How can we Revitalize the Struggling Georgian Agricultural Sector?

How can we Revitalize the Struggling Georgian Agricultural Sector?

The FINANCIAL -- Left behind

Between 1990 and 1994, the Georgian economy experienced one of the sharpest declines in economic activity in recent history, with GDP per capita falling by more than 70 percent. Since then, however, especially after 2003, it has been growing quite fast, with the Georgian GDP per capita overtaking the 1990 level in 2013. However, the Georgian agricultural sector, in the same period, has been characterized by a quite different trend, as shown in Figure 1.

During the crisis in the early nineties, when agricultural value added amounted to more than 65 percent of GDP, the agricultural sector provided valuable support to the livelihood of many Georgians. Currently, the Georgian agricultural sector seems to have been left behind as the rest of the economy recovered. Today, the agriculture value added represents less than 10% of Georgian GDP, even though about 50% of the labor force is still employed in agriculture.

The debate about how to stimulate the development of the Georgian agricultural sector has been going on for a while. In some of our past blogs (A Georgian Man without Land Is Nobody? – How the Age Structure Impairs “Inclusive Growth” in Rural Georgia – Farmers without Verve) we suggested several possible explanation for the dismal performance of the Georgian agricultural sector, and discussed a few possible remedies. Given the importance of the topic for the country, and following the release of the 2014 Census Data, we decided to look back into it in a more systematic way. The results of this analysis are quite interesting.

Institutional constraints

In the last decade, the economic literature has suggested several potential institutional causes for the stalled structural transformation of the Georgian agricultural sector: incomplete land reforms, lack of land-registration, and underdeveloped markets (for credit, inputs and outputs), worsened by the poor quality of physical infrastructure. All these causes are still there, even though the situation has been slowly improving after the Saakashvili government abandoned its “active neglect” of agricultural policy, an improvement accelerated after the Georgian Dream party took power. 

Today, however, most land remains unregistered, and the tax rules continue penalizing larger landholdings (especially if acquired after 2004). All this increases transaction costs and hampers the functioning of the land market, contributing to prevent land consolidation     2     and the reallocation of land from low-productivity activities to high-productivity ones. In addition, access to credit remains difficult and expensive, making it hard to finance much needed investment. At the same time, access to high quality and affordable inputs is not yet guaranteed, and access to support services is limited. Essential infrastructure (roads and irrigation) has only partially been restored. 

Institutional causes, however, constitute only part of the constraints hindering the development of the Georgian agricultural sector. Our analysis has highlighted two other important constraints on the development of the agricultural sector so far overlooked, by the literature: the demographic trends characterizing the country (and in particular land ownership), and the functioning of the Georgian labor market. 

Other constraints: demographic trends in land ownership…

The Georgian population is aging quickly, due to a combination of low fertility and strong outmigration. At the same time, as shown in Table 1, land ownership is increasingly concentrated in the hands of older individuals.

Between 2004 and 2014, the share of land owned by individuals 55 years of age or more increased from 55 to 61 percent. If we include individuals between 45 and 54 years of age, the percentage grows to 83 percent (up from76 percent). As already mentioned in our previous blogs, and as clearly shown by the economic literature, there is strong association between aging and a reluctance to take risks. If this is the case, the aging of land owners is likely to negatively affect the development of the agricultural sector in two ways. First, as higher willingness to take risks is associated with a higher probability of starting an entrepreneurial activity, this might reduce the creation of larger scale and job-creating activities. Secondly, if land is perceived as a form of “insurance” – particularly valuable in an environment characterized by a high level of uncertainty – this might reduce the willingness of older owners to sell it. 

 …and land’s additional livelihood support functions

Land does seem to provide additional income generating opportunities for those households that own it. For example, according to our analysis, access to land significantly increases the labor market options of several vulnerable groups (individuals older than 50, individuals with low education, and ethnic minorities). Individuals belonging to these groups whose household own land appear to be significantly less likely to be unemployed and discouraged to compared to identical individuals from landless households. Households with land can ensure that their members are (at least partially) employed, even when the labor market conditions are unfavorable, and can count on agricultural production to supplement their consumption.

Finally, land ownership can lead to additional income when – as it has been the case so far – development initiatives (such as the input voucher programs) are designed mostly as “social programs” to maximize popular support for the government, with land ownership being a prerequisite for receiving subsidies.

Clearly, all these aspects increase the value of land to its owners, reducing the supply of land and hampering the development of the land market.

Which way out?

Given the complexity of the issue, revitalizing the Georgian agricultural sector will require a structured and well-thought approach. One should probably start by eliminating the disincentives to land consolidation and agricultural-related entrepreneurial activities that currently exist in the tax legislation, while pushing forward land registration. Agricultural development initiatives should be stripped of their “social assistance” components (social assistance should be delivered in separate programs). At the same time, the Georgian government should work to increase incentives for current landowners (especially the least active) to invest in the development of their own activity or to transfer land to potentially more productive and active farmers. Policies to achieve these effects could include increasing taxation on unutilized land, coupled with an effort to provide better services and improve the quality of the existing infrastructure. In addition, the provision of information about market opportunities for agricultural products and existing development support initiatives, which would increase farmers’ awareness (and potential farmers) about the possibilities open to them, would probably be helpful for this purpose. 

A final group of policies that would very likely help is more directly linked to the demographic structure of land ownership and to the functioning of the labor market. The government should strive to provide a well-functioning safety net reducing the role of land as an “insurance tool” for the elderly and the most disadvantaged groups in the labor market. The institution of active labor market policies to stimulate labor market participation and increase employability could constitute an important step in this direction. A reform of the pension system reducing uncertainty about the future pension income would be another. These initiatives could be coupled with programs facilitating intrahousehold and intergenerational transfer of land ownership to younger and more entrepreneurial household members (for example, through the provision of targeted training and facilitated access to financial resources), which would probably offer a good chance to accelerate transformation while minimizing resistance to change. 

Our opinion is that once the context in which landowners live and operate, and the set of opportunities, constraints and incentives they face improves and becomes better aligned with what is needed for the development of the agricultural sector, we can expect it to finally develop at a much faster pace than we have seen so far.

1 Professor, International School of Economics at Tbilisi State University – Head of the Energy and Environmental Policy Research Center - ISET Policy Institute.

2 According to the data from the 2014 census, the average size of agricultural landholdings in 2014 went up to 1.31 ha from 1.21 ha in 2004, while the median size decreased (in 2004 the median landholding fell in the class size 0.5-0.99 ha while in 2014 it fell in the class size 0.2-0.49)