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for consumers and governments in countries with growing middle classes. Safety problems in informal food systems
can lead to scandals and heavy-handed state responses, as was recently seen in the Chinese dairy sector Box 3.4. In
that case, outcry over tainted milk led to dramatic declines in consumption of domestically produced milk, so the state’s
intervention may have served to save many dairy farmers’ livelihoods — but only by formalising them.
There are many other markets where informal trade of highly perishable products is the norm, and calls for safety
standards could grow. Looking just at the dairy sector, Mugoya’s study for the Learning Network noted that 42
per cent of milk in Kenya is sold directly from farmers to consumers and usually delivered to their doorsteps; another
17 per cent is sold to mobile traders on bicycles, and 15 per cent to small shops, kiosks or milk bars that are mostly
unlicensed. In comparison, registered dairy cooperatives purchase 24 per cent of all dairy farmers’ milk. Only 2 per
cent of the milk produced in Ethiopia reaches the market through the formal dairy chain van der Valk and Tessma
2010, while in the state of Assam in northeastern India, 96 per cent of milk is distributed by informal milk vendors,
leaving only 4 per cent for the organised sector Grace et al. 2011.
3.1.4 Accommodating informality
in policy
All this is not to say that informality will disappear as middle classes push for safer products, or when states grow stronger
or producers organise for political inluence. As part of small farmers’ diversiied economic strategies, informal markets are
central to producers’ economic agency and are here to stay. As such, some governments and development institutions are
becoming interested in actively supporting the informal sector and mitigating some of its downsides Box 3.5. If states seek
to better understand the reasons for widespread informality in food markets, this can lead to inclusive policies that support
— rather than ight or ignore — the preferred strategies of small-scale producers. Such action could potentially help both
small-scale producers and low-income consumers get more out of informal markets. Improving aspects of informal supply
chains and strengthening farmers’ position within them are likely to have strongly pro-poor outcomes, because of this
sector’s broad base Ram 2010.
Box 3.4 Chinese milk scandals: the fallout for small producers
In 2008, 294,000 Chinese babies became ill, and six died, after drinking melamine-tainted milk in their infant
formula. It was the worst in a long series of food safety scandals in China. Milk consumption plummeted, and
the country’s dairy farmers — most of them smallholders — faced tremendous marketing dificulties.
The government reacted rapidly. New marketing management policies were introduced that heavily
regulated buyers in the milk supply chain and gave them incentives to procure from larger, more reliable farms.
Policy directives were issued to move the small backyard farmers into concentrated production complexes,
where marketing was centralised to facilitate inspection and quality supervision. Soon there were no more
mobile milk brokers. The complexes have rescued milk producers from rejection by disgusted consumers, but
committed them to additional costs and narrowed their choices to a single primary marketing channel, heavily
regulated by the government Zhang and Carmody 2009; Luan et al. 2011.
Box 3.5 Supporting informal dairy markets in Kenya and India
Before about 2000, the Kenyan government’s approach to traditional small-scale milk vendors was to crack
down on them. But recently the state has become far more supportive of these sellers, who procure milk from
some 800,000 dairy farmers and supply most of the domestic market. New legislation acknowledges their
central role and aims to improve processing standards in the informal sector, develop low-cost appropriate
technologies for small investors, offer safety training and establish an accessible certiication system. Local
oficials have begun advising small-scale vendors rather than punishing them. The results are not only improved
relationships between traders and regulators, but lower transaction costs and greater volumes of milk sold
Hooton and Amore 2007. In northeast India there have been similar proposals, focused on assessing and
reducing safety risks in the informal dairy sector rather than trying to stamp out informality Grace et al. 2011.
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3.2 Small producers and formal markets: barriers
and catalysts
While informality continues to be central to rural economies, globalisation does offer some small-scale producers pathways
into formal value chains — especially through more direct contacts with modernised local and national markets and
export buyers. These present new opportunities, though also greater exposure to risks and more stringent standards.
In many cases, it’s not only easier but also more proitable for small-scale farmers to deal with informal and traditional
markets. Moreover, traditional traders and wholesalers may be the only buyers meeting certain urgent needs of small farmers
— such as ready cash. Exercising agency means inding ways to market in line with those incentives and needs.
Yet certain groups of small producers have successfully entered even some of the most demanding formal markets.
In these cases, a third-party facilitator often plays a central role in making formality accessible and attractive for small-
scale farmers. Alternatively, innovative policies may promote market inclusion for small producers across an entire
commodity sector, rather than trying to build one value chain at a time.
3.2.1 Costs of formality
