Institutions and Livelihoods in Nepal's Tea Value Chain: A Policy Paper

Institutions and Livelihoods in Nepal’s Tea Value Chain


A Policy Paper

By Sarah Mohan


The research presented in this publication was carried out with the financial assistance of Canada’s International Development Research Centre. Information on the Centre is available on the web at www.idrc.ca.

The author welcomes feedback and comments on this document. These can be forwarded to Sarah Mohan at [email protected].

Citation: Mohan, Sarah. (2013) Institutions and Livelihoods in Nepal’s Tea Value Chain. International Development Research Centre, Ottawa, Canada.

Copyright Sarah Mohan, 2013.

The views expressed in this publication are those of the author and do not necessarily reflect the views of IDRC.

Cover Picture: Ran Bahadur Rai, Tea Farmer, Kolbung Village, shows his tea leaf. May 2010.

AcknowledgementsThis report was prepared as part of a research project on standards and livelihoods carried out by Sarah Mohan, with the support of many others. The author wishes to thank the International Development Research Centre (IDRC) for the research grant, administrative support, and guidance. The editorial assistance of Marion Sandilands is greatly appreciated. Menuka Maharajan and Sanjeev Pradhan provided valuable translation and research assistance during fieldwork. Without the participation of respondents in Nepal, and the host family in Daragoun, Ilam, the project would not have been possible.

The author would like to thank each member of the informal advisory group who guided research design, implementation, and analysis. They include Maggie Gorman, IDRC (Canada); Rhiannon Pyburn, KIT (Netherlands); Marwan Owaygen, IDRC (Egypt); Michael Kollmair, ICIMOD (Nepal); Anu Joshi Shrestha, ICIMOD (Nepal); Marion Sandilands, IDRC (Canada); John Taylor, HIMCOOP (Nepal); Matt Smith, IDRC (Canada); Keshab Khadka, Tribhuvan University (Nepal); Paras Kharel, SAWTEE (Nepal); Bill Pritchard, University of Sydney (Australia); Arun Rana, GIZ (Nepal); Pilar DePedro (Canada); Shoham Poudyal (Canada); Daniel Burnier, University of Ottawa (Canada); and Kate Green, USC Canada (Canada).

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Table of Contents

Figures, Appendices and Acronyms.... 4Executive Summary.... 51. Introduction.... 62. Conceptualizing value chains, livelihoods, and institutions.... 63. About the Nepal Case study.... 8

3.1 Methodology.... 83.2 Context.... 103.3 A brief history of upgrading.... 113.4 Mapping the value chain.... 113.5 Institutions at the farmer node of the chain.... 12

4. Livelihood Outcomes.... 134.1 Profits.... 144.2 Assets, strategies, and other livelihood factors.... 14

5. Institutional Constraints.... 165.1 Labour Institutions....165.2 Incentives for Quality.... 175.3 Standards duplicating and shopping.... 19

6. Strategies to Leverage Institutions to Access Value Chain Opportunities.... 206.1 Leveraging Sustainability Norms.... 206.2 Strengthening Cooperatives.... 206.3 Small Factories and Spontaneous Functional Upgrading.... 216.4 Other Strategies.... 22

7. Policy Recommendations.... 228. Conclusion.... 24Bibliography.... 25

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Figures

Figure 1: The Institutional Matrix of Nepali Tea Farmers.... 12Figure 2: Average Livelihood Assets of Organic and Conventional Farmers.... 15Figure 3: Livelihood Activities of Organic and Conventional Farmers.... 15Figure 4: Selected Livelihood Outcomes of Organic and Conventional Farmers.... 15

Appendices

Appendix 1: Project Outcomes.... 26Appendix 2: The Tea Value Chains.... 27Appendix 3: Actors in the Tea Value Chain.... 29

List of Acronyms

CIDA - Canadian International Development AgencyCoC - Code of ConductGIZ - (German Development Agency) Gesellschaft für Internationale Zusammenarbeit HACCP - Hazard Analysis and Critical Control PointsHIMCOOP - Himalayan Orthodox Tea Producers’ CooperativeHOTPA - Himalayan Orthodox Tea Producers’ AssociationIDRC - (Canadian Research Agency) International Development Research CentreJICA - Japan International Cooperation AgencyNTCDB - (Nepali Government) National Tea and Coffee Development BoardSNV - (Dutch) Not-for-profit Development Organization

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Executive Summary

Do smallholder farmers benefit from adopting food production rules for high-value export agriculture? This paper reports how a research project addressed this question with respect to tea farmers in Nepal. Funded by the International Development Research Centre (IDRC) of Canada, it compared the livelihoods of farmers who grow tea for local markets with those who adopt organic and other food standards for export markets.

Research findings indicate that in the short term, going global can generate smaller average net profits for the farmer than staying local. Moving beyond simple average profits, the methodology employed in the report -- and in particular the inductive approach to understanding the factors that contribute to well-being and are affected by value chain upgrading -- illustrates how a livelihood approach can be integrated into value chain analysis to understand the impact of interventions on the welfare of households.

The case study unpacks heterogeneity in the countryside and finds that specific institutional factors, such as labour allocation rules, factory grading practices, and support for on-farm learning affect whether individual farmers can benefit from upgrading their production. By shedding light on the rules of exchange, institutional analysis can act as a bridge to help us understand how value chain upgrading affects farmers’ livelihoods. Reconciling institutional, livelihood and value chain analysis can thus yield rich insights into rural transformation.

In the context of the Nepali tea case study, the livelihood perspective clarified that farmers continue to convert to organic and Code of Conduct standards - notwithstanding lower average annual profits - because of institutional and livelihood factors. In particular, they tend to convert to organic production because of their belief in the superior long-term economic prospects of organic tea. Farmers who adopt the organic or Code of Conduct standard are more hopeful for the future, have more confidence in the long-term fertility of the land, and have more stable prices.

The Nepali case confirms that opting out of a high-value chain may be optimal for some households. Such “downgrading” can be strategic from a livelihoods perspective, for example when the cost of coordination time and stress of upgraded production are taken into account. In some households and communities, however, upgrading can be beneficial. Actual outcomes from upgrading can the be result of seemingly obscure rules of the game; addressing these institutions is part of the solution.

Policy that supports the strategies of small-scale farmers can help improve livelihoods and the future of the value chain. In the Nepali case, this includes reducing labour scarcity, incentivizing and educating for quality improvements, and improving policy coherence. Research findings do not suggest that small-scale farms examined in the case study are becoming unviable, but that outmigration from rural areas could threaten their future. The future of the tea value chain thus involves improving quality and replacing aging farmers by upwardly mobile labourers.

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1. Introduction

Small-scale farmers around the world are converting their land to high-value export crops. Do smallholder farmers benefit from adopting demanding certification schemes, known also as production standards, for high-value export agriculture? The literature on the subject suggests that local conditions affect whether farmers can benefit from upgrading to high-value standards. Yet the literature lacks a conceptual framework to analyze these local conditions and how they can help or hinder upgrading.

This research paper develops and deploys a framework to understand how farmers themselves understand the impacts of upgrading and how local conditions influence that impact. It does so by integrating value chain, institutional and livelihood analysis. This framework is deployed through a case study of the Nepali tea value chain. Born out of desk and field research conducted in 2010 with funding from the International Development Research Centre (IDRC) of Canada, this report both provides policy insights for the Nepali tea chain and suggests a way forward for addressing bottlenecks in value chain upgrading.

Project objectives included: 1. Analyse whether smallholder farmers who adopt food production standards for high-value export

agriculture do better than those who do not;2. Describe how the institutional context influences the impact standards have on farmers and their

subsequent strategies; 3. Disseminate results with a view to policy and program change, improving farmer and labourer

knowledge, and the promotion of Nepali tea.

Research findings suggest that a livelihoods lens can illuminate how value chain upgrading influences the profits, assets and activities of farmers. An inductive approach to data gathering can highlight other livelihood criteria that matter to farmers. Following a basic mapping of the politics, history and institutions of a value chain, we compare the livelihoods of farmers who upgraded to high-value standard-governed export agriculture to those who did not. In the case study, we find that although upgrading farmers have higher per-unit profits, they have lower annual profits than conventional non-upgrading farmers. While this holds in the short run, farmers appear to upgrade in order to access longer-term livelihood benefits. A mapping and analysis of the institutions at the farmer node of the value chain suggests that some institutions, like labour allocation rules, can exacerbate problems that prevent farmers from benefitting from upgrading. However, institutions are also used by agents in the chain to implement strategies that improve their returns from participation in the chain.

This rest of this report highlights research findings in more detail. The next section discusses the conceptual framework deployed by the research project. The context of the Nepali case study is set out in section three. Section four lays out the livelihood outcomes from upgrading in the Nepali tea value chain. The next section discusses institutional constraints to livelihood improvements. An analysis of how institutions are used in value chain actors’ strategies is the subject of the sixth section. Part seven summarises policy recommendations for the Nepali tea sector, and the last section concludes.

2. Conceptualizing value chains, livelihoods, and institutions

A rigorous conceptual framework can provide the tools to evaluate whether smallholder farmers who adopt certification schemes for export do better than those who do not. Farmers are one actor in a value chain that stretches from the field to the fork to deliver products to consumers. A value chain can be defined as “the full range of activities which are required to bring a product or service from conception, through the different phases of production” (Kaplinsky and Morris 2001). The components, or nodes, of the chain can include sourcing of inputs, production, transportation, processing, exporting, importing, wholesale, retail, and consumption.

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A value chain for a given product can have different “threads”, each of which produces the good according to a different method. For example, the tea value chain has conventional, organic, and other threads, each of which uses different rules about production practices. Certification to these rules, which are also known as standards, can grant value chain actors access to new, higher-value threads of the value chain. The value chain literature has analysed this process using the concept of upgrading (Gereffi et al 2005). Upgrading is a process by which value chain actors attempt to improve their position in the chain and thereby capture profits. In product upgrading, an actor moves to a different thread of the value chain that generates more sophisticated, higher quality, and higher-value output. Functional upgrading, on the other hand, entails an actor moving to a new, higher-value node of the value chain. Although sometimes actors at a value chain node decide to upgrade by themselves, often it is the decision of downstream actors such as exporters or processors that induce upstream actors such as farmers to upgrade.

Development agencies from GIZ to CIDA have adopted the value chain upgrading framework to guide their interventions in markets in the global south. It is thus crucial to understand the welfare impacts of upgrading on the intended beneficiaries of interventions. While value chain analysis often assumes that upgrading actors will benefit by capturing more power and value in the chain, that is not necessarily the case. There are cases of upgrading that actually worsen the welfare of participants and drive marginalisation and exclusion (Ponte and Ewert 2009). A new generation of research is attempting to deepen understanding of the conditions in which upgrading is beneficial for actors (Mitchell and Coles 2011; Bolwig et al 2008; Riisgaard et al 2008; Neilson and Pritchard 2009). These authors use poverty, gender, environmental, livelihood and empowerment lenses to evaluate the impact of value chain upgrading. They wed value chain analysis with a more profound understanding of the social, institutional, and environmental conditions at each node in the chain. While the strength of the value chain framework has been the focus on the movement of the product “vertically” down the chain, each node of the chain is embedded in its own “horizontal” social, institutional and environmental context (Mohan forthcoming-A).

Including additional welfare criteria that are important to participants themselves, however, can explain participants’ choices and understanding of the upgrading framework. As such, an inductive livelihood approach can shed light on how participants themselves understand the welfare impacts of upgrading. An inductive approach to assessing livelihoods involves asking research subjects what factors are important to their well being. Criteria revealed in this fashion typically involve profits, assets, strategy, norms, and empowerment. Livelihoods have been defined by Ellis (2000) as “a combination of assets (e.g., natural, physical, financial, human, social, political, symbolic capital), activities and access to these (mediated by institutions and social relations) that together determine how an individual or household make a living.” Livelihoods analysis helps us understand what is really happening in people’s lives, and what enables some to escape from poverty. It overcomes the biases presented by linear understandings of poverty which characterize poverty as a problem of production, employment, and cash incomes. Livelihood analysis, on the other hand, sees poverty as a problem of entitlement, ways of making a living, and well being and dignity. According to an ODI-DIIS-IDRC conceptual framework, the willingness and ability of a household to improve its participation in a value chain depends not only on resources, returns, and risks, but also how these factors are incorporated into the balance of the household’s livelihood strategies (Riisgaard et al 2008).

A livelihood analysis of value chain upgrading paints a picture of how upgraded farmers’ livelihoods differ from conventional farmers. Yet can we explain why this is the case? Why does upgrading yield different outcomes in different locations? To conceptualize the diversity in outcomes from upgrading, we need to better understand the context in which upgrading takes place. Institutional analysis enables us to do so. Institutions are “the rules of the game in a society or, more formally, are the humanly devised constraints that shape human interaction” (North 1990). Institutions constrain activity, and in so doing put some exchange and production options out of limits. At the same time, they provide predictable rules and can be leveraged to change production and exchange arrangements. In a value chain context, institutions govern production at each node of the chain as well as

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exchange of the product with actors at other nodes. They can include, for example, labour institutions such as unions and payment rules. Formal institutions are enforced by an external authority and are difficult to change, while informal institutions such as norms and tacit practices can be changed by the actors at that node in the system.

Upgrading to an organic standard amounts to a change in the production institutions governing the value chain. This in turn affects the institutional matrix in which each actor in the value chain is embedded. Other institutions affect how actors respond to that change and its impact on their welfare. A mapping of the institutional matrix at a given node of the value chain can illustrate institutional constraints and opportunities actors face. Upgrading impacts on this matrix by changing the production institutions, but other sets of rules -- for example, financial rules or informal norms -- can help or hinder actors from deriving benefits from upgrading. The rest of this paper examines in more detail how institutions mediate between upgrading and outcomes in this static framework. Yet upgrading also triggers a process of dynamic institutional change (Mohan forthcoming-B): it transforms one or more institutions for chain coordination, and actors at a particular chain node consider these formal and informal institutions and subsequently adopt strategies. Organizations develop to support these strategies, and informal norms change concurrently. Livelihood outcomes evolve over time as this cycle repeats itself.

Institutional analysis of the livelihood impacts of value chain upgrading thus requires us to first understand the static institutional context at the chain node of interest and the nature of the upgrading initiative. A livelihood analysis of the impacts can then contrast how profits, assets, strategy, norms, and empowerment of upgrading actors differ from non-upgrading actors. Next, in order to understand why outcomes emerged as they did, and the diversity of outcomes amongst upgrading actors, we study the institutional constraints to upgrading. Finally, opportunities to leverage institutions to improve the benefits from upgrading are examined and corresponding policy changes highlighted.

3. About the Nepal Case study

The rest of this report deploys the theoretical framework described above to analyze a case study of the Nepali tea value chain. The study yields insights into whether smallholder farmers benefit from adopting production standards for high-value export agriculture, and why or why not. Following on a brief methodology sub-section, the rest of this section presents the context for the case study; a history of the upgrading process; a map of the chains; and a mapping of the institutions at the farmer node of the chain.

3.1 Methodology

The case study focused on the orthodox1 tea value chain in Ilam district, Nepal. The case study is ideal for the research question for several reasons. Nepal has been classified by the UN as a Least Developed Country (LDC) and agriculture employs the majority of the population of the landlocked South Asian country. Orthodox tea has been identified as a potential growth sector with poverty reduction potential (Warakaulle et al 2007), and indeed it is supplied by thousands of small-scale farmers, yet it has been grappling with upgrading to new food safety standards. Some farmers are following their factories in upgrading production to a local code of conduct, to organic production, or HACCP; and other, conventional farmers are not. Some farmers are prospering, and others are not. As such, the chain provides a unique opportunity to understand whether upgrading benefits farmers and why. The case study focuses on Ilam district since approximately 71% of orthodox tea in Nepal is produced in this region.

1 Orthodox tea is from camellia sinensis variety tea bushes which has been processed using so-called “orthodox” production methods. It is to be contrasted with CTC tea which, in Nepal, is produced using camellia assamica variety tea bushes and processed using the cut, tear and curl production methods (CTC). CTC accounts for 80% of the tea produced in Nepal, and is grown largely in the southern terai region on large plantations. This paper examines only orthodox tea.

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A set of ninety interviews conducted in spring 2010, the majority with small-scale farmers, form the methodological backbone of this study. The interviews included 26 informant interviews; 25 household guided interviews, which informed the choice of livelihood questions in the survey; and 30 quantitative surveys. Nine supplementary informant interviews were conducted. Research was conducted largely in three villages in Ilam, namely Sundarepani, Kolbung, and Sankhejung. Criteria for selection included the importance of village production in gross district output as well as the presence of both organic and conventionally certified production. A few additional interviews were held in other villages include Borboté (Fikkal), Jasbiri, Horcoté, Iroté and Kanyam. Data was gathered from two groups of farmers: the first grows tea for factories that supply to Nepali or nearby Indian markets; the second grows organic or Code of Conduct (CoC) tea for factories that supply to developed country markets. In each of the three main research villages, five conventional farmers and five organic/CoC farmers participated in the quantitative survey. Analysis compares the livelihoods of the two groups using both quantitative and qualitative methods.

Informant interviews with other value chain actors -- including labourers, NGO employees, factory managers and owners, development agency employees, government employees, consultants, and industry body representatives -- also informed the research. An advisory group, including representatives from academia, industry, and the development community, provided advice on analysis and a draft report. Preliminary findings were presented in a field workshop in Fikkal, Ilam and policy and academic workshops in Kathmandu during a second field visit; and at workshops in Ottawa, Canada and Wageningen, The Netherlands.

Farmer and labourer respondents benefitted from the research in several ways. They learned about the sector, including through information shared during the interviews, survey, and workshop, and were thus able to make more informed livelihood decisions. Mutual appreciation, developed through the two or three visits to their home, was also important. Beyond the conversations and cross-cultural exchange, each qualitative interview respondent received a framed picture of himself or herself, and prizes were given at the field workshop. Project outcomes are outlined in more detail in Appendix 1.

As in any study, the research findings are only as rigorous as the data collection methods. Insofar as research objectives focused on how farmers understand their own well being, all data was reported by farmers. That is, farmers reported their own annual production, cost, and profit data, which was used to generate the findings. This lends a certain subjectivity to the data that at the same time reflects the livelihoods focus of the research. Future research could strive to objectively measure field productivity over the year, and directly measure costs (converted to cash measures) for both groups, but that was outside the scope of this research. A panel data set, which collected information over many years, could provide evidence on whether organic productivity increases over time, as some informants suggested.

Finally, is it really participation in upgrading that leads to livelihood outcomes? Or could it be that wealthier farmers choose to upgrade, and as a result have better outcomes? That is, on what grounds can it be said that participation in upgrading causes the livelihood effect? This issue, which is known in the literature as the selection problem, was addressed by the research design of the case study. A lead farmer may be the first in the region to decide to convert to the standard and upgrade his or her production practices. However, since organic produce cannot have any traces of pesticides on it, and since Ilam has a rolling, mountainous landscape, the lead farmer will convince his/her neighbours to convert as well so that his/her own farm is chemical-free. As such, production types tend to “clump” geographically: one mountain will be all organic, while the next is not. When a factory converts all or some of its production to organic or CoC production, all the farmers in one sub-village will convert, while another sub-region will not2. Data from a given village thus compares two different sub-villages, each of whose farmers are representative of the village’s diversity of income, ethnic background,

2 Income, ethnicity, and other demographic characteristics vary amongst the inhabitants of each sub-region, although their upgrading status is the same. In conducting the survey, effort was made to select a representative sample from different caste and tribal groups and across different topographical areas.

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socio-economic status and agro-ecological growing conditions. As such, we can assert that the difference in livelihood outcomes between the two groups is caused by the differences in upgrading status, not from other socio-economic differences. The selection problem thus does not affect the research findings.

3.2 Context

Ilam district is situated in the lush foothills of the Himalaya, just across the border from India’s famous Darjeeling tea gardens. Agriculture is the main employer, with most families growing at least one cash crop, but households diversify their occupations and crops to generate cash income for rice purchases, school, and to mitigate exposure to risk. In our sample, two occupations and four main crops were maintained on average per household, and average farm size was 0.77 hectares. Average individual income in the region is US$1,344 (2006 figures, GDP per capita PPP; UNDP 2009:149). Nepal’s peace treaty of 2006 brought prosperity to the region, and small-scale commercial agriculture has expanded.

Tea cultivars were brought from Darjeeling as early as the 1860s, but it wasn’t until 1976 that a group of seven small-scale farmers began growing tea in the Fikkal region of Ilam. In 1995, the government privatized the sector, which at the time included major plantations in Ilam town, Kanyam, and almost 100 small-scale farmers in the Fikkal region. Since privatization, production and export of tea have increased significantly, with nearly 6,900 tea farmers on the books (NTCDB, 2009), and informal estimates suggest there may be double that number.

Until the mid-1990s all tea was exported to India for processing, often through family ties between Nepalis in Ilam and Nepalis in Darjeeling. In 1994 the first two factories in Ilam were started and while most production continued to be exported to India, small amounts were exported to German buyers (Rana 2007). In 1998 an organization was created to represent and coordinate the interests of the factories – HOTPA, the Himalayan Orthodox Tea Producers’ Association – which was sustained by member dues paid by the factory-members. By 2003, several other processing factories had opened, development organizations including JICA and Winrock International were active in the sector, and a Tea Development Alliance was formed to coordinate work in the sector. In 2006, in order to complement HOTPA’s coordination role with income generation activities, a marketing body was created – HIMCOOP, the Himalayan Orthodox Tea Producers’ Cooperative.

Discussions within HOTPA, the Tea Development Alliance, and HIMCOOP had focused on two main challenges between 2000 and 2005. Firstly, in order to capture more value-added in the chain, the sector needed to bypass middlemen in Darjeeling that were buying tea from Nepali factories and re-exporting it at a premium under their own well-known tea brand. In order for Nepali tea to be sold directly to overseas buyers, however, its brand recognition and reputation had to improve internationally. Secondly, the use of banned pesticides had to be curtailed. Nepali tea farmers were overusing chemical pesticides in their fields despite the fact that some of those chemicals – notably monocryl – had been made illegal by government regulation in European countries. To reduce the risk of rejection of shipments of Nepali tea, and improve its reputation, chemical use had to get under control.

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Tea Hills in Sankhejung village, Sudung sub-village


3.3 A brief history of upgrading

As a result of these challenges, a national tea Code of Conduct certification scheme was developed. It had four components: respect for nature, which requires that farmers reduce pesticide and chemical use by 25% in the first year of participation, by 50% in the second year, and bring chemical use to zero in the third year; respect for people, including reducing child labour; transparent processes, including making factory’s sales easier for farmers to understand; and assured quality, including encouraging the plucking of two leafs and a bud of tea leaf. In discussions in the Tea Development Alliance meetings between 2004 and 2006, plans were made to implement the scheme3. Farmers, participating factories, and NGOs implemented the CoC scheme at a field level. Factories offered to pay a small premium on CoC tea leaf; a certifier from NASA Australia was hired to inspect compliance with the standard; trainings were provided by NGOs; farmers kept record books; they reduced pesticide and fertilizer use; and factories stamped tea produced along CoC-certified production lines with the CoC logo.

More recently, organic standards have become popular in European markets. Indeed, in view of the burgeoning market in organic tea, several farmers and factories have converted to the organic standard. Using their own financial resources and those of overseas donors, factories offered farmers the option of converting to organic production. They hired Nepali experts to provide training sessions to farmer cooperatives, and they hired a certifier to certify participating farmers via the cooperatives. Many farmers decided to convert to organic, particularly on the basis of higher price promises and increased demand in the future. We will refer here to organic/CoC tea, for the sake of simplicity, keeping in mind that the nature of the two standards is different.

Some factories have chosen to adopt these standards, and sell into overseas markets, and thus buy tea from farmers who follow their requirements, while other factories supply the Nepali market or the bulk, spot market in nearby Darjeeling, and don’t follow standards. There are thus two threads in the chain, corresponding to the two types of buyers.

3.4 Mapping the value chain

The value chain maps presented in Appendix 2 show, in detail, the difference in structure and flows between the two threads of the chain. In the conventional thread of the tea value chain, any way to grow the tea is fine: it enters the spot, mass market. There is no coordination from end user to farmer. This is a low margin, high quantity business. The upgraded organic tea value chain has a different structure, distribution of rents, and set of actors from this conventional chain. In the organic/CoC thread, a standard governs the whole chain. There is a premium for better quality product, and records have to be kept all along the chain. The information required for production is highly complex, suppliers struggle to meet requirements of end-markets, and there are high levels of monitoring of suppliers. The controlling nodes in both chains are the wholesalers, who evaluate the quality of the tea and thus the pricing, and the factories, who decide which downstream market to focus on, have knowledge about processing that determines the final quality and price of the product, and who feed market information back to farmers. While the processed tea in the conventional chain is usually sent to India, where it is then blended with other tea and re-exported overseas, organic factories export directly from Nepal. We can thus see that middlemen (the green leaf dealer, the Indian blender) are eliminated in the upgraded chain, enhancing chain efficiency and increasing the share of value that is captured by Nepali farmers and factories. The upgraded export chain is more streamlined and direct. Appendix 3 shows selected actors in the chain.

3 Factories were to create a separate processing line; SNV was to support the cooperatives that delivered training sessions to participating farmers; GTZ was to boost the brand, marketing, and international recognition of COC; and HOTPA was to ensure that participating farmers got a NRs3 premium per kg of CoC tea sold.

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3.5 Institutions at the farmer node of the chain

Interviews with Nepali small-scale tea farmers revealed a set of institutions that frame their livelihoods. These can in turn be decomposed into formal institutions, which are enforced by external authority, and informal institutions, which are influenced by the actions of farmers. Figure 1 shows the static institutional framework of tea farmers in Ilam that emerged from fieldwork, with sets of formal institutions in boxes and informal ones in ovals. Farmers are embedded in a network of informal institutions, as shown by the large oval, and are affected by the formal rules. External actors (in small boxes) and strategies influence the dynamic path of the system.

Figure 1: The Institutional Matrix of Nepali Tea Farmers

Four sets of formal institutions particularly affected farmers’ livelihoods, namely production standards; labour rules; factory practices; and financial institutions. In Ilam, each village had only one local factory, which accepted tea produced according to conventional, CoC, organic, or other standards. Labour institutions included the payment contract and allocation rules. Workers were paid either a piece (per kg) or time (daily) rate. Daily rates ranged from NRs60 to 120, and piece rates range from Nrs7/kg to Nrs13/kg. Labour was allocated through customary obligations (i.e.. landlord-tenant relations), by verbal contract from one season to next, by the discretion of mobile labour groups, on a spot market, or through the community labour sharing system (“porma”). Factory practices included the frequency with which farmers are paid, which could be monthly, every other month, quarterly, or annually. Factory grading rules also affected farmers’ livelihoods. When a farmer dropped off tea leaf at the factory, the manager classified it as either A-grade, high-quality tea that is paid the standard rate, or B-grade, lower-quality tea that is paid a lower rate4. A respondent put the farmers’ critique

4 In some cases, the farmer is told on the spot how much is A and how much is B grade. In other cases, it is only at payment time months later that the farmer is told how much is A and how much is B grade. At payment time, the farmer is either paid for both A and B grade tea on the spot; or, payment is made for A grade tea, and B grade payment only comes months later. In some cases, farmers receive no payment for B grade tea whatsoever.

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Figure 1: Farmer’s Static Institutional Matrix in the Nepali Tea Sector

Legend Formal Institutions Informal Institutions

Strategies External Actors

Norms about future (demand, soil, health)

Geography (demonstration effect, distance

to factory)

Education norms (send kids to school)

Risks (bandhs, factory refusal, drought,

low prices)

Diversify livelihood, crops

Build own factory, hand-dryer

Send son to

tea school

convert, pluck 2 leaf 1 bud

HOTPA, HIMCOOP Labour Institutions

Mode of payment Allocation rules Scarcity

Factory Institutions Frequency of payment Price fluctuations Transport arrangements Grading Training

Standard Institutions Production requirements Certification costs

NGOs

Government

Farmer

Finance Institutions Bank loans Microcredit rules

NGOs

Government


of this system succinctly: “There is a grading system to evaluate the quality and pay accordingly. But this is not a good grading system, because it is done by the factory, it’s not transparent, we don’t know how they decide the grade, and there is no lab to verify that its the grade they say it is.” [Farmer, Daragoun village]

Financial institutions including banks and microcredit groups were relevant, but were not studied specifically for this research project.

Informal institutions also affected farmers’ context and choice. Local norms about future demand, the environmental sustainability of production, and farmer and consumer health affected farmers’ decisions and how they judged their own well being. The first generation of parents to send their children away to school did so in the hopes of one day obtaining a good desk job, but this generated labour shortages in the village. Individual farmers are embedded in particular geographical locations that expose them to the demonstration effect of innovative local farmers. Closeness to the local factory makes it easier to access training and production knowledge while reducing transportation cost. Farmers’ institutional context also includes factors that expose them to risk such as strikes (bandhs) that halt economic activity, drought, and world prices for tea.

External actors influence the institutional framework of farmers. Through the training sessions that they offer, NGOs affect farmers’ norms and values. This can increase farmers’ valuation of sustainable farming, as reflected by one respondent as follows:

If I use the chemical fertilizers and pesticides, then the soil will be damaged, and when my time is done, what can be grown on this land? I am growing organically for my children and grandchildren, for the health of the soils that will feed them. [farmer, Sundarepani]

NGOs also affect factory institutions by providing training sessions at the factory and other support. Government affects farmers through country-wide strikes (bandhs), which adversely affect income, as well as through concessional rates on loans and other financial services at state banks. Industry associations HOTPA and HIMCOOP influence standard institutions by facilitating certification, exports, and through industry coordination work.

In response to the opportunities and constraints offered by their institutional context, farmers craft livelihood strategies to get the most out of the situation. In response to the new standard institutions, and new sustainability norms, a farmer may choose to convert to organic /CoC production, reducing chemical use and plucking high-quality tea leaf. In response to all the risks they face, farmers are taking up different occupations and planting many crops in order to diversify their sources of income. In response to the perceived unfairness of some factory rules, and distance to the factory, many farmers are starting up their own small-scale factory works in their homes or nearby buildings. Finally, to reconcile the desire to send children to school and the need for help on the farm, several respondents spoke of sending children to tea school.

This static institutional matrix provided the context in which farmers experienced the change from conventional to organic standards. The next section examines how farmers who opted into the new standard did compared to those who stayed with the conventional standard. However, we return to the question of how institutional conditions hindered and helped welfare in sections Five and Six.

4. Livelihood Outcomes

This section explores how the adoption of an organic standard for export affected small-scale farmers in the Nepali orthodox tea sector. It does so by comparing the two groups of farmers, namely those who grow organic for overseas export and those who grow conventional tea for local and Indian spot markets. Drawing on quantitative survey data, the first subsection compares the profits of each group, and the second compares livelihood outcomes, assets and activities. This livelihood analysis of the impacts of upgrading contrasts how profits, assets, strategy, norms, and empowerment of upgrading actors differs from non-upgrading actors.

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4.1 Profits

Although farmers got a better price for CoC and organic tea, we find that organic farmers’ annual profits in 2009 were 41% lower than those of conventional farmers, based on our survey of 15 organic and 15 conventional farmers. Data for 2010 were collected from the first quarter (first flush); inducting them out to all of 2010, organic farmers had annual profits that were 14% lower than conventional farmers. This indicates that in the short run, farmers who convert to standards for high-value exports have lower profits than those who produce for local markets. This very question is debated informally by farmers across the region: do the neighbours’ full, lush fields of conventional tea earn them more money than more sparse, but high-value, organic tea bushes?

It appears that organic farmers have high per-unit costs, but even higher revenues, making their per-unit profits higher than conventional farmers. Conventional farmers have low per-unit costs and low per-unit revenues, leading to lower per-unit profits. Indeed, we find that the profits per kg of tea sold in 2010 by organic farmers is, on average, 40% higher than the per kg profits of conventional farmers. This stems from the price differential between the two groups: organic farmers receive, on average, Nepali Rupees (NRs) 40 per kg of tea sold in first flush 2010, while conventional farmers received on average a significantly lower Nrs22. However, the productivity of organic farmers is lower than conventional farmers. Low-margin, high-quantity conventional tea farming appears, according to our data, to be more profitable on average over a year than is high-margin, low-quantity organic tea farming.

4.2 Assets, strategies, and other livelihood factors

Livelihood theory requires analysis of assets (e.g., natural, physical, financial, human, social, political, symbolic capital), activities and access to these to illustrate well being. A livelihood analysis thus requires us to move beyond simple profits to explore the other economic, social and environmental factors that make up farmer well being. To this end, the research methodology employed an emergent, iterative approach: once a topic was mentioned in a qualitative interview, it was included as a question in subsequent interviews. Similarly, the quantitative survey was built around issues mentioned by previous interviewees. In this manner, a set of livelihood criteria were defined, measured, and compared across the two groups.

Livelihood theory would suggest that organic farmers have different assets than conventional farmers, and our data supports this assertion, though the differences are not statistically significant in our small sample size. Assets of value to smallholder tea farmers in Ilam include livestock; land; knowledge of tea farming techniques; education; a large family; and financial assets. Data gathered through the quantitative survey, shown below, indicate that organic farmers tend to have more livestock. This is consistent with the hypothesis that livestock would be more important to organic farmers, since farm animals provide crucial inputs to organic fertilizers and pesticides. Organic farmers are more likely to have attended at least one training, and have attended on average more trainings than conventional farmers. This suggests that they are more likely to be knowledgeable about the farm, reflecting that organic production requires a more in-depth knowledge of soil fertility and agroecosystem management. organic farmers tend to have more education than conventional farmers, but the difference is slight. There is no perceptible difference in the average tea farm size between the two groups. Interestingly, conventional farmers spend many more hours, on average, working the farm per day, more so than organic farmers. Organic and conventional farmers are equally likely to have a loan, but organic farmers have a higher

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Tea leaf freshly plucked from the bush. Kolbung Village.


average debt load.

Figure 2: Average Livelihood Assets of Organic and Conventional FarmersOrganic farmers Conventional Farmers Statistical Significance

Number livestock 4.23 3.67 No: p=0.55Land area in tea, hectares 0.729 0.724 No: p=0.98Attended trainings? 47% 40% No: p=0.72# trainings attended 2.7 2 No: p=0.5Years of education 7.06 6.73 n/aFamily hours worked on farm per day

9.87 12.2 No: p=.345

Have loan? 47% 47% No: p=1Amount loan (NRs) 49,167 38,021 No: p=0.66

The set of livelihood activities of the two groups of farmers differs, but only slightly. Organic households tend to pursue fewer occupations (shopkeeper, teacher, etc), which is consistent with qualitative evidence that organic farmers tend to spend more time coordinating household tea production. Organic farms tend to have a higher number of crops grown, consistent with evidence that they encourage a variety of herbs, vegetables, and mixed cropping patterns, to provide inputs for biopesticides, but also as an approach to farming.

Figure 3: Livelihood Activities of Organic and Conventional FarmersOrganic farmers Conventional Farmers Statistical Significance

Number household activities

2.2 2.33 No: p=0.54

Number crops grown 3.3 3 No: p=0.5

Inductive criteria included feelings and expectations for the future. Farmers spoke often about how they felt when they went to sell their tea, and how that feeling affected their well being. The quantitative survey thus asked each respondent to choose the term that best expressed how they felt when they went to sell their tea. The numbers in the first row of Figure 2 below show that of the 15 organic farmers, fewer were satisfied; more of the 15 conventional farmers were satisfied. However, more organic farmers were hopeful for the future. That hopefulness comes from their confidence that there will be a good market in the future for the tea they were producing: they described that market as very good (an average rating of 4 out of 5), while conventional farmers described the future market just as “OK”. The soil was also described as important to well being, and organic farmers were more confident that the tea they were growing was good for the long-term health of the soil.

Figure 4: Selected Livelihood Outcomes of Organic and Conventional Farmers5

Organic farmers Conventional Farmers Statistical Significance

Feelings 1 proud, 4.5 satisfied, 5 hopeful, 4 frustrated

1 proud, 6.5 satisfied, 2.5 hopeful, 5 frustrated

n/a

Good market in future 4 3.5 Yes: p=0.08

Long-term health of soil 3.7 2.9 Yes: p=0.002

Household terms of trade +1.66 -0.24 Yes: p=0.03

Years no profits (organic) 73% had years without profits; 4.5 years on average

n/a

% Tea price variation 2009 19% 38% Yes: p=0.02

5 The figures in the statistical significance column reflect the p-values from a t-test of the equality of the means of the two groups for the given variable (N=30). At a 5% level of significance, we can reject the null hypothesis that there is no difference between organic and conventional farmers in their average value for that variable if there is a reported p-value of 0.05 or lower.

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The household terms of trade are defined as the per kg change in the tea price (over the last five years) divided by the change in the price of a kilogram of rice over the same time period. While the terms of trade per kg for organic households was improving, it was worsening for conventional households. However, organic farmers had many years without profits, 4.5 on average, during the conversion period, which may be longer than the profit-less period faced by conventional farmers. This undoubtedly led to the high rates of indebtedness described above. Unfortunately, data was not gathered on years without profits from conventional farmers, though anecdotal data suggests this was less of a problem. Organic farmers’ prices tend to be more stable, reflecting the closer relationships they have with the factory.

The evidence presented in this section indicates that farmers who upgraded to organic/CoC production had different livelihood outcomes than farmers who did not. Local conditions, however, prevented actors in the value chain from getting full benefits from conversion. We turn to these constraints in the next section.

5. Institutional Constraints

In order to understand why the outcomes presented in the last section emerged as they did, this section examines the institutional constraints to upgrading. The institutions surrounding farmers affect how they make a living. As noted in section 2, institutions can constrain actors, preventing certain kinds of behaviour -- for example, norms against crime can prevent farmers from stealing from one another. Institutions for exchange, such as purchasing tea leaf or hiring labour, can affect production outcomes. Institutions that govern inputs to production like labour and knowledge affect production costs and the feasibility of production. If upgrading is intensive in certain inputs that are particularly constrained by institutions, then upgrading can be more difficult and less beneficial for targeted groups. Other institutions govern exchange of information and product between nodes in the value chain. If these rules are suboptimal, this too can hamper successful upgrading.

These institutional constraints can help explain the diversity of outcomes amongst upgrading actors. Farmers in case study villages where constraints were more binding were less able to meet certification requirements and to improve profits and livelihood conditions. Understanding institutional constraints to upgrading can help policy-makers explain failures to benefit from upgrading as well as actors’ behaviour to overcome these challenges. An institutional analysis can thus illuminate bottlenecks in the value chain upgrading process that, if addressed, help improve rural development. Qualitative interviews illuminated how certain institutions (see Figure 1) were actively constraining the ability of farmers to upgrade to organic/CoC farming and from benefiting from the same. Labour institutions, quality incentives, and standard duplication were emphasized as particular challenges. The quantitative survey went on to measure certain aspects of these constraints.

5.1 Labour Institutions

The scarcity of labour was a key constraint in the tea sector in Ilam. Sometimes agricultural produce and tea goes unharvested because labourers cannot be obtained in time. In survey responses, this problem was described as “extreme” or “acute”. The shortage affected costs in several ways. It increased the time and energy farmers had to put into tracking down and securing people who can do tea plucking. This is particularly costly for organic/CoC households whose fields require more labour time than conventional farming and whose farmers have additional demands on their time including for training and making organic pesticides.

The shortage also affected the cost of labour input. It increased the bargaining power of labourers, but interestingly not over the price they were to be paid, which seemed to be “sticky” – non-negotiable in a particular geographical area. Instead, labourers bargained over when they were to be paid, sometimes managing to negotiate advances of several thousands of rupees weeks before the work is to be done. Loans from farmer

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to labourer went outstanding for months. Labourers were able to get paid at the same time as the work is done, or every two weeks or a month, while farmers get paid by the factory either every month, or as infrequently as once a year in some cases. The shortage thus increases the farmers’ debt burden and costs of production.

There are impacts on farm households’ revenues from tea sales and thus their profits. Owing to labour scarcity, tea leaf was not plucked at the correct time nor with appropriate attention to quality, which reduced the quality of the tea leaf sold to the factory and the price farmers receive. For example, in some areas, labourers formed into groups and themselves decided when they would go to which farm. Sometimes, they arrived at a farm days or weeks after the optimal plucking time, and the plucking quality was poor, in which case they instructed the farmer that the tea had to be sold to low-quality CTC markets. This is once again particularly problematic for CoC/organic farmers, since the factory will only pay them “A-grade” prices for good-quality tea leaf. Farmers need these higher prices and revenues to compensate for higher costs and lower productivity of CoC/organic production.

Failures in labour institutions have worsened the shortage. Low wages have reduced the incentive for immigration of labourers from elsewhere in Nepal and India. Wages haven’t increased because of the stickiness in wage-setting institutions. Untransparent labour allocation mechanisms allow labourers to take advantage of their market power, to the expense of farmers’ bottom lines and upgrading capacity. In addition, cultural norms against farm labour send labourers away from the fields. Children are being sent to school, exacerbating the shortage. This generates a demographic shift as farmers’ children take jobs in the city, their parents give up the farm to join them, and crucial knowledge about tea farming is lost. Where is the next generation of farmers going to come from? If it is from the labourers and their children, who may buy the land, then they need to be trained and their assets developed in anticipation of that shift. Finally, labour institutions are failing to incentivize high-quality tea leaf plucking. This in turn is reducing the quality of Nepali tea and its reputation and price internationally.

5.2 Incentives for quality

International sales of Nepali orthodox tea have been constrained by its relatively weak quality. Unlike bulk CTC tea that is sold for use in tea bags, orthodox tea is consumed by connaisseurs who buy only if the quality is good, and who pay a premium for high-quality product. As one respondent noted, the market for orthodox tea can be readily compared to fine wine:

“Quality, it’s everything. The leaf, the plucking, the way it’s processed, fermentation. The raw material is number one; the processing number two. [....] Orthodox tea, the price is set by the buyer. Putting a price on it is a process. Just like wine. The table wine is like a commodity. With fine wine: each bottle is different.” [Informant, Kathmandu]

Yet the quality of Nepali orthodox tea lags behind that of its competitors, including fine Darjeeling, Taiwanese, and Chinese teas. Interviews with tea experts, including tea tasters and retailers, confirmed that tea chain actors, including consumers, pay for taste -- quality -- not labels. The organic standard attempts to act as a proxy for quality, but its requirements are costly and perhaps unnecessary. Organic and Fair Trade teas are not necessarily of higher quality, and indeed some value chain experts suggest that they tend be of lower quality, arguing that it

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Kedar Nath Sitaula and his wife, Borboté (Fik-kal). The Sitaulas are labourers. The per-kg pay-

ment system is much better for them, they say; still, they face risks from strikes and increasing food prices. They say they are worried for their three sons, since they have no land to give them.


is the tea producers who can’t get a good price on the quality of the tea alone who turn to organic production. One Nepali tea industry official pointed out that organics are becoming more and more popular in Europe, and predict they will eventually be required throughout the sector. Another pointed out, though, that most markets only require compliance with Codex food safety standards as well as HACCP requirements, and suggested that Nepal may be better served by focusing on universal compliance with those requirements and with the quality of the tea produced.

The quality challenge affects CoC/organic farmers’ livelihoods by reducing the price that they receive from the factory. Without a high quality premium, factories receive a lower price for their processed CoC/organic tea leaf and so pass a

lower price premium on to their supplying farmers. While the price paid by factories for CoC/organic tea leaf is higher than is paid for conventional tea leaf, it is lower than it would be if they were able to sell the processed leaf as world-class top-quality tea. Because of the difference in the quality of their tea, farmers in Nepal -- even if they grow organic -- thus earn less per kg of tea leaf than farmers in Yunnan or other elite growing areas.

The quality challenge also affects CoC/organic farmers’ livelihoods by reducing the proportion of their tea leaf that is sold as “A” grade product. Factories cannot sell the full quantity of CoC/organic tea they produce into international markets because world demand for Nepali tea is low. Demand is low in turn because of Nepal’s weak reputation for quality. As one factory owner put it, “The buyer is only concerned with quality; they have not bought all our production”. Two-thirds of organic factory production is rejected by the developed country buyer and must be sold in low-value markets, for lower prices. As noted above, farmers earn as much as two times the return on A-grade leaf as on B-grade leaf, but factories pay A-grade prices only if that tea is sold overseas at high international rates. If international demand is too low, the product is sold in Nepali or Indian markets at low rates and farmers are paid only B-grade rates. Thus, the farmer must grow all his or her crop at organic costs, but is reimbursed at the higher rate for only a portion of their crop; the factory must process all of the tea according to high-value market’s requirements, but sells half of the product or less at high-value organic international market rates. This undermines the profit margins of the farmer and factory respectively.

Informal and formal rules in the Nepali tea sector are failing to incentivize the production of quality tea. Poor knowledge about techniques for quality are a key constraint, one which is not addressed by current institutions in the sector. Quality is relevant at the plucking, transportation, processing, and packaging stages of the chain. Labour institutions, and particularly the mode of payment, need to incentivize quality plucking. Informal norms amongst farmers need to value quality more, distill informal practices that improve tea leaf quality, and disseminate knowledge about best farm practice. Mechanisms for transportation of the tea leaf need to improve, including to reduce spoilage, for example by switching from horse or human transportation to regular motorized leaf pick-up. At the factory level, norms for professionalism could be disseminated amongst factory owners and managers, including through training, improved technology, and better management techniques. Factory owners and managers need to know their

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A tea tasting at the Nepal Small Tea Producers Ltd (a.k.a. the Dr. Khola factory), Fikkal. The factory supplies to both

overseases and local buyers. It has opted to not go Organic.

Uttam Pradan, Manager of Gorkha Factory in Sundar-epani, contrasts the tea leaf he tends to get from farmers (on the left) with the high-quality tea leaf he’d like to get

(on the right) to make better-tasting processed tea.


tea – its quality, weaknesses, and its place within the international tea market -- in order to bring the processed quality up above international expectations.

The next frontier in the Nepali tea sector is how to boost the overall quality of the tea and improve the professionalism of the sector. Yet it lacks the norms, incentives, and rules that incentivize quality. An ethos of trust and a shared focus on quality improvement could complement incentives to transform the sector.

5.3 Standards duplicating and shopping

There are too many different certification schemes involved in governing the tea value chain. These schemes are examples of food production standards that communicate the needs of downstream actors to upstream actors. Standards can reduce the transaction costs of communicating market requirements by including all the requirements in one set of rules, like the organic rules, with corresponding training and enforcement mechanisms. Yet factories and farmers are being asked to juggle a multitude of different standards, each of which is required by a different downstream actor. These include organic, CoC, HACCP, Rainforest Alliance, Fair Trade, and GlobalGap standards.

This duplication of standards hurts the livelihoods of farmers by increasing the cost of certification. That is, duplication increases transaction costs in the value chain. Factories, cooperatives and farmers have to pay multiple compliance costs, including formal certification fees as well as conversion and training costs. For example, when a factory needs to become compliant with three different food safety schemes, it has to pay three different certification fees, implement three different record-keeping measures, and sometimes train farmers according to three different field practice methods. Factory managers grapple with the duplication of standards: one manager was coordinating the processing of tea adhering to three standards (organic, organic conversion, and conventional) coming into the factory at two different times of the day, requiring enormous managerial talent to juggle six simultaneous production lines. With some schemes, farmers themselves have to pay to be certified. Standard duplication also hurts farmers by increasing the complexity of required field-level production processes, which leads to stress and confusion.

Standard harmonization involves having fewer production standards which all importing nations and companies use as a requirement for market access. This harmonization would reduce the costs of production

and enable factory managers to focus on producing a quality product. Similarly, it would reduce the barriers to entry to agricultural processing, enabling smaller-scale actors -- such as the household processing works in Nepal -- to market their produce.

It should also be noted that standards duplication can, in some cases, be beneficial, including when it is used strategically by value chain actors to address weaknesses in the chain. Factory owners appear to assess the demands in end-markets, look at the changes in production necessary at a field level, and “shop” amongst the standards and choose one that matches the consumers’ needs with the transformation and enforcement needed at the farmer level. Having multiple standards available can also be useful when they are used sequentially to complement each other, for example where one certification scheme improves the capacities of farmers and prepares them for the next one. One NGO representative said, for example, that the CoC was an “easy way” to transition to organic insofar as it provided support for the gradual reduction of chemical use over time, allowing

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Proof of almost a half-dozen certification schemes are proudly on display outside the

Himalayan Shangri-La factory in Sankhejung Village.


production levels to recover slowly and teaching farmers how to farm organically. This, they argued, was better than abrupt conversion to organic rules, in which productivity can be cut in half.

6. Strategies to Leverage Institutions to Access Value Chain Opportunities

Although institutions can constrain possibilities in the value chain, they can also be leveraged to improve the value chain. Institutions provide predictable, stable rules that give each chain actor confidence in how production and exchange will take place. Fieldwork also suggested, however, that chain actors find opportunities to increase their return from participation in the chain. They then devise strategies to capture these higher returns. They use existing institutions -- including organizations, informal norms, and formal rules -- as a mechanism or leveraging device to implement these strategies. Taking advantage of institutions in this way allows them to alter their terms of engagement in the chain in order to improve their livelihoods.

The last section noted, for example, how some factory owners strategically use standards to improve the capacities of upstream farmers while accessing downstream markets. We also suggested that labour practices could be leveraged to incentivize high-quality tea leaf plucking. The rest of this section explores how value chain actors are using institutions to implement strategies that improve their livelihoods.

6.1 Leveraging sustainability norms

Even if upgrading is not financially optimal in the short run, factories and NGOs have been able to use informal norms to induce farmers to convert to upgraded organic/CoC tea. The overwhelming reason for conversion cited in interviews was belief in the superior long-term prospects of organic tea. One farmer explained that he didn’t see a future in inorganic tea on global markets, but added that “for the future, we’re hopeful. Is there any future for organic tea in foreign markets?” Others expressed concern for the long-term environmental sustainability of conventional tea. NGOs provided training which induced change in informal norms relating to the environment, health and market access. This made farmers more willing to sacrifice short-term profits for long-term market viability. As a result, they were more interested in converting to CoC/organic production.

6.2 Strengthening Cooperatives

Farming cooperatives were being used by farmers to improve their market power. Although many cooperatives were formed as early as 2000 by the government for the purpose of extension and coordination, or by farmers in reaction to government incentives, it was when the CoC was created that the cooperatives really took off. They are active today particular amongst CoC and organic farmers. Some of the most innovative cooperatives were created by a crisis -- for example, when a factory refused to buy the tea leaf of farmers. As they describe it, this slight caused indignation amongst the farmers, who gathered together and decided that they would have more power if they were united as a cooperative.

Cooperatives are in some cases agents of innovation, searching out factories to pay more for leaf, investigating opportunities for certification, finding funding for new collection centres and technologies, and working at the cutting edge of ecological tea farming. These activities increase the market power farmers have vis a vis factories by increasing farmers’ options for sale, production, and funding. As such, they enable farm leaders to take advantage of opportunities in the chain. However, cooperatives can also be used to restrict access to such opportunities. Some cooperatives have a high fee to join them, creating barriers for new farmers to join and thus access higher tea prices. They may provide

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High Hill Cooperative Members, Santidara Sub-Village, Sankhejung


preferential services -- technical assistance, financial aid -- to lead farmers who have been members for a longer period of time. The political economy of cooperatives is thus crucial to successful farming strategies. The literature suggests this is the case elsewhere in the world: for example, one case study of organic banana producers in Peru notes that access to organizations which provide support for conversion is important for individual farmer success (Mitchell et al 2009). Finally, the network of cooperatives and their members is being leveraged by farm leaders and NGOs to improve access of farmers to national policy debates on the tea sector. Through regional and national coop representative bodies, farmers are influencing broader value chain policy.

6.3 Small Factories and Spontaneous Functional Upgrading

In reaction to the perceived unfairness of factory rules, and the deficit in processing capacity in some parts of Ilam, farmers are starting up their own small processing factories or hand-dryers. In so doing, they are moving into a new downstream activity in the value chain, or what is known as “functional upgrading”. Although this process tends to occur elsewhere through projects planned by external actors, in Ilam this is happening from the grassroots, in a case of spontaneous functional upgrading. Farmers are doing this in the hopes of capturing more of the profits (rents) in the chain. Some households have hand-dryers in their homes, while others have started up their own small factories by themselves or with family, friends, or the local cooperatives.

The farmers’ factories draw on local institutions for exchange, including to buy local leaf and access inputs such as electricity, machines, and skilled labour. However, they face a number of problems, including getting access to finance. Although one development program does provide some support for the establishment of small factories, the starting capital required for participation in the program is prohibitive for most farmers. Only minimal government assistance is provided to the small factories: they can access a 50% subsidy for some components of the machinery. The second problem is electricity – there are electricity cuts (“load shedding”), which halts the processing of the tea to the point where it goes bad. Alternatively, there can be electricity problems and fire. Thirdly, obtaining equipment is difficult. The fourth, and most severe problem, is marketing. Though the quality of the tea produced can be quite good, the tea is heterogeneous, and most often not certified to any of the relevant standards. Shops in Kathmandu prefer to buy from the big factories, and small processors don’t have access to markets overseas. This highlights that upgrading strategies always need be aligned with market realities.

It is unclear, in Nepal, whether such factories can attain quality and homogeneity requirements to participate in global markets. In part, that is because of infrastructure needs (electricity, roads etc); as noted above, it’s also a matter of their access to technical support. While the small factories are proof of the empowerment of farmers, the persistent problems they face suggest that the future of these factories needs to be reconsidered. A development project could link them to other small-scale tea processing works with more history in the craft, such as in Darjeeling or Sri Lanka, to improve the quality and homogeneity of the product. It could encourage them to focus on marketing the tea locally. Back-up generators for

household hand-driers could eliminate the problem of spoilage.

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Deo Kumar Rai, a tea farmer from Pashupati Nagar (Sankhejung), wanted his story told: how the factory

encouraged him to go organic, but then the cooperative demanded an exorbitant sum for the membership neces-sary for access to the factory. Original co-op members

did not, according to him, have to pay this fee.

Home-made machinery in a small factory owned by Mukunda Paudyal in Horcoté, Kanyam


Development agencies could send trained electricians and mechanics to the area to fix the electrical problems that are burning down factories and the equipment problems that are hampering productivity. Otherwise, farmers could engage with factories to understand some of the benefits of scale and history in the craft of processing that justify the concentration of processing capacity in the region and may make household processing unviable.

6.4 Other Strategies

In reaction to risks, including strikes, factory refusal, low prices, and drought, farmers build their resilience by diversifying their livelihoods – taking up more occupations individually and within the household – and their crops. In reaction to labour scarcity, farmers are trying all sorts of innovative ways to access labour. Some use the community labour rotation system, or “porma”, more intensively. Others convince school children to work in their fields on Sundays. Some farmers set up a verbal contract with a group of labourers at the end of the farm year (November), committing them to work for them in the coming year (March), and confirm that contract by phone or in person in the spring.

7. Policy recommendations

The policies and projects of NGOs, companies, and governments affect livelihoods in the Nepali tea value chain. Company and NGO policies are crucial for the livelihoods of farmers and labourers alike. Surprisingly, the policies farmers raised as most important to them were the policies of the factory, such as their grading policy, and a policy of non-interference in cooperative practices. Food safety policies in developed countries were transmitted through the value chain by the factory to farmers. That is, the factory refused to purchase tea leaf grown with the use of pesticides forbidden by the food safety laws in developed countries. Similarly, corporate policy was transmitted through the chain to the factory, as with the Japanese firm which required its supplying factories in Nepal to follow HACCP rules, with impacts on farmers’ livelihoods. Such corporate policies affect farm-level costs, prices and profits.

Farmers and stakeholders also stressed the importance of NGO projects for their well being. NGO projects gave them access to field-level technical support, knowledge, and assistance with organizing. Nonetheless, some farmers criticised NGO policies that invested more in meetings in the capital city than in field-based staff who visit farmers’ fields to help them troubleshoot. There are several development agencies active in the Nepali tea sector, including GIZ (German), Agriterra (Dutch), SNV (Dutch), and USAID, who inter alia support local NGO TEASEC to build up cooperatives, provide trainings, support representation of Nepali tea at international tea fairs, or support specific factories. The political economy of aid in the sector, though studied through this research, is not explored in this paper.

When asked what the state does for them, or what they would like the government to do for them, most labourers responded that they do not receive any help from government, NGOs, or the factories. In fact, the main policy-related request they had was for an elimination of strikes (bandhs), which hurt their livelihoods. The policies of farmers did affect them, however, including through frequency of pay, method of hiring, and support of labourer’s families’ needs (health care, rental housing, school fees, etc).

The Nepali government’s tea policy-making is led by the National Tea and Coffee Development Board (NTCDB). The NTCDB’s regional offices, among other functions, raise tea bushes from grafting or seed, and sell them at a low price to farmers. The head office coordinates participation in the International Tea Committee (ITC), publishes an annual report summarising statistics and analysis of the sector, organizes representation at

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Prem Kumari Rai, a farmer from Jasbiri village, shows tea she processed on her household hand-drier. Prem had to give up on her machine and the small

business she had selling her tea through her sister in Kathmandu because frequent electricity cuts

spoiled her tea.


international tea fairs, and promotes Nepali tea. Its strategic plan for the Tea Sector in Nepal (2010-2014) sets out a vision for the sector and activities for the NTCDB. While its efforts are laudable, fieldwork suggests that the reach of the state into the current operations of the sector itself is not extensive. Farmers, labourers and stakeholders had difficulties pointing to government policies or programs in operation besides the provision of tea bush seedlings. Stakeholders suggested this might be the result of frequent turnover in government leadership and staff. One farmer noted that if there was a drought or crisis, they could go to the village municipal government to apply for help, but that since they didn’t know anyone in government who would champion their cause, it would be unlikely to succeed.

There are opportunities, in this regard, to strengthen the cohesion between actors in the Nepali tea value chain. The NTCDB (from government) and HOTPA/HIMCOOP (from industry) are both active in tea marketing. So much so, that they have each created their own logo for Nepali tea which they have invested in and promoted overseas. SNV/Agriterra, with representatives from the cooperatives, have a vision for the future of the sector; so does the NTCDB. GIZ has a project with a factory; so does SNV. The NTCDB is looking to implement an organic conversion project: so is HOTPA. This duplication inhibits the creation of effective multi-stakeholder policy, and could be remedied by multi-stakeholder discussions on the path forward. The case of China’s organic policy, where two separate government departments have separately developed policy competence for certification and production, shows not only that such duplication is common, but also that separate niches can be developed for different governance bodies (Thiers 2006).

Government, industry, and development agencies seeking to make an impact on the quality of Nepali tea, and price obtained, could invest in policies that support farmers’ own strategies. Farmers are investing their money and time in a set of strategies: diversification, increases in labour availability, small-scale factories, and cooperatives. This could involve, for example, investigating how changes in standards can resolve some of the contradictions that are complicating the labour market. Alternatively, it could involve helping cooperatives with the marketing of tea produced by small-scale factories. Investment in labourers is particularly relevant insofar as it affects the quality of the tea leaf plucked, and thus the final price Nepali tea fetches on international markets.

In summary, research highlighted the relevance of the following policy recommendations:

Development Agencies and NGOs: - train labourers to pluck better;- investigate ways to organize labourers, and their incentives, to improve farmers’ access to labour; - train women, including in farm management;- facilitate inter-country visits of small processors, or farmers, to small-scale factories and the fields;- investigate marketing opportunities for household processing units’ tea;- initiate discussion with small-scale processing units regarding their viability;- improve collaboration with other donors/NGOs.

Factories: - make grading rules more transparent;- build links to factories in well-established areas, including Darjeeling and China, and learn from them;- provide stronger incentives to deliver high-quality tea leaf;- enhance knowledge of the global tea market and the position of Nepali tea within it.

Government:- facilitate labour migration into the tea sector;- provide a stable working environment, including eliminating bandhs and providing electricity;- encourage coherent policy-making across tea sector actors.

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8. Conclusion

This research project aimed to develop a framework to evaluate whether smallholder farmers benefit from adopting production standards for high-value export agriculture. It also set out to investigate how local institutional context influences this welfare impact. This paper has shown that an inductive livelihoods approach can illuminate how farmers who upgrade perceive the resulting outcomes, including in terms of profits, assets, activities, and other values. The conceptual framework that emerged from the research also demonstrated that institutions can constrain value chain actors’ access to inputs and markets and thereby reduce their benefits from upgrading. Yet actors also leverage institutions in strategies to extract more benefits from the value chain.

This conceptual framework provides a vision of how to unite value chain, institutional, and livelihoods analysis. When deployed through a case study of the Nepali tea value chain, it yielded insights into possible bottlenecks to successful upgrading. We found that although CoC/organic farmers earned higher per-unit profits, lower productivity made annual profits lower than conventional farmers. Indeed, the Nepali case confirms that downgrading to a lower-value thread of a chain may be optimal for some households. CoC/organic farmers tended to have more assets yet bore higher debt loads. At the same time, CoC/organic farmers were more hopeful and confident about the future, and this long-term vision motivated their conversion. This research thus indicates that while farmers may not profit in the short term from upgrading to a standard, they may convert with long-term profits in mind. Their ability to benefit from upgrading was constrained by institutions that facilitated labour shortages, weakened knowledge about and incentives for quality, and duplicated production standards. Yet value chain actors leveraged institutions to enact livelihood strategies: NGOs used sustainability norms to encourage upgrading, farmers strengthened cooperatives to improve their market power, and farmers built small-scale factories to improve their position in the chain.

Research findings support policies that support farmers’ strategies by addressing institutional bottlenecks. In the Nepali case, this can include moves towards easing the labour shortage. Landless labourers are rarely discussed in the literature on agricultural development, yet the quality of their work, the institutions that govern their allocation to farms, and their scarcity or abundance is crucial to agricultural productivity, rural poverty, and farmer livelihoods. Policy-makers could also recognize that downgrading can be optimal for some households, particularly those which struggle to improve organic productivity and which have a high coordination cost of production.

A long-term vision would address the demographic challenges in the sector. I found no evidence that suggests that smallholders are being economically marginalised or driven off their land because of lack of financial viability. However, with commercial agriculture, growth, and changes in norms, farmers’ expectations have changed. Farmers’ children are going to school, and being raised with the expectation that they will work paid jobs in town or city, and their parents plan to sell the land and join them there. The value chain literature has assumed that the future of small-scale farmers in globalised agriculture will be determined by the purchasing decisions of downstream buyers and the cost of compliance with standards. However, this study has suggested that the concentration of land ownership and participation in high-value chains may be the result of demographic shifts. Who will be left to work the land when parents leave the farm to live with their children?

Finally, long-term farmer profits depend on factories getting better prices for their processed tea. This, in turn, depends on the quality of the tea exported from Nepal. Policies to promote quality are thus instrumental. Increased policy coherence amongst government, NGO, and private sector actors would improve the governance capacity in the chain so that these challenges could be addressed.

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Bibliography

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Ellis, F. 2000. Rural Livelihoods and Diversity in Developing Countries. Oxford, UK: Oxford University Press.

Gereffi, Gary, J. Humphrey and T. Sturgeon. 2005. “The governance of global value chains.” Review of International Political Economy 12(1): 78-104.

Kaplinsky, Raphael and M. Morris. 2001. A Handbook for Value Chain Research. IDRC.

Mitchell, Jonathan, and Christopher Coles, eds. 2011. Markets and Rural Poverty: Upgrading in Value Chains. London, UK: Earthscan.

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Mohan, Sarah. forthcoming-A. “Rethinking governance of complex commodity systems: Evidence from the Nepali tea value chain.” In Scale-sensitive governance of the environment, edited by F.J.G Padt, P.F.M. Opdam, N.B.P. Polman, and C.J.A.M. Termeer. Oxford: John Wiley & Sons.

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Ponte, Stefano and Joachim Ewert. 2009. “Which is ‘Up’ in Upgrading? Trajectories of Change in the Value Chain for South African Wine.” World Development 37(10): 1637-1650.

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Riisgaard, Lone, S. Bolwig, F. Matose, S. Ponte, A. du Toit, and N. Halbert. 2008. A Strategic Framework and Toolbox for Action Research with Small Producers in Value Chains. DIIS Working Paper no 2008/17.

Thiers, Paul. 2006. “China and Global Organic Food Standards: Sovereignty Bargains and Domestic Politics.” In Agricultural Standards: The Shape of the Global Food and Fibre System, edited by Jim Bingen and Lawrence Busch, 193-218. Netherlands: Springer.

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Appendix 1: Project Outcomes

Target outcomes included to:

short-term:• improve knowledge of farmers and labourers to inform their decisions regarding production and livelihood

strategies (accomplished through info-sharing during interviews, participation in workshop, and follow-up visits during second field visit, and dissemination of this report);

• promotion of Nepali tea (accomplished through promotion activities with Canadian retailers, as well as online, radio, TV and print interviews).

medium-term:• develop methodological and theoretical frameworks for integrating “horizontal” factors into value chain

analysis;• change policy of factories, NGOs, and government, including through highlighting constraints faced by

farmers;• change programs, including by influencing investments in factory upgrading programs and development and

government projects.

long-term:• increase the share of the price of a cup of tea that makes it to the farmer;• improve the price farmers get and empower them in their dealings with other chain actors.


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Appendix 2: The Tea Value Chains

The Conventional Nepal Orthodox Tea Value Chain

Figure 1: The Tea Value Chains

The Conventional Nepal Orthodox Tea Value Chain

Inputs Farming Transport Processing Exporters Wholesaling Retailing Consuming

Tea Bush Clone (NTCDB)

Fertilizers and Pesticides (Shops

- from India)

Labour (hired)

Land (inherited)

Smallholder farmers Large Estate

Farms

CTC Factory Estate Factory Hand-dryer/ small factory

Bought Leaf Factory

Community Transport

Local Dealer/ CTC Broker

Kathmandu, Ilam Shops

Indian Dealer

International Consumer

Overseas Retailer/ Cafe

Overseas Agent/ Wholesaler / Blender

Foreign Tourist in Nepal

Indian Packager/ Marketer

Indian Exporter

Hotels, Cafes in Nepal

Nepali Exporter

Labour (household)

HIMCOOP

Domestic Consumer

Own Consumption &

Gifts

Household Processing


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The Organic Export Nepal Orthodox Tea Value Chain

Inputs Farming Transport Processing Exporters Importers Retailing Consuming

Tea Bush (NTCDB)

Local Plants

Labour (hired)

Land (inherited)

Smallholder farmers Large Estate

Farms

Bought Leaf Factory

Community Transport

Collection Centre

Kathmandu, Ilam Shops

International Consumer

Overseas Retailer/ Cafe

Overseas Agent/ Wholesaler / Blender

Foreign Tourist in Nepal

Nepali Exporter

Labour (household)

HIMCOOP

Livestock/Manure

Technical Assistance

(NGO, Factory)

Estate Factory


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Appendix 3: Actors in the Tea Value Chain

1

Labourers pluck the tea, usually working in teams, and are paid per kg or by day. Shown here are Indra Kumari, Sabina Sherpa, and other labourers in Kanyam.

Exporting is done by the factories directly to markets in neighbouring India or sent overseas with the help of export agencies, such as HIMCOOP. Shown here is John Taylor from HIMCOOP in Kathmandu.

Wholesaling can include Indian dealers and blenders in the conventional chain, and Canadian wholesalers. Shown here is the Metropolitan Tea Co. in Toronto, Canada.

Retailers sell the tea in India, Nepal, or overseas. Shown here is Christine Fletcher, the owner of the Tea Party Café in Ottawa, Canada.

Factories process the tea using heavy equipment. Shown here are workers at the Dr. Khola/Nepal Small Producers factory in Fikkal.

Farmers own land, pay the labourers, labour themselves, and sell the leaves to factories. Shown here is Bhuwan Dhungana in Borbote.

Institutions and Livelihoods in Nepal's Tea Value Chain: A Policy Paper

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