Chapter

7 Growth and Rural Poverty in the CIS-7 Countries: Case Studies of Georgia, the Kyrgyz Republic, and Moldova

Author(s):
Sarosh Sattar, and Clinton Shiells
Published Date:
April 2004
Share
  • ShareShare
Show Summary Details
Author(s)
Louise Cord, Ramon Lopez, Monika Huppi and Oscar Melo* 

Rural poverty is a major problem in the CIS-7 countries, exceeding urban poverty in four of the seven countries. The high rates of rural poverty are partially a historical phenomenon, but they also reflect the immense dislocation experienced by the rural sector following the breakup of the Soviet Union. Production and marketing structures, the incentive framework, social services, and farm and nonfarm employment opportunities were profoundly affected by the breakup of state and collective farms and the switch to a market economy.

Regional and country-focused poverty analyses have examined aggregate rural poverty trends but only rarely have examined their possible determinants, such as access to land and livestock assets and participation in agricultural product and factor markets.1 Similarly, analyses of rural development in the CIS-7 countries have focused on growth constraints and the overall content and pace of sectoral reforms but have paid less attention to the links between macro and rural policies and rural poverty outcomes.2

This chapter seeks to improve the understanding of rural poverty in the CIS-7 countries and to highlight priority policy options to reduce it. It places rural poverty outcomes within the broader context of macro and sectoral performance and analyzes the determinants of rural poverty, as well as the characteristics that allow rural households to benefit from overall economic growth. It focuses on growth and rural poverty trends in three CIS countries—Georgia, the Kyrgyz Republic, and Moldova—whose economic, geographic, and political characteristics and poverty and growth outcomes are broadly representative of the CIS-7.

The chapter draws on macro and sectoral output data and panel household survey data for 1997/98 through 2000/01 for the three countries. It also draws on analysis of agricultural markets in the Kyrgyz Republic and Moldova and a brief assessment of the business climate for rural entrepreneurs in Georgia.3 The analysis focuses on the monetary dimensions of poverty and does not address its nonincome aspects.

Four key messages emerge. First, the source of growth was an important determinant of its impact on rural poverty. In particular, agricultural growth was more associated with rural poverty reduction than was growth led by nonagricultural sectors. In Georgia, growth in the late 1990s was driven by a narrow set of service industries, while the agricultural and nonfarm sectors stagnated and rural poverty continued to rise. In the Kyrgyz Republic, growth was driven by the agricultural sector, and rural poverty fell significantly. In Moldova rural poverty rose through the late 1990s and began to decline only in 2001, the first year since the transition that the agricultural sector experienced growth.

Second, the benefits of growth were transmitted to the rural poor in different ways. In the Kyrgyz Republic, the benefits were transmitted through increases in labor, livestock, and land assets, as well as beneficial returns to market participation. In the Kyrgyz Republic, these assets and market participation were positively associated with higher household expenditures. In Georgia, by contrast, with the exception of livestock, these assets and market participation were not effective in channeling the benefits of growth to rural households. In Moldova, where there was no economic growth in the late 1990s, the levels of both household labor assets and market participation rates declined, and land assets, which increased, were not effectively linked to higher expenditures.

Third, the land reform programs of the late 1990s provided rural households with a basic safety net but were not sufficient to generate agricultural growth and reduce rural poverty. The association between land assets and household welfare was generally insignificant, except in the Kyrgyz Republic, where it was small but significant. The weak relationship reflects similar results for other transition economies and is not surprising given the relatively equal distribution of land across expenditure quintiles, the unequal marginal productivity of land across producers because the distribution was made by fiat, the low profitability of agriculture and low productivity of land (particularly in Georgia and Moldova), and the lack of information on land quality in the survey data.

Fourth, while all three countries implemented important macro and agricultural reforms that provided a basic framework for growth, the performance of agriculture was heavily constrained by initial conditions (structure of production in 1990, relative openness to trade) and exogenous forces (economic and climatic shocks, political stability). The macro policy framework was broadly similar across the three countries, as all three had achieved macroeconomic stability by the mid-1990s. There were more differences in structural and sectoral policies relevant to the rural sector, mainly related to the speed of land privatization and the content of public investments.

Sectoral Performance and Progress of Reform Programs

Despite implementing fairly similar reform programs, with the notable exception of the pace and content of land reform, the three countries experienced different rural poverty and growth outcomes during the late 1990s. The Kyrgyz Republic experienced agriculture-led economic growth in the late 1990s, and rural poverty fell markedly, from 60.2 percent in 1998 to 46.6 percent in 2001. Georgia also experienced high economic growth, but led by a narrow set of services rather than by agriculture, which stagnated. Rural poverty continued to increase throughout the late 1990s, rising from 13.4 percent in 1997 to 20.9 percent in 2000. In Moldova, the economy, including the agricultural sector, continued to decline in the late 1990s, while rural poverty rose, peaking at 75.8 percent. Economic growth began to recover in 2000, the same year that rural poverty began to fall.

Growth Record and Sectoral Performance

Growth is a necessary condition for poverty reduction and a key determinant of per capita expenditures. But it is not a sufficient condition for poverty reduction. The pattern and quality of growth also affect the impact on poverty. While both Georgia and the Kyrgyz Republic experienced positive growth during this period, growth was driven by the agricultural sector in the Kyrgyz Republic and by services in Georgia. Poverty fell in the Kyrgyz Republic but not in Georgia.

Trends in Gross Domestic Product

Following the decline in output in all three countries in the early 1990s, gross domestic product (GDP) began to recover in Georgia and the Kyrgyz Republic in 1995 but continued to decline in Moldova until 2000. Between 1996 and 2000, the economies of the Kyrgyz Republic and Georgia posted moderate growth rates, averaging around 5.7 percent a year, while Moldova’s economy continued to decline at an average rate of 2.5 percent a year before starting a modest recovery in 2000. Reflecting the dramatic decline in the early 1990s, GDP remained at just over 20 percent of its 1990 level in Georgia, compared with 70 percent for the Kyrgyz Republic and 40 percent for Moldova.

Agricultural Sector Performance

Agriculture’s role in generating economic growth has varied in the three countries. In the Kyrgyz Republic, the economic recovery was led by agriculture. In Georgia, growth was driven primarily by a narrow set of services (transport, communications, and financial intermediation), while the industrial and agricultural sector lagged. In Moldova, the continued drop in GDP through most of the 1990s was driven by weak performance of the agricultural and industrial sectors, with industry performing worse than agriculture.

The Kyrgyz Republic is the only country of the three in which agricultural production has regained—in fact, surpassed—pretransition levels.4 In Georgia, the value of crop production essentially stagnated during 1996–2001 and in 2002 remained at about 60 percent of pretransition levels. The Moldovan agricultural sector continued to decline until 1999, stagnated in 2000, and then grew by 4 percent in 2001, still reaching only 30 percent of its 1990 level.

Why did agriculture in the Kyrgyz Republic outperform agriculture in Georgia and Moldova? The Kyrgyz Republic experienced an increase in both supply and demand, which did not happen in Georgia and Moldova. In addition, the value of agricultural output rose in the Kyrgyz Republic, reflecting an improved incentive framework and the country’s transition toward higher-value crops.

There appears to have been shift in the supply curve for the Kyrgyz Republic, reflecting rising yields and investments in irrigation, along with a growing labor force. By 2000, yields for key crops were close to what they had been before transition. In contrast, yields in Georgia (apart from wheat and sunflowers) and Moldova continued to drop in the late 1990s, reflecting a severe reduction in the use of chemical inputs and associated soil depletion.5 A recovery to earlier yield levels was easier to achieve in the Kyrgyz Republic, whose yields had traditionally been below those of Georgia and Moldova.

In all three countries, the agricultural labor force increased. The share of the workforce in agriculture grew from 33 percent in 1990 to 52 percent in 1999 in the Kyrgyz Republic, from 25 percent to 57 percent in Georgia, and from 33 percent to 49 percent in Moldova. However, while value added per worker rose in the Kyrgyz Republic, at least until 1999, the increase in labor assets was offset by stagnation in labor productivity in Georgia and a decline in Moldova. Why the difference?

The Kyrgyz Republic began to invest in irrigation infrastructure in 1998, earlier than the other countries. These investments likely led to both higher yields and decreased vulnerability to climate shocks. Both Moldova and Georgia were hard hit by weather shocks. Moldova experienced floods, freezes, and recurrent droughts (1992, 1994, 1996, 2000), which disrupted production and restructuring efforts. Fruit orchards and vineyards, the bulk of Moldova’s agricultural exports, are irrigation dependent and are now more vulnerable to drought. Over the past five years Georgia also experienced two severe droughts, in 1998 and 2000.

Trends in the demand for agricultural products are more difficult to discern. Shifts in domestic and international demand, as well as the decline in the agribusiness sectors, affected the three countries differently. Per capita consumption of most food products had recovered, or nearly recovered, in Georgia and the Kyrgyz Republic by 1999, reaching 75 to 100 percent of 1990 levels. In Moldova, per capita consumption of many food items (except potatoes and vegetables) in 1999 represented only about half their 1990 levels.

The absence of a vigorous and competitive agro-processing sector has constrained the demand for agricultural products in Georgia and Moldova and may constrain future growth in the Kyrgyz Republic. In Moldova and Georgia, the agro-processing sectors had traditionally been based on perennial and tree crops for export. In Georgia, agro-processing production had fallen to about 10 percent of its 1990 level by 1999, while in Moldova, agro-processing in 2000 was 10 percent or less of its 1990 level for meat and dairy products, less than 20 percent for fruit and vegetable products, and about half for most alcoholic beverages, with much of the reduction occurring during the second half of the 1990s. In the Kyrgyz Republic, some areas of food processing started to rebound during the second half of the 1990s, fuelled by growing domestic demand, but export-oriented agro-processing activities, such as wool and cotton textiles, continued to decline throughout the 1990s.6

External shocks, in particular the Russian financial crisis of 1998, have reduced demand for agricultural exports, especially for export-dependent Moldova, where the value of agricultural and agro-processed exports is about equivalent to agricultural GDP. By 2000, exports were less than half their 1997 level in Moldova. In the Kyrgyz Republic, the dollar value of agricultural and agribusiness exports dropped by 17 percent in 1998 and another 25 percent in 1999, and has continued to decline since then. In Georgia, by contrast, the effect of the Russian crisis may have been offset by the country’s competitive exchange rate. Its agricultural exports were less affected by the crisis, falling 12 percent in 1998 and another 7 percent in 1999, but recovering fully in 2000 to a level more than two and a half times higher in value terms than in 1995.

Largely reflecting positive demand factors, the incentive framework for agriculture was more attractive in the Kyrgyz Republic than in the other two countries. Real food prices rose steadily throughout the late 1990s in the Kyrgyz Republic, while they remained constant in Moldova and declined in Georgia. The rise in food prices also led to faster growth in Kyrgyz value added for agriculture. Nevertheless, the profitability of agriculture was undermined by the declining ratio of agricultural producer prices to industrial producer prices between 1995 and 2000, suggesting that input prices and transport costs were increasing.

Also helping to raise the value added of agriculture in the Kyrgyz Republic was the shift in land use from the traditional low-value forage (to support the sheep and goat production encouraged by the Soviets) toward higher-value traditional food crops for domestic consumption (potatoes, wheat, vegetables). In contrast, in Georgia and Moldova land use shifted from high-value export crops (vegetables, orchards, vineyards) to staple food crops.

Rural Policy framework

Sectoral reforms and the speed at which they were implemented did not differ substantially across the three countries, with the exception of land reform. While all three countries liberalized most agricultural prices and began reforming the agro-processing sector prior to 1995, the governments continued to intervene in agricultural markets and have not fully privatized the agribusinesses. Both the Kyrgyz Republic and Georgia initiated their land reform programs early but did not complete the reforms until the late 1990s. Moldova delayed introducing its land reform program until the late 1990s but then implemented it quickly and soon caught up with the other two countries.

Incentive Framework and Agricultural Marketing

All three countries liberalized agricultural prices and trade relatively early but continued to intervene in the markets sporadically. On the output side, Moldova and the Kyrgyz Republic did so more extensively than Georgia. Moldova repeatedly imposed ad hoc restrictions on exports of particular crops. The Kyrgyz Republic continues to be more interventionist in input markets than the other two countries, intervening in fertilizer and farm machinery markets. All three countries continue to place severe restrictions on the seed market. Overall, Georgia has the most liberalized marketing and trading regime.

The absence of well-functioning markets, particularly on the output side, continues to be a key constraint to sectoral growth, especially in Georgia and Moldova. Farmers are not effectively linked to domestic and external demand and thus experience difficulty selling their products. Producers in Georgia rely mainly on small informal traders, while those in Moldova sell through a combination of informal traders and inefficient, monopolistic agro-processors.

A recent analysis of marketing chains for wheat, fruit, and vegetables in the Kyrgyz Republic suggests that the markets operate reasonably efficiently, especially considering how briefly they have been functioning. Price differences in these markets largely reflect differences in time, space, and quality. Marketing margins are generally low. Risk is an important factor, primarily because of potential spoilage of fresh products and unpredicted variation in processing. Bribery is widespread but generally amounts to no more than 5 percent of total costs.7

Although the practice has become less common since 2000, in the late 1990s the Kyrgyz Republic and Moldova began to resort to in-kind collection of taxes and social fund contributions, in turn forcing governments to pay wages and pensions in kind, particularly in rural areas, slowing market development. In-kind payments, valued above market prices, were a form of indirect subsidy to producers, while payments to pension beneficiaries, valued below market prices, were an implicit tax on the poor in rural areas. Prices tended to be set for the entire year without taking into account seasonal or regional variations. As a result, in-kind payments had limited price flexibility in the market, discouraging private storage and transportation.8

Land Reform

The biggest contributor to differential outcomes for sectoral growth and rural poverty was most likely the different approaches to land reform and farm restructuring, particularly the pace of reform, and the nature of the legal framework for land rentals and sales. In Georgia and the Kyrgyz Republic, the broad legal framework for use rights was established in the early 1990s, and private ownership was authorized in 1996 in Georgia and 1998 in the Kyrgyz Republic. Georgia carried out a large-scale distribution of land use rights in the early 1990s, while the Kyrgyz Republic did not begin land distribution until after 1995. In both countries, some agricultural land remains in government ownership (generally at the local level) and is leased out to rural households. Moldova enacted the legal framework for both private ownership and land distribution in the late 1990s. In Georgia and the Kyrgyz Republic, the legal framework for land sales remains restricted, whereas sales are freely allowed in Moldova. All three countries allow some type of leasing, but there are some concerns about the transparency and equity of the arrangements.

Despite Moldova’s late start on land reform, it moved quickly to privatize and restructure more than 1,000 state and collective farms and provide land titles to more than 2.2 million people. Unlike Georgia and the Kyrgyz Republic, Moldova privatized all agricultural land, not just arable land and land under perennials. Restructuring included a program to free restructured farms of old debt while protecting productive assets. Land titling was completed by a program of direct income support payments to title beneficiaries, replacing a long tradition of subsidizing inputs. While most landholders initially opted to lease their land to the newly established corporate farms, by 2001 about half the privatized land was being farmed individually or by associations of peasant farmers.

The Kyrgyz land reform program began in the early 1990s, with most of the land distribution occurring between 1995 and 2000. Land was originally allocated to individual peasants through long-term leases, with private land ownership permitted by law as of mid-1998. By early 2002, about 70 percent of arable land previously held in state and collective farms had been transferred to peasant farmers. About half the arable land was cultivated by individual farmers, and a fifth was held individually but managed under a reformed collective or privatized structure. The remaining land was held by the community-based Land Distribution Fund (about 25 percent), with about 5 percent remaining in the hands of about 20 state seed and livestock-breeding farms. As of early 2001, the government had distributed about 1.06 million hectares as permanent land shares to 2.67 million people, and 510,551 families had received land certificate titles.

Georgia’s land reform started in 1992 through the large-scale distribution of use rights to rural households. Legal recognition of private land ownership was delayed until early 1996. A land leasing program was introduced in 1996 for land that remained in government ownership. By 2000, 57 percent of arable land was in private ownership and 27 percent was under lease from the government. While Georgia’s initial land distribution program was very inclusive, the leasing program has tended to increase inequalities in rural areas. Surveys have shown that the ability to lease land from state reserves significantly increases a household’s land access and thus its income, but this possibility is open only to a small number of households (about 4 percent)—often those with good connections.9

The legal framework for the land market also differs among the three countries. In Moldova, both sales and rentals have been allowed since 1996 (Table 7.1). In Georgia, government-owned land can be leased, but it is not clear whether private land can be leased. The sale of land has been allowed since 1996 but is restricted. In the Kyrgyz Republic, sales have been allowed since 2001 with restrictions, and leasing is possible. However, anecdotal evidence from both the Kyrgyz Republic and Moldova suggests that the lessor has more bargaining power than the lessee and that rental contracts are not always equitable or transparent.

Table 7.1.Legal Framework for Land Transactions
CountryLegal Framework

for Private Land

Ownership
Restrictions on Rental MarketRestrictions on Sales MarketLocal

Registries
GeorgiaLegally possible since 1996 law.The 1996 Law on the Leasing of Agricultural Lands permits the leasing of all remaining agricultural land under government control to private individuals or legal entities. The law provided a low-cost mechanism for farmers to acquire land use rights through leases priced at the same rate as the land tax. The result was a rapid transfer of land into private hands. Total agricultural output increased significantly on that land. Land is leased from the state-owned land reserve, managed by district authorities.The sale and purchase of land is legally permitted, but is restricted by the State Land Management Department, which requires that all land in a local district be registered (to ensure that no individual has more than 1.25 hectares of land) before any land sales can occur.Under development
Kyrgyz RepublicLegally possible since 1998 referendum.Land can be rented to anyone, but land leased for longer than three years must be registered at the rayon GosRegister office. The registration process, essentially the same as for purchased land, is costly for poor farmers. Most therefore lease land for shorter periods. Because leasing arrangements tend to not be registered in writing, there are substantial opportunities for disagreements to emerge. Households renting out land are typically poor farmers, while households renting in land are better-off farmers.In 1998, a package of land laws became effective. The Law on Land introduced a moratorium on sales of agricultural land, owing to concerns that poorly functioning markets might result in concentration of ownership and other negative social consequences. This law limits the use of land for mortgages. The moratorium was lifted in 2001, but significant limitations on the ability to mortgage agricultural land remain. Also, only community residents can purchase land.Registration will be conducted at the local level using a network of 50 offices.
MoldovaLegally possible since 1996.Leasing is allowed, although legal procedures are not uniformly understood or applied. Households tend to lease land back to large restructured corporate farms.Land market transactions have been legally possible since the first land certificates were issued in 1996. Almost 2,000 sale and purchase transactions were completed as of 1999.Under development
Sources: World Bank (2002a, d), (2001), and Shuker (2000).
Sources: World Bank (2002a, d), (2001), and Shuker (2000).

Agro-enterprise Reform

Although a large share of agro-processors were privatized in all three countries, several large-scale processors remain in state hands and continue to operate inefficiently. Even processors that were privatized generally were not disciplined, continuing to accumulate large arrears, avoiding serious restructuring, and perpetuating weak management practices. Some privatized enterprises still receive preferential treatment. For instance, in the Kyrgyz Republic, the government allows recently privatized tractor and chemical input companies to sell subsidized tractors and fertilizer at below-market prices.

Financial Sector Reform

While the Kyrgyz Republic and Moldova (and recently Georgia) have sought to reform their rural financial institutions with donor support, financial systems in all three countries remain shallow. The reformed rural lending schemes have proved successful, but they also have shown that developing effective and sustainable rural finance systems to serve small farmers will take time and will depend on strengthening the entire financial system in each country.

The Kyrgyz Agricultural Finance Corporation, established in 1997 with donor assistance, has about 30,000 beneficiaries, or about 4 percent of the rural population. 10 In Moldova, the Rural Finance Corporation, established in 1997 with donor support, has provided financing to an expanding network of savings and credit associations serving small-scale farmers and rural entrepreneurs. As of 2001, about 30,000 farmers and rural entrepreneurs—80 percent of them small private farmers—had benefited from short-term loans. In Georgia, the government is working with the World Bank and other donors to restructure Agrobank in order to strengthen the financial sector. A number of credit unions and other nonbank financial institutions have been established in recent years to help provide financing to small-scale farmers.

Trends in Rural Poverty and Inequality

Analysis of the evolution of rural household welfare and inequality in the three countries between 1997/98 and 2000/01 confirms that welfare improved more for households in the rural Kyrgyz Republic than for households in rural Georgia or Moldova. In the Kyrgyz Republic, rural poverty fell by 8 percent a year (Figure 7.1), and the severity of rural poverty also decreased. The effects of economic growth in Georgia were not experienced at the household level; rural poverty increased 16 percent a year (Figure 7.2), and the severity of rural poverty also grew. In Moldova, per capita expenditures in rural areas paralleled growth trends, declining through 1999 and then increasing in 2000 and 2001 (Figure 7.3). Rural poverty grew 25 percent a year until 1999 and then declined an average of 7.7 percent a year in 2000–01. The severity of poverty followed similar trends.

Figure 7.1.Evolution of Rural and Urban Poverty Rates in the Kyrgyz Republic, 1998–2001

Figure 7.2.Evolution of Rural and Urban Poverty Rates in Georgia, 1997–2000

Figure 7.3.Evolution of Rural and Urban Poverty Rates in Moldova, 1997–2001

To what extent did growth or distributional changes drive these poverty trends? In the Kyrgyz Republic, the decline in rural poverty reflected mainly growth, as the expenditure Gini declined only slightly during this period. In Georgia, the rise in rural poverty reflected an increase in inequality (the Gini rose) as well as the narrow nature of economic growth, which was not transmitted to rural households. In Moldova, inequality decreased, suggesting that distributional changes tempered the impact of the recession on rural households.

Neither the poverty rate nor the Gini coefficient fully captures how per capita expenditures fared across the expenditure distribution or how the expenditures of the nonpoor evolved during the late 1990s. Generally, in Moldova the evolution of per capita expenditures in rural areas was pro-poor, while in Georgia the reverse was true. In the Kyrgyz Republic, expenditures grew slightly more for households in the upper middle class, but in general the pattern of growth was distributionally neutral.

On average, per capita expenditures of the total population declined by about 5 percent a year in Georgia and 10 percent in Moldova while rising about 3 percent a year in the Kyrgyz Republic. In Georgia the decline in per capita expenditures was experienced more sharply by rural households in the bottom two quintiles (which approximate the rural poverty rate), while in Moldova the per capita expenditures of the first six deciles (which approximate the Moldova rural poverty rate) experienced smaller income declines than the higher income deciles. In the Kyrgyz Republic, the average expenditure increases were roughly equal across expenditure deciles, but with the nonpoor (excluding the very wealthy in the top decile) experiencing slightly higher rates of growth than the poor, especially the extremely poor.

Determinants of Changes in Household Expenditures

Exploring the relationship between household characteristics and per capita expenditures using National Household Budget Survey data helps to explain the changes in the welfare of rural households.11 The variables proposed as key drivers of changes in rural household welfare were human, physical, financial, infrastructure, and market assets, as well as regional and time dummy variables.

Analysis of these variables highlights several positive factors acting on rural households in the Kyrgyz Republic that were weaker in Georgia or Moldova, as well as several negative external forces affecting household welfare that were stronger in Georgia and Moldova than in the Kyrgyz Republic (Table 7.2).

Table 7.2.Decomposition of Rural Expenditure Changes for Georgia, Moldova, and the Kyrgyz Republic Based on Fixed Effects Estimates(In percent)
VariableGeorgiaMoldovaKyrgyz Republic
(1996–2000)(1997–2000)(1998–2001)
Per capita expenditure on nondurable goods and services-13.8-32.792.56
Human Assets-1.816.984.63
Household size (log)-2.217.450.8
Number of household members ages 18–60 (log)1.54
Mean years of education of household members 18 or older (log)0.17
Household members’ mean age (log)2.42
Female head of household (dummy variable)..-0.3
Education of household members older than 17 (log)0.30.13
Labor per capita (log)..-0.98
Age of head of household (log)0.37
Physical Assets5.914.11
Amount of land owned (log)....2.6
Ownership of automobile (dummy variable)1.44
Ownership of moped (dummy variable)0.55
Availability of pigs (log)6.36
Availability of poultry (log)3.17
Animal equivalents (log)5.9
Financial Assets2.9-4.44..
Other transfers per capita (log)2.90.51..
Pension and retirement income per capita (log)-1.95..
Market Access-0.940.66
For livestock sales1.04
For labor market participation....-0.39
For agricultural sales (dummy variable)..-0.94
Infrastructure-10.7-1.24
Access to gas at dwelling at end of 1998-1.24
Phone-10.7....
External Effects-35.6-38.32-8.49
Unexplained Residual26.3-6.07-7.11
Source: Lopez and Melo (2002).Note: The change represents the logarithmic difference between the mean of each variable for the first and last four quarters multiplied by its corresponding regression coefficient;.. indicates that data were insignificant.
Source: Lopez and Melo (2002).Note: The change represents the logarithmic difference between the mean of each variable for the first and last four quarters multiplied by its corresponding regression coefficient;.. indicates that data were insignificant.

While the Kyrgyz Republic achieved a small percentage gain in rural welfare over the period, both Georgia and Moldova experienced substantial deteriorations. The largest adverse factor in all three countries was the difficult external environment, as reflected by the time dummy variables. The increase in household welfare in the Kyrgyz Republic reflects gains in livestock, land, and labor assets and market access. In Georgia, small gains in household welfare from increases in livestock and financial assets could not offset the negative impact of the external environment, the deterioration of infrastructure assets, and the increase in household size. Similarly, in Moldova the large increase in welfare resulting from the decline in average household size could not offset the negative forces of the drop in financial, infrastructure, and market assets and the deterioration of the external environment.

Human Assets

Human assets, notably education and household size, are strongly associated with household welfare in all three countries. As expected, household size has a large and inverse relationship with household welfare, while education has a positive but smaller relationship. Household size declined in Moldova and initially in the Kyrgyz Republic (through 2000) and rose in Georgia. The consistent decline in rural household size was the single most important positive force acting on per capita consumption in Moldova during this period (see Table 7.2). Education was positively correlated with household welfare to the Kyrgyz Republic, particularly in rural areas, where people over 17 years old have two to three years less schooling than their counterparts in urban areas. In all three countries, the distribution of schooling across expenditure quintiles is homogeneous among rural households.

In the Kyrgyz Republic and Moldova, labor market assets (number of household members 18–60 years old) and age of the household head also had a positive relationship with household welfare. The positive coefficient for labor assets suggests that these assets were constrained in these two countries and implies the existence of unexploited income-generating activities (either on or off the farm). The increase in labor assets in the Kyrgyz Republic and Georgia helped Kyrgyz but not Georgian households. There was also an inverse relationship between the gender of the household head and per capita expenditures in the Kyrgyz Republic.

Physical Assets

Land

Of the physical assets analyzed in the regressions, land contributed little to rural household welfare, suggesting that land is not the most constrained asset for rural households. Land assets had a small and weakly significant relationship with per capita expenditures, depending on the country, the econometric model (Verbeek and Nijman model, random effects model, or fixed effects model), and the tenure system.

Only in the Kyrgyz Republic was the relationship between land and per capita expenditures robust, but even there it accounted for less than 3 percent of the change in household expenditures. In Georgia there was some evidence that jointly used land (mainly pasture land) was positively related to per capita expenditures, and in Moldova there was some evidence that land managed under collective arrangements and privately owned land were positively correlated with household welfare, but in neither case were the results robust across different econometric specifications. While other studies have also noted a positive relationship between land assets and household expenditures in the Kyrgyz Republic, the lack of a strong relationship between land assets and household welfare is not unusual in transition and developing economies.12

The weak contribution of land to household welfare, particularly in Georgia and Moldova, may reflect the relatively equal distribution of land across households, the weak incentive framework, the low productivity of land, or the failure to account for the quality of the land (including access to irrigation). In this connection, several specific features of land assets bear noting.

First, the relatively equal distribution of land across expenditure quintiles in the Kyrgyz Republic and Moldova and the pro-poor distribution in Georgia suggest that there is not a strong correlation between access to land assets and household welfare at an aggregate level. The ratio of land holdings (all tenure types) for the top-to-lowest expenditure quintile is 1.02 for Moldova and 0.94 for the Kyrgyz Republic, suggesting a highly equal distribution of land. In Georgia the ratio is 0.44, indicating that households in the bottom expenditure quintile have almost 60 percent more land than households in the top quintile. In Georgia and Moldova, rural households in the bottom expenditure quintile have improved their land access relative to households in the top quintile. In the Kyrgyz Republic, households in the top quintile have had a larger increase in land access than households in the bottom quintile, reflecting in part an increase in land rentals by wealthier households (Box 7.1).

Second, the weak relationship between land access and household expenditures is indicative of the low productivity of land. In Georgia and Moldova, low yields are caused at least in part by poor access to inputs and irrigation as well as by climatic shocks. In all three countries, private plots are extremely small (one hectare or smaller), which may mean that landholdings are too fragmented to allow for economies of scale in production. Support services (credit, market information, agricultural support services) are still underdeveloped, since they were a second priority after the land reform and privatization programs, particularly in Georgia and Moldova. Much land has been allocated by fiat, and restrictions on land exchanges and rentals were lifted only recently (and sometimes only partially). The land has not been allocated to maximize its marginal productivity. According to available data, only a small fraction of land is sold or rented across households, reflecting in part institutional restrictions on the land market (Box. 7.1).

Box 7.1.Emerging Land Tenure Patterns

Most land is privately owned. About 80 to 90 percent of arable land in Georgia, the Kyrgyz Republic, and Moldova is privately owned by rural households (2000/01). The share of leased land has increased in the past five years in Georgia and the Kyrgyz Republic (no data are available for Moldova). Land rentals rose from 3 percent of total land used by households in 1997 to 11 percent in 2000 in Georgia, and from 4 percent in 1998 to 11 percent in 2001 in the Kyrgyz Republic. The share of land managed jointly by farmers (with a former cooperative or a local community) has increased in Moldova and decreased in Georgia (slightly) and in the Kyrgyz Republic, where households using “jointly owned land” do not have clear title.

Wealthier households tend to rent more land than poorer households. While the distribution of land owned is equitable or even favors households in the bottom quintile, households in the top quintiles rent more land than households in the bottom quintile. In 2001, households in the lowest quintile in the Kyrgyz Republic rented 0.05 hectares, compared with 0.1 hectares for households in the top quintile, or 50 percent less, whereas in 1 998 the amount of land rented was relatively equal.

Source: Household Budget Surveys.

Third, agricultural profitability remains low, particularly in Georgia and Moldova, which undermines the return to land ownership. The low profitability of agriculture reflects the poor productivity of the sector, declining domestic food prices, reduced Russian demand for exports, and a deteriorating agricultural price index (agricultural prices compared to industrial prices).

Livestock Assets

Livestock assets are significantly and positively related to household welfare in Georgia and the Kyrgyz Republic (data are not available for Moldova). The importance of livestock in Georgia and, to a lesser extent, in the Kyrgyz Republic may reflect the ease with which these assets can be sold or liquidated and their greater immunity than that of land assets to institutional barriers to trade. In addition, livestock provides an easily accessible store of wealth, which is important during shocks and when financial markets are weak.

Ownership of livestock increased significantly for rural households in the Kyrgyz Republic and to a lesser extent in Georgia, supporting rising rural household welfare in both countries. In Georgia, livestock assets contributed about 6 percent to the rise in per capita expenditures of rural households between 1996 and 2000, while in the Kyrgyz Republic, they accounted for almost 10 percent (see Table 7.2). However, most of the gains accrued to wealthier households. In Georgia, the top expenditure quintile experienced the largest consumption gains from increased livestock assets (30 percent, compared with 14 percent for households in the bottom quintile). In the Kyrgyz Republic, households in the lowest quintile owned no pigs (the livestock asset most significantly linked to per capita expenditures) throughout the survey period, while households in the top quintile doubled the number of pigs they owned.

Financial Assets

Financial assets (asset income, remittances, and other transfers) were significantly correlated with household welfare in Georgia and Moldova, but the correlation was barely significant in the Kyrgyz Republic, suggesting that capital is not the most constrained asset in the Kyrgyz Republic. In addition to the sharp increase in income from financial assets (an average annual increase of 66 percent between 1998 and 2000), the apparent absence of a capital constraint among rural households may reflect the high share of households across all expenditure quintiles in the Kyrgyz Republic receiving formal and nonformal credit. On average, almost half of rural households received credit. Although the average loan size was small, it increased significantly with the per capita expenditure level of the household.13

Overall, income from social benefits and transfers declined during this period for rural households, particularly for households in the bottom expenditure quintiles in the Kyrgyz Republic and Georgia. In Moldova, where the poorest households were protected, their social transfers increased, which may partially explain why the recession in Moldova was pro-poor. The income from social transfers decreased 73 percent for households in the top quintile, while almost doubling for households in the bottom quintile. In Georgia, transfers declined for rural households in the bottom quintile, while increasing for the top quintile. Between 1997 and 2000, the value of social benefits fell by half for the bottom quintile but rose by almost 15 percent for the top quintile. In the Kyrgyz Republic, transfers declined for all quintiles, but the top quintile was somewhat protected. Between 1998 and 2000, transfers declined by 7 percent for the bottom quintile but by only 1 percent for the top quintile.

Social transfers were much higher for urban households than for rural households. The value of transfers received by urban households was double that received by rural households in Moldova and Georgia in 2000, and 20 percent greater in the Kyrgyz Republic in 2001. In Georgia, social benefits declined 15 percent for urban households but 30 percent for rural households. Similarly in the Kyrgyz Republic, social benefits fell 5 percent for urban households between 1998 and 2001 but 10 percent for rural households. In Moldova, however, rural households were more protected than urban households from reduced social benefits; benefits declined by only 2 percent for rural households compared with 20 percent for urban households.

Access to Infrastructure

Access to infrastructure assets tended to be positively associated with household consumption in Georgia and the Kyrgyz Republic and insignificant in Moldova. Rural households face much more limited access to infrastructure assets than their urban counterparts, and rural households in Moldova and the Kyrgyz Republic have less access to infrastructure than rural households in Georgia (Table 7.3). Except for telephones, access to infrastructure is fairly uniform across expenditure quintiles in all three countries.

Table 7.3.Access to Utilities in 2000 in Georgia, Moldova, and the Kyrgyz Republic(Percentage of population with access)
GeorgiaMoldovaKyrgyz Republic
UtilityRuralUrbanRuralUrbanRuralUrban
Phones856.32169860
Water7893.7386159
Gas36.2555682971
Sewage26.886.92781977
Source: Household Budget Surveys.
Source: Household Budget Surveys.

Access to infrastructure is considered important for reducing the demand on labor for household chores and for improving health outcomes (in both cases raising the productivity of household members), as well for facilitating integration into the regional economy. Household access to some infrastructure assets increased over time (phones, hot water, and sewage for the Kyrgyz Republic; water and sewage for Georgia), while access decreased for other assets (gas in the Kyrgyz Republic; phones and gas in Georgia).

Market Participation

Agricultural Markets

Participation in agricultural markets was positively related to welfare in Moldova and the Kyrgyz Republic, but not in Georgia.14 This finding indicates that rural product markets in Georgia were not effective in transmitting overall economic growth to rural households, reflecting the unattractive incentive framework for agriculture and the presence of inefficient agricultural markets. Just over half of rural households participated in agricultural and livestock markets in Georgia and the Kyrgyz Republic, while only a quarter did in Moldova (Table 7.4). During the late 1990s, participation rates increased in Georgia and the Kyrgyz Republic but declined slightly in Moldova. Thus, despite the positive relationship between market access and household welfare in Moldova, market access had a negative impact on overall household welfare between 1997 and 2000 (see Tables 7.2 and Table 7.4). In general, participation in agricultural and livestock markets rises with the expenditure quintile.

Table 7.4.Rural Market Participation Rates for Georgia, Moldova, and the Kyrgyz Republic, 1997–2001(In percent)
Country and Market19971998199920002001
Georgia
Land11.54.65.5
Labor3231.23231.2
Agricultural sales53.660.361.857
Moldova
Agricultural sales26242223
Labor51494640
Kyrgyz Republic
Livestock output54595360
Livestock input16131316
Fertilizer17lei2125
Labor49444547
Renting-in land4569
Source; Household Budget Surveys.
Source; Household Budget Surveys.

Input Markets

In contrast to participation in agricultural product markets, participation in input markets was not significantly related to household welfare in the Kyrgyz Republic (the only country with data on input use). In general, purchasing inputs tend to be positively associated with household welfare. The lack of significance in the Kyrgyz Republic has several possible explanations—households that purchase inputs are not using them productively, the quality of purchased inputs is not high, households are not accurately reporting their purchases, or the marginal revenue from the use of inputs is not consumed, but saved or invested. The percentage of households purchasing fertilizer increased by 50 percent during this period, but the overall share remained low at 25 percent in 2000 (see Table 7.4). The share of households purchasing livestock inputs remained constant over the period and was higher among households in the upper expenditure quintiles.

Labor Markets

Participation in labor markets was significant and positive for household welfare only in the Kyrgyz Republic. Labor market participation was relatively high in the Kyrgyz Republic, at 47 percent of rural households in 2001, compared with 31 percent in Georgia and 40 percent in Moldova in 2000 (see Table 7.4). This finding suggests that both labor assets and labor market participation were constrained in the Kyrgyz Republic and that overall productivity of rural labor was higher than in the other two countries. The lack of significance of labor market participation for Georgia and Moldova suggests low wages, declining hours of employment (participation was measured using a dummy variable), or high transaction costs. There are signs of significant regional and ethnic clustering in the Georgian labor market, suggesting that it is segmented and not necessarily efficient.

Determinants of Household Expenditure Growth Rates

In addition to knowing which household characteristics are associated with welfare gains (or losses), it is important to know which characteristics are likely to accelerate the rate at which those gains (or losses) can be expected to take place.

This section uses household panel data to explore how the variables already identified—human, physical, financial, infrastructure, and market assets, and exogenous factors—as well as subnational economic growth rates (based on the average oblast-wide growth of per adult equivalent monthly expenditures) affect the rate of growth of per capita expenditures. It evaluates which household characteristics accelerate the growth of per capita expenditures, as well as which household characteristics are important in linking growth to a faster rate of increase in per capita expenditures (interaction terms). The net impacts of both the simple coefficients and the coefficients for the interaction terms are considered in analyzing the specific contribution of household variables to the growth of per capita expenditures. The analysis was carried out only for Georgia (Table 7.5) and Moldova (Table 7.6).

Table 7.5.Regression on Annual Growth of Monthly Per Capita Expenditures on Nondurable Goods and Services in Rural Georgia, 1996–2000
CoefficientStandard Error
Human Assets
Household size (log)-0.0210.041
Labor per capita (log)-0.1170.074
Education of older than 17 (log)-0.077*0.040
Female head of household (dummy variable)0.0330.032
Age of head of household (log)0.0540.070
Georgian head of household (dummy variable)0.220***0.078
Azeris head of household (dummy variable)0.422***0.105
Armenian head of household (dummy variable)0.0340.107
Farmer (dummy variable)-0.0570.043
Physical Assets
Land privately owned per capita (log)0.0140.076
Land jointly owned per capita (log)-0.311*0.183
Livestock (log)0.0210.049
Financial Assets
Assets income and remittances per capita (log)-0.102***0.030
All transfers per capita (log)-0.047***0.016
Market Access
Labor (dummy variable)-0.0520.042
Agricultural output (dummy variable)0.0690.060
Infrastructure
Electricity0.0910.121
Phone0.0250.043
Water-0.0130.035
Regional growth of per adult eq. monthly expenditure Interactions with Regional Growth1.4651.260
Human Assets
Household size (log)-0.0570.152
Labor per capita (log)-0.2820.269
Education of older than 17 (log)0.0530.144
Female head of household (dummy variable)-0.0540.121
Age of head of household (log)0.1320.247
Georgian head of household (dummy variable)-0.520**0.243
Azeris head of household (dummy variable)-1.195***0.348
Armenian head of household (dummy variable)-1.052***0.308
Farmer (dummy variable)0.1810.153
Physical Assets
Land privately owned per capita (log)-0.0340.263
Land jointly owned per capita (log)2.759***1.023
Livestock (log)-0.2320.171
Market Access
Labor (dummy variable)-0.1210.143
Agricultural output (dummy variable)0.417**0.207
Infrastructure
Electricity-1.201**0.495
Phone-0.0340.143
Water0.265**0.134
External Effects
14 quarter and 8 regional dummies1
Constant-0.5010.348
Number of observations4,703
R squared30.64
Source: Lopez and Melo (2002).Note: Seemingly unrelated regression approach. Monthly per capita expenditure is log monthly expenditure per adult equivalent; * significant at 10%; ** significant at 5%; *** significant at 1%.

A dummy variable for each quarter and region was included in the regression but is not shown.

Source: Lopez and Melo (2002).Note: Seemingly unrelated regression approach. Monthly per capita expenditure is log monthly expenditure per adult equivalent; * significant at 10%; ** significant at 5%; *** significant at 1%.

A dummy variable for each quarter and region was included in the regression but is not shown.

Table 7.6.Regression on Annual Growth of Monthly Per Capita Expenditure on Nondurable Goods and Services in Rural Moldova, 1997–2000
CoefficientStandard Error
Human Assets
Household size (log)0.203***0.033
Labor per capila (log)0.0710.050
Education of older than 17 (log)-0.0330.028
Female head of household (dummy variable)0.049**0.022
Age of head of household (log)0.138***0.044
Farmer in household (dummy variable)-0.317*0.180
Physical Assets
Land privately owned per capita (log)0.0050.089
Land jointly owned per capita (log)0.1020.110
Financial Assets
Other current transfers per capita (log)-0.078***0.012
Pension and retirement income per capita (log)-0.055***0.011
Market Access1
Agricultural output market * Farmer (dummy variable)-0.0480.044
Labor market (dummy variable)-0.0110.032
Infrastructure
Electricity-0.166*0.099
Water0.0070.046
Phone0.0390.027
Regional growth of expenditure2.245**0.968
Interactions
Human Assets
Household size (log)-0.456***0.108
Labor per capita (log)0.1880.177
Education of older than 17 (log)-0.0160.097
Female head of household (dummy variable)0.0110.077
Age of head of household (log)0.1500.149
Farmer in household (dummy variable)-1.633***0.630
Physical Assets
Land privately owned per capita (log)0.0410.298
Land jointly owned per capita (log)-0.2660.412
Market Access
Agricultural output market * Farmer (dummy variable)0.397***0.115
Labor market (dummy variable)0.198*0.104
Infrastructure
Electricity-0.2240.309
Water0.0850.141
Phone0.193**0.084
External Effects
1998 dummy variable0.056**0.025
1999 dummy variable0.154***0.027
8 monthly and 43 territory dummy variables1
Constant-0.4490.291
Number of observations 3,981
R squared 23.95
Source: Lopez and Melo (2002).Note: Seemingly unrelated regression approach. Monthly per capita expenditure is log monthly expenditure per adult equivalent; * significant at 10%;

significant at 5%; *** significant at 1%.

A dummy variable for each month was included in the regression but is not shown.

Source: Lopez and Melo (2002).Note: Seemingly unrelated regression approach. Monthly per capita expenditure is log monthly expenditure per adult equivalent; * significant at 10%;

significant at 5%; *** significant at 1%.

A dummy variable for each month was included in the regression but is not shown.

The key variables related to an acceleration of per capita expenditures were access to agricultural and labor markets (Moldova only), infrastructure assets, and jointly held land (Georgia only). Not surprisingly given aggregate trends, subnational economic growth did not accelerate an improvement in household welfare in rural Georgia, as it did in rural Moldova.

Access to jointly held land was important in speeding up the rate of increase of per capita expenditures in Georgia, while land assets of any tenure type were not significant in Moldova. The importance of jointly held land in Georgia may reflect the importance of livestock assets in per capita expenditures and the use of this land for pasture. While households in the bottom quintile have fairly high levels of privately held land in rural Georgia, households in the top expenditure quintile have more than twice as much jointly held land as households in the bottom quintile (2000).

Access to markets and phone service helped to increase the rate of growth of rural per capita expenditures in both countries. In Moldova, access to agricultural product and labor markets was significant in channeling growth to accelerate improvements in rural household welfare, while in Georgia, only agricultural product markets were. The fact that labor market access did not accelerate growth underscores the fact that aggregate economic growth driven by the services sector (which is labor intensive) was not transmitted to rural households. Telephone service may also facilitate integration into the regional economy and improved access to market information.

Several factors depressed the rate of growth of per capita expenditures. In Georgia, rural households that were Georgian, Azeri, or Armenian tended to benefit less from growth than rural households of other nationalities. In Moldova, household size had a negative impact on the household’s ability to accelerate per capita income growth, while older and female-headed households were better placed. Households receiving transfers (public and private) and asset income had lower rates of growth of per capita expenditures, suggesting that transfers were targeted to households with low rates of expenditure growth, which is likely to be the case for pensioners, who receive a relatively large share of transfers.

Policy Implications and Recommendations

This section synthesizes the main poverty, growth, and reform trends in each country and highlights key country-specific challenges and policy recommendations for the future.

Policy Implications

Moldova

In Moldova, to ensure that growth continues and is transmitted to all rural households, the challenges are to reverse the shrinkage of rural markets that took place during the 1990s, raise the productivity of land, and rejuvenate the traditionally strong agro-processing industry. Supporting the development of rural agricultural markets will require expanding access to rural infrastructure and improving the business climate. Raising the productivity of land will require increasing the provision of support services to rural households, increasing investments in irrigation, and supporting the development of rural land markets (both rental and sale). Encouraging the export-oriented agro-processing industry will require maintaining a competitive exchange rate, finalizing the reforms of state agro-processing industries, and creating a level playing field for new entrants.

Georgia

The key challenges for enhancing household welfare in Georgia are improving the productivity of land and labor; completing the restructuring of state farms; strengthening land market institutions and promoting more transparency in the management of community public lands; expanding demand for agricultural products by maintaining a competitive exchange rate and completing agro-enterprise reforms, including improving the business climate in rural areas; enhancing output, factor, and input market access and efficiency; increasing the ability of rural households to manage risk; and targeting safety nets to rural areas to reduce high and rising inequality in rural areas.

The Kyrgyz Republic

The key challenge for the Kyrgyz Republic will be to maintain agricultural growth, which has helped to reduce rural poverty substantially in recent years and to generate overall economic growth. Much of the favorable incentive framework that has supported agricultural growth reflects an increased domestic demand for food. Since this demand is not likely to continue to expand at the same rate, the country will need to develop export markets and agribusiness opportunities. Completing agribusiness reforms, ensuring a level playing field for new entrants, and improving the rural business climate should be top priorities. Maintaining a competitive exchange rate will also be important to promote agricultural exports. To support market development and further increases in land and labor productivity in rural areas, the government will need to continue developing the institutional frameworks for land markets and water management, reassess its policy on the distribution of fertilizer and tractors, continue investing in irrigation, and improve access to social services and infrastructure in rural areas.

As land and labor markets become more efficient and deeper, some rural households may be left behind. It will be important to have targeted safety net programs in place to help this group—which may imply decreasing the value of broad-based social transfers on fiscal grounds.

Recommendations

This section makes some recommendations on land policy, market development, and social sector policy and on priorities for data collection and further analysis.

Macro Policy

A necessary condition for growth and poverty reduction is continued macroeconomic stability. Maintaining a competitive exchange rate is an important component of macro policy and is also important for agricultural growth and rural poverty reduction. It should be a key policy objective. Macroeconomic stability is important for deepening the financial sector and lowering the cost of borrowing, which is important for rural producers. Another key aspect of macroeconomic stability is to recognize and work within fiscal constraints. To ensure that expenditures on agriculture and in rural areas are efficient, governments should carry out detailed public expenditure reviews. They should also examine the fiscal responsibilities and revenue sources of local communities, which often play a key role in infrastructure maintenance and soil conservation.

Land

The finding that land holding is only weakly correlated with household welfare does not mean that land reform programs have been ineffective. Rather, it means that they have been incomplete and that complementary public goods are required to ensure that privately held land assets achieve optimum levels of productivity.

The key policy challenge will be to support the development of land rental markets to facilitate a more efficient distribution of land and to address problems of land fragmentation. Many governments are hesitant to liberalize land markets, given concerns over distress sales and urban migration. It is not necessary to liberalize land sales immediately, since an efficient and transparent rental market is sufficient to lead to a more efficient use of land. Moreover, many of the institutions required for effective land rentals—clear titles, easily accessible registries, standardized leasing contracts, market price information—are also important for effective land sales markets. Governments may want to support qualitative studies to deepen their understanding of rural households’ perceptions of land leasing and sales markets.

In all three countries, an important share of agricultural land remains under government ownership at the national or community level. When land is managed locally, as in the Kyrgyz Republic, rental fees provide important revenues to rural community governments. For Georgia and the Kyrgyz Republic, rented land—often public land—was not significantly correlated with household welfare. In Georgia, access to this public land helped households benefit from regional growth. Access to public land was higher for wealthier households than for poorer households.

The findings of this study lead to no conclusions about whether state-owned land should be privatized. However, governments should disseminate information on who accesses public lands and under what conditions and should promote the use of open registries and standardized leasing contracts for publicly rented lands. In addition, governments should explore the use of multiyear or even long-term leases for this land to ensure adequate incentives for proper land management. In the long run, it is not likely to be efficient for large amounts of arable land to remain in government ownership, but governments may wish to delay privatizing the land until local communities develop alternative sources of revenue and rural financial and land markets deepen, which would allow rural households broader access to this land.

About 15 percent of arable land in the Kyrgyz Republic and 40 percent in Georgia and Moldova is cultivated under some collective structure, generally either a restructured and privatized state farm or cooperative or some form of producers’ association. Often, former state farm managers are in charge of these collective structures, renting in land that has been distributed to rural households. While these collective farms may be more successful in procuring inputs and accessing markets, it is important that leasing arrangements maximize land productivity and also respect the interests of lessors, who tend to be the elderly or others incapable of farming their land. Again, governments should monitor and disseminate information on the leasing arrangements and, where applicable, the profit-sharing mechanisms of these entities, to ensure that the land is well managed and that the lessors receive fair lease payments.

In the past five years, the share of land that is farmed privately has increased, and it will be important to provide small farmers with support services and microfinance to maximize productivity. As land holdings become more concentrated and agriculture becomes more commercially focused, many support services will be provided by the private sector and producers themselves. Thus, it will be important not to set up large structures with high fixed costs, but instead to focus on flexible services that can evolve and eventually be disbanded as the needs of small and medium-sized producers change and their ability to access knowledge and support from the private sector expands.

Agriculture Product and Input Markets

The analysis underscores the importance of agricultural markets in transmitting growth and supporting rural poverty reduction. To facilitate their development, it is recommended that governments take the following steps:

  • Phase out in-kind payments, which typically undermine incentives to develop a market economy, favor certain specific marketing chains (often government owned or previously government owned), and raise transaction costs for producers, consumers, and the government.

  • Evaluate the possible gains from input market interventions against the drawbacks (subsidized input distribution suppresses the development of private importers and retail chains).

  • Reassess state involvement in output processing and marketing enterprises, which are still common for agro-processed crops and may not offer competitive prices and services to the small farmers who often grow these crops.

  • Develop public goods that support access to markets—roads, telephones, transport services, and market information systems.

  • Evaluate the extent to which fiscal incentives suppress the development of larger-scale traders (for example, by raising the minimum business threshold required to pay the value-added tax).

  • Analyze formal and informal labor markets to understand key factors constraining the participation of poor rural households. This step is particularly relevant for Georgia, where the labor market was unable to transmit the growth in the services sector to rural areas.

Social Sector Policy

Except in Moldova, social sector policy favors high-expenditure quintiles over low ones. Governments should assess targeting strategies for their social policies to ensure that they are directed toward the intended and most vulnerable groups. Education is significantly correlated with welfare (in the Kyrgyz Republic, the relationship between education and household expenditures is stronger in rural than in urban areas), but access is lower in rural areas than in urban areas. Anecdotal evidence suggests both that households in rural areas have to pay more for education than their urban counterparts and that the quality of education is worse in rural areas. To better understand issues related to access and quality of education in rural areas, governments may wish to evaluate the spatial distribution of education services and expenditures.

Data Collection and Analysis

Household surveys provide critical information for examining the evolution of poverty and inequality. But in many countries, the surveys do not include variables that are important for rural poverty. Surveys should gather information on the following variables:

  • land quality (amount of land tax paid, irrigation fees, access to water for irrigation);

  • ownership of livestock and vehicle assets, which are important sources of rural welfare;

  • spending on social services (since they are free in many transition countries, this variable is not generally included in the surveys, but as the practice of informal fee paying has increased, this information should be collected);

  • purchases of specific inputs, to enable more accurate calculation of net farm income and better tracking of input market development; and

  • access to road infrastructure, an important determinant of market access.

References

The authors thank Vidhya Muthuram for research assistance, Peter Bocock for editorial support, and Esteban Hernandez for production assistance. They gratefully acknowledge preliminary comments from Daniela Gressani, Peter Lanjouw, and Laura Tuck and technical inputs from Michael Lokshin.

World Bank (1995), (1999a, b), (2000), and (2002a, b).

There is some question as to whether official statistics present an overly optimistic picture of the extent of the recovery; see World Bank (2002d).

The Household Budget Surveys were conducted in Moldova (except Transnistria) between 1997 and 2000, in Georgia between 1996 and 2000, and in the Kyrgyz Republic between 1998 and 2001. the Kyrgyz survey includes the estimated value of home-produced food items and purchases of food and nonfood items and services. Instead of including expenditures on durables directly, the value of durables the household owns was estimated. Expenditures on household business items were also excluded. Expenditures for consumer durables were excluded completely in Moldova and almost completely in Georgia. The value of home-produced goods is included.

For Moldova and Georgia, but not Tor the Kyrgyz Republic, instrumental predicted variables were used to assess the impact of market access on household expenditures, reflecting the fact that participation rates do not necessarily indicate access rates since households with access may choose not to participate.

    Other Resources Citing This Publication