Food Processing And Manufacturing In Developing Countries

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Food processing and manufacturing in developing countries: driving forces and the impact on small farms and firms

John WILKINSON

Paper prepared for the FAO technical workshop on “Globalization of food systems: impacts on food security and nutrition”

8-10 October 2003, Rome, Italy

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Information on the Author: John Wilkinson Universidade Federal Rural Rio de Janeiro, CPDA/DDAS Av. Pres. Vargas 417/8. andar Centro - Rio de Janeiro 20071-003, RJ - Brasil E- mail: [email protected]

Disclaimer: Ideas expressed in the paper are those of the author(s). Mention of any firm or licensed process does not imply endorsement by FAO. The designations employed and the presentation of material do not imply the expression of any opinion on the part of FAO concerning the legal status of any country, territory, city or area or of its authorities, or concerning the delimitation of its frontiers or boundaries.

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Food processing and manufacturing in developing countries: driving forces and the impact on small farms and firms John WILKINSON

1.

Introduction

In this paper, the processing and manufacturing sector is understood as covering both the production of final foods and ingredients or additives, either for home cooking, industry or “food services”. In terms of enterprises, it ranges from transnationals and the mix of domestic firms in developing countries through to primarily locally oriented, ruralbased processing and artisan activities. At the same time, it incorporates the broader notion of “value-added”, which more clearly recognises the historical complementarity and tension between transformation and preservation technologies. “Minimally processed” products, which are assuming strategic importance both in domestic and export markets, with the packing-house linking the farm directly to the retail sector, will also, therefore, be included in the review. In the agroindustrial studies of the seventies and early ´80s, the food industry was analysed as the hege monic actor in the production chain with the focus of interest largely confined to oligopoly forms of competition and to new backward linkages with agriculture of an explicit or implicit contract nature. These were characterised as forms of quasiintegration, and today receive renewed attention in the light of the pressure to stricter forms of co-ordination, promoted largely by desverticalisation and more demanding quality considerations. As from the ´90s, the food industry is clearly no longer the hegemonic actor in the agrofood system, ceding this place to the large-scale retail sector. Any analysis of tendencies in the food-processing sector, therefore, must also take into account the pressures deriving from forward linkages, which increasingly define the terms of the food industry’s strategic options. Given the precocious internationalisation of the agrofood system with primary processors already setting up foreign subsidiaries by the end of the nineteenth century and final foods firms following suit in the early years of the twentieth, it was never possible to analyse this sector in developing countries without also considering the strategies of the leading international players. This is even truer today as liberalisation, deregulation and the various factors accelerating globalisation (financial, technological and cultural) accentuate the importance of foreign trade, direct investment flows and cosmopolitan consumer habits on the dynamic of the domestic food processing sector in developing countries. We will begin this paper, therefore, with a consideration of trends in the foodprocessing sector of developed countries before turning our analysis to developing country dynamics. Pride of place will be given to the combined phenomena of international trade and FDI, which are coming to play such an important role in reshaping the food-processing sector in developing countries. Within this context, the relevance of the emergence of regional blocs will also be considered. At the same time, a range of domestic factors -

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income levels, urbanisation, infrastructure, changing patterns of occupation, particularly as it effects the organisation of the family - which are currently influencing the profile and perspective for the food processing sector must be taken into account. In addition to evaluating the current significance of the food-processing sector for developing country strategies, the paper will focus on the opportunities and challenges which these tendencies represent for the small farm and firm sector. Our analysis will be based on a selected review of the literature and secondary data sources. A word of caution, however, is necessary with regard to the term “developing” which is still used to describe an increasingly heterogeneous range of countries.These may be grouped by levels of income – low, middle and high, a conventional classification when dealing with aggregate data. Such an approach, however, in bringing together, let us say, India with Honduras, Bolivia with Indonesia or even Uruguay with Brazil does not allow for an appreciation of the impact of domestic market size which is a crucial structural and strategic investment variable. At the same time, it is clear that differing cultural traditions, which influence food consumption habits, limit the homogenising effects of similar income levels. This is apparent even within relatively similar economic blocs – Europe and milk products being a good example -, but is more marked in the case of Asian food systems. The consolidation of economic blocs, in its turn, and the emergence of regional agrofood systems, represent an equally important complementary approach to aggregation as investment decisions are increasingly affected by the regional dimensions of targeted markets. A similar consideration could also be applied to the developed countries, where, in spite of globalisation, trade flows and the profile and dynamic of the agrofood system are sharply influenced by historically consolidated regional specificities, clearly reflected in the negotiations and conflicts within the WTO. In our discussion of the food processing industry in developed countries, therefore, we will try to take into account the very different realities of North America, Europe and Japan.

2.

Some Major Tendencies in the Food Processing Sector of Developed Countries

2.1

The U.S. Food Processing Sector

The strategic significance of food processing for developing countries can be gauged when we consider its continuing importance in advanced industrial economies such as the US where the food and beverage processing industry still accounts for 15% of total manufacturing activity and employs 1.7 million workers. 1 Overall growth in US food processing, however, has slowed to around 2% annually as most markets become mature and new product launc hes are directed preferentially to select sectors such as convenience foods, organics and natural products and functional foods. Continuing consolidation and concentration mark the industry as the leading firms try to compensate slow growth through greater plant efficiency and market share. The pressure of the retail sector is a further factor here, although, in the US, brands still account for 80% of total food sales, (as against only 63% in the UK, already in 1992), and are being extended to fresh produc e. A key strategy to compensate slow growth has been to increase the share of value added which advanced 23% from 1992-7. The potential for adding value, however, is markedly different between 1

This section draws heavily on the USDA, AEC Report No. 811, The US Food marketing System, 2002

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sectors favouring the highly processed segments, convenience foods and soft drinks, at the expense of more traditional activities in meats, dairy and fats/oils. The US processing industry has traditionally had a strong international presence but the globalisation of its leading firms and products has been accelerated both by the maturity of its domestic market, changing regulatory regimes and the potential for exploiting global brands. US firms now account for 40% of the world´s top fifty food processors and the US is the world´s largest exporter and importer of processed foods and drink. Exports at US$30 billion in 2000 have stagnated and fallen off in the second half of the ´90s, whereas imports at US$37 billion in 2000 have increased considerably in the same period. The principal exports are meat products, miscellaneous foods, grain mill, fats/oils, fruit and vegetables. The strength of the dollar has had a negative impact on price sensitive commodity exports but has not affected exports of branded products. It has also been an important stimulus to imports where the major increases have also come from branded, highly processed final products. By order of importance the five principal importers of US processed foods and drink are Japan, Canada, Mexico, Thailand, South Korea and Hong Kong. Imports, in their turn, come primarily from Canada, Mexico, Thailand, France and Italy. Three tendencies of trade in processed foods can be noted here: the importance of regional blocs, the westernisation of diets in the developed Asian economies, and the competitiveness of high quality European products. Since the middle ´90s, foreign direct investment (FDI) by US food processing firms has become more important than exports reaching US$33.9 billion in 1998 with sales by foreign affiliates totalling US$133.1 billion. The number of affiliate firms rose from 764 to 823 between 1995-8, formed primarily through joint ventures rather than green field investment. 75% of FDI in 1995 was located in three major trading zones – the European Union, NAFTA and the Mercosul. The relation between exports and FDI has been the object of many studies, as has the impact of FDI on the host country in terms of rates of growth of GDP, possible crowding effects vis-à-vis domestic investment, re-exports and the repatriation of capital (Gopinath, 2000). The importance of the Mercosul for US FDI attests to the latter´s relevance for the analysis of food processing in developing countries, although here it is clear we are dealing with a regional dynamic which in strategic terms includes the FTAA. In addition, 60% of this FDI is concentrated in this region´s leading country, Brazil, although recent studies have shown that new investments in any of the Mercosul countries are increasingly based on regional considerations (Wilkinson,1999). On the other hand, countrie s other than these three regions received no less than US$7.5 billion in US food processing FDI in 1995. The evaluation of these investments is clearly of key importance as processed food exports account for an ever greater share of developing countries total agrofood exports. 2.2

The Food Industry in the E.U

According to the Confederation of Agrofood Industries (CIAA), 2 the food and drinks industry in Europe is the leading manufacturing sector in terms of both production (13.4%) and employment (11.8%), and occupies third place for value added (10.7%) behind chemicals (11.4%) and machinery/equipment (10.8%). France, Germany and the UK account for some 60% of gross production. In Ireland, Denmark and Spain, a quarter of the manufacturing work force are employed in the food and drinks sector, and in Holland and 2

http://www.ciaa.be/uk/library/statistics

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Spain this sector is responsible for 26% and 20% respectively of total manufacturing production. While 70% of total turnover comes from firms with more than 100 employees, some 90% of the total number of firms are small and medium. These may account for a minority of total employment in the sector, but their participation is significant, reaching 40% in Italy and over 30% in Portugal and Belgium. In the remaining countries, the figure is around 15% with a low of just less than 10% in England. The food and drinks processing sector therefore remains a key component of production and employment even in the most developed economies, with important employment and business opportunities in the SME sector. The sector experienced 19% growth in production value at constant prices between 1990-2000, increasing from Eur.460 to Eur.548 billion. The category, “other food products” (bakery, pastry, chocolate, confectionary products and similar items) is by far the most important (Eur.156 billion), followed by meat (Eur.113 billion), beverages (Eur. 98 billion) and dairy products (Eur. 95 billion). Germany dominates the first two categories, while England leads beverages and France dairy products. In contrast with the US, the EU has a trade surplus in the food and drinks processing sector, exporting Eur.45.015 billion as against imports of Eur. 36.369 billion in 2001. The US is by far the leading destination country (Eur. 9 billion), followed by Japan (Eur.3.7 billion), Switzerland (Eur. 2.6 billion) and Russia (Eur. 2.6 billion). The ASEAN countries (Brunei, Indonesia, Malaysia, Philippines, Singapore, Thailand) received 3.7% of EU exports, the Mercosul, 1.6% and the Andean Group (Bolivia, Colombia, Ecuador, Peru, Venezue la) 1.5%. On the imports side, Brazil, the US and Argentina account for some 30%. As a result, in regional terms, the leading position is occupied by the Mercosul (18.7%), with the ASEAN region responsible for 8.8% and the Andean Group 2.7%. The Mediterranean countries are a significant trading region, responsible for 10.7% of EU exports and 6.8% of its imports. If trade is examined by product category, beverages (Eur.13.256 billion), “other food products” (Eur. 11.494 billion) and dairy products (Eur. 5.163 billion) lead exports and show large surpluses. Animal oils and fats and prepared animal feeds reveal a strong deficit corresponding to imports from NAFTA, the Mercosul and Thailand. The two other categories where the EU has a heavy trade deficit are in processed and preserved fish and fish products, with imports at Eur. 11.077 billion and exports of only Eur. 1.874 billion, and processed and preserved fruit and vegetables, where imports stand at Eur.4.926 billion and exports at Eur.2.554 billion. These two categories, as we shall see below, have been identified as key export opportunities for developing countries. Only four European firms are among the world´s top 15 agri- food companies by value of sales: Nestlé (2), Unilever (4), Diageo (8) e Danone (11), as against 10 US firms and I from Japan. Nevertheless, Nestlé had 138,000 employees and Eur. 34.9 billion sales outside Europe; Unilever 204,000 employees and Eur. 11.9 billion sales; Diego Eur. 14.9 billion sales, and Danone 63,000 employees and Eur. 5.3 billion sales outside Europe. Numerous other firms in the “other food products”(Cadbury Schweppes, Associated British Foods, Tate & Lyle), drinks (Heineken, Interbrew, Allied Domecq, Carlsberg, Pernod Ricard), and dairy (Parmalat, Bongrain) sectors have a strong international presence. FDI became very important in the ´80s when the weak dollar attracted a large volume of European food industry investment to the US market. With the formation of the single market in the early ´90s, intra-EU FDI became substantially more important. In the most

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recent period, it is the new candidate members and the countries of the former Soviet Union which have become a privileged focus of FDI strategies ( ). 2.3

Japan´s Food Processing Sector

Although Japan has only one company in the world´s top 15, it is, as we have seen above, a major trading partner of both the US and the European Union. 3 Processed foods now account for two thirds of Japan´s food consumption which is heavily dependent on imported final products from Japanese subsidiaries in neighbouring countries, in addition to a rapidly increasing percentage of western products. The food processing industry represented 10.9% of all manufacturing firms in 1999, and is the third largest industrial sector after the electronics and vehicles sectors. In 1994, 12.2% of the country´s manufacturing workforce was employed in food processing. 41% of Japanese firms have up to 50 employees and are responsible for 26.4% of total output. If we were to include firms up to 100 employees, their share in the total number of firms would increase to 57.6% and 45.1% of total output. Imports of final food products make up 28% of processed food consumption and, in calorie equivalence, 64% of the ingredients for processed foods are imported. Exports, on the other hand, are limited to a few specialities and are insignificant as a proportion of total exports (<1%). In 2000, total food imports were US$50,5 billion whereas exports were only US$2.3 billion. Japanese subsidiaries overseas have only 22% of their total sales in the host market, as against 45% in the case of European subsidiaries and 33% for US firms overseas. The dominant strategy of Japanese food multinationals, therefore, is that of developmental imports - off-shore production for the Japanese market. The five leading exporter countries of processed food to Japan are: US, Australia, China, Thailand and Taiwan. In 1970, Australia was the principal exporter with 17.62% which, however, had declined to 7.35% in 1996. The US, which was in second place in 1970 with 16.84% becomes the clear leader in 1996 with 30.98%. China, which was in fourth place with 2.90%, comes next with 9.29%, followed by Taiwan, increasing its participation from 3.39% to 7.80%, and in fifth place Thailand which also improves its share from 1.86% to 5.74%. Other relevant developing country exporters include, Indonesia, Korea, Malaysia, the Philippines and Singapore. More recent data shows China´s share to have increased to over 12%. Australia, as the dramatic loser in this period, promoted a number of studies to identify the causes of its lack of competitiveness which have been analysed by Trewin (Japan Market Study, 2003). In his review, Trewin draws attention first to the conclusions of an earlier piece of research by Athukorala and Sen (1998), arguing that developing countries tend to have a comparative advantage in food processing because this sector is generally labour intensive and has benefited disproportionately from improvements in transport and storage. Trewin´s explanation for Australia´s loss of export market share to Japan gives pride of place to the more voluntaristic aspects of competitiveness (especially management performance) and policy measures, although the importance of structural variables are recognised (resource endowments, population, income growth), and further

3

This section draws on the Rural Industries Research and Development Corporation report, Japan Food Market Study,chapters 2,3 &4. January, 2003

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investigation of such as factors as labour costs, investment linkages and export subsidies are recommended.

Japanese FDI has fluctuated substantially since the ´70s with Australia and East Asia declining relative to the US and the EU. In 2000, East Asia´s share was 12.4%, the US accounted for 28% and the EU, 45.2%. In part, this is to be explained by the severe restrictions on equity participation in East Asia. By contrast, this latter region has by far the largest number of Japanese affiliates, 212, followed by North America with 86 and the European Union with 65. In the East Asian region China has 85 affiliates, Hong Kong, 31, Thailand, 23 and Singapore 21. Although there is still very little incoming FDI, both exports and imports are positively correlated with FDI flows, although in recent years, the proportion of sales inside the host countries has increased significantly. The studies consulted suggest that resource advantages tend to be offset by stringent non-tariff measures in the case of imports of processed food, particularly relating to sanitary conditions, weakening, therefore, the competitive advantage of developing country exports. Japanese trade in processed food, as in other sectors, has a strong intra- firm profile and independent access to the Japanese market is notoriously difficult.

3.

Processed-Food Export Trends and Developing Countries

The food-processing sector has recently received attention within the framework of discussions on export- led industrialisation in developing countries. Athukorala and Sen (1998) have elaborated a general analysis of this dynamic arising from their earlier reflections on the performance of Chilean agrifood and fishing exports. The share of manufacturing exports in total world trade has increased from 66% to 81% from 1970-1994, and developing country share in manufacturing exports has leapt from 6% to 24%. At the same time, processed food as a proportion of world non-manufacturing exports increased from 26% to 37%. This trend was global, but developing countries´ share of processed food in non- manufacturing exports increased from 23% to 38%, while the corresponding figures for developed countries was 28% to 36%. With notable exceptions (Bangladesh), middle and high- income developing countries have performed better than low- income countries. The authors note that non-food manufacturing exports from developing countries tend to have a faster growth record, although this is by no means universal. More importantly, they observe that there is a strong correlation between manufacturing export growth and food-processing export growth, which leads them to conclude that, for manufactured products, the key determinant is the domestic policy framework rather than resource endowments, which should be seen rather as a necessary pre-condition, although it remains the critical factor in the case of primary product exports. Five developing countries – Argentina, Brazil, Malaysia, Thailand and Taiwan were responsible for 40% of total processed food exports by developing countries, but the evidence points to a continuous increase in the number of developing countries participating in such exports. Countries with a superior overall export record – Chile, Thailand, Indonesia, Malaysia, Turkey, Tunisia, Guatamala, El Salvador and Sri Lanka – have also been most notable in the increase of processed food in their share of total non- manufactured exports. It should be noted, however, that particularly in the case of middle and high- income developing countries, the growth rate of manufacturing exports has far exceeded that of processed foods. Nevertheless, for more than half of the 37 developing countries selected

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for analysis, processed food exports represented at least 20% of total ISIC manufacturing exports in 1994. The authors also note, what they see as a remarkable shift in the commodity composition of processed food exports since the ´70s with current export growth coming from products which were of less importance in the initial period. Processed fish, whose share in total processed food exports from developing countries in 1970 was 8.8%, occupied 30,7% of total exports in 1994. Less spectacularly preserved fruit has also continued to increase its share over time. For most developing countries these two products account for some 40% of total processed food exports. For as many as 17 countries, processed fish alone has accounted for 40% of total exports. On the other hand, traditional products – meat, sugar, animal feeds, vegetable oils – have either fluctuated wildly or declined in importance. Having established the strategic role of processed food exports, the authors then consider their implications for employment, terms of trade, knowledge and technology spillovers. They note that there is no clear relation between income levels and export growth and that, furthermore, the final stages of food-processing tend to be labour intensive, particularly canning and fish-processing. The authors, also provisionally, conc lude that trade implications are positive when compared to primary products based on income and price elasticity of demand trends and in this sense processed foods are similar to traditional manufactured products as a whole. Their spill-over effects, however, would seem to be superior to traditional manufacturing since they are less dependent on imports, involve a greater degree of learning through interaction with exporters, and have to respond to more demanding quality specifications. A similarly optimistic assessment can be found in the UNCTAD report: “Opportunities for Vertical Diversification in the Food Processing Sector in Developing Countries” (1997) which analyses the prospects for four groups of food products: horticulture, fish, meat and tropical beverages. Trade opportunities are identified in three major country blocs: higher income developing countries such as South- East Asia as a result of market expansion; the economies of Eastern Europe and the Russian Federation as a consequence of the transition effect; developed and advanced developing countries through the impact of changing life-styles. The principal problems of market access are identified with sanitary and quality demands, the control of marketing channels by the established transnatio nals and the reliability of supplies, which places great demands on logistics. Favourable factors mentioned include, geographical and cultural proximity on the one hand and the existence of a large domestic market, which allows for economies of scale and scope. (Evidence from Brazil for the fruit sector in comparison with Chile would suggest, however, that a large domestic market might serve as an easy alternative to the effort required to create and sustain export markets). Three areas for further analysis were identified for developing countries seeking to promote processed- food exports in these four sectors: the new conditions for market access as a result of the WTO regulatory framework; the types of corporate strategies appropriate for seizing market opportunities; the ways to use the domestic market as a platform together with the promotion of adequate supporting structures. The horticulture sector in this study includes fruit juices, frozen and dried products, minimally processed products (salads), canning and processing, with world trade being

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calculated at US$15 billion in 1995.4 Tropical and temperate climate products are seen to face a demand, on a global scale, which is both dynamic and increasingly diversified. At the same time, a tendency by transnationals to farm out the primary processing stages to developing countries was identified, leading to the phenomenon of “bright cans” imports, which would then be labelled for final retail and sales. Such a tendency parallels strategies of out-sourcing in other manufacturing sectors. Nevertheless some brand strategies by developing countries were seen to have been successful (Thailand, Philippines, Jamaica), and while most markets are increasingly dominated by transationalised circuits this has not prevented the successful entry of new countries, such as Chile and the Dominican Republic. In the major markets, tariffs on processed fruits are often double the average applied MFN rates and additional levies may be imposed, although the Andean and the ACP countries have duty free access to the EU market. In spite of this, of the ACP countries, only Swaziland, Côte d´Ivoire, Kenya and Jamaica have gained important levels of access, and the market leaders are Brazil, Thailand and the Philippines. The importance of fish products has already been mentioned above and the size of world trade in processed fish - US$45 billion in 1995 – fully justifies the attention it has been given in the literature. 5 40% of this trade is for frozen fish and 38% for frozen crustaceans. Canned fish make up a further 10%, with fish- meal and oils accounting for 7%. On the demand side, associations of convenience and health are leading to an explosion of product innovations, and dynamic markets prevail in all three of the major trading blocs – NAFTA, EU and Japan, which are responsible for 85% of total imports. The strong presence of Japanese, Korean and Nordic firms, together with the regulatory-driven shift to new fishing grounds has led to the development of many new trade circuits and the entry of a wide range of countries. Argentina and Uruguay (hake), Thailand (canned tuna), India (frozen products), Chile (congrio), Mexico and Peru (processed squid), Morocco (canned sardines) Pacific Islands (tuna eyes and stomachs) are cited as important cases of market success, often developed in the form of joint-ventures. Tariffs in the EU are higher than in either Japan or the US, although again the ACP and the Andean countries are exempt from duties, as in this case is Argentina. Similarly, in the US, fish products from the LDCs, the Caribbean and NAFTA countries enter duty-free. A key access issue is that of regulatory sanitary controls, which now demand the adoption of HACCP procedures in all fish processing exported to these trading zones. World trade in processed meats (beef, pork and poultry) amounted to US$22 billion in 1995 with an 8% annual growth rate in the preceding five years. 6 Market opportunities and trade flows are markedly distinct for each of these major categories, but, in contrast to the two previous groups of products discussed above, meat consumption in developed countries (with the exception of Japan) has tended to stabilise, while demand in developing countries has increased, leading also to a pressure for higher imports, particularly in the case of poultry products. 90% of trade is still restricted to chilled and frozen meats, although health and convenience products are on the increase and quality thresholds have been ratcheted upwards. Developed countries are responsible for 80% of beef exports with developing country suppliers being restricted to Latin America, India and Southern Africa. The US is the largest market, followed by the former Soviet Union, Japan, the Middle East, 4

This section is based on Trade Opportunities in the International Processed Horticulture Markets by John Giles, UNCTAD, n/d 5 The section on fish was based on: Trade Opportunities for processed Fish by Helga Josupeit, UNCTAD. n/d 6 This section is based on Trade Opportunities for Processed Meat by Lionel J. Colby, UNCTAD, n/d

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Egypt and Korea. Price and entry barriers divide the world market between the Pacific and Atlantic zones, with the former virtually excluding developing country exports through their “zero-risk” policy on foot-and- mouth. The export market is, therefore, limited to the Middle East/North Africa, the Rus sian Federation and Eastern Europe, with prices and market share affected by the competition of EU subsidised beef. Four well established exporting countries account for 75% of world trade in pork – Denmark, Canada, the US and Taiwan with Japan (45%) and the US (15%) dominating imports. The opportunities for developing country exporters are largely limited to the commodity end of the market directed at the Russian Federation, Eastern Europe and more recently Korea. Trade in chilled and frozen poultry has increased 20% per year in the 1990s. A large increase in demand from developing countries, combined with domestic supply shortages, especially in the Russian Federation, which has now become the major import market, are responsible for 80% of world trade. Although competition is strong from established exporters, poultry production facilities are the easiest to set up, given access to competitive supplies of feed, and successful developing country exporters include China, Brazil and Thailand. The developed countries, however, still dominate this trade, with the US and the EU accounting for 75% of total exports. Meat products are especially sensitive in terms of both animal health and hygiene in processing plants and increasingly stringent quality and health demands constitute important technical barriers for market access. The world market for tropical beverages - coffee, cocoa, tea - at US$29 billion is larger than for both meats and horticulture but is subject to strong fluctuations. 90% of coffee is traded as green beans with processing taking place in the importing country. Brazil and Colombia are the leading soluble coffee exporters. In the case of cocoa, on the other hand, under a half of trade is in the form of beans with chocolate accounting for 20%, cocoa butter 14%, cocoa powder and cake for 12% and cocoa liquor for 6%. Nevertheless the bulk of this trade is in the form of re-exports and cocoa producing countries export 79% in the form of beans, with cocoa butter representing 10%, cocoa powder 7%, cocoa liquor 3,5% and chocolate products less than 1%. Brazil. 7 Some 90% of tea is similarly traded as raw material with packaged tea accounting for less than 10%. Access to markets for tropical beverage products, in addition to confronting higher tariffs, have to meet stricter labelling and health requirements. Further obstacles include the need to provide blended products, the sophistication of packaging, and the high levels of industry concentration. On the other hand, the transnationals which dominate processing, are increasingly investing in producer countries both for export and for the host market, and in these products it would seem that a large domestic market is an advantage for subsequent exports, both from the point of view of scale and segmentation by quality. Nestlé has coffee plants in the Côte d´Ivoire, Brazil, Indonesia, Thailand and China. Cacao Barry, Hosta, Cargill, ED & F Man and Mars have operations in major producer countries: Côte d´Ivoire, Cameroon, Brazil, Indonesia. Nestlé, Unilever and James Finley also dominate teaprocessing in producer countries with the exception of Tata Tea in India. Processors in Asia serving regional markets tend to be less dominated by transnationals.

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This phenomenon even extends now to Fair Trade initiatives going mainstream where tariffs barriers, quality and logistical considerations have led Traidcraft to produce their chocolate chip cookies in Belgium while their Geobar sold through the British Waitrose retail outlet is produced in Wales, both on the basis of imported raw materials (Humphrey, L. 2000).

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These studies converge with the literature discussed earlier on the key role of new non-traditional products in the export dynamic of processed food products from developing countries. In line with the positive interpretation of the significance and opportunities for developing countries of processed food exports adopted by Athukorala and Sen (1998), much research has focussed on the obstacles to access posed by considerably higher tariffs for processed products when compared to raw material exports (Rae & Josling, 2001), and more importantly by technical barriers consequent on greater rigour with regard to quality and food safety. Following on the decisions of the Uruguay Round, protectionist measures will tend in the future to be based increasingly on those barriers, which can be justified within the terms of the Sanitary and Phytosanitary (SPS) and the Technical Barriers to Trade (TBT) agreements (Valdimarsson et al, TAFT, Iceland, 2003). An important Workshop on Food Safety Management in Developing Countries, organised by the FAO and CIRAD in 2000, explored these issues in detail with examples from country experiences in Asia, Africa and Latin America (Hanak, Boutrif, Fabre & Pineiro, 2000). A premium therefore becomes attached also to the ability to negotiate the dispute settlement mechanisms of the WTO (Athukorala et al, 2002). In their conclusions to a recent contribution on this theme, Athukorala & Jayasuriya, (2003) argue: “Unlike conventional trade policy reforms, SPS regulations cannot be implemented simply through legislative declaration. Their effective implementation in developing countries requires that binding commitments are made to provide adequate financial and technical assistance. In particular, there is a need for a global framework to support national capacity building and improve the design of international standards.” (p17) A less sanguine interpretation of the increasing importance of processed food exports from developing countries has been developed by environmentally oriented research which would see this tendency as part of a broader mo vement either to export “dirty” industries to, or deplete the resources of, countries with less rigorous legislative and regulatory controls. The fishing industry has particularly come under attack in this sense. A United Nations Environment Agency (UNEP) Report (2001) has warned of the dangers of selling rights to fishing stocks under the pressure for short-term export cash, particularly when the developed countries are subsidising the fishing vessels. This study analysed trends in the fishing industries of Argentina and Senegal, which have opened their waters to fleets from Europe, Japan, Korea and South-east Asia. In the case of Argentina, in spite of a fivefold increase in the number of factory vessels, catches have fallen dramatically. In Senegal, on the other hand, the study identified a “massive wastage of fish caught” since the fleets were only interested in species of specific export interest. The report warns that this exploitation of developing country fisheries may seriously affect local food supplies and fishing communities and is largely based on the concession of fishing rights to foreign vessels rather than on an effort to developing the domestic fishing industry of developing countries. 8 Another critical line of research has been developed by the global commodity or value chain approaches which would see this surge in processed exports as part of a broader out-sourcing strategy of production chains dominated by transnational firms, which are taking advantage of trade liberalisation and regulatory flexibility, to harness the cheaper labour and abundant resources of developing countries. The strategy is no longer now limited to raw materials but includes basic processing activities, to the extent that value 8

The Economist, however, presents a much more optimistic in its article: “The Promise of a Blue Revolution”, August, 7, 2003

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added is increasingly concentrated clo ser to the activities directly related to final demand in the consuming countries (Gereffi, 1994, Fitter & Kaplinsky, 2002). The UNCTAD Trade and Development Report (2002) gives strong support to such an interpretation when it notes that, with the exceptio n of a small number of newly industrialising East-Asian economies, “high technology” manufactured exports from developing countries often represent “the low-skill assembly stages of international production chains organised by transnational corporations (TNC)” (p V op.cit.) with the technology and skills embodied in imported parts and components. It further adds that, while developed countries now “have a lower share in world manufacturing exports, they have actually increased their share in world manufacturing value added over this period” (p. V op. cit.). In line also with the global value chain analysis, the report argues that “perhaps a more decisive influence on product dynamism has been the strategy of TNCs,” and that “trade based on specialisation within such networks is estimated to account for up to 30 per cent of world exports.” (p VI. op. cit.) Particularly interesting examples of this line of analysis are the studies of the horticulture commodity chain, which, after fish products, is the most dynamic food processing export sector for developing countries, being carried out by the Institute of Development Studies, Sussex. Building on Gereffi´s distinction between supply and demand driven commodity or value chains, these studies analyse the out-sourcing strategies of British retail, particularly in relation to African supply bases (Kenya and Zimbabwe) and note the tendency to locate the preparation and packaging stages increasingly in the supplier countries. This ensures that there is less wastage on arrival in the consumer country and allows products to be on the shelves only twenty-four hours after they have left the farms. On the other hand, the quality and logistical demands of this pattern of outsourcing provoke greater concentration, within the agricultural sector of the producer countries, marginalizing small farmers and consolidating large farms based on casual, predominantly female labour (Barrientos, 200). In addition, the competitive advantage of producer countries is constantly undermined as production bases can be quickly mobilised in other countries with similar material and human resources. Sensitivity to negative publicity on labour conditions in these supplier countries is leading to the adoption of ethical trade standards, based fundamentally on ILO and United Nations definitions of labour and basic rights. While the worst features of “spurious competition” are, therefore, avoided, quality and “ethical” considerations appear to be accelerating the exclusion of small farmers and firms from these global horticulture value-chains (Dolan, Humphrey & Harris-Pascal, 2002). The impact of the global change in agrifood grades and standards on developing country and particularly small producer access to domestic and export markets has also been extensively studied by Reardon and colleagues, who focus on the differential strategies of transnationals, medium to large domestic farms and small firms and farms in relation to grades and standards. In particular, they argue that “Governments should build the capacity of the poor to invest to “make the grade” implied by the new G(rades) and S(tandards)” (Reardon, Codron, Busch, Bingen & Harris, 2000).

4.

FDI, Imports and Food Processing in the Domestic Market of Developing Countries

Studies on the transnationalisation of the British food industry are notable for their focus on the way retail is constructing new global value chains (IDS, 2001; Marsden, 2000). Studies on European food FDI initially focussed on US-EU flows (Green, R. 1990) and

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more recently intra-european investments related to the consolidation of the single market.. Japanese FDI studies as we have seen are focussed on their role in creating, first regional and now global, supply bases for their domestic market. Research on US FDI, on the other hand, probably reflecting its leading role in global food industry FDI, has tended to focus on the impact of the transnationalisation of food processing firms on the host countries in terms of their effect on a series of variables, ranging from domestic capital formation, growth rates, efficiency, repatriation of profits, exports x imports, employment, changes in diet and consumption patterns (Gopinath M. 2000). At the same time, important research has been carried out on the impact of food processing FDI on the innovation dynamic of developing countries (Rama, 2000) Bolling (1999) in his overview of US FDI, notes that in earlier decades investments were primarily directed at primary processing facilities both for export and for the domestic market, particularly in the grains and oils sectors. In the nineties, on the other hand, these have declined relative to investments directed to final food demand in the domestic markets of the host countries, most notably in beverages where FDI more than tripled and “other processed foods”, which saw investments more than double. Given the importance of NAFTA, which has accelerated the creation of a regional North American food industry, US investments in the Mexican food industry are of particular note, increasing from US$210 million in 1987 to US$5 billion in 1997, generating US$6.5 billion in sales in 1998. Investments were stimulated by changes in FDI law, which permitted a majority foreign capital share for firms in Mexico. (Similar laws have been enacted in many other countries to attract FDI, Brazil being a notable case in Latin America´s Southern Cone). According to Bolling, Elizalde & Handy, (1999) these investments are fundamentally directed to the Mexican domestic market and are heavily concentrated on convenience and highly processed foods, especially snacks, beverages, instant coffee, mayonnaise, breakfast cereals. In many cases the ingredients for these products (vegetable oils, dried milk, flavourings) are imported from the US on the basis of intra- firm transactions. These investments therefore accelerate trends to the adoption of highly industrialised global diets, which have come under considerable attack in recent years for their negative impact on health (indices of obesity, precocious diabetes), and may be leading to a substitution of domestic raw materials and ingredients through imports. Sustained economic growth, higher incomes and population trends are seen to be the principal stimulus for these FDI flows. It should also be noted that Mexican firms are beginning to establish affiliates in the US market also, with investment, increasing from zero in 1990 to US$664 million in 1996, largely stimulated by the demand for Hispanic foods. Similar tendencies are identified for Brazil and Argentina by Bolling, Neff and Handy in their 1998 Report: “U.S. Foreign Direct Investment in the Western Hemisphere Processed Food Industry”. In the cases of these Mercosul countries, however, investments to control key exporting sectors (oils, grains, coffee, fruit-juice) are considerably more important. Canada, Mexico, Argentina and Brazil are responsible for 90% of all US FDI in the Americas. The authors see FDI as complementary to US exports and argue that “FDI seems to have beneficial effects on the economy of the host country”, pointing to improvements in food production infrastructure, lower costs of domestic production vis-avis imports, job creation, gains in efficiency by local firms faced with competition from the multinationals, products and process innovations, contribution to gross domestic product and foreign currency earnings. Studies conducted within the Mercosul countries have given

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greater importance to the increase in industry concentration, which has occurred in the wake of the acceleration of FDI (Belik & dos Santos, 2000, Guezan, 1999, Gutman, 1999), together with the regional character of recent investments, which have led also to a greater number of green- field initiatives (Wilkinson, 1999). Other authors have emphasised the importance of the new institutional environment (deregulation, liberalisation), which tends to make greater transnationalisation compatible with increased competition, price stability and an acceleration of new product, process and logistical innovations (Farina &Viegas, 2003). In his review of the FDI literature, Gopinath (2000) identifies three schools of thought. The first, based on Bhagwati´s “immiserizing growth” thesis, would stress the lock-in consequences of tariff induced FDI in small countries where cheap labour becomes comb ined with the increasing import of capital intensive components and equipment. In these cases, Athukorala and Sen (1998) have argued that food processing would be one of the lesser affected sectors to the extent that it has a lower dependence on imports. This, however, may only be the case for processed food exports. We have seen above the combination of exports and FDI in the case of Mexico, and this tendency is well documented in the literature (Friedman, 1988) and in line with the complementarity thesis identified by much econometric analysis of trade and FDI flows (Marchant, Saghaian & Vickner, 1998). The second approach, associated with Markusen, identifies a trade-off between increased technical efficiency and increased monopoly power, where the existence of competition between transnationals would be sufficient for the establishment of welfare benefits in terms of prices. Here the size of the domestic market and/or the nature of the institutional framework would seem to be crucial. And finally, the third approach, that of new growth theory, would give pride of place to the institutional framework, seeing positive benefits to the extent that export promotion policies, deregulation and liberalisation characterise the domestic policy regime. As Farina & Viegas (op.cit.) point out, however, it is impossible to know whether, in a changed institutional climate, domestic firms would not have developed the same competitive strategies. In this case, the entry of FDI, especially in the form of acquisitions may ha ve had the effect of “crowding-out” potential domestic investment. Be that as it may, there has been a virtual universal adjustment of domestic regimes in developing countries to create an attractive environment for FDI. As we noticed earlier, US food processing FDI alone was responsible for US$133.1 billion in sales, four times more than its food-processing exports. This is heavily concentrated in the EU, NAFTA and the Mercosul regions, but some US$7.5 billion was invested in other developing countries in 1995 and, in all, the US food-processing sector had 8223 foreign affiliates in 1998. FDI, therefore, especially in the case of small countries, may have a decisive impact even with low levels of investment, and, to the extent that it is accompanied by imports, it will also involve a displacement of domestic raw material supplies. Most discussion of FDI and trade flows focus on generic variables (growth rates, technical efficiency, concentration etc), but our earlier discussion of the major developed blocs made clear that that the bulk of investments were related to highly processed food and drinks, especially snacks, convenience foods and soft drinks. This second generation of FDI, therefore, is not now focussed so much on primary processing, which involved a shift from local grains and oils to wheat, corn and soy based products, but on final foods for the domestic market, deepening the pressures for substantial changes in diet. In developing countries, where these investments are more solidly implanted, in addition to the emergence

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of new dietary associated diseases, where malnutrition predominates, the perverse combination of des- nutrition and obesity is now in evidence. Whether this should be associated with the “westernisation” of dietary practices (Richter, 1998) or the structural consequences of urbanisation and changes in family and work practices, especially the opportunity cost of female domestic labour is an area of debate particularly as this process begins to affect Asian countries where convenience foods would seem to be adapting to local tastes ( ). European and U.S. exports to developing countries, however, are not restricted to the “highly processed products” category but involve also the heavily subsidised commodities of the “fordist” diet, involving a shift from a vegetable to an animal proteinbased diet which is, at the same time, subject to more rapid and more individualised methods of food preparation and consumption. Milk powder and white meats, particularly poultry are the two anchor products of this diet, both heavily subsidised exports by the two major trading blocs. We saw earlier that world trade in the case of poultry was largely based on developing country demand, and that it is a sector, which can be rapidly put into place in developing country economies. Nevertheless 75% of this trade remains is controlled by the EU and the US, with only Brazil, Thailand and China able to compete with their subsidies. With a more level playing field, a number of developing countries would have greater opportunities for the development of a domestic poultry industry. Similar considerations could be made in the case of world trade in dried milk.

5.

The Food Processing Sector and the Domestic Markets of Developing Countries

Since the UNCTAD study: The Food Processing Sector in Developing Countries: Some Recent Trends in the Transfer and Development of Technology (1980) the macro economic and regulatory climate has suffered a sea-change. Import substitution has given way everywhere to export orie nted growth strategies and most developing countries have now adjusted to the post-Uruguay Round WTO framework. An increased participation of developing countries in the share of global manufactured exports is seen to vindicate and point the way for future development (Global Forum of Industry, 1995). The dominant orthodox view focuses primarily on the need for macro economic and regulatory adjustment, which is seen to be the basic strategy for integrating developing countries into global economic growth under the coordination of transnationals in the form of FDI or external sub-contracting. According to this scenario, sectorial measures would be focussed on policies to promote SMEs, combined with initiatives directed at poverty alleviation. Other analysts have pointed to the selective character of FDI, particularly in the case of the least developed countries where de- industrialisation (Africa) or a de- intensification of industrialisation (Latin America) have been identified in this period, and have stressed the need for more pro-active industrial strategies at domestic level. The case of South Korea and other Asian countries, on the one hand, where FDI was less important, and the inspiration of the “Third Italy” for the development of cluster strategies, wo uld provide the principal support for this approach. A further fundamental change has been the shift to the formation of regional blocs which has accompanied globalisation and which has now also become a feature of the developing world. In Latin America, Mexico became integrated into NAFTA, while the Southern Cone developed the Mercosul, complementing earlier blocs, such as the Andean

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Pact, with similar initiatives in Central America and the Caribbean. In Asia, Japan had long been the focus of regional integration, but more recently the ASEAN countries have established a free trade area with China, principally as a strategy for benefiting from FDI flows. After many setbacks in Africa, a new regional dynamic is emerging in the SADC, with South Africa as its hub. These tendencies to regionalisation are now reinforced by the global strategies of the TNCs, which, as we have seen in the case of the Mercosul, increasingly adopt regional considerations when defining their investment options. At the same time, the heterogeneity of the developing world has increased markedly in this period. Alongside newly industrialising Asian countries, this category also includes the 49 least developed countries (LDCs), with 10% of the world´s population but which contribute only 0,4% to global manufacturing value added. On the other hand, the impact of liberalisation and deregulation on the giant, but low-income economies of China and India has radically transformed trade and investment flows in the developing world. In increasingly open economies, where an export orientation is combined with rapid rates of transnationalisation, it is more difficult to distinguish specifically domestic tendencies. On the one hand, exports have less of an enclave character and on the other the domestic dynamic is being radically transformed by the presence of transnational firms. Nevertheless, for the food processing industry of developing countries, trends in population growth, rural- urban migration, income levels and their distribution, particularly the size of the middle class, are seen to be crucial differentiating variables. As much as 97 percent of the increase in world population from 2000-2050 will occur in today’s developing countries with the developed countries´ share falling from 20 percent of the total in 2000 to only 13 percent in 2050. 9 Africa will undergo the most rapid growth, increasing from 784 million in 2000 to nearly 1.8 billion in 2050. India will overtake China as the most populous country, rising from just over 1 billion to more than 1.5 billion between 2000 and 2050. Although rural to rural migration continues in certain countries of Latin America and Africa, rural- urban migration is the most significant and relevant trend from the point of view of the food processing industry. On a world-scale, half of urban growth is still based on rural- urban migration. Globally, urban areas are currently growing at a rate of 2.2% as against 0,4% for rural areas and rates of urbanisation in developing countries are much higher than in developed countries. Generational differences between developed and developed countries also have an important bearing on food consumption, both in terms of niche markets (baby foods) and broader changes in the composition of food demand. A Japanese study ha s shown that, in this country, the younger generation consume more beef and beer whereas older people eat more rice, vegetables and fruits. The enormous differences in the generational distribution of the population between developed and developing countries, and consequently for food consumption, can be appreciated in the Figure contained in the Annexes. As an indication of the impact of urbanisation on food consumption and the processing industry, in the context of rapid and sustained economic growth, we can take the example of China. 10 With some 50% of its 1.3 billion population still in the countryside, China plans to shift 40 million people to the cities in the five years 2002-2007. A Chinese 9

The data in this section are taken from This paragraph draws on “China´s Food and Agriculture: Issues for the 21st Century”, F. gale (ed), ERS/USDA, 2002 10

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household survey showed that urban per capita consumption of meat was 40% higher than in rural areas, fish consumption three times higher, and egg and poultry production 2,5 times higher. On the other hand, urban grain consumption was three times lower than that in rural areas. Here we can detect the basic elements of the “Fordist” diet discussed earlier. Higher- income urban residents in the same survey were seen to consume more of most foods on a per capita basis than low- income urban residents, but particularly so in the case of milk, fruits, beer, poultry, meat, fish, eggs and vegetables. Food processing output value in China, increasingly of final food products is said to have grown 14% per cent a year during the ´80s and ´90s, while 15% of urban food spending is now “away- from- home”. The estimated number of supermarkets for a major Chinese city is now calculated at 1,2000, with the number of hypermarkets reaching 90. While maintaining a remarkable degree of self-sufficiency, China has become a major exporter of high-value labour-intensive processed food products and an equally major importer of bulk commodities used as intermediate inputs. The world´s leading retailers and food and drinks processor are all investing heavily in the Chinese market, which has become a major destiny for FDI. Both internal and global pressures are leading to demands for greater food quality in what is essentially a market-driven growth dynamic. A low- input “green food” sector has emerged, a complete reform of the meat slaughter sector is under proposal (which raises a more general question of the informal food processing sector in developing countries which will be discussed below), and a Government-promoted strategy of contract farming is being widely implemented to respond to new quality and logistic demands. If we contrast this scenario with that of the least developed countries (LDCs) we find that the food processing sector, is if anything more strategic for economic development, but here we are dealing fundamentally with primary processing, combined in certain countries with processed food exports (Bangladesh in fisheries, and some African countries in fruit and vegetables and also fisheries), while the final foods sector is still heavily dominated by artisan cooking and street-sales. 11 These countries recall the PL480, “aid-totrade” analyses (Friedman, 1988) showing a heavy reliance on imports of rice and grains, which undercut local production and break down dynamic relations between urban consumption and agricultural production. The LDCs receive only 2.2% of FDI flows to developing countries (concentrated in mining and energy) and rely more on aid, international loans and the actions of NGOs. Their manufacturing sectors represent less than 10% of GDP, but the food and drink agroindustries make up some 35% of total manufacturing value added (MVA), rising to 50% in many of these countries, and over 80% in 17 of the 37 African LDCs. In Asian LDCs, on the other hand, while the share of food manufacturing in MVA was lower, the import content of food manufacturing industries was near to ze ro. The promotion of processing activities related to domestic crops such as millet, maize, sorghum and cassava would theoretically both improve food security and employment in the African LDCs, but it remains to be seen whether changes in urban food consumption patterns have not already taken on an irreversible character. Opportunities are identified primarily in grains, fish, oilseed and sugar processing. In all of these, however, new knowledge and technology are pre-requisites for further progress, which involves greater integration in global networks. Regional integration with more advanced developing countries is seen to be key to gaining access to the benefits of information technology 11

This paragraph draws on “Building Productive Capacity for Poverty Alleviation in Least Developed Countries (LDC´s)”, UNIDO, 2001

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decisive for integration in global demand-driven agrofood markets, and in- line with which most LDCs have adjusted their regulatory environments. Even in the above highly polarised cases, which we have briefly presented, it is clear that behind the growing heterogeneity of the developing world a number of similar patterns, challenges and opportunities emerge. Rather than present an exhaustive account of the foodprocessing sector in developing countries, which would involve discriminating countries by human and natural resources, income levels, size of market, geographical position, consumer and cultural practices, degrees of regional integration, types of access to developed country markets, trade flows and FDI, together with each country´s regulatory system, we will try present some stylised facts which may subsequently guide policy considerations. Firstly, what has emerged from our review is that, in varying degrees, internal deregulation and external liberalisation of markets, together with legislative reform favourable to foreign investments is now a general feature of all developing countries, including the LDCs. This has led to an intensification of foreign trade and investment with priority being given to the development of processed- food exporting capacity, based on intensive use of human and labour resources, which is combined with efforts to attract FDI as a substitute for domestic capital and “know how”. This has led to an intensification of the trans-nationalisation of the food-processing sector, either directly in the domestic market or as part of a “global value chain”. Even in LDCs, where trans-nationalisation is much less in evidence, this latter remains a key strategic objective of local governments and regional blocs. While this overall strategy has brought important results in food- manufacturing growth rates, to the extent that more and more countries become involved, there is a greater risk of producing the “fallacy of composition”, to which the UNIDO Trade and Development Report (2002) draws attention. This combination of liberalisation and trans-nationalisation has a range of implications, which vary from country to country but apply to the developing world as a whole. There tends to be a weakening/elimination of the dualism between the domestic market for urban consumption and export/import sectors, which accelerates with the consolidation of an urban middle class. Brazil is a world leader in poultry exports, but 70% of total production is consumed domestically and per capita consumption has increased from 2 kg per capita in 1970 to 26 kg per capita in 2000. Similarly 30% of soy meal and 70% of soy oil are consumed domestically. The same tendencies are now at work in other products – fruit-juices, coffee consumption. While, however, the dualism of domestic market versus exports is becoming attenuated, a dualism based on income differentiation persists in the prevalence of the informal sector, which even in a country such as Brazil registers levels of 30-50% in meats, milk and soft drinks, and which now comes under heavy attack in the efforts to implement new minimum standards of quality. Liberalisation and trans- nationalisation has increased the competitive structure of the food industry, leading to more rapid product and process innovations, and has accelerated the homogenisation of food consumption patterns. At the same time, it has been accompanied by a significant de-nationalisation of leading domestic food firms, increasing concentration and the elimination of many medium-sized firms, as market segments become dominated by at most three leading brands. While there is a clear trend towards a protein diet based on fish, meat and dairy products, together with a sharp increase in prepared fruits

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and vegetables, the integration of local products would seem to depend on their adaptability to the pressures for convenience foods. As in manufacturing more generally, there is a tendency for the food-processing industry to externalise many activities: design, market studies, transport, distribution and even manufacturing, as the leading firms concentrate on brand promotion and competitive strategy. Opportunities are therefore opened up for the emergence of SMEs, often in a longterm relation with the leading firm, although there are also pressures for concentration within these activities. As we mentioned at the beginning of this review, the food and drinks industry is no longer the hegemonic player in the overall food system, which has now been assumed by large-scale retail (Wilkinson, 2002). In addition, large-scale retail is as heavily involved in FDI as the food-processing sector itself, and depending on the level of development of the food system in each country, it tends to reproduce the strategies which it has developed in the industrialised countries. The rise in supermarket own brands is particularly notable in some Latin American countries. At the same time, we have seen that the leading foodprocessing firms involved in FDI tend to concentrate their activities on highly processed products and convenience foods. This may point to opportunities for SMEs and local firms in less sophisticated food-processing activities or in earlier phases of the production chain, either for the leading food firms or for retail. A common characteristic of the global food system is the adoption of ever more stringent quality criteria to which developing countries are increasing being forced to adhere. To the extent that developing country governments do not impose internationallevel standards, private standards are being implemented by the leading players in retail and food-processing (Reardon & Farina). HACCP, ISOs, traceability systems, and private quality labels, are becoming entry tickets to international markets and increasingly the reference for quality in the domestic market of developing countries. This has led to an acceleration of obligational contract relations with raw material suppliers, involving detailed specification of production and delivery conditions. There is much evidence to suggest that this is leading to a considerable degree of exclusion of small farms and firms, an issue to which we will now turn in our final section.

6.

The Participation of Small Farms and Firms

There is a sharp contrast between the literature which focuses on the combined exclusionary effects of scale and quality for SMEs, and that which sees SMEs as the main opportunity for employment creation, as strategies of “downsizing” in large firms have produced the phenomenon of growth without employment. In addition to studies demonstrating the numerical importance of SMEs in the economies of the industrialised world (OECD, 1990), the role of SMEs in innovation (Lundvall, 1997, Cooke, 2000), in local development and the promotion of industrial districts on the cluster model (UNIDO, 2001), and as components of global value chains (UNIDO, 2001) have been the focus of much research. At its most emphatic, and inspired by the work of Piore & Sabel (1984), SMEs are even seen as the basis for a new model of economic development. In our review of the European and Japanese food-processing sectors above, we have shown the continued importance of SMEs, both numerically and in terms of manufacturing value-added. At the same time, the trends to concentration are evident as, increasingly,

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different products segments on the retail shelves are reduced to three or four leading brands. The reduction in farm numbers and the successive increase in minimum viable cultivation sizes are also evident in the industrialised countries, and in this case we are faced with an absolute reduction of the agricultural economically active population to levels of 5% and under, which pose an enormous challenge to developing countries, where the economically active population in agriculture can range from 20% to as much as 50% of the total EAP. It is clear that a detailed consideration of the dynamic of SMEs in the foodprocessing sector of developing countries would have to take into account the sharp differences according to the agrofood product involved , both as regards processing and raw material supplies. In this sense, the rice-based activities of many Asian countries have a totally different dynamic than the readily mechanisable agriculture of much of Latin America, parts of Africa and indeed other parts of Asia. Many traditional processing activities, especially in grains, oil, and sugar have reached levels of scale and automation, which offer virtually no space for SMEs. Recent developments in the dairy sector, so critical to the small-scale farming sector of many developing countries would seem to be advancing in this same direction (Dirven, 1999). On the other hand, the surge in demand for prepared fruits and vegetables, affecting developing countries in all continents, is based on labour intensive on and off- farm activities, where the possibilities for participation by SMEs would appear to be significantly higher. The opportunities and challenges facing SMEs in food-processing and related activities derive, therefore from the impact of the new competitive environment on scale, minimum quality, and the perspectives for non-traditional products. At the same time a distinction should be made between traditional SME activities/actors and what we might call “new entrants”, which may be SMEs in new activities or new actors in traditional activities. This relates to a point made earlier when discussing the LDCs, that size as such is not necessarily the barrier to competitiveness, which is increasingly located in the greater learning intensity of all activities in a demand-driven market environment. From a strategic point of view, where possible, policies should be directed at increasing the capacity of traditional actors, through retraining and the provision of services, rather than focussing on new, often “urban” entrants with professional experience. Six areas can be identified as potential spaces for strengthening the presence of SMEs, each of which should therefore be the subject of appropriate policy initiatives: 1. Traditional activities, which still escape the effects of scale and new quality demands . Lack of adequate physical infrastructure (“weather-proof” roads, transport, cold storage, household fridges), especially in the case of highly perishable products, can favour local supplies, where short distance and time between production and consumption can make traditional supplies compatible with basic criteria of hygiene and sanitation. Low-density communities can also make villages and small towns less attractive for modern distribution systems. Extreme income inequalities and the prevalence of high levels of absolute poverty ensure the persistence of informal food-processing activities, which demand appropriate quality control support measures, which are neither punitive nor unrealistic in their requirements. 2. Innovative firms supplying niche markets, services and technologies. These may be urban, often emerging from university or local government “incubator” policies specifically to promote SMEs. Artisan bakeries and confectionaries are also

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3.

4.

5.

6.

7.

emerging to compensate in part the marginalisation of traditional SMEs in this sector (Scarlatto, G., 1999). They may also emerge in rural areas through the introduction of new crops and livestock. Very often these are individual initiatives and have become the object of generic policies to promote “entrepreneurialism”. Suppliers for large firms. We have already mentioned how out-sourcing by foodprocessing firms and large-scale retail are opening opportunities for small firms. It remains to be seen to what extent, this sector is also suffering the effects of scale economies. Obligational Subcontracting. New quality demands, preoccupations with health hazards, supply management and efficient consumer response techniques are all leading to a marked increase informal contracts with raw material suppliers, based on clear specification of production and delivery conditions. In many cases, this has been seen to be associated with a shift from small farms to medium or large farms runs on business-lines. Adequate resource support however, (IT, credit, technical assistance, market information services), combined with organisational initiatives for the promotion of associativism and cooperatives have shown themselves to be effective in integrating small farmers into these more demanding coordination networks. Autonomous Networks. These have been traditio nally associated with the industrial districts of Italy and the notion of clusters. Most examples in developing countries seem to be associated with light industries based on local raw materials but for nonfood markets – footwear, clothing, wood-work. In Latin America, the notion is being associated with the development of territorial strategies for local and regional development based on SMEs. In Brazil, the notion of clusters of small rural agroindustries is currently being promoted as a solution to the problems of scale for SME, which are located primarily in the areas of management practices, market access and technical support. Special Quality, Artisan Products. In many cases the most realistic short term strategy for small farms has been to engage in organisational innovations (new forms of associativism) and technological modernisation to accompany the more stringent conditions of agroindustry. Medium and long term prospects, however, would seem to be on firmer ground to the extent that they are based on strategies for establishing the market value of process and product characteristics typical to family farming and its traditions. The model here would be the European strategy of denominated origin products, which has now received some support in the framework of the WTO, but in the case of developing countries this would clearly include many specific features – indigenous products, products associated with sustainability (particularly non-wood forest products), products based on social criteria (faire trade, products from agrarian reform areas), together with products which represent the preservation of biodiversity and traditional cultures. There are indications that the modern retail sector may prove to be an important catalyst for these markets.

Conclusions

This paper has prevented an overview of the main trends in food processing and manufacturing in developing countries with a specific focus on their impact for the small farm and firm sectors. Given the centrality of the trans- nationalisation of the food processing sector of the major industrial blocs and the importance of regional and global trade flows for developing countries, we first provided a succinct profile of the food-

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processing sector in the U.S., Europe and Japan. This was followed by a more detailed consideration of the combined strategies, which have predominated over the last decade in developing countries, of promoting processed- food exports and adapting their internal regulatory and legislative framework to attract foreign direct investment into this sector. We then considered the internal dynamic of the food-processing sector in developing countries, focussing on population, rural- urban migration and consumption trends, together with the impact of the new regulatory regimes and FDI on this sector´s competitive environment. In the final section we identified the principal opportunities and challenges facing SMEs in the food-processing sector of developing countries.

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References Athukorala, P-C, & K. Sen, “Processed Food Exports from Developing Countries: Patterns and Determinants”, 1998 Athukorala, P-C & S. Jayasurita, “Food Safety Issues. Trade and WTO Rules: A Developing Country Perspective”, in The World Economy, 2003-09-21 Barrientos, S., C. Dolan. & A. Tallontire, A Gendered Value Chain Approach to Codes of Conduct in African Horticulture, n/d Belik, W. & R. R.dos Santos, “Tendencias na Produção e na Distribuição de Alimentos no Cone Sul”, 2000 Bolling, C. “U.S. Firms Invest in Mexico´s Processed Food Industry”, in Food Review, Vol22, issue 2 Bolling, C. U.S. Foreign Direct Investment in the Western Hemisphere Processed Food Industry, ERS/USDA, 1998 Cooke, P. &D. Willis, “Small Firms, Social capital and the Enhancement of Business Performance through Innovation Programmes”, Small Business Economics, 1999 Dirven, M. Local Industry Survival Difficulties in a Globalising World – Illustrated Examples from the Chilean Milk Industry, ECLA, 1999 Dolan, C. J. Humphrey & C. Harris-Pascal, Horticulture Commodity Chains: The Impact of the UK Market on the African Fresh Vegetable Industry, IDS, Working Paper, 96 Farina, E.M.M.Q. & C.A. dos Santos Viegas, “Multinational Firms in the Brazilian Food Industry”, 2003-09-21 Fitter R. & R Kaplinsky Can Agricultural “Commodity” be De-commodified, and if so Who is to gain, IDS, 2002 Gale, F. (ed) “China´s Food and Agriculture: Issues for the 21 st Century”, ERS/USDA, 2002 Gereffi, G. “Capitalism, Development and Global Commodity Chains”, in Wallerstein Gopinath, M. “Foreign Direct Investment in Food and Agricultural Sectors”, n/d Green R. Guezan, G. Trajetorias y Demandas Tecnologicas de las Cadenas Agroindustriales en el Mercosur Ampliado - Hortalizas: Tomate Fresco y Procesado, Proyecto Global, PROCISUR, 1999 Gutman, G. Trayectorias y Demandas Tecnológicas de las cadenas Agroindustriales en el mercour Ampliado – Oleaginosas: Soja y Girasol, Proyecto Global, PROCISUR, 1999 Hanak, E., E. Boutrif, P. Fabre, & M. Pineiro, “Food Safety Management in Developing Countries”, CIRAD-FAO, 2002 Humphrey, H. Industrialization in Developing Countries. The Challenges of Employment and Social Integration, Global Forum on Industry, UNIDO, 1995 Humphrey, L. Which Way to Market, Traidcraft, 2000

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ITDG, Food Chain, passim Jethra, B. D. “Export Orientation for Small and Medium Enterprises”, 2003 n/d, India PRODAR Lundvall, A-B & S. Borrás, The Learning economy – Implications for Innovation Policy, TSER/EU, 1997 Piore, M. & C. Sabel, The Second Divide, 1984 Reardon, T., J-M. Codron, L. Busch, J. Bingen & C. Harris, “Global Change in Agrifood Grades and Standards: Agribusiness Strategic Responses in Developing Countries, International Food and Agribusiness Management Review, 2 (3), 2001 Reardon, T. & E. M.M.Q. Farina, Said, D. Food Processing in Indonesia: the Development of Small-Scale Industries, Damardjati Bogor Research Institute for Food Crops,, 1995 Scarlatto, G. Trayectoria y demandas tecnologicas de las Cadenas Agroindustriales en el Mercosur Ampliado – Cereales: trigo, Maiz y Arroz, Proyecto Global, PROCISUR, 1999 Schejtman, A. Agroindustria y Pequena Agricultura: Vinculos, Potencialidades y Oportunidades Comerciales, CEPAL, 1998 UNCTAD, Opportunities for Vertical Diversification in the Food Processing Sector in Developing Countries, 1997 UNCTAD, The Food Processing Sector in Developing Countries. Some Recent Trends in the Transfer and Development of Technology, 1980 UNCTAD, Trade and Development Report, 2002 UNIDO. Building Productive Capacity for Poverty Alleviation in Lçeast Developed Countries (LDC,s), 2001 UNIDO, The Development of Clusters and Networks of SMEs, 2001 UNIDO, Integrating SMEs in Global value Chains, 2001 Wigins,S.,O. L. Otieno, S. Proctor & M. Upton, “Population, Migration and Rural Diversification; the Implications for the Post Harvest Sector, Issues Paper 1, CPHP, 2000 Wilkinson, J. “The Final Foods Industry and the Changing Face of the Global Agrofood System: Up Against a New Technology Paradigm and a New Demand Profile.” Sociologia Ruralis, v.42, p.329 - 347, 2002 Wilkinson, J. Demanda Tecnologicas, Competitividad e Innovación em el Sistema Agroalimentario del Mercosur Ampliado, Proyecto Global, PROCISUR, 1999

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Annexes

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Table 1

US Trade in processed thousand dollars

Industry group and industry

food, 2000 Export

Import

Total processed food 30,044,099 36,771,933 Meat sector 8,939,915 4,156,057 Dairy products and ice cream 1,092,828 1,530,225 Preserved fruit and vegetables 3,257,166 3,833,596 Grain mill products 3,959,532 1,220,416 Bakery products 466,139 1,031,119 Sugar and confections 1,909,013 3,470,997 Fats and oils 3,272,857 1,531,589 Beverages 2,469,906 8,057,864 Miscellaneous foods and food products 4,676,743 11,940,070 Source: USDA/ERS , US Processed Food Trade Data System

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Table 2

US: Leading exporters of processed foods to the US and top recipients of US processed food exports Share of Change Imports processed food US imports from: 2000 imports 1998-1999 1999-2000 million dollars percent percent Canada 8,400.5 22.8 12.6 8.4 Mexico 2,933.5 8.0 11.6 11.3 Thailand 2,233.9 6.1 11.7 9.3 France 1,964.8 5.3 17.8 -3.5 Italy 1,578.4 4.3 4.4 9.9 Australia 1,398.6 3.8 8.1 27.0 Netherlands 1,221.4 3.3 6.8 18.1 United Kingdom 1,199.8 3.3 15.5 2.9 New Zealand 1,073.2 2.9 -1.3 12.9 China (mainland) 1,025.8 2.8 16.3 17.3 Share of Exports processed food Change US exports from: 2000 exports 1998-1999 1999-2000 million dollars percent percent Japan 6,213.6 20.7 6.1 3.3 Canada 5,746.5 19.1 3.7 5.6 Mexico 3,369.0 11.2 1.0 16.9 South Korea 1,839.6 6.1 46.1 32.9 Hong Kong 885.3 2.9 -12.3 -4.8 United Kingdom 741.3 2.5 -1.1 -11.9 China (Taiwan) 730.2 2.4 4.7 -0.2 Netherland 704.6 2.3 1.1 -5.2 China (mainland) 661.5 2.2 -46.3 46.3 Germany 497.3 1.7 -20.7 1.7 Source : USDA, ERS

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Table 3

Profile of Foreign affiliates of US firms, 1995-98 million dollars Investment position Sector 1995 1998 Direct foreign investment by the United States: 1 Food manufacturing 28,896 33,871 Wholesaling 2,466 3,968 Foodstores 951 804 Eating and drinking places 4,592 5,690 Total 36,905 44,333 US - owned subsidiaries All food manufacturing Grain mill and bakery Beverages Meat Dairy Fruits and vegetables Other foods Food Wholesaling Foodstores Eating and drinking places Food marketing

113,166 22,202 36,958 4,980 4,093 7,989 36,944 18,848 13,165 12,145 157,324

133,141 27,448 42,127 NA NA 9,801 42,540 20,176 8,618 NA 161,935

Change 1998-1995 17.2 60.9 -15.5 23.9 20.1

17.7 23.6 14.0 NA NA 22.7 15.1 7.0 -34.5 NA 2.9

Number of companies Parent Food manufacturing Food wholesaling Foodstores Eating and drinking places Food marketing

77 13 7 13 103

72 14 7 9 102

-6.5 7.7 0.0 -30.8 -1.0

764 223 19 106 1,093

823 216 16 117 1,172

7.7 -3.1 -15.8 10.4 7.2

Affiliates Food manufacturing Food wholesaling Foodstores Eating and drinking places Food marketing Footnotes: NA: not available. 1 US direct investment abroad. Source : Based on data supplied by UNIDO.

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Table 4

The food and drink in the top 3 activities of the EU manufacturing industry, 1999 percentage

First Sector

%

Second Sector

Production Food and drink 13.4 Motor vehicules* Value Added Chemicals 11.4 Machinery and equipment Employment Food and drink 11.8 Machinery and equipment Footnotes: (*) 1995 Source: Eurostat; NACE Rev.1

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% 11.5 10.8 11.3

Third Sector Chemicals Food and drink Metal

% 10.5 10.7 9.3

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Table 5 EU: Structure / production by country, estimated 2000 billion euro Country Eur 15

Production (*)

Value Added

593 23 16 119 5 60 121 15 63 35 11 11 8 15 91

133 5 4 27 1 13 21 4 12 6 3 2 2 3 30

B DK D H E F IRL I NL Ö P SF S UK Footnote: (*) current price (**) x 1000 Source : Based on CIAA

30

Employees (**) 2.666 62 83 548 43 363 400 47 197 103 77 112 43 54 534

No of Companies 26.095 754 275 6.035 1.036 3.040 3.645 687 2.844 876 664 1.916 1.785 338 2200

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Graphic 1

12 0 10 0 80

Graphic 1: UE F&D Industry Distribution companies to size

% 60 40 20 0 I

E

P

F

D

Small enterprises.

B

D K

S

U K

Medium-large enterprises

Source: Based on CIAA

31

N L

SF

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Graphic 2

EU: F&D Industry Distrib. of employees according to size of the company 120 100 80

% 60 40 20 0

I

P F D Small comp. 10 to 49 empl Source: Based on CIAA

B DK S UK Medium-large comp. +50 empl.

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SF

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Table 6

Top export destinantions of EU F& D products, 2001 m illio n e u r o Exp o rts U S A 9.085 Japan 3.716 S w itzerland 2.617 R u s s ia 2.569 C a n a d a 1.361 P o la n d 1.157 N o rw a y 1.030 A u s tralia 776 Czech Rep 767 South Korea 741 A lg e r i a 721 Israel 528 Total 45.015 Source : Eurostat

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Table 7

Top origin of EU F& D im p o r t s , 2 0 0 1 m illio n e u r o Imports 4.038 3.438 2.936 1.501 1.481 1.345 1.284 1.255 1.214 1.095 1.010 847 38.369

Brazil U S A A r g e n t in a C h in a N e w Z e a la n d N o rw a y T h a ila n d P o lan d S w itzerland A u s tralia T u rkey C h ile T o tal Source : Eurostat

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Table 8

Europe: Commercial balance in 2001 per sector (euros) Sectors export imports 15.1 Meat sector 4522 4766 15.2 Processed and preserved fish and fish products 1854 11077 15.3 Processed and preserved fruit and vegetables 2554 4926 15.4 Animal and vegetable oils and fats 2683 6534 15.5 Dairy products and ice cream 5163 1314 15.6 Grain mill products, starches and starch products 1822 789 15.7 Prepared animal feeds 1188 965 15.8 Other food products 11494 4131 15.9 Beverages 13256 3679 Others 458 188 45015 38369 Total: all sectors of the food and drinks industry Source: Based on data supplied by CIAA

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Table 9

Ranking of European agri-food companies by sales 2001 billion euro Sales Name

Food Drink

Country

Total Employees

European Employees

Total in Europe Affiliates in Europe Thousands in Total billion euro billion euro billion euro billion euro Thousands percentage Nestlé Switzerland 52.6 ... 17.7 230 92 40.0 Unilever NL/GB 32.1 20.2 11.9 279 75 26.9 Diageo GB 19 4.1 14.9 Danone France 14.5 9.2 5.3 9.2 101 38 37.6 Cadbury Schweppes GB 8.9 ... 38 17 44.7 Heineken NL 8.1 7.3 0.8 38 27 71.1 Parmalat Italy 7.8 2.6 5.2 ... ... Interbrew Belgium 7.3 ... 38 ... Associated British Foods GB 7.1 4.7 2.4 34 ... Tate & Lyle GB 6.4 ... 2.1 9 3 33.3 Lactails France 5.5 ... 4.1 16 ... Arla Foods Denmark 5 4.4 0.6 18 ... Sudzucker AktiengesellschaftGermany 4.8 4.8 24 ... Allied Domecq GB 4.6 2.5 2.1 10 ... Calsberg Denmark 4.6 ... 27 ... Scottish & Newcastle GB 7 4.4 2.6 4.4 63 63 100.0 Ferrero Italy 0 Numico NL 4.3 1.4 2.9 30 8 26.7 Uniq Plc GB 4.1 16 Bongrain France 4.0 3.2 0.8 15 Wessanen NL 4.0 4.0 1.1 17 5 29.4 Campina* NL 3.9 3.5 0.4 7 Oetker-Gruppe Germany 3.9 3.9 15 Nutreco NL 3.8 3.8 13 Krings Fruchsaft AG Germany 3.1 Westfleisch/Nordfleisch Germany 3.0 Source: CIAA

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Table 10

Japan: Processed manufacturing enterprises by number of employees and ouptut

Employees (1000 workers) All Enterprises

4 -19 20-49 50-99 TOTAL Source: MITI (2000)

No 2162 1784 1322 9937

% 21.8 18.0 13.3 100.0

Food Manufacturing

Output All Enterprises

No % No 257 20.8 29892 249 20.2 35672 205 16.6 34544 1233 100.0 323072

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% 9.3 11.0 10.7 100.0

Food Manufacturing No % 3526 10.1 5741 16.3 6577 18.7 35121 100.0

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Table 11

Japan: The share of imported ingredientes in selected processed food, 1999

Wheat Vegetable oil Sugar Miso (seasoning) Soy sauce Biscuits Canned food Dairy Products Fish paste Fisheries Vegetables, pickles Fruits Beverages Average Source: Food Market Research Centre (1998)

38

Per cent of total 91.0 71.7 69.0 74.7 58.4 70.6 68.6 57.2 62.6 35.0 17.0 51.0 48.8 64.4

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Table 12 Country shares of total manufactured food imports into Japan (per cent of values) Year US Australia China Thailand Taiwan 1970 16.84 1980 20.98 1990 31.42 1996 30.98 Source: QVT - Industrial database

17.62 17.35 9.57 7.35

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2.9 3.32 5.5 9.29

1.86 2.84 5.33 5.74

3.39 6.64 8.07 7.8

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Table 13

Composition of Processed Food Export from Developing Countries percentage shares

Categories of Processed Food

1970

1980

1990

1994

Processed Meat products 13.7 Dairy products 0.4 Processed fish products 8.8 Flour and cereals 1.1 Preserved fruits 4.4 Preserved vegetables 33.6 Sugar and Molasses 31.0 Coffee extracts and chocolates 2.9 Preserved animal feeds 13.5 Margarine and food preparations 0.8 Beverages 4.0 Tobacco products 6.1 Animal oils 1.0 Vegetable oils 9.6 Source : UN trade data, Athukorala, P-C 1998

7.8 0.5 15.1 1.5 4.4 35.2 31.4 4.8 10.1 1.2 1.8 5.2 0.3 12.1

8.0 0.9 29.1 2.2 7.9 15.8 10.4 2.9 10.8 1.9 3.0 7.6 0.2 9.6

8.4 0.9 30.7 3.0 5.4 13.1 8.1 2.7 9.4 2.5 3.5 7.6 0.2 12.5

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Table 14

Taiwan's changing diet (kg/person/year) Sweet Period Rice Wheat Potato 1949-1951 133 7 66 1969-1971 136 25 24 1989-1991 68 29 2 Source : Huang and Bouis, 1996.

41

Meat 13 25 62

Fish 12 33 45

Fruit 16 43 108

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THE AGEING POPULATION

42