foreign investment and land acquisitions in eastern europe: implications for africa

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Foreign Investment and Land

Acquisitions in

Eastern Europe:

Implications for Africa

Presented by:

Jo SwinnenLICOS Centre for Institutions & Economic

Performance KU Leuven &

Centre for European Policy Studies (CEPS)

AGRODEP Workshop on Foreign Direct Investment and

Land Markets: Challenges and Opportunities for Africa

June 8, 2011 • Dakar, Senegal

Foreign Investment and Land A i i i i E EAcquisitions in Eastern Europe :

Implications for Africa p

JO SWINNENf i i & i fLICOS Centre for Institutions & Economic Performance

KU Leuven

&&

Centre for European Policy Studies (CEPS)

AGRODEP ‐ IFPRI Conference, June 2011, Dakar Senegal

outlineoutline

• CEE vs SSA : similarities & differences

d i C & li i• Land FDI in CEE, concerns & policies

• FDI Spillovers (capital, technology & productivity)

• An Example of “Land Grabbing” from Senegalp g g

Similarities between CEE & SSASimilarities between CEE & SSA

• Major shock induces rapid FDI inflowMajor shock induces rapid FDI inflow

• Major income gaps with “FDI source countries”

d f i i f d• Underperforming agri‐food system

• Undercapitalized, low technology, know‐how, …

• Need for integration in international markets

• Poorly developed land rightsPoorly developed land rights

• Poor/not functioning land markets

DifferencesDifferences

CEE :CEE : • higher incomes; • Better infrastructure & human capital• Better infrastructure & human capital• FDI to (also) supply local marketsFDI i il i f d i d t d ib i• FDI primarily in food industry and agribusiness

• Objections from farmers and land owners• Objections initially driven by ethnic/border disputes

FDI in agriculture (EURO MN)

900

1000 Abania

Bulgaria

C h R bli

700

800Czech Republic

Estonia

Croatia

H

500

600Hungary

Lithuania

Latvia

M d i

200

300

400 Macedonia

Poland

Romania

R ssia

0

100

200 Russia

Slovenia

Slovakia

Ukraine2003 2004 2005 2006 2007 2008 2009

Ukraine

Yearly inflows of FDI (million US $) per region, 1970 – 2006

1400000

1600000 Africa

1000000

1200000

1400000

Latin America andCarribean

Asia and Oceania

400000

600000

800000Asia and Oceania

Transition countries

0

200000

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06

Developed countries

197

197

197

197

197

198

198

198

198

198

199

199

199

199

199

200

200

200

200

Source: Calculated from UNCTADSource: Calculated from UNCTAD

FDI stocks as percentage of GDP, 1980 – 2006

35

40

Developed Countries

25

30

35 p

Africa

15

20 Latin America and theCaribbean

Asia and Oceania

5

10O

Transition Countries

0

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

Source: Calculated from UNCTAD

FDI flows compared to ODA flows to developing countries

1970 ‐ 2006

Resource flows to developing countries (US $ billion)p g ( )

1970 1975 1980 1985 1990 1995 2000 2003 2006 FDI 3 9 9 7 7 7 14 2 35 9 116 0 256 1 178 7 379 1FDI 3.9 9.7 7.7 14.2 35.9 116.0 256.1 178.7 379.1ODA 5.4 9.2 17.0 21.2 38.5 40.5 36.1 49.7 77.0

Source: Calculated from UNCTAD

Industries offering the best opportunities for FDI in SSA

Source: UNCTAD

Foreign acquisition of land in CEEForeign acquisition of land in CEE

• Objections particularly strong where ethnic/border disputes

• Not a major issue, until EU Accession: – Single market regulation since 1992 in EUg g– In principle, removes any objection against foreign ownership of land (part of capital market regulations !)

• => temporary derogationsp y g

Legal restrictionsLegal restrictions

Aft EU i f i t h i lt l1. After EU accession, foreigners can not purchase agricultural land for a transitional period in the NMS7.

h i i l i d i ( f l d)2. The transitional period is 7 years (12 years for Poland).

3. There are differences between the NMS7 in the implementation of these restrictions1. in the way ‘foreigners’ are defined 2. in conditions for foreigners to acquire land

4. There are generally no restrictions on renting agricultural land to foreigners.

Conceptual issues

• Land transactions stimulate development by:•Shifting land to most productive users

•Allow the exchange of land when the off‐farm d leconomy develops

•Facilitate the use of land as collateral

• Hence, in principle, any restrictions that p p yconstrain land exchanges and the optimal development of the land market would also pnegatively affect development.

• To what extent is the restrictions on foreign ownership really affecting the efficiency of landownership really affecting the efficiency of land exchanges and of land allocations, and productivity growth?

– Look at broader perspective of a variety of factors that affect the functioning of land markets, in general and in the NMS7 more specifically.p y

• Restrictions on foreign OWNERSHIP, not on USE

• Other factors affect land transactions Constraints in other markets (eg credit) Transaction costs Imperfect property rights

Spill‐over effects !!

Land sales versus land rentalLand sales versus land rental

• Are restrictions on ownership important for landAre restrictions on ownership important for land use ?

• How important is land ownership in land use?p p

2005 2007

Share of rented land (%) 2005 2007Slovakia 91 89Czech Republic 86 83Malta 80 81Bulgaria 76 79F 72 74France 72 74Belgium 67 67Germany 62 62Luxembourg 54 57Hungary 57 56Cyprus 50 54Estonia 48 50Lithuania 53 48Sweden 40 39Finland 34 34Finland 34 34Greece 32 32United Kingdom 31 32Denmark 25 29Slovenia 30 29It l 23 28Italy 23 28Austria 26 27Spain 28 27Latvia 24 27Netherlands 26 25Portugal 24 23Poland 20 20Ireland 18 18Romania 14 17

Land Tenure and Farm Structures(% single holder in land use)(% single holder in land use)

2003 2005 2007Ireland 100 100 100Greece 100 100 100Luxembourg 100 100 100D k 97 98 95Denmark 97 98 95Slovenia 94 95 95Norway 96 95 94Malta 92 93 93Netherlands 92 92 93C 93 93 92Cyprus 93 93 92Finland 93 92 91Latvia 89 90 91Belgium 92 92 90Poland 88 90 90U it d Ki d 89 85 87United Kingdom 89 85 87Italy 88 82 87Lithuania 88 88 86Sweden 81 82 81Austria 83 83 81P t l 77 75 72Portugal 77 75 72Germany 69 69 68Spain 69 69 68Romania 55 65 65Estonia 59 56 52Hungary 50 49 48Hungary 50 49 48Bulgaria 42 47 47France 54 50 46Czech Republic 28 29 29Slovakia 15 18 20

Land Tenure and Farm Structuresi iin Romania

100

%)

70

80

90

used

land

(%

40

50

60

and

in to

tal u

10

20

30

hare

ow

ned

l

0less than

1 ha1-2 ha 2-5 ha 5-10 ha 10-20 ha 20-30 ha 30-50 ha 50-100 ha More

than 100h

Sh

ha

Farm size

Land sales prices in the EU‐27Land sales prices in the EU 27Agricultral land sales prices*

30000 0035000,00

40000,0045000,00

15000,00

20000,0025000,00

30000,00

EUR

O/h

a

0,005000,00

10000,00

006

07 06 05 08 01 008

08 08 08 08 008

008

08 008

008

008

008

Bel

gium

-20

Den

mar

k-20

Ger

man

y-20

Irela

nd-2

0

Spai

n-20

Italy

-20

uxem

bour

g-20

Mal

ta-2

0

ethe

rland

s-20

0

Finl

and-

20

Swed

en-2

00

d K

ingd

om-2

0

h R

epub

lic-2

0

Latv

ia-2

0

Lith

uani

a-20

Slov

akia

-20

Bul

garia

-20

Rom

ania

-20

Lu Ne

Uni

ted

Cze

c

CEE land prices and EU AccessionCEE land prices and EU AccessionAgricultural land sales prices - Romania

1400

1600 120.00

140.00

800

1000

1200

1400

EUR

O/h

a

40.00

60.00

80.00

100.00

Euro

/ha

Bulgaria (rental)

0

200

400

600

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

0.00

20.00

2000 2001 2002 2003 2004 2005 2006 2007 2008

Bulgaria (rental)

999 000 00 00 003 00 005 006 007 008 009

Agricultural land sales price - Latvia

350.0

400.0

450.0

Agricultural land sales price- Lithuania

2200

2400

100.0

150.0

200.0

250.0

300.0

1400

1600

1800

2000

0.0

50.0

2000 2001 2002 2003 2004 2005 2006

Real Prices - Lats/ha

1000

1200

2000 2001 2002 2003 2004 2005 2006

Real Price - LTL/ha

Our conclusionOur conclusion

• Nature of land contracts:Nature of land contracts: – equilibrium between security of operation and allowing for adjustments to reflect changes inallowing for adjustments to reflect changes in market conditions

– Multiple equilibria ? May depend on localMultiple equilibria ? May depend on local institutions etc

Our conclusionOur conclusion

If political/social opposition too strong for full liberalization:

• Propose moderate changes – Politically least sensitivey– Economically most effective

• Examples:Examples:– Increase minimal size which one can easily acquire (Estonian model)– Allow non‐land operation to be purchased – Establish transparent (and enforceable) medium term rental contracts p ( )

for rest of the land…

• Both cases would avoid issue of “foreign take‐over” of rural gareas, but would allow foreing farms to develop based on more efficient “owned/rented” balance

Major difference between SSA and CEE

• Spill‐over effects of FDI and technologySpill over effects of FDI and technology transfer etc occur via FDI in Agribusiness and Food IndustryFood Industry

H i ib i d f d i d FDI i• Huge in agribusiness and food industry FDI in CEE through supply chain restructuring & VC

• => may affect optimal policies ! y p p

FDI & Supply Chain Restructuring (Vertical Coordination)(Vertical Coordination)

• Problem: processors/traders/retailers face lack ofProblem: processors/traders/retailers face lack of supplies, because farms are not able to supply the type/quality of products required

• Reason: factor(*) market constraints (inputs, credit, technology, …)

• Solution requires some form of contracting :– Price/quality– Supplier assistance : inputs, technology, extension

services, management, …» (*) output market with agribusiness( ) p g

“Vertical coordination” includes :Vertical coordination includes :

Input supply programs• Input supply programs• Trade credit• Investment assistance program• Bank loan guarantee programs• Extension services (technology and

management)• .....

Variations reflect market imperfections, investment security, …

Some Examples of d lContracting Models

Proces./Retail – guaranteed supplier loans: JUHOSUKOR i Sl kiJUHOSUKOR in Slovakia

& KONZUM in CroatiaRetail/Processing Co.

• Retailer/processor provides loan

f b kguarantees for bank loans to suppliers

Farm

BankBank

Leasing dairy equipment by joint projectLeasing dairy equipment by joint project Wimm Bill Dann -- De Laval in Russia

Processor

Project Farm

Equipment Sellerq p

Dairy Processor Becomes Financial I tit ti DANONE i R iInstitution: DANONE in Romania

• Processor takes on• Processor takes on banking function:– provides loans to

Processing pfarms

– based on business plansplans

– takes collateralFarm

• Provides payment guarantee for input suppliers

Bank Input Suppliersuppliers

Efficiency EffectsEfficiency Effects• Important Direct Effects :

– Enhanced QUALITY (& higher PRICES)– Increased PRODUCTIVITY– Increased INVESTMENTS

• Important Indirect Effects: Spillovers– Contract replication by other companies– Farm assistance replication– Household level spillovers

Change in Qualityg Q yDairy in Poland 1996-2001

8090

100

otal

(%)

Mlekpol

506070

s Milk

in T

o p

Mleczarnia

Kurpie

M

203040

Extr

a C

lass Mazowsze

ICC Paslek

Warmia Dairy

010

1996 1998 2001Shar

e of

ES

Effect on Investment :Farm cooling equipment in PolandFarm cooling equipment in Poland

1995-2003

90

100

60

70

80

h ow

n c.

t. (%

)

Mlekpol

40

50

60

supp

liers

with

MlekpolLowiczeMazowszeKurpie

10

20

30

Shar

e of

s

01995 1998 2001 2003

Impact on LOANS and InvestmentImpact on LOANS and Investment Small farms in Polish Dairy sector

Size (# of

Invests (% of

Uses loan to invest

Uses dairy loan

Uses bank loan(# of

cows) (% of total)

to invest(% of A)

loan(% of B)

loan(% of B)

A B C D A B C D1-5 52 54 41 50

6-10 78 51 43 70 >10 92 74 43 75ALL 76 58 43 69

VC farm assistance : Dairy companies in CEE (Bulgaria Slovakia Poland)in CEE (Bulgaria, Slovakia, Poland)

Credit Inputs Extension Vet. Bank Totalp

PL 50 67 50 0 50 43 PL 50 67 50 0 50 431994 SK 0 0 83 17 17 23 BG 9 18 9 0 0 7 PL 83 100 83 17 83 731998 SK 17 17 83 17 33 33

BG 45 64 18 18 18 33 BG 45 64 18 18 18 33 PL 83 100 83 17 83 732002 S 00 33 83 02002 SK 100 33 83 17 50 57 BG 82 91 73 18 36 60

Farm assistance by food companies in CIScompanies in CIS

(Armenia, Georgia, Moldova, Russia, & Ukraine)

% of firms % of farmsCredit 43 51Prompt payments 42 87

Physical inputs 36 53Physical inputs 36 53

Quality control 34 78

Agronomic Support 21 81

Farm loan guarantees 21 15Farm loan guarantees 21 15

Investment loans 6 0

FDI in SSA Agric & Land :gA case from Senegal

Comparative Analysis: 3 CasesComparative Analysis: 3 Cases

Small‐ Industry High valueSmallholders

Industry structure

High value exports to

EU

Madagascar green beans

100% contract

Monopoly yes

Senegal green beans

Mixed & changing

Competition yesbeans changing

Senegal cherry tomatoes

0% Monopoly yestomatoes

Senegal horticultural exports

25,000

30,000

20,000

me

(ton)

10,000

15,000

xpor

t vol

u

5,000

Ex

01997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Year

French bean Tomatoes Mango Other fruit & vegetables

Data

• Research area: Senegal River DeltaResearch area: Senegal River Delta

• Firm level interviews (Sept 2005 and March 2006)

• Household survey (Febr April 2006)• Household survey (Febr‐April 2006)– 2 rural communities

– 18 villages18 villages

– 299 households

– Recall data (2001)

x

Worst Case Scenario ?tomato export in Senegal

1. Poor country

2 FFV sector: Increasing standards (private and2. FFV sector: Increasing standards (private and public)

3. Extreme consolidation3. Extreme consolidation

4. Foreign owned multinational company

5 Full vertical integration5. Full vertical integration

6. Complete exclusion of smallholders

7 FDI of land (“Land grabbing”)7. FDI of land ( Land grabbing )

Definition of “Land Grabbing”Definition of Land Grabbing

1. Large scale land acquisition (purchase or lease) by1. Large scale land acquisition (purchase or lease) by foreign investor for agricultural prod.

2. Transnational commercial land transaction focusing on commercial nature

3. Taking possession/control of scale of land which is g p /disproportionate in size to average land holdings in the region

Datah l l• Research area: Senegal River Delta

• Firm level interviews (Sept 2005 and March 2006)

• Household survey (Febr‐April 2006)– 2 rural communities

18 ill– 18 villages

– 299 households

Recall data (2001)– Recall data (2001)

x

Employment

40%

50%ho

lds

20%

30%

f hou

seh

0%

10%

Shar

e o

2003 2004 2005 2006Year

G d R Bé hi T l

• More than 3000 workers employed in 2006

Gandon Ross Béthio Total

p y

• Almost 40% of households in the region have at least one member employed by GDS

Household participationHousehold participation

• No bias of employment towards better‐off or moreNo bias of employment towards better off or more educated households

• Bias towards households with smaller per capita p plandholdings

Income effects

2000

2500

com

e

1500

2000

ouse

hold

inFC

FA)

500

1000

ge to

tal h

o(1

,000

0Total sample Households with

members employed inHouseholds without

members employed in

Ave

ra

the tomato exportindustry

the tomato exportindustry

Total income Income from tomato export industry wagesIncome from farming Income from self-employmentIncome from other wages Non-labour income

Poverty effects

40%

50%

hold

s

20%

30%

of h

ouse

h

0%

10%

Households without members Households with members

Shar

e o

Households without membersemployed in the tomato export

industry

Households with membersemployed in the tomato export

industry

• Poverty: 35% with vs 46% without employment

Poverty Extreme Poverty

Poverty: 35% with vs. 46% without employment• Extreme poverty: 6% with vs. 18% without employment

Comparative Analysis: 3 CasesComparative Analysis: 3 Cases

Small‐ Industry High valueSmallholders

Industry structure

High value exports to

EU

Madagascar green beans

100% contract

Monopoly yes

Senegal green beans

Mixed & changing

Competition yesbeans changing

Senegal cherry tomatoes

0% Monopoly yestomatoes

Contract motivations for farmersSub Sahara Africa

Madagasc Senegal

Reasons for contracting (%)

Madagasc. Senegal

2004 2005

Stable prices 19 45Stable prices 19 45

Higher income 17 15

Higher prices 11g p

Guaranteed sales 66

Access to inputs & credit 60 63

Access new technologies 55 17

Stable income 66 30

Source: Maertens et al., 2006; Minten et al., 2006

Income during lean period 72 37

Effects on technology adoption, income & land use (biodiversity)

• Land use in the off‐season on rice fields

• Vegetable export contributes for 47% to household income

• Additional positive effect on hh income through• Additional positive effect on hh income through • technology spillovers • increased rice productivity (with 64%)

• Sharp improvement in food security

• Reduced pressure on forests

Table: Impact of vegetable contract‐farming on the length of the “hungry” season in Madagascar

4

5

2

3

mon

ths

0

1

currently contractedhousehold

contractedhouseholds before

the contract

similar householdswihtout contract

Source: Minten et al., 2009

Green beans in SenegalGreen beans in Senegal• % rural household participation

50%

60%

30%

40%

EmployedC t t

20%

30% ContractParticipation

0%

10%

0%

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Income effects

7000CF

A)

5000

6000

e (1

,000

F

2000

3000

4000

d in

com

e

0

1000

2000

hous

ehol

0Total sample Non-

participantsAgro-industrial

employeesContractfarmers

Aver

age

Total household income Income from farming

Income from agr. wages Income from non-agr. sources

Poverty effects(Green beans in Senegal)

60

40

50

lds

incidence of poverty

incidence of extreme

30

40

hous

ehol incidence of extreme

(food) poverty

10

20

% o

f

0

10

Scenario "No Scenario Actual situation

Source: Maertens and Swinnen, 2009exports" "Contract"

Gender effects

Female employment in Senegal horticulture export sector

Source: Maertens and Swinnen, 2009

Importance of female income in total household income

Case-study "Les Niayes" - all households

Self employment

Transfers Total incomeMale incomeFemale income

Case-study "Senegal River Delta" - all households

Self employment


Farming

Wages - FFV exportindustry

Wages - other

Farming


Wages - other

0 500 1000 1500 2000

Household income (1,000 FCFA)

Case-study "Les Niayes" - households employed in FFV export industry

0 100 200 300 400 500


Case-study "Senagl River Delta" - households employed in the FFV export industry

Wages - other

Self employment


Wages - other

Self employment


0 200 400 600 800 1000 1200 1400 1600

Farming


Household income (1,000 FCFA)0 200 400 600 800 1000 1200 1400

Farming



Source: Maertens and Swinnen, 2009

Household income (1,000 FCFA) Household income (1,000 FCFA)

In conclusionIn conclusion

• FDI is potentially major force for growthFDI is potentially major force for growth

• Large‐scale foreign acquisition of land:– Serious concerns and important opportunitiesSerious concerns and important opportunities

– Efficiency and rent distribution

• Nature of land contracts: – equilibrium between security of operation and allowing for adjustments to reflect changes in market conditions

– Multiple equilibria ? May depend on local institutions etc

• Very little careful research – and hard to do it right

• Beware of the simplistic arguments

More info1. Swinnen and Vranken, Land and EU Accession, Centre for European Policy Studies (freely

downloadable from www.ceps.eu)

2. Dries, L., Germenji, E., Noev, N. and J. Swinnen, 2009, “Farmers, Vertical Coordination, and the R i f h D i S i C l d E E ” W ld D lRestructuring of the Dairy Sector in Central and Eastern Europe”,World Development

3. Dries, L. and J. Swinnen, 2004, “Foreign Direct Investment, Vertical Integration and Local Suppliers: Evidence from the Polish Dairy Sector”,World Development

4. Dries, L. and J. Swinnen, 2010, “The Impact of Interfirm Relations on Investments: Evidence from the Polish Dairy Sector”, Food Policy

5. World Bank, 2005, The Dynamics of Vertical Coordination in the Agro‐Food Sectors of Europe and5. World Bank, 2005, The Dynamics of Vertical Coordination in the Agro Food Sectors of Europe and Central Asia, World Bank Publications

6. Maertens and Swinnen, 2009, “Standards, Trade, and Poverty”, World Development

7. Maertens and Swinnen, 2009, “Gender and Modern Food Supply Chains”, LICo Discussion Paper (www.econ.kuleuven.be/licos)

8. Maertens, Colen and Swinnen, 2011, “Globalization and Development in Senegal: A Worst Case S i ?” E R i f A i lt l E iScenario ?”, European Review of Agricultural Economics

9. Swinnen, 2007, Global Supply Chains, Standards & the Poor, CABI

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