ILO Value Chain Development Briefing paper 1:

Combining Value Chain Development

and Local Economic Development

VALUE CHAIN
DEVELOPMENT

ILOs work on Value Chain Development (VCD)

focuses on promoting pro-poor growth and job
creation.
The VCD briefing papers series explores
technical areas in which the ILO has specific
knowledge and capacity to offer, contributing
new pathways towards Decent Work.
Value Chain Development (VCD) can support
pro-poor development and job creation through
strengthening enterprises, business relationships,
improving market structures and the business en-
vironment. It can assist in developing local micro
and small enterprises and help in overcoming con-
straints such as poor market access and little bar-
gaining power. Often these constraints arise out of
specific local conditions. For example, one of the
major problems faced by the fish-breeding sector
in Sri Lanka was a lack of dialogue with farmers
and the local administration leading to a conflict on VCD and LED approaches can reinforce each
water usage. In order to solve this conflict a local other. Both are approaches that address the “how
solution involving improved dialogue and a new lo- to” of private sector development and that can be
cal regulation of water usage were needed. A local designed to include the poor in the resulting bene-
economic dialogue forum set up in the province fits. VCD seeks to enhance the functioning of the
solved the problem, enabling value chain deve- market system by analyzing it and devising inter-
lopment. Combining a VCD approach with a Local ventions to overcome bottlenecks and constraints
Economic Development (LED) mechanism made a in the chain. LED strategies identify the economic
solution possible. potential of a specific territory and empower local
economic actors to take joint action for economic
growth and job creation. By combining the approa-
ches possible shortcomings of each single way of
Local Economic Development is “a participatory doing things can be avoided.
development process that encourages partnership
arrangements between the main private and public One of the strengths of a value chain approach is
stakeholders of a defined territory, enabling the its understanding of boundary-crossing nature of
joint design and implementation of a common deve-
economic processes. Value chains are rarely limi-
lopment strategy, by making use of the local resour-
ted to one particular area, but they often cross lo-
ces and competitive advantage in a global context,
with the final objective of creating decent jobs and cal and national borders. On the other hand VCD
stimulating economic activity”1 . The ILO has been practitioners may fail to give enough importance
working on LED since the mid 1990s building on a to local conditions such as cultural norms and
long tradition of facilitating inclusive public-private behaviour, local red tape and local constraints to
dialogue. infrastructure development2. Understanding the
The knowledge and practice of the ILO in LED has local context is often crucial in order to address
been documented on www.ledknowledge.org
underlying constraints of local market systems:

1
ILO LED definition: Canzanelli, G.(2001), Overview and learned lessons on Local Economic Development,
Human Development, and Decent Work, Universitas working paper, ILO,
http://www.ilo.org/public/english/universitas/download/publi/led1.pdf
2
 Infrastructure Related services
Informing & communicating

VALUE CHAIN
Value chain interventions will be impinged given a A better understanding of local contexts as provi-
Informal
networks
non-enabling local environment Sourcing
or misperceived Production
lo- ded by an Marketing
LED approach Private
cansector
help avoiding pitfalls
cal conditions. LED’s focus on one particular geo- in VCD.
graphic area enables localized solutions and, thus,
combining VCD with LED can help to find solutions A key
Setting & enforcing issue in value chain development is to under-
rules
Regulations Informal rules
adapted to the local context and owned by local stand the importance
& norms
of final demand. Buyers want
populations. Furthermore, LED’s link to local gover-
Standards toLaws
buy high quality products at competitive prices
Not-for-profit Business membership
nance and developmentsectorplanning can enhance RULESthe& REGULATIONS
with short delivery times and flexible responses
organizations
cross-sectoral dimension of VCD. to their orders. Understanding the exact nature of

MARKET PLAYERS
Worker/employee
SUPPORTING FUNCTIONS membership
Government organizations
R&D Information Skills & capacities
Coordination

Infrastructure Related services

Informing & communicating
VALUE CHAIN

Informal
networks Sourcing Production Marketing Private sector

Regulations Setting & enforcing rules

Informal rules
& norms
Standards Laws
Not-for-profit Business membership
sector RULES & REGULATIONS organizations

A Value Chain “describes the full range of activities that are required to bring a product or service from conception,
through the intermediary phases of production (...), delivery to final consumers, and final disposal after use.” 3
This includes activities such as design, production, marketing, distribution, and support services up to the final consu-
mer (and often beyond, when recycling processes are taken into account).
Value chains are part of Market Systems 4 (see image). At the centre of the Market System are the value chains that
bring products and services to the market. The immediate environment is formed by supporting functions (such as
business development services and finance) and rules and regulations relevant to the chain (including labour rights). The
broader environment around this affects the immediate environment as well as setting its own conditions.

2
Schoen, Christian. 2011. Green production and trade to increase income and employment opportunities for the rural poor.
Strategy for Implementing LED Process in 2011 and 2012, Vietnam. International Labour Organisation.
3
Kaplinsky, R. 2004. Spreading the gains from globalisation: what can be learnt from value-chain analysis,
Problems of economic transition, vol. 47, no. 2, pp. 74- 115
4
Source: Value Chain Development for Decent Work (2009), page 3
3
these demands is crucial for value chain develop- ment can be slow and consultations with stakehol-
ment. Effective cooperation and communication ders can produce more questions than answers.
among the stakeholders of a chain are key to en- At times, LED as an approach has received criti-
hance its responsiveness to end market demands. cism on putting too much emphasis on strategy
The needed dialogue between stakeholders can be and planning instead of action5 . LED practitioners
enhanced by LED approaches that typically focus might also fail to take into account the importance
on participation and social dialogue. Therefore, by of value chain players outside the local territory.
improving stakeholder communication, LED can Local producers need to be connected to national
improve the knowledge flow along value chains and global buyers. If value chains are not fully un-
and make value chains more effective and inclu- derstood, local actors might not be aware of the
sive. LED might also provide an avenue to support importance and specific nature of final demand.
local innovations that can enhance VCD efficiency. This can lead to an underestimation of the impor-
tance of the factors that are “pulling” the rest of
While LED’s focus on participation and dialogue the chain, end market demand. It could also lead
can add value to VCD, participation is not always to underestimate the important role of large buy-
enough for effective intervention. Finding an agree- ers’ in many value chains. Here a value chain per-
spective can deepen the understanding of markets
and strengthen the market analysis tools in LED.

Ornamental fish value chain upgrading Moreover, there were not enough suppliers of inputs to
in Sri Lanka meet the growing demand hence the prices were high.
Breeders lacked technical skills on fish breeding. They had
The Enterprise for Pro-Poor Growth (Enter-Growth) was a low know-how about how to combat diseases. Market ac-
four-year project of the International Labour Organisation cess was an issue because of transportation problems,
(ILO), the Swedish International Development Agency (Sida) cumbersome security checks and sometimes road blocks.
and the Ministry of Enterprise Development and Investment Furthermore, because they were not organized it was dif-
Promotion. It was implemented in 4 Sri Lankan districts ficult for growers to lobby or make a strong voice to nego-
between 2005 and 2009. One of the sectors the project tiate for higher prices.
intervened in was the ornamental fish sector that has po-
tential to contribute a lot to the district’s economy, but the The ILO’s Enter-Growth project interventions
value chain was underdeveloped. The biggest problem was
a long lasting conflict on water usage between fish gro- A key structure set up by the project was a set of District
wers and paddy farmers. The water in the district was Enterprise Forums based on an LED approach. These fo-
reserved for paddy farmers and the farmers associations rums constitute bodies for dialogue on enterprise deve-
had blocked water to the fish-breeding ponds. As a result lopment and their members are district authorities, public
of the conflict, development of the ornamental fish sector sector business development organisations, chambers,
had stopped as well as its potential to create decent work small business associations and NGOs. In Polonnoruwa the
and better incomes. district forum was part of the solution for the conflict on

5
de Ruijter de Wildt, Marieke et. al. 2006. ”Making Markets work for the Poor. Comparative approaches to private sector development.”
Swiss Agency for Development and Cooperation SDC.
4
 water. The problem was presented at the District Enter- chain. Farmers observed that the quality of their supplies
prise Forum and the Forum succeeded to set up a meeting has increased, while buyers noted that the quality of fish
with the Department of Agriculture and all institutions in- they bought had gone up as well. This increase in quality,
volved in the distribution of water irrigation. The result was and hence the increased demand on the whole can be at-
the removal of all impediments to the sharing of irrigation tributed to any or all of the four interventions made in the
water with fish breeders. The agreement was formally ap- value chain. The training has brought better knowledge and
proved at the district level. Thus, the LED mechanism faci- skills in growing fish. The grants, given in the form of equip-
litated value chain interventions and helped implementing ment have contributed to the quality, while the association
the constraints identified in the value chain analysis. has led to better communication among growers, allowing
them to learn from each other, and between growers and
To allow the local sector to better meet the requirements buyers, making them better aware of their wishes, de-
of the buyers, four main interventions were implemented: mands and possibilities.
training, association building, financial assistance and in-
formation centers. Interviews with breeders, growers, col-
lectors and buyers were held to assess the impact of these
interventions on the sector. The most prominent impact Source: www.entergrowth.org, see also Enter Growth short
appears to be the increase of quality within the entire value video on http://www.youtube.com/watch?v=pfNrSDnvvQ4

How can Value Chain Development and Local Economic Development

be combined?
VCD and LED approaches can complement each In figure 1 the arrows between nodes represent
other. Figure 1 and 2 graphically present the rela- vertical linkages of a value chain, in which busines-
tion between LED and VCD. ses trade products and services6. Value chains
are sometimes misunderstood to be focused only
on these vertical business to business links in the
Institutional and economic chain. However, businesses do not operate in iso-
frameworks
lation so it is equally important to understand and
take local institutional and economic frameworks
Export node into consideration. These frameworks, which are
part of local market systems in which businesses
Vertical
Chain
linkages operate, are presented in figure 1 as circles around
actors
the smaller nodes. Moreover, there are elements
Primary processing/trading node such as poverty, gender, labour and the environ-
ment influencing the chain and chain actors in dif-
Production node ferent ways. For example, if VC facilitators are to
address issues like working conditions or child la-
Horizontal impacts on participants and
non-participants and their communities
bour, it is essential to understand the local context,
including its social norms and power relationships.
Figure 1 VCD perspective, Source: Bolwig, S. et al. (2010: 187)

6
Bolwig, S. et al. 2010. ”Integrating Poverty and Environmental Concerns into Value-Chain Analysis: A Conceptual Framework”,
Development Policy Review, 28 (2): 173-194
5
 Local value
chain
Arriving value chain
(crossing national border)

In figure 2 a circleDeparting
in the value
middle represents a local
chain national border. In figure 2 the boundary-crossing
(crossing national border)
territory and the bigger figure a national border. nature ofArriving value chain
the value chain is clearly presented. It is
(crossing local border)
Arrows represent different value chains inside the key to understand market demand that often might
territorial area, but also different value chains arri- be located far away from the local territory. Tools
ving and departing the territory. Some of the value used in LED might not always be able to provide
chains cross not only a local border, but also a this information effectively.

Departing value chain

(crossing local border)

Local value
chain
Arriving value chain
(crossing national border)

Departing value chain

(crossing national border) Arriving value chain
(crossing local border)

Figure 2 LED perspective, Source: Carlien van Empel, LED programme ILO

Upgrading living conditions of indigenous organizations seeking for solutions among tripartite
people in agricultural rural areas in Nepal constituents (governments, employers and workers)
in a Local Economic Development framework. LED
One example where VCD and LED approaches have allowed an in depth analysis of local requirements and
complemented each other is the Employment crea- opportunities while value chain analysis contributed
tion and peace building in Local Economic Develop- with its emphasis on relationships between chain ac-
ment (EmpLED) project in Nepal. This project funded tors and market demand in a more systemic way.
by the Netherlands, was working on upgrading living
conditions for indigenous people in two agricultu- The promotion of LED forums encouraged the de-
ral areas in the Dhanusha and Ramechhap district velopment of new concepts and skills, helped lend
in Nepal. The project started by making a systemic participants a voice and given them some bargaining
overview of constraints of the food and the tourism power in the allocation of funds and the decision-
value chains. It then worked with local and national making regarding government policies. Also, LED

6
 forums were used to expand participants’ social net- providing services and support directly, the project
works and gain social status and public recognition. avoided replacing local service providers and thereby
Different activities where implemented as a result of changing the market system in a short term, unsus-
the value chain analysis such as creating better ac- tainable manner. Instead, it has strengthened local
cess to business services and better infrastructure. stakeholders and enhanced their capacity. The pro-
The project contributed to the building of a road, to ject improved the living conditions of more than 8000
make touristic areas accessible. Other activities in- households. The project has contributed to expand
cluded the promotion of a culture of entrepreneurship the access to management and skills training as well
through business radio programming and skills trai- as to better market linkages to the national tourism
ning for stakeholders in the tourism value chain. and cheese markets.
By using local partners as facilitators, rather than

Written by Emilia Saarelainen and Merten Sievers,

November 2011

Links
ILO: Value Chain Development: www.ilo.org/valuechains
ILO: Local Economic Development: www.ilo.org/led
ITC ILOs training Course on Value Chain Development and Pro Poor Growth: www.itcilo.org/marketdev
Other ITC ILO training programmes on Enterprise, micro-finance and local development: www.itcilo.org/emld
The Donor Committee for Enterprise Development websites: www.enterprise-development.org and www.value-chains.org
ILO and ITCILO: Knowledge-sharing with LED practitioners from across the world: www.ledknowledge.org

Tools
ILO: Value Chain Development for Decent work: A guide for development practitioners, governments and private sector
initiatives. (2009)
http://www.ilo.org/wcmsp5/groups/public/---ed_emp/---emp_ent/---ifp_seed/documents/instructionalmaterial/wcms_115490.pdf

ILO: An operational guide to Local Value Chain Development, Enter-growth. (2007) Colombo:
http://www.ilo.org/wcmsp5/groups/public/---ed_emp/---emp_ent/---ifp_seed/documents/instructionalmaterial/wcms_101319.pdf

ITC ILOs Market Development Distance Learning Course. Enterprise Development through Value Chains and Business Service
Markets: A Market Development Approach to Pro Poor Growth. (2008): www.itcilo.org/marketdev

ILO: Making the Strongest Links: A practical guide to mainstreaming gender analysis in value chain development. (2009):
http://www.ilo.org/wcmsp5/groups/public/---ed_emp/---emp_ent/documents/instructionalmaterial/wcms_106538.pdf

ILO: Gender Mainstreaming in Local Economic Development strategies. (2010) A guide, Geneva.
http://www.ilo.org/wcmsp5/groups/public/---ed_emp/---emp_ent/---led/documents/publication/wcms_141223.pdf
ILO/ITCILO: The Global Resource Site for Local Economic Development: www.ledknowledge.org

Who to contact?
Value Chain Development: Merten Sievers: sievers@ilo.org or seed@ilo.org
Local Economic Development: Carlien Van Empel: vanempel@ilo.org or led@ilo.org