Any observer of the Georgian economy would probably agree that the country has too many people employed (or, rather, under-employed) in agriculture. Historically, many countries have experienced a secular decline in the share of employment (and GDP) related to the agricultural sector. Yet, Georgia has seen limited structural change out of agriculture (other than, perhaps, into seasonal or permanent labor migration). For more than a decade, the share of employment in the agricultural sector has been around 52-54%. As illustrated in the figure below, the remainder of jobs were in the services sector, with scarce few in manufacturing. What we observe is therefore a persistently high share of employment in a low productivity sector.

STRUCTURAL CHANGE (OR THE LACK THEREOF) IN GEORGIA

The notion that too many Georgians are stuck in agriculture was a central tenet of the Saakashvili government reform agenda. An argument has often been made by Georgian politicians at the time that “no developed country has more than 3-4% of its workforce in agriculture.” The conclusion drawn from this (correct) observation was that, in order to develop, Georgia has to go through a rapid process of land consolidation and urbanization. Hence, projects such as Lazika, miniscule agricultural budgets, and neglect of agricultural policy. When subsidies started being thrown at rural dwellers in 2010-2012, it was done for purely political reasons.

Yet, perhaps paradoxically, agriculture is today one of the fastest-growing sectors in the Georgian economy, encouraged, on the one hand, by the re-opening of traditional export markets in Eurasia, and, on the other, a spate of government and donor initiatives seeking to complete land registration and start an effective land market, repair rural infrastructure, improve skills and provide cheap finance and other services.

This recent development begs the question – in line with the great ISET Economist tradition of thinking about potential growth sources for Georgia – whether or not agriculture (and related food processing) could serve as an engine of job creation and inclusive economic development for the country.

SEARCH FOR A NEW DEVELOPMENT MODEL

A recent thought-provoking piece by Dani Rodrik ("Are Services the New Manufactures?") discusses whether developing countries need a new growth model. As argued by Rodrik, “export-oriented industrialization, history’s most certain path to riches, may have run its course.” On the one hand, he writes, “manufacturing today is not what it used to be. It has become much more capital- and skill-intensive, with greatly diminished potential to absorb large amounts of labor from the countryside.” On the other, China’s success makes it much harder for many other countries “to establish more than a niche in manufacturing.”

Now, while urban services are constituting a very large and increasing share of GDP in many developing nations, Rodrik is skeptical as to their potential to “deliver rapid growth and good jobs in the way that manufacturing once did.” His skepticism stems from two observations.

Banking, finance, other business, and ICT services are certainly high-productivity activities that can help lift economies with an adequately trained workforce. However, in most developing countries such internationally demanded (“tradable”) services cannot absorb more than a fraction of the labor supply.

Other types of locally demanded (“non-tradable”) services, such as retail trade, hairdressing, and taxi driving can certainly absorb excess agricultural workers, yet, jobs in these sectors do not promise a lot of productivity gains.

Moreover, argues Rodrik, any growth in low productivity non-tradable services is ultimately self-limiting. His point becomes evident if one cares to analyze the taxi service market in Tbilisi. As more and more villagers started driving taxis in Tbilisi, taxi fares went down to a level only slightly above earnings in the low-productivity agricultural jobs, therefore reducing or completely eliminating the incentives for the arrival of new drivers (and their shoddy Ladas).

For this very reason, micro-lending institutions, such as (most famously) the Grameen Bank in Bangladesh, often become victims of their own (initial) success. Micro-financed enterprises, e.g. providers of cellphone services in remote villages, tend to go out of business once the number of identical enterprises hits a critical threshold and the fees they could charge collapse. The result is bankruptcy for both lenders and borrowers.

WHY NOT AGRICULTURE?

Why might the agricultural sector serve as a potential growth engine in Georgia? One reason is that Georgia does not have too many other options. As the country has learned the hard way, manufacturing and services startups are not easy to sustain in the open global economy of today, particularly in the absence of a skilled and disciplined workforce.

But there are many ‘positive’ reasons for agriculture to serve the locomotive function.

First, while some might view the agricultural sector in Georgia as more of a safety net for hundreds of thousands of underemployed individuals, this is the sector where a lot of low-hanging fruit remains (both figuratively and literally). In other words, productivity gains would be relatively easy to achieve with very modest financial investment, through improved organization and processes.

Second, it’s worth considering that many economies in East Asia achieved their high rates of growth by first experiencing the development of their agricultural sectors. Increases in agricultural productivity fed into further investment in light manufacturing in urban areas and both the ‘labor push’ and ‘labor pull’ effects went into full force (see “Agriculture and Structural Transformation in Developing Asia: Review and Outlook” for more). While, as Rodrik points out, export-led industrialization might be a challenge for countries like Georgia, the economic boon arising from increased agricultural productivity may induce the development of other industries (including those which we cannot predict ex-ante).

Third, when looking at global trends, there seems to be an increasing demand for differentiated agricultural products (both primary and processed). Just look at microbrewery startup rates in the United States, agritourism or the slow food movement in Italy, etc. With its multitude of soil and climate conditions, unique culture, and traditions, there is great potential for Georgia to generate unique, high-value, geographically denominated products and engage in innovative agro-processing and organic farming.

Fourth, and very significantly, gradual commercialization of smallholder surplus production can be one avenue for lifting people in rural areas out of poverty and ‘readying’ them for functioning in a modern exchange or money economy. As Peter Bauer argued in Dissent on Development: Studies and Debates in Development Economics (1972): 

There are various reasons why in many poor countries a large measure of continued reliance on agriculture, notably on agricultural production for sale, is likely to represent the most effective deployment of resources for the promotion of higher living standards. One reason is the familiar argument based on comparative costs. Another, less familiar, reason is that the production of cash crops is less of a break with traditional methods of production than subsidized or enforced industrialization. Agriculture has been the principal occupation in most of these countries for centuries or even millennia. Thus in the production of cash crops, the difficulties of the adjustment of attitudes and institutions in the course of the transition from subsistence production to an exchange or money economy are not compounded by the need to have to acquire at the same time knowledge of entirely new methods and techniques of production. After some time spent on the cultivation of cash crops, people find it easier to get used to the ways, attitudes, and institutions appropriate to a money economy. This greater familiarity with the money economy facilitates effective industrialization. In these conditions of transition from a subsistence to a money economy, conditions widely prevalent in poor countries, production of cash crops, and effective industrialization are complementary through time. The unfavorable contrast often drawn between agriculture and manufacturing, to the detriment of the former, is an example of a time-less, unhistorical approach to economic development, an approach which is inappropriate to the historical development of societies.

Bauer wrote in a period characterized by the “Green Revolution”, when productivity in agriculture grew at unprecedented levels. This might explain his optimism and his strong support for the introduction of cash crops as a way to foster development. While the experience of many countries shows that investing in the mass production of cash crops does not necessarily lead to success, Bauer’s ideas remain valid in a broader sense.

BUT NOT JUST ANY TYPE OF AGRICULTURE

Agriculture has great development potential and, as stated above, differentiation in agricultural production and related agribusiness activities (rather than homogenization and mass production) is driving currently some of the most interesting success stories in agriculture around the world. In a globalized world, where mass products can easily be reproduced – at ever decreasing costs, driving profit margins to zero – well-trodden paths do not show much promise anymore. What matters is what cannot be easily reproduced or copied. Georgia and other developing countries should try new tricks, building on their own strengths and on what makes them unique.

Luckily for Georgia, the country’s history, culture, biological diversity, and agricultural tradition put it in the condition to do much better than just import some “modern” high yield crop and engage in large scale (capital intensive) agricultural production of standardized agricultural products. Georgia can carve its niche in the high value-added (more labor-intensive) segment of the international markets, turning its weaknesses (such as the abundance of the labor force in the countryside) into a strength.

Crafting appropriate policy instruments to support the agricultural sector is a challenging endeavor, and much more analysis must be conducted ex-ante before launching any new policy initiatives. Taxing the private sector only to subsidize potentially unproductive activities in agriculture is surely something to be avoided. That said, we are certain that Georgia’s agriculture can play the role Bauer suggested back in 1972, and be a key to the country’s long-term inclusive development.

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Special thanks to Giorgi Kalakashvili at the National Statistics Office of Georgia for providing data about employment by sector.