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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
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2001
2002
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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
.
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el
pr
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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.
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