Friday, August 19, 2011

Guest post: reforming Romanian farming

By Lucian Anghel of BCR

Few people know that Romania used to be the ‘granary of Europe’ before World War II, the second largest cereals producer after France. The situation has changed since then, for the worse unfortunately, and Romania is currently reporting significant deficits in the food product balance, of more than €1bn even in good agricultural years.

This is embarrassingly low for a country that could feed around 80m people – four times Romania’s population. The answer lies in investment, including foreign investment. But first the authorities need to implement serious land reforms to make local agriculture more competitive.

Agriculture is high on the global agenda today, with population growth and urbanisation driving demand for food.

Romania, which wallowed in a painful recession for two years, would have done much better had it had a modern agriculture sector capable of exploiting the surge in world demand.

The seventh largest EU country in terms of inhabitants and the fifth largest by arable land struggles to feed itself properly, with meagre food supplies often generating significant pressures on inflation. Agriculture contributes around 6 per cent of GDP and accounts for around 20 per cent of employment.

Now agriculture could help boost the feeble economic growth anticipated for 2011. If the weather holds up, agriculture could push local GDP up by around 0.4-0.5 percentage points this year.

But Romanian agricultural needs more than good weather. It requires comprehensive reform and restructuring.

The vast majority of holdings are poorly endowed with machines or irrigation equipment – in France for instance, an average farm is 32 times better equipped than in Romania.

The ownership map shows that property is atomized, while subsistence and semi-subsistence make up most of the local agricultural landscape. According to Eurostat, arable land per farm in Romania is less than five hectares – a tenth of that in France – while tiny family farms, of which 45 percent are run by people that are at least 65 years old, work 38 percent of the country’s total arable land.

Energy consumption per hectare in Romania is one sixth of that in France; the consumption of pesticides and fertilizers one third of French levels. If we add the fact that less than 1 per cent of the total holdings are managed by farmers with full agricultural training (43 percent in France), the reader can get a fair picture of what Romanian agriculture is all about.

Significant delays in merging small plots into larger ones, more suitable for both being exploited efficiently and attracting european funds have been an important drag on Romanian agriculture, holding off foreign investors that might have wanted to start a new business in the country.

Reform and investment would help Romania increase its absorption of EU funds at a time when the country has so far absorbed only 25 per cent of the total 2007-13 EU aid allocation.

The results would be well worth the effort – and not just for Romania. Last year, with 9m tonnes of corn harvested, Romania was the world’s 10th largest producer in the world. The international implications of ‘unlocking the huge potential’ are clear.

The recent global turmoil has hit business confidence. The main risk now is for the world to shift to some sort of over-pessimism which is likely to linger for quite a while.

After the past excesses, the link between the financial economy and the real economy should definitely be restored, while the rush for quick profits should take a backseat.

Investors should put their money into the real economy. ‘Getting back to basics’ and ‘start small to grow big’ are the keys to a fresh new start at this moment. Agriculture is an obvious place to start.

Without painting an overly rosy view, Romania will sooner or later converge towards EU productivity standards. So, agricultural production will double and agricultural exports – worth €1.9bn last year – will triple in the long run.

Romania has the potential to become a real top dog in terms of cereals production in Europe and rise from fourth place in the European output rankings to second place, after France.

Romania’s local authorities – at long last – seem to understand that land reform should be pushed forward, as this is the only way the foreign capital will start flowing. Foreign investors with an interest in agricultural should start looking now.

Lucian Anghel is chief economist of BCR, Banca Comerciala Romana

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