Global Development Institute Blog

In this episode, Stefano Ponte talks to Aarti Krishnan about his research into sustainability, the wine and seafood value chains in South Africa and his recent book Business, Power and Sustainability in a World of Global Value Chains.

Dr Stefano Ponte is a Professor of International Political Economy at Copenhagen Business School. His research looks at transnational economic and environmental governance, with a focus on overlaps and tensions between private authority and public regulation. Dr Aarti Krishnan is a Hallsworth Research Fellow at the Global Development Institute

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Intro Welcome to the Global Development Institute podcast based at the University of Manchester, where Europe’s largest research and teaching institute is addressing poverty and inequality. Each episode will bring you the latest thinking, insights and debates in development studies.

‪Aarti Krishnan And good morning, Stefano. Thank you very much for being with us at Manchester at the Global.

Stefano Ponte The pleasure is mine.

‪Aarti Krishnan  and we I’m very lucky, Stefano’s with after a very big conference around global value chains Stefano has had the time to come and visit us here. He is a professor of International Political Economy at the Copenhagen Business School and he’s very interested in areas around sustainability, governance, inequalities. He’s worked across countries in Asia, in Africa, and we’re very excited to have him here. So without further ado, we thought it would be nice to start the sort of key questions of why should governments and policy consider looking at the environment and issues around sustainability through a value chain perspective, especially considering the wine and seafood value chains in South Africa.

Stefano Ponte Thank you, Aarti, and thanks for inviting me. It’s a pleasure to be back in Manchester after a long time. So value chain perspective means to follow a product or a service from production all the way to consumption. And so the way in which we do this analysis is we look at the various relations of production and the interconnection of that of those processes with environmental and social sustainability from so from production to transformation and then trade and consumption and reuse or recycled or dispose of products. And of course, because most of the products that we as consumers get access to either are very complex in the sense that they have components coming from all around the world and they get assembled in one place and then shipped in another, and then perhaps they become part of the module that goes into yet another product. So if we if we only look at one particular point in the value chain in or even at the consumption level to understand what the sustainability issues were and if we were risk to miss a lot of important aspects. And so what we’re trying what we’re trying to do in looking at global value chains from a sustainability perspective, is to bring together different perspectives from different actors at different places in the value chain, and then try to understand what are the key issues built in, in, in each of these stages, but also overall. And sometimes it’s difficult, of course, to compare whether it is more important to say, you know, biodiversity in a farm, vis-a-vis how much we carbon we emitting to shipping things around the world. But as I guess the news in the last two years is that we we more clearly understand now how important it is to have a holistic view and the fact that, you know, these days you can’t buy a car because there’s a microchip missing somewhere in the world gives you a sense of why this is this is actually quite important. It is also important because at a time of geopolitical change, we we see new challenges to sustainability when we you know, two years ago or even before the Ukraine war, there seemed to be a general understanding of what needed to be done for the green transition. And that is up in the air now. If you follow the debate on on on energy and gas supplies into Europe and the counter-push now to going into I mean, in Italy, where I’m from now some of the ideas include going back to use coal. And so that gives you a sense of the complexity at hand. And I think that a value chain perspective allows you to at least structure some of that thinking along particular products and and understand what the challenges are, both social and environmental, but also economic at various points in the value chain. And I say economic because very often, especially on environmental issues, it’s very easy for consumers or media to say, well, you know, we want more environmental sustainability at the production level and then we don’t want to pay anything extra for it. And so the producers, especially smaller producers or producers in the Global South, are coming to improve their environmental performance, which has obviously an short term cost maybe in the long term there are also some efficiency gains. And in order to do that, they obviously have to squeeze their margins and sometimes they have to cut corners in other ways. And so we also need to take responsibility for the things that we want to be done better elsewhere in the value chain by also paying more for it. And I think that that’s also a big part of the work that I’ve done recently as we in this book published in 19 on business, power and sustainability in the world, the global value change that that that allows us to ask those, you know, economic viability questions for, say, farmers in the Global South and when they’re asked to improve their sustainability performance and on behalf of the guilt of consumers in the global north are feeling.

Aarti Krishnan Absolutely. And I mean, this is I want to segway from this point, because your book’s absolutely brilliant. And even the papers that you’ve written focussing specifically on things around sustainability, governance and power dynamics. And this is so important, especially now that when you said about the green how green transitions, who actually control these green transitions, who is doing the squeezing of all these smaller suppliers? So sort of based on that, through all the work that you’ve done, how do you think we can better understand these dynamics of power in these value chains, especially when we consider the issues around sustainability?

Stefano Ponte Right. So that that’s the kind of work that I’ve been doing in the past few years and that I want to keep developing. And so maybe rather than in general, maybe I’ll go and look into some specific examples of areas and industries that that I’m looking at in particular I’ve been working in the past year or so, and will be working for another couple of years on the wine industry in South Africa and the fishing industry, and specifically the hake industry, which is a very big export industry in South Africa. But before I do that, I actually wanted to give another interesting examples of how complex, you know, thinking about even just in just environmental sustainability has become when you think through a value chain perspective. So I just came back from a a month of fieldwork. I interviewed a lot of players in the wine industry in South Africa. And as part of the COVID sort of crisis, what’s happened in South Africa is that there were a couple of bans on alcohol consumption, which essentially led to a the shutting down of one or two glass manufacturers for bottles in the country. So when the the crisis well, when the restrictions were lifted, then all of a sudden there was a restricture in terms of getting access to glass. So there is a shortage of glass and there’s only one manufacturer now and all these wine exporters who had been sitting on wine for quite a while because of the crisis. Now they have the wine they need to sell that wine and they couldn’t get access to to to to to bottles, glass bottles. So the wine industry, there’s a lot of stuff going on, on and on improving environmental sustainability. And I come back to that in a second. But then some of these producers were essentially stuck in the sense that the only way that they could do this was by importing glass bottles from Italy or China. So here you go, shipping glass, empty glass around the world to come into South Africa, selected wine in order to ship it out again. And it is done at the same time as they’re trying to minimise carbon footprint. And all of a sudden and the glass, the bottle itself has a huge impact on the overall carbon footprint of a bottle of bottle of wine with the wine inside. So not only that, then you got into a situation in which there were no containers available in South Africa because they’re all stuck in America with with the COVID, sort of the pent up sort of great increase in demand in electronics and sorts of gadgets in the U.S. So all these exports from China to the US and then huge problems in the harbours and in in in the West and East Coast. So there are no containers to export them. And because of the crisis, again, it’s actually quite difficult now to get ships to call into Cape Town Port Harbour. Okay. So there are no ships stepping there, stopping there or much less than in the past. There are no containers and the glass has to come from somewhere else at a high cost. And imagine so there are there are empty containers being shipped around the world. So, you know, it adds to the to the to the to the issue of cargo. And then I was talking to a logistics manager just a few weeks ago, and he said and because the don’t call anymore, what happens sometimes is that what used to go from, you know, a container used to go from Cape Town into Rotterdam pretty much straight forward. And now it’s happened more than once. So the container went from Cape Town, it got trans-shipped in Port Elizabeth, then went to Malaysia, then it got put on another ship and it went back through around Africa and into the Mediterranean and then it trans shipped again and went to Rotterdam. So did the like the whole, you know, trip like two or three times. So these are the sort of complexities that are coming into a world where the disruption of the supply chains is also having a huge toll on environmental sustainability, even as we are more and more aware. And there are huge, very large number of initiatives that are trying to address these kind of issues. So so that is just a tiny peek into the complexity of the situation. And just to go back to your question, you know, in the wine industry, South Africa, there is a lot going on in terms of sustainability. So only on the environmental sustainability do we have initiatives that are trying to at least have better calculation of carbon footprint from from a production perspective, there is there are biodiversity initiatives going on in and out of WWF. There is a couple of new standards that actually, South Africa has one of the oldest standards on an integrated production of Grapes for Wine. Every bottle that is exported, almost all the production as a sustainability certification by that is managed by the state. So if you if you meet that particular standard, then it’s actually on the neck of the bottle. South African wine, you will see sustainability integrity. There is even some some initiatives on old vines. So trying to preserve old vines and and add value to this wine that is coming from these old vines, that there is also some important environmental implications. So from an environmental perspective, there’s a lot going on. And South Africa has been actually quite to the forefront by working various industries around the world, and I think that they were the first ones out on the environmental perspective trying to try to solve some of these some of these issues. At the same time, as we know, with the legacy of apartheid, they have huge issues related to farm labour, related to the ownership of the industry and ownership of land and access to land that have to do with transformation. So we have the whole process of black economic empowerment that the government is trying to push through for in various sectors. And the wine industry because land is in private hands, it has less leverage, the government, in order to push on that. While in fish, if they come back in that being the second, it has much more leverage because of the fish quotas are the hands of the state so they can actually push a lot more. Yet what we’ve seen in terms of the on the side of social and labour, it has been very hard to redistribute land. I mean, there’s a large amount of research and work done in South Africa on this and they know a lot better than I do. And we have seen that land distribution, redistribution, not only wine but in general has been quite limited. At the same time, if you look at it from a value chain perspective, then again ok, of course it is an important issue. But what we see now in the wine industry is that grape farmers are operating at very, very, very low margins, if not at a loss. So there are essentially three models in in South Africa. So either you have the high productivity model, i.e. your part of the co-operative, and you do wine that is, you know, cheap and cheerful, you know, large quantity. And, you know, with struggle, they can they can still make some money, small margins, big volume but you can still do it. Then you have the top, top industry high quality large margins. And that part is also doing okay in the sense that their quality is improved a lot and they are also much more careful. They are careful about environmental issues, etc., etc.. And then you have a middle part that is really struggling where essentially you don’t make money out of grape growing even though you may have your own winery. And so the what I’m saying is that the idea that the solution is is is to provide formerly disadvantaged people with land on which you farm grapes that make no money is not a particularly interesting one. Yes. If you had access to it to land and you did other things like, you know, grape farmers are moving into citrus, they’re moving into fruit and moving into various because the margins are much better there and they could do that. So our our understanding of that, if we only keep the land level that we’re like uh, that does really make sense from an economic sort of profitability perspective. Of course, that is making sense because the land should be better reflecting the make up of the country. Right. And so. What’s happening now, quite interestingly, is that formerly disadvantaged people are are now trying to get these, these different business models in which they buy ready made wine and then they they they set up these nice labels and branding to make wine that is quote unquote, empowered wine. And they it has a quite an interesting market both in South Africa and also abroad. A dollar is not that big of a market. And so that from a profitability perspective, is actually much better. On the other hand, these people may not have great experience in exporting or branding, so some of their brands have been quite successful. Others have not. But that’s another way of thinking about transformation, right? And now the latest wave is that there are a lot of. A lot of wine makers that come out of analogical schools now that.That are from disadvantaged backgrounds. And they are now making their own wine. And so that is like a deeper sort of transformation process in which that there is the clink, there is knowledge, they know how to talk about their wines, they make their own wines. So, you know, things are moving in different ways. And so, again, going back to the value chain, if we only look at land, of course, hugely important, but perhaps not where the money is being made now, while in other places in the value chain, there is space for adding value through sustainability content that make more sense from at least a returns kind of perspective. So the wine industry I find is is quite interesting in terms of all these kind of layers of complexity and also the kind of challenges that they’re that they’re facing. So. So now I’m working on some fish. Right. So fish everybody. Well, when back in the after the end of upper tide, because the fish quotas or the capture of fish are in the hands of the state. Transformation in theory should have been easier to do. The state said, Well, we need to change this. You know, most of these quotas are in the hands of a small number, two or three groups that are legacy groups, so used to be sort of quote unquote, white capital and therefore In the reallocation of the quotas, we need to change that. And so. That process didn’t quite go the way that people were expecting it for the reasons that may not be so obvious to some. So the industry, interestingly, used environmental sustainability to argue against redistribution of quotas to new entrants. And the point is that in fishing, the argument says if you have a lot of players, it’s much more difficult to regulate them. The big players also have a history on the record of employment creation, and they add value because they are processing plants, they’re highly capitalised. And so when the industry went through and got the Marine Stewardship Council certification back in the early 2000, the the issue of trying to maintain the certification was used discoercively to say, well, let’s be careful about redistribution of quotas. Instead of redistributing, we’ll ask the big companies to become more kind of quote unquote blacker in relation to their ownership structure. And that is what happened. At least two of the three groups are now scoring much better on ownership in terms of than in terms of capital that comes from non legacy sources. There was some redistribution of quotas anyway to new entrants, but then these new entrants didn’t have the capital necessary or the processing plants in order to handle that fish after it is caught. And so they have come into contractual relationships with the established companies. And so even as you look at the the distribution of quotas is now more distributed towards a variety of actors. They all go back in one way or another to the big to the big legacy groups that are now more empowered in terms of ownership, not so much in other aspects of transformation, but that’s a longer story. And so in this particular case, sustainability from an environmental perspective was used to justify a relative lack of transformation in the in the industry from a point of view of we need to kind of keep the competitiveness our buyers in our fish want to see certification. And so in a place where you would have expected much more transformation but sustain every while now they’ve just redistributed the quotas after 15 years have in theory a lot of leverage to do that. It hasn’t really quite happened in the way that we were expecting. And so these dynamics also teach teach us that there are very different power, different kinds of power at play. So you have the bargaining power of the big companies that are they are organised under and associated with an association as a lot of had a lot of lobbying power as well as bargaining power with the smaller players. And it tells us again, that a value chain perspective is important because all the transformation efforts for sustainable sort of industry in South Africa is focussed at the fish capture level, so the fishing itself. But then the process is in the hands essentially of those three big groups. And in that node there has been absolutely nothing going on. Right? So if you take a value chain perspective, then all the focus is on the fishing part. And then and even if you were able to fish that fish, then you would have to go to one of these groups to get it processed. So bargaining power is still important. Institutional power as I as we as as I use the term is, it’s essentially both the state and these organised associations, you know, struggling to sort of regulate and what the sustainability is and how the industry should look like. And at the end, though, it’s really a battle of ideas. So the ideational work that comes with it, what does it mean to have a sustainable wine or a sustainable fish? How should a quote unquote empowered business look like? What kind of business models do they use? Those are extremely important. And regulatory agencies are quite good that, well, you know, they’re better at writing rules and not so much sometimes of implementing them. But they’re much less. They’re not they’re not really built up to to do the ideational work that that it takes in order for them to for a certain idea of sustainability, of the environment or diversity to be then taken as legitimate. And therefore, that everyone else is going to look at these models and say, well, I’m going to do it that way, because that’s the generally accepted idea of what it means, as opposed to necessarily just what the law says or beyond what what that is. I don’t know. I’ve answered, you know, a little bit going around in various various aspects of this. So I hope it’s intelligible.

Aarti Krishnan It’s a it’s extremely interesting. And the way you also put the two cases, it’s it’s so interesting that the state played quite an important role in the seafood sector, but it still didn’t really enable a lot of equality to take place because processing is still so is probably the hub of value capture and that’s only controlled by some of the big legacy firms. While it looks like in the wine sector, it was slightly more diffused in a sense that it allowed some disadvantaged groups also to use different business models and actually participate more in the space as well. And there are different layers of complexities of value capture and creation happening across here. So what do you think like in terms of like economic or social and environmental value capture? Because there are so many sustainability initiatives, like you said, in the wine industry as well as like the Marine Stewardship Council in the seafood industry. What are the implications for value creation and capture? Like who’s really winning and losing?

Stefano Ponte I’m going to be cheeky because I’m going to answer by asking one more question. And I guess the reason I’m doing that is, is because it’s important for me and in my work that we ask the question of who is creating the value that is then embedded into the idea that the product is sustainable, whatever element there is, environmental, social transformation. And then who is then be able to leverage that value and control it? And the question in value chain studies we do is indeed to answer to to ask that question and then to answer it in terms of the fact that you have a product that is brought to the consumer that is more sustainable, let’s assume that is actually more sustainable. That’s a big question because claiming that processes are made in a sustainable way and measuring the impact is a completely different thing. Very often we don’t know if it’s really sustainable, but that’s a completely different well, it’s a much more like a conversation for another time, let’s say. That value may actually be captured or realised or distributed or absorbed by other players in the value chain. So that said, a producer gets a sustainability certification. They have invested some resources, maybe they’ve made some gains because perhaps they are better able to control their energy use, huge issue in these days or water use, but in the short term they probably have had to invest some money in places where there’s low margin like table grapes sorry, grape for winemaking, for example. That’s that’s a major issue then, you know, it goes up the value chain towards consumption. And let’s say that, you know, the retailer to begin with had asked for a certain certification because they have a particular market for sustainable wine or Fairtrade. Fairtrade is a bit different than, say, organic wine or sustainable wine and variety of labels that we have. more often than not, then the retailer will say, ‘Oh, that’s great, by the way, the price is the same’. So there is this huge issue about getting more in terms of the content in addition to quality, blah, blah, blah, also sustainable and then essentially paying the same price. So this is all this huge debate about whether we as consumers are willing to pay more for sustainability. If asked, we all say yes, but then you do the behavioural studies and we don’t do that. So you know, if you look at the behaviour at the supermarket then at the purchasing level, online, whatever, we don’t tend to do that a lot less than what we say and ideally we do. So the issue that we ask all the time is, you know, who’s capturing those, those that added value that is embedded into the product under the label of sustainability of one sort or another? My, my previous work has shown that more often than not that value is not realised by that, by the producer, but is absorbed elsewhere. And so I talk about the sustainability supply squeeze in other work, to identify those, those, those processes. Those processes are not universal. There are good examples in which that can be done differently. And so that is also part of this work is to highlight the possibilities that are coming to interplay. I’ll give you 1 example from South Africa wine. So they have this new initiative, relatively new initiatives called the Old Vine or Heritage Wines, an old Vine initiative where in South Africa they are able because they have been very good records to identify by block a vineyard and when it has been planted and the researchers know as shown that that the wines that come from from vineyards that are 35 years old and older, they there’s been these vineyard they behave in a different way and they impart a particular flavour to the wine that is more complex. And the end and the vines themselves behave in an environmental way in a different way that is actually positive for the environment, etc.. So this could have gone the usual way. Okay, we got the sustainability certification and then somebody else is going to sell their wine. And what is happening now is that these the way in which this is being set up is that the grape growers getting twice the price and even more than twice the price of the grapes is the same grapes that they sold before she sold before to the co-operative. And all of a sudden it is like twice the price. So it is possible to valorise this kind of things. But producer organisation  is very important and because and because it’s coming from below. This is not something that, you know, the retailer one day, you know, they did a focus group and said, oh, you know, people want to have this wine or these these are, you know, locally grown initiatives that then tend to valorise that that that extra value that that has been created. And I think that that’s that’s really the key. I’ll give you one example that that looks to the other side of the value chain. Again, in wine. I can tell you for sure, we do a high degree of certainty that if there is a movement towards sustainability, especially in environmental, in the wine industry, is because there are monopolies in Scandinavia. So Scandinavia you can’t just import your wines and it goes through a monopoly system on import and also retail. So there’s the state, state controlled import retailers that take care of wine and other alcoholic drinks. So it’s the role of the state, but the state also plays a retailer role. So these are retailers that are just controlled by the state. And for years now, they’ve started to include in their scoring system. So they have these tenders to go out. We want this type of wine for this particular area and each supplier has to provide all this information. And and there is a point system. And the point system also includes a lot of environmental issues, not just in terms of the practises on the farm, but also lighter bottles, carbon footprint. So now you can’t export wine in heavy bottles in Sweden, for example, unless it’s like really high end. And more often than not they will ask you to put it in bag in the box, which for, you know, glass containers are really bad for the environment. I mean, they’re just not the right shade. You lose a lot of weight. And so here what you have is, is in the period of, I guess, less than a decade, a relatively small number of people sitting. Sweden, Finland. Norway, Quebec, Ontario. those are the monopolies where established, essentially what it means to be sustainable in the wine industry and everyone else around Europe and especially in Northern Europe, is is essentially copying their models. And so it is retailer driven, it is changing ideas of the environment, but that is not control on the bottom up. And so one of the main constraints and complaints that they get from the producer side, they say, yeah, that’s great, but you know about the price. So, I mean, those are still issues that need to be resolved.

Aarti Krishnan Well, thank you so much, Stefano. I mean, there are so many more questions I want to ask about things you’ve done around inequality. And also, I mean, a lot of the work on sustainability, governance. And if I would recommend anything, please go and read Stefano’s book. It’s it is absolutely eye opening. And it is also very possible to read for somebody who has not done value chains before to get an understanding of what it really means from sustainability context. But thank you so much for your time. It’s been.

Stefano Ponte Thank you for having me.

Aarti Krishnan It’s been great having you. Thank you. Thank you.