Investigating agricultural productivity improvements in transition economies

Supawat Rungsuriyawiboon

Faculty of Economics Thammasat University

Outline

Introduction- World food price situation- Motivation

Methodology- Productivity growth decomposition- Malmquist productivity index

Application- Data discussions- Results of transition countries

Conclusions

Introduction

Food security is back on policy agendas Overall food prices rose more than 70%. Rise in food prices has

developed into a global crisis.

“When all people at all times have both physical and economic access to sufficient food to meet their dietary needs for a productive and healthy

life ” (USAID)

Production of Wheat, Corn and Rice

Food Price

Introduction

Some food price examples from the FAO

Type 2003 2007 2008$/ton $/ton $/ton

White Thailand rice(second grade)

198 323 854(+77%), (+62%)

Yellow corn 105 160 250(+58%), (+36%)

Wheat 144 207 401(+64%), (+48%)

Powdered milk 1,835 3,288 4,750(+61%), (+30%)

Dutch soy oil 521 714 1,400(+63%), (+49%)

Introduction

Food commodity price indices have increased across the board

Cereals

48%

Oil&Fat

52%

Dairy

32%

Introduction

Numerous factors are influencing this price rise Supply side: difficult seasonal conditions in the major

production regions Demand side: increasing food demand, rising demand

for grain for biofuels, and increased input costs.

Each world region must have a sufficient supply inagricultural products to meet the growing food demand

Introduction

Many countries have undergone a transformation from a CPE to a free market economy.

These transition economies undergo economic liberalization, restructuring and privatization in order to create a financial sector, and move from public to private ownership of resources.

These countries account for almost half of the regions population in Europe and Asia.

Institutional reforms have helped transform the structure and volume of their agricultural production.

Understanding the state of productivity improvements is important

Literature Review

A number of studies examine intercountry differences in productivity growth using two frontier models (SFA or DEA)

Both SFA and DEA models conducted in many studies to

investigate intercountry differences in agricultural productivity growth using the panel data from the FAO

A nonparametric DEA model:

- Bureau, Färe, and Grosskopf (1995) - Fulginiti and Perrin (1997)- Suhariyanto and Thirtle (2001) - Arnade (1998)- Trueblood and Coggins (2003) - Coelli and Rao (2005)

A parametric SFA model: - Fulginiti and Perrin (1993) - Wiebe et al (2000) - Craig, Pardey and Roseboom (1997) - Liu and Wang (2005)

Because of data problems of transition countries, previous studies just ignored these countries

Objectives

First, this study measures productivity growth in transition countriesThis study includes 35 transition countries in Asia and Europe over the period of 1979-2004

Second, this study utilizes a nonparametric Malmquist index approach to measure and decompose productivity growthThis paper pays attention to the magnitude and direction of productivity growth over different stages of their market reforms

Methodology Total Factor Productivity (TFP) growth: Residual growth in

outputs not explained by growth in input uses

Färe et al. (1989) proposed a Malmquist TFP index to measure productivity growth using the output distance function

The output distance function at period t

represents the minimum amount by which yt can be deflated and still remain producible with xt

The Malmquist TFP index for period t

The Malmquist TFP growth index (MTC) between period t and t+1 is defined as the geometric mean of two Malmquist TFP growth

between these two time periods

tttttot SYXYXD ,:inf,

)y,x(D)y,x(D

ttto

1t1tto

Methodology

The Malmquist TFP growth index (MTC) between period t and t+1 is decomposed as

To calculate the Malmquist TFP index decomposition, we need to calculate four output-oriented distance functions.

2/1

tt1to

ttto

1t1t1to

1t1tto

ttto

1t1t1tott1t1t

o )y,x(D)y,x(D

)y,x(D)y,x(D

)y,x(D)y,x(D)y,x,y,x(M

The ability of firm to use each input more efficiently

Technical Efficiency Change (TEC)

Catching up

The ability of firm to adopt new technology

Technical Change (TC)

Frontier shift

TFP progress

TFP regress

Data

The empirical analysis in this study focuses on agricultural production of 35 transition countries in Asia and Europe over the period from 1979-2004

The primary source of data is obtained from the website of the Food and Agricultural Organization (FAO) acquired from the AGROSTAT system

Production technology consists of two output variables and five input variables

Data

Output Variables: The output series are derived by aggregating detailed output

quantity data on 115 cropping commodities and 12 livestock commodities expressed in terms of the international average prices (in US dollars)

Input Variables: Land: Arable land in hectare includes both land under permanent

crops as well as the area under permanent pasture Tractor: the total number of wheeled- and crawler tractors used in

agriculture Labor: the number of economically active people in agriculture Fertilizer: the commercial use of nitrogen, potassium and

phosphate fertilizers in nutrient-equivalent terms expressed in thousands of metric tons

Livestock: the sheep-equivalent of the six categories of animals (buffaloes, cattle, pigs, sheep, goats and poultry)

Country Profile

Albania 1989 Armenia 1992 China 1979Bulgaria 1989 Azerbaijan 1992 Mongolia 1991Czech Republic 1989 Belarus 1992 Laos 1986Hungary 1989 Georgia 1992 Myanmar 1989Poland 1989 Moldova 1992 Vietnam 1986Romania 1989 Russia 1992Slovenia 1989 Ukraine 1992Bosnia and Herzegovina

1992 Kazakhstan 1992Croatia 1992 Kyrgyzstan 1992Cyprus 1992 Tajikistan 1992Macedonia 1992 Turkmenistan 1992Malta 1992 Uzbekistan 1992Serbia-Montenegro 1992Slovakia 1992Estonia 1992Latvia 1992Lithuania 1992Turkey 2001

Countries and Year of ReformCEE (18) NIS (12) ASIA (5)

Results for All transition Countries

Region Period TEC TC MTCAll 1979-1983 -1.17 1.37 0.20

1984-1988 0.17 3.56 3.731989-1993 0.48 4.98 5.461994-1998 0.10 3.83 3.941999-2004 0.24 4.52 4.751979-2004 -0.03 3.68 3.65

Agriculture was healthy in terms of its improvement in productivity Through the entire period, the rate of TC was higher than 3.5 percent

T he adoption of new varieties of crops have pushed up the production frontier by 3.68% annually

TFP growth has been pulled down due to declining TEC . This decline may be due to - the continued rise in off farm employment

TFP growth in transition countries was relatively robust and rising

Results for Groups of Transition Countries

CEE countries exhibited an impressive TFP growth after the start of the reform, the productivity increased quite strongly at 3.5%.

NIS countries posted TFP growth rate of more than 4.0%. Rises in both TC and TEC lead to relatively high TFP growth in these regions

TFP growth rate in Asia was comparatively low at the start period of transition. TFP growth rebounded and kept rising afterwards at a rate more than 4.5% annually. The relatively high TFP growth has relied on TC.

Region Period TEC TC MTCCEE 1989-1993 0.67 3.14 3.80

1994-1998 0.82 3.34 4.161999-2004 -0.04 2.56 2.521989-2004 0.45 2.98 3.43

NIS 1992-1996 -0.54 4.07 3.531997-2001 3.30 1.83 5.132002-2004 0.41 3.71 4.111992-2004 1.14 3.12 4.26

ASIA 1979-1983 0.06 1.37 1.431984-1988 0.19 3.32 3.511989-1993 -0.40 8.40 8.001994-1998 -2.06 5.67 3.611999-2004 0.35 6.77 7.121979-2004 -0.37 5.11 4.73

Productivity Profiles of the MTC Decomposition for Each Transition Country

1 = both “catching-up” and “frontier-shift” effects drove overall TFP progress

2 = only the “frontier-shift” effect drove overall TFP progress

3 = a decline in the “frontier-shift” effect led to overall TFP regress

4 = a decline in the “catching-up” effect led to overall TFP regress.

(A) CEE

3.90

-1.64

3.15

4.92

1.642.46

0.28

1.54

2.652.03

2.77

1.70

2.95 3.17 3.28

4.77 5.10

2.54

-7.17

0.89

-2.31-3.88

-0.55 -0.250.26

0.47

0.00

0.630.00

1.18

0.75 0.571.11

0.22 0.00 4.58

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

TC TEC

no. country (profile group) 1 2 3 4 5 6 7 8 9

10 11 12 13 14 15 16 17 18

Serbia-Montenegro (4) Cyprus (3) Latvia (2) Estonia (2)

Slovakia (2) Bosnia & Herzegovina

(2) Lithuania (1) Turkey (1)

Macedonia (1) Bulgaria (1)

Malta (1) Poland (1)

Hungary (1) Romania (1)

Czech Rep (1) Albania (1) Croatia (1)

Slovenia (1)

(B) NIS

-0.85

2.32

3.83

0.54

2.521.56

2.88

1.73

2.77

1.65

2.74

4.50

0.07

-1.29 -0.42

1.80

0.19

1.41

0.38

2.16

1.41

2.62

1.75

0.79

-3.0

-1.5

0.0

1.5

3.0

4.5

6.0

1 2 3 4 5 6 7 8 9 10 11 12

TC TEC

no. country (profile group) 1 2 3 4 5 6 7 8 9

10 11 12

Georgia (3) Uzbekistan (2)

Belarus (2) Armenia (1)

Turkmenistan (1) Azerbaijan (1) Kazakhstan (1)

Moldova (1) Kyrgyzstan (1) Tajikistan (1)

Russia (1) Ukraine (1)

Productivity Profiles of the MTC Decomposition for Each Transition Country

(C) ASIA

1.381.91

3.714.71

5.41

-2.20

-0.27 -0.38-1.37

-0.59

-4.0

-2.5

-1.0

0.5

2.0

3.5

5.0

6.5

1 2 3 4 5

TC TEC

no. country (profile group) 1 2 3 4 5

Laos (4) Vietnam (2) Mongolia (2) Myanmar (2)

China (2)

1 = both “catching-up” and “frontier-shift” effects drove overall TFP progress

2 = only the “frontier-shift” effect drove overall TFP progress

3 = a decline in the “frontier-shift” effect led to overall TFP regress

4 = a decline in the “catching-up” effect led to overall TFP regress.

Results of the selected transition countries over different stages of their market reforms

TFP growth decomposition differ considerably at different stages of the transition period. In the initial 5 years of transition, TFP growth rose quite strongly in some countries like Czech

Republic, Poland, Russia and Myanmar, but it fell in other countries like Belarus, Bulgaria, Hungary, Uzbekistan and Vietnam due to declining TEC.

During the second five years of transition, TFP growth rose considerably in most countries except Myanmar and Uzbekistan due to the improvement of TEC and TC.

In the beginning of the 21 century, the annual growth of TFP rose above 5 percent in many transition countries.

TEC TC MTC TEC TC MTC TEC TC MTCCEEBulgaria -1.28 0.24 -1.04 2.71 1.15 3.85 0.52 4.29 4.81Czech Rep 1.69 3.46 5.15 2.62 2.57 5.19 -0.6 3.72 3.12Hungary -1.65 1.58 -0.07 1.44 4.59 6.03 2.21 2.75 4.97Poland 0.41 3.67 4.08 3.82 2.83 6.64 -0.34 -0.83 -1.18Romania 0.77 2.29 3.07 -1.46 4.08 2.62 2.12 3.15 5.27NISBelarus -4.34 4.15 -0.19 2.62 2.72 5.34 1.26 5.17 6.43Russia 0.56 4.08 4.64 3.15 0.95 4.1 1.43 3.53 4.95Ukraine -2.2 4.74 2.55 4.9 2.79 7.69 -0.85 6.98 6.14Kazakhstan -0.25 4.14 3.89 1.53 6 7.53 -0.47 -4.08 -4.55Uzbekistan -1.15 0.86 -0.29 -2.54 2.39 -0.15 0.57 4.7 5.28ASIAChina 0.06 1.37 1.43 0.24 3.77 4 -0.52 8.86 8.33

-2.02 5.97 3.95 0.34 6.93 7.27

Vietnam -1.78 1.29 -0.49 0.39 2.33 2.73 2.16 1.52 3.68

-2.18 2.64 0.46

Myanmar 2.93 1.28 4.21 -5.98 1.36 -4.63 1.75 7.82 9.57

1994-1998 1999-2004

2001-2004

1986-1990 1991-1995 1996-2000

1989-1993 1994-1998 1999-2004

1979-1983 1984-1988 1989-1993

1989-1993 1994-1998 1999-2004

1992-1996 1997-2001 2001-2004

Conclusion

Transition economies experienced the comparatively high TFP growth over the transition period. Growth of TFP rose above 5

percent in many transition countries.

TC was a major force of driving TFP growth in these transition countries. The pattern of TFP growth shows that TEC had fluctuated

considerably over the transition period.

Serious improvements in performance and efficiency, as well as continued technology transfer are required to meet the demand for

food and anticipated increases in world population.