Clustered Enterprises in Herat

7/28/2019 Clustered Enterprises in Herat

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TraditionalEconomicClustersand

ReconstructioninAfghanistan:

TheCaseofHerat

AfghanistanPublicPolicyResearchOrganization

September2012


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AcknowledgementsThispaperisaproductofaresearchprojectfundedbyMicrofinanceInvestmentSupportFacility

forAfghanistan(MISFA).APPROexpressesitssincerethankstoDaleLampeandFeKagahastian

ofMISFAfortheirsupportandfeedbackonthevariousaspectsofthisresearch.Thisresearch

would nothavebeen possiblewithout theactive participationandassistance fromthemany

clusteredenterprisesofHeratwhowereapproachedbyAPPRO.APPROtakesfullresponsibilityforallomissionsanderrors.

Authors

The authors for this paper are Saeed Parto, Jos Winters, Ahmad Shaheer Anil, and

MohsinUsyan.AllauthorsareresearchersatAPPRO.

AboutAPPRO

Afghanistan Public Policy Research Organization (APPRO) is an independent social research

organizationpromotingsocial andpolicy learning tobenefit developmentandreconstruction

effortsinAfghanistan.APPROisregisteredwiththeMinistryofEconomy(RegistrationNumber:

1212) as a not-for-profit, non-government organization and headquartered in Kabul,

Afghanistan.APPROsmissionistofacilitatecriticaldialogueonpolicyandreconstructionissues.Thismission

hastwocomponents.Thefirstcomponentistomeasuredevelopmentprogressagainststrategic

reconstruction objectives and provide insights into how to improve performanceagainst the

milestones set by the Government ofAfghanistanand the international donors. The second

componentistotrainandmentorapoolofAfghanresearcherstoconductresearchconsistent

with internationally recognized standards for social science research. Research at APPRO is

undertakentoaddressexistingandpressingknowledgegapsinthepolicymakingprocessandto

advancethelearningofresearchers,academics,anddecisionandpolicymakersatalllevels.

(c)2011.AfghanistanPublicPolicyResearchOrganization.Somerights

reserved.Thispublicationmaybereproduced,storedinaretrievalsystemor

transmittedonlyfornon-commercialpurposesandwithwrittencreditto

APPROandtheauthors.Wherethispublicationisreproduced,storedortransmittedelectronically,alinktoAPPROswebsitewww.appro.org.af

shouldbeprovided.Anyuseofthispublicationfallingoutsideofthese

permissionsrequirespriorwrittenpermissionandcanbesoughtbyemailing

[email protected]+93700538081.


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TableofContents

Abstract .......................................................................................................................5

1.Introduction.............................................................................................................6

2.WhatAreClusters?...................................................................................................8

3.DeterminantsofClusterDevelopment .....................................................................9

4.ObjectivesandMethodology..................................................................................11

5.Findings..................................................................................................................14

5.1Ironmongercluster................................................................................................... 145.2Driedfruitandnutscluster....................................................................................... 165.3Silktextilecluster ..................................................................................................... 18

5.4Newcarpentercluster .............................................................................................. 215.5Oldcarpentercluster................................................................................................ 235.6Tailorcluster ............................................................................................................ 255.7Saffroncluster .......................................................................................................... 27

6.KeyConclusionsAllClusters.................................................................................29

7.Recommendations ..................................................................................................... 33

References.................................................................................................................36


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Abstract

InAfghanistanthereremainsignificantgapsintheknowledgebasethatinformsreconstruction

policyanddecision-makingonthesustainable sourcesofeconomicgrowth.A particulararea

wherea knowledgebaseis practicallynonexistent istheroleof traditionaleconomicclusters

suchascarpenters,tailors,ironmongers,andagri-foodprocessersinthebroadereconomyand

the extent of their positive and legitimate contributions in generating livelihood and value

addingeconomicactivity.

Foravarietyofreasonsthesetraditionaleconomicclustershavepersisted,someformorethan

300years,despitetherecurringperiodsofinstability,andcontinuedtoprovidelivelihoodsfor

urban and peri-urban households while generating added value for the domestic economy.

Evidenceontheeconomicandlivelihoodbenefitsoftraditionaleconomicclustersfromstudies

innumerousdevelopinganddevelopedcountriessuggestsinterventionstoincreaseaccessto

financial products, technology, skills and training, infrastructural change, and market

intelligencearewarrantedandeffectiveasmeanstoenableclusteredsmallandmedium-sized

enterprises(SMEs)toexpand,increaseproductivity,moveupthevaluechain,andthusincrease

employmentopportunitiesandcontributetoeconomicwellbeing.

This studywas designedand conducted in2011 toexamine the interface betweenclustered

economicactivityandreconstructionprogramminginAfghanistan.Theresearchalsosoughtto

assessthepossibilityoftriggeringincreasedclusterperformancethroughpolicyintervention.

Theresearch finds thatdespite thecontinuedneglect bypolicyandpolicymakers, traditional

economicclustersareabletopersistandevenexpand.

Much of this resilience is attributable to the clusters own structures, which facilitate

cooperation,skillstransferthroughapprenticeshiparrangements,advocacy(toprotectclusters

againstmunicipalrezoning,forexample),informalcreditprovision,andcompetition.Oneofthe

findings of this study is theabsence of any formal links between clusters and policymakers

aimedatstrengtheningandexpandingclusteredeconomicactivities.Thepaperconcludeswith

aseriesofrecommendationsonhowtoaddressthisgap.


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1.Introduction

InAfghanistanthereremainsignificantgapsintheknowledgebasethatinformsreconstruction

policyanddecision-makingonthesustainable sourcesofeconomicgrowth.A particular area

wherea knowledgebaseis practicallynonexistent istheroleof traditionaleconomicclusterssuchascarpenters,tailors,ironmongers,andagri-foodprocessersinthebroadereconomyand

the extent of their positive and legitimate contributions in generating livelihood and value

addingeconomicactivity.

Foravarietyofreasonsthesetraditionaleconomicclustershavepersisted,someformorethan

300years,despitetherecurringperiodsofinstability,andcontinuedtoprovidelivelihoodsfor

urbanandperi-urbanhouseholds,whilegeneratingaddedvalueforthedomesticeconomy.

Studiesoftraditionaleconomicclustersinnumerousdevelopinganddevelopedcountrieshave

shownthattheyhaveeconomicandlivelihoodbenefitsand,assuch,certaininterventionsarewarranted to create an enabling environment for their growth. Evidence suggests that

interventions to increase access to financial products, technology, skills and training,

infrastructural change, and market intelligence can help clustered small and medium-sized

enterprises(SMEs)expand,increaseproductivity,moveupthevaluechain,andthusincrease

employmentopportunitiesandimproveeconomicwellbeing.

The literature defines a cluster as a sectoral and geographical concentration of enterprises

(Schmitz1995).Clustersareeitherverticallyintegratedthroughbuyer-sellerrelationsbetween

the individual enterprises or horizontally integrated by having similar input, processing or

manufacturing,andoutput.Structuralandsustainableeconomicgrowthislikelytoresultwhenclustered firms/entities move up their respective value chains, expand, and/or increase

production.

Theproximityoffirmsandthepresenceofsupportinginstitutionsinaclusterareconduciveto

coordinationandincreasedtrust.Ingeneral,andinlinewithmuchoftheconventionalwisdom

ineconomics,a firm locateswhere itmakesthemosteconomicsensegiven its (incomplete)

knowledge about the market for its products or services, the labour pool, and other inputs

(Parto2008).Inotherwords,byco-locating,firmscantakeadvantageofpositiveexternalities.

Butco-locatingalsoforcesthefirmtocompetemorefiercelywithotherfirmswithinthecluster

andthus,accordingtoPorter(1990),providestheincentivefortheclusteredfirmstoinnovate.

Key to these developments is informal, face-to-face interaction as an effective means of

informationexchangeamongpersonnelfrom differententerprisesand firmproprietors. Such

informationcouldpertaintomarket,labourforce,ormaterialsupplyconditionsor simplyasa

mechanismforcontractmakingamongtheparticipantsorsizingupthecompetition.


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Theimportanceofface-to-faceinteractioninclustersandindustrialdistrictshasbeenillustrated

throughnumerousexamples,includingBecattinis(1990)accountofthePratotextiledistrictin

Italy, Saxenians (1994) Silicon Valley, and Rosenfelds (1997) account of furnituremakers in

MississippiandapparelmakersinNorthernItaly.Clusteredenterprisesarevaryinganddynamic

mixtures of cooperative arrangements and competitive relationships. Agglomerations of

industrial and agricultural producers based on flexible specialization are said to be better

prepared to deal with supply related shocks and changes in consumer preferences. The

emphasisisonproductquality,marketsegmentation,andeconomiesofscopethroughuseof

adaptive production methods and skilled workers or craftspersons. As such, clusters are

groupings of interrelated and interdependent producers that innovate and thus generate

structuralstability,sustainedeconomicactivity,and,potentially,growth.

Initialworkonclustersbytheaboveauthorswasconcernedwithdescriptivelydocumentingthe

uniquefeaturesandeconomiccontributionsofclusters.Laterworksincethe1990shastakenan

active interest in the policy and strategic implications ofunderstanding cluster dynamics for

economic reconstruction and poverty alleviation. For example, Barrientos and Nadvi (2004)

criticallyexaminetheassumptionthatclusterdevelopmentcanbeameanstoalleviatepoverty.

Focusingonclustergovernance,attentionisdrawntothedistributionalimpactsofinterventions

to strengthen clusters. In developing countries clusters provide employment, income, and

wellbeingfortheworkingpoor.Initiativestomovelocalclustersuptheglobalvaluechaincan

leadtoclustergrowthwhileatthesametimepushingoutvulnerableSMEsorindividuals.Given

this likelihood, much better understanding is needed of the relations among clustered

enterprises(internallinkages)andtherelationsbetweentheclusterandtheexternalmarket.

BarrientosandNadvi(2004)highlightthreekeyclusterfeaturesandthreeprocessesthatneed

tobeunderstoodinstudiesofthelinkagesbetweenpovertyandclusters.Thefeaturesarethe

locationofthecluster,sectorandenterprisetypesinthecluster,andthetypeofemployment

the cluster generates. The processes are the links to external economies (markets, skills,

knowledge,credit andinformation),jointaction (collective capabilities),and social capital.In-

depthunderstanding of these features and processes, these authors argue, can provide the

foundation for policy intervention aimed at enterprise development, increased business

linkages,andimprovementsinlocalgovernance.

Green (2005) adopts Barrientos and Nadvis (2004) approach ina studyofmicrofinance and

clusterdevelopmentandidentifiesthefollowingstagesinstudyingclusters:1)diagnosticstudy,

2)trustbuildingexercise,3)identificationof anactionplan,4)implementation oftheaction

plan,and5)evaluationandmonitoring.Greens(2005)premiseisthatSMEscanbenefitfrom

microfinance products whilemicrofinance institutions have the advantage of using clusters

socialcapitalascollateral.

Parrilli(2007)underlinesthecapacityofclusterstopersistandsurvive,particularlyinturbulent

operatingenvironmentsandwitha focus ondeveloping countries,andargues thatclustered


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SMEdevelopmentcannotbemeasuredbyquantitativeindicatorsaloneandrequiresaneclectic

approach to establish the determinants of clusters as economic (joint actions, collective

efficiency, external economies), governance-related (national and local policy inducement,

social (social cohesion as a result of cooperative action, networking, and trust) and

entrepreneurialspirit.

Parrillis (2007) appears to suggest that interventions to strengthen local productionsystems

should have sufficient understanding of these determinants which can only be identified

through eclectic and mixed research methods, consisting of quantitative and qualitative

analysis,longitudinalobservation,andintuition.

Slvell(2009)arguesthatclusterscanbefertilegroundsforeconomicandsocialinnovationif

their dynamics are more fully understood, and interventions are designed to work with

synergiesinherentinalmostallresilientclusters.Clustersarecharacterizedbydifferenttypesof

agglomeration,levelofdynamism,stagesinthelifecycleandpositioninginthevaluechain,and

levelofpoliticalinvolvement.Slvell(2009)proposesamoresystemicunderstandingofcluster

dynamicsthroughPorters(1990)diamondoffactorconditions,contextforenterprisestrategy

andrivalry,demandcondition,andrelatedandsupportingindustries.Understandinghowthis

diamond works is crucial in interventions to steer clusters toward becoming catalysts for

innovation and upward movements on their respective value chains, with the associated

increasesinproductivityemployment.

Oftheliteraturereviewed,Greens(2005)focusontheinteractionsofMicrofinanceInstitutions

(MFIs)withclusteredenterprisesresonatesmostdirectlywiththeneedsoftraditionaleconomic

clusters inAfghanistan.Focusingonmicrofinancingneedsofclusteredenterprises, thisstudy

wasdesignedandconductedtoestablishdemandfeaturesformicrofinanceproductsinseven

traditionaleconomic clusters inone ofthemajorprovincesof Afghanistan, Herat. The study

soughttoestablishwhetherincreasedaccessto(micro)financialproductscouldtriggercluster

strengtheningand/orbetterclusterperformance andhenceincreasesocio-economicbenefits

derivedfromclusteredeconomicactivity.

Thisprojectreportisstructuredasfollows.Thenexttwosectionsprovideasynthesisofthekey

characteristicsofclusters(Section2)andclusterdevelopment(Section3).Section4describes

theobjectivesofthestudyandthemethodologyusedintheanalysis.Section5outlinesthekey

findingsfromtheanalysiswhileSection6concludeswithrecommendations.

2.WhatAreClusters?

For this study, an economic cluster is defined as a localized network or geographically

identifiableconcentrationofsimilar,related,orcomplementarybusinessesorproducersbound

together in a social division of labour. Clusters may be vertically-integrated and consist of

enterpriseslinkedtogetherthroughbuyer-sellerrelationshipsorhorizontally-integratedwhere


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the clustered enterprises share a common market for their end products, use similar

technology,utilizethesamelabourpool,ordependonsimilarinputs.Clustersbringtogether

complementarities throughvertical andhorizontal value chain linkagesamong theco-located

producers.

Clustered producers are said to be better prepared to deal with supply related shocks and

changes inconsumerpreferences. Theemphasis isonproductquality,market segmentation,

and economiesofscopethroughuseofadaptive productionmethodsand skilledworkersor

craftspersons.Assuch,clustershaveatendencytobecomegroupingsofinterrelatedproducers

thatinnovateandthusgeneratestructuralstabilityandsustainedeconomicactivity.Economic

clusters are varying and dynamic mixtures of cooperative arrangements and competitive

relationships.

ThisstudyfocusedonsevenclustersinHerat,Afghanistan:DriedFruitsandNuts,Ironmonger,

twoCarpenterclusters(NewandOld),Silk,Tailor,andSaffron.Thefirstquestionaskedofthe

clustermemberswaswhetherornottheyfelttheybelongedtoacluster,asdescribedinthe

precedingparagraphs.AsFigure1shows,therewasoverwhelmingsenseofbelongingbyall

enterpriseswhoresponded.

Figure1.Belongingtoacluster

Someclustermembersfromthecarpenterclusters(NewandOld)andsilk,tailoring,andsaffron

clusters felt that they were independent businesses but recognized the existence of their

respectiveclusters.Casesofindependentbusinessesweremostpronouncedinthetailorand

saffronclusters(Figure1).

3.DeterminantsofClusterDevelopment

In general, and in line with much of the conventional wisdom in economics, an enterprise

locateswhereitismostrewardingbasedonits(incomplete)knowledgeaboutthemarketforits


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productsor services, the labour pool, and other inputs. By co-locating, enterprises can take

advantageofpositiveexternalities.

But co-locating also forces the enterprise to compete more fiercely with other enterprises

within the cluster and thus provides an incentive for the clustered enterprises to innovate.

Increased innovationbyenterprisesgeneratesnew niches and needswithin and outside the

cluster,leadingtotheemergenceofnewfirmsandthustheexpansionoftheclusterandthe

economyasawhole.

Key to these developments is informal, face-to-face, and repeated interactions as effective

means of information exchange among personnel from different enterprises and firm

proprietors. Such information could pertain to markets, labour force, or material supply

conditionsorsimplyasamechanismforcontractmakingamongtheparticipantsorsizingupthe

competition.1Fortheclustersselectedforthisstudytwoofthemainadvantagesofbeingina

cluster were mutual help among cluster members and recognition by actual and potential

customers(Figure2).

Figure2.Mainadvantagesofbeingaclustermember

Theexpansionandgrowthof thecluster, throughhigher productivityandbetterquality,can

leadtoamorecohesivesetofactivitiesbytheenterprises,becomingmanifestashorizontalor

verticalintegration.Expansionandgrowthmayalsobeafoundationformovingupwardonthe

valuechain.However,moving upthevaluechain isbynomeans agivenin the evolutionary

trajectoryofclusters,particularly ina lessdeveloped context suchas Afghanistan.2 Increased

integration in the global market bears new pressures on local production systems in bothdevelopinganddevelopedcountries.Mixedwithmarketpressuresareanumberofgovernance-

1Foradditionaldetails,seeParto(2008).Innovationandeconomicactivity:Aninstitutionalanalysisoftheroleof

clustersinindustrializingcountries.JournalofeconomicissuesXLII(4):1005-1030.2ForcasessimilartoAfghanistan,seeHumphreyandSchmitz(2002)."HowInsertioninGlobalValueChainsAffect

UpgradinginIndustrialClusters?"RegionalStudies36(9):1017-27.


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relatedissues,whichdeterminewhetherandhowalocalproductionsystem,suchasaclusterof

enterprises,remainsinormovesupitsglobalvaluechain.

4.ObjectivesandMethodology

Interventions to strengthenpre-existingand legitimate economic activity inurbancenters inAfghanistanare likely to benefit from in-depthknowledge aboutand analysisof the role of

clustersintheurban/peri-urbaneconomy.

The main purpose of this study was to assess the demand for microfinance products by

clusteredSMEs, given theexistingcollaborative andcompetitive arrangements. The research

soughttoestablish:

Theextenttowhichclusteredenterprisesutilizeloansandotherfinancialservicesfrominformal/traditionalsources

Theextenttowhichclusteredenterprisesutilizeloansandotherfinancialservicesfromformalsources,suchasMFIsandbanks

The extent towhich increased access to finance could trigger cluster strengtheningand/or better cluster performance through increased productivity, expansion of the

enterprise,andmovinguponvaluechains

Theextenttowhichadaptationofexisting,orcreationofnew,financialproductsandservices can meet the demand by the clustered enterprises identified through this

research.

Theseobjectivesweremetthroughthefollowingactivities:

Aphysicalsurvey inHerat toscopeoutand establishthegeographic locations oftheclusters to be studied, development of criteria for cluster selection, compilation of

baselineconditions.

Surveysoftheselectedclusterstoestablishcurrentaccessto,anddemandfor,financialproductsandservices.

Focusgroupdiscussionswithentrepreneursandcraftspersonsdrawnfromtheselectedclusters to gain in-depth insights into how clusteredenterprises cope, innovate,and

perform and how these processes could be assisted through increased access to

financialproductsandservices.

Interviews with key informants, with individuals from the local, national, andinternationalorganizationschargedwitheconomicdevelopmentandpolicymaking.

ThreeparticipatoryconferencesinHeratwithallstakeholderstocollectfeedbackandensureend-useofthefindingsfromthisresearch.

AconferencewasorganizedattheinceptionofthisstudyinHeratonFebruary6,2011,followed

upbytwofurtherconferencesonApril17,2011andJune28,2011toreportonthefindingsof


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the research and tocollect feedback from clustered enterprise representatives, nationaland

provincial governmental officials, and Herat Municipality. The findings in this report are

reflectiveofthefeedbackreceivedattheconferences.

Thesevenclustersanalyzedforthisstudywereselectedbasedonthefollowingcriteria:

1. Ageofthecluster:Asaproxyforclusterresilience.Resilienceistheextenttowhichacluster hasmanaged toadapt and continuetoexistthroughyearsofturbulence and

conflict.

2. Uniqueness to Herat: As a proxy for the importance of the cluster for the regionaleconomyandthepotentialformarketexpansion.

3. Potentialformarketexpansionexport:Asproxiesformovinguponthevaluechain.4. Sizeofcluster:Asaproxyforthenumberoflivelihoodssupportedbythecluster.5. Level of sophistication:Multiple productive activities and linkageswith other cluster

memberswereusedasanindicationofverticalintegrationinthevaluechain.

6. Evidentcompetition:Asaproxyforthepresenceofthepotentialtoincreaseeconomicperformanceandmoveupthevaluechain.

7. Evident collaboration: As a proxy for the presence of the potential to strengthenclusteredenterprisesthroughcluster-centeredintervention.

Duetotheconsiderablesizeofsomeoftheclusters,withsomehavingover100members,and

thelimitedresourcesforthisresearch,thispilotstudyutilizedastratifiedpurposefulsampling

method instead of random sampling to ensure the greatest representation.3 The stratified

sampling method grouped different enterprises according to their vertical and horizontal

position in the value chain toensure that the representationof relationships amongcluster

members and the nature of their demand for microfinance products are inclusive and as

accurateaspossible.

For each segment ofthe sevenstratified cluster populations, two tosevenenterpriseswere

randomly selected. The focus group participants were also selected according to this

segmentation.

Inadditiontointerviewswithandsurveyofsampledclusteredenterprises,15keyinformants

were also interviewed; theywere drawn fromnationaland provincial governmental entities,

internationalaidorganizations,tradeassociations,andlocalofficials.Table1showsthenumber

ofenterprisessurveyed ineach cluster.The stratificationmethod for the selectedclusters is

describedingreaterdetailinthenextsection.

3Inrandomsamplingifthepopulationsizeis60,obtaininga95percentconfidencelevelrequiresasamplesizeof53,

usingthestandardformulaforcalculatingsamplesizes:n=Nx/((N-1)E

2+x).Withpurposefulsampling,thesamplesize

canbereducedtoaround20-30.


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Table1.Clustersizeandsamplesize

ClusterSize SampleSize

Ironmonger(+/-60) 18

Driedfruitandnuts(+/-60) 25

Oldcarpenter(+/-80) 26

Newcarpenter(+/-50) 20

Silk(14) 14

Tailoring(+/-40) 22

Saffron(>100) 18

Total 143

Inancientwalledcities,bazaarsaretypicallylocatedalongtheaxialstreetsleadingfromonecity

gatetotheother,whileatthemaincross-sectionoftheaxialstreetsliesthecommercialand

socialheartof thecity.Heratcontinues todisplaymanyofthesecharacteristics. Theclusters

selected for this study, i.e. dried fruit and nut cluster, old and new carpenter clusters, silk

cluster, tailoringcluster,andironmongerclusterare located intheancientbazaarsalong the

axialroadsleadingtoChaharSu(Figure3).

Figure3.Clusterlocations

Thesaffroncluster,chosenformeetingtheselectioncriteriaanditsincreasingimportanceasa

substituteforpoppycultivation,isbestdescribedasavirtualclustersinceco-locationdoesnot

playaroleinitspresentform.


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5.Findings

Thefindingsreportedintheremainderofthissectionareorganizedasfollows.Eachclusteris

describedfollowedbyadiscussionof thedemandformicrofinanceproductsandservices.The

descriptionentailslocation,segments,product(s),collaborativeandcompetitivearrangements,

innovation,and businessobstacles asviewed bythe enterprisessurveyedfor this study. Thedemand formicrofinance productsand services isdisaggregated basedonneed for credit in

general,toolsandmachinery,training,andextrastock.Inaddition,observationsonreservations

againstborrowingoninterestarereportedforeachcluster.

5.1Ironmongercluster

LocatedonthestreetbetweentheKhushGateandChaharSu,thisclusterhasbeeninexistence

for over 300 years. Initially the ironmongers in this cluster were producing copperware but

switchedtothecheaperandmorereadilyavailableironabout25yearsago.Atthetimeofthis

study only one copperware enterprise remained inside the cluster. Currently, there are 18

enterprisesinthisclusterprovidinglivelihoodsforaround60households.

Theclusterhasrelativelyhighlabour intensityandmanufacturesdiverseproducts.Thereare

ongoingbuyer-sellerrelationsbetweentheenterpriseswithinthecluster.Theclusterspecializes

inmanufacturingironstorageboxesuniquetoHerat,andwithapotentialforexpansioninthe

national domestic market. Traditionally, all manufacturing and selling were done inside the

cluster. After 2001 the cluster expanded with some activities of the enterprises being

transferredtolocationsoutsideofthecluster.The ironmongerclusterwasstratifiedaccording

tothefollowingsegments:

Wholesalingmetalsheets

Manufacturingandsellingwatertanksandwateringcans Manufacturingandsellingstovesandcookingpots ManufacturingandsellingHeratiandIranianstylestorageboxes Manufacturingandsellingtubesandpipesforheaters,and Retailingready-mademetalproducts.

Thereiscollaborationamongtheclustermembersatdifferentscalesandindifferentstagesof

production. The cluster has a well-established (but informal) apprenticeship system through

whichyoungmenaretrainedwithsomeapprenticessettinguptheirownenterpriseswithinthe

cluster.Apprenticeshipinironmongerybeginsatanearlyage(earlyteens)throughatraditional

arrangement.Allenterprisestart-upsarefinancedbytraditionallendersorestablishedas jointventures between an investor and a trained ironmonger. Moreover, there are ongoing

arrangementsforbulkpurchasesofinputmaterial,worktoolsandmachinery,andlendingto

otherclustermembers.Thereareveryhighdegreesofknowledgetransferandordersharing

amongtheclustermembers.Toalesserextentthemembersalsosharemachinery(Figure4).


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Clustermemberscompetewithoneanotherbyofferingbetterquality,innovativedesigns,and

on-time delivery to their customers. Other forms of innovation to compete include selling

products through interest free loans, whereby the customers pay the cost of the product in

installments.Moregenerally,thereis competition among theclustermembers throughprice

reductions.

Figure4.TypesofcollaborationIronmongercluster

WithageneralincreaseinimportsfromChinaandIran,theclustermembersreportedhaving

takena number ofmeasures, largely by imitating, to competewith importedproducts. The

focusgroupparticipantsindicatedthatforeignproductswereactuallyhelpingthemorforcing

them to redesign their products and thus strengthening their customer base.Moremodern

tools,machinery,anddesignswouldlikelystrengthentheinnovativecapacityoftheclusterand

produceproductscomparableinpriceandqualitytoimportsfromIranandChina.Inabilityto

affordmoderntoolsandmachineryforpressing,dotting,designing,bending,andcolouringand

possessionofwindpumpsandweldingequipmentwerereportedasmajorneedsbythecluster

members to sustain themselves and expand their customer base domestically and in the

neighbouringcountries.


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Figure5.InvestmentsneededIronmongercluster

Lackofstoragespaceandshortageofelectricitywerereportedastwoothermainchallenges

facedby the clustermembers.The rangeofproductionproblems startsfromrelianceonold

toolsandmachineryandendswithinsufficientdesignknow-howtocompetewithimports.The

vastmajorityoftheclustermembersreportedlackofaccesstocapitalasamajorobstaclein

theirattemptstoremaincompetitiveandexpandcustomerbase.Themostlikelyusesofcredit

were stated as new machinery, tools, additional employees, and input material purchases

(Figure5).Overonequarterofthesurveyedclustermembersreportedthatthereweretraining

needsfortheapprenticesandtrainedpersonnelalikeontheuseofnewtechniques,tools,and

machinery.

Despitetheavailabilityofloansfromlocalbanks,noneofthefocusgroupparticipantsreported

havingutilizedthispossibilityduetoconcernsaboutpayinginterestonloans.Thesurveyofthe

clusterrevealed,however,thatapproximately20percentoftheclustermembershadutilized

formal credit despite their reservations about paying interest. Traditional sources were the

preferredoptionforthevastmajorityoftheclustermembersmainlyduetotheirbeingmore

acceptableonreligiousandsocialgrounds.In caseswhereclustermemberswantedtoborrow

despitereligiousprohibitiononpayinginterest,theywerenotabletoobtainloansbecausethey

hadnocollateral.Themajorityoftheclustermemberspayrentanddonotownotherproperty

touseascollateral.

5.2Driedfruitandnutscluster

Thisclusterisover60yearsoldandlocatedwithintheoldCityonastreetlinkingChaharSuto

theMalaki Gate and Shahr-e Naw (new city). There are about60enterprises in the cluster,

providing livelihoods for approximately 200 households. The enterprises process, package,

and/or sell driedfruits and nuts.Therearemainlyhorizontal linkagesbetweentheclustered

enterprisesand verylittle variationor specialization.A randomsampleof25enterpriseswas

selectedforasamplesizecomparabletootherclustersinthisstudy.Thisclusterwasselected


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foritsage,thesectorsimportanceasatraditionaloccupation,itsdependenceonlocalproduce,

andforbeingpartofthelargestlicitproductiveeconomicactivityinAfghanistan.Withraisins

andotherdriedfruitsandnutsbeingmajorexportsforAfghanistan,thesectorhasenormous

potentialformarketexpansioninneighbouringcountriesandbeyond.

There is collaboration among cluster members through knowledge transfer, sharing energy

sources, e.g., communal generators, workspace, and borrowing, lending, and repairing one

anothers machinery (Figure 6). The main form of competition is through quality, product

variety, and selling on credit. Innovation takes place largely in preparation, i.e., drying and

baking, packaging, and in-store presentation methods to increase product attractiveness

throughadequatelightingandhighhygienestandards.

Figure6.TypesofcollaborationDriedfruitandnutscluster

Lackofaccess todomestically grownfruits andnutswas stated asa majorchallenge for theclustermemberswho claimed that they purchased substandard fruits and nuts fromabroad

and,duetoimportingcosts,hadtosellatunacceptablyhighpricesinthedomesticmarket.A

majorobstacleinaccesstodomesticproducewasdeterioratingsecurityinruralareas,which

prohibitedrelativelywealthymerchantsfromtravelingtoandfromlocalproducers.Asaresult,

the cluster members opt for usingmiddlemen to procure produce locally, or purchase bulk

produce from importers. Unreliable/unstable electricity supply was also cited as anongoing

challengefortheclustermembers,whoruntheriskofhavingexpensivemachinerydamagedby

inconsistentandfluctuatingvoltageofthecityspowersupply.


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Figure7.InvestmentsneededDriedfruitandnutscluster

Compared to other clusters in this study, the production process in this cluster is less

complicatedandtraininginbasicproductionisnotamajorissue.Thereis,however,muchneed

forbetterqualityandhygienestandardsaccordingtothefocusgroupparticipants,particularlyif

the clustered producers want to export. Currently, much of the drying is done throughtraditionalmethodsofdryingintheopenairorindryinghouses.Automaticdryingmachinescan

beusedforfasterandbettercontrolofdrying,seasoning,androastingprocesses.Seasonalbulk

purchasesofinputmaterialsanddryingandpackagingmachinerywerecitedasthetwomost

importantneedsthatcouldbeaddressedthroughaccesstocreditonfavourableterms(Figure

7).

The focusgroupparticipantswere unanimous intheiropposition to loanswith interest. Like

numerousothersengagedinthisandotherresearch,theenterprisesmadereferencestothe

needforrisksharingbythelendersandinsurancemechanismsagainstbusinessfailure.

5.3Silktextilecluster

ThesilkproductionandweavingiscenturiesoldandmostlyspecifictotheHeratregion.Thereis

some silk production and weaving activity inKunduz and Balkhprovincesaswell.The Herat

clusterispartlyvirtualandconsistsofaround250(home-based)workshops,scatteredaround

HeratCityandtheprovince,wheremostofthesilkthreadproductionandweavingtakesplace.

The cluster of 14 enterprises, supported and supplied by the 250 home-based workshops,

provideslivelihoodsforanestimated700to800households.Theclusterislocatedonastreet

linkingShahr-eNaw tothe JamiHeratMosque.Thisclustercame intoexistenceduring Zahir

Shahsruleinthe1960s.HeratMunicipalityprovidedthecurrentlocationoftheclusterandthe

enterprisescontinuetoberentpayingtenantsoftheMunicipality.Someoftheenterprisesdo

weaving onsite but the main activity of all the clustered enterprises is selling ready-made

products,suchasfabric,garments,scarves,turbans,andhandkerchiefssuppliedbyhome-based

workshops. Thereareonlyhorizontal value chain linkagesbetween theclusteredenterprises

and little variation between the enterprises intermsofspecialization. Since thiswas a small

cluster,all14clustermemberswheresurveyed.


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Themarketforlocallyproducedsilkproductshasdeclinedsignificantlyovertheyearsdespite

the cohesiveness apparent in the cluster and an active etehadia (business association)

representingsilkproducerinterests.CheapsilkandsyntheticimportsfromPakistan,China,and

Tajikistanarethemajorthreatstothecluster.Inpartthedeclineofthisclusterhasalsobeena

functionofa lowereddemandforsilkproducts,drivenbytheavailabilityofsyntheticproducts

costingafractionofthecostforproducingsilkproducts.Innovationsinblendingsilkwithcotton

andwoolandnewformsofpackaging,developedinthelast20orsoyears,havebeenattempts

toreducecostsandretainorincreasemarketshare.

A numberof the focus group participants pointed out that amajor concern for the cluster

memberswasgeneratingrevenuefromretailsales,whichtheycoulddoreasonablyquicklyby

selling much cheaper imported products. A number of participants suggested that if the

pressuresfromcheapandlowerqualitysyntheticimportscontinued,thedownwardtrendinsilk

beingwovenbytheclustermembersinHeratwouldalsocontinue.Currently,thereremain20

handloomsinthecluster,downfromabout400around20orsoyearsago.

Theclusterisrepresentedbyan etahadia,whichenjoysexceptionallegitimacyamongcluster

members. The etahadia recently waged an initiative against cheap synthetic imports from

Pakistan,China,andIndiatoprotectdomesticproducersandthetraditionofsilkweaving.This

initiativewasmore thananattemptat importsubstitutionora call for protectivemeasures.

Instead,theetahadiaappealedtotheimporterssenseofprideintheirtraditionaltradeandthe

reputationofthe cluster asa whole. Compelled bya senseofguiltandpride, the importers

ceasedfurtherimportationofnon-silksyntheticproductsfromabroad.

Traditionally, collaboration among silk producers has been strong. Learning and knowledge

transfer through social interactions and firmly established apprenticeship arrangements

continue to be key features of the cluster. The focus group participants made numerous

references to other forms of collaboration, including bulk buying, bulk contracting through

multi-producer arrangements, sharing space, raw materials, tools and equipment, and

secondarysalesthroughborrowingfinishedproductsfromotherswhentherewasinsufficient

stocktosell(Figure8).

There is competition among the cluster members in different forms and at different levels.

Qualityandcolouringtechniquessetthemoresuccessfulproducersapartfromothers.Unique

product design can also bea competitionfactor amongst clustermembers.The focusgroup

participants pointed out that unique designs and superior product quality strengthen and

expandthecustomerbaseevenwithoutadvertising.Tocompete,someproducersspecializein

making one product only, e.g., turbans, with the expectation to become leaders through

reputationintheirspecificlineofproduct.


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Figure8.TypesofcollaborationSilkcluster

Investment toexpandormodernize,orto bulkpurchaserawmaterialisnot possiblefor the

cluster members due to cashflow problems. Low enterprise revenue and uneven market

demand for silk products have meant that most cluster members cannot afford to retain

apprenticesonanongoing,full-timebasis.Duringperiodswithlowrevenueandincome,most

enterprises lay off their apprentices,who are crucial for the long-term sustainability of the

cluster. The need for credit was stated most specifically in terms of smoothing seasonal

variations and purchasing bulk raw material, acquiring modern equipment and tools, and

retainingapprentices(Figure9).

Figure9.InvestmentsneedsSilkcluster

Themainrawmaterialforsilkproductionisthesilkwormpupa,currentlyimportedinbulk(andnotalwaysofthebestquality)fromtheneighbouringcountries,suchasIranandTajikistanby

independentmerchants,whothensellittothesilkproducersatamarkedupprice.Availability

ofandincreasedaccesstoloanscouldstalltheclustersdeclineiftheloanswereusedtobuy

modern tools for extracting silk threads in the home-based workshops in Herat, since the

traditionalmethod ismore likely todamage thesilkandresult ininferior qualityofthe final

products(Figure8).


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Affordableloanscombinedwithassistancefromgovernmentalandnon-governmentalagencies

couldalsobeusedtoencouragethesilkproducerstofarmtheirownsilkworms.Forexample,

private-public partnerships involving the government, development organizations, such as

ASMED,MFIs,andthesilkproducersetahadiacouldcollaborateonprovidingthesilkproducers

withcaterpillarboxes,eggs,andprocessingandweavingequipmentinreturnforacommitment

bytheproducerstorepayingtheirloans.

Accordingtosomeofthefocusgroupparticipants,aninterventionalongtheselinescouldrevive

thesilkclusterinonetotwoyears.However,therearenoexpectationsthatthegovernment

willplaya role inpartnerships insupportofthe industry. The participants reportedthat the

governmentwas planninga relocation of some of the producers, which is likely to have an

adverse effect on the workings of the cluster. The government plans are reportedly being

devisedwithoutconsultationwiththeclustermembersortheiretahadia.

Unanimouslyand inthe first instance,the reactionbythe clustermembers toborrowing on

interestisnegative.Furtherprobingduringthediscussionrevealedsomedegreeofpragmatism

basedoncertainconditionsbeingmetbythelendersrelatingtohowtheinterest/commission

ontheloanwaschargedandhowmuch.Theparticipantsalsoreportedthatseveralattempts

hadbeenmadetoapproachMFIsforloans.However,due tohigh ratesof interestandshort

paybackperiods,nonehadborrowedloansfromMFIs.Therewasalsoastrongsentimentfor

sharingrisksofborrowingwithsomeparticipantsenquiringabouthowtheycouldminimizeor

eliminate becoming indebted or bankrupted if unable to repay due to factors beyond their

control.Arecurringsuggestionduringthediscussionwastheformationofpartnershipsbetween

borrowingsilkproducersandthelendingorganizations,suchasMFIs.

5.4Newcarpentercluster

Thisclusterisabout50yearsold.ItistheonlyselectedclusterinHeratcitythatisnotwithinthe

OldCity.Around50workshopsarelocatedonbothsidesofastreetthatrunsbetweenShahr-e

Nawand thenorthof the city.Thenew carpenterclusterwas selected for its relatively high

labourintensity,therelativelyhighlevelofcomplexityinthemanufacturingmethods,diverse

output, and the multiple buyer-seller relations within the cluster. This cluster provides

livelihoodsforanestimated200households.Itwasstratifiedintothefollowingsegments:

Wholesalebeamsandboards Manufactureandsaleofwindowframesanddoors Manufactureandsaleofstaircaserailings,and Manufactureandsaleofwoodencupboardsandcabinets

There isongoing knowledge transfer among the clustermembers. Newmethods are shared

amongthemembersanddesignproblemsareresolvedbasedonopenconsultationwithothers.

Someclustermembersformpartnershipstobuygeneratorsforusebythosewhocontribute.


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Thereisbulkpurchasingofinputmaterialsandordersharingaswellasborrowingandlending

oftoolsandmachinery(Figure10).

Themembers compete in pricing and speed of production, as well as quality and specialty

products.Thereiswidespreadrecognitionthatgoodcustomerrelationsisaneffectivemeansof

winningandkeepingnewcustomers.Freeofchargeafter-saleserviceisofferedbysomeofthe

clustermembersasameansto competeagainstothers.Anumber ofclustermembershave

compiled catalogues of their products in attempts to standardize product specification and

qualityandhenceattractmorecustomers.

Figure10.TypesofcollaborationNewcarpentercluster

Thereisanapprenticeshiptraditionintheclusterbutmostenterprisescannotaffordtoprovide

thetrainingduetootherworkpressures.Thissituationputstheresponsibilityoflearningonthe

apprentice,whoismostlyusedasacheaplabourerratherthantomorrowsmastercarpenter.

Some members also stated that they could use credit to retain skilled labour and maintain

productivecapacity.

Figure11.InvestmentsneededNewcarpentercluster


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Highcostofinputmaterials,insufficientspace,inadequatemachinery,cheapimports,andlack

of access to (Sharia-compliant)creditwere listed as themain problems facedbythe cluster

members. Much of the cabinet and frame making is done by using manual tools such as

handsaws.Acquisitionoforaccesstoadequatetoolsandmachinerywerecitedasthetwomain

areaswherecreditwouldbeused.Purchaseofinputmaterialwasalsocitedasanareawhere

creditwouldbeused(Figure11).

TheclustermembersareawareoftheMFIsexistenceinHeratbutclaimedthattheyhadnot

takenloansonreligiousgrounds.Whenpressed,thefocusgroupparticipantsstatedthatthey

wouldonlytakeloansinpartnershipwiththelenderssothatrisks,aswellasprofits,couldbe

sharedasprescribedbySharia.

5.5Oldcarpentercluster

ThisisoneofthemostancientclustersinHerat.Theclusterislocatedinasmallsidealleyoffa

mainstreetthatconnectsChaharSuwiththeIraqGate.Forthelast300yearsthetradehasbeen transferred through generations. The surveyed enterprises all reported that they had

learnedthecraftfromtheirfathers.Becauseofitsageandreputationtheclusteredenterprises

feel compelled to work according to formal, though undocumented, quality standards as a

means to uphold the prestige of the cluster. There are about 80 workshops, providing

livelihoods for approximately 300 households. The cluster was segmented as follows:

Manufactureandsaleofwindowframesanddoorsformodernbuildings Manufacture andsaleofwooden handlesforpickaxesandhammers,sandalis (tables

usedforheating),andsticksusedinceremonies

Manufactureandsaleofstaircaserailings Saleofdoorandwindowframes,and Saleofwoodentoysandstickhandlesforhammersandshovels.

Thereisongoingknowledgetransferamongtheclustermembers.Inaddition,andaswiththe

other six clusters, there is cooperationonbulk purchasing of inputmaterials, order sharing,

borrowing and lending tools and machinery, and periodic advocacy through the localwakil

(locallyappointedcommunityrepresentative)onsuchissuesasadequatemunicipalservicesand

fairtaxes(Figure12).


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Figure12.TypesofcollaborationOldcarpentercluster

Thereiscompetitioninpricingandcustomerrelations.Toreducepricesandincreasecustomer

satisfaction, a number of the cluster members have acquired modern precision machinery

though many continue to use traditional tools in production. The cluster members pride

themselves in attracting customers based on product quality rather than deception which,

according tosomeclustermembers,iswidespread inalltradesasacommonwayofwinning

overcustomers.

Themainproblemfacedbytheclusteristhefloodingofthemarketwithcheap(andoftenlow

inquality) imports.Therewere calls for the government toact bybanning the imports asa

meanstostrengthenthecluster.

A recurringproblemfora smallnumberofclustermemberswas theunreliableandunstable

municipalelectricitysupply,whichcoulddamageexpensiveelectricaltoolsorrendermanyofthe enterprises redundant during blackouts. The vast majority of cluster members feel that

usinggeneratorpowertoservicesmallerordersisnotcost-effective.Anotherproblemspecific

tothisclusterisaseriousshortageofspace.Beinglocatedinoneofthemostancientpartsof

Herat,thereisnospacefortheclustertoexpand,orforindividualclustermemberstomoveto

largepremises.


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Figure13.InvestmentsneededOldcarpentercluster

Themain form of innovation in the cluster is utilization of modern tools andmachinery to

producetraditionalproducts.However,allfocusgroupparticipantsandmanyofthosesurveyed

stated that their businesses could still benefit from having precision tools and automatedmachinerytomakebetterframes,windows,andtraditionalfurniture.Affordablecreditwassaid

tobekeyinacquiringmoderntoolsandmachinerytoimproveproductionqualityandspeedand

tocompetewithcheapimports.Amajorbenefitofacquiringmodernizedtoolsandmachinery

wouldbefasterproductionspeedsandabilitytotakeonrushcustomerorders.Aswiththenew

carpentercluster(above),aboutonequarterofthosesurveyedstatedthattheywouldpurchase

moreinputmaterialswithincreasedaccesstocredit(Figure13).Themainneedfortrainingwas

expressedasmarketingandfinding,andmeeting,newcustomerdemands.

Allfocusgroupparticipantsandthemajorityofthosesurveyedstatedexplicitlythattheycould

usecreditinavarietyofwaystoimprovetheirbusinessoperations.Thereisstrongreservation

aboutborrowing oncredit, although it iswidely knownthat someclustermembershave,or

havehad,interestbearingloans.Aswithotherclusters,thecarpentersclaimedthattheywould

bemorewillingtoborrowiftheloanwasprovidedwithoutcontraveningSharia.

5.6Tailorcluster

The cluster ismorethan50 yearsoldandhasabout40 enterprises,providing livelihoodsfor

approximately120householdsandlocatedinoneofthequadrangle-shapedtradecentresnear

theJamiMosque.Theentrancetotheenclosedareaisfromasideallyoffthestreetrunning

between the Mosque and Chahar Su. The cluster has gradually increased its level of

specialization over time and currently caters for a diverse customer base. This cluster wasselectedbecausethesectorisverylargeandexpandinginHerat.Therearereportedlysixother

tailorclustersinHerat.Thereareverticallinkageswithintheclusterbetweentheworkshopsand

theshops.Theclusterwassegmentedasfollows:

ManufactureofAfghanmaleclothing ManufactureofAfghanfemaleandchildrenclothing


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Embroideryforfemaleandmaleclothing SaleAfghanmaleclothes SaleAfghanfemaleandchildrensclothes SaleAfghanfemaleandmaleembroidery

Aswithotherclusters,thereisongoinginformationexchangeaboutproductionmethods,design

ideas,andfactormarketprices.Bulkpurchasing,ordersharing,andlending/borrowingtoolsand

otherproductionequipmentarealsocommonamong theclustermembers.Borrowingcredit

fromotherclustermemberswassaidtobecommonpractice(Figure14).

Figure14.TypesofcollaborationTailoringcluster

The main form of competition is toward higher quality and newer designs with shorter

productiontime.Productionspeedisachievedthroughinvestinginspecializedmachineryto

replace the tedious handwork in sewing the typically intricate and elaborate traditional

womensdresses.Clustermembersalsocompetebyusinghigherqualityfabric.Withpressure

tocompeteagainstother clustermembers andexpandcustomerbase, anumberofcluster

members expressed a need for automation in doing standardized precision work such as

embroidery. The focus group participants were adamant that due to the nature of their

business they had tobe continuously innovative partly becauseofconsumerdemand, and

partly as a means to compete against foreign designs. Customer demand for shorter

productiontimeandnewdesignswerecitedasthemainreasonsfortherelativelyhighlevelof

automation in the cluster. Innovation also occurs in presentation of the finished products

throughattractivepackaging.


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Figure15.InvestmentsneededTailoringcluster

Themainproblemfortheclusterasawholeischeapimports.Tocompetesuccessfully,the

clusterwouldbenefitfromlowerrawmaterialcosts.Inpart,itwasarguedthatthiscouldbe

achievedthroughloweringtariffsonimportedfabrics.Thefocusgroupparticipantsalsocited

irregularandunstablecitypowerasamajorproblem.

With rapidadoptionofnew techniques and acquisitionofnew automated machinery, the

focusgroupparticipantsemphasizedtheneedfortrainingtooptimizeproductionskills.Access

tocreditwouldserveasameanstoacquirenewtoolsandmachinery(Figure15).However,

thefocusgroupparticipantsclaimedthatnooneintheclusterhadborrowedinterest-bearing

loansonreligiousgrounds.

5.7Saffroncluster

Thisisavirtualclusterinthesensethattheclustermembersarenotasco-locatedastheother

sixclustersselectedforthisstudy.Therearemorethan10femaleandmalesaffronassociations

inHeratanditssurroundings.Everyassociationhasmorethan100saffronproducermembers.

Therearesomedifferencesbetweentheassociationsintermsofhelpprovidedtoassociation

members. For instance, some of the saffron associations have access to national and

internationalexhibitionsandmarketswhileothersdonot.Theassociationsprovidetrainingand

saffron bulbs to farmers. The Herat region has the highest number of saffron producers in

Afghanistan.Theclusterwassegmentedasfollows:

Cultivatorsofthesaffronbulb, Collectorsoftheflowers(whoalsoseparatethesaffronstigmas) Dryersofsaffron,and Packagersandsellersofsaffron.

Being a nascent sector and having been supported by international development agencies,

mainly DACAAR but also others,whichbrought groups of growers together and emphasized

collectivelearning,thereisahighdegreeofcollectivedependencyamongtheclustermembers.

A key indicator of cluster cohesiveness is the pricing mechanism through which the cluster


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membersagreeonthesellingpriceoftheproducts.Traderswhobuythepickedflowersorthe

driedsaffroncannotmakethepurchasepriortothepricesbeingformallysetaccordingtothe

qualitycategoriesofsaffronbytheproducerassociations.

Figure16.TypesofcollaborationSaffroncluster

Themost pronounced formofcollaboration inthe saffron cluster isaround informationand

experiencesharing,particularly fromexperiencedgrowersandprocessersto thenewcomers.

Informationisfreelysharedonplantingbulbs,weedingandwatering,flowerpicking,anddrying.

There are also indications of collaboration in forming a unified voice when it comes to

approaching(mainly)internationaldonororganizationsforhelpinsecuringinputmaterials,such

assaffronbulbs,andinaccessingexportmarkets(Figure16).

Co-locatedproducers,e.g., inGhoryanorPashtunZarghoon,competewithfellow co-located

producers mainly onproduct quality, but not onpricing.Price competitionoccurs basedon

location,e.g.,betweenalltheproducersinGhoryanandalltheproducersinPashtunZarghoon,

andnotamongproducersinthesamelocation.

Figure17.InvestmentsneededSaffroncluster


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Accesstomarketsisamajorobstacleforthevastmajorityofproducers.Currently,twoorthree

traderspurchasetheproductinbulk,thenpackagethemforsaledomesticallyorinternationally.

This islessa problemfor the sector asa whole, butmonopolizationof the saleofpackaged

saffrondetersproducers,manyofwhomarewomen, frominnovatingandmovingupon the

valuechain.Otherthanbeingexcludedontheaccountofbeingjustfarmers,orwomenwhosejobwas onlytogrow theproductbut leave the sellingtomen, low literacyand inabilityto

speakEnglishorotherEuropeanlanguagesmeansthatthefemaleproducerswouldhavemajor

difficultiesinbecomingdirectlyinvolvedintradeandmarketingoftheirproduct.4

Therehavebeenattemptsoverthelastfewyearsbytheclustermemberstostandardizeand

grade their products. Also, there have been successful attempts to standardize packaging,

largelythroughimitatingpackagingdesignsfromIran.However,thereremainssomeneedfor

trainingonotheraspectsofentrepreneurship,suchasqualityassuranceandmarketing.There

have been attempts by the Government through the Ministry ofAgriculture, Irrigation, and

Livestock to provide the saffron growerswith drying machines. This unprecedented support

from the government was reportedly driven by the eradication policy and as a means to

encourage poppygrowers toswitch tosaffronasan alternativecrop. Yet, the overwhelming

majority of the cluster members do not have the most basic modern tools for processing

saffron. Unable to pay for drying machines, co-located producers in Pashtun Zarghoon and

Ghoryansharecommunaldryingfacilitieswheremachinetimefordryingcanbepurchasedby

producers,whowishtodrytheirowncrop(Figure17).

Asidefromcapitaltopurchasemachinery,tools,andsomeinputmaterials,suchassaffronbulbs

andfertilizer, thefocusgroupparticipantsexpressedaneedfor credit tosupportthemselves

during non-productiveperiods,i.e., the firsttwo tothreeyears afterthe firstplanting ofthe

bulbsandthegrowingseasons.Withcreditavailable,theproducerscouldsupportthemselvesin

thefirsttwotothreeyearsand,afterbulbmaturity,wouldnotbedesperatetosellthecropas

quicklyaspossibleinmarketsoversuppliedbyotherproducersdesperatetosell.Noneofthe

clustermembershaseverborrowedmicroorotherformsofformalloan.Sixtypercentofthose

surveyed reported borrowing from time to time from traditional sources. The focus group

participantsexpressednoreservationsagainstcredit.Contrarytootherclusters,saffroncluster

membersmadeexplicitstatementsinsupportofcreditavailabilityfromformalsources.

6.KeyConclusionsAllClustersOngoing information sharing on factorprices, productionmethods,bulk purchasing of input

materials, and order sharing appear to be the fundamental benefits of being in a cluster.

Competitionusuallyoccursindesign,quality,productionspeed,andinsomecases,aftersale

service. All clusters can benefit from more modern tools and machinery, and production

4SeePartoandMihran(2010).


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techniques.Recognizing thisneed,allclusteredenterprisesexpectedthatincreasedaccess to

loansonacceptabletermswouldallowthemtohavebetterperformanceandmorepossibilities

forexpansion.Someclustermembershaveborrowedoninterestbutthevastmajorityobjectto

interest-bearingloansonreligiousgrounds(Figure18).

Figure18.Currentaccesstoformalcredit

There is significant need for credit, although not without strong reservations about paying

interestandtheinabilitytoprotectagainstrisksofborrowing(Figure19).Ontheassumption

that loans could be obtained in consistency with Sharia values, there would be additional

concernsregardinghighinterestrates,shortdurationof therepaymentperiods,andcollateral

requirements of the formal lending sources.5 Acquisition of modern tools and machinery

throughincreasedaccesstoloanswouldneedtobeaccompaniedbyrelevanttraining,andin

conjunctionwithpre-existingformsoflearningthroughtheapprenticeshipsystem.

Figure19.MosturgentusesofcreditAllclusters

Thereare lending/borrowing arrangementswithinandamong theclusteredenterprisesin all

sevenclustersthough,notably,thesearrangementsareattheirlowestinthesilkcluster(Figure

20). With the exception of the saffron cluster, all other clusters have long established

apprenticeship arrangements. The majority of those engaged in focus group discussions

5ForadditionaldetailsseeDemandAssessmentforSharia-basedFinancialProducts:FindingsfromHerat,Jalalabad,

Kabul,andMazar-eSharif,basedonresearchbyAfghanistanPublicPolicyResearchOrganization(APPRO).


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expressedconcernsthat,duetocashflowproblems,theycouldnotretainapprenticesonan

ongoingbasisandthattherewasaneedforsomedegreeofstandardizationandfamiliarization

withmodernproductionmethodsintheirrespectiveapprenticeshiparrangements.

Figure20.Informalborrowingandlending

The main concerns for the clustered enterprises, with the exception of the saffron cluster

members,wereunreliableandunstableelectricity,andcheaperbutsub-qualityimports.Inthe

caseofthesaffroncluster,therewereadditionalconcernsregardinggender-basedexclusionof

femaleproducersfromthehigherstagesofthevaluechain,i.e.,marketingandretail.

Despitethemanyissues,andperhapsasthemainreasonfortheirresilience,innovativeactivity

iswidespreadinallclusters,includingthenascentsaffroncluster.Innovationoccursintermsof

continuous improvementand, in some cases, byaddressing some ofthe governance related

issuesthroughadvocacybyetahadias.

Theonlyclusterwithsignsofdeclineisthesilkclusterduetotwomainfactors.First,synthetic

products sold at a fractionof the cost of silk productsare increasinglydifficult to compete.

Second,themachineryusedforsilkpreparationandweavingbytheclustermembersistooslow

tobeefficientandtoooutdatedformeetingtodaysqualitystandards.

Ofthesevenclusters,thedriedfruitandnutclusterappearstohavethehighestneedforcredit,

followedbytheoldcarpenterclusterandthesaffroncluster(Figure21).


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Figure21.AveragecreditamountsneededperclustermemberannuallyAllclusters

Acaseistobemadefortworelatedformsofcatchingupbytheproducersinalltheclusters.

First,andverymuchconsistentwithhowtraditionaleconomiesoperate,manyoftheclustered

enterprisesdonothaveformalaccountingsystemsandoftendonotknowtheprecisevaluesof

theirassetsandliabilitiesortheirnetgainandrevenuefromtheirbusinessoperations(Figure

22).IntheeventthatMFIstargetclusteredenterprisesfortailormadefinancialproducts,many

oftheenterprisesarelikelynottohaveproofoftheirearningsortheirneeds.

Figure22.Formsofbookkeepingbycluster

Second,themachineryandthetoolsoftradeofthemajorityoftheclusteredenterprisesare

oftenancientandillmatchedtotherequirementsofmodernproduction.Withoutadequateand

moderntoolsandmachinery,itisunlikelythattheclusterscouldaspiretomeetmodernqualitystandards,improveperformance,andcompeteagainstcheapimportsorinforeignmarkets.

Acquiringmoderntoolsandmachinerycanbefacilitatedthroughloans,butthelendingentities,

such as MFIs, are likely to expect the borrowing enterprise to keep orderly accounts of its

transactionsandbeabletoprove,basedondocumentedpastperformanceandrevenues,that

itwillbeabletopaybackitsloan.


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Similarly,acasecanbemadeforaunifiedstrategybyeachclusterasawholetocompete,not

onlyinternallywiththeaimofraisingqualitystandards,butalsoexternallythroughpromoting

its products with assistance from development donors, for example. Within the current

arrangementsandthestateofaffairs,competitionamongclustermembersisoftenfocusedon

price-cuttingattheexpenseofqualityimprovements.Qualityimprovementstostrengthenthe

current customer base and compete in new markets is likely to increase the possibility of

competitionamongtheclustermembersupwardsandtowardmeetingnewcustomerdemands.

7.Recommendations

Table2summarizesthevariousformsofloandemandedbyclustertype.Theinformationinthis

tableisbasedondiscussionswithclustermembersinfocusgroupdiscussionsandduringthree

presentationsinHeratinvolvingclustermembers,etehadias,andkeyinformants.

Table2.Microfinanceproductsandpotentialuses

Cluster MFIproduct Primaryuse

Ironmonger IndividualSMEbasis Insuranceagainstbusiness

failure/sharelossandbenefit

Moderntoolsandmachinery Retainapprentices Inputmaterial Additionalemployees

Driedfruit&nuts IndividualSMEbasis Jointventure/risksharing Seasonalsmoothingcredit Catch-upcredit Valuechainfinancing

Inputmaterial Dryingmachines

Silk Clusterbasis IndividualSMEbasis Catch-upcredit Seasonalsmoothingcredit Valuechainfinancing

Inputmaterial Moderntoolsandmachinery Retainapprentices

Newcarpenter IndividualSMEbasis Seasonalsmoothingcredit Catchupcredit JointventurewithMFI

Inputmaterial Moderntoolsandmachinery Retainapprentices

Oldcarpenter IndividualSMEbasis Catch-upcredit Smoothingcredit JointventurewithMFI Financialtraining/investment

Moderntoolsandmachinery Infrastructure(space/electricity) Inputmaterial

Tailoring IndividualSMEbasis Catch-upcredit Moderntoolsandmachinery

Saffron Seasonalsmoothingcredit Catch-upcredit Marketing/exhibition Dryingmachines


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Basedonthefindingsfromtheresearch,reportedintheprecedingsectionsandsummarizedin

Table2,thefollowingrecommendationscanbemadeforconsiderationinthedevelopmentof

newproductsbyMFIs:

Themost demanded formofborrowing is jointventure betweenMFIs and the borrowingenterprises. In the event that MFIs commit to joint ventures with clustered enterprises,

preparations need tobemade for profit and loss sharingbetween the lenders (MFIs) and

borrowers(clusteredSMEs).

Since lack of collateral of individual enterprises is likely to be an issue for the MFIs,considerationneedstobegiventousingtheexistenceoftheclusterascollateral.Thiswould

be consistent with MFIs preference for group borrowing where the group as a whole

guarantees the repayment of loans by individual group members, in this case cluster

members.

Withsomeclusters,e.g.,driedfruitandnutsandsilk,considerationshouldbegiventovaluechainfinancing.Someoftheseclustersrelyheavily,andhaveproblemswith,securingtimely

andhighqualityinput.Withinputsuppliessecured,throughcluster/groupborrowing,each

enterpriseisthenlefttoitsowndevicestoinnovateinprocessingtheinputmaterialinterms

ofgradingorpackagingofthefinalproduct.

Lack of access to credit byclustered enterprises should be addressed in conjunctionwithother needs, such as basic infrastructure, enhanced trade agreements with neighbouring

countries,andfamiliaritywithmodernmethodsofbusinessmanagement,e.g.,bookkeeping.

There is a three-faceted trade-off that should be considered in promoting new productsamongclusteredenterprises.First,almostasarule,noneoftheclusteredenterprisespays

taxes.Second,asthisreportshows,theoverwhelmingmajorityoftheclusteredenterprises

donotkeepadequatebusinessandaccountingrecords.Third,MFIs(should)requirereliable

accountingrecordkeepingasaformofassurancethattheborrowingenterprisescanafford

to repay their loans. When promoting new products to clustered enterprises, MFIs could

consider adequate bookkeeping as a condition of borrowing. This condition forces the

borrowingentitiestorecordtheirtransactionsandbecomeeligibletopaytaxes,effectinga

formalization of informal business activity and generating new revenue sources for the

Government.

Currently,MFIsareviewedinanegativelightforavarietyofreasonsbymanyofclusteredSMEs. There is much to be gained in changing this image by providing fair and accurate

information about how MFIs operate, emphasizing the fact that they are not for profit

entities. Also, loansaremuch less likely tobeconsidered asharam if interest/commission

chargedisinvestedindevelopmentandstrengtheningofalreadysuccessfulenterprises.


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Thought needs to be given to the potentially important role of etehadias in relation toclusters.Borrowingneeds,andreservationsagainstborrowing,arewellknowntoetehadias

aslegitimateandrecognizedbodiesinthegovernanceofclusters.Formalengagementwith

etehadiasislikelytoachievetwogoals.First,thefullextentanddisaggregationofdemandfor

credit couldbe established for consideration indeveloping newmicrofinance productsby

MFIs.Second,thenegativeimageofborrowingismorelikelytobealleviatedby etehadiasas

legitimateinternalbodies,ratherthanMFIsasexternalentities.

Inaddition,thereareanumberofbroaderpolicyrelevantrecommendationsthatneedtobe

madeonthebasisofthisresearch:

Zoning byHeratMunicipality has consistently failed to recognize the economic and socialvalueofclusteredenterpriseactivity,orthecontributionstheymaketostabilityanissueof

utmostimportanceinconflict-riddenAfghanistan.HeratsuniqueGuildofExperts,abody

consisting of volunteer professionals that safeguards Herati citizens interests, must be

alertedtotherole,value,andcontributionsofclustersinHeratandstartadvocatingfortheir

recognitionandprotectionfromurbandevelopmentprojectsthatthreatenclusters.

Todate, this current study is theonly researchconducted onclusters inAfghanistan. ThescopeofthisresearchwastheCityofHeratonly.Therearefourotherlargecities,including

Kabul,andanumberofsmallertownsthroughoutAfghanistaninwhichamajorportionof

productive(offfarm)economicactivityoccursinclusteredform.Moreresearchisneededto

identifyandanalyzetheseclusterswiththeintentionofaddingtothereservoirofknowledge

forinformedurbaneconomicdevelopmentpolicymaking.

There is a strong need for formalized and certifiable vocational training for the clusteredenterprises. Since all clusters already have traditional apprenticeship arrangements,

formalizedvocationaltrainingwillneedtobeprovidedinsuchawayastoresonatewithand

expand thesepre-existing arrangements. To facilitate this,clustered enterprisesshould be

encouraged by MFIs to invest in their apprenticeship efforts as key to their longer-term

sustainability.

ThevastmajorityofclusteredSMEsdonotusemodernanddocumentedformsofaccountingor bookkeeping. There should be a coordinated effort to provide them formal business

management training, including but not limited to basicbookkeeping, filing and inventory

management.Thiscouldbeledbyanjomans(guilds)andetehadias(businessassociations),in

collaboration with government agencies charged with economic and private sector

development,andinternationaldonorsorganizations.


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Documents

Clustered Enterprises in Herat