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Case Studies for Class Discussion and Debate Agricultural Economics I: Agricultural and Food Policy Analysis

These initial case studies were primarily developed for use in class discussions and debates in the Agricultural and Food Policy Analysis course in the MA Program in Economics at the International School of Economics at Tbilisi State University (ISET). The case studies were prepared by Adam Pellillo and Lasha Labadze. These case studies are made possible by the generous support of the American people through the United States Agency for International Development (USAID). The contents are the responsibility of Tbilisi State University (ISET) and do not necessarily reflect the views of USAID, EWMI, or the United States Government.

Employment in Agriculture: How is it Defined?


Labor Force 1,959,293
(Active Population above age 15)

84.9%
1,664,190 Employment

15.1%
295,103 Unemployment

32.3%
631,963 Hired Employment

52.3%
1,025,434 Self Employment

0.3%
6,794 Undefined Emp.

0.9%
17,392 Agriculture

31.4%
614,571 Other

44.1%
864,529 Agriculture

8.2%
160,905 Other

Source: GeoStat

The National Statistics Office of Georgia produces labor force statistics using information from the quarterly Integrated Household Survey (IHS). Household members aged 15 and above are interviewed in the IHS. The household surveys are the only data source which, with an appropriate survey design, are representative of the entire population of Georgia, all branches of economic activity, all sectors of the economy, and all categories of workers. According to GeoStat, a person is employed if he/she has worked for at least 1 hour during the last seven days in order to receive a salary, profit or other (cash or in-kind) labor compensation inside the country. A job means any kind of activity, including but not limited to: farming, hunting, fishing or gathering forest fruits, mushrooms, medical plants etc., processing of any agricultural products, corn grinding, wine making, making cheese, butter, canned products and etc. sewing, knitting, making brooms, baskets, etc. Even if a person did any unpaid job at farm, household or helped friends/neighbors doing any type of job for free, he/she is considered employed. While following closely the ILO recommendations, the criteria is relatively soft because Georgian traditions and other characteristics are quite different compared to those in EU or anywhere else. For example, helping a neighbor could be very different phenomenon in Georgia and in EU. Thus, employment in rural areas is arguably overestimated and the unemployment rate in Georgian regions differs mainly due to the share of population in rural areas.

According to official statistics, in 2011, more than one million people, that is about 52.3% of total labor force, is self-employed in Georgia. The majority of self-employment is in the agricultural sector, where 44.1% of total labor force is self-employed. In other words, 51.9% of working population is self-employed and about 1% of working population is hired in agriculture. Being selfemployed in agricultural sector doesnt mean to have sufficient means for life. More than half (444,734) of those self-employed people in agriculture live in families with less than 500 GEL total monthly income, including both monetary and non-monetary incomes, pensions, remittances and other sources. If we just take people living in rural areas, we find that 93.5% are considered as employed by official statistics (according to their estimates 1,046,764 person is employed in rural areas out of 1,119,797). Normally, the labor force of a country consists of everyone of working age, typically above a certain age and below retirement, but in Georgia labor force includes participating workers above 15. About 25% of self-employed people in agriculture are pensioners. If we exclude pensioners from the labor force, unemployment rate will go up to 17.6% from its current level of 15.1%. Other interesting facts: The average family size varies in the range of 3.3-4.5 by regions. The lowest 30% of household members are employed in Tbilisi and the highest value 57% is observed in Guria. The unemployment rate is higher in Tbilisi (29.3%), followed by Adjara (18%) and Samegrelo (16.5%). The lowest unemployment rates are observed in Guria (5.1%) and Samtskhe-Javakheti (5.4%) regions of Georgia. Regions differ by unemployment due to the few reasons, except the obvious reasons, such as big industrialized cities, we could name land distribution (less unemployment in regions where land is more equally distributed). 13.8% are pensioners in the labour force. This number is one of the highest in Guria (20%). 16.1% of those who are employed is pensioner. In Tbilisi 6% of working population are pensioners, followed by 11% in Adjara and 14% in Samtskhe-Javakheti region. This number varies from 15-25% in other regions of Georgia.

Technical Appendix The household survey data are available on GeoStats http://geostat.ge/index.php?action=meurneoba&mpid=1&lang=eng The survey questionnaires are available at: http://geostat.ge/index.php?action=page&p_id=698&lang=eng Information is provided in different datasets and for the purposes of analysis it is important to merge them. The main dataset is called Tbl_Ec_stat_05, which describes economic status and other characteristics of each household member. In order to perform the above analysis first it is important to have survey weights in this database. Thus, we should merge Personal_Weights data to our main dataset. In STATA this entails using the following commands: use Personal_Weights sort uid memberno save Personal_Weights clear use Tbl_Ec_stat_05 sort uid memberno merge uid memberno using Personal_Weights drop if _merge==1 | _merge==2 We can use the following commands to calculate the numbers provided in the first chart. Active population: tabstat aqt [weight=p_weights], stat(sum) save matrix list r(StatTotal) matrix stats=r(StatTotal) di stats[1,1]/4 Number of employed people: tabstat momusave_sul [weight=p_weights], stat (sum) save matrix list r(StatTotal) matrix stats=r(StatTotal) di stats[1,1]/4 Number of unemployed people: tabstat umush_mkacri [weight=p_weights], stat (sum) save matrix list r(StatTotal) matrix stats=r(StatTotal) di stats[1,1]/4 Number of people on hired employment: tabstat momusave_sul if daqmomusave==1 [weight=p_weights], stat (sum) save matrix list r(StatTotal) web page at:

matrix stats=r(StatTotal) di stats[1,1]/4 Number of self-employed people: tabstat momusave_sul if tvitdasaqm==1 [weight=p_weights], stat (sum) save matrix list r(StatTotal) matrix stats=r(StatTotal) di stats[1,1]/4 Number of undefined employment: tabstat momusave_sul if gaurkv_momosh==1 [weight=p_weights], stat (sum) save matrix list r(StatTotal) matrix stats=r(StatTotal) di stats[1,1]/4 Number of hired employed people in agriculture: tabstat momusave_sul if brunch_converted==1 & daqmomusave==1 [weight=p_weights], stat (sum) save matrix list r(StatTotal) matrix stats=r(StatTotal) di stats[1,1]/4 Number of hired employed people in sectors other than agriculture: tabstat momusave_sul if brunch_converted!=1 & daqmomusave==1 [weight=p_weights], stat (sum) save matrix list r(StatTotal) matrix stats=r(StatTotal) di stats[1,1]/4 Number of self-employed people in agriculture: tabstat momusave_sul if brunch_converted==1 & tvitdasaqm==1 [weight=p_weights], stat (sum) save matrix list r(StatTotal) matrix stats=r(StatTotal) di stats[1,1]/4 Number of self-employed people in sectors other than agriculture: tabstat momusave_sul if brunch_converted!=1 & tvitdasaqm==1 [weight=p_weights], stat (sum) save matrix list r(StatTotal) matrix stats=r(StatTotal) di stats[1,1]/4

Seasonal Fluctuations in Khachapuri Prices ISET-PI conducts the Khachapuri Index (Kh-Index) surveys in four different cities in Georgia. Unlike traditional consumer baskets used for monitoring price inflation, the Kh-Index basket includes only those ingredients that are needed to cook one Imeretian khachapuri (cheese, butter, flour, yeast, eggs, and milk) and energy inputs (gas and electricity). ISET conducts a monthly survey of the major markets in Tbilisi, Kutaisi, Batumi and Telavi. Tbilisis survey is the oldest one and it was begun in August 2008. The survey was expanded in the other three cities later in May 2011. Based on the collected data, monthly fluctuations in the prices of all relevant ingredients are tracked and recorded. Here we discuss just a few potential reasons for price fluctuations of (Imeretian) khachapuris: 1. Climate and seasonal production: Fresh fruits and vegetables show a marked seasonal pattern of production and consumption. Khachapuri ingredients (mostly cheese and milk) are seasonal products as well and thus they follow this general pattern. Every year the Kh-index bottoms out in June, and starts on the upward swing of its 6-month seasonal cycle, reaching a maximum around December-January. Cheese is much more expensive in winter time, by more than 3 GEL per kilo. These fluctuations are of course the result of changes in supply conditions. Due to a lack of coordination among smallholder farmers and a lack of agroprocessing and storage facilities, dairy products that have a long shelf life, such as cheese, are not saved for the high season. Given that milk production peaks in April and May, too much cheese is brought to the market in May and June. As a result, cheese prices are too low at this time of the year and too high in July and August. In many countries around the world, small farmers are forming cooperatives that are helping to plan production, reduce costs and smooth the seasonal fluctuations in the prices of agricultural goods. This is not yet happening in Georgia. The fluctuations in the supply (and price) of dairy products in Georgia may be further exacerbated during the summer months because of dependence on weather conditions. Georgian farmers are not feeding their cows in the summer, letting them to fend for themselves. For example, in 2011, the scorching heat recorded in July and the early August withered pastures, leaving dairy cows without sufficient nutrition and shrinking milk production by as much as 50%. 2. Religious traditions, such as fasting, reduce the demand for meat and dairy products, etc. Every year, a month before Easter, this development is driven by the Easter Lent period that many Georgians observe. The Easter Lent decreases the demand for cheese and other dairy products, and, therefore the prices of these ingredients decrease. For example, in March 2013, the prices of cheese and butter were down by 8.7 and 2.5%, respectively, and the price of milk declined by 2.4%. The prices of dairy ingredients traditionally spike at the end of the Easter Lent and Georgians rush to get their khachapuris prepared.

Khachapuri Price Trend in Tbilisi: August 2008-December 2012


4.000 3.500 3.000 2.500 2.000 1.500 1.000 0.500 0.000 Aug-08

Apr-09

Aug-09

Aug-10

Aug-11

Aug-12

Dec-08

Dec-09

Dec-10

Dec-11

3. City characteristics, specifically the city size. Prices in larger cities change more smoothly than in smaller ones. The size of the city matters, as a bigger city means higher competition, reducing the discretion of sellers to raise the price above the input costs. In addition, smaller cities are less endowed with necessary infrastructure, such as storage facilities, making production more labor intensive and raising per unit production costs. Since May 2011, the price of making a khachapuri in Tbilisi fluctuated between 2.70 GEL and 3.62 GEL, much narrower than in other cities. The second lowest difference between maximum and minimum prices was observed in Kutaisi (1.07 GEL compared to 0.92 GEL in Tbilisi), followed by Batumi (1.26 GEL). The highest price range is recorded in Telavi (1.34 GEL).

Dec-12

Apr-10

Apr-11

Apr-12

Oct-08

Oct-09

Oct-10

Oct-11

Oct-12

Feb-09

Feb-10

Feb-11

Feb-12

Jun-09

Jun-10

Jun-11

Jun-12

Khachapuri Prices (GEL) May 2011-December 2012


4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00

Tbilisi

Batumi

Kutaisi

Telavi

Georgias Wine Industry There is a rich tradition and long history of wine production in Georgia. The word wine may even originate from the Georgian word ghvino () (BBC, 2008). Yet Georgias wine makers have faced a number of barriers to growth over time, from political instability and the absence of the rule of law in the countryside to the breakdown of trade ties across former Soviet republics. Most recently, the wine industry has had to contend with the Russian embargo. Prior to the import ban, which began in 2006, most of Georgias exported wine was shipped to its large neighbor to the north (The Economist, 2010). Since then, the export market has been diversified and major importers of Georgian wine now include Ukraine and Kazakhstan. New export markets, like China or the United States, are becoming accessible, but nevertheless current demand for Georgian wine is likely lower than it would have been in the absence of the Russian import ban. With Russias ascension to the World Trade Organization, ongoing talks with the European Union over the establishment of the Deep and Comprehensive Free Trade Area (DCFTA), and the potential for warming relations between Georgia and Russia, demand for Georgian wine may increase considerably over the coming years. This may especially be the case given recent wine promotion efforts at home and abroad, which have sparked interest in and demand for Georgian wine. Efforts to support Georgias wine industry have taken various forms, from handing out small sample bottles of wine at the airport (Figure 1 below) to promoting Georgian wine in international competitions. President Mikheil Saakashvili has been one of the more colorful promoters of the Georgian wine industry. Mr. Saakashvili even recently proposed to develop a vineyard near Tbilisis airport (Hvino News, 2012): I ask the municipality to allocate a big land plot next to the airport, where we create a large vineyard, so that the first thing a guest sees when he arrives is a vineyard. We will give all the guests a small bottle of wine, so they take it back home as a souvenir. We must teach children how to make wine in Georgia. There should not be left a single piece of uncultivated land, where a vineyard could be made. I am really fascinated by wine-making. This is part of our national ideology. Making inroads into the Russian market again may be somewhat challenging given that substitutes for Georgian wine and mineral water have already emerged (The Economist, 2013). While Georgian wines and mineral waters had relatively large market shares in Russia prior to the import ban, it may take time before such market shares are reached again. Access to the Russian market may also take longer than expected if quality inspections on the Russian side (from the agency tasked with ensuring food safety, Rospotrebnadzor) continue to delay imports of Georgian products into Russia

(DFWatch, 2013). But, on the other hand, the Georgian wine industry may find new market niches, like the production and sale of organic wine or kvevri wine or the promotion of Georgias unique wine traditions (see Bardzimashvili and Lomsadze, 2013).

Figure 1: A Warm Welcome to the Land of 8000 Vintages

References Bardzimashvili, Temo and Giorgi Lomsadze (2013). Georgia: Betting on Clay and Kvevri for Entre into International Wine Markets. EurasiaNet, September 30, 2011. Available at: http://www.eurasianet.org/node/64246. Last accessed: April 2, 2013. BBC (2008). Fading Traditions: Will Georgia Lose Its 7000-Year Old Wine Producing Tradition? BBC Radio World Service, Documentary. Available at: http://www.bbc.co.uk/worldservice/documentaries/2008/01/080131_fading_traditions_two.shtml. Last accessed: April 1, 2013. DFWatch (2013). Russia Balks Borjomi Comeback to Its Market. April 2, 2013. Available at: http://dfwatch.net/russia-balks-borjomi-comeback-to-its-market-86710. Last accessed: April 2, 2013. Hvino News (2012). President of Georgia Proposes Tbilisi Airport to Open Its Own Vineyard. May 9, 2012. Available at: http://news.hvino.com/2012/05/president-of-georgia-proposes-tbilisi.html. Last accessed: April 1, 2013. The Economist, Eastern Approaches blog. Georgias Wine Industry: What Doesnt Kill Us Makes Us Stronger. September 21, 2010. Available at: http://www.economist.com/blogs/easternapproaches/2010/09/georgias_wine_industry. Last accessed: March 30, 2013

The Economist, Eastern Approaches blog. Georgias Legendary Mineral Water. February 19, 2013. Available at: http://www.economist.com/blogs/easternapproaches/2013/02/georgia. Last accessed: April 1, 2013.

Barriers to Effective Risk Management In many agriculture-based rural economies around the world, households must contend with considerable income risks arising from fluctuations in weather patterns, input quality, availability and price (e.g., fertilizers), or agricultural product prices, among others. Income risks may be covariant across households, such that many individuals are affected by the same income shock at one time (Binswanger and Deininger, 1997), though they may also be household-specific. When agricultural lands are poorly irrigated, smallholders are dependent on rainfall, which can be highly variant in particular areas. Insurance products aimed at providing risk diversification (specifically, index insurance) can help individuals reduce or eliminate such income risks. Yet the development and subsequent take-up of these types of insurance products may be limited, but not only because premiums may be high relative to expected payouts. In a recent paper, Cole et al. (2013) use randomized field experiments to try to understand some of the non-price factors that may influence demand for rainfall insurance in India. They present evidence that demand for rainfall insurance is particularly price-sensitive. But they also find that a lack of trust, financial illiteracy, liquidity constraints, and low salience limit take-up of the rainfall insurance product. Could such findings be generalizable to the Georgian context? Its difficult to say. Its not implausible that there are similar factors influencing demand for such an insurance product. However, the product that would prospectively be rolled out in this country would vary from that rolled out elsewhere, so its difficult to say with any certainty whether the findings in Cole et al. (2013) are applicable to Georgias agricultural setting. Given that there may be barriers to developing formal insurance markets that allow for more effective risk management at the household level, it is important to better understand what informal insurance mechanisms current exist at the village level in Georgia in order to inform ongoing policy debates and discussions. For example, many individuals may find employment both on their own plots but also in the non-farm rural economy as a means to manage income risks or protect themselves against the event of a failed crop or lower than expected yields (see Banerjee and Duflo, 2011 [Chapter 6 in particular] for more on the behavior of the poor and how they cope with risk).
References Banerjee, Abhijit V. and Esther Duflo. (2011). Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty . New York: Perseus Books. Binswanger, Hans P. and Klaus Deininger (1997). Explaining Agricultural and Agrarian Policies in Developing Countries. Journal of Economic Literature, XXXV: 1958-2005.

Cole, Shawn, Xavier Gin, Jeremy Tobacman, Petia Topalova, Robert Townsend, and James Vickery (2013). Barriers to Household Risk Management: Evidence from India. American Economic Journal: Applied Economics, 5(1): 104-135.

Agricultural Cooperatives in Georgia? Agricultural cooperatives and other forms of farmers associations may have important roles to play in Georgia given fragmentation of land, limited value chain integration among smallholders, and imperfect or missing financial, insurance, and land markets.1 In addition to the above mentioned imperfect or missing markets, there is also a lack of a marketbased solution to issues of market information, agricultural research, and agricultural extension. Knowledge produced through demonstration or pilot projects may be nonrival and nonexcludable as a productive input or input multiplier and individual firms or farmers may not have strong incentives to invest in knowledge generation activities. Through sharing resources and making inputs and information available to members, agricultural cooperatives may play an important role in helping farmers when there are weather shocks, for instance, as was the case in Kakheti this past summer. Cooperatives may also play an important role as acting as a financial intermediary. Rural and agricultural credit cooperatives are active in countries like Bulgaria, Hungary, Poland, Romania, and Slovenia (Koester, 2001). Such credit cooperatives allow for access to credit for agricultural producers and others in the rural economy. Koester (2001) argues that, relative to the private banking sector, credit cooperatives may have lower transaction costs if they are smaller, located in some villages, and have better knowledge of the potential borrowers credit history and his present creditworthiness. Such credit cooperatives may also be better positioned to deal with loan risks and other informational limitations. But before rolling out any project aimed at facilitating cooperation among farmers, there are very important questions that need to be answered. First, what informal mechanisms for insurance, credit provision, or information sharing already exist at the village level? To what degree might these informal mechanisms or trade ties be crowded out (or crowded in) by the development of an agricultural cooperative? For instance, Bauer (2000: 10) discusses the following: The small-scale trader often does not supply simply marketing services to his customers. In many cases he provides credit, usually in modest sums. This credit is used for such purposes as the purchase of seeds, fertilizers, pesticides, building materials, implements, and consumer goods. Can it be presumed that an agricultural cooperative would necessarily provide better results? It really depends on the underlying market conditions, exchange mechanisms, and existing informal trade ties. Second, what kind of selective incentives are needed to promote cooperation? This is a classic problem identified by Mancur Olson (1965) in The Logic of Collective Action, which has important
1

The latter features are often common in agrarian, rural areas (Binswanger and Deininger, 1997).

implications for agricultural cooperative development. Third, if cooperatives can be part of the organizational and institutional environment that supports the agricultural sector, how can they be developed in practice? What legal or tax rules promote or hinder cooperative development? These questions, and many more, must be researched prior to implementing any projects aimed at supporting farmer cooperation. Lastly, one must wonder whether agricultural cooperatives or farmers associations can be established in a country where the word cooperative invokes images of sovkhoz and kolkhoz, the Soviet era state and collective farms. But this is ultimately an empirical question of whether experience in such farms influences current perceptions of cooperatives or other farmers associations. Additional Resources The Economist recently had an interesting piece about the last remaining Soviet collective farm (kolkhoz) in Azerbaijan. Soviet collective farms received heavily subsidized inputs (fertilizer, farming machinery, etc.). Different former Soviet republics took varying paths with regard to land reform and farm restructuring after the disintegration of the Soviet Union. In some republics, the large kolkhoz and sovkhoz (state farms) were broken up and distributed to individuals and their families, while others evolved into super-large corporate farms.
References Bauer, Peter (2000). From Subsistence to Exchange and Other Essays . Princeton University Press, Princeton and Oxford. Binswanger, Hans P. and Klaus Deininger (1997). Explaining Agricultural and Agrarian Policies in Developing Countries. Journal of Economic Literature, XXXV: 1958-2005. Koester, Ulrich (2001). Agricultural Finance and Institutional Reforms in Transition Economies: The 1990s an d Challenges Ahead. Quarterly Journal of International Agriculture, 40(4): 301-323. Olson, Mancur (1965). The Logic of Collective Action: Public Goods and the Theory of Groups. Harvard University Press.

Agricultural and Food Policy: Knowing What Works and What Doesnt There has been much discussion recently about different policies, projects, and programs to promote rural and agricultural development in Georgia. There is even talk of Georgia being on the eve of an agricultural revolution. Yet identifying which agricultural and food policies are appropriate for the Georgian context, a remarkably heterogeneous one at that, is an immensely challenging task. This is especially the case given that knowledge of local specifics (e.g., soil quality, micro-climate, input supply networks, etc.) is dispersed across many individuals in the rural economy and agricultural sector. The role of knowledge in an economy has seen much attention by economists over the years. As Hayek (1945) wrote almost seventy years ago, the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form, but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess (pp. 519). Because of this, Hayek thought that the problem of what is the best way of utilizing knowledge initially dispersed among all the people is at least one of the main problems of economic policyor of designing an efficient economic system (pp. 520). Hayek argued that because knowledge is dispersed among millions of people, it is crucial to allow the price system to coordinate economic activity.2 The price system communicates information about the availability of different inputs, goods and services. In the preface of their book, The Atlas of Economic Complexity: Mapping Paths to Prosperity, Hausmann et al. (2011) provide a 21st century update to Hayeks work on the use of knowledge in society, arguing that modern societies can amass large amounts of productive knowledge because they distribute bits and pieces of it among its many members. Yet in order to make use of this knowle dge, they argue that it has to be put back together through organizations and markets. Lastly, they argue that our most prosperous modern societies are wiser, not because their citizens are individually brilliant, but because these societies hold a diversity of knowhow and because they are able to recombine it to create a larger variety of smarter and better products. From a development perspective, the use of knowledge in society is of crucial importance. Hausmann et al. (2011) further argue that the enormous income gaps between rich and poor nations are an expression of the vast differences in productive knowledge amassed by different nations. Local productive knowledge, whatever form it might take, is also important for thinking about development policy. Pritchett and Woolcock (2004) note that valuable local practices idiosyncratic knowledge of variables crucial to the welfare of the poor (e.g. soil conditions, weather

Specifically, Hayek (1945: 526) wrote that Fundamentally, in a system where the knowledge of the relevant facts is dispersed among many people, prices can act to coordinate the separate actions of different people in the same way as subjective values help the individual to coordinate the parts of his plan.
2

patterns, water flows)get squeezed out, even lost completely, in large centralized development programs. There are also unintended consequences of policies and programs, a classic problem identified in economic thought which is also related to the role of knowledge in a society. As an example of this, consider the case of the promotion of hybrid corn in Georgia. Even assuming the best of intentions with regard to promoting higher corn yields, this program reportedly led to damage of agricultural land (Georgia Times, 2013). Determining what works and what doesnt with respect to agricultural and food policy ultimately requires an experimental approach (trial and error). Its likely that many pilot or demonstration projects or programs will not be successful, and this is something that should be recognized by international organizations and NGOs seeking to support their development.
References Georgia Times (2013). Lost Hopes of Georgian Peasants. March 25, 2013. Available at: http://www.georgiatimes.info/en/articles/88339.html. Last accessed: April 5, 2013. Hausmann, Ricardo, Csar A. Hidalgo, Sebastin Bustos, Michele Coscia, Sarah Chung, Juan Jimenez, Alexander Simoes, and Muhammed A. Yldrm. 2011. The Atlas of Economic Complexity: Mapping Paths to Pr osperity. Available at: http://atlas.media.mit.edu/book/. Hayek, F.A. 1945. The Use of Knowledge in Society. American Economic Review, 35(4): 519-530. Pritchett, Lant and Michael Woolcock (2004). Solutions When The Solution is the Problem: Arraying the Disarray in Development. World Development, 32(2): 191-212. Rodrik, Dani (2005). Growth Strategies. In Philippe Aghion and Steven Durlauf, eds. Handbook of Economic Growth, Amsterdam: North-Holland.

Institutions and Property Rights in Georgia In order to understand the potential for growth in the agricultural sector or the rural economy in Georgia, it is important to assess whether the general institutional environment poses a barrier to such growth. North (1991) defines institutions as the humanly devised constraints that structure political economic and social interaction. These constraints can be either formal (like a national constitution) or informal (like certain customs or traditions). North argues that institutions emerge in response to the need to promote order and reduce uncertainty among different economic actors. North, Wallis, and Weingast (2009) argue that, in order for a society to transition from being a natural state to an open access order, the state must ensure that property rights are protected, that there is transparency and accountability in government, and that there is generally an inclusive, free environment. A recent report by the FAO, The State of Food and Agriculture, 2012, also emphasizes the importance of a stable political and economic environment and secure property rights for the functioning of agricultural and food markets. Such a policy analysis deals fundamentally with the role of the formal institutional environment. Yet institutions have taken a wide variety of forms over time and across countries. In many places around the world, property rights may be neither well-defined nor well-protected. There is some evidence that countries with institutions which protect private property rights and constrain the executive branch of government from expropriation have better economic performance over the long run (see, for example, Acemoglu and Robinson, 2005). In the context of civil war or extreme political instability, property rights are even more poorly defined and enforced. In general, the insecurity of property rights, be they formally or informally defined, may also be a contributing factor to local or even national conflict, which may further reduce property and land use rights if there is disorder and weak rule of law in the countryside. This seems to be the case during the transition period in Georgia, when civil war, disorder, and political transition led to reduced maintenance of infrastructure and weaker investment incentives in the countryside. Many economists view the institutional environment as being of foremost importance for economic growth and development. In their recent work, Acemoglu and Robinson (2012) stress the importance of establishing inclusive economic institutions, which they define as the following: [Inclusive institutions are] those that allow and encourage participation by the great mass of people in economic activities that make best use of their talents and skills and that enable individuals to make the choices they wish. To be inclusive, economic institutions must feature secure private property, an unbiased system of law, and a provision of public services that provides a level playing field in which people can

exchange and contract; it also must permit the entry of new businesses and allow people to choose their careers. Inclusive economic institutions, as defined here, seem to relate more to the formal institutional environment than to the informal institutional environment, though, of course, the former is built upon the latter, as viewed in Williamson (2000). Lets now turn briefly to an examination of the institutions governing land ownership, land use, and the right to transfer both ownership and use to others. Institutions Governing Land Ownership and Use in Georgia Agricultural land privatization in Georgia started in 1992, shortly after the countrys independence. Arable land (1.25 hectares each) or pasture land (5 hectares each) were distributed to farmers, though their rights to this land were initially circumscribed (for example, at the time of privatization one could not privately sell land) (Jones, 2013). However, individuals were subsequently afforded the right to use or own agricultural land, as well as to transfer these use and ownership rights to others (Rozelle and Swinnen, 2004). Yet, still today, there have been reports of violations of property rights across the country. There have been numerous accounts of land being incorrectly registered as state-owned when it was fairly clear that other individuals had a customary or traditional right to such property (see Corso, 2012). This lack of protection of property rights may significantly impede development of the agricultural sector and improvements in rural incomes. This interaction between formal institutions and informal institutions indicates the feedback processes described in Figure 1 in Williamson (2000). In their growth diagnostics study, Yasya Babych and Michael Fuenfzig (2012) point to the need to improve property rights in Georgia in order to create an environment conducive to higher economic growth. Strengthening the judiciary, protecting peoples property rights, improving the rule of law, and decoupling politics and business may be some aspects of such institutional strengthening. Aside from providing direct incentives for individuals to invest in their capital, land, and education, strengthening existing institutions may also put downward pressure on real lending rates in Georgia, which are some of the highest in the world. This may thereby spark further investment in the agricultural sector and the rural economny.
References Acemoglu, Daron and Simon Johnson (2005). Unbundling Institutions. Journal of Political Economy, 113(5): 949-995. Acemoglu, Daron and James A. Robinson (2012). Why Nations Fail: The Origins of Power, Prosperity, and Poverty . Crown Publishers, New York.

Babych, Yaroslava and Michael Fuenfzig (2012). An Application of the Growth Diagnostics Framework: The Case of Georgia. ISET Policy Institute. Available at: http://www.iset-pi.ge/files/growth_diagnostics_study.pdf. Last accessed: April 4, 2012. Corso, Molly (2012). Georgia: Can Property Rights Survive the Digital Age? EurasiaNet, April 17, 2012. Available at: http://www.eurasianet.org/node/65275. Last accessed: April 2, 2013. Food and Agriculture Organization (FAO) of the United Nations. The State of Food and Agriculture 2012. Available at: http://www.fao.org/publications/sofa/en/. Last accessed: April 4, 2013. Jones, Stephen (2013). Georgia: A Political History Since Independence. I.B. Tauris & Co Ltd. North, Douglass, John Wallis, and Barry Weingast (2009). Violence and Social Orders: A Conceptual Framework for Interpreting Recorded Human History. Cambridge University Press, New York. Rozelle, Scott and Johan F. M. Swinnen. (2004). Success and Failure of Reform: Insights from the Transition of Agriculture. Journal of Economic Literature, XLII: 404-456. Williamson, Oliver (2000). The New Institutional Economics: Taking Stock, Looking Ahead. Journal of Economic Literature, XXXVIII: 595-613.

Foreign Ownership of Agricultural Land in Georgia: An Economic Perspective There are many differences around the world in the legal arrangements regarding the sale or leasing of agricultural land to foreign investors. In Georgia, foreign citizens were previously unable to purchase agricultural land under Article 4 of the Law of Georgia on Ownership of Agricultural Land. This rule was struck down as unconstitutional this past June, however, and now foreign citizens can purchase agricultural land in the country (Kvanchilashvili, 2012). From an economic perspective, how should such a ruling be viewed? Arguably, so long as any land sale is conducted in a fully transparent manner and all parties to the exchange voluntarily agree to its terms, the land sale in question can be mutually beneficial. In addition to the static benefits from the exchange, there may be additional benefits that foreign direct investment in the agricultural sector brings. For instance, such investment could lead to the adoption of new technologies and production methods which improve total factor productivity in agriculture, which may subsequently induce investment and innovation in the agro-processing sector. Its also important to note that it really shouldnt matter whether the investor is from abroad or is a citizen of the country, which was something that was noted by Elene Kvanchilashvili in her article on the topic. A voluntary exchange is a voluntary exchange and so long as it is made in a fully transparent manner, with property and land use rights being respected, all parties to the exchange can benefit. Al Jazeera recently ran an article about an Indian invasion of Georgian agricultural land. The article included the following remarks from Raul Babunashvili, the founder of the Georgian Farmers Union: "The union founder admitted the inadequacies of local agriculturalists, but said the government should focus on Georgians instead of foreigners to boost food production. "Georgian farmers lack the know-how and skills. We don't have the resources to invest in building infrastructure. That's why Georgian farmers are lagging behind, while Indians come and literally grab their land for the cheapest prices." Babunashvili said he doesn't have any statistics on how much land Indian farmers own in Georgia, but he wants immediate government action to halt foreigners from buying up prime agricultural areas. "We must stop this invasion of land-buyers from India. I call it invasion because they are coming in massive numbers," said Babunashvili."

The economic perspective above strongly contrasts with those who view foreign investors as invading Georgian agricultural land. Such views neglect the potential gains that foreign investment can bring to the agricultural sector, so long as the conditions are right. At the same time, challenges may exist regarding the definition and enforcement of property and land use rights. These can be difficult issues especially with regard to common land areas. In some cases, property and land use rights are traditionally defined and enforced, like in Mestia (Green Alternative, Georgian Young Lawyers Association, Transparency International Georgia, and Regional Media Association of Georgia, 2012). Additionally, in situations where the legal institutions governing such investments are still developing, property and land use rights violations may be more prevalent. Perhaps what ultimately matters is the legal institutions governing such investments. What differentiates a land grab from a mutually beneficial exchange in practice is the structure and enforcement of the institutions which define and protect individuals property rights and land use rights, even if these rights were traditionally or customarily defined and enforced. Issues related to land registration and the definition and protection of property rights will likely see increasing focus in the coming years as the Ministry of Agriculture is continuing to work on registering land plots (DFWatch, 2013). Since there may be legitimate concerns about violations of property rights in the process of facilitating FDI (see, for instance, http://transparency.ge/en/post/report/problems-relatedprotection-property-rights-case-mestia-july-2011), an alternative policy recommendation to "immediate government action to halt foreigners from buying up prime agricultural areas" may be immediate government action to stop violating individuals' property and land use rights in order to facilitate FDI.
References Democracy and Freedom Watch (2013). Georgia Hands Out Vouchers to Farmers. January 30, 2013. Available at: http://dfwatch.net/georgia-hands-out-vouchers-to-farmers-65503. Last accessed: April 1, 2013. Kvanchilashvili, Elene (2012). Citizen of Denmark vs. Parliament of Georgia. Tabula, September 25, 2012. Available at: http://en.tabula.ge/article-6726.html. Last accessed: April 2, 2013. Green Alternative, Georgian Young Lawyers Association, Transparency International Georgia, and Regional Media Association of Georgia (2011). Problems Related to the Protection of Property Rights The Case of Mestia. Available at: http://transparency.ge/en/post/report/problems-related-protection-property-rights-case-mestiajuly-2011. Last accessed: April 2, 2013.

Path Dependence and the Agricultural Sector Research in the field of new institutional economics suggests that institutional path dependence may play an important role in influencing present-day economic arrangements and economic behavior in the agricultural sector and rural economy. North (1991: 97) argues that institutions evolve incrementally over time: history in consequence is largely a story of institutional evolution in which the historical performance of economies can only be understood as part of a sequential story. Path dependence is the idea that the consequence of small events and chance circumstances can determine solutions that, once they prevail, lead one to a particular path (North, 1990: 94; [Arthur, 1988]). Much recent economic research assesses the role of history in economic development (see Nunn, 2009 for a review). The institutions and policies that influence the agricultural sector and rural economy seem to have much path dependence. Consider the argument put forth by Koester and El-Agraa (2003): Policies have pronounced path-dependencies. Policy instruments which have been introduced in the past cannot easily be removed as any policy change leads to winners and losers. The loss often materializes in the short or medium term, whereas the gain arises in the long-term. Take for example a reduction in politically set grain prices. Grain producers will see immediately a loss and lobby against it. Consumers may gain, if bread prices eventually decline. However, that will take time and the gain for the individual consumer is quite small as compared to the loss of the individual grain producer. Hence, it is much easier to organize producers and to lobby against price reduction than to organize consumers. This fact helps to explain why governments in democratic countries tend to be more producer than consumer friendly. It also explains why policies are as they are and that present policies are often not in line with economic reasoning. They are constrained by the past. Table 1 in Koester (2005) illustrates the degree to which the land use shares have been persistently allocated to farm enterprises in Russia, rather than individual farms or household plots, largely as a result of path dependence in the policies and institutions influencing the agricultural sector.

As another example of long run path dependence, consider why Georgia ended up being regionally known as a wine producer while Armenia became known for cognac production, as reported by Avagyan (2013): [Avag Haroutyunyan, President of Armenias Wine Growers Union] argues that for the past 150 years, first Russia and then the Soviet Union targeted the best winemaking technologies to Georgia and Bessarabia, while Armenia got the nod for cognac. This was due to the fact that under Seljuk and Persian rule Armenia had lost a majority of its grape gene pool the best Armenian vineyards were in the possession of foreign conquerors. The Georgians had an independent state in the 17th-18th century and made sure their grapes werent destroyed. Thus, when Armenia was incorporated into Tsarist Russia in 1828, we had grapes that were only suited for vodka production. When European technology reached Armenia in 1860-1870, it was quite easy to produce cognac from the grape alcohol. Thats exactly what happened, says Haroutyunyan. Armenia led Tsarist Russia in terms of cognac production. Consider also the case of path dependence in the policies and institutions influencing land structure in Georgia, as discussed by Livny (2013): The main wine producing region and historically the buffer (Sakartvelos pari) against Persia and other Moslem invaders, Kakhetiis an interesting case. To provide locals with some degree of protection against the enemy, Kakhetian villagers huddled together in dense villages surrounded by cultivated land. Demand for protection was also a cause in strengthening and sustaining the rule of local lords (tavadi) whose lands the villagers were working for much of the regions history. The

facts that Kakhetian lands remained consolidated under the lords control made them an easy target for expropriation by the Bolsheviks who turned Kakhetian villages and the lands around them into collective kolkhoz farms. The kolkhoz farms were destroyed and looted in the early 1990s while the lands they occupied were divided among their individual members. However, the availability of large contiguous parcels suitable for grape growing a very lucrative business until 2006 quickly made Kakheti an attractive target for investors, local and domestic. As a result, Kakheti is currently the leader in land consolidation. As a final example of path dependence, this time from Russia, consider that there has been much path dependence in mental models, which has resulted in persistently large (sometimes super large) farm structures across the country. This persistence in farm size is something Koester and Petrick (2010) argue cannot be squared with predictions from neoclassical economics. They argue the following: Russian society can be described as both strongly hierarchical and egalit arian. The absence of humanism, renaissance and reformation and the close alliance between government authority and the orthodox church in Russia led to a strongly patrimonial character of society. According to this view, the different phases of tsarist, communist and capitalist power and ideology only slightly dressed up the same patrimonial system. In turn, no work ethic compared to Calvinism could develop and an active civil society emerged to a much lesser extent than in west Europe. Contrary to the exercise of government power which was often perceived as autocratic or even violent, the century-old institution of the village community is seen as an arena of solidarity and reciprocity in which family ties play a dominant role. In essence, the path dependence of institutions, policies, and organizations in the agricultural sector and rural economy illustrates why history matters for their current structures and performance.
References Livny, Eric (2012). Know Thy Land or a Tale of Two Georgian Regions. The ISET Economist. Available at http://www.iset.ge/blog/?p=1089. Last accessed: April 2, 2013. Koester, Ulrich (2005). A Revival of Large Farms in Eastern EuropeHow Important Are Institutions? Agricultural Economics, 32(s1): 103-113. Koester, Ulrich and Martin Petrick (2010). Embedded Institutions and the Persistence of Large Farms in Russia. In Imre Ferto, Csaba Forgacs, Attila Jambor (eds.), Essays in Honour of Professor Csaba Csaki, Budapest, pp. 57-76.

North, Douglass (1990). Institutions, Institutional Change, and Economic Performance. Cambridge University Press, Cambridge UK. Nunn, Nathan (2009). The Importance of History for Economic Development. Annual Review of Economics, 1(1): 65-92. Sona, Avagyan (2013). Armenias Struggling Vintners: Government Promotes Cognac, People Prefer Vodka. Available at http://hetq.am/eng/news/22694/armenias-struggling-vintners-government-promotes-cognac-peopleprefer-vodka.html. Last accessed: April 2, 2013.

Urban Bias in Georgia? In a recent paper, Bezemer and Headey (2008) explored a number of sources of urban bias, the idea that policies will be developed with the specific aim of promoting urban, rather than rural, development, sometimes unevenly taxing or restricting growth in the latter. One domestic cause of urban bias, they argue, is a relatively weak political voice of [the] rural poor relative to [the] rural rich, urban rich, and even urban poor. Other sources of domestic urban bias they list include market failures in the agricultural sector, a lack of internalization of agricultural externalities, and a colonial inheritance of a dualistic economy. Some of these attributes certainly apply to the case of Georgia. In terms of international urban biases, Bezemer and Headey (2008) identify a rural bias from OECD countries (in that they support their own rural sectors and distort world market prices), skepticism about the role of government and agricultural industrial policy among aid experts, and the perception that rural projects and agricultural research, development, and extension have not been successful. Some of these factors most certainly apply to the case of Georgia, especially when it comes to accessing the European market. In terms of its economic consequences, urban bias may lead to relatively low incomes in the agricultural sector. This is indeed something that seems apparent from Georgian household data (see Figure 1). In fact, of all economic activities considered in Figure 1, the average monthly salary of employees involved in agriculture, hunting, and forestry, or fishing, is quite low. Of course, incomes from those involved in agroprocessing may be somewhat higher, but at least at the household farm level the average monthly salary from such activities is quite low. An Industrial Policy for the Agricultural Sector? Some academics and policymakers support relatively more activist government policies with respect to the agricultural sector, with Bezemer and Headey (2008) even calling for an agricultural industrial policy. However, it is worth considering that establishing an enabling institutional environment first and foremost may be a more effective strategy. It is difficult to know which specific industries should be supported and the market may come up with these solutions more effectively than the government. Consider, for instance, that Rustavis used vehicle market has sprang up more or less because of the creation of an enabling registration and customs environment (Corso, 2011). The same thing may be said for promoting rural and agricultural development, in that getting the institutions right and promoting a generally enabling environment may lead to more efficient investments and sectoral development.

Figure 1: Average Monthly Salary of Employees by Economic Activity


Total Agriculture, hunting and forestry Fishing Mining and quarrying Manufacturing Production and distribution of electricity, gas and water Construction Wholesale and retail trade; repair of motor vehicles and personal and household goods Hotels and restaurants Transport and communication Financial intermediation Real estate, renting and business activities Public administration Education Health and social work Other community, social and personal service activities GEL 2011 636.0 392.6 271.1 838.6 552.2 877.0 738.5 548.9 342.4 873.8 1386.3 674.3 998.8 319.6 522.9 511.5

Source: GeoStat

Those who are employed in Georgia tend to be self-employed rather than hired labor (see Figure 2 below).

Figure 2: Employment Situation in Georgia

Source: GeoStat On the other hand, an industrial policy for the agricultural sector may indeed be warranted, especially given the number of challenges related to the emergence and development of specific markets (markets for rural credit, insurance, land, inputs and outputs, etc.). But what form will such an industrial policy take? It is one thing to say support the agricultural sector but it is another thing to devise context-appropriate policies, something that is discussed by Rodrik (2005) in our class discussions. For example, much of the irrigation and drainage infrastructure across the country is in ruins and it has seen little maintenance since the fall of the Soviet Union. Yet extreme caution should be used when reconstructing any irrigation or drainage infrastructure. During Soviet times, as noted by Ellman (1988), large scale irrigation and water control projects that took place during the Brezhnev era had a devastating effect: by 1985 30 per cent of the irrigated black earth land was unfit for agriculture because of salinity and the formation of bogs. This is an important issue again related to local knowledge and how to best support agricultural and rural development.
References Bezemer, Dirk and Derek Headey (2008). Agriculture, Development, and Urban Bias. World Development, 7: 1-40. Corso, Molly (2011). Georgia: Riding the Road to Export Riches in a Used SUV. EurasiaNet, June 11, 2011. Available at: http://www.eurasianet.org/node/63769. Last accessed: April 1, 2013.

Ellman, Michael. (1988). Soviet Agricultural Policy. Economic & Political Weekly, 23(24): 1208-1210. Rodrik, Dani (2005). Growth Strategies. In Philippe Aghion and Steven Durlau f, eds. Handbook of Economic Growth, Amsterdam: North-Holland.

The Puzzle of Agricultural Productivity in Georgia In a recent blog post for The ISET Economist, it was argued that it was puzzling why Georgias labor productivity in agriculture had such a weak recovery relate to other former Soviet republics in transition. According to official statistics, most employment in Georgia takes place in the agricultural sector. Yet the sectors value share in GDP was only 11 percent in 2007 (World Bank). This is rather puzzling considering that Georgia was one of the most productive republics during the Soviet era in terms of food, wine, tea, and mineral water. Even more puzzling was why Georgia was the only former Soviet republic in which agricultural labor productivity (a partial measure of agricultural productivity) is still less than what it was in 1992, at least according to the most recently available data. Specifically, according to World Bank figures, labor productivity in agriculture was only 77 percent of its 1992 level in 2010. This variable is specifically defined as agriculture value added per agricultural worker in constant 2000 US dollars.

2000

4000

6000

Agricultural Productivity

0
1990

1995

2000 Year

2005

2010

Data source: World Bank

2000 0
1990

1995

2000 Year

2005 Azerbaijan Estonia Kazakhstan Latvia Moldova Tajikistan Ukraine

2010

Armenia Belarus Georgia Kyrgyz Republic Lithuania Russian Federation Turkmenistan Uzbekistan

A number of economic and political circumstances have contributed to Georgias relatively poor agricultural labor productivity growth since the time of transition, as discussed in the comments section of the blog post. Foremost among these are likely to be the onset of violent conflict in the early 1990s and the subsequent political instability, a weak enabling environment for foreign investors, and the Russian import ban on agricultural products, mineral water, and wine from Georgia. Yet there are broader questions that should be considered about the puzzle of agricultural productivity in Georgia. For one, it is likely that these figures are measured with no small amount of error. Is it likely that labor productivity in agriculture is indeed that much higher in Armenia than in Georgia? Other questions relate to how value added is calculated, how the value of inputs into the production process is calculated, and how employment is considered. Many of the rural selfemployed in Georgia are considered to be agricultural workers though it is difficult to say to what degree they are fully employed in the sector. In this sense, the official statistics may actually underestimate the degree to which labor productivity in agriculture has improved in recent years. Its also worth bearing in mind that a significant fraction of Georgias total economy is in the informal sector. A recent estimate from Schneider, Buehn, and Montenegro (2010) suggest that the total size of the overall shadow economy in Georgia was about 62 percent of officially recorded GDP in 2007, which suggests there is indeed much informal economic activity taking place across the country. Productivity gains at the farm household level may therefore be much greater than what is officially captured in national accounts statistics. It is also crucial to note that while each country considered is a former Soviet republic, the transition experiences of each country are remarkably heterogeneous. Estonia, Latvia, and Lithuania are members of the European Union and agricultural producers there benefit from generous, albeit distortionary, support measures. Countries like Uzbekistan have improved agricultural labor productivity, but at the high cost of forced labor. Clearly this is not a trajectory Georgia wants to follow.

Lastly, it is also important to consider the argument made by Sen (1999) about development as freedom. In his book, he argued that development can be seen as a process of expanding the real freedoms that people enjoy. Focusing on human freedoms contrasts with narrower views of development, such as identifying development with the growth of gross national product, or with the rise in personal incomes, or with industrialization, or with technological advance, or with social modernization. Growth of GNP or of individual incomes can, of course, be very important as means to expanding the freedoms enjoyed by members of the society. But freedoms also depend on other determinants, such as social and economic arrangements (for example, facilities for education and health care) as well as political and civil rights (for example, the liberty to participate in public discussion and scrutiny). Arguably, when gains to labor productivity in agriculture come at the expense of individual rights, they should not be seen as legitimate or what we think of as development. As Sen (1999) argued, real development requires the removal of major sources of unfreedom: poverty as well as tyranny, poor economic opportunities as well as systematic social deprivation, neglect of public facilities as well as intolerance or overactivity of repressive states. At the end of the day, more household-level, survey-based research is needed to better understand the binding constraints to local agricultural labor productivity growth and which policies can help support pro-poor growth in the sector.
References Schneider, Friedrich, Andreas Buehn, and Claudio E. Montenegro. (2010). New Estimates for the Shadow Economies All Over the World. International Economic Journal, 24(4): 443-461. Sen, Amartya (1999). Development as Freedom. First Anchor Books. The ISET Economist, The Puzzle of Agricultural Productivity in Georgia (and Armenia). October 11, 2012. Available at: http://www.iset.ge/blog/?p=836. Last accessed: April 1, 2013. The World Bank. World Development Indicators Dataset. Available at: http://data.worldbank.org/indicator.

Agricultural Production and Agricultural Processing: The Foundations of Agrobusiness When thinking about supporting rural and agricultural development, its important to remember that both agricultural production and the processing of agricultural products are both considered to be part of agribusiness (see Table 1, for the case of Georgia). Sparking development in terms of agricultural productivity (total factor productivity in agriculture, that is), may reduce the market price of these agricultural products, making it relatively more profitable for those engaged in agricultural processing. This may induce greater investment in the agroprocessing industry such that there are (literally) fewer low hanging fruits across Georgias agricultural sector. Table 1: Georgias Agrobusiness Sector in 2011

Data source: GeoStat

Georgia: From Subsistence to Exchange How can subsistence agricultural production be replaced by production for the market? This question is at the heart of Peter Bauers (2000) inquiry into the process of economic development. Bauer (2000: 8) noted the following: Advance from subsistence production involves trading activity. This is obvious at a simple level. There can be no production for sale without an outlet and an accessible conduit to it. Producers also need to buy inputs, such as simple tools and equipment. And they will not produce for sale unless they can use the proceeds to buy goods and services they want. The purchase of inputs and of incentive goods and production for sale are, in turn, closely linked with credit. This is required for the purchase of inputs used in the production of the crops, whether seasonal crops or slow-maturing trees, and also in many cases for sustaining producers until their crops are harvested. Traders are an effective and convenient source and channel of such finance. In these circumstances, production of cash crops, trade, and credit are intertwined. But the significance of trade extends far beyond these pipeline services. Contacts through traders and trade are prime agents in the spread of new ideas, modes of behavior, and methods of production. External commercial contacts often first suggest the very possibility of change, including economic improvement. These insights have clear application to the case of Georgia, especially when thinking about regional trade and market access. As discussed in the case study above, the lack of access to the Russian market, due to the embargo of 2006, has effectively severed many of the trade ties that did or would have existed between Georgian farmers, agroprocessing firms, and Russian importers, for instance.
References Bauer, Peter (2000). From Subsistence to Exchange and Other Essays . Princeton University Press, Princeton and Oxford.

Is Corruption a Constraint to Growth in the Agricultural Sector? This course has emphasized the importance of an enabling environment for promoting rural and agricultural development. One political economy issue we discussed in class is whether corruption presents a constraint to growth in the agricultural sector (or agribusiness in general). This is an open question in the political economics literature and there is a variety of viewpoints on the issue. Is it the case that corruption grinds the wheels of rural and agricultural prosperity, or does it sand the wheels? Lets look briefly at just a few perspectives on this topic, considering the more general situation for the economy. There has been much discussion recently about corruption and development. Recently, David Cameron, Britains Prime Minister, wrote an op-ed about tackling global poverty in which he argued that there should be greater focus in the international development agenda on supporting the rule of law, the absence of conflict and corruption, and the presence of property rights and strong institutions in developing countries. Chris Blattman, an economist at Columbia University, questioned why corruption should be considered up there with property rights, conflict, or the rule of law. He suggested that corruption may not be as detrimental to growth as one might think: It helps to remember: every economic marvel of its dayfrom the US to China to (dare I say) England were paragons of corruption. Few can match Tammany Hall or the Chinese Communist Party in their ingenious machinations. Its not clear this is a hindrance to development. Taking the long view, corruption may even be part of the glue that keeps societies from falling apart in the midst of transformative economic changelike it or not, elites need something to compensate them for losing their influence, or theyre unlikely to let go without a fight. My feeling: Anti-corruption is a 20th century Anglo-American fetish, important, but nowhere near as important as political stability or basic property rights. The exception might be kleptocratic rulers like Mobutu. They are major impediments to, well, everything important to their citizens. But Id argue theft of that magnitude is merely a symptom of the much more important institutional issuesthe absence of any check or balance on Presidential power foremost among them. Fix the underlying institutional problems of over-centralized political power before picking at corruption around the edges. In his second post, Professor Blattman argued that

Most of us fail to imagine that corruption can also grease the wheels of prosperity. Yet in places where bureaucracies and organizations are inefficient (meaning entrepreneurs and big firms struggle to transport or export or comply with regulation), corruption could improve efficiency and growth. Bribes can act like a piece rate or price discrimination, and give faster or better service to the firms with highest opportunity cost of waiting. Other economists, including Daron Acemoglu and James Robison, Peter Boettke, and Tyler Cowen, have since weighed in on the debate. Professor Blattmans comments echo those of Mancur Olson, who, in Power and Prosperity: Outgrowing Communist and Capitalist Dictatorships, made the following argument regarding market-contrary policies (distortionary price ceilings, for instance) and corruption (p. 108): legislation or regulation that is market contrary must leave all or almost all parties with the incentive to evade the law, and it is likely to promote criminality and corruption in government. Thus, one reason why many societies have a lot of corruption in government is that they prescribe outcomes that all or almost all private parties have an incentive to avoid, and no one in the private sector has an incentive to report violations to the authorities. Moreover, when caught in violation of the rule, those on both sides of the market have the same incentive to persuade or bribe the officials not to enforce the law. Essentially all of the private-sector incentives are on the side of undermining the rules. Sooner or later, the government becomes corrupt and ineffective. These are important points to consider when thinking about the impact of corruption on development. When policies or institutions are perversely market contrary (think central economic planning during the Soviet era) or when political losers have to be compensated in order to get market-oriented reforms out the door, corrupt dealings could grease the wheels of prosperity. Yet corrupt dealings can also sand the wheels of prosperity by facilitating the misallocation of resources and by increasing the cost and uncertainty of doing business. It is not unlikely that most of the corrupt dealings that took place in Georgia prior to the Rose Revolution had much more of a sand effect than a grease effect on growth. The following excerpt from Fighting Corruption in Public Services: Chronicling Georgias Reforms illustrates how systemic and distortionary corruption was in Georgia less than a decade ago: In 2003, corruption permeated nearly every aspect of life in Georgia. Perhaps the most visible and hated manifestation of the pervasive corruption was the traffic

police. Dressed in shabby Soviet-era uniforms, the mostly corpulent traffic police were stationed at nearly every road crossing in the country. They wielded wooden batons to flag down hapless motorists and extort bribes, usually for fabricated infractions. Motorists were not the only targets; the bribe-hungry traffic police often nabbed pedestrians as well. Most other government services were also rife with corruption. Bribes were needed to get a passport, register property, start a business, or build a home. Entrance to state universities required bribes, and additional payments helped secure good grades and even degrees; mastery of subject matter was optional. Citizens paid officials to obtain drivers licenses (knowing how to drive was not required) and pass vehicle inspections. Restaurants bribed inspectors not to arbitrarily close enterprises that met sanitary standards and to turn a blind eye to enterprises that did not. Corruption in tax administration decimated revenue collection and spawned elaborate schemes to steal what little revenue was collected. Only a few people paid their utility bills, with many risking their lives to establish illegal power connections. Criminal gangs, called thieves-in-law, operated with impunity, engaging in extortion, smuggling, carjacking, theft, and protection rackets. They often allied with government officials to rig contracts and otherwise plunder the treasury. Many corrupt government officials had been enriching themselves for years. State officials who officially earned $100 a month or less and were banned from holding a second job owned large villas and significant other assets, according to Zurab Adeishvili, the minister of justice. Prosecutors were also corrupt, routinely trumping up charges as a source of bribes with which to augment their salaries or finance legitimate investigations. In his response to Blattmans posts, Tyler Cowen, an economist at George Mason University, put forth the following argument: the correct corruption/poverty model may have multiple equilibria, depending on expectations. In that setting, making your country look clean may improve outcomes by shifting the economy up to better equilibria, even if corruption isnt a direct cause of greater prosperity. There is worse advice than Act like a rich country, and in the meantime you may become one, at least provided you do not take this as liberty to spend above your means or to slack off with the work hours. After the Rose Revolution took place in the fall of 2003, the new government restructured the rules of the game for government bureaucracies and changed how the rules were enforced (for example, by increasing public sector wages, by developing better mechanisms for monitoring public workers, and by abolishing certain agencies altogether). The reforms seemed to effectively tackle corruption in public services.

It looks as if the anti-corruption reforms indeed shifted the economy up to better equilibria, especially with regard to increased investment, trade, tourism, and donor support. And I suspect that the anti-corruption reforms also had a direct impact on growth by finally allowing people to interact in markets without severe impediments and by reducing the uncertainty of the business environment. Yet we really dont know for sure. For one, there were other reforms under way at the same time. Its therefore hard to say what growth would have looked like in the absence of the anti-corruption reforms and in the presence of other policies and institutional reforms. Also, it may be the case that corruption simply shifted shapes and that elite corruption was never properly addressed. We may not have sufficient information about the occurrence, type, and magnitude of corrupt dealings in Georgia before and after the Rose Revolution. Further, because of other ongoing problem areas (for instance, the Russian import ban starting in 2006 and the war with Russia in 2008), it would be difficult to identify whether the anti-corruption reforms indeed promoted more growth in the agricultural sector. There is, at least to my knowledge, no natural experiment that would allow us to precisely isolate the effects of the anti-corruption drive after the Rose Revolution. There is one final point to consider. Much of the discussion that has taken place about increasing focus on the rule of law, the absence of conflict and corruption, and the presence of property rights and strong institutions in the international development agenda assumes these policy objectives can be chosen and implemented if sufficient resources are devoted to achieving them. Yet to what degree can the international community actually support developing countries in achieving these objectives? Institutional changes like these are intensely political matters and its unclear ex ante whether intervening into these processes does more good than harm. Ultimately, much more research needs to be conducted on the specific mechanisms by which corruption influences growth in the agricultural sector and the rural economy, if it does at all.

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