Strategic Policies for a More Competitive Agriculture Sector William R. Sutton The World Bank ABCDE Conference, Tirana, Albania June 11, 2008

Agriculture is Important for Rural Areas and the Economy Constitutes 25% of GDP Sector growth has been healthy = 4.2% Agri-food = 8% of total exports Important for growth, employment and poverty reduction in rural areas Majority of the population continues to live in rural areas (55%), and most of the poor (75%) Contributes to food security and nutrition for whole country

Agriculture Continues to Have Potential Favorable climate, plentiful land and labor, good location for exports Increasing yields and output Apparent comparative advantage in high value crops such as fruit and veg; livestock; agro-processing; and niche products including organics Potential for growth in right conditions Potential links with tourism/environment.

But Agriculture Faces Many Challenges Agricultural growth has slowed, and agriculture is shrinking as a share of GDP A large share of the labor force (58%) remains in agriculture, and labor productivity is very low Food exports are relatively low (8% of total), and trade deficit increased 18% from 2001-2004 Competition will increase with EU accession, and standards will be very high Few other employment opportunities in rural areas. -

This is a normal development pattern

But agricultural labor productivity is still low… -

…Due to the structure of the sector Majority of farms very small Majority of farms very fragmented: ave. 3.9 parcels of 0.28 ha each Supply chains are very weak Farmers are not commercially oriented: only 30% of production for market Heavy reliance on off-farm employment/ remittances

Many very small farms

Why so many small farms? Agriculture provides vital income opportunities in rural areas High levels of employment in agriculture are due to lack of off-farm opportunities in rural areas. Agriculture is an employment and income safety net.

How to improve labor productivity? Diversification of rural economy to increase off-farm opportunities  rural development: Infrastructure Business environment Education for a good workforce This will reduce number of people currently working in agriculture “by default”

How to improve labor productivity? 2. Strengthening agriculture sector Agriculture sector can provide employment in rural areas provided the sector is healthy. There is a great deal of potential But much needs to be done to improve competitiveness, otherwise Albanian producers will lose their presence in markets and the sector will decline.

How to improve competitiveness? Develop modern, EU-compatible standards and certification system Remove structural constraints: small farm size, weak land sales and rental markets. Improve coordination of supply chains Increase investment. Invest in rural infrastructure. Improve public support for the sector. Ensure good policy environment.

Improve public expenditures Provide grants for farmers to invest in improving competitiveness (not output/renewable input subsidies), and for non-farm investments Provide assistance using EU-type instruments Increase capacity of MAFCP staff to manage Improve public services in agriculture: extension, research, education Invest in rural infrastructure, including transport, marketing and irrigation Avoid investments where private sector is more effective, e.g. processing facilities. Once expenditures improve, consider increasing

Policy Options Transform support from agricultural subsidies to rural development Strategic adoption of EU Acquis. Build capacity to access and use EU assistance funds among farmers. Reform of food safety policy. Encourage land consolidation by improving land markets and providing non-farm rural employment opportunities. Tackle structural constraints to rural credit.

Food price increase In 2007, food prices grew at 5.4% Higher than inflation (CPI = 3.1%) Cereals prices much faster: 24.6% So far in 2008, accelerating: 7.1% overall Low for region (14.1%) and world (55%) There are winners (net sellers) and losers (net buyers) Caused by complex supply and demand pressures This is a global issue for med-/long-term

Food price response Requires long-term as well as short-term response Avoid market distortions, provide safety net for consumers, support production Markets: let prices pass through; don’t tax or restrict exports; discourage monopolies; avoid increasing state reserves Improving quality of and access to safety net for vulnerable consumers Consider temporary, unilateral removal of import duties (flout = 10%, wheat = 2%) Begin climate change adaptation (hotter, drier)