Agribusiness & Economic Development

"Although small businesses are generally the focus of most economic development programming,
research shows that it is not small business which drives job creation but rather fast growing businesses.
The real issue in economic development is rate of growth."

At the end of the war that tore Yugoslavia apart, the people on the territory of what has become Bosnia & Herzegovina were suffering. Half of the pre-war population of 4.3 million was displaced and much of the country's infrastructure was ruined. There were over 97,000 dead-- over half of the total casualties in the three-sided, three-year civil war. The post-war environment was such that families returning to villages and cities often found only rubble. This was not just a poor country in need economic stimulus or restructuring; virtually all productive businesses had been destroyed as battle lines shifted and each ethnic group took turns destroying the assets of the others. In the absence of commercial activity and employment options, many people desperately turned to farming to feed themselves as best they could, but it was difficult. Even experienced farmers could not reach markets, processors had lost suppliers-- in short, the agricultural sector, in which almost half the population worked, was in ruins. 1995 GDP was at 15% of its pre-war level.

After the region stabilized and security was assured, a development project was begun to try to help the agricultural sector. Funded by USAID, the project was based on promoting business activity through aggressive efforts to build market linkages, access commercial credit, provide training & technical assistance, and improve the policy environment.

The target beneficiaries were any farm, cooperative, or agricultural processor which satisfied two basic criteria: demonstrated potential for growth and the possibility of strong linkages to smaller area enterprises which could grow along with it. Agriculture in BiH is diverse, and three promising sectors were chosen as areas of focus. The objective was to foster business growth in these sectors.

Conceptual Basis The design is based on an economic development approach sometimes called "economic gardening" which holds that most new jobs are produced by growing businesses already in the community. These high-growth enterprises are often called "gazelles". Project management and staff had the tasks of identifying these enterprises early and providing them with long-term support. Gazelles create the great majority of new jobs. They rapidly spot market opportunities and explore them, they constantly improve productivity and efficiency, and they can quickly change and expand. According to research in the US, while these firms are significant users of technology and computers, only three percent can be called "high-tech companies". The majority are involved in retail, services, and manufacturing sectors. Three-quarters are family-owned. Most are small with only about 30% having over 100 employees. Gazelles comprise about three to five percent of all companies in the United States. To apply this to developing countries whose economies are primarily agricultural, the challenge is to identify rural enterprises with entrepreneurial leaders and provide targeted support. The enterprises can be cooperatives or for-profit companies. The application of project resources to beneficiaries is customized and largely demand-driven. There is an obstacle to applying this approach in the developing world. As an article in Reason magazine put it, "even in those happy moments when economists have a pretty good idea of what should be done, they are generally at a loss to prescribe programs that can survive a political process that is usually controlled by the same group of people who are causing the problems." Such is the case in BIH, where every political party says it supports EU accession. As this effects the project, the fact is that the desire to harmonize the legal and regulatory environment with the EU means that BiH's macro-economic policies do not promote economic growth. The EU is a mature and largely closed economic area. As a result, some good work to support exporters from this non-member country was stifled by the tight import quotas of the EU. This reservation aside, the application of the economic gardening concept to practical project activities was fairly effective. With an objective to support economic growth, it is sensible to provide support directly to fast growing companies rather than pursuing the less focused approach of supporting SMEs or a "cluster". Growing enterprises are the engines of growth, and support to them increases employment both directly and at supplier businesses. We called these growing enterprises "market integrators" as we built linkages which used their growth to pull others along. Other Best Practices A Strong Core of Experienced Local Staff and the Decreasing Role of Expats The project began with five expatriates, with one in every field office. The expatriate management in each field office was vitally important to a fast and effective start-up, it provided long lasting benefits in operations, and it allowed in-depth training of the replacement HCN managers. When authority was passed to them, their own qualities and the value of local knowledge brought the project forward at an increasing pace and sustained productivity for years. Decentralized Operations The HCN branch managers had true authority. This makes a project faster to act and more responsive. It encourages initiative and ownership by the HCN team and builds substantive relationships with field resources of other international and local projects. Integration of Existing Institutions into the Project The project established substantive cooperative relationships with other development resources in order to save money and time, gain local knowledge, and establish contacts. For example, when the project supported a micro-lending program, it was done through existing MCOs; this helped the project but also supported the MCOs as legitimate financial intermediaries and not just bank substitutes. Also, local NGOs and consultant firms received priority when contracting trainers. Creation and Use of a Project Database The project had a comprehensive client database accessible to all field offices. It contained profiles of each client, measured their growth, and provided information to refine project design and target activities and programming. It was the best database of agricultural businesses in the region. Integration of Policy Activities into Program Areas Policy development without the involvement of those effected leads to months of meaningless talk. This project actively involved business owners and cooperative managers in association development, which in turn led to identification of policy positions, preparation of policy papers, and then advocacy. Direct involvement of project staff opens the doors for the clients. Some Lessons Learned Politics Complicated Association Building The political situation in BiH is rigid and ethnically divided. It yields a highly unworkable system, yet that structure has been used, almost reflexively, as a model in forming associations of all types in this country. The reader might be aware of a 2007 strike by the national football team because the leadership of the football federation is determined by the religion of the candidate instead of his knowledge of the game. The project suffered from this as well. For example, rather than form a "Sunny Valley Honey Association", the beekeepers followed the outlines of political districts: they founded associations in each of the five municipalities in the valley and then an association in each of the two cantons in the valley and then an association for each entity (ethnically defined region), and then finally addressed themselves to the 48 other honey associations in the country. Three years of limited progress could have been avoided with a more pragmatic approach. A More Tightly Defined Grant Mandate In the small grant program the haste to support growing enterprises made the apparent need of an individual applicant a primary consideration in grant approval. Decisions appeared arbitrary at times, and a large percentage of the grants went to for-profit enterprises which should have turned to the credit market. Grant making to private enterprises is a dubious proposition in any case. With a broader view to the development role of a grant program, the funds could have been used in better alignment with the broader needs of the sector or industry. A more strategic direction would have had a broader impact. Business Plans Still Viewed as Loan Applications There is always a great deal of talk about "business plans". Development programs push them, business centers pop up and offer to write them, banks ask for them if a business wants a loan... but managers rarely use them as they should, as management tools. By assisting clients with business plans in the credit process, the project did not change the thinking of many managers. Also, accounting is still seen as tax preparation obligation and no more. It is still "cigar box accounting" at most enterprises. The information value of financial reports is not widely recognized. For those intrested in operational aspects: The project worked through four field offices with 37 local staff, and used outside resources to provide extensive training and technical assistance in business and management as well as technical experts in various aspects of agricultural production and processing, a number of cross-border activities to promote trade, and extensive use of regional resources for training. There was active integration of project elements with each other. The primary objective of the project was to create lasting commercial relationships between clients and other businesses both inside and outside the country so the team actively initiated contacts and recruited promising enterprises into its programs. The project supported trade fair participation by clients and led "study tours" for industry-specific groups to neighboring countries. There was a grant program which provided support to expand the commercial operations of project clients. Originally these financed equipment for the most part-- feed mixers, lacto-freezers, irrigation systems, packaging machines & materials, and so forth-- but toward the end of the project there was a shift toward marketing activities, broadly defined. In approving these grants, there was a strong emphasis on results beyond the immediate activity supported by the grant. It was important that the business activity reach a large number of cooperative members, for example, or suppliers to an enterprise. In making these grants, there was a conscious effort to avoid using grants to replace borrowing in the commercial credit market. Project staff with experience in finance assisted clients in business planning and preparing loan applications. These went to commercial banks, particularly those which are partners in the Development Credit Authority (DCA), which provides USAID Missions with the authority to issue loan guarantees to private lenders which cover up to 50% of the risk in lending to projects that advance USAID's development objectives. Workshops, seminars, and consulting were important activities. There was training in technical issues, business management, and institutional development with 126 training courses developed, all in the local language. The vast majority of the trainings were delivered with local training partners to contribute to the sustainability of these training organizations. Over two dozen local organizations were involved. For the project's more promising cooperatives, there was intensive training at a USAID-funded graduate school of business in the capital with supplementary TA by project experts. The cooperatives each prepared marketing plans and used them to define growth strategies. The training and field work were funded by the project, and implementation of the strategies was led and funded by the cooperatives. The project also created in innovative partnership with two BiH advertising agencies to support its best clients. The project funded preliminary agency consultations to help the clients refine their brand image and promotional plans. After this start, the clients hired the agency to continue with their programs. The policy team provided assistance to several associations and lobby groups to strengthen their capacity to advocate for changes in the policy and regulatory framework because the business enabling environment is less than favorable to new business, and the country's economic policies favor compliance with EU regulations over increasing employment and growth. ##