The Development of a Village Economy: A Step-by-Step Illustration

In this simulation, we will follow the growth and development of a small village economy over a period of eight months, through five steps; (i) import substitution of cooking oil and kerosene, (ii) import substitution of soap, (iii) improvement of living conditions, (iv) social equity, and (v) value adding to exports.

Village Description

The village is located in rural Vanuatu, away from rural centers and connected to other villages by only jungle foot paths. It has 10 households with a very basic standard of living. The cash economy depends on one cash crop of low value, harvested and sold in small quantities. Housing is made of materials gathered from the jungle, food is cooked over an open fire, they have no electricity, and the only source of fresh water is rainwater runoff from their roofs.

Here we explain the development situation by tracking several key indicators.

• Cash Earnings – the village produces green copra as a cash crop. Green copra is the fresh, white meat of the coconut. Cut out of the shell, the villagers sell it to a copra drier in a neighbouring village for 8 cents per kg. Eight of the households have about the same number of members and manpower, and each produce 500kg of green copra per month. Two of the households (#9 and #10) are at a manpower disadvantage - one is a widow with four young children, and the other is an elderly couple with two grandchildren living with them. These two poorer households each produce 300kg of green copra per month. Household earnings for the whole village total to $368 per month, the highest being $40, and the lowest $24.
• Household Cash Expenses – All households spend all their cash earnings buying imported consumer goods from a store in another village. Each month, each family buys one liter of cooking oil @ $4.00, one liter of kerosene @ $3.60, 10 bars of soap @ 50 cents each, and then spends the rest of their cash to buy various items (rice, tinned fish, clothes, footwear, matches, batteries, etc.).
• Internal Cash Transfers - there are no internal cash transfers between villagers.
• Cash Inflows and Outflows – cash flows into the village economy from green copra ‘exports’ to a neighbouring village ($368/mth), and flow out of the village through the purchase of ‘imported’ consumer goods from a neighbouring village store ($368/mth). Inflow equals outflow.
• Cash Income Producing Assets – as green copra producers, each household possesses one copra cutter, value $10.
• Value Added - the production of green copra requires no imported input and so all of its sale value is added value. At 8 cents per kg produced, total value added is $368 per month.
• Household Assets – villagers have acquired cooking pots, and a few other household assets, but for this simulation we assume a value of zero for household assets at the outset.
• Savings and Loans – villagers have no cash savings and no outstanding loans.

Step #1 – Import Substitution of Cooking Oil and Kerosene

Acting on a local radio announcement of a village enterprise demonstration being held in a nearby village, several of the villagers travel there and spend the day gathering information about village business starter kits offered by the Rural Community Development Club of Vanuatu (RCDC). RCDC is an organization that helps people in rural communities start their own businesses, and then provides on-going support in the way of production technologies, product designs, supplies and further training.

One of the villagers (village household #1) contacts a relative that lives in the capital, and arranges a non-interest loan for $400 to purchase RCDC’s village workshop starter kit and training. The village workshop is set up with tools that do not require electricity and the workshop owner is trained to produce three products; a hand-powered coconut oil press (selling price $30), coconut oil lamps of various designs ($4), and a smokeless wood stove made of soil-cement bricks ($30).

Three households in the village (#2, #3 and #10) buy oil presses from the workshop and begin to produce coconut oil as a substitute for imported cooking oil and kerosene lamp fuel. The village workshop allows each of these three families to pay for the oil presses over time, as they can afford. Every household in the village buys an oil lamp from the village workshop and begins to buy all of their cooking oil and lamp fuel from the village coconut oil producers at $1.00 per liter.

• Cash Earnings – All of the households continue to produce green copra, but by substituting imported cooking oil and kerosene, three of the village households receive an increase in their household earnings of between $3.00-5.00 per month. The village workshop owner benefits from the production and sale of the oil presses and oil lamps, his earnings increasing to $98 for that month. Household earnings for the whole village total to $437.52, the highest being $98, and the lowest $24.
• Household Cash Expenses – By purchasing their cooking oil and lamp fuel from their own village oil producers, village households save $5.60 per month. In this simulation we assume that all of the households except for household #9, keep their consumption at the same level, and keep their extra cash as savings, or use them to purchase household or production assets. Household #9, the poor widow with young children, chooses to improve her family’s standard of living by buying more goods from the store with her savings (milk, tinned meat, bread, clothes, shoes, school books, etc.). Her household expenses increase from $24 to $29.60.
• Internal Cash Transfers – a total of $14 worth of cash transfers between villagers each month as the oil producers sell oil to their neighbours. This is an indication that the village economy is beginning to specialize and develop.
• Cash Inflows and Outflows – without any decrease in the consumer goods used by each household, the cash outflow to the neighbouring village store drops from $368.00 per month to $293.60.
• Cash Income Producing Assets – income producing assets increase by $490 with the setting up of the village workshop and the purchasing of the three coconut oil presses.
• Value Added - with no increase in the amount of coconut harvested, producing oil increases the value added to local coconuts by $17.36 (+5%).
• Household Assets – village households each purchased an oil lamp adding $4 to their household assets.
• Savings and Loans – the oil makers and the village workshop have obtained increases in earnings and decreases in their household expense. They apply this money to pay off the loans they made to purchase their working tools. Except for household #9 for reasons explained above, all of the other households begin to save. By the end of the first month, total savings have grown to $8.00.

Step #2 – Import Substitution of Soap

One of the villagers (household #4) purchases a soap making business starter kit from RCDC and begins making soap from coconut oil. They sell it for 40 cents per bar and all of the villagers begin to buy their soap from them (100 bars per month per household). RCDC supplies them imported sodium hydroxide at a cost of 5 cents per bar, and they buy 15 liters of coconut oil each month from a close relative (household #3) who is one of the village’s oil producers. Compared to the initial situation where any cash earned quickly left the village as payment for imported consumer goods, the import substitution of oil and soap has created many cash transfers between villagers and begun to diversify the economy (Table 1).

• Cash Earnings – In addition to oil and soap, all of the households continue to produce green copra. With the introduction of soap making, household earnings for the whole village total to $476.92 – an increase of $108.92 (30%) - the highest household earnings being $88.56, and the lowest $24.00.
• Household Cash Expenses – By purchasing their cooking oil, lamp fuel and soap from their own village producers, households save $6.60 per month.
• Internal Cash Transfers – a total of $65 transfers between villagers each month.
• Cash Inflows and Outflows – the substitution of local soap for imported soap lowers the cash outflow to the neighbouring village store by another $43 per month. Other cash outflows that are occurring at this point are, payments on loans used to buy production equipment ($81.76), and payments to RCDC for soap making supplies ($5.00).
• Cash Income Producing Assets – the new soap making equipment increases the value of the village’s production assets by $80 to a total of $670.
• Value Added - producing oil and soap plus the production of green copra, increases the value added to local coconuts to $416.36 – a 13% increase over producing only green copra.
• Savings and Loans – by the end of the month, total savings have grown to $34.40 and loans have been paid down to $408.76 from the $570 originally borrowed.

Step #3 – Improve Living Conditions

In this simulation, the village economy is left to operate for three months producing green copra, and local coconut oil and soap. By the end of the third month, total household savings have increased to $259.20 and the village workshop decides to offer smokeless stoves for sale ($30). The stoves are inexpensive because they are made of soil-cement bricks. In addition to firewood, they burn many types of waste materials, for example coconut husks and shells – burning them without smoke. Seven of the village households buy stoves. The two poorest families do not have the savings required to buy a stove, and the village workshop household has been applying their savings to paying down their business start-up loan.

• Household Assets – with the addition of seven smokeless stoves, household assets have grown to $250.
• Savings and Loans – total savings were decreased to $150.36 as villagers chose to use their savings to improve their living conditions. Only the village workshop still has a loan – $171.40.

Step #4 – Social Equity

As another month passes, household #10 has finally saved enough money to purchase a smokeless stove. The only household in the village without a stove is household #9 - the widow with four children. Neighbours in the village – many of them relatives – have helped out this family from time to time and as their economy grows, the villagers do a “social equity check” and realize that the widow’s family is being left behind. They decide to donate some of their savings to provide her with a smokeless stove and a coconut oil press. The village workshop provides free labour. Seven village households each give up $3.70 to buy the stove and press materials and provide the widow with these assets.

• Household Assets – with the addition of a smokeless stove for household #10 and a stove and press for household #9, total village household assets grow to $310.
• Savings and Loans – even with the donation, villager savings increased to $82.12 during the 7th month. The village workshop loan, the only remaining loan, decreased to $147.83.

Step #5 – Add Value to Exports

Village stores in two neighbouring villages have asked our village to supply them with locally made soap and coconut oil and also coconut oil lamps. Each village will require 20 liters of coconut oil and 100 bars of soap each month. They have requested a 10% discount off the selling price. Our village’s oil and soap makers have agreed. The village workshop has also agreed to make 10 oil lamps for each village and sell them to the stores at a 10% discount.

• Cash Earnings – The village workshop, and the oil and soap makers are the key beneficiaries of this development. Household earnings for the whole village increase to $627.24, the highest being $148.00, and the lowest $32.40.
• Household Cash Expenses – The poorest household (#9) begins to produce oil for sale and increases their household consumption to $32.40. This is equal with the consumption of the other families in the village. Otherwise there is no change in household consumption in the village.
• Internal Cash Transfers – the value of internal cash transfers increase as more oil and soap are produced.
• Cash Inflows and Outflows – due to oil and soap exports to neighbouring villages, cash inflows increase to $534.24 – a 47% increase.
• Cash Income Producing Assets – an increase in the soap maker’s equipment (fabricated by the village workshop) to meet the increase in soap produced, raises the production assets by $30 to $730.
• Value Added - without any increase in the amount of coconut harvested, producing oil and soap for the neighbouring village increases the value added to local coconuts by $135.24 (+37%) . The making of lamps by the village workshop adds another $17 in added value for that month.
• Savings and Loans – total savings have grown to $380.12 by the end of the 8th month. The village workshop still has $124.23 in outstanding loans.
• Labour Time Budgets – subsistence farmers spend much of their time working in their gardens and doing other household chores. The time they have to spend on activities that provide cash income is limited to about 24 hours a week, and will vary from household to household. Except for Oil Making Household #3, even at maximum production of oil, soap, and village workshop items, the households in this village do not exceed 96 hours a month in labour devoted to earning a cash income. Household #3 is making 422kg of green copra and 47 liters of coconut oil, requiring 120 hours of labour per month. Likely this household would manage their time by ‘hiring’ one of the other households to harvest from their coconut trees (likely for a fee based on a small percentage of the green copra earnings produced), or they would spend less time growing their own crops and buy food from their neighbours.

Summary of Development

Economic development began with the production of coconut oil in the village, allowing the import substitution of cooking oil, kerosene lamp fuel, and soap. This saved villagers $6.60-8.60 per household each month and freed up this cash for economic development. In the last stage of the village’s development, soap and oil are sold to neighbouring villages, adding further value to the green copra they produce and fueling even greater development.

Table 2 below summarizes several key indicators of village economic development.



Over the eight month period, total village savings and assets increased by $1,220. Household cash earnings increased by 70% and household expenses decreased by 16%. The value added to local resources increased by 41%. The village’s poorest family increased their income by 35%.

These advances were accomplished by leveraging a very small amount of a low value local resource – 4,600kg of fresh coconut. And this was done using only 4% of that resource as it was converted to higher value products (coconut oil and soap) - the rest continued to be exported as a cash crop.

Conclusion

The village began with a cash economy producing only green copra for sale. Import substitutions freed up some of the earnings from green copra and allowed savings to increase, living conditions to improve and productive technologies to be purchased. In this case, the import substitutions were coconut oil and coconut oil soap substituting imported cooking oil, kerosene lamp fuel and imported soap. But other substitutions are possible. For example, imported foods (rice, tea, coffee, sugar) could be substituted with local food and the portion of green copra earnings saved (or earnings from vanilla, kava, or cacao) could be used to start the developmental process.

There were several key conditions present that made development happen.

(i) an existing resource with the potential to make import substitution products (coconut),
(ii) appropriate technologies to produce import substitutions (oil press, soap making equipment),
(iii) an organization to introduce the technologies, train the producers, and provide on-going support (the rural community development club), and
(iv) a source of cash to finance the process (loans and earnings).

For this village economy to develop further, these conditions need to continue. As trade increases within the village between neighbours, and more trade is developed with other villages and even with the urban center, this village will increase its economic strength and continue to raise its standard of living.

The Rural Community Development Club played a key role in this developmental process by introducing new technologies, products and enterprises. By providing on-going support, the RCDC will help sustain the progress that has been accomplished.

Where from here? The villagers will go forward by substituting imports and increasing the value of exports, and then using the money to improve their living conditions and invest in more productive assets that add value to their local resources. RCDC can help them with this. Having now begun the process, there are plenty of opportunities available to them.