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Strategic Transformation in Agriculture and Rural Space (STARS RAS)

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Strategic Transformation in Agriculture and Rural Space (STARS RAS) Strategic Transformation in Agriculture and Rural Space (STARS RAS) Background Document Productive Inclusion for Agricultural Competitiveness in Croatia This background document is a product of the staff of the World Bank Group. The findings, interpretations, and conclusions expressed in the background document do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank Group does not guarantee the accuracy of the data included in this work, which is drawn from multiple external sources. Nothing herein shall constitute, or considered to be, a limitation upon or waiver of the privileges and immunities of The World Bank Group, all of which are specifically reserved. CO-FINANCED BY THE EUROPEAN UNION EUROPEAN AGRICULTURAL FUND FOR RURAL DEVELOPMENT: EUROPE INVESTING IN RURAL AREAS MEASURE TECHNICAL ASSISTANCE EUROPEAN MARITIME AND FISHERIES FUND MEASURE VII.1. TECHNICAL ASSISTANCE Contents Introduction .................................................................................................................................................. 3 Structural Transformation of Agriculture in Croatia ............................................................................... 3 Dynamics of Structural Transformation .............................................................................................. 3 Structural Transformation of Agriculture in Croatia ........................................................................... 4 Patterns ................................................................................................................................................ 4 Drivers .................................................................................................................................................. 6 Trade and Competitiveness of Agriculture in Croatia ......................................................................... 13 Competitive Advantages ..................................................................................................................... 13 Agricultural Competitiveness .............................................................................................................. 14 Trade ...................................................................................................................................................... 15 Pathways to Change ................................................................................................................................ 16 Providing Smarter Incentives for Productivity-enhancing Investments ........................................ 16 Developing an Integrated Agricultural Knowledge and Innovation System ................................ 19 Promoting Digital Agriculture .............................................................................................................. 23 Emerging Policy Priorities ....................................................................................................................... 26 2 Introduction 1. Croatia has a vast potential to transform its agri-food system in a driver of higher growth, employment, and rural income levels. The agri-food sector is an important contributor to GDP, jobs, and rural incomes in Croatia. The sector benefits from a number of competitive advantages, which could be leveraged for increased growth and development, including unrestricted access to EU markets, diverse agro-ecological conditions, quality land and water resources, modern logistics infrastructure, as well as a growing domestic tourism industry. Croatia’s agri-food sector is therefore endowed with the key assets necessary to seize growth opportunities on the EU and domestic markets. 2. But structural constraints to competitiveness must be addressed to realize this potential. Croatia is currently a net importer of agri-food products and faces growing agri- food trade imbalances. Meanwhile, climate change poses increasing supply risks for agri-food chains. Strengthening the competitive position of the agri-food sector will require improvements in the (i) productivity of the primary sector, including its modernization and diversification towards value addition; (ii) ability of agri-food chains to cost efficiently respond to growth opportunities in domestic and international markets; and (iii) capacity to manage increasing climate risks. In this context, Croatia’s fragmented production structure constitutes a major impediment to building a competitive agri-food sector, which functions as an engine for growth, job creation, and improved rural incomes. 3. Sector policies aimed at accelerating the structural transformation of the agri-food system could boost its competitiveness. The structural transformation of agri-food systems is marked by industrialization and modernization of agriculture, significant increases in labor productivity across sectors, rural-urban migration, and a reduction in the share of agriculture in total employment and in GDP (Kuznets, 1957, Bustos et al. 2016). From this perspective, Croatia can still be classified as an “incomplete transformer” because of relatively low productivity of the agri-food system, high shares of GDP and employment that still depend on the primary sector, the rural-urban divide (income, poverty, etc.), and a link between poverty and agriculture. This report applies the lens of structural transformation dynamics to identify policy priorities for building agri-food system competitiveness. In particular, the report provides a diagnostic of (i) the current state and factors driving the structural transformation of the agri- food system in Croatia; (ii) the competitive position of the agri-food system in the current trade environment; (iii) potential pathways to strengthen agri-food system competitveness by leveraging structural tranformation dynamics; and (iv) emerging policy priorities for accelerating the structural transformation of the agri-food system. Structural Transformation of Agriculture in Croatia Dynamics of Structural Transformation 4. Rising factor productivity is the main engine for transforming agri-food systems, building the competitiveness of downstream food chains, and alleviating rural poverty. The structural transformation of agri-food systems follows a path where on-farm capital intensification through mechanization together with enhanced knowledge on farming practices (e.g. fertilizer, pesticides, tilling, etc.) unleashes significant increases in agricultural output due to higher labor and land productivity (See Figure 1). The expansion of agricultural output leads to an increase in the supply of raw materials at lower costs to agri-processors downstream 3 the agri-food chain. This increased supply enables the scale-up of operations, promotes horizontal integration, and reduces overall costs, all of which strengthen the competitiveness of the agri-food system as a whole. In addition, capital investment-led improvements in labor productivity tend to displace rural workers who subsequently migrate to peri-urban areas or cities to find employment in non-agricultural sectors. Meanwhile, increased labor productivity and mobility in rural spaces improve livelihoods in rural areas by enabling higher incomes per capita as well as lower poverty density and poverty rates. Figure 1: Structural Transformation Dynamics of Agri-Food Systems Rural-urban migration Increase in per capita On-farm structural income transformation Lower poverty density and poverty rate Rural Space Potential threat to Mechanization smallholder viability and =Improved livelihoods and infrastructure (Capital) Intensive & extensive use of Increase in: land Labor Increase in emissions productivity nt Potential land degradation Land productivity =Potential negative Output Environme Enhanced environmental impact knowledge on farming practices Increased and more stable (knowledge) supply of raw materials Lower costs of raw materials m chain m More jobs Downstrea =Improved competitiveness Structural Transformation of Agriculture in Croatia Patterns 5. The structural transformation of the agri-food system in Croatia has been steadily progressing as part of its integration process with the EU. Changes in Croatia’s rural space include an increase in agricultural labor productivity combined with a sharp increase in rural-urban migration, which has led to a decline in the share of the rural population (see Figure 2). However, the agriculture sector has recorded constant negative growth in terms of both gross output and gross value added in the past decade. Gross agricultural output declined by 5.6 percent each year on average between 2008 and 2013, whereas gross value added declined by 6.3 percent each year on average between 2008 and 2016. This signals that primary agriculture is underperforming compared to the rest of the economy and has had 4 difficulties adapting to the new economic environment created through Croatia’s integration process with the European Union (EU). 6. Growth in agriculture and food processing have demonstrated strong multiplier effects in Croatia. Thanks to the primary sector’s backward (demand for inputs, capital, and labor) and forward linkages (supply inputs) to other sectors, agricultural sector growth affects economic activity in manufacturing of food products and beverage, transport, wholesale and retail trade, hotels and restaurants, and research and development. The multiplier effects of changes in agricultural output appear to be particularly
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