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Market-based approaches to food safety(or what do we get from economics?)

Karl M. Rich, Ph.D.

Norwegian Institute of International Affairs

International Livestock Research Institute

24 April 2012

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Outline

• Motivation

• Review of impacts of animal diseases and zoonoses

• Mechanisms and tools for evaluating incentives for food safety compliance: a bottom-up approach

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Motivation

What is economics?

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Motivation

• It might be best to explain first what economics is NOT:– It is NOT just about money…

– It is NOT about accounting …

– It is NOT just about costs …

– It is NOT about getting the number for your grant application …

– And … it doesn’t have to be boring …

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Motivation

• Economics highlights how and why people make choices under conditions of scarcity and the results of such choices on society.

• It is about assessing tradeoffs: how do we reconcile unlimited wants with limited resources?

• It is about behavior and incentives: faced with tradeoffs, why do people do what they do?

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Where does economics fit into the animal health world?

• For starters, animal diseases are taking increased prominence and awareness both in domestic markets and on the global stage– Rise in perceptions and fear: emergence of new diseases or

virulent strains of old diseases with potentially dangerous impacts on human health (think avian flu)

– Rise in globalization: more trade, more potential for the introduction of pathogens (particularly from LDCs)

– Greater demands from policymakers, particularly in light of new diseases, budgetary pressures and priorities, etc.

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Where does economics fit into the animal health world?

• Economics should provide a framework for helping with improved decision-making– Increased cost-effectiveness: optimization of spending decisions

and resource allocation

– Understanding of drivers, incentives, and constraints of decision-makers

– Insights into potential impacts of different policies

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The good, the bad, the ugly

• The good:– Greater sophistication of economic impact analysis and (partial)

integration of economics with epidemiology– Institutionalization of cost/benefit thinking– New institutional economics

• The bad:– View of economics as a subordinate tool vs. economics as

contextualizing food safety/animal health decisions

• The ugly: “people” as decision makers missing

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Where are the gaps?

• But, you might ask: “well, our models capture what policymakers should do, right?”

• Yes, but they also approach the world from a command-and-control perspective: if X then Y must happen

• The problem is that there are always people behind those decisions, whether in policy, on the farm, or somewhere in between that influence how well those choices are implemented.

• And, those people have their own incentives, their own tradeoffs they face.

• Move from normative to positive approaches.

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A veterinarian’s perspective on disease

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An economist’s view: focus on the people behind the animals, their incentives, and constraints

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Where are the gaps?

• Context matters – we need better information on why actors behave how they do, what their incentives are, and how they interact.

• Economics matters to unpack these incentives, quantitatively and qualitatively.

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Where are the gaps?

• If we look at a more complicated case (LDCs), context is even more critical:– Actors are diverse

– Governments and institutions have limited capacity

– Sufficient regulations and compliance are lacking

– No data

• In addition, there is not a strong history of using animal health economics tools in decision making

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Impacts of animal diseases

• What are the potential economic impacts of an animal disease?

• While many of these are disease-specific, there are some commonalities

• Example: FMD (based on Perry and Randolph, 2003)

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FMDOvert disease Disease risk

Livestock production- production losses (mortality,

weight, milk loss, lameness)

- Treatment, containment costs

- other profit losses (idled capacity, timing of

sales, price effects)

Other income activities- crop production (manure, draught)

- fuel, transport

Natural resources- land use

- settlement & migration

- ecosystem sustainability

Risk management

- preventive control (surveillance,

fencing, zonation, movement

controls)

- maintain DVS capacity

National

and

Sectoral

Farm household

real income levelsHousehold welfare

Farm-

level

Household real

income levels-wage earnings

-meat expenditures

Risk management- own control measures

(vaccination)

- compulsory control measures

(movement controls)

- traceability

Macro-economy- Other sectors (inputs,

trannsport), multiplier effects

- foreign exchange

- growth

- consumer meat prices

Livestock trade- production losses

- profit losses (idled

capacity, timing of sales)

Market AccessTo export markets

To local markets

Livelihoods-loss of insurance, financial,

social networking functions

-increased vulnerability

Containment

-slaughter & compensation

- movement controls

Animal welfare

Tourism

Environmental concerns

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Impacts of animal diseases

• Dimensions of animal disease and food safety impacts:

– Costs

– Prices

– Linkages

– Trade

– Welfare/livelihoods

– Employment

– Public health (DALYs)

• Role of time/space

• Role of context: how systems are organized/governed matters

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Toolkits to analyze food safety impacts

• Mix of quantitative and qualitative approaches needed.

• Qualitative approachescontextualize our systems – they identify the nature of relationships, trading mechanisms, organizing behavior – in other words the incentives for different actors to engage in production and trade– Role of value chains

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Why value chains for animal disease analysis?

• Animal disease outbreaks take place in a systems context, with the risk and spread of disease contingent on measures taken throughout the chain.

• “Weak links” in the chain may accentuate disease risk, but analysis is needed to understand who these stakeholders are, how they interact with others, and why they behave as they do (including their constraints).

• Utilization in livestock systems and animal health applications increasing (see Kobayashi 2006 and unpublished FAO work in context of HPAI), though a lot of analysis is quite ad hoc

• Value chain analysis can also help to inform critical control points in the chain that accentuate risk

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From Taylor et al. (2008)

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Toolkits to analyze food safety impacts

Quantitative approachestease out specific aspects or subsets of chain-level impacts AND behavior

• Damage functions: distill impact into single measure linking risk and expected damage from disease (DALY ++);

• Econometric analysis: willingness-to-pay for food safety;• Conjoint analysis: identify/distill key food safety/quality attributes

governing decisions along chain; • Experimental economics: trial innovative incentive mechanisms to

observe behavioral change;• Systems dynamics/network models: model/simulate the chain as a unit

and conduct ex-ante scenarios of new technologies to observe evolution of behavior

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Mechanisms to mitigate food safety impacts

• Bottom line: how do we improve the governance of pro-poor systems?– Move from ad hoc to more integration (horizontal and vertical)

• Market-based risk mitigating measures:– Contracts (formal or informal)

– Certification and branding

– Institutional development to support (associations, cooperatives)

• Do costs of integration exceed the benefits – role of impact analysis

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Two examples

• Developed world: Label Rouge in France

• Developing world: Safe vegetables in Viet Nam

• Contrast: bottom-up vs. top-down approaches

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Example: Label Rouge in France

(Based on Westgren, 1999)

• Label Rouge: labeling program for various products based on geographical origin (est. 1965 by producers)

• High success of label in the poultry industry (30 percent of market):– Price premiums of 100 percent

– High demand growth from consumers

– Strong reputation for delivering reliable, high-quality products

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• How does it work?– First, an organization called a quality group comprised of

different value chain actors must be established that applies for the label from a government commission on labels (ag/commerce)

– The application is extremely detailed and gives plans on how quality is to be ensured in the value chain

• Full traceability and quality/food safety checkpoints at each stage of production are required

Example: Label Rouge in France

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• How does it work?– The application also requires the designation of a third-party in

the private sector (certified by rigorous standards of the government) to audit the quality group.

– Once approved, the quality group becomes a member of a larger organization of poultry labels that collects a small fee for market promotion activities and protection of label.

Example: Label Rouge in France

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• How does it work?– If quality standards are not met at any stage of the value-chain

(production, distribution, processing), the label is immediately removed

– Food safety is very high in the sector• 1-3 percent incidence of Salmonella in Label Rouge compared to 70

percent in industrial poutry

– Label Rouge also allows for producers to brand according to different images, but signals to consumers a high-quality product.

Example: Label Rouge in France

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Lessons of Label Rouge

• Organization of the value-chain is key– All participants play an active role

• Important certification and supervisory roles played by both the private and public sector– Government: credible certification, regulation

– Private sector: auditing, marketing, lobbying

• Financial sustainability: role of check-off fee

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Safe vegetables in Viet Nam

(source: VECO 2009)

• Similar to meat, food safety concerns high in vegetable production – overuse of pesticides, high incidence of foodborne illnesses

• Government push promoting safe vegetable production– MARD regulations on residue limits, etc.

– Training in IPM techniques

– Top-down mandates, but requires bottom-uporganization

• Focus mainly on production side, not on chain

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Safe vegetables in Viet Nam

• Regulated production process

– Training requirement (certificate received), though not fully standardized

– Residue tests

– Use of certain chemicals

– Certification of production area as “safe”

• Independent certification process, including NGOs

• Self-certification allowed too (participatory guarantee systems)

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Safe vegetables in Viet Nam

• Production costs higher (20-30%): lower productivity, higher costs for certification and infrastructure

• Prices higher too (20-30%) but only a subset of production can be sold at safe vegetable prices

• Assurance of quality at retail mixed

• Key role for farmer groups – need to strengthen certification, training, organization

• Key role to improve consumer awareness

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General challenges

• Buy-in/ownership of process throughout chain

• Roles of public and private sectors

• Sustainability

• Enforceability

• Credibility