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Does it Make Sense to Subsidize Smallholder Georgian Agriculture, and if so How?

While Georgia never faced anything like a wartime food crisis, the agricultural policies implemented by the Georgian Dream coalition government in 2013-2015 did not lack in ambition, seeking to make up for more than a decade of “active neglect” of Georgia’s smallholder agriculture by the Saakashvili administration. In this piece, we take a critical look at one of the first government initiatives, the Agricultural Card Program, introduced in February 2013. 

According to the then Minister of Agriculture David Kirvalidze, the program aimed to “revive Georgia’s lost villages”, providing up to 600,000 Georgian smallholders with input subsidies and free plowing services to the tune of 190mln GEL. Incidentally, Kirvalidze had to resign just a few months later, on May 2, amid a scandal involving MoA officials accused of misappropriating public funds allocated to the program. Despite this major setback, the program continued with some modifications and (much) reduced budgets in 2014 and 2015.

A summary of key program parameters, as they evolved in 2013-15, is provided in Table 1.

Table 1: Agricultural Card Program, 2013-2105


table

As the program enters its third year, we tried to understand how effective it was in achieving its stated objectives: revitalize Georgian villages, increase the total area of land under cultivation and, ultimately, boost agricultural production. Another set of questions relates to the program’s efficiency: how well did it do in terms of targeting its beneficiaries and addressing their needs. In the end, the million-dollar question to ask is whether programs of this type make good use of taxpayers’ money. (Money, we should be reminded, that is at least in part raised through taxes levied on commercial farmers, Georgian food producers and food imports.)

Our analysis is based on official statistics concerning land use and agricultural production, as well as in-depth interviews and focus groups with program beneficiaries, sellers of agricultural inputs and providers of machinery services in Tbilisi and Georgia’s regions: Mtskheta-Mtianeti, Kartli, Kakheti in the east; Kvemo Kartli and Samtskhe-Javakheti in the south; Guria and Samegrelo in the west.


IMPROVEMENTS IN PROGRAM DESIGN

Launched without much preparation in the rush to support the spring sowing campaign of 2013, the Agricultural Card Program (ACP) subsequently went through significant modifications. The overall budget of ACP was cut from 190mln in 2013 to 50mln in 2015. These “savings” were achieved, first, by excluding households owning plots larger than 1.25ha, and, second, by dramatically reducing subsidies for all farm sizes and types.

The basic logic of the program, however, remained intact. Owners of the smallest plots (not large enough for tractor cultivation) were offered subsidized inputs. Owners of slightly larger plots got subsidies for cultivation services or inputs, depending on crop types.

In 2014, a significant effort was made to verify and expand the list of beneficiaries from 710,000 to 800,000 farmers. Additionally, better targeting was introduced by distinguishing between farmers involved in perennial crops (e.g. hazelnut, mandarin, and apple growers), who do not use tractor cultivation but could benefit from subsidized inputs, on the one hand, and those growing annual crops (maize, wheat, etc.), on the other.

To avoid price inflation, the government set maximum prices on inputs sold through retail shops registered with ACP. The number of registered input suppliers increased over time with many veterinary and plant protection shops opening in various municipality centers.


ACHIEVING POSITIVE IMPACT

The program is certain to have achieved impact in terms of increasing the amount of land under cultivation and encouraging smallholders to use chemicals (fertilizers, pesticides, etc.) and machinery services. In particular, sown areas have grown by 25% since 2010 (see Chart 1). Likewise, as shown in Chart 2, production of almost all annual crops increased in 2013, suggesting that ACP has had a positive short-run effect on farmer’s productivity. While not all these improvements can be fully attributed to ACP, the program was certainly a contributing factor.

Chart 1. Sown areas

Mar-30_2015_500_1_

Source: own calculations based on GeoStat data

It is also important to note that the program is likely to have achieved longer-term impacts as well. In particular, any capital investments made by the project beneficiaries as a result of ACP – e.g. by using money saved on inputs and cultivation services – will have a lasting positive effect on productivity. The same is true about permanent improvements in farmers’ awareness about the benefits of modern agricultural inputs (e.g. seeds and chemicals) and practical experience in their application.

Finally, another impact of the program is concerned with improvements in farmers’ access to inputs as ACP has visibly increased both the number of suppliers and the variety of inputs available to farmers.

Chart 2. Production of annual crops, 2012-13

Mar-30_2015_500_2

Source: own calculations based GeoStat data

BUT OFTEN MISSING THE TARGET!

Our study suggests that the program suffered from many design flows, resulting in inefficient use of scarce public resources.

First, the program’s design failed to take into account that the vast majority of agricultural plots are not properly registered. Since Georgia’s cadastral map is far from complete, data on land ownership (the basis for determining the size and type of subsidy to be provided) was in many instances collected informally, with the help of “village elders” and based on unverified information volunteered by the households. We heard of many instances in which cards were received by urban households who formally own agricultural land but are not at all involved in agricultural activities. On the other hand, many farmers were denied government subsidy because they did not formally own the land they cultivated.

Targeting, or rather lack thereof, was another major issue. In Dedoplistkaro (Kakheti) we heard that cards were systematically exchanged or traded. In many cases, farmers preferred to trade-in their “plowing cards” and receive extra points on their “agro cards” (allowing to buy extra inputs). Giorgi Z., 27 y.o., explained: 

You can hire a private tractor for 20 GEL for service and 20-25 liters of diesel per ha. Whereas in case of Meqanizatori [state-owned machinery service center], you need to pay 115 GEL per ha plus a mileage fee”.

While this type of exchange improved upon the initial allocation of subsidies by the ACP, we also heard of the much less welcome phenomenon of medium-size farmers (owning 10-20ha of land) systematically buying cards from smallholders at a 20-40% discount. As it turns out, many of the smallholders simply lack the manpower and/or desire to engage in agricultural production, preferring to get cash instead. Thus, we documented instances in which “farmers” granted cards to friends and neighbors, or – much less auspiciously – exchanged them for alcohol. It goes without saying that it would be more efficient to support such “farmers” using social, rather than agricultural policy tools.

Yet another issue with targeting concerns the great variety of climate and soil conditions across Georgia’s regions. For instance, in Satskhori village (Mtskheta-Mtianeti) we were told that neither tractor cultivation nor agricultural inputs are the binding constraints for increased productivity. In east Georgia, the binding constraint is irrigation. Irakli K. (51 y.o.) was quite explicit on this point:

“The card program costs a lot of money. Rather than getting vouchers we would like the government to spend this money to improve irrigation. If there is no irrigation, money spent on chemicals or plowing is money wasted”.

Conversely, irrigation is not an acute problem in western Georgia. The farmers we interviewed in Guria and Samegrelo report greatly increased land utilization and use of fertilizer as a result of ACP. Their main complaint is that the amount of subsidy was slashed after 2013, suggesting that the program is unlikely to be sustained. 

“The main issue for us to be able to sell our products and to be assured of a reasonable price, suggested Lasha L. (37), a smallholder from Shukhuti village, Guria. “The money that was spent on this project could be used to build two juice processing factories in our region,” he added.  

Sustainable market access was identified as the binding constraint in other regions as well. According to Rati Sh. (25) from Uraveli village in Samtskhe-Javakheti:

“Markets for agricultural products is the key issue. A farmer has around 1-1.5 tons of potato to sell during the year. Clients are not coming to the village. The price of 0.30-0.40 GEL per kg is not acceptable for farmers. The government should support farmers by ensuring stable prices. If this will be done, people will start plowing and planting without any vouchers.”

An excellent summary was provided by Giorgi A. (43) from Dedoplistkaro, Kakheti. “To be efficient, government policies have to be better targeted”, he said:

It would be far better if government support programs were region- and sector specific. For instance, in our municipality people have larger plots of land than elsewhere. Georgia is a small country but every region specializes in different kinds of crops and has different needs. One-size-fit-all approach is not going to work.”


GOING FORWARD

The fact that the ACP budget has been cut over time from 190 to 50mln GEL suggests that, in MoA’s own assessment, the program’s effectiveness has been rather limited. While the data that are available to us are too scanty to allow for the final conclusions to be drawn, we can suggest a number of improvements in program design should it be implemented in the future.

First, better targeting must be a primary concern. Targeting could be improved through more precise identification of land ownership and tailoring to local condition. At the same time, one should take into account that better targeting increases the administrative cost of the program.

Second, agricultural cards and similar input subsidy programs should have a clear exit strategy. Input subsidies have distorting effects (causing people to use too much of the subsidized input) and therefore are not the most efficient form of delivering assistance to smallholders in the long run. The main argument in favor of input subsides is that they trigger market development and technology adoption at the initial stage: help small input suppliers develop their businesses; introduce farmers to the use of modern inputs; forge closer links between farmers and input suppliers. A possible exit strategy for an input subsidy program may involve informing farmers from the beginning that the value of vouchers will be reduced over time. After several years (ideally 5-6) subsidies could be transformed into crop credits (to be paid back after harvest).

Third, an input subsidy program, such as ACP, should be accompanied by a training program targeting both farmers and input suppliers, introducing them to new technologies and proper use of inputs (fertilizers, herbicides, pesticides, etc.). In the absence of such training, subsidized inputs are likely to be used inefficiently, potentially even damaging crops.

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Guest - Humph Abbott on Monday, 30 March 2015 23:10

Hi Eric and team.

What evidence do you have to justify the assumption implicit in your first and second charts and supporting texts that the growth in cultivated areas and production is coming entirely from smallholders eligible for the card scheme ?

Hi Eric and team. What evidence do you have to justify the assumption implicit in your first and second charts and supporting texts that the growth in cultivated areas and production is coming entirely from smallholders eligible for the card scheme ?
Guest - Eric Livny on Tuesday, 31 March 2015 17:03

Thanks for the question, Humph! We don't have any evidence and, in fact, are not claiming that "the growth in cultivated areas and production is coming ENTIRELY from smallholders eligible for the card scheme." We are actually quite tentative in our conclusions. There has been growth in both of these parameters, and there are reasons to think, including some of our interviews that the card scheme was a contributing factor. Even those who say that there could have been better uses of public funds received their cards and did something with them.

Thanks for the question, Humph! We don't have any evidence and, in fact, are not claiming that "the growth in cultivated areas and production is coming ENTIRELY from smallholders eligible for the card scheme." We are actually quite tentative in our conclusions. There has been growth in both of these parameters, and there are reasons to think, including some of our interviews that the card scheme was a contributing factor. Even those who say that there could have been better uses of public funds received their cards and did something with them.
Guest - Salome on Tuesday, 31 March 2015 18:17

Thank you for your question. Majority of respondents claimed increase in output and sown areas, but you would probably agree, that this is not enough for assessing the impact. The issue of attribution is definitely very important and as Eric mentioned, in our article we just suggest that the program might contribute to the increase in sown areas and output. In order to claim this, one would need to assess first of all changes in the output if any (and we see that output increased), then one should focus on counterfactual and try to estimate what would have happened without the project. The average growth rate in output or sown areas might be helpful in assessing counterfactual and defining attributable change.

Thank you for your question. Majority of respondents claimed increase in output and sown areas, but you would probably agree, that this is not enough for assessing the impact. The issue of attribution is definitely very important and as Eric mentioned, in our article we just suggest that the program might contribute to the increase in sown areas and output. In order to claim this, one would need to assess first of all changes in the output if any (and we see that output increased), then one should focus on counterfactual and try to estimate what would have happened without the project. The average growth rate in output or sown areas might be helpful in assessing counterfactual and defining attributable change.
Guest - mfmsm on Tuesday, 31 March 2015 03:15

Excellent work. The sown area has demonstrably gone up. I can see that just looking at the local fields.Not happy to hear of pesticides. Georgia should become an organic farming leader. There is huge demand for that in western European supermarkets, when the export phase is reached. But for that, you would have to aggregate cleverly. Airport at Marneuli is my idea. True - I think - about irrigation in Kakheti. Mr Singh suffered because of that. Locally, too many mindless pine trees are being planted. There is nothing to stop schools cultivating their lands and teaching the students ecology in the process. Many students will actually teach the teachers! The produce can be sold or exchanged locally.

Excellent work. The sown area has demonstrably gone up. I can see that just looking at the local fields.Not happy to hear of pesticides. Georgia should become an organic farming leader. There is huge demand for that in western European supermarkets, when the export phase is reached. But for that, you would have to aggregate cleverly. Airport at Marneuli is my idea. True - I think - about irrigation in Kakheti. Mr Singh suffered because of that. Locally, too many mindless pine trees are being planted. There is nothing to stop schools cultivating their lands and teaching the students ecology in the process. Many students will actually teach the teachers! The produce can be sold or exchanged locally.
Guest - Ia on Tuesday, 31 March 2015 19:01

Thanks for your comment.

I agree with you that if we consider quite high quality of Georgian soil and variety of climate conditions/zones in Georgia, one can argue that there is a great potential for Georgia to generate unique, geographically denominated products and engage in organic farming. Since organic food needs to be produced under certain standards that restrict the use of pesticides and fertilizers, the amounts of those type of agricultural inputs should be reduced in the future. Hopefully in the future Georgia follows that path and capitalizes on its potential.

However majority of our respondents were small subsistence farmers who produce for their own consumption and rarely sell their products.That's why their potential in terms of organic production is quite limited. Currently their productivity is very low and their production is hardly enough to fulfill their own demands. That's why one of the goals of the project was to ensure that these small scale subsistence farmers start to plow their land and increase their self-sufficiency level.

Thanks for your comment. I agree with you that if we consider quite high quality of Georgian soil and variety of climate conditions/zones in Georgia, one can argue that there is a great potential for Georgia to generate unique, geographically denominated products and engage in organic farming. Since organic food needs to be produced under certain standards that restrict the use of pesticides and fertilizers, the amounts of those type of agricultural inputs should be reduced in the future. Hopefully in the future Georgia follows that path and capitalizes on its potential. However majority of our respondents were small subsistence farmers who produce for their own consumption and rarely sell their products.That's why their potential in terms of organic production is quite limited. Currently their productivity is very low and their production is hardly enough to fulfill their own demands. That's why one of the goals of the project was to ensure that these small scale subsistence farmers start to plow their land and increase their self-sufficiency level.
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