Procedimiento

Standards are seen as commonly accepted benchmarks that transmit codified information to end users on a product’s technical specifications. This is corroborated by several studies (Ruben et al. 2007, Laven 2007, Nadvi, 2008). Standards therefore, can extend to customers and end users a basis for attaching credence, or value, to particular claims made about a product’s characteristics and specification or the ways in which it has been produced (Nadvi, 2008). As argued in that study, the key policy challenges around the debate on global standards centred on the questions of who sets standards, who monitors standards, what are the costs of non-compliance and what are the governance implications. According to Renard (2003), quality is an endogenous social construct that contributes to coordinate the economic activity of the actors. It can be constructed by two routes: the introduction of collective institutions that establish rules for quality and the means to uphold them or the acknowledgement of forms of local ties among actors that allow them to communicate and negotiate which, in reality often cross (Ouma, 2010). They are thus important for promoting economic efficiency and reducing information related transaction costs (Nadvi, 2008). Standards therefore influence the nature of governance of global value chains because they provide the

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potential to codify complex forms of information (Kaplinsky 2006, Tander & Tilburg 2007, Nadvi 2008).

Standards and Governance of Global Value Chains

Value chains are governed when parameters requiring product, process, and logistic qualification are set which have consequences up or down the value chain encompassing bundles of activities, actors, roles, and functions (Kaplinsky & Morris, 2001). Gerreffi et al. 2005 identify three key determinants of value chain governance patterns: (i) the complexity of information and knowledge transfer required to sustain a particular transaction, especially with respect to product and process specifications; (ii) the extent to which this information and knowledge can be codified and, therefore, transmitted efficiently and without transaction-specific investment between the parties to the transaction;

and (iii) the capabilities of actual and potential suppliers in relation to the requirements of the transaction.

Kaplinsky and Morris (2001) further argue that governance is important because the intricacy and complexity of trade in the globalization era requires sophisticated forms of coordination, not merely with respect to positioning (who is allocated what role in the value chain) and logistics (when and where intermediate inputs, including services, are shipped along the chain), but also in relation to the integration of components into the design of the final products, and the quality standards with which this integration is achieved. It also requires the monitoring of outcomes, linking the discrete activities between different actors, establishing and managing the relationships between the various actors comprising the links, and organizing the logistics to maintain networks of a national, regional or global nature. It is this role of coordination, and the complementary role of identifying dynamic rent opportunities and apportioning roles to key players, which reflects an important part of the act of governance of value chains, they argue.

Kaplinsky and Morris 2001 distinguish three forms of governance as legislative - i.e. the rules defining the basis of participation in the chain;

judicial - the monitoring or auditing of compliance with set rules; and executive - as assistance to value chain participants in meeting the set rules. The same firm or even different firms can perform these three forms in the value chain depending on the type and structure of the

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particular chain. Gerreffi and Sturgeon (2003) further identify five coordination structures of value chains as market, modular, relational, captive and hierarchical, all depending on the degree of control by lead firms and the relationships between the various actors. They attribute the mode of governance to a combination of complexity of transactions, ability to codify transactions and the competency of supplier base, the combinations of which result in different coordination structures. Riisgaard et al. (2008) recently suggested a simplification of this typology to include market organization, vertical integration and “contractualization”, with the latter referring generally to contracts (explicit or implicit) within or between actors in the chain.

Numerous players characteristically dominate high value chains - often many smallholders or clusters of producers exporting though lead firms. They are very sensitive to health and safety requirements and are faced by many other standards such as labour or ethical; which pose numerous challenges with respect to coordination and monitoring of compliance. For instance food safety and health requirements are covered by HACCP and ISO standards and by the EU’s Food safety regulations. In addition, private sector standards such as GlobalGAP, British Retail Consortium (BRC) and the Ethical Trading Initiative (ETI) are also required in order to participate in the chain. These private standards often require compliance at the very lowest level of the chain and producers are often closely monitored, audited and certified by third parties. This in effect means greater coordination by lead firms -which provides another angle to the role of standards in shaping governance of global value chains.

Through the implementation of standards, especially technical product, and process standards, the codifiability of information can be improved and governance of inter-firm ties can move away from relatively more hierarchical forms to more modular or market based interactions which require less co-ordination by lead firms (Nadvi, 2008, Tander & Tilburg, 2007). However, for high value chains like horticulture, this may not hold because of the nature of standards in these chains which require strict monitoring and enforcement by lead firms at the farmer-lead firm level and hence have not shifted entirely to market based interactions but rather a hybrid leaning towards hierarchical forms (Nadvi, 2008).

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For instance Dolan & Humphrey, 2004 in a study on the vegetables chain, observe a shift away from company specific standards towards generic social and sectoral codes such as EurepGAP and Ethical Trading Initiative (ETI) as alternative instruments in parameter setting which are then monitored by actors outside the chain and hence supermarkets are less involved in monitoring exporters, effectively shifting their relationships from hierarchy to market types of governance at the exporter-supermarket level. Another study on the South African wine value chain by Ponte, 2009 draws attention to the different forms of governance in three strands of quality of wine – low quality wine as more governed by lead firms and based on quality and price; mid to top quality firms more governed by external actors, mostly industry wine critics’ appreciation of quality. This study concludes that chain governance is more based on a normative work where different players in different markets define quality conventions. A more recent study (Tallantoire et al. 2009) on Kenya’s horticultural exports industry specifically looked at KenyaGAp and ETI, the authors conclude that the implementation of standards influences horizontal aspects of governance especially the ones related to legislative and judicial governance. Another study by Konefal et al. in 2005 looks at agro-food networks and the rise of private standards. The authors argue that the rise of these private standards and the increasing authority by supermarkets to enforce them have led most agro-food networks to restructure away from market based forms of governance towards hybrid forms leaning more towards hierarchy.

Judging from the preceding analysis of literature, the power of global lead firms to organize and structure value chains has been one of the core elements of the GVC approach (Gereffi, 1999, Humphrey &

Schmitz, 2004, Gereffi et al. 2005, Gibbon & Ponte 2005, Altenburg 2006, Nadvi, 2008). These authors recognize that there is asymmetrical power exercised by lead firms whose major task is reducing the costs of organizing these chains, coordinating dispersed and varied suppliers and dealing with concerns such as asset specificity. Lead firms also face the task of specifying quality standards and parameters to chain participants down-stream; and may use tactics to transfer costs of quality control to suppliers and achieve quality control at a distance – mainly achieved through the use of third party certification (Gibbon & Ponte 2005, Nadvi, 2008). This phenomenon, they say, depends on the various

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forms of coordination and the mechanisms for transmitting knowledge and information to various actors along the chain. Thus in cases where standards are used to set the parameters that govern the chain, monitoring and enforcement by lead firms is often imperative hence a tendency towards (quasi) hierarchy type of chains with lead firms wielding more power than other chain participants (Tallantoire et al.

2009).

All of this implies that quality is not simply a dimension of competition, but an object of collective understanding and negotiation among major actors in the chain some of whom are more powerful than others (Valceschini & Nicolas, 1995). Power relations are therefore important in defining who and who does not participate in the chain, the setting of rules of inclusion, assisting chain participants to achieve these standards, and monitoring their performance (Kaplinsky &

Morris, 2001) and to a large extent the distribution of costs and rents.

A Transaction Cost Perspective of Standards in High-Value Chains and the Distribution of Rent

The costs involved in communicating and enforcing transactions and the property rights on which they are based are known as transaction costs and these are incurred in order to reduce the risks of loss from transaction failure (Doward et al, 2005). Traditionally, TCE allows for industries to organize as markets, hierarchies or hybrids (Williamson 1985) and standards as already seen in the previous section determine the patterns of these arrangements. Transaction costs in a value chain depend on the structure and governance of the chain. In a market, a transaction is arranged with an anonymous economic agent, usually based on price. The transaction is independent of the parties involved and does not build on other transactions. In a hierarchy, a transaction is arranged with a specific, familiar economic agent. The transaction partner is predetermined and is specific to the parties involved (Aggarwal & Walden, 2005).

With respect to standards in high value chains, transaction costs can materialize before, during and after the transaction itself i.e. the contact phase, the contract phase and the control phase (Den Butter et al.

2007). The contact phase often involves search and information costs and constitute sunk costs; the contract phase consists of negotiating the contract terms - more specifically - spelling out the requirements to be

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met in order to fulfil the contract terms; while the control phase involves coasts related to monitoring and enforcement (Ibid).

Furthermore, there are also various forms of costs incurred by participants along the value chains that constitute production costs, opportunism costs, search costs and coordination costs which vary depending on the governance structure (Aggarwal & Walden 2005).

Standards are said to reduce transaction costs because they are codified and carry information, and therefore reduce information asymmetry and lower costs related to obtaining information (Aggarwal & Walden 2005, Den Butter et al. 2007). Furthermore, when product specifications are standardized and known to trading partners, the bargaining process will cover only the price and conditions of delivery. When the product has not been standardized, bargaining will also be needed with respect to the specifications of the product (Den Butter et al. 2007). Standards can also increase transaction costs especially those related to their establishment and implementation including monitoring and enforcement costs.

Several studies have analysed the effects of standards on transaction costs and how this may act as a barrier to entry. A study by Wilson et al.

(2003), revealed that Africa’s cereal exports will decline by 4.3% and that of nuts and dried fruits by 11% with a 10% tighter EU standard on contamination levels of aflatoxin in these products. The EU has also estimated the costs of technical standards as being equivalent to a tax of 2% of the value of goods traded (Otsuki et al. 2001). Fixed costs in compliance with standards may affect the decision to export. Maskus et al. 2005 show that the higher setup costs needed to meet strict standards also increase the variability of production costs. Equally, compliance includes not only the cost of meeting the technical requirement but also the cost of verifying that the requirement is met, known as the conformity assessment. This cost represents the largest barrier to trade competitiveness (Lyakurwa, 2007, Sanchez et al. 2006).

Chen et al. (2006) find that technical regulations adversely affect a developing country firm’s propensity to export. They also reveal that standards and testing procedures impede market entry for exporters, reducing the likelihood of exporting to multiple countries.

Few studies have analysed how transaction costs differ for chain participants. For instance costs of compliance with a certain quality standard may be higher for small producers. This could result from the

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fixed cost component of complying with the standard, which would favour larger producers due to economies of scale (World Bank, 2005).

However, it could also be due to farm characteristics such as illiteracy of farmers, which makes information and documentation requirements more costly, or illiquidity, which may exclude farmers from the investments necessary to upgrade their farm to comply with the standard (Aloui & Kenny 2005, Jaffee & Henson 2004, Willems et al.

2005)

Standards as Repositories for Rent and How They Influence Distribution of Incomes

Economic rent arises as a result of differential productivity of factors and barriers to entry (scarcity). Makakok (2001) identifies three kinds of rents in value chains which are intra-chain or individual: monopolistic rents result in protected market power; Ricardian rents depending on special resource and Schumpeterian Rents originated in dynamic capability of the firm. Kaplinsky (2000) argues that most economic rent in value chains is dynamic in nature and eroded by forces of competition where producer rent is converted into consumer surplus through competition. Barriers to entry and rent have been identified as important determining factors of rent distribution. Kaplinsky (2000) argues that primary returns in value chains accrue to those parties who are able to protect themselves from competition encapsulated by possession of scarce attributes and involves barriers to entry. Classical economists also argue that economic rent accrues on the basis of unequal ownership or access to control over an existing scarce resource.

However, as Schumpeter showed, scarcity can be constructed through purposive action and hence surplus accrues to those who create scarcity (Tullock, 2005). This is essentially what happens in the case of innovations such as standards; because they create greater returns from a product than required to meet the cost of innovation (DFID, 2008).

Standards when viewed as innovations that attract intellectual property rights can be used to create barriers to entry and rent. In a hierarchical system, all resources (codes, procedures and policies) needed to create and implement a standard are produced in-house. The resources so developed become the intellectual property of the firm and can be protected by way of patents (Swinnen et al. 2010). In a hierarchy, the lead firm bears all the cost of research and standards development.

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Since internal organizational communication is centralized the decision making, and information dissemination, is fast and inexpensive – which in effect reduces transaction costs in the entire value chain. However, lead firms extract more rent/surplus because of their bargaining power in the chain, which is augmented by their relative positions in the chain (Ibid).

The nature of distribution of economic rent results in different outcomes for different players and this can have serious consequences to developing countries especially in terms of poverty reduction and consequent development. For developing countries, an unbalanced outcome measured by the costs associated with accessing foreign markets vs. returns from sale of goods in foreign markets. This is further exacerbated by the nature of products (mainly agricultural) with little value addition and which in most cases fetch low prices as already discussed in previous sections. Technological divide has also been cited by some authors as reasons for unequal distribution of rent (Grossman

& Helpman, 1991). More recently however, some authors like Kaplinsky, 2000 have argued that the problem of falling returns not only afflicts countries but also individual firms especially when they confine their competences to simple and low value adding activities firms fail to insert themselves into global production chains by participating in high value adding activities. The consequence of this failure is immiserizing growth as earlier discussed in a previous section.

Several papers describe examples of small farmers losing market share as a result of the increasing quality standards. Humphrey et al.

(2004), describe the redistribution of market shares as a result of quality standards in the fruit and vegetable sector in Kenya. They underline that

“own farm production” of downstream actors increased from 40% in 1998 to more than 60% in 2001. All interviewees stated that they had reduced their smallholder supply due to concerns expressed by supermarket buyers about product characteristics and product quality.

Other studies (Chemnitz et al. 2007, Okello 2005) find that producers in developing countries especially small farmers have a comparative disadvantage in complying with standards due to high transaction costs and diseconomies of scale; and those that comply with the help of downstream actors are better off and that cost of compliance are greatly reduced for farmers who opt for group certification.

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2.3.3 Social Micro-processes of Standards in the New