The FINANCIAL — A worsening taxation system, lack of modern technologies, high production costs, lack of markets, and almost no restrictions on import… these are the main reasons why Georgian agri-products are so expensive at local supermarkets and are not competitive abroad. These reasons were named by business leaders interviewed by The FINANCIAL last week.
The agriculture sector occupies only 8% of the total GDP as of the first and second quarters of 2010 according to the information of the National Statistics Office of Georgia.
The total GDP of the country reached 8,170 million GEL in the first and second quarters of 2010, while the share of agriculture by GDP is only 650 million GEL.
“The official figures put the share of the agriculture sector in Georgia’s economy at something like 10%. I think it is much higher, but invisible to the official statistics system. It may be as much as 20% or 30% given that so many people are employed or self-employed in agriculture (above 50%),”said Eric Livny, Executive Director at the International School of Economics at Tbilisi State University (ISET).
The majority of key company CEOs in their interviews with The FINANCIAL declared that development of the agricultural sector plays a crucial role in the country’s further development.
Problems in the agriculture sector
“The main problem is the lack of a coherent government strategy and investment for the development of this sector. In all successful agricultural economies the Government plays an active and supportive role to encourage and support farmers. The Ministry of Agriculture is actually allowing the infrastructure to get worse. For example the lack of investment in Agricultural Testing Stations and farms and the lack of maintenance of common systems of irrigations which have been allowed to deteriorate to the point of collapse,” said David Lee, President of the American Chamber of Commerce and General Director of Magticom.
“The taxation system is also oppressive and could become worse. Suggestions that fines will be placed on land that is non-fully utilized will encourage an exit from this sector and exaggerate the situation further,” Lee added.
“One of the major problems in the agriculture sector is the lack of modern technologies, consequently cost in the agricultural sector is quite high. Due to the fact that people employed in the agriculture sector have small territories we see they cannot afford making large-scale investments, process land and consequently in many cases production is uncompetitive,” said Giorgi Chirakadze, founder and President of UGT, President of the Supervisory Board of Business Association of Georgia.
“Moreover, one of the problematic issues is investment in technological education. In European countries, the specific educational level of employed people in the agricultural sector is much higher than in Georgia,” added Chirakadze.
“The major problem for Georgian agriculture is the loss of the Russian market. Weaker demand for some of the traditional Georgian exports, such as wine, implies lower incentives for investment in the relevant sector (both in production, downstream food processing, and ancillary services). Unfortunately, there is not much the Government can do to fix that problem in the short or medium term except for continuing the efforts to redirect Georgian agricultural exports to other countries,” said Livny.
Despite the loss of the Russian market, Livny singled out the problem of fragmentation of agricultural holdings, on the one hand, and the weakness of farmer cooperatives on the other.
“Land fragmentation (1.2 ha per farm on average) is not necessarily a problem for the kinds of agricultural crops that are grown in Georgia. In other words, since Georgian agriculture is predominantly labour intensive, the “economy of scale” are not very pronounced, and the economic incentives for land consolidation are rather weak. This explains why land consolidation has not happened and is not happening. It is important to understand, however, that land fragmentation in and of itself is not necessarily a hurdle for efficiency gains in agriculture,” declared Livny.
“What are the reasons for the lack of farmers’ cooperation? Some writers suggest that this has to do with the trauma of Soviet-time forced collectivism. I don’t agree. In my view, the main reason for the lack of formal cooperation in agriculture is the lack of economic rationale:
Georgian villagers do collaborate quite extensively in many informal ways, when it makes sense. Joint shepherding is just one example. Thus, there is no lack of trust or ability to cooperate among Georgians in general and within tight village communities in particular. What does not happen in Georgia is the transition from informal collaboration to the creation of formal cooperatives that would go beyond “primitive” modalities of cooperation: facilitate long-term planning and coordination, represent the individual farmers in negotiation with clients, vendors and service providers, invest in local public goods (roads, food processing facilities), etc. Some explain this particular “failure” by the “unfavourable” tax regime, which subjects agricultural cooperatives to the standard requirements of financial reporting and taxation (e.g. cooperatives have to hire an accountant and charge VAT; individual farmers receiving payments from the cooperative would be subject to the income tax. I would think that the profit tax could be avoided by registering cooperatives as not-for-profit organizations),” declared Livny.
“In my view, however, the problem lies elsewhere. The transition to formal cooperatives involves another transition: from the informal to the formal economy; from cash-based, tax-free transactions to formal contracts, non-cash payments and taxation. To the extent that Georgian farmers are not forced out of the gray economy, they will stay in the shadow, sticking to the familiar, labour intensive methods of land cultivation, shun technologic innovation and investment (which is risky), and avoid formal cooperation,” Livny added.
Levan Kalandadze, CEO of Georgian Small and Medium Enterprises Association, believes the major problem is the lack of a government strategy and plan of this field as business sector development. “The announcement of different fields is not enough for this field’s development. It is necessary that government visions and the unity of steps be defined, which will guarantee creation of a profitable environment for agriculture business development. From the government side the priorities and protectionism should be expressed towards several directions: protectionist tax environment, creation of guaranteed access to modern technologies and agricultural standards, government stimulation of training and qualification of human resources,” said Kalandadze.
“The problem and unsolved difficulty obstructs cooperation and consequently, the problem of implementation of modern technologies and standards in agriculture, which is directly reflected on local production price. A very easy example, potatoes grown in Egypt, imported to Georgia plus the prices of freight and customs are cheaper than locally Akhltsikhe or Akhalkalaki produced potatoes. The same might be said for the potatoes imported from Armenia, this is a paradox but it’s true,” added Kalandadze.
Kalandadze believes there are serious problems with primary production of agricultural products as well as production of agricultural products. “Currently, the problematic issue and significant deficit is in production of beef, as well as production of natural milk and its restoration. Also the production of cheese from natural milk, while these issues were not problematic 5-6 years ago,” said Kalandadze.
Development of the agriculture sector
Chirakadze believes that while speaking of the agriculture sector attention should be paid to two directions – firstly, corporate investors should invest heavily in the agriculture sector and second – investment should be made in specific education.
“What’s vital is to find what the competitive advantages of Georgian production are and the second is for what purpose do we produce, do we plan to export or supply the local market? While speaking of the external market several standards should be followed. The major one is that we have good land and vast opportunity to develop the agriculture business. The sector itself is quite difficult, however, I believe by making the right investments both from the Government and private sector many projects could be developed,” Chirakadze declared.
Kalandadze believes that almost all directions in the agriculture field have huge potential and perspective. However, what’s major is to form the right state strategy and creation of supportive environment for further development of business.
“Almost all crops can be grown in Georgia profitably; the land, climate and access to water are amongst the best in the world. But better infrastructure is required and mechanization must be accelerated through taxation and subsidy policies aligned to a sector strategy,” declared Lee.
Lee believes that for development of agriculture business in Georgia the roads should be improved as well as irrigation systems in rural areas, tax breaks should be given and subsidized loans to agricultural equipment investments.
“If farmers were able to get together and cooperate, they would be able to benefit from technological innovations, make better use of machines, improve services (procurement of inputs, marketing, storage, transportation) and undertake other efficiency-enhancing steps. In Europe and Israel farmers’ cooperation is the name of the game. In Georgia, every donor laments the inability of farmers to work together,” declared Livny.
Threats from imported products
Imported products are a great threat for local production, as the prices mean there is a paradox of imported goods being cheaper than Georgian ones.
“The cost of local production is quite high. For example chicken which is imported from Brazil, crosses the ocean and borders, is much cheaper that chicken produced locally. Moreover, the production imported from Turkey is also cheaper. This is illogical that goods which pass through custom houses are priced less than Georgian production,” said Chirakadze.
“As far as I know, the free trade agreement with Turkey does hurt the prospects for investment in industrial agricultural production in Georgia (e.g. modern greenhouses). The scale of production in Turkey is much larger, and hence they are able to dump their products (e.g. tomatoes) at a low price that kills the incentives for investment. I don’t think imports have any impact on traditional agriculture during the regular season. Turkish products hit the market in late fall and stay on the shelves until late spring,” declared Livny.
“The major problem of Georgian agriculture towards imported products is that in foreign countries the agricultural sector provides a real business field, while in Georgia it is not considered. Consequently, imported agricultural products with absolute majority price, product qualities, packaging, and marketing significantly outrun Georgian analogues. In these components what’s major is still the price, as due to a hard social background the majority of society is formed as price-conscious. The condition that Georgian production ecologically as well with taste is evidently better than imported products, is not a stimulating factor while the customer makes choice between local and imported products. As the client chooses the product which is cheaper,” declared Kalandadze.
“Imported food is a problem, primarily because Georgia cannot produce enough itself. It is a consequence of the problem, not its cause. Import restrictions alone would just drive up prices in the short term,” said Lee.
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