USAID Review of Georgian Agriculture Sector

USAID have released their 2011 review of Georgia’s agriculture sector. You can find it here

To a large extent, it repeats and validates many reviews performed by USAID, World Bank, UNDP and various EU agencies over the past decade. Most of its findings are already well known by anyone who works in the farming sector here.  There are no new discoveries in this report.

It is however quite well written and a good introduction for somebody with no Caucasus experience.

Two criticisms I would make:

(1) Co-Operatives

The report once again reiterates the call for the promotion of farmers’ co-operatives, so beloved of the EU and various socialist jurisdictions. This of course will demand subvention, both from the state budget and foreign donors. The justification is for improved farmer margins through direct marketing to larger wholesalers, bypassing small local traders.

“Hey Friend, come with us into The Collective!!!” Ukraine, 1930

The demonisation of small traders in the farm sector is as old as time. Often traders are of a different ethnic group to their suppliers and so resentment has a sharper edge. In the case of Indonesia in the post-Independence era (1947-1966), forming of cooperatives under state supervision was accompanied by the ethnic cleansing of Chinese people from Indonesian villages. Chinese-Indonesian traders in villagers were typically the seed and equipment vendors, commodity buyers and bankers to village communities, so expelling them resulted in their roles being forcibly reallocated to the co-operatives. The result was two decades of crushing poverty and lack of economic growth, as well as the very unjust expropriation of private businesses. Both the Soviet and Nazi regimes in Eastern Europe took delight in expropriating Jewish food traders in villages, denouncing them as “parasites” and seeking to establish communal structures more easily controlled by government.

The function of a trader is to develop sales channels for a product and market those products, maintain the customers’ desired commodity quality by grading goods, and to derive profit from the trade. If farmers can perform these functions on their own, then the need for traders naturally decreases. Forming cooperatives may provide the scale to perform pre-sale grading and QA, and to develop relationships with larger buyers, which are traditional services that small traders provide. It is however very destructive to subsidise the formation of structures that displace small traders; traders usually have invested substantial money and time in developing supply chains, storage facilities, QA methodologies and in many cases are selling to large wholesalers on open-account terms rather than spot basis. They have risk capital in play. If the the market share of small traders declines as a result of normal market forces, village trading entrepreneurs will accept this as part of life or diversify to cope with the new situation. If they are squeezed out as a result of government subsidy for the formation of co-ops, this amounts to forcible expropriation of property without compensation.

If traders added no value to the system  in an open market, they would not exist. The concept that intermediaries are inherently parasitic is popular amongst the NGO sector but needs to be reviewed rationally. An good example of small trader turned to major driver of peasant prosperity is the stockfeeed, shrimp and poultry giant,  Thailand’s Charoen Pokphand or ,CP.

Having started as a small scale seed trading venture in a village in Thailand, they have grown to be the largest contractor of poultry and shrimp in Asia and have financed the development of tens of millions of profitable smallholder-owned poultry farms and fish farms in poor areas of Asia. By contrast, the clove  “co-operative” established by Suharto’s youngest son in the 1990’s, to provide “protection of growers from price volatility” and to “avoid exploitation of poor farmers by unscrupulous traders” resulted in clove growers in Indonesia receiving prices 70% below farmgate prices elsewhere.

As a general rule, co-operatives fail at a higher rate than ordinary limited liability companies, even in developed countries. A creeping tendency to pay higher and higher prices to producers tends to result in bankruptcy. Corruption within co-operatives is a huge problem in Indonesia and China, resulting in most small farmers withdrawing from such collectives. A fundamental failing of human nature is that once more than two people are engaged in a mutual enterprise, conflict escalates and productivity drops; the Chinese aphorism is “One monk draws the water, two monks carry the water, three monks- no more water!”. For those interested in an animation of this concept, the authoritative version can be found here

If co-operatives are to form in Georgia, it should be an organic and voluntary process without state subsidy or foreign-aid support. Concurrently, government and aid agencies should look at how to co-operate with existing small-scale traders for mutual benefit, be it as sales agents for rural insurance, extending small harvest loans to farmers who are well-known the the trader, or providing basic  training in post-harvest management to their suppliers.

(2) Extension Services

The report reiterates the findings that extension services are an important driver of productivity increases amongst farmers, particularly among small farmers who can’t afford private services or who have difficulty accessing written materials in a language they understand.

While the finding is unremarkable, the recommendation is that a State Extension Service is the suitable model. This is contentious; many other countries have realised huge gains in productivity without the use of government-owned extension services.

In the Australian colonies of the 19th century, and the Commonwealth of Australia in the first half of the 20th century, dairymen were generally impoverished and owned only a handful of cows. The dairy factories which bought their milk employed their own company veterinarians and production experts, who provided free extension advice to the factory’s suppliers. Inputs suich as vaccines and drugs were provided at low cost and often on account, paid for out of monthly milk checques. Dramatic increases in productivity, profitability and herd size were achieved in this manner.

Government extension services to this industry in Australia did not become a feature until after politically powerful soldier-settlers on new irrigated dairy estates in the 1940’s and 50’s lobbied for free government extension and research in parallel with the dairy company extension activities. In short, the greatest gains in productivity and prosperity were achieved with an old-fashioned paternalistic commercial approach by the large dairy factories, with State extension services being provided for political reasons rather than compelling need and becoming available after farmers had risen to a moderate level of prosperity.

In Indonesia and China today, state extension services achieve a great deal of air time on State TV channels and in government propaganda, but the lion’s share of extension service is provided by commercial processors of milk, beef, fruit, vegetable and fish. It is not uncommon for finance, insurance and extension, as well as crop care and veterinary care on request,  to be provided as one bundle by such processors. It works tremendously well in general despite the paternalistic concept that some aid agencies find distasteful.

There are many ways that government policy can drive such nucleus-plasma commercial extension models, using tax incentives or import quota penalties to drive processors in the right direction, without taxpayers’ money or donor funds being required.

Overall, a creditable report and a good basic resource.


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