CEFIR July-September 2007

8/3/2019 CEFIR July-September 2007

1/32

Beyond Transition

The Newsletter About Reforming Economies

July September 2007 Volume 18, No. 3 http://www.worldbank.org/transitionnewsletterwww.cefir.ru

Theme of the Issue: Agriculture and RuralDevelopment

Agriculture for Development 3

Distortions to Agricultural Incentives in TransitionEconomies

Kym Anderson and Johan Swinnen 5

The World Food Equation, Rewritten

Joachim von Braun 7

Biofuels A Revolution in the Making? 8

Brazil's Experience with Bioenergy

Jose Roberto Moreira 9

Can China Continue Feeding Itself?

Jinxia Wang, Robert Mendelsohn, Ariel Dinar, Jikun Huang,Scott Rozelle and Lijuan Zhang 10

Where to Sell? Market Facilities and Agricultural Marketingin India

Forhad Shilpi and Dina UmaliDeininger 11

The Economics of Farm Organization in Transition Countries

Pavel Ciaian, Jan Pokrivcak, Dusan Drabik 12

Land Policy and Farm Efficiency: The Lessons of MoldovaDragos Cimpoies, Zvi Lerman 13

Alternative NonAgricultural Employment in Rural RussiaYevgenia Serova, Dmitry Zvyagintsev, Tatyana Tikhonova,

and Olga Shik 14

Health Shocks in Rural China

Yang Yao 15

"Ruralization" of Poverty in Russia

Christopher J Gerry, Eugene Nivorozhkin, John Rigg 17

The Impact of International Migration on Albanian FamilyFarmingJuna Miluka, Gero Carletto, Benjamin Davis,

and Alberto Zezza 18

New Findings

Electricity Sector Reforms and the Poor in Europe andCentral AsiaJulian A. Lampietti, Sudeshna Ghosh Banerjee, and Amelia

Branczik 19

Fiscal Policy and Economic Growth in Europe and CentralAsia

Cheryl Gray, Tracey Lane and Aristomene Varoudakis (eds.) 21

Who Wants to Revise Privatization?Irina Denisova, Markus Eller, Timothy Frye,

and Ekaterina Zhuravskaya 23

The Resource Curse and Corporate Transparency

Art Durnev and Sergei Guriev 24

World Bank Agenda 25

New Books and Working Papers 27

Conference Diary 30

Photo: ECA, the World Bank


2/32

Beyond Transition JulySeptember 2007

2

From the Editor:

Dear Reader,

What was the reason for last year's food price increase? Was it a temporary phenomenon, causedby droughts, or was it the result of long-term changes in supply and demand fundamentals? Thearticle by von Braun in this volume argues that it is mainly the changes in demand and supplyover the past few years that have lead to price hikes. Troublingly, there are many factors that canlead to a permanent, or at least long-term, price rise on agricultural products. Examples includeincreased incomes, and hence increased food consumption, and furthermore changes in the struc-ture of consumption itself in the fast-growing developing countries. Then there are the negativeeffects of global warming on food production and some distortionary policies in support of bio-fuels (though there are positive examples of biofuels production as Moreira's account of Brazil'sexperience shows).

To change the situation developed countries need to remove trade barriers, and developing coun-tries need to increase their efforts to stimulate agricultural investments. In most developing and transition countries such effortsmust also include the removal of distortions to agricultural incentives (Anderson and Swinnen). Land reform and privatizationof land to small family farmers can help to increase productivity, as Moldova's experience has shown (Cimpoies and Lerman),however, even a rapid and intense land reform, such as in Albania, does not guarantee the speedy development of agriculturalareas (Miluka et al.). The presence of transaction costs is one of the major determinants of agricultural production structure(Ciaian et al.), and measures aimed at reducing such costs and improving farmers' access to the markets (Shilpi and Umali-Deininger) should be part of any policy program aimed at promoting rural economic development.

Having such programs is particularly important for poor agriculture-based and transforming countries, where the majority ofthe population lives in rural areas and is distinctly poorer than the urban population (summary of the World DevelopmentReport), and, consequently, more vulnerable to various shocks, including health shocks (Yao). Moreover, economic growth in

poor and transforming countries has led to a widening income gap between urban and rural dwellers (the World DevelopmentReport, and Gerry et al. on Russia). So special policies designed to promote rural development and address rural poverty issues,including policies fostering non-agricultural employment, need to be put in place (Serova et al.). Implementation of such policiesshould be put in the hands of municipal authorities. Thus, providing proper incentives to municipalities via elections is animportant part of the rural development agenda.

A related question on the efficiency of government spending is addressed in the article by Gray et al. in the New Findings sec-tion of this issue. To be effective, a policy needs to receive fairly large support from the population; ways of strengthening suchsupport is further studied in the article by Denisova et al. Specifically, the latter looks at the attitudes towards the revision of pri-vatization in transition countries in Europe and Central Asia and discusses why such attitudes prevail.

Ksenia Yudaeva, Managing Editor


3/32


4/32

4 Theme of the Issue: Agriculture and Rural Development

Beyond Transition July September 2007

economies were expanding rapidly. InIndia, the low level and quality of educa-tion of most rural workers is mainlyresponsible for their inability to find jobsin the booming services economy.

The main challenge for transforming

countries is to reduce the rapidly risingurban-rural income gap and rural pover-ty. All pathways out of poverty should bemobilized: farming, employment in agri-culture and the rural nonfarm economy,and migration.

Rapidly expanding markets for high-value products especially horticulture,poultry, fish, and dairy offer anopportunity to diversify farming systemsand develop a competitive and labor-intensive smallholder sector. Export mar-kets for such products are also accessible

because transforming countries have acomparative advantage in labor andmanagement-intensive activities. Thepoverty impact of growth in the agricul-tural sector will thus depend increasinglyon the poor connecting to these newgrowth processes, either as smallholdersor laborers. Vertically integrated supplychains may pose particular challenges forthem, although recent evidence fromChina suggests that small and poor farm-ers take an active part in China's rapidlyexpanding horticulture economy.

Agriculture alone cannot relieve ruralpoverty; rural nonfarm employment isalso important. In India and Indonesia,for example, growth in rural services hascontributed at least as much as growth inagriculture toward reducing poverty.Growth in rural nonfarm employmentoften remains closely linked to growth inagriculture, as agriculture becomes alarger supplier of intermediate inputs toother sectors such as processed foods.However, with urbanization and global-

ization, growth in nonfarm employmentoccurs increasingly independently ofagriculture. Regions in India with theslowest growth in agricultural productiv-ity had the largest increase in the ruralnonfarm tradable sector. When capital

and products are mobile, investors seeklow-wage opportunities in areas that didnot increase their incomes through high-er agricultural productivity.

Faster absorption of the agriculturallabor force in the urban economy shouldbe facilitated through investments inhuman capital and labor market policies,such as vocational training, transportservices, and job matching. Complement-ing these policies with those that fosterrural income growth and slow migrationout of the traditional sector can provide

important synergies.

Urbanized Countries:Linking Smallholders toModern Food Markets

Agriculture makes up only 6% of theurbanized economies and contributesproportionately to growth, however theagribusiness and food industry, and serv-ices can account for 30% of GDP.Although almost three-quarters of thepopulation of urbanized countries livesin urban areas, 45% of the poor are inrural areas, and 18% of the labor forcestill works in agriculture.

The broad goal is to capitalize on therapid expansion of modern domesticfood markets and booming agriculturalsubsectors to create opportunities forsmallholders and sharply reduce theremaining rural poverty, which remainsstubbornly high. The urbanized coun-tries are experiencing the supermarketrevolution in food retailing. For small-

holders, being com-petitive in supply-ing supermarkets isa major challengethat requires meet-ing strict standardsand achieving scalein delivery, forwhich effective pro-ducer organizationsare essential.

Increasing theaccess of smallhold-ers to assets, partic-ularly land, andincreasing their

voice in unequal societies can enhancethe size and competitiveness of the small-holder sector. Beyond farming, territorialapproaches are being pursued to pro-mote local employment through inter-linked farming and rural agroindustry.

Agricultural growth is especially impor-tant to improve well-being in geographicpockets of poverty with good agricultur-al potential. For regions without suchpotential, the transition out of agricul-ture and the provision of environmentalservices offer better prospects. But sup-port to the agricultural component of thelivelihoods of subsistence farmers willremain an imperative for many years.

Implementing the AgendaThe agriculture-for-development

agenda presents two challenges forimplementation. One is managing thepolitical economy of agricultural policiesto overcome policy biases, underinvest-ment, and misinvestment. The other isstrengthening governance for the imple-mentation of agricultural policies.

The prospects are brighter today thanthey were two decades ago.The anti-agri-culture bias in macroeconomic policieshas been reduced thanks to broader eco-nomic reforms. Agriculture is likely tobenefit from general governance reforms,

such as decentralization and public sectormanagement reforms. But reforms specif-ic to using agriculture for developmentare yet to be widely implemented.

There is also evidence that the politi-cal economy has been changing in favorof agriculture and rural development.Democratization and the rise of participa-tory policymaking have increased the pos-sibilities for smallholders and the ruralpoor to raise their political voice.The pri-vate agribusiness sector has become morevibrant, especially in the transforming

and urbanized countries. New, powerfulactors have entered agricultural valuechains, and they have an economic inter-est in a dynamic and prosperous agricul-tural sector and a voice in political affairs.Yet these improved conditions alone donot guarantee the more successful use ofagriculture for development smallhold-ers must have their voices heard in politi-cal affairs, and policymakers and donorsmust seize the new opportunities.

Full text of the report can be accessed at:www.worldbank.org/wdr2008. BT

UrbanRural Income Disparity Has Increasedin Most Transforming Countries

Source: WDR 2008 team, based on national household surveys

Guatemala

19892002

4

3

2

1

0

Initial year End year

Thailand

19902002

Cambodia

19972004

China

19852001

Vietnam

19922001

Indonesia

19932002

Bangladesh

19912000

India

198999

Pakistan

19992001

Ratio of urban to rural median income


5/32

5

The World Bank & CEFIR

Distortions to Agricultural Incentivesin Transition Economies

Kym Anderson and Johan Swinnen

Incentives for agricultural producersand food consumers were massively dis-torted in European and Central Asia(ECA) transition countries under centralplanning. The distortions resulted from acombination of collective farm propertyrights, centrally controlled organizationof production allocation, processing,input provision and marketing, price-set-ting unrelated to demand-supply condi-tions, and state controlled trading andexchange rate systems. There may havebeen a net subsidization of agriculturerelative to other sectors, but data are tooinadequate to tell with certainty.

How have policies affecting agricul-ture evolved in the region over the pasttwo decades? We assess the changinglandscape of agricultural protection ortaxation patterns in 11 Central andEastern European (CEE) countries (theten new EU members plus Turkey), andseven CIS countries. Together these coun-

tries in 2000-04 accounted for 89% of theregion's agricultural value added, 91% ofits population and 95% of total GDP.

Our analysis shows that beginning inthe early 1990s,many trade and price dis-tortions were removed throughout theregion. Price, exchange rate, and tradepolicies were all liberalized, subsidieswere cut, hard budget constraints wereintroduced, property rights were priva-tized,and production decisions were shift-ed to companies and households. Supportfor agriculture fell to very low levels(Table 1). Between 1992 and 1995, nomi-nal rates of assistance to agriculture(NRA,defined as the percentage by whichgovernment policies have raised grossreturns to producers above what theywould be without the government's inter-vention) averaged just 12% in the CEE-10 and were below zero in Bulgaria, thethree Baltic nations, Russia and Ukraine.

In the second half of the 1990s, assis-tance to agriculture increas-ed again, to an average of22% in 1996-99 for all ECAcountries, before it fellsomewhat to an average of17% in 2000-03.

Distortion levels varyconsiderably among coun-tries and across commodi-ties. The CEE-8 countriesmoved first and most rapid-ly towards market-basedsystems. The reforms inRomania and Bulgaria wereinitially half-hearted andinvolved many inconsisten-cies during most of the1990s, with governmentinterventions continuing toheavily distort incentives. InRussia, Kazakhstan andUkraine, governments con-tinued important controls ofthe agricultural economythrough a variety of inter-ventions such as regionaltrade controls, input supplycontrols, and the continua-

tion of soft budget constraints. While theKyrgyz Republic liberalized relativelyquickly, the other Central Asian countrieshave restricted reforms and liberalization.In particular, major controls still remainin place in Uzbekistan and Turkmenistan.

In the 1980s virtually all commoditieswere supported, but some more than oth-ers. With transition there is substantialvariation among commodities and in theCIS producers of some commodities arenow effectively taxed. Government inter-vention and controls are especially impor-tant in a few key commodities withineach country, often because of food secu-rity concerns or the need to raise govern-ment revenue to meet other priorities, orbecause the government wishes to extractrents from those activities.

Changes in AgriculturalPolicy Instruments

In ECA, most support for agriculturewas and, despite the reforms, still is pro-vided via highly distortive and hence inef-ficient policy instruments. Under thecommunist regime, output price distor-tions (which accounted for more than80% of the NRA) were complementedwith heavy distortions in input prices, inparticular low fertilizer and energy pricesand subsidized irrigation, while in the1990s the majority of farm support in theCEE countries was provided by outputprices being kept above border prices.

In the CIS countries, soft loans anddebt forgiveness continue to play animportant role, although fiscal con-straints for most of the 1990s limited thegovernment's ability to support farms bythis means. Due to the improved budget-ary situation this may well become aneven more important source of govern-ment assistance to farmers in the nearfuture.

The inefficiency of policy instrumentsis typically correlated with the distor-tions that they cause. In general, the mostefficient instruments (such as lump sumtransfers) cause least distortions. In con-

Average protection levels in ECA are relatively low, yet some countries need to do more

Table 1. Nominal Rates of Assistance toAgriculture*, 1992 to 2005 (percent)

199295 199699 200003 200405

Bulgaria 19 10 0 13Czech Rep 20 19 27 naEstonia 14 20 20 naHungary 19 18 34 naLatvia 15 30 36 naLithuania 19 29 32 na

Poland 10 24 7 naRomania 24 30 55 67Slovakia 28 26 30 naSlovenia 64 79 80 naCEE10 12 22 24 na

Turkey 15 25 22 30Russia 8 25 13 22Ukraine 21 1 11 3

All ECA studiedcountries 3 22 17 na

*Weighted average, with weights based on gross value of agricultural production at undistorted prices

Source: Ch. 1 of Anderson. K. and J. Swinnen (eds.), Distortions toAgricultural Incentives in Europe's Transition Economies, WashingtonDC: World Bank, forthcoming 2008.


6/32



trast, price and trade interventions, suchas price supports or import tariffs, aremuch less efficient.

The efficiency of policies used byECA countries is often low. In replacingbudgetary transfers to the food sector

under the communist system, a differentset of inefficiencies has been introduced,such as transfers from consumers to pro-ducers by way of import restrictions. Upto the mid-1990s, policies in all countriesexcept Turkey and Slovenia imposed theequivalent of low or negative taxes onfood consumers, which thereafter havebecome positive.

Many of the direct subsidies to pro-ducers do not reach the farmer. This isdue to a combination of institutionalconstraints and induced reactions to pol-

icy changes. For example, benefits target-ed at the farms dissipate to other groups,e.g. agribusiness or food industries orlandowners; they often go to a subset ofthe farms, typically those with the bestpolitical connections. Other importantconstraints include poor physical infra-structure; corruption; inadequate humancapital; the incompatibility between thelarge-scale input supplying or food pro-cessing firms and the small farmers; aswell as policy interventions, such astrade controls by regional authorities.

Political Economy ForcesBehind Policy Choices

On average, farmer assistance tendsto be higher in higher-income countries,and in countries with weaker compara-tive advantage in agriculture (Table 2).

However, these correlations are becom-ing weaker over time as internationalforces (particularly accession to the EU)become relatively more important thandomestic political forces.

The forces underlying the politicaleconomy of agricultural taxation andassistance in the ECA region havechanged considerably during transition:

Rent extraction. Heavy negativegovernment intervention tends to be con-centrated on commodities that have thepotential to provide export tax revenue

for the government.This is especially thecase in the cotton sectors of Uzbekistan,Turkmenistan and Tajikistan, where gov-ernments expressly control the cottonvalue chain so as to extract rents.

Increases in agricultural supportin the second half of the 1990s in CEEand more recently in the CIS are theresult of the interaction between domes-tic political forces and internationalevents. The EU accession process hasinduced changes in policy instrumentsand increased support in CEE. In the CIS

the improvements in the government'sbudgetary situation has reduced fiscalconstraints on agricultural subsidies.

Crises, political change, andreforms. Most often the policy reformscome only after new elections induce achange in government, reflectingchanged electoral preferences. However,democratic political change is not a suf-ficient condition in itself for better agri-cultural policies, as evidenced for exam-ple in Ukraine and the Kyrgyz Republic.

International agreements. The

CEE-8 countries that joined the EU in2004 have raised domestic agriculturaland food prices and have been graduallyincreasing subsidies towards EU-15 levels,and have changed trade policies andimproved regulatory environment to stim-ulate their markets. WTO accession hasnot strongly disciplined ECA countries.

Prospects for ReducingDistortions

With the major reductions in distor-tions to agricultural incentives in ECAover the past two decades, average pro-tection levels there are now relatively

low. However, some of the ECA coun-tries still have considerable scope forremoving the remaining distortions.

Removing the most distortivetaxation of agriculture would allow asubstantial improvement in incentives to

domestic producers in the cotton sectorsin some Central Asian countries. Countries should focus on effi-

ciency improvements, i.e. a shift from afocus on quantity and minimum stan-dards to a policy framework focused onquality and high standards. Otherreforms remain important, e.g. macroeco-nomic and regulatory reforms to stimu-late food industry investment, labor mar-ket reforms to enhance off-farm employ-ment opportunities, and credit reforms tostimulate access to rural credit.

Increased funding should befocused on upgrading infrastructure,quality and efficiency of the agri-foodsystem, and the introduction or improve-ments of a variety of institutions to sup-port rural markets.

Competition and anti-trust pol-icy are important across the region. Insupply chains where farms have to selltheir products to trading, processing, andretailing companies, the ability to choosefreely between companies is of crucialimportance in getting better returns.

Across ECA countries, and par-ticularly in countries where the contiuedhigh energy prices may lead to 'Dutchdisease' effects for agriculture, exchangerate distortions and adjustments willcontinue to have very substantialimpacts on farmers' incentives.

While it is important to understandthe political economic forces identifiedabove that may constrain the prospectsfor further reducing distortions to agri-cultural incentives in the foreseeablefuture, it is equally important to identify

areas where there is potential for policyimprovement so that advisors can try toinfluence outcomes whenever and wher-ever opportunities arise.

Kym Anderson is George Gollin Professorof Economics at the University of Adelaide,Australia, and a CEPR Research Fellow;Johan Swinnen is Professor of Economics andDirector of LICOS Center for Institutionsand Economic Performance at the KatholiekeUniversiteit Leuven, Belgium. The article isbased on the summary chapter of the World

Bank book Distortions to AgriculturalIncentives in Europe's Transition Economies(forthcoming in mid-2008). BT

Relativeper

capitaincome

Table 2: Relative per Capita Income*,Agricultural Comparative Advantage

Index**, and NRA, 200003

Slovenia 216 52 80Czech Rep. 135 61 29Hungary 122 90 34Estonia 102 199 20

Poland 93 105 7Slovakia 92 57 30Lithuania 80 176 32Latvia 76 364 36Turkey 55 131 22Russia 47 53 13Romania 41 74 55Bulgaria 39 143 0Ukraine 17 112 11

Agricult.compara

tiveadvantage

NRA

*Income per capita relative to the world average,200004**Agriculture and food's share of national exportsas a percentage of agriculture and food's share ofglobal exports, 200004

Source: Ch. 1 of Anderson. K. and J. Swinnen (eds.),Distortions to Agricultural Incentives in Europe'sTransition Economies.


7/32

7


The world food situation is currentlybeing rapidly redefined by new drivingforces income growth, climatechange, high energy prices, globaliza-tion, and urbanization. The influence ofthe private sector in the world food sys-tem, especially the leverage of foodretailers, is also rapidly increasing.Changes in food availability, rising com-modity prices, and new producercon-sumer linkages have crucial implicationsfor the livelihoods of poor and food-

insecure people.

Demand: Economic Growthand Population Change

Many parts of the developing worldhave experienced high economic growthin recent years. Developing Asia grew onaverage by 9% per annum between 2004and 2006, and Sub-Saharan Africa byabout 6% during the same period. Thisgrowth is a central force of change onthe demand side of the world food equa-tion. High income growth in low income

countries readily translates intoincreased consumption of food.

Another major force altering thefood equation is shifting rural-urbanpopulations and the resulting impact onspending and consumer preferences.Within the next three decades, 61% ofthe world's populace is expected to livein urban areas.

Higher incomes, urbanization, andchanging preferences are raising domes-tic consumer demand for high-valueproducts in developing countries. The

composition of food budgets is shiftingfrom the consumption of grains andother staple crops to vegetables, fruits,meat, dairy, and fish. The demand forready-to-cook and ready-to-eat foods isalso rising, particularly in urban areas.These consumption patterns are expect-ed to be reinforced in the future.

Supply: Climate Change andthe Corporate Food System

Risks from climate change will haveadverse impacts on food production,

compounding the challenge of meetingglobal food demand. With the increased

risk of droughts and floods due to risingtemperatures, crop-yield losses are immi-nent. The impact of global warming ondeveloping countries will be much moresevere than on developed ones. Agricul-tural output in developing countries isprojected to decline by 20%, while out-put in industrial countries is projected todecline by 6%. Technological change isunlikely to alleviate output losses andincrease yields to a rate that would keepup with growing food demand.

In addition, the growing power andleverage of international corporations aretransforming the opportunities availableto small agricultural producers in devel-oping countries. While new prospectshave arisen for some farmers, many oth-ers have not been able to take advantageof the new opportunities since the rigor-ous safety and quality standards of foodprocessors and food retailers create highbarriers to their market entry.

Transactions along the corporate foodchain have increased in the past two years.

Between 2004 and 2006, total global foodspending grew by 16%. In the same peri-od, the sales of food retailers increased bya disproportionately large amount more than 40% for top retailers com-pared to the sales of food processors andof companies in the food input industry(which grew by 13% and 8% for topcompanies in the respective field).

The Changing EquationThe changes on the supply and

demand side of the world food equation

have led to imbalances and drastic pricechanges. Between 2000 and 2006, worlddemand for cereals increased by 8% whilecereal prices increased by about 50%.Thereafter, prices more than doubled byearly 2008 (compared to 2000). Supply isvery inelastic: it typically increases by 1 to2% when prices increase by 10%. Supplyresponse decreases further when farmprices are more volatile, but increases asthe result of improved infrastructure andaccess to technology and rural finance.

The consumption of cereals has been

consistently higher than production inrecent years. The greater increase in con-

sumption is explained not just by grow-ing cereal use for food and feed (whichincreased by 4 and 7% since 2000,respectively) but also by the use of cere-als for industrial purposes such asbiofuel production.

Supply an demand changes do notfully explain the price increases.Financial investors are becomingincreasingly interested in rising com-modity prices, and speculative transac-tions are adding to increased commodi-

ty-price volatility. In 2006, the volume oftraded global agricultural futures andoptions rose by almost 30%.Commodity exchanges, which arebecoming more relevant in India andChina, and some African countries, canhelp to make food markets more trans-parent and efficient.

Policy RecommendationsWhile maintaining a focus on long-

term challenges is vital, some policy acti-ons should be undertaken immediately:

Developed countries shouldfacilitate flexible responses to drasticprice changes by eliminating trade barri-ers and programs that set aside agricul-ture resources, except in well-defined con-servation areas. A world confronted withgreater food scarcity needs to trade more,not less, to spread opportunities fairly.

Developing countries shouldrapidly increase investment in ruralinfrastructure and market institutions inorder to reduce agricultural-input accessconstraints, since these are hindering a

stronger production response. Placing agricultural and food

issues onto the national and internation-al climate-change policy agendas is criti-cal for ensuring an efficient and pro-poor response to the emerging risks.

Joachim von Braun is Director General ofthe International Food Policy ResearchInstitute (IFPRI). The article is based on theFood Policy Report No. 18 "The World FoodSituation: New Driving Forces and RequiredActions" published by in December 2007.

Full text of the report can be downloaded at:http://www.ifpri.org/pubs/fpr/pr18.asp. BT

The World Food Equation, Rewritten

Joachim von Braun

Supply and demand changes have led to imbalances on the food markets and drastic price increases


8/32

With oil prices near an all-time highand few alternative fuels for transport,Brazil, the European Union, the UnitedStates, and several other countries areactively supporting the production ofliquid biofuels ethanol and biodiesel.The economic, environmental, and socialimpacts of biofuels are widely debated.As a renewable energy source, biofuelscould help mitigate climate change and

reduce dependence on oil in the trans-portation sector. They may also offerlarge new markets for agricultural pro-ducers that could stimulate rural growthand farm incomes. On the downside areenvironmental risks and upward pres-sure on food prices.

About 90% of the global ethanol fuelproduction in 2006 was produced inBrazil and the United States, and 75% ofbiodiesel was produced in the EU mainly in France and Germany. Brazil isthe most competitive producer and has

the longest history of ethanol production(dating back to the 1930s), using abouthalf its sugarcane to produce ethanoland mandating its consumption.However, new players are emerging, suchas Indonesia, Malaysia, Mozambique,and India.

Economic Viability and theImpact on Food Prices

Governments provide substantialsupport to biofuels so that they can com-pete with gasoline and conventional

diesel. These supports include consump-tion incentives (fuel tax reductions), pro-duction incentives (tax incentives, loanguarantees, direct subsidy payments),and mandatory consumption require-ments. Are biofuels economically viablewithout subsidies and protection?

The most important determining fac-tors are the cost of oil and the cost of thefeedstock, which constitutes more thanhalf of today's production costs. Biofuelproduction has pushed up feedstockprices. The clearest example is maize,

whose price rose by 23% in 2006 and bysome 60% over the past two years, large-

ly because of the U.S. ethanol program.Spurred by subsidies and the RenewableFuel Standard issued in 2005, the UnitedStates has been diverting more maize toethanol. Because it is the world's largestmaize exporter, biofuel expansion in theUnited States has contributed to adecline in grain stocks to a low level andhas put upward pressure on world cerealprices. Similar price increases have

occurred for vegetable oils (palm, soy-bean, and rapeseed).Cereal supply is likely to remain con-

strained in the short term and prices willbe subject to upward pressure from fur-ther supply shocks. Provided there is notanother major surge in energy prices,however, it is likely that feedstock priceswill rise less in the long term as farmersrespond to higher prices, and biofuelsproduction will be moderated by lowerprofits because of higher feedstockprices.

Rising cereal prices will have anadverse impact on many food-importingcountries. At the same time, many poorproducers could benefit from higherprices.

Potential Benefits Energy Security. Current-tech-

nology biofuels can only marginallyenhance energy security in individualcountries because domestic harvests offeedstock crops meet a small part of thedemand for transport fuels, with few

exceptions (for example, ethanol inBrazil). In 2006/07, around one-fifth ofthe U.S. maize harvest was used forethanol but displaced only about 3% ofgasoline consumption. Second-genera-tion technologies could potentially makea higher contribution to energy security.

Environmental impacts. Globalenvironmental benefits from usingrenewable fuels reducing greenhousegas emissions (GHGs) are frequentlycited as reasons for policy support to bio-fuels. Although possibly significant, those

benefits cannot be assumed. The emis-sions from growing feedstocks (including

emissions from fertilizer production),manufacturing biofuels, and transportingbiofuels to consumption centers, as wellas those from changes in land use, alsohave to be evaluated. According to the2006 EU Biofuel Strategy, a change inland use, such as cutting forests or drain-ing peat land to produce feedstocks suchas oil palm, can cancel the GHG emissionsavings "for decades." Reducing poten-

tial environmental risks from large-scalebiofuels production could be possiblethrough certification schemes to measureand communicate the environmental per-formance of biofuels.

Benefits to smallholders.Biofuel can benefit smallholder farmersthrough employment generation andhigher rural incomes, but the scope ofthese impacts is likely to remain limited.Ethanol production with current tech-nologies requires fairly large economiesof scale and vertical integration and may

do little to help small-scale farmers.

Defining Public PoliciesCan developing countries, apart from

Brazil, benefit from the production ofbiofuels? In some cases, such as land-locked countries that are importers of oiland potentially efficient producers ofsugarcane, the high costs of transportcould make biofuel production econom-ically viable even with current technolo-gies. The much higher potential benefitsof second-generation technologies,

including for small-scale biodiesel pro-duction, justify substantial privately andpublicly financed investments inresearch.

The challenge for developing countrygovernments is to avoid supporting bio-fuels through distortionary incentivesthat might displace alternative activitieswith higher returns and to implementregulations and devise certification sys-tems to reduce environmental risks.

Source: World Development Report2008, www.worldbank.org/wdr2008 BT



Biofuels A Revolution in theMaking?The challenge is to avoid supporting biofuels through distortionary incentives


9/32

9


Brazil is the second largest worldproducer of ethanol, a biofuel usedmainly in automobiles as an additive oralternative to gasoline. Although Brazil'sprogram, started in the mid-1970s, wascriticized as being uneconomic duringperiods of low oil prices, the ethanolindustry today is recognized as an effi-cient sector that brings substantial bene-fits to the Brazilian economy.

All Brazilian ethanol is produced fromsugarcane. About 330 privately ownedsugar mills each process an average of 1.2million tonnes of sugar cane per year.

Major Savings andIncreased Employment

The government's reasons for sup-porting biofuels, at first purely economicand triggered by the oil price spikes ofthe 1970s, have expanded to includeconcerns about the country's energysecurity, greenhouse gas emissions andglobal climate change, rural employmentand equity issues, and local air pollution.

Ethanol production has played animportant role in guaranteeing fuel secu-rity. Since 1975 ethanol has displacedmore than 280 billion liters of gasolineand saved more than US$65 billion inthe cost of oil imports.

Moreover, the sugar/ethanol sectorhas become a major employer: in 2001 itaccounted for roughly one million jobs,of which about 65% were permanentand the remainder seasonal. Another300,000 jobs were created in manufac-turing and other sectors. Sugarcane plan-

tations also represent a major activity forsmall farmers, as around 30% of sugar-cane production is in the hands of60,000 independent producers.

The introduction of gasohol, a com-bination of gasoline and ethanol, had animmediate positive impact on the airquality of Brazil's large cities, reducingcarbon monoxide by more than 25%.

Reasons for the Success Synergies with the sugar mar-

ket. The coupled production of ethanol

and sugar, which occurs in almost allsugar mills, allows mills to shift to

ethanol production if sugar prices falland vice-versa. Significant productivityimprovements in the sugar industry havebenefited ethanol production: the cost ofproducing ethanol declined by an annualaverage of 5.7% from 1985 to 2005.

Synergies with electricity andheat production. Cogeneration of heatand electricity from the by-product,bagasse, supplies all the energy needs ofthe biofuel production process itself, andallows the surplus electricity to be export-ed to the grid. Presently more than 1,500MW of this electricity is being supplied tothe grid, mainly in the period of low rain-fall, which is a very relevant contributionto energy security since more than 90%of electricity is produced from hydrosources.Programs designed for the supplyof more than 3,000 MW are in their finalstages, having been developed by the gov-ernment and the private sector jointly.

Institutional support. TheBrazilian government has provided neces-sary incentives to buyers of cars poweredby ethanol and service station owners,and has set up a clear institutional frame-work. The measures included settingtechnical standards, supporting ethanolproduction and consumption technolo-gies, providing financial advantages, andensuring appropriate market conditions.

Geographical aspects. An abun-dant supply of agricultural land, anappropriate climate for growing sugar-cane, a developed sugarcane industry,and the presence of more than half of thecountry's car fleet in Sao Paulo thestate with the dominant sugarcane indus-try have all contributed to the success.In other regions, the government has sub-sidized the transport costs of ethanol toensure a wide geographical coverage.

Positive OutlookAlthough ethanol supply and

demand have not always been properlybalanced, since the launch of flex-fuelcars in early 2003, internal ethanol con-sumption has increased significantly inBrazil. By 2008, around 90% of new

cars manufactured in Brazil are to beflex-fuel models. Export of ethanol hasalso increased since 2001.

The recent expansion of internal andexternal markets has triggered the inter-est of investors, resulting in the plannedconstruction of about 90 new sugar millsbetween 2006 and 2010, expansion ofsugarcane cultivation to new areas, andretrofitting old refineries.

Sugar/ethanol production does raiseconcerns about land use, as it competeswith the production of food and exportcrops. Yet the six million hectares culti-vated with sugarcane represent only 8.6%of the total area harvested with essentialcrops. Moreover, farmers are increasinglyrotating between sugarcane and foodcrops like tomatoes, soy, peanuts, beans,rice, and maize. This has helped maintainthe balance between energy and food andhas improved land profitability.

Policy LessonsFor countries wishing to improve ener-

gy security while promoting rural develop-ment, Brazil's experience offers some rele-vant lessons. The following policies have

been most important to Brazil's success: Requiring the auto industry to

produce cars running on neat or blendedbiofuels;

Subsidizing biofuels duringmarket development until economies ofscale allowed fair competition with oilproducts;

Allowing renewable energy-based independent power producers tocompete with traditional utilities in thelarge electricity market;

Financing private ownership of

sugar mills, which helps guarantee effi-cient operations; Stimulating rural activities

based on biomass energy to increaseemployment in rural areas.

Jose Roberto Moreira is president of theExecutive Council of the Brazilian ReferenceCenter on Biomass, Institute ofElectrotechnology and Energy, University ofSao Paulo, Brazil. The article is based on theauthor's policy brief, which first appeared in"Bioenergy and Agriculture: Promises and

Challenges", the International Food PolicyResearch Institute, http://www.ifpri.org/2020/focus/focus14.asp. BT

Brazil's Experience with Bioenergy

Jose Roberto Moreira

Brazils ethanol industry today is an efficient sector that brings substantial economic benefits


10/32



Can China Continue Feeding Itself?

Jinxia Wang, Robert Mendelsohn, Ariel Dinar, Jikun Huang, Scott Rozelle and Lijuan Zhang

For quite some time, global foodsecurity issues have been in the center ofpolicy debate. One of the major aspectsof this debate has been the role of China,a giant economy with 20% of theworld's population. China is alsoresponsible for a significant share in theworld's production and consumption ofprimary agricultural commodities wheat, rice, maize, soybean, and cotton.With projected increases in both popula-tion and income in China, feeding larger

numbers of more affluent people couldbecome a challenge if not accompaniedby increased supply.

However, will China be able toincrease supply if the climate warms?Growing evidence on rising global tem-peratures and changes in precipitationpatterns makes it ever more important tounderstand the impacts of global warm-ing on China's agriculture.

We measure the sensitivity of Chineseagriculture to warming, employing farmlevel data and relying on the Ricardianmethod. The analysis is conducted on8,405 farms sampled across 28 provinces.

Climate and Net CropRevenue

In general, China's climate is bestdescribed as monsoonal, with clear tem-perature and precipitation differencesthat vary by region and season. From thesouth to the north, temperature declinessteadily. In the dryer north, more than70% of a year's precipitation is concen-trated in the summer. In the wetter south,precipitation is mainly concentrated inthe spring and the summer.

Not surprisingly, the net crop rev-enues also vary by region: they are high-er in the south compared to the northand higher in the east compared to thewest. Just as significantly, net crop rev-enues vary between villages that are irri-gated and those that are rainfed. Onaverage, the net crop revenue amountedto 10,150 yuan (US$1,353) per hectareacross all farms in 2001, however netcrop revenue was 12,180 yuan in irrigat-ed villages compared to 7,610 yuan inrainfed villages.

Effect of Warming Negative on Average

The analyses, measuring the directeffects of temperature and precipitationon crop net revenues, show that the aver-age impact of higher temperatures on netrevenues is negative and the averageimpact of more precipitation is positive.However, marginal increases in tempera-ture and rainfall have very differenteffects on different farm types in differ-ent regions:

Rainfed farmers are more vulner-able to warming than irrigated farmers;

Warming is likely to be helpfulto rainfed farmers in very cold places butharmful to those in most of China andespecially the far south;

More rain is likely to be harm-ful to rainfed farmers in the wet south-east but to be beneficial to farmers in theremaining regions;

All irrigated farms are likely toenjoy small benefits from increasing pre-cipitation.

Quantitatively, the mid latituderegion of China could gain up to

US$127/ha/0C from higher tempera-tures, while southern and northern lati-

tudes could lose up to US$165/ha/0C.Additional precipitation in the wetsouthwest would be harmful (up to-US$153/ha/mm/month). The rest ofChina would enjoy small gains (up toUS$65/ha/mm/month).

Can China ContinueFeeding Itself?

The agricultural sector as a whole isonly mildly vulnerable to global warm-ing. This is because, first, a very largefraction of farms in China are irrigatedand, second, the rainfed land in China islargely in temperate or cool regions.

The results thus suggest that theanswer to the question above is in theaffirmative. The likely gains realized bysome farmers will nearly offset the lossesthat will occur to other farmers. Animportant caveat, however, is that ouranalysis does not examine the potentialharmful consequences of possible reduc-tions in water supply from climate change.

Policy ImplicationsAs is clear from the above, the effects

of climate change are not going to beuniform across the country. Warmingwill assist areas that are currently highlyproductive and will further handicapareas that have below average productiv-ity. Chinese policy makers need to beaware that warming is likely to imposeadditional costs on specific regions thatalready have below average incomes.

The ability of Chinese farmers to

change and adapt to new conditions hasallowed China to outperform other agri-cultural economies in the world and willcontinue to be important with respect toclimate change. However, it is criticalthat policies allow China to get the mostout of the available factors relating toproduction and natural resources.

An important message of our analysisis that irrigation is critical to China'sagriculture system.As nearly 60% of cul-tivated land in China is irrigated, part ofChina's ability to cope with future cli-

mate change depends on its capacity touse water for irrigation. There could bemuch larger harmful effects if warmingforces many irrigated farms to becomerainfed farms. Climate change increasesthe pressure to develop institutions andinfrastructure in water scarce regions totreat water as a valuable resource.

China may also consider developingbetter management practices; adoptingnew varieties (crops and livestock) suit-able for a warmer climate; adapting newtechnologies in agriculture and educating

farmers about them.

Jinxia Wang is an Associate Professor inthe Center for Chinese Agricultural Policy(CCAP), Chinese Academy of Sciences,Beijing. Robert Mendelsohn is a Professor,Yale University, USA, and a consultant to theWorld Bank. Ariel Dinar is a Lead Economistin the Development Research Group, theWorld Bank. Jikun Huang is a Professor andDirector in CCAP. Scott Rozelle is a Professorand Senior Fellow, Stanford University, USA.Lijuan Zhang is a Senior Research Assistant inCCAP. Full text of the paper is available at:http://go.worldbank.org/HRW0P2R1V0 (WBPolicy Research Working Paper 4470). BT

The Chinese agricultural sector is only mildly vulnerable to global warming


11/32

11


Forhad Shilpi and Dina UmaliDeininger

Rural areas are home to the vastmajority of the world's poor. As most ofthe rural poor are engaged in agriculture,diversification and commercialization ofagriculture are often essential pre-condi-tions for rural income growth and pover-ty reduction. Transportation costs andthe characteristics of the nearest marketinfluence the transaction costs of takingproducts to the market. For instance, ahighly congested market with few facili-ties can add substantially to waitingtime, product deterioration and losses,and costs to farmers and traders.Investments in market infrastructure andfacilities and in rural road networks nowform a core of rural development strate-gies in many countries.

We utilize data from a 2005 survey offarmers, traders, markets and villages inthe Indian state of Tamil Nadu to exam-ine how facilities available at the marketinfluence farmers' decision to sell at themarket. By relating farmers' place ofsales to their level of sales, we also esti-mate the distributional consequence ofan improvement in market facilities.

In our study the interaction of marketfacilities and distance to market from afarmer's village is captured by a marketaccess index, which is a ratio of a num-ber of facilities available at market to thesquare of the travel time from farmer'svillage to that market.

Wealthier Farmers Benefit

More in Congested MarketsTrading in agricultural produce inIndia is governed by the State Acts,which prescribe the setting up of a net-work of state controlled "regulated mar-kets", where commodities grown in thesurrounding area are required to betaken to. Tamil Nadu has not completelyenforced the Act, so in our sample only10% of the wholesale markets are regu-lated. Thus, 53% of sales by the farmersin our sample were made at the unregu-lated wholesale markets, and about 45%

at the farmgate (with the rest in the vil-lage markets).

The majority of the markets are notcompletely specialized, are quite small in

size and heavily congested,with limited infrastructureand facilities (see Table).Apart from having bus sta-tions, police stations, com-mercial banks, and postoffices, most markets offerfew other facilities. Theaverage travel time from

villages to relevant marketsis about 41 minutes.

Our analysis of howmarket facilities influencefarmers' decisions showsthat:

An improve-ment in the market accessindex increases the likeli-hood of sale at the market,either because of a reduc-tion in transportation costor because of an improve-

ment in market facilities; The wealth

level influences a farmer's

decision to sell at the market, as wealthallows farmers to gain access to marketfacilities easily cutting waiting time inthe congested market place.

Wealthy farmers are thus able to cap-ture disproportionate benefits from theexisting market facilities in a congestedmarket place. They are perhaps able toavail of cheaper modes of transportationand to reduce waiting time and costs inutilizing the market facilities.

ProPoor Policy ChangeWhat if the market access index

improves by 20%? Given the average mar-ket access index of around five in our sam-ple, this increase translates roughly intoadding an extra facility in each market.The results of our simulation show that inpercentage terms, such policy change will

Benefit all farmers with land upto 20 acres;

Benefit disproportionately thepoorer farmers, especially those with lessthan 2,5 acres of land these will expe-rience the largest percentage increase insales about 1%. In contrast, farmerswith land of more than seven acres willexperience less than 0.5% increase insales.

A seeming puzzling contradiction ofthe simulation to our regression analysisabove is not actually so perplexingbecause wealthy farmers already havebetter access to markets, and an

improvement in market access benefitsthem much less compared with poorerfarmers, who face much more stringentmarketing constraints.

Thus, investments in market facilitiesand infrastructure (including transporta-tion) will be pro-poor.

Forhad Shilpi is a senior economist atDevelopment Economics Research Group,and Dina Umali-Deininger is a lead econo-mist at South Asia Sustainable Developmentunit, the World Bank, Washington, DC. Full

text of the paper can be accessed at:http://go.worldbank.org/1Z71VSQQF0 (WBPolicy Research Working Paper 4455) BT

Where to Sell? Market Facilitiesand Agricultural Marketing in India

Market Facilities (selected)

Market area (average), acre 14 26Number of shops (average) 282 181

Shop area (average), sq. feet 704 1001Storage capacity (avg), sq. feet 31 93FacilitiesParking (all vehicles), % 10 33Bus station, % 89 77Commercial banks, % 84 78Post office, % 84 75Police station, % 89 81Factory/mills, % 47 57Guard, % 40 53EquipmentsLarge scale weighing machine, % 10 29Grading machine, % 5 17Fumigation equipment, % 10 5

Cold storage, % 5 6Warehouse, % 5 44

TamilNadu

SurveyedStates (4)Market characteristics

Poor farmers will benefit most from adding extra facilities in the market place


12/32



The Economics of Farm Organizationin Transition Countries

Pavel Ciaian, Jan Pokrivcak, Dusan Drabik

The structure of agriculture in formercommunist countries was stronglybiased towards extremely large farmsdirectly controlled by the state. The aver-age farm size ranged from 1,157 hectaresin Poland to around 124,770 hectares inTurkmenistan. For comparison, the aver-age farm size in the EU-15 was 20 ha,and in the USA 197 ha.

In the beginning of the 1990s farmrestructuring followed after privatizationand restoration of private property rights.New owners of farm assets and land wereallowed to break away from cooperativefarms and start family farming. At thesame time, some old socialist cooperativeswere turned into cooperatives of ownersof agricultural assets, joint-stock or limit-ed-liability companies or partnerships.Depending on the methods of privatiza-tion and state policies, different farmstructures emerged in different countries.While in Albania and the Baltic Statesmany small size family farms were creat-ed (see Table), agriculture in Slovakia, theCzech Republic and most former SovietUnion (FSU) countries are still dominatedby large transformed corporate farms.

Comparative AdvantagesFarms choose the production structure

in which they have comparative advan-

tage. The comparative advantage of largecorporate farms is in capital intensiveproducts for which monitoring of labor isrelatively low and in which specializationin labor is possible. Small family farmshave comparative advantage in productsin which labor monitoring is important,measurement of labor effort is difficultand capital intensity is unimportant.

Significant transaction costs explainwhy corporate farms can keep their dom-inant position in Central and EasternEurope (CEE) and the FSU. However, cor-porate farms compete with family farmsfor land resources and in domestic andinternational output markets. High trans-action costs protect the existence of cor-porate farms, but they still have to choosethe production structure that moststrengthens their competitiveness on theland market relative to growing familyfarms, and on the output market relativeto domestic family farms and internation-al competitors. Thus, in transition coun-tries the crucial choice is not betweenfarm organization, but rather what pro-duction structure is chosen by corporatefarms and family farms, respectively.

Our empirical investigation of agri-cultural commodities, in which familyfarms and corporate farms, have compar-ative advantage, takes into account labor

monitoring require-ments and capitalintensity by farmtypes in ten transi-tion countries inCEE and in the EU-15. We find that:

C o r p o r a t efarms have compara-tive advantage incereals and oilseedproduction, whichhave low laborrequirement and arecapital intensive;

Family farmshave comparative

advantage in perma-nent crops (such as

fruits), which have high labor require-ment and low capital intensity;

Additional empirical tests confirmthat the observed product specializationis indeed as stated above and is similarboth in CEE and the EU-15. However,the evidence is mixed for animal sectorand field crops (potatoes and sugarbeet). In CEE small farms (which usemore labor intensive technology) special-ize in field crops, while the opposite istrue for the EU-15 (where production ismore capital intensive).

Consistent with the above, a test atthe country level finds that in countrieswhere the share of family farms on landuse is higher, a smaller area is allocatedto cereals and oilseeds and more to laborintensive crops. In these countries thenumber of livestock and pigs per ha ishigher than in countries with a lowershare of family farms on the land.

ConclusionsThus, the farm structure determines

which products the country will be com-petitive in on international markets. Ashigh transaction costs hinder the changeof farm organization in transition coun-tries, the choice of product structure ismore important than the choice of farmorganization.

Moreover, when comparing efficiencyof family and corporate farms, the trans-action costs of using markets should also

be taken into consideration. In many tran-sition countries, output markets suit largecorporate farms and prevent the develop-ment of family farms. Labor intensiveproducts usually require different types ofcontracting and vertical integration than,for example, capital intensive products.

Pavel Ciaian is a researcher at KatholiekeUniversiteit, Belgium, and Slovak AgriculturalUniversity in Nitra, Slovakia, Jan Pokrivcak,Dusan Drabik are from Slovak AgriculturalUniversity in Nitra, Slovakia. The paper was

presented at the joint IAAE-104th EAAESeminar "Agricultural Economics andTransition" in Budapest in 2007. BT

The farm structure determines which products the country will be internationally competitive in

Farm Structures in Selected Transition Countries

Albania 96 4 Czech Rep. 28 20 72 937Hungary 59 4 41 312Kazakhstan 20 80 Latvia 90 12 10 297Lithuania 89 4 11 483Poland 87 8 13 Russia 11 89 6100

Ukraine 17 83 2100

Share of totalagricultural

land (%)

Family Farms

Note: data from various years from 1997 to 2003 from national ministries ofagriculture/statistical offices

Transformed cooperative farms

Averagesize (ha)

Share of totalagricultural

land (%)

Averagesize (ha)


13/32

13


Land Policy and Farm Efficiency:The Lessons of Moldova

Dragos Cimpoies, Zvi Lerman

As a result of the agrarian reform inMoldova, which started in the early1990s and was virtually completed by2000, over one million residents becamelandowners. Many of them used theirprivately owned land to establish inde-pendent family farms, while othersentrusted their land to managers ofnewly created corporate farms. As oftoday, 50% of agricultural land inMoldova is used by individual produc-ers. This is in stark contrast to the pre-reform situation, when individuals culti-vated only 2% of agricultural land.

The shift of agricultural land fromcorporate to individual farms has led tosignificant changes in the productionstructure of Moldovan agriculture.Whileat the beginning of the reforms, the indi-vidual sector was producing 20% of agri-cultural output on less than 10% of agri-cultural land, in 2003 individual farmsproduced three-quarters of agriculturaloutput on half the agricultural land.

We analyze the efficiency and per-formance of Moldovan farms along twodimensions organizational form andfarm size.

Individual Farms MoreEfficient

The partial productivities of land andlabor estimated using national statisticsdecreased over time in both corporateand individual farms (see Figure). Yet,the land productivity of individual farmswas significantly higher than that of cor-porate farms over the entire period of

1990-2003. This is similar to other tran-sition countries. The difference in laborproductivity (which is usually higher forcorporate farms in other transition coun-tries) was not statistically significant inMoldova during this period.

Our calculations of total factor pro-ductivity (TFP) using national statisticsshow that the TFP for individual farmswas higher than for corporate farms over1990-2003. The respective means for1990-2003 were 11.5 for individualfarms and 4.4 for corporate farms.

When comparing the efficiency of spe-cific farms to the production frontier (con-structed using survey data) we find thatwhile all farms surveyed are relativelyinefficient, individual farms achieve higherefficiency scores than corporate farms,implying that they utilize land and labormore efficiently than the corporate farms.

The partial productivity measures forsmall and large farms in four recent sur-veys in Moldova show a mixed picture.Small farms have a higher partial pro-ductivity of land (output per hectare)

and a lower partial productivity of labor(output per worker); moreover, theyemploy a much higher number of work-ers per hectare than large farms.

We resolve the ambiguity in partialproductivity measures by calculatingTFP from survey data. This measure con-clusively shows decreasing returns toscale: large farms produce less per unit ofinputs in the margin than small farms.

Since large farms are typically corpo-rate farms while small farms are familyfarms, we tried to disentangle the farm

size effect and the organizational formeffect by looking at two homogeneoussamples: one of corporate farms and the

other of family farms. Our analysis ofcorporate farms shows that the land pro-ductivity clearly increases with farm size,whereas labor productivity does not.Most importantly, TFP shows a definiteincrease with farm size.

In a sample of family farms, the stan-dard of living of rural families (a proxyfor farm performance) increased withfarm size. Family farmers reporting a'comfortable' standard of living had 11hectares on average, compared with lessthan 5 hectares for farmers with 'subsis-tence' standard (sufficient to buy foodand necessities) and those on a 'poverty'income (not sufficient to buy food).Thus, policy measures should facilitateaugmentation of the small family farms.

ConclusionsOur results thus demonstrate that

family farms are more productive than

corporate farms. Farm performanceimproves with increasing size for farmsof the same organizational form, but notacross different organizational forms.

Higher efficiency of family farms doesnot necessarily imply that corporate farmsshould be eliminated. Market economieshave achieved an equilibrium farm struc-ture, which includes a mix of individualfarms (the dominant majority) and corpo-rate farms (a small minority) determinedby resource availability, managerialcapacity, and personal preferences of

farmers and investors. A similar processcan unfold in Moldova, but the develop-ment of corporate farms must be left tomarket forces, free from governmentintervention. At the same time the govern-ment should focus on improving the envi-ronment for small individual farms.

Dragos Cimpoies is associate professor atthe State Agricultural University of Moldova,Chisinau. Zvi Lerman is professor and chair atthe Department of Agricultural Economicsand Management, the Hebrew University,

Rehovot, Israel. The article is based on theauthors' paper prepared for the 2007 IAAE104th EAAE Seminar in Budapest. BT

Large farms of the same organizational form perform better

Land and Labor Productivity forCorporate and Individual Farms

CorporateIndividual

20

15

10

5

0

1990 1992 1994 1996 1998 2000 2002

a) Productivity of agricultural land

b) Productivity of agricultural labor

3530252015105

01990 1992 1994 1996 1998 2000 2002

CorporateIndividual

000 lei/ worker (2000 prices)

000 lei/ worker (2000 prices)


14/32



Alternative NonAgriculturalEmployment in Rural Russia

In comparison to developed countriesSoviet agriculture was noted for its lowlabor productivity and an accordinglyhigh rate of employment. Modernizationof agriculture during transition wasbound to reduce employment in agricul-tural production. In Russia employmenthas indeed shrunk at major agriculturalenterprises, mainly due to a falling

demand for farm produce.Simultaneously, employment on privatesubsidiary plots increased. As a result,the share of those employed in agricul-ture dropped by just 2.5 percentagepoints since 1990 to 10.4% today.

The official unemployment in ruralareas is fairly low, but the actual rate isvariously estimated at between 27 and37%, and this does not take into accountpartial employment and low wages.

Further modernization would releasestill more labor in agriculture, but at the

same time would set higher requirementsfor the quality of manpower. Yet thequality of the rural labor force has deteri-orated during the reform period. Theeducation level of agricultural workers islower than of those in other sectors. Forexample, the share of people with highereducation in agriculture is three times lessthan in the economy as a whole.

The rural population is ageing whileits more productive and energetic repre-sentatives migrate to the cities. The possi-

bilities of daily commuting to other labormarkets are restricted by long distancesand poor communications. Young peo-ple, as the potential workforce, are notoverly eager to work in agriculture. Oursurvey of 1,385 students in several highereducation institutions in Voronezh, Perm,Kostroma, Astrakhan and Ivanovo con-ducted in 2006 has shown that only 11%

of students intended to work in ruralareas, and most of them were ruraldwellers who majored in agriculture.

Thus a paradoxical situation exists inthe rural labor market: the excess ofmanpower coexists with a shortage ofskilled labor. This situation is a conse-quence of rural underdevelopment, in thefirst place, and a lack of opportunitiesfor rural people to be employed in thenon-agricultural sector.

As experiences of other countriesshow, economic development will further

reduce employment in agricultural pro-duction and only the growth of the non-agricultural sector will be able to cutunemployment, diversify the sources ofincome of the rural population andimprove its living standards,which may inturn attract skilled workers to rural areasand enable rural communities to survive.

Alternative Employment:Definition

For the purposes ofthis study we define alter-native employment asemployment in non-agri-cultural economic activi-ties, with the exception ofthe social services, and fed-eral and municipal govern-ment.Thus, such non-agri-cultural activities includegathering and pre-process-ing of wild plants, ruraltourism, commercial fish-ing and hunting, folk artsand crafts, etc.

We look at alternativeemployment in rural areas

and assess the efficiency of rural labormarket policies in two Russian regions:Perm Krai and Ivanovo Oblast. Thestudy draws on a survey of about 800rural households conducted in 2006. Ineach of the two regions we have chosentwo pairs of rural districts with matchingcharacteristics. In one pair of the districtsthe authorities implemented special

measures to create alternative jobs, andin the other pair no such measures weretaken.

Perm Krai, more economically devel-oped and prosperous (unemploymentthere is 1.5 times less and per capitamonthly income is more than doublethat in Ivanovo Oblast) renders greaterassistance to agriculture and rural devel-opment than Ivanovo Oblast. Perm Kraiproclaims an alternative employmentpolicy to be a priority, with special fund-ing allocated for the purpose. The

authorities in Ivanovo Oblast, by con-trast, support agricultural productionmainly at private farms and private sub-sidiary plots. It is important to bear inmind that the share of agriculture in thegross regional product in Ivanovo Oblastis twice that in Perm Krai (7.3% and3.6% respectively).

Unstable Economic SectorThe survey revealed that an average

rural family of 2.7 persons receivesabout 60% of family income in the formof wages, of which 40% is earned innon-agricultural activities, such as con-struction, industry, retail, services, etc.(see Figure). Non-wage incomes fromnon-farm activities (mainly wild plantsgathering) account for a mere 2% of thetotal income; however, the 18% of thehouseholds that have this source ofincome have a higher overall incomecompared to other households (butlower average wage). Thus, it may bethat the income from non-agriculturalself-employment is used to compensatefor low wages and not to augment theoverall family income.

Policies supporting nonagricultural employment in two Russian regions have so far had little effect

Yevgenia Serova, Dmitry Zvyagintsev, Tatyana Tikhonova, Olga Shik

Family Income Structure

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%Total

sample

Transfers

Ivanovo

Oblast

Perm Krai

Nonagriculturalincome

Agricultural income

Wages


15/32

15


Major illnesses are the most unpre-dictable and devastating shocks for farmhouseholds in developing economies, fewof whom have adequate health insurance.A family loses on two fronts when amajor health shock comes: it has to spenda considerable amount of money to treatthe sick member, and it loses part of itslabor capabilities when the sick memberis a major laborer in the household. In the

short run, the family has to reduce itsconsumption due to imperfect insurance;in the long run, it may fail to accumulateenough productive assets including chil-dren's education. As a result, experienc-ing a major health shock may well send afamily into both short-term poverty and aprolonged poverty trap.

Using household-level data over theperiod of 1986-2002 from 48 villages in

eight Chinese provinces, we assess theimpact of major health shocks on farmhouseholds' long-term income, children'sschool attainment and the role played byvillage elections in attaining more equalincome distribution in the village andhelping households to mitigate the nega-tive impacts of health shocks.

Continued on p. 16

Health Shocks in Rural ChinaYang Yao

Households living in villages, which held elections, can avoid income reduction due to health shocks

We found that the probability ofderiving income from non-agriculturalself-employment increases due to:

The presence of unemployedhousehold members;

Ownership of farm machines

(the possibility of providing services formembers of the community); The community's remoteness

from the districts center; The existence of a place of inter-

est in the area; A lower level of economic

development in the district (for IvanovoOblast).

To what extent does non-agriculturalemployment compete with other types ofemployment? In terms of workload, wefound that alternative employment and

working one's private subsidiary plotcannot be seen as mutually complementa-ry because they involve comparableworkloads with employment peaking inthe same season. Indeed, households withboth a core employment and a privateplot hardly have any time left for alterna-tive employment, except in the off season.

An absolute majority of respondents(88%) prefer to earn a living as hiredworkers and only 12% as entrepreneurs,with the share of potential entrepreneursamong those engaged in the non-agricul-

tural sector standing a little higher, at17%. Among those employed in the non-agricultural sector, a larger share than inthe average sample plan to change jobsor are afraid to lose their job, whichindicates a lower job satisfaction. Thismay be due to greater social vulnerabili-ty of the non-agricultural sector workers.

Considering the above, it is not sur-prising that in order to diversify incomeshouseholds will seek employment in amore stable sector of the economy andnot in the non-agricultural sector. Self-employment is likely to develop towards

increased activity working private sub-sidiary plots and not expanding non-agricultural employment.

Poor Regional PoliciesUp until now government support of

rural employment has been undulybiased in favor of promoting agriculturalproduction (including in private sub-sidiary plots). A lack of a coherent policyin support of alternative employmentlimits the opportunities for such employ-ment, as our detailed case studies in five

districts have shown. Successes achievedin some districts can be attributed mainlyto the efforts of individual enthusiasts.

A quantitative analysis of the effi-ciency of the policies in Perm Krai andIvanovo Oblast (through a comparisonof pairs of districts on various indica-tors) revealed that the existence of for-mal municipal policy to support alterna-tive employment has yet to make a dif-ference to the incomes of rural dwellers.Even so, unemployment was on averagehigher in the districts unaffected by poli-

cy. There are more car owners in the dis-tricts affected by policy but the samecannot be said of household appliances,mobile phones and computers. On thewhole only the municipal policy of onedistrict can be described as having a realimpact on the well-being and employ-ment of the local population.

The reason why policy has had nopronounced effect is firstly due to thefact that support for non-agriculturalactivities does not as yet figure promi-nently in rural development programs.Far more attention is paid to the infor-

mal employment in working subsidiaryplots, which does not remove the prob-lems of rural employment and is fraughtwith aggravated and persistent ruralpoverty. Unfortunately, there is also iner-tia in ways of thinking among the ruralpopulation. It is thought to be reprehen-sible not to cultivate land if you live in arural area. Despite the fact that invest-ments in private subsidiary plots areoften not recouped by proceeds from thesale of produce, this activity takes somuch time and effort as to leave no room

for engaging in alternative activities.The development of rural areasrequires the development of rural infra-structure; coordinated policies in the fieldof education and healthcare; the financialsupport of small rural enterprises, includ-ing a cut of interest rates on entrepre-neurial loans; information support andconsultancy services to rural entrepre-neurs; and educational campaigns amongthe rural population to change their atti-tude to non-agrarian activities.

Yevgenia Serova is the President, TatyanaTikhonova and Olga Shik are researchers withthe Analytical Center of Agricultural and FoodEconomy at the Institute of Economies inTransition (IET); and Dmitry Zvyagintsev isSenior Lecturer at the Higher School ofEconomics (Moscow). The full text of thepaper is available at: www.iet.ru. BT


16/32



Longterm NegativeImpact

In 2002, only 20% of Chinese ruralresidents had some form of health insur-ance. The most popular insurance systemstill was the traditional cooperative med-

ical system, financed by the communebudget.

A 2003 survey asked households torecall health shocks i.e. illnessesrequiring treatment in hospital or a totalmedical expenditure of over 5,000 yuan(roughly twice of the average annual per-capita income) happening to their

family members in the period of 1987-2002. The 5,000 yuan cutoff was chosenin 2002. Among the 676 reported casesof health shocks, 28.0% were inpatienttreatments with a cost of more than5,000 yuan, and 5.9% were illnesseswith a cost of more than 5,000 yuan butwithout inpatient treatment.

What are the negative impacts ofhealth shocks? Our estimations showthat a major health shock has strong andpersistent negative impacts on householdincome. In the first 16 years after the

shock, the affected household's incomedrops below its normal trajectory by anaverage of 12.3%. Therefore, healthshocks lead to a prolonged poverty trap.

Primary Schoolage Children Most Vulnerable

What is the effect of an adult familymember's illness on children's schoolattainment?

In our sample, among the familieswith children of 13-19 years old (the

middle school age range) in 2002, about20% had experienced at least one shockduring their prime-age as adults dur-ing1987-2002.

Our analysis shows that primaryschool-age children are the most vulner-able to health shocks. Experiencing afamily health shock in his/her primaryschool age will reduce a child's chancesto enter middle school (the final level ofcompulsory education) by 9.9%. At thesame time, people of middle school ageare not affected by family health shocks,

possibly because the families havebecome more resilient to the damagebrought about by these shocks.

Girls are more susceptible than boysto the damage of health shocks, and thisadds to a 5.6% gender gap that existswithout any shock happening. Having aseriously sick adult member forces afamily to reduce its daughters' chances

to attend middle school by 12.5%.We have found that birth order mat-ters, too. On average, the third or higherorder child trails the first child by 13%in his/her chances to get into middleschool. Interestingly, the misfortune isreversed when health shocks happen to afamily. In this case, the family reducesthe first and second child's chances to

attend middle school, but leaves the thirdand higher order children intact.Although China set a law for com-

pulsory nine year education as early as1986, the record shown in our samplehas not been impressive. Among peoplewho entered primary school in or after1986, only 58.4% completed nine yearsof schooling. Therefore, while providingbetter school facilities and more quali-fied teachers is important, more atten-tion should be paid to farm households'weak abilities to deal with unexpected

risks, among which health shocks are themost important.

Elections Mitigate theEffect of Health Shocks

Village elections may help farmhouseholds to deal with health shocksand, more generally, to ensure better pro-vision of public goods. They can alsoreduce income inequality. Democracydoes this by enhancing the accountabili-ty of the village government; conducting

pro-poor policies (e.g. income redistribu-tion or more spending on public projectsthat enhance the income capability of thepoor); and providing an institutionalizedmechanism for villagers to take collectiveaction, for example, a health care planthat benefits both the rich and the poor.

China began to experiment with vil-lage elections in 1987, and 12 of the vil-lages in the sample were among the firstin the nation to introduce elections. By1990, more than half of the sample vil-lages had held at least one election.

Our estimations show that the intro-duction of elections has indeed had thedirect effect of reducing the village Gini

coefficient on average by 14.3% during1987-2002. This is despite the risingincome inequality during the same peri-od (from 0.29 in 1987 to 0.35 in 2000 inrural China). Moreover, elections tend toincrease the income shares of poorer

portions of population, so the reductionof the Gini coefficient has been a resultof pro-poor policies. Moreover, electionssignificantly increase per-capita publicexpenditures. Since the level of publicgoods provision is generally low in ruralChina, it is reasonable to believe thatpoor households would benefit morefrom increased public investmentbecause the rich can rely more on theirown investment to generate income.

Have the elections specifically helpedthe villages mitigate the negative impacts

of health shocks? We have found that thisis the case. By our most conservative esti-mate, households living in villages, whichhave elections, are able to avoid theincome reduction due to health shocks by8.3 percentage points. In addition, vil-lages are more likely to set up a healthcare plan after it has started elections.

Policy RecommendationsSince 2003, the Chinese government

has begun to establish a new insurance-based rural cooperative medical scheme.

By September 2006, about half ofChina's 2,600 counties had establishedthe new system. Despite limited benefitsprovided by the system, this is a goodstart. The system should preferably becombined with provision of educationalloans to shock-hit households to releasetemporary liquidity constraints. Becausedropping out in primary school will mostlikely result in a permanent deficiency ina person's educational attainment, pro-viding health insurance and shock-relatededucational loans will bring large benefits

to the children and the society as a whole.

Yang Yao is Professor at the China Centerfor Economic Research, Peking University,China. The article is based on the author'sworking papers: "Health Shocks and Child-ren's School Attainments in Rural China"(jointly with Ang Sun), "Health Shocks,Village Elections, and Long-term Income:Evidence from Rural China" (jointly with LiGan and Lixin Colin Xu), and "GrassrootsDemocracy and Income Distribution:Evidence from Village Elections in China"

(jointly with Yan Shen). The papers are avail-able on request from the correspondingauthor, e-mail: [email protected]. BT

In the first 16 years after a major health shock a householdsincome drops below its normal trajectory by over 12%


17/32

Since the dark days of Russia's 1998financial crisis, economic growth hasbeen impressive in both its breadth andpersistence and has prompted a dramat-ic decline in the incidence of poverty forall socioeconomic groups. Taking thepost-1998 reduction in poverty as ourpoint of departure, and focusing in par-ticular on the growing rural-urbandivide, we examine the changing relativedistribution of poverty. Aside from its

relevance for economic efficiency, theincidence of poverty is also importantfrom a social justice perspective since, ifnot all population sub-groups benefitfrom economic growth, policy interven-tions may be justified.

Our study is based on 53,970 obser-vations drawn from the 2000-2004rounds of the Russian LongitudinalMonitoring Survey. Our principal meas-ure of poverty is constructed on the basisof a representative regional subsistencefood basket, for a number of distinct

demographic groups, adjusted forregional price variations.

Our analysis establishes that a sub-stantial aggregate fall in poverty inci-dence has occurred from 31.1% in2000 to 10.6% in 2004 and that theeffect of the fall has been felt broadlyacross socio-economic groups. Indeed,irrespective of whether we divide the pop-ulation according to gender, age, humancapital, labor market status or householdtype, we observe a decline in poverty.

Rural Population Accountsfor over Half of the Poor

The decline though has been far fromuniform. The improvements have beenfelt least strongly by the rural popula-tion, single adult households (with orwithout children), those without work orin low paid work and the less educated.

The most striking contrast is betweenthose in urban areas, enjoying a 78.6%

decline, and those in rural areas experi-encing just a 47.3% fall. We find that,besides experiencing a higher povertyincidence, by 2004 the rural populationaccounted for over half (59%) of thosein poverty (see Table). As a consequence,by 2004, Russian poverty had become alargely rural phenomenon.

Why might the rural population beenunable to benefit equally from the risingtide of economic growth? Possible expla-nations abound. Rural dwellers havebeen faced with fewer economic oppor-

tunities, have faced restrictions in landuse, have lost their brightest human cap-ital to urban areas, have been neglectedin relation to those in resource rich areasand remain surrounded by a decayingrural infrastructure.

A Growing "Divide" between Rural and Urban Areas

Our analysis establishes that the shal-lower decline in poverty in rural settle-ments does not stem from changing pop-

ulation character-istics or shares; itis not dependenton the use of aparticular povertyline; nor is it driv-en by the rapidexpansions thathave occurred inMoscow, St.Petersburg orother boomingurban areas.

The propor-tionate povertyreduction across

all urban areas is found to be broadlysimilar and substantially higher than theaggregate rate. It is true that the sharpestdecline was observed in Moscow and St.Petersburg but the overall impact of thison the growth in the urban-rural povertydifferential is negligible, since povertyamong individuals in Moscow and St.Petersburg accounts for less than 5% oftotal poverty.

Divergence Driven by theWorking Age Population

The labor market plays an importantrole in preserving and improving livingstandards. This being the case, the aggre-gate effect we observe may reflect urban-rural labor market differences. If so, thenit is possible that elderly individuals inrural areas may not have fallen behindtheir urban counterparts. We do find thatthe decline in urban poverty among theelderly (85.9%) exceeds the correspon-

ding rural decline (64.1%), and signifi-cantly so, though we also note that thedifference in the extent of poverty reduc-tion is closer than for working-age indi-viduals. This is important since it indi-cates that the growing divergence weobserve is primarily, though not exclusive-ly, driven by the working age population.

Understanding the different dynamicsof rural and urban poverty and their dis-tinct relations with aggregate economicgrowth is crucial if Russia is to developevenly and avoid those policies of

"urban bias" associated with embeddedpockets of poverty and social exclusion.In particular, such a comprehension isessential for the design of policy as wellas for understanding the nature ofRussia's economic development.

Christopher J Gerry and EugeneNivorozhkin are Economists at the UCLSchool of Slavonic and East EuropeanStudies. John Rigg is affiliated to the LSECentre for Analysis of Social Exclusion. Fulltext of the paper is available at:

http://www.ssees.ac.uk/wp76sum.htm and arevised version is forthcoming in theCambridge Journal of Economics (2008). BT

17


"Ruralization" of Poverty in RussiaThe ruralurban poverty divide may reflect ruralurban labor market differences and be primarilydriven by the working age population

Christopher J Gerry, Eugene Nivorozhkin, John Rigg

Poverty Rates in 2000 and 2004

2000 2004 2000 2004

Rural 39.3 20.7 47.3 40.8 59.0Moscow 18.4 2.7 85.4 2.9 3.6and St. Petersburg

Other cities > 500,000 24.3 5.6 77.1 20.8 12.5Cities < 500,000 28.9 7.2 75.1 35.5 24.9

Povertyrate

% change inpoverty rate2000/2004

% of all individuals in

poverty bysubgroup(total=100)


18/32



The Impact of International Migrationon Albanian Family Farming

Juna Miluka, Gero Carletto, Benjamin Davis, and Alberto Zezza

More than 15 years into transition,Albania remains predominantly rural:54% of the population reside in ruralareas and agriculture still employsapproximately 50% of the workforce,providing an income source to morethan 90% of the households in the moreremote north-eastern part of the country.The agricultural reforms carried out in

the post-communist period, and theresulting land redistribution, led to ahighly fragmented sector.

Albania's land reform was uniqueamong transition countries for its rapid-ity and intensity: by the mid-1990s, 94%of farmland had be

CEFIR July-September 2007

Documents

Transcript of CEFIR July-September 2007