IV. Summary and lessons

4.1 This study has provided a synthesis of fifteen "successful" food commodity systems in nine middle- and low-income countries. All the cases have involved competitive exports of high-value food products, either spanning several decades or occurring during the 1980s in response to market opportunities. In a number of cases, the focal country has become the leading or dominant player in world markets. While the focal commodity systems experienced their initial 'take-off' periods at different times and have certainly been influenced by country- and time-specific factors, several common features can be identified in the development contexts and patterns of the focal commodity systems.

4.2 Regarding the development context, each faced very favorable international market conditions during their 'take-off' stage and for many subsequent years. This combined at least two of the following three elements:

1) a generally upward trend in international demand and prices as a result of rising incomes, relatively high income elasticities of demand, increased health consciousness, consumer desire for dietary variety, and quality improvements,

2) multi-year periods of substantial market undersupply ("market vacuums") due to trade embargoes or to adverse weather conditions, political instability, or other problems faced by traditional suppliers, and

3) the prior build-up of considerable consumer product awareness and distribution charnels within industrialized country markets before our focal commodity systems sought entry or expanded trade into such markets.

4.3 In addition, most of the focal commodity systems faced a favorable macroeconomic and policy environment at the time of their initial 'take-off'. This does not mean that this favorable macroeconomic/policy environment was sustained in subsequent years. In fact, several of the case study countries have experienced extended periods of high inflation, currency overvaluation, and low rates of investment and economic growth over the past two decades, with producers of the focal commodities being taxed directly and/or indirectly. While Taiwan (China) and Thailand have had a generally favorable environment for export and non-traditional agricultural development over most of the past two decades, the initial export booms experienced for Chilean fish, Brazilian FCOJ and soybeans, and Chinese shrimp occurred in the wake of or parallel to significant macroeconomic and/or trade reforms. The collective experience does suggest that an already well-developed commodity system can survive and retain its international competitiveness during a period of macroeconomic instability and uncertainty as long as it has an underlying low cost operating structure, a modern infrastructure, and strong international market (and marketing) links.

4.4 Several common ingredients were needed for the competitive responses to favorable international market conditions. These were: a) favorable natural endowments (e.g. land and water resources, temperature and sunlight patterns, geography, etc.) which provided initial production opportunities, lowered costs, and/or enabled extended or counter seasonal supply patterns. b) strong human capital-- combining abundant supplies of inexpensive field and factory labor with a well-trained, experienced, and motivated cadre of managerial and technical personnel. c) well-developed physical infrastructure-- combining general facilities for trade (e.g. roads, railways, ports, telecommunications) with the production, processing, and storage infrastructure needed for the specific commodities. In many cases, the focal commodity systems benefitted from production and marketing infrastructure previously put in place for other commodities or uses. d) the capacity to effectively develop and/or adapt imported production and processing technologies so as to attain cost efficiency and meet (or exceed) international quality standards. Such technology development or adaption was effective because of the limited restrictions placed on imported technologies, the strength of local research programs, and, at least in the Latin American cases, the very similar agroclimatic conditions between the major production areas and producing areas within the United States.

4.5 Another common factor contributing to the rapid and sustained supply response to international market opportunities was the prior or parallel development of complementary industries which lowered input or investment costs or created additional demand. Hence, the production and marketing infrastructure developed initially for wheat in both Brazil and Argentina was subsequently used also for soybeans, sharing overhead costs among the two crops. Thailand's well-developed feed industry supported both poultry and shrimp industry development. The well-developed processing equipment industry in Taiwan (China) provided that country's food processing firms which flexibility in shifting between processing methods and product lines. On the demand side, the Brazilian soybean industry benefitted from as well as contributed to the development of a local poultry industry requiring feeds (e.g. soybean meal).

Both the Israeli citrus and Chilean temperate fruit trades benefitted from the development of domestic fruit processing industries which absorbed surplus or second-grade fruit and which in the former case, has become the dominant market outlet.

4.6 On the institutional front, there are several common as well as divergent patterns. In nearly all of the focal cases the private sector has played a dominant. if not exclusive role in commercial production. processing, and trading activities. The two primary exceptions are for Chinese shrimp and Israeli citrus, although in the latter case private and cooperative firms initially developed the export trade and remained the major traders for fifty years. In a few other cases, government agencies have played a supplementary trading role, either in procuring and maintaining stocks for price stabilization purposes or in undertaking limited export trading activities. Both multinational corporations and local firms have been active in virtually all of the focal commodity systems, with the latter accounting for a majority of exports in all cases but one (e.g. Thai poultry).

4.7 In the vast majority of the focal cases. governments have provided facilities and services which either have public good properties. give to externalities. or exhibit large economies of scale. Hence, governments have generally invested in port and rail facilities, roads, large cold stores, and terminal/auction markets, without which little trade can be conducted. The development of public knowledge systems (combining research, training, and extension) also proved critical, especially in the initial 'take-off' of production and trade. Most of the focal commodity systems have also benefitted from government trade promotion efforts as well as government negotiation of favorable terms for international market access. Some form of market information service and quality control/licensing system has been put in place by governments in most of the focal cases. Beyond these investments and services, there is considerable variability in the roles played by government in commodity system development. Over the past two decades, there has been relatively little microeconomic activism in the focal Chilean and Thai commodity systems and in Kenya's fresh vegetable trade. Elsewhere, there has been more substantial microeconomic interventions, most commonly through credit schemes, tax holidays and differentials, and subsidized material inputs. At least in the Latin American cases, these interventions have generally not compensated for the negative effects of adverse macroeconomic conditions and policies.

4.8 The review found that while nearly all of the commodity systems have featured a competitive and decentralized domestic marketing system, in most cases processing and export marketing operations have tended toward high levels of concentration, with between three and ten firms accounting for the bulk of capacity and trade. In some cases, such concentration patterns have derived primarily from economic factors (e.g. economies of scale; differential capabilities and performance; the effects of macroeconomic instability); in other cases, government interventions have directly contributed to such organizational patterns.

4.9 The review also found a common significance of contract farming and/or vertical integration in linkages between farm-level production and downstream processing and trade. Open market buying and selling of commodities or raw materials has become only a supplementary, market-clearing arrangement in many of the focal commodity systems. In many cases, the leading firms have developed their own programs of applied research, extension, input delivery, and credit as a supplement or replacement for markets and government programs for such services. Long-term contracts or intra-firm trade were also found to be significant features of export operations in the majority of the focal commodity systems. Such long-term marketing ties have helped to maintain market access, lower logistical and transaction costs, and facilitate flows of information and technologies which have enabled suppliers to better meet changing consumer and buyer tastes and requirements. These common features of trade suggests a need for more institutionally focused analyses of international trade patterns and developing country involvement and performance therein.

Table 18: Major Factors Contributing to Initial Commodity System Export Booms

4.11 In addition to the above findings, several general lessons can be drawn from this review of fifteen food commodity "success stories". First, agricultural export diversification by developing countries need not focus on exotic tropical commodities and need not depend upon low labor costs for international competitiveness. The collective experience suggests that developing countries can compete against industrialized country suppliers in the markets for a wide range of high-value and high-volume commodities on the bases of both cost and quality. Although such quality-based competitiveness did not occur overnight, with the liberal adoption/adaption of foreign technologies and advice, and with the build up of local skills, infrastructure, research capabilities, and experience, many of the focal commodity systems succeeded to match or exceed competitive quality standards within a decade after initial international market entry. While very small developing countries which lack the capacity to serve large distribution systems might need to focus on niche market supply, larger middle- and low-income countries should aspire to compete in larger and less variable food markets.

4.12 Second, successful export diversification often depends upon prior or parallel development of domestic markets. None of the focal commodity systems has developed as an export-oriented enclave and relatively few have relied upon export markets for the bulk or even the majority of their sales. In nearly half of the focal cases, export development followed upon many years of domestic market experience, during which infrastructure and institutions were built up, product quality improved, and experience gained in new product development, handling, and packaging. In these and several other cases, export booms were accompanied by a rapid growth in the domestic market which provided an outlet for blemished or local grade produce, an outlet for animal/fish parts or products which could not be exported, and an overall fall-back position in case of unforeseen barriers to export. This suggests that government and donor interventions geared toward agricultural export diversification should not only seek to build upon existing domestic marketing experience, but should also incorporate policy reform and investment components to further develop domestic markets.

4.13 Third, while there is no ideal organizational structure for commodity system development and export marketing. government (and donor) interventions in this area should comply with a few general rules. The appropriate structure depends upon the breadth and depth of local skills and experience, the technical characteristics of the specific commodity, the present and potential scale of exports, the distance to major markets, the country's market share in major markets, and other factors. Government policies and interventions should be generally geared toward encouraging competitive and flexible export marketing structures. This means that governments should: a) encourage new entry by prospective processors and trading companies, b) encourage (or at least not restrict) processors and traders to experiment with alternative institutional arrangements for stimulating raw material production and coordinating it with their own requirements, c) encourage the formation and functional diversification of cooperatives, trade associations, and similar collective institutions, d) streamline procedures for foreign direct investments, and e) reduce tariff and non-tariff barriers for the importation of planting materials and production, processing, and marketing equipment.

4.14 On the other hand, governments should not: a) 'pick winners' from among prospective or existing firms, providing favorable treatment to some and excluding others, or b) endow state (or any other) enterprises with monopoly export or trading rights. While such monopoly enterprises might be able to achieve economies of scale in logistics, promote a national brand name, and/or exercise market power wherever a country has a large market share, these same objectives can also be achieved under a competitive (yet concentrated) structure where there is voluntary cooperation in certain activities (e.g. international transport, promotion, etc.). Most export marketing boards have lacked operational flexibility, have adopted a production pushrather than market-orientation, and are averse to risk-taking, therefore not inclined to develop and implement marketing innovations. The state trading agencies operating in the focal commodity systems have proven to be adept at selling commodities to undersupplied markets, but not effective in cultivating additional demand, responding to market changes, or truly marketing products in competitive environments.