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How to escape the middle-income trap

Sep 10. 2018
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By Rob van Tulder 
Philippine Daily Inquirer 
Asia News Network

Eight years ago, the University of the Philippines and the Erasmus University of Rotterdam started a joint research project on the question why the “middle-income trap” applies well to the Philippines.

Countries that get out of poverty but are (forever?) stuck in a dependent low-middle income position are deemed to be trapped. We wanted to know how to escape from this trap, and our project became known as “EMIT: Escaping the Middle-Income Trap”.

There is something particular in the history of the Philippines. In the post-war period, the country “missed the bus” of economic development compared to other Asian countries. In the 1950s, the Philippines missed the bus that transported Japan, South Korea and Taiwan. In the 1990s, the country missed the bus of Malaysia and, later on, that of Thailand and China.

The EMIT team realised that the overall problem of the Philippines’ lack of competitiveness can be traced to low and stagnant agricultural productivity and dysfunctional supply chains. We found an interconnection between inclusiveness and competitiveness, and the relevance of our findings was strengthened by research done by the International Monetary Fund – that inclusiveness (low income inequality) precedes competitiveness (economic growth).

The EMIT team embarked on a Chains-for-Change (C4C) effort by doing action research on agriculture value chains, together with a number of trailblazing companies and organisations. From mid-2017 until mid-2018, C4C documented the value chains of the Farmer Entrepreneurship Programme (FEP) of the Jollibee Group Foundation, the SKK Rice Processing Centre of the Caritas Diocese of Libmanan and PinoyME Foundation, and the Transformational Business Partnership of Unifrutti Tropical Philippines and Hineleban Foundation.

The FEP is a programme where the smallholders are enabled to sell directly to Jollibee Foods Corp and other buyers such as supermarkets and hotels. The FEP comes with a bundle of interventions that the farmers describe as a “complete recipe”: a) access to financing through partner financial institutions, b) community organising and capacity building through local governments and local groups, and c) access to major buyers through the Jollibee Group Foundation. The complete recipe, among others, contributed to increased income in farmers.

The SKK Rice Processing Centre in Bicol is majority owned by smallholders. The requirements for its set-up were steep, so local priests invited different stakeholders (eg, the PinoyME Foundation, Peace and Equity Foundation) to help with grants, loans and business development services. The rice processing centre now competes through higher buying prices relative to spot markets.

The Transformational Business Partnership involves the efforts of Unifrutti and Hineleban Foundation to improve the quality of life of indigenous peoples, Muslims and farmers’ cooperatives. In Bukidnon, they work with the “guardians of the forests” through livelihood opportunities (adlai and Hineleban Coffee) to secure watersheds that are the sources of water for agriculture irrigation in Mindanao. This is consistent with Unifrutti’s investment in banana agribusiness in the town of Datu Paglas in Maguindanao, which eventually contributed to peace and order in the area. Unifrutti also partners with agrarian reform cooperatives to enable them to have farms that can be passed on to future generations.

We drew at least three lessons from these studies.

First, inclusive value chains are based on relationships among stakeholders. Lead companies and smallholders engage in a market exchange, and the smallholders were capacitated and organised by various partners (eg, the Jollibee Group Foundation, PinoyME Foundation). This relationship is long-term and does not give up despite occasional problems.

Second, lead companies (eg, Jollibee Foods, Unifrutti, SKK Farmers), smallholders and other partners incurred social investment costs or expenses to improve the human capital of smallholders and local stakeholders. These were costly but were “worth it,” based on the outcomes of the models. Over time, these expenses tapered off.

Three, despite successes in becoming competitive and inclusive, the longer-term sustainability of the models will still benefit from improved public goods like better roads, post-harvest facilities, logistics and technologies. Business development services for smallholders are still sorely needed.

Prof Rob Van Tulder teaches at the Rotterdam School of Management, Erasmus University. He is co-leader of a joint project with the University of Philippines on inclusive value chains.


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