World Bank Commission on Economic Growth
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World Bank Commission on Economic Growth Case Study: Kyrgyzstan Agriculture and Agro-processing in Kyrgyzstan: Engine for Growth – Or Social Safety Net? Report Synopsis Compared to other CIS countries, Kyrgyzstan enjoyed slightly earlier and more robust growth after the collapse of the Soviet Union. The economic growth was driven partly by fast-growing agricultural output and employment, an effect that most economists attribute to the country’s aggressive land-reform policies. Since 2002, however, the agricultural growth engine has slowed, leading economists to re-think the role that agriculture will play in Kyrgyzstan’s future. Graph 1. CIS (Kyrgyzstan excluded) and Kyrgyz USD GDP Indices, (1990- This paper examines the 160 2006) Kyrgyz agriculture and agro- 140 processing sectors to explain 120 which government policies Total reginal GDP, attributed to the initial stage of 100 Index (1990 =100) growth, and which policies or 80 KGZ, Index - factors may have led the 60 1990=100 (right country’s largest sector to 40 axis) subside in recent years. 20 Agricultural activity is central 0 to most economic activity in 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Kyrgyzstan. One out of two * Note: GDP in current US dollars grow th figures w ere used to construct the indices Kyrgyz workers is a farmer, and 30% of GDP comes from the production and sale of agricultural products. Other major sectors in Kyrgyzstan’s economy, include services and government activities, but both have grown more slowly than agriculture since 1991. Only the mining sector, with sharply higher prices, has contributed to growth over recent years. But as the Kumtor mine, situated 15,000 feet above sea level, is depleted -- even mining has begun to lead Kyrgyz growth downward. 120 Agriculture enjoyed A g ric u ltu re robust growth between 100 1995 – 2001, after an F o o d In d u s try 80 aggressive land reform policy and complete T o ta l G D P Index 1990=100 60 market liberalization. These reforms 40 T ra d e & C o m . provided incentives to increase effort and 20 T ra n s p o rt productivity compared to traditional work at 0 L ig h t In d u s try . 90 91 92 93 94 95 96 97 98 99 20 00 el pr 19 19 19 19 19 19 19 19 19 19 20 01 1995 – 2001: Strong Agriculture Recovery government owned farms. Thousands of newly-formed small-plot holdings absorbed the unemployed industrial workers, thus providing a social safety net as traditional soviet- style jobs and social services evaporated. The shift from industry to farming in Kyrgyzstan caused an out-migration from the cities, back to rural life – opposing the global trend of urbanization. These new workers increased farming intensity per acre, and shifted the output mix somewhat toward small-scale comparative advantage. Fruits, nuts, berries and other crops that are difficult to mechanize were the country’s fastest-growing crops, albeit from a small base. Recently, arable land has grown scarce, and soil quality is falling from intensive farming, leading farmers to shift again – toward herding livestock and using the country’s high-pastures for grazing. Slow Growth and Political Unrest: The steady growth of the late 1990’s has subsided since 2002. Slow economic growth and rising income inequality led to increasing discontent among the poor. An eventual revolt in 2005 culminated with the ouster of Askar Akayev, the president since 1990, to flee the country in exile. These tumultuous events led to declines in output and GDP in 2005. Although no single policy led to slower agricultural growth, a combination of circumstances since 2001 have made it almost impossible for typical Kyrgyz farmers to continue expanding output. In hindsight, these circumstances are clear, but even if they were known to be limitations to growth a-priori, the country’s relatively weak and unstable government would have been unable to prevent them. Factor usage is close to the production possibilities boundary. With 95% of arable land already in production, and with the urban-rural migration complete, the two key factors of production are approaching the possibilities frontier. Sustained growth can only come from factor productivity or rising prices. Low labor productivity is persistent in Kyrgyzstan and is linked to low levels of investment and planning – both by private farms and by the public sector. Private investors face an inhospitable investment climate in Kyrgyzstan, which is ranked 136/150 by Transparency International’s corruption perceptions index. The lack of contract enforcement, rule of law, or clear property rights all raise investment risk for both foreign and local investors. In addition, a popular revolt in 2005 and subsequent political instability has shortened the period of political visibility, making it difficult to determine who may control government licensing and land rights. As a result, foreign investment has declined precipitously since 2005, and locals now hold onto cash in hard- currency, or they purchase tangible assets, such as apartments and land. Public investment and support has also been scarce, unless funded by external donors. Without the typical public support systems such as agricultural universities, product marketing associations, and publicly-supported market information, small farmers have been forced to sell their outputs at prices dictated by monopsonist traders and to purchase inputs at unfavorable rates. Unlike China, Vietnam, or Eastern Europe, land reform in Kyrgyzstan was not supported by strong input or output market services. China and Vietnam maintained government purchasing programs, which provided clear price guarantees to rural farmers. Likewise, Eastern Europe enjoyed a tradition of strong public agricultural support systems, designed to disseminate new technologies and to connect Eastern farmers with buyers in the West. Kyrgyz farmers and herders, who have relied upon Russia to organize input and output markets for 70 years, were left to form these support systems alone. Agricultural economists show that scale economies are typically weak in peasant farms, especially for crops that require extensive handling. Although this may be true, the surrounding support activities for farming exhibit significant scale economies which cannot be captured by individual farmers. The cost of storage, transportation, packaging, and marketing are prohibitively high for the small plot farmer, forcing them to sell on the local markets upon harvest, for whatever price they can get. Similarly, access to farm inputs, animal vaccines, and new technology requires some sophistication which is typically associated with large-scale farmers or processors who can withstand the risk of income or crop losses if mistakes are made. In Kyrgyzstan, 70% of arable land is operated by small, peasant farmers on than 3.8 hectares. Overcoming these scale economies, especially for transportation, could yield high returns for Kyrgyz farmers and herders, as China drives world food prices higher. Three of Kyrgyzstan’s neighbors are poised for rapid growth. In China, Russia, and Kazakhstan, rising demand for raw food inputs and feed stock is pushing basic food prices higher. But Kyrgyz farmers and herders face significant geographical and logistical challenges before they may enjoy these higher global prices. Until urban investment and employment opportunities increase enough to draw workers from rural to urban Kyrgyzstan, farming is likely to remain a social safety net, rather than an engine for growth. Alternatively, if barriers to trade are mitigated, and farmers can enjoy rising food prices, agriculture itself may be revived as the engine driving Kyrgyzstan’s economic growth.