Farm Commercialization and Income Diversification on the Road to EU Accessionn

Thedesignationsemployedandthepresentationofmaterialinthispublica- tion do not imply the expression of any opinion whatsoever on the part of the Food and Agriculture Organization of the United Nations concerning the legal status of any country, territory, city or area or of its authorities, or concerning the delimitation of its frontiers or boundaries.

For more information please contact: Stjepan Tanic, Farm Management and Agribusiness Officer Tomasz Lonc, Policy Officer FAO Subregional Office for Central and Eastern Europe Budapest Hungary http://www.fao.org/Regional/SEUR/ Email: [email protected] [email protected]

All rights reserved. No part of this publication may be reproduced, stored in a re- trieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying or otherwise, without the prior permission of the copyright owner. Applications for such permission, with a statement of the purpose and extent of the reproduction, should be addressed to the Director, Information Di- vision, Food and Agriculture Organization of the United Nations, Viale delle Terme di Caracalla, 00100 Rome, Italy

INTRODUCTION ...... 1

WORKSHOP SUMMARY REPORT ...... 3 CONTEXT AND POTENTIAL FOR DIVERSIFICATION PRESENTED IN KEYNOTE PAPERS AND COUNTRY REPORTS ...... 3

DIVERSIFICATION OF FARM AND HOUSEHOLD INCOME BASE AND SUPPORT PROGRAMMES AND POLICIES – RESULTS OF DISCUSSIONS IN THE WORKING GROUPS ....5

WORKSHOP CONCLUSIONS AND RECOMMENDATIONS ...... 8

FARM BASED APPROACHES TO INCOME DIVERSIFICATION ON THE ROAD TO EU ACCESSION ...... 11 SOPHIA DAVIDOVA AND HANNAH CHAPLIN INTRODUCTION ...... 11

SPECIFIC CONDITIONS IN THE ACCESSION COUNTRIES IN COMPARISON TO THE EU MEMBER STATES ...... 12

DIVERSIFICATION AND PLURIACTIVITY ...... 13

WHY DOES DIVERSIFICATION OCCUR? ...... 15

TRENDS TOWARDS COMMERCIALISATION OF FARMING ...... 16

THE DYNAMICS OF DIVERSIFICATION SINCE TRANSITION ...... 19

FACTORS AFFECTING DIVERSIFICATION ...... 20

BENEFITS AND RISKS OF PLURIACTIVITY ...... 23

CONSTRAINTS AND CHALLENGES TO DIVERSIFICATION ...... 24

REVIEW OF SUPPORT PROGRAMMES AND POLICIES FOR FAMILY FARM DEVELOPMENT . . . 25

KEY ENTRY POINTS AND POLICY RECOMMENDATIONS FOR SUCCESSFUL AND SUSTAINABLE FARM DIVERSIFICATION ...... 29

REFERENCES ...... 31

EVOLUTION OF NATIONAL AND REGIONAL POLICIES AND PROGRAMMES SUPPORTING DIVERSIFICATION OF RURAL INCOMES IN THE CONTEXT OF THE EU ACCESSION...... 35 JUNIOR DAVIS RELEVANCE OF RURAL DIVERSITY AND THE RURAL NON–FARM ECONOMY ...... 35

DEFINITIONS AND MEASUREMENT PROBLEMS ...... 38 ACTIVITIES, ASSETS AND DIVERSIFICATION ...... 41

HOW IMPORTANT IS RURAL NON–FARM INCOME AND EMPLOYMENT? ...... 45

DETERMINANTS OF ACCESS TO LIVELIHOOD DIVERSIFICATION AND THE RNFE ...... 47

GOVERNMENT AND DONOR POLICIES AND PROGRAMMES OF RELEVANCE TO THE RNFE ...... 65

WHAT DO WE KNOW ABOUT POLICIES AND INTERVENTIONS FOR THE RNFE? ...... 75

REFERENCES ...... 81

APPROACHES TO FARM/HOUSEHOLD INCOME DIVERSIFICATION FOR IMPROVED LIVELIHOOD IN BULGARIA ...... 85 HRABRIN BACHEV EXECUTIVE SUMMARY ...... 85

INTRODUCTION ...... 88

EXTENT OF, AND FACTORS FOR FARM COMMERCIALISATION ...... 89

CASE STUDY ON FARM INCOME DIVERSIFICATION AND ENTERPRISE DEVELOPMENT IN THE PAZARDJIK REGION ...... 95

CONCLUSIONS AND RECOMMENDATIONS ...... 107

APPROACHES TO FARM/HOUSEHOLD INCOME DIVERSIFICATION FOR IMPROVED LIVELIHOOD IN CROATIA ...... 111 MARIO NJAVRO EXECUTIVE SUMMARY ...... 111

INTRODUCTION ...... 114

THE SETTING ...... 115

FARM STRUCTURE AND PERFORMANCE ...... 118

SUPPORT POLICIES INSTITUTIONS AND SERVICES ...... 122

ENHANCING RURAL LIVELIHOOD – ISSUES AND PERSPECTIVES FOR ZAGREB COUNTY ...... 126

FARM COMMERCIALISATION – CASE STUDY ...... 130

CONCLUSIONS ...... 137

REFERENCES ...... 138 THE STATE OF FARM AND RURAL INCOME DIVERSIFICATION IN THE CZECH REPUBLIC ...... 139 TOMAS DOUCHA, LADISLAV JELINEK, TOMAS MEDONOS, TOMAS RATINGER INTRODUCTION ...... 139

THE ROAD TOWARDS A MARKET–ORIENTED FARM SECTOR ...... 140

THE CURRENT LEVEL OF DIVERSIFICATION OF FARM AND FARM HOUSEHOLD INCOME . . 144

POTENTIAL AND CONSTRAINTS TO DIVERSIFICATION ...... 148

CONCLUSIONS ...... 150

REFERENCES ...... 151

THE STATE OF FARM AND RURAL INCOME DIVERSIFICATION IN HUNGARY ...... 153 SZILARD PODRUZSIK INTRODUCTION ...... 153

ROLE OF AGRICULTURE IN NATIONAL ECONOMY – MAIN INDICATORS ...... 153

REGIONAL DIFFERENCES ...... 154

FARM STRUCTURE AND OWNERSHIP ...... 155

INCOME DIVERSIFICATION ...... 155

PRE–ACCESSION PROGRAMMES ...... 157

FUTURE PERSPECTIVE ...... 158

REFERENCES ...... 158

THE STATE OF FARM AND RURAL INCOME DIVERSIFICATION IN ROMANIA ...... 161 MARIOARA RUSU INTRODUCTION ...... 161

OVERVIEW OF GOVERNMENT POLICY CONCEPTS AND PROGRAMMES ...... 162

FARMING SECTOR IN ROMANIA – BETWEEN SURVIVAL AND PERFORMANCE ...... 163

GENERAL CHARACTERISTICS OF NON–FARMING ACTIVITY ...... 168

CONCLUSIONS AND RECOMMENDATIONS ...... 170

REFERENCES ...... 171 APPROACHES TO FARM/HOUSEHOLD INCOME DIVERSIFICATION FOR IMPROVED LIVELIHOOD IN SLOVAKIA...... 173 JELA TVRDONOVA INTRODUCTION ...... 173

THE SETTING ...... 174

PROGRAMMES AND POLICIES SUPPORTING DIVERSIFICATION ...... 179

CONCLUSIONS AND RECOMMENDATIONS ...... 187

REFERENCES ...... 189

ANNEX TABLES ...... 189

THE STATE OF FARM AND RURAL INCOME DIVERSIFICATION IN SLOVENIA ...... 193 ANTON PERPAR SOME CHARACTERISTICS OF AGRICULTURAL HOLDINGS ...... 194

AGRICULTURAL POLICY AND BUDGET ...... 196

INCOME SITUATION IN SLOVENE AGRICULTURE AND ON FAMILY FARMS ...... 199

CONCLUSIONS ...... 202

REFERENCES ...... 203

LIST OF PARTICIPANTS ...... 205 ACKNOWLEDGEMENTS

The workshop on Farm Commercialisation and Income Diversification on the Road to EU Accession and these proceedings are the result of work and joint efforts of a number of people who invested their enthusiasm and experience in implementation of this workshop. Intellectual input to the workshopwasprovidedbytheauthorsofkeynotepapersandcountrystud- ies from Bulgaria, Croatia, Czech Republic, Hungary, Romania, Slovakia and Slovenia. Experiences shared by participants during discussions were vital for creation of a cross–cutting picture on the issues identified and discussed. Financial support provided by the Government of Czech Republic, within the framework of the Cooperation Agreement with FAO, was essential to havethemeeting.CoordinationwiththeCzechMinistryofAgricultureand NationalFAOCommitteeheadedbyMrJ.Muchkacontributedtotheover- allsuccessoftheworkshop.MrJ.Jesztrebi,ExecutiveDirector,Comenius, Prague, Czech Republic, and his team provided excellent support in the organization and throughout the implementation of the workshop. The workshop was prepared and implemented under the leadership of Messrs D. Baker, Chief AGSF, F. Rembold, SEUM, Tomasz Lonc, SEUP and Stjepan Tanic, SEUM, thus providing an excellent example of multidisciplinary approach and collaborative work between FAO Head- quarters and decentralised offices. During the preparations and follow–up activities, Ms M. Kadlecikova, FAO Sub–regional Representative, for Cen- tral and Eastern Europe has actively contributed with her support to the topic as one of major areas of potential FAO assistance to countries in the Sub–region. Finally, a note of appreciation goes to S. Tanic and T. Lonc for their conceptual contributions and technical backstopping during preparation and implementation of the workshop, as well as the final revision and editorial work, needed to publish these proceedings.

FOREWORD

European countries have been passing through the process of adjustment of their agricultural sectors, which also resulted in the re–establishment and emergence of many new family farms that are becoming increasingly important. Most of these farms, which are in many cases small, are faced with the lack of adequate support and management skills to operate and develop under the increasingly demanding market conditions and regulatory requirements. In addition, new business approaches are developed as a tool to respond to new challenges and constraints on the farming sector. The agrifood sector, for example, is developing quality standards with which agricultural producers must comply and which are used to establish product differentiation and market segmentation. This has generally a negative effect on small family farms, their incomes and household livelihoods. In many cases farmers do not know how to respond to these changes, and how to exploit new markets opportunities to expand and commercialise. This in turn results in contraction of the household income base and reduced employment opportunities, sometimes pushing the farming population beyond the threshold of poverty. To address these issues a workshop on Farm Commercialisation and Income Diversification on the Road to EU Accession was organized within the framework of the Cooperation Agreement between the Government of the Czech Republic and the Food and Agriculture of the United Nations. The purpose of this meeting was to investigate and review the diversification of farming through redeployment of farm resources into new agricultural and non–agricultural activities that could create opportunities to make more efficient use of available resources, increase farm and household incomes to improve family farm livelihoods. This workshop has been an excellent example of cooperationbetweenthecountriesofCentralandEasternEurope,whichwerefacedwiththeabso- lutely unique challenge of transforming their economies from centrally planned to market oriented ones. The support of the Ministry of Agriculture of the Czech Republic to the organization of the workshop was greatly appreciated. Participants of the workshop representing different stakeholder groups, including farmers, representatives of central and local government, research, extension and rural development institutions came from eight Central and Eastern European countries: Albania, Bulgaria, Croatia, Czech Republic, Hungary, Romania, Slovakia and Slovenia. Workshop participants appreciated the meeting as a good opportunity to exchange experiences and to discuss variety of approaches to family farm diversification which can contribute to sustainable expansion of family farm livelihood base. Timing of the workshop in the wake of EU enlargement also provided a unique opportunity to learn from experiences of new EU members and, building on past FAO experience and initiatives, use them in the future work in designing assistance and support programmes for other Central and Eastern European Countries.

Maria Kadlecikova, FAO Sub-regional Representative for Central and Eastern Europe

INTRODUCTION

Diversification of the income base by redeployment of farm resources into new agricultural and non–agricultural activities could create opportunities to make better use of labour, increase farm household income and improve family farm livelihoods. Numerous studies show that in this endeavour the major bottlenecks are the human resource capacity for adoption of new concepts and management tools, as well as the absence of policies addressing legal impediments to market development and creation of the supportive environment for emergence of new types of private small–scale rural enterprises. Barriers to entry and growth of new enterprises frequently exist in contravention of national legislation and policy declarations. Farmers lack knowledge of market opportunities, prices and standards and production technologies. The challenge facing small farmers in making necessary adjustments towards the pluriactive livelihoods is to improve their management practices and decision making capabilities, and adoption of innovative value adding products and services. With the accession to the EU, these processes are expected to continue. However, due to the differences in the pace of adjustment and adoption of concepts and tools needed to achieve common policy objective to integrate into the EU, there is also a need to reassess those differences. Equally important is to explore the potentials of different farm level approaches and experiences to diversification of farm household income base as a means to sustain farm family livelihoods. To address these issues, a workshop Farm Commercialisation and Income Diversification on the Road to EU Accession was organized within the framework of the Cooperation Agreement between the Government of the Czech Republic and FAO as part of FAO/GCP/INT/790 “Training Programmes in Selected Areas”. The workshop was organized under the auspices and with the support of FAO, and in coordination with the Ministry of Agriculture of the Czech Republic and the Czech National FAO Committee. The workshop was implemented by Comenius, Pan–Eu- ropean Society for Culture, Education and Scientific and Technical Cooperation. The workshop took place in the Hotel Krystal, Prague, from 2 to 6 November 2003. Theobjectiveoftheworkshopwastocontributetobetterunderstandingoffarmhouseholds'income base diversification patterns in selected Central and Eastern European (CEE) countries, seen as a way for family farm development and improved rural livelihoods. This objective was pursued through: (i) exchange of information on farmer opportunities and decision trade–offs contributing to improved decision making, addressing related management and entrepreneurial skills, introduction of new value–adding on– and off–farm enterprises and responsive support services; (ii) review of previous, present and prospective support programmes and policies for family farm development that could be instrumental for diversification into alternative farm andnon–farmincomegenerationactivitiesand(iii)appraisalofcircumstances,drivingfactors, key entry points, and support requirements behind successful and sustainable farm (livelihoods) diversification and enterprise development. The workshop was attended by 32 participants, selected on the basis of their professional interest and experience in the theme of the workshop. Besides FAO staff members and resource persons, participants came from government, farmers, research and development and other relevant institutions and stakeholders groups from Albania, Bulgaria, Croatia, Czech Republic, Hungary, Romania, Slovakia and Slovenia. One of the outcomes of the workshop are these pro-

1 ceedings which comprise of workshop summary, two keynote papers and country case studies and reports. Country reports, as they were prepared by the authors, present not only a factual situation of the state of farm and rural income diversification in individual countries, but can also serve as an indicator of the availability of relevant information and the state of conceptual knowledge about farm commercialisation, rural income diversification and related policies

2 WORKSHOP SUMMARY REPORT

The workshop was structured around the main plenary session during which the keynote papers were presented, followed by country briefs on the state of farm and rural income diversification and case studies on approaches to farm/household income diversification for improved livelihood. During the breakout sessions, participants identified and discussed issues related to: (i) diversification of the farm and household income base through adoption of value–adding activities, developing entrepreneurial attitudes and skills, sound farm and rural business management approaches and practice and (ii) support programmes and policies to create an enabling environment for rural income diversification and facilitate improved farm and rural enterprise level decision making, thereby supporting sustainable expansion of family farm livelihood base.

CONTEXT AND POTENTIAL FOR DIVERSIFICATION PRESENTED IN KEYNOTE PAPERS AND COUNTRY REPORTS

The context and conditions for farm commercialisation and diversification in the eight CEE 2004 accession countries in comparison with the EU–15 Member States are highly specific. As a result, EU CAP–based policies and approaches may not be adequate for the accession countries. Evidence from several EU accession countries indicates that diversification contributes to increase of household incomes in a period of stagnating farming revenues. The main external factors affecting farm–based diversification are related to the development of local economy and local labour market, as well as the state of infrastructure, particularly transport and telecommunications. On the other end, education levels, age, capital availability, social capital and networks and farmers' perception and preferences were given as the most important internal factors, these in turn affected by policies and programmes. From the farmers' point of view, based on EU CAP experience, policies inhibiting diversification include stabilisation of prices of farm outputs, direct payments, investment subsidies, tax exemptions and subsidies to farming credit. Policies and initiatives for encouraging diversification include provision of seed money for business start–up, loan guarantees, tax exemptions for diversified enterprises, advice on completing loan or grant application forms, business training and advice on business planning, as well as non–pecuniary benefits like free health care and training to undertake off–farm employment. In the context of EU accession, Rural Non Farm (RNF) employment appears to be a major driving force contributing to agricultural and rural development, improved food security, rural economic growth, and sustainable rural livelihoods. This hypothesis was supported by evidence and findings from RNF enterprise and household surveys in Georgia and Romania, as well as several case and “best practice” studies. Key identified constraints to RNF enterprise development were: (i) lack of working capital and investment funds, (ii) lack of managerial expertise and know-how, (iii) unstable market environment, (iv) poor and ineffective legislation (competition, contracts, property rights and corruption) and (v) inadequate economic infrastructure (roads, railways and water supply). In order to exploit the potential of RNF enterprises

3 development, the identification of export market for tradable goods and services to non-local markets is considered to be a key component. The context and driving forces for commercialisation and diversification in developing regions differ from those in the transition countries. The shift from food–first strategies with systemic price risk at the local level, forced farmers to look at market options for “high value commodities” to generate cash incomes to meet food and non–food needs through introduction of market–oriented farm enterprises. In the context of Western Europe, diversification mainly relates to non–farm activities or the maintenance of a diversified enterprise mix as risk management strategy and in response to loss of employment opportunities in primary production. As regards commercialisation, the gap between transition and development countries is nar- rowing due to the vertical integration and supply chain concentration and management. In both groups of countries removal of state–dominated supply chain management in the course of structural adjustments, associated with market–focused policy reforms have been a driving force for vertical integration and concentration. Despite differences in terminology and circumstances, there is some commonality in trends and challenges relating to commercialisation and diversification in Western Europe, the CEE transition economies and developing regions. The presentations and discussion of country briefs and case studies on the status of farm and rural income diversification demonstrated the diversity of situations and approaches. In response to production support policies, many newly established farmers attempted to adjust their businesses to the new conditions through expansion of farm operations, commercialisation and specialisation. In many cases farmers who managed to transform their farms to successful businesses had to rely on their own experience and initiative when moving into commercially–oriented production. Due to the limited possibilities to improve efficiency through economies of scale, caused by institutional restrictions on the land market and local monopolies on input and output markets, many of them resorted to diversification of farming into storage, processing and marketing. The start assumption was that income and enterprise diversification can contribute to better management resources, reduction of risk, stabilisation of cash flows and overall improvement of sustainability of their households. Country case studies on approaches to farm and household income diversification for improved livelihood from Bulgaria and Croatia presented successful farm enterprise development and income diversification. The studies described specific approaches for family farm development by the new generation of farm entrepreneurs who managed to develop a modern farm. In both cases experiences has shown that the most effective way to develop a farm is to enlarge and modernise the enterprise through applying up–to–date know–how, based on specialist advice of experts, introducing more productive varieties and technologies, increased production specialisation, based on agro–market analysis, and diversifying from farming into marketing and processing. The entrepreneurs considered however, their success would have been greater if government supportpoliciesforfamilyfarmdevelopmentwereinplace.Itwasnotedthatcommercialisation and vertical integration in the food chain may be solutions only for a limited number of well organized and equipped farms with credit standing or informal borrowing capacity and skilled management. Possible solutions for farmers that do not meet such conditions could be alliances with other farmers or contract arrangements with agribusiness. This experience was confirmed and supported by other farmers participating in the workshop during their presentations.

4 To the varying degree, farm diversification is also becoming widely recognised as an essential instrument of rural development policies. Diversification of farming activities into non–agricultural activities, particularly services, has demonstrated to have a strong multiplier effect through job creation. Since incomes from farming activities are declining in the long–run, large–scale farms emerge with fewer full–time workers aiming to increase productivity. Larger holdings move towards intensification and concentration, while smaller ones combine farming income with other sources to sustain a socially acceptable level of incomes. While CEE national support programmes and policies in the last decade were mainly focusing on direct support, EU–supported programmes such as Phare and SAPARD, targeted structural adjustment, institutional and rural development in general, creating an enabling environment for commercialisation, as well as on– and off farm diversification. However, the effectiveness of those programmes was and to a certain extent still is diminished, on one hand by changing rules, lack of transparency according to beneficiaries, and inconsistency in the design of financial support instruments. On the other hand, the emerging private farms sector lacks entrepreneurial and managerial skills and capacity, including attitudes, technical knowledge and management skills on the part of the potential beneficiaries.

DIVERSIFICATION OF FARM AND HOUSEHOLD INCOME BASE AND SUPPORT PROGRAMMES AND POLICIES – RESULTS OF DISCUSSIONS IN THE WORKING GROUPS

The starting point for the breakout sessions was a short brainstorming session in which participants identified the main groups of issues related to the commercialisation of farming and diversification and their impact on rural incomes. From the farm and household perspective the main issues were related to credit and finance, education and training, infrastructure and services, marketing and vertical food chain integration. From the policy level perspective the main issues identified were administrative burdens, legislation, insurance, land and agrarian structures and rural development policies in general. Those issues were used by two working groups during the breakout sessions where opportunities and recommendations for action and assistance needed to improve diversification of farm and household income base were discussed. As the outcome, a number of recommendations and actions related to the support programmes and policies, as well as possible areas of technical assistance have been identified. A summary and findings of the working groups discussions are presented in tables 1 and 2. In addition to that, the discussions also revealed several analytical and policy issues which may be of interest for further investigation (listed below not in the order of priority). • Circumstances and causes of diversification and commercialisation differ in particular countries and regions. The development policies and instruments often do not reflect the particular cause and effect modalities as no standardised policy approach is possible. Governments and stakeholders are not clear as to the priorities for rural and regional development policies. On one hand, CEE transition economies face the challenge of developing, as part of the EU accession harmonisation of agricultural and rural development policies, the institutional framework in line with the acquis communautaire in order to benefit from the EU accession funds. On the other hand, as part of the transition to a market economy, they have to devolve policy implementation and resources management responsibility to regional and local levels. This will require capacity building at central, regional and local governments' levels to

5 formulate and implement specific policies, and a large–scale training of trainers programme to provide rural development agencies and rural entrepreneurs with the needed administrative, managerial and marketing skills. • Experience has shown that commercialisation and vertical integration in the food chain may be solutions only for a limited number of well organized and equipped farms with credit standing or informal borrowing capacity and skilled management. Lack of start–up capital combined with non transparency of operational procedures inhibits smaller farmers to commercialise. Possible solutions for those could be alliances with other farmers or contract arrangements with agribusiness. Although there are numerous programmes and support initiatives to offset diseconomies of scale and improve farmers' bargaining power and position in a food chain, due to the inappropriate extension and consulting services, knowledge about potentials and benefits of cooperation, commercialisation and diversification is still limited. It is therefore necessary to appraise existing approaches and programmes as a basis for the design and implementation of new ones based on best practices. • Identification and development of products for markets to be found outside the less–favoured areas were recognised as a condition for rural enterprise development and economic growth; it is doubtful whether policies to increase or subsidise incomes from farming alone will generate sufficient purchasing power and demand to improve livelihoods. While foreign direct investment has a record of improving agricultural productivity and creating opportunities for commercialisation, the experience of a number of countries has shown that displacement of workers and exclusion of rural populations may rapidly become social problems. • A legacy of the centrally–planned economy is distrust of farmers and entrepreneurs for all forms of cooperatives and associations. Donors–supported efforts to build farmers marketing institutions have been moderately successful. The preparation for the EU CAP Common Market Organisations remains a major challenge as producer groups etc. have to be active for a number of years prior to accessing the system. A specific training, extension and education effort is required to assist these entrepreneurs in finding their place in a market economy, to demonstrate the factual dimensions of the commercialisation and diversification. • Some of the CEE transition countries face a dual farm structure with a socially important subsector of small subsistence farms that offer housing and basic food security for displaced urban and industrial workers. It remains to be seen whether and at what cost the surplus labour on these farms can be extracted from farming and, in effect, land and farm fragmentation and hidden unemployment reduced. Diversifica- tion and commercialisation of farming will have in the medium and long run fundamental implications for the social protection and security systems, as farmers exit social security systems designed and subsidised for this vocational group. Gov- ernments, in turn, face the immediate challenge of building or restructuring farmer retirement systems that can be supported by the state budget. It was noted that in some countries retirement benefits and pensions, based on the former collective farms'retirementsystem,remainthesolesourceofcashincomesoftheruralpopula- tion.

6 Table 1: Working group I – diversification from farm–household perspective

ISSUE OPPORTUNITY RECOMMENDATION Credit and financing • transparency of operational proce- • existing information channels consulta- • appraise existing programmes design dures tion and monitoring mechanism and implement best practices • range of financial products for diversi- • existence of government support • redesign government programmes to fied farming programmes and commercial banking introduce risk mitigating measures • start–up venture capital sector and complement commercial landing Marketing and food chains emerging body of innovative insurance food chain mechanisms to manage the • appraise possibilities for introduction • mechanisms and products in other re- • risk of innovative insurance mechanism gions • appraise best practices and inform farmers about the benefits of producer • diseconomies of scale–bargaining • existing policies and support initiatives groups power and programmes • promote knowledge about regional differentiated products and opportunities Education and training • entrepreneurial behaviour and manage- • capture previous specific recommenda- ment skills tions on training related to farm management and marketing, non/farm education level of rural population • extension services existing activities, business planning inappropriate extension and consult- • • existing SMEs support programmes • redefine the role of extension person- ing services • nel towards facilitators of change • knowledge about potentials for • consultancy services (investment, busi- diversification ness planning) to cover rural areas Infrastructure and services • promotion and certification of • market infrastructure • physical infrastructure in place on–farm value added products by local government • information technology training for extension services • promote the use of info services • the use of information technology • information technology available • support to development of software and information packages suitable to farmers needs

7 Table 2: Working group II – diversification from policy level perspective

Recommendations and actions Policy issues and options Regional and local Central government Private sector and NGOs governments Diversification and commer- Training and skills to receive Rural development policies in Diversification and commercialisation as part of rural de- and process development general cialisation as part of regional velopment policy funds and to develop export development policy • integrate development ef- • define ptolicy priorities (outside region markets) forts devolution of responsibility regular policy impact assess- • • to allocate funds and imple- • assistance to farmers and • support to regional development ment programmes and pro- entrepreneurs in prepara- ment or to population and tion of project proposals for vocational groups • devolve funding and imple- jects mentation responsibilities submission for loans Recognise role of EU Com- mon Market Organisation Recognise role of EU Com- mon Market Organisation and NGOs Business and management Administrative burdens faced and NGOs Development of local versus skills training by farmers and entrepreneurs export markets Development of local versus export markets training of trainers to pro- standardise procedures to harmonisation with EU • • • vide services by private sec- extent possible CAP procedures in me- • one stop shop for assistance tor dium–term Recognise role to farmers and entrepre- of EU Common Market Or- neurs ganisation and NGOs Farmer and entrepreneur–friendly legal frame- Farmer and entrepre- work Legislation environment neur–friendly legal frame- Training on legal aspects of Harmonisation with EU work building marketing institu- • improve transparency and • tions stability of laws acquis communautaire, in particular CAP • inclusion of grey economy into rural development • training in producer to con- • standardise procedures to • inclusion of grey economy sumer legislation at enter- extent possible into rural development • enabling environment for prise level FDI • enabling environment for FDI Diversification as an instru- Land and agrarian structures ment to improve agrarian Integrated regional develop- structure ment of rural areas, including • prevent further land and infrastructure investment and Training of trainers for land farm fragmentation • Improve access by farmers rehabilitation and farm consolidation to available structural funds • simplify court and intro- • Provide social safety nets to programmes duce out–of–court settle- • Provide social safety nets to displaced and excluded ment procedures displaced and excluded farmers farmers

WORKSHOP CONCLUSIONS AND RECOMMENDATIONS

1. Participants agreed that the workshop provided a useful opportunity to exchange information and experience on the state of farm and rural income diversification; the presented keynote papers provided a methodological approach and base for further work to analyse issues and policies related to commercialisation and diversification of farm and rural incomes.

8 2. Workshop discussions allowed to list and review key economic and policy issues related to commercialisation of farming and diversification of rural incomes, and on this basis, to develop a set of recommendations, accepted by participants, reflected in the summary of the workshop. 3. FAO was invited to facilitate further networking and the exchange of information related to the field level activities which support farm commercialisation and income diversification in the transition economies. 4. The following were identified as the major areas of possible technical assistance related to the issues discussed during the workshop: • information, trainingandeducationrelatedtoidentification anddiversification of income generating opportunities, • improvement of extension and advisory services with particular emphasis on business–related training, marketing and financial management, • appraisal of best practices to facilitate the role of producer groups in the food chain, • training of local level authorities in creating a conducive and supporting environment for village and community rural development, focused on SMEs diversified farms as target group and • assistance in design of local level financial services. 5. Proceedings of the workshop, consisting of presented papers and studies, should be edited for publication and distribution among participants and interested stakeholders in CEE transition economies.

9 10 FARM BASED APPROACHES TO INCOME DIVERSIFICATION ON THE ROAD TO EU ACCESSION

Sophia Davidova and Hannah Chaplin1

INTRODUCTION

This paper aims to provide insights into the socio-economic pressures, driving forces and constraints to farm household income diversification in Central and Eastern European countries (CEECs) that are on the road to accession to the EU. Although the EU policies and experiences in the field of pluriactivity are particularly relevant for accession countries, the latter have their own specificities and constraints that are often more similar to the other countries in transition than to the current EU Member States. From this point of view, some of the lessons and prac- ticesintheaccessioncountriescouldbeusefulforpolicyformulationandsupportprovisionsfor the rest of the transition economies. The insights into the development of income diversification, its major driving forces and barriers faced by farm households presented in this paper come from various sources and studies. However, the main information is generated by a survey carried out within the EU Fifth Frame- work programme project Integrated Development of Agriculture and Rural Areas (IDARA)2. The survey covered three regions in each of Poland, Hungary and the Czech Republic. In Po- land, 342 households were surveyed, in Hungary, 267, and in the Czech Republic, 217. The regions were selected by local experts to reflect the contrasting rural environments in each country. Most of the regions are predominantly agricultural and are disadvantaged when compared to the national average standard of living and the level of unemployment. Within each region, sampled farms were selected randomly from lists of individual farms held by central statistical offices. However, in the case of unregistered individual farms in the Czech Republic, lists made at the local level were used. 3 The paper is structured as follows. The next section discusses some specific conditions in accession countries which are contrasted with the policy environment in the EU Member States. Fol-

1 Sophia Davidova is a senior lecturer in Agricultural Policy and Hannah Chaplin is a Ph.D. student at Imperial College, London, Wye Campus, Wye, Ashford, Kent TN25 5AH UK, e-mail: [email protected] 2 EU FP5 QLRT-1999-1526. 3 In the Czech Republic there are two main legal types of individual undertaking in agriculture: (a) trade law farmers, subjected to business registration under the Trade Law like other full liabilitybusinesses;and(b) solelyoperatingfarmers,whoarenotsubjecttosuchregistration.

11 lowing this, the concepts of diversification and pluriactivity are defined. The socio-economic pressures, as a result of which the process of diversification occurs, are then developed. Com- mercialisation of farming in accession countries in light of its potential effect on diversification is elaborated, followed by an analysis of the dynamics of farm income diversification during transition. The main factors, benefits and constraints to diversification are identified. Follow- ing on from this, relevant policies are reviewed in the penultimate section and points for further support identified in the final section.

SPECIFIC CONDITIONS IN THE ACCESSION COUNTRIES IN COMPARISON TO THE EU MEMBER STATES

Successive reforms of the Common Agricultural Policy (CAP) have attempted to reduce the level of real protection afforded to farmers in the EU and have altered the instruments of support. These reforms, which aim to increase international competitiveness in the Union, are seen to promote further farm amalgamation and reductions in the agricultural labour force. To ease policy adjustments, direct payments were introduced along with increased financial support for rural development that may concern “the diversification of activities with the aim of complementary or alternative activities” (Council of the European Union, 1999). Under these circumstances, diversification has been seen by governments as a strategy to stabilize and augment farm household incomes without encouraging surplus production (Shucksmith, 1993). This has led to a shift in support measures towards rural development, including farm diversification. Diversification through non-agricultural enterprises may lead to job creation. In rural areas, with little alternative employment to agriculture, such diversified enterprises could aid in stymieing rural depopulation. Thus, diversification, whether through off-farm employment or diversified enterprises, is an important means of maintaining the agricultural fabric of rural society. Additional income gained from these activities facilitates farm households to remain in agricultural production without recourse to government income support. These characteristics, combined with its potential to lower the budgetary costs of agricultural policy while maintaining farm household incomes, make diversification an increasingly popular strategy for governments in the EU. Within this particular policy environment, strategies to aid agricultural diversification have been developed which rest on four main assumptions (Chaplin et al., 2004)4. These four assumptions can be listed as: (a) diversification is a process of decreasing dependence on agricultural activities; (b) real protection to farmers is being reduced; (c) farm households possess a relatively high level of physical assets; and (d) farm diversification can make a significant contribution to rural development. These assumptions are discussed in turn and contrasted with conditions in accession countries.

4 The remaining part of this section draws heavily on the referred paper by Chaplin, H., Davidova, S. and Gorton, M.

12 DIVERSIFICATION IS A PROCESS OF DECREASING DEPENDENCE ON AGRICULTURAL ACTIVITIES

The underlying idea in the current EU Member States is that the farm based adjustment occurs as the households steadily decrease their dependence on agriculture, thereby assuming an initial full engagement in agricultural activities. This is not fully true for accession countries since, during the transition process, land reforms resulted in households gaining agricultural land. These households started to generate income, whether in cash or in kind, from their land. In this way, agricultural income from an own farm entered the income portfolio (in Poland and Slovenia,landwaslargelyprivatepre-reform,soentryintoagriculturewaslesspronounced).In the case when households had previously been exclusively engaged in non-agricultural activities, land reform made them pluriactive. Therefore, in the context of accession countries, pluriactivity should not be considered as a unidirectional process out of agriculture. An indication of the extent to which households diversify into agriculture is provided by the IDARA survey results. In the Polish sample, 19 percent had diversified into agriculture, while this percentage was 25 percent in the Czech Republic and 34 percent in Hungary. Mathijs et al. (2001) studied 412 farms in Slovakia and found that 31 percent had diversified into agriculture. Therefore, the historical pattern in accession countries is different to the West European experience of a steady postwar disengagement from agriculture.

Real protection to farmers is being reduced The promotion of agricultural diversification in the EU has been against a backdrop of CAP reform that is lessening the real protection afforded to agriculture (Shucksmith & Winter, 1990). CEEC agriculture has a very different history of relationships with the state and overall, during the 1990s, it received significantly less market price and direct payment support than in the EU (OECD, 2001). For example, if the percentage Producer Support Estimate, representing the share of market price support and various direct payments in the total farm receipts, in 2002 was36percentintheEU,itwas29percentinHungary,28percentintheCzechRepublicand14 percent in Poland. Post–accession, in general, the level of price support and direct payments are expected to be higher than that which CEEC farmers currently receive (Slovenia is an exception to this trend). Whereas diversification is promoted in Western Europe as a strategy for dealing with falling government protection, for the CEECs it is necessary to consider the attractiveness of diversification in an environment of rising farm support.

Farmers have a considerable asset base Typically, family farms in the EU have a considerable asset base from which they can embark on diversification. For example, several schemes have attempted to promote the conversion of farm physical assets into new uses (renewal of redundant buildings and development of farm tourism) or the conversion of land into sporting and leisure uses (Ilbery et al., 1998). In the accession countries, individual farms have typically less physical, financial and landed capital than their EU counterparts and often the only item they own is a parcel of land. Some evidence on capitalization was given by a recent study of bookkeeping farms in Western and Eastern Eu- rope (Davidova et al., 2002). The authors found that in 1999 the average value of total assets per

13 hectare was EUR 1 450 in the Czech Republic, EUR 1 977 in Hungary and EUR 3 440 in Poland. In contrast, for the two EU regions studied (the small-scale, upland farming region of Navarra in Spain and the lowland, arable region of southeast England) the comparative figures were EUR 5 840 and EUR 9 540 respectively.

Agricultural diversification can make a significant contribution to rural development In Western Europe, by creating new non-agricultural enterprises and consequent job generation, diversification has been seen by some as a plausible strategy for rural development. How- ever, the rate of agricultural diversification has been spatially uneven (McInerney & Turner, 1991). The highest levels of diversification and new job generation have been recorded in accessible and wealthier rural areas. This diversification has tapped into a growing demand for leisure and recreational activities. In contrast, where diversification is most needed, in remote low-incomelocalities,performancehasbeenextremelymodest.Therefore,expectingquickand territorially equal contributions of farmers to rural development is not realistic. This, however, does not undermine the importance of pluriactivity for household incomes in the accession countries. From the above, it is clear that differences do exist between the situation in the current Member States and the accession countries. Following from this, it could be argued that in CEECs specific policies and support are necessary in order to promote pluriactivity.

DIVERSIFICATION AND PLURIACTIVITY

Diversification can be seen as “the production of a variety of different articles, services, etc. Of- ten as a safeguard against the effects of fall in demand for a particular product” (A Supplement to the Oxford English Dictionary, 1972: 825). The concept of diversification is often taken to mean a shift away from the production of surplus commodities to those which may be expanded (Newby, 1988). The latter is particularly relevant to accession countries, as once they join the single market, they will face demand constraints and oversupply of some primary agricultural products. Diversification is also an adequate strategy of utilizing excess capacity of farms' pro- ductionfactors.Itinvolvestheuseoffarmresourcesfornon-agriculturalactivities(Shucksmith & Winter, 1990). If there is no market for surplus factors of agricultural production, such as land or capital, income could be generated by utilizing these factors in an on-farm non-agricultural enterprise. It could include, for example, on-farm processing of primary agricultural products, or the provision of non-agricultural products and services on-farm. For larger farms, the surplus factors of production are mainly capital and land, whereas for the smaller farms, it is labour which is most often in surplus (Shucksmith et al., 1989). The term diversification is often used interchangeably with those of part-time farming and pluriactivity. Focusing on farm households, part-time farms are defined as those where either the farmer or spouse combines non-agricultural work with work on the holding. The farmer or spouse is then a part-time farmer (Gasson, 1986). Pluriactivity is utilized to describe the combi- nation of farming and other gainful activity, which could be on– or off–farm (MacKinnon et al., 1991). In this paper, diversification and pluriactivity are used interchangeably. They include farming in conjunction with other gainful activities, namely on– or off–farm non–agricultural

14 enterprises, or off–farm employment. The term non–agricultural includes activities beyond the primary production of food, fibre and fuel, such as on–farm processing, packaging and marketing of produce. In addition, household income could include the so–called unearned income. This is income which does not require the human resources of the receiver in order to be obtained. Examples are interest from savings, dividends, remittances, pensions and other state benefits (Shucksmith et al., 1989). Of course, farmers can also diversify within agriculture by expanding their farm output mix. However, as monoculture is not a particular problem in the accession countries, this aspect is not treated in the paper.

WHY DOES DIVERSIFICATION OCCUR?

There are socio–economic pressures at the household level which act as drivers of diversification. The first is the increasing commercialisation of agriculture due to a rise in labour productivity, specialization and concentration in agricultural production itself (McNamara and Weiss, 2001). Concentration of farming has been a response to the “production treadmill” in which the costs of production have increased to a greater extent than the price of farm output. In order to overcome this, farmers in developed countries have expanded their production area or used more intensive methods of production; both responses have generally been financed through borrowed capital. Production has therefore increased, leading to overproduction and a corresponding fall in prices, exacerbating the original problem. In an effort to break this vicious cycle, governments introduced production–limiting policy instruments, such as quotas. This halted farmers from intensifying agricultural production but pushed them to seek alternative forms of income and to diversify (Ilbery, 1988). Diversification can be distress–push or demand–pull. This suggests that households may be pushed into pluriactivity by financial necessity or may be pulled by non–agricultural opportunities. Those who are pushed, normally accept returns on assets or a wage below their returns to farming or their agricultural wage, as they are simply trying to increase their total household income. These households are constrained with regard to their job opportunities by their education levels, appropriateness of skills, lack of infrastructure etc. There are many such households in accession countries and they are one of the target groups for support to help increase their training and practical skills. Most studies in several transition countries (Bulgaria, Romania, Poland, Hungary, the Czech Republic) have found that the main reason for diversifying is to gain additional income, and therefore diversification tends to be distress–push (Kopeva et al., 2003; Moellers & Heidhues, 2003; Chaplin et al. , 2004). Usually, small farms are associated with distress–push diversification. This can be illustrated by the example of farm households in Podkarpackie voivodship, in the southeast of Poland. Amongst the three surveyed regions, it was there that there was the highest rate of uptake of off–farm employment. In this region, the average farm area is only 4 ha, with many farms being subsistence. On the other hand, larger farms generate more agricultural income, which reduces the need to gain income from alternative sources. Frequently, these households have surplus assets to deploy in diversified activities, such as machinery and buildings. Providing an income generating opportunity exists, they become pluriactive. This is a demand–pull factor. On this basis, it might be expected that pluriactive households would tend to be those with the smallest and largest farms. This is indicative of where policies should be targeted if an increase in farm household pluriactivity is to be achieved – at the smallest and largest farm groups.

15 TRENDS TOWARDS COMMERCIALISATION OF FARMING

In accession countries, the agriculture sector consists of both commercial and subsistence farms. The large subsistence and semi–subsistence sector in the countries on the road to the EU is an impediment to investments in farming and farm restructuring. These farms have insufficient cash flow and the standard of living of such households depends mainly on non–farm income alternatives (Abele et al., 2002). In some countries, the subsistence and semi–subsistence sector is quite prolific. For example, in Poland, the agricultural census of 1996 indicated that 31 percent of individual farmers produced for their own needs, while 29 percent produced above subsistence level, but had a small traded surplus, thus were semi–subsistence. This is at least partly due to the history of Poland, where small private farms were predominant during central planning. Small subsistence and semi–subsistence farms, however, are typical not only in Po- land but in most of the accession countries. A detailed study of Romanian household expenditure indicates that if production for self–consumption is valued, it represents 57 percent of the total household expenditure of rural farm households. The difference in this respect with the EU is obvious; the average percentage of self–consumption in the EU represents 2 percent of the total household incomes (Firici and Thomson, 2002). One of the main effects of transition was a fall in agricultural incomes. In Poland, in many cases, the decrease was by as much as 60 percent. A consequence of this was a declining share of farm production forming a marketed surplus (Chmielewska & Baker, 1995). A further indicator of low farm incomes in the region comes from a study of 412 household farms in Slovakia. Seven- teen percent of those who leased some land to other farm operators stated as the main reason for doing so the lack of sufficient finance to cultivate the land themselves. Another 14 percent indicated that, although they would have liked to have expanded their farm area, they were unable to do this due to a lack of capital (Mathijs et al., 2001). All this suggests that in accession countries farm expansion and commercialisation are constrained by a lack of capital. Further constraints lie in land ownership rights. Of the same Slovak sample, 22 percent of farmers emphasized the continuous lack of security of land ownership and 15 percent claimed insecurity with regard to rented land (Mathijs et al., 2001). Despite these problems that impede the increase in farm size and commercialisation, still there is evidence of commercialisation through developments in vertical integration. In the early years of transition, contract enforcement between farmers and processors was weak. Essen- tially, transition had the effect of breaking up the previously vertically integrated food chains, leading to the emergence of autonomous enterprises. At the same time, the legal enforcement mechanisms were absent or ineffectual. This led to delayed payments to farmers, exacerbating their problems with cash flow and profitability, which resulted in a decline in their supplies to processors. In an effort to overcome this problem, the downstream sector introduced innovations to contracts with farmers, such as input provision. An example of this includes Palma–Tumys, the main processor of oilseeds in Slovakia, which provides advance payments for chemical inputs and fertilizers (Gow and Swinnen, 2001). The Polish dairy industry provides further insights into commercialisation through vertical integration. In 1995, the dairy processor ICC Paslek (a joint venture with an American company) introduced a credit programme which enabled producers to purchase new and second–hand cooling and milking equipment. Furthermore, the company provided access to inputs, e. g. feed, seed and fertilizers, through a company run input supply shop. Payments for these goods were made by deductions from the amounts due for milk deliveries. The company also provided

16 extension agents to aid the producers with crop production, animal nutrition, health and genet- ics. Help with the latter extended to assistance for those expanding their herds in finding suitable breeds both in Poland and Western Europe. ICC Paslek has had a strong influence on milk quality which had a knock–on effect on the surrounding dairy companies (Dries and Swinnen, 2002). The imposition of tighter regulations regarding milk quality and the preference of dairy companies for contracts with fewer, but larger farms, has had an impact on the structure of dairy producers in Poland. Between 1995 and 2000 the number of producers with fewer than three cows has shown a significant increase, while those with 15 or more have also risen. At the same time, thenumberofproducerswith4–12cowshasdeclined.Mostofthosewiththesmallherdsdonot deliver to dairies. However, the dynamics do not mean that small farmers have been removed from the market; rather some companies find the small farmers loyal suppliers. This has led them to encourage these farmers to expand their dairy enterprises, thereby becoming more commercial (Dries and Swinnen, 2002). Evidence suggests that in other sectors and countries, although dealing only with larger farms would reduce transaction costs for processors, they alsostilltransactwithsmallfarms.Insomecases,thisisviaanintegratorofsmallfarms,suchas in the case of Interbrew's Hungarian brewery/malting facility (Gow and Swinnen, 2001). This does suggest that as commercialisation increases, and buyers of farm produce become more concentrated, small farms who do not choose to invest and expand would be disadvantaged in the marketplace if they do not coordinate themselves in order to be able to sell their produce together. However, the experience is not always so smooth and positive. Zalewski and Skawinska (2002) argue that the commercialisation and concentration at all stages of the food chain has raised concerns about the use of market power of food processors and retailers at the expense of farm producers and consumers in Poland. A comparison of the functioning of beef and pork sectors in Slovenia indicated that contractual arrangements between farmers and slaughter houses work better in the pork sector as the commercial farmers are large. In the fragmented cattle sector processors and traders have a higher market power and they are charging a mark–up of the retail price plus an absolute constant margin (Bojnec, 2002). Actions that can increase farmers' market power, e.g. marketing cooperatives, are indispensable under the conditions of increasing concentration in the downstream sector. One of the most important recent developments in commercialisation is the growth of supermarkets which has been substantial; e.g. currently in Poland 40 percent of food is retailed through supermarkets. This means that supermarkets have enormous market power. Not only this, but they can stipulate quality standards and production methods compliance which require investment. Such developments have a negative impact on farms which lack capital to invest, and thus are at risk of losing an outlet for their produce. Furthermore, in a drive to compete on price and ensure supply throughout the year, supermarkets import products and as a result farmers are faced with global competition (Reardon et al., 2003). This again emphasizes the need for farmers to invest in order to survive. However, the upside of these developments is that those who stay with supermarkets as buyers have gained access to resources such as credit, technical assistance, packaging and other support services that the supermarkets observe are not supplied through public systems (Reardon et al., 2003). The main question is what the developments towards commercialisation mean for farm household adjustment and pluriactivity. Since farms which expand will be preferred over smaller farms, those farms which have not benefited from buyers' credits, and other aids towards

17 investment and expansion are less able to achieve economies of scale and to maintain contracts with large commercial buyers. This has consequences for farm incomes which will decline. The need for investment to stay with buyers will also bring about the need for a farm household to decide whether to make the investment or not. Those who choose not to invest may need to diversify their income base in order to survive (distress–push diversification). Changes to the farm enterprise mix that can release both labour and buildings might be necessary to start a diversified enterprise. Pluriactivity is also an option for farmers who decide to invest in order to cope with the pressures stemming from the commercialisation of the food chain. Investment in agriculture in order to expand and/or intensify production will make the farm household more affected by income shocks in the cases when they have to make repayments on these investments. This has the potential to encourage the household to become pluriactive as a coping strategy in response to income shocks from agriculture. Investment in agriculture may continue, even when returns are declining. By and large, this is in the hope of establishing sufficient growth to ensure farm survival. In these cases income gained outside agriculture is used for farm investment. Such behaviour has been observed in the EU Member States. A study of Belgian farm households found that in many cases off–farm employment accounted for 50 percent of income but the household continued to invest in agriculture to try to establish growth (Vernimmen et al., 2003). A further road to commercialisation is for farmers to form producer groups or cooperatives for selling their produce and providing limited added value, such as packaging. This has the advantage of increasing the price for the product which could be further augmented when a regional identity is attached to the product. This has been a successful strategy for some farmers in cur- rentMemberStates,suchaslocalbeefproducersintheLlynpeninsulainWales(Marsdenetal., 2000). Such groups have already developed in accession countries, e.g. Sun–Sad, a group of Polish fruit growers south of Warsaw, who have together invested in a grading, packing and chilling system. This form of commercialisation does lead to pluriactivity through the introduction of a value–added enterprise. Commercialisation may also be encouraged by access to state–funded advisory services which have the potential to improve returns to agriculture. However, evidence from Bulgaria suggests that the impact of such services may be limited due to a lack of financial resources and knowledge of the problems faced by farmers. Commercialisation has been further impeded in Bul- garia by a lack of credit available to farmers, ineffective institutional and support infrastructure, high trading costs, and a lack of management and marketing experience on the part of farmers. Similar problems have been faced in Croatia where, in addition, problems are raised by a lack of contracts between farmers and the agroprocessing industry, which restricts the potential for commercialisation to be driven by the processing industry as it was the case illustrated by the Polish example. In Romania, the level of agricultural commercialisation has also been hampered by a limited access to finance. This constrains farmers' production levels and as a result there is less potential for marketed output. The prevailing form of marketing (67 percent of produce) is still direct sale by producers. This indicates a low level of integration with the process- ingindustry,andthuslimitedscopefortheverticalintegrationtofacilitatecommercialisation.

18 THE DYNAMICS OF DIVERSIFICATION SINCE TRANSITION

The changes on–farm and in the economic environment since the start of transition have introduced considerable changes to diversification patterns of farm households. Table 1 presents the changes to sources of income between 1990 and 2000. One of the main tendencies is a sharp increase in the number of households gaining income from independent farming. This is due, as mentioned, to the land reform which brought the opportunity to exit collective farms with land and a share of non–land assets. Both the Czech Republic and Hungary exhibit this tendency accompanied with a decline in income from agricultural and non–agricultural employment. In contrast, Poland has no such rise in households gaining income from farming due to relatively limited scope and role of land ownership transfers and farm transformation. This is reflected in stability in the frequency of off–farm employment which is more prevalent than in the other two countries. This has been induced by the smaller farm size in Poland. Generally Poland is a typical example of distress–push diversification. The second main tendency is a rise in government transfers. The number of farm households receiving such payments has risen dramatically since transition. This is symptomatic of the high average age of the rural population, as most of the transfers are in the form of pensions. This is also the reason why some households are not and will not be pluriactive whatever the policies and support are, since those of pensionable age are unlikely to work off–farm or to start a diver- sifiedenterprise.Amongstthosereceivinggovernmenttransfersarealsotheunemployed.State benefits to agricultural households have been estimated to account for a quarter of total incomes in Slovakia and 50 percent in Hungary. In Poland, more than 20 percent of the farming population is supported by pensions or disability benefits with benefits accounting for 40 percent of incomes (EBRD, 2002).

Table 1: Percentage of surveyed farm households receiving income from different sources for the period 1990–2000

Poland Czech Republic Hungary 1990 1995 2000 1990 1995 2000 1990 1995 2000 Farming 98.0 97.0 96.0 17.0 59.0 67.0 30.0 85.0 92.0 Agricultural paid employment 2.0 1.0 2.0 25.0 12.0 8.0 33.0 9.0 8.0 Non–agricultural paid employment 46.0 49.0 47.0 29.0 28.0 25.0 38.0 32.0 33.0 Non–ag on–farm enterprise 1.8 2.6 3.8 0.9 2.8 4.7 6.0 10.0 10.0 Non–ag off–farm enterprise 3.2 5.0 7.3 3.7 5.1 5.6 4.5 7.5 5.6 Unearned income incl. farm income 7.0 14.0 16.0 4.0 14.0 23.0 33.0 43.0 50.0 support policies Social security government transfers 44.0 65.0 66.0 26.0 38.0 43.0 14.0 28.0 35.0 Remittances1 0.0 0.6 0.6 na na na 1.5 3.7 3.4 Other privately generated 0.3 0.6 1.2 0.5 0.9 1.8 0.0 2.2 2.6 1 For the Czech Republic data on remittances were not collected. Diversification through non–agricultural enterprises is more common in the Czech Republic than either Poland or Hungary, with Poland showing a particularly low level of entrepreneurship (Table 2). This emphasizes the link between enterprise diversification and farm size. Ac- cordingtotheaveragelandarea,individualfarmsintheCzechRepublicarelargeincomparison to the other accession countries and several of the current EU Member States.

19 Table 2: Types and numbers of diversified enterprises

Type Activity Poland Czech Republic Hungary Registered farm shops/kiosks 4 32 17 Retail Other retail 5 6 6 Agricultural contracting 10 20 28 Services Construction 2 7 3 Other services 16 16 6 Food processing 0 9 0 Production Manufacturing 1 0 3 Other production–based 0 2 0 Biomass 0 2 6 Land–based Woodland/forestry 5 20 8 Other 1 3 0 Tourism Tourist accommodation 1 2 7 Other tourist activity – – 2 Other Other 1 1 10 Total 46 120 96 Total as a percentage of the sample 14 55 36 Concerning the type of diversified enterprises, agricultural contracting is the most common form of diversification in Hungary. It is a reflection of the increasing commercialisation of agriculture, which has led to investment by owners of larger farms into machinery that can also be used to run a contracting business. In the Czech Republic, the most prevalent forms of diversification are farm shops, while in Poland farm households are engaged in services. Some services can be provided with small initial investments and thus low capital input, which explains their popularity in accession countries. Evidence from other countries heading towards accession provides a more varied picture of changes to diversification since the onset of transition. In Romania, non–agricultural activities have declined dramatically due to the closure of formerly state run enterprises and a lack of demand in rural areas for their non–agricultural products and services. Furthermore, rural households tend to be reluctant to start their own non–agricultural enterprises. As a result of these changes, in Romania in 1998 only 17 percent of the small– and medium–size enterprises (SMEs) were located in rural areas. The above–mentioned developments in farm income diversification have been influenced by a variety of factors.

FACTORS AFFECTING DIVERSIFICATION

The ability to diversify is influenced by a mix of external economic environment and factors related to human and physical capital, which are internal to the farm household. External factors The local labour market and local economy. Clearly, if there is high regional unemployment in the vicinity of the household, the potential to become pluriactive through off–farm employment

20 is limited. Underdevelopment of the local economy affects not only the unemployment rate, as described above, but also the viability of non–agricultural enterprises which rely on local demand for products and services. Therefore, often policy measures that can stimulate the growth of the local economy, e.g. support for starting–up of SMEs or for attracting urban businesses to rural areas, are more important to achieve pluriactive livelihoods of farm households than policies targeted at diversification per se. It is not surprising that when the participants at the Euro- pean Association of Agricultural Economists seminar on “Policy Experiences with Rural Development in a Diversified Europe”, held in Ancona in 2001, were asked to complete a survey about their opinion on rural development, 67 percent of the participants from CEECs indicated rural underemployment and unemployment as the main problem and 83 percent argued that full rural employment should be a priority objective. In this respect, their answers were substan- tiallydifferentfromtheopinionspresentedbyotherEuropeancountries(Hartelletal.,2002). Transport and telecommunication infrastructure. The quality and density of the local infrastructure affect both non–agricultural enterprises and off–farm employment. For example, a poor road infrastructure has a negative effect on the ability of household members to travel to off–farm employment. This can be illustrated by the Hungarian region of Kunszentmiklos which is located on the east of the river Danube, in the Great Hungarian Plain. Although Buda- pestisnotfarasthecrowflies,therearenomajorroadsconnectingthisregiontoBudapest.One of the main constraints to travel is that the bridges crossing the Danube are not close, the near- est being 50 kilometres away. The bridges that do exist are often undergoing repair, making journeys more difficult and impeding labour mobility. In the case of diversified enterprises, infrastructure determines how easily inputs can be delivered and outputs collected, thus affecting the viability of the enterprise.

Internal factors Education levels. Higher levels of education or skills provide more opportunities in the labour market (Tokle & Huffman, 1991). This is particularly true where there are high levels of unemployment, as in most of the accession countries. Appropriate skills or education are no less important for starting a diversified enterprise. A lack of knowledge and skills has been cited as important constraint to both off–farm employment and enterprise diversification for groups of farmers in Poland, Hungary, the Czech Republic and Slovenia (IDARA, 2002; Moellers & Heidhues, 2003). Just the opposite, if there is human capital, non–farm businesses can thrive. Several case studies carried out in accession countries reinforced the importance of general education or non–agricultural skills in facilitating diversification.5 Age. Older household members are unlikely to start a diversified enterprise or take up off–farm employment. They are also more likely to be in receipt of pensions and other such government transfers which will reduce the need to seek income from other sources. From this point of view, schemes such as early retirement and support to set up young farmers could be important to build potential for pluriactivity.

5 In one case the farmer had good stonemasonry skills. When the household decided to diversify their income base, starting a stonemasonry enterprise was their obvious choice. In another case, the spouse had studied horticulture and both had experience in the sector. When they decided to diversify, they started a garden centre, using these skills and knowledge.

21 Capital availability. Even if a household has spare resources in the form of buildings, land and labour, it may not be able to utilize them in a non–agricultural enterprise if it lacks start–up capital. They may need to invest in specific equipment or to comply with bureaucratic requirements such as applying to change the use of a building. When subsamples of non–diversifiers in Po- land, Hungary, the Czech Republic and Lithuania were questioned about their reasons for relying on farm incomes only, one of the main constraints mentioned was the lack of capital (Bezemer et al., 2003; Chaplin et al., 2004). The high financial risks were cited as a main impediment in Slovenia (Moellers & Heidhues, 2003). The development of rural financial systems, promoted by several international organizations, seems well targeted at alleviation of one of the main constraints to pluriactivity. However, many times the target is farming per se, and there is a lack of specific programmes mitigating the financial risk involved in diversification. Social network. This is described as an important prerequisite to diversification (Vernimmen et al., 2003). Social contacts outside the farm can be instrumental in enabling a farm household to run a successful non–agricultural enterprise. This could be, for example, joint marketing of agri–tourism enterprises, sharing of experiences or informal credit. A case study of a Hungar- ian household illustrates the use of informal credit. The head of household had formerly worked in a bar in the village. When it came up for sale, they wished to buy it but were unable to raise capital through commercial channels. Using the social network they found informal credit, enabling the purchase. Farmer's perceptions and preferences. Diversification may be hampered by a farm household's perception of diversification. If it is negative, “moving to non–agricultural activities means a failed farmer”, this will decrease the likelihood of the household to become pluriactive. Simi- larly, if the household has a strong preference for agriculture over working in the non–agricultural sector, this will make a household unwilling to deploy resources in the non–agricultural sector. In accession countries, agriculture played a buffer role when unemployment rose during transition. In many cases, individuals with family members who owned land returned to these farmsinordertoachievefoodsecurity. Thishasresulted inareluctance todownsize orceaseag- ricultural production, and, therefore, hampered both the developments of competitive farming and pluriactivity. Case studies of diversifiers illustrate how some of these factors act. A Bulgarian example is that of an apple producer and his family who brand and package their “almost organic” apples which they sell to a food chain. They also produce apple juice from their apples of poorer quality, which is marketed to some of the most popular cafes and restaurants in the region. They explored the local demand for apple juice and the growing demand for table apples of good quality and/or organic. One of the reasons which enabled this to be done was the use of extension agents and other advisors who encouraged them to start growing an apple variety which had some resistance to pests and so had a lower requirement for pesticides use. Both the farmer and spouse have university degrees, the spouse in law which has been beneficial for drawing up contracts and business plans, and for negotiating with other agents and institutions. The farmer's education, although non–agricultural, has provided him with a firm grounding from which he has built agricultural knowledge through journals, seeking expert advice and visiting other producers both domestically and internationally. Their ability to obtain bank credit was also influ- ential in enabling the necessary investment in developing value–added products. A Croatian farm also demonstrates diversification through processing of agricultural production, thereby adding value to the primary production. In this case, wheat and maize are processed to produce animal feed. Only 30 percent of the feed produced is retailed on the market;

22 the rest is consumed by a pig production unit, and 12 broiler enterprises to which the farm is linked. In addition, the farm sells agricultural inputs to local farmers and provides drying and storage facilities. The main drivers for diversification were to reduce price risk both in terms of the price received and the timing of payments. The input enterprise helps to reduce the costs of agricultural inputs. Again education has played an important role. The male family members, who manage the farm, have degrees in agricultural economics which helped them identify the potential benefits of diversification. The availability of credit was also an important determi- nant for investment in the diversified enterprise.

BENEFITS AND RISKS OF PLURIACTIVITY

One of the main benefits of pluriactivity is that it increases total household income. Results of the IDARA survey indicate a good case for diversification as a strategy to increase total household income. Households in each country are classified into four income bands with the objective of identifying the number of non–diversified households and those diversified through: (a) off–farm employment; (b) diversified enterprises; and (c) both off–farm employment and diversified enterprises in each income band. The income bands have been determined in cooperation with country experts in order to reflect the income situation in each particular country. Aclearlinkisrevealed betweendiversification andhigherincomes, withmosthouseholds inthe lowest income bands being non–diversifiers, while those in the higher bands tending to be diversified, particularly through both off–farm employment and enterprises (Table 3). Those households in the highest bands which were not diversified were those with the largest farms (IDARA, 2002). These results present a clear case for the encouragement of pluriactivity as a strategy to increase farm household income. Diversification also has the potential to reduce risk in total household income by providing a source of income which is independent of the variability of agricultural yields and prices.

Table 3: Percentage of different income sources within income groups (EUR/year)

Poland Czech Republic Hungary Less Less Less 1,500 – 3,500 – Over 4,000 – 9,000 – Over 3,500 – 7,000 – Over than than than – 3,500 – 6,000 6,000 – 9,000 – 13,000 13,000 – 7,000 – 10,000 10,000 1,500 4,000 3,500 Farming only 91 64 31 15 34 23 23 0 40 22 29 37 Off–farm employment 9 35 62 60 33 33 23 25 30 47 26 22 Diversified enterprise 0 1 4 12 14 17 8 50 14 9 9 18 Diversified enterprise and 0 1 4 13 20 27 46 25 16 22 37 23 off–farm employment Total 100 100 100 100 100 100 100 100 100 100 100 100 An additional benefit, particularly related to diversified enterprises, is employment creation, although the same survey indicates that in practice, few jobs are created (IDARA, 2002). Many of those which are created are filled by farm household members. This maintains these members on the farm, which has the advantage that they may be able to provide agricultural labour at times of peak demand. Furthermore, a diversified enterprise has the potential to offset the diseconomies of scale of small–scale subsistence farm production. Potentially, the non–agricultural enterprise may be able to expand and achieve economies of scale, while the farm is

23 constrained by the availability of land, particularly when the land market does not function well as in most accession countries. Having considered the advantages of diversification, it is also important to look at some of the risks involved, particularly with regard to enterprise diversification. When setting up an enterprise, a farm household is exposing itself to the risk of the enterprise failing and going bankrupt. This may be of particular concern if the enterprise has required substantial initial investment. Borrowed capital involves risk of rising interest rates and repayment difficulties. Furthermore, an enterprise is prone to fluctuations in revenue due to changes in market demand. The lack of collateral is a particular impediment. The problem of the lack of collateral has been confirmed by the studied farm households in Poland, Hungary and the Czech Republic. In contrast, off–farm employment, offering a fixed wage over a pre–determined period, provides a more consistent and a less volatile source of income.

CONSTRAINTS AND CHALLENGES TO DIVERSIFICATION

It is difficult to generalize the constraints, as frequently they have strong regional character or lie in the characteristics of the farm and farm household. Despite this, the IDARA survey enabled the identification of some constraints faced by a great deal of farm households. In order to better identify the constraints faced, subsamples of non–diversifiers were asked more in–depth questions about their reasons for staying in farming. Groups facing similar problems were profiled according to their location and socio–economic characteristics. In some countries, such as Poland, the regional element in the constraints was strongly present, while in other accession countries, e.g. Hungary and the Czech Republic, there was not clear regional differentiation. The most often quoted impediments to pluriactivity were the following: insufficient human and physical capital; lack of market demand; local competitors; high risk of investments in a slow growing economy; and high rate of regional unemployment. However, even if these impediments are overcome, a household may still face challenges in diversifying. Adjustments to pluriactive livelihoods require flexibility from family members in order to be able to continue to carry out farm operations and engage in non–agricultural activities. Often longer working hours and work during the evenings or weekends are necessary. The move to pluriactive livelihoods would also involve changes in farming practice. It may require downsizing of the farming operation, changing the farm enterprise mix to one which is less labour intensive or using more extensive production methods in order to release labour and capital for the diversified business. The adoption of innovative value–added products presents good opportunities for farmers to increase their incomes. However, there is always a risk that there may not be a market for the new product or that it will take long time to create a customer base. The main challenge, however, is that of marketing the product (or service). Most of the regions in accession countries have a weak local economy. In these cases, unless the product can be marketed beyond the immediate locality, the sustainability of the enterprise cannot be secured. This raises the crucial problem of how to reach the wider market. The same problem is echoed in studies in Western Europe where one of the greatest bottlenecks to small–scale processing of primary agricultural products has been identified as the difficulty of obtaining markets. For farm households, this is due to the relatively low level of initial production, as small quantities are difficult to sell beyond the close vicinity of the enterprise. Business success in farm based approaches depends on

24 product quality, healthiness and uniqueness coupled with a distribution network (Revell & François, 1997). The latter requires good management skills for coordinating the supply of products, ensuring a sufficient supply of raw agricultural products (whether produced on the farm or bought in) and identifying intermediaries over a geographical area who are willing to buy the product and sell it to end consumers. This is a particular challenge to small–scale farmers as few are in possession of such skills. The main challenges facing small farmers are not only to identify a market into which they can diversify, but also to develop strategies to cope with changes in that market. This is particularly difficult in the context of transition countries. Due to the rapid opening of markets and job cuts, often several people respond in succession to the same opportunity, creating competition that could only be faced by product or service differentiation within a market. This requires initiative and an entrepreneurial ability. It is one problem to identify a product or service with a market, but another to be able to respond to changes within that market and to overcome competition from similar enterprises. Thus, improvement of managerial ability of small farmers is crucial for promoting pluriactivity. There is a sharp learning curve to be passed through by farmers in accession countries when diversifying and seeking a market. Difficulties may also persist not only because of the problems of marketing from a given location, but also due to inbuilt prejudices about rural areas in city dwellers. A case study of a farm household in Hungary indicated that the spouse, who was a translator, faced difficulties in operating outside of Budapest. Customers in the city were initially unwilling to work with some- one located in a rural area. Information technology helped to gradually overcome this problem but people in the same village, who had moved from Budapest, had maintained their city phone numbers in order to keep their customers. This is an important impediment to relocation of businesses from urban to rural areas in accession countries, a process that has taken place in some of the EU Member States. This impediment might be transitory, but for the time being it constrains the increase in some professional rural non–farm jobs and thus the opportunity for farmers to become pluriactive through non–farm employment or self–employment. Policies can help alleviate some of the difficulties to pluriactivity; others need time to accumulate experiences and to benefit from a more sustainable economic growth. Some of the current policy measures are briefly reviewed below, together with farm household opinion of what they need most of all.

REVIEW OF SUPPORT PROGRAMMES AND POLICIES FOR FAMILY FARM DEVELOPMENT

Policies in accession countries can be placed in two broad categories. The first consists of national agricultural policy for family farms, and the second, policies promoted under the EU Spe- cial Accession Plan for Agriculture and Rural Areas (SAPARD). The main thrust of both categories, so far, is to facilitate investments and commercialisation in farm production. They allmayhavesomeindirecteffectsondiversification,butrelativelylittlehasbeendonetodirectly enable pluriactivity. Even the more mature CAP rural development measures are inadequate to deal with farm diversification, particularly when off–farm activities are concerned. They focus mainly on on–farm diversification even in cases when the target groups are marginal farms (Vernimmen et al., 2003).

25 In Hungary, the national policy mainly aims at encouraging family farm development through subsidized loans for land purchase and prepurchasing rights on the land market (EBRD, 2002). Family farms, which are not allowed to exceed 300 hectares (Hungarian Trade Commission, 2002), are eligible for direct payments which are based on the income potential of farms (OECD, 2001). In the Czech Republic, measures are directed towards loan guarantees and interest rate subsidies for input purchases and investments, while in Poland, 75 percent of expenditure is directed towards family farms in the form of farmers' pension and health insurance support(OECD,2001).Thisisavailabletoholdersof1hectareormore.Thisencouragespeople to retain small farms and is a contributing factor to the perpetuation of the current structure of small farms. Clearly, the Czech and Hungarian measures are aimed at increasing investment in agriculture and farm production, as opposed to influencing pluriactivity. Survey evidence suggests that subsidised inputs, direct payments and other measures that decrease volatility of farm income in fact decrease the propensity of farm households to diversify. The Polish case influences the perpetuation of small farms, and hence it encourages activities to augment household income, but the grounds it provides is for distress–push diversification. Therefore, so far relatively little is built in the national agricultural policies in accession countries to encourage pluriactivity. However, it should be emphasized that initiatives to encourage diversification do not always succeed in targeting households which are experiencing distress–push drivers towards becoming pluriactive. Western European experience suggests that it is usually the households with larger, more profitable farms who utilize policy instruments to diversify (Bryden et al., 1993). Similar evidence is provided by the Bulgarian State Fund for Ag- riculture programmes to support long–term investment in agriculture which have been accessed by only a small proportion of farms, which are generally larger ones. This is due to the greater capacity of large farms to write proposals, comply with the formal requirements and bear the cost of interest payments. The lack of take–up by farms in less favoured areas has been identified as a problem of SAPARD implementation in Slovakia. Thus, a great challenge rests in designing policy support in accession countries where most of the diversification is distress–push. In addition to agricultural production–orientated policies, a few exist which are aimed at promoting pluriactivity. For example, in Slovakia, the recently introduced EU Phare grant scheme has potential to encourage agri–tourism through the provision of aid in planning, marketing and promotion, infrastructure and renovation, and construction or purchase of buildings to be used for the purposes of tourism. A programme aimed at facilitating agri–tourism is also in place in Hungary. In the Czech Republic, some support is available through the Guarantee Fund for Farmers and Forestry which is targeted towards processing of agricultural products andagri–tourism.InCroatia,theDepartmentforAgriculture,RuralDevelopmentandForestry has several schemes to encourage pluriactivity; these include local branding of farm produce such as wines and cheeses, and the provision of credit. In Bulgaria, a programme exists to assist micro– and small enterprises in regions of high unemployment. The road to accession to the EU has brought with it SAPARD. It includes several measures which may have an impact on family farms. However, studying the lessons from EU Member States different measures may have different uptake. Investments in agricultural holdings. In Hungary, this aims to upgrade existing assets, such as machinery and buildings, with the aim to improve both the quality and profitability of

26 agricultural production. In Poland, this measure has prioritized restructuring of the dairy industry with the intention of encouraging the emergence of specialized dairy farms. However, the measure will also support beef, sheep and pig production, as well as non–traditional agricultural activities. A similar programme initiated in Portugal revealed a very low uptake. In one studied region, only eight producers submitted investment proposals (Bryden et al., 1993). It is yet to be seen, but the Polish scheme may have only limited impact. In the Czech Republic, the focus is on conforming to the acquis communautaire. With regard to the Baltic states, for all three, the measure is targeted towards commercial or larger farms. In Latvia three submeasures are included: investments in machinery and buildings, afforestation of farmland and reparcellingofland(Slee,2000).Thesemeasuresalltendtoincreasecommercialisationofagri- culture so that the likely impact on pluriactivity is similar to that described in the earlier section on commercialisation. Agri–environmental measures. These promote changes in agricultural production either towards organic farming, such as in Hungary and Latvia, or towards encouraging stronger environmental measures such as buffer zones, hedge and tree planting, and changes to grazing practices whether through delayed haymaking or lower stocking densities. In the Czech Repub- lic and Poland, these measures are only applicable to specific regions. These measures have not been included in Estonia or Lithuania (Slee, 2000). If these measures are taken up by producers, they could have indirect positive effects on pluriactivity. First, reducing stocking densities or cultivated areas through the introduction of buffer zones etc. may reduce agricultural labour demand, thereby opening up the potential for labour to be deployed in other activities. Second, environmentally friendly farming methods will improve the stocks of wildlife in the regions selected. This may provide a draw for tourists, such as bird watchers, and thus demand for agri–tourism. However, one should not be overly optimistic. Previous research in Western Europe suggests that the uptake of agri–environmental schemes is low in areas with poor agrarian structures, small farms, and pluriactive farm households. The problem has largely been institutional and attributed to weak administrative and advisory support services. This has led to poor uptake both from local administrations and farmers (Bryden et al., 1993). This suggests that in order to improve the positive effect on developing alternative income sources, institutional strengthening and advisory provisions are an important prerequisite. With the background of existing policies, farm households in Poland, Hungary and the Czech Republic were questioned as to which measures they would expect to help them to become pluriactive. The majority of households ranked financial measures, such as seed money for enterprise start–up or loan guarantees in first place. Important measures also included improvements in market infrastructure, better information on public sector assistance, advice on grant and loan applications, and business training and education. Various measures through the provision of capital are already in place but often these require a proportion of capital to be provided by the households themselves. For example, SAPARD requires part of the initial capital to be provided by the beneficiary of funds and the measures are mainly focused on on–farm activities. Such arrangements have discouraged would–be investors in the EU in the past, due to their inability to raise their proportion of the funds (Bryden et al., 1993). However, there is also a quite positive aspect of such a requirement. A study of SMEs in the UK found that firms self–select themselves for financial assistance, rather than banks having to do the overall selection. Firms with higher human capital were more likely to take out bankloans(Cressy,1996).Thissuggeststhatthecreationofprogrammesinsuchamannerthat

27 the beneficiary must also provide some capital is useful for selecting applicants with plans for businesses with a higher chance of survival. Nevertheless, it should be remembered that this study was not farm centred and that UK farms are commercial, and thus their behaviour will not necessarily mirror that of a subsistence producer in Central Europe. Tying financial assistance to capacity building can be beneficial in improving the survivability of an enterprise. In Germany, in order to apply for loans from the government business start–up and SME promotion agency, the enterprise founder must have sufficient technical expertise and business qualifications, as well as correct training and relevant practical experience (www.dta.de). Research carried out comparing businesses which received financial assistance from the agency with those that did not, indicated that those receiving assistance, on average, had a 14 percent higher survivability rate (Almus & Prantl, 2001). This indicates that well designed financial assistance has a role in business survival. Applying a similar model may, therefore, be beneficial in attempting to encourage sustainable and successful diversified enterprises, as the last thing accession countries would like is to have massive closure of farm based diversified businesses. Concerning the need of business training and education, expressed by the studied households in accession countries, one positive lesson that can be learned from the EU is by encouraging involvement in apprenticeships. In the early 1980s, the United Kingdom government attempted to bridge the gap between early school leavers and employment by introducing the Youth Training Scheme. Within this, young people spent a year working for an employer who trained them. (In order to increase the usefulness of the scheme, later the period was extended to two years.) Their allowance and training was heavily subsidized by the government. Evaluations indicate that it had a positive impact on employment with a greater number of participants gaining employment than those who went through specialist training providers (Upward, 1999). “Learning by doing” is another form of support to aid in building up confidence in entering a new sphere of activity. This type of training has been taken on board in Germany where the government's SME policy includes programmes in schools and universities which familiarize students with entrepreneurship, e. g. the JUNIOR project set up by the Deutches Institut der Wirtschaft in which students establish mini–companies operating under market conditions, thereby creating an environment under which they are able to learn about issues which arise under self–employment and how to tackle them (www.bmwi.de). Therefore, there are several specific measures that could be adopted if government policies are to be targeted at pluriactivity as a means to curb low farm incomes and alleviate pockets of rural poverty. However, for many of them the responsibility should lay in the local authorities as the needs and the farm structures vary according to the locality. Other measures do not depend on government agencies, central, regional or local, but on farmers' initiative and cooperation. The following Table 4 summarizes three types of strategies that are available for on– and off–farm activities in order to increase household incomes. They are not alternative, but complementary. Market strategies are related to market participation, redistribution to redistributing the economic growth through various types of support and aid, and the reciprocity involves farmers' cooperation and social networks.

28 Table 4: Possible strategies for increase of farm household incomes and successful pluriactivity

Market Redistribution Reciprocity On–farm Off–farm On–farm Off–farm On–farm Off–farm Intensification, Cooperation Exchange of in- commercialisation, with other farm- Wage employ- formation; joint value–added prod- ers; producer Within ag- ment on Government marketing of ucts, diversification groups; ex- riculture non–owned (CAP) support services; infor- within agriculture, change of infor- farms mal credit sale or lease of re- mation; dundant farm assets informal credit Wage employ- Support to rural ment outside SMEs; business Exchange of in- Social exchange Diversification Support to envi- agriculture; advice; retrain- formation; joint with local com- Outside (agri–tourism, ronmental ser- non–agricul- ing; marketing; in- munity; move to agriculture shop, crafts) vices and tural enterprise; programmes to formal financial new social net- agri–tourism leaving farming curb local un- aid works employment

Source: Adapted from Vernimmen et al., 2003.

KEY ENTRY POINTS AND POLICY RECOMMENDATIONS FOR SUCCESSFUL AND SUSTAINABLE FARM DIVERSIFICATION

First of all it is necessary to reiterate the ingredients for a successful introduction of innovative value–added products and launching profitable non–agricultural enterprises. The experience in Western Europe points to two major factors: • identification of a market and good marketing strategy, including distribution networks and good relationships with customers; and • having a business strategy and a financial hold on the business, since the latter requires monitoring the costs and revenues, which determine profitability, and, therefore, the survival of the business.6 Given the fact that several of the market institutions and service provisions necessary for successful pluriactivity which exist in the EU are underdeveloped in the acceding countries from Central and Eastern Europe, the entry points for these countries are more numerous. The opportunities are that CEECs do not start from the very beginning and in all countries most of these institutions and arrangements exist, although their effectiveness is low and their focus is often on farming and not pluriactivity. In addition, there is a rich experience in other parts of the world on which some useful lessons and examples can be drawn. The main entry points can be summarized under the following sections: • Credit and finance – There is a need of redesigned policies that mitigate the risks involved in diversifying through non–agricultural enterprises or introducing value–added innovative products. They should be made conditional on achieving

6 http://www.valleyviewfarm.com; http://www.actinic.co.uk/examples/cs-ampleb.htm

29 quality standards. In this area credit guarantees, that will cover partially the risk, would be an option. • Education, training and dissemination of information. • Producer cooperation and producer groups – It is necessary to inform farmers about the benefits of producer groups and to disseminate the best practice. Most of the farm households in CEECs and would–be diversifiers have insufficient management and marketing skills. This a key area where improvements are necessary in order to facilitate farm–based approaches to income diversification: 1. Redefining the role of extension services to facilitate the road towards diversified incomes. This involves a change to the area of advice, particularly to cover marketing and starting up a business; a change in the mode of operation of these services to apply a bottom–up approach; and strengthening and simplifying the delivery mechanisms. 2. Capacity building through the provision of business training for farmers, concen- trating it in regions where farmers are most likely to respond, for example, in those with the smallest or largest farms. The timing of such courses should take the agricultural calendar into account so that they do not coincide with periods of peak demand on agricultural labour. The training should focus firstly on marketing, with an aim to encourage the would–be diversifiers to consider who the market for a product or service would be and how to target it. Additionally, training in devising strategies to counteract the effects of competition would also be beneficial. Secondly, since financial aspects of a business are vital for its survival, would–be diversifiers are likely to benefit from learning financial management and developing methods to monitor and evaluate business performance. Such training may be delivered best through practical exercises whereby potential entrepreneurs can learn by doing in a simulated environment. After all it must not be forgotten that farming is a practical vocation and farmers may consequently prefer training of a practical nature. Learning by doing will also aid in building up confidence in entering a new sphere of activity. 3. Provision of assistance in making grant and loan applications for business start–up or expansion. Clearly, information of such assistance would also need to be disseminated. At the same time as aiding the application process itself, such consultants could first provide a sounding board for the business idea and a preliminary assessment of the feasibility and sustainability of the potential enterprise. This could provide a useful stage in aiding the development of business plans and assessing their feasibility. This could thus also help in weeding out those least probable to survive, aiding the process of selecting those to receive loans or grants. It is important when providing funding to fully evaluate proposals since if businesses start but then become unsustainable this could have a negative impact on the attitudes of people within the local community towards diversification. 4. Improving information transfer about public sector assistance would aid in increasing awareness of farmers about programmes which could be beneficial for becoming pluriactive. Without effective dissemination of information, programmes will not necessarily reach those that they are designed to target. In

30 ordertoeffectively informfarmers,itisnecessarytoidentifytheirsourcesofinfor- mation, e.g. the farming press or information disseminated at farmers' markets. 5. Support services could be used to integrate some of the above measures, firstly by disseminating information about business training, but then following up with the participants afterwards. Those whose enterprises do seem to be sustainable and successful could be encouraged to speak about their experiences at business training initiatives. This would aid in enabling would–be diversifiers to see that success is possible. Concerning rural development policies, more involvement of regional and local administrations is necessary in order to answer the specific regional needs. In summary, the most important measures for support of farm–based income diversification appear to be: a) information dissemination and training related to farm income diversification and identification of income generating opportunities; b) improvement of extension and advisory services with a particular emphasis on business, marketing and financial management; c) appraisal of best practices to facilitate the role of producer groups in the food chain; and d) training of local level authorities in creating a conducive and supporting environment for local level rural development. Workshops with participation of different stakeholders, presenting cases of success and failures across the region, would be a very useful tool for exchange of cross–country information.

REFERENCES

A SUPPLEMENT TO THE OXFORD ENGLISH DICTIONARY. 1972. Oxford, England: Clarendon Press. ABELE,S.–VOIGT,P.&WEINGARTEN, P. 2002. Subsistence agriculture in Central and East- ern Europe: Determinants and perspectives. Paper presented at the X. Congress of the European Association of Agricultural Economists, Zaragoza, Spain, August 2002. ALMUS,M.,&PRANTL, S. 2001. Do start–up promotion programmes improve a company's chances for development? Mannheim, Germany: Centre for European Economic Research Sci- entific Series Volume 15. BEZEMER,D.–RUTKAUSKAITE,J.&ZEMECKIS, R. 2003. Income diversity in rural Lithuania: Benefits,barriers and incentives (Working Paper number 32). London, UK: Centre for the Study of Economic and Social Change in Europe. BOJNEC, S. 2002. Price transmission and marketing margins in the Slovenian beef and pork markets during transition. Paper presented at the X. Congress of the European Association of Agricultural Economists, Zaragoza, Spain, August 2002. BRYDEN,J.–BELL,C.–GILLIATT,J.–HAWKINS, E., & MACKINNON, N. 1993. Farm household adjustment in Western Europe 1987–1991. Final report on the Research Programme on Farm Structures and Pluriactivity. Luxembourg: Commission of the European Communities.

31 CHAPLIN,H.–DAVIDOVA, S., & GORTON, M. 2004. Agricultural adjustment and the diversification of farm households and corporate farms in Central Europe. Journal of Rural Studies, 20: 61–77. CHMIELEWSKA,W.,&BAKER, D. 1995. The Polish agricultural marketing system: A policy perspective on developments. Food Policy, 20: 51–57. COUNCIL OF THE EUROPEAN UNION. 1999. Council Regulation (EC) No. 1259/1999. Brussels, Belgium. CRESSY, R. 1996. Are business startups debt–rationed? The Economic Journal, 106: 1253 – 1270. DAVIDOVA,S.–GORTON, M. – Ratinger, T. – Zawalinska, K. – Iraizoz, B. – Kovács, B. & Mizik, T. 2002. Variations in farm performance: Evidence from the CEECs and existing EU Member States. Paper presented at the X. Congress of the European Association of Agricultural Economists, Zaragoza, Spain, August 2002. DRIES,L.&SWINNEN, J. 2002. Globalisation, European integration and the transition of the Polish dairy sector. Paper presented at the X. Congress of the European Association of Agricul- tural Economists, Zaragoza, Spain, August 2002. EBRD. 2002. Transition report 2002: Agriculture and rural transition. London, UK: European Bank of Reconstruction and Development. FIRICI,C.&THOMSON, K. 2002. Distributional impact of CAP adoption on Romanian households. Paper presented at the X. Congress of the European Association of Agricultural Econo- mists, Zaragoza, Spain, August 2002. GASSON, R. 1986. Part–time farming in England and Wales. Journal of the Royal Agricultural Society of England, 147: 34–41. GOW,H.&SWINNEN, J. 2001. Private enforcement capital and contract enforcement in transition economies. American Journal of Agricultural Economics, 83 (3): 686-690. HARTELL, J. – Kilkenny, M. & Swinnen, J. 2002. European rural development policy preferences. Paper presented at the X. Congress of the European Association of Agricultural Econo- mists, Zaragoza, Spain, August 2002. HUNGARIAN TRADE COMMISSION. 2002. Support for family farms hopes to improve estate structure. IDARA. 2002. An analysis of diversification of farm enterprises and household income in CEECs (Working Paper 2/12 volume I). Wye, UK: Imperial College at Wye. ILBERY, B. 1988. Farm diversification and the restructuring of agriculture. Outlook on Agricul- ture, 17: 35–39. ILBERY,B.–BOWLER,I.–CLARK,G.–CROCKETT,A.–&SHAW, A. 1998. Farm–based tourism as an alternative farm enterprise: A case study from the Northern Pennines England. Re- gional Studies, 32 (4): 355–364. KOPEVA,D.–DOICHINOVA,J.–DAVIDOVA,S.–GORTON,M.–CHAPLIN, H. & Bezemer, D. 2003. Rural households, incomes and agricultural diversification in Bulgaria. In M. Spoor, ed. Transition, institutions and the rural sector.

32 MACKINNON,N.–BRYDEN,J.–BELL,C.–FULLER,A.M.&SPEARMAN, M. 1991. Pluriactivity, structural change and farm household vulnerability in Western Europe. Sociologica Ruralis, 31 (1): 58–71. MARSDEN, T. – Banks, J. & Bristow, G. 2000. Food supply chain approaches: Exploring their role in rural development. Sociologica Ruralis, 40 (4): 424–438. MATHIJS,E.–SARRIS,A.–BEKA,I.–DIVILA,E.&BIELIK, P. 2001. Micro–economic analysis of farm restructuring in Central and Eastern Europe EU Phare ACE Programme Contract Num- ber P97–8158–R Final Report: Slovakia. MCINERNEY,J.&TURNER, M. 1991. Patterns, performance and prospects in farm diversification (236). Exeter, UK: Agricultural Economics Unit, University of Exeter. MCNAMARA,K.&WEISS, C. 2001. On– and off–farm diversification. Paper presented at the AAEA–CAES Meeting, August 2001 Chicago, USA. MOELLERS,J.&HEIDHUES, F. 2003. Diversification decisions in the rural non–farm sector of tranistioneconomies:ThecaseofSloveniaandMacedonia.InG.Buchenreider,ed.Proceedings of the mini–symposium on poverty impacts and policy options of non–farm rural employment.In- ternational Conference of Agricultural Economists: Durban, South Africa. NEWBY, H. 1988. The countryside in question. London: Hutchinson. OECD. 2001. Agricultural policies in OECD countries monitoring and evaluation: Agriculture and food. Paris: Organisation for Economic Co–operation and Development. REARDON,T.–VRABEC,G.–KARAKAS,D.&FRITSCH, C. 2003. The rapid rise of supermarkets in Croatia: Implications for farm sector development and agribusiness competitive pro- grams: Report under the Development Alternatives Incorporated, Croatia and Michigan State University collaborative project for RAISE REVELL,B.J.&FRANÇOIS, M. 1997. On–farm processing of the products of livestock systems. Paper presented at the Livestock Systems in European Rural Development, Nafplio Greece, January 1997. SHUCKSMITH, D. & Winter, D. 1990. The politics of pluriactivity in Britiain. Journal of Rural Studies, 6: 429–435. SHUCKSMITH, D. M. 1993. Farm household behaviour and the transition to post–productivism. Journal of Agricultural Economics, 44: 466–478. SHUCKSMITH,D.M.–BRYDEN,J.–ROSENTHALL,P.–SHORT,C.&WINTER, D. 1989. Pluriactivity, farm structures and rural change. Journal of Agricultural Economics, 40: 345–360. SLEE, B. 2000. W(h)ither the small farm? Rural development and agricultural restructuring in transition economies with particular reference to the Baltic States. Paper presented at the Inter- national Conference: European Policy at the Crossroads, The Arkleton Centre of Rural Devel- opment Research, University of Aberdeen, June 2000. TOKLE,J.G.&HUFFMAN, W. 1991. Local economic conditions and wage labour decisions of farm and rural non–farm couples. American Journal of Agricultural Economics, 70: 652–670.

33 UPWARD, R. 1999. Evaluating outcomes of the Youth Training Scheme using matched trainee–firm data. Paper presented at the Education and Employment Economics Group An- nual Conference July 1999, Swansea, Wales. VERNIMMEN, T. – Bourgeois, M. – VAN HUYLENBROECK,G.–MEERT, H. & Van Hecke, E. 2003. Diversification as a survival strategy for marginal farms: Exploratory research. In G. Van Huylenbroeck & G. Durand, eds. Multifunctional Agriculture A new paradigm for Eurpean agriculture and rural development. Aldershot, UK: Ashgate. VRANKEN, E. & Swinnen, J. 2002. Individual Farmers and Land Renting in Hungary. Paper presented at the X Congress of the European Association of Agricultural Economists, Spain, August 2002. ZALEWSKI,R.&SKAWINSKA, E. 2002. Determinants of quality management efficiency in Pol- ish food processing industry. Paper presented at the X. Congress of the European Association of Agricultural Economists, Zaragoza, Spain, August 2002.

34 EVOLUTION OF NATIONAL AND REGIONAL POLICIES AND PROGRAMMES SUPPORTING DIVERSIFICATION OF RURAL INCOMES IN THE CONTEXT OF THE EU ACCESSION

Junior R. Davis7 with contributions from: Dr D. Bezemer, Mr Tiago Wandschneider & Dr S. Wiggins

RELEVANCE OF RURAL DIVERSITY AND THE RURAL NON–FARM ECONOMY

The purpose of this paper is to outline key emerging national and regional policies and programmes supporting the diversification of rural incomes in the context of EU accession in the development of the rural non–farm economy in transition economies.8 It is based on a con- ceptualframeworkwheretheruralnon–farmeconomy(RNFE)isdiscussedasbeingeitherpart of a growth strategy for the economy, or as a “defensive” survival strategy for the rural poor. For most rural people in developing and transitional economies, rural non–farm activities are part of a total livelihood activity set that includes farming: that is, they are part of a diversified livelihood portfolio. The rural population in developing countries derives important income shares from rural non–farm activities. Ellis (1999) states that 30–50 percent is common in sub–Saha- ran Africa, and UN–FAO (1998)9 gives a mean figure of 42 percent for SSA. In Asia and Latin America, FAO estimates the figures to be 32 percent and 40 percent respectively (Ellis, 2000a gives appreciably higher estimates for South Asia). Bezemer and Davis (2003) maintain that

7 Natural Resources Institute, United Kingdom 8 The term transition economies is used to describe the new political geography of the former CMEA, comprised of the Central and Eastern European countries (the Czech Republic, Hungary, Poland, Slovakia, Slovenia), the Balkans (Albania, Bosnia-Herzegovina, Bulgaria, Croatia, the FYR Macedonia, Romania and the Federal Republic of Yugoslavia), the Baltic States (Estonia, Latvia and Lithuania), the former Yugoslavia, and the Commonwealth of Independent States (Russia, Ukraine, Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Tajikistan, Turkmenistan, Uzbekistan). 9 The FAO study summarizes data from over 100 studies - focusing mainly on farm households (as opposed to rural town residents) - undertaken over three decades (from the 1970s to the 1990s).

35 the average rural non–farm income shares of rural households in some Central and Eastern Eu- ropean (CEE) and Commonwealth of Independent States (CIS) households is 44 percent. There has been an increasing recognition recently that the rural economy is not confined to the agricultural sector, but embraces the broad spectrum of needs of all rural people including social service provision, economic activities, infrastructure and natural resources in rural areas (Caski et al., 2000). Since the 1970s, a large number of studies have investigated the role of non–agricultural economic activities for rural development. Evidence from the developing world suggests that economic diversity in the countryside has the potential to foster local economic growth and alleviate the rural–urban income gap and rural poverty. These findings are also relevant to the post–socialist transition countries, where typically alargepartofthepopulationlivesinruralareas,andeconomicgrowthandthereductionofpov- erty are significant challenges. This is particularly true for those transition countries that are outside Central Europe. Analysis of the transition process in general and of transition in the agricultural sector has generated a large literature, but less has been specifically devoted to the wider RNFE. However, studies in this field are now being undertaken, since it is recognized that in the longer term the development of the rural non–farm sector is a critical factor in providing rural employment and income (see Davis and Pearce, 2001). The rural non–farm economy is of interest to governments, bilateral and multilateral donor agencies, non–governmental organizations (NGOs) and development practitioners because of its increasing prevalence in both developing and transition economies. In many parts of the world, the number of poor people in rural areas exceeds the capacity of agriculture to provide sustainable livelihood opportunities. Even with a decline in fertility rates and a slowing of population growth, this situation will not change significantly. Out–migration is not possible for all types of people, and urban centres cannot (or should not, for economic and social reasons) be assumed capable of providing adequate livelihood opportunities for all those unable to make a living in agriculture. For these reasons, a healthy RNFE holds out the prospect of improved livelihoods for people living in rural areas. This set of circumstances puts the spotlight on the RNFE as a potential vehicle for poverty reduction in rural areas. The RNFE may: • absorb rural surplus labour; • help farm–based households spread risks; • offer more remunerative activities to supplement or replace agricultural income; • provide a means for the rural poor to cope or survive when farming fails; • exploit rural comparative advantages (resources, location, labour costs); • foster rural growth; and • improve the overall quality of life, goods and services in rural areas. From a policy perspective, it is important to understand participation in the RNFE, particularly participation of the poor. Why do individuals enter the rural non–farm economy? What types of RNFE opportunities are accessible to them? Does participation in the RNFE contribute to an individual's “upward” or “downward” livelihood trajectory (a concept elaborated by Swift, 1998)?10 Further, just as it is important to understand entry into the RNFE, it is equally

10 When thinking about the rural non–farm economy, it is important to realize that different social units are constantly engaged in a dynamic process of livelihood adaptation. Taking the

36 important to understand exit – whether people remain in the RNFE or leave, either through choice or circumstance. Answers to these questions can inform the development of policies that: • support the efforts of the rural poor; • protect them from deleterious livelihood trajectories; and • improve access to sustainable and remunerative non–farm livelihoods. Participation in the RNFE requires both motivation to enter the RNFE, and ability to access sustainable and remunerative livelihoods from it. These two aspects – motivation and ability – are important because the reasons people enter the RNFE may have an implication for the types of access barriers faced – for example, a person who is forced to diversify into non–farm activities because of lack of access to credit to purchase seeds will in all probability also face problems in accessing credit to start up a new business. This might be termed distress–push diversification.12 Conversely, those entering the RNFE for demand–pull i.e. in response to an observed market gap or entrepreneurial reasons are more likely to have access to higher entry barrier activities that allow accumulation (we discuss these two concepts in greater detail below in the section, “Distress–push and demand–pull diversification“). Setting aside the problem of how to define “low” and “high” asset endowments, we may for convenience simplify this to represent two extreme types. In one, the social unit (characteristically an individual or household) has low endowments of all types of capital asset: human, natural, physical, financial and social, whilst in the other, the social unit has high endowments. In practice of course, particular social units will have particular endowments of different types of asset, thus there would be a multi–stranded spectrum of asset endowment, each strand corresponding to a type of asset. Particular configurations of contextual factors – such as the policy environment, institutions and the vulnerability context – combined with particular configurations of asset endowments will result in differing RNFE entry motivations, access capabilities and livelihood trajectories. These livelihood strategies may be better understood by seeing them as being on a spectrum be-

unit of the household: households operating within a particular livelihood system may be on any of a number of different livelihood trajectories. These may be “downward”, in the sense that there is a process of disaccumulation of assets; “upward” in which case there will be asset accumulation; or more or less constant in the sense that the household asset base is neither expanding nor contracting. In each of these different scenarios, the role and importance of off-farm strategies takes on a different meaning. 12 Reardon et al. (1998) suggest that when relative returns are higher to the RNFE than to farming, and returns to farming are relatively more risky, “pull” factors are at work. Conversely, when farm output is inadequate and opportunities for consumption smoothing, suchascreditandcropinsurance,aremissing,orwheninputmarketsareabsentorfailandthe household needs cash to pay for farm inputs, “push” factors are at work. As evidence of distress-push, wages or incomes are likely to be lower in the rural non-farm economy.

37 tween “demand–pull” and “distress–push” diversity. The paper is based on a conceptual framework where the RNFE is discussed as being either part of a growth strategy for the economy (“demand–pull”), or as a “defensive” survival strategy for the rural poor (“distress–push”). The following section considers RNFE definitional and measurement issues. The paper then explores the concepts underlying access, assets and livelihood diversification. This leads to an overview of the relevance of rural non–farm economy (RNFE) and its composition in transition countries. The determinants of access to livelihood diversification and the RNFE are then explored. This is followed by a brief discussion of policy processes and interventions which support or promote the RNFE in transition economies. Finally, the paper seeks to address the question about what do we as development practitioners, researchers and government actually know about the policies and intervention for RNFE development and growth? What do we think works and how do we prioritize interventions?

DEFINITIONS AND MEASUREMENT PROBLEMS

The RNFE In this study the RNFE is defined as being all those income–generating activities (including income in–kind) that are not agricultural but located in rural areas (Lanjouw and Lanjouw, 1995). A key term in this definition of the RNFE is “rural”. The OECD (1996) classifies predominantly rural areas as those where more than 50 percent of the population live in rural communities, and significantly rural areas as those where between 15 and 50 percent live in rural communities; but different studies include very different definitions of “rural”. “Agriculture” is here taken to mean all primary production of food, flowers and fibres – it thus includes growing crops, rearing livestock, horticulture (flowers, fruit and vegetables), forestry and fisheries. It excludes any food processing (although this may happen on–farm), agricultural services (whether technical or commercial) and also other primary sectors such as mining or quarrying (see Davis and Wiggins, 2003). This definition is not solely activity based (waged work or self–employment), as it also includes non–earned income (social payments, remittances) as well as the rural institutional framework (roads, schools, hospitals etc.), which are an integral part of the rural economy. This also includes social payments (pensions, social insurance etc.), which are often a significant source of unearned household income, but for which there is no activity undertaken by household members (in contrast with remittances or asset income). However social payments have a clear impact on the RNFE as they reduce poverty levels, influence household work–leisure decisions, and may create opportunities for investment. Thus the RNFE might include agro–processing, the setting up of a small business, or the receipt of transfer payments such as interest, dividends or remittances from temporary, seasonal, or permanent migration. The RNFE incorporates jobs which range from those requiring significant access to assets, such as education or credit, to self–employed activities such as the road- side “hawking” of commodities which have low barriers to entry and low asset requirements (Davis and Pearce, 2000). As regards the concept itself, it could be argued that the term “RNFE”, although in common usage is technically incorrect, as non–agricultural activities may actually take place on farms. Thus, although the rural non–agricultural economy would be a more accurate definition, the terminology in this paper conforms to usage in the literature, where the focus is often on “farm” versus “non–farm” or on “on–farm” versus “off–farm” activities.

38 Incomes and Livelihoods

Figure 1. Potential sources of income

Source: Davis and Pearce, 2001.

Davis and Pearce (2000), in a review of the level of RNFE diversification, assert that it is important to consider the potential sources of income available to each farm or rural household. These are shown in Figure 1 for the case of a farm–based household. The traditional main component here has been income from agricultural core activities. In defining RNFE income, diversification and other economic activities of farmers and rural dwellers, two central problems emerge: (i) capturing the appropriate unit for income analysis, and (ii) recognizing and ordering the multiple nature of income sources. The question of which the appropriate unit might be for income analysis is important, and partly relates to social and cultural factors. The most obvious units would be either the “individual” or the “household”. The definition of the former is not in doubt. The latter – the household – is not so straightforward, since the co–resident unit is not always the only economically rele- vantunitintermsofproductionorconsumption.Theremaybesmallerunits,whicharerelevant where there is an extended or joint family situation, or there may be larger units where closely related households collaborate and cooperate in activities that are economically significant. It might be argued that the most appropriate unit should be identified in the specific cultural and social context; however this presents additional empirical problems because it means that it is difficulttodrawoutparallelsanddifferencesbetweendifferentcountries,andevenbetweendif- ferent regions of the same country. One undisputed characteristic of households is that members in it share income to some extent.

39 A disadvantage with this focus on household livelihoods and household incomes is that it provides no insight into enterprise behaviour. Its main advantage is that it is better suited for measurement purposes: all rural income from whatever source sooner or later ends up in household wallets. However, micro– and small–scale rural enterprises have often been investigated as potential motors of local economic growth. The dynamics, drivers and barriers for these businesses are not fully captured by the livelihoods approach. They are usually captured as family businesses, but not once they go beyond the size of a micro–enterprise. By defining rural economic diversification as all rural income generation other than food production, large heterogeneity in the activities undertaken by, or sources of income of, rural households and enterprises is implied (Start, 2001:496). This “bewildering diversity” (Haggblade et al., 2002) implies problems of concepts and definitions relating to both the unit of measurement and the definition of incomes and activities (Barrett et al., 2001; Reardon, 1998). In response, many dichotomies or categorizations have come to be used in empirical research to address the above problems of defining and measuring the RNFE, such as off–/on–farm, business/wage income, local/urban activities, earned/non–earned income, tradable/non–tradable, activity–based/income–based. Davis and Pearce (2000) suggest that one approach is to study the components of potential sources of income (see Figure 1). In the case of farms, on–farm income can come both from agricultural core activities and non–agricultural activities. Potential sources of non–agricultural income can be divided into three components: income from non–agricultural employment; non–farm enterprises; and remittances. As such, one can distinguish between enterprise and income diversification. Enterprise diversification activity embraces both on– and off–farm business creation outside of agricultural core activities. Income diversification will embrace these two components plus any movement towards non–farm employment (whether agricul- turallybasedornot).Finally,athirdsourceofrevenueisunearnedincome(suchasremittances, pensions, dividends and interest), which while usually ignored, can be very substantial, and decisions made in this sphere may have an important bearing on such crucial choices as time of retirement and intensity of farming. Thus, potential sources of income are disparate, likely to vary substantially in importance between rural households, and exhibit wide variations in their attractiveness as sources of financial gain. These variations between components of income are therefore likely to have a major effect on the decision–making of rural households and individuals and there is a need to understand the importance of each, rather than subsuming them all into binary classifications such as the part–/full–time dichotomy.12 Moreover, there is no reason why RNFE income diversification has to be either about setting up new enterprises or even be farm based at all – for many, other, intermediate options may prove more fruitful or promising (Pearce and Davis, 2000).

12 See Mishra and Goodwin (1997) who address farm income variability and how this affects the supply of off–farm labour. They also attempt to test whether spouses make joint decisions in terms of their off–farm employment activity. Of course, their paper assumes that markets function efficiently, again not always the case in rural LDC economies. However, utilizing an econometric approach, the authors found that the off-farm labour supply of farmers is positively correlated with the riskiness of farm incomes; that farmers and their spouses with more farming experience are less likely to work off–farm; and that off–farm labour supply is correlated with off–farm experience.

40 This heterogeneity is one of the reasons the concept of livelihoods, introduced previously, is more appropriate as it encompasses all income sources.

ACTIVITIES, ASSETS AND DIVERSIFICATION

Rural non–farm activities may be defined in a number of different ways. One simple distinction is between waged and self–employment. This is a functional distinction. In addition, activities may be classified according to sector (e.g. primary sector vs. secondary sector) and/or space. See Barrett and Reardon (2000) who explore these distinctions in great detail. RNFE activities may fall anywhere within the shaded part of Table 1 below:

Table 1: The heterogeneity of rural non–farm activities

Primary Secondary Tertiary Agriculture13 Mining / Other extractive Manufacture Services Waged employment L M L MLMLM Self– employment L M L MLMLM Source: Barrett and Reardon (2000: 40). Key: L = local; M = migratory 14 The situation is, however, even more complex than that depicted by Table 1, because in addition to the three–way classification, it is also important to make a distinction between the asset implications of particular activities. That is, it is important to distinguish between activities that accumulate, spread or denude assets. Activities and assets are difficult to measure for some of the same reasons that incomes are, i.e. complexity, oversight and respondent/subject recall problems, dubious legality of certain activities and certain (financial) assets. In addition, there are further valuation difficulties in relation to assets (Barrett and Reardon, 2000: 27), and certain types of activity: • The quantity of the asset may not be known accurately (this is common with land, for instance). • It may be difficult to value assets for which no local market exists.

13 Ellis (2000(b): 12) makes the point that there are no hard and fast rules governing income classifications (and the same can be said for activity classifications). “Agriculture” may be taken as a rough shorthand for renewable natural resources, so that gathering/cultivation of forest products and fishing are also included. This is the definition used in this paper reflecting a perceived need to correct for past oversight in focusing largely on agriculture, forestry and fisheries in rural areas. Non-farm activity includes agroprocessing and trading activities, neither of which is primary production, even if conducted on-farm. 14 Migratory activity and incomes are tricky subjects. Rural non–farm activity could not include the activities of permanent migrants. The same cannot necessarily be said however for rural non–farm incomes, as under some definitions, remittances from former members of the household who have permanently moved away would be regarded as unearned rural non–farm income. In this paper, unearned income from such sources is included in our definition of the RNFE.

41 • Some assets are held in common with other households; describing a “share” is difficult. • Some of the most important assets – especially components of human capital (e. g. skills, health) and social capital (e.g. capacity to make claims on others) – are difficult to observe accurately. • It is difficult to observe (in a survey) quality differentiation (e.g. soil quality, animal health). • There may be multiple activities undertaken by several household members over several seasons of the year. • Some activities are illegal or “informal” and are therefore not readily reported. • The activities are often undertaken part–time and mixed with other activities (such as operating a small–scale retail commerce business mixed with household chores and farm labour in a given season). There are also several income valuation problems given the diversity of income sources, non–monetary income (e. g. barter), levels of remuneration, and empirical problems in accurately measuring and collecting reliable income data in transition and less developed countries (see Davis and Wiggins, 2003).

Concepts, assets, activities and livelihoods This paper is structured around the concepts of livelihood and diversity. “A livelihood comprises the assets (natural, physical, human, financial and social capital), the activities, and the access gained to these that together determine the living gained by the household.” (Ellis, 2000b:10) Assets form households' endowment of resources with which to gain their living. In this definition, the conventional meaning of assets is expanded to include, besides material and financial resources, also household members' skills and experience (human capital) and their relations within wider communities (social capital). This inclusive definition, as well as use of the term “capital” in these senses, is not uncontroversial, but it serves to highlight several unifying features of diverse resources. They require investment, in terms of time or money, in order to be obtained or formed. They can (but need not) be used in an economically productive way. And in doing so, they are (imperfectly) substitutable and complement household labour. Activities comprise all the ways in which household members utilize their non–leisure time to support their livelihoods. This broad definition includes work and care, employment and entrepreneurship,agriculturalproductionandtrade,andarangeofotherdichotomies,someofthem depicted in Figure 1. Engagement in activities both requires assets and may increase households' stock of assets. Households' endowment of assets and involvement in activities jointly support their level of well–being (Figure 2). The second central term in this paper is diversity, which follows naturally from the idea of livelihood. Diversity in a household's activities and income (which is one measure for a household's living standard) “refers to the existence, at a point in time, of … different household income sources…” (Ellis, 2000:14). Given heterogeneity in assets, diversity in income is almost implied. Indeed, both individual and household income normally derive from more than one source: income diversification is the norm, specialization the exception (Barrett et al., 2001).

42 Figure 2. A framework for livelihoods analysis

Source: Adapted from Ellis (2000: 30)

Typically, household income diversity is especially large in rural areas. Rural households are more often producers as well as consumers, which implies the presence of profit (from sold output) or in–kind income (if output is consumed) as income components in addition to, for instance, wages. Also, the relatively lower remuneration of capital and labour and the more limited market development that often characterizes rural areas make it less likely that any single source of income is sufficient to meet rural household needs. For similar reasons, income diversity is particularly relevant to developing economies. In this context, it is unsurprising that theorising about, and empirical study of, the economics of livelihoods and diversity mainly draw on evidence from the developing world (Reardon et al., 1998; Start, 2001; Haggblade et al., 2002) and, more recently, also from the transition economies in Central and Eastern Europe and the former Soviet Union. Of particular interest is the evolution of diversity, i.e. the process of diversification of activities and incomes. This is how households respond to changes in their economic environment, drawing on their various assets and with the aim of preserving or improving their livelihoods. As reflected in the definition of livelihoods, they are enabled or restricted in doing so by their social and economic environment.

DIVERSIFICATION TYPOLOGIES Distress–push and demand–pull diversification

43 In studying households' diversification strategies, it is important to account for the fact that the motivations, means, and outcomes of diversifying are heterogeneous. The two extremes in this respect are, on the one hand, the traditional belief that diversity of activities would signify a lack of economic development. Diversity is then juxtaposed with specialization of labour and efficiency gains (Lewis, 1954). On the other hand, more recently rural diversity in activities and incomes has been identified as a potential motor for rural economic growth through additional income generation and production and consumption linkages between agriculture, industry and services (Reardon et al., 1998; Start, 2001; Haggblade et al., 2002). Although such effects have been observed, rural diversity per se is clearly not a panacea for rural development (Lanjouw and Lanjouw, 1995; Deininger and Olinte, 2001). An approach that is more sensitive to the different potentialities of rural diversity is suggested by a distinction in the literature between “demand–pull” and “distress–push” diversification (e. g. Reardon, 1999; Ellis, 2000; Pearce and Davis, 2001; Haggblade et al., 2002). Dis- tress–pushdiversificationtypicallyoccursinanenvironmentofrisk,marketimperfections,and of hidden agricultural unemployment, and is typically triggered by economic adversity, which sets the household on a downward income trajectory. It implies engaging in economic activities that are less productive than agricultural production could be on a full–employment basis, and ismotivatedbytheneedtoavoidfurtherincomedecreases.Demand–pulldiversification,onthe other hand, is characterized as a response to evolving market or technological opportunities, which offer the opportunity of increasing labour productivity and household incomes.15 This distinction suggests a number of specific inferences in terms of the relationship between diversification strategies, household characteristics and the socio–economic environment. Regionally, distress–push diversification will dominate in rural areas which have one or more of the following characteristics: geographical isolation, low–quality physical infrastructure, low human capital, underdeveloped markets, resource scarcity, or recent shocks to the natural environment, the economic system, or the agricultural sector. Demand–pull diversification would be possible in the presence of expanding technological innovations (whether within or outside agriculture) market development, or intensifying links with markets outside of the local economy (Davis and Pearce, 2000). Within any rural area, distress–push diversification attracts households in a rural population, which are less well–endowed, or which have lower incomes. These households will enter non–agricultural activities that are, on average, less rewarding (e.g. in terms of labour productivity) than demand–pull diversification activities, since the higher–return activities typically require higher investment that only the richer households can afford. For instance, poorer households will obtain a larger share of their non–agricultural income from wage employment, while richer households have better opportunities to enter non–agricultural activities in their own independent enterprise. Third, since income inequality is typically such that there are more relativelypoorthanrelativelyrichhouseholds,distress–pushdiversificationwillbemorepreva- lent than demand-pull diversification. Fourth, distress-push and demand-pull diversification activities will be more clearly separately observable as inequality is larger.

15 Several studies in Asia (cited in Islam, 1997) show that the poorest groups (the landless and smallfarmers)diversifyintoactivitieswherewagesarenohigherthanthoseintheagricultural sector, whilst higher income groups (larger farmers) also diversify, but into better-paid sectors. Peters (1997) has observed a similar process in rural Malawi.

44 One implication of this approach is that the distribution of diversification activities over households would follow a bimodal distribution over household incomes in the presence of both demand–pull and distress–push diversification, there would be two clusters of low–return and high–return activities, which are engaged in by poor and affluent households, respectively.16 Moreover, if distress–push diversification dominates, we would expect that poorer households are more involved in diversification than others. In the case of predominantly demand–pull diversification, we would expect that higher income households engage more in non–agricultural diversification than the poorest households. This relationship between returns to diversification activities and income levels of households engaged in them is reflected in some empirical findings on rural diversity (see Seppala, 1996; Carter and May, 1999). This framework is one way of accounting for varied evidence on the diversification–income relationship from different geographical areas, signifying different rural development patterns (Deininger and Olinte, 2001; Start, 2001). The distinction between demand–pull and distress–push diversification is also useful for evaluating the economic significance of the RNFE. In many developing countries, particularly in South Asia, demand–pull diversification is occurring, signifying rural economic growth in the sense of increasing efficiency (Haggblade et al., 2002). In contrast, in many transition economies, it appears that household diversification has often been occurring during a downhill trajectory of household incomes – which would be distress–push diversification – and in conditions of a general “primitivization” of the economy, i.e. a decrease in the value–added in the economy (Ellman, 2000).

HOW IMPORTANT IS RURAL NON–FARM INCOME AND EMPLOYMENT?

Composition of the RNFE For most rural people in developing and transitional economies, rural non–farm activities are part of a diversified livelihood portfolio. The rural population in developing countries derive important income shares from rural non–farm activities. Ellis (2000) states that 30–50 percent is common in sub–Saharan Africa, and FAO (1998)17 gives a mean figure of 42 percent for SSA. In Asia and Latin America, FAO estimates the figures to be 32 percent and 40 percent respectively (Ellis (2000) gives appreciably higher estimates for South Asia). Bezemer and Davis (2003) found that the average rural non–farm income shares of rural households in some CEE/CIS households is 44 percent (see Table 2).

16 What about those that are neither rich nor poor? Although numerous analyses of the RNFE and diversification tend to distinguish between these two extremes, often the situation on the ground is not that clear-cut, so it is important that diversification typologies are not oversimplified. 17 The FAO study summarizes data from over 100 studies – focusing mainly on farm households - undertaken over three decades (1970s to the 1990s).

45 Table 2: Rural non–farm income shares by region

Region Average Share Africa 42 East/South 45 West 36 Asia 32 East 35 South 29 Latin America 40 Eastern Europe & CIS18 44 Source: Reardon et al. (1998); Bezemer and Davis (2003).

Table3belowshowsacompositionof RNF employmentinlessdevelopedcountries(LDCs)and transition economies. Agriculture still dominates as the most important sector of economic activity for LDCs. Manufacturing is less important in terms of income and employment than the services and commerce sectors. Davis (2003), and Haggblade et al. (2002) show that these sectors seem to be both higher growth sectors and of particular importance to the poor. Within the RNFE, earnings from self–employment and non–farm wage employment dominate agricultural wage earnings and remittances.

Table 3: Composition of RNF employment by region (primary workers)

Rural workers Women Percent Percent Percent of total Percent employed in of total of total Region of total in in trade and of total RNF activity rural in other manufacturing transport in other services (%) workers (%) activities Africa 10.9 26.3 23.1 21.9 24.5 30.4 Asia 24.8 20.1 27.7 26.3 31.5 14.4 Latin America 35.9 27.5 19.5 19.6 27.3 33.5 West & North Africa 22.4 11.3 22.9 21.7 32.0 23.2 Eastern Europe 47.0 37.8 38.6 20.3 26.2 15.6 Source: Haggblade, Hazell and Reardon (2002).

Impacts of RNF activity: inequality Davis (2003) maintains that much RNF activity distributes income as unequally as primary activities. The poor, the discriminated, females, remote areas – all seem more often to be at disadvantage in accessing RNF opportunities compared to those who already hold important advantages. Indeed, Reardon et al. (1998) have highlighted the paradoxes of the RNFE: that it works best for people and areas that need the boost least, and usually does much less for those wholackresourcesandeducation,andforremoteareas.Thosefewstudiesthatlookexplicitlyat

18 This figure represents surveys conducted by NRI and partners on six CEE and CIS states. The average rural non-farm income shares range from 31 percent in Armenia to 68 percent in Bulgaria.

46 income distribution see self–employment businesses in the RNFE as widening income differences;butalsothatwagedjobstendtoclosethegap.Thissuggeststhatthekeypointinreducing inequalities and disadvantage is creating jobs in the RNFE, rather than businesses in themselves.

DETERMINANTS OF ACCESS TO LIVELIHOOD DIVERSIFICATION AND THE RNFE19

In this section of the paper the relevance of non–agricultural activities and incomes to households in rural areas in four low– and middle–income transition countries is explored. The guiding theoretical framework is the livelihoods approach, which links households' endowment with capitals to their engagement in economic activities and the outcomes in terms of households' incomes and consumption. A distinction between distress–push and demand–pull diversification strategies is used to explore the livelihood choices and opportunities of households in different income brackets. These concepts are applied to survey samples of rural households in Georgia, Romania, Bulgaria, and Slovenia. Thecontributionofthispaperisthreefold.First,itfillsagapinourknowledgeoftheimportance of the RNFE in transition countries in terms of income shares and activities. The heterogeneity within this group of economies is reflected by the inclusion of poor, middle income, and relatively rich transition countries in the study, located in the three main regions where the transition is underway – Central Europe, the Balkans, and the Former Soviet Union. Second, it demonstrates how a livelihoods approach can be applied both in describing the size and nature of the RNFE and in analysing the links between poverty and RNFE participation. Third, some empirical content is given to the conceptual distinction between demand–pull and distress–push diversity, developed elsewhere in this paper. Different countries are shown to have different types of diversity, which are understandable in light of the stage of their economic development.

Country Backgrounds In this section a brief sketch of the countries under study is provided along with key economic and rural indicators. The relevance of this study is that these four countries each represent a group of transition countries with different backgrounds, in different stages of the transition to a market economy, and plausibly heading for different destinations in terms of economic systems.

19 Much of the work and data presented in this section was commissioned by the United Kingdom Department for International Development's (DFID's) Rural Livelihoods Department through the DFID/WB collaborative programme for rural development. Some of the data, mainly on Bulgaria and Slovenia has been collected through the EC–Phare ACE Programme – EU Accession in the Balkans: Policy Options for Diversification in the Rural Economy (P98–1090–R). For more information see Buchenreider et al., A cross-country comparison of non-farm rural employment in the Balkans, BPODRE (P98–1090–R Discussion Paper No. 03/2002; Bezemer, D. (2003), RNFE in low-middle income transition countries, DFID report (unpublished mimeo); and Davis (2003).

47 Slovenia is probably the most successful of the transition economies surveyed, and represents the Central European states with a successful transition performance, which are set to enter the European Union in 2004, including Poland, the Czech Republic, Hungary, Slovakia, Lithuania and Estonia. These countries are on their way to becoming Western-type developed market de- mocracies. BulgariarepresentsthoseEuropeanstatesjustbehindthisfirstgroupintermsofeconomicsuc- cess, including Latvia and Macedonia. They are considerably poorer than the countries in the first group, but are increasingly integrating with the Western European economies, and have been implementing deep market reforms over the last five years. Policy challenges in the areas of governance, social safety, crime and monetary stability remain, but have been decreasing appreciably over the last few years. These countries are expected to eventually fully converge to the market model and join the European Union. One example of a country that achieved this is Slovakia, which was in this group until 2001 and was then promoted to the “first wave” of EU accessions. Romania,withitsmuchmorepersistenteconomicproblems,representstheEuropeanlaggards in the transition, where often both the historical background and transition policies have impeded economic growth. This includes Bosnia, Serbia, Albania, Moldova, Ukraine, Belarus, and Russia. These states are in limbo: politically between democracy and dictatorship, and economically between market, mafia and central planning. Their present situation is precarious and even the near future uncertain. Georgia represents the Caucasus and Central Asian former Soviet Republics. They were never developed market economies, depended heavily on Soviet linkages during the central planning era, and suffered most from its disruption. This group also includes Armenia, Moldova, Kazakhstan, Tajikistan, Turkmenistan, and Uzbekistan. Although the share of industry in their economies is still high relative to per capita income, they share most of the other characteristics of the poorer developing countries. In some ways, transition has meant economic reversal for them. Slovenia, a small state bordering on Italy, was part of relatively wealthy Yugoslavia before the 1990reforms.TheYugoslavsystemoflargeworkers'controlwithinenterprisesimpliedalarger degree of decentralization of decision–making than in most other centrally planned economies, a feature which may have been behind its relatively good economic performance during central planning and which facilitated market–oriented enterprise reforms afterwards. In agriculture, privatefamilyfarmswereneverabolished,andtheYugoslavsuccessorstatesenteredthetransi- tion with a farm sector that initially needed little structural reform in comparison to the other transition economies (Poland excepted). Slovenia quickly established independence when Yu- goslavia disintegrated and has kept out of its violent aftermath. Its economy benefits from proximity to Western Europe via tourism and trade, and has known no disruption after 1990. The country is a stable democracy with positive growth rates, moderate inflation and a relatively well–developed social security system. Known as the “Switzerland of Eastern Europe”, Slovenia is set to enter the European Union in 2004. In contrast, the Bulgarian economy in the 1989–1999 decade of transition suffered from a systemic collapse followed by delayed and incomplete reforms, a sharp reduction in its trade, collapse of much of its industry, severe problems with governance and corruption, two periods of hyperinflation (1991–1992 and 1996–1997), and a banking crisis in 1997. Economic growth was negative for most of this decade and the size of the economy, as measured by GDP, declined

48 by over 20 percent. Official unemployment was persistently over 10 percent and rose to 16 percent in 1999. Bulgaria delayed reforms until after 1996, but has caught up since. The European Commission recently acknowledged Bulgaria as a “functioning market economy”. Romania was the second poorest centrally planned economy in Eastern Europe (the poorest was Albania). During three decades under dictator Ceausescu prior to the 1989 changes it suffered from erratic policies that often impeded and sometimes reversed economic development. In 1989 it was the second latest of the Eastern European states to have its liberal revolution (again still before Albania), and the only one where this revolution was violent. Romanian market reforms have been slow and incomplete, with real reforms in exchange rate liberalization and privatization starting only in 1997. The transition was characterized by low and sometimes negative growth, continuously high inflation (of between 30 and 155 percent), political instability, financial scandals and scams (such as widespread Ponzi schemes) and a serious corruption problem. Romania is the most rural of the European transition economies. Its agricultural sector has been structurally reformed, from one where state and collective farms dominated, to a three–tier sector of relatively few farm companies, a small number of commercial family farms, and millions of semi–subsistence producers. Georgia is one of the small Caucasus republics that regained independence in 1991 during the disintegration of the Soviet Union. Among former Soviet States, it has been progressive in its reforms,privatizingthestatesectorinamassvoucherprogrammeandprivatizingownershipof all land, so that Georgia's agriculture now completely consists of family farms. Well–known for its fruit and wines and tourism potential during Soviet times, the Georgian economy suffered considerably from loss of Soviet–era linkages in tourism, trade and energy. Its transition was also characterized by a territorial war over the enclave Nagorno Karabakh. The Georgian state is weak, resulting in endemic corruption, organized crime and lack of control over parts of the state territory. It has so far failed to capitalize on its strategic position on the Caspian Sea oil route. As in most Caucasus and Central Asian countries, “transition” for most Georgians has so far meant disruption, impoverishment, insecurity and violence. This characterization of the countries under study in this paper is reflected in some social and economic indicators presented in Table 4.

Table 4: Economic and social indicators

Bulgaria Georgia Slovenia Romania Population 1992 and 2000 (million) 8.5 8.1 5.4 5.4 2.0 2.0 22.8 22.3 Rural population 2000 (% of total)1 33 47 2 46 Unemployment 1992 and 2000(% labour force)2 15.6 17.4 2.3 10.3 8.3 5.9 8.2 8.6 GDP per capita 1992 & 2001 (US$)3 1 012 1 619 214 581 6 280 9 416 859 1 743 Gini coefficient, 1987 – 1990 – 1996 – 19984 0.23 0.41 0.29 0.43 0.22 0.30 0.23 0.30 Share of population in poverty (%)5 75 63 – 45 Rural/urban poverty incidence (ratio, various years)6 1.8 0.9 2.9 2.4 Human Development Index ranking 19957 67 108 42 74 Importance of agriculture 1992 and 2000 (in % of 12 13 55 28 5 3 19 11 GDP)8 Notes: 1. The share of the population in rural areas is taken from World Bank (2000) and depends on definitions of rural areas. In comparison with other sources it probably represents a lower boundary – for instance OECD

49 (2000) reports 44 percent of Bulgarians live in rural areas compared to the World Bank (2000) 33 percent figure, which in turn is based on FAO data. 2. Georgian unemployment is for 2000. Source: EBRD (1996, 2001). 3. Source: EBRD (1996, 2001). 4. Source: World Bank (2000b). 5. Poverty percentages are based on an absolute poverty line of USD 4.30 per day per person. Sources: World Bank (2000a) for Bulgaria and Romania; World Bank (2002) for Georgia. 6. This ratio is based on a relative poverty line. Source: World Bank (2000a). 7. Source: UNDP (1999). 8. Source: EBRD (1996, 2001). Although there is an exception to every generality, these figures show that income inequality measures have risen during transition; poverty rates are high, except in Slovenia (data not available); rural poverty is more serious than urban poverty, except in Georgia; the contribution of agriculture to the economy has fallen, expect in Bulgaria; and rural populations are relatively large, except in Slovenia. The figures also demonstrate that a focus on rural areas in poverty alleviation polices is sensible. A brief characterization of changes in agriculture and rural areas during transition may illustrate this further. While official gross agricultural output mostly decreased during transition, the share of the agricultural sector in the economy often increased during transition, especially in the less successful transition countries. Sometimes this is apparent in official figures, as in Bulgaria, where it increased from an official share in GDP at current prices of 11 percent in 1989 to 17 percent in 1998–1999, falling to 13 percent in 2001. This signifies the greater contraction in the rest of the economy. The actual (rather than official) increase in the importance of agriculture is higher still, due to the large and plausible increased importance of unregistered output in semi–subsistence agriculture (Abele et al., 2002; Kostov and Lingard, 2002). Household food production is an important part of incomes in transition countries, particularly but not only in rural areas (Caski, 2001; Tho Seeth et al., 2000). The decline in agricultural output accompanied the collapse or transformation of much of the pre–reform farming structures and its replacement by family or peasant farms. The share of agricultural land used by such individual farms increased, mostly in very small land holdings. For instance, in 1998, three–quarters of all individual farmers in Bulgaria worked an area of less than 1.5 hectares (Lerman et al., 2002: 90; OECD, 2000: 79). The remaining larger farms' structures, which are mostly privately owned successor organizations to the agro–industrial complexes, collective farms, and state farms from the communist era, are relatively inefficient due to overstaffing, technical obsolescence, and lack of capitalization. Rural industry typically also collapsed during the first years of the transition (Davis and Pearce, 2001; Kostov and Lingard, 2002), due both to the socialist heritage and transitional policies. One social objective of socialism was to transcend differences between towns and the countryside. In this policy framework, industrial employment in rural areas was created. Rural non–farm employment existed during socialism on a larger scale than in Western Europe. Much of that activity was reduced or disappeared during the transformational recession (Bezemer andDavis, 2002). Asanillustration, inarecent survey intwo regions inthenorthwest of Bulgaria, the density of non–farm companies was found to be significantly lower than the national average (12 compared to 25 enterprises per 1 000 inhabitants), while also industrial labour productivity was below the national average. In these regions, which are relatively low–developed among rural regions, agriculture accounted for 50 percent of employment, and trade and industry for 24 percent each. (OECD, 2000: 149). This illustrates both the importance

50 oftheruralnon–farmeconomyandthechallengesitiscurrentlyfacing.Thephysicalinfrastruc- ture (e.g. the transport, electricity and water systems) as well as the social infrastructure (comprising community centres, educational institutions, and public facilities) are often not less widely spread than the urban systems, but generally of lower quality. Since substantial investments are required for its maintenance and renovation, the quality of these infrastructures is likely to be declining further in the near future. Overall, “an attack on total poverty will require sustained attention to rural poverty.” (World Bank, 2000b: 14)

Survey background, frames and implementation In recent years there has been growing recognition of the role of the non–farm sector for employment and income smoothing and generation in rural areas in the developing countries as well as in the EU, CIS and CEECs. However, there has been relatively little focus on the factors that determine people's capacity to take advantage of or to generate these opportunities. It is hy- pothesized that two processes are apparent: demand–pull, where rural people respond to new opportunities; and distress–push, where the poorest are driven to seek non–farm employment as a survival strategy. Sometimes these processes work together. The non–farm sector is thus vital for rural employment and incomes in situations of both stagnant and buoyant agricultural sectors and rural economy as a whole. It is also important for EU accession as the development of remunerative and sustainable non–farm employment opportunities will have important effects in terms of the use of future structural funds, regional assistance and the implementation of the Common Agricultural Policy. Here, we aim to identify the key socio–economic factors, resources, activities and constraints to rural households and enterprises in the non–farm rural economy. These data were collected at the micro–level and analysed in the context of farm systems theory and contemporary econometric methodologies. Figure 3 provides a schematic diagram of the survey fieldwork criteria/structure. Certain secondary data and conceptual problems were encountered. These included limited regional secondary data available in the CIS. Romania has municipal (unofficially NUTS)20 and regional data. Georgia has no NUTS 2 or 3 data. At NUTS 4 Georgia have several regions. These are large municipalities and much larger than in the EU. There is no standardised definition of “rural” in the CEE/CIS. Therefore, we have used a definition of “rural” based on the OECD criteria: 21

20 The NUTS nomenclature (Nomenclature of Territorial Units for Statistics) is a five-level hierarchical classification (three regional levels and two local levels) drawn up by Eurostat to provide a single uniform breakdown of territorial units for the production of Community regional statistics, for socio-economic analyses of the regions and for the framing of Community regional policies. Although it has no official standing, it has been used in Community legislation since 1988. NUTS subdivides each Member State into a number of NUTS 1 regions, each of which is in turn subdivided into a number of NUTS 2 regions and so on. 21 Rural and urban regions are defined by the OECD (1996) as follows: (1) in a mainly rural area more than 50 percent of the population inhabit rural municipalities; (2) in an area with essentially rural features between 15 percent and 50 percent of the population live in rural municipalities and (3) in mainly urban areas fewer than 15 percent of the population live in rural municipalities (Pohlan, 1998). A rural municipality is classified as such if it has a population density of fewer than 150 persons per square kilometre. The idea of “rural” also includes municipalities with fewer than 5 000 inhabitants (Lanjouw and Lanjouw, 1997).

51 The survey structure has two tiers; first, the regional tier is where we disaggregate according to peri–urban and rural regions. Variability at this level is important statistically and the local knowledge of the project team was crucial, as they made the final decisions concerning less favoured area (LFA) and more favoured area (MFA) designations. For complementarity reasons we follow the EU definition of less favoured regions as closely as possible. The second tier is comprised of less favoured and more favoured areas, within which around 1 000 households from any number of villages were selected in Romania and Georgia.22 In Slovenia, Macedonia, and Bulgaria the sample size was 120 households. The survey focused on four types of households, each represented by a quarter of the total sample size: 1. Full–time farm household 2. Part–time with dependent/wage employment 3. Part–time with self–employment 4. Non–farm household For a more detailed explanation of the survey sample frame, data collection, collation and vali- dation see Bezemer and Davis (2003).

Figure 3. Survey structure

Overview of findings: Capitals and activities In this section the survey findings will be presented following the livelihoods structure of capitals (or assets), activities, and outcomes in terms of income and consumption levels. In this ap-

22 The survey also included Armenia, but the results of that analysis are not reported here.

52 proach, households' capital comprises their natural, physical, social, human, and financial capital. Table 5 presents data on human capital in the five countries surveyed.

Table 5: Human capital

Countries Mean (S.D.) Human Capital Variables Georgia Romania Bulgaria Slovenia (n = 1,000) (n = 1,100) (n = 120) (n = 120) Ethnic diversity index1 0.36 0.22 0.1 0.0 hh size (persons count)2 3.9 1.8 3.2 1.6 3.8 1.4 4.7 1.8 Male/female ratio 1.05 0.77 1.10 0.81 1.3 0.8 1.1 0.61 Female–headed hhs (percent)3 12631 Average age (years) 41.2 15.9 47 18 40 13 38.1 11.5 Dependency ratio4 0.36 0.31 0.39 0.35 0.5 0.2 0.50 0.01 Highest education level5 5 1.9 3.9 1.6 4.8 2.0 3.6 1.0 Source: Survey findings. Notes: S 2 1. The ethnic diversity index is 1 – (Sj) , where Sj is the sample share of population group j, with j = 1,2, …, i. With ethnic homogeneity, the index equals zero, approaching 1 as i increases and as the population shares become more equal. 2. hh stands for household. 3. Female–headed households are defined as households without male members aged over 18. 4. The dependency ratio is defined as: (1 – (number of household members aged over 15 and under 66) /household size)). 5. Education level is defined on a 9–point scale: 0 – No studies and cannot read or write; 1 – No studies but can read or write; 2 – Elementary school; 3 – Vocational school; 4 –Secondary school, gymnasium; 5 – Col- lege; 6 – Graduate studies (University B. S.),7–M.Sc.studies (University); 8 – Ph. D. studies (University); 9 – Other occupation specific higher education Ethnic diversity is largest in Georgia, where about 20 percent of the sampled households are Azeri, and in Romania, where there were a number of Transylvanian Hungarians in the sample. Household size varies between three and five over countries, while within–country variation is of a similar magnitude. In all countries there are on average slightly more men than women, although this difference is not always statistically significant. Households without adult males are rare except in Georgia, where their larger number may be linked to political violence and civil war in the recent past. Average household age is similar in Slovenia, Bulgaria, and Georgia. It is appreciably higher in Romania. The dependency ratios show that the Balkan samples have on average relatively fewer household members of working age than is the case in Georgia. Low life expectancy and low quality diet and health care plausibly account for this smaller presence of children and elderly people in Caucasus countries. Education levels are high relative to rural populations in countries of similar per capita income levels. This is an inheritance from the socialist systems which generally provided universal primary and secondary education. Data on access to land reflect the land reforms implemented in the early 1990s. Georgia, together with Armenia and Moldova and the Baltic States, is a former Soviet Republic where land

53 was privatized and agriculture individualized in similar fashion as the land reform programmes implemented in Central and Eastern Europe. Slovenia, as successor state to Yugoslavia, inherited a large private family–farming sector from the socialist era which accounts for the high access to land figure for the rural population. In the other Balkan countries, pre–reform collective andstatefarmstructuressurviveinsomenumber,mostclearlysoinRomania(Bezemer,2002).

Table 6: Physical capital: Land, livestock and assets

Country Samples Mean (S. D.) Physical Capital Variables Georgia Romania Bulgaria Slovenia (n = 1,000) (n = 1,100) (n = 120) (n = 120) Access to land (%) 73 80 78 95 Land available (ha) 0.6 0.7 2.3 3.0 0.3 1.0 11.8 10.5 Beef & milk cattle (hd) 12142131719 Pigs, hogs & sows (hd) 011518252068 Sheep & goats (hd) 021551117 Poultry (hd) 2 3 15 18 5 17 132 1 158 Owns other productive assets (%)1 14 63 65 100 Value of productive assets1 (EUR) 160 1 031 728 1 558 7 731 14 011 10 321 37 373 Source: Survey finding. Note: 1 Other productive assets include: stables, slaughterhouse, car, lorry, tractor, trailer etc. The amount of land available reflects a number of factors: land reform choices, which in turn re- vived historical patterns from the 1940s in the Balkans; rural population density; and survey frames. In Romania, and in particularly Bulgaria and Georgia, land areas are small on average. This fragmentation is typical for rural land ownership patterns in the transition countries in general, where subsistence production on smallholdings has come to dominate food production especially of non–staples. The large average land area in the Slovenian sample results from the survey frame in this country, which was more focused on the more viable and thus larger family farms. This also accounts for the larger average number of livestock and asset values in Slovenia. The differences in the incidence and the average value of asset ownership reflect their different levels of economic development.

Table 7: Financial capital

Country Samples Mean (S.D.) Human Capital Variables Georgia Romania Bulgaria Slovenia (n = 1,000) (n = 1,100) (n = 120) (n = 120) Loan uptake (%) 18 11 11 23 Amount of loans taken up in last year (EUR) 432 695 85 300 300 1 927 1 508 6 287 Households with asset income (%)1 85018 Monthly asset income (EUR)1 9 44 3 46 0 0 2 993 11 913 Source: Survey findings. Note(s): 1 Assets include financial assets and real estate.

54 The take–up of loans is limited everywhere, which reflects the underdevelopment of credit markets for agriculture in the transition economies in general (Davis and Gaburici, 1999; Bezemer, 2002). It is highest in Georgia, which plausibly has a large informal credit market servicing households and small enterprises, as is the case in its neighbour Armenia (Bezemer and Davis, 2002). The high uptake figure in Slovenia reflects the more commercially oriented farms in this sample. Income from assets is rare in all countries except in Slovenia. These data are in line with the limited degree of monetization of the rural economy in transition countries outside Central Europe.

Overview of findings: Levels of rural diversity Figure 4 and Figure 5 display the relative importance of different economic sectors in the RNFE, separately for waged jobs and for independent enterprises other than farms (see Appendix 2 for details on occupations). A first observation, unsurprisingly, is that in each sample (Bulgaria excepted) there are more individuals in wage employment than in their own independent enterprise. Among enterprises, trade is clearly the most important activity in Georgia. In Romania and Bulgaria, trade and services are about equally frequently engaged in. In Bulgaria only, also industry is of similar importance. Non–farm activities related to services are by far the largest sector in Slovenia. Figure 4. Self–employment by sector

These findings can be explained by the different levels of economic development, by pre–and post reform political decisions, and by the extent to which the trade system has broken down during transition in the various countries. Georgia relied heavily on Soviet linkages for trade in the old system. The disintegration of the Soviet Union and the only very partial replacement with a new regional private trading system has created large scope for individuals to step in. Much regional trade is now in the form of “suitcase traders” (shuttle trade): individuals travel- ling back and forth between Russia and other former Soviet republics with tradables. In contrast,thecollapseofthe CMEA (thetradingsystemoftheSovietUnionanditseasternEuropean satellite states) has been quickly replaced by new trade links operated by larger–scale enter-

55 prises within Central and Eastern Europe as well as, importantly, new links with the European Union member states.

Figure 5. Wage employment by sector

Source: Survey findings

The higher service sectors in the other Balkan states compared to Georgia can be explained in terms of their higher level of economic development, which tends to go hand in hand with a larger share of services in the economy, replacing trade and especially industry. The exception is Bulgaria. The high figure for industry in Bulgaria may be explained by socialist–era industrial policies, which caused large industrial concerns (so–called agro–industrial complexes)tobelo- cated in rural areas in Bulgaria (Davidova, 1994). Much of the assets in these enterprises may have been (in) formally privatized, ending up in private, small–scale rural industry. In wage employment data (Figure 5), the trade sector is almost absent. This is one indication of the small size of rural trade enterprises. The state sector, in contrast, is shown to be important for rural employment, especially in Georgia where plausibly, private alternatives have often not survived the recent economic duress. The figures also reflect that Romania and Bulgaria are largely unreformed economies with regard to their sectoral structures, compared to Slovenia, which is further progressed towards a market–based economic model with a reduced role for the state. Services is the private sector activity accounting for the largest share of employment. This reflects the general trend in the transition countries of de–industrialization and towards a service–based economy, which, as argued by Hedlund (1996) and more recently by Mickiewics and Zalewski (2002), may represent a “primitivization” of the economy rather than genuine economic development. The average number of income sources per household varies considerably over countries. With the exception of Romania, it appears to be increasing with a country's per capita income level. Intuitively it may seem straightforward that an extra income source means extra income. Seen in the light of economic theory, the observation is more controversial. A positive relation would

56 suggest that diversity, not specialisation, boosts income. This would go against the conventional notion of specialisation as the motor of economic growth. Obviously these few data points cannot provide an answer, but they do serve to raise the question. Below in Table 8 we will examine the relationship between the number of income sources and income levels within the surveyed countries.

Table 8: Diversity in income sources, by incidence of access

Mean, (S. D.) Income Diversity Variables Georgia Romania Bulgaria Slovenia (n = 1,000) (n = 1,100) (n = 120) (n = 120) P.c. annual income (EUR) 775 1 073 560 865 1 356 2,448 4 798 3 421 Number of income sources 2.0 1.2 2.6 1.0 2.1 0.9 3.4 1.1 Diversity index1 0.28 0.24 0.57 0.34 0.62 0.27 0.61 0.27 Percent households with earned income from: Own farm2 77 90 73 100 Other farm–based activities 9 32 6 92 Wage employment 21 32 27 65 Own non–farm enterprise 13 10 35 21 Migration labour3 46870 Source: Survey findings. Notes: 1 Diversityofincomeismeasuredas1– S(incomesharej)2 ,withj=1,2,…,i.Withonesourceofincome,the index equals zero, approaching 1 as i increases. It is based on non–negative income shares. 2 Agricultural income is calculated on the basis of reported output levels valued based on price data collected in a separate farm survey. Annual agricultural income is the difference between these revenues and the sum of reported variable costs and 10 percent nominal depreciation of the asset stock. Agricultural income includes both marketed and non–marketed produce, and can take negative values. 3 Income from migration includes remittances in money, food, and other goods sent by household members resident in other parts of the country or abroad. An interesting difference between Bulgaria and Romania is that, while households in the former sample have more income sources, households in the latter have more equal shares from their fewer income sources. This illustrates that diversifying by accessing more sources of income (seeking extra income) is not identical to diversifying by spreading income more equally over different sources (reducing income risk). The share of households with income from their own farm should be around three–quarters according to the survey frame (of the four pre–defined household types with identical survey sample frequencies, three are engaged in agricultural production). The figures show that this is true in Bulgaria and Georgia, but not in Romania and Slovenia. The Slovenian survey team included in the fourth group also households with less than 10 percent of their total income from agriculture, hence the 100 percent of households with some agricultural income in the table. The reason for the higher figure in Romania is unknown at the moment of writing. It should be noted that “other farm based activities” in fact include subsidies, which are only indirectly linked to the “activity” of having a farm. In those countries where farm subsidies are

57 widespread (Slovenia and Romania), this is a frequent income source also within the sample, however without being directly linked to a household's activity pattern. The incidence of wage employment has similar values in Georgia and within the poorer Balkan countries, and is very high in Slovenia. Again, it increases with income level. This might be interpreted to reflect the larger labour mobility in the better–off countries due to better infrastructure, education and skills. No such rough pattern is observable in the incidence of enterprises. Migration is rare everywhere except in Georgia, which is plausibly to a large extent a remittance economy, as is its (very similar) neighbour Armenia. (e. g. Davis et al., 2002; Lerman and Mirzakhanian, 1998). We now turn from the incidence of income sources to their relative contributions to total household income (see Table 9).

Table 9: Diversity in income source, by structure of incomes

Countries Income Shares Mean (S.D.) (percent) Georgia Romania Bulgaria Slovenia Share in total income from: (n = 1,000) (n = 900) (n = 120) (n = 120) Agriculture 45 40 58 32 42 34 57 25 Other farm–based activities 0237152517 Wages 24 34 4 10 9 17 8 10 Own non–farm enterprise 8 23 1 3 23 35 1 4 Remittances 9 22 160000 Social payments 9 21 34 29 24 – 6 7 Asset income 3 11 020029 Total 100 0 100 0 100 0 100 0 Source: Survey findings. Note: Figures are based on non–negative income components only. Unsurprisingly, the family farm is the most important source of income in each country, but barely or not the majority source. In all countries, the share of the RNFE in income terms is between 40 and 60 percent, a finding roughly in line with other studies on developing countries (Reardon et al., 1998; Start, 2001). Farm–based income from a non–agricultural source is low on average, even in those countries where its incidence is high. The exception is Slovenia, which operates a subsidy system that is extensive in comparison with the other countries. These subsidies are included in “other” farm income. The other figures on income shares show the same relative pattern as those in Table 8. Wages and remittances constitute an appreciable part of the income of the average Georgian household, and are much lower everywhere else. Another interesting finding is the large share of social payments in Romania and Bulgaria. Plausibly it is lower in the Caucasus because the social safety net is much less widespread or absent; and in Slovenia, because the sample households with relatively large farm operations would not qualify for social assistance. Another way of looking at rural diversity is by considering the pattern of rural households' labour allocation (see Table 10).

58 Combining these with the income data presented in Table 8 and Table 9 allows some inference to be made on the returns to household labour allocated to different activities (see Appendix 1 fordetails).Absolutefiguresonhoursallocatedtoactivitiesperyearareobviouslydependenton household size and dependency ratio. With the exception of Bulgaria, these countries spend only a few hours on own non–farm enterprise. In terms of time, the RNFE accounts for between half and three–quarters of rural household labour.

Table 10: Diversity in income source, by household labour allocation

Countries Mean (S. D.) Income Shares Georgia Romania Bulgaria Slovenia (n = 1,000) (n = 900) (n = 120) (n = 120) Hh time allocated to… (hours/year) Own farm 2 048 2 393 2 657 2 572 3 800 2 173 4 411 2 789 Employment 1 267 1 987 1 040 1 777 3 290 1 582 1 910 1 838 Own non–farm enterprise 559 1 854 437 1 502 2 252 1 166 342 1 116 Migration 360 1 000 251 792 362 584 0 0 Hh time allocated to… (percent of total) Own farm 56 41 68 39 50 37 64 33 Employment 29 36 21 32 12 19 32 33 Own non–farm enterprise 9 23 6 18 32 38 4 11 Migration 6 17 6 17 4 10 0 n.a. Source: Survey findings. It is interesting to compare the returns to labour between farming and non–farming activities – although these data should be taken as indicative rather than precise (see Appendix 1). Note that re- turnstomigrationlabourarenotcalculatedsinceonlyremittances,notearningswereobserved.

Table 11: Returns to labour

Countries Returns to labour Mean (S.D.) (Eurocent/Hour) Georgia Romania Bulgaria Slovenia (n = 1,000) (n = 900) (n = 120) (n = 120) Returns to labour in: Own farm 70 152 75 491 125 357 63 143 Employment 72 81 4 2 90 44 308 139 Own non–farm enterprise 194 491 4 6 60 22 877 113 Overall return to labour 23 112 58 440 90 198 231 263 Source: Survey findings.

In Georgia and Slovenia, households obtain more per hour in the RNFE than in their own farm; that is, they are in RNFE activities that give them better prospects to increase their labour productivity as measured. This observation links in with the demand–pull/distress–push distinction elaborated elsewhere in this paper, and suggests that there is predominantly a demand–pull element to diversity in these two countries. In the next section we will find further evidence for this hypothesis. In the other countries, agriculture offers better average

59 returns than non–farm activities. That people are still involved in the RNFE may be rational on the basis of marginal, not average returns; and also there may be constraints to farm expansion that leave the non–farm economy as the best option available. Still, the considerable difference in average returns between farming and the RNFE suggest that the RNFE in these countries has limited potential for improving the productivity of rural labour and fostering local economic growth. A final observation on Table 11 is that average returns to labour increase with the general level of economic development as indicated, for instance, by per capita incomes.

Income Levels and Income Diversity Table 12 shows how income shares of wages, enterprise incomes, remittances (where relevant), and all RNFE sources of income taken together differ over levels of total earned income. These figures may help identify how the RNFE is or is not pro–poor: if RNFE income is higher for the lower incomes, and especially for the fifth and lowest income quintile, this implies that RNFE activities are more intensively accessed by the poor. The data on Romania, for instance, do reflect such a pattern, which was also displayed in Figure 4. Total RNFE income share as well as wage income and enterprise income are falling with increasing earned incomes.

Table 12: Trends of income shares over income levels

Share in earned income of… Population quintile, by per capita income (percent) Richest 2 3 4 Poorest Georgia Wage income 29 32 28 19 15 Enterprise income 11 11676 Migration income 1678811 Total RNFE 56 50 42 34 32 Bulgaria Wage income 0 27 15 11 6 Enterprise income 22 23 34 32 24 Migration income 00000 Total RNFE 22 50 49 43 30 Romania Wage income 1 4 11 30 65 Enterprise income 02152 Migration income 34630 Total RNFE 4 10 18 38 67 Slovenia Wage income 38 41 39 54 57 Enterprise income 22 35 41 20 – Migration income 00000 Total RNFE 60 76 80 74 57 Source: Survey findings. Note: Earned income is defined as total household income minus social payments. Thus RNFE income is here presented as a share in activity–related income, rather than a share in total household income as in Ta- ble 5. Including social payments would introduce a variation in the importance of RNFE income that does not reflect any variation in economic activities (enterprises, jobs, and remittance labour).

60 Figure 6. Earned income shared in the RNFE, Romania

Source: Survey Findings.

As suggested in the previous section and explained more fully elsewhere in this paper, this pattern might also say something about the growth prospects of the RNFE. If activities are mainly accessed by those with low earned incomes but apparently not preferred by the better earning households, the poor are likely to be “pushed into” non–agricultural activities by income distress, forced to enter activities that the richer can, and apparently prefer to, do without. This distress–push diversity is likely to be low–return as compared to agriculture. While it is thus importantforsustainingthepoor'slivelihoods,itisunlikelytorepresentsustainablegrowthop- portunities. In Romania wages appear to have this nature (see Figure 6). In contrast, RNFE income shares may also rise with income level, indicating so–called “demand–pull” diversity where those who can afford it enter the RNFE. This is clearly the case in Georgia (see Figure 7). This pattern can be interpreted as signifying the presence of barriers to accessing the RNFE, which exclude the poor. This pattern is clearest for wages; migration, in contrast, is larger in the upper and lower income quintiles and smallest in the three middle–income quintiles. Barriers to entry could indeed be expected by higher–return activities. They maybothenabletherichtoaccumulate,andexcludethepoor,thusincreasingruralinequality. Figure 7. Earned income shared in the RNFE, Georgia

Source: Survey Findings.

61 This observation differs from the one made by Lanjouw and Shariff (2000) in a similar analysis of the RNFE in India: in Indian states where the RNFE is large (as it is in Romania), the rich are over–represented;instateswhereitisrelativelysmall(asinGeorgia),thepoorarethemainpar- ticipants in the RNFE. This serves to emphasize the very different structure of the (rural) economy in transition compared to developing countries. Also the share of the RNFE in total income is lower on average in India than in either of the transition countries. Figure 7 and Figure 8 are clear examples of what would be observable in distress–push and demand–pull patterns. As is clear from Table 12, RNFE shares in the other three countries exhibit a hump–shaped curve over income levels: low in the lowest and highest quintile(s), higher for middle–income households. This pattern suggests that RNFE activities here have some barrier to access but returns are on average below return to labour allocated to agricultural production. The poorest cannot afford to enter the RNFE intensively; the richest are not interested to do so. It is the middle–income group where households most frequently have both the incentive and the ability to take up RNFE activities. The number of income sources as well as the value of the diversity index exhibit similar, but not identical patterns over income levels (see Figure 8 and Figure 9). This relationship is again most clearly linear for Georgia (positive) where diversity benefits mainly the rich and Romania (negative) where mainly the poor access the RNFE. Because of the limited range these variables can take, income–level patterns of diversity are less clearly observable. Compared to household income shares, they also are less informative about the importance of the RNFE for households. The data do serve to show how many options for diversification are open to rural households; and also that a positive relationship between the number of income sources and income level, though intuitively plausible, is not general either across or within countries.

Figure 8. Diversity and income: number of income sources over quintiles

Concluding observations on the RNFE and livelihood diversification in CEE/CIS This study provides insight into the RNFE economy in four transition countries that represent their different stages of economic development: low–income Georgia in the Caucasus; middle–income Bulgaria and Armenia in the Balkans; and high–income Slovenia on the border of Central Europe. The study applies the livelihoods framework in describing and analysing the sample, and aims to increase our understanding of the nature of diverse livelihood strategies in

62 rural areas as it seeks to give empirical content to the conceptual distinction between “distress–push” and “demand–pull” diversity of rural incomes.

Figure 9. Diversity and income: diversity index over quintiles

Source: Survey Findings.

The five capitals: Social, human, physical, financial & natural The samples show considerable ethnic diversity in Georgia and Romania, and homogeneity in the other samples. The average household size is around four persons. There are generally high levels of schooling in each household (secondary schooling completed). Female–headed households account for between 6 and 12 percent of all households. The average age of surveyed people is between 38 (Slovenia) and 47 (Romania) years. The dependency ratio is highest in Romania and similar in the other samples. Only around a tenth of households in Romania and Bulgaria take up loans. In Georgia informal credit markets provide loans to 18 percent of households, while the more commercially oriented farm operations of Slovenian households show a loan takeup percentage of 23 percent. Income from financial asset or real estate is rare except in Slovenia where a fifth of respondents reported such income. Between 73 percent (Georgia) and 95 percent (Slovenia) of respondents have access to land. The average land areas vary from less than one hectare in Bulgaria and Georgia to over 10 hectares in the Slovenian sample. In our sample, few households hold livestock, with the exception of Slovenia. Around 65 percent of households in Romania and Bulgaria own other productive assets besides land and livestock. In Georgia this is 14 percent, in Slovenia 100 percent. Small–scale independent enterprises in the RNFE mostly fall into the trade and services categories. In Bulgaria industry is also important. The state sector is important in non–agricultural wage employment, accounting for between 20 percent and 40 percent of all employment, except in Slovenia. The services sector employs about the same number of individuals. Wage

63 employment in agriculture is only important in Romania. The percentage of households with access to wage employment varies between a fifth in Georgia to 65 percent in Slovenia. Non–farm enterprise income is found in between 13 percent (Georgia) and 35 percent (Bul- garia) of our sample. Half the Georgian sample has remittance income; in the Balkan countries this percentage is 8 percent; in the Slovenian sample remittances were absent. The share of non–farm income in earned household income is between 40 and 60 percent, which is in the range reported for many developing countries. In terms of labour, households allocate roughly half their annual working time to agriculture and half to non–farm activities.

Inequality, poverty and the nature of the RNFE in CEE/CIS countries Households in Bulgaria, Romania, and Georgia are in non–agricultural activities that have lower average returns to labour than agricultural activities. In Slovenia the opposite is true. Pre- liminary analysis suggests that the RNFE has a clear income distributional dimension. In Ro- mania, RNFE involvement, in terms of income shares, falls with rising income, and it is comprised almost exclusively of wage income. In Georgia it increases with increasing income, and includes both enterprise and wage income. In Slovenia and Bulgaria households at the lower end and at the upper end of the income distribution are less involved than those in the middlesegment.Similarobservationsaremadeonincomediversityasmeasuredbythenumber of income sources and quantified by an income diversity index. In addition, preliminary econometric analysis also shows that households with access to non–agricultural income are more likely to be in poverty in Romania, while the opposite is true in Georgia. These observations lend support to an interpretation of the RNFE as being either predominantly “distress–push” or predominantly “demand–pull”. Another finding is that households' risk of poverty is mainly related to their involvement in activities, more so than to their ownership of assets. This distinction is particularly clear in Romania and Georgia. Time limitations on data exploration and analysis imply that this conclusion is tentative and merits further investigation in future work.

RNFE access and livelihood diversification: Summary In conclusion, this section has shown that the livelihoods framework can be fruitfully used to describe and understand rural households' livelihood strategies. It explored data from recent household surveys in Georgia, Romania, Bulgaria, and Slovenia. Various measures for households' social, human, physical, and financial capital were presented, and their values interpreted in view of the countries' different backgrounds and present levels of economic development. Three important findings of this study may be highlighted. First, the RNFE is important for the livelihoods of rural people in the samples. They allocate roughly half their labour time to non–agricultural activities and derive about half their income from sources other than agriculture. Second, the nature of the RNFE differs considerably. In Georgia wages are the most important source of income outside agriculture; in Bulgaria it is independent small-scale enterprises; and in Romania it is social payments, which are not connected to any economic activity. Third, the pattern of involvement in the RNFE in relation to earned income levels also varies. In Romania it falls with rising earned income, and the RNFE can be seen as a refuge from poverty, or “distress–push”. The limited overall importance of the RNFE in Romania may well be due to the cushioning effect of social payments on this push factor. In Georgia the RNFE share rises

64 with increasing earned incomes: those more involved in the RNFE are better capturing opportunities to gain income outside agriculture and hence have higher earned incomes. Here the RNFE has a “demand–pull” nature, and those outside it are the poorer households.

GOVERNMENT AND DONOR POLICIES AND PROGRAMMES OF RELEVANCE TO THE RNFE23

At the beginning of the transformation process in transition countries, economic policies focused mainly on macroeconomic problems. The increasing income disparity between rural and urban regions was ignored. We now know that the increasing inter–regional divergence in the transition economies is one of the major transformation problems. This is, among other reasons, why the World Bank, Organisation for Economic Co–operation and Development (see OECD, 1996) and the European Union (EU) have formulated special rural development strategies (see Breitschopf and Schrieder, 1999; Davis and Pearce, 1999).

The European Union approach The role of the RNFE is explicitly recognized in the EU Accession states through support for pre–accession measures for Agriculture and Rural Development (SAPARD).24 SAPARD represents the first occasion when the EU is demonstrating its commitment to accession to many in the agricultural and rural communities of the CEECs. The proposed EU priorities as recently set out in its draft SAPARD regulations are: • to improve market efficiency; • to adopt EU levels of quality and health standards in order to take part in the single market and to act on behalf of the EU at external borders; and • to introduce measures to create new employment in rural areas. Although rural job creation is well recognized as an important part of the solution of the farm income problem and also a rational response to the labour shedding consequences of farm and food processing modernization, the current SAPARD measures do not explicitly highlight this as a priority, despite it being a necessary component of a coherent rural development strategy in the CEECs. Investments and improvements in market efficiency should have strong multiplier effects within a rural economy. However, the specific measures that might foster job creation and should be consistent with the relevant acquis might be constrained to agricultural situations, with incentives for SME start–ups neglected.

23 Much of the work presented in Sections 6 and 7 was commissioned by the United Kingdom Department for International Development's (DFID's) Rural Livelihoods Department; and the UN–FAO (SEUR) funded RNFE feasibility studies in Armenia, Bulgaria and Romania, during 2001–2002. 24 A special fund of EUR 520 million per annum over the period 2000–2006 was agreed at the Berlin Council for special assistance between all the applicant countries for agricultural and rural development (SAPARD) first mentioned in the accession strategy paper of the Madrid Council of November 1995.

65 Clearly, EU SAPARD funding is accession–driven and has to be consistent with accession partnerships and the national programme for the adoption of the acquis . In the context of the Bal- kans SAPARD only applies to Bulgaria and Romania. Countries such as Croatia, Romania and Bulgaria that aspire to being included in the next wave of EU accession will not be insulated from pressures to restructure the farm sector, and the non–farm sector will likewise assume increasing significance to the viability of households and communities in rural areas. The input supply,outputprocessinganddistributioncomponentsofthe RNFE aresubjecttopressuresre- latedtothechangingfarmsector,aswellastowidereconomicpressuresandindustrialtrends. The rural non–farm economy should be actively encouraged and this is recognized within SAPARD. However, the measures are not sufficiently rural. This is another reason for partnership both nationally and across the EU. The RNFE is a source of employment and income especially for small farm families. In addition, there are powerful income and employment multiplier effects within rural economies when agriculture grows. The LEADER programmeandsimilarschemesindifferentmemberstatesprovideanindication ofthekindofbroad–based RNF–friendlydevelopmentpoliciesthatcouldsupportthegrowthof the sector and reduce poverty in transition countries. With the possible exception of those policies to be discussed below, most current approaches to EU rural development insufficiently link aims and means, i.e. a lack of policy transparency; most programmes are dominated by the agri- culturalsector;stakeholdersreceivelittleattentionandareprobablynotatthecentreof EC rural policies and those procedures and policies which exist are very difficult and costly for transition countries to financially manage and implement.

The LEADER programme approach Since its inception in 1991 the EC initiative LEADER is widely recognized as having been a successful and innovative pilot instrument to mobilize local actors in a bottom–up, territorial and integrated approach to pursue local development in rural areas. Currently, LEADER+ is one of four EC initiatives financed by EU structural funds and is designed to help rural actors consider the long–term potential of their local region. It has a strong focus on sustainable development, partnership and networks of exchange and experience. LEADER is structured around three actions: 1. Action 1: Support for integrated territorial rural development strategies of a pilot nature, including i.e. Local Action Groups (LAG). 2. Action 2: Support for cooperation between rural territories. Many of the LAG under Action 1 will also be active under Action 2 setting up cooperation projects. 3. Action 3 Support for (national) networking. In each member state a national net- workunitsupports LAGsinimplementingtheirstrategiesunderActions1and2. In the programmes adopted under LEADER+ the highest share of funds go to Action 1 (86.7 percent of planned expenditure). In the transition countries, particularly the EC–applicant states from the CEECs, the LEADER programme and in some cases the Structural Fund programmes, have been important in offsetting the impact of declining primary sectors in rural areas and related employment through new growth areas such as tourism, new value–added niche product activities, health, social care, local culture and environment and information communication technology (ICT). Local factors have been crucial and include a sense of local identity, place based marketing, good governance, and revitalization of local cultural and

66 environmental assets, strong local entrepreneurship and timely external support. In the accession states a comparatively high proportion as compared to the EU–15 of rural people are still engaged in agriculture. Eastern enlargement will probably mean reduced expenditure and population coverage under structural and cohesion policies in the existing member states after 2006, and many more areas willlosetheirprioritystatusunderObjectives1and2.Whilethisprocessofre–prioritizationto- wards the new member states (CEECs) may be limited by political process (resistance by regions and members who are net contributors [or net recipients] at present) as well as the capacity of the CEEC accession states to absorb funding under EU rules (4 percent of GDP). Thus more attention should be focused on current programmes, for example SAPARD, Rural DevelopmentRegulationetc.,andtheircurrentlimitationsasterritorialdevelopmentmeasures which support RNFE development and diversification. In addition to the programmes dis- cussedabove,otherEUmeasureshavebeendevelopedduringthetransitionperiodtoaiderural non–farm development and accession.

EC–Phare programme The EC–Phare programme funded projects across the region, which focused on the identification of priorities in modernization of agriculture and food processing sectors, and the formula- tion of strategies. It was usually initiated by transition country ministries of agriculture (and rural development) and implemented through the EC–Phare programme.

RAPID programme The RAPID programme provided investment support for rural area development on a regional basis with the primary objective of reducing economic discrepancies between regions through the support provided to rural infrastructure development, where socio–economic conditions were worse compared to the national average in a number of CEEC accession states. For example, in Poland RAPID was implemented in ten voivodships and coordinated by the Polish Agency for Rural Development (PARR). The RAPID programme has been judged a success and had significant “learning” and demonstration effects. Amongst other benefits, the project improved technical infrastructure, the environment and created rural jobs.

The World Bank approach The World Bank's approach to non–farm rural development is primarily problem–driven. The World Bank has focused its assistance strategy for CEEC countries on supporting these countries in their preparation for eventual membership in the European Union (EU), and in this context on systemic economic issues (World Bank, 1997). In the post–conflict states the World Bankhasbeenparticularlyactiveinthereconstructionefforts,andhastargeted:thereconstruc- tion of physical assets; re–starting economic activity; building and strengthening institutions; and initiating the policy reforms of transition (Pearce and Davis, 2001). World Bank–funded economic restart initiatives that have benefited rural enterprises have included credit lines to SMEs and employment generation programmes (World Bank, 1999a). To date for most multilateral donors, the single most promising way of achieving greater RNFE improvements (particularly in income and equity) has been to put emphasis on employment and small– to medium–sized enterprise (SME) creation. In rural areas disguised unemployment

67 in the agricultural sector, and declining on–farm productivity should lead to a shift into the non–farm rural sector. However, market failure in transition countries often leads to the misallocationofproductionfactorsresultinginexcessiverurallabourmarketstressbecauseof: • slow expansion of the private sector which could absorb the excess labour (from disguised unemployment in the private agricultural sector); • the low formal qualifications and high average age of the agricultural labour force; • the high market transaction costs for goods, services and production factors; and • mobility constraints, which are augmented by shortages on the housing market in transition economies. Education is one of the key elements for SME development and entrepreneurship. It influences a wide variety of other bottlenecks for SME formation. Among them the main problem (far ahead of others) is the lack of operating capital. Besides development obstacles that may be associated with access constraints due to a lack of financial, social and human capital, there are other bottlenecks, for example insufficient road, communication and market infrastructure. Apart from these bottlenecks, deficient price information systems as well as a lack of extension and other services offering technical expertise represent impediments for potential entrepreneurs and existing SMEs. As a result, most donors and NGOs have placed great emphasis on SME and microfinance development at the core of their non–farm rural employment interventions in transition economies.

A multi–donor approach to RNFE development: REED A number of international and bilateral development organizations (GTZ, DFID, SDA, UN–FAO, CTA and the World Bank) took the initiative to launch a consultative and learning process about approaches to rural economic development with a focus on agriculture–based enterprise development, involving field level practitioners, the private sector and NGO participants. This process was furthered by a workshop called Fostering Rural Economic Develop- ment through Agriculture–based Enterprises and Services, held in GTZ House in Berlin, Germany from 20–22 November 2002 (www.gtz.de/agro–based–development/). The Berlin workshop brought together two distinct groups of practitioners, i.e. those primarily dealing with agricultural production and agriculture–related activities, and those supporting private sector development. The results of the workshop showed a broad awareness of the limitations of working in isolation and the significant potential for efficiency gains through cooperation between organizations and across disciplines and backgrounds. Despite large regional differences in economic development potential, the importance of agriculture as an engine of rural economic growth, and the size of non–farm sectors, it was felt that a conceptual framework for guiding and evaluating interventions to foster rural economic and enterprise development would be useful. Instead of relying on theory alone, the conceptual framework developed was based on an analysis of success factors in rural economic development, as well as lessons learned from failures. The Guide to Rural Economic and Enterprise Development (REED) is based on the findings of a working group that was mandated by the participants of the Berlin workshop to elaborate and refine the framework. The document provides a conceptual frame for other approaches that address enterprise promotion and economic development in rural areas. An example of such an approach is the “Blue Book” on business development services, compiled by an international

68 working group.25 The Guide to REED is envisaged as an effective analytical instrument for assessing and improving policies, institutional development, and intervention programmes and projects for more system–based and comprehensive intervention by all partners. The information in the document enables stakeholders to identify the strengths, weaknesses and gaps of current interventions. The REED conceptual framework, building on the experiences and lessons learned from practical experience in rural projects, consists of ten cornerstones for intervention. These are clusters of successful elements of intervention approaches dealing with rural economic and enterprise development. Although there are many linkages and interdependencies between them, which do not allow one to draw clear lines between them, the cornerstones can be broadly classified into four categories: • policies and institutional framework; • infrastructure, services and markets; • entrepreneurial competence; and • stakeholder involvement and linkages. The cornerstones represent the core functions that must be provided for successful, self–sustaining rural economic and enterprise development processes. The framework is based upon the principle of systemic interaction, so that each of the cornerstones is critical for the success of policies, programmes and projects. They are fundamental functions, which are nevertheless interdependent and linked to each other. The framework thus facilitates the analysis of weaknesses and bottlenecks, and the identification of critical entry points and priorities for intervention. For each of the ten cornerstones, the core elements, key strategies and ways of implementation have been identified in an iterative process, building on the collection of available information and experience–based knowledge. The REED approach is currently being piloted in Sri Lanka by GTZ and SDA. We return to a broad evaluation of most donor and government interventions in the RNFE later in the section, “What do we know about policies and interventions for the RNFE?”

Transition economy case studies on RNFE development approaches For most transition economies rural sector strategy is based conceptually on a systematic and coherent approach to tackling the implementation of common economic, infrastructural, environmental and cultural measures in rural areas. As previously noted, a significant majority of rural dwellers depends on agriculture for most of their meagre livelihoods. Others depend on associated non–farm activities. Many rural dwellers live in regions where arable land is scarce, agricultural potential is low, and environmental problems have appeared. Development endeavours in rural areas have tended to be chanelled in two major directions: activities for the diverse development of the particular region; and activities aimed at incentives

25 Business development services for small enterprises: Guidelines for donor intervention , „The Blue Book“, ed. by Kris Hallberg, Jim Tanburn and Gabriele Trah, September 2000. http://www.ilo.org/public/english/employment/ent/sed/bds/seminar/present/trah/

69 for local business initiatives, which can be in the agricultural, tourism and services sectors. For both development paths, detailed intervention procedures have usually included elements of the following: • improvement of infrastructure in regions with predominant rural population; • promoting vitality and competitiveness of agricultural producers; • job creation in regions threatened by depopulation, including those in the non–agricultural sector; • supporting small and medium–sized businesses through stimulating traditional and region–specific activities, scientific support for agriculture, etc.; • a decrease in discrepancies in economic development between regions; • specific measures related to environmental protection, preserving of landscapes, etc.; and • measures related to standardization, certification and labelling of particular production according to the region, and specification of origin stemming from the specific region. A major aim of most CEEC and CIS development policies in rural areas has focused on the identification of measures to solve regional, demographic, social and economic problems, thus providing better quality of life for the inhabitants of those areas, by accomplishing the following objectives: • rural growth based on competitive private agriculture and agribusiness as the main engines of growth; • provision of employment opportunities from family farms and non–farm enterprises; • sustainable management and utilization of the soils, water, forests, grasslands, and fisheries; • well–developedandwell–functioningmarketsforproducts,inputsandfinance;and • access to medical care, educational opportunities, communications, clean water and sanitation. It is not yet clear how current national rural development measures are to be synchronised with both the World Bank's new rural development strategy “Reaching the Rural Poor – an Updated Strategy for Rural Development” and the EU's SAPARD programme. Co–financing will lever more funds than the rather limited external funds but it depends on the provision of these beyond the minimum rate of 30 percent stipulated in the SAPARD regulations. Until recently, Ministries of Agriculture and Rural Development in Bulgaria and Romania were responsible for most rural infrastructure and agricultural support schemes, which were mainly based around subsidized credit (see Davis and Bleahu, 2002; and Davis, Kopeva et al., 2002). With the development of new rural development programmes such as Beautiful Bulgaria and the JOBs Programme (see Davis, Kopeva et al., 2002), there has been a shift in resources and attitudes to rural non–farm employment and economic development (see Box 2).

70 In Bulgaria, the UNDP, in conjunction with other donor agencies, has instigated a number of projects under the banner of Beautiful Bulgaria (see Box: 1).26 Although having a predominantly urban focus, Beautiful Bulgaria and the JOBS programme – both successful and high–profile series of projects – provides a useful example of effective project planning and implementation in close collaboration with Bulgarian partners and implementing agencies, and with due note taken of local needs and conditions.

Box: 1: The achievements of Beautiful Bulgaria projects

The key achievements of the Beautiful Bulgaria projects include the following: a) Employment Generation. Beautiful Bulgaria II created more than 24 000 person–months of temporary jobs in 11 cities. Ap- proximately 6 146 people were employed by the project, out of which more than 5 080 were unemployed. Twenty–two percent from the unemployed were from ethnic minorities (Roma, Turkish etc.,) and 15 percent were later offered long–term employment. b) Urban Refurbishment. The project funded subcontracts for the refurbishment of facades, roads, pavement, parks, and play- grounds addressing the specific infrastructure problems of each city's urban environment. In total, works on 221 sites were re- furbished by 128 construction companies. c) Vocational Training. The project trained 2 548 unemployed in eight different vocational skills and 526 in Start Your Own Business courses and 149 managers or members of staff of contractors under it were qualified in Improve Your Construction Business courses. Twenty–two percent of the trainees were from minority groups. d) Capacity Building. The second phase of the project further strengthened the capacities of the Bulgarian central and local administrations to manage EU pre–accession funds. e) High Popularity. Beautiful Bulgaria II became one of the most popular projects in the country (see Davis, Kopeva et al., 2002).

However, the problem with these programmes/projects has been the degree to which they remain sustainable beyond the government and or donor support. The Beautiful Bulgaria project created jobs, but the bulk of these were only temporary and at the time of writing there is limited evidence of much technology transfer or training to the poorest project participants. Similarly, althoughthe JOBS project(seeBox2)isintendedtocreatefinanciallyself–sustainablebusiness centres, when Davis, Kopeva et al., (2002) interviewed the project management team it was clear that this was not guaranteed and that limited effective project evaluation or impact assessment was taking place. However, a high–level policy commitment to the RNFE is largely absent in the governments of Bulgaria and Romania. These governments are typically insensitive to RNFE development and the agricultural paradigm tends to dominate. We would emphasise the need for high–level policy commitment to the RNFE. Where local economic development initiatives and interventions may be fostered, actions (and investment to support them) by local administrative/municipal bodies are probably most appropriate. Local municipal authorities are probably subject to less

26 The project's strategy is to create temporary jobs in the construction sector for the refurbishment of tourism sites, attractions and facilities located in or around selected municipal centres. The ultimate objective of the project is to raise the attractiveness of Bulgaria's traditional and unconventional tourism products, thus supporting tourism activity and creating the conditions for sustainable employment also in the tourism sector. The project will refurbish around 300 sites in 21 municipalities (including municipal centres and surrounding sites) selected for their tourism potential (Davis, Kopeva et al., 2002).

71 urban bias, are more knowledgeable about rural needs, and have the potential to operate more efficiently at the local level. Both governments in Bulgaria and Romania have instituted a number of National Agricultural and Rural Development Plans (since 2000 as part of implementing SAPARD), regional development and unemployment reduction programmes (see Box 3). At the time of writing, it has not proved possible to evaluate their impact, particularly in poverty reduction terms. Davis and Kopeva (2002) found that in Bulgaria during the period 2000 to 2001 the Government of Bul- garia had instituted around 14 employment programmes (some of these are presented below in Box 3).

Box: 2: JOBS Programme – Bulgaria

The Job Opportunities Through Business Support Project (JOBS) has been executed by the Bulgarian Ministry of Labour and Social Policy with the support of the United Nations Development Programme (UNDP) since 2001. The JOBS project aims to enhance the economic development of regions with high unemployment levels by creating a sustainable environment for job generation through support to micro– and small companies and agricultural producers. The purpose of this project is to present a model appropriate for re–creation and generating new jobs through the creation and promotion of micro– and small enterprises and to provide assistance for the introduction of this model as a national strategy. The economic development of the rural regions will be accelerated through the creation of an environment where employment will be promoted by providing support for micro– and small enterprises. New business initiatives will be introduced and the creation of associations and corporations of producers and farmers will be supported as well as the business associations at a local level. The JOBS project demonstrates a replicable model for stimulation and creation of micro– and small enterprises. The project is implemented in 24 communities throughout Bulgaria. It has created a sustainable network of 24 business centres, including 11 business incubators and three business information centres, which provide services to businesses in order to help them grow. JOBS strategy is to: • support micro– and small enterprises and agricultural producers in rural areas; • integrate approach to job creation and economic development; • promote an entrepreneurial environment; and • enhance linkages between public, private and NGO sectors. JOBS beneficiaries are unemployed, existing micro– and small enterprises, subsistence farmers with entrepreneurial potential, minorities, and local stakeholders – public, private and NGOs. Under the programme, business centres, business incubators and business information centres have been established. The business centres and business incubators (BCs and BIs) are registered Bulgarian NGOs, which support private sector and economic development at a local level. The BCs and BIs provide information and consulting services, training, financial services and below market rate premises. Through the JOBS project, the BCs and BIs also provide their communities with access to financial mechanisms and information technology centres.

Government initiatives at promoting non–farm rural employment have been wide ranging, but sporadic. Davis and Bleahu (2002) in a review of government RNF employment initiatives found that the most important labour market instruments in Romania include social protection policy, minimum salaries, and national and regional programmes for reducing unemployment (independently, or in partnership with national or international bodies or with representatives of civil society). However, social protection policies were not focused on supporting the poorest people, but aimed at compensating losses suffered by employees, through the social insurance system. The Romanian government will certainly need to address this issue, if they are to adequately address rural unemployment and poverty. In addition, Romanian government policies to create new jobs in rural areas from the Unemployment Relief Fund have had a very low impact. In the rural environment, programmes for retraining and re–qualification have also had a low impact. The programmes have failed because they were not adequately targeted at the rural

72 poor, were intermittently funded and in some counties poorly administered. Davis and Bleahu (2002) found there is broad scepticism in rural Romania about the ability to change given the environment in which they find themselves. A general conclusion to be drawn from this is of communities still in thrall of top–down solutions to their problems. This in turn has ramifica- tions with regard to future rural development policies and programmes, and leads one in particular to stress the importance of achieving attitudinal change in rural communities. This ultimately has to come from within, brokered possibly through the development of “natural” local leaders. Ultimately, the idea of development itself involves enlarging the scope for action for all members of rural society, and this definition has therefore to incorporate the right to self–determination. Policies that “do things for” people without their involvement create dependency and are thus contrary to the very concept of what development is. There is thus a logi- cal case for the full participation of stakeholders in all the processes of rural development.

Box 3: Bulgarian government RNF employment programmes 1999–2002

During the period 1999–2002 the following selected government programmes and projects were started: • The National Programme for employment increase through creation of new jobs in activities connected to overcoming the consequences of forest fires. Provision of vocational qualification and placement of unemployed persons in temporary employment in forest and mountain regions with monocultural–type economies. • The project for integrated development of the Pernik region – Measures are taken for restoring the environment, support for development of new undertakings, providing of new jobs and training of the workforce from the mines in the Pernik region. In- stitutional structures have been created on a national and regional level, which is to carry out the regional funding for the purposes of urban, national and ecological development and for the creation of sustainable jobs, including regional funds for the creation of new jobs. The project “Support for Partnership in the Community” is financed with funds under the Phare Programme and also from the state budget. • The programme for employment in the steel–producing and mining industries (BG 991501 SMAEP) in Sofia/Pernik, Rodopi, and Bourgas regions. The main purposes of the project are: provision of jobs and training to workers dismissed from steel–producing and mining undertakings in the process of restructuring; creation of institutional structures on national and regional levels capable of carrying out investment financing for the purpose of new sustainable job creation; elaboration of micro–projects; and provision of sustainable jobs. The project is being financed with funds under the Phare Programme and is carried out by the Ministry of Labour and Social Policy. • The National programme for social integration and professional realization of young people from social care institutions for children deprived of parental care in Bulgaria. The main purpose of this programme is the achievement of accelerated, pur- poseful and effective career development and integration into society of children deprived of parental care in Bulgaria. • The national programme for educational and labour integration of dropouts from the education system. The main purpose of this programme is the provision of conditions for educational and labour integration of dropouts from the secondary education system through acquiring education, vocational qualifications and basic skills in compliance with the requirements of the labour market (see Davis, Kopeva et. al., 2002).

Although support for participatory planning and project development is growing (which we broadly support), it is however important to recognize that it is a necessary condition for development but is not sufficient by itself. Moreover, an outside and more aggregate view lends per- spectiveto“bottom–up”plansandtakesintoaccounttheobjectivesofthosetransferringfunds. Moreover greater participation of the poor will likely result in political resistance if it involves a greater sharing of resources (as it should) with the rich and powerful who usually benefit most from any government intervention. This is likely to be the biggest obstacle within an RNF employment project. We would suggest interventions that (a) target specific activities and regions, since their fea- turesarecrucial,ratherthanhaveageneralruralprogramme;(b)firstdeterminethegrowthpo- tential, and then adjust instruments to realize that potential (rather than starting at the supply

73 side); and (c) implement instruments that have a high leverage, i.e. benefit many rather than a few firms or households. This is one way to realize cost–effective interventions. These ideas are more fully discussed in the section on “What do we know about policies and interventions for the RNFE?”. Market and demand considerations must inform policy decisions and choices regarding the allocation of resources. The perception that demand and market conditions are often neglected in policy and other interventions not only in Romania but also Bulgaria came out strongly during the focus group and survey research conducted by Davis, Kopeva et al., (2002); and Davis and Bleahu (2002). Growth and employment creation opportunities are missed as a result. For example, at a very practical level, the impact of direct support to enterprises in high potential sectors will be enhanced if accompanied by market linkage development. In contrast, direct support measures to rural enterprises that face acute demand constraints may either fail to have an impact or benefit assisted businesses at the expense of competitors (see Wandschneider and Davis, 2002).

Critical regional success factors in EU policies and programmes of relevance to the RNFE First, this would include the support of accessible rural regions around major regional centres that have benefited from urban growth. The best examples in the CEECs of this type are the greater Budapest and Prague regions, but also around emerging centres such as Riga and on a smaller scale, Ljubljana. They are characterised by: rising property prices and development; suburbanization by a new middle class with higher levels of educational attainment; and high commuting and car ownership. These regions may not qualify for structural funds as they are above the 75 percent of community GDP. Agriculture has a low and falling share of employment in these regions, with potential as peri–urban economic growth poles. However, there remains debate within the EU and wider about how to deal with the negative effects of this form of rural development – congestion, property markets, and public infrastructure to catch up with private development (roads, schools etc.). This is not well developed in thinking and policy on rural areas in the CEECs but should not be ignored when designing RNFE policies. A second factor is diversified regions through non–urban growth. These are rural regions that havediversifiedeconomicstructuresfromeitherruralindustrializationorservicesectoractivity (tourism, sports and forestry including the use of cultural capital). In this category we include parts of upland Slovenia. In Slovenia, tourism, sports and forestry have provided additional income (in some cases the main income). These areas have developed as real incomes in the region recover and a new middle class develops with greater purchasing power for leisure activities. These regions would probably benefit from EU Second Pillar measures on agri–tourism, LEADER etc.

What are the prospects for the RNFE in CEE/CIS? Regarding the RNFE and globalization, the key thing is that while the Balkan economies have opened up, rural areas have become more isolated. It seems that the position of the RNFE in Bulgaria and Romania (handmaiden/motor of growth) largely depends on: (i) location and policy drivers; (ii) transport and communication facilities towards markets; and (iii) purchasing power in those markets. In some cases this market is the national market, in other cases it will be abroad. Given the expected ongoing opening up of their economies, one might argue that it would be unsustainable to promote an RNFE that is predicated on rural isolation and which cannot compete on more open markets.

74 On the other hand, is there an alternative to starting with such activities? Is it feasible to start with activities that are immediately potentially competitive with, e.g. similar German products or services? (N. B.: Increased globalization does not necessarily mean that they are going to compete with German products – these may well remain a separated market due to declining productivity.) We would argue that it is better to start with low–investment/low–return activities that target easily accessible (i.e. geographically close) markets and that can thrive on low levels of purchasing power in that market. Doing this is better than nothing; it creates human and social capital and important links with markets, and possibly accumulates financial resources (see Davis, Kopeva et al., 2002; and Davis and Bleahu, 2002). If or when markets open up, these activities could decline/disappear, but the region should however be much better placed and prepared to start higher value–added activities, and the loss of physical investment wasprobablysmallanyway.Inanycasethisopeningupmighttakeaverylongtime;overthelast decade regional areas (particularly in Romania) have lost many of their economic links with the outside world rather than created new ones. At the very simplest level, the RNFE can be supported by any measures that increase aggregate demand, such as additional public spending in a given area. For instance, road building and repair, or house building generate directly a demand for additional labour with a variety of skills, some of which will be supplied from the local rural economy; and indirectly, the incomes earned by the new workers will generate demands for additional consumer goods and services, some of which again will be supplied by the local RNFE. However, while such public spending can provide an initial boost to the RNFE, it is unlikely to provide a long–term, sustainable basis for an expanded volume of activity. Hence we need to consider other means of expanding rural business in areas where local incomes are initially rather low. The key, surely, is to be found in exports – not from the country as a whole in most cases, but from other regions of the home economy. For illustrative purposes, suppose economic growth is resuming in a few major cities or regions of the country concerned. The extra incomes resulting from this process will give rise to additional demand for many final goods and services, as well as additional demand for any intermediate products. Much of the demand might be met from the very areas already enjoying growth, as well as from imports into the country. However, the expansion also provides opportunities for other areas, including the RNFE, to meet some of the additional demand by expanding their own economic activities. Typically, though, potential providers in the RNFE are small, poor and poorly informed about what is going on elsewhere even in their own country, and have few resources with which to develop new businesses or expand existing ones. Next we explore these issues in more detail by reviewing what we think is known about policies and interventions for RNFE growth.

WHAT DO WE KNOW ABOUT POLICIES AND INTERVENTIONS FOR THE RNFE? The multifarious economic activities with differing pro–poor growth potential and implica- tionsforpolicyinterventionmakeitimportanttofocusonkeyissuesandactivities(e.g.tourism, construction, transport services etc.) which have growth potential. At the same time, the importance of linkages and multiplier effects in the rural economy implies that governments and multilateral agencies need to move away from traditional sectorally compartmentalized thinking of rural areas towards more “joined–up” models of multisectoral, symbiotic growth. Rural economic drivers generally lie within primary sectors, agriculture in particular. Furthermore, we maintain that supply chain and sub–sector approaches should inform many rural development policies and interventions aimed at promoting RNFE growth. The issue is not so much whether

75 weinterveneintheprimarysectororruralnon–farmsectors,butrathertoacknowledgethatpo- tential engines of growth (e. g. agriculture) are intimately linked to other upstream and downstream activities which are non–farm. The two should develop in tandem since linkages operate both ways: while raising productivity and incomes in agriculture fosters growth elsewhere, improvements in agricultural service provision (e. g. input supply and marketing) and processing may play a critical role in stimulating agricultural production.

What can donors contribute? Policies and interventions aimed at developing agriculture will need to address bottlenecks outside the sector. The policy entry point may lie in the RNFE or even urban areas. For example, port and air cargo services may need to be improved if horticultural exports are to take off. The enabling environment for private sector activity may need significant improvement if agribusiness firms are to invest in processing activities within rural areas. In short, RNFE policies and interventions may be required to release the potential associated with “dormant” drivers of rural growth. Donors and some transition country governments could take the RNFE sector much more seriously in terms of project, programme and investment plans (although a continued focus on agriculture is necessary). Donors need to work more closely together; work across disciplines; look at non–traditional areas/sectors e.g. infrastructure and regulatory frameworks; work with government agencies; and work through existing institutions. Donors can also assist governments in creating an enabling environment for rural development through technical assistance and support with the legal framework for enterprise, the regulatory environment for service delivery and provision, contract enforcement, RNF pro–poor growth strategies as part of PRSPs etc., and a functioning financial system. Donors can facilitate policy integration and harmonization through public–private cooperation and the development of shared donor and government platforms on best practice and evaluation of rural development initiatives and poverty reduction strategies. The RNFE in developing and transitional economies is fundamentally private. Donors can assist the development of the private sector and facilitate its involvement in RNFE investments, planning strategies and job creation to promote growth.

What generic strategies could be used? Key strategies include: assisting government in the identification of the key constraints to RNF development with different types of market failures: labour, credit, commodity, infrastructure and skills mismatch. For example, DFID in India disaggregates to identify potential growth engines in specific areas; and disaggregates gains to identify those sectors that provide a combina- tion of growth and employment opportunities. In certain cases, the use of donor subsidies to promote growth in for example less favoured areas may be viable where these take the form of “greenfield” investments aimed at attracting further private sector or foreign direct investment (e.g. joint ventures, infrastructure projects etc.) through demonstration effects. However, donors should primarily intervene from the demand side, not the supply side (however, some supply side interventions also require action, for example training). Most services and products from the RNFE are non–tradable – i.e. dependent on local consumption. In addition, low per capita income reduces demand even if there is demand; so supply–side interventions may be inappropriate if demand is stagnant. Alternatively, donors could help make

76 non–farm products tradables in their own right (through assistance with marketing, business services, training, labelling, product development and investment). For example, if we consider ecotourism, the main demand is local and the key constraint is low income; thus agriculture remains very important. The engine is taking growth from the main exports from a region: forestry, mining, manufacturing. Donors need to examine supply chains and look for bottlenecks to be loosened (and opportunities to be stimulated), never mind the sector in which they may arise, or whether that point is geographically rural or urban. There is a history of blind spots in agricultural development, when enormous effort has gone into gearing up on–field production, with little attention to post–harvest issues. Tools for RNFE analysis exist; however donors should try not to do everything. We have shown thatusingresearchtolinkandevaluateactionispracticalanduseful.Alsoinvestinginlocallevel public goods (perhaps in some cases with the state as facilitator) and perhaps safety net provision (short–term) would be useful. Donors and transition governments also need to look wider than just self–employment in the RNFE, but also at businesses (SMEs) that employ 20–30 people as part of a waged job creation strategy.

How to intervene in resource–poor, low–potential areas? The economic potential of a particular rural area largely depends on its natural resource base and location due to its impact on market access. Low–potential areas tend to score low on both accounts, in that they lack the economic resource base and suffer from remoteness. The economic and social infrastructure is generally poor and human capital levels are low. Because of the lack of economic opportunities, these areas normally export labour to other more prosper- ous regions within the country or abroad. It is important to note, however, that not all underdeveloped regions have low economic potential. Some may possess resources and dormant engines of growth, which have not been developed due to infrastructural constraints, bad governance, or conflict. Whilst RNFE interventions in low–potential areas may be desirable from a poverty reduction perspective, project agencies must be well aware of the difficult challenges ahead. Given the paucity of growth engines, infrastructural development in these regions may generate few employment and income opportunities while exposing them to increased competition from the outside, a scenario that would exacerbate economic distress and intensify migration outflows. In these adverse environments, the higher intervention costs, the need for a longer intervention time frame, the difficulties of generating significant impact, and the potential sustainability problems must also be borne in mind. Still, even resource–poor regions may offer scope for cost–effective, demand–driven interventions. Livestock, forestry, fisheries or handicraft activities can often be targeted. Cultural specificities and natural beauty may in some cases present opportunities for developing tourism (Davis, Kopeva et al., 2002). Despite the fact that some case study programmes and projects have intervened in poor communities and areas, knowledge on how to promote the RNFE in remote and low–potential areas is still insufficient. What sort of interventions should be developed for resource–poor and remote areas which lack clear growth opportunities? What sort of balance should be reached between support to higher and lower potential regions? Resources are scarce and difficult allocation choices must be made.

77 How to develop private service activities? Services are weakly represented in the studied RNFE government and donor interventions, which emphasize manufacturing activities, especially food processing. Potential biases in the services sector composition of many transition country studies are partly a consequence of the fact that many RNFE project interventions reflect local communities' interest in adding value to their agricultural production (see Davis, Kopeva et al., (2002); and Davis and Bleahu (2002); see Box: 4). These imbalances may also result from insufficient knowledge by programme and project designers of recent empirical work showing that in transition economies services account for a much larger proportion of RNFE incomes than manufacturing (see Bezemer and Davis, 2003). The fact that services are important to the livelihoods of many poor rural households cannot be neglected, nor can the fact that some of them play a supportive role in the development of key subsectors.27 While it is true that in the past RNFE interventions have shown a tendency to overlook such activities, this feature may be somewhat overstated. Some examples of micro–credit and micro–enterprise development initiatives in Armenia with clear impacts on rural service activities could have been assessed (Davis, 2003). An evaluation of these experiences could then translate into lesson learning and the development of guidelines for rural service activity promotion. Dissemination of this work could prove important in addressing current sector imbalances within RNFE initiatives.

What role for wage employment promotion? Most of the studied interventions in transition countries have emphasized self–employment.28 Theexcessivefocusonself–employmentmayperhapsresultfromperceptionsofitslessexploit- ative nature and its strategic importance for poverty reduction. Although true in some contexts, these perceptions are debatable. Integration of the poor into the labour market can prove a much valid complement, and sometimes superior alternative, to strategies centred on self–employment promotion in the informal or formal sectors. A greater balance between promotion of self–employment and support to small and medium enterprise development has implications in terms of the spatial focus of programme and project interventions. The latter requires using ru- raltowncentresasanentrypointtoagreaterextent,sincesmallandmediumenterprisestendto locate in centres where they can benefit from improved access to services, economic infrastructure, markets, and labour. Although there may be some scope for project support to large enterprises, this option is limited since external bottlenecks to firm growth tend to dominate. Because of their costly and public good nature, external constraints are largely beyond the intervention capacity of individual projects, and must be addressed through selective subsector interventions by local and central governments and project networks. Key bottlenecks may include, for example, inadequate power and water supply, poorly developed telecommunications; weak transport infrastructure etc.

27 This is the case, for example, of repair, trading and transport activities. 28 This contrasts with recent empirical evidence which shows that in rural Latin America and South Asia non-farm wage employment is equally - if not more - significant (Mandal and Asaduzzaman, 2002; Reardon et al., 2001).

78 Box: 4: Identifying potential RNF income generating projects in Romania

Davis and Bleahu (2002) conducted a feasibility study in two Romanian settlements (Zagar [Mures County]) and Motatei Gara [Dolj County]) to identify problems and constraints for labour diversification, opportunities for employment, and concrete project proposals based on a rational use of local resources in Romania. In so doing, they also sought to assess the relevance of participatory methods for identifying local needs. Below we present some of the suggestions made by the focus groups. Identifying potential RNF Income generating projects in Romania, Zagar Requirements for im- Disadvantages and Type of Proposal Advantages Expected impact plementation risks Not in the best condi- Major social impact Investment for procur- tion (over the past 5 A long tradition in fruit production and ing the necessary equip- years they have been ne- Fruit and vegetable vegetable processing Utilization of the exist- ment glected) processing ing local potential and Available raw materials available skilled and un- Technical assistance Former IAS buildings skilled labour need repair Rural tourism (i.e. backpackers, hikers 29 Individual micro–cred- etc). The poorest segment its for repairing houses Improving the living Former inhabitants could be potential (Roma) is likely to be and creating tour- standards for certain rural tourism clients excluded Ecotourism ism–favourable condi- households There is currently a large project around tions (running water, Sighisoara (Dracula myth) under devel- • Tourism incomes are sewage system) for po- • Multiplier effects opment which would trigger high needs seasonal tential investors of tourist accommodation • Very good land for grapevine culture The growth and profit- Restore the vine- (in the 80s there were 600 ha of grape- ability of this type of Micro–credits and large Using the local specific yards & create a vines) SME occur with a long investments natural resources wine bottling plant • The local wine is famous in the country time lag and there is no and abroad (exports) guarantee of success Using the local live- Meat & milk pro- • Local livestock breeding potential stock potential and in- The number of cattle is 30 Micro–credits cessing • Skillful butchers creasing the number of declining cattle in the long term. • Skilled labour (ex. women workers at Intense competition the textile factory in Sighisoara, cur- and market monopoly, 31 Focus on hiring female Tailoring rently unemployed) Micro–credits given the low demand labour • Approx. 10 sewing machines, private and the people's re- property duced incomes

29 “There are older people who would like to come from Germany or Switzerland and stay here for two to three weeks, but our roads are in a very poor condition. The German ethnics who know the area or lived here when they were kids would surely come here on leave. Here is an example: A Dane came last summer and he was very delighted with this region, with Romania in general. He said: 'You have good beverages and I haven't seen so many beautiful women anywhereelseintheworld,butwheneverIcomeagaininRomaniaI'lltaketheplane,becauseI destroyed my car.'” (School headmaster, Zagar). 30 “There used to be butchers in the village before; milk can be collected from the neighbouring villages, too; this would stimulate livestock breeding.” (Focus group, men, Zagar). 31 “As long as there are secondhand clothes in Romania this will not work.” (Focus group, women, Zagar).

79 How to ensure sustainability? Most sustainability analyses are conducted before, during or immediately after project interventions, often as part of project design, monitoring and evaluation. The analysis undertaken is generally forward–looking and somewhat speculative rather than based on objective indicators. Comparative analyses of different transition country experiences are rare. Sometimes, those involved in the analysis lack the incentives to undertake an objective and critical assessment or disseminate findings to a wide audience. For all these reasons, and despite many decades of rural development interventions, not enough is known about sustainability. Dissemination of lessons learned has also been erratic and far from effective in changing perceptions and practices. Future research should address current knowledge gaps and stress dissemination among relevant agencies and organizations. Focused case studies, conducted by independent analysts some time after projects or programmes have phased out, could prove useful. Examples of similar strategies that have succeeded or failed in different parts of the world would be particularly illustrative.

How do we prioritize policies & interventions? As the RNFE in both developing and transition economies covers a lot of ground the above may be rather general. Few if any expected points are omitted. But a policy–maker might wish for more guides in prioritizing amongst the many good things that might be done. How do we go about prioritizing? We need to be able to classify sets of policies by some criterion such as phase of development, or geographical characteristic of the RNFE – remote areas, middle countryside, peri–urban areas. The following is expressed as phases, although the three phases could be relabelled as remote, middle and peri–urban areas requiring only a few adjustments. This is hardlysurprisingifformanyruralareastherehasbeen,isandwillbeasequenceofmovingfrom remoteness to peri–urbanity (but this should not be overstated: there will be places that will not necessarily make these transitions). The key principles, strategy, activity and rationale for do- nor or government intervention include: 1. prioritize activities targeting attractive markets; 2. support producers to meet market requirements; 3. improve market access; 4. whenever relevant and feasible, promote the development of common interest producer associations and cooperatives; 5. develop flexible and innovative institutional coalitions; 6. adopt a sub–sector approach; and 7. develop sustainability strategies from the beginning.

Further areas for analysis – “mind the gaps” During preparation of this document, the following gaps in knowledge appeared: a) Little attention has been given so far to the coherence of policies at regional, national and international levels and their impact on Rural Economic and Enter- prise Development (REED). b) The role that agricultural policies play in fostering or hampering RNFE is poorly understood.

80 c) Despite the growing importance of globalized trade, there are no instruments to assessopportunitiesintheglobalmarketplaceforthebenefitofruralenterprises. d) Fostering an effective political or institutional environment for REED and the RNFE is another matter of concern. It seems to be difficult to provide feedback from field experiences in the rural environment into the political decision–making process to improve the enabling environment for the rural poor. e) There is considerable knowledge of how to create and develop farmers' groups and self–help groups: the difficulty lies in setting up apex group organizations and particularly in organizing independently–minded entrepreneurs. f) Ownership of the planning and implementation process by partner organizations and target groups is another issue that needs to be addressed. Facilitating more real and effective participation (on more equal terms) of rural or local poor groups in project planning and implementation is a major challenge. g) Effective knowledge management depends on willingness to share information on project monitoring and evaluation, rigorous impact assessment of REED interventions, and documentation of positive or negative field experiences. A more systematic inventory of success stories in rural economic and enterprise development is needed.

REFERENCES

ACE–Phare. 1998. EU Accession in the Balkans; Policy options for diversification in the rural economy, (Project acronym BPODRE) Project No. P98–1090–R Final Report. BARRETT, C. B. & Reardon, T. 2000 Asset, activity and income diversification among African agriculturalists: some practical issues. Discussion Paper, Department of Agricultural, Re- source & Managerial Economics, Cornell University, Ithaca NY 14853–7801. BEZEMER D. 2002. Russian Reforms: The return of the peasant? In A. Tavidze, ed. Progress in economic research. New York, Nova Science Publishers. BEZEMER D. & DAVIS, J. 2002. The rural non–farm economy in Armenia. In M. Spoor, ed. Transition, institutions, and the rural sector. Rural Economies in Transition series, Z. Lerman, C. Csaki, and J. Swinnen eds. Lanham, MD, Lexington Books. BEZEMER,D.–DAVIS,J.&WANDSCHNEIDER, T. 2003. The rural non–farm economy in Ar- menia, Georgia and Romania: Synthesis of findings. NRI. (mimeo) CARTER,M.&MAY,J.1999.Poverty,livelihoodandclassinruralSouthAfrica.WorldDevelop- ment, 27 (1): 1–20. CASKIE, P. 2000. Back to basics: Household food production in Russia. Journal of Agricultural Economics, 51: 196–209. DAVIDOVA, S. 1994. Changes in agricultural polices and restructuring of Bulgarian agriculture: An overview. In J. Swinnen, ed. Policy and Institutional Reform in Central European Agri- culture. LICOS Studies on the Transition in Central and Eastern Europe, Vol. 1. Aldershot etc., Avebury.

81 DAVIS, J. 2002. Constraints and Potential to the Development of Rural Non–Farm Activities in Armenia. Joint Endeavour European Commission and UN–FAO/SEUR GCP/ INT/ 758/ EC–ARM. DAVIS,J.&PEARCE, D. 2001. The rural non–farm economy in Central and Eastern Europe. In Z. Lerman and C. Csaki, eds. The Challenge of Rural Development in the EU Accession Process. World Bank Technical Publication. Washington DC, World Bank. DAVIS,J.&BLEAHU, A. 2002. Diversification of income and employment opportunities: RNFE feasibility study in selected areas in Romania. UN–FAO/SEUR. DAVIS,J.–KOPEVA, D. & Mihailov, D. 2002. Diversification of income and employment opportunities: RNFE feasibility study in selected areas in Bulgaria, UN–FAO/SEUR. DAVIS,J.&CRISTOIU, A. 2001a. Patterns of rural non–farm diversification and employment in Romania: A county level analysis. (mimeo) DAVIS,J.&GABURICI,A.2001b.Non–farmemploymentinsmall–scaleenterprisesinRomania: Policy & development issues. (mimeo) DAVIS, J. R. 2001. Sustainable non–farm rural livelihoods in transition economies: Under- standing the access and capacity constraints. Eastern European Countryside, 7. DAVIS, J. R. 2003. The rural non–farm economy, livelihoods, and their diversification: Issues and options. Report 1, DFID. (mimeo) DAVIS,J.R.&BEZEMER, D. J. 2003. Key emerging and conceptual issues in the development of the rural non–farm economy in developing countries and transition economies (unpublished mimeo). Report 2, DFID. DAVIS,J.R.&GABURICI, A. 1999. The economic activity of private farms in Romania during transition. Europe–Asia Studies, 51 (5): 843–869. DAVIS,J.&WIGGINS, S. 2003. A typology of the rural non–farm economy: A note (unpublished mimeo). Report 2.1, DFID. DEININGER,K.&OLINTE, P. 2001. Rural nonfarm employment and income diversification in Colombia. World Development, 29 (3): 455–465. ELLIS, F. 2000a. The determinants of rural livelihood diversification in developing countries. Journal of Agricultural Economics, 51 (2): 289–302. ELLIS, F. 2000b. Rural livelihoods and diversity in developing countries. Oxford: Oxford Univer- sity Press. ELLMAN, M. J. 2000. The Russian economy under El'tsin. Europe–Asia Studies, 52 (8): 1424. HAGGBLADE,S.–HAZELL,P.&REARDON, T. 2002. Strategies for stimulating poverty–allevi- ating growth in the rural nonfarm economy in developing countries (unpublished mimeo). Paper prepared for the World Bank, 25 March, 2002. Washington, DC, International Food Policy Re- search Institute. HEDLUND,E.&SUNDSTROM, E. 1996. The Russian economy after systemic change. Eu- rope–Asia Studies, 48 (6): 900–901. KOSTOV,P.&LINGARD, J. 2002. Subsistence farming in transition economies: Lessons from Bulgaria. Journal of Rural Studies, 18: 83–94.

82 LANJOUW,J.&LANJOUW, P. 1995. Rural nonfarm employment: A survey. World Bank Policy Research Paper No. 1463. LERMAN Z.&MIRZAKHANIAN, A. 2001. Private agriculture in Armenia. Lanham, Maryland and Oxford, UK, Lexington Publishers. LEWIS, A. W. 1954. Economic development with unlimited supplies of labour. Manchester School of Economics and Social Studies, 22: 139–191. MICKIEWICZ,T.&ZALEWSKA, A. 2002. Deindustrialisation: Lessons from the structural outcomes of post–Communist transition. Working Paper No. 463, William Davidson Institute, University of Michigan. PEARCE,D.&DAVIS, J. R. 2000. The role of the non–farm rural sector in the reconstruction of the Balkans. MOST–MOCT: Economic Policy in Transition Economies, 10 (2): 207–228. REARDON T. – STAMOULIS,K.–CRUZ, M – E., BALISACAN,A.–BERDEGUE,J.&BANKS,B. 1998. Rural non–farm income in developing countries. The state of food and agriculture 1998: Part III Rome, Food and Agricultural Organization of the United Nations. Internet address: http://www.fao.org/docrep/w9500e/9500e02.htm. START, D. 2001. The rise and fall of the rural non–farm economy: Poverty impacts and policy options. Development Policy Review, 19 (4): 491–505. THO SEETH,S.–CHACHNOV,&SURINOV, A. 1998. Russian poverty: Muddling through the transition with garden plots. World Development, 26: 1611–1623. UNDP. 1999. Human development report for Europe and the CIS. New York, United Nations Regional Bureau for Europe and the CIS. WANDSCHNEIDER,T.S.&DAVIS, J. 2002. Rural non–farm employment and development in transition economies. Proceedings of a workshop held at the Old Royal Naval College, Univer- sity of Greenwich, London, 6–7 March 2002. WIGGINS, S. 2003. The rural non–farm economy: Key issues (unpublished mimeo). Report 3, DFID. WORLD BANK. 1997. Rural development: From vision to action. A Sector Strategy, Environ- mentally and Socially Sustainable Development Studies and Monographs Series 12. WORLD BANK. 1999a. Bosnia and Herzegovina 1996–1998: Lessons and accomplishments. Review of the priority reconstruction and recovery program and looking ahead towards sustainable economic development, a report prepared for the May 1999 Donors Conference co–hosted by the EC and the World Bank. WORLD BANK. 2000a. Rural development strategy: Eastern Europe and Central Asia. Wash- ington, DC, World Bank. WORLD BANK. 2000b. Making transition work for everyone: Poverty and inequality in Eastern Europe and Central Asia. Washington, DC, World Bank. WORLD BANK. 2002. Georgia: Poverty update. Washington, DC, World Bank.

83 * Much of the work presented in this document was commissioned by the United Kingdom Department for International Development's (DFID's) Rural Livelihoods Department, the EC-Phare ACE programme and UN–FAO (SEUR). The author, Junior Davis has led complementary CEECIS research activity on the RNFE which includes: a three–year DFID/WB collaborative research programme on rural development and the RNFE in transition economies during 2000–2003; a two–year NRI project – funded by EC–Phare ACE Programme – EU Accession in the Balkans: Policy Options for Diversification in the Rural Economy (P98–1090–R); and UN–FAO–commissioned RNFE feasibility studies in Armenia, Bulgaria and Romania during 2001-2002. Most of the information presented in this document has derived from these three research projects. The report has been compiled in close collaboration with Felicity Proctor (DFID/World Bank), Mr Fritz Rembold (FAO), Dr. Marc Duponcel (UN–FAO), Dr Dirk Bezemer, Mr Tiago Wandschneider, Dr Steve Wiggins, and a range of individuals and organizations that have contributed their expertise in promoting rural livelihood diversificationandtheruralnon-farmeconomyindevelopingandtransitioncountries.

84 APPROACHES TO FARM/HOUSEHOLD INCOME DIVERSIFICATION FOR IMPROVED LIVELIHOOD IN BULGARIA

Hrabrin Bachev32

EXECUTIVE SUMMARY

In this paper we attempt to present Bulgarian experience in successful farm enterprise develop- mentandincomediversification.Recenttrendsincommercialisationoffarmsandexistingsup- port programmes for farm development are analyzed. The agro–ecological, economic and institutional environment for development of farms in the Pazardjik region is characterized. A specific approach for the development of Sirakov's farm is described, and problems and prospects for farm modernization underlined. Suggestions for effective policies and the improvement of support programmes are made. A specific transitional farming structure has evolved in Bulgaria comprised of numerous subsistent and small–scale family farms and a small number of larger–size production cooperatives and agrofirms. Farming is a major employment source for 368 000 people (12.5 percent of workers in the country), as almost 1 million Bulgarians use farming as a source of supplementary income. Large specialized agro–firms and cooperatives are typical in grain, sunflower, fruits, and grape operations. Production cooperatives account for a major share of total output in registered farms, but a vast part of activities of many cooperatives is oriented to internal members' demand. In horticulture and tobacco production specialized smaller size (up to 1 hectare) and mainly unregistered farms supply a significant proportion of total marketed output. There are more than half a million livestock farms in Bulgaria. The greater part of livestock raising occurs on small non–professional farms, which produce and market a considerable part of total output. Only the country's poultry, and partly pig production are characterized by higher concentration and specialization. A vast share of commercial farms operates below modern technological, quality, environmental, and labour and animal welfare standards. Farm profit depends on type of specialization, region, technological level and marketing conditions, and varies significantly. Principally, only a fraction of these enterprises generates enough income for effective growth. Extension of commercialisation ranges significantly for different farm products. Besides, a great variety of market and private modes for output realization have emerged as a managerial reaction to specific needs for the governing of farms. Prevailing forms differ between various types of farms and are

32 Senior Researcher, Institute of Agricultural Economics, Sofia.

85 quite specific for different farm products. The most critical factors for development of commercial farms are “inefficient laws and contract enforcement”, “unavailable markets for farm products” and “lack of accessible credit”. Until recently the State Fund for Agriculture (SFA) has been the major instrument for government support to agriculture. It provides preferential credits and subsidies for all types of farms producing for market through various short– and long–term credit lines. Up to now SFA has been mainly accessible to powerful, larger–scale, and as a rule “less needy” farms, and its resources are quite insignificant to support huge capital investments necessary for the renovation of agrarian material assets. Another special state programme supports tobacco producers who get free seeds, premiums for marketed tobacco, and farmgate prices guaranteed by the government. This programme contributes significantly to the well–being of many small farms with few alternative income opportunities. The European Union Special Accession Programme for Agricultural and Rural Development (SAPARD) provides subsidies for modernization of farms and food processing, diversification of economic activities and building of modern rural infrastructure. It is expected that SAPARD implementation would improve livelihood, increase income, and provide new job opportunities for a considerable part of farm and rural households. Until now funds have not been easily accessible because of complicated paperwork and bureaucratic SAPARD procedures, enormous costs associated with projects etc. Selection criteria equally impose some limits for the application of family farms. The UNDP project, Employment through Support of Business assists micro– and small enterprises and farms in regions with high unemployment. There have also been a number of Euro- pean Union, international, NGO an other such initiatives targeting special regions, segments of population, or type of activities etc. Some of these programmes have affected considerably the welfare of the few participating farmers, but due to the projects' small scope, broader goals or unsustainable support, their overall impact on development of family farms in the country is not significant. The Pazardjik district is one of the major agrifood producing regions of the country. Total farmland in the Pazardjik municipality is about 42 500 hectares, out of which 86.7 percent is planting area, 4.8 percent is orchards (including 1.6 percent vineyards), and the rest is natural meadows and pastures. There are 16 269 farms with an average size of 2.6 hectares. Unregis- tered are the majority of farms, amounting to 98.5 percent of all farms. Full–time farms total more than one–fourth of all unregistered farms. Farming has been a substantial source of cash and nonmonetary income for almost every household in the region. Total rice production and a great part of cereal and sunflower production are concentrated in large–scale production cooperatives and agrofirms. Usually cereal and sunflower cultivation are profitable for large–scale operators. Most cooperatives are specialized in cereals and pulses while a small portion of them have more diversified crops. To date most of the cooperatives are having serious problems sustaining activities, meeting financial obligations, paying rent to members etc. Poultry production in its entirety and a significant share of pig production are concentrated in a few large agrofirms. Most vegetable, grape, fruit, and tobacco farming is carried out on small–sized but intensive family farms. Nearly all cows, sheep, and goats are raised on small non–professional farms. The largest share of livestock farms is not specialized but with a mixed production structure. Large fluctuation of market prices and monopoly positions of processing

86 industries cause high variation of income level in vegetables, grapes, and livestock. Only fruit and tobacco production are profitable for all sorts of farms. All large farms and a majority of mid–sized ones are generally equipped with the most important machinery and tools for mechanization of farm operations. A significant number of buildings,tractorsandcombinesareoutdatedandamortized.Agoodnumberoffarmsuseirrigation, but generally primitive systems for watering are widespread. The majority of fruit trees and vineyards are of mature age, as the rate of renewal is far beyond the technologically optimal level. “Resource saving” technologies are dominating in commercial farms. Average yield for vegetables, grapes and some fruits is above the common level for the country but far below the productivity of developed countries. There exists a large infrastructure for processing of farm products in the region. Wine and some vegetable and fruit canning facilities meet to a certain extent the requirements of western markets, while none of the dairy and meat processing companies are in accordance with EU quality standards. A modernized terminal market for fruits and vegetables near Pazardjik has been mainly used by smaller farms while bigger operators rely more on other forms of sales (marketing contracts, direct farmgate trade, shipping to bigger wholesale markets etc.). The regional office of the National Advisory System for Agriculture (NAAS) in Pazardjik City serves farmers from 11 municipalities in the region. Due to insufficient staff, a deficit of municipality–level officers, lack of experts in household economy, a major shortage of financial resources, inadequate knowledge on farmers' problems, little competency in effective methods for extension education etc. its impact on farm development in the region is not considerable. A successful case of enterprise development is Sirakov farm, representing a new generation of farm entrepreneurs who have managed to develop a modern farm from scratch. Their experience shows that the most effective way to develop a farm is to enlarge and modernize this enterprise using agromarket analysis, applying know–how and advice of leading experts, introducing up–to–date varieties and technologies, deepening production specialization and diversifying farming into marketing and processing. Sustainable development of that enterprise could not have been possible without the opportunity to obtain a large consolidated plot of state farmland and the chance to receive a long–term preferential credit from the SFA. How- ever, Sirakov's success could have been much greater if there had been more supportive government policies for family farm development in multiple directions. In order to further improve public policies and support programmes, various policy measures must be directed to enhance prospective family farms, rather than other farming structures that are unsustainable in long run. Unless a considerable multidimensional public assistance structure is in place, the effective modernization of family farms can hardly be achieved. A special emphasis has to be put on making SAPARD and SFA funds accessible for all types of farms, and the practice of financing only large–scale projects must be revised to include differential rather than universal criteria for participation in government support programmes. In addition, the entire spectrum of promising farm activities has to be made eligible for public aid. That would allow more equal and fair use of public assistance initiatives by all prospective farms. Transparency and efficiency of each public support programme also has to be improved. Nu- merous offices are responsible for different farmers' matters at the local level. It is extremely costly for individual farmers (in terms of time, paperwork and direct access expenses) to deal with all these authorities. A single office for easy application for different support programmes should be established, and overall participating costs for farmers reduced. It is extremely im-

87 portant to institutionalize farmers' direct participation in priority setting, execution, and control of various public programmes at all levels. This would certainly reduce total management costs and increase the efficiency of public programmes. Special emphasis needs to be made on training farmers in management, income diversification techniques, technological know–how etc. as well as in proposal writing, property rights arrangements, and application for different public programmes. A system for the exchange of positive experiences and other relevant information needs to be organized. Significant modernization of NAAS should be undertaken through: closer cooperation with universities and research institutes; direct involvement of leading farmers as trainers and demonstrators; joint initiatives with private and farmers' organizations; applying modern methods for extension education; appointment of household and rural economics specialists in every regional office etc. Directinvolvementoffarmersandfarmorganizationsinprioritysetting,execution,andcontrol of NAAS programmes at all levels should become institutionalized, and an appropriate system for public/collective/private co-financing of activities introduced.

INTRODUCTION

There has been a significant change in Bulgarian farm structures since the beginning of economic reforms in 1991. Over a short period of time, formerly state–run farming has been entirely transferred to new private farms. Newly–emerged farmers and farm entrepreneurs have accumulated valuable experience in managing private enterprises (learning by doing, sharing know–how, specialized training and education etc.). Significant progress has been achieved in the modernization of market and support infrastructure (development of wholesale markets system, system of agromarket information, system for agrarian extension education etc.), and in harmonization with European Union institutions and farming and food standards. There has been a huge public (government, international assistance etc.) intervention to support farming development – direct price support; preferential credit lines; various sectoral, infrastructural,andregionalinitiativesetc.Tradeliberalizationandincreasing(internalandex- port) demand for agrifood products exert enormous pressures for the competitive supply of farm produce. All these have contributed to the unprecedented commercialisation of farming activities and intensification of agrarian (land, labor and inputs supply and marketing) transactions. A fundamental adjustment of farm sizes, production structures, and extension of special- izationanddiversificationhaveallbeeninplace.Examplesofmodernandhighlyefficientfarms can now be seen in many sub–sectors of production and regions of the country. In addition, a great variety of specific market and private models have emerged to govern relationships between agents in the agrarian area (farm organizations, diverse contractual arrangements, trade with origins and brand names, quasi– and vertical integration etc.). Despite this unparalleled transformation, there are a number of obstacles impeding further commercialisation of Bulgarian farms – low off–farm job opportunities, insufficient agrarian credit, ineffective institutional and support infrastructure, high costs of trading agrarian resources, lack of managerial and marketing experience etc. Consequently a massive degree of small–scale farming continues to exist, providing income for more than half of Bulgarian households. This primitive farming has been playing an important role in these households' economies. However, its significance would inevitably decrease along with augmentation of opportunities for on– and off–farm income generation.

88 In this paper we try to present Bulgarian experience in successful farm enterprise development and income diversification. Firstly, we will analyze recent trends in the commercialisation of Bulgarian farms and existing support programmes for farm development. Next, we will charac- terize the agro–ecological, economic, and institutional environment for development of farms in the Pazardjik region – one of the truly agrarian regions of the country. Third, we will describe a specific approach for family farm development, and try to underline the problems and prospects for farm modernization. Finally, we will summarize lessons from positive experience and their relevance to other farms.

EXTENT OF, AND FACTORS FOR FARM COMMERCIALISATION

A polarized and bimodal production structure has persisted in Bulgarian farming since the beginning of transition. Currently agricultural production is carried out in numerous small–sized unregistered farms, and in a minor number of large–scale cooperatives and agrofirms (Table 1). 33Only 6 percent of farms are highly specialized and market–oriented. The majority of farms are small subsistence farms with little or zero product commercialisation (Ministry of Agricul- ture and Fishery, Agro–statistics, 2001).34

Table 1: Estimate on number of farms in Bulgaria in 2000–2001

Number Cultivated land Average size Type of farm Thousands % Thousand ha % ha Unregistered 763.5 99.0 880.0 26 1.2 Registered 5.3 1.0 2 555.7 74 482.2 Incl. Cooperatives 2.9 0.4 1 738.6 51 599.5 Total 768.8 100.0 3 435.7 100 4.5 Source: Ministry of Agriculture and Forestry, Agro–statistics, 2002. Farming is the sole or major source of employment for 368 500 people, accounting for 12.5 percent of workers in the country. In addition, almost one million Bulgarians use farming as a source of supplementary income.35 In conditions of economic hardship, low–income opportunities, and high unemployment36, part–time farming has been a significant income source for a great segment of the population.37 The majority (85 percent) of those mainly or fully em- ployedinagricultureworkonunregisteredfarms.Thesefarmspredominantlyusefamilylabour

33 In addition there are about 1 million unaccounted miniature “farms” (household plots). 34 According to some estimates only 200 000 Bulgarian farms sell to market, and a mere 10 percent of them market more than 50 percent of their output (Strategy for food security in Bulgaria, 1998 TAP, FAO). 35 Evaluated in "year labour units" agriculture comprises 25.8 percent of employment in Bulgaria. 36 Unemployment rate is 13.7 percent and reaches 15.6 percent in villages (National Statistical Institute, 2003). 37 Income from household farms (plots) accounts for 5 to 25 percent of the total household income in various months of the year.

89 (averaging two members) while registered farms principally provide jobs for hired non–family labour (averaging ten workers). More than half of those employed in agriculture are of pre–retirement or retirement age, which puts serious restrictions on effective farm adjustment and enlargement (low investment activity and entrepreneurships, limited training capacities etc.). Concentration and commercialisation of farming is quite specific in different subsectors. Large, highly specialized and commercialized agrofirms and cooperatives are typical in grain, sunflower, fruit, and grape operations. They cultivate 89 percent of sunflowers, 86 percent of grains, 80 percent of fruit–trees and 76 percent of vineyards in the country. Production cooperatives account for a major share of total output in registered farms.38 However, a vast part of activities of many cooperatives is not commercialized but rather oriented toward internal members' demand (providing services; producing food for households, feed for private livestock etc.). In horticulture and tobacco production, specialized smaller size (up to 1 ha) and mainly unregistered farms supply a significant proportion of total marketed output. In all subsectors of crop production there are also a considerable number of miniature family farms having no or very little (absolute and relative) commercialisation of harvest. There are 506 000 livestock farms in Bulgaria (Ministry of Agriculture and Forestry, 2003). Only 2 percent of these are professional farms which carry out relatively large livestock operations.39 Non–registered family and group farms account for 90 percent of professional farms. The majority of livestock production takes place on small non–professional farms which breed 80 percent of cows, 86 percent of sheep, 96 percent of goats, and 58 percent of pigs.40 Non–professional farms are low in productivity and unspecialized farms breed a small number of different sorts of animals.41 Apart from household consumption, a good share of non–professional farms sell a fraction of their output. Therefore, a great number of less–commercialized small farms produce a significant share of overall livestock output in the country (as much as 82 percent of cow milk, 81 percent of sheep milk and 95 percent of goat milk; three–fourths of meat, more than 90 percent of wool and honey etc.). Only the country's poultry, and partly pig production are characterized by higher specialization and market orientation. Less commercialized and self–sustaining farms are not sensitive to market pressure. Farm size here is determined by household demands and available agrarian resources (family labour, farmland,technologicalknowledgeetc.).Therehavebeennogreatopportunitiesforalternative use (e.g. trade) of resources (due to pension age, high unemployment and low demand for farmland),oranymanagerialexperienceorcapitalwithwhichtoexpandfarmand/oroff–farmoper- ations. This has been coupled with a strong unwillingness (and high risk) to cease that which is

38 They carry out 65 percent of sunflower, 56 percent of grain, and a good portion of grape and fruit production. 39 Average number of milk cows on professional farms is 13.3; pigs – 125.9; sheep – 67; and goats – 23.2. 40 Unregistered farms raise 88 percent of beef cattle, 90 percent of cows, 95 percent of sheep and 100 percent of goats in the country. 41 Average number of milk cows on these farms is 1.6; pigs – 2.5; goats – 4.3; and sheep – 7.2.

90 vital for family income generation activity. Moreover, there have been no government policies intent on restructuring these farms. Activity of commercial farms is driven by the “rule of competition” and profit motives. These farmstendtoadjust(extend)farmsizeaccordingtomarketdemand,toimproveproductquality and productivity, and to innovate and diversify farming into processing and related activities. Nevertheless a vast share of these farms still operate below modern technological, quality, environmental, and labour and animal welfare standards. Farm profit depends on type of specialization, region, technological level, and specific market conditions (demand, prices), and varies from negative up to BGL 100 000 (EUR 50 000) per hectare. Principally, only a fraction of these enterprises generates enough income for effective growth. According to managers, the most criticalfactorsfordevelopmentofcommercialfarmsare:“inefficientlawsandcontractenforce- ment”, “unavailable markets for farm products” and “lack of accessible credit”. 42 The extent of commercialisation varies significantly among different farm products. Tobacco, oilseeds, rice, cotton, flowers, green peas, silkworms and the like all have a commodity character. Here entire output is either sold (spotlight, wholesale, retail) or under marketing contracts with downstream partners (processors, traders etc.). A significant share of the total production of strawberries, tomatoes, peppers, eggplants, cabbages, honey, wheat, mushrooms, pump- kins, melons, watermelons, eggs, poultry, meat, pig meat, cow milk and wool also go through retail chains or to industrial processing. For the remainder of farm products, a fair amount or

Figure 1. Modes for realisation of farm outputs in Bulgarian farms

Source: 2002 survey of prospective commercial farms covering 0.5 percent of market–oriented farms in Bulgaria..

42 Share of agrarian credit in the entire credit of commercial banks in recent years is merely 1.6 to 2 percent (Bulgarian National Bank, 2002).

91 the entire output is used for household consumption and/or it is utilized or processed within the same farms.43 A great variety of models for output realization have emerged as a managerial reaction to specific needs for the governing of commercial farms. Prevailing forms differ between various types of farms and are quite specific for different farm products. Spotlight or standard trade withsometypeofmarketagent(e.g.middleman, anotherfarmorcooperative) ismoreoftenex- ecuted for vegetables, grains, animals and meat, by all types of farms (Figure 1). Farms also equally have a firm–processor as the major buyer for vegetables, fruits, grapes and milk. Here product specification (technology, quality, origin, time of delivery) is important for a particular buyer(s), strong site–specificity is in place and frequency of trade between some partners is high. Therefore, facilitating of vertical links through direct and generally long–term and interlinked (with inputs and credit supply) contracts are meaningful for counterparts. Closely coordinated contracts for wholesale marketing to shops, hotels, restaurants etc. are also frequently appliedbylargeagrofirmsforfruits,grapes,meatandtoalesserextentformilkandvegetables. Mainly mid–sized fruit, grape, and vegetable agrofirms use wholesale markets. Only a few large grain producers utilize commodity exchange. Some smaller farms practice direct retail marketing, and it is chiefly important for vegetables, animals and meat, and milk. Mem- ber–cooperatives are used solely for a part of fruits and grapes, and grain realization in smaller farms. A number of larger grain, fruit and grape producers carry out direct export. Selling to the state reserve is an important marketing channel for a few registered and large grain producers. Intra–farm (own) processing is most essential for realization of fruit and grapes, and to a lesser extent for animals, meat and milk in middle–sized non–cooperative farms. Diversification of farming into processing (vertical integration) allows an enterprise to overcome market dependency (monopoly or absence of market situations) and to profit from marketing of value–added products.

SUPPORT PROGRAMMES FOR FAMILY FARM DEVELOPMENT

There have been a number of support programmes involving family farms in the country. Until recently the State Fund for Agriculture (SFA)44 has been the major instrument for government supporttoagriculture.SFAprovidespreferentialcreditsandsubsidiesforalltypesoffarmspro- ducing for market. Its short–term finance lines include preferential working capital for the production of major farm products in the country. Since the beginning of transition, government intervention in short–term finance supply has been a critical factor for carrying out the major production operations on a good number of commercial farms. The SFA also supports long–term investments of market–oriented farmers through various specific programmes in the following areas: start–up farming, Bulgarian farms, development, mountainous farming, eco–farming, young farmers, greenhouses, reconstruction of tractors, crop production, livestock production, farming machinery and less–developed regions (e. g. Rodopi mountain, northwestern Bulgaria). Different types of schemes have been used,

43 For instance, it is universal that grass forage (alfalfa etc.) is produced by livestock farms rather than purchased or sold on the market. 44 The SFA was established in 1995.

92 providing an opportunity to match the specific situations and needs of the farms that apply (resource endowment, stage of development, project size, priority areas, direct or through commercial bank financing, crediting with explicit guarantee from the SFA etc.). A major share of funded investment projects has consisted of proposals from unregistered farms.45 However, complicated bureaucratic procedures, enormous paperwork and formal requirements, and high costs for obtaining credit (for preparing proposals, for various related inspections, for interest and bribe payments etc.) allow only an insignificant fraction of Bulgarian farms to have access to SFA programmes.46 In fact, the Fund has been mainly accessible for powerful, larger–scale, and as a rule “less needy” farms. Besides, the Fund's resources have been quite insignificant for supporting the huge capital investments necessary for renovation of amortized and out–of date material assets in agriculture. Another special state programme aims to provide support to tobacco producers in the country (Tobacco and Tobacco Products Act, 2000). All tobacco producers get free seeds, premiums for total and high–quality marketed tobacco, and they have minimum farmgate prices guaranteed by the government. The majority of tobacco producers are small–scale family farms located in areas with low opportunities for alternative farm and off–farm income. Therefore, this programme contributes significantly to increasing incentives for production of high quality tobacco and for sustaining household farming in some less–developed regions of the country. The European Union Special Accession Programme for Agricultural and Rural Development (SAPARD) has recently introduced a programme targeting farming and rural households in Bulgaria.The2000–2006NationalPlanforAgriculturalandRuralDevelopment(NPARD)has approved nine measures for implementation of SAPARD: investment in agricultural holdings; improving processing and marketing of agricultural and fishery products; development and diversification of economic activities, providing for multiple activities and alternative income; setting up producers' groups; farmers and wholesale markets; forestry, afforestation of agricultural areas, investment in forestry holdings and processing and marketing of forestry products; renovation and development of villages, protection and preservation of rural heritage and cultural traditions; development and improvement of rural infrastructure; and improvement of vocational training. NPARD aims at modernizing and improving the efficiency and competitiveness of farms and food processing according to EU standards; sustainable development of rural regions in line with leading ecological practices; creation of alternative employment in rural areas and new incentives for younger farmers; and diversification of economic activities and building of modern rural infrastructure. A significant share of investments for carrying out SAPARD projects comes as subsidies (50 to 100 percent according to project type). Up to now 720 projects have been approved with total eligible costs of EUR 118.5 million.47

45 In 2001 they comprised 87.4 percent of all funded projects (Agrarian paper, 2002). 46 In 2001 only 0.55 percent of commercial farms got financial support for their long–term projects. 47 Since accreditation of the SFA as a SAPARD agency in May 2001: 480 projects for investment in agricultural holdings; 142 on improving the processing and marketing of agricultural and fishery products; and 98 for development and diversification of economic activities, providing for multiple activities and alternative income have been approved (Ministry of Agriculture and Fishery, September 2003).

93 More than a third of selected projects have been successfully completed and subsidies paid to participants. Rural regions account for 81.4 percent of the national territory and 43.6 percent of total population. Having in mind the scope of SAPARD48 it is expected that its implementation would improve livelihood, increase income, and provide new job opportunities for a considerable part of farm and rural households. Despite its original direction to support small and mid–size farms, up to the present a majority of SAPARD projects have been granted to a significant number of larger and highly commercialized enterprises. According to the beneficiaries SAPARD funds are still not easily accessible because of complicated paperwork and bureaucratic procedures, enormous efforts and costs for approval and carrying out projects etc. Selection criteria equally impose some limits on the application of family farms, such as an obligation to find financing and complete the project before receiving any subsidy; a requirement to match the subsidy with 50 percent own financing; a prerequisite to have a certain number of livestock (at least 15 milk cows, 100 milking sheep and/or water buffaloes, or 30 pigs); necessity of presenting future marketing contracts for 50 percent of processed outputs; age restrictions etc. Besides, the uniform criteria for farms in all regions of the country49 and exclusion of some prospective areas of activity (e.g. ostrich farming) put additional restrictions on the application of many farms. There is a provision for providing farmland for landless and poor people from state and munici- pally–owned agricultural land (Land Law, 1991). While transfer of municipal farmland to needy households is practiced, the state agricultural lands have been mainly leased out to large entrepreneurs. There is a plan to reallocate (lease or grant) 25 000 hectares of state land for that purpose. Implementation of that programme in the near future would definitely add a new income generation opportunity for some marginal households. There have been other programmes non–specialized for agriculture which also concern poverty reduction and income generation in farming. The project Employment through Support of Business is supported by the United Nations Development Programme and carried out by the Ministry of Labour and Social Policy.50 Its goal is to assist micro– and small enterprises and farms in regions with high unemployment and to create a sustainable environment for new job opportunities. Besides, there have been a number of European Union, international, NGO etc. initiatives targeting special regions (border, mountainous, undeveloped), segments of the population (minority, disabled, drug addicted) or type of activity (innovation, training, organization building). Some of these programmes have affected considerably the welfare of a few participating farmers – direct income from involvement in projects (salary payments; grants of materialassetsorcheapcredit),acquiringmanagerialskills,initiatingprospective employment (e.g. sericulture), organizational modernization etc. Nevertheless, due to the projects' small scope, broader goals or unsustainable support, their overall impact on the development of family farms in the country is not significant.

48 For the period 2000–2006 an annual EU grant of EUR 52.124 million is allocated. 49 For instance, 2 hectares might be a “normal” size for orchard farms in one region yet quite large for regions with a shortage of farmland. 50 This project covers 24 of the least developed municipalities in the country (9 percent of all municipalities).

94 CASE STUDY ON FARM INCOME DIVERSIFICATION AND ENTERPRISE DEVELOPMENT IN THE PAZARDJIK REGION

Characteristics of agro–ecological and socio–economic environment The Pazardjik district is one of the major agrifood producing regions of the country. It is located in southern Bulgaria – in the eastern and central part of Gornotrakiyska Lowland together with portions of bordering mountains (see map below). Its main territory covers lowlands between Sredna Gora Mountain (2 191 m) on the north and Rodopi Mountain (1 604 m) on the south. Gornotrakiyska Lowland is closed by Sredna Gora and Rodopi Mountains from the west side, and widely opened eastward to the Black Sea. Elevation is between 190 and 370 metres, with the administrative center Pazardjik at 205 metres above sea level. The slope is gentle from the northwest to the southeast direction along the valley of Mariza River (the second biggest river in Bulgaria).

Map of Bulgaria with 28 administrative regions

Soils of the lowland are fertile, moist, and rich in humus. Major land types presented in the region are: Chernozems, Alluvial (Deluvial) Meadow soils, and Cinnamonic Forest soils. Climate is moderate with a mild winter and hot summer favourably affected by Black Sea and Aegean Sea influences. Average temperature is 11.5 C, with the coldest month of January between –4.4 C and 3.6 C and the hottest month of July between 21.3 C and 25.6 C. There is plenty of sun- shine, reaching 2 300 hours per annum. Snow cover is about 30 days a year, and annual rainfall variesbetween450–600mm.Almosttheentirelowlandiscoveredbyarableland,meadowsand pastures, while hilly and mountainous sections are with natural meadows and pastures, and forests. There are excellent agro–ecological conditions for the development of vegetable, fruit, grape, cereals and pulses, rice, tobacco, and livestock production. The Pazardjik region is located on a highway a short distance from Bulgaria's biggest cities – Sofia (population 1.2 million; 120 km to the west) and Plovdiv (population 340 000; 36 km to theeast).Closeproximitytotheselargestconsumercentreshasbeenanimportantfactorforthe development of the farming and food processing industry in this region. The Municipality of

95 Pazardjik51 consists of Pazardjik City and 31 villages. Its territory is approximately 640 square kilometres and it has a population of 127 900, which accounts for 14.2 percent of the territory and 41.2 percent of the population of the Pazardjik region. Total farmland is about 42 500 ha, out of which 86.7 percent is planting area, 4.8 percent is orchards and permanent crops (including 1.6 percent vineyards), and the rest is natural meadows and pastures.52 Before 1989 a large irrigation system was built in the area but currently it is not entirely utilized. The number of owners of farmland is 31 034, including 30 828 private and 206 juridical persons. The average size of farmland holdings is 1.37 hectares. State and municipal agricultural land is accordingly 0.7 percent (mainly planting area) and 8.3 percent (one–tenth of which are pastures) of total farmland. Until 2000 an annual (one season) lease was the dominant form for land transactions and for the extension of farms. The slow pace of land restitution and absence of full titles on ownership rights have been mainly responsible for this. In recent years, long–term lease and sale markets of farmland have started to emerge. Long–term lease contracts are applied predominately by cooperatives (as ruled by the Law for Cooperatives, 1998) while non–cooperative farms give preferences to one–season or annual contracts. At present, 272long–termleasecontractshavebeenregisteredinvolving23tenantsand360landlords,and merely 1.9 percent of total farmland. Sale deals are occasional and concern an insignificant portion of agricultural land in the region. To date only 216 sales transactions have been carried out on 0.3 percent of all farmland. Major means for land supply and for extension of farm size are utilization of own land, short–term rent, and production cooperation (group farming, joining a cooperative etc.). State and community farmland is under long–term or year–base lease while a portion of municipal land has been provided to landless persons. There are 16 269 farms in Pazarjik municipality with an average size of 2.6 hectares. There are registered farms are 244, including 38 production cooperatives. The largest share of registered farms consists of family, group or partnerships firms. The firm form is preferred because of the legal requirements for engaging in some farm–related activities such as trade of grain and wine, or the opportunity to supply to the army. The strategy to diversify into related or non–related businesses (processing, marketing etc.) or desire to invest in specific brand name capital on farm or processed products also play a critical role here. In some cases the formal type of joint–stock firm has been a consequence of the “manager–workers” privatization of former state farms and agrocompanies. The majority of farms, amounting to 98.5 percent of all farms in that municipality, are unregistered. They are mainly individual or family (household) farms but there are also informal small group farms and partnerships. Full–time farms are more than one–fourth of all unregistered farms. In these farms all or major (as in the case of retired persons) income comes from farming and related activities. The bulk of farms are part–time enterprises, but farming activity brings a sizeable income to family (household) budgets. The share of farm–related income is not uniform across part–time farms. It depends on the level of earnings from off–farm occupations or businesses of the person(s)whorunsthefarm,aswellastheincomeofotherfamilymembers.Inaddition,thereexist

51 There are 262 municipalities in Bulgaria. 52 All specific farming-related data for Pazardjik municipalities have been provided by the local administration.

96 few households without a small subsistence “farm” (or large garden). Income opportunities in off–farm activities have not been great and the unemployment rate has been very high (18.6 percent in 2002), especially in rural areas. This is why farming has been a substantial source of cash and non–monetary income for almost every household in the region. As a rule all family members are involved to some extent in carrying out farm operations on every type of farm. In addition, larger unregistered farms, cooperatives, and agrofirms provide considerable permanent or seasonal work for a good part of the rural population. Therefore, professional or part–time farming is a predominant occupation for a great portion of residents in the Pazardjik area. Besides, there are relatively more farms with smaller land size than is common in other regions of Bulgaria. On the other hand, the share of professional (full–time) farms among all farms is higher than the country average. All full–time farms are registered as “agricultural producers” which is necessary for receiving statesupport(LawforSupportingofAgriculturalProducers,1998).Inaddition,thereare1200 farms registered as “tobacco producers” (mostly physical persons), which is important for obtaining production quotas and receiving state subsidies and premiums on marketed tobacco (TobaccoandTobaccoProductsAct).Therearealsoregistered1292wineproducers(12juridi- cal and 1 280 physical persons) and 48 traders of grain (only juridical persons) as required by laws regulating the trade of wine and grain (2002 Wine Law; 1998 Law for Grain Storage and Trade). As for total arable area of the municipality, approximately half is occupied by cereals and pulses, oilseeds and forage crops; 45 percent is for horticulture; and 4–5 percent for tobacco. Wheat is the most widely grown cereal in the region, followed by barley and corn, while sunflower is represented to a lesser extent. Despite the fact that a major part of all rice paddies in the country is concentrated in the Pazardjik region, paddy cultivation has fallen dramatically in recent years. Tomatoes, peppers, potatoes, cucumbers, and strawberries define chief horticultural produce. There are also 41.4 ha of vegetables (mainly tomatoes) in greenhouses, amounting to about 13 percent of all greenhouses in the country. More than half of planted tobacco is of local Oriental varieties. Plums and cherries comprise the major share of fruit–trees in that region, while apples and peaches represent a relatively smaller share of fruit production. Wine varieties dominate in grape production, reaching 95 percent of overall vineyards, out of which 73 percent are planted with red grape varieties. Livestock is also well developed within the municipality (Table 2). Total meat output comprises 920 tonnes, including 44 percent meat of bovine animals, 30 percent pig meat, 22 percent sheep andgoat meat, andless than4percent poultry. Overall production ofmilk is4750000liters, out of which 54 percent is cow milk, 45 percent sheep and goat milk, and less than 1 percent water buffalo milk. In addition, 9.4 million eggs, 75 tonnes of wool and approximately 27 tonnes of honey are produced per annum. Farm size and income generation vary according to type of production and kind of farm. The entire rice output and a great part of cereal and sunflower production are concentrated in large–scale production cooperatives and agrofirms. The low level of domestic rice prices has caused a drastic reduction in planted paddies and currently only about 20 rice producers continue to operate in the region. Usually cereal and sunflower cultivations are profitable for large–scale operators. Grain producing agrofirms are highly specialized and market oriented. A predominant portion of cooperatives are specialized in wheat, barley, corn, and sunflower production while a smaller share of them exhibit a more diversified production structure.

97 Table 2: Number of livestock in Pazardjik municipality (2002)

Category Number Category Number Cattle total 3 793 Pigs total 14 200 Dairy – cows 2 490 Reproductive sows 1 700 Sheep total 28 000 Poultry 185 000 Reproductive ewes 15 500 Laying hens 75 000 Goats total 18 300 Rabbits 5 200 Reproductive nanny–goats 11 100 Beehives 1 560 All poultry production and a significant share of pig production are concentrated in a few large agrofirms. Most vegetable, grape, fruit, and tobacco production is carried out on small–sized (roughly 1 ha) but intensive family farms. Both large livestock firms, and small horticultural and tobacco farms have strong market orientation. To a great extent their product and variety mixisdeterminedbymanagers'expectationsofmarketdemandandprofitability.However,asa consequence of strong (including price) competition in the area and great fluctuation of market prices, and monopoly or semi–monopoly positions of processing industries, the income level of vegetable, grape, and livestock farms varies significantly (from high to negative profit) in different years. Solely fruit (where prices appear to be relatively stable), and highly government–regulated tobacco production are profitable for all types of farms. Nearlyallcows,sheepandgoatsareraisedonsmallnon–professionalfarms.Nonetheless,various forms of informal group organization (such as collective daily grazing or whole season breeding of individual animals) are broadly used for sheep and goats (e. g. hiring a shepherd for all animals in a neighborhood or community, shift care of the group's animals by individual ownersetc.).Thelargestpartoflivestockfarmsarenotspecializedandhaveamixedproduction structure – e. g. breeding different types of animals; producing forage for animals; and engaging in vegetable, fruit and tobacco–related occupations. There are also a few examples of highly specialized and relatively large operators in some horticulture, grape, fruit, non–oriental tobacco, milk, and meat production enterprises. Their bigger operationalsizegivesanumberofadvantages(potentialforeffectiveinvestment,explorationof economies of scale and scope; better crediting, negotiation and contract enforcement positions etc.). Typically all but milk–producing activities are connected with reasonable income generation and profit making. Commercial honey production is also widespread. It is concentrated in narrowlyspecializedfamilyfarmsandusuallybringsagoodincomeforrespectivehouseholds. Finally,thereexistsahugenumberofsmallnon–professionalfarmsproducingagreatvarietyof products for self–consumption and selling a slight fraction of output to local markets.53 These small–sized and unspecialized farms make no investment in human and material capital, and productivity level is very low. However, since production and marketing costs are low (or zero) such primitive farming brings relatively “high” (badly needed) income for households. All large and a majority of mid–sized farms are generally equipped with the most important machinery and tools for mechanization of farm operations. However, a significant number of

53 For example, almost 63 percent of all wine produced in the south-central region is processed in domestic but industrial conditions (Ministry of Agriculture and Forestry, 2003).

98 buildings, tractors and combines are outdated and amortized. Only a small fraction of farms use collective or leased machinery and equipment. Larger farms usually provide (sell) mechanization services to smaller farms. A good number of farms use irrigation but generally primitive systems for watering are widespread. The majority of fruit trees and vineyards are of mature age, as the degree of renewal is far beyond the technologically optimal level. Market–oriented farms tend to innovate practices, and to introduce new varieties and technologies. Some of them are very active seeking advice from agrarian universities and specialized research institutes; transferring know–how; training their staff; seeking agromarket information etc. However, “resource saving” technologies are generally practiced. Usually application of ni- trogen fertilizers and pesticides is up to 25 percent beyond modern standards. Moreover, the average use of phosphates and potassium fertilizers is often several times beyond the recommended levels. Despite the fact that the average yield for vegetables, grapes and some fruits is above the average level for the country, it is far below the productivity rate of developed countries. Besides, unsustainable concentration of phosphates and potassium intakes from land would inevitably cause serious environmental problems in the long run. Small and subsistence farms use predominately primitive technology dominated by human and animal power, and low application of chemicals. Nonetheless, the unintentional but actual “organic” (chemical–free) character of products from these farms makes their produce attractive for some middle– and upper–class buyers. With very few exceptions, the running of livestock farms is not in line with modern sanitary–hygienic, environmental, and animal welfare standards. There exists a large infrastructure for processing of farm products in the region. Wine and some vegetable and fruit canning facilities meet to a certain extent the high requirements of western markets. On the other hand, none of the dairy and meat processing companies are in accordance with EU quality standards.

Framework for farm income diversification in the Pazardjik region There have been a number of initiatives of the Ministry of Agriculture and Forestry, municipal government, and international donors in the Pazarjik region. The project, Construction of Producers' Market for Fruits and Vegetables in Pazardjik is comprised of building a new wholesale facility and three terminal markets. It is part of a government programme for development of a modern market infrastructure system consisting of ten wholesale and producers' markets for fruits, vegetables, and flowers in the country. The project in Pazardjik is co–financed by the government, municipality, European Bank for Reconstruction and Development, and the German Government. Expected impacts of this project are: improved marketing conditions for fresh fruit and vegetables, increased production and marketing of fruit and vegetables; supply of a larger spectrum of fresh fruit and vegetables at competitive prices; and creation of new job opportunities in farming, processing and wholesale trade of fruit and vegetables. In 2000 the former popular terminal market in Ognyanovo was modernized, while the main facility on highway near Kalugerovo (90 km from Sofia) and two other terminal markets are to be built. The wholesale market has been mainly used by smaller farms while larger operators rely more on other forms of sales (marketing contracts with processors, middlemen or retailers; direct farmgate trade or shipping to big wholesale markets in Plovdiv and Sofia etc.). Therefore, this

99 project has been contributing significantly to the minimization of marketing costs and increasing income from the production of fresh fruits and vegetables from family farms. Moreover, improved marketing conditions eventually create relatively higher incentives to grow fruits and vegetables than other crops, and thus to shift to a more intensive and income–generating structure of farming. Up to the present a great number of farms have widely utilized other (more efficient) means rather than formal wholesale market modes for realization of output such as spotlight or contract sales, dealing at some informal wholesale markets etc. However, a large number of subsistence and small farmers use direct marketing (street, home delivery, retailing at farmers' markets) extensively for a variety of farm products to increase their overall income. SAPARD and SFA are the major forms of public support available to farmers in the region. The number of approved projects from SAPARD is 5654, which constituates about 8 percent of all projects in Bulgaria. It means that farms from the Pazardjik area have been relatively more at- tracted to these assistance opportunities, prepared more high–quality projects, and achieved greater success rates than other regions of the country. On the other hand, the amount of approved long–term projects by STA is not considerable – only ten concerning the purchase of livestock and machinery. The greatest number of beneficiaries of SAPARD and STA support are medium–sized and large family farms. However, for the vast majority of farms in the region these principal sources of assistance are still out of reach due to the restrictive requirements for application, high cost of obtaining public funding etc. The regional office of NAAS in Pazardjik City serves farmers from 11 municipalities in the Pazardjikregion.Geographicalproximitytothe NAAS officeallowsfarmersfromthecasestudy area to obtain relatively greater benefits from the free extension service – easy access, frequent personal contacts etc. Despite the huge enhancement of NAAS in the last few years its impact on farm development in the region is not considerable and the number of assisted farms is limited. This is due to insufficient staff55, deficit of municipality–level officers, lack of experts in household economy, great shortage of financial resources (for telephone calls, field visits, group events etc.), inadequate knowledge of farmers' problems, little competency in effective methods for extension education etc. The private sector has been very active in creating an environment for sustaining small and family farms. The principal line of support comes through providing short–term credit to some vegetable producers by a major processor or exporter against interlinked contracts for marketing of outputs. These arrangements allow the execution (and extension) of farming operations; in- duce incentives to improve product quality; and intensify relations with downstream partners. The main distributors of chemicals and machinery also offer some crediting programmes and generally provide “free” advice, training, maintenance services etc. However, the activities of all these agents are principally directed toward the most commercialized and (as a rule) larger farms. There has been significant progress in farm associations in recent years. Branch organizations of milk, meat, poultry, rice, grain, vegetable, honey etc. producers have been established and they try to protect the interests of their members at the national level, distribute specialized

54 Some of these projects are in cross-border areas or entirely within other municipalities of the Pazardjik district. 55 One extension officer per 1 000 full–time farms, and one for every 10 000 part–time farms.

100 information, provide training etc. However, at the regional level the interests of farmers are quite diversified – large, small, family, cooperative, livestock, crop, mixed, subsistence etc. farms. This creates serious obstacles to cooperation at the local level in exploring economies of scale (or scope), technology, input supply, credit supply, marketing, or broader lobbying activity. In fact, there is neither a marketing, input supply or crediting cooperative in the Pazardjik region, nor an association of fruit producers. Competition between small producers dominates, and adverse feeling between cooperative and private farming has not been overcome. Conse- quently, potential improvement in productivity and income from various “collective actions” is not explored. Within the local government there is no institution to represent different farms' interests in decision–making on farmers' matters – priority setting, allocation of resources, project selection, execution of control over public servants etc. This restrains effective information exchange, and decreases the efficiency of various farm support programmes.

A specific approach to farm income diversification and new enterprise development Mr Stoicko Georgiev Sirakov, 42 years old, initiated the establishment of a family farm in 1992. He graduated with a degree in Bulgarian Philology and used to work as a high school teacher. In 1992 Sirakov's family was granted restitution of his grandfather's apple orchard56 in the area of Malo Konare village (10 km northeast from Pazardjik City). Sirakov's family had been experiencing considerable economic hardships at that time – a young family with a small child, low salaries of junior public employees, high inflation, lack of any source of additional income, great uncertainty associated with employment and income etc. Then Mr Sirakov decided to give up teaching and to become a farm manager. Together with his wife and his father they set up a family farm on 6 hectares of restituted land with apple trees. Mr Sirakov's uncle's portion of the inherited farmland was transferred to Mr Sirakov. Mr Sirakov had no farming experience, and put a lot of effort into learning about the biology, technology, and management of apple farming. In addition, at the outset he extensively sought the expertise of various private consultants on cultivation, spreading of chemicals, and other operations associated with the growing and storage of apples. He hired ten seasonal workers for carrying out major manual activities as well as about 40 persons for the harvesting period. Land disking (1–2 times), and spreading of chemicals and pesticides (15–20 times) was arranged through contracts with outside suppliers. A storehouse with regulated temperature in nearby Stamboliyski (16 km east of Pazardjik City) is leased in order to keep the apples fresh for a longer time and command premium off–season prices. Apples are from two varieties – Red Deli- cious and Golden Delicious. The output is marketed during several (4–5) months at the storage site to interested middlemen on a wholesale basis (0.2–0.5 tonnes). All non–standard and low–quality apples are sold for processing into concentrated juice at a nearby specialized factory.

56 According to the 1991 Land Law all farmlands which were forcefully cooperated or otherwise nationalized are to be restituted to the previous owners or their heirs in the original locations and structures of use (e. g. vineyard, orchard, planting area etc.).

101 Mr Sirakov is the farm manager and he takes care of the day–to–day running of business. His wife is also actively involved in making important decisions on the management and development of the farm. In addition, Mrs Sirakova has a law degree and is actually responsible for the preparation of all contracts and project proposals, and for formal relations with other agents andinstitutions(insurancecompanies, SFA etc.).Sheworksasafull–timejurist–consultantfor the Regional Directorate of Agriculture in Pazardjik. The father of Mr Sirakov is elderly, but also contributes with management advice and otherwise to the running of the farm. InashortperiodoftimeMrSirakovaccumulatedsignificantexperienceinmanagementandthe family farm started to generate a good income. Nevertheless, initial yield (3–5 tonnes/ha) began to deteriorate due to unfavourable changes in the pattern of neighboring farms and orchard isolation. Soon the Sirakovs began to think about the extension and modernization of their enterprise. Mr Sirakov had been carefully studying specialized publications and world experience, seeking experts' advice from the Agrarian University and Fruits Institute in Plovdiv, local agronomists etc. He also had meetings with foreign consultants (from Belgium, Macedonia etc.) on apple matters and visited some neighbouring countries to witness farmers' experiences in apple growing. AnanalysiswasmadeonthetrendsofdevelopmentoffruitproductionandconsumptioninBul- garia. The apple happens to be the fruit most preferred by Bulgarians. However, due to the im- mense reduction of orchards and deterioration of fruit–trees after 1989, about 80 percent of domestic consumption is now coming from imports. Traditionally Bulgarian apples are grown inthebestsoils–inuplandratherthanpoorrockyzones(typicalofothercountries).Thatiswhy locally produced apples are characterized by their excellent taste, which is favoured by the majority of Bulgarian consumers. Moreover, unlike horticultural investments that may be recov- ered very quickly, formation of new orchards requires a long period and large investments. Furthermore, most fruit production in the country is carried out on primitive small–scale farms without effective investment potential. Another favourable condition is that compared to producers of other subsectors (vegetables, grapes, livestock etc.) where there is a big fluctuation in market prices, apple prices are relatively stable over the years. Inaddition,anincreasingdemandforhighqualityandorganic(chemical–free)fruits,freshand concentrated apple juice, apple jam and other new apple–based products (e.g. cider) has been developing along with improving the welfare of the population and focusing attention on a healthy diet. Increasing apple quality and shifting to organic products could be “easily” achieved, since it depends on the selection of proper variety structure and production technology. On the other hand, while on–farm production of concentrated juice is quite complicated, processing of apples into fresh juice and cider is not connected with serious technological problems. Thus a huge, uncontested and safe (in terms of income generation) market for increasing apple output of the farm was envisaged for the coming 10–15 years. This was coupled with excellent agro–ecological conditions for the development of apple farming in the Pazardjik region. Dan- ger from hail and early spring freezing of orchards, and the unregulated (duty–free, subsidized, illegal etc.) import of apples have been identified as major areas of risk associated with large orchard operations. As far as in–farm processing is concerned, the main worry appeared to be a tiny and undeveloped market for fresh apple juice. Unlike concentrated juice, the fresh juice spoilsrapidly(in5–6days)andthereforemustbetargetedexclusivelytoregionalconsumers.In addition, there is high uncertainty related to the demand for cider, a drink entirely new to

102 Bulgaria. Currently imported cider is available only in a limited number of specialized restaurants and large liquor shops, and there is no tradition of consuming or exporting this product. The Sirakovs decided to extend their farm into modern orchard production instead of entering into a new unspecialized activity. They chose to keep up apple production, to apply accumulated experience in a larger scale and to focus on high quality products. In addition, the building of the farm's own modern storehouse with controlled temperature, humidity, and oxygen played a crucial role in their strategy to market high–quality apples for a longer time (six or more months) and to get the best off–season price for their output. In order to avoid risk from monoculture and to utilize labour and machinery more effectively, the Sirakovs were thinking of starting a rare raspberry and morello (cherry) plantation as well. There are exceptional conditions for growing these two fruits in the region. Moreover, experts' estimates show the existence of a huge exporting potential for these rare fruits in the European Union. Furthermore, they began to consider in–farm processing of low–grade (sub–standard, poor quality) apples into fresh juice, and experimenting with a cider drink new to the Bulgarian market. According to specialists and based on positive experiences the minimum operational size for a profitable orchard farm should be 10–20 ha on consolidated land. A large operational size would also allow effective innovation, the use of one's own machinery, development of a modern irrigation system, hire of an independent storage shed or construction of one's own storage facilities, investment in product promotion and brand name, extension of farming into marketing and processing etc. A large project for extension and modernization of the farm was designed, which has been evolving ever since. Major elements included in the overall concept for the farm's development have been the following: • to seek a suitable large plot and build up a new apple orchard; • to introduce new varieties with great resistance to diseases and predators, and high yield and quality of fruits; • to explore new potential for the export of raspberries and morello cherries to Euro- pean markets; • to buy a tractor and equipment for their own execution of all operations; • to construct an efficient (drip–watering) irrigation system; • to design and introduce a modern system for protection from hail and spring freezing; • to construct a state of the art storehouse with regulated temperature, humidity, and controlled oxygen ratio; • to introduce their own brand–name fruits with attractive packaging, quality guarantee, and near–organically grown apples (integrated farming); • to begin supplying large food chains and the army with apples; • to build up processing facilities for fresh apple juice, and a small winery for cider; • tocommencemarketingoftheirownbrandoffreshapplejuiceandciderdrink;and • to find an effective outside source(s) for funding the massive investments necessary for realization of various components of the new enterprise.

103 Unfortunately, due to a large number of landlords and scattered land ownership of miniscule plots, it is not easy to find the badly needed large consolidated blocks in this region. In 1998 an appropriate 14.6 ha tract of state farmland in nearby Mirentci village area (3 km southeast from Pazardjik City) was offered for a 15–year lease with a term for further extension. Mr Sirakov applied and luckily got the contract. The following year he managed to purchase that land with his own financing. In addition he leased for 15 additional years 3 ha of bordering land plots from various private owners. The most critical resource for the implementation of the extension project – the necessary farmland – was finally secured. There were no other non–financial factors restricting farm extension. There was plenty of specialized and qualified labour available in the area, and various alternatives for market and contract supply of needed services (mechanization, speeding of chemicals and pesticides etc.), an enormous vacant storage place for hire, and high demand for apples. In 1998 the Sirakovs prepared an investment project proposal for the creation of a new orchard according to the requirements of the SFA. Their project was approved and they got a preferential long–term credit of BGL 170 000 (EUR 85 000) for seven years, including a two–year gratis period.With SFA creditandtheirownmoneytheycreatedanewappleorchard.Newvarietiesof appleswereintroduced,suchasFlorina(6hectares),MorsperGolden(3hectares),GleniSmith (1 hectare), and Merlows (1 hectare). Furthermore, a tractor and necessary equipment were bought.Along–termcontractforcurrentserviceswiththeRegionalServiceforCropProtection was signed in order to assure a timely and effective safeguard against diseases and predators in the apple orchard. New packages for marketing with their own brand name and quality guarantee were designed and introduced. In order to meet the prerequisite of the SFA Mr Sirakov registered himself as an “agricultural producer” and insured the orchard with a private agent. Explicit requirements for taking part in tenders for army supply made it necessary to register the farm formally as a firm (one–person trader) as well. There was an expectation that the project components would be successfully achieved within five years. However, the new scale of the farm was actually determined by the rare opportunity to buy a large suitable plot of available land – state farmland of a particular size. As a matter of fact, precise economic calculations on optimal size of the new enterprise in relation to current and capital expenditures, rate of profitability etc. were not made at the time of the strategic decision–making. A modern apple orchard has been successfully built and entered into exploitation (Table 3). A prospective variety structure with higher yield, improved quality, and reduced need for pesti- cide use has been introduced. The Sirakovs developed the largest area in the country planted with the new Bulgarian variety “Florina”, which currently represents the dominant share in overall apple output of the farm (Figure 1). This new variety is strongly resistant to a typical apple disease (Stronyasvane) and therefore requires few (only five to six) treatments with pesticides. In fact, this is a good example of an effective adaptation of chemical–free and near–organic (integrated) farming. A tractor and all necessary equipment have been bought, and outside supply of services has been replaced by the farm's own execution of each mechanized operation. A special package and label has been introduced, and marketing of brand–name apples with a guarantee of product quality has been initiated. In addition, a supply contract to the food chain Billa with a special brand of “near–organic apples” has been launched. And finally, a small processing facility for

104 internal production of fresh apple juice from low–grade apples has been constructed. The brandedjuiceissuccessfullymarketedtosomeofthemostpopularlocalcafesandrestaurants.

Table 3: Assessment of achievement of project objectives on Sirakov's farm

Partially Not Reasons for delay Project objectives Achieved achieved achieved or rejection Build up modern apple orchard ü Equipment with machinery and modern irriga- ü Modern irrigation postponed due to tion lack of financing Start up new fruit operations (raspberry and mo- ü Postponed due to lack of financing rello cherry) Build up system for hail and freeze protection ü Postponed due to lack of financing Build state of the art storehouse ü Postponed due to lack of financing Introduce own packaging and brand–name ap- ü ples Marketing of branded apples with quality guar- ü antee Contract sale to food chains, army ü Failure to get army contract Start in–farm processing of fresh apple juice and ü Small market appreciation for cider cider Marketing of branded processed products ü Cider drink not produced During the process of modernization and extension of the farm, Mr Sirakov has regularly employed a consultancy service of leading experts from universities, research institutes, and private companies. He also visited the regional extension office in Pazardjik and got to know the specialists there. However, by the time the public advisory office was established, Sirakov's new orchard had been de facto built and therefore NAAS's contribution to this particular farm has indeed been nonexistent. Unfortunately in 2001 the farm was hit by hail and the next year was unfavorable because of the early frost. The Sirakovs suffered significant losses (BGL 40 000, equal to EUR 20 000) which have not been compensated by the insurance company. Disputes on unclear insurance policies and contested terms of contract have been going on since. A lawsuit still continues without any effective outcome and with completely negative consequences for the farm's development. With friends' financial assistance the Sirakovs have managed to maintain farming and to carry out all current activities. They even sold the tractor in the beginning of 2003 in order to overcome difficulties associated with the shortage of cash. The deficiency of funds has prevented the timely realization of each project component. It has been impossible to get credit from commercial banks for the financing of long–term investments. Building of a drip–watering irrigation network, a system for protection from hail and frost, and a storehouse have all been postponed. In addition, neither the securing of new farmlands nor the development of raspberry and morello (cherry) operations have been initiated. Furthermore, an insignificant market for cider has caused reconsideration and that element of the project has been put on hold. And finally, despite the attempt to procure a contract for supplying the Bulgarian Army it has not been successful. The procurement department of the army prefers to deal with a few middlemen suppliers of the bulk of products, instead of direct contracts with specialized producers of individual products.

105 The Sirakovs are looking for existing possibilities provided by SAPARD and SFA to complete their project for farm development. They wish to begin experimentation of a modern system for hail and frost protection as soon as possible, and if that proves to be efficient to equip the orchard before long. Besides, there exist attractive funding schemes to buy a new tractor, construct a modern irrigation system, build a storehouse, and to develop exotic fruits such as raspberries and morello cherries. The Sirakovs believe that they could effectively apply and use these funding opportunities in the near future. And the idea for building a small apple winery for cider has not been completely abandoned. This seems to be a new but prospective product, and there is some potential to compete in the emerging internal market (entirely with imported brands) or to export to cider drinking countries.

Assesment of the impact on farm development and performance There has been considerable improvement in the economic performance of the farm as a result of the project's implementation. The Sirakovs have established themselves as the biggest sup- plier of apples in the region. Great variety, guaranteed quality, and appropriate packaging of output all make the farm an attractive partner for traders from all over the country. Thus far the Sirakovs have encountered no problems in marketing their products. All apples are sold directly on–farm or from the storehouse on a wholesale basis. The number of hired labour has increased, up to 15–20 seasonal workers for major manual activities and about 100 for harvesting. Proficient management and large operational size have led to a more efficient utilization of the workforce and consequently labour productivity has significantly risen (Table 4). Average yield has expanded by almost one–third, and more than half of the apples are now of extra quality. A positive change has also occurred in the level of overall material costs per unit of production, which have been reduced substantially in physical terms. There have been minor fluctuations in the level of labour costs and up to 50 percent variations in the market prices of apples throughout the period. Conversely, there have been progressive increases in the prices of pesticides and of energy needed for the preservation of fruit in the storehouse. Essential economic gains have been realized from proper storage of the apples and obtaining higher off–season prices; marketing of brand–name apples with guaranteed quality; and contract sales of high quality and near–organic apples to an exclusive food chain, Billa. Despite widespread illegal imports the temporary duty protection of domestic apple producers (in force until 31 December) provides an extra opportunity to command a higher price on most of the output. In addition, the intra–farm processing of low–grade and cheap fruit into fresh apple juice and marketing of a new value–added product contributes to income growth.

Table 4: Changes in economic performance of Sirakov's farm

Indicators Rate of change Increase in labor productivity 200 – 250 % Increase in yields per hectare 130 % Reduction in material expenditures per output (in physical terms) 10–15 % Increase in product quality 40 % Increase in value–added product 100 % Increase in farm income 300 – 350 %

106 Mr Sirakov has been trying to initiate the creation of an association of apple producers in Bul- garia similar to other professional organizations in agriculture. Such an alliance could promote great cooperation between apple producers in sharing experiences, technology transfer, exchange of agromarket information, arranging direct export etc. as well as to increase their lobbying efforts for government support. For instance, a great demand for Bulgarian apples is expressed by a large Belgian importer, but the requested minimum amount of extra–grade output is 20 000 tonnes. It is obvious that such large–scale production and associated marketing deal(s) could only be effectively organized by a specialized organization of apple producers. Moreover, collective efforts for prioritized public support (price, subsidies etc.) would be much more effective than individual lobbying of unorganized farmers. However, due to various reasons (a small number of specialized farms, diverse interests of different types of apple producers, high set–up costs etc.) no such association has been organized to date. There has been an important development of Sirakov's farm since its establishment. In the beginning, farming activity was undertaken in order to support Sirakov's low and fixed income as a public servant. Gradually the farm has evolved as a huge enterprise generating more than 95 percent of household income. The entrepreneurial and innovative spirit of Mr Sirakov, and the growing managerial experience of all family members have been responsible for the success of the farm transformation. The Sirakovs have faced many difficulties, but took risks and initia- tivesandeventuallysucceededindealingwithtechnological,financial,organizational,contractual, and institutional problems alike. Their managerial skills have been substantially enhanced, and their capacity for innovation and business initiatives has expanded. Despite all obstacles and restrictions, most of the Sirakovs' ideas (the vision for the farm) have been effectively materialized while others are in the course of realization. The largest apple farm in the Pazardjik region has been built alongside a few such large–scale examples countrywide. The Sirakovs have been seeking and finding solutions in large–scale operations, effective specialization and diversification into storage, processing and marketing rather than in small self–sufficient farming. Unlike most of the families in the region they pursue no other farming activities, and buy all agrofood products for their own consumption from a modern (and inaccessible for most Bulgarians) supermarket, Billa. All family members are strongly motivated andsatisfied,andthethoughtofquittingfarmingandmovingelsewherehasnevercrossedtheir minds.

CONCLUSIONS AND RECOMMENDATIONS

Bulgarian farming has been undergoing a radical transformation. At the same time agriculture has been an object of fundamental restructuring and has a crucial role to play in the household economy. A specific transitional structure has evolved, comprising a large number of subsistence and small–scale family farms, numerous production cooperatives with little long–term sustainability, and relatively few larger–size operators. The Sirakovs are from the new generation of farm entrepreneurs who have managed to develop a modern farm from scratch. They have passed successfully through all challenges and difficulties, and realized their idea of a prospering family farm. They have also proved that the family farm can be an effective and innovative enterprise, providing a full–time employment opportunity with a significant income generation potential. Mr Sirakov is a good example of a fully

107 devoted and highly qualified professional farmer who will represent Bulgarian farming in the years to come. The Sirakovs' experience shows that the most effective way to develop a farm is to enlarge and modernize this enterprise using agromarket analysis, applying know–how and advice of leading experts, introducing up–to–date varieties and technologies, deepening production specialization, and diversifying farming into marketing and processing. The prolonged apple growing tradition and experience in the Pazardjik region, and the close proximity to the largest innovation centers in the area (Agrarian University and Fruits Research Institute in Plovdiv) have also been significant factors for the expansion of the farm. Moreover, the sustainable development of this enterprise could not have been possible without the opportunity to procure a large consolidated plot of state farmland and the chance to obtain a long–term preferential credit from SFA. And lastly, the precise initial arrangement of property rights on farmland between family members, which is crucial for any application for government support schemes, has also been important for the success of this project. On the other hand, the Sirakovs' success could have been much greater if there had been more supportive government policies for family farm development in multiple directions, such as those that exist in other European countries (price, credit, inputs supply, insurance, duty pro- tectionetc.).Extremelyimportantwouldhavebeentheexistenceofapublicfundforguarantees against natural disasters (hail, frost etc.) in instances where private insurance companies are not eager to take the risk. Such public assistance (compensation, refunding, providing a loan etc.) would have certainly given a real opportunity for the timely materialization of all components of the farm modernization project. The Sirakovs' experience could feasibly be replicated in other farms and regions with similar conditions. Indeed, such prospective family farms have been emerging in other parts of the country.Akeyfactorofcourseistheentrepreneurshipandinnovativeskillsofthefarmmanager who has to combine agrarian resources within the specific economic environment into a modern enterprise. Another crucial factor is the institutional support to prospective farmers in help- ing to improve their managerial abilities, adapt positive experiences and realize their modernization projects. The future strongly depends on the efficiency of support policies and fine–tuning to the requirements of farms of different types and in the various regions. Further- more, different farms have unequal access to relevant information, know–how, leading expertise from agrarian universities and research institutes (lack of resources, proximity, personal contacts etc.). Thus the role of the public extension system in training, consulting, disseminating positive experiences etc. to all farmers becomes extremely important. The analysis of achievements and constraints of farms in Bulgaria and the Pazardjik region leads us to suggest several directions for further improvement of public policies and programmes for family farm development and income diversification: Firstly, various policy measures must be directed to enhance prospective family farms rather than other farming structures (production cooperatives, large agrocompanies etc.) that are unsustainable in the long run. Currently, much public support goes to the most powerful and less needy structures, and often not according to the original priorities. Pure market financing (debt, equity) is practically unavailable for the majority of Bulgarian farms, and this situation is unlikely to change in the forseeable future. At the same time, internally generated income and different private arrangements are not sufficient to fill the huge funding gap in the family farm economy. Unless a considerable multidimensional (including price, credit etc.) public assis-

108 tance structure is established, the effective modernization of family farms can hardly be achieved. A special emphasis has to be put on making SAPARD and SFA funds accessible for all types of farms and the practice of financing only large–scale projects must be revised. This would enable small and family farms to take advantage of public support programmes and ac- celerate their development. Secondly, since specific conditions for the operation and resource endowment of farms in dif- ferentregionsarenotuniform,differentialratherthanuniversalcriteriamustbeusedforpartic- ipationingovernmentsupportprogrammes.Inaddition,theentirespectrumofpromisingfarm activities (e.g. ostrich raising and processing) should be made eligible for public aid. This would allow more equal and fair use of public assistance initiatives by all prospective farms. Alterna- tively,continuationoftheuniversalapproachwouldactuallydeepenincomedifferentiationand the state of development within individual farms. Third, the transparency and efficiency of each public support programme has to be improved in order to make their accessibility by family farms possible. Currently numerous offices are responsible for different farmers' matters at the local level – regional offices of SFA and SAPARD, Ministry of Agriculture and Forestry, NAAS; numerous State Inspection Agencies; Municipal- ityDepartmentsofAgricultureetc.Itisextremelycostlyforindividualfarmers(intermsoftime, paperwork, direct access expenses, fees etc.) to deal with all of these authorities – different locations, lack of coordination, specific requirements, contradictory policies etc. Family farms have no extra staff or means to employ a special agent to cope with a huge agrarian bureaucracy and complicated procedures. Farmers' direct and indirect costs for application and obtaining public support have to be minimized. Otherwise all public programmes will remain beyond the reach of the most needy farms. A single office for easy application for different support programmes needs to be established and all regional bureaus of central agencies located at the same address. The relevant paperwork and overall access costs for farmers have to be cut. Furthermore, it is extremely important to institutionalize farmers' direct participation (representation) in priority setting, execution, and control of various public programmes at all levels. This would certainly reduce total management costs and increase the efficiency of public programmes. Fifth, special emphasis has to be made on training farmers in management, income diversification techniques, technological know–how etc. as well as in proposal writing, property rights arrangements, and application for different public programmes. In addition, a system for the exchange of positive (and negative) experiences and other relevant information must be organized. In this respect, a significant modernization of NAAS should be undertaken through: closer cooperation with agrarian universities and research institutes; direct involvement of leading farmers as trainers and demonstrators; joint initiatives with private and farmers' organizations; applying modern methods for extension education; appointment of household and rural economics specialists in every regional office, etc. Direct involvement of farmers and farm organizations needs to be institutionalized in priority setting, execution, and control of extension programmes at all levels. An appropriate system for public/collective/private co–financing of activities should be introduced. All of these measures would increase farmers' incentives to direct, participate, and support NAAS programmes, and eventually would increase their efficiency.

109 110 APPROACHES TO FARM/HOUSEHOLD INCOME DIVERSIFICATION FOR IMPROVED LIVELIHOOD IN CROATIA

Mario Njavro57

EXECUTIVE SUMMARY

Starting with the assumption that income and enterprise diversification can achieve better management of economic risk, stable cash flow and sustainability of rural households, this paper presents the main features of rural areas in Croatia, farm structure and performance, institutional framework, local initiatives and, through case study, the factors that lead to farm commercialisation. Croatia is a predominately rural country; 85 percent of its surface is rural and about 37 percent of the total population live in rural areas. Its specific geographical position has resulted in great natural diversity of climate, relief and soils, and three different regions can be defined: Pannonian, Mountainous and Adriatic. Agriculture is the dominant activity in rural areas. Ac- cording to statistical data the agricultural sector currently contributes to approximately 7 percent of GDP of the Republic of Croatia (together with the food and processing industry it amounts to about 11 percent) and 1.95 percent of the employed population (4.16 percent food, drinks and tobacco products). According to the 2001 census the agricultural population is 245 987 or 5.54 percent of the total. The volume and structure of agricultural production have been determined by agro–ecological conditions, traditional technology, agricultural policy measures and market demand. The present volume and structure of agricultural production are the result of falling production since the early 1980s, which was especially sharp during the war. This fall in production is the result of slow adaptation to a market economy and inefficient use of resources. The largest share in the total value of agricultural production is of crops, predominantly cereals, while livestock production contributes about 40 percent of the total value of agricultural production. The contribution of family farms is of main importance in terms of the quantity and value of agricultural products. They differ greatly in socio–demographic, production and business characteristics. The farm structure is dominated by a large number of small–scale family farms. The average farm size in Croatia is approximately 3 hectares, with an average parcel size of 0.5 hectare and more than five parcels per household.

57 Faculty of Agriculture University of Zagreb, Department of Farm Management

111 Human resources are the key factor and probably the weakest link in achieving the rural economy's sustainability and competitiveness. According to age structure, the rural population is predominantly mature (20 to 59 years) but with some deterioration. Between two censuses (1991–2001) the share of young and mature populations decreased 1 percent and 3 percent respectively. During the same period, the share of elderly population (60 years and older) increased 4 percent. Farm managers are about 57 years old and almost two–thirds of them have only a primary school education (farm survey). Ageing of the population and depopulation trends in rural areas could result in irreversible consequences for villages and broader areas, and therefore demographic policy should be a priority in any future rural programmes. The low educational level presents constraints for the introduction of new technologies and diverse economic activities in rural areas. The process of concentration and reinforcement (neither at a satisfactory level nor with desirable speed) of so–called “viable family farms” is occurring. “Viable family farms” are specialized and market–oriented and some of them operate as companies or produce crafts. Such family farms possess significant resources and are managed by educated, mainly younger farmers. The economic significance of agriculture is declining. Off–farm activities, part–time jobs in industry or services or income form non–agricultural activities (pensions or remittances) are an integral part of a farm's strategic management. The share of off–farm income within total household income (in the year 2001) was about 20 percent. The share of income from other activities in the household (such as forestry, tourism and crafts) was only 1 percent, and the share ofincomefromothersources(mainlypensions)wasabout13percent.Onthenationallevel,the average share of farm income within household income was slightly above 60 percent. Croatian policy–makers have already become aware that agriculture is merely an element of rural space and that solutions must encompass support for a wider range of activities besides farming. In line with this assumption, the agricultural policy support system has recently been reformed. As a result four models were introduced. The model of rural development is aimed at protecting and improving rural livelihoods and includes programmes for the development of village areas, preservation of original and protected species, and marketing projects. The rural development programme, although described as a step forward, received some criticism. The main reasons for this are the lack of clearly developed rules regarding eligibility criteria, selection, monitoring and evaluation. Secondly, there is the problem of financing such programmes, and lastly is the fact that the model is not compatible with rules for support of rural development as applied in the EU member countries (as well as EU accession countries). The supply of programmes and activities for rural areas is satisfactory. The funds available for institutional programmes are not insignificant, but economic evaluations of their effectiveness are almost nonexistent. Many programmes overlap with other similar programmes implemented under other institutions, without sufficient coordination among them. Therefore design, financing and monitoring should be more effective in order to improve rather weak implementation. It seems that today financial sources are not a limitation for rural development. However, insufficient farm and business management skills, lack of viable investment opportunities and feasible project proposals, inadequate institutional support services (research and new technologies, extension services), collateral issues, agricultural input and equipment supply,

112 market information systems and market structures cause farmers to face serious difficulties in accessing credit to complement their own resources. Zagreb county and the family farm under study are situated in the Western Pannonian subre- gion. With road, train and air traffic infrastructure, the county is exceptionally well connected to other parts of Croatia, as well as other European countries. Zagreb County exhibits great potential for the development of crafts and SMEs, continental tourism and rural development. Its proximity to the Zagreb market (with more then one million consumers), gives family farms and rural households an extraordinary opportunity for market realization of produce surpluses. The county is also well known for its crafts, where it enjoys a long tradition, and as a tourist destination. Socially, demographically and economically, Zagreb County is one of the most developed counties in Croatia. Zagreb County (including the city of Zagreb) produces more then one–tenth of agricultural value in Croatia. The majority of Croatian livestock production, fruit production, vines and pastureland are concentrated in Zagreb County. Nevertheless, the level of agricultural production is unsatisfying, operating below its current potential, and more importantly below current market demand. Determination of the key factors that influence commercialisation, specialization and/or diversification processes was the main goal of the case study and these have been presented through qualitative analysis of production, marketing, management and the related institutional policy framework. The analyzed farm is involved in crop and fruit (apple) production, animal food processing, drying and storing facilities and retail business (as suppliers of agricultural inputs to local agricultural producers). In many respects the farm is an above–average family farm in Croatia and shows a good example of on–farm enterprise diversification and vertical integration of production. Strategies that led the farm to its present position are of a dual nature. One is the attempt to avoid risk in a single activity (e. g. only apple production), and another is to retain as much profit as possible in the chain from field to market. Commercialisation and vertical integration in the food chain may be solutions suitable only for a limited number of well–organized, equipped farms with borrowing capacity and skilled management. Possible solutions for farmers who do not meet such conditions might include alliances with other farmers in the form of cooperatives, or contract arrangements with agribusiness. Low competitiveness of the key rural sectors, depopulation and unfavourable age, and the educational and gender structure of rural residents seriously limits programmes and actions to support rural development. Changes are necessary on the institutional level by securing land privatization, consolidation and better functioning of the land market. Investments in rural infrastructure (transport, communication, health and education) are necessary while fiscal incentives for rural populations and rural business issues should be taken into consideration. Existing polices, programmes and activities should be better coordinated, controlled and monitored in order to achieve greater funding effectiveness. Administrative credits and preferential interest rates give the wrong signals and influence inefficient resource allocation. Prudential regulation and types of guaranty funds suitable for rural areas could attract more interest from financial institutions in rural lending. Savings and credit cooperatives are currently unimportant. As an important source of loans they must receive more attention and should be stimulated. The supply of training and additional educational opportunities, especially in economics, are necessary. They must be accompanied by a rural market information system. The role of such business intelligence systems could include the collection, dissemination and analysis of

113 business opportunities of interest for rural populations such as rural tourism, ecological production, traditional agricultural and food products, and crafts.

INTRODUCTION

Croatia is a Mediterranean and Central European country. Albeit a territorially small country (comprising a total area of 56.5 square kilometres and the area of coastal sea is about 32 square kilometres), its geographical position has resulted in three clearly defined regions: the Pannonian, Mountainous and Adriatic. The Pannonian region has a typical continental climate and it is the traditional grain and livestock production area. At the same time, it is the most in- dustrially developed part, especially around Zagreb, the capitol of Croatia. The Mountainous region separates the Pannonian and Adriatic regions. It is economically less developed, but with good conditions for wood and timber industry and potentially viable in some aspects of rural tourism. The Adriatic region has a Mediterranean climate. Tourism is the main economic activity, supplemented by agriculture and fishery. Vegetables, fruits, olives and olive oils, grapes and wine are the most important products in the coastal area while sheep and goat breeding prevails in the hinterland. It should be noted that significant differences in living conditions exist across theseregions.Therearemanyreasonsforthis.Someofthemaresubjecttolessfavourablenatu- ral conditions, negative agricultural and industrial production indices, depopulation, inadequate and/or unavailable infrastructure and war damage. Croatia is a predominately rural country. According to the EU measurements (the level for qual- ifying as a rural area is 100 inhabitants per square kilometre), about 85 percent of its surface is rural (5 300 settlements or 78.6 percent of Croatia's total) and about 37 percent of the total population lives in rural areas. The transition and privatization processes, concurrent with war damage and market shrinkage have influenced the agricultural structure, human and capital resources. The dual agricultural structure consists of small and fragmeted family farms and, at the other extreme, large state farms (agrokombinats). Small family farms typically exhibit an unfavourable educational, age and sex structure of farmers and poor managerial skills. Despite the fact that the transition and privatization processes started more than a decade ago, the largest agricultural conglomerates arestillunderstateownership, highlyindebtandwithoutaclearprivatization strategyorfuture business development. Recently, to a smaller extent, commercially–oriented farms run by young and educated farmers have appeared. In addition to the above–mentioned problems, constraints in agriculture are high production costs,arigidfiscalsystem,inefficientlegalsystemandlackofaccesstobankloans.Theproblem of loan collateral in agricultural lending is aggravated by the lack of a functional land market and poor land registers. Monopolistic market structures, inefficient trade and distribution channels for farmers, and inappropriate agricultural education, advice, training and organizational forms such as cooperatives further contribute to insufficient competitiveness. Rural development is constrained by a sluggish non–agricultural economy which does not provide sufficient alternative employment opportunities. Croatian policy–makers have already become aware that agriculture is just one element of rural space and that solutions must encompass support for a wider range of activities besides farming.Amorediversifiedruraleconomyshouldprovideadditionalemploymentopportunitiesand additional income for rural populations, and in line with this some policies and support

114 programmes aimed at sectors such as rural tourism, forestry, small– and medium–sized enterprises and crafts have already been prepared or implemented. Beginning with the hypothesis that income and enterprise diversification can reduce economic risk and promote stable cash flows and sustainability of rural households, this paper presents possibilities for income diversification in Croatia, institutional attempts for promotion of diversification and a case study of a family farm. Followingtheintroduction,thispapergivesanoverviewofagricultureinCroatia.Basedonoffi- cial statistical data and scientific research, the role of agriculture in the Croatian economy is described. Subsequent sections include figures on human factors in rural areas, and present farm structures and their performance. Facts presented here are based on Farm Survey data. The paper then addresses existing rural programmes with the potential for family farm development, creation of a broader income base, and their influence on rural households' sustainability. It alsoattemptstogiveadeeperanalysisofsuccessfulincomeandenterprisediversificationonthe family farm and household. The paper then describes the main features (climate, land relief, agricultural production and rural space) of the region under study – Zagreb County. This is followed by a description of rural support programmes in the region (county) and its effects on rural development, and presents the case study of a large commercial family farm. The final section presents some conclusions and recommendations. It evaluates the current situation in rural areas, the role and influence of rural programmes and capacities for conducting such programmes. Attention is given to the estimation of entrepreneurial skills among rural populations. The author gives recommendations for necessary support and assistance in rural areas.

THE SETTING

According to statistical data the agricultural sector currently contributes to approximately 7 percent of GDP of the Republic of Croatia, and together with the food and processing industry it amounts to about 11 percent. Approximately 1.95 percent of the total employed population of the Republic of Croatia are employed in agriculture and 4.16 percent of the total (65 299 persons) are employed in the production of food, drinks and tobacco products. The agricultural population, according to the Census of Population Households and Apartments of 31 March 2001 (hereinafter referred to as Census 2001) amounts to 5.54 percent of the total population and a total of 245 987 persons are in this category. The contribution of the agricultural, hunting and forestry sectors to total revenue generated in the Croatian economy in the year 2001 varied only between 2–7 percent. Although it should be noted that this applies only to registered business entities and the share of agriculture could be (and probably is) higher because of the high number of unregistered farms. The manufacturing sector, together with the wholesale and retail trade and repair sectors contributed on average from 63 percent to 70 percent of total regional revenues (Rural development strategy – draft version). The total area of agricultural land in Croatia is 3 155 690 hectares, out of which 66 percent are privately owned (2 089 253 ha). The rest is under state ownership (1 066 437 ha or 34 percent). Within the agricultural land structure the largest share is of arable land and gardens (46.4 per-

115 cent), then pastures (36.6 percent), meadows (12.9 percent), orchards (2.2 percent) and vineyards (1.9 percent). Family farms cultivate about two–thirds of agricultural land. Furthermore, family farms possess the largest area of orchards and olive groves (96 percent), followed by vineyards (92 percent), meadows (84 percent), arable land (80 percent) and pastures (40.5 percent). The rest of the land is generally owned by the state and used by companies either in state or private ownership.

Table 1: Agricultural land by type of cultivation in Croatia Average 1997–2001

Agricultural Arable land and Orchards1 Vineyards Meadows Pastures land gardens Thousand hectares 3 120 1 430 69 59 414 1 147 Share ( %) 100.00 45.83 2.21 1.89 13.28 36.79 Family farms' share (%) 66.42 79.59 95.65 91.51 84.41 40.50 1 Olive groves are included. Source: Calculated according to Statistical yearbook 2002, p. 238. Regionally, the Pannonian region has the largest area of agricultural land as well as arable land, ploughland and meadows. Horticulture is dominant in the coastal areas and the share of orchards and vineyards is higher than is the case with other land types. In the Mountainous region meadows and pastures (not presented in Table 3) are of importance. The share of uncultivated (or unused land) is significant and exhibits an increasing trend. The Agricultural Census 2003 reveals about 96 000 hectares of uncultivated land. Another source (Rural development strategy – draft version) claims that in the year 1999, 36.6 percent of the overall agricultural area, of which 688 000 hectares were state–owned land (mainly pasture), was not cultivated. According to the same source the situation is worse in the Adriatic and Mountainous regions where more than half of the surface area is not regularly tilled. The main reasons for such a situation could likely be found in the intensive out–migration of the population,thelowprofitabilityofproductiononfarmsandthehazardoflandmineswhichstillexist.

Table 2: Allocation of state land according to approved programmes as of June 2003

No. Type of allocation Area (ha) Structure (%) 1. Denationalization 44 317.99 11 2. For sale 174 962.30 42 3. For rent 75 027.72 19 4. For long–term lease 98 939.71 25 5. For other purposes 10 366.29 3 Total 403 614.01 100 Source: Ministry of Agriculture and Forestry. The agricultural land ownership, market, property rights and registry system are great obstacles to efficient production and organization. A large number of farms are small–sized with unfavourable land structure; i.e. the average size of a private farm in Croatia is about 3 ha, with an average parcel size of about 0.5 hectare and more than 5 parcels per household, very often located far from each other. Problems with land market issues are linked to unclear land owner-

116 ship, poorly functioning leases and incomplete privatization of land utilized by former state agricultural companies – a relatively large share of remaining state land (one–third of land area). In addition, inappropriate succession legislation, an undeveloped land market due to an ineffective cadastre and land registry system, related bank loan collateral problems, fragmented land parcels and lack of adequate infrastructure (access roads, drainage systems, etc.) exist. To- day'slandpolicyisconcernedmainlywithstatelandandsolvingproblemsinconnectionwithit. The private land market, long–term financing or credits for buying land (either private or state) and similar issues have yet to be tackled. Family farms have priority in denationalization, rent and sale: therefore, one can say that 72 percent of state land is designated for this sector. Legal entities (including former agrokombinats)havepriorityover25percentofstateland.Thesaleofstatelandisaccompanied by loan programmes. These are long–term loans with significantly better terms than commercial loans. The volume and structure of agricultural production have been determined by agro–ecological conditions, traditional technology, agricultural policy measures and market demand. The present volume and structure of agricultural production are the result of falling production since the early 1980s, which was especially sharp during the war. The decline in production is the result of slow adaptation to a market economy and inefficient use of resources. The largest share in the total value of agricultural production is in crops, mostly cereals, while livestockproductioncontributesabout40percentofthetotalvalueofagriculturalproduction.

Table 3: Cropping pattern of arable land and gardens in Croatia 1997–2001

Type of crops 1997 1998 1999 2000 2001 Average Total land sown 100.00 100.00 100.00 100.00 100.00 100 Cereals 67.47 65.78 61.10 65.31 66.35 65.20 Forage crops 12.87 11.48 11.99 11.27 11.10 11.74 Vegetables 12.17 12.12 13.06 12.52 12.48 12.47 Industrial crops* 7.49 10.62 13.85 10.91 10.08 10.59 * Sugar beet, tobacco, oilseeds, aromatic and fibre plants. Source: Statistical yearbook 2002, p 239. Almost two–thirds of arable land and gardens are under wheat, followed by forage crops, vegetables and industrial crops with approximately equal shares (10–12 percent). Livestock production in Croatia is characterized by low yields and quality. Farm Survey data show the importance of livestock production on family farms, but in many cases it is practised for self–consumption purposes. As an illustration, 70 percent of the family farms in the sample own cows, 22.9 percent produce calves and 16.9 percent fatten calves. The average production per cow is small, only 2 053 litres, which includes sold and home–consumed milk. The family farms' typology shows that 31.52 percent of them are specialized in some sort of livestock production, while 23.02 percent are mixed livestock farms. In addition, with regard to the size of the farms, very small livestock farms (37 percent) and small farms (32 percent) prevail.

117 Table 4: Livestock in Croatia 1997–2001

Livestock and poultry, '000 animals Year Cattle Pigs Sheep Poultry 1997 451 1 176 453 10 945 1998 443 1 166 427 9 959 1999 438 1 362 488 10 871 2000 427 1 233 528 11 256 2001 438 1 234 539 11 747

Source: Statistical yearbook 2002, p 237.

Table 5: Family farms and households by total available land

Groups of agricultural households by total Number of households available land* Percent Total 448 532 Up to 0.10 ha 40 361 9.00 0.11 – 0.50 ha 121 734 27.14 0.51 – 1.00 ha 65 339 14.57 1.01 – 2.00 ha 71 933 16.04 2.01 – 3.00 ha 40 129 8.95 3.01 – 5.00 ha 45 732 10.20 5.01 – 10.00 ha 42 426 9.46 10.01 – 20.00 ha 15 628 3.48 Over 20.00 ha 5 250 1.17

* Utilized agricultural land (owned + rented – rented out) + other land. Source: Agricultural census 2003, Croatian Bureau of Statistics.

FARM STRUCTURE AND PERFORMANCE

Croatian agriculture is characterized by the dual nature of ownership and production. In agricultural production the following organizational types exist: a) family farms, b) trade companies, c) crafts, and d) cooperatives. The contribution of family farms is of primary importance in terms of quantity and value. But family farms differ greatly in socio–demographic, production and business characteristics. Generally, the farm structure is dominated by a large number of small–scale self–sufficient family farms. According to the Census from 1991 Croatia has about 534 000 farms with an average size of 2.8 hectares, which are often split into nine or more plots. The Agricultural Census 2003 showed a slight decline in the number of family farms (households with agricultural production). There are 448 532 family farm households. They cultivate about 860 000 hectares of agricultural land, out of which 83 percent or about 720 000 hectares islandinfamilyfarmownershipandtherestisrentedout.Theutilizedagriculturallandareaper farm is small, on average 1.9 hectares. The number of land plots per farm is 4.2. On average farms have 0.8 cows, 3.8 pigs and 23.3 chickens.

118 It seems that commercially–oriented family farms (included in the Farm Survey58 project) have better indicators in land use, production and equipment. For example, the average land area of surveyed farms was about 12 hectares. Nevertheless, land fragmentation is still high and on average, farms had almost 13 land plots of total land, with the average size of arable land plots being 1.04 ha. Family farms located in the Pannonian region (average size 9–17 ha, consisting of 8–10 plots) were characterized by a much better farm structure compared with family farms located in the Mountainous region (average size 11 ha per farm, consisting of 21 separate plots) or the Mediterranean region (average size 8 ha per farm, consisting of 18 plots). In addition, the surveyed farms had on average five cows and 1.4 two–axle tandem tractors. At any rate, all presented data are higher in value than those found in the Agricultural Census, and we could hy- pothesize that the processes of concentration and development of so–called “viable family farms” are occurring. “Viable family farms” are specialized and market–oriented and some of them operate as companies or small businesses. Such family farms possess significant resources and are managed by educated, mainly younger farmers. Figure 1: Family farms by type of farming and economic size of farming

Source: Farm Survey.

58 Project “Farm Survey” has started in 1998 with the goals for determination of main capable resources on farms, production and development level. The sample was drawn from the 1991 Census and according to the following rules: each farm must have at least four hectares of arable land, at least one family member employed full-time on the farm and be engaged in significant agricultural production. Based on the mentioned criteria from a total of 525 253 family farms, 75 000 family farms were chosen and a sample was drawn of 892 of them. The survey takes place over the entire territory of Croatia, and for the purpose of the survey the territory is divided into four regions: Pannonia – eastern part, Pannonia – western part, Hilly–mountain region and Mediterranean region.

119 Based on the Farm Survey, the attempt to classify family farms in line with the typology used in FADN has been made. The expectation that mixed farms dominate has been approved. Accord- ing to the type of farming, most farms are of mixed crop–livestock (19.27 percent), mixed livestock(23percent)andmixedcroppingtypes(5percent).Almost70percentoffarms,according to the economic size of farming, are classified as very small or small. The analysis regarding regions did not show any significant differences in specialization and the economic size of farming. Capital–intensive productions and activities that demand a higher level of knowledge and investment generate more income and seem to be more profitable. For example, on the farms specialized in vegetable production, income was three times greater than those in mixed production. Source: Farm Survey. Farms specialized in vegetable production, pigs, poultry and permanent crops have a higher share in the group of medium and large farms. Indicators of profitability were higher on farms with mixed production as the result of lower farm resources value. The average profitability r159 of family farms with livestock production was 6.58 percent and the average r260 was 17.32 percent.

Table 6: Family farm profitability (1999)

Farm income Net household income Engaged means r1 r2 Croatia – all farm types 2 273.12 6 046.32 61 095.98 5.94 16.73 Source: Farm Survey. The fact that the profitability indicator r1 on family farms with mixed production (mixed livestock holdings: 8.47 percent and mixed crop–livestock: 7.58 percent) is higher than the same indicatoronspecialistfarms(specialistgrazinganimals:4.05percentandspecialistgranivores: 6.51) could be explained by insufficient production efficiency and insufficient use of capacity. At the same time the indicator r2 is higher on specialized livestock farms. It is the result of incomes from other activities inside and outside of the household. In most cases off–farm activities, part–time jobs in industry or services or income form non–agricultural activities (pensions or remittances) are important for the survival and development of family farms. Income base diversification is not just a risk management tool but an integral part of a farm's strategic management. The farm survey shows the importance of non–agricultural sources of income in the households. For illustration purposes, the share of off–farm income in total household income (in the year 2001) was about 20 percent. The share of income from other activities in the household (such as forestry, tourism and crafts) was only 1 percent and the share of income from other sources (mainly pensions) was about 13 percent. On the national level, the average share of farm income in household income was slightly above 60 percent. The households that belong to a higher net income class have a higher proportion of income realized by activities outside the household (employment) and higher values of capacities.

59 Ratio between farming income and engaged means. 60 Ratio between net household income and engaged means.

120 Figure 2: Family farm profitability by types of farming

Source: Farm Survey.

Table 7: Basic economic results of family farms and households (average 1998–2001)

Net Gross Gross Net Farm household household farm household income Region N income income income income share per person HRK HRK HRK % HRK CROATIA 891 72 191* 44 930 55 578 12 721 61.67 Mediterranean 65 127 459 91 463 100 271 20 865 71.08 Mountainous 82 74 207 35 850 57 414 14 523 48.44 Pannonian A 245 68 908 47 809 52 184 12 503 68.52 Pannonian B 499 66 269 38 948 51 117 11 451 58.23 * Equivalent of EUR 9 600 per year. Source: Farm Survey, 1999–2002. Expressed in terms of age, education, management and entrepreneurial skills and such, human resources are the key factor and probably the weakest link in achieving the rural economy's sustainability and competitiveness. According to age structure, the rural population is predominantly mature (20 to 59 years). Between two censuses (1991–2001) the share of young and mature populations decreased 1 percent and 3 percent respectively, while the share of the old population (60 years and older) increased 4 percent. Farm managers are about 57 years old and almost two–thirds of them have only a primary school education (Farm survey). The low educational level is one of the primary constraints in the process of introducing new technologies and new economic activities to rural areas. Improving and raising the level of knowledge among rural populations is one of the key points in accelerating rural development. Different programmes in this direction exist and they are aimed at improving knowledge of production technologies, introduction of new agricultural systems (e. g. ecological production) and occasionally deal with issues such as food safety and related regulations. Programmes of this kind are conducted by agricultural advisory services, governmental or local agencies,

121 international organizations and consulting companies. Management and entrepreneurial skills are rarely the subjects of training programmes. The author has often witnessed the serious lack of basic agricultural economics knowledge among farmers and their orientation toward production rather than toward markets and market demand.

SUPPORT POLICIES INSTITUTIONS AND SERVICES

Agricultural policy in Croatia is currently based on the following acts: Law on Agriculture, Law on Agricultural Land, Law on Ecological Agriculture and Strategy for Agriculture and Fishery. The Law on State Support in Agriculture, Fishery and Forestry classifies farms into commercial or non–commercial groups (on the basis of minimal production capacity). In line with this, the agricultural policy support system has been recently reformed. As a result these four models were introduced: • model of production support; • model of income subsidy; • model of capital investments; and • rural development model. The model of production support includes: stimulation of farming field crops, stimulation of planting material, plantations and olive oil, stimulation of cattle breeding and cattle products, stimulation of feathered game breeding, stimulation of ecological production and stimulation of fishery. The beneficiaries ofincome subsidy in terms of the model for income subsidyare non–commercial agricultural estates which hold possession of or use 3 hectares of cultivated agricultural fields, andhavethestatusofaninsuredpersonforpensioninsuranceforagricultural workers, whoare at least 50 years of age for women, and 55 for men. The amount of annual subsidy income for the beneficiaries is HRK 7 200. The model of capital investments in agriculture aims to stimulate commercial bank credit for investments in agriculture with the goal of establishing dynamic and competitive commercial farm production. The Ministry proposes to participate in the model with a non–recoverable grant to farms together with the provision of a fixed subsidy for each bank loan that is given in order to cover the costs related to loan appraisal. All other bank loan terms (interest rate, repay- mentperiod,andgraceperiod)willbebasedonacommercialbank/farmerclientrelationship. In addition, the main sources of finance for farmers are: government and public government–sponsored agencies (Ministry of Agriculture and Forestry, Croatian Bank for Recon- struction and Development, Ministry of Crafts, and Small and Medium Enterprises to mention a few), international development and donor institutions61, commercial and other financial institutions such as banks, savings cooperatives and credit unions, and business companies (trade finance credits). However, insufficient farm and business management skills, lack of viable investment opportunities, feasible project proposals, inadequate institutional support ser-

61 World Bank, European Bank for Reconstruction and Development, United Nations Development Program, U. S. Agency for International Development, EU programmes, etc.

122 vices (research and new technologies, extension service), collateral issues, agricultural input and equipment supply, market information systems and market structures cause farmers to face serious difficulties in accessing credit to complement their own resources. The model of rural development is aimed at saving and improving rural areas and includes the following programmes: a) the development of village areas, b) the preservation of original and protected species, and c) marketing preparations of agricultural products. The aim of the programme of village areas is the development of these areas by ensuring the suitable working and living conditions and the preservation of natural and cultural heritage. The aim of the programme for preservation of original and protected species is the improvement of the production of original and protected Croatian species of domestic animals. The aim of the programme of marketing preparations of agriculturally nutritive products is the stimulation of their sales. The rural development model aims at co–financing the local self–government development projects that relate to sustainable rural development. The basic means of the model's implementation is the pooling of resources from the MAF budget and county resources, local communities, users and other possible resources (foreign subsidies, technical support). The rural development model includes ten measures: • restorationanddevelopmentofvillages,culturalheritageandcustomspreservation; • farm subsidies support; • education, upgrading and training; • land management measures; • environmental measures in the field of agriculture and forestry; • diversification of agricultural and related activities for the purpose of multidisciplinary activities creation and alternative income resources; • stimulation and promotion of rural tourism and traditional rural crafts; • rural infrastructure improvement connected to agricultural development; • tourist vineyard roads promotion; and • promoting high–quality autochthonous products. The rural development programme, although described as a step forward, primarily lacks clearly developed rules regarding eligibility criteria, selection, monitoring and evaluation. Sec- ondly is the problem of financing such programmes, and finally is the fact that the model is not compatible with rules for the support of rural development applied in the EU member countries (as well as EU accession countries). In terms of the budget for 2004, approximately HRK 15 million (approximately EUR 2 million) were allocated for activities linked to the rural development model, of which HRK 3.75 million (25 percent) will be utilized in support of native protected breeds (i.e. promoting high–quality autochthonous products). Furthermore, co–financing from counties and local funds is sought in the amount of HRK 12 million annually). It is expected that approximately HRK 90 million will become available for rural development under the MAF during the next five years. Without the relevant institutional support, the design, implementation and success of rural policies and programmes will be limited or even impossible. In order to comply with EU standards significant changes and modernization of existing services and institutions has been undertaken, or new services have been founded.

123 Important breakthroughs havebeenmadeinthemodernization andfunctioning oftheMinistry of Agriculture and Forestry. The MAF's programmes concerning rural areas also consist of financing marketing projects, while projects financed by the Council for Agricultural Research should improve the income of the private farming community and increase its productivity, and hence the competitiveness of the sector. Under the auspices of the MAF the market information system in agriculture was established in 1997, with the objective of acquiring processes and dis- tributing market data on agricultural products to be used in the administration of policies and programmes for agriculture and rural development. The Agricultural Advisory Service has an exceptionally important role in expanding new technologies and methods of management, and transfer of agricultural knowledge and skills, techniques etc. in rural areas. For the completion of this work the Croatian Agricultural Advisory Service was founded in 1997 (active through county branches). Yet, the number of employed consultants (on average seven per county or three to four per 100 000 family farms) is much too low for any stronger impact of this service on the development and adaptation of Croatian agriculture. Aside from the Agricultural Advisory Service, the list of institutions and services with the goal of improving agriculture especially on family farms consists of the following: Croatian Livestock Selection Centre, Centre for Reproduction in Croatian Livestock Breeding, Centre for Plant Protection in the Agriculture and Forestry of the Republic of Croatia, Institute for Seed Produc- tion and Nursery, and Institute of Viticulture and Wine Production. Institutional presence, primarily of economic interests of agricultural manufacturers, despite the great number of associations, is still neither functional enough nor developed on the basis of partnershipwithofficialmanagingoffices,especiallytheMinistryofAgricultureandForestry. In the Croatian Economic Chamber (HGK) the business interests of agricultural companies, associations andotherlegal people arerepresented bythesector foragriculture, food industry and forestry whose members are connected to associations, councils and groupings. A large portion of agricultural manufacturers, family entrepreneurships, do not belong to this chamber. There are a few associations, unions and societies active in promoting the social and economic interests of farmers, organized mostly through the initiative and support of individual political parties. However, they are considerably uncooperative in presenting farmers' interests. Besidesinstitutionsonthenationalleveltherearelocalinstitutionsandservice–orientedoffices for economy, agriculture and rural development organized at the county, town or municipal levels. Besides the MAF, other ministries, government agencies and bodies are also involved in “rural programmes”. Some of the important ones are: Ministry for Crafts, Small and Medium Enter- prises, Ministry of Tourism, Ministry of Environmental Protection and Physical Planning, and Ministry of Public Works, Reconstruction and Construction. All are involved in programmes for rural areas through credit lines, grants, and different kinds of service, but unfortunately operate without sufficient coordination. Furthermore, on the lower, local, levels officials manage different programmes for agriculture, SMEs, tourism and the like. Generally, a weak interaction is present, especially between the MAF and local offices, regarding initiating and forming joint development programmes for regions and villages. The small funds that are set aside from county (city) budgets are insufficient for ambitious programmes of regional and rural development.

124 TherearemanyformsofruraltourismavailableinCroatiawhichseemespeciallyattractiveboth for domestic as well as foreign tourists, e. g. hunting, fishing, sport and recreation etc. On the other hand, other forms of rural tourism, e.g. agrotourism are much less popular and their development will very much depend on progress made in areas such as: improvement of local infrastructure, quality of general services, marketing, information etc. In line with this, the Ministry of Tourism has worked out a programme of employment, encouraging the development of small– and middle–scale entrepreneurship and preventing a grey economy in tourism, which encourages measures for self–employment and the development of small family farms as well as SME entrepreneurship in tourism, and also favours development of agro– and rural tourism on rural family farms (although no such farms have applied for credit). In most cases agriculturaltourismisasecondaryactivitycarriedoutonafarminadditiontoprimarilyagricul- tural production. Yet, a farmer's decision to be involved in tourism is guided primarily by a wish to increase profits though selling their products directly on their farms, which in many cases reduces the costs of sale as well as eliminates the middlemen. On the other hand, diversification of activities (supply side) and improvement of the quality of other services for potential tourism (demand side) are usually not sincerely considered. Besides Croatian institutions, a number of international organizations and agencies such as the United States Agency for International Development (USAID), the United Nations Develop- ment Programme (UNDP), World Bank and EU programmes provide technical support, grants, donations, loans and training. In the main, the focus of international organizations' interest was on economic renewal in war-affected areas. Economic activities in these areas (which are exclusively rural) have been fostered by donations and loans, by promotion of cooperative organizations and offering additional training, by offering expert management help, and designing business plans and marketing strategies. With time the scope of work will be transferred to the entire territory of Croatia with emphasis on agricultural marketing linkages, raising productivity in agriculture and achieving food safety (e. g. USAID, Agribusiness Com- petitiveness Enhancement project). The World Bank is financing the extremely important Real Property Registration and Cadastre Project. The objective of the project is to install an effective land administration system with the specific purpose of contributing to the development of functional real property markets. This will be achieved by supporting the real property registration systems in municipal courts and the cadastre system that is operated by the State Geodetic Administration Office at regional and branch levels, and the Zagreb City Cadastre Office. The total land area that is proposed to be covered by the project for registration renewal, correction and harmonization is approximately 250 000 ha, consisting of about one million separate parcels and benefiting about 360 000 persons, including 110 000 land owners. Available funds for institutional programmes are not insignificant, but economic evaluations of their effectiveness are almost nonexistent. Many of the programmes overlap with other similar programmes implemented under other institutions, without sufficient coordination between them. Only some basic physical indicators of programmes implemented by different institutions exist. Therefore design, financing and monitoring should be more effective in order to improve rather weak implementation.

125 ENHANCING RURAL LIVELIHOOD – – ISSUES AND PERSPECTIVES FOR ZAGREB COUNTY

Zagreb County is geographically placed in the central part of Croatia and together with the City of Zagreb comprises a metropolitan area, space and functional units while retaining local spe- cifics. With its position and shape the County creates a ring around the City of Zagreb. The County is exceptionally well connected with other parts of Croatia via road, train and air traffic infrastructure, as well as with European countries. With its eight towns and 26 municipalities Zagreb County occupies about 3 000 square kilometers. According to the 2001 Census, 304 000 inhabitants live in Zagreb County and the average population density is 101 inhabitants per square kilometre. Due to its position near Zagreb, the County is an attractive space for newcomers. The majority of the population lives in rural settlements (69 percent). Every second household is an agricultural household and about 12 percent of the population are farmers. About two–thirds of the agricultural population is active and one–third is dependent. When speaking about agriculture in Zagreb County it should be noted that the share of the agricultural population is 6.68 percent of the total, and that 11.46 percent of the total employment force works on its own family farms.

Table 8: Zagreb county – population, households and area

Zagreb county Croatia Share in Croatia (%) A. Population 1. Census 1991 282 989 4 784 265 5.91 2001 309 696 4 381 352 7.07 Index 2001/1991 109 92 120 2. Natural increase of population*2000 –220 –6 500 3. Vital index** 2000 93 87 107 4. Number of inhabitants per sq km 1991 92 85 109 2001 101 77 131 B. Households 1. Number of households 1991 86 113 1 544 250 5.58 2001 94 441 1 474 298 6.41 Index 2001/1991 110 95 115 2. Number of members per household 1991 3.29 3.10 106 2001 3.27 2.97 110 Index 2001/1991 99 96 C. Surface (sq km) 3 067 56 610 5.42 *Difference between live born children and number of deaths. ** Number ;of live born per 100 deaths. Source: Statistical yearbook of the Republic of Croatia 1998, 2001; Croatian State Bureau of Statistics (in: Kraljickovic J: Poljoprivreda, ruralni razvitak i sumarstvo u Zagrebackoj zupaniji).

126 Zagreb County has great potential for crafts and SME development, potential for development of continental tourism and, throughout all mentioned, rural development. Its proximity to the Zagreb market (with more then one million consumers), gives family farms and rural households an extraordinary opportunity for market realization of produced surpluses. The county is also well known for its crafts, where it has a long tradition, and as a tourist destination. Socially, demographically and economically, Zagreb County is one of the most developed counties in Croatia. In the year 2001 about 12 000 legal persons were registered in Zagreb County and 5 313wereactive.OftotalrevenuesinZagrebCounty(HRK 11.5billion),mostwereearnedinthe business sector: trade, repair of motor vehicles and objects for households (59.1 percent) and in the processing industry (23.7 percent). These are followed by civil engineering, agriculture, forestry and fishery, transportation, storage and communications.

Table 9: Family farms in Zagreb County by total available land

Groups of agricultural Number of households Percent of households Percent of households households by total with agricultural Total available land in total available land in total available land available land production in the County in Croatia Up to 0.10 ha 2 177 139.8 0.133 9.00 0.11 – 0.50 ha 8 350 2 213.69 2.102 27.14 0.51 –1.00 ha 5 374 3 948.84 3.750 14.57 1.01 – 2.00 ha 6 837 9 947.27 9.446 16.04 2.01 – 3.00 ha 4 177 10 320.15 9.801 8.95 3.01 – 5.00 ha 5 106 19 871.33 18.871 10.20 5.01 – 10.00 ha 4 581 31 709.83 30.113 9.46 10.01 – 20.00 ha 1 417 18 597.24 17.661 3.48 More than 20.00 ha 264 8 553.13 8.123 1.17 Total 38 283 105 301.28 100.000 100.00 Source: Agricultural Census 2003, Croatian Bureau of Statistics. Zagreb County is endowed with favourable conditions for agricultural production. This is primarily the result of the continental climate, pumped water sources, available agricultural land and forests, tradition and the very crucial proximity of the largest market in Croatia – Zagreb, with a potential of one million consumers. Arable land and gardens in Zagreb County occupy 100 252 hectares. About 90 percent of its agricultural land (data for the year 2001) was sown, mainly with grains (67 percent). Zagreb County (together with the City of Zagreb) produces more than one–tenth of agricultural value in Croatia. The majority of Croatian livestock production, fruit production, vines and pastures are found in Zagreb County. Nevertheless, the level of agricultural production is unsatisfying and below current potential, and more importantly below current market demand. According to the 1991 Census there were 43 000 family farms in Zagreb County. The 2003 Agri- cultural census indicates that the number of family farms is 38 283. The average farm size was 2.9 hectares and farms with 5 hectares of agricultural land prevailed. The total available land according to the 2003 Agricultural Census is 105 000 hectares, which results in an average farm size of 2.7 hectares. In the year 1991 more than one–fourth of family farms used up to 1 hectare of agricultural land and only 2.5 percent of family farms used more than 10 hectares. The Agri- cultural Census indicates that Zagreb County has a much better farm structure than was the case in the year 1991. The farm structure according to land size is also much better compared

127 with the rest of Croatia. More than 50 percent of farms are in the group between five and 20 or more hectares. The Croatian average in that group is only 14 percent. Exclusive income from agriculture was exhibited on only 16 percent of family farms. Mixed sources of income were earned on 19 percent of farms and 63 percent earned their main income from non–agricultural activities. An insignificant number of family farms had younger members below the age of 30, and nearly 20 percent of family farms had neither family members younger than age 65 nor non–agricultural sources of income. Former data showed that agriculture was still a way of life, but a commercial activity as well. Table 12 presents a comparison of business results according to farm types between Zagreb County (city of Zagreb included) and Croatia. Keeping in mind the tradition of livestock breeding in the County, as well as limitations in sampling and data collection methodology, a significant share of specialist grazing livestock animals is expected. A high share of farmers in permanent crop types is also realistic, although (negative) farm income and net household income on such farms could be the consequence of high cost and low yields or high depreciation values (net household income). Except for specialized (poultry and pigs) farm types, incomes from other farm types are smaller than is the case in other parts of Croatia. The average for all farms shows the great influence of non–farm activities and their importance in households. The percent of farm income in the net household income in Croatia in the year 1999 (all farms) was 76 percent, while the same percent in Zagreb County was 60 percent.

Table 10: Zagreb county– business results according to type of farming

Number Farm Income Net household income ESU (average) Zagreb Zagreb Zagreb Zagreb Croatia (County + Croatia (County + Croatia (County + Croatia (County + + City) + City) + City) + City) Permanent crops 79 10 26 681.87 –2 802.95 36 549.26 –11 656.36 9.31 6.88 Mixed cropping 46 1 64 888.84 38 968.00 68 573.14 27 001.81 6.41 0.87 Mixed livestock holdings 203 13 35 330.32 6 005.115 46 831.20 34 266.36 10.57 16.69 Mixed crops – livestock 170 7 27 635.22 24 433.00 38 974.61 52 364.94 7.17 6.63 Specialist granivores 53 2 47 001.61 385475.50 58 391.67 245 573.50 7.83 8.33 Vegetables 36 3 68 921.53 116 868.30 72 130.00 117 335.27 12.03 14.82 Specialist grazing livestock 225 50 27 088.74 14 237.05 43 962.86 37 223.00 11.11 10.48 Specialist field crops 70 1 41 504.08 –5 565.00 38 053.96 48 200.00 6.07 4.19 All farms 882 87 35 74.05 23 998.61 45 828.83 39 942.05 9.26 10.60

Source: Farm Survey 1999. The lesser importance of farm income within household income could be explained by more multi–activity and employment opportunities for households in the Zagreb area as compared to other parts of Croatia.

128 Figure 3: Zagreb county – business results according to type of farming

Source: Farm Survey 1999.

The County government recognized the importance of agriculture, constituted in the Adminis- trative section for agriculture and forestry and rural development62 and allocated significant funds from its budget to agriculture (more then 10 percent). Last year the County budget for the above–mentioned projects was HRK 8.8 million. Together with forestry and hunting the total was HRK 10 477 million. Zagreb County through its Administrative section for agriculture and forestry also recognizes problems and the necessity for holistic approaches to rural space, and has initiated different kinds of programmes that could influence income generation, diversification and stability. Some of these programmes are: 1) Marketing projects: different projects aimed at the creation of county brand names such as county wine, county cheese, “Samobor salami,” wine roads, apple vinegar production, hydro- ponic vegetable production, line productions and line products etc. Projects are divided into: • Projects for creating county brand names – The main goal is the creation of well–known and valuable regional products and to help family farms to achieve higher and more stable incomes. These projects are: project for creating county wine

62 At the local level, special sections for agriculture as a part of local governments were established only in a few counties. Zagreb county is one of them.

129 brands (“Portugizac Plešivica” and “Kraljevina Zelina,” involving about 37 family farms); b) project for creating county brand of manufactured vegetable (sour cab- bage); c) county cheese – involves four small dairies and about 1 000 family farms; d) “Samobor salami”; e) county wine roads, involving 42 farmers; f) improving Char- donnay wine technology; and g) line production and processing; • research projects; • a grouping that incorporates 16 different projects for development, from agriculture and forestry, ecology, culture and infrastructure; • promotion; • creationofdifferentpromotionalmaterials,books,Webpages,souvenirs,fairsetc.; • credit for entrepreneurs and farmers; and • other projects including various activities (co–financing, seminars, supports) aimed at entrepreneurs and innovators, protection of autochthonous flora and fauna, agricultural cooperatives and associations, wine queen contest, contest for model farm woman, direct sales of agricultural products, etc. 2) Rural development – mainly aimed at the preservation of the county's autochthonous breeds of livestock, plants and valuable environment, then development of ecological agriculture and direct sales (marketing) of agricultural products. 3) Institutional support includes support to associations (NGOs) and cooperatives, cooperation with state and scientific institutions. 4) Land preservation and land amelioration projects. 5) Promotional projects (fairs, books, Web pages and leaflets).

FARM COMMERCIALISATION – CASE STUDY

Determination of the key factors that influence commercialisation, specialization and/or diversification processes is the main goal of case study and will be presented here through detailed analysis of production, marketing, management and related policy framework issues. In addition, future perspectives will be forecasted with an estimation of internal and external elements which could foster or slow business development plans. The case study is primarily based on qualitative analysis. Whenever possible, quantitative data and indicators are used. This case study presents production characteristics (land, enterprises, machinery and equipment and processing), human resources, marketing strategies and future plans and investments needed for realization. The farm's history has been presented with critical points in its evolution. In addition, the case study takes into consideration the business environment and evaluates both the positive and negative effects which confront the farm, such as market, production and institutional risks. Evaluation of management and entrepreneurial skills is not an easy task. Relation- ships between business results and management skills, especially outside of agriculture, could be questionable as a management success indicator. Very often “good decisions” based on ade- quateinformationmightbecancelledoutbyunpredictablefactorsinsideoroutsideofthefarm. The family farm (hereinafter referred to as the Farm) which has been chosen as the case study is situated in the small village of Lipovec Lonjski. The village is about 30 kilometers from Zagreb. A good transportation connection with Zagreb exists. Other public infrastructure is also available and enables a good living standard for the village's inhabitants.

130 The Farm is registered as trade company/limited liability company. Its name is Poljorad d.o.o. and it is involved in crop and fruit (apple) production, animal food processing, drying and storage facilities and retail business (as suppliers of agricultural inputs to local agricultural producers). Until 1992 the Farm was a so–called “classical”, mixed livestock crop–type farm. Pig production was supplemented by arable crop production. In the year 1992 the first three hectares of apples were planted. Apple production was the exclusive activity on the Farm for almost three years. In 1996, after time spent on planning and preparation, work on fodder plant facilities began.Withintwoyearsdryingfacilitiesandawarehouseforgrainswerecompleted.Dryingfacil- ities, warehouse facilities and the purchase of additional agricultural land (arable land for grain production)arecloselyrelatedtofodderfactoryactivities.Landcapacity,grainproduction,drying and storing facilities and above all the fodder factory inevitably led to the next step: contract arrangements (cooperation) with farmers that produce broilers (chicken) and fatten pigs. Ap- ple production has not been neglected, and in the period 1998-2001 three hectares of orchards were planted. The organizational structure of the Farm is present in Figure 2. The Farm does not have an official or proclaimed organizational structure, but organization is based on the farm's enterprises, which actually form profit centers. Figure 4: Poljorad d.o.o. organizational scheme

The Farm started with commercial apple production more than a decade ago (in fact, apple production began twenty years ago but as a hobby). Today the Farm possesses six hectares of modern apple orchards. Idared and Jonagold varieties prevail (90 percent), while Golden Delicious and Elstar constitute 5 percent each. Annual fruit production is about 300 tonnes per year and average yields per hectare are far above the Croatian average (below 10 metric tonnes/ha) and close to yields in the EU. Some business results in apple production are presented in Table 11. Indicators show positive results. Revenues/cost ratio is higher than one in every year. The Farm has plans to enlarge apple production on at least 10 hectares. New orchards require new and attractive apple varieties and additional modernization of technology (production system, anti–hail and anti–frost protection). Based on previous experience, the enlargement process is very slow, mainly because of land issues. The agricultural land available for purchase and situated near the existing orchard is owned by a large number of persons and usually divided into many plots. Such unfavourable land ownership structures present serious constraints and slow down the processes of negotiation and buying land. Another limitation is cooling and storage space for apples. Without cooling space the Farm must sell the apples soon after harvesting. With adequate storage space this “price taker” position would be replaced by a significantly better market position. The cost of investment in cooling space for fruits is about EUR 100 000. It is a short–term goal, and either alone or in cooperation with other local fruit producers such

131 an investment should be conducted. Fruit processing (vinegar, juice and similar products) is another potential future investment but not seriously taken into consideration as yet.

Table 11: Business results in apple production

Year 1997 1998 1999 2000 Yield (kg) 37 500 30 000 20 100 39 400 Revenues (HRK) 101 250.00 78 000.00 56 280.00 106 380.00 Total costs (HRK) 61 320.60 56 249.80 53 575.60 61 920.20 Revenues/cost ratio 1.65 1.39 1.05 1.72 Production price (HRK/kg) 1. 64 1.87 2.67 1.57 Break–even (kg/ha) 22 711.33 21 634.54 19 134.14 22 933.41

Source: Bunjevac, H. (2001): Economics of apple production (graduate work). Besides apple production, the Farm produces crops on 75 hectares of arable land (50 ha of its own land, and 25 ha is leased). In the last production year they produced 50 tonnes of corn and 12.5 tonnes of wheat. The average corn yield was 10 tonnes per hectare and the average wheat yield was 5 tonnes per hectare. The Farm owns all the necessary machinery: tractors (one single–axle tandem tractor and five two–axle tandem tractors), three cars, a truck, and all necessary equipment: ploughs, trailers, planters, fertilizer placement drills, etc. Nearly all of the wheat and corn production was processed as animal feed. Last year they produced 1 200 tonnes of feed. Contract arrangements with livestock producers (of chicken and pigs) will probably be replaced to some extent by the supply of their own broiler farm (with a capacity of 50 000 chickens). The investment value of this venture is approximately EUR 500 000. In line with this, broiler production is relatively stable (in terms of supply and demand conditions and prices), while pig and beef production do not grant such security. The reasons for this are market uncertainties caused by pig's cycles, imports and threats of animal diseases (such as "mad cow disease"). Besides meat processing capacities, the chain from field to market is almost closed. The Farm's own broiler operation will offer better cost control and cost reduction, and better monitoring of technology and quality standards. Due to the highly competitive market in animal feed products, the described vertical integration from grain production, animal feed to livestock is a precondition for Farm survival. The current level of production would be unattainable without credit sources. Up to now the Farm has received credits in the amount of almost EUR 260 000. The average interest rate is 7 percent and credit sources are the Ministry of Agriculture and Forestry and commercial banks. Thepurposeofthesecreditswastobuylandandnewbuildings,andtoplantpermanentcrops. Seven permanent employees work on the Farm at the moment. This number was higher in the past, but rationalization of the production process enabled a decrease in the number of workers. Investments are closely connected between the above–mentioned developments and the same applies to asset value. Average Farm assets increased sharply in the relatively short period of eleven years. The current level of assets is HRK 2.8 million (about EUR 360 000). According to the classification of enterprises by the Law on Accountancy (criteria are based on number of employees, revenues and asset value), the Farm can be placed within the group of small enterprises.Revenuetrendanalysisalsoshowsasignificantincrease,exceptin2001whenapplepro- duction dropped because of weather conditions.

132 Year 000226912121177 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Business indicators Indicator Number of workers (permanently employed) Investments (HRK)Asset value (HRK)Revenues (index) 0 22 000 22 000 100 0 22 000 200 000 100 1 22 200 000 000 120 000 22 000 100 22 000 300 210 0 000 2 000 000 210 000 300 000 300 210 000 200 000 210 000 120 500 000 210 000 2 880 000 500 0 1 000 80 000 1 000 800 1 000 1 100 Table 12: Source: Interview.

133 Marketing channels

Marketing channels can be divided into two: selling channels for farm produce are on one side, and buying channels for inputs necessary to production are on the other. Apple production goes through the wholesale market (80 percent) and a smaller percentage through retail (20 percent). Most of the apples are sold soon after harvesting, during October and November. Grain production mainly goes toward processing but a small percentage after drying goes directly onto the market, which depends on the current market situation. Animal feed produced on the farm goes to the retail market. About 30 percent of the animal feed is sold through retail. Small local farmers are the main buyers. The greatest share or about 70 percent of animal feed is realized through cooperation. Twelve broiler farms and one farm with sows are included in contract production. External markets supply the Farm with the components for animal feed production (protein crops such as soybeans, vitamins, minerals and medicine). Agricultural inputs such as fertilizer, seeds, small machinery and tools also come from external markets for retail business in the Farm ownership. In order to examine the decision–making process, management and entrepreneurial skills, perception of risk sources and risk management strategies on the Farm, Liker scale–type questions have been used. For illustration purposes, a comparison with the results of a similar survey (made by the same author on vegetable production and arable crops) shows much more consis- tency in management processes on the studied farm. The Farm is a typical family business run by a father and his two sons. Two persons in management, the father and interviewee (younger son) completed the agricultural faculty with specialization in agricultural economics, while the older son has a degree in agronomy. Management responsibilities are divided based on farm enterprises. The high level of education of the farm managers logically implies that experience and consultation with family members are the most important means of decision–making. Business evidence is ranked as a very important source of data in the decision–making process, as well as cooperation with the scientific community

134 and new information from published materials and the media. The low ranking of farmer colleagues as a source of information is difficult to explain because of memberships in professional associations such as the Fruit Growers' Association and the Croatian Agro-economist's Associ- ation. Other sources of information for management decisions such as buyers, suppliers, bak- ers, advisory staff, fairs, etc. are never or rarely used.

Table 13: Decision–making on family farms (sources of information); (1 – never to 5– always)

Production Investment Experience 5 5 Family members 5 5 Published materials (books, articles etc.) 3 2 Farmer colleagues 1 1 Business evidence 4 4 Scientists 3 3 Bankers 2 2 Source: Interview. A comparison between tactical (production) and strategic management decisions (investment) showed little difference. In the case of investment decisions, bankers probably have a greater influence than estimated in the interview. According to the farmers' perceptions, the list of important or very important sources of risks is quite long. Of primary importance is the health of the farm manager and family members. Health aspects are followed by market risks, which include prices of agricultural inputs and outputs, duration of the payment period and consumer preferences. Production risks (weather conditions, animal and plant diseases) are also important sources of risks. Irrelevant sources of risk are ownership structure and labour force, while environmental protection policy and changes in agricultural policy are in the middle of the scale.

Table 14: Sources of risk (1 – Irrelevant, 5 – Very important)

Score Health of farm manager and family members 5 Payment period 4 Weather conditions (hail, drought, frost etc.) 4 Consumer preferences 4 Prices of agricultural products 5 Access to marketing channels 3 Diseases 4 Prices of agricultural inputs – production costs 5 Labour force 2 Environmental protection policy 3 Changes in agricultural policy 3 Changes of interest rates and credit repayment ability 4 Ownership questions (e.g. regarding land) 1 Source: Interview.

135 Risk perception and risk sources are partially covered by risk management tools. On–farm diversification is, of course, the main strategy. It is followed by efficient production (production technology and production at the lowest possible cost). All other risk management tools which could be implemented are of average importance. Life insurance is a strategy never used (al- thoughthisisnotinlinewithmainrisksources)andcooperativerelationshipswithotherfamily farms is likewise of little importance.

Table 15: Risk management strategies (1 – Never used, 5 – Always used)

Score Enterprise diversification 5 Production technology 4 Off–farm employment 3 Contract production and cooperation 2 Production at lowest possible costs 4 Agricultural insurance 3 Irrigation system 2 Leasing 3 Life insurance 1 Cash reserves 2 Use of consultant services 3 Buying inputs through cooperation 1 Labour force reserves 3 Own land 3 Source: Interview. In many aspects the Farm is an above–average family farm in Croatia and constitutes a good example of on–farm enterprise diversification and vertical integration of production. The strategies that have brought the Farm to its present position are of a dual nature. The first consideration is the attempt to avoid risks in a single activity (e. g. apple production only), and the second is to retain as much profit as possible in the chain from field to market. The strengths or positive side of the business are the farmers' level of education and management skills, the short distance to about one million consumers in Zagreb, existing business relationships, and recognized quality. In order to continue with development and to fulfill short– and long–term goals (additional land under fruit production, cooling space for fruit, and chicken production), the Farm will need capital in the form of credits. The lack of agricultural credit sources in Croatia could be a reason for delay in the investment process, but the problem also lies in the high ratio of assets to credits. Financial management issues must be seriously reconsidered. Possible opportunities for the Farm include cooperation with other fruit producers with the goal of entering hypermarket chains in Croatia, and aiming production at the expanding tourism sector (e.g. summer apple varieties). The situation regarding the vertically integrated chain from arable crops to poultry, pigs or beef is unclear (at least to the author). Strong competitiveness is present in that sector, and the majority of the market share has been occupied by large domestic or international companies. Quality standards are high and are becoming even stricter. Strategic alliances, market segmentation or market niche in such a competitive environment is a challenge and condition of survival.

136 CONCLUSIONS

The contribution of family farms is of major importance in the structure of agricultural output. Family farms differ greatly in socio–demographic, production and business characteristics. The farm structure is dominated by a large number of small–scale family farms. The unfavour- ableeducational,ageandsexstructureoffarmersandtheirpoormanagerialskillstogetherwith land, credit and legislation issues result in the generally low productivity and competitiveness of family farms. The economic significance of agriculture is declining. Off–farm activities, part–time jobs in industry or services, or income from non–agricultural activities are an integral part of a farm's income. The share of off–farm income within total household income (for the year 2001) was about 20 percent. The share of income from other activities in the household (such as forestry, tourism andcrafts)wasonly1percent, andtheshareofincome fromothersources (mainlypensions) was about 13 percent. On the national level, the average share of farm income within total household income was slightly above 60 percent. Policy–makers have already become aware that agriculture is but an element of rural space and that broad–based growth of all rural economies should be accomplished. In line with this, the agricultural policy support system has recently been reformed. Important breakthroughs have been made in the modernization and functioning of ministries, government agencies and local government. Available funds for institutional programmes are not insignificant, but economic evaluations of their effectiveness is almost nonexistent. Many of the programmes overlap with other similar programmes implemented under other institutions, without sufficient coordination among them. Therefore design, financing and monitoring should be more effective in order to improve rather weak implementation. Determination of the key factors that influence commercialisation, specialization and/or diversification processes was the main goal of the case study, and these have been presented through qualitative analysis of production, marketing, management and the related institutional policy framework. Commercialisation and vertical integration in the food chain may be viable solutions only for a limited number of well-organized, equipped farms with borrowing capacity and skilled management. The low competitiveness of the key rural sectors, depopulation and the unfavourable age, educational and sex structure of rural residents seriously limits programmes and actions to support rural development. The availability of training and additional educational opportunities, especially in economics, is necessary and must be accompanied by a rural market information system. The role of such a business intelligence system could be the collection, dissemination and analysis of businesses opportunities of interest for rural populations such as rural tourism, ecological production, traditional agricultural and food products and crafts. In line with these goals, better import promotion must be established. Changes are also necessary on the institutional level by speeding up land privatization, consoli- dationandbetterfunctioningofthelandmarket.Investmentsinruralinfrastructure(transport, communication, health, education) are necessary while fiscal incentives for rural populations and rural business subjects could be taken in consideration. Existing policies, programmes and activities must be better coordinated, controlled and monitored in order to achieve higher fund

137 effectiveness. Above all, rural space must be defined and rural typologies established in order to assist in targeting groups with specific polices.

REFERENCES

CROATIAN BUREAU OF STATISTICS. 2003. Census 2001, Agricultural Census 2003, Statistical yearbook 2003, www.dzs.hr CVETKOVIC M. (Ed.) 2003. Croatian agriculture, food and food processing industry. University of Zagreb, Faculty of Agriculture and Croatian Chamber of Economy, Agriculture, Food Indus- try and Forestry Department. DENT J. B. & MCGREGOR, M. J. (Ed.) 2001. Rural and farming systems analysis. CAB Interna- tional. FAO AND MINISTRY OF AGRICULTURE AND FORESTRY. 2003. A strategy for rural development in Croatia 2003 (2004–2010) (draft). Zagreb, Croatia. GOVERNMENT OF THE REPUBLIC OF CROATIA. 2003. Information provided by Government of the Republic of Croatia to the Questionnaire of the European commission, www.mei.hr/EUanswers HERON,I.–KNIGHT,I.&WINTER, M. 2002. Croatia agriculture/agribusiness assessment. Prepared for USAID Croatia, Office of Economic Growth. JURACAK, J. 2002. Povezanost poduzetnièkih osobina upravitelja i uspješnosti obiteljskih poljoprivrednih gospodarstava u Hrvatskoj. Zagreb, Croatia. (Ph. D. thesis) KRALJIÈKOVIÆ,J.&SUBAR, G. 2002. Robne marke Zagrebaèke upanije – vina Portugizac Plešivica i Kraljevina Zelina. Symposium, Collective Management of Traditional and Original Agricultural and Food Products, Wines and Liquors, Zagreb, Croatia. MIHALJEK, D. 2000. Toward a long term strategy of economic development of Croatia:Where to begin, what to do, and how to do it? Financijska teorija i praksa, 24 (4). MINISTARSTVO POLJOPRIVREDE I ŠUMARSTVA REPUBLIKE HRVATSKE. 2001. Strategija gospodarenja poljoprivrednim zemljištem u vlasništvu drave. Zagreb, Croatia. MINISTRY OF AGRICULTURE AND FORESTRY. 1995. Agriculture in Croatia: A strategy for development. Zagreb, Croatia. NJAVRO, M. 2001. Tipologija obiteljskih poljoprivrednih gospodarstva u Hrvatskoj, magistarski rad, Agronomski fakultet Sveuèilišta u Zagrebu. WORLD BANK. 2000. Croatia: A policy agenda for reform and growth, sector policy notes, Vol- ume 2. WORLD BANK. 2003. Izvješæe br. 25434–HR Croatia country economic memorandum. Strategija za gospodarski rast kroz europske integracije (svezak1i2).

138 THE STATE OF FARM AND RURAL INCOME DIVERSIFICATION IN THE CZECH REPUBLIC

Tomas Doucha, Ladislav Jelinek, Tomas Medonos, Tomas Ratinger

INTRODUCTION

The Czech Republic recently joined the EU in May 2004.63 In the EU, rural areas cover a large share of the countries' territory and enjoy relatively high attention due to their recognized importance for social, environmental and other functions. In the Central and Eastern European (CEE) countries the extent and importance of rural areas may be even greater; however, the governments of these countries have so far paid less attention to specific rural issues than those of the EU due to the other transition priorities (e. g. macro–economic stabilization, privatization, etc.). In this context, development of rural areas in the Czech Republic has became a key issue only in the pre–accession period when the country was invited to formulate its development priorities and design a short– and medium–term rural development plan. The specific character of rural areas had to be recognized: first, a different pace of overall structural adjustment; second, declining agricultural income, low farming profitability and relatively low efficiency; and third, the increasing importance of land and landscape management (Ratinger et al., 2003). Despite the fact that the process of rural–urban migration is not rapid, conditions in many rural areas do not seem to be in favour of stopping the depopulation of rela- tivelylargeterritories.TheCzechcountrysidehasbeenhit,amongothers,bythesociallypainful process of agricultural restructuring. The reduction of agricultural production has resulted in the release of redundant labour; agricultural employment dropped to one–third of the previous level between 1990 and 2001 (MOA, 2002). The intensity of agricultural production has been reduced (with a positive impact on the environment); however a large part of land has been abandoned, 64 with a negative impact on the management of natural resources. Rural regions have also suffered as result of the collapse and restructuring of industries to which rural workers commuted for jobs: coal mining, heavy industry, engineering etc. concentrated in urban agglomerations such as Ostrava or North–Bohemia

63 Paper written in November 2003; the Czech Republic joined the EU on 1 May 2004. 64 At present, after Czech farmers registered in the EC IACS, it can be estimated that about three-quarters of total agricultural land is cultivated commercially; one-eighth of the land in household plots and one-eighth of land in commercial farms (500 000 hectares) is idle (own estimation based on IACS figures; ref. e.g. Zemedelec, 2003).

139 regions; the decline of the construction industry offering traditional off–season jobs; and to some extent this concerns also the food industry – smaller plants scattered across the countryside have been closed down as the industry concentrated. In addition, non–economic, social and cultural problems can be observed, mainly due to the post–socialist social deficits in families, as well as in village communities (Hudeckova Lostak, 2002). Policies responded gradually to rural development deficiencies in three ways: first, through increasing the importance of self–governance, which included rearrangement of the budget toward a greater role given to municipalities, support programmes for the renewal of villages and finally, decentralization toward regions and regional governments. The second direction was the support to small and medium (non–agricultural) businesses and third, the introduction of the concept of multifunctional agriculture (Ratinger et al. 2003). This last policy concept involves seeking additional sources of income either by supporting on–farm non–agricultural diversification or by support for non–marketable environmental services for biodiversity protection and landscape management. In the Czech context, on–farm non–agricultural diversification was already regarded as important for the long–term viability of farm businesses during the 1970s and 1980s, enabling farms to generate extra unplanned income to finance above–average rural welfare. However, non–agricultural enterprises separated from the farms during the early days of agricultural reforms and farms concentrated on improving their agricultural efficiency and utilization of market opportunities. Nowadays, policy-makers and farmers struggle to develop, digest and implement the concept of multi-functionality, integrating all capabilities of farm resources to strengthen farm viability. The general objective of this paper is to draw attention to the evolution of farm structure with re- specttofarmdiversification,toassesstheimpactofdiversificationonindividualincomesandto discuss the constraints in diversification from both internal governance and institutional arrangement points of view. The development of farm structure from small–scale farming in the pre–communist period, to large–scale agriculture based mainly on agricultural cooperatives, and the further transformation period and evolution of a new type of farm market structures is briefly presented.

THE ROAD TOWARDS A MARKET–ORIENTED FARM SECTOR

From small–scale farming to large agricultural cooperatives The current farm structure is inevitably influenced by its historical development. Before World War II, the farm sector consisted of mainly small–scale farms. Even at that time, the national economy being well developed, the relative importance of agriculture in the economy was substantially lower than that of the manufacturing industry. Before the Communist Party took power, Czechoslovak agriculture consisted primarily of small– to medium–sized family farms with productivity on a par with most European countries. The situation changed in 1949, when the communists launched the policy of collectivization. Farmers were not only forced to merge their land and assets into large units – collective farms – but these new farms were often managed by people having no agricultural background, often industrial workers or people from the Communist Party apparatus. Collectivization was essentially completed by 1960. Disappoint- ment with the disruption of traditional farming systems and the supply of better–paid industrial jobs encouraged workers to migrate from villages and rural areas.

140 Subsistence farming versus collective farms The basic units of production in the mid–1980s were unified agricultural cooperatives and state farms.65 However, members and workers of collective farms, in order to compensate for the malfunctioningofagricultureandtomotivatethemtostayonfarms,werepermittedtocultivate personal (household) plots of one–half hectare or less and to maintain some livestock. Such personal plots reached a peak of popularity in the early 1960s, when they accounted for 355 000 hectares. Production from personal plots served primarily as food self–supply for the cultivator. In 1982, the government introduced measures to encourage small–scale private animal husbandry and fruit and vegetable cultivation. The planning authorities did not however allow this activitytobecomethemainsourceofincomeforlandusers,andtheyallowedaccessonlytoland which was marginal and difficult to cultivate. The total area of agricultural land used for small–scale private farming was estimated at 100 000 hectares in 1984. The government hoped, however, that a large proportion of demand for fruit and green vegetables, as well as for meat, would be covered in this way. In 1984, according to official reports, small–scale private producers accounted for about 10 percent of meat production, 38 percent of vegetable production and 64 percent of fruit production.66

Diversification in socialist centrally–planned economy agriculture The phenomenon of diversification was quite common in collectivized agriculture. Prior to the political changes in 1989, cooperatives already enjoyed some freedom with regard to their non–agricultural enterprises. Income generated through these activities was not subjected to central planning and could be fully retained by the farm. State farms did not have this flexibility. Therefore, collective farms exhibited more non–agricultural activities than state farms (OECD, 1995). There were various activities in which collective farms were engaged. Some diversified through the provision of services, such as agro–mechanical services and transport. Others processed food products or engaged labour in non–agricultural activities such as construction work, car repair and metalworking (Csaki et al., 1999) in off–season periods. Non–agricultural activities accounted for 20 percent of production sold and 50 percent of profits of collective farms in 1989 (OECD, 1995).

The reform period The lack of private ownership, even if in cooperatives the land and assets were never formally expropriated, resulted in loss of incentive, initiative and accountability and, inevitably, affected the performance and sustainability of the Czech farming sector (Koester, 1991). Although poor performance was disguised by the relatively higher standard of living of the agricultural population until 1990, the ensuing transition has clearly demonstrated all of the accumulated problems, such as low labour productivity and overall efficiency, inappropriate production structure (cropmixnotadjustedtoparticularsoilandclimaticconditions),criticalandunacceptablelevel of water and soil pollution etc.

65 Both referred to as collective farms. 66 Taken and adjusted from: http://www.1upinfo.com/country-guide-tudy/czechoslovakia/ czechoslovakia90.html (accessed 17 November 2003).

141 Agriculture had to adjust through the reduction of labour and working capital use, along the output demand curve once prices were liberalized, while land and capital were privatized. Pri- vatization took three forms: (i) restitution of expropriated and collectivized assets and land; (ii) redistribution of assets of collective farms (obtained after collectivization); and (iii) sale of state assets. The restitutions restored ownership of about 70–75 percent of the total agricultural land and almost a hundred percent of agricultural assets were privatized (by either method) during this phase. The reforms, being targeted at individualization of property rights and restitution (Ratinger and Rabinowicz 1997), resulted in a highly fragmented ownership structure with about 3.5 million landowners with average property size of 1 hectare, and roughly the same number of claims for non–land assets. The number of private commercial farmers and the area they cultivated expanded rapidly and reached 23.5 percent of total agricultural land by the year 1995 (CSO 1996, Table 1). In the first stage of the structural changes, cooperatives transformed and survived in unchanged number, although their size decreased by 45 percent (to 1 450 hectares). Two new organizational forms emerged: joint stock companies and limited liability companies. The following table illustrates development of farm structure throughout the last decade.

Table 1: Farm structure development – individual farms and corporate farms between 1989 and 2000

Agricultural land cultivated Average acreage Number of farms thousand hectares hectares 3 1989 1995 20001 1989 1995 2000 1989 1995 2000 Individual farms 3 205 20 820 24 053 12 823 9342 4 39.5 38.8 Corporate farms 1 198 2 395 2 587 4 284 2 722 2 681 – 1 136.3 1 036.2 –State farms 174 80 – 1 089 52 – 6 261 660.0 – –Coops 1 024 1 105 723 2 622 1 665 1 059 2 561 1 507.4 1 465.3 –Companies – 1 196 1 726 – 996 1 579 – 832.6 914.8 – joint stock c. – 223 519 – 269 780 – 1 205.8 1 502.3 – limited liability c. – 945 1 171 – 714 784 – 755.9 669.3 Total 4 403 23 215 26 640 4 296 3 544 3 614 – 152.7 135.7 1 The Agricultural census of 2000 statistical survey done by the national Czech Statistical Office, included all agricultural businesses with more than 1 ha of agricultural land or meeting other farm classification criteria. Due to different threshold limits used in 1995 and 2000 Agricultural Census surveys, the data in the table was calculated for farms with an area of more than 3 ha of land. In the 2000 Agricultural Census (AGC 2000), the survey included 56 500 farms, of which 53 500 were private farms. Of these about 18 000 were identified as semi–subsistence farms with only a small part of their output being traded. There are thus about 38 500 private farms, and this is the same number as the one presented in the Register of Agricultural Units of the Czech Statistical Office in 2001. 2 The total area of agricultural land cultivated by private farms which met the criteria of the 2000 Agricul- turalCensuswas926300haandthetotalnumberofthesefarmswas53460.Therefore,some29407mostly agricultural households cultivated slightly more than 28 000 ha and had on average 0.96 ha of agricultural land. 3 Only farms cultivating agricultural land. Source: Agricultural census 1995, 2000, Report on the State of Czech Agriculture (Zpráva o stavu èeského zemìdìlství) 1994–2001, and authors' own calculations. The early organizational development was already constrained by problems with identification of plots in the terrain, access to land and limited divisibility of non–land assets, postponed ac-

142 cess to capital for non–agricultural owners and delayed privatization of state land. The second phase of farm restructuring was specific in its deceleration of individualization (decollectivization) and, on the other hand, very visible shifts in the corporate sector between cooperatives and joint stock companies (Table 1). Divila (2001) provided the explanation for the latter process: a) In order to avoid possible settlement of restitution claims by non–farming owners (often termed as transformation debts), agricultural cooperatives transformed into joint stock companies and transformation and restitution liabilities were turned into tradable shares. The owners of the transformation claims were rarely aware of the actual financial situation of a cooperative while making decisions; however they were satisfied by formal settlement of their claims as something one can deal with instead of waiting for uncertain repayments or financial compensation. b) Transformation into a joint stock company provided conditions for capital concentration by a few owners, often linked to the current management. Concerning the first argument, we have to note that not all members and assets claimants have been satisfied with the process. According to case studies (Curtiss et al., 2003) some members complained about losing their control over the assets and management; restitution claimants were also afraid that the shares would lose value quickly. Regarding the second argument, concentration of capital facilitates diminishing the potential opportunistic behaviour resulting from the power of workers being the decisive capital owners. It also improves the strategic decision–making (Curtiss et al., 2003) Table 1 has also shown that small–scale individual farms have not evolved on a scale expected at the beginning of the transition. In contrast to the expected individualization and fragmentation of farming systems, the figures from both Agricultural Censuses (CSO, 1996; CSO, 2001) demonstrate tendencies to increase the average size of commercial farms, both the private farms of more than 100 hectares and corporate farms. Although there is no uniform answer by researchers to this phenomenon, the most plausible explanation seems to be that large farms were benefiting from economies of scale and diversification of production to offset most of their risks. Concerning the large private farms, economies of scale and farm size exist not only in production but also in the administration of hired labour and dealing with markets, with benefits much higher than organizational and transaction costs alone. Decollectivization is associated with relatively higher transaction costs and it is noted that rural dwellers often lack entrepreneurship and managerial skills. This may be the result of the past available employment offered by former corporate farms: wages were low, but allowed the use of the company's labour, machinery and material inputs in the household plot businesses. Also we must take into account that the standard of living of most of the agricultural population deteriorated during the reform period, and hence, feelings and enthusiasm were not always in favour of setting up new businesses or entering into new and, in fact, risky activities.

143 THE CURRENT LEVEL OF DIVERSIFICATION OF FARM AND FARM HOUSEHOLD INCOME

Agricultural core activities can be defined as activities taking place on predominantly agricultural proprietal units and based on the primary production of food, feed or fibre (Slee, 1986). Thus, agricultural diversification can be defined as all other gainful activities by farmers outside agricultural core activities. Further, diversification may be viewed as a process with four stages. Initially, diversification is at the cropping level where there has been a shift away from monoculture. At the second stage, the farm is engaged in more than one enterprise and may produce and sell crops at different times of year (Metcalf, 1969). At the subsequent stage, diversification is understood as being mixed farming (Shucksmith et al., 1989). Finally, activities beyond agriculture are incorporated into the meaning of diversification (Newby, 1988). The other definition explains diversification as a strategy for utilizing excess capacity of production factors, which are subject to market failure (Mongomery and Wernerfelt, 1988). Part–time farms may be defined as those where either the farmer or spouse combines non–agricultural work with work on the holding. The farmer or spouse is then a part–time farmer (Gasson, 1986). For our purposes, part–time farmer means that the farmer himself works on and also outside the farm, whether or not the spouse has an off–farm job.

Policies affecting diversification of enterprises and incomes in the reform period Throughout the transition period, most agricultural operators found themselves in a precarious financial situation due to the unfavourable development of the terms of trade. At the same time, financial resources were extremely necessary to set up new businesses, to improve viability and efficiency of current farms through innovation and to provide risk management when the state reduced its protective measures. Gaining credits and loans was extremely difficult in the early stages of transition due to the lack of a developed commercial banking system and capital markets. The problem was complicated further by a low density of bank branches throughout the country. The overall decline of the agricultural industry made agricultural producers unattrac- tive to banks (Jehle, 1998).67 In order to reduce the difficulties faced by individual farmers to obtain credit, the government offered investment grants and interest–free loans between 1991 and 1993. In 1994, the Support and Guarantee Fund for Farms and Forestry (SGFFF) was set up, its support generally available for all farming entities. The scheme functioned as follows: if a bank was willing to lend, the government through the SGFFF provided a guarantee and subsidized the interest rate. Within the instruments used by the Fund, there are at present only two dealing with farm diversification: a) Investment (Subprogramme Farmer) – on–farm processing, agrotourism, production and use of renewable sources of energy; and b) Young Farmers – additional investment support relating to the measures in a) but only for farmers younger than 40 years.

67 Nevertheless, banking officials are becoming slowly aware of the fact that agricultural enterprises might be prospective partners for banks.

144 There is also the support for Small and Medium Enterprises (SMEs)68. The programme was introduced by the Ministry of Regional Development in cooperation with the Ministry of Trade and Industry. The assistance offered by the state is aimed at facilitating access to capital and the sharing of risk faced by entrepreneurs. The key objective of this support is to create job opportunities. In order to enhance farms' competitiveness and to increase rural employment opportunities and, parallel, to gain experience with the use of the EU Structural Funds, the SAPARD programme was launched in 2002. Within this program, Measure 2.2 concerns non–agricultural diversification of farm activities. This measure includes development of SMEs, improve- mentsofcommodityoutletsanddevelopmentofagrotourism.15.7percentofthetotal SAPARD budget was reserved for support to farm diversification. SAPARD also supports the provision of vocational training to farmers. Although the programme has not yet been fully evaluated (the last round of applications was concluded only a few months ago), problems with the quality and viability of project proposals on the one hand and difficulties with administration on the other are regarded as the major issues. Only 40 percent of applications for Measure 2.2 were accepted, with the final budget accounting for only 10.7 percent of the SAPARD funding.

On–farm and off–farm income of individual farmers 69 A relatively clear picture of off–farm diversification can be obtained when analysing the proportion of full–time and part–time farmers. The share of full–time farmers with or without additional income outside the farm is 22 percent of all individual farmers. However, these farms cultivate more than 74 percent of all agricultural land used by individual farmers. Part–time farmers who have full–time off–farm jobs account for about 44 percent of all farmers, but culti- vateonly14percentofagriculturalland.Retiredfarmerswhoconsiderpensionsasthemostim- portant part of income account for a relatively significant proportion – 29 percent of all farmers and 12 percent of agricultural land cultivated (Table 2). Not surprisingly, full–time individual farmers with or without additional income run the farms with higher area, on average 67 hectares. In other categories this figure is approximately 7 hectares. Table 3 shows the proportion of private farms with non–agricultural incomes. The group of farms that cultivate between 20 and 100 hectares of agricultural land demonstrates the lowest proportion of farms with non–agricultural income. It can be assumed that such farm size provides sufficient employment for household members and, parallel, does not require employing additional labour. Therefore household members do not need to look for off–farm jobs; nor does the farmer have to look for extra work for the permanent hired labour force during the off–season.

68 The scheme includes four general sub-programmes (Guarantee, Credit, Market and Start) and four sub-programmes (Community, Region, Border and Operation) for structurally affected and economically weak regions. Most of the support (51 percent) is through interest subsidies for bank loans, guarantees for bank credit or interest-free loans (Integrated Strategy for Agricultural and Rural Development, 2003). 69 Data relate to both registered (entrepreneur) and non-registered (household plot) farms.

145 Table 2: The proportion of full–time and part–time farmers

Share Cultivated Share Number of Number of Farm size Item in total area in total farmers farmers (ha)1 (%) (ha) (%) without land Farmers receiving retirement (disability) pen- 15 478 29.0 111 632 11.6 552 7.5 sion and working on–farm Pluriactivity farmers (full–time off–farm job plus 23 284 43.6 131 394 13.7 1 329 6.0 working on–farm) Agriculture is the main activity, not receiving retirement (disability) pension, but receiving in- 1 553 2.9 69 081 7.2 58 46.2 comes from a part–time activity outside the farm Full–time farmers receiving neither pensions nor 10 113 18.9 648 262 67.4 378 70.3 wages or salaries Not reported 3 032 5.7 1 956 0.2 116 0.7 Total 53 460 100.0 962 325 100.0 2 433 18.9 Source: Agricultural census 2000, CSO, 2001.

The IDARA70 survey provided a detailed analysis of farm diversification on a sample of 217 individual farms and about 100 legal entities. The diversified income (secondary farm income) was split into three categories: The income from employment included agricultural and non–agricultural off–farm jobs; the income from diversified activities involved income obtained from non–agricultural on–farm enterprises as well as non–agricultural off–farm enterprises, and unearned income included pensions, unemployment payments, dividends, interest, etc. The survey indicated that on average 30.5 percent of individual farms were running non–agricultural enterprises in 2000. Registered and more commercially–oriented farms participated more in non–agricultural activities (43 percent) than the non–registered ones (18 percent). However, the income from diversified activities constituted just 5 percent of total household incomes (see Table 4). Thus, Chaplin (2003) and Jelinek (2002) concluded that individual farmers paid more attention to typical agricultural activities or went for off–farm jobs rather than deal with non–agricultural enterprises.

Table 3: Selected indicators of registered individual farms according to farm size

Size of agricultural land (in hectares) Indicator 0 >0 – <2 2 – <5 5 – <20 20 – <50 50 – <100 100 – <200 ³200 The proportion of farms having agricultural income as the main 25.0 22.5 20.4 35.5 69.0 76.8 82.4 88.9 source of farm income (%) The share of providing – 0.1 16.7 11.8 23.8 32.1 35.3 63.0 agricultural services (%) The share of farm with 8.3 15.0 27.8 13.6 7.1 8.7 11.8 22.2 non–agricultural income (%) Note: The share is calculated on the total number of individual farms in the sample. Source: South–east region survey, Divila, E. (2001)

70 The survey was carried out within the framework of the EU 5FP project IDARA QLRT-1999-1526.

146 Table 4: Sources of income for individual farms (registered and non–registered together) (in percent)

Source 1990 1995 2000 Income from agricultural production 16 45 48 Income from employment 61 27 19 Income from diversified activities 5 6 5 Subsidies 1 2 5 Unearned income 17 20 23 Total 100 100 100 Source: IDARA Survey 2001; Chaplin, Gorton, Davidova, 2003; Jelinek 2002 The essential shift in structure of income sources from employment to own farming happened in the first half of the 1990s, and it corresponds to the decollectivization process. The income pattern has more or less stabilized since 1995. However, we can observe a slight increase of the proportion of unearned income between 1995 and 2000, which might reflect that farmers became older on average and started to receive pensions. The sample of 217 farm households included 120 non–agricultural enterprises.71 When a strict definition of diversification, which excludes agricultural contracting, biomass and woodland was applied, the figure dropped to 78. Diversification, thus establishment of non–agricultural enterprises created 18 full–time jobs and three part–time jobs on only eight farms. On five farms, the jobs were taken by family members, who either performed non–essential farm work or preferred non–agricultural to agricultural work. New employees were recruited mostly locally. Jobs were also created in the other 14 cases (60 full–time jobs and one part–time job) con- sideredasbusinessdevelopment,i.e.whenfarmlandorbuildingshadbeenleasedoutorsold.

Diversification of corporate farms This diversification through creation of enterprises increased significantly between 1990 and 2000. The number of non–agricultural enterprises grew from 81 to 158 (the sample included 102 corporate farms). The process accelerated between 1990 and 1995 and then slowed down (ISARD, 2003). Using the strict definition of diversification, thus including activities beyond the primary production of food, fibre and fuel (excluding agricultural contracting and land–based activities), the number of diversified enterprises rose from 56 in 1990 to 102 in 2001. The shares of revenues and deployed labour in agricultural and non–agricultural enterprises indicate that agricultural enterprises are more important in both terms. On average, 93 percent of labour was allocated to agricultural activities and only 7 percent to non–agricultural, and the revenue was distributed in a similar proportion. It can be stated that the attitude of the vast majority of general managers to diversification was positive. Most of them also agreed that diversification provided better opportunities to be successful in business rather than agriculture alone. Selling or leasing buildings and land to other persons and companies for business purposes occurred on 53 occasions and contributed to the creation of 1 024 full–time jobs. It brought

71 Some households had more than one diversified enterprise (compared with the figure of 30.5 percent of households running at least one diversified enterprise).

147 Chaplin(2002)totheconclusionthatmorejobsmightbecreatedbybusinessdevelopmentthan by diversified enterprises, and that this observation should be taken into account when designing the rural development policy.

POTENTIAL AND CONSTRAINTS TO DIVERSIFICATION

Theaboveanalysisjustifiesthequestionsregardingtheprosandcons(institutions,legalframe- work, financial situation etc.) of farm diversification. The results of IDARA survey can be summarized in a SWOT table (Table 5).

Table 5: SWOT analysis of farm diversification

Strengths Weaknesses • On–farm surplus of production factors • Lack of start–up capital • Positive attitude of managers of corporate farms • Lack of professional knowledge and experience in non–agri- • Experience of those who diversified into agriculture during cultural business of those who have thus far worked in agri- the transition culture • Commitment to re–establish an individual farm or to maintain a corporate farm Opportunities Threats • Diversification as risk management • Low attractiveness of farming for young people • Demand for agrotourism, traditional food and fibre prod- • Agricultural support policies reducing the risk and hence the ucts, renewable energy etc. need for diversification • Availability of information and communication technologies. • Remoteness and weak public transport • Overall decline of the region Source: ISARD, 2003. We can look on the diversification problem from different perspectives. The approach that we have adopted suggests distinguishing between internal (on–farm strengths and weaknesses) and external (off–farm conditions, opportunities and threats) factors.

Internal preconditions and constraints Despite the fact that farmers are motivated to diversify when they have excess resources, such as buildings, machinery hours or off–season labour, to start a business requires some additional investment to meet particular product or service requirements. However, lack of cash and limited willingness to lend by banks constrain the farmer's ability to establish non–agricultural enterprises. Individual farmers, as well as the corporate farms, have confirmed that their propensity to diversify might increase if financial support (seed money, loan guarantees, tax exemptions etc.) were available. It was found that 67 percent of the subsample of non–diversifiers indicated lack of financial capital as an impediment. Taking legal form into consideration, cooperatives seem to be the most affected due to their transformation debts (restitution liabilities). Individual farms felt disadvantaged because their relatively small revenues limit their access to bank credits. Corporate farms indicated that the main reason for not diversifying was the decision to concentrate on farming, while households added lack of time as a reason for not taking up off–farm work. The latter concerned mainly larger farmers. In fact, Chaplin (2003) found a positive

148 relationship between concentration on farming and farm size and, on the other hand, a negative correlation between concentration on agriculture and a prospect to diversify. A commitment to agriculture, causing a reluctance to diversify income might be unlikely to change soon. It seems to be very rational that farmers concentrate on improving farming technologies and practice to become efficient and benefit from economies of scale, particularly when support policies aim to increase market stability, income stability and to reduce risk. It was demonstrated that farmers and managers have a positive attitude to diversification, as stated earlier; however, they were aware of the limitations due to inherited human capital and managerial knowledge and skills. Some groups of households indicated low educational level of theirmembersasaseriousimpedimentintakingupanewjob.Ontheotherhand,highereduca- tion was positively correlated with on–farm diversification. It can thus be proposed that the skills and knowledge of managers or individual farmers in the field of marketing, quality management, project preparation, business planning etc., are still lacking (see conclusions in the paragraph on policies).

External and institutional environment Successful diversification of farms depends on availability and access to markets for non–agricultural products and services. The importance of the institutional framework in the market economy is widely recognized. Transition depends precisely on building such a framework, including laws, standards and ethics, information distribution etc. The discrepancy occurs when governance structures are implanted regardless of the state of the institutional environment.72 Thus the market as a governing structure may fail to generate expected welfare if the institutional environment is underdeveloped. The non–agricultural enterprises of the former collectives that were established under non–market economy conditions faced difficult competition under the changed circumstances. The comparative advantage of agricultural cooperatives in freedom of operations had been lost and the market revealed the deep gap in productivity between the farming sector and the manufacturing industry or the service sector. Non–agricultural enterprises either quickly separated or were closed down. On the other hand, market liberalization gave new incentives for agricultural production. Improving efficiency (including benefits from economies of scale) of the core agricultural production became the priority. However, the withdrawal or reduction of state protection has increased the vulnerability of agriculture. Risk due to weather and world price shocks, underdeveloped and uncertain vertical integration relationships and changing policies have negatively affected the behaviour of farmers and structural development. As Curtiss (2003) pointed out, farms have adopted defensive strategies, reducing production costs while looking slowly for organizational changes and saving on transaction costs. Case studies (Chaplin, 2003, Curtiss et al., 2003) indicate that informal communication and networking played a very important role for the farm businesses in developing diversified activities. Some agricultural companies obtained contracts through personal relationships with former managers who moved to work in firms or banks, while standard contractual arrangements between farmers and up– and downstream industries remained weak.

72 For more information, see Havel, J., Budování institucí v Èechách (Building up of the Czech institutions), http://veda.fsv.cunicz/doc/havel.doc

149 Farms usually conclude one year contracts for the main products but except for the quantity, the other important attributes, namely price and quality requirements, were subjects of uncompen- sated changes imposed by the buyers (Curtiss et al., 2003). Under the above circumstances, production diversification as an active risk management tool is welcome if contractual conditions are significantly better than those for agricultural commodities. The opportunity is in sectors such as agrotourism, production of local specialities or other niche market products where farms can have comparable bargaining power. However, limited experience in differentiated marketing reduces farmers' ability to utilize these opportunities. Chaplin, Gorton, Davidova (2003) and ISARD 2003 suggest launching training for farmers, provision of appropriate extension services for project development business planning and establishment of regional development agencies. Such agencies could provide potential entrepreneurs, and not only those running diversified enterprises, with relevant information about the market, potential demand for goods and services, consumers, what is to be done to enhance attractiveness of a product or service etc.

CONCLUSIONS

Farm diversification is becoming widely recognized as an essential instrument of rural development policies. The reason is obvious: the declining number of workers engaged in agriculture threatens the viability of settlement in remote areas, and thus the very sustainability of these areas. Diversification of farming activities into non–agricultural activities, particularly services, is believed to have a multiplier effect through job creation. However, the case studies have shown that it is not an easy and problem–free process. First of all, significant progress needs to be made on the farms themselves. To cope with competition and to maintain the position on the market requires new and original approaches, enterpreneurship, managerial skills and knowledge. Social capital understood as trust and reli- ability in business relationships are equally important but recognized as acutely lacking. There are other areas where investment support to be provided by the state or regional governments is key if the objective of rural development is to be achieved. This assistance should be focused on vocational training, project proposal processing, promotion of opportunities and programmes available for firms etc. From the point of view of farmers' income, diversification plays an important role in risk management. We suggest a much broader understanding of diversification than only non–agricultural market activities. The provision of public or semi–public goods and services such as landscape management and biodiversity protection should definitely be included. We also suggest considering as diversification the switch from bulk production to differentiated highqualityandlocally–specificproductsandservices.Diversificationisalsoaboutdemanding more from farmers and managers in terms of managerial abilities and skills and, primarily, perception of new market possibilities.

150 REFERENCES

CSO. 2001. Agricultural census 2000. Czech Statistical Office, Prague. CSO. 1996. Agricultural census 1995. Czech Statistical Office, Prague. Chaplin, H. 2001. Czech Republic: Review of policies and information affecting diversification. IDARA Working Paper 4, Wye College. CHAPLIN,H.–GORTON,M.&DAVIDOVA, S. 2003. Agricultural adjustment and the diversification of farm households in Central Europe. Paper presented at the Congress of IAAE, Durban, August 20 – 24. CURTISS, J. 2003. Efficiency and structural changes in transition: A stochastic frontier analysis of Czech crop production. Institutional Change in Agriculture and Natural Resources 12, Shaker Verlag. CURTISS,J.–DOUCHA,T.–JELINEK,L.–MEDONOS,T.&RATINGER, T. 2003. Organiza- tional type, institutional environment and efficiency in Czech Agriculture. Paper presented at the 80th Conference of EAAE, Ghent (Belgium). DIVILA, E. 2001. Výsledky výbìrového šetøení v zemìdìlských podnicích a domácnostech se zemìdìlskou výrobou v regionu Jihovýchod,è.63,VUZE Praha. JEHLE, R. 1998. Bottlenecks of SME in services and craft enterprises and their elimination in rural areas of the Czech Republic: A trial to use of traditional regional economic measures. 38th Congress of the European Regional Science Association, 28 August – 1 September 1998. JELINEK, L. 2001. Analysis of diversification of agricultural incomes in the framework of IDARA project in the Czech Republic. Agricultural Economics, 47. ISARD. 2003. Integrated strategy for agricultural and rural development in the Czech Republic. T. Ratinger, ed. IDARA Working Paper Series, Research Institute of Agricultural Economics, Prague. RATINGER,T.&RABINOWICZ,E.1997.ChangesinfarmingstructuresintheCzechRepublicas a result of land reform and privatization. In Swinnen, J. F. M. – Buckwell, A. E. & Mathijs, E., eds. Agricultural privatisation, land reform and farm restructuring in Central Europe, pp. 42–65. Aldershot, Ashgate. Web sites: SAPARD Agency. Available at http://www.sapard.cz/index.php?clanek=162 Charles University. Available at http://veda.fsv.cuni.cz/doc/havel.doc Information about Czech agricultural history. Available at http://www.1upinfo.com/country–guide–study/czechoslovakia/czechoslovakia90.html Support and Guarantee Agricultural and Forest Fund. Available at http://www.pgrlf.cz

151 152 THE STATE OF FARM AND RURAL INCOME DIVERSIFICATION IN HUNGARY

Szilárd Podruzsik

INTRODUCTION

Hungary is considered a rural country. The total area of the country is 93 030 square kilometres with a population of 10 135 000 inhabitants, thus 109 persons per square kilometre. There are 19 counties (NUTS 3 classification) in the country. Recently, seven regions were created (NUTS 2); in this division there are 150 statistical subregions (NUTS 4). According to EU classification, 98 percent of Hungary territory is considered as rural areas. Thereare237townsand2898villages.Nineteenpercentofthecountry'spopulationlivesinthe capital, 45 percent in other towns and 36 percent in villages. The climate and topography of the country are highly favourable for agricultural production. 86.4 percent of the country's area is used for agricultural purposes; the share of arable land, in turn, is 67 percent of the total used for farming.

ROLE OF AGRICULTURE IN NATIONAL ECONOMY – MAIN INDICATORS

The importance of agriculture in the Hungarian economy has been decreasing since the political and economic transition that started in 1989. While agriculture contributed 12.5 percent of the GDP in 1990, since that year the contribution of agriculture to GDP has been decreasing continuously. Hungary has always been a net exporter of food and agricultural products due to the availability of fertile agricultural land, the favourable topographic and climatic conditions, the good condition of soils, and the traditional commitment of the rural population to agriculture. However, at present the country cannot maintain its long–established outstanding position in agricultural foreign trade. The tendency of the share of agriculture in total exports is very similar to that of the share in GDP. While agricultural exports accounted for 23.1 percent of overall Hungarian exports in 1990, this figure had fallen to 7.2 percent by 2001. This means a decrease of 15.9 percentage points in ten years. Despite the radical decrease in the share of agricultural exports, the balanceofagriculturaltraderemainspositiveandshowedasurplusof EUR 269millionin2001. Employment in the agricultural sector has also shown a decreasing tendency. According to official employment statistics, the share of full–time employees in the sector radically decreased from 14.2 percent to 6.2 percent of total employment in the 1990s. The most recent Agricultural Census 2000 indicates however that 23.7 percent of all workers in the national economy are

153 active in various forms of agriculture–related activities, either as part–time workers or full–time workers pursuing a hobby or supplementary activities. The share of agricultural investment in the beginning of the 1990s represented 8.7 percent of the total investment in the economy. By 1995, investment in agriculture represented only one–third of the 1990 level. A slight decrease was also recorded in 2000, and in 2001. In effect, agricultural investment amounts at present to 3 percent of overall investment in Hungary.

Table 1: Agriculture in national economy: economic indicators

1990 1995 2000 2001 Share of agriculture in GDP (%) 12.5 5.9 4.1 4.5 Share of agriculture and food production in total 23.1 22.0 6.9 7.2 export (percent) Balance of trade in agricultural and food products 1 298 1 470 1 347 1 567 (EUR million) Share of agriculture in employment (%) 14.2 8.0 6.5 6.2 Share of agriculture in total investment (%) 8.7 2.9 3.3 3.0 Source: Ministry of Agriculture and Rural Development (MARD).

REGIONAL DIFFERENCES

The Act on Regional Development (1996 and 1997) has introduced the role, the objectives and the institutional system of regional policy in Hungary. The Act defined the subregional statistical levels regarding regions as NUTS 2 level and small regions as NUTS 4. These levels, one notes, do not correspond to public administration units. The county administrative unit is NUTS3level;countiesremainthetraditionalpublicadministrationunitsoflocalgovernment. Seven regions were set up in Hungary: Central Hungary, Central Transdanubia, Western Transdanubia, Southern Transdanubia, Northern Hungary, the Northern Great Plain and the Southern Great Plain (NUTS 2). Regional differences are explained by geographical and political history and global economic development. These factors are interdependent and continuously change over time. Differ- ences between the regions can be distinguished by: • production places and facilities; • economic performance; • economic activity of labour; • unemployment rate; • wages; and • infrastructure. The lack of employment opportunities, small size of farms and poor infrastructure are the main reasons for economic and social problems in rural areas. Services that would support farmers and rural populations are underdeveloped. While electricity and telecommunication services usually satisfy the population's needs, the other elements of infrastructure are not well developed.

154 In terms of the structure of agricultural production, in the Southern and Northern Great Plains priority is given to the breeding of concentrated fodder–consuming animals, thus pigs and poultry. In regions with weaker crop potential, sheep breeding is the most characteristic activity. In a number of microregions, traditional plantations of fruits and vegetables dominate but the plantations require modernization. This modernization will also result in a more efficient utilization of the production potential characteristic for the particular regions. In Northern Hungary, in hilly grasslands beef cattle and sheep breeding dominate, while in the traditional wine–growing regions such as Tokaj and Eger, quality wine growing and wine production is to be further developed. In Southern Transdanubia, the whole region is a traditional beef and poultry producing zone, while the traditional wine–growing and wine–producing regions are Mecsek, Villány and Szekszárd. In Northern Transdanubia the main production orientation is animal husbandry specialized in milk and meat. In the Budapest conurbation agriculture supplying products for the city is expected to further strengthen because of the growing market potential, in particular vegetable and fruit production. (Dorgai, L. et al., 1998)

FARM STRUCTURE AND OWNERSHIP

In 1989, cooperatives owned the highest share of land while the share of the private sector was the lowest. There were no great differences between the three types of ownership in terms of use. Cooperatives used more than half of all land (60 percent), and 14 percent of land was privately used. In 2000 in turn, 86 percent of the land was in private hands and private owners used one–half of the land (51 percent). Cooperatives thus lost their dominant position in ownership as well as in land use.

Table 2: Ownership and use of land

Land ownership (%) 1989 2000 State owned 34 12 Cooperatives 37 2 Private 28 86 Total 100 100 Land use (%) 1990 2000 Corporations 26 34 Cooperatives 60 15 Private farms 14 51 Total 100 100 Source: MARD. In the 1990s, the dominance of large farms should be seen alongside the large number of small farms. This was the result of the privatization of land that was carried out between 1991 and 1997. About 660 000 hectares remained in the ownership of the state and local authorities. Large farms cultivated 2.61 million hectares out of the 4.71 million hectares of arable land in 1994 and 2.26 million hectares in 1996. After further decrease, two million hectares of arable land were cultivated by large farms in 2000.

155 As a result of privatization, land has been divided into extremely small holdings. In the same period, small– and medium–sized farms cultivated an increasing proportion of land, more precisely from 2.1 to 2.48 million hectares. The average area of land used by private farms was 0.5 hectare in 1990. The number of small farms decreased somewhat in the 1990s. On the other hand, in 1998 the average area of land used by private holdings of more than 5 hectares was 60 hectares, and 59 percent of farms over 60 hectares in area were in private ownership. (Ferto et al., 1999). In Hungary, the market for renting (leasing) land is very dynamic as 85 percent of the production land belongs to individuals, while nearly 45 percent of land is used by farming organizations, which are not allowed to own land. Thus, they must look for land on the lease market. The efficiency of the tenancy market depends on a sound legal environment and elimination of potential barriers to transactions. Enterprises rely mostly on land leased from their members or partners. The structure of rental prices by origin shows significant differences. Companies (limited liability and joint stock companies) pay by far the highest rent to their partners, and these price trends are followed by the level of payments made by cooperatives. Much lower rental prices are paid to outsiders (Lakner et al.,1997).

INCOME DIVERSIFICATION

A significant proportion of private farms – some 60 percent – produce agricultural products only for own consumption, thus a self–sufficiency orientation predominates. While the role of this production in family incomes is not significant, it is not to be ignored. Some 30 percent of private farms use the surplus production above a self–sufficiency level to supplement their income. Producer farms (commercial) represent only 8 percent of the total number, while farms with services constitute 0.2 percent. One significant advantage of commercial farms over farms producing only for self–sufficiency is that their workforce is markedly younger and better qualified. In rural areas, especially in small villages it is hard to find other economic activities besides agriculture; therefore agriculture and related activities are key in preventing the population from migrating. The number of full–time workers in agricultural enterprises was 110 700, which accounts for 96 percent of the entire labour force in agriculture. Corporations employed almost 60 percent of full–time workers. The remaining 40 percent of full–time workers worked for cooperatives. Only 4 percent of the workforce have been employed by agricultural enterprises in recent years. One notes that there were no pensioners formally employed in this sector in 2000. Most part–time farms are run as subsistence entities and aim to supplement the family income. Farms or companies producing as competitive, commercial farms have limited possibilities to receive state subsidies. Most of the non–competitive farms would not be able to meet the economic requirements to obtain a subsidy, and the subsidies they do receive are so small that they would not improve the standard of living. Most of the farmers applying for state support do not want to receive social support and benefits any longer. Their long–term concept is to earn income from their gainful activities.

156 Small producers without capital maintain their undersized farms only as a supplementary income source but have no chance to develop the farm. This is the reason for the insufficient number of workplaces and the weak social network in the countryside. On the existing small farms within a household, family members share the agricultural income. The number of family members and production change relatively frequently without affecting the farm itself. The scale of production on the farms remains below a certain level and, in effect, they avoid regulations on both taxes and market sales. Market policies have been formulated to help the integration of production. (Chaplin et al., 2001) Recent changes to land market regulations and policies related to land leasing have contributed to the start of non–agricultural businesses on farms. In order to encourage the development of tourism as a new business activity in the countryside, the government provides incentives such as tax relief or complete tax exemption to encourage farmers to take this opportunity (Dorgai et al., 1998). The objective and task of the three main types of central government agricultural subsidies was to support and improve the competitiveness of the agricultural sector by promotion and development of the marketing of products. The central subsidies enhanced investment through development grants as well as production grants. The intention was to improve through these grants the prospects for life and settlements in rural areas. The economic development appro- priations and the labour force market fund were intended to keep the population in the rural areas where they were living (Ferenczi: IDARA Working Paper 6/1).

PRE–ACCESSION PROGRAMMES

The total amount of budget subsidies was HUF 1 095.5 billion between 1996 and 2000. Tar- geted and Earmarked Support provided the largest amount. The second biggest fund was Agrarian Support with HUF 189.6 billion in five years. It was followed by the Labour Market Fund with HUF 146.3 billion and Environmental Targeted Provision of HUF 107.4 billion. In 2000 alone, of the 11 types of central funds for regional development the budget of the Targeted and Earmarked Support was the highest with HUF 83.7 billion at 1998 prices, which accounted for 36 percent of the overall budget subsidies. From the total figure of HUF 244.5 billion, the share of Targeted Provisions for tourism was only 1.5 percent. EC Phare 2000 is the main source of financing for rural development. Phare can support programmes such as environmental protection, transport and agricultural and rural development. Phare is also intended to help the regional administrations learn the system of EU Struc- tural Funds. The beneficiaries of Phare are NUTS 2 regions, as will be the case with Structural Funds. It is noted that all Hungarian regions have a GDP per capita level lower than 75 percent of the EU average. Thus, all Hungarian NUTS 2 regions will become beneficiaries of the EU Structural Funds after accession. This will require a revision and reformed financing of regional development, focusing on the NUTS 2 regions. Also within the framework of the SAPARD Program, the main tasks are to strengthen the competitiveness of Hungarian agricultural products, reduce the harmful pollution due to agricultural activities, and help rural areas improve their adjustment capacity, create jobs and prepare them to receive grants from Structural Funds (Nemes et al., 2000).

157 FUTURE PERSPECTIVE

One of the most important elements of development in rural areas is the improvement of the regions' economic potential and increased employment. This can be achieved through creating infrastructurethatissustainable,andsupporttoagriculturalproductionadaptedtolocalcondi- tions and available facilities and processing, including improvement of soil quality, development of water resources and improvement of basic services to support farmers. The policies and instruments used to increase rural employment and effective income generation are as follows: extension of rural economic activities such as rural and agro–tourism, development of crafts, diversification of production and processing, enhancement of the range and quality of products, civic works, producer services and raising the effectiveness of marketing and promotion. The present agricultural policy in Hungary aims to increase the productivity of the agricultural sectorandtostrengthenandimprovethemarketandincomepositionofagriculturalproducers. To fulfil the tasks that are in harmonization with EU accession requirements, the Hungarian government uses both domestic as well as EU financial resources. The agricultural and rural development strategy is primarily based on the aforementioned Act on Regional Development including EC regulations and based on principles of the EU rural development policy. The government intends to encourage rural populations to stay in their present living areas. The financial support provided for structural changes of farms, to young farmers, for agricultural investment, training and education, development of agricultural infrastructure and diversification of farm activities can contribute to attaining these objectives.

REFERENCES

ALVINCZ, J. et al. 2001. A mezõgazdaság jövedelemhelyzete és az arra ható tényezõk. Agrárgazdasági Kutató és Informatikai Intézet,7. CSÁKI, Cs. 2003. A vidékfejlesztés új irányai – különös tekintettel az Európai Unióhoz csatlakozó országokra. AVA, április 1– 2. CHAPLIN,H.2001.Hungary:Reviewofpoliciesandinformationaffectingdiversification. IDARA Working Paper Series, 2/6. DORGAI,L.et al. 1998. Regionális fejlesztés–vidékfejlesztés. Agrárgazdasági Kutató és Informatikai Intézet, 9. DORGAI,L.et al. 1998. Mezõgazdaságunk üzemi rendszere az EU tapasztalatok tükrében. Agrárgazdasági Kutató és Informatikai Intézet,8. FERTÕ, I. 1999. A magyar mezõgazdaság strukturális problémái az Európai Unióhoz való csatlakozás tükrében. Magyar Tudományos Akadémia Közgazdaságtudományi Kutatóközpont, Mûhelytanulmányok, 1999(2). FERENCZI,T. Central funds for regional development and their objectives in the Nineties. IDARA Working Paper 6/1.

158 LAKNER, Z. 1997. A magyar agrárvállakozások stratégiái egy primer felmérés tükrében. Gazdálkodás, 41 (2). NEMES, G. 2000. A vidékfejlesztés szereplõi Magyarországon. Magyar Tudományos Akadémia Közgazdaságtudományi Kutatóközpont, Mûhelytanulmányok, 2000(10). VARGA, J . 2003. A magyar agrárpolitika egyes pénzügyi vonatkozásai. Budapest, BKAE. (Ph.D. dissertation)

159 160 THE STATE OF FARM AND RURAL INCOME DIVERSIFICATION IN ROMANIA

Marioara Rusu73

INTRODUCTION

In the first years of transition to a market economy, rural development in Romania was frequently associated with agricultural development. While agriculture is still the backbone of the rural economy, at present attention is also focused on the non–farm sector role in the context of rural development. It is becoming generally recognized that, in the longer term, the development of the rural non–farm sector is an important factor in providing rural employment and income. The main objective of this paper is to analyse the types of farms and nature of farming and non–farming activities in which the population in rural areas is involved. This paper aims to identify the main potential and constraints to development and to propose short recommendations in the context of Romania's prospective accession to the European Union. Romania has a significant natural potential for a diversified rural economy, including its natural and human resources that at present are not fully utilized. Rural areas account for 89 percent ofRomania'stotalareaand91percent ofitsagricultural land,andover90percent offorests. On this area about 10 million people are living, i.e. 45 percent of the country's total population, of which 3.5 million are young people (15–40 years). Many villages preserve their traditions and customs and have a rich cultural heritage and historical past. Even though Romania has great development potential, the economic and social situation in- heritedfromthecommunistperiod,combinedwithahesitanttransitionhaveresultedinanum- ber of problems in rural development that will be quite difficult to solve. At present, in Romania about 65 percent of the rural population experiences poverty. There is a low qualitative structure of the labour force, experiencing a general process of ageing and out–migration of young and educated people. The social and technical infrastructure is undeveloped. More than 50 percent of rural roads are not modernized, while about 50 percent of the rural communes have no direct access to the national transportation system (trains and buses). Only 38 percent of the national drinking water supply network, 36 percent of piped gas supply and 6 percent of the sewerage network are located in rural areas. Education and sanitary services are poorly developed as concerns both the

73 Senior researcher at the Institute of Agricultural Economics, Bucharest.

161 number of units as well as a poor endowment of equipment and specialized staff. As result, the infant mortality rate is 35 percent higher compared to urban areas. Agriculture represents the backbone of the rural economy and remains one of the most important sectors of the national economy. More than 3 million people are working in this sector, i.e. 47 percent of the total employed population. The constant increase of agriculture's share in the labour force represents a trend contrary to that in developed countries. The relatively high share of agriculture in GDP (12.9 percent) is by no means an indicator of developed agriculture; rather this phenomenon points to the weakness of the balance of the economy. On the contrary, the decreasing trend of this economic indicator after 1994, combined with the high share of population employed in agriculture, demonstrate the continuous decline of labour productivity in this sector, estimated at 32 percent of labour productivity in the national economy as a whole. Agricultural production is also characterized by poor technical endowment and an extensive model of technique, confirmed by the low share of agriculture in capital investment (6.7 percent) and in fixed assets (3.1 percent).

OVERVIEW OF GOVERNMENT POLICY CONCEPTS AND PROGRAMMES

During the transition period, the policy issues related to development of farms and rural income diversification have been integrated into the general strategies of the transition to a market economy. Land restitution, land privatization and family farm sector development have represented the core of market–oriented reform. The policies and methods of reaching the income diversification objective were identified as follows: (i) establishment and modernization of local enterprises, mainly in the following sectors: handicrafts, trades and raw material processing; (ii) establishment and development of services for supporting the activities complementary to agriculture; (iii) establishment of new units in the rural tourism sector; and (iv) development of small– and medium–size enterprises etc. Nevertheless, within these strategies the objectives and measures concerning the above issues were not formulated in a sufficiently clear manner. There was also a strong focus upon the short– and medium–term objectives, to the detriment of the long–term view. There was no rig- our in planning the availability of financial resources. The development of the farm and non–farm sectors in Romania has been supported through the activities of the different projects, programmes, grants, investment funds and loan guarantee funds financed by domestic and/or foreign funds. In these projects and programmes, family farm and income diversification issues were addressed, directly or indirectly. As result of the lack of a rural strategy until early 2001, there was no coordination of these programmes and projects, implemented without common links which would lead to the pooling of technical and financial resources in order to obtain more efficient results. At present, the SAPARD Programme provides financial support for most agricultural and rural development projects.74 The Government of Romania holds the view that rural development

74 Romania has identified four priority measures to be financed under this programme: (i) improving processing and marketing of agricultural and fishery products; (ii) development

162 continues to focus upon agricultural development; even in the SAPARD measures, nine out of 14 objectives refer to agricultural modernization and development. However, a model of Roma- nia's regional development, in which an important part is played by the diversification of incomes and of rural economic activities, is also foreseen in the policy concepts of the present agricultural decision–makers.

FARMING SECTOR IN ROMANIA – BETWEEN SURVIVAL AND PERFORMANCE

Romania has quite significant land resources (23.839 million hectares) of which 14.857 million hectares are agricultural land (62.3 percent of total land resources); 6.457 million hectares of land are under forests and forestry vegetation (27 percent); 0.868 million hectares are permanent water bodies (3.8 percent); 0.633 million hectares are constructions (2.6 percent); 0.388 million hectares roads and railways (1.6 percent) and 0.636 million hectares under other use (2.7 percent).

Agricultural land use and property The country's agricultural land structure provides significant development potential for a diversified agriculture: arable land totals 9.381 million hectares (63 percent of total agricultural land); land under pastures and hayfields 4.949 million hectares (33.5 percent); land area under vineyardsis0.272millionhectares(1.8percent);landareaunderorchardsandfruittreenurser- ies 0.257 million hectares (1.7 percent). Land reform in Romania's agriculture has been implemented at a quite slow pace, with many inconsistencies and half–measures. In spite of these, at present the private sector in Romania's agriculture prevails: the share of agricultural land in private ownership has increased from 14 percent in 1989 to 74 percent in 2000; the share of agricultural land in state ownership has significantly decreased from 86 percent in 1989 to 26 percent in 2000.

Farm size and structure From a structure based on large–scale state farms and collective farms, agricultural land has been transferred to private individual farms, farmers' associations and state and privately operated companies. In 2001, the private sector mainly consisted of: (a) legal agricultural associations, operating on a total land area of 1.685 million hectares; the average size being 385 hectares; (b) family agricultural associations, operating about 6 percent of the agricultural land in the private sector; the average size area is about 120 hectares; and (c) individual/rural households, about 4.2 million, accounting for 81 percent of land in private ownership; the average size of this farm type is 2.47 hectares. Almost 88 percent of such farms own less than 5 hectares and only 12 percent have more than 5 hectares.

and improvement of rural infrastructure; (iii) development of the rural economy (investment in agricultural holdings, economic diversification and forestry); and (iv) development of human resources.

163 Intending to go beyond the general aspects of the agrarian reality, as provided by the relatively scarce macrostatistical information available, the following part is based on information obtained from the World Bank field survey conducted in 2001.75 Rural households are characterized by the small land area in ownership: the average size of rural households investigated in the field survey was about 3 hectares. The share of properties less than 3 hectares in area was about 65 percent. This data leads to the conclusion that a high percentage of rural households have such a small land area in ownership that they do not have the necessary resources for becoming competitive farms. The negative consequences of small farm size are further aggravated by high land fragmentation; there are four parcels per household on average. Land fragmentation is generally considered one of the main obstacles to technical progress in agriculture. The small size of properties and extremely high fragmentation are a constraint for competitive agriculture. The above are accompanied by delays in clarification of land ownership rights. Many years after the promul- gation of the Land Laws, only about 85 percent of landowners have received their ownership titles.

Land market The agricultural land market was not functional on a legal basis until 1998. In the first two years of its legal operation, the start was quite slow. Of the total number of households interviewed in the survey, only 5.4 percent have bought land, 2.3 percent have sold land, while 0.5 percent both bought and sold land. The peasants who have received their land back are not willing to transfer it to other entities. It seems that for overall economic instability considerations, the owners of small plots of land prefer to keep them as a social safety net. It is the households consisting of elderly persons, with no successors or heirs, lacking agricultural technical means and financial resources, that are mainly the ones to sell land. The households that buy land are for the most part run by young persons, which generally achieve high incomes, operate larger land areas and have better labour resources. In spite of the difficulties experienced, rural households prefer farming their land on an individual (rather than collective) basis: this preferred land operation modality was stated by about 92 percent of farm operators asked. The households leasing out land (the entire property or only part of it) generally consist of elderly people that are confronted with financial difficulties, as well as of landowners living in towns; the latter provide a significant part of the land operated under this form.

Agricultural production, technical endowment and inputs use The analysis of crop structure and of the share of different crops in total cultivated area shows that cereals prevail, as 92 percent of households grow cereals. Maize remains the main crop, followed by wheat. Animal husbandry has experienced a decline, following 1989. This was

75 The field survey was financed by the World Bank and was conducted by the Urban and Regional Sociology Centre in March 2001. Although the research and hypotheses in the survey questionnaire for the sample of farms analysed were elaborated by World Bank experts, the ideas presented in the paper do not imply the views of the Bank.

164 confirmed by the field survey. In 2000, of all investigated rural households, 91 percent raised poultry, 65 percent pigs, 48 percent cattle and 30 percent sheep. Further analysis of the crops and livestock number per household indicated the presence of a highly diversified agriculture: about 60 percent of households cultivated more than three crops or bred more than three animal species. This diversification protects farmers against risk; at the same time, it is a characteristic of subsistence households for which meeting own consumption needs becomes a priority. One of the main causes of low agricultural efficiency is the low level of agricultural inputs use. Among the rural households interviewed, only 34 percent used certified seeds, 52 percent relied on outside mechanization services, 40 percent used veterinary services, and pesticides were used by 22 percent and fertilizers by 49 percent of farms. The main causes which determined the above low use of inputs were identified as follows: slow adjustment of input markets to the new ownership structures; input–output price scissors; and the lack of financial resources. The primary means of input procurement remains direct payment, while purchases based on contracts continue to account for an extremely low share (4 percent). The Romanian peasants, after getting their agricultural land back, found themselves in the dramatic situation of being obliged to farm, while lacking the necessary agricultural equipment and implements with no financial possibilities to buy them. The high costs of modern agricultural machinery make it inaccessible for most rural households. The agricultural credit policy in turn has not succeeded in bridging the gap between the rural households and the manufactures of agricultural machinery and equipment.

Marketing and agroprocessing Rural communities have a poorly defined commercial behaviour, characteristic of a subsistence economy. In the year 2000, only 35 percent of rural households were involved in commercial relations. Theproblemofmarketingofagriculturalproductstendstoaggravate,inducingnegativeeffects in the whole production cycle; the main cause is the lack of available financial resources. The ownconsumptionmodelresultsinlackofagriculturaloutputstobesoldonthemarket.Thisim- plies low incomes that hinder the future development of the households. In effect, the rural households further shift to the natural economy model, more and more covering its consumption needs from its own production, with far–reaching implications for the integration of local and regional community activities. Most peasants in effect offer for sale only the surplus left after covering their families' needs; the family here means either family members who have effectively worked in the household or family members living in town. In many cases if the products do reach the market, the explanation for this is not the landowner's entrepreneurial behaviour but rather the acute need of money. The sale of agricultural production still continues to depend on traditional practice: the traditional sale of production at the marketplace is still maintained as the prevailing type of produce marketing (67 percent), i.e. each producer sells its own production. The links between small producers and the downstream sector are weak. The processing industry is still characterized by a low level of productivity, obsolete technologies, lack of adjustment to demand and inadequate treatment of small producers.

165 Investment The investment behaviour of rural households is targeted specifically to a survival, subsistence strategy rather than a development strategy. The share of households that undertook investment represented 35 percent of the total number investigated in 2000. The main investments were buying livestock (14 percent) and in buildings for agricultural production (6 percent). So- cial investment, mainly children's education has a top position, with 17 percent. The financial sources for investment mainly come from the family's own savings obtained from agricultural and non–agricultural sources. The usual perception of a bank as loan institution is negative. A double conditioning appears in the relations of rural households with banks. In the first place, there is the peasant's carefulness when contracting debt. The second reason at the basis of peasants' reluctance to apply for a loan at the bank is related to the very high interest rates and the great bureaucracy (formalities required to obtain a loan). These are the main reasons those obtaining a loan from a bank represent an extremely low share, less than 1 percent. We must mention that as regards credits, the state has had no specific policy in order to facilitate private producers' access to bank credits.

Farm typology by source of income The classification of households according to the main and secondary activity field of their members is presented below. The distinction between farming and non–farm activities allows us to differentiate the various sources of income and livelihood strategies in different groups of the rural population and enables policy planners to design strategies tailored to the needs of these groups in order to enhance their capacity to cope with social risks.

Table 1: Rural households profile by activity sector (2000)

Household category Share (%) Households with members working only in agriculture 67.2 Households with members working mainly in agriculture and secondary occupation in non–agricultural sector 0.2 Households with members working only in non–agricultural sector 13.7 Households with members working mainly in the non–agriculture sector and secondary occupation in agriculture 2.9 Mono–activity represents the characteristic feature of Romanian rural communities: about 70 percent of rural households were and are employed in agriculture alone. This high share of those who engaged in agricultural activity in one way or another reveals the rural population's orientation towards a subsistence agriculture. Thestructureofthepopulationemployedinruralareasisnottheresultofadevelopment andin- vestment policy but rather the result of the absence of such a policy, associated with the lack of a coherent job creation policy at the national level that has resulted in labour force migration from urban to rural areas. The diversification of non–farm activities in rural Romania is a very important issue for the sustainable development of these areas. Although agriculture is the basis of the livelihoods of almost all households in rural areas, it is generally known – however, without much official data to prove this – that most of them are also involved in a number of activities besides farming and have different alternative sources of income.

166 There has been a dramatic decrease in the intensity and scope of non–farm activities in the transition period. The main reasons for the decline of the non–farm economy are the closing down of most public enterprises, a decrease in the number of public jobs and the absence or very limited market demand for the types of goods and services that the non–farm workers used to produce. At the same time, many rural households find it increasingly difficult and have little incentive to get involved in non–farm activities within the changing social and economic context imposed by the market economy. People are not enthusiastic about setting up small businesses and are reluctant to take up new initiatives. Few people have been prepared for the need to assume new roles and responsibilities under the rulesofthemarketeconomy.Nowthatthestatecannolongerprovidejobsandincomesecurity, most people have found it psychologically difficult to look for sources of income on their own and to cope with the everyday uncertainty in their lives.

Entrepreneurial behaviours The entrepreneurial orientations represent a reaction of rural households' adaptability to a cap- italisticeconomicenvironment.Entrepreneurialbehaviourhasanactiveandinnovativenature, specific to the economic systems based upon competition, risk and private initiative. The agricultural entrepreneur assumes the risk to organize, carry out and develop a profitable activity. S/heisinoppositiontopeasantmentality,shiftingfromtheaspirationtoownlandtotheaspira- tionforitsrationalutilization,fromself–subsistenceproductiontoproductionforthemarket. Defining agricultural entrepreneurs is always a controversial issue.76 We can identify three types of entrepreneurial households: households with weak entrepreneurial behaviour (27.6 percent); households with medium entrepreneurial behaviour (15.8 percent); and households with strong entrepreneurial behaviour (6.2 percent). For the three types of households, their structure in terms of average household age and incomes is very significant. The younger and richer (in terms of money) a household is, the higher its probability of becoming a successful entrepreneurial farm unit. This is also true for households with medium entrepreneurial behaviour and the relation still holds for households with weak entrepreneurial behaviour, even though it is not so obvious. Apparently there is no linear relationship between farm size and different types of entrepreneurial households. In terms of occupational status it seems that households with strong entrepreneurial behaviour include more members performing non–agricultural activities. It seems that non–agricultural employment provides capital for agricultural investment. However, successful entrepreneurs in agriculture may no longer be dependent on a non–farming activity, since their businesses have consolidated in the last years.

76 We shall use four dimensions to classify agriculture-related entrepreneurship in Romania: (a) buying or leasing land – if the farmer bought or leased land; (b) productive investment – if the household has a truck, tractor, combine harvester for cereals, sowing machine, equipment for processing agricultural products or invests money in buying agricultural equipment, planting trees, developing a food processing business etc.; (c) buying inputs/selling outputs – if the farmer bought at least one input and sold at least one agricultural product; and (d) hiring labour – if the farmer hires full- or part-time workers to work on the farm.

167 Income sources from selling agricultural products are generally found in households with medium entrepreneurial behaviour and households with strong entrepreneurial behaviour. A private non–agricultural business seems to be an important discriminating factor between households with strong entrepreneurial behaviour and the other types of entrepreneurial households. The aspects presented above regarding the characteristics of rural households with entrepreneurial orientation invite a reflection on this matter. Agricultural sector performance is mainly influenced by two factors, i.e. the quality of entrepreneurs in the agricultural sector and a favourable economic environment. During the transition period, the governments in power have mainly focused on privatization, while the problems linked to competitive family farm development have taken second place in the agricultural policy agenda.

GENERAL CHARACTERISTICS OF NON–FARMING ACTIVITY

The collapse of the state–run economy and the privatization of state farms, collective farms, fac- toriesand(moreslowly)servicesthatfollowedthecollapseofthecommunistregimemeantthat an important part of the population lost their jobs; this was because in the communist period there had been very little employment outside the state sector. The loss of safe jobs in the urban areas meant that huge numbers of people left and returned to the villages from which they or their parents had come.

State of non–farming sector The sector of small– and medium–sized enterprises has been neglected, in spite of all warning signs issued by specialists in the field. Except for mining and the energy industry, non–agricultural activities are taking place in small– and medium–sized units. Out of the 661 657 small– and medium–sized units, only 17 percent were located in rural areas (1998). This sector has been facing a deep crisis, being confronted with many problems threatening not only its development but also its survival. The solving of these problems requires the elaboration of a national strategy concerning this sector's development that should have in view a series of aspects, namely: • establishment of a special credit line for the sector of small– and medium–sized enterprises; • granting fiscal support and facilities for production earmarked for export; • differentiation of the tax on profit in relation to the activity sector; • facilitating access to production premises and land; • development of advisory and consultancy centers; and • establishment of an organization to facilitate business contracts between Romanian and foreign entrepreneurs etc. The territorial distribution of industrial activities is determined by the local natural resources, by the economic and social situation and by tradition. In Romania, industrial activities are mainly concentrated in two compact areas located in the southwestern and northeastern parts of the country, these economic regions traditionally known as having a high level of economic development.Ontheotherhand,inmorethanhalfofRomanianrurallocalitiesnoindustrialac- tivity can be found (Rusu, 1998).

168 The sector of services developed quite well in the communist period; afterwards it experienced a drastic collapse after 1989. Most of the state–run service delivery enterprises in rural areas have been closed. The demand for service delivery and crafts is very low. There is not even a demand for construction workers due to the drastic decrease in building activities in poor rural areas. The demand for such essential services as car repairs, dressmaking, hairdressing etc. is also low due to the lack of the population's financial resources. Romania's tourism, rural tourism implicitly, is confronted with a strong crisis, as tourism is poorly developed compared to the rural areas' generous natural, historical and ethnographic potential. The development and enlargement of this sector is hindered by the deficient infrastructure, relatively low degree of equipment facilities existing in households and lack of tradition in this field, as well as lack of information.

Informal arrangements As many of the non–farm rural activities in Romanian villages are on a very small scale, do not involve cash, are not officially registered and may be either illegal or semi–legal, it is quite difficult to make an estimation of them, either on a quantitative or qualitative basis. Field research studies have shown that this sector provides only small amounts of cash income for most households. However, it is vital to livelihoods, particularly in Romania where such informal arrangements are quite developed in the rural areas. What is worth mentioning in relation to these type of activities is that payments are not made in cash, but rather in kind, in labour or under a barter system. This type of activity creates and maintains interpersonal and interhousehold ties which are vital to the survival of households. Barter is important in the countryside because of the shortage of cash, both within the village and outside it.

Legal and institutional framework Until early 1999, rural development problems were addressed precisely by various structures at the central level and/or local public administration, depending on their characteristic features. At present, the only governmental structures with responsibilities in rural development are those within the organizational structure of the Ministry of Agriculture, but currently rural de- velopmentisstillgivenaminorpoliticalandinstitutionalimportancecomparedtoagriculture. There are also other governmental institutions involved in rural development; however, there is no coherent structure of these bodies, and neither good coordination nor collaboration between them exists. A sequential approach to rural development is already in place, but in the future an integrated development policy for rural areas should be implemented. Due to the public administration reform, the administrative capacity for rural development has increased, and there is some progress regarding the communication between and within government departments. Generally, the present policies do not seem to focus upon the needs of the rural population and their specific social and economic problems. In general, the lack of a realistic assessment needed for drawing up a coherent rural development strategy hinders reaching the rural development objectives. In addition to the weak links and insufficient interactive participation, a general lack of communication between institutional structures at all levels and weak interministerial coordination have also been noted. Transparency and strong coordination between the institutions in charge

169 of rural development programmes would be necessary so as to increase the projects' efficiency and impact. A legal framework concerning rural development was established in harmonization with the EU regulations for the SAPARD Program. For the SAPARD implementation, an institutional structure was established at national, regional and county levels. A legal framework for the administrative and fiscal decentralization exists, and its effects are highly differentiated in the particular localities. In the rural development sector, the legislative framework for regional development is not yet entirely operational. The implementation of rural development programmes also depends upon civil society. Here employers' associations, trade unions, private farmers' professional organizations, young farmers' organizations etc. are involved. According to some studies, there are strong disparities regarding NGO distribution in the country's territory. Only 10 percent of NGOs are found in rural areas but a large part of them are not active. As a rule, local structures do not yet have the experience and capacity to implement rural development programmes and projects.

CONCLUSIONS AND RECOMMENDATIONS

Thenon–farmsectorisconsideredveryimportantforruralemploymentandincomegeneration against the background of a declining agricultural sector. It is also important for Romania's EU accession, currently foreseen in 2007, as the development of remunerative and sustainable non–farm employment opportunities will have important effects in terms of using future structural funds, regional assistance and implementation of the Common Agricultural Policy. For those rural households which can no longer rely on non–farm employment, agriculture has become the main source of income and a key safety net. It has played an important role in pro- tectingthepopulationagainstdeeppovertyduringtheyearsoftransitionandeconomicdecline. At the same time, subsistence farming, upon which many rural households are still dependent, cannot contribute to agricultural growth in the long run. It does not provide an effective way for getting out of poverty. Many Romanian villagers, mainly the poor ones, find it very difficult to go beyond subsistence production. They have difficulties in gaining access to enough land, to irrigation and other supporting infrastructure, to financial resources for essential investment as well as to markets. Many rural households, mainly the elderly and disabled and female–headed households, cannot cultivate all their land; for them land is a burden rather than an asset. Households cannot entirely rely upon subsistence production. They also need some cash income to allow them to buy those food products which they cannot produce themselves, goods such as clothing, and basic services. There has been a sharp decrease in the intensity and scope of non–farm activities in the transition period in Romania. With the collapse of the state economy, a significant number of rural non–farm workers suddenly found themselves unemployed and deprived of their main source of income. There is also very low consumer demand for many goods and services in both rural and urban areas and foreign markets are hardly accessible, so that rural businesses struggle hard to maintain their existence.

170 Many rural residents have found it extremely difficult to get involved in non–farm activities in the market economy context. Many entrepreneurial and capable men and women who could potentially contribute to the development of the rural economy have left Romania. It has been argued that a crucial precondition for the development of the non–farm economy in Romania is the strengthening of the farming sector. Agricultural sector development depends on successful design and implementation of a wide range of policies and programmes, including legislative, financial and policy measures in various subsectors. Some of the key aspects that have been identified could be improved through the following: (i) resolving the land fragmentation problem; and in relation to this: (ii) development of land markets, although this should be approached with caution, given the high dependency of some groups of the population on subsistence farming; (iii) promoting the sustainable use of land resources; (iv) improving agricultural extension services in order to increase knowledge and improve farming practices in relation to market–oriented production; (v) provision of essential inputs and mechanization, including support to input and service suppliers and subsidizing the most essential inputs; and (vi) fostering the development of local agricultural markets etc. Development of the rural non–farm economy primarily depends on changes at the macroeconomic level such as an improved business and investment environment, development of financial markets, and strengthening the rule of the law in the country. In relation to these, some of the measures to support the non–farm rural sector could include the following: (a) develop a policy framework and draft legislation on agricultural labour and rural employment; (b) design and implement programmes to counteract rural underemployment and hidden unemployment; (c) strengthenruralfinanceandcreditprogrammesorientedtowardssmall–andme- dium–sized enterprises; (d) increase information flow to the population regarding available opportunities; (e) develop the rural economic infrastructure, including improvement of roads and means of transportation; (f) empower and build the capacity of some of the poorest households and vulnerable groups, who because of their lack of influence and poor access to important social networks cannot benefit from economic opportunities; and (g) promote community–driven development programmes as an effective means to empower and enhance the capacity of the poorest and marginalized groups and households.

REFERENCES

CSAKI,C.&TUCK, L. 2000. Rural development strategies for the Eastern Europe and Central Asia region. World Bank. DAVIS,J.R.&GABURICI, A. 2001. Non–farm employment in rural microenterprises in Roma- nia: Policy & development issues.(NRI Report and unpublished mimeo)

171 DAVIS,J.R.–BUCHENREIDER,G.&BREITSCHOPF, B. 2002. The transition to private agriculture in Romania. Lexington Books. (forthcoming) DAVIS,J.R.&PEARCE, D. 2001. The non–agricultural rural sector in Central and Eastern Eu- rope. In: Lerman, Z. & Csaki, C. eds. The challenge of rural development in the EU accession process. World Bank Technical Publication, paper No. 504 ECAESSD series. RUSU, M. 2000. From agrarian policy to rural policy: Romania in transition. Paper presented at the International Conference: European Rural Policy at the Crossroads, The Arkleton Centre for Rural Development Research, King's College, Aberdeen, 29 June – 1 July. SANDU, D. 1999. Spatiul social al tranzitiei. Ed. Polirom.

172 APPROACHES TO FARM/HOUSEHOLD INCOME DIVERSIFICATION FOR IMPROVED LIVELIHOOD IN SLOVAKIA

Jela Tvrdonova

INTRODUCTION

The political and economic changes that started in Slovakia after1989 have affected profoundly the development of the entire society; one aspect is that the transition caused major disparities among various social groups as well as between the western and eastern regions of the country and between urban and rural areas. Citizens were challenged suddenly with many hitherto unknown problems, such as unemployment, loss of income, loss of professional perspective and exclusion from social security systems. The transition processes influenced first of all the agriculture sector and, as consequence, aggravated the problems of rural areas. During the last decade, more than two–thirds of workers in agriculture and related branches have lost their jobs. The decrease of agricultural subsidies and increase of input prices resulted in the lack of ability of agricultural enterprises to continue providing various social services for rural populations, such as the financial support of the social infrastructure, culture, sport and other leisure time activities. The so–called small privatization practically liquidated alternative income activities of agricultural cooperatives and rural agriculture–related enterprises that represented, particularly in less favoured areas (LFAs), a significant source of incomes and – to some extent – were similar to the currently promoted rural economic diversification. The difference between diversification then and the present situation will be discussed further. The second pillar of the former rural economy and employment – industrial plants in city districts, employing the workforce from surrounding rural areas – lost the markets for their products previously exported to Eastern European countries and the USSR. The enterprise managers, who lacked marketing or modern management skills and knowledge were not able to compete in Western European markets and could not manage well in the new production and distributionsystems.TheSlovakindustrialsector,heavilydependentonthemetalandweapons industries, was reduced as result of the rapid conversion policy, as part of the so–called shock therapy, in effect eliminating job opportunities for local workers. The most important asset in rural areas after the transition is, first of all, the human capital – hardworking and technically educated people, who very often choose to leave the countryside and look for jobs in other regions, capital cities or abroad, and create added value there instead of in their own region. In many cases they search for jobs in the grey economy. They also often lack specialist skills, knowledge and the capital necessary for the development of entrepreneurial activities on their own.

173 The traditional rural economic sectors, first of all primary agricultural production, fully privat- izedtoday,representtodaylessthan4.9percentofthenationalGDPandemploy7percentofto- tal labour resources. Although the economic results in 2001 and 2002 have demonstrated an overall growth trend, as witnessed by the government's 2003 Green report, nevertheless a number of these enterprises experienced economic decline, with negative consequences for local employment and rural infrastructure maintenance; the latter is a negative factor primarily in regions with high tourism potential. Further development potential is represented by the forestry sector that uses land which accounts for 44 percent of the country's total surface area. The majority of forests are privatized as well, but this is not always a positive factor since private owners see the forest assets more as the source of easy and fast profit rather than a base for value–added sustainable rural development. The rich natural resources of the country, i.e. mountains, rivers, lakes and landscape are also very important assets for future development of rural tourism and agrotourism but at present are significantly underutilized and neither managed well nor conserved.

THE SETTING

Social and demographic situation in rural areas The total population of Slovakia is 5 379 000 and the average population density is 109.9 inhabitants per square kilometre. Outside urban areas, the population is concentrated in lowlands and valleys, while mountain areas are sparsely settled. The extensive settlement and use of the countryside in the past has essentially affected the original settlement structure and composition of ecosystems. Generally, rural settlements are considered as those not having the status of a town and having a specific character and type of occupancy and economic structure, based mainly on agriculture and forestry, combined with a less developed infrastructure and low population density. In statistical classification, these settlements have fewer than 5 000 inhabitants. The Statistical Office of the Slovak Republic (SR) registers 2 883 settlements, of which 2 745 (95.2 percent) are villages and 138 cities. The majority of villages – some 1 979 – have no more than 1 000 inhabitants and of these 1 210 villages have fewer than 500 inhabitants. The level of rurality is, according to OECD methodology, defined by the share of the population living in rural settlements. Regions (districts) with a share of the population living in rural municipalities higher than 50 percent are defined as districts having a significantly rural character. These districts are predominantly rural. Districts where 15 percent to 50 percent of the population live in rural municipalities are defined as semi–rural districts. Districts where less than 15 percent of the population live in rural areas are described as predominantly urban. Graph 1 shows the predominantly rural regions, semi–rural regions and urban regions as classified by the Department of Regional Development of the Slovak Agriculture University. On the basis of this classification, 48 percent of the country's population live in predominantly rural districts, 40 percent in semi–rural and 12 percent in predominantly urban districts. Predominantly rural areas represent 59.5 percent of the SR land area. These areas account for 62.8 percent of agricultural land and 55.9 percent of forests. In the EU on average 28 percent of the population live in predominantly rural regions, 32 percent in semi–rural regions and 40 percent in predominantly urban regions. Slovakia has a settlement structure comparable to that of, for example, Norway, or among non–European countries, Turkey.

174 Graph 1: The regional typology of rurality in Slovakia

TRADITIONAL RURAL ECONOMY SECTORS

Agriculture Agriculture demonstrates a permanent decline as concerns its share in national GDP as well as in employment. In 1989–1990, the share of agriculture decreased to 8 percent of GDP and 12 percent of employment; this long–term trend continued in 2001, with agriculture accounting for 4.89 percent of GDP and 7 percent of employment (SR Statistical Office). As in other countries, the agriculture sector is facing a number of challenges; most important among these is the high fragmentation of land ownership, which constitutes a major barrier for the development of land markets and does not allow the use of the land as collateral. This, in effect, decreases the creditworthiness of farms and processors when applying for credits. Acceler- ated land consolidation is thus a vital factor of further development of agriculture. Although the government has allocated financial resources for land ownership identification programmes, in line with Act No. 330/91 Coll., more than 20 percent of land remains unidentified and 90 percent of plots have not been consolidated. Land consolidation is supported under the EU SAPARD and will continue under the Sector Operational Programme for Agriculture and Rural Development in the post-accession period. So far, only 120 cadastres have been consolidated out of a total of 3 519. Most of these have been completed as part of SAPARD assistance. Inplantproduction,importantchangeshavetakenplaceinthecropcomposition,butingeneral the traditional pattern of production remains basically unchanged. The share of cereals, oilcrops and vegetables has increased in the total area planted and the share of many–year fodder crops, potatoes, sweet corn and legumes has decreased. In the overall composition of agricultural land, the acreage under permanent plantation has increased and the share of hop plantations, vineyards and orchards has decreased. In animal production, persistent shortcomings in nutrition, shortages of feeding equipment andcareofanimalscontinuethatresultinunderutilization ofbreedingandreproduction capacities. The period 1990–1998 for bovine cattle was characterized by a continuing decline in the numbers of animals bred, accompanied by a change in the breed structure. The most marked

175 technological change in livestock production is occurring through the transition to free–range breeding. Pig production is stagnating following a sharp decline, and output does not meet domestic demand. Only poultry breeding demonstrates a growth trend. The structure of the agriculture sector is in a state of constant flux. Cooperatives continue to retain their dominant position, although their share in the total acreage of agricultural land has fallen. The number of commercial companies has increased, in particular limited liability companies, as consequence of privatization of state assets and the decline in agricultural cooperatives. Thus their share in acreage used has also increased. Table 1 shows the composition of is entities active in as concerns their number, average farm size and share in the total agriculture land.

Table 1: Entities in agriculture and their structure (2001)

Average size Share in the total Legal status Number of enterprises of enterprise agriculture land (%) in hectares State enterprises 6 2 850.8 0.81 Cooperatives 715 1 582.4 53.9 Commercial companies 722 1 002 35.09 • commercial associations 1 390 0.02 • limited companies 627 877 26.14 • shareholding companies 94 1 842 8.23 • others 79 221.5 0.83 Natural persons 5 473 39.32 10.2 Total 6 995 300.8 100.0 Source: Green report, 2002. The declining trend in the number of employees in agriculture continued also in 2001, although at a more moderate rate compared to previous years. According to the 2001 workforce survey by the Statistical Office, some 106 400 persons worked in agriculture. Changes in the employment structure as concerns the level of education were apparent, in particular a growth of the share of university educated workers, women and workers with higher technical education and women workers with secondary level education. TheincomesituationofagriculturalemployeesandfarmersaspresentedinTable2wasnotvery favourable. The sector was quite significantly disadvantaged compared to forestry and even more in relation to the industrial sector and other branches of the national economy. (Green report, 2003) Data in Table 2 clearly indicate the inferior economic status of agriculture and its deterioration since the transition started in 1989. It also shows that the work–related incomes in this sector of the economy are very low in absolute terms. One notes that in spite of the fact that rural populations are self–sufficient to a certain extent in own food supply, nevertheless, their standard of living as a result of lower income and high unemployment is generally very low. The structure of revenues of agricultural enterprises, as shown in Table 3, remains very dependent on primary agricultural production. The conclusion is obvious – agricultural producers do not tend to think in the direction of diversification of economic activities. Only very advanced

176 managers try to diversify their incomes, e.g. via obtaining shares in food processing industry plants, or they go into processing themselves (small slaughterhouses, bakeries, dairies etc.). Another way is through establishment of retail shops in cities, either daughter companies or offering various services to municipalities or other customers. Only some consider tourism or smallindustrialactivitiesasapossiblesourceofrevenues.Unfortunately, nocomprehensive research has so far been carried out regarding farm diversification in Slovakia; so far only two studies are available, which basically confirm the above statements, based on the empirical experience of the author.

Table 2: The income situation in various sectors of the economy in 2002 (1989 = 100)

Income parity Income parity Average salary Branches in 2002 in 1989 SKK/EUR in 2002 (%) (%) Agriculture total 10 478 / 255.50 76.1 106.8 • Agricultural co–ops 10 446 / 254.80 76.1 109.0 Food processing industry 13 627 / 332.40 97.2 94.7 Forestry 12 118 / 295.60 85.5 97.6 Construction 14 031 / 342.20 102.6 106.7 Industry total 15 105 / 368.40 108.4 100.2 • Textile industry 9 797 / 239.00 72.2 85.5 Transport and telecommunication 15 585 / 380.10 112.2 97.9 Banking, insurance agencies 27 634 / 674.00 192.2 97.6 Total national economy 14 214 / 346.70 100.0 100.0

Table 3: Breakdown of agricultural companies' revenues in SKK/EUR per hectare

Cooperatives Commercial Companies Private farmers SKK/EUR SKK/EUR SKK/EUR % % % ha ha ha Revenues from agriculture 32 056 / 782 98.2 39 609 / 966 98.5 19 027 / 464 80.4 Revenues from non– agricul- 569 / 13.9 1.8 593 / 14.5 1.5 4 647 / 113.30 19.6 tural activities Source: Green report, 2002. The data also indicates that it is the private farmers who are more willing to diversify their income, in contrast to the cooperative and commercial entities, where the share of diversified revenues is not significant. First of all, farmers are more flexible and innovative and have better access to loans, since their title to land ownership is clear. They have also less land compared to cooperatives or commercial companies and have to think more carefully about their earnings. This observation will be confirmed by findings shown later in Tables 6–10 concerning subsidies to support on–farm diversification of activities in rural areas.

Fishery Slovakia's production of fish is limited in size, comprising approximately 80 enterprises; their contribution to job generation and share in the GDP is negligible. Production is mainly salmon and freshwater lowland fish types. Salmon fish farms are in terms of productivity comparable

177 with those abroad; they do however have a high rate of equipment obsolescence and a low level of mechanization. The main cause of the low productivity of freshwater lowland fish in general as well as per hectare lies in the poor technical state of fish ponds, as a consequence of lack of finance for maintenance and mud removal from fishing grounds, as well as repairs and maintenance of outlet and dike facilities. The renovation of fish farming facilities would support multi–functional utilization of water resources that would favourably affect the landscape and environment. A major transformation has occurred in fish pond breeding as result of privatization of the former state enterprises. The fisheries certification commission that issues certificates for fish farming registers at present approximately 80 entities. Further development of fish pond breeding may also involve links to agrotourism activities, for example the construction of fish ponds next to agrotourism facilities. In this sense processing and marketing of fish products appear to represent an important potential source of rural economic diversification.

Forestry The total forest areas in the SR represents timber stands on 1 927.4 thousand hectares. The share of forestry in GDP continues to decline and is below 1 percent (1990 – 0.97 percent; 2001 – 0.54 percent). The value of public use functions of forests is however two to three times higher than production as such, but as yet the latter are not on the market and therefore are not included in GDP. The wood processing industry based on forestry products represents a GDP share of approximately 8 percent. Investment in forestry since 1990 has fluctuated from 0.36–0.19 percent of total investment in the SR. This number also shows that the forest assets from the point of view of value added for rural areas are still underutilized and focused mostly on regional trade or export of timber as the main income source for this sector. A significant component of the post–1989 reforms was the transformation of ownership relations of forests, comprising their return to the original owners. As of 31 December 1998, forest lands totalling 812 500 hectares had been returned to entitled persons. It has not always been possible to match the owner of the forest land with its user (forester), where the user must undertake duties ensuing from the respective legal regulations. Forest land of which ownership is not completely identified or documented and where the entitled persons have as yet not expressed an interest in assuming ownership, represents 137 000 hectares. At the end of 2001, 42.4 percent of the forest area was owned by state; the structure of ownership and land use in forestry is shown in Table 4 below:

Table 4: Land use and form of ownership in forestry in the SR

Type of ownership Category Agricultural Commu- Total State Private Associations Church Unknown cooperatives nities 816 343 282 659 469 571 61 703 2 271 187 495 107 346 1 927 388 Ownership 42.4 14.7 24.4 3.2 0.1 9.7 5.6 100 1 171 575 138 635 399 387 45 834 4 644 167 313 – 1 927 388 Use 60.8 7.2 20.7 2.4 0.2 8.7 – 100

178 Approximately 22 000 employees work permanently in forestry, and their number is gradually declining(1990–36000;1997–27000;and1998–24000).Apartfromthese,duringseasonal work, especially at the time of spring afforestation, more than 10 000 seasonal workers are employed. More than 4 000 entrepreneurs are registered in the forestry and wood processing industry.

PROGRAMMES AND POLICIES SUPPORTING DIVERSIFICATION

The restructuring of the Slovak economy following 1989 brought a reduction of the number of employees, which affected the agriculture sector the most. The number of employees registered in agriculture in 1989 was 351 000 but dropped down to 106 400 by the end of 2001, which represented a 74.0 percent reduction. In forestry, the number of employees has fallen by 14 000 since 1989, which represents a reduction of 38.9 percent. The national unemployment rate was 18.6 percent at the end of 2001 but in rural areas this share was two to three times higher. TheunfavourableemploymentandincomesituationinruralareaswasconsideredbytheMinis- try of Agriculture (MA)oftheSR in the document Concept of agrarian and food processing policy of the SR to 2005. In the framework of this programme, the support for investment activities for development of agrotourism and rural tourism was included within the measure called The Countryside and Diversification of Economic Activities. Within the framework of the subsidy policy, MA support for diversification of economic activities in rural areas was given in line with the MA regulation No. 3485/2/2001–100–§ 28 and called The Development of Agrotourism, the Countryside and Diversification of Economic Activities. Diversification of farm activities was also planned in the Agriculture and Rural Development Plan under the SAPARD Programme within Measure No. 4a – Diversification activities in rural areas. For the years 2002–2006 support for co–financing of these projects has been approved in the amount of EUR 2.293 million per year from the European Commission resources. A similar measure was also included in two Phare programmes that have been executed through the Ru- ral Development Fund functioning under the MA. MA together with the Ministry of Environment have also launched the Programme of Village Renewal. This programme was supported since 1995 via technical assistance provided by the Agency for Rural Development in the area of local development programmes, plan and project design, management and implementation. Recently a new measure was opened under the SAPARD programme, which supports invest- mentinrenovation andmodernization ofvillagecultural andhistorical sites–Measure No.4b– Diversification Activities in Rural Space of the Agricultural and Rural Development Plan of the SR. During 2002–2006 support from the resources of the European Commission has been approved for co–financing of these projects in the amount of EUR 0.795 million per year. In addition, the technical assistance measure provides the opportunity to finance elaboration of 26 local development strategies carried out by rural microregions in near future. This measure was also introduced in the framework of the Special Preparatory Phare Programme – Rural Devel- opment Fund, which was executed between 2001 and 2002 in the regions of Topo¾èany, Detva and Rimavská Sobota.

179 Overview of programmes supporting diversification of agriculture and forestry enterprises As mentioned previously, there were three programmes implemented at the national level for agricultureandforestryenterprisestosupportdiversificationactivitiesonfarmsandinforests: • National agriculture subsidies; • Fund for Rural Development; and • SAPARD Programme.

National agriculture subsidies The support through subsidies and the recent SAPARD Programme are of major importance in implemented policies. The state policy of subsidies as well as the SAPARD Programme were focused on farms' economic diversification, mainly through rural tourism and regional product development.Belowisthebreakdownofutilizationofparticularinstrumentsmentionedabove, by number of projects, type of business, resources allocated and regions (Annex Tables 6 - 10; Source – SR MA Internet home page: The breakdown of subsidies). The resources allocated from the state budget were rather small and did not meet the demand of the beneficiaries. Most projects were focused on rural tourism development and only in very few cases were applicants willing to develop innovative regional products. At the beginning of the programme, in 1999 only a small number of potential beneficiaries expressed their interest to use the opportunity to diversify into rural tourism. Later, the number of applicants and their financial demand were always greater than the allocated resources and the project selection criteria became more strict. In 2002, MA decided to support only the finalization of projects which started before 2002; therefore the number is again smaller. Even if the demand for support was greater than the resources available, the general interest to diversify was quite low (as compared to the total number of beneficiaries – see Table 1.) The majority of applicants were private farmers (as seen from all tables) although this varied by year and region. As seen from the tables however, they did not always receive the greatest share of resources allocated; actually while half of all projects were submitted by farmers, they received only one–third of the assistance. This also means that budgets of projects proposed by farmers were usually smaller than those of commercial companies and cooperatives. If we consider the following regions as most competitive from the point of potential tourism development, we can identify Trencin, Banska Bystrica, Zilina, Presov and partly Nitra. We also note that from the region with highest potential competitiveness – Presov (with the High Tatra mountains) there was only a very small number of project applications. This was due to the very low financial capacity of agricultural enterprises as well as private farmers to cofinance the projects from their own or bank sources. The subsidy in question was offered only to a maximum of 40 percent of the total budget of the project. In the regions discussed, companies are facing the biggeststructuraldifficultiesaccompaniedbyweakmanagementandthisalsoinfluencednega- tively their willingness to diversify.

180 Fund for Rural Development – Economic Diversification of Rural Areas The Fund for Rural Development project in 2001 was a pilot for the SAPARD Programme in threeselecteddistricts–RimavskaSobota,DetvaandTopolcany.Thecompositionofmeasures was the same as in the Programme; especially Measures 4a and 4b focused on rural economic diversification. Under Measure 4a were supported the so–called profit–generating investment activities, again mainly rural tourism and regional product development projects. Altogether four projects received public aid in the amount of EUR 243 951 under this measure (representing 22.4 percent of the total funds allocated for the six measures). Beneficiaries were requested to cofinance 50 percent of the project budget. Further under Measure 4b, nine community projects (reconstruction of city halls, historical sites, cultural houses etc.) – so–called non–profit generating projects – were supported. Total public expenditure for these projects amounted to EUR 583 634 and represented 55.6 percent of the total Fund expenditures. Although this programme did not influence diversification to an important extent, this was a very useful exercise for rural beneficiaries to test EU procedures and encourage them to apply further for SAPARD Programme grants. Several beneficiaries of the Fund are applicants for SAPARD today. From this point of view, it was a successful capacity–building programme.

SAPARD Programme – Diversification Activities in Rural Areas The SAPARD Programme, opened with Measure 4a in April 2002 and with Measure 4b in May 2003. Below is the breakdown of public expenditures under the SAPARD Programme for Mea- sure 4a (Table 5) and 4b (Table 6) according to regions and type of beneficiaries. (Tables 5–7; source – SAPARD Agency Monitoring tables, 2003)

Table 5: SAPARD Programme – Diversification activities in rural areas in 2002–2003: applications

Total number of which of which Total public of (in percent) spending EUR Projects/ Private Private Cooperatives CC (thousand) Cooperatives CC /enterprises farmers farmers Trnava 17 4 8 5 4 151 22.1 29.6 48.3 Nitra 10 0 5 5 3 201 0 52.4 47.6 Trencin 2 0 1 1 369 0 8.33 91.67 Zilina 7 2 2 3 1 770 32.2 31.9 35.9 Banska Bystrica 9 2 3 4 2 649 7.73 34.47 57.8 Presov 3 0 2 1 624 0 25.3 74.7 Kosice 7 0 2 5 1 085 0 18.1 81.9 Total 55 8 23 24 13 876 10.3 28.6 61.1 Note: CC – Commercial companies. Source: Monitoring tables of SAPARD Agency. As witnessed by data in the tables, there was only a small number of project applications from the two regions considered competitive from the point of view of tourism development (Presov – 3; High Tatra region and Trencin – 2; historical sites region). The situation was better in two othercompetitiveregions–ZilinaandBanskaBystrica.Ontheotherhand,quiteahighnumber of approved projects came from the Trnava region, which is a lowland area close to the capital.

181 Most probably applicants from this region can demonstrate higher cofinancing capacity compared to those in eastern or northern Slovakia. From the above–mentioned applications for project support, 29 projects have already been contracted, of which commercial companies account for 12 and private farmers for 10; the rest belong to cooperatives. The majority of contracted projects were submitted by small companies: respectively 18 to 25 employees for commercial companies and 6 to 50 employees for cooperatives. As concerns the regional breakdown according OECD criteria of rurality, the biggest share of projects were approved and contracted in predominantly rural regions – 72 percent (21 projects); further in semi–rural regions – 28 percent (8 projects). As SAPARD results show there was a significant influence of this measure on the total performance of the Programme in terms of employment generation. The data in Table 6 indicate the increase in planned employment due to the diversification in 26.26 percent of the beneficiary companies. Actually, only this measure among all contributed significantly to the total performance of the Programme with the general objective to increase the job opportunities in rural areas.

Table 6: Planned employment development by SAPARD approved projects according to measures

Number of employees Planned increase of employment Planned Before After increase Measure Number implementation implementation percent of employment of employees of projects of projects per project Investment in agriculture holdings 5 428 5 468 40 0.74 0.7 Food processing and marketing 43 198 44 142 944 2.19 7.1 Rural economic diversification 971 1 226 255 26.26 8.8 Forestry 463 469 6 1.3 0.4 Together 60 060 51 305 1 245 2.49 5.2 As concerns Measure 4b, under which public projects were financed supporting rural diversification from the community point of view (reconstruction of cultural and historical buildings and sites, reconstruction of local infrastructure etc.), the following projects were approved:

Table 7: Breakdown of approved projects and public expenditures under SAPARD Measure 4b in 2003

Total amount of public expenditures Region Total number of approved projects (EUR, in thousand) Trnava 23 2 123 Trencin 7 1 167 Nitra 25 3 432 Zilina 9 877 Banska Bystrica 23 2 741 Presov 20 2 335 Kosice 20 3 111 Total 127 15 786 Source: Monitoring tables of the SAPARD Agency.

182 In conclusion, we note that there is an overall lack of interest on the part of agricultural enterprises and companies to diversify their economic activities. Furthermore, they do not see rural tourism as a real opportunity to diversify their income, because of lack of professional experience outside agriculture as such. So far only a small portion of potential beneficiaries have shown interest in applying for assistance under established instruments. As seen from results presented, the majority of financial aid was delivered to private farmers that applied mostly for the economic diversification measures to the national subsidy system as well as to the SAPARD Programme. It is possible to conclude that private farmers show greater interest in farm diversification activities supported by the presented instruments than large–scale enterprises – both cooperatives and commercial companies (in numbers of applicants these are the second biggest group) and obviously see them as income–generation opportunities. On the other hand, as observed from the SAPARD case (unfortunately we do not have precise information on regional division of subsidies), the discussed support instruments which require 50 percent and more of own financing, could lead to the support of already better off enterprises which are not located in the most competitive regions in terms of tourism. Thus, quite a high number of projects were supported in Bratislava and Trnava regions, with high cofinancing capacity. At the other end, enterprises from regions with recognized higher potential for tourism development had almost no benefit from these measures. This lesson should be taken into consideration in future programmes and beneficiaries from less favourite regions should be given preferential criteria and conditions.

Future policies and possibilities of farm and rural diversification In the immediate future there are basically three opportunities at the national level for financial support of rural economic diversification. One is within the agriculture sector itself and is based on improved access to structural funds in the field of rural development. The two others are broad national schemes – one for general tourism development, including rural tourism and agrotourism; both are open for farmers and other beneficiaries from rural areas. The latter two schemes are supported by the Phare Programme and aim to improve the access to structural funds in the area of industry (including SME development) and services (including tourism activities); rural beneficiaries are eligible to participate.

Phare grant scheme The Phare Grant Scheme for Tourism Development was announced on 1 September 2003 and at present the implementation agency accepts applications from potential beneficiaries. The following activities are supported: • for small and medium entrepreneurs – construction and reconstruction of tourism facilities, property purchase for tourism development, tourism attraction development; and • for rural tourism NGOs and associations – strategic planning in tourism, marketing and promotion, infrastructure investments, information networks.

183 Sector Operational Programme for Agriculture and Rural Development The Sector Operational Programme for Agriculture and Rural Development is under negotiation with the EC. Under the Programme, the following activities will be supported, targeting farm or community–based economic diversification: • improvement of processing and marketing of agriculture products; • diversification of agriculture activities (rural tourism, supplementary production activities and production of traditional materials and products); • forestry( investment and non–investment activities); and • fishery (aquaculture and processing activities). It will partly follow the previous Grant Scheme in the field of tourism development but will contain several other measures which could benefit potential beneficiaries living in rural areas and entering or developing small business activities other than tourism. The following measures will be relevant for rural economic diversification: • support of the development of existing businesses and start–ups; • support of innovations, technologies and applied research; and • support of alternative renewable energy sources.

Farm income diversification and enterprise development – case study There were 210 rural diversification projects supported via the state subsidies system under the MA between 1999 and 2003. Most of them addressed private farms, which represented the majority of applicants. The second major group receiving state subsidies for diversification was commercial companies. Among these was Fructop Ostratice, a fruit processing limited company in Western Slovakia that received financial aid for rural tourism development. Later this company was also successful in obtaining a grant from the SAPARD Programme in order to extend production activities to more advanced processing and marketing to capture the value–added market. The company is located in the area of intensive agriculture in western Slovakia, inthe Topolèany district. The farmers and processors inthe district are well known for high quality of management and good yields both in plant and animal production. The company owns and rents approximately 250 hectares of high quality flat land, although close surround- ingsarequitehilly.Forty–threehectaresofthelandareownedbythecompanyand207hectares are rented. The company's turnover in the year 2003 was SKK 99 million (EUR 2.45 million equivalent) and its economic situation is presented in Table 8, as well as the employment situation. All workersarefulltime;inadditionthecompanyemploys50seasonalworkers,mainlyinfruitpro- duction. The company is well equipped with technology – 40 percent of the field work is mechanized but the share of manual field work still represents 60 percent. The machinery was imported from It- aly and the Netherlands. Storage and packaging equipment from the Netherlands is fully mechanized.

184 Framework Despite the fact that the region is considered to be advanced in agricultural production with high quality of both management and production, there is no apparent intention to diversify economic activities. The general way of thinking of agribusiness managers in this region is con- servative, focused on traditional agriculture: large–scale crop production and large herds of animals, with the objective to achieve economic results first of all in the traditional sectors. This approach of leading managers in the region brought very good results in terms of agriculture: yields, quality etc. but resulted in decline of rural employment. From this point of view, the way of thinking of the entrepreneurs – owners of the Fructop enterprise – was more advanced and one can also say unique in the region. They found support in the Agency for Rural Development in Nitra, the state advisory company specializing in agritourism and rural tourism, processing and direct marketing of fruit products. Professional advice and study tours organized by the Agency in Austria and Slovenia helped the entrepreneurs to shape their future diversification ideas. On the other hand, one should admit that the level of understanding of families of both entrepreneurs was beyond the normal standards and they received a lot of support from their wives.

The story The Fructop company, based on the production of three fruits, was established in 1991 by two young agriculture university graduates. Both entrepreneurs returned to their home village, purchased an old and abandoned small manor house and rented approximately 25 hectares of orchard land in an area with a tradition of growing fruit trees. The original ambition of both entrepreneurs was to bring high quality fruit trees: the Dutch standard at Slovak prices, to the Slovak fruit tree market. Hardworking and well educated, they soon reached a high share of the local market of 70 percent in four years. Gradually they increased the land area used: purchased and rented; the farm reached 200 hectares in 2000. At present, the company's annual production of trees has reached 500 000. At the end of the 1990s, they decided to diversify their economic activities in order to bring more and diversified income to the company but also to provide some additional employment in the village and surrounding rural areas. They planted their own orchards but also orchards for other fruit producers, as the latter represented for them an additional income earning activity, and started to sell fruits, first of all apples: Golden Delicious, Fuji, Jonagold, Topaz, Rosana, Rubinola, Granny Smith, Gala and Breabourn. At present, they sell 4 500 metric tonnes of apples and plan to increase the production to 15 000 tonnes by 2006. They also sell pears, cherries, peaches,strawberriesandplums,andrecentlyintroducedpickles–500metrictonnesperyear. The growth trend in sales of fruits resulted in the idea to reconstruct the manor house and yard to make them more attractive for the already regularly visiting customers. Since visitors from far away were arriving to learn and buy, the idea to create the pension with accommodation and food facilities based in the old manor house became the investment priority. Since both entrepreneurs lacked means of financial resources, they applied to the Ministry of Agriculture SR state subsidy programme supporting the diversification of agricultural businesses, called De- velopment of Agritourism, the Countryside and Diversification of Economic Activities and received a grant to cover 30 percent of the total investment for the reconstruction of the manor house from this programme. In addition to the pension, they also built an attractive and interactive country shop inside the yard, where they sold not only fruits but also products based on

185 processed fruits with high value added, such as fresh fruit juices and various fruit tea mixes. The shop also sold literature, gifts related to fruits and offered promotional material. The shop became a local attraction known in the area and brought visitors from all of western Slovakia – both business but also casual customers wishing to buy fresh fruits and environment–friendly products. The success with the shop and pension led to an idea to build a tourism complex with a hotel, restaurant and sporting grounds on the edge of the village – in an area where one would not expect such intensive rural tourism activities. The company applied for another tranche of state subsidies and was successful again. Although this project is not yet finalized and the new facility will open to the public in 2005, it will bring the value added not only for the company but also for the village and the entire region. Althoughthecompanyintroduceddiversificationthroughthedevelopmentofruraltourismata late stage, the attention was also devoted to the development of the basic product – fruits. The production of juices that started with pasteurization of juices, expanded and allowed sales through supermarket chains as well as production of dry fruit and fruit tea mixtures. At present, annual production of fruit juices is 250 000 litres of fresh juice without artificial preservatives and 100 000 litres of pasteurized apple juice. Fresh juices are sold directly in their own shop or through the specialized distribution network, while pasteurized juices are sold through hypermarkets, supermarkets or cash and carry chains. The problem was to secure storage during the winter season in order to obtain a better price later. Therefore further investment focused on modern storage facilities with regulated atmo- sphere and air conditioning, packaging and preparation of production to correspond to the EU Common Market Organization in terms of hygiene, quality of products, efficient promotion of products and customer services. For this programme the company applied six times for SAPARD assistance and was successful with every project. In order to cope with the fact of expanding trade chains and hypermarkets (Tesco, Billa, Metro etc.), the company started the process of establishment of the fruit producers' group SK Fruit, offering its storage facilities and management experience for all 13 members of the group. In this producer group, the company plays the role of central store, packaging station, storehouse and distribution for all members. The group produces on an area of 1 300 hectares in total, owns nine packaging lines, 16 200 tonnes of storage capacity and occupies 30 percent of the total domestic market in fruits. The main customers of SK Fruit are major supermarket chains placed in Slovakia and the Czech Republic: Carrefour, Billa, SAMA, Metro, Interfruct, Cash&Carry, Hypernova, Rema and Tesco. As result of the above investment and modernization, the chart of the company and the share of particular production in the total revenue are at present as follows (Table 8). In this particular case non–agricultural diversified activities, thus the last three sectors represent 8 percent of total company revenue. When compared to the entire national average (see Ta- ble 3, section on commercial companies, which indicates the share of diversified activities at around 1.5 percent), Fructop Ostratice represents an exception with its strong philosophy to decrease entrepreneurial risks and increase income via economic diversification.

186 Table 8: Fructop revenues and employment in 2003 and share of sectors

Company sector Number of employees Share in total revenues (%) Management of the company 10 2 Production and service sectors: 70 98 Nursery: • Construction of orchards for customers • Wholesale • Direct mailing 20 40 Fruit production 25 50 SK Fruit producer group 6 Fruit juice production • Fresh juice production and sales • Pasteurized juice production and sales 6 6 Agritourism 2 2 Total 139 100

CONCLUSIONS AND RECOMMENDATIONS

There are several opportunities for economic development of rural areas in Slovakia. The creation of value–added products, and thus increasing the share in market prices, based on rural natural resources should represent the core of future rural development strategies. The current rural economy main sectors such as agriculture and forestry do not correspond to the requirements of sustainable development. In their actual form they do not offer the possibility for further income and employment generation. Therefore, new rural economy sectors should be promoted to encourage progressive and innovative opportunities, which would better utilize the existing human, natural and physical potential of the rural areas of Slovakia. Therefore, rural economic diversification represents one of the most important development trends. On–farm economic diversification is constrained by the traditional simplified approach to agriculture, focused often on growing crops and breeding livestock that neither generates high in- comeperhectareandnorprovidesthebasisforlocalprocessing.Traditionalproductsdominate since the processing and marketing plants continue to exist, but there is no longer a market for the products in question, although some new and innovative trends have been observed, resulting in increased value added of agricultural products marketed. Farmers and processors need to look for alternatives that will bring a higher income per hectare and, at the same time, provide opportunity for growing local products with a higher value–added component, such as herbs, spices, energy plants, flax etc. Traditional rural economic sectors: agricultural primary production and forestry in the current development stage do not meet the needs of rural areas in terms of job creation and income generation; they also no longer play a significant role in national employment and GDP generation. The traditional sectors also suffer from inferior social status and contribute little as a source of value–added goods in rural areas of Slovakia, which could be offset by support to on–farm processing and retail activities and direct marketing, especially in the field of regional products and broadening their traditional assortment.

187 Support services development and their provision to farms and farmers' networks is constrained by the lack of interest and willingness on the part of farmers to collaborate and cooperate and build marketing networks. Not enough attention is paid to provide rural businesses, including agriculture and forestry with proper capacity building including educational programmes, training, advisory services, information and IT technologies as well as additional business infrastructure such as networks, incubators, business services and suitable credits including micro–financial schemes. The group of private farmers most often considers diversification of income as a development option. Commercial companies and agricultural cooperatives are not as willing to diversify and are continuing with traditional primary production patterns. Rural businesses must seek support under general SME support schemes and face unequal competition with urban businesses with better financial situations, access to information, business infrastructure and credit. Rural businesses are also discouraged from startup, development or expansion of their entrepreneurial activities, which results in lack of jobs and income opportunities in rural areas. The current policies and instruments in Slovakia are focused in particular on rural tourism and regional product development with the beneficiaries originating in agriculture or forestry primary production; the national subsidies, Fund for Rural Development and SAPARD Programme are rather horizontal and do not take into account the particular conditions and social and economic context of the various regions of the country. Existing instruments are utilized by eligible beneficiaries mainly in the area of rural tourism development, but even there only to a very limited extent, i.e. only a small portion of eligible beneficiaries applies for the assistance. Rural communities in Slovakia were and still are mainly dependent on primary agriculture and forestry production, some considering rural tourism as an alternative option. Current and future development trends indicate however that more opportunities for job creation and additional income generation in rural community diversification may be provided through small industry development based on traditional or innovative agriculture and forestry products as well as such assets as water and other geological resources (sand, stones, soils etc.) and rural landscape. Further opportunities may be upgraded to rural tourism linked with recreational servicesandcrafts,butalsooutsourcedITservices.Inthisapproach,thevalueaddedisnotinev- itably connected with agricultural enterprises but new business opportunities are also provided for other rural entrepreneurs or urban investors who are willing to employ rural residents. This new approach requires change of several policies at the national level that at present are disintegrated and rather sector–oriented. An integrated and sustainable bottom–up approach at the local, community level needs to be introduced as well. New support policy instruments will have to be introduced to support the economic diversification of rural communities, instruments that are not included at present even in the EU structural funds. Rural business can receive assistance for their establishment or development either through aid for farmers or for general entrepreneurial schemes. The overall aim is to assist disadvantaged rural entrepreneurs with less access to information, business services and infrastructure and poor access to credit, that cannot compete with their urban counterparts on an equal basis. These policies should contain measures which will enable the improvement of the business environment and culture in rural areas and therefore should be focused on business infrastructure development and access to credit, rather than focus only on direct public aid through grants for specific activities such as rural tourism or regional product development. At the same time,

188 capacity building for entrepreneurs in rural areas to obtain new skills such as local rural development programmes, planning and project design, implementation, management, monitoring and evaluation should be encouraged. The above policies will support rural business activities that should be market–driven (commercial aspect of diversification) rather than public sector oriented and supported and thus encourage rural entrepreneurs to invest in effective and efficient enterprises. This consequently will have a positive impact on their income as well as on job opportunities generation (social aspect of diversification) and will enhance the competitiveness of rural areas as such. A broad discussion involving government, non–government and private sector organizations, institutions and engaged professionals should be encouraged concerning the future shape of policies and instruments towards rural areas.

REFERENCES

EU PHARE. Special preparatory programme for Structural Funds, Priority B, Pilot Project for rural development. Final report. MINISTRY OF AGRICULTURE. Green report 2002, official report of the Ministry of Agriculture on the situation in agriculture and food sector in SR. MINISTRY OF AGRICULTURE. Green report 2003, official report of the Ministry of Agriculture on the situation in agriculture and food sector in SR. MINISTRY OF AGRICULTURE. Internet home page of the MA SR, Breakdown of subsidies. SECTOR OPERATIONAL PROGRAMME FOR AGRICULTURE AND RURAL DEVELOPMENT OF THE SR. Analytical Part. SAPARD. Monitoring tables of the SAPARD Agency.

ANNEX TABLES

Table 1: Utilization of MA SR subsidies – Development of Agrotourism, the Countryside and Diversification of Economic Ac- tivities (1999 – 2002)

Total public of which of which spending Total in percent Year number (EUR) of projects Private Private Cooperatives CC Cooperatives CC farmers farmers 1999 31 10 6 15 633 194 27.6 33.4 39 2000 47 16 12 19 850 975 25.43 23.93 50.64 2001 71 16 23 32 1 687 535 32.6 33.4 34 2002 42 4 17 21 954 513 16.2 42.7 41.1 Total 191 46 58 87 4 126.2 25.4 33.3 41.2 Note: CC – commercial companies.

189 Table 2: Breakdown of MA subsidies – Development of Agritourism, the Countryside and Diversification of Economic Activ- ities, according to statistical regions in 1999

Total public Total Among them spending Among them in percent Region number (EUR) of projects Private Private Cooperatives CC Cooperatives CC farmers farmers Bratislava 4 1 1 2 134 146 36.4 36.4 27.2 Trnava 0 0 0 0 0 0.0 0.0 0.0 Nitra 1 0 1 0 9 756 0.0 100.0 0.0 Trencin 5 2 1 2 105 122 18.8 39.4 41.8 Zilina 4 1 0 3 56 585 77.6 0.0 22.4 B. Bystrica 4 2 0 2 76 610 35.5 0.0 64.5 Presov 5 2 1 2 59 512 18.0 16.4 65.6 Kosice 8 2 2 4 191 463 7.2 41.8 51.0 Total 31 10 6 15 633 194 27.6 33.4 39.0

Table 3: Breakdown of subsidies of the MA – Development of Agritourism, the Countryside and Diversification of Economic Activities according to statistical regions in 2000

Total public Total Among them spending Among them in percent Region number (EUR) of projects Private Private Cooperatives CC Cooperatives CC farmers farmers Bratislava 3 2 0 1 57 341 66.82 0.00 33.18 Trnava 2 0 0 2 25 854 0.00 0.00 100.00 Nitra 6 1 3 2 94 463 14.45 48.90 36.65 Trencin 5 2 1 2 90 390 22.56 35.35 42.09 Zilina 9 5 3 1 185 171 53.90 39.54 6.56 B.Bystrica 11 3 4 4 230 585 15.59 37.13 47.28 Presov 5 2 0 3 84 878 22.99 0.00 77.01 Kosice 6 1 1 4 82 293 7.11 30.53 62.36 Total 47 16 12 19 850 975 25.43 23.93 50.64

190 Table 4: Breakdown of subsidies of the MA – Development of Agritourism, the Countryside and Diversification of Economic Activities according statistical regions in 2001

Total public Total Among them spending Among them in percent Region number (EUR) of projects Private Private Cooperatives CC Cooperatives CC farmers farmers Bratislava 2 1 0 1 42 415 62.4 0.0 37.6 Trnava 3 1 0 2 99 024 22.4 0.0 77.6 Nitra 19 1 6 12 353 317 6.1 55.3 38.6 Trencin 3 2 0 1 104 707 85.4 0.0 14.6 Zilina 13 5 6 2 407 512 40.2 53.8 6.0 B. Bystrica 10 2 5 3 293 634 4.2 66.3 29.5 Presov 7 4 2 1 128 585 40.1 48.6 11.3 Kosice 14 0 4 10 258 341 0.0 43.5 56.5 Total 71 16 23 32 1 687 535 32.6 33.4 34.0

Table 5: Breakdown of subsidies of the MA – Development of Agritourism, the Countryside and Diversification of Economic Activities according to statistical regions in 2002

Total public Total Among them spending Among them in percent Region number (EUR) of projects Private Private Cooperatives CC Cooperatives CC farmers farmers Bratislava 4 0 1 3 52 587 0.0 37.8 62.2 Trnava 1 0 0 1 92 376 0.0 0.0 100.0 Nitra 9 0 4 5 161 663 0.0 43.3 55.7 Trencin 2 1 1 0 63 441 63.6 36.4 0.0 Zilina 7 3 3 1 163 105 65.5 25.9 8.6 B. Bystrica 7 0 3 4 163 809 0.0 60.6 39.4 Presov 1 0 1 0 21 717 0.0 100.0 0.0 Kosice 11 0 4 7 235 815 0.0 37.6 62.4 Total 42 4 17 21 954 513 16.2 42.7 41.1

191 192 THE STATE OF FARM AND RURAL INCOME DIVERSIFICATION IN SLOVENIA

Anton Perpar77

Slovenia covers 20 256 square kilometres stretching between the Alps, the Adriatic and the Pannonian Plain. In spite of its geographically small size, Slovenia is a convergence point of a range of different landscapes – Alpine and Mediterranean, Pannonian and Dinaric, each of whichhasitsowncharacteristicsanduniquefeatures.Thecountry'stopographyisverydiverse. Approximately90percentofthecountryliesmorethan300metresabovesealevel,forestscover more than half of its territory and about 85 percent of the other half is agricultural land. The characteristics of Slovene territory are a variety of relief, relatively limited plains, richness of surface and underground waters, position near the sea, biodiversity, diversity of landscape and nature as well as extensive woodlands. Slovenia is characterized by a large number of small settlements and many areas with scattered settlement patterns. About 42 percent of Slovenia's population lives in urban areas, the rest in rural areas. The settlement pattern is diverse. The country's population density averages 98 inhabitants per square kilometre, which is less than in the EU (116 inhabitants/sq km). Differ- ences in population density are accompanied by other aspects of population trends that are not favourable for the less developed regions. Sloveneagriculture's2.7percentshareinSlovenia's GDP in2001placesthecountryhighonthe list of European countries.78 The sector employs about 5.3 percent of the workforce, which indicates its productivity lag relative to both the manufacturing and services sectors,79 and relative to the EU's average productivity in agriculture. This is partly the result of difficult farming conditions in Slovenia80 and the unfavourable size of farm holdings. The average farm size is 5.6 hectares, or in terms of European Size Units, 4.7 ESU. More than 70 percent of farm holdings are operating on a part–time basis. Average labour input per farm is 1.2 Annual Work Units (AWU).

77 University of Ljubljana, Biotechnical Faculty, Department of Agronomy, Institute of Agricultural Economics, Rural Sociology and Rural Development. 78 Astheavailabledataindicate,agricultureaccountedfor1.7percentofvalueaddedintheEUin 2000. However, there are conspicuous differences between various EU Member States. 79 Productivity, expressed in terms of value added per employee, lies at about two-thirds of the corresponding figures for the manufacturing and services sectors. 80 About 76 percent of utilized agricultural land is located in Less Favoured Areas (as defined by Reg. 1257/99/EC).

193 Agriculture's upward forward linkage, i.e. the food processing sector, contributes a further 4 percent to the country's GDP, contributing and employing a 3 percent share of employees to the overall manufacturing sector. Slovenia is a net importer of food products. Only some groups of products, such as milk and milk products, meat products and beverages show a surplus in foreign trade. The main structural problems in Slovene agriculture are: a) The production structure is very unfavourable. Average farm size is 5.6 hectares (4.7 ESU) and labour productivity is low (3.7 ESU/AWU), which results in high production costs and inefficient management of farms. b) The prevailing age structure of Slovene farm owners (with an average age of 58 years) is unfavourable. c) In the structure of utilized agricultural land, less–favoured areas predominate. d) Unfinished restitution prevents the development of larger agricultural enterprises. e) Low level of education of farmers (about 60 percent of farm holders have only primary education or less; only 15 percent of farm holders have agricultural vocational education) and insufficient education possibilities. f) Lack of upward and downward linkages of agriculture with other productive sectors. g) High levels of market protection in the food processing sector. h) Inefficient corporate structure of the food processing sector and difficulties in meeting demanding EU standards (esp. veterinary).

SOME CHARACTERISTICS OF AGRICULTURAL HOLDINGS

Agricultural holdings in Slovenia use slightly more than 950 000 hectares of land. Family farms have 96.7 percent of total utilized area; on average they manage 10.6 hectares of land or 5.9 hectares of agricultural land per holding. Average size of land held by agricultural enterprises is 304.5 hectares or 288 hectares of utilized agricultural area per agricultural holding. The average size of agricultural holdings in Slovenia is practically incomparable to the size of agricultural holdings in the EU. With average size of 5.6 hectares of utilized agricultural area, holdings in Slovenia are 5.3 times smaller than the average of EU Member States and 12 times smaller than in the United Kingdom, which has on average the largest holdings in the EU. The size structure is similar only in some Mediterranean EU Member States, i.e. Greece, Italy and Portu- gal, where production on smaller farms is more specialized and aimed at intensive production (horticulture, wine growing, fruit growing). According to the structure of utilized agricultural area, family farms and agricultural enterprises differ importantly. On family farms grassland represents more than 60 percent of land, while arable land represents less than one–third. In agricultural enterprises the structure is ex- actly the opposite. Both in family farms and agricultural enterprises the third most important form of utilization of agricultural area is vineyards. Inaddition tounfavourable sizestructure, fragmented landisoneofthelargestproblems ofSlo- vene agriculture. This is especially true for family farms, which cultivate slightly more than 600 000 parcels of agricultural land or on average 7.2 parcels per holding. The average size of a piece of land is below 1.4 hectares. Only one–eighth of family farms in Slovenia have land property in

194 a single parcel. They cultivate less than 10 percent of total utilized agricultural area. Most land is cultivated by family farms which have between 2 and 10 parcels of land. According to 2000 Agricultural Census data, households on family farms in Slovenia have 322 981 family members, or 3.8 members per holding. The age structure of households on family farms is characterized by high shares of older family members. In the structure of households, people over 55 years of age represent almost a third. The ageing index in households is 135. Comparison of data collected in the previous two censuses (1981 and 1991) shows that the age structure of households on family farms has deteriorated considerably (in 1981– ageing index = 78; in 1991 = 85; and in 2000 = 135).

Table 1: Age groups of family members on family farms (SURS, 2002)

Age groups members share (%) TOTAL 322 981 100.0 under 14 44 842 13.9 15–24 46 373 14.4 25–34 45 085 14.0 35–44 43 513 13.5 45–54 42 561 13.2 55–64 40 223 12.5 65–74 39 950 12.4 Over 74 20 434 6.3 Work on family farms is performed by approximately 252 thousand family members. With regard to the descriptive assesment by family members doing work on family farms, for 72 percent of them agricultural work means only a supplementary activity or they help out occasionally.Theirlaboutinputonagriculturalholdingswasestimatedat49percentofthetotal annual work unit (AWU). Just under 6 percent of family farms are engaged in some sort of supplementary activity. Among them, three activities predominate: services with agricultural machinery, food processing and wood processing on family farms. are also Farm tourism and cottage industry are also relatively widely developed. The share of family farms with supplementary activities rises with the size of the farm. Never- theless more than half of family farms (54 percent) engaged in supplementary activities are farmswith1–5hectaresof UAA.Anadditional25percentofsupplementaryactivitiestakeplace on family farms with 5–10 hectares of UAA. The probability that a family farm will decide to engage in a supplementary activity grows with labour force input on the family farm. However, in this case as well most supplementary activities are registered on family farms with 1–2 AWU (81 percent of all family farms engaged in supplementary activities). In Slovenia ever more family farms are deciding on ecological farming. 7 206 or 8.3 percent of familyfarmsareatvariouslevelsoftransformation.Theycultivatealmost53759hectaresofag- ricultural area and breed slightly more than 47 650 LSU. There are already 333 ecological, i.e. environmentally–friendly family farms, which is 4.6 percent of all farms that answered the question about the transformation into ecological farming

195 positively. 11.6 percent of family farms answered that they are in the process of transformation and the other 83.8 percent answered that they are still planning the transformation. From the point of view of the size structure, family farms deciding on ecological farming are mostly small– and medium–sized. Over 70 percent of family farms actually farming ecologi- cally or deciding to start farming in this way are smaller than 10 hectares. Economic size is closely related to the size and type of agricultural production. The average economic size of family farms in Slovenia is 4.0 ESU and smaller as in any EU Member State but relatively close to that of Greece, Portugal and Italy. Almost half of family farms have an economic size under 2 ESU and a quarter have between 2 and 4 ESU. Thus nearly three–quarters of family farmshaveaneconomicsizeunder4 ESU.Lessthanaquarteroffamilyfarmshaveaneconomic size between 4 and 16 ESU and only 3 percent have a size of more than 16 ESU. Less than 1 percent exceeds the economic size of 40 ESU. Family farms with more than 40 ESU use less than 3 percent of agricultural area. Family farms with the economic size under 8 ESU represent almost 90 percent of all farms; however their SGM (standard gross margin) value is only 53 percent of the total SGM on family farms in Slovenia. On the other hand a few hundred family farms (less than 1 percent of family farms) have over 40 ESU and their total SGM value is one–tenth of the total SGM. SGM shares of individual agricultural activities in the total SGM on an agricultural holding show that in Slovenia close to three–tenths of agricultural holdings belong to the mixed livestock production type. Almost 60 percent of holdings belong to one of the types with mixed production and only 40 percent of holdings are specialized. The economic size of family farms is largest in horticulture (21 ESU), followed by breeding of pigs and poultry (14 ESU), while for all other types of farming it is lower than 7 ESU (in all mixed types it is around 3 ESU).

AGRICULTURAL POLICY AND BUDGET

There was a significant increase in the Slovene agricultural budget over the period between 1998 and 2003 for agricultural policy purposes. In 1998 the government adopted the Agricul- tural Policy Reform Programme 1999–2002 and in 1999 the National Development Programme for Agriculture, Food, Forestry and Fisheries for 2000–2002. This reform was mainly aimed at a re–instrumentation of agricultural policies which can be generally characterized by a shift from market price support (deletion by the government of the system of administrative guaranteed prices for basic structural, environmental and rural development measures). This reform resulted in the Law on Agriculture in June 2000 laying down the broad legal framework for the current Slovene agricultural policy. In 2001, agricultural budget expenses allocated to carry out given farm policy objectives were enhanced by almost 80 percent compared to 1998. This rise in budgetary expenditures, however, has still not followed the increase in financial funds declared at the initial stage of agricultural policy reform (late 1990s). Some important shifts in the structure of the agricultural budget can be observed. Funds for market and intervention policy in 2001 have been virtually tripled compared to 1998. This resulted primarily from a substantial positive leap that occurred in the financial funds provided for direct payments (400 percent), aid given in the case of natural disasters and, to a lesser extent, financial funds intended for the promotion of sales and consumption. In contrast, price

196 supports and input subsidies have ceased to exist as viable market price policy instrument, while funds for market intervention have also fallen considerably.

Figure 1: Budget expenditure for agriculture (EUR million)

Source: MAFF. Quite a startling result emerges from the financial data pertaining to structural policy measures. There has been only a marginal increase in these funds, which has been brought about by higher funds for eco–payments and payments for aggravated production conditions (around 200 percent). At the same time, investment funds and financial sources for the restructuring process in agriculture and the food industry have even been reduced, a trend which seems out of line with declared agricultural policy reform objectives. Funds allocated to support general services in agriculture remained, over the period between 1998 and 2001, practically unchanged. The major financial contribution to agriculture in the state budget is through the budget of the Ministry of Agriculture, but an increasing part comes from other ministries.

Agriculture and rural development Agricultural policy in Slovenia is tackling rural development problems by carrying out an extensive set of measures aimed at supporting agriculture in areas with unfavourable production conditions, promoting sustainable agricultural practices, supporting effective restructuring of the agrifood sector and integrated development of rural areas.81 In 2002, the Slovene public

81 The measures are grounded by the underlying national strategic documents: Strategy of Slovenian agriculture (1993); the Programme of agricultural policy reform (1999); and the Rural development plan for Slovenia (2004-2006). The legislative basis is provided by the Law onAgriculture(OGRS,No.54/00).Theimplementationalprovisions(e.g.scopeofmeasures, eligibility criteria, description of procedures relating to selection of projects, their implementation and monitoring) are defined by the secondary legislation. In 2001, the underlying legal provisions were: Decree on agricultural structural and rural development

197 funds allocated to the support of rural development amounted to EUR 41.99 million. The breakdown of public support for restructuring of agriculture and rural development by the main groups of measures is presented in Figure 1.

Figure 2: Budget expenditure for rural development policy measures in Slovenia (1992–2002)

Similarly to the EU, Slovenia has diverted a considerable share of agricultural support towards a programme of market–neutral payments promoting the multifunctional role of agriculture. These payments compensate for higher production costs in less–favoured areas and stimulate more sustainable practices of agricultural production. Virtually all sectors of primary agricultural production are eligible for public support for competitive restructuring of the agricultural sector in Slovenia. Support is given in the form of preferential long–term loans (interest rate subsidies) and capital grants. In addition to programmes targeted to the agricultural sector, investment support is also provided to improvements in marketing and processing of food products. Other measures aimed at restructuring of the agrifood sector include land operations (reparcelling of agricultural land, land ameliorations), support for producer groups and marketing of agricultural products. At the same time, the scope of policy action has gradually been extending its activity towards a wider scope of rural development measures. They are based on initiatives at the local community level, stimulating endogenous development potential in the countryside. The supported projects relate to generation of supplementary or alternative income sources, promotion of ru- raltourism,andassistanceindevelopingruralinfrastructureandpreservationofruralheritage.

programmes in 2001 (OG RS, No. 60/01, 76/01, 91/01); Decree on agricultural structural measures 2000–2006 (SAPARD) (OG RS, No.107/01), Decree on introduction of compensatory payments in Less favoured areas (EKO 1) (OG RS, No. 34/01), and Decree on agri-environmental measures in 2001 (EKO 2, EKO 3) (OG RS, No. 34/01).

198 INCOME SITUATION IN SLOVENE AGRICULTURE AND ON FAMILY FARMS

The total farm income situation in Slovene agriculture, after increasing in 1995, has deteriorated in recent years as a result of the reduction in physical output and the decline in real agricultural prices. This has occurred in spite of the fact that the budgetary support to agriculture has increased. The farm income situation varies according to type of farming. It has been more stable for the farms specializing in forestry, in dairy productoin and for those which are more diversified. It has been less so for meat producers and horticultural farms. The main problem seems to be in risks related to market and weather conditions, although the application of new technologies could lead to productivity gains and cost reductions. Farm consolidation has taken place during more recent years and is expected to continue, particularly through lend–leasing arrangements and to a lesser extent through lend–selling transactions. The reduction in costs of production, which occurred only slightly in 1998, seems to be insufficient to cope with the increased competitive pressure of market and trade liberalization. With price level close to those in the EU and the adjustment of farm support policies to the CAP, the key drivers of farm income are likely to be productivity and efficiency gains which act to reduce production costs. As in the majority of other European Countries, in Slovenia agricultural holdings combine their total income through work in other economic activities, either within the frame of agricultural households (supplementary activities = on–farm activities) or through off–farm employment. Different combinations of income sources represent a kind of survival strategy for agricultural holdings on which economic size does not enable an appropriate income level. Particularly often in Slovenia is supplementing of income with off–farm employment (Kovaèiè, 1996). Com- bining of income in Slovenia is also a consequence of very small size structure of agricultural holdings and low share of full–time farms. For most agricultural holdings income from farming activities is not adequate to assure economic stability. With the purpose of estimation of total income on agricultural holdings a simple income model has been developed by Oblak et al. (2002) based on expert knowledge of the local situation by the moderator and taking into account the survey data and partly statistical data. The basic income model is composed of partial models (of farm related income, income from supplementary activities, off–farm income, other earnings and revenues) and the model for calculationg workforce input. Based on this income model an estimate of total income and individual income sources on an agricultural holding is possible, together with determinating the full employment of the workforce on an agricultural holding as a whole and according to its individual sources of income. The basic population has been divided into four types or strata by socio–economic types of farms (by Kovaèiè, 1996). A full–time farm is a holding where none of the active members of the family farm nucleus (holder, spouse, successor and his/her spouse) is ordinarily em- ployedoutsideofthefamily.Thefarmisinthiscasetheonlyincomesource.Onpart–timefarms at least one member of the family household nucleus is ordinarily employed outside of the farm. Supplementary farms were classified as farms which have less than SIT 1 million (approximately EUR 4 255) of annual income from farming activities. Abandoned farms or farms with discontinued market production are those where income from farming is less than SIT 300 000 (approximately EUR 1 275) or where market production has ceased within the last 10 years.

199 Total income of agricultural holdings is calculated as a sum of incomes from farming (IF), supplementary activities (ISA), off–farm employment (IOFE) and other earnings and revenues of family farm members (OER). Results of an investigation made by Oblak (2002) show that income from farming in the sam- ple82 averaged the amount of SIT 1.078 million (approximately EUR 4 585) per agricultural household, which is below the level of parity income. In most cases it does not meet survival and normal development needs, which forces most agricultural households to combine their incomes. Twenty percent of farms from the sample reached negative income (loss) from farming; 60 percent of farms do not attain even 40 percent of the average income from farming. Half of the farms in the sample attained less than SIT 516,000 (approximately EUR 2 200) of income from farming. Results exhibit the variability of agricultural income inside the sample. Direct payments in 2001 reached an average amount of SIT 323 000 (approximately EUR 1 375) on agriculturalholdingsandrepresentsaround30percentinthestructureofagriculturalincome. On observation income on agricultural holdings from farming represents on average only 30.5 percent of the total. Income from farming therefore is not the most important income source on agricultural holdings, but it is attained with high work input. Agricultural holdings require even more than the average work input, as half of working time (60 percent) is dedicated to farming. Productivity in agriculture is very low in comparison with other activities in the sample.

Table 2: Share of income and share of work input by individual income sources on agricultural holdings

Supplementary activi- Off–farm Other Activity Farming ties (on–farm) employment receipts Share of income (%) 30.5 33.3 55.1 28.1 Share of work input (%) 59.4 32.2 49.2 0.0 Source: Oblak, 2002.

Total income on agricultural holdings in the sample was on average SIT 3.765 million (approximately EUR 16 020). Off–farm income sources represent in all areas approximately two–thirds of total income on agricultural holdings. In total, the share of income from farming of the sample represents 28.6 percent and non–agricultural income sources 71.4 percent. Between non–farming sources the highest share is of incomes from off–farm employment (34.2 percent), followed by other earnings and revenues (27.0 percent). Income from supplementary activities in the total amount is 10.2 percent. As expected, the highest share of income from farming is attained by full–time farms with the share of income from farming around 61.0 percent, or 2.1 times higher than the total sample. Abandoned agricultural holdings produce negative income (loss) and cover losses with other income sources, more or less from off–farm employment.

82 In collecting data a survey method was used which included 120 agricultural holdings in two Slovene regions, namely Gorenjska and Pomurje, each differing in economic and agricultural aspects. The guideline which was considered in the sample selection was to follow real life situations in representing particular socio-economic types and the share of farms with more difficult or less favourable conditions for agricultural production in those areas. In selecting farms for the sample the method of proportional stratified random sampling has been used.

200 On farms with supplementary activities, such activities in the share of total income contribute on average 36.6 percent. In addition the share of income from employment off–farm differs significantly statistically between types of agricultural holdings. This is the most important source for abandoned farms (69.3 percent of total income) and for part–time farms (52.0 percent of total income). Other earnings and revenues contribute to holdings with supplementary activities around 18.3 percent and to full–time farms around 33.4 percent.

Table 3: Income structure in sample of family farms (in %)

Socio–economic type of farms Income source Total Full–time Part–time Supplementary Abandoned Farming 27.0 61.0 19.9 32.0 0.0 Off farm employment 34.2 4.7 52.0 13.4 69.2 Supplementary activities 28.6 1.0 2.1 36.3 1.9 Other receipts* 10.2 33.4 26.1 18.3 28.9

*Retirement allowances, social aids, income from shares and debentures, rents etc. Source: Oblak, 2002. Off–farm employment is an important contribution to the welfare of agricultural holdings, but its frequency often depends on conditions in the local labour market and of capacities and preferences of the workforce on agricultural holdings. Better employment possibilities would probably speed up the crossover of the agricultural workforce from agriculture. However, poor mobility as a consequence of old age and lack of professional qualifications for non-agricultural activities render such a crossover unlikely and limited more or less to generational changes (Juvanèiè, 2002). Retirement allowances also play an important role in the total income of the observed sample, as do social transfers such as child support, support for unemployed persons and other kinds of assistance. Results show that they contribute almost a third of the total income of agricultural holdings.

Diversification of agricultural activities and activities close to agriculture (alternative income sources) Diversification of income sources is the predominant strategy regarding Slovene agricultural holdings, and in the near future we cannot expect major changes in the organizational structure of agricultural holdings in Slovenia. Agricultural holdings combine their incomes to a level appropriate to satisfy their income aims and needs. Their main aim is a stable income structure which is on the level of average incomes in the country. In addition to the unfavourable natural and structural conditions for agricultural production, farms in Slovenia are affected by inefficient allocation of agricultural work. Farm work on 86 467 farms was measured at the equivalent of 107 809 Annual Work Units (AWU). Despite their small size, Slovene farms employ on average 10 percent more workforce than an average farm in the EU. It is therefore hardly surprising that labour productivity in agriculture is distinctly low. On average, one Annual Work Unit (AWU) utilizes 4.5 hectares of agricultural land, or in terms of economic size, produces within the scope of 3.7 European Size Units (ESU). Difficult growing conditions, technology lag, low level of vocational qualifications in agriculture and, in particular, an extremely disadvantageous farm structure have a considerable impact towards

201 low labour productivity and underdevelopment in agriculture. Agricultural production in Slovenia is still considerably dispersed and insufficiently oriented towards the market. The long–term strategic orientation of agricultural policy in Slovenia and the activities of the Minis- try of Agriculture, Forestry and Food are thus directed towards encouraging farms to search for new sources of revenue from supplementary and additional activities on farms (e.g. modifica- tion of agricultural products, tourist farms, crafts etc.). Market orientation, joint appearance on the market and more efficient allocation of the workforce on agricultural holdings will remain the main focus of this measure. This implies that farms need to be urgently redirected toward the development of alternative income sources connected with agriculture. These activities are planned to contribute towards improved income status of agricultural households and to provide alternative sources of employment. They are intended to make the best use of development potentials of the immediate environment andtobecomplemented bytherange ofregional products andservices andthus to contribute towards the promotion of the entrepreneurial sector and competitiveness. The general objective of supplementary and additional activities on farms is to improve efficiency of labour allocation on farms and thus to provide additional sources of employment and improved incomes. Implicitly, we can expect a positive impact on the economic, social and environmental situation in rural areas, which are often characterized by unfavourable conditions for agricultural production and facing a substantial lag in economic development. The specific objectives of this measure are: • to increase added value of basic agricultural production through development of supplementary or additional activities on farms; and • to create capacities for adding value to agricultural products on farms.

CONCLUSIONS

Lagging of agricultural income behind parity income does not necessarily translate as the worst economic situation of agricultural households in comparison with non–agricultural households.Incomefromfarmingisoftenmerelyonesourceoftotalincomeonagriculturalholdings. Agricultural holdings strive to stablize income structure. The targeted income level is on par with the level of average incomes in the state. Many agricultural holdings combine their incomes to satisfy their income aims and needs. Incomes from farming activities are falling in the long term. For this reason larger holdings are forced to think about intensification and concentration, and smaller ones about combining farming income with other sources to preserve the income situation. Better income results from farming were attained especially on full–time farms. Polarization of farm growth patterns, together with asymmetries in employment decisions in favour of off–farm employment (Juvanèiè, 2002) lead us to the finding that the share of pluriactive agricultural holdings in Slovenia is likely to remain constant. This provides the em- piricalevidencetothefindingthatpluriactiveagriculturalholdingsrepresentthemostcommon structural type in Slovene agriculture and that no major changes in this respect can be expected in the near future.

202 On the other hand, the location of farms in areas with high unemployment decreases the probability of farm survival. Upkeep of agricultural production is evidently not a universal survival strategyinareasfacingdifficultiesonthelabourmarket.Itischaracteristiconlyinthecaseofar- eas with a high share of agricultural employment (and a probable high share of underemployment in agriculture).

REFERENCES

EUROPEAN COMMISION,DIRECTORATE GENERAL FOR AGRICULTURE. 2002. Country report on Slovenia. Agricultural Situation in the Candidate Countries. July 2002, 34 pp. GOVERNMENT OFFICE FOR STRUCTURAL POLICIES AND REGIONAL DEVELOPMENT, REPUBLIC OF SLOVENIA. 2003. Single Programming Document 2004–2006. Ljubljana, Sep- tember 2003. (draft) JUVANÈIÈ L. 2002. Modelling of employment decisions on farm households in Slovenia. Biotechnical Faculty. (Ph.D. dissertation) KOVAÈIÈ M.–UDOVÈ A.–ÈEBULJ B. Dohodek. na kmetijah. Income on family farms. Zbornik Biotehniške fakultete Univerze v Ljubljani. Kmet. 77–2, s. 247–266. OBLAK O. 2002. An estimate of total income on agricultural households in Slovenia. Biotechnical Faculty. (M. Sc. thesis) PERPAR A. 2002. Development characteristics of Slovene countryside. Biotechnical Faculty, Ljubljana. (M. Sc. thesis) POROÈILO O STANJU KMETIJSTVA, IVILSTVA IN GOZDARSTVA V LETU 2001. Kmetijski inštitut, 2003. REDNAK M. 2003. Slovensko kmetijstvo 1992–2006. Slovene agriculture 1992–2006.V: Slovensko kmetijstvo in Evropska unija. 2. konferenca DAES, Ljubljana, 2003. SURS. 2002. Slovensko kmetijstvo 2000. Slovene agriculture 2000. Census data 2000.

203 204 LIST OF PARTICIPANTS

Hristo Botev Bulevard 55 Albania Sofia Tel: +359298511245 Fax: +359 2 980 8270 Mr Albert Dubali E–mail: Chief of the Rural Development Sector [email protected] Ministry of Agriculture and Food Internet: Shesli Skenolerbei No. 2, Tirana http://www.mzgar.government.bg Tel: +355 4 227 920 Fax: +355 4 227 920 E–mail: albertd@icc–al.org Croatia Internet: http://www.icc–al.org Mr Mario Njavro Bulgaria University Assistant Faculty of Agriculture, Department of Farm Management, Mr Hrabrin Bachev Svetosimunska c.25, Senior Researcher 10000 Zagreb Institute of Agricultural Economics Tel: +385 1 23 93 761 125 Tzarigradsko shosse Blvd., Blok 1, Fax: +385 1 23 93 745 1113 Sofia E–mail: [email protected] Tel: +3592 971 3913 Internet: http://www.agr.hr Fax: +3592 971 3913 E–mail: [email protected], Mr Hrvoje Bunjevac [email protected] Farmer Internet: http://ww.iai–bg.com Farmers Association Lipovec Lonjski 26, Mr Stoichko Georgiev Sirakov Farmer 10312 Kloštar Ivaniæ Farmers Association Tel: +385 1 2892–664 Pazardjik City Fax: +385 1 2892–994 12 Plovdivska street E–mail: [email protected] Tel: +359 98 237 723 Mr Miroslav Varga Ms Antoaneta Simova Head of Office Sofia University Osjecko–baranjska County, Development Sofia, Mladost 1. Bl.12 – A, Agency tel. 77–61–42 Europske avenije 11, E–mail: Mira@techno–link.com 31000 Osijek Tel: +385 31 200 677 Ms Mariela Hristova Milenkova Fax: +385 31 215 677 Senior Expert E–mail: Ministry of Agriculture and Forestry razvoj@osjecko–baranjska–zupanija.hrIInt International Relations Department ernet:http://www.osjecko–baranjska–zupan International Business Contact ija.hr Division

205 Czech Republic Mr Peter Ware Farmer Farmers Association Mr Tomasz Ratinger Sátormapuszta 5 Head of Department H–8296, Hegyesd Research Institute of Agricultural Economics Tel: +36 87 715 819 Manesova 75, Praha 2 Fax: 36 87 715 820 Tel: 00 420 222 000 510 E–mail: warep–[email protected] E–mail: [email protected] Internet: http://www.vuze.cz Ms Krisztina Magocs VATI Kht. Orszagos Videkfejlesztesi Iroda Mr Ladislav Jelinek 1016 Budapest, Research Institute of Agricultural Econom- Gellerthegy u. 30 –32 ics Tel: +36 1 224 3100 Manesova 75, Praha 3 Tel: 1 420 222 000 510 E–mail: [email protected] Romania Internet: http://www.vuze.cz Mr Tomas Doucha Ms Mara Rusu Director Senior Researcher Research Institute of Agricultural Economics Institute of Agricultural Economics Manesova 75, Casa Oamenitor di Flunfa, Calea 13, Praha 2 Septembrie no. 13 Aector 5, Tel: 00 420 222 000 510 Bucharest Internet: http://www.vuze.cz Tel: +40214100776 Fax: +40214100776 E–mail: [email protected] Hungary Internet: http://www.iea.ro Mr Constantin Neagoe Mr Szilárd Podruzsik Project manager FAO Lecture FAO – TCP NTL Budapest University of Economic Sciences Tel: +40 72 333 0102 and Public Administration E–mail: [email protected] 2300 Ráckeve, Október u. 14 Mr. Sorin Constantin LAZAR Tel: + 36 1 209 09 61 Farmer E–mail: [email protected] Farmers Association Internet: http://www.bkqe.hu comuna Strunga, judetul Iasi Tel: +40–232–714–260 Mr Istvan Francsovics Fax: +40–232–714–301 Vice – Major E–mail: [email protected] Farmers Association Tokai n. 25. 6447 Felsoszentivan Tel: 36 30 99 55 212 Fax: 36 79 553 177 E–mail: [email protected]

206 Slovakia Tel: +386 7 3465 493 Fax: +386 7 3465 E–mail: [email protected] Ms Jela Tvrdonova Director Agency for Rural Development United Kingdom Akademicka ul. 4 94901 Nitra Ms Sophia Davidova Tel: +421 905 409 782 Project manager FAO Fax: 421377336402 Wye College/Imperial College E–mail: [email protected] 1, Purr Wood, Godmersham, Internet: http://www.arvi.sk Kent, CT4 7DX, UK Ms Eva Porubanova Tel: +44 1227 731 952 Director Fax: +442075942838 Association of land owners and agribusi- E–mail: [email protected] ness of Slovakia Internet: http://www.imperial.ac.uk Dobrovièova 12, Mr Junior Davis Bratislava, 812 66, Project manager FAO Slovak Republic Natural Resource Institute. UK Tel: + 421 556 45666 NRI, Rm P307 ETFG, Central Avenue; Mr Jan Babinsky Chatham Maritime, Ministry of Agriculture, Structural Policy Kent ME4 4TB Department Tel: +44(0)1634 883338 Cimburkova 15, Fax: +44(0)1634 883706 040 01 Košice E–mail: [email protected] Tel: +421 2 59266 499 E–mail: [email protected] FAO

Slovenia Mr Doyle Baker Mr Anton Perpar Service Chief Researcher, Assistant Agricultural Support Systems Division Biotechnical Faculty FAO AGSF Department of Agronomy Vialle delle Terme di Caracalla, Jamnikarjeva 101 1010, Rome Italy SI–1000 LJUBLJANA Tel: +39 06 570 55095 Tel: 386 1 423 11 61 E–mail: [email protected] Fax: 386 1 423 10 88 Mr Tomasz Lonc E–mail: [email protected]–lj.si FAO SEUR Internet: http://www.bf.uni–lj.si Benczur utca 34, Mr Gorazd Marinèek 1068 Budapest, Farmer Hungary Farmers Association Tel: +36 1 461 2002 Dolenje Selce 18, Fax: 36 1 351 7029 8211 Dobrnic E–mail: [email protected]

207 Mr Fritz Rembold Mr Stjepan Tanic FAO SEUR FAO SEUR Benczur utca 34, Benczur utca 34, 1068 Budapest, 1068 Budapest, Hungary Hungary Tel: +36 1 461 2000 Fax: +36 1 351 7029 E–mail: [email protected]

208