There are many possibilities for how to increase the productivity of the Georgian agricultural sector. Experts suggest upgrading knowledge and technologies, promoting 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 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%, the higher unemployment will be the result.

It is well known that the productivity rate of Georgian agriculture is almost unfathomably 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 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 Imeretian 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 the 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.

As can be seen, the rural populations in Imereti, Adjara, and Samegrelo are highly vulnerable to negative consequences brought about by productivity increases. Imereti 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 advanced age. Above the age of 35, it is difficult to acquire new qualifications, and even if an elderly worker is absolved of 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 a 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.