A Framework for Effective Markets Work

MARKETS FRAME WORK INTRODUCTION The challenge confronting development practitioners in the Morden world today is to formulate and implement development approaches that would help the marginalised and poor members of society break through the barriers of capitalism, trade and economic policies that tend to favour the rich. It is evident that traditional development approaches have mainly focused on the poor without creating viable relationships with the mainstream private sector. Economic systems such as capitalism have influenced public policy to favour commercial enterprises as opposed to small scale farming and entrepreneurship. It is therefore imperative that an effective market based approach be explored and implemented to enable an equitable access to opportunities and resources. RATIONALE FOR A MARKETS BASED APPROACH The market approach can help to shift the focus of poverty reduction efforts more in terms of enabling opportunity and less in terms of aid. successful market!based approach would bring significant new private sector resources into play, allowing development assistance to be more targeted to the segments and sectors for which no viable market solutions can presently be found. There are distinct differences between a market!based approach to poverty reduction and more traditional approaches. Traditional approaches often focus on the very poor, proceeding from the assumption that they are unable to help themselves and thus need charity or public assistance. market!based approach starts from the recognition that being market!based approach thus focuses on poor does not eliminate commerce and market processes" virtually all poor households trade cash or labor to meet much of their basic needs. competitive, and inclusive. Traditional approaches tend to address unmet needs for health care, clean water, or other basic necessities by setting targets for meeting those needs through direct public investments, subsidies, or other handouts. The goals may be worthy, but the results have not been strikingly successful. market!based approach recogni#es that it is not $ust the very poor who have unmet needs%and asks about willingness to pay across market segments. It looks for solutions in the form of new products and new business models that can provide goods and services at affordable prices. people as consumers and producers and on solutions that can make markets more efficient,

&

A Framework for Effective Markets Work

Those solutions may involve market development efforts with elements similar to traditional development tools%hybrid business strategies that incorporate consumer education' microloans, consumer finance, or cross!subsidies among different income groups' franchise or retail agent strategies that create $obs and raise incomes' partnerships with the public sector or with nongovernmental organi#ations ()*+s,. -et the solutions are ultimately market oriented and demand driven%and many successful companies are adopting such strategies. .erhaps most important, traditional approaches do not point toward sustainable solutions% while a market!oriented approach recogni#es that only sustainable solutions can scale to meet the needs of / billion people. HOW DOES THE MARKET BASED APPORACH WORK? Guiding principl ! "# D $ l%p & p%!i'i$ &''i'ud '%(&rd! ') pri$&' ! c'%r In order for market development programs to be successful, the 0facilitators1 of these programs need to develop a positive attitude towards the role of the private sector in economic development. They need to recogni#e that all market actors (producers, traders, processors, input suppliers, etc., play an important role and they need to become comfortable with the principle that these actors need to make a profit in order for their activity to survive. It is also important to recogni#e that the motivation of many market actors (including larger firms and intermediaries, goes beyond $ust making money. 2usinesses need to make a profit as described above, but many take personal pride in their work and the impact it has on their local communities and their country3s economy. 4eveloping a mindset that respects the role of all market actors is very important in promoting 0win!win1 relationships in targeted markets. If )*+ staff can develop this attitude then their ability to partner with lead firms to bring increased benefits to M5E6poor will improve. long the same lines, )*+ should not see their role in market development programs as 0protecting the poor.1 This reinforces the view held by some that 0all private sector businesses are intent on exploiting the poor.1 7hile there are examples of monopolistic and exploitative behavior, there are many more examples of close collaboration and positive inter!firm relationships among market actors. In many cases one sees that the most

A Framework for Effective Markets Work

successful lead firms (buyers, processors, input suppliers, etc., are those that foster positive relationships with the M5Es they buy from or sell to. In order for )*+ staff to identify opportunities to build and strengthen such relationships they need to look at product value chains as a 0team effort1 that involves all of the market players (including producers who are themselves part of the private sector, 9 each one playing an important role. )*+ market programs will focus on" :ow to increase and improve the participation of M5E6poor in those markets' and :ow to help lead firms understand how better to structure their relationships with producers they source from or sell to (including how to create positive incentives for them,. +nce interventions have begun, pro$ects can monitor activities to determine whether or not benefits are actually accruing to M5Es6poor via these relationships. *# I+p&c' ')r%ug) indir c' in' r$ n'i%n! +ne of the lessons of market approaches is that it is not always necessary to intervene directly with the poor to bring them benefits. *reater impact can sometimes be achieved indirectly by working with other market players. The reasons for this include the high cost of interacting directly with large numbers of small!scale enterprise and the lack of sustainability of this kind of intervention. Examples of activities that can create large!scale and sustainable benefits for the poor without intervening directly with the M5E6poor include" ssisting an agribusiness firm to structure mutually beneficial contract farming (procurement operations, with small!scale producers' 7orking with traders to develop new marketplaces closer to targeted communities 9 where they can provide market access and market information to producers' and ddressing policy constraints to create incentives for M5E6poor (such as advocating for correct enforcement of land leasing policy,. In all of these examples, the ob$ective of the pro$ect is to impact the poor 9 it is the indirect method employed that differs from more traditional approaches. The challenge in all these cases is to identify win!win relationships where all parties benefit. In this way, the relationships and corresponding benefits to both parties will continue once the pro$ect activities end. It is important, however, to carefully select the private sector companies that the pro$ect will work with 9 to insure that they are capable of creating win!win partnerships with the M5Es.

A Framework for Effective Markets Work

,# A$%id +&r- ' di!'%r'i%n! Market distortions frequently occur when development programs intervene directly in markets without building upon or taking account of the existing market players. There are examples of )*+s that have used donor funds to take a direct commercial role in industries such as crafts and poultry. These programs frequently sell inputs and6or purchase and market final products. Their interventions are frequently $ustified by stories of unfair intermediaries, etc. 7hile well intentioned, they oftentimes have a negative effect on private entrepreneurs who are trying to fulfil these functions in a commercially viable manner. These entrepreneurs find it difficult to compete with )*+s or others who are subsidi#ed by donors and who don3t need to fully rely on commercial sources of revenue. 5uch programs can push existing entrepreneurs out of business and create problems for the M5E6poor if their subsidy of market operations ceases at some point due to lack of donor funds. s they do not need to depend as much on market forces to survive, these )*+s also tend to be less 0demand driven.1 Their products and services frequently reflect more of what the )*+ managers think is appropriate versus what the market demands. market development approach will always take a look at the larger 0market systems1 to understand who the existing market players are and what function they play in the value chain. They then try to work with these existing players (or encourage the emergence of new players if there are no existing ones, to address the 0systemic constraints1 facing the targeted market and participating M5E6poor. Expressed in another way, they try to identify existing market players that can provide sustainable market!based solutions to the constraints that are holding back industry competitiveness and increased benefits to M5Es. .# R $i!i' ') r%l %/ +iddl + n +ne of the commonly held views around the world is that middlemen (or women, are the source of low prices, inefficient value chains, and exploitative behaviour towards the M5E6poor. The automatic reaction of many pro$ects therefore is to try and 0eliminate the middlemen.1 Middlemen or 0intermediaries1 play an important role in product markets. They provide links to markets, help to consolidate production, provide transportation, and sometimes provide inputs, technical assistance, finance or other services to the M5Es they source from. They also take risks in buying products, stocking them, and finding buyers who will accept the product. These are usually tasks that individual M5Es cannot, or do not want to undertake on their own. They can also be complicated tasks that go beyond the ability of groups or cooperatives to successfully manage. /

A Framework for Effective Markets Work

It is frequently stated that the price paid by intermediaries to M5Es is very low compared to the price they receive when they sell. This is, therefore, interpreted as exploitative behavior. 2efore making assumptions, however, that margins are unduly high or unfair, it is important to investigate the costs of intermediation. These costs include transportation, storage, pre! financing, and personnel, not to mention a salary for the intermediary himself6herself. Intermediaries are also taking risks 9 they may en$oy a good margin one day and make a loss another. +nce all of these factors are taken into consideration it is frequently the case that the cause of high margins and low prices is more due to market inefficiencies such as poor roads, long distances between farms and markets, lack of adequate storage and transportation facilities, fees paid to officials, etc. 9 and not so much the intermediaries themselves. 5uch an investigation also uncovers the challenges that intermediaries face themselves 9 and could result in a new found respect for the role that they play. To conclude, instead of trying to eliminate middlemen a more effective approach in market development programs can be to explore how to work with both intermediaries and producers to reduce the inefficiencies that are causing low prices.

0# Pr%+%' !+&r' !u1!idi ! +ne of the principles of market development programs is the use of 0smart subsidies1 to promote sustainable solutions that will continue to accrue benefit to targeted sectors and M5E6poor after the development program is complete. <nder a market development approach such subsidies are used to fund the activities of 0facilitators1 (such as )*+ staff who are implementing the programs,. The activities of facilitators include such things as" . developing the capacity of private sector 0providers1 to offer improved products and services to M5Es in a sustainable manner' promoting awareness of these products and services among M5Es' and contributing to an improved enabling environment.

These activities, or pro$ect interventions, do not need to be sustainable themselves. +nce they are complete however, they should leave behind sustainable market relationships and improved services and products for M5Es. Instead of funding direct and unsustainable support to the M5E6poor, smart subsidies are used strategically to build the capacity of market players to interact more productively among themselves.

2# P%$ r'3 &ll $i&'i%n ')r%ug) !+&ll4+ diu+ /ir+! =

A Framework for Effective Markets Work

.overty alleviation can be affected in different ways. +ne way is to promote individual economic activities among the very poor. nother is to help foster employment opportunities for the very poor. This latter point can be achieved by targeting more established M5Es as vehicles for employment generation. These M5Es (which might still be considered as 0poor1, are frequently in a better position to participate in growing value chains than others who are landless, disenfranchised, etc. If they can grow their activities (agricultural production for example, they will need to hire labor. This can then result in employment opportunities for the 0very poor.1 In some cases, impact on poverty can be greater by following this strategy, rather than by insisting that the very poor have their own economic activities, or that they engage in group economic activities (which can be problematic,. 5# Tr &d lig)'l3 in +&r- ' r l&'i%n!)ip! In order to ensure sustainability of impact to targeted M5E6poor it is important for pro$ects to avoid being overly prescriptive or heavy handed in determining what the structure of market relationships should be, what activities to engage in, etc. 5ome )*+ programs try to prescribe what the relationships between market actors should look like without conferring with the market actors themselves. This usually does not work as market actors alone understand what is possible and not possible from their own perspectives. It is always preferable therefore to engage the targeted market players (producers, traders, wholesalers, transporters, etc., in the design of program interventions. They will be the ones responsible for carrying out the market operations and many of them have significant experience which would enable them to quickly determine what might, or might not be, feasible. Engaging the market players in this way also helps encourage ownership and buy!in which is critical to ensuring sustainability. In general, the M5E6poor and other market players that the )*+ engages with should ultimately make their own market decisions. 7hen looking at hypothetical market scenarios )*+ staff should always ask private sector actors 0why isn3t this happening now>1 The answers provide a reality check and help ensure that pro$ect interventions result in practical solutions that are based on market realities. This approach also builds on existing knowledge, practice and market players in the targeted sectors.

6# T&-ing & +&r- ' in!' &d %/ gr%up /%cu! ?

A Framework for Effective Markets Work

Many development initiatives are very 0group focused.1 They target groups, conduct capacity building activities for them (such as how to structure the group, conduct meetings, keep records, etc.,, and then look for opportunities to assist them to increase income. These activities sometimes lead to $oint marketing or procurement activities that provide economies of scale and modest increases in savings6income to the participants. There are questions, however, as to whether the pro$ect costs required to generate these benefits can be $ustified. In order to find greater, more cost effective opportunities it is important to take a look at markets from a broader perspective. It is important to identify growing product (or service, markets and then to identify all the players in those markets. In many product markets, there are key players or 0lead firms1 that play a critical role as buyers, input suppliers, etc. .ro$ect activities can often partner with such players to bring sustainable benefits to the rural poor. @or example, if the poultry sector is growing there might be a lead firms that are providing day!old chicks, feed, even market access to farmers. In another case, there might be a fruit or vegetable processing plant that is looking for suppliers of product. 2y identifying these market players from the onset, )*+s can introduce them to rural farmers and help the farmers respond to the opportunities they offer. In this case, the pro$ect activities are using growth markets and key actors in those markets as a starting point, rather than small farmer groups. In cases where growth markets can be identified, there are greater opportunities of 0expanding the pie1 among all market actors, rather than promoting better 0sharing of the existing pie.1 The $oint marketing and procurement activities cited earlier are usually an example of 0sharing the pie1 whereby a group is able to take on some of the functions that were previously provided by other market actors (traders, input suppliers, etc.,. 2y doing this the group members can gain modest benefits, though the cost of taking on the additional functions also needs to be factored in. In the case of a growing market, all market actors can increase their earnings. 4epending on the opportunities at hand, a formal group may or may not be needed to respond to market opportunities. In some cases, farmers may only need to come together to an agreed upon collection point periodically in order to meet with buyers. +r they may only need to come together a few times per year to coordinate bulk purchases of inputs. 7hile these activities may require coordination, they may not require a formali#ed group with bylaws, officers, etc. It is, therefore, important not to look at group development or A

A Framework for Effective Markets Work

group empowerment as an end in itself 9 but rather as an means to an end in certain (but not all, circumstances. The ultimate goal of business or markets based approaches to development is to create viable and sustainable linkages between the private sector and small scale farmers that would further lessen the burden with regards to market availability, access to resources and technical support including financing and business advisory. In a development context market approaches means working with small scale farmers to identify their potentials, capabilities and weaknesses and see how these can help small scale farmers and entrepreneurs fit into local and international markets. It is also about building the capacity of small scale farmers and small business owners to become more competitive in the business world. The answer to the following questions can help us to see how market approaches can be implemented" :ow can small scale farmers benefit more fully from local and international markets> :ow can )*+s help small scale famers adopt business approaches while at the same time not compromising business principles> :ow can markets work for the poor> It is thus evident that, the market based approach requires the adoption of a rational and holistic approach to development. 5mall scale farmer should be clear about what they can do, how they would do it and how it is going to fit in to the end market. The market based approach can thus then work very well in an enabling environment that allows small scale farmers who are in many cases marginali#ed and are not part of the local and international markets. t micro level research has shown that a number of factors that lead to marginali#ation and exclusion of small scale farmer can be eluded to be a weakness on the part of the farmers. 5ome of these factors include' .oor organi#ation Inability to produce quality products Back of technical and financial capacity to increase production volumes Back of entrepreneurial skills, business acumen and6or business skills Inability to market products and add value Back of cooperation C

A Framework for Effective Markets Work

t macro level factors leading to exclusion on the part of the farmer include the following' Trade and market policies @4I griculture policy (.hitosanitory requirements,

dopting a markets based approach thus requires that the above stated factors are addressed within the framework. 2oth micro and macro factor have been seen to increase poverty in developing countries. The micro level factors require a more hands on approach than the macro level which are mainly advocacy activities. The above micro and macro activities can be demonstrated as follows'
Market System Map
-DIS.E(AB%I() E($I"/(ME(T %and & property rig'ts (atural environment & resources )overnance, commercial la+ & en!orcement Social norms & in!ormal net+or s Trade rules & competition policy Quality standards & regulations

In!rastructure )ender roles & *e'aviours

Competition Consumer trends

MA"#ET C0AI( Primary Producers Enterprise Traders Processors Exporters 3 Importers "etailers

Consumer1 2International 2(ational 2%ocal

Inputs

Alternative liveli'ood strategies Mar et In!ormation Insurance Finance Production Transport Trade Facilitation Business Development Business Management

MA"#ET SE"$ICES Financial Management Savings

Credit

Extension

Accreditation

Brand Development

Quality Assurance

AN ENABLING EN7IRONMENT In order for an enterprise to flourish, the following sectors of the business are supposed to be clearly harmonised. These include' &. .roduction 8. ccess to financing and capital

;. 2usiness development D

A Framework for Effective Markets Work

PRODUCTION In any business enterprise, production is key and at the core of the entity. s a result of this )*+ efforts have mainly been towards production support. It is important that enterprise owners understand production and are clear on what needs to be done to enhance production as this has a bearing on the quality of goods produced. Therefore production refers to the processes and methods used to transform tangible inputs (raw materials, semi!finished goods, subassemblies, and intangible inputs (ideas, information, knowledge, into goods or services. Eesources are used in this process to create an output that is suitable for use or has exchange value. In order to be effective the following key question should be considered" 7hat to produce> :ow it will be produced> (technical and financial requirements 9 feasibility, @or whom it will be produced> (Market availability, is this guided by a market survey, 7hat quantities to produce and quality> (.roduction schedules, 7hat conditionality should be considered> (Terms of trade,

ACCESS TO CAPITAL AND FINANCING ccess to financing is a crucial aspect of successful business management as this can create opportunities for business expansion. t all times business owners need to be aware of various financing opportunities that will supplement their own resource mobilisation efforts. n effective guide to financial planning is a detailed financial plan in the business plan will show the input and resource requirements of the business. In the financial plan the business owner should be clear of how much resources are needed to run the business profitably. The following questions should be considered' :ow much do i need for my enterprise to run profitably> 7hat income sources do i have> :ow much will i invest in the business from my own sources>

&F

A Framework for Effective Markets Work

:ave i been reinvesting profits back in the business>

BUSINESS DE7ELOPMENT 2usiness development is critical as all enterprises that farmers would engage need to be developed to a point that they are able to compete with well established local and international competitors. 2usiness development has four core areas that need to be developed. These include' &. Marketing 8. 2usiness management ;. Trade facilitation /. Guality assurance =. 2rand development In order for any business to be effectively developed, the above stated areas need to be clearly understood.

M&r- 'ing Marketing is a very crucial aspect of a business as it is the means by which goods produced are sold. 2usiness owner need to be clear on what marketing strategy to use and also the characteristics of their market. The following questions should be answered' :ow will you promote your product6 service 7hat is special about your product Is your product meeting customers needs :ow is your product different from the rest

Bu!in !! M&n&g + n' &&

A Framework for Effective Markets Work

2usiness management is a critical role that any business owner needs to understand and perform correctly. Most entrepreneurs do not understand what to be a business manager entails. In simple terms a business manager means H3to be in charge33 of drawing up and implementing plans that yield success continuously. business manager has to perform the following management functions in order for the business to run smoothly, these include' .lanning +rganising Motivating 4irecting Iontrolling Ioordinating

Tr&d F&cili'&'i%n Trade facilitation looks at how procedures and controls governing the movement of goods across national borders can be improved to reduce associated cost burdens and maximise efficiency while safeguarding legitimate regulatory ob$ectives.

&8