ORGANIZATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT

DIRECTORATE FOR FOOD, AGRICULTURE AND FISHERIES

COMMITTEE FO AGRICULTURE

 

AD HOC GROUP ON EAST/ WEST ECONOMIC RELATIONS 

IN AGRICULTURE 

 

 

1. AGRICULTURAL TRADE POLICIES AND TRADE MEASURES

Currently Latvia is negotiating possible membership of GATT and as such would bound by the disciplines of the Uruguay Round, relating to market access, domestic support and export subsidisation. And as usually one of the main barriers in these negotiations is agriculture and high level of its protections. Is it really so? 

To have better understanding of that, some background is needed. 

Trade policy and Agricultural policy. 

Latvia had very liberal trade policy till middle of 1994. Customs tariffs were introduced in 1993, but they remained low, and it leaded to dramatic increase in imports of grain, meat and milk products, which caused also decrease in domestic demand. Due to it tariffs were changed not once, as it is illustrated in Table 1. 

At the same time this measure is almost only one real instrument used by State to support agriculture. Amount of direct subsidies has even decreased during last two years, and they are not used as price support subsidies. Existing in legislation tax reliefs are not too significant in real terms, because, as it will be seen later, income level is too small to pay income tax. 

In this context negotiating of relatively higher border protection level compare to 1991, (when real economic border for Baltic countries did not exist) for agricultural products can not be evaluated as not following to real WTO principles, taking into account obstacle, currently in European economic area also exists significant level of border protection. 

Trade Relation development 

In this context development of FTA with neighboring countries can be looked as a real measure to liberalise trade also with Agricultural products. 

In 1996 for Latvian agricultural trade policy the most significant event was signing of agricultural part of FTA with other Baltic states, which occurred in June 16 and which now is accepted by the Parliament in the first reading. It is expected, this FTA part will come into force in 1997. 

1. Tariff barriers

There were no big changes in tariff barriers in 1995. 

Evolution of border protection level for the basic agricultural and food products and its present level is characterised in Table 1. There can be some slight changes to be negotiated with EU. But the basic tariff level is being kept since current law on Customs’ Tariffs on Imports was imposed in December 1994. 

Table 1

Customs’ Tariffs on Imports on 01.07.95

Commodity Till 01.03.94

$/kg Till 01.12.94

Ls/kg Since 01.12.94 generally

to FTA

with EU On

01.07.95 generally

MFN to FTA

(also with EU) 

 

Live animals 

(cattle) 15 % 15 % 40 % 30 % 40 % 30 % 30  %

Meat (beef) 0.3 15 % 40 % 30 % 40 % 30 % 30  %

Meat (poultry) 40 % 30 % 30 %

Meat (pork) 55 % 45 % 45 %

Edible meat offals 20 % 15 % 6 %

Butter and cheese 0.7 30 % or 0.3 55 % 45 % 55 % 45 % 45  %

Condensed milk 40 % 30 % 30 %

Skimmed milk powder 0.3 15 % or 0.1 40 % 30 % 40 % 30 % 30  %

Eggs 40 % 30 % 30  %

Potatoes 0.06 40 % 30 % 30 %

Carrots 0.06 40 % 30 % 30 %

Other Vegetables 0.06 1-20 % 0.5- 15 % 0.5- 15 %

Grain 30 % or 0.075 0.075 0.075

Durum wheat 0.06 0.025 Ls/kg 0.025Ls/kg 0.5 %

Others wheat grains 0.06 0.025 Ls/kg 0.025Ls/kg 0.025Ls/kg

Other grains 0.06 0.075 Ls/kg 0.075Ls/kg 0.075Ls/kg

Sausages and other meat products (incl.canned) 0.6

(0.3) 55 % 45 % 18 %

Sugar (cane and beet) 0.2 0.12 Ls/kg 0.12Ls/kg 0.12Ls/kg 0.12 Ls/kg 0.12Ls/kg 0.12Ls/kg

Feed 15 % 30 % or 0.075 0.075 0.075 0.075 0.075

Alcoholic drinks 2.00 2.5 Ls/l 2.5 Ls/l 2.5 Ls/l

It can be expected the current level of import tariffs will not increase, but in the context of FTA will even decrease. 

2. PROFITABILITY IN AGRICULTURE AND AGRICULTURAL INCOMES IN THE CEECS AND NIS

It is obvious, that also in Latvia both the profitability in agriculture and agricultural incomes significantly declined at the beginning of transition due to changing price relationships which affected agriculture’s terms of trade. In most countries, price relationships have now stabilized and in a number of cases agriculture’s terms of trade even improved. 

At the same time it necessary to point out, that there are still not available exact statistical data, characterizing profitability in agriculture and agricultural incomes in Latvia. 

Only in 1996 first preparations to introduce analysis of economical data from bookkeeping farms according to FADN approach are started. The same concerns farm structure statistics (farm register). 

Thus, why incomes and profitability in agriculture can be evaluated only in indirect way. 

Comparison of monthly remuneration of employees’ in different branches 

In Share of agriculture in GDP. 

As other indirect indicator, characterising relative income level in agriculture, GDP and its distribution by types of activities can be used. 

Data, characterising dynamics of GDP by kind of activities and per employee in different production branches, are given in Table 3. 

Table 2 there are given data on employees’ remuneration dynamics in national economy in general and by different kinds of activities. As the figures show, agriculture still is among the branches with the lowest level of monthly income per employee. And also, if there can be observed some trends to converge remuneration level in other activities, gap between agriculture and national economy in average continues to increase. 

It should be pointed out, that in this table are given figures only for people employed in agricultural companies and specialised state farms, which in 1995 represented not more as 25 % from total number of people engaged in agriculture. 

Share of agriculture in GDP. 

As other indirect indicator, characterising relative income level in agriculture, GDP and its distribution by types of activities can be used. 

Data, characterising dynamics of GDP by kind of activities and per employee in different production branches, are given in Table 3. 

Table 2

Monthly remuneration of employees by kind of activity 

1993 1994 1995

USD % USD % USD %

Average in national economy 76.8 100.0 139.0 100.0 169.5 100.0

Agriculture, hunting and forestry 58.9 76.6 112.1 80.6 121.8 71.8

Fishing 86.6 112.7 180.9 130.1 225.0 132.8

Industry 72.5 94.4 140.6 101.1 179.4 105.9

Construction 74.9 97.5 136.7 98.3 164.3 96.9

Trade 67.6 88.0 145.3 104.5 127.4 75.2

Transports and communication 133.2 173.4 218.3 157.0 257.0 151.6

Financial intermediation 145.6 189.6 276.6 198.9 315.2 185.9

Education 58.4 76.1 100.3 72.1 135.6 80.0

Health services 58.9 76.6 100.9 72.6 135.9 80.1

Source: Central Statistical Bureau of Latvia

As it can be observed from this table, share of agriculture, hunting and forestry is relatively stable decreasing during last 4 years. It reflects also significant decrease in GVA per 1 employed person within agriculture compare to relatively stable level in national economy in average. 

Some conclusion can be made general level of income in agriculture is decreasing year by year since 1992. 

Table 3

GDP and its distribution by types of activities

Unit 1991 1992 1993 1994 1995

GDP total at average prices of 1993 thsd.Lats 2645.4 1732.2 1467 1475.4 1451.8

GVA (at basic prices) thsd.Lats 2401.4 1554.3 1331.8 1344.5 1324.3

of which

agriculture, hunting and forestry thsd.Lats 271.9 192.9 155.5 111.5 109.2

Share of agriculture, hunting and forestry % 11.3 12.4 11.7 8.3 8.2

Employed by kind of activity- total thsd. 1397 1345 1245 1205 1189

of which

agriculture, hunting and forestry thsd. 236 262 235 224 214

Share of agriculture, hunting and forestry 16.9 19.5 18.9 18.6 18.0

GVA per employee-total Lats/empl. 1719 1156 1070 1116 1114

 

agriculture, hunting and forestry Lats/empl. 1152 736 662 498 510

manufacturing Lats/empl. 2488 1416 1142 1268 ..

construction Lats/empl. 2103 1260 832 1102 ..

transport and communications Lats/empl. .. 2722 2848 3302 ..

financial intermediation Lats/empl. .. 5230 5450 5192 ..

Source: Central Statistical Bureau of Latvia 

However there are some expectations, in 1996 could be small increase in GVA per employee, which can result from some decrease of number of people calculated as agricultural personal. 

Table 4

Dynamics of gross value added per employed person by kind of activities, 1992=100%

unit 1991 1992 1993 1994 1995

GVA per employee-total % 148.7 100.0 92.6 96.6 96.4

agriculture, hunting and forestry % 156.5 100.0 89.9 67.6 69.3

manufacturing % 175.7 100.0 80.6 89.6 ..

construction % 167.0 100.0 66.1 87.5 ..

transport and communications % .. 100.0 104.6 121.3 ..

financial intermediation % .. 100.0 104.2 99.3 ..

Source: Central Statistical Bureau of Latvia 

Economic accounts for agriculture. 

Economic account for agriculture according to the methodology used by EU, has been started to carry out by Latvian State Institute of Agrarian Economics in close cooperation with the ASA Institute for Agricultural Sector Analysis, Germany. Apart from the official information sources as Statistical Bureau, MoA, LAAS (Agricultural Advisory Service), a lot of assumptions and calculations had to be made within the Institute due to lack of appropriate information. 

Thus it can not be said, figures represented in Discussions above show lack of available relevant economical information, characterising real income level in agriculture. Too many assumptions have to be made to get these calculations. 

Also data, illustrating income disparities in different type of farms the both by type of ownership, scale and specialisation did not exist. Only some general assumptions on higher profitability in bigger farms with specialisation in milk and grain production can be made. 

Table 5 are final and exact. They are just the best available currently. Some more update will be made within next few months. 

But they show, branch value added per person, employed in agriculture is similar to calculations on GDP, represented in previous tables and characterising income level significantly lower as that existing in other branches. 

It can be pointed out level of remuneration of employees of companies and state farms, illustrated in Share of agriculture in GDP. 

As other indirect indicator, characterising relative income level in agriculture, GDP and its distribution by types of activities can be used. 

Data, characterising dynamics of GDP by kind of activities and per employee in different production branches, are given in Table 3. 

Table 2 is to some extent higher as in sector generally. 

Discussions above show lack of available relevant economical information, characterising real income level in agriculture. Too many assumptions have to be made to get these calculations. 

Also data, illustrating income disparities in different type of farms the both by type of ownership, scale and specialisation did not exist. Only some general assumptions on higher profitability in bigger farms with specialisation in milk and grain production can be made. 

Table 5

Branch Value Added  (thsd.Lats at current prices)

1994 1995

Final output 248068 271694

Intermediate consumption 120195 126055

Gross Value Added (GVA) at market prices 127873 145639

Subsidies 4324 6920

Taxes linked to production 799 564

GVA at factor costs 131399 151994

Depreciation 24807 27169

Net value added (NVA) at factor costs 106592 124825

Number of persons employed in agriculture 209000 214000

NVA per person 510 583

Thus why in 1995 some activities of CSB and MoA have started to be carry out to recognize the situation in income sphere. The first results will be available later. 

Some stabilisation of the income level in agriculture, which still is insufficient to introduce new technologies and breeds, has been reached as the result of better adaptation of the farmers to market conditions rather from deliberatization of state policies. 

3. RURAL DEVELOPMENT POLICIES IN THE CEECS AND NIS

Issues, discussed in previous section are especially urgent in relationship to situation in rural areas in generally. 

Background 

Also in Latvia Rural development policies are rather at an early stage of formulation. 

During Soviet era Latvia was transformed from primarily agricultural economy, where two thirds of population lived in rural areas to industrial one. As the consequence was change in numbers of rural population and population density. It is characterised in Table 6.  

Table 6

Dynamics of population in Latvian rural areas in 1937-1995. 

1935 1959 1979 1990 1996

1. Number of population, total thsd. 1905,9 2079,9 2502,8 2673,5 2500,4

2. Number of rural population, total thsd. 1196,6 1003,9 838,8 820,6 775,1

3. Share of rural population % 62,8 48,3 33,5 30,7 30,9

4. Rural (non-urban) area km2 (64573)* 64589 64589 64589 64589

5. Rural population density 1/ km2 18,5 15,5 12,9 12,7 12,0

*) data for 1940

Development of economic and social infrastructure was focused on urban areas. In rural areas all the development was related to the welfare of collective and state farms as almost only economically active structure maintaining not only agricultural production function, but also all social, transport, and even local municipalities’ functions. 

Real gap in urban and rural incomes and living standards existed. 

Transition process  including privatisation of socialised farms and creating of new private family farms on the bases of restituted land, has sharpened already mentioned problems and created new ones. 

They can be divided into several groups. 

1. Agricultural employment and rural income 

a) Not decrease of agricultural employment. 

It can be mentioned as the most important. Already before reforms number of people engaged in agriculture was too extended, comparing with labor efficiency in more developed economies. After land privatisation it has even increased, because former owners were given back their land and they started to farm on that, while employees of former collective and state farms also stayed there. 

b) Sharp decrease in markets followed by decrease also in state support for agriculture 

It has led to decrease of total agricultural production by almost 50%, at approximately the same number of persons engaged in agriculture, what lowers real income per person in this branch, at coul be observed in previous section. 

2. Land usage and environment. 

a) decrease of utilised agricultural area. 

Currently more then one fifth of that used in 1990 actually is set- aside area. There are several reasons for that- on going land reform has not given to any parcel a new owner as a real farmer, limited external markets, and also internal, can not provide demand for more produce. 

b) Latvia has significant share of wet lands, requiring melioration.

Not used agricultural areas, fragmentation of fields, as the result of restitution and satisfying  of new requests, and shortage in resources to maintain already drained areas are leading to destroying of existing melioration facilities. 

c) Non used area as the source of weeds etc...

Definition of rural development policies. 

Since 1993/1994 the concept of integrated agricultural and rural development policies has been started to be discussed in Latvia. The change in the attitude to agriculture only as a source of food and industrial inputs in direction to production as employment and income source can be observed in some conceptual policy documents. 

There is not clear definition of rural development policy declared in Latvian Republic. It should be looked in the context of two parallel processes. 

1. Discussions about Agricultural policy related to Law “On agriculture”. 

This law has been passed in the second reading in the Parliament in June 1996 and now waits the final approval. 

It sets several goals of agricultural development in Latvia, among them to create preconditions for: 

• development of socially oriented sustainable, environmentally friendly agriculture considering balanced use of natural resources, as well as for development of rural cultural and social environment; 

• to promote employment in rural areas. 

Quite clearly these are goals of general rural development. At the same time necessity to develop agriculture compatible also within international markets is underlined by some other paragraphs. 

2. Development of the Concept of Latvian Regional Development policy. 

This concept was elaborated by the relevant Latvian institutions and now is under discussions in the Cabinet of Ministers. There is said in this Concept, that 

“  region in Latvia is relatively homogeneous part of Latvian territory, which is characterised by common problem or is has similar features.” 

This problem concept in some extent is put as the basis for definition of regions in practice. And rural areas due to non- diversified economical activities, low level of population density and income level, insufficiently developed infrastructure, are going to be defined as specific depressive region with setting up policies to promote economical activities there. 

Rural development and agriculture. 

Thus political leadership and the society in general are coming to: 

 statement on agriculture as an important but not only one activity in the rural areas and 

 the necessity to increase the both: efficiency of agricultural production and importance of other type of economical activities in rural areas to improve rural environment- social and natural, and living standard of rural population. 

Unfortunately still there is not any meaningful direct financial support to rural development policies in Latvia. There are several reasons to that: 

• not clearly set development and structural policies for rural areas. Several problems are defined- as not developed other businesses in rural areas, decline in agricultural production, caused by loosing of markets, not developed production and social infrastructure, especially communications. But solutions are not decided yet. 

• General Budget defficit, increased during last two years and Government’s decision to accept non- deficit budget for 1997. 

At the same time some indirect ways to support rural development. Network of Small and Medium entrepreneurship Supporting Centers is being developt through all the Latvia to provide:

• marketing research for a new business, 

• advise to establish a company, 

• support to develop bookkeeping in a new small company. 

More directly in rural areas similar activities related to agriculture LAAS is providing.

Now question on tax reliefs for depressed areas is under discussion within the Government. Mentioned above Concept on Regional Development Policy expects to establish also Rural Development Fund, where similar principles to those ones in EU are expected to be used. 

Also studying of EU structural development policies related to laging behind areas and restructuring of economy is taking place now in Latvia to find possibilities to utilize existing already experience. 

In conclusion it can be said, also in the field of rural development policies lacking of reliable statistical data and other relevatnt information is one of the main barriers to find the key problems and their possible solutions.