The FINANCIAL — On June 2, 2016 the second EU supported Farmers’ Congress of Georgia was held at the Tbilisi exposition center. Around 150 farmers from different parts of Georgia had an opportunity to meet with the government representatives and discuss current challenges of Georgian agriculture.
The Congress mainly focused on three major issues for smallholders and cooperatives: access to market, access to finance and potential impact of food security regulations. Farmers provided their own view on what type of trade policies the government should implement in order to support farmers’ access both to local and foreign markets. Many issues were raised but the most notable one was the farmers’ insistence on food import restrictions. If the imports from Turkey and other major trade partners of Georgia were restricted, they claimed, the Georgian farmers would be in a much better position. Indeed, trade protection is perhaps one of the most requested policy action by farmers’ unions (and not only) worldwide.
DO RESTRICTIVE TRADE POLICIES WORK?
My answer as an economist is that they don’t. Here are a few reasons to be skeptical of restrictive trade policies:
Trade restriction do not benefit the economy as a whole. Restrictive trade policies do not affect the overall trade balance (the difference between exports and imports). No matter what kind of trade policies the government implements, for given levels of national saving and domestic investment, the real exchange rate would eventually adjust to keep the trade balance stable. In other words, Import restrictions reduce imports, increase net exports leading to the appreciation of local currency which in its turn hinders exports. As a result reduction in imports is balanced by the reduction in exports causing a net zero effect on the trade balance.
Some domestic industries do benefit from import restrictions – at the expense of others. Usually trade restrictions are lobbied by particular industries which can benefit at the expense of other companies (exporters in particular). Exports might be hurt not only by currency appreciation but by the trade partner’s symmetric responses to the import restrictions. If Georgia restricts food imports then it can get the same response from its trade partners and as a result of this food exports will decrease.
The protected “infant industries” never grow up. Proponents of import restrictions usually rely on so called infant industry argument which states that at the beginning industry needs government protection because it does not have economies of scale and cannot equally compete with foreign competitors (Hamilton A., 1790). Many case studies have shown that this kind of protection as applied by some developing countries (e.g. Brazil, Argentina) did not bring expected results and protected industries stayed at the “infancy stage” forever. They never grew and became competitive. Thus by restricting food imports Georgian farmers will not necessarily become more competitive.
Last but not least import restrictions increase domestic prices and hurt consumers’ welfare. Artificially reducing supply of a particular commodity will drive its price up. For example, if the imports of Turkish potatoes are restricted, this would result in the reduction of supply and higher potato prices. Potato growers will definitely benefit from higher price but the consumers will lose from such policy. In developed country slightly higher food price might not be an issue but in Georgia where Georgian consumers spend significant portion of their income on food the effect of increased food prices is more severe.
CAN GEORGIA AFFORD RESTRICTING FOOD IMPORTS?
Even if import restrictions made economic sense, in the sense of providing some temporary protection to local farmers, can Georgia afford such policies?
The answer is again “no”.
If Georgia applies import restrictions, then local production should be high enough to avoid huge price increases. However Georgian farmers can hardly produce enough food during season, let alone the whole year. One of the indicators for production level is self-sufficiency ratio which shows whether a country is self-sustaining or not.
Currently more than 60% of food is imported from abroad and self-sufficiency rate of Georgia is around 34% on average. This implies that volumes of local production are quite low and cannot satisfy local demand throughout the year.
Table 1. Self-sufficiency ratios for food commodities
# Product Self-sufficiency ratio (%)
1 Wheat 8
2 Maize 92
3 Potato 89
4 Vegetables 70
5 Grape 141
6 Beef 70
7 Pork 42
8 Sheep and goat meat 79
9 Poultry meat 25
10 Milk 91
11 Egg 96
Source: Agriculture of Georgia, Statistical Publication 2014, Geostat
Low self-sufficiency results from relatively low productivity of Georgian farmers compared to the productivity of our major trade partners. For example the average cereal yield for Georgia was 2.0 tons per hectar in 2011-2015 (according to the World Bank data), whereas the same indicators for our top import origins were: 2.8 for Turkey, 5.9 for China, 2.3 for Azerbaijan, 2.4 for Russia and 4.4 for Ukraine. Other countries clearly outperform Georgia in productivity of cereals.
The same is true for livestock production. Georgia shows a decreasing trend in the production of meat and milk from all sources, dairy products such as cheese, and eggs, honey, raw silk, wool, hides and skins, as compared to 2006. While our trade partners increased their production of these groups of products, Georgia suffered a reduction. Similar decreasing trends are identified in the case of yet another index – Food Production Index. Given the base of 100 in 2004-2006, index for Georgia equaled 86.9 in 2013. The same figures for Turkey, China, Azerbaijan and Russia were 129.8, 129.5, 139.8 and 122.4 respectively. Based on this index Georgia’s food production decreased compared to 2004-2006, whereas competitors kept producing more.
It is quite clear that the real problem Georgian farmers are facing is not the competition from abroad, but low domestic productivity.
The major problems hindering Georgian farmers’ ability to compete with foreign producers, is not government’s “unfair” trade policy, but outdated production technology and lack of skills and education. These are the challenges that should be resolved with the joint efforts from the government and farmers.
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