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									     Releasing the
Agricultural Potential of
 the East Agri Region

            Johan F. M. Swinnen




LICOS Centre for Institutions and Economic Performance
         University of Leuven (KUL), Belgium
  Outline

• World Food Security Challenges



• Current State of Production in the Region


• Potential of the Region


• How to Unleash this Potential?
                            A Changed Perspective on Food
                      2.5                            Rice      Wheat


                       2
Change in price (%)




                      1.5


                       1


                      0.5


                       0
                            1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Oxfam :
                  In 2005 :
“US and Europe‘s surplus production is sold
  on world markets at artificially low prices,
      making it impossible for farmers in
   developing countries to compete. As a
     consequence, over 900 millions of
   farmers are losing their livelihoods.”
 Oxfam :              In 2005 :
  “US and Europe‘s surplus production is sold on
    world markets at artificially low prices, making it
   impossible for farmers in developing countries to
   compete. As a consequence, over 900 millions
      of farmers are losing their livelihoods.”

                     In 2008 :
“Higher food prices have pushed millions of people
   in developing countries further into hunger and
         poverty. There are now 967 million
       malnourished people in the world….”
 FAO (United Nations) :
                 In 2005 :
    “The long-term downward trend in
  agricultural commodity prices threatens
the food security of hundreds of millions
  of people in some of the world's poorest
            developing countries.”
 FAO (United Nations) :
                   In 2005 :
 “The long-term downward trend in agricultural
commodity prices threatens the food security of
  hundreds of millions of people in some of the
      world's poorest developing countries.”

                    In 2008 :
 “Rising food prices are bound to worsen the
already unacceptable level of food deprivation
 suffered by 854 million people. We are facing
the risk that the number of hungry will increase by
           many more millions of people.”
OECD, IMF, World Bank :
                    In 2003/4:
“Many (developed countries) continue to use
  various forms of export subsidies that drive
 down world prices … Because the majority
     of the world’s poorest households
      depend on agriculture and related
 activities for their livelihood, this is especially
                      alarming.”
 OECD, IMF, World Bank :
                        In 2003/4:
“Many (developed countries) continue to use various
   forms of export subsidies that drive down world
    prices … Because the majority of the world’s
  poorest households depend on agriculture and
       related activities for their livelihood, this is
                  especially alarming.”

                      In 2008/9 :
  “The increase in food prices represents a major
   crisis for the world’s poor … Up to 105 million
     people could become poor due to rising food
                    prices alone.”
       World Food Security Challenges

           Cereal Consumption Predictions (OECD)
                                                            Food
   2018
                                                            Feed

                                                            Biofuels
 2006-08
                                                            Other

           0           500                    1000   1500
                             Million Tonnes


• In order to feed to world and produce bio-energy,
  it is crucial to increase production
                                   Agricultural Production
                                       Change in output (%) since 1990
                          20

                          10

                           0
Change in GAO index (%)




                          -10                                                                         Centra l Europe
                                                                                                      Ba lka n
                          -20                                                                         Ba ltics
                                                                                                      Europea n CIS
                          -30
                                                                                                      Tra nsca uca sia
                                                                                                      Centra l Asia
                          -40

                          -50

                          -60
                                1990   1992   1994   1996   1998   2000   2002   2004   2006   2008
        Share of Global Output and Trade
          East Agri Region: % World Production & Trade 2007

               % of World Production
18                                                   % of World Exports
16                                         16

14                                         14

12                                         12
10                                         10
 8                                          8
 6
                                            6
 4
                                            4
 2
                                            2
 0
     Cereals     Bovine   Poultry   Milk    0
                  Meat     Meat                 Cereals   Bovine   Poultry   Milk
                                                           Meat     Meat
                              Exports (net, million USD)
                      4000


                      3000
Net Exports (mio $)




                      2000                                                    Belarus
                                                                              Kazakhstan
                      1000                                                    Russian Federation
                                                                              Ukraine
                         0                                                    Turkey
                              Barley   Wheat   Bovine Meat   Poultry   Milk
                                                              Meat
                      -1000


                      -2000
Scope for Production Increase?

• AMOUNT: Increase the production by:
   • Increasing land use
   • Increasing land productivity
   • Increasing labor productivity


• SUSTAINABILITY:
   • efficient use of land and water resources
   • less under pressure in the EastAgri Region
   than in the rest of the world ?
Land
Availability
            Change in arable land use (%, 1992-2007)




                                                          0
                                                              10




      -40
                -30
                            -20
                                        -10




-50
                                              Armenia

                                         Azerbaijan

                                                Belarus

                                               Bulgaria

                                    Czech Republic

                                                Estonia

                                               Georgia

                                              Hungary

                                        Kazakhstan

                                        Kyrgyzstan

                                                 Latvia

                                              Lithuania
                                                                                                       Land Availability




                                              Moldova

                                                Poland

                                              Romania

                                                Russia
                                                                   Change in land use since 1992 (%)




                                               Slovakia

                                               Slovenia

                                          Tajikistan

                                                Turkey

                                               Ukraine

                                         Uzbekistan
Land Productivity
                                               (Change in YIELDS since 1990)
                                         30
Change in Agricultural Yield Index (%)



                                         20


                                         10

                                                                                                   Central Europe
                                          0                                                        Balkan
                                                                                                   Baltics

                                         -10                                                       European CIS



                                         -20


                                         -30
                                               1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
                            Cereal yield (in kg/ha, average 2005-2008)




                     1000
                                  2000
                                            3000
                                                     4000
                                                               5000
                                                                         6000
                                                                                                          7000




                 0
     Armenia
    Azerbaijan
      Belarus
      Georgia
   Kazakhstan
   Kyrgyzstan
      Moldova
       Russia
       Turkey
                                                                                   European CIS + Turkey




Turkmenistan
                                                                                Transcaucasia + Central Asia +




      Ukraine
   Uzbekistan
      Bulgaria
Czech Republic
       Estonia
      Hungary
        Latvia
     Lithuania
                                                                                                                 Cereal Yields (kg/ha 2005-07)




       Poland
                                                                                                 CEEC region
                                                                                                                                                 Land Productivity




     Romania
      Slovakia
      Slovenia
    Argentina
     Australia
        Brazil
         India
        China
       Canada
                                                                                                 Other regions




         EU15
          USA
          Estimated Maximum Cereals Potential
          (IKAR, EBRD and FAO)             Diff. between
                                           max. potential     Potential
                          Max. potential   and 2004-06      growth (%)
Area Harvested (mio ha)
Kazakhstan                     19                4             27%
Russia                         47                6             15%
Ukraine                        17                3             21%
Total                          82               13             18%
Yields (ton/ ha)
Kazakhstan                     1,56             0,58           59%
Russia                         2,7              0,82           44%
Ukraine                        4,5              1,85           71%
Total                          2,8             0,96            52%
Production (mio ton)
          Kazakhstan           29               15            107%
          Russia               126              49             64%
          Ukraine              75               38            103%
          TOTAL                230              102            80%
Impact of Climate Change on
Water Availability
Climate Change & Yield Changes
           Labour Productivity
                                              (Change since 1990)
                          200



                          150
Change in ALP index (%)




                                                                                                Central Europe
                          100
                                                                                                Balkan
                                                                                                Baltics
                                                                                                European CIS
                           50
                                                                                                Transcaucasia
                                                                                                Central Asia

                            0



                          -50
                                1990   1992    1994   1996   1998   2000   2002   2004   2006
                                    ALP (US dollar/ agricultural worker)




                0
                                                       50000
                                                               60000
                                                                       70000




                    10000
                            20000
                                       30000
                                               40000
                                                                               80000
                                                                                       90000
                                                                                                                           100000
    Armenia

  Azerbaijan

     Belarus

     Georgia

 Kazakhstan

  Kyrgyzstan

    Moldova

      Russia

   Tajikistan
                                                                                             European CIS + Turkey




Turkmenistan
                                                                                          Transcaucasia + Central Asia +




     Turkey

     Ukraine

  Uzbekistan

    Bulgaria

zech Republic

     Estonia

      Latvia

   Lithuania

    Hungary

      Poland
                                                                                                        CEEC region




    Romania

    Slovakia

     Slovenia

       Brazil

       India

       China

     Canada

       EU15
                                                                                                       Other regions




        USA
                                                                                                                                    Labour Productivity ($/worker)
        Key Issue
There is substantial room for
 agricultural production and
     productivity growth.

How to promote and unleash
      this potential ?

  And how to do this in a
    sustainable way ?
Key Areas of Attention

1. Overall economic
   development & growth
2. Infrastructure
3. Investment
4. Institutions
    Overall Economic Growth
•    Increase of domestic demand for agricultural
     products

•    Development of non-agricultural (rural)
     economy : essential to reduce
     overemployment in the agricultural sector

•    Improvement of rural factor markets

=> Essential for productivity growth
                                                      Agricultural employment
                                                      (% change)

                                             60
Change in agricultural emplyment index (%)




                                             40


                                             20

                                                                                                                         Central Europe
                                              0                                                                          Balkan
                                                                                                                         Baltics
                                             -20                                                                         European CIS
                                                                                                                         Transcaucasia
                                             -40                                                                         Central Asia


                                             -60


                                             -80
                                                   1990   1992   1994   1996   1998   2000   2002   2004   2006   2008
Infrastructure
 Weak infrastructure is a bottleneck for:
   • Investment
   • Transportation
   • Market development
   • Price transmission
   • Technology transfer
   • Productivity growth, etc.
Investment

•   PRIVATE and PUBLIC (& SYNERGY)
•   FOREIGN and DOMESTIC
•   PHYSICAL, FINANCIAL and HUMAN CAPITAL
•   AGRICULTURE and FOOD INDUSTRY


In many of these areas the region is lagging behind
                                               FDI in Agro-Food Industry
                                                  Total in 2007 (million EUR)
                                        7000
FDI in the agro-food industry (mio €)




                                        6000

                                        5000

                                        4000

                                        3000

                                        2000

                                        1000

                                           0
                                                Czech Estonia Hungary Lithuania Latvia   Poland Romania Russia   Ukraine
                                               Republic
                                                 Per Capita FDI in Agro-Food Industry
                                                                              (EUR/capita in 2007)
                                               250
FDI in the Agro-food industry (€ per capita)




                                               200



                                               150



                                               100



                                               50



                                                0
                                                      Czech     Estonia   Hungary Lithuania   Latvia   Poland   Romania   Russia   Ukraine
                                                     Republic
      Private Investment: Constraints
      Assessment of problems faced by foreign investors

                                  Ukraine   Mol    Kyrgyz   Geor    Total
                                            dova    stan     gia   Average
Volatility of the political
environment                         3.4     3.3     4.5     2.8      3.5
Uncertainty about the economic
environment                         3.3     3.4     4.4     2.9      3.5
Ambiguity of the legal system       3.9     3.5     3.5     2.7      3.4
Corruption                          4.0     3.9     3.1     2.1      3.3
Bureaucracy                         3.9     3.9     3.1     2.0      3.2
Lack of physical infrastructure     2.5     2.8     3.9     2.9      3.0
Backward technology                 2.4     2.9     3.1     2.4      2.7
Lack of business skills             2.4     2.6     3.1     2.7      2.7
Finding a suitable partner          2.5     2.9     2.3     2.8      2.6
Problems in establishing clear
ownership conditions                3.2     2.9     1.7     2.4      2.6
    Private & Public Investment
•   Investment in the agro-food industry can have
    major SPILLOVER effects on farms’
    productivity through supply chain
    development
        see various studies by EBRD, World
         Bank, FAO


•   Key issue: policies to allow / enhance
    • investment in value chains
    • integration of farms in value chains
Public Investment

•   Rural infrastructures
         e.g. irrigation and roads
•   Research and agricultural R&D
•   Extension services
•   Education (human capital)
•   Quality enhancement & control
Institutions
What is needed to enhance/improve

• the functioning of markets
    • e.g. markets for credit, inputs, technology,
      land, food, …)

• the functioning of non-market institutions?
    • e.g.agri-holdings, vertical coordination,
      contracting, etc.

Policies, further reforms, investments, ….?
    Additional Questions for Debate

•   What are areas where government can
    have most effect?


•   What should be policy priorities?


•   Which are important across the region,
    and which are country specific?

								
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