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Exporting High-Value Food Commodities: Success Stories from Developing Countries (WB, 1993, 119 p.)

III. Synthesis high-value food commodity system ''Success stories''

(introduction...) Selected dimensions of commodity systems performance International market environment Macroeconomic conditions. human capital. and infrastructure Government support and interventions Commodity system organization coordination

(introduction...)

3.1 This section reviews and synthesizes the development experience, organization, and performance of the fifteen focal commodity system "success stories" listed in the Introduction. It examines selected dimensions of commodity system performance, their bases for competitive advantage, the international market environment and domestic macroeconomic/human capital/infrastructure conditions under which commodity system development has taken place, the common and varied forms of government support and intervention, organizational patterns, and the role of foreign capital and technology.

(introduction...)

3.2 As discussed earlier, there are many criteria against which the performance of food commodity systems can be assessed. These include indicators of 1) operational, allocative, and transactional efficiency, 2) market development (volumes and values) and market shares, 3) product quality and variety, 4) marketing service quality, 5) profitability at farm, processing, and trade levels, 6) the levels and types of employment, 7) the distribution of income and risk, and 8) innovativeness and adaptability. -Both the limitations of space and the absence of comparable data for several of these criteria lead to a focus here on long-term patterns of growth in high-value food production, trade, and world market shares, although several additional performance criteria (such as cost competitiveness, product quality and differentiation, local market development, and employment-generation) are also briefly addressed here and in the Appendix.

3.3 With the exceptions of China, Thailand, and perhaps Brazil, the 'successful' commodity systems are drawn from countries whose overall agricultural performance over the past quarter century has not been especially notable. In fact, long-term agricultural growth has been slower in many of these countries than in low- and middle-income countries more generally. This is illustrated in Table 6. Only Israel (for the 1965-80 period), China (for the 1980s), Chile (for the 1980s), and Thailand (for 1965-89) have experienced agricultural GDP growth rates well above those of developing countries as a group.

Table 6: Average Annual Growth Rates in Agricultural GDP (%)

Country(s)	1965-1980	1980-1989
Argentina	1.4	0.3
Brazil	3.8	3.0
Chile	6	4.1
China	2.8	6.3
Israela	5.5	2.4
Kenya	5.0	3.2
Mexico	3.2	0.8
Taiwan (China)	2.0	1.6
Thailand	4.6	4.1
All Low-Income Countries	2.6	4.0
All Middle-Income Countries	3.4	2.6
All Low-/Middle Income	3.0	3.3

^a Rates of change in agricultural production quantities only.

Sources: World Development Report (1991, Table 2); Hsiao (1992); Statistical Abstract of Israel (1991)

3.4 Rapid agricultural growth in both China and Thailand has been broadly based, covering livestock, horticultural, grain, and fisheries sub-sectors. The four commodity systems examined here for these countries could have been supplemented by additional 'success stories'. Agricultural growth in Brazil has also been fairly broad based, with several different sub-sectors experiencing considerable export growth. In contrast, much of the dynamic growth in Chilean agriculture since the mid-1970s has been accounted for by a single sub-sector: that of temperate fruits. While the importance of agriculture in the Taiwanese economy has declined steadily, that of the food processing industry has increased with its share of GDP and employment now matching that of agriculture. The other countries covered in this survey have featured a stagnation in many of their traditional agricultural sub-sectors.

3.5 Long-term trends in total food production for the case study countries are somewhat better then the trends in agricultural GDP growth, although they also are not exceptional compared with developing countries in general (Table 7). For Argentina, Chile, and Israel, rates of growth in total food production have lagged behind growth rates for middle-income countries as a group through the 1960s, 1970s, and 1980s. Of the focal countries, only Brazil, China, and Kenya experienced growth rates in food production during the 1980s which exceeded comparative international norms.

Table 7: COMPARISON OF AVERAGE ANNUAL GROWTH IN TOTAL FOOD PRODUCTION AND CASE STUDY COMMODITY PRODUCTION OR EXPORTS (X)

Country	Total Food Production				Case Study Commodities
	1960s	1970s	1980s		1960s	1970s	1980s
Argentina	2.6	2.6	0.9	Beef	4.0	1.4	-0.7
				Soybeans	112.5	74.5	10.7
Brazil	4.1	3.2	3.2	FCOJ	39.8	28.2	10.2
				Soybeans	24.8	28.8	6.9
Chile	2.4	1.9	2.7	Fish	NA.	NA.	19.1
				Tomatoes	2.9	-2.2	15.4
				Grapes (X)	NA.	15.1	25.6
China	5.9	3.4	4.0	Shrimp (Cult.)	NA.	NA.	65.9
Israel	3.3	1.7	0.9	Citrus Fruit	14.9	2.5	-0.2
Kenya	3.5	2.2	4.7	Vegetables (X)	NA.	24.9	7.0
Mexico	4.9	4.5	1.5	Tomatoes	9.5	6.3	3.7
Taiwan	4.4	3.3	2.1	Livestock	7.6	7.1	5.2
(China)				Fisheries	10.1	5.8	4.4
Thailand	3.9	4.8	2.4	Poultry	5.1	12.0	8.7
				Shrimp (Cult.)	NA.	NA.	40.2
				Tuna (X)	NA.	NA.	68.8
Comparison
All Low-Income	2.3	2.3	3.0
Middle-Income	3.4	3.5	2.8
High-Income	4.2	3.4	3.4

NA. Complete data not available.

Sources: FAO World Crop and Livestock Statistics, 1948-85; FAO Production and Trade Yearbooks; Case Study Sources

3.6 In addition to providing data on growth rates for total food production in the focal countries, Table 7 also indicates the rates rates of growth in production volumes (or export volumes where production data are not available) for the case study commodities. In virtually all cases, production (or export volume) growth for the focal commodities has far exceeded that for total food production. For two-thirds of our cases, there has been double-digit growth in production (or exports) for a decade or more.

3.7 Each of the focal commodity systems have been successful in international markets, as evidenced either by a long-term development of trade and market shares covering several decades or by a surge in exports over the past decade in response to new market opportunities. These long-term or more recent export development patterns are discussed and illustrated graphically in Appendix. Table 8 below provides a summary of export performance patterns over the past two decades, signifying rising export values, world market shares, and commodity shares in total food exports.

3.8 The table shows that in 1970, exports in most of these commodity systems were either very small or non-existent. Only in the cases of Israel citrus, Brazil FCOJ, Argentina beef, and Taiwan (China) canned vegetables did exports exceed $50 million and world market shares exceed 10%. The 1970s witnessed a major expansion in exports and world market shares in many of these cases, the most dramatic growth occurring for Brazilian and Argentine soybeans and soybean products, Brazilian FCOJ, Chilean fish products, and Taiwanese fish and canned vegetables. While export growth slowed in a number of the focal commodity systems during the 1980s, initial or secondary export rooms were experienced in Chilean fruit and fish, Brazilian FCOJ, Chinese shrimp, Taiwanese pork products, and Thai poultry, tuna, and shrimp. By 1988/89, the focal commodity systems generated contained exports worth $11.1 billion, representing more than 20% of the total exports of high-value foods by middle- and low-income countries.

3.9 With only a few exceptions, world market shares for the focal commodity systems have increased since 1970 or 1980, the largest industries occurring for Chilean grapes, Brazilian FCOJ, Thai tuna, and Argentine and Brazilian soybeans/soybean products. Brazil has taken over from the United States as the dominant world exporter of FCOJ. In less than ten years, Thailand went from a non-exporter of canned tuna to the supplier of nearly 50% of the world's rapidly expanding trade. During the 1980s, China and Thailand experienced the world's most significant expansions in shrimp exports and together now account for more than one-fifth of total world trade.

3.10 Again with only a few exceptions (e.g. Argentine beef, Taiwanese canned vegetables, and Brazilian soybean products during the 1980s), the focal commodity systems have increased or maintained their shares of national food exports over the past two decades. This is a sign of their long-established or recently developed comparative advantage within domestic agriculture and agro-industry. For several of the countries, the focal commodity systems account for a large share of national food (and beverage) exports, as in Chile (81 %), Taiwan na) (73 %), Israel (60%), Argentina (29 %), Thailand (25 %), and Brazil (24 %).

3.11 To what extent are the focal commodity systems exceptional within the wider patterns of agricultural export development in the countries examined? For Chile, Taiwan (China), Mexico, and Kenya, the focal subsectors can be regarded exceptional performers, particularly if one extends the latter two subsectors to include a broader range of fresh and processed horticultural products. For Israel, agricultural export success has also centered around fresh and processed horticultural products with the citrus subsector remaining the core. Nevertheless, that country has also developed a small, but successful trade in high-quality meat products. Argentina conducts relatively large export trades in cereals, fish products, and fruits and vegetables, although the volume and value of this trade has either stagnated or declined during the 1980s. Argentina's soybean commodity system has far outperformed that country's traditionally strong cereals sub-sector over the past two decades (Box 1). Thailand's agricultural export success extends beyond the focal commodity systems to include fresh and processed tropical horticultural products, rice, and processed cassava (for feed). Agricultural export success has also been broadly based in Brazil and China, with each country having export trades exceeding $100 million for six of our eight focal categories of high-value foods.

Table 8: Case Study Commodity System Export Performance

Commodity System	Export Value ($ Million)			Share of World Export Value (%)			Share of total national food export earnings (%)
	1970	1980	1988/89	1970	1980	1988/89	1970	1980	1988/89
Mexico Tomatoes	26.6a	185.4	243.1	13.1a	16.6	15.3	5.6	9.7	8.6
Kenya Vegetables	2.3	17.6	47.7	0.1	0.2	0.4	1.8	3.1	7.4
Chile Grapes	4.0	51.8	315,1	2.4	7.9	25.1	7.2	7.6	16.8
Apples	3.5	74.7	129.1	1.1	5.3	8.1	6.3	10,9	6.9
All Fruit	11.8	168.7	582.3	N.A.	N.A.	N.A.	21.3	24.7	31.1
Chile Tomato Paste	0	2.3	48.8b	0	0.6	4.5	0	0.3	2.2
Israel
Fresh Citrus	86.1	231.1	177.5	12.3	8.3	5.3	49.1	35.7	21.5
Proc. Citrus	37.0	124.0	322.0	N.A.	N.A.	N.A.	21. 1	19.1	39.0
Brazil FCOJ	147.3	338.7	1144,3	18.4	65.6c	73.3d	8.5	3.6	11.6
Argentina Beef	239.7	566.8	313.0	13.1	6.4	2.6	18.2	10.9	5.3
Canned Meat	135.3	278.9	263.3	14.9	9.7	7.7	10.3	5.4	4.2
Thailand Poultry	0	32.5	236.3	0	1.3	7.6	0	1.1	4.3
Thailand Tuna	0	0	536.8	0	0	46.5	0	0	9.7
Thailand Shrimp	11.3	97.4	630.5	1.8	4.1	9.2	3.2	3.3	11.4
Chile Fish/Fish	27.1	322.9	895.8	6.5	2.1	2.7	48.8	47.3	47.8
Products
China Shrimp	0	180.2	846.3	0	7.5	12.4	0	3.9	11.8
Taiwan Pork	2.6	63.5	507.0	0.4	1.4	6.5	1.0	3.7	16.8
Fish Products	22.7	561.2	1310.3	5.4	3.7	4.0	8.5	32.9	43.4
Canned Vegs	85.7	443.1	397.7	13,5	19.3	12.7	32.3	26.0	13.2
Argentina Soybeans	0	604,5	549.6	0	10.9	11.5b	0	11.6	10.1
Soybean Oil	0	53.4	415.5	0	4.6	23.4b	0	1.0	7.6
Soybean Meal	0	68.4	117.9	0	2.0	17.6b	0	1.3	2.2
Brazil Soybeans	27.1	393.9	989.7b	2.3	7.1	16.5b	1.6	4.2	7.4
Soybean Oil	0.8	421.3	333,9b	0.2	36.2	18,7b	0.1	4.5	3.0
Soybean Meal	43.6	1449.0	161.0b	9.8	43.3	30.8b	2.5	15.5	2.1

^a 1967;

^b 1990;

^c 1978; d 1987

Sources: Case Study Sources; FAO Trade Yearbooks; UNCTAD International Trade and Development Statistics Yearbooks

Comparative Performance Indicators of Major Crops

Source: World Bank Documents

Cost advantages and product/service differentiation

3.12 As noted earlier, the international competitiveness of a commodity system can stem either from a) lower costs of production and delivery or b) product differentiation. Table 9 below summarizes the major source(s) of competitive advantage in the focal cases and indicates where a shift in competitive strategy has taken place. Where the commodity system has had both a cost advantage and a differentiated product, an asterisk (*) indicates the most important factor in competitive success. The table also indicates cases in which international market penetration and trade expansion have been aided by 'off-season' or other complementary supply patterns.

Table 9: Sources of Competitive Advantage for Commodity

3.13 The table indicates that the majority of these sub-sectors have incurred lower production costs than faced by many major competitors. Such lower production costs have been the result of different combinations of relatively low labor and land costs, availability of inexpensive inputs (e.g. feeds), government-built or subsidized infrastructure, and/or favorable yields (See Box 2). These production cost advantages have off-set the generally higher processing, packaging, and transport costs incurred in these subsectors. Few of the focal sub-sectors have achieved especially low processing costs, in part due to the common pattern of capacity underutilization in processing. Relatively high (international) transport costs has lowered profitability and/or the competitiveness of the Mexican tomato, Kenyan vegetable, Israeli citrus, and Brazilian soybean subsectors (See Box 2).

3.14 Several commodity systems, either initially or more recently, have sought to compete in international markets by differentiating their products or the marketing services accompanying these products. This has included efforts to provide especially high-quality products, products designed to meet special manufacturer requirements or consumer tastes, a broad range of related products, and special distribution services. In this regard, the Taiwanese food processing industry is especially interesting as it has successfully adapted to rising labor and raw material costs by improving product quality, developing new value-added products (e.g. shifting from primarily canned foods to frozen and prepared foods), and targeting its exports to higher price market segments. The Thai poultry and shrimp industries have followed a similar path in recent years. In the latter, many new value-added products have been developed to cater to Japanese demand. In several cases, lower labor costs have contributed to the achievement of higher quality or more preferred product forms, as with vine-ripened tomatoes from Mexico, 'extra-fine' Kenyan french beans, and Thai de-boned poultry products. In only one of the focal cases, that of Israeli fresh citrus fruit, has a national brand name been effectively used for product differentiation.

Comparative Production and Distribution Costs Per Acre and Per 25 lb. Carton

Source: Cook et al. (1991), p.. 281.

Additional performance indicators

3.15 Several other important dimensions of commodity system performance are examined in the individual case studies. One of these concerns the development of domestic markets and consumption. In several cases, the development of the sub-sector has supported per capita domestic consumption levels of meats and fruits and vegetables which are among the highest in the world (Box 4). This pertains to Argentine beef, Mexican tomatoes, Israeli citrus, and Taiwanese pork and fruits and vegetables. Sub-sector growth has also contributed to rapidly increasing consumption of shrimp and poultry in Thailand and of shrimp in China. Growth of the Brazilian soybean industry helped to counter the country's deficit in vegetable oils. In contrast, the expanding Chilean fish, Brazilian FCOJ, and Kenyan vegetable export operations have not contributed to a significant growth in local consumption or an improvement in the domestic marketing systems for these or similar products.

3.16 A second area of impact has been intra-industry multiplier effects. In Brazil, the expansion in soybean meal production was an important factor in the growth of the domestic livestock industry, especially for poultry. With an improved feed supply, Brazil's poultry industry has emerged as one of the world's largest exporters. Similar intraindustry stimuli are found in the cases of Israeli citrus, Chilean temperate fruits, and Thai fish and poultry. In the former two cases, the major expansion in fruit production contributed to the rapid growth of domestic fruit/vegetable processing industries which themselves have become internationally competitive. In Thailand, by-products of the tuna canning industry have been used as feed in poultry and cultured shrimp production.

3.17 Employment-generation has been another area of significant impact. In several cases, including Chilean fruit and fisheries, Brazilian FCOJ and soybeans, Argentine beef and soybeans, and the Taiwanese food processing industry, employment has been provided for more than 100,000 people in production, processing, and trading activities. Employment in the food processing industry of Taiwan (China) is estimated at 1.1 million people. In several of the other cases, including Israeli citrus, Thai Poultry, tuna, and shrimp, and Chinese shrimp production and processing, employment levels are also significant between 25,000 and 75,000 people. As in the cases noted earlier, employment in many of these commodity systems has been geographically spread. In comparison, the employment effects have been much more limited and geographically concentrated in the cases of export-oriented Mexican tomato, Kenyan vegetable, and Chilean processed tomato subsectors due to the narrow ownership and participation base of the former case and the relatively small size of the latter two cases.

3.18 Although outside the scope of this paper and not examined in the case, another potentially significant set of issues concerns the impact of commodity system development on the value of land, on land markets, and on smallholder access to land. Evidence from Brazil, Mexico, and Chile suggests that the focal commodity export booms contributed to or accentuated patterns of land concentration and smallholder exclusion.

3.19 As discussed earlier, there are several sets of factors which are expected to contribute to the emergence and sustainability of internationally competitive food commodity systems, including (1) (international) market conditions and demand, (2) macroeconomic and sector policies, (3) natural resource and human capital endowments, (4) the development of physical, technical and social infrastructure, and (5) marketing efficiency and the coordination of production and marketing activities. These conditions, facilities, and institutions are discussed in turn.

International market environment

3.20 For most of the commodities covered by our case studies, world market conditions have been very favorable, either during the initial years when the focal industry experienced a rapid growth in trade or over a more extended period covering several decades. Favorable trends in world trade and in world prices for these commodities have been sparked not only by rising incomes, relatively high income-elasticities of demand, increased health consciousness, and demand for dietary diversity, but also by product and distribution system innovations which have both enhanced demand and increased value added.

3.21 In many of our focal cases, demand for the commodity (s) in industrialized countries was well-established long before the developing country 'success stories' entered international markets on an significant scale. Consumers were familiar with the products, while the physical and other infrastructure for imports and for market distribution were already well developed. The focal industries built upon this base, either enlarging the market in size or seasonality or replacing traditional domestic and/or international suppliers. The costs for market entry and development for these low/middle-income country sub-sectors were considerably lower than would have been the case if they were promoting consumption or use of a non-traditional or exotic commodity. While several of the focal sub-sectors did encounter protectionist moves by producers in foreign markets to limit imports, the focal sub-sectors were generally able to cultivate allies among the food manufacturers and/or distributors in such markets to stave off protectionist measures.

3.22 The generally favorable world market conditions are summarized in Tables 10 and 11 below. Table 10 compares the average growth rates in world imports for the case study commodities with those of more traditional tropical food and beverage products exported by many developing countries. The majority of our focal commodities featured world import growth of more than 4.0% per year over the 1970-88 period. Annual trade growth has exceeded 7.5% for fresh vegetables, frozen concentrated orange juice, poultry, crustaceans (e.g. shrimp, crabs, lobster), and canned tuna over this period. Trade growth for fresh tomatoes and citrus fruits has been considerably slower since 1970, although there was rapid growth in trade during the 1950s and 1960s when the focal commodity systems experienced their initial or secondary trade booms. In comparison, the growth rate for world imports of many traditional beverage and tropical food crops has been generally in the range of only 1 3%.

Table 10: AVERAGE ANNUAL RATE OF CHANGE IN WORLD IMPORTS 1970 TO 1988

^a World exports, 1965-85
^b Grapes, axles, peers, peaches, and nectarines.
^c Export volumes of LDCs, 1971-88
^d 197086
^e 1980-89

Sources:
- World Bank Economic and Social Database FAO Fisheries Commodity Statistics FAO Trade Tape

- World Bank (1990) Price Prospects for Major Primary Commodities 1990 - 1995; and Islam (1990)

3.23 Table 11 provides indices of representative world prices for many of the case study commodities and for all major food commodities combined. With the exceptions of soybeans and soybean meal (whose nominal prices have been relatively flat since the late 1970s), each of the case study commodities has featured better long-term price trends than the aggregate food commodity category. World price trends for grapes, oranges, and FCOJ have been especially favorable.

3.24 While the case study sub-sectors have taken advantage of favorable long-term market trends, they have also benefitted from shorter term market vacuums created when previous suppliers of the commodities (or of traceable substitutes) suffered from adverse weather conditions, plant or animal disease, a reduction in productivity and/or restrictive trade measures imposed by governments. The rapidity and/or scale in which the focal commodity systems responded to these new market opportunities is what makes them especially distinctive. Examples of these market vacuums (and their beneficiaries) included:

a) the under-supply of the U.S. fresh tomato market in the early 1960s (and later) due to the trade embargo placed on Cuba and periodic frosts in Florida. This provided opportunities for Mexico and other Latin American countries to supply the 'off-season' winter market, yet it was Mexico which became the dominant player in this market.

b) the under-supply of the world and U.S. markets for frozen concentrated orange juice in 1977 and again in the early-to-mid-1980s due to damaging frosts in Florida. This provided market opportunities to existing or new FCOJ producers, yet Brazil would assume a dominant share of world trade within five to ten years of initial major investments in processing facilities.

c) the under-supply of the world market for livestock feeds during the early 1970s due to the rapid decline of the Peruvian anchovy catch and the short-term U.S. embargo on soybean exports. Brazil was among the first countries to respond to this market opportunity and Brazil and Argentina would eventually account for large shares of the growing international market.

d) the under-supply of the U.S. processed tomato market in the late 1980s following the imposition of a punitive tariff of 100 % of canned tomato products from EEC countries. While several countries responded to this market opportunity (including Mexico, Israel, Turkey, and others), the growth in Chile's trade was the most sudden and substantial.

e) the under-supply of the U.S. and Japanese shrimp markets during the mid-to-late-1980s with the slowdown of production and trade from Latin America and with the collapse of the Taiwanese shrimp industry due to disease and pollution. This provided a stimulus for shrimp cultivation throughout Asia, although the Chinese and Thai industries have been the most successful.

Table 11: Indices of World Prices For Case Study Commodities (Based on Current Prices; Period Averages with 1972-74 = 100)

^a Weighted index of major beverages, cereals, and other foods (World Bank 1991).
^b Unit values for U.S. imports FAO Trade Yearbooks)
^c Unit values for world imports (World Bank Economic and Social Data Base)
^d Unit values for world imports FAO Trade Yearbooks)
^e EEC Indicative Import Price for Mediterranean Navel Oranges (World Bank 1991).
^f Unit values (f.o.b) for Brazilian exports (Braga and Silber 1°,91)
^g U.S. imported frozen boneless (World Bank 1991)
^h Unit values for Japanese chicken meat import (World Bank 1991)
ⁱ Unit values for world imports (FAO Fisheries Commodity Statistics); 1976-78 =100
^j U.S. exports c.i.f. Rotterdam (World Bank 1°.91)
^k U.S. exports c.i.f. Rotterdam (World Bank 19.°1)

3.25 It was not only a favorable international market environment which provided a boost to the development of the focal commodity subsectors. In the majority of cases, the development of a large domestic market for the fresh or processed product either preceded or paralleled the development of exports. Significant domestic market experience was obtained prior to exports in the cases of Kenyan vegetables, Thai poultry, Thai shrimp, and Taiwanese livestock and fruit and vegetable products, and paralleled export development in the cases of Mexican fresh tomato, Brazilian and Argentine soybeans, Argentine beef, and PRC shrimp. While the Mexican tomato, Argentine beef, and PRC shrimp sub-sectors were initially primarily export-oriented, one-half or more of production is now directed to the domestic market where per capita or total consumption levels are among the highest in the world Local market development provided an arena for 'learning by doing' before entering international markets, enabled producers and marketing enterprises to spread their market risks, and facilitated fuller use of raw materials as some grades of produce or animal/fish parts could be directed to the local market while premium grades or choice parts could be channeled to export markets.

Macroeconomic conditions. human capital. and infrastructure

3.26 Table 12 summarizes selected macroeconomic patterns, human capital characteristics, and infrastructure features of the case study countries and for comparison, all low income, middle income, and OECD countries. Internationally competitive food commodity systems would be expected to emerge and be sustained in environments of high overall economic growth, low or moderate inflation, and high rates of growth in investment. Successful development of high-value food exports might also be expected to be associated with a healthy and literate/numerate work force (as represented here by the proxy indicators of life expectancy and adult literacy) and with a well-developed transport and communications network (as represented here by data for road densities and population per telephone). The indicators for Kenya and China should be compared with those of low-income countries, while those for the other case study countries should be compared with indicators for middle-income countries.

3.27 With regard to macroeconomic indicators, only three of the case study countries--China, Taiwan (China), and Thailand-- stand out as particularly impressive over the entire 1965-89 period, although several other countries exhibited favorable growth and low-to-moderate inflation during the 1965-80 period when some of the focal commodity systems experienced sustained growth. With slow economic growth, limited aggregate investment, and high rates of inflation during the 1980s, it would not have been expected that Argentina, Brazil, Israel, and Mexico would be able to sustain formerly competitive food commodity systems.

3.28 In terms of GDP growth, China, Thailand, and Taiwan (China) each experienced considerably faster economic growth than their peer countries over the past quarter century. Brazil, Kenya and to a lesser extent Israel and Mexico had economic growth rates higher than the comparative norms during the 1965-80 period, but at or below these norms during the 1980s. Economic growth rates for Argentina and Chile have lagged behind those for other middle-income countries. Regarding inflation, the patterns are even more varied, with Argentina, Brazil, and Israel having relatively high inflation rates over the entire period, with Chile facing very high inflation during the 1960s and into the mid-1970s, with Mexico facing high inflation during the 1980s, and with the other case study countries experiencing low rates of inflation compared with all low- or middle-income countries. The patterns for gross domestic investment are also not especially impressive, with only Taiwan (China) and China (during both sub-periods), Thailand (in the 1980s), and Brazil (from 1965-80) having growth rates above their peer groups of countries. For five of the countries, gross domestic investment either declined or grew by less than 1 % per year during the 1980s.

Table 12: Macroeconomic Conditions, Human Capital, and Infrastructure in Case Study and Comparative Countries

3.29 While this superficial review suggests that macroeconomic conditions are not determinant in the maintenance of an internationally competitive food commodity systems, this does not suggest that macroeconomic conditions are unimportant in inducing/deterring investments in food production and marketing and in the profitability of such investments. As is discussed in several of the case studies (including Mexican tomato, Chile fish and temperate fruits, Brazilian soybean and FCOJ, and China shrimp), the initial boom in production and trade accompanied or followed upon macroeconomic and trade policy changes which improved incentives. Such changes included exchange rate devaluations, reductions or reconfigurations of export taxes, the liberalization of imports for intermediate inputs, and other favorable policies. The case of Argentine soybeans is an exception in that its initial export boom (in the early-to-mid-1970s) occurred just as a new government was raising taxes on exported cereals and oilseeds, imposing a new value-added tax on domestic use of soybeans, and displacing the private grain trade with a monopoly government exporter.

3.30 While overvalued exchange rates, high rates of inflation, and generally high rates of effective taxation during the 1970s and 1980s did reduce the profitability of production, processing, and trade in several of the focal Latin American commodity system cases and contribute to the withdrawal or bankruptcy of individual firms therein, these subsectors were generally able to maintain their competitive position as a result of their low underlying cost structure, their large installed processing and marketing capacity, strong vertical and/or horizontal coordination by (or among) the remaining firms, and their well-developed overseas marketing linkages (Box 5). The same cannot be said for the Israeli fresh citrus trade, although the problems of competitiveness and profitability in this subsector extended beyond macroeconomic instability.

3.31 Examining indicators of human capital, each of the case study countries has higher life expectancies and adult literacy rates than comparable categories of low- and middle-income countries. Argentina, Chile, Israel, and Taiwan (China) have levels of these indicators which approach those for OECD countries. With the single exception of Kenya, all of the other countries included in this study have a relatively large skilled and semi-skilled workforce with considerable managerial experience. Such human capital assets have undoubtedly been an important factor in the steady up-grading of product quality and marketing services which have occurred in a number of these sub-sectors and in the capacity to flexibly respond to changes in international demand and standards.

3.32 With regard to indicators of physical infrastructure, the case countries have road densities which are actually lower than the comparative norms, with the exceptions of Thailand, whose road endowment is similar to middle income countries as a whole, and of Israel and Taiwan (China), both very small countries. While a less extensive road network is not a major problem for Chile, whose main agro-industries are located along the coastal plain, transport bottlenecks have been experienced in geographically large Argentina, Brazil and China. Indeed, high transport costs have reduced the returns to Argentine and Brazilian soybean producers. In sharp contrast, the telephone systems are generally far better developed in the case study countries than in comparable categories, the only exception being Thailand. Better communication links facilitate improved access to up-to-date market information, lower transaction costs, and generally improved trading relationships.

Effective Rates of Protection

Sources:
· Hurtado, Valdes, and Muchnik (1990);
· Sturzenegger (1990);
· Brandao and Carvalho (1990)

The table indicates that while Chilean grape production was effectively taxed during the 1960s, it was provided positive protection during the 1970s, the years of its initial export boom. Argentine beef has faced substantial negative protection over the period examined. While both Argentine and Brazilian soybean have faced negative protection, similar (or higher) levels of direct and direct taxation has been applied in these countries to other oilseeds and cereals, rendering world price levels and trends an important determinant of the relative profitability of different crops.

Government support and interventions

3.33 Government interventions in the case study commodity systems have generally been quite extensive, although their forms and longevity have differed considerably. This can be seen in Table 13 below. Direct government participation in production and marketing has been substantial or dominant only in two cases. In China, it was state enterprises which initiated shrimp aquaculture through investments in production infrastructure and research. State trading enterprises in China have also undertaken the export marketing of frozen shrimp. In Israel, a government-created marketing board exercised monopoly buying and export rights for fresh citrus fruit over the period from 1948 to 1990 when this monopoly was lifted. In several of the other focal commodity systems, direct trading activities by state enterprises have also occurred, although this has generally been on a modest scale, involving product stockholding and regional trade in domestic markets and/or ad hoc deals with state importing agencies in the Middle East and the former Soviet Union. Such state enterprise trading has taken place in the Kenyan horticulture, Argentine beef and soybean, Thailand shrimp, and Brazil soybean commodity systems.

3.34 Direct government investments in production and/or marketing infrastructure have occurred in nearly all of the focal cases. In most instances, this investment consisted of ports, market places, auctions, and storage and transport facilities which either exhibit 'public good' characteristics or have entailed large up-front investments and significant economies of scale. Only in the cases of Chilean fruit and PRC shrimp have governments invested directly in food processing plants. In the Chilean case, this investment has been of a short-term or transitional nature as factory ownership has typically transferred from the government-supported Fundacion Chile to private investors after only a few years of operation. Hence, with the exceptions of Chinese shrimp and Israeli fresh citrus, commercial production and trade in the focal commodity systems has been dominated by the private sector (including cooperatives).

3.35 Governments have provided a variety of different support services in each of the focal cases, although the available information enables us to make only tentative comments about the actual significance of such support services for export development. In virtually all cases, governmental institutes and/or public universities undertook production, post-harvest, and/or food technology research which contributed to production and trade expansion and quality gains. Government research and extension were especially critical in the development of shrimp aquaculture in China and Thailand, in the expansion of pig production in Taiwan (China), in the upgrading of quality in Thai poultry, and in the recent adoption of new citrus and temperate fruit varieties in Israel and Chile respectively. A pattern common to many of the focal cases is that once commercialization reached relatively advanced stages, much of the applied research work has been undertaken by the leading private or cooperative firms or other non-governmental bodies (e.g. foundations, associations).

3.36 Government involvement in the collection and dissemination of market information has been less common and less important among the focal commodity systems than might be expected given the public goods nature of market information. Most such efforts have involved the provision of statistics and the distribution of newsletters. Important exceptions are the more extensive fresh product market information system developed in Taiwan by the government (in collaboration with cooperatives) and the livestock/meat market price system developed in Argentina by the National Meat Board. In a majority of cases, governments have promoted exports, primarily through trade fairs and bilateral or multilateral market access negotiations. The government-supported Fundacion Chile and the Israel Citrus Marketing Board have conducted direct advertising campaigns both in domestic and external markets.

3.37 In virtually all of the focal commodity systems, governments have played some role in product quality control, whether simply through communicating international quality standards to producers/processors, through undertaking sample quality inspections on exported or domestically-sold products, or through the inspection (and licensing) of factories, cold storage units, and other processing and marketing infrastructure.

3.38 In a majority of cases, governments have taken an activist microeconomic position, providing subsidies in one or more forms to producers, processors, and/or traders, although as noted in Box 5, these subsidies have not fully countered the negative incentive effects of overvalued exchange rates, industrial protection, and direct commodity taxation in several Latin American countries. In such cases as Chilean fruit, Israeli citrus, Brazilian FCOJ and soybean, and Chinese Shrimp, subsidies have been provided both for raw material production and for the subsequent processing and marketing operations. The most common forms of subsidy have been low interest production credits, subsidies on production infrastructure and material inputs, and grants and low interest loans for investments in processing and storage facilities. In a number of cases, subsidies were removed or substantially reduced once the sub-sector reached a mature status; in others, subsidies remained for many years, partly to compensate for the adverse effects of macroeconomic or other sectoral policies.

3.39 It is important to note that in the large majority of cases, production and investment subsidies were not targeted on the specific commodities covered in this study. For the most part, subsidies for water, energy, fertilizer, tractors, irrigation facilities, crop storage facilities, and processing facilities were available to producers, processors, and traders of other commodities as well. Commodity-specific production and investment subsidy programs were implemented only in the cases of Israeli citrus, Chinese shrimp, Brazil and Argentina soybean processing, and various Taiwanese sub-sectors. In the cases of Chilean fruit, Brazilian FCOJ, and Chinese shrimp, producers, processors, and traders also benefitted (over several years) from income, value-added, and/or export tax exemptions. Differential tax rates on exports of fresh and processed goods was an important factor inducing investment in soybean processing in both Brazil and Argentina.

3.40 In approximately half of the cases, governments have (either on a continuous or intermittent basis) intervened to control or adjust commodity prices and/or traded volumes. This has been done through such measures as official producer support prices, minimum export prices, direct controls on domestic prices, and production, processing, and export quotas. In such cases as Mexican tomatoes, Israeli citrus, and Brazilian FCOJ, these interventions have been at least partly driven by the objective of maximizing export revenues through the control of international supplies. In most other cases, these interventions were designed either to protect domestic consumers or to counter capital flight.

Table 13: Government Involvement in Case Study Commodity Systems

(introduction...)

3.41 This section provides a synthesis of major institutional/organizational patterns in the case study commodity systems. We examine the competitive structure within these systems, the primary institutional linkages between producers and processor/exporters and between the latter and foreign market buyers/agents, and the roles played by foreign private companies and by local producer or trade associations.

Competitive structure

3.42 Table 14 summarizes the competitive structure of production, processing/packing, and domestic distribution and exporting in the case study subsectors. Production or trade is denoted as 'Highly Decentralized' if it features numerous firms or individuals, with the largest ten accounting for less than 50% of supplies, processing capacity, or sales. An operation is labelled an 'Oligopoly' if the ten largest firms or individuals account for more than 50% of the market. A label of 'Concentrated Oligopoly' is given to operations in which five or fewer firms control 75% or more of the market. The label 'Monopoly' refers to an exclusive processor or trader. The indicated structures are those which prevailed during the mid-to-late 1980s. It is recognized that a concentrated structure is not a sufficient condition to suspect the presence of collusive and anti-competitive practices.

3.43 The table shows that while production and domestic marketing are generally highly decentralized, most cases feature relatively high levels of concentration at the packing or processing stage and most especially in export marketing. This pattern is not unexpected given the economies of scale in processing and export logistics and sales and the high transaction costs associated with international trade.

3.44 Virtually all of the subsectors have developed with the participation of large numbers of crop, fish, or animal product producers. In some cases, including Kenyan vegetables, Israeli citrus, Thai poultry, Thai and China shrimp, and Taiwanese vegetable and pork sub-sectors, farm producers number in the thousands and generate operate on a small-to-medium scale. Still, technological changes, economic pressures, and vertical integration by input suppliers or downstream marketing enterprises into production have contributed to increased concentration in production over time in some of these sub-sectors. Export-oriented fruit production in Chile and soybean production in Brazil and Argentina has been undertaken by relatively large numbers of middle- and especially large-scale farmers and agribusinesses. Only one of the focal cases has featured a very narrow production base. Export-oriented fresh tomato production in Mexico has remained the preserve of about a dozen local companies, due to preferential access to water resources, government-delegated powers to regulate (export-oriented) tomato plantings and sales, and favorable ties to U.S. vegetable distributors. The Thai tuna canning industry is unique among our cases in that it relies upon imported fish for 70% of its raw material requirements.

3.45 Domestic marketing of the focal commodities remains highly competitive in most of the focal subsectors, even where export marketing has become concentrated among a few firms. Domestic marketing systems have often featured the wide participation of cooperatives, brokers, and small-to-medium scale private firms, in addition to a handful of larger wholesaler/distributors. In a number of cases (including Argentine beef and soybeans, Mexican tomatoes, and Thai shrimp), large auctions or terminal markets have enhanced the competitive environment of local markets. Direct marketing between producers and either retail chains or restaurants/hotels has also emerged in a number of these cases.

Table 14: COMPETITIVE STRUCTURE OF COMMODITY SYSTEMS

3.46 While there are a few exceptions, fresh produce packing, processing, and exporting have tended toward oligopolistic structures with between three and ten firms accounting for the bulk of operating capacity and sales. In one-third of our cases (e.g. Israeli citrus, Brazilian FCOJ, Thai poultry and tuna, and Chinese shrimp), three firms or less have recently accounted for 75% or more of total exports. In such cases as Kenyan vegetables, Chilean temperate fruit, and Thai tuna and poultry, concentrated trade structures have resulted largely from economic factors, with a limited number of firms taking advantage of superior technical or financial resources and overseas market linkages to acquire leadership positions within their industries. Having invested in modern packing and/or processing facilities and having effectively penetrated overseas markets, such firms have been better able to adapt to changing market requirements.

3.47 In several other cases, the concentration of trade has derived from government interventions as much as from economies of scale or other underlying economic factors. For example:

--In Mexico, the government has given the National Commission of Vegetable Producers and individual state producer unions the power to control planted acreage, export licenses, and export volumes so to exercise market power in the United States and maintain the profitability of the Mexican industry. Powerful members in these producer unions have been able to control entry into export-oriented tomato production and to consolidate their own positions.

--In Israel, several laws and regulations adopted in the 1940s created a marketing cartel in the form of the Citrus Marketing Board which incorporated many of the larger pre-WWII exporters as contractors to the Board and as members, together with government representatives, of the Board's decision-making committees. By operating as the sole buyer and seller of Israeli fresh citrus, the CMBI was designed to achieve economies of scale in the procurement of inputs and in export logistics and to assert Israel's market power in Europe for selected fruits during certain months. This cartel faced serious difficulties as its members had widely differing interests with regards to the quality and types of fruits to market, the timing of sales, and the patterns of grower remuneration from a price pool.

--In China, initially an export monopoly for shrimp was given to the National Cereals, Oils, and Foodstuffs Import and Export Corporation and later (in 1985) shrimp and other food export rights were granted to provincial foreign trade corporations (all state enterprises).

--In Brazil, government credit programs and the periodic imposition of export quotas (based on past exports) contributed to the consolidation of a three-firm dominance of the FCOJ industry with some degree of price coordination in international markets.

Institutional arrangements linking producers with processors/exporters

3.48 In the focal commodity systems, various institutional arrangements have been developed to coordinate raw material production with processing and other downstream requirements. These patterns are summarized in Table 15, which represents a 'snapshot' of important institutional arrangements prevailing in the late 1980s. The Table indicates that while in the majority of cases there are open market linkages between some producers and processors/exporters, only in two cases is arms-length trade the dominant mode of raw material procurement. In the case of Argentine beef, a well-established system of auctions, terminal markets, and brokerage arrangements (dating back more than 50 years) facilitates a steady and massive movement of cattle from producers to slaughterhouses and processors. In the case of Thai tuna, Bangkok's fish markets have become amongst the largest and well-developed in Southeast Asia, providing Thai canners with a steady and large supply of different tuna species caught both in the Indian and Pacific Oceans. In all other cases, market coordination has been supplemented or replaced by a combination of other modes of vertical coordination, including seasonal (or longer term) contracts, ownership integration, cooperative coordination, and/or government coordination.

Table 15: Institutional Arrangements Linking Producers with Processors/Exporters

XX denotes the dominant linkage in the industry

3.49 Contractual coordination is important in all of the case studies involving fresh and processed fruit and vegetables as well as in the Thai poultry and shrimp sub-sectors. While the actual contractual arrangements vary, most feature the supply of credit and/or production inputs, a forward or formula pricing mechanism, and specifications regarding the quantity, quality, and timing of producer deliveries. Such arrangements have improved the flow of information, technologies, money, and physical commodities between producers and processor/exporters and facilitated a sharing of production and/or market risks.

3.50 Many of the subsectors feature at least some vertical integration between production and downstream activities. This has normally been undertaken by relatively large processing/trading firms in order to reduce raw material supply risks and costs or by larger farmers seeking to capture a larger share of the export revenues. In both the Thai poultry and shrimp cases, individual firms have developed operations integrating feed supply, production, processing, and trade. In many cases, processors have combined own production with contracted outgrower supplies so to achieve a preferred mix of cost economizing and risk spreading. In general, the export-oriented components of individual sub-sectors have exhibited far more 'intensive vertical coordination than production and trade for domestic markets. However, in many cases the contractual and other coordinating methods used by exporters are being increasingly adopted in the domestic market, especially by producers and firms targeting higher-quality, higher-price market segments.

3.51 Cooperatives or producer and trade associations have played an important marketing and coordination role in several of the case study commodity systems. In the Mexican case, both the National Union of Vegetable Producers and the Confederation of Agricultural Associations of the State of Sinaloa have played important coordinating roles, not only through their assignment of acreage and export quotas, but also in their dissemination of market information, their assistance in agricultural inputs procurement, their enforcement of tomato quality standards, and their liaisons with government water authorities. In Taiwan (China), cooperatives have played a very important role in the domestic marketing of smallholder fruit, vegetable, and pork production and in the exports of fresh fruit and vegetables. The same holds true in the Argentine and Brazilian soybean sub-sectors. Producer and trader associations have been active in establishing quality standards, negotiating producer prices, and settling disputes in the cases of Chilean fruit and fish and Thai shrimp.

3.52 In several cases, government trading or regulatory agencies have played a role in coordinating production and downstream operations. The pattern for Mexican tomato exports has already been discussed. In Israel, the Citrus Marketing Board gave annual supply quotas (specifying quantities, varieties, and delivery times) to a limited number of private or cooperative packing/production companies which in turn had annual supply agreements with many individual farmers. In Brazil, the government periodically intervened in negotiations and disputes between growers and processors, seeking to work out appropriate methods for allocating market risks and determining producer prices. In the case of Thai tuna processing, the Thai government has coordinated government controlled fresh tuna supplies from the Maldive Islands.

Institutional arrangements linking exporters with foreign markets

3.53 Table 16 summarizes the institutional linkages (during the mid-to-late 1980s) between exporters in the focal subsectors and foreign market buyers or agents. Once again, the table indicates that while open market sales occur in each case, such sales constitute the dominant linkage to foreign markets in only three of the commodity systems. Spot market sales or sales on consignment are very important in the exports of Chilean temperate fruits, Israeli citrus, Argentine beef, Brazilian and Argentine soybeans, and PRC shrimp. In all but the last of these cases, shipments are made over very long distances to well-developed markets, featuring major wholesale outlets or mercantile commodity exchanges. Until recently, the bulk of Chinese shrimp exports have been undertaken either at periodic trade fairs in the country or via Hong Kong commercial agents.

Table 16: Institutional Arrangements Linking Exporters with Foreign Buyers/Agents

XX denotes the dominant linkage in the industry

3.54 At least a portion of trade in nearly all the cases occurs in the context of seasonal, annual, or other contracts. Some 80% of Brazil's FCOJ exports to the U.S. are conducted within the framework of long-term contracts with multinational beverage manufacturers/distributors. While most of the subsectors feature some trade conducted on an intra-firm basis by local or multinational companies, such intra-firm trade is dominant in the cases of Mexican tomatoes and Thai poultry and tuna. Approximately 60% of the vegetable distributors based in Nogales, Arizona (the U.S. entry point for most Mexican winter vegetables) are partners with Mexican producing/packing companies, while 20% of these distributors are owned outright by Mexican firms. Three Japanese companies handle virtually all of Thailand's exports of frozen chicken parts to Japan. Thailand's leading tuna canners have integrated forward into major markets, buying up leading import/distribution firms. Approximately 25% of Kenya's fresh vegetable (and fruit) exports are conducted with overseas firms which are affiliated through familial ties with Kenyan exporters.

3.55 These long-term contractual ties or ownership linkages have been important in maintaining market access, in penetrating rapidly expanding marketing channels (e.g. for retail chains), in obtaining detailed and up-to-date information on market conditions and consumer tastes, in reducing uncertainties regarding payments, and in assuring continuity of supplies so to benefit from (national or foreign) brand name promotion. In circumstances where product demand and/or distribution channels needed to be built up from an only rudimentary base, such personalized trade or ownership linkages provided an effective framework (See Box 6). In several cases, including Mexico tomatoes, Chile fruit, Brazil FCOJ, Argentina beef, Thai poultry, and Brazil soybean, long-term foreign trading partners have actively campaigned for continued supplier access to industrialized country markets in the face of pressures by domestic producers for protection against imports.

3.56 As indicated earlier, in several of the cases, governments have either directly negotiated deals with foreign government importing agencies or have negotiated access and entry terms for private exporters into foreign markets. Those signified in the table relate only to direct trade deals.

Foreign capital and technology in the case study subsectors

3.57 Foreign capital, technology, training, and management skills have played an important role in the development of many of the focal commodity systems, especially during their initial 'take-off' stages. The primary roles of foreign companies or international donor agencies is summarized in Table 17.

Table 17: Foreign Capital and Technology in Commodity System Development

3.58 In virtually all of our focal cases in Latin America, credit from foreign distributors or direct foreign investments in production and/or processing and marketing facilities played a major role in the initial subsector growth. It was less important in our other cases (except for Thai poultry) and generally occurred in later stages of subsector development, serving to alleviate an existing bottleneck (e.g. feed shortages and high prices in the Chinese shrimp industry) or to augment the operating capacities of already competitive industries. In all of the focal cases, local companies have continued to account for a majority of exports, with multinational corporations accounting for 25 % or more of exports only in four cases-- Chilean fruit, Thai poultry, and Brazilian FCOJ and soybean.

3.59 Most of the subsectors initially relied upon imported technologies in the forms of planting materials, seed and breeding stocks, tractors, and processing plant and equipment. In most cases, at least some of these inputs and technologies were subsequently produced locally, either through licensing arrangements or through direct investments by international suppliers. Transfers of important technologies have also taken place through university or private training programs and joint or foreign programs of food technology R&D. In this regard, the most notable case is that of Chilean fruit

3.60 Bilateral or multilateral development finance organizations appear not to have played any role in directly supporting production and marketing of the focal commodities. However, at least in the cases of Israeli citrus, Chilean fruit, and Brazilian soybeans and FCOJ, loans or grants from such institutions did contribute to the development of production, marketing, and/or transport infrastructure (e.g. irrigation facilities; rail/port facilities) which was subsequently used for the focal commodities, among others.