Programme Design

Hand-made Economic Development, IADB 2006

    Description
    Behind every decorative object or piece of handcrafted furniture in famous stores in the United States such as Pier 1 and Anthropologie, there is a long history. A large part of the activities necessary to produce and bring these items to adorn high income homes is distributed among microproducers in developing countries around the world who make up the so-called "global value chains."

    Atuto de Honduras, Oyanca de Nicaragua and La Casa de Guatemala export furniture and decorative items for the home, but due to their small scale, they cannot compete with China's production costs. To do so, these Central American countries have concentrated their business strategy on a single area: design. Their customers are distribution companies from the United States and Europe that sell to exclusive stores. These retailers do not work with the large volumes that characterize the Chinese supply, but rather with products of high design value whose shapes and colors change according to the styles of a market, which has grown in recent years at an estimated annual rate of 10%.

    The three exporters receive orders on a regular basis from some 20 U.S. distributors, which pay 50% of the final payment in advance and establish detailed specifications for the designs. The exporters divide the orders among over 1,000 microproducers in Guatemala, Honduras and Nicaragua, to whom they provide supplies, cash advances, training and supervision in producing their handicrafts. In this way, the value chain resolves problems that usually afflict these types of producers: lack of access to financing, knowledge and markets. On average, for each dollar that the microproducer receives, the exporter receives 1.5 dollars, the distributor 3.75 dollars and the retail seller 7 dollars. The exporters ensure sufficient profitability for the microproducers to prevent them from sending their production to other intermediaries, the tourism market, or dedicating their time to other work activities. However, not all craftsmen meet the competitive conditions to take part in this business, where only those with vision and business organization participate.

    How can the value chain be used to increase the income of microproducers and contribute to economic development? Traditionally, the response of donors has been to support craftsmen through projects directed toward subsidizing technical assistance through nonprofit organizations. Although this model has been successful in terms of raising the production capacity of the craftsmen, it has not raised their income in a manner that is sustainable since it has left out the links of the chain specialized in access to the market.

    Based on these experiences and the knowledge acquired about how global value chains function, a new generation of projects is being planned. They use the strength and incentives of the chain to increase microproducers' income. Under this model, support for craftsmen is channeled through export and distribution companies, which on the one hand, are the ones that have established access to the markets, but which on the other, must co-finance the projects. Thus, initiatives are designed in which the exporters have market incentives to organize microproducers with poor competitive conditions, since they assume part of the risk of the endeavor.

    The project described in the documents and links on this entry was launched in 2005 with a $1.12m grant from the MIF; a more detailed description can be found here.