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Agricultural Supply and Structural Change with Focus on Caucasian countries. Ulrich Koester University of Kiel, Germany Ukoester@ae.uni-kiel.de. Justification of the Topic. Agricultural Supply is far below potential production as compared to other regions

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Agricultural supply and structural change with focus on caucasian countries
Agricultural Supply and Structural Change with Focus on Caucasian countries

Ulrich Koester

University of Kiel, Germany

Ukoester@ae.uni-kiel.de

Agricultural Supply and Structural Change Tbilisi


Justification of the topic
Justification of the Topic Caucasian countries

Agricultural Supply is far below potential production as compared to other regions

Changes in agricultural supply are important for reducing poverty in rural areas

WTO accession of Russia can have a positive effect on agricultural supply

The Government can pay a significant role for increasing agricultural supply in the region

Agricultural Supply and Structural Change Tbilisi


I georgia s current conditions in agriculture in a comparative perspective
I. Georgia’s current conditions in agriculture in a comparative perspective

1. An agricultural growth substantially below potential

Agriculture growth in Georgia is lagging that in other regions of the world in spite of high potential

Agricultural Supply and Structural Change Tbilisi


I georgia s current conditions in agriculture in a comparative perspective1
I. Georgia’s current conditions in agriculture in a comparative perspective

2. A lagging structural transformation: Excess labor in agriculture

Differential sector growth and stagnant population shares imply a rapidly rising income disparity between agriculture and the other economic sectors

Agricultural Supply and Structural Change Tbilisi


I georgia s current conditions in agriculture in a comparative perspective2
I. Georgia’s current conditions in agriculture in a comparative perspective

4. A relatively low land and labor productivity in agriculture

Compare to Guatemala (smallholders), Chile (labor in agroindustry), Hungary (EU 2004): Countries with diverse temperate crops and strong links to international markets

Agricultural Supply and Structural Change Tbilisi



Outline
OUTLINE comparative perspective

The individual supply function

The aggregate supply function

Determinants of the shifts of the aggregate supply function

The role of the government to increase agricultural supply

Agricultural Supply and Structural Change Tbilisi


The individual supply functions
The individual supply functions comparative perspective

  • Some specifics

    • Joint production

    • Alternative production

    • Subsistence and market production

  • The slope of the supply curve

Agricultural Supply and Structural Change Tbilisi


The slope of the individual supply curve
The slope of the individual supply curve comparative perspective

> 0; The normal case

  • < 0 Inverse reaction a possibility in agriculture

    = 0

Agricultural Supply and Structural Change Tbilisi


The aggregate supply curve
The aggregate supply curve comparative perspective

Wit constant marginal costs

With positive marginal costs

The concept of the marginal producer

Agricultural Supply and Structural Change Tbilisi


Hypothese of the inverse supply curve
Hypothese comparative perspectiveofthe inverse supplycurve

Real

income

Indifference curve

p0

y0

p1

y1

Income

possibility curve

L0

16 h

L1

Leisure time

Production

q1

q0

w0

w1

working time

Agricultural Supply and Structural Change Tbilisi


Linear total cost function inelastic supply
Linear total comparative perspectivecostfunction: Inelasticsupply

C

C = C(q)

variable costs

fixed costs

q

price

marginal

costs

q

qmax

Agricultural Supply and Structural Change Tbilisi


Aggregation of individual supply curves leads to a positive slope
Aggregation comparative perspectiveof individual supplycurves: Leads to a positive slope

Farm B

Market supply

Farm A

mc

vc

mc

vc

q

q

q

Farm A

Farm B

Market supply

mc

mc

qmax

q

q

q

Agricultural Supply and Structural Change Tbilisi


The concept of the marginal supplier
The concept of the marginal supplier comparative perspective

Not all farmers will likely react to policy changes or to changes in the economic environment

The marginal supplier will react

The marginal supplier is not the producer which is technically not efficient

Small farmers may not be the marginal supplier because opportunity costs of labor might be near to zero

Agricultural Supply and Structural Change Tbilisi


Supply elasticities
Supply comparative perspectiveelasticities

p

short term

medium term

long term

p1

p0

q0

q

Agricultural Supply and Structural Change Tbilisi


Shifts of the supply curve
Shifts of the supply curve comparative perspective

P

q

Agricultural Supply and Structural Change Tbilisi


Determinants of the shift of the market supply curve
Determinants of the shift of the market supply curve comparative perspective

  • The amount of land used

  • Transaction costs: Market price remains constant, but farm gate price increases

  • Know how of farmers

  • Structure of farms

  • Price and availability of inputs

  • Technical progress

  • Capital

  • Behavior of farmers

  • Risk

Agricultural Supply and Structural Change Tbilisi


Determinants of the shift of the market supply curve1
Determinants of the shift of the market supply curve comparative perspective

  • The amount of land used

    • There seems to be no accurate data available, however, estimates go up to 40 or even 50 percent

  • Some hypotheses for non-use

    • Unclear property rights: it is possible to overcome the problem partly

    • Small plots: There must be small or larger plots nearby which are under cultivation

    • Lack of profitability due to low prices : Lower transaction costs by setting up market organizations and a market and price information system

Agricultural Supply and Structural Change Tbilisi


Agricultural supply and structural change with focus on caucasian countries

Structure of Land Ownership at the End of 2002 comparative perspective(Thousand ha)

Source: Source: World Bank estimation based on reconciliation of various sources, e.g. ‘Land Balance, April 2002, State Department of Land Management.

World Bank 2009

Agricultural Supply and Structural Change Tbilisi


Determinants of the shift of the market supply curve2
Determinants of the shift of the market supply curve comparative perspective

Transaction costs

Market price

Farm gate price

  • The amount of land used

  • Transaction costs: Market price remains constant, but farm gate price increases

    • Farm gate price is lower than market price due to transaction costs

Agricultural Supply and Structural Change Tbilisi


Transaction costs exchange property rights
Transaction costs (exchange property rights comparative perspective

  • Costs incurred for transactions

    • Search cost

    • Monitoring costs

    • Enforcement costs

  • A main element of transaction costs is uncertainty with respect to

    • the other party’s behavior (trust, reliability etc)

    • to the quality of the product

    • to the prospects of its own ability to fulfill the contract in an uncertain world

Agricultural Supply and Structural Change Tbilisi


Determinants of the shift of the market supply curve3
Determinants of the shift of the market supply curve comparative perspective

Supply curve of a subsistence farmer

p

Demand curve of a subsistence farmer

q

Farm production costs

High transaction costs as cause for subsistence production

Transaction costs can be reduced by a better enforcement system and marketing system

Agricultural Supply and Structural Change Tbilisi


Determinants of the shift of the market supply curve4
Determinants of the shift of the market supply curve comparative perspective

  • The amount of land used

  • Transaction costs

  • Know how of farmers

    • Low yields of crop and livestock indicate that more yield increasing input would be profitable

    • Farmers have to be trained : The German dual education system is considered as a world-wide model

    • Extension service is needed

    • Extension has to include farm management and agricultural economics

Agricultural Supply and Structural Change Tbilisi


Determinants of the shift of the market supply curve5
Determinants of the shift of the market supply curve comparative perspective

Know-how of farmers

Modern agriculture is knowledge based

Human capital is of high importance

Agricultural Supply and Structural Change Tbilisi


Determinants of the shift of the market supply curve6
Determinants of the shift of the market supply curve comparative perspective

Average Costs

Transformation costs

Internal transaction costs

External transaction costs

q

  • Structure of farms

    • Is there an optimal farm size?

    • Small farms can be more profitable than large farms

    • The technology is of importance but also internal and external transaction costs

Agricultural Supply and Structural Change Tbilisi


Determinants of the shift of the market supply curve7
Determinants of the shift of the market supply curve comparative perspective

The amount of land used

Transaction costs

Know how of farmers

Structure of farms

Price and availability of inputs

Capital

Technical progress

Behavior of farmers

Risk

Agricultural Supply and Structural Change Tbilisi


What can the government do a selection
What can the Government do? A selection comparative perspective

Provision of public goods

Agricultural Supply and Structural Change Tbilisi


Ii lessons from the wdr 2008 and new opportunities in agriculture
II. Lessons from the WDR 2008 and new opportunities in agriculture

Many countries have insufficient public expenditures in agriculture

Volume and - even more important -the pattern of expenditure is inadequate in many countries

Successful countries typically have public expenditures in agriculture equal to 10-11% of agricultural GDP

Agricultural Supply and Structural Change Tbilisi


What can the government do a selection1
What can the Government do? A selection agriculture

Provision of public goods

Budget has to be increased and restructured

Public expenditure review and functional review is needed

Agricultural Supply and Structural Change Tbilisi


What can the government do a selection2
What can the Government do? A selection agriculture

  • Provision of public goods

  • Provide incentives to use land

  • Reduce transaction costs

    • by improving market organization

    • by improving in formation through a market and price information scheme

  • Improve know-how of farmers

    • by provision of an extension service

    • By introducing a dual education system

  • Set up a sound agricultural research and higher education system in agricultural economics

Agricultural Supply and Structural Change Tbilisi


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