NOTE NUMBER 341 viewpoint PUBLIC POLICY FOR THE PRIVATE SECTOR JULY 2014 Food Safety Standards Laurian Unnevehr and Economic and Market Impacts in Developing Countries T r a d e a n d C o m p e t i t i v e n e s s G l o b a l P r a ct i c e Loraine Ronchi Compl i an c e wi th pu bl i c an d pri vate food safe ty stan dards h as be e n Laurian Unnevehr (lunnevehr.professional@ th e su bj e c t of i n c re asi n g atte n ti on . Mu c h of th e l i te ratu re on i mpac ts gmail.com) is Professor of food safe ty re gu l ati on i n de ve l ope d c ou n tri e s foc u se s on pu bl i c Emerita, Agricultural h e al th . In poore r c ou n tri e s, th e e mph asi s i s on e c on omi c de ve l op- and Consumer Economics, University of Illinois me n t. H ow stan dards sh ape ac c e ss to marke ts an d wh at i s th e i r e c o- at Urbana-Champaign. n omi c i mpac t on produ c e rs. Th i s n ote di sc u sse s e vi de n c e of th e e c o- Loraine Ronchi (lronchi@ worldbank.org) is the n omi c an d marke t i mpac ts from th re e pe rspe c ti ve s: c ompl i an c e wi th Global Agribusiness pu bl i c food safe ty stan dards; c ompl i an c e wi th pri vate stan dards; an d Lead for the World Bank Group’s Investment th e i mpac t of te c h n i c al assi stan c e i n ac h i e vi n g c ompl i an c e . Climate Department at Public and private regulation countries or firms that fail to comply. These the IFC. Food safety touches upon issues of public regu- standards may include requirements that must be lation, private supply chain coordination, and met by public agencies in exporting countries as The Impact Program international trade. More stringent food safety well as by private firms engaged in export. Public is funded by the U.S. Agency for International standards have emerged over the past two standards must meet World Trade Organization Development, the decades as the result of several factors, including requirements for transparency, equal application U.K. Department advances in hazard detection and epidemiology, to domestic and imported products, and must for International high profile health scares, scientific and regula- be based on scientific risk assessment. Typically Development, The Foreign tory consensus on best approaches to risk man- such standards change only infrequently. Private THE WORLD BANK GROUP Affairs, Trade and agement, and the recognition of global standards standards are set by buyers (or a by a consortium Development Canada and and approaches under the WTO. As a result there of firms) and include both safety and quality the World Bank Group. is a consensus “among nations about the basic specifications for particular market channels. components of an effective food safety system… While they may be de facto requirements for the vision is of a farm-to-fork, risk-based, scientifi- particular buyers, failure to comply with private cally supported safety control system” (Hoffmann standards will not, by itself, preclude entry into and Harder 2010). an importing country. Private standards change Compliance efforts differ for public and private over time as buyers manage risks and reputation, standards. Public standards constitute legal and thus compliance must also evolve. requirements for market entry, and can be used by New regulations or standards can add to governments to deny market access for exporting production costs. In high-income countries, F ood S afety S tandards Ec o n o m i c a n d M a r k e t I m p a ct s i n D e v e l o p i n g C o u n t r i e s such costs are weighed against the public health markets of some developing countries and firms benefits from reduced foodborne illness. But as new standards came into force in the 1990s. in developing countries, studies have focused Examples include European Union (EU) bans on how standards shape market participation, on imports of fishery products from Bangladesh exports, and farm incomes. In this Viewpoint, in 1997 (Cato and Subasinge 2003); from Kenya we review evidence regarding economic and in 1997-2000 (Henson and Mitullah 2004); and market impacts of compliance with (1) public from Malaysia in 1998 (Alavi 2009); and a U.S. food safety standards; (2) private standards; ban on raspberries from Guatemala in 1997-98 and (3) the impact of technical assistance in (Calvin et al. 2000). Case studies document how 2 facilitating compliance. While public and private bans led to substantial export revenue losses and standards are distinct, we will also briefly discuss how many banned firms, struggling to comply, joint public-private strategies for responding to went out of business or, if they survived, incurred more stringent standards that can reduce their high compliance costs (Cato and Subasinge 2003; negative economic consequences. Calvin et al 2000; Henson and Mitullah 2004). Public sector support in exporting countries was A context of catalysts, costs, and scale sometimes required to underwrite investments Three important themes from the literature beyond the reach of individual firms (Henson provide context for a review of evidence. First, and Mitullah 2004). Such support enabled both public and private standards are important a resumption of exports as firms came into in high value markets. New public regulations that compliance, but at a lower and less profitable emerged in high-income countries in the 1990s level than before. became mandatory requirements for low-income Even where countries maintained export country exporters. Even more stringent private market access and avoided product bans, standards quickly followed, as European retail compliance costs were substantial. Compliance chains used standards to establish brand identity with seafood standards in the Philippines (Ragasa and reputation, and to respond to emerging et al 2011) and Brazil (Donovan et al. 2001) consumer concerns (Fulponi 2006). Second, the imposed costs that were higher than expected, literature reflects the debate regarding whether and likely reduced production and exports at standards are barriers to market participation or the margin. Thus, exporter compliance with catalysts for strategic investments. Higher public public standards imposed by importing countries standards in importing countries reduce traded increased costs and may have reduced trade. quantities, especially from low-income exporters Compliance with public standards to achieve (see Wilson 2007 for review of trade studies). access to high-income markets may be a strategic In contrast, Jaffee and Henson (2004) showed priority for some governments, which suggests a that higher standards can serve as catalysts for public sector role in compliance. improved management, higher value added, and greater efficiency in production and marketing. Private standards can raise farm incomes but Third, the costs imposed by more stringent may exclude smallholders standards have elevated concern that food safety Rigorous study of the impact of private standards standards pose a barrier to market participation has focused almost exclusively on private by small farms or firms. The high non-recurring standards for horticultural products—mainly costs of setting up a food safety quality control fruits and vegetables—particularly GlobalGAP for system might give an advantage to larger firms the EU market.1 Compliance with private food and farms that can employ economies of scale and safety standards has been found to lead to higher exclude smaller competitors. In addition, buyers export sales and prices, revenues, and incomes in incur higher transaction costs when they have to 10 studies of high-value horticultural exports in 14 monitor compliance from many small suppliers. different countries (Table 1 shows representative results). Other benefits identified in many cases Compliance with public standards incurs include adoption of improved technology with cost, noncompliance means loss of markets spillover benefits for staple crops (Minten et Failure to meet public standards imposed by al. 2009), higher or more stable labor income high-income countries led to the exclusion from (Maertens and Swinnen 2009; Minten et al 2009), and improved health through reduced on-farm in supply chains declined over time (Henson et exposure to pesticides (Kersting and Wollni 2012; al. 2005; Handschuch et al 2013; Kersting and Asfaw et al. 2009; Okello and Swinton 2009). The Wollni 2012; Roy and Thorat 2008). In Senegal, a conclusions in these studies tend to support Jaffee shift to estate production excluded smallholders, and Henson (2004), who show that standards can but these households then benefited from wage serve as catalysts for improved products and yield labor opportunities that led to higher incomes premiums for exporting industries (Swinnen (Maertens and Swinnen 2009), and low-income and Vandeplas 2011). Similar conclusions have workers in exporting firms also benefited from emerged from studies of smallholder response to higher wages (Colen et al 2012). The Senegal modernizing markets (Dries et al. 2009, Barrett studies demonstrate the strong poverty alleviation 2011), in which improved food safety is one of impacts that can result from job creation many simultaneous changes. associated with successful market access. Results of studies that focused on the exclusion Smallholders may be excluded by high costs, effects of private standards on smallholders so to overcome cost barriers, exporting firms, were more mixed (Table 1), possibly because governments, and donor institutions often pay a prevailing market conditions and the varying portion of suppliers’ compliance costs (Kersting compliance costs determine which producers and Wollni 2013; Handschuch et al. 2013; turn these standards to their benefit and which Leimeilleur 2013; Subervie and Vagneron 2013; are harmed (Xiang et al. 2012). A study of export Henson et al 2005). In other cases, farmer groups supply chains over 19 years in Peru found that or buyers provide intensive monitoring, training, stringent standards led to greater buyer control and inputs to facilitate compliance (Henson et of supply and exclusion of smallholders who al. 2005; Okello and Swinton 2007; Lemeilleur remained independent (Schuster and Maertens 2013; Roy and Thorat 2008). Successful farmer 2013). In contrast, studies in Zimbabwe, Chile, compliance was found to be associated with Thailand, and India found that smallholders education, male gender (Chile), experience, were able to adapt because the scale advantages membership in a farmer association, and access of larger farms were modest, and transaction costs to technical support (Kersting and Wollni 2012; Table Impact of compliance with private food safety standards for EU horticultural product markets 1 Impacts of compliance Country Study On benefits and costs… On smallholder inclusion… Madagascar 2013 Subervie and Vagneron Certified producers sell larger quantities at higher Market access determined by proximity to processing plant, 2 prices than those not certified. not scale of production . Thailand 2012 Kersting and Wollni Farmers’ perceived benefits including improved quality, One hectare increase in farm size associated with only 2% reduced pesticide risk, better market access. increase in likelihood of compliance. Chile 2013 Handschuch, et al. Certified producers gain higher yields, prices, and net Smaller farmers more likely to not be certified. Certification income through better quality, offsetting higher fertilizer costs 11% of gross income per ha, making public support and pesticide costs. critical. Kenya 2011 Kairuki, et al. Certification raises prices 4.2% to 9.5%. 10 SSA countries 2011 Henson, et al. Certification leads to higher sales revenue About one-third of exporting firms’ purchases are from (Euro2.6 million higher per firm). smallholders. Madagascar 2009 Minten et al. Compliance leads to greater income stability, adoption Smallholders are able to meet quality requirements. of improved technology and better resource management, with spillovers for staple crop productivity. Senegal 2009 Maertens and Swinnen Compliance leads to sharp growth in exports, higher A shift from smallholder contract farming to integrated rural incomes and poverty reduction. estate production. Poor households benefit through labor markets. Kenya 2009 Ashraf, et al. Farmers switching to compliant export crops generate The switch is not sustained when new certification significantly higher income. requirements are not supported. India 2008 Roy and Thorat Compliance increases successful export market Smallholders participate through group marketing participation and higher net profits for farmers. arrangements and receive assistance through cooperatives. Handschuch et al. 2013; Lemeilleur 2013). These Program (PIP) was a significant determinant results suggest that not all smallholders will be of whether an exporting firm was certified to equally able to comply with standards, but also GlobalGAP (Henson et al 2011), although it had that assistance can support participation. little influence beyond sales to the EU in Senegal (Caud and Jadot 2012). Interventions are not Technical assistance can have positive sustainable, however, when market conditions impacts on farmer and firm compliance change or follow-through from donor institutions To support new income opportunities for weak (Ashraf, et al. 2009). A review of experiences smallholders, governments and donors have in Sub-Saharan Africa by Jaffee et al. (2011) 4 assisted in bringing about compliance with food emphasized the need to partner with buyers, safety standards through training and capacity who have a continued economic motivation to building, direct financial support for certification support farmer compliance. costs, and fostering farmer organizations or cooperatives (Table 2). Market returns clearly Conclusion motivate compliance, but technical assistance Growing recognition of the importance of seeks to overcome barriers to entry that might “co-regulation” or public-private partnerships prevent inclusive participation. Such assistance for compliance with food safety standards has may also have spillover benefits, such as emerged from several of the studies listed in reduced pesticide exposure or improved farm Table 2. Experience and the literature reviewed management. here demonstrate the benefits that flow from Six studies that tested explicitly for the impact compliance. The question is whether public of technical assistance found positive impacts in assistance can help stakeholders access these facilitating compliance, market participation, benefits. Public-private approaches may have and higher incomes (Table 2). Technical the potential to reduce enforcement costs assistance, subsidies for initial certification and improve compliance through supporting costs, and managerial support were effective industry-led efforts (Martinez et al. 2007; in Chile and Thailand in promoting market Narrod et al 2009). These approaches have not participation of smallholders (Handschuh et yet been explored in the research literature al 2013; Kersting and Wollni 2013). In India, as, for example, a means of reducing the costs government-supported cooperatives facilitated of compliance with EU requirements in new farmer compliance (Roy and Thorat 2008). member states in Eastern and Central Europe. In 10 Sub-Saharan Africa countries, technical Examples of such partnerships are emerging in assistance from the EU Pesticide Initiative pilot projects, such as those addressing aflatoxin Table Impact of TA for compliance with food safety standards in developing countries 2 Country Study TA Impact of assistance Madagascar 2013 Subervie and Vagneron Donor support for GlobalGAP certification Certified producers have better access to markets and higher prices. Chile 2013 Handschuch, et al. Public support for compliance with export standards Assistance is critical to smallholder participation in markets. Thailand 2012, Kersting and Wollni Donor support for group certification of small farmers Support by donors and exporters enabled farmers’ compliance. SSA 2011, Henson, et al. Compliance support for EU Pesticide Initiative Program Firms more likely to be certified if they receive PIP technical assistance. Senegal 2012 Caud and Jadot EU PIP support for food safety management practices PIP has a positive effect on horticulture exports to the EU but not on total horticulture exports. Kenya 2009, Ashraf, et al. NGO assistance to smallholder participation in Support for market services effective in supporting farmers’ export markets shift to export crops. Exports did not continue when support ended. India 2008 Roy and Thorat Government support for farmer cooperatives Cooperatives result in higher net profits for farmers and facilitate smallholder inclusion. risks in commercial feed markets in Africa (IITA Evidence from an Export Crop Adoption and 2013). 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