and developing countries is composed of the food, beverages and tobacco industry, which accounted in 1994 for about 13 percent of total MVA in the industrialized countries and 18 percent in the developing countries, although the share has also been declining in both groups.

As regards the distribution of world value added in the various branches of agro-industry, the share of the developing countries has increased significantly in all branches, reaching close to one-third of the world total in tobacco, footwear and textiles and also rising considerably in the cases of beverages and leather between 1980 and 1994 (Table 4).

Among the industrialized countries, a strong advance was made by the European Community (EC) in food products, beverages, tobacco and leather which, however, went along with relative declines in most other agro-industrial branches. North America strengthened its market dominance in wood and paper products, and also increased significantly its share in the rubber and textile industries. By contrast, steep relative declines occurred in Eastern Europe and the CIS, where problems of economic transition imposed a heavy toll on, inter alia, agro-industrial activity. Shares in output in this region declined for all branches, from around three percentage points for footwear, wood products and tobacco, to up to nine or ten points for food, beverages, textiles and leather.

The overall gains in contribution to output by the developing countries were reflected in the faster rates of expansion of their industries compared with those of the industrialized countries during 1980-94 (Table 5). Their rate of growth exceeded those of industrial and transition economies for all branches of industrial activity during the 1980s, and again in 1990-94. Rubber and paper were particularly buoyant throughout the period, as was the beverage industry in 1990-94.

The food, beverages and tobacco industries combined are by far the most important component of agro-industrial activities in both developed and developing countries, and also account for a sizeable share of their overall economic output. In the case of the developing countries, food, beverages and tobacco manufacturing account for about 3 to 4 percent of GDP, the share in the various regions showing a remarkable convergence over the past decades (Figure 13).

Latin America and the Caribbean stands apart from the other regions, however. While the economic weight of the subsector has been historically greater in this region, it has tended to lose relative importance since the mid-1980s, in contrast to the other regions where it has tended to increase. Most notable is the steady rise in Asia and the Pacific throughout much of the 1970s and 1980s, a trend which has continued also in the 1990s.

TABLE 4

Distribution of world1 value added by branch of agro-industry, 1980 and 19932

Branch Industrialized countries and economies in transition Developing(ISIC)

Year

All

EU

Japan

North America

Eastern Europe and CIS

All

NIEs

World1

Food (3.1.1/2)

1980

85.5

28.0

14.8

22.3

16.3

14.5

7.4 100.0

1994

82.0

32.3

13.7

24.7

6.9

18.0

9.0

100.0

Beverages (3.1.3)

1980

79.3

32.6

10.4

18.6

14.0

20.7

11.1

100.0


1994

73.2

36.3

8.8

19.2

4.8

26.8

13.6

100.0

Tobacco (3.1.4)

1980

73.7

33.7

3.2 29.3

5.8

26.3

12.2

100.0


1994

66.8

35.9

2.8

23.4

2.8

33.2

14.7

100.0

Textiles (3.2.1)

1980

78.1

29.3

14.4

14.0

17.9

21.9

13.2

100.0


1994

71.3

29.7

11.4

19.0

8.8

28.7

16.5

100.0

Wearing apparel (3.2.2) 1980

81.5

34.2

11.1

21.7

11.6

18.5

10.9

100.0


1994

76.0

29.3

10.3

25.9

7.4

24.0

12.6

100.0

Leather (3.2.3)

1980

76.7

34.6

9.9

12.0

18.9

23.3

15.3

100.0


1994

72.2

39.1

10.4

11.5

9.1

27.8 18.1

100.0

Footwear (3.2.4)

1980

74.1

42.1

4.4

13.1

11.7

25.9

17.6

100.0


1994

69.3

41.8

6.4

8.5

9.2

30.7

20.0

100.0

Wood products (3.3.1)

1980

89.6

33.5

22.1

19.4

7.6

10.4

4.9

100.0


1994

87.8

34.4 14.7

27.5

4.3

12.2

4.0

100.0

Paper (3.4.1)

1980

90.4

33.1

12.7

35.0

6.1

9.6

6.3

100.0


1994

88.3

33.5

13.4

36.5

1.5

11.7

7.7

100.0

Rubber (3.5.5)

1980

84.9

36.3

17.2

17.6

11.3

15.1

10.1

100.0


1994

78.2

31.7

16.2

24.3

3.7

21.8

14.2

100.0

All manufactures (3.1-3.9)

1980

87.1

35.7

14.2

23.9

9.5

12.9

8.2

100.0


1994

83.5

33.0

17.1

25.9

4.2

16.5

9.8

100.0

1 Excluding China, for which data were not available. 2 At constant 1990 prices. Source: UNIDO. 1997. International Yearbook of Industrial Statistics 1997. Vienna.

TABLE 5

Average annual growth of value added in agro-industries by country groups, 1980-90 and 1990-941

Branch (ISIC)

Industrialized countries

Eastern Europe and CIS

Developing countries


1980-90

1990-94

1980-90

1990-94

1980-90

1990-94

Food (3.1.1/2) 1.8

1.4

1.7

..

2.6

3.4

Beverages (3.1.3)

1.8

1.2

-1.7

..

2.6

4.9
Tobacco (3.1.4)

0.0

-1.4

0.4

..

1.8

2.1

Textiles (3.2.1)

0.2

-1.5

1.1

..

2.2

0.8

Wearing apparel (3.2.2)

-0.6

-2.3

1.7

..

2.4

-1.7

Leather (3.2.3)

-1.4

-4.1

0.0

..

0.7

-3.6

Footwear (3.2.4)

-3.1

-3.5

2.4

..

-0.4

-2.4

Wood products (3.3.1)

1.6

-0.1

2.1

..

2.1

..

Paper (3.4.1)

3.4

1.8

1.2

..

4.3

4.5

Rubber (3.5.5)

2.6

-0.3

1.4

..

4.9

3.9

Total MVA

2.8

-0.4

2.5

-10.1

4.4

3.5

1 At constant 1990 prices. Source: UNIDO. 1997. International Yearbook of Industrial Statistics 1997. Vienna.

At the global level, the food, beverages and tobacco industries are dominated by the developed countries, which in 1994 accounted for about 80 percent of the world value added in the subsector, with western Europe and North America together accounting for nearly 60 percent (Figure 14).

In the developing countries, the lion’s share of total production in the subsector is accounted for by Asia and the Pacific and Latin America and the Caribbean, each with approximately 45 percent of developing country production (Figure 15). Yet, while Latin America and the Caribbean, once dominant among the developing country regions, has seen its share decline significantly in the course of the 1980s from the 50 to 60 percent of the 1970s, the share of Asia and the Pacific has expanded rapidly over the same time span. The decline in the relative position of sub-Saharan Africa has been dramatic: after peaking in 1983, its share in developing country production has contracted steadily, falling below that of the Near East and North Africa.

Expressed as a ratio to agricultural GDP, value added in food, beverages and tobacco provides a broad indicator of the importance of processing relative to primary agriculture (Figure 16). As emerges from the figure, processing has always been an important component of overall agrifood production in Latin America and the Caribbean, indicating a relatively greater sophistication of the whole food chain in that region. However, processing has tended to lose importance vis-à-vis total agricultural GDP since the early 1980s in this region.

In all the other developing regions, processing has gained in importance relative to primary agricultural production, most notably so in the case of Asia and the Pacific.

DEVELOPMENTAL ROLE OF THE AGROPROCESSING INDUSTRY

Theoretical and empirical studies of the structural changes that accompany the development process have revealed a number of constant patterns. The most basic is a secular decline in the relative weight of the agricultural sector vis-à-vis non-agriculture as per caput income increases. This relative decline is observed as a fall in the share of agriculture in value added, employment, trade and per caput consumption. This goes together with a drop in the share of primary agricultural production in the value of the final product, and with a parallel increase in the agroprocessing industry value added.

These observations have emanated the popular prescription that development necessarily involves a transfer of resources out of agriculture and that this is largely coterminous with industrial development. More recently, however, the development debate has increasingly focused on the far more relevant issue of whether and how the agricultural sector can be expected to make an optimum contribution to the overall process of economic growth. This question can be asked both regarding the size and functioning of the agricultural sector itself and regarding its links with the rest of the economy. More specifically, it can be argued that the development of agro-industry, for those countries with a comparative advantage in this sector, may contribute to achieving the proper balance between agriculture and industry.

A precise theoretical rationale for emphasizing the role of agro-industry during the process of development is provided by Hirschman’s linkage hypothesis,2 which postulates that the best development path lies in selecting those activities where progress will induce further progress elsewhere. Thus, an activity that shows a high degree of interdependence, as measured by the proportion of output sold to or purchased from other industries, can provide a strong stimulus to economic growth. While the issue of linkages will be discussed in some detail later, the general observation can be made here that, because of its high degree of interdependence with forward and backward activities, agro-industry can play a very important role in accelerating economic activity.

Potential for agro-industry in developing countries

The potential for agro-industrial development in the developing countries is largely linked to the relative abundance of agricultural raw materials and low-cost labour in most of them. The most suitable industries in such conditions are indeed those that make relatively intensive use of these abundant raw materials and unskilled labour and relatively less intensive use of presumably scarce capital and skilled labour.

Many of the industries using agricultural raw materials have in fact those characteristics that make them particularly suitable for the circumstances of many developing countries. Where the raw material represents a large proportion of total costs, its ready availability at a reasonable cost can often offset such disadvantages as a lack of infrastructure or skilled labour. Furthermore, for many agro-industries, a small plant may be economically efficient, which is another important factor in developing countries where the domestic market is limited by low purchasing power and sometimes by the small size of the market itself.


BOX 11

LABOUR PRODUCTIVITY AND COST STRUCTURE IN AGRO-INDUSTRY

Value added per employee varies widely, both among countries and among different branches of agro-industry. The Table (column 1) shows value added per employee in food processing for selected countries, ranging from a high of $102 300 per worker in the United States to a low of $1 700 in India, among the countries covered. The disparities are also substantial – more than 10:1 – between NIEs (e.g. the Republic of Korea, Singapore and Hong Kong) and the low-income countries (e.g. China, Kenya and India), no doubt reflecting differences in the technologies used as well as in managerial and operative skills. The Table (column 2) also shows that, as expected, wage levels rise with productivity. In food products, annual wages per employee range from a low of $600 in Indonesia to a high of $27 800 in Germany. Workers in the food industry in Singapore are paid 20 times as much on average as those in Kenya and India.

As for the cost structure, raw materials and utilities (water and power) account for well over half the total cost of production in food processing (column 3). In most countries the cost of these inputs represents between 60 and 90 percent of the gross value of production. The proportion tends to fall as productivity rises. Peak levels were found in Kenya and India, where the cost of raw materials and utilities constituted 93.1 and 87.7 percent, respectively, of the value of output in 1993. Labour costs, expressed as a percentage of the total value of output, fluctuates within a relatively narrow range, but the share tends to be higher in the industrialized than in the developing countries. Operating surplus (column 5) covers the returns to capital and entrepreneurship in the form of interest payments, profits and dividends. The data do not reveal any clear-cut pattern. The level of operating surplus seems to depend more on the market conditions and degree of competition prevailing in each country than on the nature of the technology used.

Selected indicators for the food industry1 in various countries, 1991-93

Countries

Value added per employee
($’000)

Wages per employee
($’000)

Materials and utilities
(%)

Percentage in output Labour
(%)

Operating surplus
(%)

INDUSTRIALIZED




United States

102.3

24.0

61.8

8.9

29.3

Germany

87.3

27.8

66.2

10.8

23.0

Japan

83.3

26.7

60.7

12.6

26.7

Italy

66.1

..

79.5

12.4

8.1

France

63.8

..

69.5

15.3

11.4

United Kingdom

56.0

20.9

64.8

13.2

22.0
Russian Federation

8.4

1.9

62.9

8.3

28.8

DEVELOPING




Korea, Rep. 50.1 10.7

60.0

8.6

31.4

Singapore

37.5

14.6

68.2

12.4

19.4

Chile

25.7

5.1

62.1

7.6

30.3

Hong Kong

23.6

11.4

66.3

16.3 17.4
Malaysia

15.2

3.6

84.5

3.7

11.8

Thailand

12.3

2.0

72.8

4.5

22.7

Ghana

6.9

1.4

65.0

7.4

27.7

Indonesia

6.1

0.6

64.8

3.7

31.5

China

3.8

3.5

71.0

3.5

12.5

Kenya

2.8

0.7

93.1 1.6

5.3

India

1.7

0.7

89.7

4.2

6.1

1 ISIC 3.1.1/1.2.

Source: UNIDO. 1996. International Yearbook of Industrial Statistics 1996. Vienna.


The factors actually determining the most economic location for an agro-industry are complex. Generally transport is a main factor. Most agricultural products either lose weight and bulk in processing, meaning they can be transported more cheaply after they have been processed, or they are perishable and so can be more easily transported in processed form. The situation is also affected by labour supplies and the availability of power and other infrastructure, but industries based on these products can often be set up economically in the area where the raw material is produced. They can therefore contribute to the relief of the rural underemployment which is characteristic of developing countries.

There are, however, exceptions. For most grains, shipment of the raw material in bulk is frequently easier, while many bakery products are highly perishable and thus require production to be located close to the market. Oilseeds (except for the more perishable ones such as olives and palm fruit) are also an exception and can be transported equally easily and cheaply in raw form or as oil, cake or meal, so there is more technical freedom of choice in the location of processing. The same is true for the later stages of processing of some commodities. For example, while raw cotton loses weight in ginning, which is consequently carried out in the producing area, yarn, textiles and clothing can all be transported equally easily and cheaply.

Where there is a high degree of technical freedom in the choice of location, industries have frequently tended to be located in proximity to the markets because of the more efficient labour supply, better infrastructure and lower distribution costs in the large market centres. With production for export, this factor has often tended to favour the location of processing in the importing country. This tendency has been reinforced by other factors, including the need for additional raw materials and auxiliary materials (particularly chemicals) that may not be readily available in the raw material-producing country; the greater flexibility in deciding the type of processing according to the end use for which the product is required; and the greater regularity of supply and continuity of operations that are possible when raw materials are drawn from several different parts of the world. However, with improved infrastructure, enhanced labour efficiency and growing domestic markets in the developing countries, there is increased potential for expanding such processing in the countries where the raw materials are produced. In addition, with growing liberalization of world trade, more developing countries will be able to take advantage of lower labour costs to expand their exports of agro-industrial products.

One further aspect of importance for the location of agro-industries would appear to be the possible existence of economies of scale. Where there are considerable economies of scale (as in the production of rubber tyres and pulp and paper), large markets are of course essential. The size of market needed for economic production in such cases may be far in excess of the domestic market in individual developing countries, where it is limited not only by the low level of per caput income but also by the frequently small size of the total population. However, although in most agro-industries average costs of production can be reduced as the scale of plant is increased, the importance of economies of scale should not be exaggerated. The lower cost of production with a large-scale plant results not only from the spreading of capital and other overhead costs, but also from the frequently smaller labour requirements per unit of output in the larger plant, an aspect which is of less importance in developing countries where labour costs are low.

The specificity of agro-industry

Processing is only one link in a continuous chain between raw material production and final consumption. The specificity of agro-industry vis-à-vis other industrial subsectors lies largely in the biological nature of the raw material. The raw materials used by agro-industry are generally characterized by the seasonal nature and the variability of their production as well as by their perishability. These aspects put particular demands both on the organization of agro-industrial activities and on the agricultural base producing the inputs, thereby adding to the need for a close integration of raw material production and processing.

Crop and livestock production cannot be controlled with great accuracy and tends to vary sharply from year to year owing to the effects of weather and pests and diseases. It is possible to some extent to reduce these fluctuations through the better use of soil and water resources and control of pests and diseases. It is generally in the interest of the processing enterprise, which requires as regular a supply of raw material as possible, to ensure or promote implementation of these measures by producers.

Furthermore, for most crops production tends to be concentrated in a particular season. It can therefore be advantageous for processing enterprises, particularly those engaged in canning and freezing, to promote the production in a particular area of a suitable range of crops and varieties maturing in different seasons in order to keep processing facilities in operation for as long as possible. The perishable nature of many crop and livestock products also requires close contact between the producer and processor as well as advance planning to keep losses to a minimum.

However, the most impelling reason for the necessity of this close contact arises from the possibility of controlling the quality of the raw materials. Their quality can be influenced by such factors as the choice of seed; the application of fertilizers; the control of weeds, pests and diseases; and sorting and cleaning. Processors are interested not only in obtaining uniformity in the quality of their raw material supplies, but in some cases their needs are quite specific. Particular varieties of some crops (for example, of tomatoes, apples and pears for canning) have long been grown for processing, but the need for such varieties is increasing as food technology develops more advanced processes. Often there are specific requirements for such factors as shape, size, texture, colour, flavour, odour, acidity, viscosity, maturity, specific gravity, soluble solids, total solids and vitamin content.

The initiative for the introduction of different varieties and practices has usually come from the processing enterprises. As a result, for some commodities, especially fruit and vegetables for canning and freezing, raw material production and processing are increasingly "vertically integrated" in the developed countries through various forms of contract farming. In the developing countries, the large-scale plantation production of such crops and sugar, coffee, tea, sisal and rubber is based on the vertical integration of raw material production and processing.

Linkage effects

From the point of view of development strategy, one of the most important features of any industry is the degree to which it is able to generate demand for the products of other industries. This phenomenon is known as linkage. An industry may encourage investment both in subsequent stages of production by "forward linkage" and in earlier stages through "backward linkage".

The establishment of certain primary processing industries can lead, through forward linkage, to a number of more advanced industries. Forest industries are particularly valuable as a base on which other industries can be established in this way. Once paper and paperboard production has been started, a large number of conversion industries can emerge, such as the manufacture of paper bags, stationery, boxes and cartons, wooden containers, furniture and a wide range of timber products. There are many other examples: products such as vegetable oils and rubber are used in a wide variety of manufacturing industries; based on the preparation of hides and skins, tanning operations can be started, as can the manufacture of footwear and other leather goods.

The development of agro-industries also has many beneficial feedback effects on agriculture itself. The most direct one is, of course, the stimulus it provides for increased agricultural production through market expansion. Often, in fact, the establishment of processing facilities is itself an essential first step towards stimulating both consumer demand for the processed product and an adequate supply of the raw material. The provision of transport, power and other infra-structural facilities required for agro-industries also benefits agricultural production. The development of these and other industries provides a more favourable atmosphere for technical progress and the acceptance of new ideas in farming itself.

The capacity of agro-industry to generate demand and employment in other industries is also important because of its growing potential for activating "sideway linkages"; that is, linkages that derive from the use of by-products or waste products of the main industrial activity. For example, animal feed industries can utilize several agro-industrial by-products, such as whey, oilseed presscakes and blood, carcass and bone meal. In addition, many industries using agricultural raw materials produce waste that can be used as fuel, paper pulp or fertilizer. Recycling and biological agriculture are two activities that go together to respond to the idea of a sustainable form of exploitation of natural resources within an efficient industrial context.

An effect that is sometimes overlooked is the substantial increase in employment that may result from setting up an industry using a raw material. Even if the industrial process is itself capital-intensive, considerable employment may be generated in providing the raw material base. Finally, agro-industry gives rise to a demand for a wide variety of machinery, equipment, packaging materials and intermediate goods used in the processing itself.

The agroprocessing industry in the process of development

The role of agro-industry as a sector of the economy has multiple facets and changes in the course of development. In the early stages of growth, industrial processing of agricultural products tends to be limited to a few export crops, while the majority of agricultural products are consumed after minimal forms of processing that are performed entirely within the agricultural sector. Upstream processing industries prevail in their more primitive form, such as rice and flour milling, oil pressing and fish canning. An example of this stage would also be the plantation economy, where agro-industry and primary agriculture appear as a vertically integrated activity, with upstream processing taking over the agricultural base through a production system that is often founded on forms of disfranchisement of labourers and small cultivators.

Other cases of apparently more diversified agro-industrial activities, based on fruits and vegetables or livestock products, may be equally primitive in their organization, the low degree of value added produced and the lack of linkages both with the chemical and mechanical industries and with marketing and financial services. Such is the case for Egypt where, in spite of the growth of vegetable and fruit production and the related transformation industry, primary agriculture still accounts for almost 90 percent of the intermediate goods purchases of the industry, while a longer chain of links has developed only for livestock-related products. Similarly, a large share of agricultural raw products in total intermediate purchases characterizes most agro-industrial production of tropical beverages and other products originating from plantation crops, as well as vegetables, fruits, tobacco and livestock in the first stage of domestic industrial development.

Even in the case of limited backward linkages outside agriculture, food processing in the early stages of development can be an important direct complement to agriculture as a source of employment for seasonal labour. It requires very little investment and provides ample opportunities for expanding value added by using underemployed resources as well as for improving incomes and nutrition. Cottage industries of various forms are found in almost all areas where agriculture is sufficiently diversified, and there is scope for extending the range and timing of production both for dietary reasons and as a hedge against uncertainty. The off-farm employment opportunities provided by food processing may thus represent the first instrument of time-smoothing in the labour market and, as such, is an important factor of capital accumulation in rural areas.

Morocco provides an example of a more advanced stage of development of agro-industry, characterized by some more sophisticated downstream industrial activities, but where off-farm employment nevertheless remains the industry’s main engine of growth. In this country, the presence of a well-developed food preserve industry for tomato sauce, fruit juices and other canned fruit ensures stronger links with sectors other than agriculture, both as providers of inputs (chemicals, glass, aluminium and paper) and as dependent sectors of further processing (marketing services). The food industry in Morocco is estimated to purchase only about 70 percent of its raw materials from agriculture, while the final product sold to the consumer and exported in increasing quantities contains more than 45 percent of non-agricultural products.

A further stage of development of agro-industry as a producer of food and beverages can be observed in a number of middle-income countries, such as Turkey, Argentina and Chile. This stage is characterized by full development of the forward linkage chain, with several marketing and other services incorporated in the final product, and product innovation prevailing over process innovation to provide a competitive advantage and sources of growth to the firms in the market. The linkage with the marketing chain tends to be well established, with both organizational and financial links between the producers and the retail outlets. The pace at which new products are introduced is extremely high, and this testifies to the importance of product innovation in this phase of the industry cycle.

Finally, for high-income areas such as the EU or the United States, the mature stage of the food industry still appears to be very dynamic. While the backward and forward links do not go much beyond what has already been achieved by third-stage firms in middle-income countries, a separate series of linkages develops through the production of specialized machinery and process innovation. Because of their size, market leadership and degree of internationalization, the food-producing companies located in the high-income countries are often instrumental in setting the base for a whole technology of processed food production. The areas involved range from the planning and quality control of agricultural products and other raw materials, to the design and manufacture of machinery, specification and monitoring of the production cycle and the provision of specialized financial and other services.

Thus, the multiplicative power of the agroprocessing industry throughout the economy through the linkage effects appears to be an important factor of growth both for developing and developed countries. An additional reason why agro-industries are especially effective in activating demand from the upstream and downstream sectors lies in the position of food in the consumption chain. Thus, even at a relatively low level of sophistication with limited backward and forward linkages, agro-industries may still be particularly effective in channelling increased global demand into increased output. This is so because, at the earlier development stages, a high share of private expenditure is directed towards cereals and other staples and, later on, as development progresses, towards fruits and vegetables and other food products whose income elasticity is relatively higher.3 At later stages of development, it is the growing integration of the producing sectors that mainly ensures the capacity of food production to activate the rest of the economy, although the contribution of consumption to the industry multiplier remains sustained through diversification and growth of products with higher income elasticities.

An important feature of agroprocessing industries is that they are a major source of employment and income, thus providing access to food and other necessities to large groups of population. They are, therefore, essential elements in the attainment of food security goals.

Agroprocessing industries (food, beverages and tobacco) typically employ about 10 percent of the total labour force employed in manufacturing in the developed countries and around 20 to 30 percent in the developing countries (Table 6). The highest shares are found in Africa, where they reflect at once the poor development of the other manufacturing sectors and the pioneering role of agroprocessing, and, to a lesser extent, in the Latin American countries in the sample. Table 5 also shows the share of agroprocessing wages and salaries in total wages in manufacturing. By comparing both shares, it appears that, in the developed countries, earnings in agricultural processing were on the whole lower than for other manufacturing activities. For the developing countries, patterns are less distinct, but available data indicate that agroprocessing wages compare favourably with those in most other industrial activities, except those sophisticated activities that generally require more skills and training (such as aircraft, motor vehicles, structural metal production, cement and chemicals).

A factor underscoring the importance of agroprocessing activities as sources of employment and earnings relates to the differences in productivity between, on the one hand, raw material production – where gains have been in many cases spectacular – and, on the other hand, agro-industry. Although intrasectoral comparisons may be misleading (unlike raw materials, volume gains in agro-industrial output may be relatively small per unit of input, but undergo significant quality change), faster progress in labour productivity at the farm level may suggest less ability to create, or retain, employment, than agroprocessing. Further, the share of costs arising from primary products in total processing is in many cases so low as to be of minor significance to the food company. As economic growth and development proceed, the dynamic role of agroprocessing industries must be appraised in the framework of the increasing complexity of food systems and other agriculture-, fisheries- and forestry-based systems. This growing sophistication is accompanied by shifting relative weights of the value added and employment generated at various stages within these systems. The growth of labour productivity, which is typically faster in agriculture than in other sectors of the economy, contributes to the release of labour force and hence its availability for other sectors, and to the decline of the value of the primary output of agriculture in the value of the final, processed goods. This is particularly noticeable in food products; the share of food in the average consumer’s expenditure, in the order of 20 percent in high-income economies and 40 to 60 percent in medium- and low-income countries, compares with shares that are several times lower for the value added of agriculture in GDP. The agroprocessing sectors, as well as the trade and distribution sectors, account for most of this gap. The ability of domestic agroprocessing to capture this economic opportunity and to contribute to progress in the agricultural sector, particularly in the quality dimension, is of great promise for the developing countries. This also underscores the continued significance of agriculture through its role as the basis for economic diversification, at the national as well as at the local level, since much of agroprocessing is taking place and can be developed at a local level, thus contributing to a decentralization of economic and social progress.

TABLE 6

Share of agroprocessing employees1 in total employees in manufacturing, and share of agroprocessing wages in total wages in manufacturing in selected countries, 1992

Countries Agroprocessing employees out of total employees in manufacturing

Wages to employees in agroprocessing/total wages in manufacturing


(percentage)
DEVELOPED

United States 9.1 7.8
Finland

13.0

12.8

Germany

7.2

5.9

Canada

13.6

12.6

Sweden

9.8

8.8

TRANSITION

Bulgaria

11.7

13.4

Croatia

15.3

16.7

Kyrgyzstan

12.5

10.8

Russian Federation2

11.2

19.6

Lithuania3

18.7

23.7
Hungary3

20.1

21.5

DEVELOPING

Africa:

Cameroon

35.9

38.6

Kenya

32.4

28.4

Botswana

26.1

36.9

Senegal

59.3

55.6

Zimbabwe

17.7

24.4

Asia and the Pacific:

India 22.8 12.0
Indonesia 20.2 14.5
Korea, Rep. 7.2 6.2
Malaysia 8.4 8.6
Philippines 20.9 22.6
Sri Lanka 20.5 20.3
Latin America and the Caribbean:

Argentina2

27.6

25.2

Brazil

33.0

12.5

Colombia

22.1

22.7

Ecuador

36.1

33.2

Mexico 20.9

17.6

Peru

23.5

25.5

1 Food, beverages and tobacco. 2 Data refer to 1993. 3 Data refer to 1994. Source: UNIDO. 1997. Handbook of Industrial Statistics 1997. Vienna.


BOX 12

TURNING A POLLUTANT INTO A VALUE: THE CASE OF WHEY

Whey, the liquid residual of cheese and casein manufacture, is one of the biggest reservoirs of food protein that still remains outside human consumption channels. Yet a large proportion of total whey supplies is still wasted. Traditionally, whey was considered an undesirable element, of little interest at best, and costly to get rid of at worst. The most common practice was simply to dump it in waterways, a particularly damaging practice from the environmental viewpoint – it is estimated that a cheese factory producing 250 000 litres of whey per day can pollute as much water as does a city of 50 000 inhabitants. A less damaging practice was to feed it to calves or pigs as a supplement to their normal diet. With the development of the cheese industry, it became evident that these traditional solutions were insufficient to cope with the problem of whey disposal. Anti-pollution regulations were introduced and progressively enforced in countries where whey is more abundantly produced, thus obliging cheese manufacturers either to process their whey or to install their own sewage facilities, at a negative unit return. As the former alternative was the lesser of two evils, the industry increased its efforts to develop its existing facilities, particularly for drying, as well as trying to find new uses for whey. Whey-powder production, mainly for feed uses, emerged as the most economic solution and, indeed, this form of industry has expanded considerably over the past decades. At the same time, whey began entering food consumption as an ingredient for a wide variety of products, particularly beverages such as the (originally Swiss Rivella) fruit-flavoured beverages with a high nutritional content, and even "whey champagne" and soft drinks produced on a commercial scale in some Eastern European countries.

Although dumping whey into waterways remains a serious problem in some countries, this practice has been largely reduced, particularly in the industrialized countries, thanks to the tightening of anti-pollution measures. These measures have also contributed to intensifying research into alternative uses of whey, thereby constituting an example of how encouragement and regulation can induce the industries themselves to turn polluting wastage into profit.


The agroprocessing industry and the environment

Despite their important contribution to overall and agricultural development, agroprocessing industries can also give rise to undesirable environmental side-effects. Left unchecked, like any other industry, agro-industry can create environmental pollution or hazards in various ways: the discharge of organic or hazardous wastes into water supplies; the emission of dust or gases that affect air quality and produce toxic substances; and the use of dangerous machinery that can put the safety and health of workers at risk. The seriousness of the pollution problems created by agro-industrial activity greatly varies, but it appears that food transformation activities are generally less energy-intensive and release less CO2 and metal residues than most other industrial activities. In fact, agroprocessing industries, such as sugar mills, can become not only energy self-sufficient through the energy conversion of biomass residues, but also sizeable electricity producers that feed the national grid, thus reducing CO2 emissions. The risks of pollution are relatively smaller at the initial stages of preservation and transformation, but they may increase with the level of physical and chemical alteration, particularly in the industries using dated equipment and technology (new technologies are less polluting than old ones in terms of wastes and emissions per unit of output). The size of the industry may be an important factor, but not determinant in itself. In fact large, centralized agro-industries can be important sources of punctual pollution, but smaller-scale industries can also generate scattered pollutants with a cumulative effect in a given geographic region. This is especially so since small industries, particularly in low-income countries, lack the financial resources to use modern and clean technologies. The damages and hazards caused by agro-industrial pollution may be all the more serious and immediately perceived since these industries tend to be concentrated in urban and peri-urban areas. Finally, the incidence of agro-industrial wastage and pollution depends to a very large extent on the efficiency of the legislative setting and regulatory action taken to protect the environment. Anti-pollution regulation can be an important contributor, not only to reducing the release of polluting residues, but also to using them in profitable ways (see Box 12). However, many countries still lack a policy framework that adequately addresses the environmental factor as well as the institutional, legal and monitoring structures to implement pollution control measures effectively.

CHANGING CONDITIONS FOR THE AGROPROCESSING INDUSTRY

Agricultural support and trade regimes and patterns of agro-industrial production

National food and agricultural policies and international trade policies are a major factor determining the international division of labour and the geographical distribution of agricultural and agro-industrial production. Studies of domestic and international market prospects for food and agricultural products are essential to decisions on the set of policies that will enable producers and processors to gain competitiveness and take advantage of market opportunities.

Policies that affect the prices of inputs and outputs to producers, processors and consumers are of critical importance. Therefore, special attention should be given to policies regarding taxation, subsidies, direct price support and tariffs, both in the short and the long term.

The temptation exists for policy-makers to provide incentives or preferential treatment to the industries supplying inputs, or to producers, processors or final consumers of food. These policy interventions are provided in various forms: tax concessions to producers of inputs and products, subsidies on prices of inputs or food, support prices for producers at relatively high levels, protective tariffs or other international trade barriers. The sustainability of such policies must be given careful consideration before adoption, as history is full of examples of the disastrous consequences associated with the abrupt removal of such preferential measures.

It is important that policies applied at all levels of the food production and processing system are compatible and work towards the achievement of the same goal. Whether in the form of a tax, subsidy, support or tariff, policy interventions must generate net benefits for society. In other words, the loss in fiscal revenue from a reduction in taxes must be more than offset by the increase in jobs and benefits associated with the industry; the cost of a subsidy must be more than offset by gains for the direct and indirect recipients of such a subsidy; relatively high prices must ensure the required increase in production and expansion of the industry concerned, with benefits in terms of employment and income; and the subsidy to final consumers must have net benefits in terms of nutrition and productivity.

An important aspect of agricultural protection policies is the phenomenon that tariffs on processed agricultural products have generally been higher than those on their primary commodities. This tariff wedge between a processed commodity and its corresponding primary commodity is often referred to as tariff escalation. Developing countries have for many years identified tariff escalation as a major issue concerning market access and an important obstacle to their efforts to establish processing industries. However, most of the empirical studies on this process are by now outdated. A recent study by FAO4 analyses the impact of the Uruguay Round on tariff escalation for agricultural products in the EU, Japan and the United States. The study shows that tariff escalation has been reduced as a result of the Uruguay Round, creating some opportunities for developing countries to diversify their exports into higher-value processed commodities. The study concludes, however, that high levels of escalation will still remain after the implementation of the Uruguay Round concessions.

In many developing countries, from colonial times at least until the early 1980s, agriculture tended to be directly or indirectly taxed through a combination of measures involving forced procurement at prices below market prices, taxation of inputs, subsidization of manufactures and overvalued exchange rates. However, this phenomenon presented very diversified situations. On the one hand, for tropical beverages, oils, alcohol and tobacco, often against a backdrop of underpaid or taxed agriculture, huge subsidies were paid to the processing industry, which was either organized in the form of parastatals (as in Africa), or controlled by multinationals (as in Central America and Asia), or again characterized by a tight oligopolistic structure (as in much of Latin America).

On the other hand, the rise of a modern food processing sector has often been delayed or even suppressed by the combination of agricultural taxation and consumption subsidies characteristic of traditional food policy in developing countries. Food distribution systems, in particular, have relied on forced procurement and import subsidies, thus lowering simultaneously the supply of local produce and prices of processed food products. Incentives to develop local manufactures for a variety of food products have thus been artificially depressed, especially in sectors such as dairy products, packed meat and wheat derivatives. On the other hand, in several developing countries the rise of a domestic fruit and vegetable processing industry has been indirectly encouraged by the punitive policies adopted against the production of basic food items. A policy of "benign neglect" or, in some cases, of open subsidization in favour of irrigated crops has thus favoured the growth of an agro-industrial complex based on fruits and vegetables in such diverse countries as Morocco, Turkey, Mexico and Chile. Similarly, in the case of tropical fruits, many new industrial enterprises have been successful in producing fruit juices, preserves and products for domestic industries as a result of the relatively high profitability of these products, technological advances in the transformation processes and the need to diversify out of sugar and other plantation crops.

An interesting example of a development of the latter type is Brazil, where the production of juices from tropical fruits has increased more than twentyfold in the past ten years. These fruits, produced mostly in the northern and northeastern areas of the country, used to be consumed in processed form only in local markets, mainly because the technology did not allow the production of juices with the amount of chemicophysical stability necessary to maintain the organoleptic characteristics of the product at a commercially acceptable level. This technological barrier has been completely overcome in the course of the 1980s. As a consequence, the Brazilian industry that processes tropical fruits, together with the production of fruits themselves, has greatly expanded and acquired a large share of the export market where, for certain products (e.g. maracujá) it almost has a monopoly.

A special problem of change that concerns both food price policies and the processing industry is the transition to market economies of the former centrally planned economies of Eastern Europe and the CIS. Here the pricing system prior to transition was characterized by extreme subsidies to both food producers and consumers. While roughly two-thirds of agricultural land was in the hands of state or collective farms, virtually all agro-industries were state-owned monopolies. These paid little attention to quality and technological development, even for products that were high-value sources of foreign exchange (such as caviar). The transition process has changed the economic environment by removing or substantially reducing food subsidies, by privatizing agriculture and industry and by deregulating local markets. In the absence of a comprehensive liberalization programme, however, new disequilibria have been created. Higher retail prices for food are often not transmitted to farmers because the processing industry is free to use market power to appropriate monopolistic rents. At the same time local producers are faced with strong competition from imports of higher-quality, Western processed food.

The current trend towards liberalization and increased market-orientation of agricultural policies opens a series of interesting perspectives for agricultural and agro-industrial producers. In an international macroeconomic framework characterized by low inflation and low interest rates in the industrialized countries, international trade should receive a significant impulse, especially in liberalizing agricultural markets. Growth prospects appear favourable, particularly because of the increasing diversity of food consumption, the switch to high income-elasticity goods and the increasing importance of marketing and processing. These phenomena could result in a massive reallocation of agricultural products along new lines of comparative advantage, following both the new market perspectives and the possibilities disclosed by technology and the evolution of tastes.

Moreover, in many developing countries, from the mid-1980s onwards and in the wake of the general move towards increased liberalization and market orientation, there seems to have emerged a new consciousness of the importance of agriculture and related sectors. In many cases this new awareness has coincided with important policy changes such as the privatization of government-owned marketing and processing companies and with the end of the willingness to subsidize private oligopolies in the commodity sector. The stage appears to have been set, therefore, for an endogenous growth of the domestic food industry wherever a comparative advantage can be exploited. Nevertheless, it must be emphasized that, in many cases, discrimination against domestic agrifood industrial activities in developing countries continues, as the discriminatory policies have only attenuated rather than disappeared.

Evolution of technology and food consumption patterns

Additional factors shaping the future of agro-industrial production and trade are developments occurring in technology and food consumption patterns, most noticeably in the industrialized countries. In this respect, technological development in agriculture is going through a transition phase of great interest. On the one hand, improvements in production techniques based on traditional chemical and mechanical innovations have permitted exceptional increases in yields and large improvements in quality, mainly concerning product homogeneity and lack of physical defects. On the other hand, more recent trends in agricultural research and technology point to different models, based mostly on innovations of a biological and biotechnological type as well as on modern processing technologies.

Thus, while, historically, productivity growth and price gains achieved through processing innovations have been paramount in primary agriculture, and have been easily transferred to the agro-industrial sector, product innovations are also beginning to materialize. Although the resulting improved variety and quality of final products do not necessarily go hand in hand with lower costs, the innovations promise to increase efficiency in agro-industry and, through the correspondent increase in demand for agricultural inputs by the processing industry, they can contribute to mitigating the tendency towards price declines facing primary producers.

Parallel to technological development, patterns of food consumption in industrialized countries are evolving (Table 7). Between 1969-71 and 1990-92 the share of cereals, sugar and roots and tubers declined at the world level, while that of livestock products, fish and vegetable oils and fats tended to rise. There were significant variations in the patterns among country groups and regions, however. In the developing regions, for instance, the increased share of animal products was most evident in East and Southwest Asia, followed by South Asia and Latin America and the Caribbean countries, whereas a similar increase did not occur in the Near East and Africa. The variations were equally significant between developed and developing countries. In the example of sugar, the overall reduced share reflected a marked decrease in the developed countries’ share, as that of the developing countries increased.

In industrialized countries two different types of force are shaping food consumption patterns, of which the final effects on the quality, composition and geographical allocation of production are difficult to predict. One is represented by an increasing concern for health and fitness. This was one reason for the marked decline in per caput food consumption of sugar. Also, while the consumption of livestock products has increased significantly over the past decades, the relative importance of these products is progressively decreasing, while a premium is put on products such as vegetable products and fruits which, until only recently, were considered complementary in nature and largely of lower value relative to animal products. These trends are expected to continue in future years, as shown by the example of European countries (Table 8).

Fish and other marine and water products, the supply of which is enhanced and enlarged by the growth of aquaculture and other farming techniques, have also become choice foods in the diet of higher-income earners in the developed countries. Another aspect of this tendency is the revaluation of those characteristics of food products that can be traced back to an "original" or "natural" pattern of production. In addition, another biological agriculture, which appeals to environmentalistic attitudes and value judgements of intrinsic characteristics of food, is part of the tendency, as is the trend towards more nutritious products, which also possess other desirable dietary properties. These changes in the dietary patterns of middle-income brackets in developed countries mark a transformation of attitudes which is likely to have profound implications for food production patterns.

TABLE 7

Share of major food groups in total dietary energy supply (DES), 1969-71 and 1990-92

Food group World

Developed countries

Developing countries


1969-71

1990-92

1969-71

1990-92

1969-71

1990-92


(percentage)
VEGETABLE PRODUCTS

84.4

84.3

71.7

70.9

92.3

89.7

Cereals

50.1

51.2

32.6

30.4

60.9

59.6

Sugar

9.1

8.8

13.2

12.8

6.6

7.2

Vegetable oils and fats

5.7

8.2

8.2

11.1

4.1

7.0

Roots and tubers

7.5

5.0

5.0

3.8 9.0

5.4

Vegetables and fruits

4.2

4.3

4.5

4.9

4.5

4.8

Pulses and nuts

4.8

4.0

2.3

2.3

2.3

4.7

Alcoholic beverages

2.7

2.4

5.3

4.9

5.3

1.3

Stimulants and spices

0.4

0.4

0.4

0.6

0.4

0.4

ANIMAL PRODUCTS

15.6

15.7

28.3 29.1

7.7

10.3

Meat and offal

6.4

7.4

11.1

12.8

3.5

5.2

Milk

4.8

4.3

8.9

8.6

2.2

2.6

Animal oils and fats

2.7

2.0

5.4

4.4

1.0

1.1

Eggs

0.8

0.9

1.5

1.8

0.3

0.7

Fish

0.9

1.0

1.4 1.3

0.6

0.7

Source: FAO.

TABLE 8

Growth rate in per caput consumption of selected foods, Western Europe, 1970-90 and 1988-90 to 2010


1970-90

1988-90 to 2010


(percentage)
Cereals and products

0.2

-0.2

Potatoes

-0.4

-0.4

Sugar -0.5

0.0

Pulses

1.4

0.0

Vegetables and products

1.3

0.5

Fruit and products

0.8

0.8

Vegetable oils

1.3

0.8

Milk and products

0.7

-0.3

Eggs

-0.5

-0.2

Meat and products

0.8

0.4

Population growth rate

0.2

0.1

Source: FAO food balance sheets and projections; FAO. 1995. World Agriculture: towards 2010. Edited by N. Alexandratos. Rome, FAO and Chichester, UK, Wiley.

On the other hand, modern food production technology tends to multiply the variety of products derived from original, natural products. A proliferation of goods that incorporate innovations in form, colour, organoleptic and conservation properties is flooding the supermarkets and presenting consumers with alternative choices. The return to "naturalness" and the artisanal nature of original food is thus matched, somewhat paradoxically, by an increase in the artificial nature of these new products, especially the more industrially sophisticated ones. The challenge to the food industry, in this case, is to try to reconcile the two tendencies through processing and product innovation.

An important issue is the extent to which changes in consumption patterns and the growing importance of transformed or processed food in total food consumption may affect consumer safety. In general, the contribution of agrifood industries to raising the quality, variety, nutritional value and safety of food cannot be overstated. However, risks of food infection may arise at all the stages of the food industry – production, transformation, packaging, storing and transport. Also, if inadequately controlled, the growing sophistication of the product, with the addition of preservatives, additives and other substances that may enhance its market value, may be a source of greater risk for consumers. A further factor affecting food quality and safety is the intensification of trade in food products, resulting from the general process of interdependence of agrifood systems (see the section, The internationalization of agrifood systems, p. 250) and factors such as shifts in tastes and preferences towards well-publicized imported products, and greater demand for convenience foods. Intensified trade flows, however, raise the potential of exposing consumers in one part of the world to the food quality and safety problems of other regions. Rapid transport and increased shelf-life technology may allow for contaminated products to reach their intended destinations more quickly and remain on the market longer, thus affecting greater numbers of consumers. These problems raise the importance of adequate food standards and mechanisms for the rigorous vigilance and monitoring of the quality and safety of processed foods, of both domestic and foreign origin.

Evolution of the agroprocessing industry and developing countries

The developments in international agro-industry discussed here have implications for developing countries and the possibility of developing their agro-industrial sectors. Thus, on the one hand, the gradual process towards increased liberalization of trade and market-orientation of domestic policies in the developed countries will hopefully offer increasing opportunities for developing countries. On the other hand, the need to adapt production to the increasingly sophisticated and demanding requirements of these markets poses challenges to both agriculture and agro-industry in countries wishing to supply these markets. Indeed, the success of a number of developing countries in expanding agro-industrial production and exports has to a large extent depended on their ability to meet the requirements of the developed countries’ markets.

Because developed countries practically consume only processed food, as even fresh vegetables are variously cleaned, prepared and packaged when they reach distribution outlets, the development of agro-industries is increasingly becoming one with development of industrial agriculture. Indeed, although most of the so-called new agricultural exporters, such as Chile and Thailand, have expanded their capacity to provide markets with both fresh and processed products (see Box 13), on closer inspection, even "fresh" fruits and vegetables are themselves processed goods undergoing sophisticated operations in collection, quality control, packaging, storage, refrigeration and transport.

Even disregarding some of the more exceptional cases, agro-industry has been an important growth component in a great number of the better performing economies of the developing world. Econometric studies show that this new and integrated form of agricultural development is invariably based on productivity growth and technological development that are as rapid and spectacular as those occurring in the manufacturing sector. Many studies report higher growth rates of total factor productivity in the agricultural sector than in other sectors.5 Just as important for many countries is the drive towards diversification, as this allows them to end their dependence on primary goods, which often constitute a crucial obstacle to self-sustained growth. The economy-wide drive towards diversification can be accompanied by a tendency to diversify within the sector, with recourse to an increasing number of processing technologies that expand value added and productivity for agricultural products beyond the boundaries of traditional agriculture.

One characteristic of the new agro-industrial development is the increasing importance of processing and marketing activities. That this is a key to acquiring stable shares of international markets had been realized by Israel, which represents the success story of the 1970s and was the model for similar experiences in other countries. The extraordinary export growth achieved in the 1980s and 1990s by some countries has depended on the thorough planning of all product transformation phases, from the original producers to the final consumers. For off-season fruits and vegetables, for example, which have been one major expanding export of Chile, careful time planning has been used to ensure that they arrive on the European markets precisely in the intraseasonal intervals when local products, including off-season produce, are not available.


BOX 13

SUCCESS STORIES IN EXPORT-ORIENTED AGRO-INDUSTRY

Up to ten years ago, Chile had a tradition of producing high-quality fresh fruits. The development of its capacity to export against the established producers of Europe, North America and Mexico was based on careful studies of potential competitive advantage, including cost, quality and marketing characteristics such as off-seasonality and timeliness of delivery. This effort, sustained over a trial period of three to five years, brought about an expansion of exports of unprecedented magnitude, not only for Chile’s fresh fruit, but also for many of its agro-industrial products such as wine and food preserves. Timeliness in harvesting, processing and transport depend on an industrial marketing structure that coordinates sales contracts, temporary storage and quality controls in all phases of the product cycle. Reliability in terms of quality, timeliness of delivery and other contractual conditions (composition, prices, packaging, etc.) have gradually contributed to earning Chilean products a reputation that ensures them a stable share of the international markets.

In addition to product choices, seasonality and careful planning of other market characteristics, a more detailed analysis of the Chilean case reveals other key factors for success. Chilean agriculture took off in the 1970s, when a series of market-friendly reforms removed earlier restrictions and ended longstanding import substitution policies. In the growth of the agricultural sector, moreover, a major role has been played by transnational agro-industrial companies, which have planned the development of fruit production in a vertically integrated mode, according to modern industrial standards and by exploiting their experience of export markets.

Chilean agriculture also constitutes a good example of the sector’s importance as an engine of aggregate growth of an economy. The process of diversification and integration of the agricultural sector has coincided with analogous diversification processes of the economy which, in the early 1970s, was still heavily dependent on the exports of copper (which represented more than 70 percent of export earnings). Industrial development and a widening of the production base, accomplished in the 1980s and the 1990s, have gone hand in hand with the development of a modern agro-industrial sector, at the bottom of which industrialized agriculture has shown productivity growth comparable with that of the most advanced manufacturing activities.

Another interesting success story is that of Thailand, which was among the world’s top export performers in the 1980s when its exports expanded by an annual average of 13.2 percent in real terms, accounting for as much as 38 percent of GDP in 1990. Exports continued expanding dramatically during the first half of the 1990s, doubling in value between 1990 and 1995. Agro-industrial products, which were responsible for more than 65 percent of total exports, were developed by ensuring a market-friendly economic environment and providing adequate financial and support services. Some elements of this success story also give an idea of the potential of agro-industry as a leading sector. Indeed, the number of manufacturing jobs in Thailand doubled between 1978 and 1991, with agro-industry accounting for 60 percent of all workers in manufacturing industries by 1990, and for 15.4 percent of GDP (up from 9.7 percent in 1960). Agro-industry grew at a rate exceeding 8 percent per year from 1980 to 1990 and, by 1990, numbered 32 000 private enterprises or 62 percent of the total number of establishments in the manufacturing industry.


THE INTERNATIONALIZATION OF AGRIFOOD SYSTEMS

Agrifood trade and interdependence of national agrifood systems

In 1994 world agrifood trade was valued at about $390 billion, about 10 percent of total world trade. A predominant role was played by Europe, which accounted for almost 50 percent of all imports and 45 percent of all exports. As highlighted in Figure 17, p. 254, Asia is also an important economic area with the Japanese market playing a major role.

Latin America and the Caribbean has gained a significant market share in the past 20 years by virtue of high diversification of agricultural production and dynamic growth of primary processing industries as well as progressive trade liberalization, factors which have allowed this region to integrate remarkably well in international markets. On the other hand, Africa’s presence in agrifood markets has remained modest, while the small market share of countries in Central and Eastern Europe and the CIS bear witness to the difficult integration of these countries in world markets.

International capital activities in agro-industry have reached a very high level: out of a total of about $300 billion of foreign direct investment (FDI) in 1995, an estimated $25 billion went to the agrifood industry (see Box 15).


BOX 14

VERTICAL INTEGRATION

Despite growth and diversification in agro-industry, vertical integration and vertical coordination activities appear to be increasing in the sector. This can be seen in the progressive incorporation of large agricultural estates into food multinationals and in the rapid increase of preproduction contracts between farmers and industry. In the United States, for example, where these phenomena are more evident and tend to precede similar developments in other countries, in 1996 more than 50 percent of broiler and almost 16 percent of fruit and vegetable production were regulated through preproduction contracts.

The objective of reducing transaction costs accounts for much of the growth of vertically integrated companies, and explains some of the attempts to coordinate agricultural supply with industry needs. An integrated firm may save resources by consolidating the many contracts that pertain to sales of agricultural goods into a single line of business. Cost reductions may also derive from the consolidation of upstream contracts with labour, land and other inputs of agricultural production.

A second cause of vertical integration lies in the need for agro-industrial production to meet the quality standards required by an increasingly specific and diversified consumer demand. Because of the extra costs associated with enforcing these standards in the field, there is an incentive for individual agricultural enterprises to free-ride on quality levels already achieved. Vertical integration may also be a way of dealing with this type of problem.


Underlying the growing importance of international trade and capital flows in agro-industry has been a process of internationalization, which has increased in intensity over the past decades and has manifested itself in:


BOX 15

FOREIGN DIRECT INVESTMENT IN AGRO-INDUSTRY

An important aspect of the economic internationalization process has been the dramatic increase in foreign direct investment (FDI), generally and in agro-industry, in the 1980s and 1990s.

According to the World Bank Debtor Reporting System, total net flows of FDI to developing countries rose from $24.5 billion in 1990 to $95.5 in 1995, while preliminary estimates for 1996 indicate a further increase to $109.5 billion in 1996.1 Multinational enterprises in the industrialized countries are the main source of FDI, accounting for more than 90 percent of flows in recent years.

The sectoral composition of investment flows towards developing countries is not so well documented. However, according to statistics2 on total flows of FDI from OECD countries to all destinations, the share going towards the food, beverages and tobacco manufacturing subsector was quite significant for a number of the major providers. Based on data for 1993 the share of FDI flows to this subsector amounted to 9.9 percent for the United States, 5.7 percent for the United Kingdom, 2.5 percent for Japan, 4.2 percent for France, 35.9 percent for the Netherlands and 13.5 percent for Switzerland, but only 0.5 percent in the case of Germany.

1 See Box 1, External debt and financial flows to developing countries, p. 41.

2 OECD. 1995. International Direct Investment Statistical Yearboook 1995. Paris.


Multinationals in the internationalization process

An important aspect of the internationalization process is the increased role of multinational corporations in the agro-industrial sector of numerous countries. The creation of a multinational as an organizational entity may in many cases represent the final leap in the process of internationalizing the enterprise, a process which generally begins with the export phase.


BOX 16

MARKET FRAGMENTATION

The evolution of the food industry in the past 15 years may be considered as a case-study of a fragmented market that is becoming increasingly global under the effect of two powerful forces: the evolving patterns of consumption and technological progress. In the 1970s the food industry was characterized by: i) a large number of local producers, generally specialized in the production of a single good or in a set of closely related products; ii) a small number of national or international producers also specializing in a single core business; iii) an even smaller number of multinational firms, which were either extremely diversified (Unilever, Nestlé) or strictly specialized (Coca Cola).

The fragmented nature of the market was the result of both natural and policy-induced constraints. Natural constraints mainly comprised, for local products, tastes, local equipment, brand loyalty and consumer information. Policy-induced constraints resulted mainly from non-tariff barriers associated with health and hygiene regulations and from discriminatory policies of local traders and retail shops. Because their products could not be replicated in a standard form by the larger producers, local manufacturers enjoyed the double advantage of higher prices and lower transport costs. Their traditional equipment and the local brands also proved to be a very effective means of discouraging national producers from trying to penetrate local markets, except with products that did not compete directly with local ones.

Starting in the mid-1980s, however, the larger producers in Europe and the United States gradually took over local markets by developing a high-growth strategy based on three tenets: i) covering the market to achieve dominance of a few standard products; ii) increasing the degree of differentiation by acquiring or by directly challenging the local leaders; and iii) introducing new products that could embody some of the characteristics of local products without trying to replicate them. This strategy not only required rapid growth, but also an expansionary policy of horizontal acquisitions and aggressive control of marketing activities, such as advertising, retailing and investment in research and development for product innovation. The present trends, which constitute a continuation of the expansion at the national level, are mostly characterized by national producers’ attempts to upgrade their traditional leadership to an international level.


In the current environment of increasing competition in international markets the main strategies adopted by the agrifood enterprises have been those of obtaining, through acquisitions of other enterprises operating on foreign markets, a level of competitiveness which would otherwise have been more costly or risky to achieve. Indeed, the food industry has been affected since the early 1980s by major acquisitions, mergers and agreements, the main product of which has been a strong market concentration in numerous sectors. According to data from UNCTAD,6 over the period 1990-95, cross-border mergers and acquisitions in the food, beverages and tobacco manufacturing subsectors amounted to an annual average of $12.2 billion, representing 7.7 percent of total cross-border mergers and acquisitions over the period.


BOX 17

BENEFITS OF FOREIGN DIRECT INVESTMENT

In its 1996 annual report,1 WTO discusses several aspects of FDI. The report contains a review and discussion of some of the benefits and costs of FDI to the host country, a question which has been the object of strong debate between supporters and critics of this type of investment. Although the discussion relates to all forms of FDI, it is of obvious relevance to the debates on the role of FDI in the agro-industrial sector and on the agrifood multinationals. Following are some of the main points that emerge from the WTO report.

According to the proponents of FDI, in general terms the benefits accruing to the host country are represented by an increase in national output and income exceeding the gain to the investor. These benefits can accrue either to domestic labour (in the form of expanded real wages), domestic consumers (through lower prices and/or improved product quality) or government (as increased revenues).

Much criticism has, however, been voiced against FDI and the role of multinational corporations. Critics point to potential negative balance-of-payments effects in the medium term, as the multinational corporations increase imports of intermediate goods and start repatriation of profits. Other points of criticism or concern are the potential market power of multinational corporations on the domestic market of the host country, which would allow them to engage in various restrictive practices that reduce competition, and the possible vulnerability of the host country governments to political pressures. In general, WTO does not believe that these concerns can constitute a sufficient case against FDI as such. As for the potential negative balance-of-payments effect, it is pointed out that FDI in countries with high levels of import protection tends to be less export-oriented than in countries with low protection levels and also that any balance-of-payments effect will depend on the exchange rate regime of the country. In any case, it does not appear that the potential costs associated with FDI outweigh the benefits deriving from it. Also, it is the belief of WTO that some of the problems and concerns associated with FDI could be adequately dealt with in the framework of a multilateral agreement on FDI.

On the positive side, FDI has considerable importance as a vehicle for technology transfer. This transfer can of course take place directly to the firms affected, but there may also be important effects of indirect diffusion of technology in the host country. Such diffusion may be deliberate, for example through the upgrading of technologies in other domestic firms doing business with the foreign affiliate, or in the form of spillover effects, such as when technology is copied by other firms. Other important positive effects in the host country could be the pressure on domestic producers to upgrade and improve efficiency. According to WTO, the empirical evidence tends to support the view that FDI is the most potent vehicle for technology transfer and that FDI leads to higher productivity in locally owned firms.

FDI also has important effects on employment The view that multinational corporations may have little impact on the development of local skills is rejected by the empirical evidence; rather, evidence tends to support the view that multinational corporations can fill critical management gaps, facilitate employment of local labour and transfer skills to local managers and entrepreneurs.

1 WTO. 1996. Annual Report 1996. Geneva.


Within the framework of the increasing market concentration, the multinationals have played a role of primary importance, strengthening their position in the majority of the world agrifood sectors and basing their competitive strength on high degrees of diversification (Table 9).

The majority of the top 100 agrifood multinationals are located in Europe. Over the past 20 years the multinationals of European and Japanese origin have increased their share of the top ranking as compared with the Americans who, in 1974, occupied 50 positions out of 100 (Table 10). Out of a total business volume of $599 billion in 1990, the top ten multinational groups operating in the agrifood sector accounted for 32 percent, and the market is becoming even more concentrated in the hands of a few multinationals.

TABLE 9

The top 20 multinationals of the agrifood industry, 1994

Group

Country

Main sector

of activity

Agrifood business

volume

(million $)

Philip Morris

United States

Multiproduct

53 288

Cargill

United States

Cereal transformation

50 000

Nestlé

Switzerland

Multiproduct

40 247

Pepsico

United States

Beverages and soft drinks

28 472

Unilever

Netherlands

Multiproduct

26 150

Coca Cola

United States

Beverages and soft drinks

23 828

Conagra

United States

Multiproduct

23 512

RJB Nabisco

United States

Multiproduct

15 366

Danone (BSN)

France

Multiproduct

12 843

Anheuser Bush

United States

Beer

11 364

Grand Metropolitan

United Kingdom

Multiproduct

11 300

Snow Brand Milk Products

Japan

Dairy products

10 600

Archer Daniels Midland United States Oils and vegetable fats

10 344

Bunge y Born

Argentina

Cereal transformation

9 500

Maruha (Taiyo Fishery)

Japan

Fish

9 221

Eridania/Beghin-Say

Italy

Oils and vegetable fats

9 157

Kirin Brewery

Japan

Beer

9 020

George Weston Ltd

Canada

Food distribution

8 939

General Mills

United States

Multiproduct

8 517

Allied Domecq Plc

United Kingdom

Wines and liquors

8 375

Source: Agrodata.

TABLE 10

Division by zone of origin of the top 100 agrifood multinationals

Countries Number

1974

1994

United States 50

28

Western Europe

37

43

Japan

7

20

Others

6

9

Source: Agrodata.

The geographical distribution of the industry is subject to rapid change. The United States, which was the leading producer at the beginning of the 1980s, lost ground in the course of the 1980s and the early 1990s, to the point where the EU is now the main world producer, with a turnover of more than $600 billion, corresponding to more than 35 percent of the value of total production. The reduction in the United States’ supremacy, however, is less accentuated in terms of the largest holdings, with Cargill, Kraft, Pepsico and Coca Cola still at the top of the industry, respectively in first, third, fifth and sixth place in the worldwide ranking by turnover, while the Swiss Nestlé and the Dutch-English Unilever occupy second and fourth position.


BOX 18

UNILEVER

Perhaps no other company may be taken to represent the worldwide food business as Unilever. Founded in the early nineteenth century through the merger of two successful "colonial" companies, respectively the property of the English and the Dutch crown, Unilever has grown to become perhaps the single largest producer of processed food in the world. With 1 700 subsidiaries in all countries of the world, Unilever’s profits place it twenty-first in Fortune’s 500 top-ranking companies. Fully 50 percent of its business is from food, with a portfolio of a balanced mix of local, regional and international brands which take into account the differences as well as the similarities in consumer demand.

Unilever describes itself as "international", not "global", because it does not attempt to enter all markets with the same product. Rather, it takes the view that successful food business must be based on local tastes. As a multinational conglomerate, however, Unilever can hardly be said to be local, except for its intense involvement with the food business of a great many countries, with special attention for developing ones. Recent business expansions, for example, concern Malaysia, Thailand, Pakistan, Bangladesh, the United Republic of Tanzania and Mozambique. Older, better established and rather successful ventures can be counted in Mexico, Brazil, India and several other middle-income countries.

According to the official company account: "Generating growth in emerging markets is a key business priority for Unilever. These markets are set to overtake the advanced industrial countries in their share of world output by the year 2000. Unilever already has a strong presence in emerging markets."

Rationalizing its strategy as one of diversification and market winning, the company statement goes on by describing its product innovation philosophy: "A ‘broad product base’ is more than an expression of size. It conveys strategic flexibility. Unilever can enter a market through the product category which is most relevant: it may be laundry soap (Brazil), margarine (Hungary), tea (Arabia) or detergents (Thailand). It can then gradually build its business by introducing other categories."


The need to control the supply of raw materials and the increasing concentration of the industry has resulted in a process of expansion based on foreign subsidiaries. On average, the first 100 companies control 15 subsidiaries A policy environment for agro-industrial development.

Importance of economy-wide policies

To a very large extent promoting agro-industrial development and ensuring that agro-industry provides the optimal contribution to economic development depend on appropriate economic and other policies throughout the economy, more than on sector-specific policies and interventions. Worldwide experience has shown that competitive markets are the best way yet found for efficiently organizing the production and distribution of goods and services. Domestic and external competition provides the incentives that unleash entrepreneurship and technological progress. However, markets cannot operate in a vacuum – they require a legal and regulatory framework that only governments can provide. Also, there are many other tasks in which markets sometimes prove inadequate or fail altogether. That is why governments must, for example, invest in infrastructure and provide essential services for the poor. It is not a question of state or market: each has a large and irreplaceable role.

The consensus that has been gradually forming emphasizes the role of government in creating an enabling environment conducive to private sector investment, principally by providing a stable macroeconomic foundation and removing market distortions and rigidities through policy reforms. Without going into the components of such an economy-wide enabling environment,7 the most general aspect would be the need to establish a stable macroeconomic framework through sound monetary and fiscal policies that control inflation, limit budgetary deficits and public sector borrowing requirements and maintain realistic exchange rates. Other important elements would be open trade policies, an efficient financial system and liberal financial markets, together with free international capital movements. A favourable business environment also depends on the absence of legal and regulatory constraints to enterprise, such as price controls, investment licensing, etc. as well as the existence of modern business legislation, a reliable judicial system and liberal labour codes and landownership laws. Further elements in a favourable general economic environment would be efficient and non-distorting systems of taxation and the reduction of the public sector’s role in productive activities, among other things, to avoid the diversion of allocations from important support services (such as infrastructure and education) required by the private sector.

Taking for granted the fundamental importance of an appropriate economy-wide enabling environment, the following section briefly identifies some of the key policy issues that are of particular importance for development of agro-industrial potential in developing countries. The discussion does not claim to introduce elements of originality, but can be said largely to reflect lessons of experience as well as the current consensus.

Promoting domestic agriculture

The specificity of agro-industry vis-à-vis other industrial sectors lies in the agricultural origin of a large part of its inputs. In most cases, for developing countries it is domestic agriculture which is, or would be, the main supplier of raw materials to agro-industry, just as the potential for agro-industrial development in developing countries is largely linked to the actual or potential availability of such agricultural inputs to the processing industries. For this reason, increasing the efficiency of domestic agriculture is an important aspect of promoting agro-industrial development. At the same time agro-industrial processing activities can themselves have a positive impact on efficiency in primary agriculture by promoting technological innovation and stimulating competition within the sector.8

Investment and technology policies

Governments have often sought to promote agro-industry by investing directly in state-owned enterprises, but have lacked sufficient familiarity with technical and market requirements to prepare adequate feasibility studies and make appropriate technological choices. Public investment projects designed by foreign consultants and funded by aid have too often turned out to be white elephants because the sponsors have lacked personal stakes in, or a long-term commitment to, the commercial viability of the project. Technical and managerial resources to run state-owned enterprises efficiently are generally scarce and, in any case, budgetary constraints are requiring governments to look increasingly to the private sector as the main source of investment in agro-industry.

Ways of raising technology levels in national agro-industry in the absence of direct government involvement in the sector include the tapping of the research and development capacities of multinational corporations by encouraging direct investment, promoting joint ventures and licensing and franchising arrangements and encouraging the secondment of their staff. Foreign manufacturers of agro-industrial machinery and equipment can be encouraged to establish plants or partnerships in developing countries to develop technology that is better adapted than much imported technology to the available raw materials, scales of production, worker skills and consumer requirements of the domestic markets in those countries. Also, freedom of entry should be granted to foreign and domestic suppliers of services to agro-industry, including accountants, technical consultants, suppliers of raw materials, intermediate inputs and equipment.

FDI can provide an important contribution to economic development in general, and to agro-industrial development in particular. The benefits of direct investment lie not only in attracting additional capital and skills but also in expediting the transfer and assimilation of technology and managerial expertise as well as in a readier access to international markets. An essential condition for attracting such investment is the existence of a generally favourable business environment, as discussed above. But other more specific measures aimed at encouraging direct investments would be the lifting of restrictions on entry by foreign firms as well as on their access to foreign exchange and on dividend and profit remittances, on foreign ownership of land and financial assets; and on the employment of expatriates.9

Protecting the environment

In order to minimize the impact of agro-industrial residues on the environment, administrative tools to limit such releases must be developed. The most direct is enforced legislation prohibiting the discharge of residues into the environment. This can be coupled with incentives such as soft loans to invest in control measures. Legislation can also be accompanied by economic disincentives that penalize polluting industries. Other measures, applicable according to the circumstances, may be pollution entitlement shares and permissible limits (including trade permits); taxes on inputs or resource use (e.g. on water) rather than on the level of pollutants; subsidies to invest in environmentally friendly technologies; fees to cover the costs of removing pollutants, etc. It is important in any case that standards and regulations be realistic, enforceable and consistent with the overall policy environment.

In many cases, prohibiting the release of residuals results in a more profitable use of raw materials.10 The case of whey, discussed above, is an example. Others are the recovery of blood from slaughter operations and mill stream offals from cereals which can be converted into feeds, and the recovery of fish processing waste for food and feed products. Residues from the sugar and starch processing industries can be easily converted into fuel alcohol through fermentation. This would provide the double advantage of utilizing a processing residue and at the same time producing an energy source that is less polluting than conventional fossil fuels.

Although technological means of improving the environmental performance of many industrial activities already exist, their mere existence does not guarantee that they will be adopted, especially by small firms. One effective way to influence small firms is through extension and advisory services for industries. For example, the Pollution Control Cell of the National Productivity Council in India’s Ministry of Labour works to devise solutions that both reduce pollution and improve profits.

Generally, building pollution prevention into new agrifood investments is cheaper than adding it on later. Hence the importance of undertaking environmental impact assessments for proposed new large-scale investments. Developing countries with open markets will be able to gain from importing clean technologies already in use in industrial countries.

Protecting the consumer

For agro-industrial development to go ahead, it is important for countries to introduce and update national food legislation. Without up-to-date food laws, modern approaches to food control cannot be implemented, thus often preventing the efficient use of precious resources and impeding the government’s authority and ability to regulate the food industry. With a properly administered modern food law, consumers and traders are provided the necessary assurances that build the type of confidence required for food products to be accepted as being of suitable quality and safety for both domestic consumption and trading in international markets. There is little doubt that trade at all levels has played a significant role in improving social, political and economic conditions worldwide. Countries that increase their trade prospects by assuring safe and high-quality food products for international markets will benefit at the expense of those who do not.

FAO/WHO guidelines for developing food control systems lay down basic principles based on national practice and experience. They suggest that food law be kept simple with detailed specification about food processing, food standards, hygienic practices, packaging and labelling and food additives to be incorporated in a body of food regulations, rather than the food law. Prompt revisions of regulations may become necessary because of new scientific knowledge, changes in food processing technology or emergencies requiring quick action to protect public health. Such revisions can be made more expeditiously by executive agencies than by legislative bodies. Regulations must be written in clear, concise language and a regulation should be promulgated only when there is a recognized need for it. When a regulation is developed as a result of a recognized need, it is more likely to be practicable and acceptable to the regulated sector. Regulations that are prepared by the government with the participation of the affected industries, consumers and other interested parties hold the best chance of acceptability because the stakeholders have had a part in their development and recognized their need.

The national food control system should include appropriately organized, multidisciplinary and multipurpose functional units that collectively contribute to the overall official food control effort. This can be achieved through specialized government agencies in public health, agriculture or trade, or, in some cases, through a single food control agency with multidisciplinary subdivisions. A national food control system should include inspectional, investigational, analytical and compliance (regulatory or voluntary) functions; provide technical, advisory and educational services; and be oriented towards public service in terms of industry, media and the public. Decisions made by food control officials should be based on up-to-date scientific information, carried out in a transparent manner and represent a fair balance of the sometimes competing interests of consumer protection, industry and trade development.

The production and handling of food throughout the chain (from farm to table) must be carried out under appropriate conditions in compliance with established principles that are consistent, transparent and scientifically supported. Such principles should be an integral part of any national set of food standards and regulations, established under the authority of an up-to-date food law to protect public health and facilitate trade in food. Many of these principles already exist and were established by the Codex Alimentarius Commission (CAC) in a harmonized manner using hazard analysis and risk assessment methods. They include more than 40 different commodity-related codes of practice; the General Principles of Food Hygiene; a system of food safety based on the Guidelines on the Application of Hazard Analysis and Critical Control Point (HACCP); and Good Manufacturing Practices.

In addition, 237 standards for foods considered to be most important to international trade have been promulgated by CAC for adoption by the Member Governments of FAO and WHO. CAC has also evaluated the use of 185 different pesticides; set safe residue levels for 3 274 pesticides; established guidelines for the maximum levels of 25 environmental and industrial food contaminants; established acceptable daily intake levels of over 780 chemical additives to foods; and evaluated the use of 54 different veterinary drugs used in animal husbandry. These guidelines and standards should serve as a benchmark for national governments in the regulation of their food industry. National governments which meet the requirements of Codex standards are also presumed to meet the international requirements expressed in WTO’s Agreement on the Application of Sanitary and Phytosanitary Measures for food safety in international trade, providing a competitive advantage and assurance of acceptability for traders worldwide. Compliance with these standards is essential for the protection of public health and for successful trade in both international and domestic markets.

1 The term "agro-industry", sometimes used in this chapter as a convenient abbreviation of "agroprocessing industry", should not be understood to comprise industries supplying agriculture with industrial machinery, inputs and tools.

2 A.O. Hirschman. 1958. The strategy of economic development. New Haven, USA, Yale University Press.

3 The income elasticity of demand refers to the responsiveness of the quantity demanded of a good to changes in the income of consumers. Thus, the higher the income elasticity, the more demand for a good will increase as incomes of consumers grow.

4 FAO. 1997. The impact of the Uruguay Round on tariff escalation in agricultural products. ESCP No. 3. Rome.

5 D. Evans. 1987. The long-run determinants of North-South terms of trade and some recent empirical evidence. World Development, 15(5): 657-671; D. Jorgenson, F. Gollop and B. Fraumeni. 1987. Productivity and US economic growth. Harvard University Press, Cambridge, Mass., USA; P. Lewis, W. Martin and C. Savage. 1988. Capital investment in the agricultural economy. Quarterly Review of the Rural Economy, 10(1): 48-53.

6 See UNCTAD. 1996. World Investment Report 1996. Geneva, UN.

7 See FAO. 1995. World agriculture: towards 2010, Chap. 7, p. 257-293. Edited by N. Alexandratos. Rome, FAO and Chichester, UK, Wiley; and FAO. 1996. Socio-political and economic environment for food security. World Food Summit technical background documents, Vol. 1. Rome.

8 The various technical, institutional and financial aspects involved in agricultural efficiency and development are discussed in FAO. 1996. World Food Summit technical background documents, Vol. 3. Rome.

9 For a more detailed discussion of specific incentives to FDI, see WTO. 1996. Annual Report 1996. Geneva.

10 See Farming, processing and marketing systems for SARD. FAO/Netherlands background document No. 4, Den Bosch Conference on Agriculture and the Environment, the Netherlands, 15-19 April 1991.

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