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A blog about economics in the South Caucasus.

Georgia on the Development Frontier: From Subsistence Agriculture to Exchange

While written in 1991, “The Development Frontier” by Peter Bauer has lost none of its relevance for Georgia and other predominantly agrarian economies of the 21st century. Economic development, suggests Bauer, “begins with the replacement of subsistence activities by production for sale. Producers will move out of subsistence production only if they see the advantages of doing so and if it is made possible for them to do so. They need the incentive, the opportunity, and the resources.”

And this, according to Bauer, is where the traders come in. Traders make consumption goods available for villagers, tempting them to enrich their consumption patterns. This temptation creates the incentives for commercial production and exchange. Armed with knowledge of local, regional and export markets, traders also create new opportunities by providing outlets for farm products. Furthermore, traders also acquaint farmers with new products that are in demand, and provide necessary skills and resources – tools, seeds, fertilizer, etc.

No one has yet told Georgian traders that they may be the agents of progress and civilization. In fact, they are the guys we all so love to hate. On our travels through the Georgian countryside we often see them going from village to village in their Ladas and Volgas, small trucks and marshrutkas. Then we meet them again in the open air wholesale markets in each and every Georgian city.

Unlike their ancient colleagues, traders of today don’t risk their lives, yet trading activities as such are still associated with very high transaction costs and considerable commercial risks. Driving old marshrutkas on Georgia’s mountain roads is certainly no fun. But of particular concern are damages and losses to agricultural products resulting from poor packaging compounded by vibration and shaking on bad roads. Another source of risk is overheating since agricultural products are often carried in vehicles that are not protected from the sun, let alone having proper ventilation and refrigeration systems. Finally, breakdown of old vehicles can also be a significant cause of losses, as perishable produce may be left exposed to the heat while repairs are carried out.

It is only natural that given these risks, traders are more likely to frequent some regions and villages and not others. Difficult-to-reach regions will see lesser numbers of traders, lesser competition among them, and consequently lower prices. For example, villages in proximity to Tbilisi are likely to fetch better prices for their produce compared to further away places. Following this logic, it would be reasonable to assume (or hypothesize) that transition from subsistence farming to exchange is likely to be inversely related to distance (travel time) from the farm gate to the market and the size of that market (faster around Tbilisi and slower in other regions).

In recent years Georgia has seen a very significant improvement in regional and rural road infrastructure, reducing trade-retarding transport and transaction costs. If our reasoning is correct, we should expect commercial agriculture to gradually pick up across the entire nation. In some parts of Georgia this is already the case. Given the quantum leap in the quality of road infrastructure experienced by Samtskhe Javakheti (SJ) in 2009-10 (travel time to Tbilisi was reduced from 8 to less than 2.5 hours), SJ households have seen their income increasing by more than 60% in just 2 years (from 2009 to 2011).

Even more importantly for our analysis, however, a very large portion of this increase can be attributed to commercial farming. A simple comparison with Imereti (see chart) is quite telling in this regard. In 2009, Imereti and SJ had roughly the same level of income per household (slightly above 500GEL/month). By 2011, SJ households were earning about 250GEL more; approximately 170GEL of this gap is explained by SJ’s growing advantage in commercial farming and exchange.

Monthly Income (GEL) of Rural Households in Samtskhe-Javakheti and Imereti Regions, 2009-2012

 

graph1

 

Looking at 2012, not only are SJ farmers producing more agricultural products, they also sell a much larger share of it. Agricultural production-related income constitutes a rather similar share of total income in SJ and Imereti (46% and 41%, respectively), however, SJ farmers sell more than half of what they produce. Imeretian farmers demonstrate a much lesser degree of commercialization: they sell only one quarter of their agricultural products and consume the rest.

Shares of Different Sources in Total Household Income, Samtskhe Javakheti vs Imereti in 2012

 

graph2

 

The main point here is that while investment in regional and rural road infrastructure is no silver bullet, it may still be one of the most effective ways to promote the much needed transition from subsistence farming to exchange. If Georgia builds good roads, its small traders should be able to do the rest!

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Guest - Helene Ryding on Tuesday, 22 October 2013 13:31

"Armed with knowledge of local, regional and export markets, traders also create new opportunities by providing outlets for farm products. Furthermore, traders also acquaint farmers with new products that are in demand, and provide necessary skills and resources – tools, seeds, fertilizer, etc"
The first point seems obvious, because traders by definition need to know about differences in market conditions. But it seems unlikely that they can actually provide skills or create demand for resources. If you were a small farmer in a conservative community, would you trust the ideas of someone coming in a marschrutka about what to grow or how to grow it?

"Armed with knowledge of local, regional and export markets, traders also create new opportunities by providing outlets for farm products. Furthermore, traders also acquaint farmers with new products that are in demand, and provide necessary skills and resources – tools, seeds, fertilizer, etc" The first point seems obvious, because traders by definition need to know about differences in market conditions. But it seems unlikely that they can actually provide skills or create demand for resources. If you were a small farmer in a conservative community, would you trust the ideas of someone coming in a marschrutka about what to grow or how to grow it?
Guest - Eric Livny on Tuesday, 22 October 2013 14:38

A valid point, Helene. The transfer of know-how, let alone seeds and implements, etc, is certainly not as smooth as Bauer is describing (after all he is trying to make a point). It takes somewhat more sophisticated traders for farmers to start heeding their advice. But such traders are not uncommon. A couple of years ago a met a start-up trading company managed by two young Georgians who were supplying some of the large hotels in Tbilisi with high quality greens, broccoli and other exotic vegetables. Their business model was about providing small farmers with the right seeds and teaching them how to cultivate, harvest, store and package high quality products. I am sure there are many others as well...

A valid point, Helene. The transfer of know-how, let alone seeds and implements, etc, is certainly not as smooth as Bauer is describing (after all he is trying to make a point). It takes somewhat more sophisticated traders for farmers to start heeding their advice. But such traders are not uncommon. A couple of years ago a met a start-up trading company managed by two young Georgians who were supplying some of the large hotels in Tbilisi with high quality greens, broccoli and other exotic vegetables. Their business model was about providing small farmers with the right seeds and teaching them how to cultivate, harvest, store and package high quality products. I am sure there are many others as well...
Guest - Juan Echanove on Tuesday, 22 October 2013 16:42

do agree that the improvements in roads (specially the rehabilitation of Tsalka road, which has totally modified the whole trade networks form Samtskhe Javakheti (SJ) region played an important role in the improvements agriculture production in SJ. Still, I can think on a few other reasons behind the comparably better results of SJ.



· The 'PB factor' and its cash injection in rural areas in SJ (and Lower Kartli too). Various thousands of people form the remote villages adjacent to the pipe were recruited during the pipeline construction. For many peasants there, this was the first time they got a regular and more or less fine income in two decades. Most of them were farmers and many used these savings to invest in improving their farms (equipment, better inputs, etc). This, of course, had a positive effect in the production and in better living conditions for many.



· Donors. During the period 2000 to 2005 SJ become a favourite site for donor-assisted projects,: the depress economic levels there and, specially , the perception that there might be a risk of ethnic class (Armenian minority) if living conditions would not improve, made the area more 'attractive' for donors than other places: The EU alone invested some EUR 3 M in supporting potato and other value chains there. Some 30 coops were established thanks of the2 EU projects- the West-style coops in Georgia. The CZ invested also some EUR 2 M too in small food processing and on service centres and equipment. BP's social responsibility projects also injected funds for livelihoods –at least EUR 2 M. These figures may look modest, but they are not. During those years hardly anything was invested in the Ineretian agriculture sector.



· …and the 'Vano Merabishvili factor'…during the Saakhasvili administration, the government disregarded the agriculture sector…excepting in SJ, the feud of Meravishvili (he is from this part of Georgia) He managed to keep the region aside from the libertarian approaches applied in the rest of the country. Thus, in SJ the government, via the municipalities and also state-funded projects kept some active presence in supporting the agriculture sector there.



All these started paying back already by 2009/10 SJ was the first region with a modern cattle market, the first also with a network of well functioning service coops, with a middle size modern abattoir, with a nice number of privately owned service centres, and it is also the region where the strongest Georgian farmers' organization has been created….now, virtually everyone in the agriculture community recognizes this small agriculture miracle' of SJ.


Of course, still many things are to be improved there…but compare to Imereti, the situation is now much better.

do agree that the improvements in roads (specially the rehabilitation of Tsalka road, which has totally modified the whole trade networks form Samtskhe Javakheti (SJ) region played an important role in the improvements agriculture production in SJ. Still, I can think on a few other reasons behind the comparably better results of SJ. · The 'PB factor' and its cash injection in rural areas in SJ (and Lower Kartli too). Various thousands of people form the remote villages adjacent to the pipe were recruited during the pipeline construction. For many peasants there, this was the first time they got a regular and more or less fine income in two decades. Most of them were farmers and many used these savings to invest in improving their farms (equipment, better inputs, etc). This, of course, had a positive effect in the production and in better living conditions for many. · Donors. During the period 2000 to 2005 SJ become a favourite site for donor-assisted projects,: the depress economic levels there and, specially , the perception that there might be a risk of ethnic class (Armenian minority) if living conditions would not improve, made the area more 'attractive' for donors than other places: The EU alone invested some EUR 3 M in supporting potato and other value chains there. Some 30 coops were established thanks of the2 EU projects- the West-style coops in Georgia. The CZ invested also some EUR 2 M too in small food processing and on service centres and equipment. BP's social responsibility projects also injected funds for livelihoods –at least EUR 2 M. These figures may look modest, but they are not. During those years hardly anything was invested in the Ineretian agriculture sector. · …and the 'Vano Merabishvili factor'…during the Saakhasvili administration, the government disregarded the agriculture sector…excepting in SJ, the feud of Meravishvili (he is from this part of Georgia) He managed to keep the region aside from the libertarian approaches applied in the rest of the country. Thus, in SJ the government, via the municipalities and also state-funded projects kept some active presence in supporting the agriculture sector there. All these started paying back already by 2009/10 SJ was the first region with a modern cattle market, the first also with a network of well functioning service coops, with a middle size modern abattoir, with a nice number of privately owned service centres, and it is also the region where the strongest Georgian farmers' organization has been created….now, virtually everyone in the agriculture community recognizes this small agriculture miracle' of SJ. Of course, still many things are to be improved there…but compare to Imereti, the situation is now much better.
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