| Abstract: |
Croatia is very close to meeting the requirements necessary for becoming a
member of the European Union (EU). On February 6, 2008, the European
Enlargement Commissioner Olli Rehn said that accession negotiations with
Croatia are moving ahead well. As in all new member states (NMS), the
agricultural sector and food processing chain are core issues within the
negotiation process. Successful negotiation requires intimate knowledge of the
issue at hand, including the socio-economic situation and the fears and
strategies of the stakeholders, particularly small-scale farmers. This report
attempts to close some of these knowledge gaps by reviewing Croatia’s rural
development dynamics and farm structures, as well as agricultural and rural
policies. Based on an empirical research component, the report provides
unique, detailed insights into the ongoing structural change in two typical
rural regions of Croatia. Special focus will be placed on socio-economic
developments within farm households. Farmers’ views, perceptions, and
strategies are challenged by a competitiveness analysis of Croatia’s farming
sector, particularly in dairy farming. The opportunities and challenges for
Croatia’s rural regions are discussed vis-à-vis lessons learnt from the
Slovenian accession experience. This executive summary provides a review of
the major findings and policy recommendations. The recommendations follow
those of the OECD in placing emphasis on regions rather than sectors and
investments rather than subsidies in rural development policy. The
recommendations refer to two important policy fields: (1) policies to develop,
structurally adjust and diversify agriculture, and (2) territorial approaches
for policies to create and secure employment (the wider rural economy). Main
findings The findings for Croatia are derived from the analysis of secondary
sector data as well as micro-economic data from approximately 140 farm
households surveyed in 2007. Furthermore, a domestic resource costs (DRC)
analysis looked into the competitiveness of the Croatian small-scale dairy
sector. Expert interviews in Slovenia provided valuable lessons with regard to
negotiating the Agricultural Chapter with the European Commission (EC). In the
following, the main findings for accelerating both, rural and agricultural
sector development, and smoothing the negotiation of the agricultural chapter
are summarised: Small-scale family farms. A considerable number of farms are
quite small, with three hectares or less. Few family farms exceed ten
hectares. Dairy farms. Dairy production plays an important role in Croatia's
agricultural sector; with roughly 25% of total revenue, it is the largest
sub-sector. Further, 95% of dairy cows are kept in family farms, with an
average of about three heads per farm. The DRC analysis was based on a small
sample of farms which were divided into two groups: those with less than 16
cows (four on average), and those with 16 or more (an average of 47).The DRC
value for the former was 3.0, and the latter was 2.2. These high figures
indicate that all dairy farmers must greatly improve their efficiency.
Compared to Slovenian dairy farmers, Croatian milk producer use feed,
especially feed concentrates, in an inefficient way. Improvements can
especially be made by investing in better breeds and cowsheds. Also,
investments will be needed for reaching EU hygiene standards in the coming
years. This will put an additional burden on dairy farms for staying in
business. Food processing chain. Analysing revealed comparative export
advantage indicators of agro-food commodities showed that the processing
industry is rather efficient; the deeper the level of processing the more
competitive Croatia’s food sector becomes on EU markets. This observation is
made for trade in agro-food in general as well as in dairy products. Types of
farms. Seventy-five per cent of all farms surveyed are part-time farms. Based
on the share of receipts from non-farm activities, we grouped the part-time
farms into those with 10-50% (called ‘complementing’) and those with more than
50% (called ‘subsidiary’). Twelve per cent of the farms in the sample are
complementing farms and 63% are subsidiary farms. Overall, non-farm income
accounts for over a third of the total income over all types of farms.
Professional training, education & farm-related topical information.
Successful farm and non-farm businesses require improved access to appropriate
professional training, education and topical information. Compared to
Slovenia, professional training in agriculture does not play a big role in
rural Croatia. The average level of educational attainment is not fully
satisfactory, with only 36% of farm family members having attended primary
school and 46% having had secondary school education. Family farm income. Even
if most part-time farms derive only a supplementary income (less than 50%)
from farm activities, their livelihood is interwoven, to a certain extent,
with their (semi-)subsistence farm activities. Especially when non-farm
activities are badly paid and insecure, farming activities are maintained as a
fallback option. This makes it quite unlikely that the subsidiary farms will
give up farming in the medium-term. Full-time farms are economically much
better off and more productive when it comes to cultivating their land: the
average annual per capita income within full-time farm families is € 7,675,
followed by part-time farms with € 6,386, and subsidiary part-time farms trail
far behind with € 4,718. Farm returns to land and labour. Especially full-time
farms show higher returns to land and used labour, probably due to a more
intensive production, particularly in the animal production, and also a better
endowment with physical capital: Their economic performance is reflected by,
on average, four times higher incomes per hectare compared to small-scale
subsidiary farms. Nevertheless, a poorly-functioning land market restrains
land consolidation and thus productivity. Farm labour productivity presently
appears to be insensitive to education levels. However, non-farm labour
returns increase along with increased years of education. Thus, the importance
of professional training and overall educational attainment cannot be
overemphasised in the process of a shrinking farm sector and a non-farm sector
that becomes more decisive for rural livelihoods. Farm expansion, farm exit
and diversification. Approximately one-tenth of all surveyed farms intend to
expand their farming activities within the next five years, and roughly the
same share claim they plan to give up farming. Determinants that increase the
chance that a farm will be expanded are a positive perception about the
capability of the farm to adapt and good infrastructural links, as well as
access to land. An exit from farming becomes more probable if the farm is
located closer to an urban centre (here, Zagreb), which may facilitate access
to lucrative non-farm activities. Also, negative attitudes towards farming,
unfavourable farm prospects and no access to subsidies work in the same
direction. However, a significant share of farm families (almost 40%,
including hobby farmers) plans to take steps towards diversification and
non-farm incomes. If individual employment choices are considered,
pluriactivity, i.e. the combination of farm and non-farm work, can be seen as
a first step out of farming: 25% of pluriactive people intend to concentrate
on non-farm work in the future, and those who leave the farming sector prefer
not to return. However, even if (semi-)subsistence farms disappear gradually,
developments in Slovenia show that hobby farming could become a non-negligible
factor keeping small farms alive. Almost 20% of the family farms plan to
continue at a (semi-)subsistence level or as hobby farmers. This means that in
the medium-term these farms will be relatively insensitive to policy measures
directed towards structural change. Expectations from EU accession. The
attitudes of Croatian farmers towards the anticipated EU accession are largely
negative. There are very few positive aspects, such as law and order that are
expected. Among the negative aspects, the one most frequently mentioned was
that farmers consider EU regulations as a threat to the survival of their
farms. Farmers also fear the prospect of becoming uncompetitive due to open
markets and their small-scale farming structure. These fears, however, do not
prompt the Croatian farmers to apply for the Instrument for Pre-accession
Assistance (IPA), which co-finances farm investments and investments to
upgrade community standards. The Slovenian example shows that the opinion
towards the EU and its agricultural policy could improve as soon as the
(financial) benefits become obvious to the farmers. Therefore, the negative
attitude could also be seen as a sign of lacking information. Policies versus
politics in the negotiation process of the Agricultural Chapter. One general
important lesson from the Slovenian accession experience is that the
harmonisation of legislation is not only an issue of adopting the relevant
laws and regulations. It is also about the harmonisation of administration and
policies. Although the EU clearly carries more weight in the negotiation when
it comes to influencing the content of the Agricultural Chapter, it is
important that the national interest groups formulate their policy objectives
very clearly, set aside national political concerns, and act in concert.
Consequently, the negotiation team must have a common strategy and rely on the
same background information for the negotiations. Policy pointers The
following summarises the policy recommendations derived from the above
findings. Recommendation 1: Balanced structural change in agriculture
Agricultural sector measures and in particular agricultural subsidies alone
should not constitute the public policy portfolio for rural regions. In
Croatia this is recognised, but traditional sector measures still play an
important role. Small-scale farm structures lacking the prospect of future
prosperity are the main problem in Croatia. Therefore, structural policies
should be at the heart of sector-related policies. With that in mind, seven
fields of actions are critical: Factor market mobility. Land markets are not
fully functional. A careful land consolidation policy would therefore be
helpful. Inter-sectoral labour mobility is already a reality. Nevertheless,
professional training and education is crucial, particularly for successful
participation in the non-farm sector. 'This implies the need to improve access
to education and professional training at all age levels. It may also somewhat
dampen if not reverse the rural-urban migration trend to some degree. Croatian
farmers hardly participate in the capital (credit) market. Whether this is due
to reluctance on the farmers’ side or a lack of financial intermediaries
specialising in micro-credit requires further analysis. In any case, access to
credit is important for structural adjustment. Badly designed credit schemes
can become a burden on public budgets, therefore, any endeavour in this
direction needs to draw on successful experience from other countries. Farm
enterprise development. Full-time farmers (25% of the sample) do relatively
well compared to part-time farmers. Eleven per cent of the surveyed farm
families intend to expand farming within the next five years. This should be
the main target group for the extension service and investment-related policy
measures. If investments are credit-financed, adequate business plans are
crucial and care should be taken not to put the farms at too much risk if the
investment fails. Innovative credit and micro-credit schemes may be an option
here. Dairy farming. The analysis of Croatian dairy farming has revealed that
it is not competitive at present. Certainly the larger dairy farms are
somewhat more competitive. However, improving the milk collection
infrastructure and investing in dairy processing (though presently rather
efficient compared to primary production) could improve the competitiveness of
the larger units at least. If Croatia wants to maintain its dairy sector and
allow for the prosperity of dairy farmers, the output per unit of land and
labour must considerably grow. This can only be attained through better
management through e.g. improved extension work and investment into the
production structure. However, introducing the milk quota system of the EU in
Croatia is not recommendable for now. This would be a burden on the budget, as
it implies heavy investment in the administration and would last only for some
years. Farm subsidies. A high level of farm subsidies paid from EU funds is
certainly one of the goals of the negotiations. Yet, when choosing finance
measures, it is important to avoid common pitfalls. Economic theory provides
two rationales for government intervention: correction of market failures and
income redistribution. However, many subsidies distort markets. Often they are
not precisely enough targeted and, because of this, tend to consolidate
structures instead of promoting structural change. Generally, all farm
subsidies should be brought in line with EU measures as early as possible,
which means that if direct farm support is desired, Croatia should opt for
direct payments which are decoupled as much as possible. Direct payments have
proven useful for securing certain income levels, for example in Slovenia. But
compensation payments which aim at tiding over the adjustment pressures should
be designed according to a clearly-defined transitional period; i.e. such
payments should not be made permanent since their distortion potential would
increase and lead to a slowdown of structural change. Exit schemes for
farmers. Only about 10% of the farms want to exit farming within the next five
years, while 45% of the farms intend either to retain their present state of
development or continue as hobby farmers. However, for successful structural
change, farm exit is crucial as a driver of farm development. Incentives are
needed to convince farmers to give up farming and release their land to those
who are willing to expand. Therefore, (semi-) subsistence and hobby farms
should be excluded from regular farm subsidy programmes. Positive incentives
for farm exit could be set, for example by an early retirement scheme as
offered within the EU, or other monetary or social benefits that are offered
under the condition of giving up farming. Food processing sector. Generally,
the question applies, and could not be finally answered in this study, whether
the lack of competitiveness at farm level can be compensated somewhat at
processing level. It is likely, however, that this assumption is true to some
degree, as with increasing depth of processing Croatia’s food sector becomes
more competitive on EU markets. However, this issue should be looked into more
closely in order to further accelerate structural change in the agricultural
sector. Agricultural extension service. The manpower and background of the
extension service in Croatia is sub-optimal and needs to be strengthened
substantially in order to come to terms with the challenge of structural
change in the Croatian farm sector. As of 2007, 215 extension workers (thereof
198 agricultural specialists) within the Croatian Agricultural Extension
Institute (CAEI, founded in 1997) potentially service 448,000 thousand family
farms. This means every extension worker is responsible for more than 2,000
farms. Obviously, the overwhelming task ahead requires many more qualified
extension workers. These ought not to be solely experts in agronomy, but also
agricultural economists and persons experienced in regional rural development.
Furthermore, to advise interested farmers in the correct application
procedures, the development of business plans, and the assessment of
associated risks, these workers will need professional training with regard to
the various national and/or EU investment schemes that are available to the
farmers. Recommendation 2: The wider rural economy As stated earlier, rural
development is a spatial challenge. Apart from sectoral policies for
agriculture and agro-food processing, policies addressing all rural sectors
are at the heart of sustainable rural development. Five actions are important
in this area: Rural employment opportunities. Farming can provide a prosperous
future for many, but not for all. For those who want to diversify into the
rural non-farm sector, professional training and education is crucial. Hence,
it is necessary to provide opportunities to improve human capital at all age
levels. Unemployment is still rather high at around 11% of the workforce. This
situation, combined with the relatively low level of education among the
farming population, dampens the prospects of non-farm employment. Increasing
the employment rate and improving the employability of the labour force must
therefore be a key objective of social policy and labour market policy in
Croatia. In order to increase employment of those with a low level of
education, or of those with knowledge and skills that are not in demand in the
labour market, it is necessary to continue shifting the emphasis to active
forms of assistance, i.e. training and education in accordance with changing
labour market needs. Policies that enable farmers to find secure and lucrative
employment in the non-farm sector promote exit options as shown above.
Economic development. Rural regions are heterogeneous. Therefore, little scope
exists for generalist recommendations with regard to rural economic
development policies. A wide variety of policy interventions may be required
which should be tailored to the local necessities. Decentralised and
participatory decision-making may be necessary to identify the right policy
mix for each region. In this context, the promotion of local action groups
(LAGs) à la LEADER (= Liaison entre actions de développement de l'économie
rurale) prior to the EU accession (as done in Poland or Romania) can greatly
facilitate regional policy decision-making. The challenge in this context is
to ensure that more decentralised decision-making does not compromise the
government’s distributional objectives. Small-scale farm families in
particular may not benefit from decentralisation since it is possible that
better-off farmers will be better placed to take advantage of decentralised
funding and implementation mechanisms, or that within a given community the
priorities of the local economic or political elite are more effectively
articulated than those of the marginalised population groups. Cross border
cooperation & networking. In the context of regional rural development, the
work of the Regional Rural Development Standing Working Group (RRD SWG) needs
to be pointed out (http://www.seerural.org). The RRD SWG was founded based on
a common wish to establish an informal organisation, consisting of
representatives of those institutions responsible for rural development in the
respective countries and territories of South Eastern Europe (SEE), to work on
rural development based on sustainable principles, through networking and
permanent cooperation between all stakeholders of rural development in the
region. By the end of 2008, Croatia has joined this network. Hard
infrastructure and institutional environment. Although not at the heart of
this analysis, experience shows that hard infrastructure (such as roads,
markets and public transport, etc.) and information technologies (IT, such as
telephone, internet etc.) are decisive when comparing successful regions to
those lagging behind. Therefore, investments in this area should generally be
of high effectiveness. Apart from regional investments in infrastructure and
IT, internet access for farm households could also be supported explicitly and
thus give the owners the opportunity to be informed about markets and policies
relevant to them. Awareness campaigns. The rural population feels generally
insecure when facing the anticipated changes that will come with EU accession.
Awareness campaigns could help with both reducing fears and informing farmers
and the rural population about how they can efficiently adapt to meet the
demands of changing economic structures. In the farming sector, the extension
service should be closely involved in such activities, including appropriate
training offers for extension workers. Recommendation 3: What can be learnt
from Slovenia's EU negotiation process In many aspects, the situation of
Croatia vis-à-vis the EU and the country's aspirations with regard to
negotiating the Agricultural Chapter is similar to that of Slovenia some years
ago. Key recommendations were therefore derived from interviewing the
Slovenian negotiation team and associated experts. Three actions are
particularly necessary: Negotiation tactics & networking. Sound and fair
negotiation tactics and networking are everything. It is very important to
clearly define policy objectives and express demands for rural development
funds. Negotiation tactics refer to a clear strategy, based on analytical
results and political considerations, in terms of what the negotiation team
should achieve, including minimum and maximum outcomes. The tactics should
thus aim for a pre-defined outcome of the negotiation process. The strategy
and goal ought to be backed-up by a coherent statistical data base and
analytical work on simulations of possible solutions and their implications
upon which the networking negotiation team and resource persons can rely.
Regular consultations on results and on open questions in the negotiation
process are important. It is therefore highly recommended that all relevant
policy stakeholders agree on the anticipated negotiation outcome and work
together to reach it. International networking in the RRD SWG may also be
useful in terms of learning from other accession countries or NMS with regard
to their negotiation experience. Introduce the main lines of the CAP soon.
Based on the experience of Slovenia, Croatia should strive to introduce the
main lines of the reformed CAP before the final stage of negotiations, also by
utilising the national budget. This not only signals the EU that Croatia is
ready to accede, but also provides the relevant policy-makers some leeway to
gain experience prior to accession, which generally allows smoother
adaptation. In addition to harmonising the legislation and adoption of
relevant laws and regulations, particularly important are the efficient
implementation and harmonisation of institutions and policies. When
implementing CAP measures, it is important to assure the participation of
agricultural extension services from the very beginning. Rural development
funds. Similar to Slovenia, it makes sense for Croatia to place a strong focus
on a high level of rural development funds. Rapidly equalising the level of
payments with other EU countries could also be desirable in terms of income
goals, although the trade-off with structural goals might be considerable.
Therefore, contrary to Slovenia, Croatia would be well-advised to concentrate
not so much on less-favoured area payments, but rather on measures related to
regional development that encompass the wider rural sector, i.e. including
non-farm issues. Generally, it is important to ensure that the chosen policy
measures are not contradictory. Since the cause and effect of certain measures
are not always identifiable, and results may only appear in the medium- and
long-term, indicators that fairly capture policy impacts should be defined. |