Productivity Changes at the Farm Level Lessons from Transition Countries

1. Productivity Changesat the Farm LevelLessons fromTransition Countries Jo Swinnen & Benoit Blarel - Oct 31, 2005

2. What happened ? • Indicators: • Partial Productivity (Labor, Land) • Total Factor Productivity (TFP) • Most CIS (“Russia”) • FALL in output AND in productivity • Central Europe / Baltics / Balkans • Output: fall in first years, then stablilizes • Productivity (partial and full): falls, then rises

3. Agricultural Labor Productivity (ALP) (Output per Unit of Labor) Drops in most economies, except in CE Central Europe East Asia

4. Agricultural YIELDS for Major Crops Recovery in CE & Baltics, protracted decline in CIS China Central Europe & Baltics Russia / Ukraine / other European CIS

5. Total Factor Productivity (% change year)Same story as partial measures Early = first 5 to 8 years Early = first 2 to 3 years

6. Total Factor Productivity – Russia and Ukraine • Some studies show TFP falls during first 10 years – consistent with partial productivity measures • Others say TFP begins to rise in late 1990s

7. Why ? • Initial Shocks • Terms of trade collapse • Demand shock • Market institutions disappear • Drivers of output & productivity growth • Property Rights Reforms & Farm Restructuring • Reform of Market Institutions • Labor Markets • Land Markets

8. Effects of Property Rights Reform • Early 1990s net output effect is - 20% • 70% negative output effect from falling prices • 50% positive output effect due to TE increase • Central Europe: gains in technical efficiency due to property rights reform and farm restructuring • Russia and CIS: little productivity increase, except where there is private farming

9. Patterns of Transition • Role of initial technology and factor endowment • Budget constraint drives farm restructuring

10. Pattern ILand intensive with hard budgets • In land intensive nations : gains in productivity primarily from labor shedding on large privatized farms with hard budget constraints • e.g., Central Europe (Czech, Slovakia, Hungary, …) [labor use declined by 44 percent and individual farms accounted for only 15 percent of cultivated area]

11. Central Asia: reverse migration Vietnam China Ukraine Russia Hungary / Czech Rep. Agricultural Labor Use (per hectare)

12. Pattern IILand intensive with soft budgets • Russia, Ukraine, Kazakhstan • Initially: productivity decline on large farms because of continued soft budget constraints • Recovery and productivity growth since 1998 because of • Improved prices with devaluation after Russian crisis (eg Russia, Kazak) • Improved acces to inputs through vertical integration • Effective land reforms (eg Ukraine) • Hard budget constraints (Kazak, Ukraine)

13. Pattern IIILabor intensive – small farms • In labor intensive nations: productivity gains from property rights came with shift to individual farming • Immediately: Albania 1991, Armenia 1992 • After first trying the Russian (shares) approach: • Georgia 1995 • Kyrgyz Rep 1995 • Azerbaijan 1996 • Moldova 1998 • No labor outflow (often even inflow) in farming

14. Labor intensity and the shift to individual farming

15. Some Lessons Land reform & farm restructuring • Least disruptive reforms (Russia) gives weakest results • “Large” versus “small” farms ? Optimality depends on initial technology, endowment • Hard budget constraints and clear land rights essential • Use rights are sufficient (initially) for major incentive effects and productivity improvements

16. Reform of Exchange Institutions • Supply chains severely disrupted • Breakdown of access to credit, inputs, and output markets • Absence of marketing and supply channels has large negative effect on farm restructuring and efficiency • Individuals farms reluctant to invest when they have trouble accessing inputs and market outlets • Collective farms in many CIS nations remain important channel to access inputs and sell output

17. Productivity growth • Emergence of new and innovative institutions to facilitate exchange of outputs and access to inputs and technology (eg. contracting, vertical coordination, private enforcement systems, … ) contribute strongly to productivity growth

18. Other factors • Labor markets: Limited off-farm employment/income opportunities (migration, general economic recovery, safety nets/pension schemes) are a major constraint to productivity growth. • Land Markets (sale, lease) facilitate the alignment of farm structures with endowment, and land use by more efficient farmers

19. Conclusions • Productivity growth is halted when important pieces are missing • Property rights not clear • Soft budgets • Constrained access to inputs or output markets • But there is substantial room for variation to reflect local conditions, e.g. • use vs ownership rights • Labor intensive HH farms vs large corp.farms • commercialization of the state vs FDI-led institutional change

20. Conclusions Flexibility is important • Because the nature of “transition” requires flexible institutions, eg: • Use versus ownership rights • rental instead of sales markets • non-traditional exchange systems (eg leasing) • because of dynamics: • transition-changes themselves create need for further adaptation and institutional change