initial case studies - agricultural and food policy analysis (eng); iset

7/28/2019 Initial Case Studies - Agricultural and Food Policy Analysis (ENG); ISET

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Case Studies for Class Discussion and Debate

Agricultural Economics I: Agricultural and Food Policy Analysis

These initial case studies were primarily developed for use in class discussions and debates in the Agricultural and Food

Policy Analysis course in the MA Program in Economics at the International School of Economics at Tbilisi StateUniversity (ISET). The case studies were prepared by Adam Pellillo and Lasha Labadze.

These case studies are made possible by the generous support of the American people through the United States Agency

for International Development (USAID). The contents are the responsibility of Tbilisi State University (ISET) and do

not necessarily reflect the views of USAID, EWMI, or the United States Government.


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Employment in Agriculture: How is it Defined?

Source: GeoStat

The National Statistics Office of Georgia produces labor force statistics using information from the

quarterly Integrated Household Survey (IHS). Household members aged 15 and above are

interviewed in the IHS. The household surveys are the only data source which, with an appropriate

survey design, are representative of the entire population of Georgia, all branches of economicactivity, all sectors of the economy, and all categories of workers.

According to GeoStat, a person is employed if he/she has worked for at least 1 hour during the last

seven days in order to receive a salary, profit or other (cash or in-kind) labor compensation inside

the country. A job means any kind of activity, including but not limited to: farming, hunting,

fishing or gathering forest fruits, mushrooms, medical plants etc., processing of any agricultural

products, corn grinding, wine making, making cheese, butter, canned products and etc. sewing,

knitting, making brooms, baskets, etc. Even if a person did any unpaid job at farm, household or

helped friends/neighbors doing any type of job for free, he/she is considered employed.

While following closely the ILO recommendations, the criteria is relatively soft because Georgian

traditions and other characteristics are quite different compared to those in EU or anywhere else.

For example, helping a neighbor could be very different phenomenon in Georgia and in EU. Thus,

employment in rural areas is arguably overestimated and the unemployment rate in Georgian regions

differs mainly due to the share of population in rural areas.

Labor Force

1,959,293

(Active Population above age 15)

84.9%

1,664,190

Employment

32.3%

631,963

Hired Employment

0.9%

17,392

Agriculture

31.4%

614,571

Other

52.3%

1,025,434

Self Employment

44.1%

864,529

Agriculture

8.2%

160,905

Other

0.3%

6,794

Undefined Emp.

15.1%

295,103

Unemployment


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According to official statistics, in 2011, more than one million people, that is about 52.3% of total

labor force, is self-employed in Georgia. The majority of self-employment is in the agricultural

sector, where 44.1% of total labor force is self-employed. In other words, 51.9% of working

population is self-employed and about 1% of working population is hired in agriculture. Being self-

employed in agricultural sector doesnt mean to have sufficient means for life. More than half

(444,734) of those self-employed people in agriculture live in families with less than 500 GEL totalmonthly income, including both monetary and non-monetary incomes, pensions, remittances and

other sources.

If we just take people living in rural areas, we find that 93.5% are considered as employed by official

statistics (according to their estimates 1,046,764 person is employed in rural areas out of 1,119,797).

Normally, the labor force of a country consists of everyone of working age, typically above a certain

age and below retirement, but in Georgia labor force includes participating workers above 15. About

25% of self-employed people in agriculture are pensioners. If we exclude pensioners from the labor

force, unemployment rate will go up to 17.6% from its current level of 15.1%.

Other interesting facts:

The average family size varies in the range of 3.3-4.5 by regions. The lowest 30% ofhousehold members are employed in Tbilisi and the highest value 57% is observed in Guria.

The unemployment rate is higher in Tbilisi (29.3%), followed by Adjara (18%) andSamegrelo (16.5%). The lowest unemployment rates are observed in Guria (5.1%) and

Samtskhe-Javakheti (5.4%) regions of Georgia.

Regions differ by unemployment due to the few reasons, except the obvious reasons, such asbig industrialized cities, we could name land distribution (less unemployment in regions

where land is more equally distributed).

13.8% are pensioners in the labour force. This number is one of the highest in Guria (20%). 16.1% of those who are employed is pensioner. In Tbilisi 6% of working population are pensioners, followed by 11% in Adjara and 14% in

Samtskhe-Javakheti region. This number varies from 15-25% in other regions of Georgia.


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Technical Appendix

The household survey data are available on GeoStats web page at:

http://geostat.ge/index.php?action=meurneoba&mpid=1&lang=eng

The survey questionnaires are available at:http://geostat.ge/index.php?action=page&p_id=698&lang=eng

Information is provided in different datasets and for the purposes of analysis it is important to

merge them. The main dataset is called Tbl_Ec_stat_05, which describes economic status and

other characteristics of each household member. In order to perform the above analysis first it is

important to have surveyweights in this database. Thus, we should merge Personal_Weights data

to our main dataset. In STATA this entails using the following commands:

use Personal_Weightssort uid membernosave Personal_Weightsclearuse Tbl_Ec_stat_05sort uid membernomerge uid memberno using Personal_Weightsdrop if _merge==1 | _merge==2

We can use the following commands to calculate the numbers provided in the first chart.

Active population:tabstat aqt [weight=p_weights], stat(sum) savematrix list r(StatTotal)matrix stats=r(StatTotal)di stats[1,1]/4

Number of employed people:tabstat momusave_sul [weight=p_weights], stat (sum) savematrix list r(StatTotal)matrix stats=r(StatTotal)di stats[1,1]/4

Number of unemployed people:tabstat umush_mkacri [weight=p_weights], stat (sum) savematrix list r(StatTotal)matrix stats=r(StatTotal)di stats[1,1]/4

Number of people on hired employment:tabstat momusave_sul if daqmomusave==1 [weight=p_weights], stat (sum) savematrix list r(StatTotal)
http://geostat.ge/index.php?action=meurneoba&mpid=1&lang=enghttp://geostat.ge/index.php?action=meurneoba&mpid=1&lang=enghttp://geostat.ge/index.php?action=page&p_id=698&lang=enghttp://geostat.ge/index.php?action=page&p_id=698&lang=enghttp://geostat.ge/index.php?action=page&p_id=698&lang=enghttp://geostat.ge/index.php?action=meurneoba&mpid=1&lang=eng


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matrix stats=r(StatTotal)di stats[1,1]/4

Number of self-employed people:tabstat momusave_sul if tvitdasaqm==1 [weight=p_weights], stat (sum) save

matrix list r(StatTotal)matrix stats=r(StatTotal)di stats[1,1]/4

Number of undefined employment:tabstat momusave_sul if gaurkv_momosh==1 [weight=p_weights], stat (sum) savematrix list r(StatTotal)matrix stats=r(StatTotal)di stats[1,1]/4

Number of hired employed people in agriculture:tabstat momusave_sul if brunch_converted==1 & daqmomusave==1 [weight=p_weights], stat

(sum) savematrix list r(StatTotal)matrix stats=r(StatTotal)di stats[1,1]/4

Number of hired employed people in sectors other than agriculture:tabstat momusave_sul if brunch_converted!=1 & daqmomusave==1 [weight=p_weights], stat(sum) savematrix list r(StatTotal)matrix stats=r(StatTotal)di stats[1,1]/4

Number of self-employed people in agriculture:tabstat momusave_sul if brunch_converted==1 & tvitdasaqm==1 [weight=p_weights], stat(sum) savematrix list r(StatTotal)matrix stats=r(StatTotal)di stats[1,1]/4

Number of self-employed people in sectors other than agriculture:tabstat momusave_sul if brunch_converted!=1 & tvitdasaqm==1 [weight=p_weights], stat(sum) save

matrix list r(StatTotal)matrix stats=r(StatTotal)di stats[1,1]/4


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Seasonal Fluctuations in Khachapuri Prices

ISET-PI conducts the Khachapuri Index (Kh-Index) surveys in four different cities in Georgia.

Unlike traditional consumer baskets used for monitoring price inflation, the Kh-Index basket

includes only those ingredients that are needed to cook one Imeretian khachapuri (cheese, butter,

flour, yeast, eggs, and milk) and energy inputs (gas and electricity). ISET conducts a monthly surveyof the major markets in Tbilisi, Kutaisi, Batumi and Telavi. Tbilisis survey is the oldest one and it

was begun in August 2008. The survey was expanded in the other three cities later in May 2011.

Based on the collected data, monthly fluctuations in the prices of all relevant ingredients are tracked

and recorded. Here we discuss just a few potential reasons for price fluctuations of (Imeretian)

khachapuris:

1. Climate and seasonal production: Fresh fruits and vegetables show a marked seasonal pattern of

production and consumption. Khachapuri ingredients (mostly cheese and milk) are seasonal

products as well and thus they follow this general pattern. Every year the Kh-index bottoms out in

June, and starts on the upward swing of its 6-month seasonal cycle, reaching a maximum around

December-January. Cheese is much more expensive in winter time, by more than 3 GEL per kilo.

These fluctuations are of course the result of changes in supply conditions. Due to a lack of

coordination among smallholder farmers and a lack of agroprocessing and storage facilities, dairy

products that have a long shelf life, such as cheese, are not saved for the high season. Given that

milk production peaks in April and May, too much cheese is brought to the market in May and June.

As a result, cheese prices are too low at this time of the year and too high in July and August. In

many countries around the world, small farmers are forming cooperatives that are helping to plan

production, reduce costs and smooth the seasonal fluctuations in the prices of agricultural goods.

This is not yet happening in Georgia.

The fluctuations in the supply (and price) of dairy products in Georgia may be further exacerbated

during the summer months because of dependence on weather conditions. Georgian farmers are not

feeding their cows in the summer, letting them to fend for themselves. For example, in 2011, the

scorching heat recorded in July and the early August withered pastures, leaving dairy cows without

sufficient nutrition and shrinking milk production by as much as 50%.

2. Religious traditions, such as fasting, reduce the demand for meat and dairy products, etc. Everyyear, a month before Easter, this development is driven by the Easter Lent period that many

Georgians observe. The Easter Lent decreases the demand for cheese and other dairy products, and,

therefore the prices of these ingredients decrease. For example, in March 2013, the prices of cheese

and butter were down by 8.7 and 2.5%, respectively, and the price of milk declined by 2.4%. The

prices of dairy ingredients traditionally spike at the end of the Easter Lent and Georgians rush to get

their khachapuris prepared.


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3. City characteristics, specifically the city size. Prices in larger cities change more smoothly than in

smaller ones. The size of the city matters, as a bigger city means higher competition, reducing the

discretion of sellers to raise the price above the input costs. In addition, smaller cities are less

endowed with necessary infrastructure, such as storage facilities, making production more labor

intensive and raising per unit production costs.

Since May 2011, the price of making a khachapuri in Tbilisi fluctuated between 2.70 GEL and 3.62

GEL, much narrower than in other cities. The second lowest difference between maximum andminimum prices was observed in Kutaisi (1.07 GEL compared to 0.92 GEL in Tbilisi), followed by

Batumi (1.26 GEL). The highest price range is recorded in Telavi (1.34 GEL).

0.000

0.500

1.000

1.500

2.000

2.500

3.000

3.500

4.000

Aug

-08

Oct-08

Dec

-08

Feb

-09

Apr-09

Jun

-09

Aug

-09

Oct-09

Dec

-09

Feb

-10

Apr-10

Jun

-10

Aug

-10

Oct-10

Dec

-10

Feb

-11

Apr-11

Jun

-11

Aug

-11

Oct-11

Dec

-11

Feb

-12

Apr-12

Jun

-12

Aug

-12

Oct-12

Dec

-12

Khachapuri Price Trend in Tbilisi:August 2008-December 2012


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0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

Khachapuri Prices (GEL)May 2011-December 2012

Tbilisi Batumi Kutaisi Telavi


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Georgias Wine Industry

There is a rich tradition and long history of wine production in Georgia. The word wine may even

originate from the Georgian word ghvino () (BBC, 2008). Yet Georgias wine makers have

faced a number of barriers to growth over time, from political instability and the absence of the rule

of law in the countryside to the breakdown of trade ties across former Soviet republics.

Most recently, the wine industry has had to contend with the Russian embargo. Prior to the import

ban, which began in 2006, most of Georgias exported wine was shipped to its large neighbor to the

north (The Economist, 2010). Since then, the export market has been diversified and major importers

of Georgian wine now include Ukraine and Kazakhstan. New export markets, like China or the

United States, are becoming accessible, but nevertheless current demand for Georgian wine is likely

lower than it would have been in the absence of the Russian import ban.

With Russias ascension to the World Trade Organization, ongoing talks with the European Union

over the establishment of the Deep and Comprehensive Free Trade Area (DCFTA), and the

potential for warming relations between Georgia and Russia, demand for Georgian wine may

increase considerably over the coming years.

This may especially be the case given recent wine promotion efforts at home and abroad, which

have sparked interest in and demand for Georgian wine. Efforts to support Georgias wine industry

have taken various forms, from handing out small sample bottles of wine at the airport (Figure 1

below) to promoting Georgian wine in international competitions.

President Mikheil Saakashvili has been one of the more colorful promoters of the Georgian wineindustry. Mr. Saakashvili even recently proposed to develop a vineyard near Tbilisis airport (Hvino

News, 2012):

I ask the municipality to allocate a big land plot next to the airport, where we create a

large vineyard, so that the first thing a guest sees when he arrives is a vineyard. We

will give all the guests a small bottle of wine, so they take it back home as a souvenir.

We must teach children how to make wine in Georgia. There should not be left a

single piece of uncultivated land, where a vineyard could be made. I am really

fascinated by wine-making. This is part of our national ideology.

Making inroads into the Russian market again may be somewhat challenging given that substitutes

for Georgian wine and mineral water have already emerged (The Economist, 2013). While Georgian

wines and mineral waters had relatively large market shares in Russia prior to the import ban, it may

take time before such market shares are reached again. Access to the Russian market may also take

longer than expected if quality inspections on the Russian side (from the agency tasked with

ensuring food safety, Rospotrebnadzor) continue to delay imports of Georgian products into Russia


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(DFWatch, 2013). But, on the other hand, the Georgian wine industry may find new market niches,

like the production and sale of organic wine or kvevriwine or the promotion of Georgias unique

wine traditions (see Bardzimashvili and Lomsadze, 2013).

Figure 1: A Warm Welcome to the Land of 8000 Vintages

References

Bardzimashvili, Temo and Giorgi Lomsadze (2013). Georgia: Betting on Clay and Kvevri for Entre into International

Wine Markets.EurasiaNet, September 30, 2011. Available at:http://www.eurasianet.org/node/64246. Last

accessed: April 2, 2013.

BBC (2008). Fading Traditions: Will Georgia Lose Its 7000-Year Old Wine Producing Tradition? BBC Radio World

Service, Documentary. Available at:

http://www.bbc.co.uk/worldservice/documentaries/2008/01/080131_fading_traditions_two.shtml. Last

accessed: April 1, 2013.

DFWatch (2013). Russia Balks Borjomi Comeback to Its Market. April 2, 2013. Available at:

http://dfwatch.net/russia-balks-borjomi-comeback-to-its-market-86710. Last accessed: April 2, 2013.

Hvino News (2012). President of Georgia Proposes Tbilisi Airport to Open Its Own Vineyard. May 9, 2012. Available

at:http://news.hvino.com/2012/05/president-of-georgia-proposes-tbilisi.html. Last accessed: April 1, 2013.

The Economist, Eastern Approaches blog. Georgias Wine Industry: What Doesnt Kill Us Makes Us Stronger.

September 21, 2010. Available at:

http://www.economist.com/blogs/easternapproaches/2010/09/georgias_wine_industry. Last accessed:

March 30, 2013
http://www.eurasianet.org/node/64246http://www.eurasianet.org/node/64246http://www.eurasianet.org/node/64246http://www.bbc.co.uk/worldservice/documentaries/2008/01/080131_fading_traditions_two.shtmlhttp://www.bbc.co.uk/worldservice/documentaries/2008/01/080131_fading_traditions_two.shtmlhttp://dfwatch.net/russia-balks-borjomi-comeback-to-its-market-86710http://dfwatch.net/russia-balks-borjomi-comeback-to-its-market-86710http://news.hvino.com/2012/05/president-of-georgia-proposes-tbilisi.htmlhttp://news.hvino.com/2012/05/president-of-georgia-proposes-tbilisi.htmlhttp://news.hvino.com/2012/05/president-of-georgia-proposes-tbilisi.htmlhttp://www.economist.com/blogs/easternapproaches/2010/09/georgias_wine_industryhttp://www.economist.com/blogs/easternapproaches/2010/09/georgias_wine_industryhttp://www.economist.com/blogs/easternapproaches/2010/09/georgias_wine_industryhttp://news.hvino.com/2012/05/president-of-georgia-proposes-tbilisi.htmlhttp://dfwatch.net/russia-balks-borjomi-comeback-to-its-market-86710http://www.bbc.co.uk/worldservice/documentaries/2008/01/080131_fading_traditions_two.shtmlhttp://www.eurasianet.org/node/64246


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The Economist, Eastern Approaches blog. Georgias Legendary Mineral Water. February 19, 2013. Available at:

http://www.economist.com/blogs/easternapproaches/2013/02/georgia. Last accessed: April 1, 2013.
http://www.economist.com/blogs/easternapproaches/2013/02/georgiahttp://www.economist.com/blogs/easternapproaches/2013/02/georgiahttp://www.economist.com/blogs/easternapproaches/2013/02/georgia


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Barriers to Effective Risk Management

In many agriculture-based rural economies around the world, households must contend with

considerable income risks arising from fluctuations in weather patterns, input quality, availability and

price (e.g., fertilizers), or agricultural product prices, among others. Income risks may be covariant

across households, such that many individuals are affected by the same income shock at one time(Binswanger and Deininger, 1997), though they may also be household-specific.

When agricultural lands are poorly irrigated, smallholders are dependent on rainfall, which can be

highly variant in particular areas. Insurance products aimed at providing risk diversification

(specifically, index insurance) can help individuals reduce or eliminate such income risks. Yet the

development and subsequent take-up of these types of insurance products may be limited, but not

only because premiums may be high relative to expected payouts.

In a recent paper, Cole et al. (2013) use randomized field experiments to try to understand some of

the non-price factors that may influence demand for rainfall insurance in India. They present

evidence that demand for rainfall insurance is particularly price-sensitive. But they also find that a

lack of trust, financial illiteracy, liquidity constraints, and low salience limit take-up of the rainfall

insurance product.

Could such findings be generalizable to the Georgian context? Its difficult to say. Its not

implausible that there are similar factors influencing demand for such an insurance product.

However, the product that would prospectively be rolled out in this country would vary from that

rolled out elsewhere, so its difficult to say with any certainty whether the findings in Cole et al.

(2013) are applicable to Georgias agricultural setting.

Given that there may be barriers to developing formal insurance markets that allow for more

effective risk management at the household level, it is important to better understand what informal

insurance mechanisms current exist at the village level in Georgia in order to inform ongoing policy

debates and discussions. For example, many individuals may find employment both on their own

plots but also in the non-farm rural economy as a means to manage income risks or protect

themselves against the event of a failed crop or lower than expected yields (see Banerjee and Duflo,

2011 [Chapter 6 in particular] for more on the behavior of the poor and how they cope with risk).

References

Banerjee, Abhijit V. and Esther Duflo. (2011). Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty. New

York: Perseus Books.

Binswanger, Hans P. and Klaus Deininger (1997). Explaining Agricultural and Agrarian Policies in Developing

Countries.Journal of Economic Literature, XXXV: 1958-2005.


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Cole, Shawn, Xavier Gin, Jeremy Tobacman, Petia Topalova, Robert Townsend, and James Vickery(2013). Barriers to

Household Risk Management: Evidence from India.American Economic Journal: Applied Economics, 5(1): 104-135.


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Agricultural Cooperatives in Georgia?

Agricultural cooperatives and other forms of farmers associations may have important roles to play

in Georgia given fragmentation of land, limited value chain integration among smallholders, and

imperfect or missing financial, insurance, and land markets.1

In addition to the above mentioned imperfect or missing markets, there is also a lack of a market-

based solution to issues of market information, agricultural research, and agricultural extension.

Knowledge produced through demonstration or pilot projects may be nonrival and nonexcludable

as a productive input or input multiplier and individual firms or farmers may not have strong

incentives to invest in knowledge generation activities.

Through sharing resources and making inputs and information available to members, agricultural

cooperatives may play an important role in helping farmers when there are weather shocks, for

instance, as was the case in Kakheti this past summer.

Cooperatives may also play an important role as acting as a financial intermediary.

Rural and agricultural credit cooperatives are active in countries like Bulgaria, Hungary, Poland,

Romania, and Slovenia (Koester, 2001). Such credit cooperatives allow for access to credit for

agricultural producers and others in the rural economy. Koester (2001) argues that, relative to the

private banking sector, credit cooperatives may have lower transaction costs if they are smaller,

located in some villages, and have better knowledge of the potential borrowers credit history and his

present creditworthiness. Such credit cooperatives may also be better positioned to deal with loan

risks and other informational limitations.

But before rolling out any project aimed at facilitating cooperation among farmers, there are very

important questions that need to be answered. First, what informal mechanisms for insurance, credit

provision, or information sharing already exist at the village level? To what degree might these

informal mechanisms or trade ties be crowded out (or crowded in) by the development of an

agricultural cooperative? For instance, Bauer (2000: 10) discusses the following:

The small-scale trader often does not supply simply marketing services to his

customers. In many cases he provides credit, usually in modest sums. This credit is

used for such purposes as the purchase of seeds, fertilizers, pesticides, building

materials, implements, and consumer goods.

Can it be presumed that an agricultural cooperative would necessarily provide better results? It really

depends on the underlying market conditions, exchange mechanisms, and existing informal trade

ties. Second, what kind of selective incentives are needed to promote cooperation? This is a classic

problem identified by Mancur Olson (1965) in The Logic of Collective Action, which has important

1 The latter features are often common in agrarian, rural areas (Binswanger and Deininger, 1997).


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Agricultural and Food Policy:

Knowing What Works and What Doesnt

There has been much discussion recently about different policies, projects, and programs to

promote rural and agricultural development in Georgia. There is eventalkof Georgia being on the

eve of an agricultural revolution. Yet identifying which agricultural and food policies areappropriate for the Georgian context, a remarkably heterogeneous one at that, is an immensely

challenging task. This is especially the case given that knowledge of local specifics (e.g., soil quality,

micro-climate, input supply networks, etc.) is dispersed across many individuals in the rural economy

and agricultural sector.

The role of knowledge in an economy has seen much attention by economists over the years. As

Hayek (1945) wrote almost seventy years ago, the knowledge of the circumstances of which we

must make use never exists in concentrated or integrated form, but solely as the dispersed bits of

incomplete and frequently contradictory knowledge which all the separate individuals possess (pp.

519). Because of this, Hayek thought that the problem of what is the best way of utilizing

knowledge initially dispersed among all the people is at least one of the main problems of economic

policyor of designing an efficient economic system (pp. 520). Hayek argued that because

knowledge is dispersed among millions of people, it is crucial to allow the price system to coordinate

economic activity.2 The price system communicates information about the availability of different

inputs, goods and services.

In the preface of their book, The Atlas of Economic Complexity: Mapping Paths to Prosperity, Hausmann et

al. (2011) provide a 21st century update to Hayeks work on the use of knowledge in society, arguing

that modern societies can amass large amounts of productive knowledge because they distribute

bits and pieces of it among its many members. Yet in order to make use of this knowle dge, they

argue that it has to be put back together through organizations and markets. Lastly, they argue

that our most prosperous modern societies are wiser, not because their citizens are individually

brilliant, but because these societies hold a diversity of knowhow and because they are able to

recombine it to create a larger variety of smarter and better products.

From a development perspective, the use of knowledge in society is of crucial importance.

Hausmann et al. (2011) further argue that the enormous income gaps between rich and poor

nations are an expression of the vast differences in productive knowledge amassed by different

nations. Local productive knowledge, whatever form it might take, is also important for thinkingabout development policy. Pritchett and Woolcock (2004) note that valuable local practices

idiosyncratic knowledge of variables crucial to the welfare of the poor (e.g. soil conditions, weather

2Specifically, Hayek (1945: 526) wrote that Fundamentally, in a system where the knowledge of the relevant facts isdispersed among many people, prices can act to coordinate the separate actions of different people in the same way assubjective values help the individual to coordinate the parts of his plan.
http://www.finchannel.com/Main_News/Geo/118539_David_Lee_on_the_Eve_of_an_Agricultural_Revolution_in_Georgia/http://www.finchannel.com/Main_News/Geo/118539_David_Lee_on_the_Eve_of_an_Agricultural_Revolution_in_Georgia/http://www.finchannel.com/Main_News/Geo/118539_David_Lee_on_the_Eve_of_an_Agricultural_Revolution_in_Georgia/http://www.finchannel.com/Main_News/Geo/118539_David_Lee_on_the_Eve_of_an_Agricultural_Revolution_in_Georgia/


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patterns, water flows)get squeezed out, even lost completely, in large centralized development

programs.

There are also unintended consequences of policies and programs, a classic problem identified in

economic thought which is also related to the role of knowledge in a society. As an example of this,

consider the case of the promotion of hybrid corn in Georgia. Even assuming the best of intentionswith regard to promoting higher corn yields, this program reportedly led to damage of agricultural

land (Georgia Times, 2013).

Determining what works and what doesnt with respect to agricultural and food policy ultimately

requires an experimental approach (trial and error). Its likely that many pilot or demonstration

projects or programs will not be successful, and this is something that should be recognized by

international organizations and NGOs seeking to support their development.

References

Georgia Times (2013). Lost Hopes of Georgian Peasants. March 25, 2013. Available at:

http://www.georgiatimes.info/en/articles/88339.html. Last accessed: April 5, 2013.

Hausmann, Ricardo, Csar A. Hidalgo, Sebastin Bustos, Michele Coscia, Sarah Chung, Juan Jimenez, Alexander Simoes,

and Muhammed A. Yldrm. 2011. The Atlas of Economic Complexity: Mapping Paths to Prosperity. Available

at:http://atlas.media.mit.edu/book/.

Hayek, F.A. 1945. The Use of Knowledge in Society.American Economic Review, 35(4): 519-530.

Pritchett, Lant and Michael Woolcock (2004). Solutions When The Solution is the Problem: Arraying the Disarray in

Development. World Development, 32(2): 191-212.

Rodrik, Dani (2005). Growth Strategies. In Philippe Aghion and Steven Durlauf, eds. Handbook of Economic Growth,

Amsterdam: North-Holland.
http://www.georgiatimes.info/en/articles/88339.htmlhttp://www.georgiatimes.info/en/articles/88339.htmlhttp://atlas.media.mit.edu/book/http://atlas.media.mit.edu/book/http://atlas.media.mit.edu/book/http://atlas.media.mit.edu/book/http://www.georgiatimes.info/en/articles/88339.html


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Institutions and Property Rights in Georgia

In order to understand the potential for growth in the agricultural sector or the rural economy in

Georgia, it is important to assess whether the general institutional environment poses a barrier to

such growth. North (1991) defines institutionsas the humanly devised constraints that structure

political economic and social interaction. These constraints can be either formal (like a nationalconstitution) or informal (like certain customs or traditions). North argues that institutions emerge

in response to the need to promote order and reduce uncertainty among different economic actors.

North, Wallis, and Weingast (2009) argue that, in order for a society to transition from being a

natural state to an open access order, the state must ensure that property rights are protected, that

there is transparency and accountability in government, and that there is generally an inclusive, free

environment. A recent report by the FAO, The State of Food and Agriculture, 2012, also emphasizes the

importance of a stable political and economic environment and secure property rights for the

functioning of agricultural and food markets. Such a policy analysis deals fundamentally with the role

of theformalinstitutional environment.

Yet institutions have taken a wide variety of forms over time and across countries. In many places

around the world, property rights may be neither well-defined nor well-protected. There is some

evidence that countries with institutions which protect private property rights and constrain the

executive branch of government from expropriation have better economic performance over the

long run (see, for example, Acemoglu and Robinson, 2005).

In the context of civil war or extreme political instability, property rights are even more poorly

defined and enforced. In general, the insecurity of property rights, be they formally or informally

defined, may also be a contributing factor to local or even national conflict, which may further

reduce property and land use rights if there is disorder and weak rule of law in the countryside. This

seems to be the case during the transition period in Georgia, when civil war, disorder, and political

transition led to reduced maintenance of infrastructure and weaker investment incentives in the

countryside.

Many economists view the institutional environment as being of foremost importance for economic

growth and development. In their recent work, Acemoglu and Robinson (2012) stress the

importance of establishinginclusiveeconomic institutions, which they define as the following:

[Inclusive institutions are] those that allow and encourage participation by the great

mass of people in economic activities that make best use of their talents and skills

and that enable individuals to make the choices they wish. To be inclusive, economic

institutions must feature secure private property, an unbiased system of law, and a

provision of public services that provides a level playing field in which people can


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exchange and contract; it also must permit the entry of new businesses and allow

people to choose their careers.

Inclusive economic institutions, as defined here, seem to relate more to the formal institutional

environment than to the informal institutional environment, though, of course, the former is built

upon the latter, as viewed in Williamson (2000). Lets now turn briefly to an examination of theinstitutions governing land ownership, land use, and the right to transfer both ownership and use to

others.

Institutions Governing Land Ownership and Use in Georgia

Agricultural land privatization in Georgia started in 1992, shortly after the countrys independence.

Arable land (1.25 hectares each) or pasture land (5 hectares each) were distributed to farmers,

though their rights to this land were initially circumscribed (for example, at the time of privatization

one could not privately sell land) (Jones, 2013). However, individuals were subsequently afforded the

right to use or own agricultural land, as well as to transfer these use and ownership rights to others

(Rozelle and Swinnen, 2004).

Yet, still today, there have been reports of violations of property rights across the country. There

have been numerous accounts of land being incorrectly registered as state-owned when it was

fairly clear that other individuals had a customary or traditional right to such property (see Corso,

2012). This lack of protection of property rights may significantly impede development of the

agricultural sector and improvements in rural incomes. This interaction between formal

institutions and informal institutions indicates the feedback processes described in Figure 1 in

Williamson (2000).

In their growth diagnostics study, Yasya Babych and Michael Fuenfzig (2012) point to the need to

improve property rights in Georgia in order to create an environment conducive to higher economic

growth. Strengthening the judiciary, protecting peoples property rights, improving the rule of law,

and decoupling politics and business may be some aspects of such institutional strengthening. Aside

from providing direct incentives for individuals to invest in their capital, land, and education,

strengthening existing institutions may also put downward pressure on real lending rates in Georgia,

which are some of the highest in the world. This may thereby spark further investment in the

agricultural sector and the rural economny.

References

Acemoglu, Daron and Simon Johnson (2005). Unbundling Institutions.Journal of Political Economy, 113(5): 949-995.

Acemoglu, Daron and James A. Robinson (2012). Why Nations Fail: The Origins of Power, Prosperity, and Poverty. Crown

Publishers, New York.


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Foreign Ownership of Agricultural Land in Georgia: An Economic Perspective

There are many differences around the world in the legal arrangements regarding the sale or leasing

of agricultural land to foreign investors. In Georgia, foreign citizens were previously unable to

purchase agricultural land under Article 4 of the Law of Georgia on Ownership of Agricultural Land.

This rule was struck down as unconstitutional this past June, however, and now foreign citizens canpurchase agricultural land in the country (Kvanchilashvili, 2012).

From an economic perspective, how should such a ruling be viewed? Arguably, so long as any land

sale is conducted in a fully transparent manner and all parties to the exchange voluntarily agree to its

terms, the land sale in question can be mutually beneficial.

In addition to the static benefits from the exchange, there may be additional benefits that foreign

direct investment in the agricultural sector brings. For instance, such investment could lead to the

adoption of new technologies and production methods which improve total factor productivity in

agriculture, which may subsequently induce investment and innovation in the agro-processing sector.

Its also important to note that it really shouldnt matter whether the investor is from abroad or is a

citizen of the country, which was something that was noted by Elene Kvanchilashvili in herarticle

on the topic. A voluntary exchange is a voluntary exchange and so long as it is made in a fully

transparent manner, with property and land use rights being respected, all parties to the exchange

can benefit.

Al Jazeera recently ran an article about an Indian invasion of Georgian agricultural land. The

article included the following remarks from Raul Babunashvili, the founder of the Georgian Farmers

Union:

"The union founder admitted the inadequacies of local agriculturalists, but said the

government should focus on Georgians instead of foreigners to boost food

production.

"Georgian farmers lack the know-how and skills. We don't have the resources to

invest in building infrastructure. That's why Georgian farmers are lagging behind,

while Indians come and literally grab their land for the cheapest prices."

Babunashvili said he doesn't have any statistics on how much land Indian farmers

own in Georgia, but he wants immediate government action to halt foreigners from

buying up prime agricultural areas.

"We must stop this invasion of land-buyers from India. I call it invasion because they

are coming in massive numbers," said Babunashvili."
http://en.tabula.ge/article-6726.htmlhttp://en.tabula.ge/article-6726.htmlhttp://en.tabula.ge/article-6726.htmlhttp://www.aljazeera.com/indepth/features/2013/02/201322081918452141.htmlhttp://www.aljazeera.com/indepth/features/2013/02/201322081918452141.htmlhttp://www.aljazeera.com/indepth/features/2013/02/201322081918452141.htmlhttp://en.tabula.ge/article-6726.html


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The economic perspective above strongly contrasts with those who view foreign investors as

invadingGeorgian agricultural land. Such views neglect the potential gains that foreign investment

can bring to the agricultural sector, so long as the conditions are right.

At the same time, challenges may exist regarding the definition and enforcement of property andland use rights. These can be difficult issues especially with regard to common land areas. In some

cases, property and land use rights are traditionally defined and enforced, like in Mestia (Green

Alternative, Georgian Young Lawyers Association, Transparency International Georgia, and

Regional Media Association of Georgia, 2012). Additionally, in situations where the legal institutions

governing such investments are still developing, property and land use rights violations may be more

prevalent.

Perhaps what ultimately matters is the legal institutions governing such investments. What

differentiates a land grab from a mutuallybeneficial exchange in practice is the structure and

enforcement of the institutions which define and protect individuals property rights and land use

rights, even if these rights were traditionally or customarily defined and enforced.

Issues related to land registration and the definition and protection of property rights will likely see

increasing focus in the coming years as the Ministry of Agriculture is continuing to work on

registering land plots (DFWatch, 2013).

Since there may be legitimate concerns about violations of property rights in the process of

facilitating FDI (see, for instance, http://transparency.ge/en/post/report/problems-related-

protection-property-rights-case-mestia-july-2011), an alternative policy recommendation to

"immediate government action to halt foreigners from buying up prime agricultural areas" may be

immediate government action to stop violating individuals' property and land use rights in order to

facilitate FDI.

References

Democracy and Freedom Watch (2013). Georgia Hands Out Vouchers to Farmers. January 30, 2013. Available at:

http://dfwatch.net/georgia-hands-out-vouchers-to-farmers-65503. Last accessed: April 1, 2013.

Kvanchilashvili, Elene (2012). Citizen of Denmark vs. Parliament of Georgia. Tabula, September 25, 2012. Available at:

http://en.tabula.ge/article-6726.html. Last accessed: April 2, 2013.

Green Alternative, Georgian Young Lawyers Association, Transparency International Georgia, and Regional Media

Association of Georgia (2011). Problems Related to the Protection of Property RightsThe Case of Mestia.

Available at:http://transparency.ge/en/post/report/problems-related-protection-property-rights-case-mestia-

july-2011. Last accessed: April 2, 2013.
http://www.aljazeera.com/indepth/features/2013/02/201322081918452141.htmlhttp://www.aljazeera.com/indepth/features/2013/02/201322081918452141.htmlhttp://transparency.ge/en/post/report/problems-related-protection-property-rights-case-mestia-july-2011http://transparency.ge/en/post/report/problems-related-protection-property-rights-case-mestia-july-2011http://transparency.ge/en/post/report/problems-related-protection-property-rights-case-mestia-july-2011http://dfwatch.net/georgia-hands-out-vouchers-to-farmers-65503http://dfwatch.net/georgia-hands-out-vouchers-to-farmers-65503http://en.tabula.ge/article-6726.htmlhttp://en.tabula.ge/article-6726.htmlhttp://transparency.ge/en/post/report/problems-related-protection-property-rights-case-mestia-july-2011http://transparency.ge/en/post/report/problems-related-protection-property-rights-case-mestia-july-2011http://transparency.ge/en/post/report/problems-related-protection-property-rights-case-mestia-july-2011http://transparency.ge/en/post/report/problems-related-protection-property-rights-case-mestia-july-2011http://transparency.ge/en/post/report/problems-related-protection-property-rights-case-mestia-july-2011http://transparency.ge/en/post/report/problems-related-protection-property-rights-case-mestia-july-2011http://en.tabula.ge/article-6726.htmlhttp://dfwatch.net/georgia-hands-out-vouchers-to-farmers-65503http://transparency.ge/en/post/report/problems-related-protection-property-rights-case-mestia-july-2011http://transparency.ge/en/post/report/problems-related-protection-property-rights-case-mestia-july-2011http://www.aljazeera.com/indepth/features/2013/02/201322081918452141.html


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Path Dependence and the Agricultural Sector

Research in the field of new institutional economics suggests that institutional path dependencemay

play an important role in influencing present-day economic arrangements and economic behavior in

the agricultural sector and rural economy.

North (1991: 97) argues that institutions evolve incrementally over time: history in consequence is

largely a story of institutional evolution in which the historical performance of economies can only

be understood as part of a sequential story. Path dependence is the idea that the consequence of

small events and chance circumstances can determine solutions that, once they prevail, lead one to a

particular path (North, 1990: 94; [Arthur, 1988]). Much recent economic research assesses the role

of history in economic development (see Nunn, 2009 for a review).

The institutions and policies that influence the agricultural sector and rural economy seem to have

much path dependence. Consider the argument put forth by Koester and El-Agraa (2003):

Policies have pronounced path-dependencies. Policy instruments which have been

introduced in the past cannot easily be removed as any policy change leads to

winners and losers. The loss often materializes in the short or medium term, whereas

the gain arises in the long-term. Take for example a reduction in politically set grain

prices. Grain producers will see immediately a loss and lobby against it. Consumers

may gain, if bread prices eventually decline. However, that will take time and the gain

for the individual consumer is quite small as compared to the loss of the individual

grain producer. Hence, it is much easier to organize producers and to lobby against

price reduction than to organize consumers. This fact helps to explain why

governments in democratic countries tend to be more producer than consumer

friendly. It also explains why policies are as they are and that present policies are

often not in line with economic reasoning. They are constrained by the past.

Table 1 in Koester (2005) illustrates the degree to which the land use shares have been persistently

allocated to farm enterprises in Russia, rather than individual farms or household plots, largely as a

result of path dependence in the policies and institutions influencing the agricultural sector.


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As another example of long run path dependence, consider why Georgia ended up being regionallyknown as a wine producer while Armenia became known for cognac production, as reported by

Avagyan (2013):

[Avag Haroutyunyan, President of Armenias Wine Growers Union] argues that for

the past 150 years, first Russia and then the Soviet Union targeted the best

winemaking technologies to Georgia and Bessarabia, while Armenia got the nod for

cognac. This was due to the fact that under Seljuk and Persian rule Armenia had lost

a majority of its grape gene pool the best Armenian vineyards were in the

possession of foreign conquerors.

The Georgians had an independent state in the 17th-18th century and made sure their

grapes werent destroyed. Thus, when Armenia was incorporated into Tsarist Russia

in 1828, we had grapes that were only suited for vodka production. When European

technology reached Armenia in 1860-1870, it was quite easy to produce cognac from

the grape alcohol. Thats exactly what happened, says Haroutyunyan. Armenia led

Tsarist Russia in terms of cognac production.

Consider also the case of path dependence in the policies and institutions influencing land

structure in Georgia, as discussed by Livny (2013):

The main wine producing region and historically the buffer (Sakartvelos pari)

against Persia and other Moslem invaders, Kakhetiis an interesting case. To

provide locals with some degree of protection against the enemy, Kakhetian villagers

huddled together in dense villages surrounded by cultivated land. Demand for

protection was also a cause in strengthening and sustaining the rule of local lords

(tavadi) whose lands the villagers were working for much of the regions history. The
http://hetq.am/eng/news/22694/armenias-struggling-vintners-government-promotes-cognac-people-prefer-vodka.htmlhttp://hetq.am/eng/news/22694/armenias-struggling-vintners-government-promotes-cognac-people-prefer-vodka.htmlhttp://hetq.am/eng/news/22694/armenias-struggling-vintners-government-promotes-cognac-people-prefer-vodka.html


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facts that Kakhetian lands remained consolidated under the lords control made

them an easy target for expropriation by the Bolsheviks who turned Kakhetian

villages and the lands around them into collective kolkhoz farms.

The kolkhoz farms were destroyed and looted in the early 1990s while the lands they

occupied were divided among their individual members. However, the availability oflarge contiguous parcels suitable for grape growinga very lucrative business until

2006 quickly made Kakheti an attractive target for investors, local and domestic.

As a result, Kakheti is currently the leader in land consolidation.

As a final example of path dependence, this time from Russia, consider that there has been much

path dependence in mental models, which has resulted in persistently large (sometimes super large)

farm structures across the country. This persistence in farm size is something Koester and Petrick

(2010) argue cannot be squared with predictions from neoclassical economics.

They argue the following:

Russian society can be described as both strongly hierarchical and egalit arian. The

absence of humanism, renaissance and reformation and the close alliance between

government authority and the orthodox church in Russia led to a strongly

patrimonial character of society. According to this view, the different phases of

tsarist, communist and capitalist power and ideology only slightly dressed up the

same patrimonial system. In turn, no work ethic compared to Calvinism could

develop and an active civil society emerged to a much lesser extent than in west

Europe. Contrary to the exercise of government power which was often perceived as

autocratic or even violent, the century-old institution of the village community is

seen as an arena of solidarity and reciprocity in which family ties play a dominant

role.

In essence, the path dependence of institutions, policies, and organizations in the agricultural sector

and rural economyillustrates why history matters for their current structures and performance.

References

Livny, Eric (2012). Know Thy Land or a Tale of Two Georgian Regions. The ISET Economist. Available at

http://www.iset.ge/blog/?p=1089. Last accessed: April 2, 2013.

Koester, Ulrich (2005). A Revival of Large Farms in Eastern EuropeHow Important Are Institutions?Agricultural

Economics, 32(s1): 103-113.

Koester, Ulrich and Martin Petrick (2010). Embedded Institutions and the Persistence of Large Farms in Russia. In

Imre Ferto, Csaba Forgacs, Attila Jambor (eds.),Essays in Honour of Professor Csaba Csaki, Budapest, pp. 57-76.
http://www.iset.ge/blog/?p=1089http://www.iset.ge/blog/?p=1089http://www.iset.ge/blog/?p=1089


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North, Douglass (1990). Institutions, Institutional Change, and Economic Performance. Cambridge University Press, Cambridge

UK.

Nunn, Nathan (2009). The Importance of History for Economic Development.Annual Review of Economics, 1(1): 65-92.

Sona, Avagyan (2013). Armenias Struggling Vintners: Government Promotes Cognac, People Prefer Vodka. Available

athttp://hetq.am/eng/news/22694/armenias-struggling-vintners-government-promotes-cognac-people-prefer-vodka.html. Last accessed: April 2, 2013.
http://hetq.am/eng/news/22694/armenias-struggling-vintners-government-promotes-cognac-people-prefer-vodka.htmlhttp://hetq.am/eng/news/22694/armenias-struggling-vintners-government-promotes-cognac-people-prefer-vodka.htmlhttp://hetq.am/eng/news/22694/armenias-struggling-vintners-government-promotes-cognac-people-prefer-vodka.htmlhttp://hetq.am/eng/news/22694/armenias-struggling-vintners-government-promotes-cognac-people-prefer-vodka.htmlhttp://hetq.am/eng/news/22694/armenias-struggling-vintners-government-promotes-cognac-people-prefer-vodka.htmlhttp://hetq.am/eng/news/22694/armenias-struggling-vintners-government-promotes-cognac-people-prefer-vodka.html


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Urban Bias in Georgia?

In a recent paper, Bezemer and Headey (2008) explored a number of sources of urban bias, the

idea that policies will be developed with the specific aim of promoting urban, rather than rural,

development, sometimes unevenly taxing or restricting growth in the latter.

One domestic cause of urban bias, they argue, is a relatively weak political vo ice of [the] rural poor

relative to [the] rural rich, urban rich, and even urban poor. Other sources of domestic urban bias

they list include market failures in the agricultural sector, a lack of internalization of agricultural

externalities, and a colonial inheritance of a dualistic economy. Some of these attributes certainly

apply to the case of Georgia.

In terms of international urban biases, Bezemer and Headey (2008) identify a rural biasfrom OECD

countries (in that they support their own rural sectors and distort world market prices), skepticism

about the role of government and agricultural industrial policy among aid experts, and the

perception that rural projects and agricultural research, development, and extension have not been

successful. Some of these factors most certainly apply to the case of Georgia, especially when it

comes to accessing the European market.

In terms of its economic consequences, urban bias may lead to relatively low incomes in the

agricultural sector. This is indeed something that seems apparent from Georgian household data (see

Figure 1). In fact, of all economic activities considered in Figure 1, the average monthly salary of

employees involved in agriculture, hunting, and forestry, or fishing, is quite low. Of course, incomes

from those involved in agroprocessing may be somewhat higher, but at least at the household farm

level the average monthly salary from such activities is quite low.

An Industrial Policy for the Agricultural Sector?

Some academics and policymakers support relatively more activist government policies with respect

to the agricultural sector, with Bezemer and Headey (2008) even calling for an agricultural industrial

policy. However, it is worth considering that establishing an enabling institution al environment first

and foremost may be a more effective strategy. It is difficult to know which specific industries

should be supported and the market may come up with these solutions more effectively than the

government. Consider, for instance, that Rustavis used vehicle market has sprang up more or less

because of the creation of an enabling registration and customs environment (Corso, 2011). Thesame thing may be said for promoting rural and agricultural development, in that getting the

institutions right and promoting a generally enabling environment may lead to more efficient

investments and sectoral development.


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Those who are employed in Georgia tend to be self-employed rather than hired labor (see Figure 2below).

GEL

2011

Total 636.0

Agriculture, hunting and forestry 392.6Fishing 271.1

Mining and quarrying 838.6

Manufacturing 552.2

Production and distribution of electricity, gas and water 877.0

Construction 738.5

Wholesale and retail trade; repair of motor vehicles and personal and household

goods 548.9

Hotels and restaurants 342.4

Transport and communication 873.8

Financial intermediation 1386.3Real estate, renting and business activities 674.3

Public administration 998.8

Education 319.6

Health and social work 522.9

Other community, social and personal service activities 511.5

Source: GeoStat

Figure 1: Average Monthly Salary of Employees by Economic Activity


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Figure 2: Employment Situation in Georgia

Source: GeoStat

On the other hand, an industrial policy for the agricultural sector may indeed be warranted,

especially given the number of challenges related to the emergence and development of specific

markets (markets for rural credit, insurance, land, inputs and outputs, etc.). But what form will such

an industrial policy take? It is one thing to say support the agricultural sector but it is another

thing to devise context-appropriate policies, something that is discussed by Rodrik (2005) in ourclass discussions.

For example, much of the irrigation and drainage infrastructure across the country is in ruins and it

has seen little maintenance since the fall of the Soviet Union. Yet extreme caution should be used

when reconstructing any irrigation or drainage infrastructure. During Soviet times, as noted by

Ellman (1988), large scale irrigation and water control projects that took place during the Brezhnev

era had a devastating effect: by 1985 30 per cent of the irrigated black earth land was unfit for

agriculture because of salinity and the formation of bogs. This is an important issue again related to

local knowledge and how to best support agricultural and rural development.

References

Bezemer, Dirk and Derek Headey (2008). Agriculture, Development, and Urban Bias. World Development, 7: 1-40.

Corso, Molly (2011). Georgia: Riding the Road to Export Riches in a Used SUV. EurasiaNet, June 11, 2011. Available

at:http://www.eurasianet.org/node/63769. Last accessed: April 1, 2013.
http://www.eurasianet.org/node/63769http://www.eurasianet.org/node/63769http://www.eurasianet.org/node/63769http://www.eurasianet.org/node/63769


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Ellman, Michael. (1988). Soviet Agricultural Policy.Economic & Political Weekly, 23(24): 1208-1210.

Rodrik, Dani (2005). Growth Strategies. In Philippe Aghion and Steven Durlauf, eds. Handbook of Economic Growth,

Amsterdam: North-Holland.


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The Puzzle of Agricultural Productivity in Georgia

In a recent blog post for The ISET Economist, it was argued that it was puzzling why Georgias labor

productivity in agriculture had such a weak recovery relate to other former Soviet republics in

transition.According to official statistics, most employment in Georgia takes place in the agricultural

sector. Yet the sectors value share in GDP was only 11 percent in 2007 (World Bank). This is ratherpuzzling considering that Georgia was one of the most productive republics during the Soviet era in

terms of food, wine, tea, and mineral water.

Even more puzzling was why Georgia was the only former Soviet republic in which agricultural

labor productivity (a partial measure of agricultural productivity) is still less than what it was in 1992,

at least according to the most recently available data. Specifically, according to World Bank figures,

labor productivity in agriculture was only 77 percent of its 1992 level in 2010. This variable is

specifically defined as agriculture value added per agricultural worker in constant 2000 US dollars.

0

2000

4000

6000

1990 1995 2000 2005 2010Year

Data source: World Bank

Agricultural Productivity
http://data.worldbank.org/indicatorhttp://data.worldbank.org/indicatorhttp://data.worldbank.org/indicatorhttp://data.worldbank.org/indicator


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A number of economic and political circumstances have contributed to Georgias relatively poor

agricultural labor productivity growth since the time of transition, as discussed in the comments

section of the blog post. Foremost among these are likely to be the onset of violent conflict in the

early 1990s and the subsequent political instability, a weak enabling environment for foreign

investors, and the Russian import ban on agricultural products, mineral water, and wine fromGeorgia.

Yet there are broader questions that should be considered about the puzzle of agricultural

productivity in Georgia. For one, it is likely that these figures are measured with no small amount of

error. Is it likely that labor productivity in agriculture is indeed that much higher in Armenia than in

Georgia? Other questions relate to how value added is calculated, how the value of inputs into the

production process is calculated, and how employment is considered. Many of the rural self-

employed in Georgia are considered to be agricultural workers though it is difficu lt to say to what

degree they are fully employed in the sector. In this sense, the official statistics may actually

underestimate the degree to which labor productivity in agriculture has improved in recent years.

Its also worth bearing in mind that a significant fraction of Georgias total economy is in the

informal sector. A recent estimate from Schneider, Buehn, and Montenegro (2010) suggest that the

total size of the overall shadow economy in Georgia was about 62 percent of officially recorded

GDP in 2007, which suggests there is indeed much informal economic activity taking place across

the country. Productivity gains at the farm household level may therefore be much greater than what

is officially captured in national accounts statistics.

It is also crucial to note that while each country considered is a former Soviet republic, the transition

experiences of each country are remarkably heterogeneous. Estonia, Latvia, and Lithuania aremembers of the European Union and agricultural producers there benefit from generous, albeit

distortionary, support measures. Countries like Uzbekistan have improved agricultural labor

productivity, but at the high cost of forced labor. Clearly this is not a trajectory Georgia wants to

follow.

Armenia Azerbaijan

Belarus Estonia

Georgia Kazakhstan

Kyrgyz Republic Latvia

Lithuania Moldova

Russian Federation Tajikistan

Turkmenistan Ukraine

Uzbekistan


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Lastly, it is also important to consider the argument made by Sen (1999) about development as

freedom. In his book, he argued that development can be seen

as a process of expanding the real freedoms that people enjoy. Focusing on

human freedoms contrasts with narrower views of development, such as identifying

development with the growth of gross national product, or with the rise in personalincomes, or with industrialization, or with technological advance, or with social

modernization. Growth of GNP or of individual incomes can, of course, be very

important as means to expanding the freedoms enjoyed by members of the society.

But freedoms also depend on other determinants, such as social and economic

arrangements (for example, facilities for education and health care) as well as political

and civil rights (for example, the liberty to participate in public discussion and

scrutiny).

Arguably, when gains to labor productivity in agriculture come at the expense of individual rights,

they should not be seen as legitimate or what we think of as development. As Sen (1999) argued,

real development requires the removal of major sources of unfreedom: poverty as well as

tyranny, poor economic opportunities as well as systematic social deprivation, neglect of public

facilities as well as intolerance or overactivity of repressive states.

At the end of the day, more household-level, survey-based research is needed to better understand

the binding constraints to local agricultural labor productivity growth and which policies can help

support pro-poor growth in the sector.

References

Schneider, Friedrich, Andreas Buehn, and Claudio E. Montenegro. (2010). New Estimates for the Shadow Economies

All Over the World. International Economic Journal, 24(4): 443-461.

Sen, Amartya (1999). Development as Freedom. First Anchor Books.

The ISET Economist, The Puzzle of Agricultural Productivity in Georgia (and Armenia). October 11, 2012.Available

at:http://www.iset.ge/blog/?p=836. Last accessed: April 1, 2013.

The World Bank. World Development Indicators Dataset. Available at:http://data.worldbank.org/indicator.
http://www.iset.ge/blog/?p=836http://www.iset.ge/blog/?p=836http://www.iset.ge/blog/?p=836http://data.worldbank.org/indicatorhttp://data.worldbank.org/indicatorhttp://data.worldbank.org/indicatorhttp://data.worldbank.org/indicatorhttp://www.iset.ge/blog/?p=836http://www.iset.ge/blog/?p=836


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Agricultural Production andAgricultural Processing: The Foundations of Agrobusiness

When thinking about supporting rural and agricultural development, its important to remember that

both agricultural production and the processing of agricultural products are both considered to be

part of agribusiness (see Table 1, for the case of Georgia).

Sparking development in terms of agricultural productivity (total factor productivity in agriculture,

that is), may reduce the market price of these agricultural products, making it relatively more

profitable for those engaged in agricultural processing. This may induce greater investment in the

agroprocessing industry such that there are (literally) fewer low hanging fruits across Georgias

agricultural sector.

Table 1: Georgias Agrobusiness Sector in 2011

Data source: GeoStat


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Georgia: From Subsistence to Exchange

How can subsistence agricultural production be replaced by production for the market? This

question is at the heart of Peter Bauers (2000) inquiry into the process of economic development.

Bauer (2000: 8) noted the following:

Advance from subsistence production involves trading activity. This is obvious at a

simple level. There can be no production for sale without an outlet and an accessible

conduit to it. Producers also need to buy inputs, such as simple tools and equipment.

And they will not produce for sale unless they can use the proceeds to buy goods

and services they want. The purchase of inputs and of incentive goods and

production for sale are, in turn, closely linked with credit. This is required for the

purchase of inputs used in the production of the crops, whether seasonal crops or

slow-maturing trees, and also in many cases for sustaining producers until their crops

are harvested. Traders are an effective and convenient source and channel of such

finance. In these circumstances, production of cash crops, trade, and credit are

intertwined.

But the significance of trade extends far beyond these pipeline services. Contacts

through traders and trade are prime agents in the spread of new ideas, modes of

behavior, and methods of production. External commercial contacts often first

suggest the very possibility of change, including economic improvement.

These insights have clear application to the case of Georgia, especially when thinking about regional

trade and market access. As discussed in the case study above, the lack of access to the Russian

market, due to the embargo of 2006, has effectively severed many of the trade ties that did or would

have existed between Georgian farmers, agroprocessing firms, and Russian importers, for instance.

References

Bauer, Peter (2000). From Subsistence to Exchange and Other Essays. Princeton University Press, Princeton and Oxford.


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Is Corruption a Constraint to Growth in the Agricultural Sector?

This course has emphasized the importance of an enabling environment for promoting rural and

agricultural development. One political economy issue we discussed in class is whether corruption

presents a constraint to growth in the agricultural sector (or agribusiness in general).

This is an open question in the political economics literature and there is a variety of viewpoints on

the issue. Is it the case that corruption grinds the wheels of rural and agricultural prosperity, or

does it sand the wheels? Lets look briefly at just a few perspectives on this topic, considering the

more general situation for the economy.

There has been much discussion recently about corruption and development. Recently, David

Cameron, Britains Prime Minister, wrote anop-edabout tackling global poverty in which he argued

that there should be greater focus in the international development agenda on supporting the rule

of law, the absence of conflict and corruption, and the presence of property rights and strong

institutions in developing countries.

Chris Blattman, an economist at Columbia University, questionedwhy corruption should be

considered up there with property rights, conflict, or the rule of law. He suggested that corruption

may not be as detrimental to growth as one might think:

It helps to remember: every economic marvel of its dayfrom the US to China to

(dare I say) Englandwere paragons of corruption. Few can match Tammany Hall

or the Chinese Communist Party in their ingenious machinations. Its not clear this is

a hindrance to development. Taking the long view, corruption may even be part of

the glue that keeps societies from falling apart in the midst of transformative

economic changelike it or not, elites need something to compensate them for losing

their influence, or theyre unlikely to let go without a fight.

My feeling: Anti-corruption is a 20th century Anglo-American fetish, important, but

nowhere near as important as political stability or basic property rights.

The exception might be kleptocratic rulers like Mobutu. They are major impediments

to, well, everything important to their citizens. But Id argue theft of that magnitude

is merely a symptom of the much more important institutional issuesthe absence ofany check or balance on Presidential power foremost among them. Fix the

underlying institutional problems of over-centralized political power before picking

at corruption around the edges.

In his secondpost, Professor Blattman argued that
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Most of us fail to imagine that corruption can also grease the wheels of prosperity.

Yet in places where bureaucracies and organizations are inefficient (meaning

entrepreneurs and big firms struggle to transport or export or comply with

regulation), corruption could improve efficiency and growth. Bribes can act like a

piece rate or price discrimination, and give faster or better service to the firms with

highest opportunity cost of waiting.

Other economists, includingDaron Acemoglu and James Robison,Peter Boettke, andTyler Cowen,

have since weighed in on the debate.

Professor Blattmans comments echo those of Mancur Olson, who, inPower and Prosperity: Outgrowing

Communist and Capitalist Dictatorships, made the following argument regarding market-contrary

policies (distortionary price ceilings, for instance) and corruption (p. 108):

legislation or regulation that is market contrarymust leave all or almost all parties

with the incentive to evade the law, and it is likely to promote criminality and

corruption in government.

Thus, one reason why many societies have a lot of corruption in government is that

they prescribe outcomes that all or almost all private parties have an incentive to

avoid, and no one in the private sector has an incentive to report violations to the

authorities. Moreover, when caught in violation of the rule, those on both sides of

the market have the same incentive to persuade or bribe the officials not to enforce

the law. Essentially all of the private-sector incentives are on the side of undermining

the rules. Sooner or later, the government becomes corrupt and ineffective.

These are important points to consider when thinking about the impact of corruption on

development. When policies or institutions are perversely market contrary (think central economic

planning during the Soviet era) or when political losers have to be compensated in order to get

market-oriented reforms out the door, corrupt dealings could grease the wheels of prosperity.

Yet corrupt dealings can also sand the wheels of prosperity by facilitating the misallocation of

resources and by increasing the cost and uncertainty of doing business. It is not unlikely that most of

the corrupt dealings that took place in Georgia prior to the Rose Revolution had much more of a

sand effect than a grease effect on growth.

The following excerpt from Fighting Corruption in Public Services: Chronicling GeorgiasReforms illustrates

how systemic and distortionary corruption was in Georgia less than a decade ago:

In 2003, corruption permeated nearly every aspect of life in Georgia. Perhaps the

most visible and hated manifestation of the pervasive corruption was the traffic
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police. Dressed in shabby Soviet-era uniforms, the mostly corpulent traffic police

were stationed at nearly every road crossing in the country. They wielded wooden

batons to flag down hapless motorists and extort bribes, usually for fabricated

infractions. Motorists were not the only targets; the bribe-hungry traffic police often

nabbed pedestrians as well.

Most other government services were also rife with corruption. Bribes were needed

to get a passport, register property, start a business, or build a home. Entrance to

state universities required bribes, and additional payments helped secure good grades

and even degrees; mastery of subject matter was optional. Citizens paid officials to

obtain drivers licenses (knowing how to drive was not required) and pass vehicle

inspections. Restaurants bribed inspectors not to arbitrarily close enterprises that met

sanitary standards and to turn a blind eye to enterprises that did not. Corruption in

tax administration decimated revenue collection and spawned elaborate schemes to

steal what little revenue was collected. Only a few people paid their utility bills, with

many risking their lives to establish illegal power connections. Criminal gangs, called

thieves-in-law, operated with impunity, engaging in extortion, smuggling,

carjacking, theft, and protection rackets. They often allied with government officials

to rig contracts and otherwise plunder the treasury. Many corrupt government

officials had been enriching themselves for years. State officials who officially earned

$100 a month or less and were banned from holding a second job owned large villas

and significant other assets, according to Zurab Adeishvili, the minister of justice.

Prosecutors were also corrupt, routinely trumping up charges as a source of bribes

with which to augment their salaries or finance legitimate investigations.

In his response to Blattmans posts, Tyler Cowen, an economist at George Mason University, put

forth the followingargument:

the correct corruption/poverty model may have multiple equilibria, depending on

expectations. In that setting, making your country look clean may improve

outcomes by shifting the economy up to better equilibria, even if corruption isnt a

direct cause of greater prosperity. There is worse advice than Act like a rich country,

and in the meantime you may become one, at least provided you do not take this as

liberty to spend above your means or to slack off with the work hours.

After the Rose Revolution took place in the fall of 2003, the new government restructured the rules

of the game for government bureaucracies and changed how the rules were enforced (for example,

by increasing public sector wages, by developing better mechanisms for monitoring public workers,

and by abolishing certain agencies altogether). The reforms seemed to effectively tackle corruption

in public services.
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It looks as if the anti-corruption reforms indeed shifted the economy up to better equilibria,

especially with regard to increased investment, trade, tourism, and donor support. And I suspect that

the anti-corruption reforms also had a direct impact on growth by finally allowing people to interact

in markets without severe impediments and by reducing the uncertainty of the business environment.

Yet we really dont know for sure. For one, there were other reforms under way at the same time.Its therefore hard to say what growth would have looked like in the absence of the anti-corruption

reforms and in the presence of other policies and institutional reforms. Also, it may be the case that

corruption simply shifted shapes and that elite corruption was never properly addressed. We may

not have sufficient information about the occurrence, type, and magnitude of corrupt dealings in

Georgia before and after the Rose Revolution.

Further, because of other ongoing problem areas (for instance, the Russian import ban starting in

2006 and the war with Russia in 2008), it would be difficult to identify whether the anti-corruption

reforms indeed promoted more growth in the agricultural sector. There is, at least to my knowledge,

no natural experiment that would allow us to precisely isolate the effects of the anti-corruption drive

after the Rose Revolution.

There is one final point to consider. Much of the discussion that has taken place about increasing

focus on the rule of law, the absence of conflict and corruption, and the presence of property

rights and strong institutions in the international development agenda assumes these policy

objectives can be chosen and implemented if sufficient resources are devoted to achieving them. Yet

to what degree can the international community actually support developing countries in achieving

these objectives? Institutional changes like these are intensely political matters and its unclear ex ante

whether intervening into these processes does more good than harm.

Ultimately, much more research needs to be conducted on the specific mechanisms by which

corruption influences growth in the agricultural sector and the rural economy, if it does at all.

initial case studies - agricultural and food policy analysis (eng); iset

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