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Rural Unemployment Through Productivity Gains

There are many possibilities how to increase the productivity of the Georgian agricultural sector. Experts suggest upgrading knowledge and technologies, promoting the collaboration among farmers, and coping with the land fragmentation problem, to name just a few of the ideas circulating in the debate. The right policy measures may indeed be successful to lift up the productivity, yet the unwanted consequence of a productivity increase may be even higher unemployment among the rural population. In particular, people who are currently underemployed are at risk to lose their subsistence incomes when productivity demands rise.


PUSHED OVER THE PRODUCTIVITY EDGE

Increased productivity means that the economic output per worker goes up. If the employment is to be kept on the same level after a productivity increase, the total output must grow at the same rate. If, for example, there is a productivity gain of 5% and the economic growth in the same year is 5%, the unemployment rate will not be affected. If, on the other hand, productivity goes up by 10% and the growth is just 5%, higher unemployment will be the result.

It is well known that the productivity rate of the Georgian agriculture is almost unfathomable low. It takes around two Georgian villagers to generate the same value as one Latvian colleague creates, four Georgians together produce as much as one Estonian, and a whole Georgian family of six people produces as much as one Bulgarian. Compared to advanced Western economies, the numbers are even more striking: 30 Georgian villagers generate the same value as one French agricultural worker.

This means that there is a lot of potential for higher productivity, possibly more than there is a potential for output increase. Certainly, the Georgian agricultural productivity will not stay for a long time where it is now. The output, on the other hand, does not have this clear upward trend, as it is constrained by global and domestic demand for agricultural produce. Demand is governed by many factors, most of which are not under Georgian control.

When agricultural production becomes sophisticated and capital-intensive, the first to drop out of the production process are those who already now are barely participating in it. For them it is most difficult to meet the rising productivity requirements. These people are at the “productivity edge” – they just match the minimal productivity demanded to survive as an agricultural worker. If agricultural productivity picks up, they may be pushed over the edge. Most of the underemployed people in rural Georgia are of this type, and given their huge number, this may cause great social problems.


VULNERABILITY ANALYSIS

By using a simple analytical framework, we estimated the share of the population from each region of Georgia that will lose their unproductive job were the productivity levels to increase similar to the levels of the two peer countries Armenia and Lithuania.

Nobody knows for sure how the output of the Georgian agriculture will evolve in the future, as it is constrained by external factors. In a globalized market, a crop failure in South America may affect the demand for the produce of Imereitan farms. It would be clearly too pessimistic to assume that the agricultural output will not change, but it is difficult to make reliable estimations about this. We therefore chose another method. Instead of looking at the number of workers needed to produce a certain output, we consider the number of workers needed to cultivate a hectare of arable land. While output is variable, the amount of arable land will not change drastically in future.

Based on publicly available numbers from various sources, we calculated the amount of additional unemployed people from the rural areas if the number of agricultural workers per arable land changes to the level of peer countries. The result is shown in the table.

 

unemployment

 

As can be seen, the rural populations in Imereti, Adjara, and Samegrelo are highly vulnerable to negative consequences brought about by productivity increases. Imeretia accounts for around 38% of total additional unemployment in Scenario 1 and around 30% in Scenario 2. Kakheti will suffer less from these developments, as already now the number of workers per land is rather low compared to other regions of Georgia. In total, around 278 thousand people from the rural areas are at risk to lose their jobs if the first scenario would realize, about half of the number of the second scenario, where the number of workers per land converges to the level of Lithuania. As these numbers are based on rough calculations, ignoring some relevant differences between the three countries, they should not be seen as a proper economic estimation, but rather as a hint which regions are most affected by the unwanted consequences of future productivity gains in the agricultural sector.


POLICY RESPONSE

What will people do who cannot sustain themselves in agriculture anymore? As it happened in the age of industrialization, when agricultural productivity soared in Europe, and as it still happens in many countries all around the world, the direct consequences will be migration waves into the cities. If there is no smallholder agriculture in Imeretia anymore, former Imeretian smallholders will seek their fortunes in Tbilisi.

Unemployed people from the rural areas will only refrain from moving to the capital if, in parallel with the productivity increases in the agricultural sector, alternative job opportunities for these citizens will be created in the regions. This is not impossible, but as we all know, the means of the government to foster economic activity are limited.

One may try to provide training to the most unproductive people, improving their chances to find jobs elsewhere. This, however, hardly alleviates the fate of those who are in an advanced age. Above the age of 35, it is difficult to acquire new qualifications, and even if an elderly worker absolved some training, the employers may still have a preference for younger people. In addition, training does not help if there are no employment opportunities. Processing, manufacturing, and tourism may have the potential to absorb laid off agricultural workers, yet there needs to be enough processing industry, manufacturing industry, and tourism industry for this to happen.

In our view, the most promising response would be to promote the production of “niche” agricultural goods that are labor intensive and, due to their niche character, allow for the realization of high margins (parts of which can be obtained by the society through taxation).

In a market economy, the fact that the goods offered on the market are so inhomogeneous is partly owed to the attempts of companies to set themselves apart from their competitors. You can buy a car from many companies, but you can buy a Rolls Royce only from one unique company. Because people perceive a Rolls Royce to be a car that is different from other brands, a Rolls Royce and other cars are no perfect substitutes for each other, and Rolls Royce is a monopolist for its cars. This creates high margins.

Also countries can benefit from delivering goods that are different from what is produced elsewhere. Certain types of agricultural goods, like mulberries and blueberries, are like the Rolls Royces of agriculture. The demand for these fruits is low, but it is relatively stable, and there are just few competitors. Their production is less mechanized and requires more labor than the typical cash crops.

Western Georgia is already successfully applying this strategy by becoming an important hazelnut producer. Identifying similar niche products and targeting subsidies accordingly may be a way to alleviate the unwanted side-effects of productivity gains.

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Guest - Eric Livny on Monday, 25 November 2013 12:35

I have many questions related to this article. The first one that comes to mind is about the sources of productivity gains. You seem to be assuming that it will happen through land consolidation (as this would clearly reduce the ratio of people to land). If this happens (how?) your argument holds. But, at least in the medium term, given how low is current productivity level (per ha and per worker), gains could come through many other ways that would not necessarily reduce the ratio of people to land. For example, irrigation, fertilizers and pesticides would increase productivity in that way. Cooperatives would have the same effect...

I have many questions related to this article. The first one that comes to mind is about the sources of productivity gains. You seem to be assuming that it will happen through land consolidation (as this would clearly reduce the ratio of people to land). If this happens (how?) your argument holds. But, at least in the medium term, given how low is current productivity level (per ha and per worker), gains could come through many other ways that would not necessarily reduce the ratio of people to land. For example, irrigation, fertilizers and pesticides would increase productivity in that way. Cooperatives would have the same effect...
Guest - Florian on Monday, 25 November 2013 12:59

It is difficult to directly estimate the number of people who will be laid off due to the productivity gains. If in future we will have 10% productivity increase per year, but we will also have 10% increase in output, employment won't be affected at all. Yet we do not know the output in future, i.e. how much demand there will be for the output of Georgian agriculture. And we do not know the productivity increases either, though we think that it will be considerable.

To avoid these uncertainties, we make use of the fact that as a side effect of the modernization of agriculture the number of workers per hectare of arable land goes down. When Georgia achieves the productivity of Armenia or Latvia, it is likely that there will be similarly many workers per hectare.

It is difficult to directly estimate the number of people who will be laid off due to the productivity gains. If in future we will have 10% productivity increase per year, but we will also have 10% increase in output, employment won't be affected at all. Yet we do not know the output in future, i.e. how much demand there will be for the output of Georgian agriculture. And we do not know the productivity increases either, though we think that it will be considerable. To avoid these uncertainties, we make use of the fact that as a side effect of the modernization of agriculture the number of workers per hectare of arable land goes down. When Georgia achieves the productivity of Armenia or Latvia, it is likely that there will be similarly many workers per hectare.
Guest - Daan on Monday, 25 November 2013 13:16

Most farmers in Georgian are subsistence farmers, which means that if total output stays constant, but output per worker goes up, they will need fewer family members on their farms. Yes, technically the number of unemployed people has gone up, but the total family income has stayed the same.

Another problem: "While output is variable, the amount of arable land will not change drastically in future." Yes it probably will. A lot of arable agricultural land in Georgia is not used. This entire assumption of keeping output constant is problematic. Georgia is a small country, a price-taker in international markets. An increase in agricultural production in Georgia is not going to shock world markets, and wouldn't change prices by much. It is quite plausible that increased agricultural productivity will lead to increase output and increased incomes.

Third problem: your comparison with other countries is extremely problematic. Different crops require different types of labor. If you have large quantities of wheat, you can pretty easily harvest this with two people and a machine. Harvesting asparagus on the other hand, is extremely labor-intensive.

Another thing is that most people who are "working" in agriculture in rural areas in Georgia are already unemployed for all intents and purposes. Yes, their family has a small farm, but for the size of the average smallholder farm, you really don't need an entire family. If there were job opportunities somewhere else, these people would be out of there tomorrow.

Most farmers in Georgian are subsistence farmers, which means that if total output stays constant, but output per worker goes up, they will need fewer family members on their farms. Yes, technically the number of unemployed people has gone up, but the total family income has stayed the same. Another problem: "While output is variable, the amount of arable land will not change drastically in future." Yes it probably will. A lot of arable agricultural land in Georgia is not used. This entire assumption of keeping output constant is problematic. Georgia is a small country, a price-taker in international markets. An increase in agricultural production in Georgia is not going to shock world markets, and wouldn't change prices by much. It is quite plausible that increased agricultural productivity will lead to increase output and increased incomes. Third problem: your comparison with other countries is extremely problematic. Different crops require different types of labor. If you have large quantities of wheat, you can pretty easily harvest this with two people and a machine. Harvesting asparagus on the other hand, is extremely labor-intensive. Another thing is that most people who are "working" in agriculture in rural areas in Georgia are already unemployed for all intents and purposes. Yes, their family has a small farm, but for the size of the average smallholder farm, you really don't need an entire family. If there were job opportunities somewhere else, these people would be out of there tomorrow.
Guest - Florian Biermann on Monday, 25 November 2013 14:15

Hi Daan,

It is not clear whether future agriculture will be done by the same families that work in the current smallholder agriculture. More likely, they will sell their land to agricultural entrepreneurs, which provides a one-time income shock to those families but no long-run economic basis.

We did not make the assumption that output remains constant. We write: "It would be clearly too pessimistic to assume that the agricultural output will not change, but it is difficult to make reliable estimations about this. We therefore chose another method."
Instead of looking at output and workers, we look at land and workers.

Regarding the comparisons with other countries, you are right. There are definitely relevant differences in the countries we compare. Therefore we write: "As these numbers are based on rough calculations, ignoring some relevant differences between the three countries, they should not be seen as a proper economic estimation, but rather as a hint which regions are most affected by the unwanted consequences of future productivity gains in the agricultural sector."

Hi Daan, It is not clear whether future agriculture will be done by the same families that work in the current smallholder agriculture. More likely, they will sell their land to agricultural entrepreneurs, which provides a one-time income shock to those families but no long-run economic basis. We did not make the assumption that output remains constant. We write: "It would be clearly too pessimistic to assume that the agricultural output will not change, but it is difficult to make reliable estimations about this. We therefore chose another method." Instead of looking at output and workers, we look at land and workers. Regarding the comparisons with other countries, you are right. There are definitely relevant differences in the countries we compare. Therefore we write: "As these numbers are based on rough calculations, ignoring some relevant differences between the three countries, they should not be seen as a proper economic estimation, but rather as a hint which regions are most affected by the unwanted consequences of future productivity gains in the agricultural sector."
Guest - NP on Monday, 25 November 2013 13:52

I share some of the doubts raised about the existence of a causality link between increased productivity and increased unemployment in the countryside. I suspect that presently labor productivity in agriculture might be partially underestimated because of the fact that a number of otherwise unemployed individual simply "went back to the village" and appear to be working in family farms.
If this is the case, it is not clear that they are going to leave the countryside just because productivity arises, unless real opportunities arise somewhere else.
This said, I do appreciate a lot the suggestion that Georgian agriculture could at the same time increase productivity and maintain existing jobs (or even increasing them) finding its "niche" in the world market. This could indeed be done by focusing on high-value added/labor intensive productions, where it might have (or develop) a comparative advantage.

I share some of the doubts raised about the existence of a causality link between increased productivity and increased unemployment in the countryside. I suspect that presently labor productivity in agriculture might be partially underestimated because of the fact that a number of otherwise unemployed individual simply "went back to the village" and appear to be working in family farms. If this is the case, it is not clear that they are going to leave the countryside just because productivity arises, unless real opportunities arise somewhere else. This said, I do appreciate a lot the suggestion that Georgian agriculture could at the same time increase productivity and maintain existing jobs (or even increasing them) finding its "niche" in the world market. This could indeed be done by focusing on high-value added/labor intensive productions, where it might have (or develop) a comparative advantage.
Guest - Leqso on Monday, 25 November 2013 23:08

Thanks for the interesting comments,
few points to mention:

I do agree with Eric's criticism regarding the assumptions behind these numbers. Of course currently underemployed rural employees are not going to be eliminated from agricultural activities in a glimpse. The figures, shown in the post are rather trying to describe the medium to long run scenario.
On top of that, to my view land consolidation will be the major driver of productivity increase in agriculture. If we look at the figures from other countries we can spot the positive correlation between agricultural land per rural population and agricultural value added. Unless Georgia will invent something extraordinary, land consolidation should be the main driver of productivity increase in agriculture. On the other hand, I do not see any special attempts of the government to promote more labor intensive agricultural production, rather they are giving out free crop seeds to farmers and bringing in new species of more productive crops.

As Florian already mentioned, these numbers are just rough approximations and main idea is to see the comparative vulnerabilities of different regions of Georgia. If we assume more or less homogeneous nature of agricultural production across Georgian regions these numbers will be equally biased for all regions of Georgia and thus will give us sensible benchmark for relative vulnerability analysis.

Thanks for the interesting comments, few points to mention: I do agree with Eric's criticism regarding the assumptions behind these numbers. Of course currently underemployed rural employees are not going to be eliminated from agricultural activities in a glimpse. The figures, shown in the post are rather trying to describe the medium to long run scenario. On top of that, to my view land consolidation will be the major driver of productivity increase in agriculture. If we look at the figures from other countries we can spot the positive correlation between agricultural land per rural population and agricultural value added. Unless Georgia will invent something extraordinary, land consolidation should be the main driver of productivity increase in agriculture. On the other hand, I do not see any special attempts of the government to promote more labor intensive agricultural production, rather they are giving out free crop seeds to farmers and bringing in new species of more productive crops. As Florian already mentioned, these numbers are just rough approximations and main idea is to see the comparative vulnerabilities of different regions of Georgia. If we assume more or less homogeneous nature of agricultural production across Georgian regions these numbers will be equally biased for all regions of Georgia and thus will give us sensible benchmark for relative vulnerability analysis.
Guest - Simon Appleby on Tuesday, 26 November 2013 16:57

I am really pleased to see you starting to examine rural labour productivity, and what the consequences of improvements are.

As I have suggested before, if Georgian farmland were extensively consolidated, all of Georgia's meat/eggs/milk produced domestically, and labour trained to the same level of productivity as that of Chile or New Zealand, all of Georgia's agricultural sector would require no more than 45,000 full-time employees, including proprietors. Allowing for another 270,000 workers in logistics, contract labour, food processing and farm-sector service, that represents less than a third of the current working age population in Georgia's rural areas. As substantial productivity improvements are very likely over the next generation, gainful employment in sectors other than agri-food will have to be found for other 2/3 of the rural population, either in manufacturing or services. Of course barriers to land consolidation and worker productivity enhancement will slow this process but it is inevitable.

While some may have seen the previous government's "Lazica" concept of a multi-function city on the Black Sea Coast as hare-brained, if preferential policies attracted light industry and the processing trade in sufficient density close to a port, the challenges of how to absorb Georgia's surplus rural labour may have been addressed successfully. Hopefully the current government are working hard on how to aggressively compete with countries like Vietnam, Cambodia, Bangladesh and Morocco in attracting FDI into labour intensive manufacturing and associated service industries. The market access granted by DCFTA may counter the problem of relatively expensive labour in Georgia.

The suggestion of focusing on capital-intensive and labour-intensive horticultural industry is a useful one, as regional rivals Russia and Ukraine have massive competitive advantages in low cost broadacre cereal farming but major deficiencies in fresh produce. If such horticultural ventures absorb labour from the family that owns the venture, this may well be sustainable. However if one speaks to mid-scale and large vignerons and horticulturalists here, who need to hire outside labour, they all complain that labour availability is low, and that workers are unwilling to work at night, which is a common seasonal requirement in such horticultural ventures. The assumption that demand for labour is automatically fulfilled when unemployment rates are high does not seem to hold water here. I know of vignerons and teagrowers here who are switching to mechanical picking as they cannot find enough willing workers to pick the crop at any price.

I am really pleased to see you starting to examine rural labour productivity, and what the consequences of improvements are. As I have suggested before, if Georgian farmland were extensively consolidated, all of Georgia's meat/eggs/milk produced domestically, and labour trained to the same level of productivity as that of Chile or New Zealand, all of Georgia's agricultural sector would require no more than 45,000 full-time employees, including proprietors. Allowing for another 270,000 workers in logistics, contract labour, food processing and farm-sector service, that represents less than a third of the current working age population in Georgia's rural areas. As substantial productivity improvements are very likely over the next generation, gainful employment in sectors other than agri-food will have to be found for other 2/3 of the rural population, either in manufacturing or services. Of course barriers to land consolidation and worker productivity enhancement will slow this process but it is inevitable. While some may have seen the previous government's "Lazica" concept of a multi-function city on the Black Sea Coast as hare-brained, if preferential policies attracted light industry and the processing trade in sufficient density close to a port, the challenges of how to absorb Georgia's surplus rural labour may have been addressed successfully. Hopefully the current government are working hard on how to aggressively compete with countries like Vietnam, Cambodia, Bangladesh and Morocco in attracting FDI into labour intensive manufacturing and associated service industries. The market access granted by DCFTA may counter the problem of relatively expensive labour in Georgia. The suggestion of focusing on capital-intensive and labour-intensive horticultural industry is a useful one, as regional rivals Russia and Ukraine have massive competitive advantages in low cost broadacre cereal farming but major deficiencies in fresh produce. If such horticultural ventures absorb labour from the family that owns the venture, this may well be sustainable. However if one speaks to mid-scale and large vignerons and horticulturalists here, who need to hire outside labour, they all complain that labour availability is low, and that workers are unwilling to work at night, which is a common seasonal requirement in such horticultural ventures. The assumption that demand for labour is automatically fulfilled when unemployment rates are high does not seem to hold water here. I know of vignerons and teagrowers here who are switching to mechanical picking as they cannot find enough willing workers to pick the crop at any price.
Guest - Simon Appleby on Wednesday, 27 November 2013 13:46

An issue to consider is that Georgia is a relatively low-subsidy, low-tariff jurisdiction; despite recent voucher programmes it is still a very open economy with little subsidy activity. Hence one must be careful when comparing economic output per worker between here and EU countries, or the USA, as the subsidies, ethanol mandates, import quotas, tariffs and non-tariff barriers to trade practiced by the EU and USA artificially inflate the economic output per farm worker.

Strict labour codes in EU jurisdictions drive farm owners to mechanise extensively rather than employ staff, which dramatically improves economic output per worker but doesn't help rural unemployment much.

It may be more valid to compare Georgia with other low-subsidy/low-tariff countries like South Africa, New Zealand, Chile and Australia.

An issue to consider is that Georgia is a relatively low-subsidy, low-tariff jurisdiction; despite recent voucher programmes it is still a very open economy with little subsidy activity. Hence one must be careful when comparing economic output per worker between here and EU countries, or the USA, as the subsidies, ethanol mandates, import quotas, tariffs and non-tariff barriers to trade practiced by the EU and USA artificially inflate the economic output per farm worker. Strict labour codes in EU jurisdictions drive farm owners to mechanise extensively rather than employ staff, which dramatically improves economic output per worker but doesn't help rural unemployment much. It may be more valid to compare Georgia with other low-subsidy/low-tariff countries like South Africa, New Zealand, Chile and Australia.
Guest - RT on Monday, 02 December 2013 21:03

A great article. While there may be issues with particular calculations (I am having trouble understanding why productivity in Armenia would be significantly different from that in Georgia), I subscribe to the concerns expressed by the authors and Simon.

A great article. While there may be issues with particular calculations (I am having trouble understanding why productivity in Armenia would be significantly different from that in Georgia), I subscribe to the concerns expressed by the authors and Simon.
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