Governance

  Impacts of Voluntary Standards on Value Chains

In past newsletters, I have discussed the proliferation of voluntary standards and shared insights from my experience with various standards and supporting supply chain systems (e.g. BCI, biofuels chain of custody). So it was with interest that I recently read The Impacts of Private Standards on Global Value Chains, Literature Review Series on the Impacts of Private Standards - Part I. (International Trade Centre, 2011); a paper that provides insight – and evidence – on the impacts that voluntary standards are having on global value chains.

From a systematic review of 63 studies –32 empirical and 31 conceptual, theoretical or methodological– the paper attempts to answer several key questions on the impacts of private standards on the value chain. Some interesting findings are summarized below.

Measurable change: Change in conventional chains appears to be limited. With this said, positive impacts have been found where dominant chain actors operate in alignment with the values promoted by standards. 

Governance: Mainstreaming strategies might change governance patterns in global value chains. In some instances, entities that are not historically part of the value chain, e.g. certification bodies,  

Opportunities: Vertical integration can occur and it often enables producers to carry out value adding activities and increase revenues; however, they also put additional demands on producers and exporters.

Small producer participation: The majority of studies indicate that standards create increased barriers to small producer participation. This is more likely when significant investments are required. For example, the study found that smallholder participation in United Kingdom-bound fresh fruits and vegetables value chains declined from 50%–55% in 1999 to under 20% in 2001, which the authors attributed to the investments needed to meet supermarkets’ demands –a cost most small-scale actors cannot accommodate.

Distribution of revenues along the value chain: Revenues derived from standards compliance increased along value chain actors with a disproportionately higher benefit to the retailer.

The review also found that compliance with voluntary standards in value chains depends on the following characteristics of the supply chain (examples are of greatest compliance):

Length of the chain: short chains with few actors.

Degree of integration: highly integrated chains.

Type of product: those with existing requirements regarding traceability, quality and safety (e.g. food).

Market conditions: high level of market concentration among actors purchasing supplies, such as retailers, manufacturers, brands.

Kind of relations among actors: long-term relations and high degree of trust.

Identification: commodities identifiable in end products (e.g. cocoa, coffee, sugar).

If we briefly consider these findings they become clear. Complex (longer) value chains are often challenging due to the sheer number of producers. A greater number of producers results in widespread production sites which makes auditing – a critical component of compliance– difficult. With increased producers the relationships among players are often short-term, significantly reducing the level of influence end buyers can have over other value chain participants.

When developing or implementing voluntary standards, it is important to understand the potential impacts they may have on the various actors in our value chains. Once we understand the impacts, we should take actions to ensure that the standards do not inadvertently hinder some actors’ (often those in most need of help) abilities to participate in these value chains.

 Question for consideration

 Are voluntary standards creating opportunities for the cotton industry or simply causing a distraction to business?

The Organisation for Economic Co-operation and Development (OECD) recently presented its Strategy for Development, which will be adopted at the OCED Council in January 2012. It is a concise outline of the OECD's framework for a broader development strategy that OECD countries can follow. It summarizes the broader approach to development as laid out in the vision statement for the OECD 50^th Anniversary Council Meeting.

The framework aims to leverage the OECD's strengths and contribute to the United Nations' Millennium Development Goals (MDGs) up to and beyond 2015. It also holds stakeholders accountable to the OECD's high standards of public policy backed by evidence-based analyses, policy dialogue and peer learning. I believe these three criteria will be increasingly important as both public and private sectors scale up sustainability development.

The OECD would take a broader approach and expand knowledge sharing and mutual accountability beyond its membership based on the idea that an open and inclusive OECD would have great impact with collective benefits. A direct goal of this more inclusive approach would be to support a wider range of developing countries in identifying, assessing and implementing more effective policies that foster strong governance. The more inclusive approach could also lead to a more level playing field between OECD and non-OECD countries.

The broader and more inclusive approach would better integrate diverse perspectives and ignite fresh thinking as well, and create opportunities for more progressive and innovative solutions to long existing challenges.  The resulting solutions would be built on the improved sharing of expertise and lessons learned from decades of experiences in development co-operations. A broad approach would also leverage policies, practices and instruments  providing countries with a more coherent strategy for development based in part by the use of more standardized tools and by stepped up evidence-based analysis.

With this new approach, OECD hopes to:  1) strengthen its response to demands and needs from emerging and developing countries; 2) to add core competencies and value to the work of other regional and international organizations and donors, and 3) to leverage its multi-disciplinary expertise. The OECD will apply these criteria to the following strategic areas of work:

• Innovative and sustainable sources of growth
• Mobilization of resources for development
• Governance for development
• Measuring progress for development

Other elements of the strategy framework include prioritizing the concerns of developing countries, enhancing dialogue with key stakeholders, and upgrading the OECD's knowledge and skills.

I applaud the OECD's new approach. But I also wonder if such a large, bureaucratic organization can effectively and successfully shift to such a broad and all encompassing model.

Question for consideration

How would the OECD approach affect (or not) the cotton industry?