A Agriculture for Jobs and Growth in the Western Balkans B i Agriculture for Jobs and Growth in the Western Balkans A Regional Report June 2017 ii Acronyms BiH Bosnia and Herzegovina CAP Common Agricultural Policy CEFTA Central European Free Trade Area CENELEC European Committee for Electrotechnical Standardization EU European Union FADN Farm Accountancy Data Network FAO Food and Agriculture Organization FDI Foreign Direct Investment GDP Gross domestic product GIs Geographical Indications HACCP Hazard analysis and critical control points IPARD Instrument for Pre-Accession Assistance for Rural Development NSBs National Standards Bodies SME Small and medium enterprise SO Standard output SPS Sanitary and phytosanitary USD United States Dollars VET Vocational Education and Training WB Western Balkan (region, country) iii Table of Contents Acknowledgments.................................................................................................................................................................. v Executive Summary................................................................................................................................................ 1 I. Study Objectives and Scope.............................................................................................................................. 4 II. Framework and Context.................................................................................................................................... 6 Size and structure.....................................................................................................................................................6 Employment intensity..............................................................................................................................................7 Productive inclusion............................................................................................................................................... 12 Growth potential..................................................................................................................................................... 15 Opportunities............................................................................................................................................. 15 Challenges................................................................................................................................................... 19 III. Looking Forward............................................................................................................................................. 24 Annex 1. Input-Output Analysis......................................................................................................................... 39 Scenario Results ....................................................................................................................................................40 iv List of Figures Figure 1. While most countries in the region are in a process of transitioning out of agricultural based economies, Albania continues to heavily depend on its rural economy......................................................................................................................................7 Figure 2. The share of food, beverage and tobacco manufacturing turnover of total manufacturing turnover is large in the Western Balkans, 2011........................................................................................................................................................................................8 Figure 3.A. Concentration of food and beverage manufacturing in CEFTA*, 2008-10...........................................................................................8 Figure 3.B. Concentration of motor vehicles manufacturing in CEFTA*, 2008-10..................................................................................................8 Figure 4. The share of food, beverage and tobacco manufacturing employment in total manufacturing employment is Important, 2011.....9 Figure 5. Index of agricultural labor productivity growth for the Western Balkans, 2006=100.....................................................................10 Figure 6. The average value added per employee in the food, beverage and tobacco manufacturing industry is very low, 2011...........11 Figure 7. The average wages and salaries in the food, beverage and tobacco manufacturing industry are very low, 2011..................... 12 Figure 8. The smoothing effect of agriculture, 2005-2015......................................................................................................................................14 Figure 9. Exports of food and beverages from WB countries have grown faster than total world exports, 2006-2012.......................... 17 Figure 10. Value addition in agri-food exports is significant, 2011............................................................................................................................18 Figure 11. Trade deficits of processed food and beverages are large for BiH, Albania and Montenegro, 2013............................................19 Figure 12.A. Food and beverages represent a large share of manufacturing turnover, 2009...............................................................................20 Figure 12.B. The share of manufacturing FDI that goes to food and beverages is proportionately small, 2010.............................................20 Figure 13. The food, beverage and tobacco manufacturing enterprises employ a large number of people, 2011....................................... 22 Figure 14. The average turnover of food, beverage and tobacco manufacturing enterprises is small, 2011................................................. 23 Figure 15. The density of food, beverage and tobacco manufacturing enterprises (per million inhabitants) is similar to the EU, 2011.......... 23 Figure 16. The average gross fixed capital formation of food, beverage and tobacco manufacturing enterprises is small, 2011........... 23 Figure 17. Example of agri-food industry cluster.......................................................................................................................................................... 31 Figure 18. Share of agri-food sector employees by agri-food sub-system, 2012................................................................................................. 37 List of Tables Table 1. Macroeconomic indicators, Western Balkans, 2015..................................................................................................................................7 Table 2. Average size of agricultural holding (ha) and number of agricultural holdings................................................................................ 13 Table 3. Share of holdings by size of farmed area in selected WB countries (%)............................................................................................14 Table 4: Share of (semi-) subsistence farmers in selected WB countries (%)................................................................................................. 15 Table 5. Foreign direct investment in the food supply chain (inward stock), 2012.......................................................................................... 21 Table 6. Economic impacts of the agri-food sector in Albania and North Macedonia.................................................................................. 25 Table. 7. Impacts of CAP on employment in Albania and North Macedonia.................................................................................................... 26 Table 8. Impacts of changes in the magnitude of domestic demand................................................................................................................. 27 Table 9. Impacts of policy scenario compared to status quo (Ratio: scenario impacts/status quo impacts), Albania..........................41 Table 10. Impacts of policy scenario compared to status quo (Ratio: scenario impacts/status quo impacts), North Macedonia...... 42 Table 11. Impacts of structural scenarios (changes compared to 2013)............................................................................................................. 43 Table 12. Impacts of structural scenarios (compared to no change in policy, 2013)........................................................................................44 List of Boxes Box 1. Characteristics of farms in the EU-27.......................................................................................................................................................... 11 Box 2. Social security, agriculture and the elderly................................................................................................................................................ 14 Box 3. Measuring (semi-) subsistence farms........................................................................................................................................................15 Box 4. E-commerce growth in the food industry in Spain ..................................................................................................................................17 Box 5. Organic farming benefits and costs ...........................................................................................................................................................28 Box 6. Futog cabbage ..................................................................................................................................................................................................29 Box 7. The UK Sustainable Agri-food Innovation Platform ...............................................................................................................................33 Box 8. Serbia’s Innovation Fund ...............................................................................................................................................................................33 Box 9. Australia’s Agri-Food Industry Skills Council...........................................................................................................................................35 Box 10. Agri-food promotion portal...........................................................................................................................................................................36 Box 11. E-commerce – A promise unfilled for the agri-food industry? ............................................................................................................36 Box 12. Food smart specialization strategy of Lazio, Italy ...................................................................................................................................38 v Acknowledgments This Regional Study was led by Irina Schuman and Svetlana Edmeades, and comprises a team of World Bank staff, including Bekzod Shamsiev, Daniel Gerber, David Treguer, Luc Christiaensen and Meeta Sehgal. The task was managed by Julian Lampietti and has benefited by peer-review comments received from Sergiy Zorya, Parmesh Shah and Joao Pedro Wagner de Azevedo. The team is grateful for the analysis and inputs provided by Johan Swinnen, Maria Garrone and Hannah Ameye (KU Leuven), Philip van der Celen (FAO) and Demetris Psaltopoulos (University of Patras). The study has benefited from the strong collaboration with staff of the Ministries of Agriculture in the six Western Balkan countries. vi 1 Executive Summary 1. The agri-food industry—comprising agricultural inputs, primary agricultural production, off-farm food processing, food distribution, food retail and consumption, and other food-related services—is one of the most important in- dustries in the Western Balkans in terms of turnover, jobs and geographic scale. Average turnover of the agri-food industry accounts for 24 percent of total manufacturing turnover in the Western Balkan (WB) region compared to the European Union (EU) average of 15 percent (in 2011) and it is more evenly distributed geographically than other industries. Global evidence suggests that agribusiness has the highest short-term indirect employment impact, where creating one job generates more than double the number of jobs in the rest of the economy. The sector’s broad geo- graphic footprint, multiple functions and cross-sector link- ages could transform the industry into a powerful driver of value addition, income diversification and innovation in rural areas. 2. The Western Balkans have both the productive assets and the market opportunities to transform their agri-food industries into engines of growth and jobs. The agri-food industry has experienced positive growth in recent years (an estimated average annual growth rate of 11.9 percent in the period 2006-2011 compared to the EU average of 4.4 percent) thanks in part to its gradual integration to regional markets. In the next decade, the ongoing transition process of the agri-food industry will be further shaped by shifting consumer demand, increased weather risks, food quality re- quirements and new sustainability commitments undertak- en by governments, businesses and investors. In this rapidly changing environment, WB countries can respond by diver- sifying regional offerings of high-value agri-food products and related services and capitalizing on related jobs. 3. The economic impacts of the agri-food sector are signif- icant for jobs and growth. The input-output analysis carried out for this report finds that, in Albania, the agri-food indus- try is responsible (directly and indirectly) for almost half of the economy-wide jobs, while in the Republic of North Macedonia (where the economy has already embarked in a diversification process) it creates nearly a third of employ- ment. The economic impacts of direct support to farmers 2 (under Pillar 1 of the Common Agricultural Policy, CAP) are turing FDI in 2010 was only 15 percent. Direct investments not negligible, but in the case of Albania, support allocated can be an effective vehicle for the transfer of technology under rural development programs (Pillar 2 of CAP) has and know-how to the region. The design and promotion of double the effect on increases in employment (which grows FDI incentive schemes are not fully developed and strate- 13 percent), with farm modernization and food processing gic investor targeting is still an emerging practice. being important generators of jobs due to their labor inten- sity. The findings also point to the importance of pursuing 6. To overcome these challenges and to advance their policy initiatives which facilitate strengthening of economic development agendas in the context of EU-accession interdependence in the food chain and rural areas. For ex- and beyond, WB countries must consider “farm to fork” ample, in North Macedonia, if the agri-food sector doubles intervention approaches that are centered on promoting its purchases of domestically-produced farm products, em- compliance with international food safety and quality stan- ployment in the economy increases by 21 percent, also rising dards, facilitating well-functioning agri-food value chains, output and value added by 16 percent. incentivizing innovation and entrepreneurship, and building sector-specific human capital, as well as promoting foreign 4. Small farm size, low skilled labor, depopulation of rural direct investment and trade. In addition, given that the agri- areas and limited market participation are important food sector alone is unlikely to absorb all the surplus labor in obstacles to modernizing the primary sector. With an av- rural areas, facilitating the integration of modern agri-food erage farm size raging between 1 ha (in Albania) and 5 ha value chains inside diversified and knowledge-based rural (in Serbia and Montenegro) and many (35 to 40 percent) economies will be critical for long-term success. A shift agricultural producers in the region being semi-subsistent, of policy towards rural diversification investment should selling surplus production to local markets, production be gradually but decisively attempted. This is because a at scale, innovation and integration are not possible. Yet, more-diversified rural economy would facilitate the absorp- despite the depopulation of rural areas, around half of the tion of surplus farm labor and, in parallel, contribute to the region’s residents live in such areas, a share larger than the enhancement of economic linkages in rural areas and enable EU-28 (around 26 percent). However, the skills of the pri- a reverse of rural decline. mary agriculture labor force are limited due to low educa- tional levels and lack of opportunities for training. Although 7. Public policies enabling private sector development in some countries (Serbia, Albania, Montenegro) a third of and participation are critical for job creation. Developing the agricultural workers are above 65 years of age, the age an enabling business environment and investment climate composition of the labor force is much younger in Kosovo, that help transform the agri-food industry into a competitive North Macedonia and BiH. With age and educational levels provider of a diverse offering of high-value agri-food prod- being highly correlated with the possibility of moving from ucts must be the focus of government interventions. Policy agriculture into service-based activities, it is imperative that and institutional reforms could be organized around the training programs are designed to support the moderniza- following core components: (i) Providing smart incentives tion needs of the sector on and off farm. Unless these are to producers and agribusinesses; (ii) Delivering core public tackled, the agri-food industry will continue to underper- goods in rural areas; and (iii) Building effective institutions. form in terms of its contribution to generating added value, Increased private sector investment and innovation are also diversifying rural economies and raising rural incomes. required to capitalize on the value addition potential of the agri-food industry. Building human capacity that responds 5. The limited amount of foreign direct investment in the to the new dynamics of the agri-food industry is critical for agri-food industry in the region is another constraint to capturing the job creating potential. competitiveness. In the new member states of the EU, foreign investment in the agri-food industry was the most 8. Information technology is the new variable in the prominent contribution to productivity growth, quality im- transformation equation. It can play an important role in provements and enhanced competitiveness in the agricul- bringing knowledge to producers and supporting the pro- tural sector. In the Western Balkans, the agri-food industry cess of strengthening extension services and food quality remains significantly underrepresented in foreign direct in- control. It can be the link between producers and consum- vestment (FDI) compared to its share in total manufactur- ers, and rural and urban areas, where road infrastructure ing turnover. Whereas the sector accounted for 24 percent is not sufficient and production units are geographically of total manufacturing turnover, its share in total manufac- dispersed. It can be an aggregating factor in a context of 3 fragmented land and weak land markets. It can play an im- portant role in capital and labor mobility. And for all it can be, it requires jobs and training to unlock the potential of the agri-food industry. These jobs up the agri-food system are likely to be taken by the WB youth in both rural and urban areas. 4 I. Study Objectives and Scope 9. The objective of this regional study is to examine how further investment, modernization and transformation of the agriculture and rural economy can contribute to job creation and economic growth in the Western Balkans, while highlighting how better public policies and deeper European integration can help take this process forward. The study aims to better understand the features of agri-food employment in the region, including its potential to generate more, better and more inclusive jobs and to identify trans- formative (policy) actions that could trigger a structural change towards a more productive use of human and other resources in agriculture. 10. The study is expected to inform the policy dialogue in the agriculture and rural sector in the region, in a way complementary to the more specific financial and techni- cal support that the EU is providing through its dedicated Instrument for Pre-Accession Assistance (IPA). 11. The study focuses on the Western Balkans, a re- gion comprising six EU pre-accession countries: Albania, Bosnia and Herzegovina (BiH), Kosovo, North Macedonia, Montenegro and Serbia. 12. The study uses information and data about agriculture and related factors which, for the most part, is publicly available. As none of the Western Balkans has fully har- monized its agricultural statistics with EU standards and Eurostat rules, direct comparisons of the data and indicators between the countries is not always possible. The study re- lies on a combination of quantitative and qualitative meth- ods for the analysis. 13. Considering the important forward and backward linkag- es that agriculture brings about and its related job creation potential, the sector is considered broadly as an agri-food system in which both on-farm production (primary sector), output and food processing (agribusiness) and related ser- vices for input provision and output delivery are considered. This enables a more integrated perspective to job creation potential. 5 14. The World Development Report (WDR) 20131 defines jobs as “activities that generate income, monetary or in kind, without violating human rights”, internalizing both job creation and enhancing job quality. In line with this definition, the study discusses the employment generating potential in the agri-food system, while also touching on job quality aspects, such as productivity and well-being. There are common challenges across countries based on their level of development, demography, endowments and insti- tutions—how to make agricultural jobs more productive and create job opportunities outside farms; how to find ways to diversify exports, so that jobs are connected to global mar- kets rather than supported through government transfers; how to design social protection systems in ways that extend coverage without penalizing employment (WDR, 2013). All these challenges are true for the Western Balkans. 1 World Bank. 2013. World Development Report: Jobs for Development. 6 II. Framework and Context 15. The study is organized around a framework developed by the Agricultural Global Practice of the World Bank Group2 that focuses on four factors that determine the num- ber of jobs in the food system: 1) initial size and structure of the food system (including farming, food manufacturing and services); 2) employment intensity (productivity); 3) productive inclusion; and 4) projected growth. Size and structure 16. Agriculture plays an important role in the economy of the Western Balkans. Agriculture, as a primary sector, contributes, on average, 12 percent to GDP (in 2015), with important differences between the countries—Albania (22 percent), Kosovo (14 percent), North Macedonia (11 percent), Montenegro (10 percent), Serbia (9 percent) and BiH (7 per- cent) (see Table 1). These numbers are high in comparison to the EU-28 average of 1.56 percent. In some countries— Albania and Montenegro—there has been an increase in the share of agriculture from a decade ago, while in others—BiH and Serbia—a declining trend is observed. In general, for most countries in the WB region, agriculture continues to be one of the main drivers of growth (World Bank, 20173). 17. Agriculture, as a primary sector, continues to be an im- portant formal (full and part-time) employer in rural areas. Agriculture is particularly important as a source of employ- ment in Albania (Figure 1), where it was responsible for 41.3 percent of total employment in the country in 2015 and the main employer in rural areas. The share of full-time agricul- tural employment is lower in the rest of the WB countries de- spite their reasonably large shares of rural population—Serbia (19.4 percent), BiH and North Macedonia (17.9 percent), Montenegro (7.7 percent) and Kosovo (2.2 percent). This is partly explained by the high share of part-time and informal employment in the sector. For example, close to 80 percent of those working in agriculture in 2016 were employed part- time. This is much higher than in other WB countries—20 percent of total agricultural employment in Montenegro and BiH is part-time, and in North Macedonia it is slightly above 2 World Bank. 2017. Future of Food: Shaping the Food System to Deliver Jobs. 3 World Bank. 2017. Faster Growth, More Jobs. Western Balkans Regular Economic Report no. 11, Spring 2017. 7 followed by BiH (22.9 percent), North Macedonia (22.8 TABLE 1. MACROECONOMIC INDICATORS, WESTERN BALKANS, 2015 percent) and Albania (18.2 percent). Importantly, agri-food industry turnover is more evenly distributed geographical- Agricultural Agriculture Rural GDP employment population ly than other manufacturing sectors such as automotive Country % % % production (see Figures 3.A and 3.B), which underlines the Albania 22.05 41.27 42.59 unique role that agri-food industry development can play in promoting growth and jobs in rural areas. Average employ- BiH 7.10 17.88 60.23 ment in the agri-food industry amounted to 16.9 percent of Kosovo 13.73 2.24 60.00 total manufacturing jobs in the WB region in 2011, compared North Macedonia 11.16 17.86 42.90 to the EU average of 14.9 percent (see Figure 4). Whereas Montenegro 10.20 7.71 35.97 the sector accounts for large shares of manufacturing em- Serbia 9.46 19.41 44.45 ployment in North Macedonia (19 percent) and BiH (17.5 EU-28 1.56 4.19 25.20 percent), its share is smaller in Albania (14.3 percent). Source: WDI, The World Bank (2016), Eurostat (2016), Kosovo Green Report (2015). Employment intensity 12 percent This has implications for the measurement of labor productivity and comparisons across sectors, considering the 19. Unemployment rates in the Western Balkans are high. variations in hours worked within the sector. In Kosovo unemployment was very high throughout 2006- 2015, although it fell from around 45 percent in 2006 to 18. The agri-food industry is the most important manufac- around 33 percent in 2015. Serbia’s unemployment rates turing industry in the Western Balkans in terms of turn- fluctuated between 10 and 25 percent from 2006 to 2015. over and employment, as well as geographic footprint in North Macedonia’s unemployment rate has steadily de- rural areas. The agri-food industry accounts for the largest creased from about 38 percent in 2006 to 28 percent in share of manufacturing industry turnover in the WB region. 2015. Montenegro’s unemployment rate has been around Average turnover of the agri-food industry in 2011 accounted 20 percent in recent years. BiH’s unemployment rate de- for 23.8 percent of total manufacturing turnover in the WB clined and stabilized to around 28 percent in 2015. Overall, region compared to the EU average of 15.4 percent (Figure Albania’s unemployment rates are the lowest, but still fluc- 2). The sector is most significant in Serbia (31.5 percent), tuate between 12 and 18 percent. Youth and rural residents FIGURE 1. WHILE MOST COUNTRIES IN THE REGION ARE IN A PROCESS OF TRANSITIONING OUT OF AGRICULTURAL BASED ECONOMIES, ALBANIA CONTINUES TO HEAVILY DEPEND ON ITS RURAL ECONOMY 45 11,248.96 40 35 Agricultural employment (%) 30 25 10,633.21 13,907.94 20 9,759.10 15 10 37,864.80 15,464.17 5 13,720.95 0 0 5 10 15 20 25 Agriculture, value added (% of GDP) EU BiH Serbia Montenegro North Macedonia Kosovo Albania Source: World Development Indicators (2016); Eurostat (2016). Note: The size of the circles reflects the size of GDP per capita (current international dollars). 8 FIGURE 2. THE SHARE OF FOOD, BEVERAGE AND TOBACCO MANUFACTURING TURNOVER OF TOTAL MANUFACTURING TURNOVER IS LARGE IN THE WESTERN BALKANS, 2011 25 23.8 20 15.5 15.4 14.8 15 % 10 5 0 Western Balkan average EU-11 EU-15 EU-28 Source: UNIDO. Note: No data available for Kosovo and Montenegro. FIGURE 3.A. CONCENTRATION OF FOOD AND BEVERAGE FIGURE 3.B. CONCENTRATION OF MOTOR VEHICLES MANUFACTURING IN CEFTA*, 2008-2010 MANUFACTURING IN CEFTA*, 2008-2010 0.25–0.5% 0.5–1% 1–2% 2–3% 3–4% 4–5% +5% Source: OECD, CEFTA (2013). Industry Concentration and Country Specialisation in CEFTA. CEFTA Issues Paper 5, OECD Publishing, Paris, p30, p47. Note: The map shows the share of sector turnover in each sub-national region of the Western Balkans. The shares do not add up to 100% because CEFTA includes Moldova (not shown on the maps). are among the most affected by the lack of gainful employ- sectors. In 2013, 87 percent of the Albanian agricultural ment opportunities. workforce had an informal job, compared to 43 percent of the non-agricultural workforce. The gap is wider in Serbia 20. Informality in the sector is significant, suggesting that where, in 2014, the share of informal employment account- labor absorption by the sector is broader than that mea- ed for 67 percent of total agriculture employment, compared sured in the formal labor market. In countries like Serbia and to 8.9 in non-agricultural sectors (ILO, 20164). Albania, where such data is available, a much larger pro- portion of the agricultural workforce is engaged in informal 21. The net effect of labor mobility is not clear due to the agricultural employment compared to the non-agricultural complexity of the dual (formal and informal) labor dy- 4 ILO. 2016. International Labor Organization database. 9 FIGURE 4. THE SHARE OF FOOD, BEVERAGE AND TOBACCO MANUFACTURING EMPLOYMENT IN TOTAL MANUFACTURING EMPLOYMENT IS IMPORTANT, 2011 20 16.9 15.8 14.6 14.9 15 10 % 5 0 Western Balkan average EU-11 EU-15 EU-28 Source: UNIDO. Note: No data available for Kosovo and Montenegro. namics in the sector. On the one hand, it was believed that Montenegro having the smallest share in the region of during the economic transition in the region, there were people living in rural areas (36 percent). significant outflows of labor from agriculture, as returns of labor in other sectors increased (e.g., Bofinger, 19935; 22. Labor productivity in the region has increased, driven Brada, 19896; Jackman, 19947). Between 2011 and 2015, mainly by rural outmigration. Over the past decade, agri- Albania reported the largest decline in rural population cultural labor productivity (agricultural value added per farm (4.0 percent), followed by BiH (2.6), Kosovo (2.3) and worker)10 has significantly increased in the Western Balkans; North Macedonia (0.9). In the EU-28, the share of agricul- more so than in the EU-28 (Figure 5). The increments in ag- tural employment was relatively stable at around 4 percent riculture labor productivity range from 45 percent in Albania (Eurostat, 2016). On the other hand, agriculture continued to 107 percent in BiH. Montenegro and North Macedonia’s to play a buffer role by absorbing labor laid off in other sec- productivity growth is 73 and 64 percent, respectively. tors (e.g., Leiprecht, 19998; Seeth et al., 19989). Although Serbia has a slightly lower productivity growth than the the share of the rural population in the Western Balkans EU-28 with 45 percent compared to 52 percent. However, has significantly decreased over the last 50 years, in 2015, in Albania, the inter-sectoral and spatial shift away from this share (about 49 percent) was still much larger than in agriculture in the 2000s did not lead to notable gains in the EU-28 (around 26 percent). In Kosovo and BiH more aggregate productivity or formal employment growth in this than half of the total population still lives in rural areas period (World Bank, 201511). (an estimated 60 percent). In North Macedonia, Albania and Serbia the average share of people living in rural areas 23. Low educational levels and age composition of those is between 42-44 percent of the total population, with in primary production challenge the modernization of the 5 Bofinger, P. (1993). “The Output Decline in Central and Eastern Europe: A Classical Explanation,” Discussion Paper Series. Center for Economic Policy Research. London. 6 Brada, J. C. (1989). “Technical Progress and Factor Utilization in Eastern European Economic Growth,” Economica 56 (1989), 433–448. 7 Jackman, R. (1994). Economic Policy and Employment in the Transition Economies of Central and Eastern Europe: What Have We Learned? International Labor Review 133, no. 3 327-345. 8 Leiprecht, I. (1999). “Sectoral Change out of the Agricultural Sector in Poland,” Unpublished manuscript. 9 Seeth, H. T., S. Chachnov, A. Surinov, and J. von Braun (1998). “Russian Poverty: Muddling through Economic Transition with Garden Plots,” World Development 26, no. 9, 1611–1623. 10 As defined by the World Bank: “Agriculture value added per worker is a measure of agricultural productivity. Value added in agriculture measures the output of the agricultural sector (ISIC divisions 1-5) less the value of intermediate inputs. Agriculture comprises value added from forestry, hunting and fishing as well as cultivation of crops and livestock production.” Data are in constant 2010 USD. 11 World Bank. 2015. Next Generation Albania. Systematic Country Diagnostic. 10 FIGURE 5. INDEX OF AGRICULTURAL LABOR PRODUCTIVITY GROWTH FOR THE WESTERN BALKANS, 2006=100 220 200 180 160 140 120 100 80 60 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Albania BiH North Macedonia Montenegro Serbia EU-28 Source: Calculations from World Development Indicators, World Bank (2016). sector. Kosovo and North Macedonia have a relatively young ing vocational training programs, are very important. Those agricultural labor force compared to the other WB countries. training programs will not only tackle the unemployment Almost one third of the agricultural holders in Kosovo and more level, but also improve the production standards in different than 40 percent in North Macedonia were under 45 years of sectors including agriculture. age in 2013. In both federal states of BiH the largest share of people working in the agricultural sector is between 45 and 54 25. The average farmer is of old age and low education years, while the share of workers above 65 is extremely low in the broader European context. In Portugal, Spain, Italy, (less than 1 percent). In Albania, Serbia and Montenegro a third Greece and Malta the percentage of people who achieved of agricultural workers are above 65 years of age. Many agricul- at least upper-secondary education in rural regions ranges tural workers have not completed primary or secondary school from 27 percent (Portugal) to 51 percent (Italy). Only 1 per- and some have no formal education. A reduction of skills in the cent of adults in the rural regions of Bulgaria and Romania agricultural labor force is due to aging, migration and lack of participated in education or training activities in 2012 opportunities for education and training of new entrants. (European Commission, 201314). In the EU–27 almost one third of the farmers is older than 65 years (Box 1). 24. Inadequate human capital is a key constraint for ag- ricultural labor restructuring, as well as business devel- 26. The structural challenges facing the agri-food industry opment and economic activities in rural regions (Swinnen currently limit its potential contribution to growth and and Ciaian, 200812). Studies have shown that age and decent jobs. The agri-food industry in the Western Balkans educational levels are highly correlated with the chance of underperforms today as a potential engine for growth and finding a job in various sectors, such as the industrial sector, higher incomes in rural areas. In 2011, average value added services, business start-ups and non-agricultural activities in generated per employee in the agri-food industry in the rural areas. In Slovenia, younger and more educated people Western Balkans was equivalent to only 23.6 percent of the are more likely to move from agriculture into service-based EU-28 average (Figure 6), whereas agri-food industry sala- activities (Bojnec and Dries, 200513). General labor market ries equaled only 15.4 percent of the EU-28 average (Figure policies as well as those targeted to the rural areas, includ- 7). In order to transform the agri-food sector into an engine 12 Swinnen, J. and Ciaian, P. (2008). Growth, competitiveness and convergence in Romanian agriculture. Agricultural Economics and Rural Development, 5 (3-4), 143-160. 13 Bojnec, Š. and L. Dries (2005) ‘Causes of changes in agricultural employment in Slovenia: evidence from micro-data’, Journal of Agricultural Economics, Vol. 56(3), pp. 399–416. 14 European Commission, (2013). Rural Development in the EU: Statistical and Economic Information. Report. Directorate-General for Agriculture and Rural Development (DG AGRI).. 11 standards, well-functioning value chains, innovation and en- BOX 1. CHARACTERISTICS OF FARMS IN THE EU-27 trepreneurship, foreign direct investments and trade, as well as sector-specific human capital development. Given that • Close to one third of all farmers are above the nor- agri-food industry growth alone will not be able to absorb mal retirement age of 65 in 2013. all the surplus labor in rural areas, diversifying economic • The overall ratio of young (below 35 years) to el- opportunities in rural areas must be a critical component of derly (over 55 years) farmers came to 0.11 in 2013, any development strategy in the region.15 meaning that for every young farmer, there were 9 elderly farmers. 27. Key knowledge and skills gaps impede high productiv- • In 2013, 42 percent of all farmers worked full-time. ity levels of the agri-food industry in the Western Balkans. • Roughly 75 percent of agricultural labor was pro- According to the World Bank’s 2015 Business Environment vided by family members in 2013. and Enterprise Performance Survey (BEEPS) survey, 58 per- • Large farmers accounted for 3.1 percent of all farms cent of firms across sectors in the Western Balkans reported in 2013. that the skills and the education of workers are a problem for • Farms with less than 20 ha of utilized agricultural doing business. The agri-food industry faces particular chal- area accounted for almost 9 out of 10 (86.3 per- lenges in attracting staff with advanced skills that are not typ- cent) farms in the EU and for more than two thirds ical for the sector (e.g. ICT, genetics, behavioral science, etc.). (68.1 percent) of the labor force directly working Given that the agri-food industry is generally not considered on farms. an attractive sector by young people, the most economically Source: European Commission 2015 and 2016. 15 active and educated segments of the population are usually underrepresented in it. Furthermore, agricultural schools and faculties in the WB region focus mainly in providing their of growth and decent jobs, governments in the WB region students with production-level knowledge and skills that are must consider a multi-pronged strategy aimed at developing tailored to the needs of large-scale production systems. They an enabling business environment and investment climate also operate as stand-alone units, which limits inter-discipli- that are conducive to compliance with international quality narity and cross-fertilization.16 As a result, smaller producers FIGURE 6. THE AVERAGE VALUE ADDED PER EMPLOYEE IN THE FOOD, BEVERAGE AND TOBACCO MANUFACTURING INDUSTRY IS VERY LOW, 2011 78,950 80,000 70,000 65,186 60,000 50,000 EUR 40,000 30,000 24,145 20,000 15,370 10,000 0 Western Balkan average EU-11 EU-15 EU-28 Source: UNIDO. Note: No data available for Kosovo and Montenegro. 15 European Commission. 2015. EU Farms and Farmers in 2013: an Update. EU Agricultural and Farm Economics Briefs No. 9 November European Commission (2016). Agriculture, forestry and fishery statistics 2016 edition. Directorate-General for Agriculture and Rural Development (DG AGRI). 16 Grozdanic, R. (2013). Agribusiness and Agro-Industrial Strategies, Policies and Priorities for Achieving Higher Competitiveness, Employability and Sustainability in the Western Balkans Region, Friedrich Ebert Stiftung and European Federation of Food, Agriculture and Tourism Trade Union (EFFAT), Belgrade, p81. 12 FIGURE 7. THE AVERAGE WAGES AND SALARIES IN THE FOOD, BEVERAGE AND TOBACCO MANUFACTURING INDUSTRY ARE VERY LOW, 2011 34,498 35,000 30,000 28,308 25,000 20,000 EUR 15,000 9,853 10,000 4,354 5,000 0 Western Balkan average EU-11 EU-15 EU-28 Source: UNIDO. Note: No data available for Kosovo and Montenegro. as well as agri-food small and medium enterprises (SMEs) in areas in more recent years, and with agricultural income particular face important knowledge and skills gaps in areas exhibiting the highest level of volatility for the poor (World such as business management, quality management, logis- Bank, 201621). tics, financial literacy, as well as (international) marketing. Lastly, vocational education and training (VET) schemes, in 29. Inequity can be costly. It can substantially impair cer- particular work-based learning schemes, remain underde- tain groups’ upward economic mobility prospects, as well veloped and lack collaboration with businesses. For example, as the economic growth potential of the region. Specifically, legal frameworks regulating internships and apprenticeships differences in labor market activity rates between men and are not in place in most countries.17 women are estimated to lead to potential economic losses averaging around 18 percent of GDP in the WB region, and Productive inclusion as high as 28 percent in Kosovo.22 Similarly, prevalent un- employment of youth across the Western Balkans can have 28. Rural poverty is a problem in all the WB countries, as long-lasting effects since joblessness at a young age tends farming systems are only developing in more favorable areas to delay or prevent the accumulation of valuable on-the-job and in the vicinity of urban settlements (Volk et al., 201718). skills, translating into lower productivity and human capital In Albania, due to the decelerating pace of economic growth accumulation for young workers later in life.23 Population post-2008, accompanied by a contraction of the demand aging in most of the region adds further urgency to the need for labor (in construction), poverty increased between 10 for more participation of all groups in the workforce. and 30 percent in rural areas (World Bank, 201519) There is not a unique pattern across Albania in terms of poverty and 30. Women represent a high share of agricultural labor. sector of employment concentration of the population.20 In In 2015, the majority of formal workers in agriculture in the the same period, growth in Montenegro has been accom- region were male (64 percent). Albania reports the highest panied by increased poverty, with rural poverty reaching share of women employed in the agricultural sector (49.5 55 percent in 2012, but increasingly concentrating in urban percent), followed by Montenegro (48 percent), North 17 OECD. 2016. Competitiveness in South East Europe: A Policy Outlook, Competitiveness and Private Sector Development, OECD Publishing, Paris, p103. 18 Volk et al. (2017). Monitoring of Agricultural Policy Developments in the Western Balkan Countries. JRC Technical Reports. 19 World Bank. 2015. Next Generation Albania. Systematic Country Diagnostic. 20 World Bank. 2016. Portraits of Poverty and Inequality in Albania. 21 World Bank. 2016. Montenegro: Achieving Sustainable and Inclusive Growth Amidst High Volatility. Systematic Country Diagnostic. 22 Cuberes and Teignier (2015). 23 World Bank. 2016.. 13 Macedonia (39.1 percent), Serbia (36.2 percent) and BiH farms are mostly concentrated in one region, the Vojvodina (35.1 percent). Kosovo’s share of female participation in ag- Province. Although official data for Albania are not available, riculture is by far the lowest at 10.4 percent. In Albania and there is evidence that more than 65 percent of farms are Serbia, female workers represent 80 percent of all informal between 0.5 and 3 ha. (Qineti et al., 201527). workers in agriculture (ILO, 201624). 32. Land fragmentation is an important land reform topic 31. A small average farm size remains a key characteris- in the Western Balkans and one that has contributed to the tic of WB agriculture. Small-scale farms survived under low productivity and competitiveness of the sector in the communism, except in Albania, the only WB country that region (Volk et al., 201728), among other factors. Although was not part of the former Yugoslavia and where large-scale land consolidation can bring important economies of scale farms dominated during that time. Albania experienced in production and contribute to growth, the rest of the the most dramatic collapse of large-scale farming in all of economy would have to enable the process of job creation Eastern Europe and Central Asia (ECA) with a complete and absorption, which will be challenging given the high un- shift to small-scale family farming in the 1990s (Cungu and employment rates in the region. With weak credit and land Swinnen, 199925).26The average farm size ranges from less markets, this process of consolidation will take time and, than 2 hectares (ha) in Albania and North Macedonia to in the short run, small land units can be the only asset that around 5 ha in Montenegro and Serbia (Table 2). Compared many formal and informal agricultural producers can rely on. to the EU-28 average (16.1 ha per farm in 2013), the aver- age farm in the Western Balkans is almost three (Serbia) 33. Agriculture continues to be an important safety net to ten times (Albania) smaller. In terms of distribution, the in the Western Balkans. Households remain in farming proportion of farms smaller than 2 ha is particularly high in as a source of both food and income security (Swinnen et Montenegro (73 percent) and Kosovo (63 percent) (Table al., 200529), with older people, in particular, using farming 3). In Serbia, the proportion is smaller and close to the to complement small or sometimes inexistent pensions EU-28 average (around 50 percent), even though large-scale (Box 2) (Swinnen and Ciaian, 2008). Small-scale farming is one of the most common livelihoods for the provision of food security, especially for the elderly. Similar constraints TABLE 2. AVERAGE SIZE OF AGRICULTURAL HOLDING are faced by numerous unemployed younger households. (HA) AND NUMBER OF AGRICULTURAL HOLDINGS Due to high food prices and slim social payments, few in- Average holding Number of centives exist for these households to rent out their land to Country size (ha) holdings more productive farms (Swinnen and Van Herck, 200930). Albania (2014) 1.16 352,315 In many countries in the region, surplus labor was laid off BiH from privatized large-scale corporate farms while small Kosovo (2014) 3.1826 129,220 scale family farms absorbed labor in an environment with North Macedonia (2013) 1.85 170,885 few alternative employment opportunities (Swinnen et Montenegro (2010) 4.50 48,870 al., 2005). This “smoothing” effect of agriculture employ- ment during the transition period in the Western Balkans Serbia (2012) 5.40 631,552 is evidenced by the almost constant share of agricultural EU-28 (2013) 16.11 10,841,000 employment in total employment despite GDP per capita Source: Albanian Agricultural Statistics (2014), Kosovo Agricultural Census (2014), FYR Macedonia Farm Structure Survey 2013-preliminary data, Montenegro Agricultural growth (Figure 8), a normally inverse relationship, as in Census (2010), Serbia Agricultural Census (2012), Eurostat (2016). the case of Albania and Kosovo. Coupled with a decline in Note: the data for Albania refer to “arable land’. industrial employment and a modest rise of service sector 24 ILO. 2016. International Labor Organization database. 25 Cungu, A. and Swinnen, J. (1999). “Albania’s Radical Agrarian Reform”, Economic Development and Cultural Change, Vol. 47, No. 3 (April 1999): 605-61. 26 For Kosovo, the figure on the average holding size is based on the Agricultural Census 2014, which differs from those reported by Bajramović et al. (2016) and Volk et al. (2014). 27 Qineti, A., Rajcaniova, M., Braha, K., Ciaian, P. and Demaj, J. (2015). “Status quo bias of agrarian land structures in rural Albania.” Post-Communist Economies 27(4): 517–536. 28 Volk et al. (2017). Monitoring of Agricultural Policy Developments in the Western Balkan Countries. JRC Technical Reports. 29 Swinnen, J.F.M., L. Dries and K. Macours (2005). “Transition and Agricultural Labour.” Ag. Econ. 32, 11–20. 30 Swinnen, J., and Van Herck, K. (2009). Agricultural Aspects of Accession to the European Union: Lessons from the EU New Member States and implications for FYR Macedonia. 14 TABLE 3. SHARE OF HOLDINGS BY SIZE OF FARMED AREA IN SELECTED WB COUNTRIES, (%) Farm size (ha) Kosovo (2014) Montenegro (2010) Serbia (2012) Farm size (ha) North Macedonia (2013) <2 63.22 73.41 48.83 <1 58.22 2 to 5 23.28 15.61 28.90 1 to 3 29.40 5 to 10 8.28 5.55 14.11 3 to 5 7.30 10 to 20 3.19 2.37 5.12 5 to 8 2.91 >20 2.04 3.06 3.05 8 to 10 0.83 >10 1.33 Source: Kosovo Agricultural Census 2014, FYR Macedonia Farms Structure Survey 2013-preliminary data, Montenegro Agricultural Census 2010, Serbia Agricultural Census 2012. BOX 2. SOCIAL SECURITY, AGRICULTURE AND THE ELDERLY Montenegro has implemented a social security policy directed mainly at rural households targeting the elderly. The Old Age Allowance Program provides social transfers to rural farmers in the form of pensions. In turn, the aim is to secure an adequate living standard in rural areas. These pensions are provided to the elders of family households, where one elderly member is eli- gible per household. This policy, however, constitutes around 20 percent of Montenegro’s agriculture budget. The financial sus- tainability of these pension schemes is a problem in the Western Balkans. A high unemployment rate, the large proportion of the population working informal jobs and the exclusion of the self-employed, lead to a large social burden and strain state budgets. Nevertheless, agricultural policy will remain rather limited in terms of reducing overemployment as the process of agricultural employment depends highly on the other income opportunities that do or do not exist. Some policy examples can be found in Poland and Romania, such as the “early retirement schemes”. These schemes motivate elderly farmers to stop farming and rent out their land instead. This relieves the problem of overemployment as well as aiding land consolidation. jobs, the proportion of agricultural employment increased when the number of jobs in the formal sector was limited temporarily in most countries of the region and remained (World Bank, 200331). While economic circumstances have at high levels. Agriculture has absorbed fired workers from changed considerably over the past 20 years in many transi- other sectors or has provided subsistence activity at times tion countries, these factors still can play an important role FIGURE 8. THE SMOOTHING EFFECT OF AGRICULTURE, 2005-2015 70 Employment share in agriculture (%) 60 50 40 30 20 10 0 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000 5,500 6,000 6,500 GDP per capita (current prices, EUR) Albania BiH Serbia North Macedonia Montenegro Kosovo Source: World Development Indicators, World Bank (2016). 31 World Bank. 2003. FYR Macedonia – Country Assistance Strategy. Report No. 26513-MK. Washington, D.C. 15 BOX 3. MEASURING (SEMI-) SUBSISTENCE FARMS Measuring semi-subsistence is challenging. Semi-subsistence farm households do not keep records of production, consump- tion or sales, which must be estimated by household members themselves or by third parties (Fritzsch et al., 201032). Several methods have been used to quantify semi-subsistence farmers. One approach is based on farm size - to reach a marketable level of surplus output, the farmed areas should be above a certain minimum size (Lerman, 200433). McConnell and Dillon (1997) argue that farms between 0.5 and 2 ha could be a good proxy indicator for semi-subsistence farms. However, they also caution about the shortcoming of using farm size as a general indicator, as there are other conditions for defining subsistence farming, such as local land quality and social and economic conditions. Another measure is the Standard Output (SO), measuring the economic size of a farm regardless of its land area. In a study by Davidova et al. (2013)34 for the European Parliament, the au- thors set as the economic size criterion for EU small and semi-subsistence farmers that the standard output must be between 2,000 EUR and 8,000 EUR. In terms of economic size, the farm structure in Montenegro is dominated by farms with a SO of less than 2,000 EUR. In North Macedonia and Serbia, the proportion is also quite high—between 46 and 50 percent. In all three countries, a small share of holdings have an SO above 8,000 EUR (Table 4). The EU also uses a market participation criterion for defining semi-subsistence farming, although this definition lacks specific thresholds for consumption and sales. Data on semi-subsistence farming based on market participation criterion are available only for North Macedonia (Table 4). Wharton (1969) proposed a cut-off point for differentiating semi-subsistence from commercial farming as 50 percent of output sold, a threshold which has been widely used in semi-subsistence farming studies including this one. TABLE 4: SHARE OF (SEMI-) SUBSISTENCE FARMERS IN SELECTED WB COUNTRIES, (%) SO <8,000 EUR Production for UAA<0.5 UAA <2 ha SO < 2,000 EUR (subsistence & Country self-consumption (subsistence) (semi-subsistence) (subsistence) semi-subsistence) Kosovo (2014) 23.17 40.27 North Macedonia (2013) 54.64 39.10 48.02 49.59 85.77 Montenegro (2010) 37.91 35.5 65.02 95.07 Serbia (2012) 11.4 36.8 45.87 86.03 Source: Kosovo Agricultural Census (2014), FYR Macedonia Farms Structure Survey 2013-preliminary data, Montenegro Agricultural Census (2010), Serbia Agricultural Census (2012). in influencing labor allocation, in particular in countries with it and services markets into the global economy have been a large share of employment in agriculture and few alterna- the dominant forces driving the transition process of the tives for low skilled labor.32 33 34 agri-food industry in the Western Balkans. While these forc- es will continue to shape the sector in the Western Balkans Growth potential in the next decade within the framework of the countries’ WTO and EU pre-accession processes, they will be further Opportunities amplified by the increasing input supply and financial risks posed by accelerating climate change as well as the shifting 34. Shifting consumer demand and increased climate consumer demand in high-value export markets towards change risks will further shape the transition process of safe, healthy, convenient and sustainably grown origin prod- the agri-food industry in the Western Balkans in the next ucts. In this regard, the sector will also need to respond to decade. During the last two decades, privatization of state- the new sustainability commitments undertaken by govern- owned agricultural land, cooperatives and manufacturing ments, businesses, and investors in the context of the re- enterprises as well as the integration of input, product, cred- cently adopted Sustainable Development Goals (SDGs) and 32 Fritzsch, J., S. Wegener, G. Buchenrieder, J. Curtiss and S. Gomez y Paloma (2010). Economic Prospects for Semi-subsistence Farm Households in EU New Member States. JRC Scientific and Technical Reports (EUR collection). Luxembourg. 33 Lerman, Z. (2004). Policies and institutions for commercialization of subsistence farms in transition countries, Journal of Asian Economies, Vol. 15, pp. 461-479. 34 Davidova, S., Bailey, A., Dwyer, J., Erjavec, E., Gorton, M. and Thomson, K. (2013). Semi-subsistence farming – value and directions of development. Study prepared for the European Parliament Committee on Agriculture and Rural Development, Brussels. 16 the Paris Climate Accord. These combined market, environ- food products are expected to become more differentiated mental and regulatory forces point to a future of continued in order to meet individual consumer preferences. In addi- transformational change for the agri-food industry in the tion, a stronger focus is placed on niche markets and tar- WB region, which will affect stakeholders across the agri- geted products with a shorter product life cycle (European food value chain and beyond. Commission, 2016). Although this trend tends to benefit large food and beverage manufacturers with multiple prod- 35. Consumers in high-value export markets are shift- uct supply chains, it also creates space for smaller, ‘single ing their food and beverage expenditures towards safe, play’ food and beverage manufacturers, buyers and retailers healthy, convenient and sustainably grown origin prod- to enter the market, especially when leveraging e-commerce ucts. Whereas price and taste remain the most important platforms (Box 4). Regardless of their size and business factors determining food choices in high-value export model, increased flexibility, integration and coordination markets in the EU, the purchases of consumers with higher between producers, manufacturers, buyers and retailers are disposable incomes are increasingly driven by other factors required to accommodate individual consumer needs. The and values such as food safety, expected health benefits, need for close coordination across the agri-food value chain sustainability and product origin. In the EU, this shift is is further reinforced by the steady introduction of stringent largely the result of increased consumer awareness and public standards and regulations governing agri-food mar- information following recent food safety crises (e.g. e-coli, kets in the EU. In response to consumer/citizen demands, bovine spongiform encephalopathy, listeria and bird flu), the EU has complemented its General Food Law (2002) which reduced consumers’ trust in the agri-food industry with regulations focused on food hygiene (HACCP), food and led to growing consumer interest in food production information and traceability.36 The EU has also expanded systems, processing practices, supply chain traceability and environmental regulations in regards to waste management, product origin. Meanwhile, the growing share of urban and packaging and renewable energy. elderly consumers in Europe continues to seek convenience in food and beverage products. However, they also demand 37. The agri-food industry in the Western Balkans has ex- that these products are healthy and «functional», i.e. con- perienced positive growth in recent years thanks in part to venience foods that are natural, minimally processed and its gradual integration to regional markets. The agri-food provide personalized health benefits beyond basic nutrition. industry in the Western Balkans experienced an estimated This includes organic products, whose consumption has average annual growth rate of 11.9 percent in the period 2006- grown very fast despite the recent financial crisis (European 2011 compared to the EU average of 4.4 percent.37 The indus- Commission, 201635). try’s positive growth rate has been underpinned by a strong regional export performance, which has been enabled by the 36. The modern retail sector is increasingly differentiating gradual liberalization of regional custom tariffs.38 Overall, the products in response to shifting consumer demand and WB economies’ average applied tariffs for agricultural and in- stricter regulations. As consumer demand in high-value dustrial products are now largely in line with EU levels.39 With export markets in Europe shift towards safe, healthy, con- an average annual growth rate of 9 percent between 2006 venient and sustainably grown origin products, modern and 2012, regional exports of food, beverages and tobacco 35 European Commission. 2016. The Competitive Position of the European Food and Drink Industry – Final Report, Directorate-General for Internal Market, Industry, Entrepreneurship and SMEs, Publications Office of the European Union, Luxembourg. 36 Regulation (EC) 852/2004 establishes general rules for hygiene of food stuffs; Regulation (EC) 1169/2011 introduces a minimum font size and rules on nutrition labelling. It also includes mandatory labelling of the country of origin or place of provenance for certain pre-packed fresh meat; Regulation (EC) No 178/2002 establishes basic traceability requirements. It requires food business operators to be able to identify from whom and to whom a product has been supplied (“one step back-one step forward traceability”), but they do not have to identify the immediate customers when they are final consumers. In addition, they are required to have systems and procedures in place that allow for this information to be made available to the competent authorities, upon request. Although the Regulation does not compel food/feed business operators to establish so-called internal traceability systems, a recent SME-focused survey by the European Commission indicated that around 75 percent of the respondents have an internal traceability system. 37 No UNIDO data is available for Montenegro and Kosovo. 38 WB countries have pursued custom tariff liberalization in the framework of the CEFTA agreements with the countries in the region, the Stabilization and Association Process (SAP) with the EU, the multilateral agreements within the WTO, and bilateral agreements, in particular with EFTA, Turkey, and the Russian Federation. In the context of CEFTA, WB countries have fully removed tariffs for manufactured and agricultural products. In the context of their Stabilisation and Association Agreements with the EU, WB candidate and potential candidate countries have obtained duty-free exports for almost all products (with the exception of baby beef, wine and sugar) while gradually reducing tariffs on imports form the EU. 39 OECD. 2016. Competitiveness in South East Europe: A Policy Outlook, Competitiveness and Private Sector Development, OECD Publishing, Paris, p88. 17 BOX 4. E-COMMERCE GROWTH IN THE FOOD INDUSTRY IN SPAIN In Spain, 3 precent of Spaniards shop online, but of those that use the Internet to purchase food, 60 percent shop fairly often (about nine purchases a year) according to a Capraboacasa.com survey done in collaboration with the Center for Demographic Studies in Catalonia. Even though the percentage of sales over total e-commerce sales is still low, the industry is growing stron- ger and firms are offering companies and consumers options to shop online at supermarkets, gourmet food stores and specialty shops. Since 2001, nearly all of the country´s major supermarket chains offer online shopping through their websites, including Carrefour, Mercadona, El Corte Inglés and Erokski. Delinostrum.com is a gourmet food store created in 2005 that sells gourmet products from Spain to consumers throughout Europe. It offers a broad catalog of products and can customize gifts and deliver them anywhere in Europe. Highly specialized stores that focus on one kind of product are another trend in the industry. For ex- ample, Olivaoliva.com is an extra virgin olive oil marketplace that buys directly from olive oil mills in 16 Spanish provinces, often bottled right at the mill and delivered right to consumers’ homes. Finally, there are multi-product platforms that don’t use inter- mediaries but that sell products from different industries on a single platform. Examples of this type of platform are Mumumio, which offers organic vegetables, meats, beverages, fruit baskets, etc. and Directodelcampo.com, a Grupo Intercom business that offers a wide range of agri-food products. Source: Nicolas, I.R. (2012). E-Commerce Growth in the Food Industry in Spain. E-Market Services, Spain. Available at http://www.emarketservices.com/clubs/ems/prod/E-Business%20Issue%20-eCommerce%20growth%20in%20the%20food%20industry%20in%20Spain.pdf have grown rapidly compared to other manufacturing sectors (see Figure 9). Moreover, considering that a majority share of in the region.40 Exports of food and beverages from the region agri-food exports from WB countries currently consists of have also grown faster than total world exports in the sector processed food and beverage products, the region’s agri-food for key subsectors, including beverages, fruit and vegetables, sector appears to be integrated into the final stages of agri- dairy and edible oils, which has led to increased market shares food value chains (see Figure 10). FIGURE 9. EXPORTS OF FOOD AND BEVERAGES FROM WB COUNTRIES HAVE GROWN FASTER THAN TOTAL WORLD EXPORTS, 2006-2012 35% Animal oils and fats Oil seeds and 30% Vegetable oleaginous fruit oils and fats Average annual growth in WB countries exports 25% Feeding stuff for animals 20% Cereals Dairies Fertilizers, 15% manufactured Vegatables and fruits Meats 10% Beverages 5% Miscellaneous edible products Sugars 0% 0% 5% 10% 15% 20% 25% Fish products -5% Coffee, tea, cocoa and spices -10% Average annual growth in world exports Source: OECD. Note: The size of the bubbles represents the size of the sectors as measured by total world exports in 2012. 40 OECD. 2014. The Food and Beverages Processing Sector in South East Europe: Identification of Policy Constraints to Growth. Discussion Note available at: http://www.oecd.org/investmentcompact/Discussion%20Note%20-%20First%20Meeting%20of%20the%20Food%20and%20Beverages%20 Processing%20Expert%20Group.pdf 18 FIGURE 10. VALUE ADDITION IN AGRI-FOOD EXPORTS IS SIGNIFICANT, 2011 100% 75% 50% 25% 0% Montenegro EU BiH Croatia Serbia North Macedonia Albania Agriculture, hunting, forestry and fishing Food products, beverages and tobacco Source: OECD. Note: No data available for Kosovo. 38. WB countries have the potential to transform their of the EU, previously in similar situations to the Western agri-food industries into an engine of growth and decent Balkans, foreign direct investment (FDI) in the agri-food jobs in this rapidly changing environment. WB countries industry was the most prominent contribution to produc- are well-positioned to seize upon the growth opportunities tivity growth, quality improvements and enhanced compet- created by shifting consumer demand in high-value export itiveness in the agricultural sector. Farmers have benefited markets where agribusinesses tend to compete not only greatly through vertical spillover effects and the general on price and cost, but also, and increasingly, on product inflow of FDI into the agri-food sector which conditioned the quality and variety. The WB region has abundant land and restructuring of the agricultural supply chain (Swinnen and water resources, including highly productive lands as well Van Herck, 200942). Vertical coordination in the industry as large areas of less intensively cultivated and unpolluted can have important benefits for the food chain in terms of land. Moreover, the region has diverse landscapes and fa- stimulating productivity. vorable climate and soil conditions for producing a variety of high-value agri-food products such as fruits and vegetables, 39. Investments in agricultural competitiveness are wine, spirits, meat, edible oils and dairy. Furthermore, WB closely related to employment and have strong multipli- countries benefit from competitive unit labor costs, a rela- er effects. A recent analysis of World Bank investments tively educated workforce, a diversified industrial sector and in agricultural competitiveness finds that such industry reasonably developed infrastructure. Lastly, they enjoy geo- competitiveness projects in agriculture show a positive graphic proximity to the EU and nearly unrestricted access correlation with the levels of employment. Investments in to its markets. As a result, WB countries have the necessary competitiveness generally focus on enhancing the business productive assets and market opportunities to transform environment of agriculture through increasing the adoption their agri-food industries into competitive providers of a of new and improved inputs and technologies, enhancing diverse offering of high-value agri-food products. the capacity of agricultural institutions and improving ag- ricultural infrastructure (e.g. improve links between agri- 39. Growth in the agri-food sector is important in the con- cultural producers and markets, reduce market transaction text of job creation and absorption. Agri-food businesses costs, align production decisions with business and market can help stimulate competitiveness in the rural economy as opportunities, link smallholder farms to international mar- a whole and support the modernization process of the sec- ket supply chains). The analysis finds that agribusiness has tor (Swinnen and Ciaian, 200841). In the new member states the highest short-term indirect employment impact, where 41 Swinnen, J. and Ciaian, P. (2008). Growth, competitiveness and convergence in Romanian agriculture. Agricultural Economics and Rural Development, 5(3-4), 143-160. 42 Swinnen, J. and Van Herck, K. (2009). Agricultural Aspects of Accession to the European Union: Lessons from the EU New Member States and implications for FYR Macedonia. 19 creating one job generates more than double the number currently characterized by low productivity and limited value of jobs in the rest of the economy (depending on the coun- added. Governments in the Western Balkans could help the try’s income level). Agribusiness has the highest short-term agri-food industry to overcome these barriers by developing indirect impact because of its strong link to labor-intensive an enabling business environment and investment climate agriculture. Therefore, an increase in output in agribusiness that are conducive to industry compliance with international will have a high indirect effect, especially in agriculture. quality standards, well-functioning value chains, innovation Effects are lower, but significant, in the long term: every six and entrepreneurship, foreign direct investments and trade, jobs in agribusiness create one indirect job in the rest of the as well as sector-specific human capital development. economy. Low indirect long-term effects are also present in Given that agri-food industry growth alone will not be able other industries, but agriculture remains the industry with to absorb all the surplus labor in rural areas, the success the lowest indirect job creation effect. Employment changes of these efforts will critically depend on the integration of in agriculture are mostly associated with a change in mar- modern agri-food value chains inside diversified and knowl- ket size. A negative correlation between employment and edge-based rural economies. productivity is found to be particularly strong in agriculture, because of the sector’s low efficiency (IEG, 201743). 41. Large agri-food trade deficits indicate that important challenges remain to the overall competitive position of Challenges the agri-food industry. Most WB countries maintain signif- icant deficits in their trade balances of processed food and 40. Structural challenges to the competitive position of the beverages (Figure 11). The only exception is Serbia, which agri-food industry must be addressed to realize this poten- is the largest exporter of agri-food products in the Western tial. To seize the growth opportunities in high-value export Balkans. In 2011, it registered a processed food and beverag- markets and create decent jobs while managing increased es trade surplus of EUR 592.2 million.44 climate change risks, the agri-food industry in the Western Balkans must further strengthen its competitive position in 42. The limited amount of FDI in the WB agri-food sector international markets. Today, this position is constrained by is another constraint to competitiveness. The agri-food in- the persistence of non-tariff barriers to trade, insufficient dustry remains significantly underrepresented in FDIs com- quality inputs and excessive industry fragmentation. These pared to its share in total manufacturing turnover. Whereas structural barriers translate into an agri-food industry that is the sector accounted for 28 percent of total manufacturing FIGURE 11. TRADE DEFICITS OF PROCESSED FOOD AND BEVERAGES ARE LARGE FOR BIH, ALBANIA AND MONTENEGRO, 2013 2,500,000,000 2,379,963,000 2,000,000,000 1,477,664,910 EUR 1,500,000,000 1,141,810,290 1,000,000,000 713,685,720 691,706,100 502,792,410 592,555,080 500,000,000 366,407,910 Croatia 1,477,664,910 67,543,110 0 Albania BiH Montenegro Serbia North Macedonia Import value Export value Source: FAO Eastern Europe and Central Asia Agro-Industry Development Country Briefs 2014. Note: No data available for Kosovo. 43 Independent Evaluation Group (IEG). 2017. Industry Competitiveness and Jobs. An Evaluation of World Bank Group Industry-Specific Support to Promote Industry Competitiveness and its Implications for Jobs. 44 OECD. 2016. Competitiveness in South East Europe: A Policy Outlook, Competitiveness and Private Sector Development, OECD Publishing, Paris, p48. 20 turnover in 2009, its share of total manufacturing FDI in current trading patters suggest that food and beverage 2010 was only 15 percent (see Figures 12.A and 12.B). In the manufacturers in the Western Balkans are primarily inte- three WB countries for which data are available, FDI in the grating in intra-regional agri-food value chains and remain agri-food industry (agriculture and food processing) follows insufficiently connected to EU and global value chains. With different trajectories for the period 2008-2012. Albania ex- the exception of Albanian manufacturers, who exported 20 perienced declining FDI inflows per capita, while BiH, and in percent of their agri-food exports (in terms of value) to Italy particular North Macedonia, managed to attract more FDI in in 2013, food and beverage manufacturers in the WB region the food industry (Table 5). In all three WB countries, FDI in export mainly to other countries in the region.47 the agricultural sector is relatively limited. 44. Various non-tariff barriers remain to accessing both 43. While trade logistics have generally improved in WB EU and regional markets. Non-tariff barriers to trade countries, agri-food manufacturers have mainly inte- may include technical regulations and product standards, grated in intra-regional value chains. With the exception sanitary and phytosanitary (SPS) measures, administra- of North Macedonia, WB countries improved their overall tive barriers and import licenses. In the WB region, there Logistics Performance Index between 2010 and 2014.45 remains significant room for removing SPS-related and, to Whereas their median performance rose from 2.66 in 2010 a lesser extent, technical barriers to trade. Although key to 2.82 in 2014, the cost of importing and exporting one national legislation has been aligned with the EU’s General 20-foot container has dropped by 4 percent from 2012 to Food Law, different adoption rates of EU SPS and technical 2015.46 According to the World Bank’s 2015 BEEPS survey, regulations, divergent national interpretations, muddling of only 4 percent of companies across the region considered food safety and food quality non-conformities, and weak transport a significant barrier to business growth. However, institutional capacity lead to varying compliance require- the region’s performance is still below the EU average. In ments and enforcement conditions in WB countries.48 Also, 2014, global rankings ranged between 63 (Serbia) and 117 there is no systematic notification of new SPS and technical (North Macedonia). While trade logistics are improving, regulations, mandatory conformity assessment procedures, FIGURE 12.A. ALTHOUGH FOOD AND BEVERAGES REPRESENT FIGURE 12.B. ...THE SHARE OF MANUFACTURING FDI THAT GOES A LARGE SHARE OF MANUFACTURING TURNOVER (2009)... TO FOOD AND BEVERAGES IS PROPORTIONATELY SMALL (2010) Food and Food and beverages, beverages, Food and Food and Other, 20% 15% Other, 20% and Basic 15% Basic and Other, 28% Other, 28% beverages, beverages, fabricated fabricated 28% 28% metals, 8% metals, 8% Chemicals Chemicals Non-metalic Non-metalic and chemical and chemical mineral mineral products, 4% products, 4% Non-metalic Non-metalic products, 17% products, 17% Basic and Basic and mineral mineral Coke and refined Coke and refined fabricated metals, fabricated metals, roducts, 7% products, 7% petroleum petroleum 17% 17% products, 31% products, 31% Textiles, apparel Textiles, apparel and leather, 3% and leather, 3% Textiles, apparel Textiles, apparel and leather, 5% and leather, 5% Coke and refined Coke and refined petroleum products, 7% Chemicals petroleum and products, 7% Chemicals and chemical products, 8% chemical products, 8% Source: OECD. 45 The World Bank’s Logistics Performance Index (LPI) is a multi-dimensional international benchmarking tool for measuring countries’ trade and trans- port facilitation friendliness. It analyses countries’ performances against six areas of logistics—customs, infrastructure, ease of arranging shipments, quality of logistics services, tracking and tracing, and timeliness. They are measured on an ascending scale of 1 to 5 (very good). 46 OECD. 2016. Competitiveness in South East Europe: A Policy Outlook, Competitiveness and Private Sector Development, OECD Publishing, Paris, p224. 47 FAO Eastern Europe and Central Asia Agro-Industry Development Country Briefs 2014. 48 OECD (2016), Competitiveness in South East Europe: A Policy Outlook, Competitiveness and Private Sector Development, OECD Publishing, Paris, pp. 91-92. 21 TABLE 5. FOREIGN DIRECT INVESTMENT IN THE FOOD SUPPLY CHAIN (INWARD STOCK), 2012 Agriculture Food industry Wholesale and retail Agri-food industry Wholesale and retail Country (million EUR) (million EUR) (mllion EUR) (EUR per capita) (EUR per capita) Albania 1.90 42.40 189.10 15.26 65.16 BiH 24.50 372.90 677.70 103.51 176.52 North Macedonia 36.50 261.10 453.90 144.48 220.36 Croatia 147.60 536.50 2,290.20 159.99 535.60 Czech Republic 190.00 3,512.00 11,071.00 352.39 1,053.83 Estonia 398.80 404.90 1,827.50 606.47 1,379.02 Hungary 465.20 1,853.90 8,996.10 233.50 905.78 Latvia 294.50 190.80 1,351.20 237.33 660.79 Lithuania 112.90 318.70 1,415.40 143.69 471.23 Poland 662.00 10,654.00 25,338.00 297.29 665.67 Romania 1,402.00 2,153.00 6,714.00 176.90 334.10 Slovenia 12.60 123.8 1,827.80 66.36 889.23 Source: WII database on FDI in Central, East and Southeast Europe (Hunya, 2014 and 2013). and draft national standards.49 This negatively impacts the ers when sourcing raw materials for processing. As contract competitiveness of the agri-food industry by creating ad- farming is not widely used in the region, transactions remain ditional costs and uncertainty. In general, neither National largely ad hoc and contract breaches and delayed payments Standards Bodies (NSBs) nor national SPS agencies have the are frequent issues. In general, Albania (116), BiH (64), capacity to actively and consistently participate in EU and Serbia (61) and Montenegro (41) rank poorly on the World international technical committees.50 In addition, food safe- Bank Doing Business “Enforcing Contracts” indicator, which ty agencies in the region are understaffed and lack sufficient assesses the efficiency of the judicial system in resolving a resources for inspectors’ training and inspection equipment, commercial sale dispute. Current post-harvest operations in as well as to perform regular testing to consistently enforce the Western Balkans further undermine product freshness public food safety and quality standards. Although the rele- and quality, while often providing products that are unsort- vant legal and regulatory frameworks are in place in all WB ed, of lower grade and unsuitably packed for transport. Most countries, risk management analysis is still not implemented WB countries have limited and outdated cold storage ca- in practice.51 pacities, which are often not adequately located for certain crops. Many existing buyout and distribution centers also 45. Lack of access to sufficiently large and reliable volumes lack the logistical arrangements as well as infrastructure of quality inputs further constrains the competitiveness design, technology, techniques and know-how to provide a of agri-food manufacturers in the Western Balkans. Local full range of grading, sorting and packing services that meet access to sufficient volumes of quality inputs is key to agri- buyers’ quality and delivery requirements.52 food industry competitiveness. However, smaller producers, which dominate the production structure in the WB region, 46. Fragmentation, low capital investment and weak R&D participate mainly in short-value chains that typically end at expenditures inhibit the productivity of the agri-food in- local green or wholesale markets. Food and beverage manu- dustry in the Western Balkans. The agri-food industry in facturers in the Western Balkans therefore rely primarily on both the Western Balkans and the EU is dominated by SMEs. wholesale buyers, consolidators or large individual produc- In 2011, the average number of people employed by food 49 Although most CEFTA Parties have established enquiry and notification points and are publishing notifications of their legislation and measures on official websites, these enquiry and notification points are not always functioning properly and have capacity limitations. 50 For example, only North Macedonia’s NSB is a member of CEN and CENELEC, while the others (apart from Kosovo’s) are affiliates and have observer status in CEN and CENELEC technical committees according to national priorities. 51 OECD. 2016. Competitiveness in South East Europe: A Policy Outlook, Competitiveness and Private Sector Development, OECD Publishing, Paris, pp. 91-92. 52 AgBizMK (2014) Report : Survey to Assess and Prioritize Technical Needs in Leading Ag Sub-Sectors and Identify new Export Opportunities, USAID Regional Economic Growth (REG) project. 22 and beverage manufacturers in most WB countries (16.6) 47. Agribusinesses in the Western Balkans innovate de- was close to the EU average (14.6) (Figure 13). Only Serbia spite insufficient private R&D investments. A recent OECD (21.5) and Albania (2.7) are notable exceptions. However, survey of companies in the agri-food sector in BiH revealed there are major gaps in terms of turnover between food and that 86 percent had introduced some form of innovation in beverage manufacturers in the Western Balkans and the the previous three years.54 And according to the Innovation EU. The average regional turnover was less than 25 percent Union Scoreboard, North Macedonia and Serbia perform the EU average in 2011. Average turnover in Serbia (EUR 2.1 relatively well in business product, process, marketing and million), which is the highest among the WB countries, still organizational innovations.55 represented less than half the EU average (Figure 14). Low turnover is in part driven by the fragmentation that charac- terizes the agri-food industry in several WB countries. While the average number of food and beverage manufacturers per million inhabitants in the Western Balkans (588) is close to the EU average (575), there are wide variations between countries in the region (Figure 15). For example, the number of agri-food manufacturers appears to be very low in BiH (219), whereas the numbers for Albania (1,035) and North Macedonia (704) are significantly higher. In addition, agri- food industry productivity in the WB countries suffers from low capital investments and R&D expenditures. Average gross fixed capital formation of food, beverage, and tobacco manufacturers in the Western Balkans amounts to only 22.2 percent of the EU average (Figure 16). Overall private sector R&D expenditures in North Macedonia accounted for only 0.02 percent of GDP in 2010 and 0.09 percent in Serbia, while the figure was 1.24 percent in the EU.53 FIGURE 13. THE FOOD, BEVERAGE AND TOBACCO MANUFACTURING ENTERPRISES EMPLOY A LARGE NUMBER OF PEOPLE, 2011 19.9 20 18 16.6 16 14.6 13.5 14 12 Number 10 8 6 4 2 0 Western Balkan average EU-11 EU-15 EU-28 Source: UNIDO, FAO Eastern Europe and Central Asia Agro-Industry Development Country Briefs 2014. Note: No data available for Kosovo. 53 OECD. 2016. Competitiveness in South East Europe: A Policy Outlook, Competitiveness and Private Sector Development, OECD Publishing, Paris, p137. 54 OECD. 2016. Competitiveness in South East Europe: A Policy Outlook, Competitiveness and Private Sector Development, OECD Publishing, Paris, p137. 55 In North Macedonia, 39 percent of companies reported producing innovation, as did 36 percent in Serbia, compared to an average of 38 percent in the EU. Figures are broadly similar when it comes to marketing and organizational innovations—30 percent of firms have introduced them in North Macedonia and 39 percent in Serbia, compared with 40 percent on average in the EU. 23 FIGURE 14. THE AVERAGE TURNOVER OF FOOD, BEVERAGE AND TOBACCO MANUFACTURING ENTERPRISES IS SMALL, 2011 4,883,805 5,000,000 4,416,780 4,500,000 4,000,000 3,500,000 3,000,000 2,362,229 EUR 2,500,000 2,000,000 1,500,000 1,004,333 1,000,000 500,000 0 Western Balkan average EU-11 EU-15 EU-28 Source: FAO Eastern Europe and Central Asia Agro-Industry Development Country Briefs 2014. Note: No data available for Kosovo. FIGURE 15. THE DENSITY OF FOOD, BEVERAGE AND TOBACCO MANUFACTURING ENTERPRISES (PER MILLION INHABITANTS) IS SIMILAR TO THE EU, 2011 700 588 590 600 575 517 500 400 Number 300 200 100 0 Western Balkan average EU-11 EU-15 EU-28 Source: FAO Eastern Europe and Central Asia Agro-Industry Development Country Briefs 2014. Note: No data available for Kosovo. FIGURE 16. THE AVERAGE GROSS FIXED CAPITAL FORMATION OF FOOD, BEVERAGE AND TOBACCO MANUFACTURING ENTERPRISES IS SMALL, 2011 160,000 147,547 140,000 138,841 120,000 100,538 100,000 EUR 80,000 60,000 40,000 30,815 20,000 0 Western Balkan average EU-11 EU-15 EU-28 Source: UNIDO. Note: No data available for Kosovo, Montenegro and Serbia. 24 III. Looking Forward 48. Agricultural support through budgetary funds is low compared to the EU. Compared to the EU-27, budgetary transfers to agriculture in the Western Balkans are relatively low. In 2012, the budgetary support per hectare of utilized agricultural area (UAA) amounted to EUR 480 for the EU-27, while the equivalent indicator was about EUR 25 in Albania, EUR 50 in BiH, EUR 70 in Kosovo, Montenegro and Serbia, and to about EUR 150 in North Macedonia (Bajramović et al. 2016, Volk, 201456). The Western Balkans’ level of support is quite similar to the support given by the new member states five years before their accession (Volk, 2014). In the Western Balkans for which data is available, investment support and other measures intended to improve the competitiveness of the agricultural sector represent the highest share of funds for rural development, while the other two dimensions of rural development policy (i.e. the environment and rural economy and population) are given lesser attention. 49. All WB countries have embarked on an intensive process for the implementation of medium-term strate- gies for agriculture and rural development. Over the last decades, there has been substantial development in the area of agricultural policy in the Western Balkans. New na- tional strategic frameworks have been or are in the process of being adopted, where objectives and priorities for agri- culture and rural development are set. In general, the new strategic goals are to align their agricultural policies with the EU’s acquis and can be summarized as:(i) strengthening sustainable agriculture from an economic, environmental and social perspective; (ii) ensuring an increase in compet- itiveness; and (iii) supporting farmers’ income (Grozdanić, 201357; Bajramović et al., 201658). 56 Volk T., Erjave. E. and, Mortensen K. (2014). Agricultural Policy and European Integration in Southeastern Europe, FAO, Budapest. 57 Grozdanić, R. (2013). Agribusiness and agro-industrial strategies, policies and priorities for achieving higher competitiveness, employabili- ty and sustainability in the Western Balkans region. 58 Bajramović, N., N. Bogdanov, J. Butković, D. Dimitrievski, E. Erjavec, G. Gjeci, E. Gjokaj, B. Hoxha, I.J. Stomenkovska, D. Konjević, A. Kotevska, A. Martinović, I. Miftari, M. Nacka, D. Ognjenović, M. Rednak, E. Tuna, T. Volk, E. Zhllima (authors); Volk, T., E. Erjavec, P. Ciaian and S. Gomez y Paloma (editors) (2016). Analysis of the agricultural and rural devel- opment policies of the Western Balkan countries. EUR 27898 EN, Joint Research Centre, European Commission, doi:10.2791/744295. 25 50. In terms of harmonization of specific policy instru- my-wide jobs, while in North Macedonia (where the ments with the CAP, significant differences in the degree economy has already embarked in a diversification of the actual adjustment exist. Anecdotal evidence sug- process) it creates nearly a third of employment. gests that the proposed policy instruments are still pre- The results also reflect the development level and dominantly an outcome of political and interest-motivated structural characteristics of both economies from choices rather than being designed based on objective cri- another point of view, i.e. this of sectoral interdepen- teria (Bajramović et al., 2016 p.18). Serbia and Montenegro dence (integration of sectors within the economy). In are well-advanced in this regard having actually put forward North Macedonia they reflect the higher (compared plans for the gradual introduction of CAP elements, while to Albania) links of agriculture with the rest of the other Western Balkans have not yet designed a clear plan economy, as indirect and induced effects linked to of harmonization with the CAP.59 With the CAP evolving, agri-food activity are higher. this could be an opportunity to develop plans that align with developing CAP considerations for modernization and b) A shift of policy towards rural diversification invest- simplification: (i) the CAP is a vehicle for addressing oppor- ment should be gradually but decisively attempted. tunities and challenges for climate and the environment; (ii) This shift is a sine-qua-non condition following the quantifying CAP’s wider contribution on jobs and growth is successful implementation and positive results of in- difficult but needed; (iii) bottlenecks in the food chain pro- vestments in agri-food production and processing and vide opportunities to refocus some policy responses. in agricultural and rural infrastructure. This is because a more-diversified rural economy would facilitate the 51. To simulate the economic impacts of policy support, an absorption of surplus farm labor and in parallel, con- input-output analysis of the agri-food sector was carried tribute to the enhancement of economic linkages in out60 for two countries, for which data is available—Albania rural areas and the reverse of rural decline. and North Macedonia. The scenarios are presented in detail Annex 1. The main findings suggest: c) The economic impacts of direct support to farmers (under Pillar 1) are not negligible, mainly due to the a) The economic impacts of the agri-food sector are importance of agriculture in the two economies (see significant in both countries and reflect the respec- Table 7). In Albania, these impacts are constrained tive economic development contexts (see Table 6). by the relatively low share of direct public support to In Albania, the agri-food industry is «responsible» farmers in total agricultural policy spending and also (directly and indirectly) for almost half the econo- by the comparatively low links of farm activity with TABLE 6. ECONOMIC IMPACTS OF THE AGRI-FOOD SECTOR IN ALBANIA AND NORTH MACEDONIA Changes compared to 2013 (%) Change in output Change in value added Change in employment ALBANIA No agri-food sector -19.73% -23.91% -47.22% Double livestock production 6.01% 5.70% 15.31% Double fruits & vegetables production 2.49% 4.10% 11.63% NORTH MACEDONIA No agri-food sector -19.06% -18.15% -30.14% Double livestock production 2.40% 2.75% 6.25% Double fruits & vegetables production 1.15% 1.73% 3.12% Double forage production 0.72% 0.87% 1.94% Source: Psaltopoulos, D. (2017). 59 These differences might reflect the different stage of their EU accession processes. 60 The analysis was carried out by Professor Demetris Psaltopoulos (University of Patras, Greece) as an input to this study. The full report on the input- output analysis can be provided upon request. It includes: 1) the main characteristics and elements of IO analysis; 2) other similar analyses performed at the EU level and their main findings; 3) the IO model construction process and, in more detail, the subset of countries to which this method is applied, the IO models elaboration process and its relevant assumptions; and 4) specification of policy scenarios and scenario analysis results. 26 e) An increase in support for agricultural moderniza- TABLE. 7. IMPACTS OF CAP ON EMPLOYMENT IN ALBANIA AND NORTH MACEDONIA tion, food processing and rural infrastructure might not generate immediate substantial economic effects, Change in employment but in the medium and longer terms, it would lead to NORTH Support for policy ALBANIA MACEDONIA an improvement in agri-food competitiveness, an in- crease of the currently low economic interdependence Pillar 1: Direct payments 6% 1% and, ultimately, a notable improvement in the econo- Pillar 2: Rural development programs 13% -3% my-wide growth and jobs. Within this context, an es- Pillar 2: Farm modernization 10% 1% pecially important issue relates to the increase of links Pillar 2: Food processing 10% 4% between agriculture and food processing, for which Pillar 2: Rural infrastructure -6% -2% there is certainly much room for improvement, espe- Pillar 2: Rural income diversification -2% 0% cially in Albania. Taking into account the employment Re-orientation of support (IPARD) 18% 0% and growth generating capacity of the food sector, Source: Psaltopoulos, D. (2017). and the significant needs for its modernization in both countries (which in turn are linked with the moderniza- the rest of the economy. In North Macedonia, higher tion needs of primary production), emphasis should be economic linkages developed between farm activity given to the exploitation of its economic potential. and the rest of the economy lead to the generation of significant economic impacts of farm support (see 52. To move from policy to economic impact, a number of Annex 1, Tables 1 and 2). In Albania, allocation of funds areas can and should be addressed to improve the perfor- towards Pillar 2 can bring a 13 percent increase in mance of the sector by creating an enabling environment for employment, with farm modernization and food pro- investment and job creation: cessing being important generators of employment due to their labor intensity. In North Macedonia, the a) Promoting compliance with international quality impacts are much lower (in proportional terms), with standards funds allocated to food processing having the largest relative impact of 4 percent increase in employment. 53. Ensuring compliance with public and private food safety and quality standards is a precondition for enter- d) Strengthening of economic interdependence in the ing high-value markets at home and abroad. As the retail food chain is critical for job creation and growth. sector becomes increasingly consolidated in the Western Support for investment measures which result into Balkans and the EU, compliance with both public and pri- demand for the output of sectors characterized by vate food safety and quality standards becomes a de facto low economic linkages (e.g. trade sector in Albania, barrier for producers and manufacturers to enter high-value construction sector in North Macedonia) generates markets. Agri-food manufacturers in the Western Balkans comparatively lower economic effects (and vice-ver- are required to implement HACCP-based food safety and sa). If economic linkages are already low within the quality management systems. While other public and food chain (e.g. Albania), doubling them does not re- private food safety and quality standards are applied vol- sult into significant effects for economy-wide output, untarily, WB countries have nonetheless been promoting incomes and jobs (and vice-versa). This particular their implementation and certification. Besides HACCP, the finding indicates the importance of pursuing policy most common certifications in the agri-food industry in the initiatives which would facilitate the strengthening Western Balkans cover food safety (ISO 22000, IFS, GMP, of economic interdependence in the food chain and BRC, FSMS), which are needed particularly for manufac- rural areas. For example, in North Macedonia, if the turers that aim to supply supermarkets in the EU directly, agri-food sector doubles its purchases of domestical- food quality management (ISO 9000) and environmental ly-produced farm products, employment in the econ- management concerns (ISO 14001).61 In general, ISO certifi- omy increases by 21 percent while also rising output cation rates increased across the Western Balkans between and value added by 16 percent (see Table 8). 2010 to 2013, but they have stagnated since. Across the WB 61 Djekic, I. et al. (2011). Quality and Food Safety Issues Revealed in Certified Food Companies in Three Western Balkans Countries, Food Control Journal Vol. 22, p1734. 27 TABLE 8. IMPACTS OF CHANGES IN THE MAGNITUDE OF DOMESTIC DEMAND Impacts compared to no change in policy (2013) Change in output Change in value added Change in employment ALBANIA Double livestock links 2% 2% 5% Double fruits & vegetables links 2% 2% 6% Double food chain links 3% 3% 9% NORTH MACEDONIA Double food chain links 16% 16% 21% Source: Psaltopoulos, D. (2017). region, the number of ISO 9001 certificates registered is well-positioned to help bridge the current supply gaps in per million inhabitants is lower than in the EU. Serbia has key EU export markets for organic products. Agriculture in the highest rate, while Albania, North Macedonia and the Western Balkans is less fertilizer-intensive than the EU Montenegro have the lowest.62 Compliance with interna- average of 149 kg per hectare of arable land per year.65 In tional food safety and quality standards requires compre- addition, the region’s smaller-scale farms and agribusiness- hensive knowledge and internal capacity for companies to es, in combination with competitive unit labor costs, lend adopt, maintain and manage (e.g. through self-audits) on a themselves well for more labor-intensive organic production day to day basis. In addition to the cost-efficient provision of systems. Despite a number of policy measures support- public food safety and quality inspections services, agribusi- ing organic certification, the area of agricultural land used nesses require access to finance for equipment upgrades as for organic farming remains limited: from 0.05 percent in well as local company technicians and external advisors to BiH to 0.7 percent in Montenegro in 2009. However, with manage the different compliance requirements associated an average annual growth rate of 57 percent in the period with international quality standards. 2005-2010 the development trend is extremely positive.66 The most significant organic produce common to almost all 54. Sustainability standards and certifications could pro- the countries of the region is that of small fruits (cherries, vide economic, social and environmental benefits for the strawberries, raspberries, blueberries and blackberries), ar- agri-food industry in the Western Balkans. International omatic and medicinal herbs and certain types of cereals.67 sustainability standards and certification systems can In recent years, Montenegro has made headway in planning strengthen the agri-food industry’s competitiveness by and implementing a range of agri-environmental support enabling access to productive and resilient supply chains, measures designed to strengthen sustainable agriculture, enhancing business reputation, adding market value and including incentives for organic agriculture. In addition, reducing both the operational and compliance costs as- North Macedonia has started to prepare for implementing sociated with environmental regulations.63 In particular, agri-environmental measures, but other WB countries are organic certification can be a source for value addition still to develop a framework to support agri-environmental and job creation in the broader agri-food sector (Box 5). policies. Albania and BiH have the greatest potential for im- The rapid rise in consumer demand for organic products provement when it comes to sustainable agriculture. in the EU so far outpaces supply considerably. As a result, excess demand in the EU is currently met through imports 55. Specialty products and origin labels can further dif- of organic products from third countries.64 The WB region ferentiate product offerings in high-value export markets. 62 OECD. 2016. Competitiveness in South East Europe: A Policy Outlook, Competitiveness and Private Sector Development, OECD Publishing, Paris. 63 Molenaar, J.W. and Kessler, J.J. (2017). The Business Benefits of Using Sustainability Standards – A Meta Review, Aidenvironment, Amsterdam, p4. 64 For example, the number of registered importers of organic produce in the EU grew from less than 500 to more than 3,000 in the period 2009-2012. 65 Fertilizer use lies between Montenegro’s 12 kg (thanks to the extensive non-fertilizer-intensive wine industry) and 99 kg in BiH. The only exception is Serbia, which uses 175 kg per hectare of arable land per year. 66 Znaor, D. and Landau, S. (2014). Unlocking the Future: Sustainable Agriculture as a Path to Prosperity for the Western Balkans, Heinrich Böll Stiftung, Zagreb, p45. 67 Grozdanic, R. (2013). Agribusiness and Agro-Industrial Strategies, Policies and Priorities for Achieving Higher Competitiveness, Employability and Sustainability in the Western Balkans Region, Friedrich Ebert Stiftung and European Federation of Food, Agriculture and Tourism Trade Union (EFFAT), Belgrade, p65. 28 BOX 5. ORGANIC FARMING BENEFITS AND COSTS Positive impacts of organic farming on the environment and climate resiliency are evident in the form of improved soil quality, ecosystem services, as well as ground and surface water. According to recent studies, organic farming has also demonstrated that it can yield more total food produce than conventional farming on the same amount of land. In addition, consumers pay a premium for organic food compared to conventional products as education, expected health benefits and greater availability positively influence consumer attitudes towards buying organic food. Organic farming also benefits the economy in terms of greater employment and business diversification. Organic farms are more labor intensive than industrials ones and create ad- ditional higher-skilled jobs downstream agri-food chains and beyond. This includes employment opportunities in post-harvest operations and processing (e.g. quality sorting, special handling, and storage), production of organic agricultural equipment and green inputs (e.g. natural fertilizers), transportation and logistics, agroecological research and extension and third party audit and certification. A comprehensive field survey of organic farming in the UK and Ireland found higher labor intensity per organic farm (i.e. 97 percent and 27 percent respectively) relative to conventional farms. The UK Soil Association analyzed the survey data and found that, on a weighted basis, organic farms averaged 32 percent higher labor requirements than comparable non-organic farms. On-farm employment gains included, in particular, casual and employed part-time labor inputs. Despite frequent yield decreases in the early years of organic implementation, organic farms are more economically profitable due to the reduction of production input costs, increased variety of total farm products and organic premium market prices. The main drivers underpinning the social and environmental benefits of organic and sustainable farming practices include the increased manual and mechanized labor inputs for more diverse cropping rotations; integration of crops and livestock in order to recycle organic wastes into soil nutrients; maintenance of crop residue and ‘green manure’ ground covers to reduce soil ero- sion; greater reliance on biological processes for pest and weed management; and many other agroecological farming methods. Significant investments are needed to make the transition from both the industrial farming practices of the developed world and from the more traditional, low productivity practices common in the developing world to more sustainable food production systems. Organic certification and inspection costs generally represent between 2 and 10 percent of the total costs of organic products in well managed operations, but there are cases where these costs have been as high as more than half of total costs. Studies therefore indicate the importance of certifying at the right scale, in particular through group and participatory certifica- tion processes, in order to effectively manage certification costs and reduce the risk of excluding smaller producers. Source: FAO (2012). Green Jobs for a Revitalized Food and Agriculture Sector, Natural Resources Management and Environment Department, Rome, p10-p12. In light of the individualization trend in consumer demand facturers exploit the diversity and manage the fragmenta- and the accompanying focus on more niche and target- tion that characterizes the agri-food sector in the Western ed products, specialty products and origin labels such as Balkans. International experience shows that success crit- Geographical Indications (GIs) have strong growth potential ically depends on strong collective action and self-organi- and provide an additional avenue to differentiate products zation by producers, clear geographical and social bound- in high-value export markets in the EU. A recent EU study aries, shared knowledge and awareness on GI processes, showed that 10 from the 13 GI-products analyzed obtained supportive national legislation, close coordination between a price premium compared to the corresponding standard all supply chain stakeholders (i.e. producers, manufacturers, good, but the price difference was less clear for producers government institutions and donors), implementation of who supply raw (versus processed) agricultural products.68 credible certification and control systems, use of protected The EU instruments governing GIs require collective action trademarks, as well as information and promotion cam- by producers for the registration and implementation of paigns to consumers. WB countries have extensive experi- GIs. GIs thus allow organized local producers to collectively ence in regards to GIs (example in Box 6). So far, however, define and manage production and processing quality stan- the socio-economic impact of GIs in the WB region has been dards, defend their products’ reputation and communicate limited mainly due to weak producer organizations and in- their value to consumers. They also help agri-food manu- ternal monitoring and control systems. 68 Areté (2013). Study on Assessing the Added Value of PDO/PGI Products - Executive Summary. Commissioned Study by the European Commission. Available at: http://ec.europa.eu/agriculture/external-studies/added-value-pdo-pgi_en.htm 29 BOX 6. FUTOG CABBAGE The Futog cabbage has become the first Serbian product to have a geographic certification mark. Producers achieved this certifi- cation, including previous successes related to preserving production, quality and building reputation, by effectively associating. The organization of producers and manufacturers of the Futog cabbage has benefited from project support from state institu- tions as well as donor agencies. Nevertheless, unlike others, this association has not only survived, but has continuously devel- oped thanks to persistent and visionary management, continuous spreading of partnerships, and knowledge promotion. After five years, about 50 producers and 6 manufacturers of the Futog cabbage succeeded in getting a higher price for their product with a geographic certification mark (20 percent compared to the hybrid). Through joint marketing, the association has created a network of support for its “brand“. At the same time, it acts as a guarantee and coordinator of the process of quality control with a view to preserve and promote the reputation of the product and thus the trust of the consumers. Source: Zivkov, G. (2013) Association of Farmers in the Western Balkan Countries, Policy Studies on Rural Transition No. 2013-1, FAO Regional Office for Europe and Central Asia, Budapest, p27. b) Facilitating well-functioning agri-food value chains and prices. While some partnership programs led to im- provements in employment and the generation of new jobs, 56. Commercial partnerships can forge close value chain the evidence is based on relatively small samples and varies coordination and align input supplies with markets’ de- strongly across value chains.70 mands. Well-functioning value chains help the agri-food sector to better create, deliver and capture market value by 57. Commercial partnerships in fragmented agri-food closely coordinating actions between upstream and down- value chains critically depend on strong producer organi- stream agri-food value chain stakeholders. Manufacturers’ zation. Modern producer cooperatives are organized around ability to deliver standardized food and beverage products a clear purpose, a well-defined market position, professional to consumers often depends on large scale changes in pro- and market-oriented service delivery to members, as well as ducers’ production (e.g. seed use, rootstock production, democratic controls by cooperative members over manage- varietal structure, natural resource management, etc.), ment and decision-making. Modern producer cooperatives processing, as well as marketing technologies and practic- strengthen smaller producers’ position in agri-food value es. Implementing such improvements requires long-term chains by facilitating joint procurement and supply of inputs, and comprehensive investments, technical assistance and enabling access to finance and cost-sharing of investments, coordination of public and private value chain stakeholders. sharing best practices and increasing bargaining power Commercial partnerships, such as the “productive alliances” with manufacturers, retailers, and traders. In addition, they introduced by the World Bank in Latin America, Africa and raise productivity levels by upholding production quality East Asia since the 2000s, have demonstrated to be effec- standards, consolidating production outputs, conducting tive platforms for coordinating these types of actions across primary processing and joint marketing final products. the value chain.69 Evidence from surveys and evaluations Producer associations, for their part, enable smaller produc- has shown that partnerships led to increases in production ers to participate and weigh into public policymaking pro- volumes, productivity, access to improved inputs and pro- cesses that affect value chain development. They can also ductive equipment, as well as producers’ integration into improve smaller producers’ business management capacity new markets. Producers also benefited from better product by providing professional assistance and support. In general, quality and diversification, which increased sales volumes various legal and institutional obstacles continue to hinder 69 Productive Alliances usually involve a group of commercially-oriented small producers, one or more large buyers and the public sector. They co- ordinate their activities on the basis of a “business plan” which outlines the investment, technical assistance and business development needs of the producers to upgrade and strengthen their linkage with the buyer(s). Business plans are implemented through sub-projects financed by public grants on the basis of transparent and technical selection criteria and matched by the beneficiary producers and in some cases also by the buyer(s). 70 World Bank. 2016. Linking Farmers to Markets through Productive Alliances: An Assessment of the World Bank Experience in Latin America, World Bank, Washington, D.C., pp. 1-4. 30 the development of modern producer organizations in the efficient transactions and products flows in agri-food value Western Balkans.71 Although there are no clear regional sta- chains. Industrial clusters, which are geographic concen- tistics, survey data for Serbia and BiH suggest that the struc- trations of businesses, business support service providers ture of agricultural cooperatives in the Western Balkans is and associated institutions working in a related value chain dominated by micro-cooperatives and that there is great (Figure 17), can help increase value chains’ productivity, variation in their type and level of development.72 Despite efficiency and innovation by virtue of location-specific ex- the progress made in recent years, the number of modern ternalities and synergies. These include specialized input cooperatives, including specialized cooperatives that are suppliers and skills, enhanced competition, knowledge involved in some form of treatment or processing, remains spillovers, cross-sectoral linkages, more cost-efficient de- small and their overall economic significance is limited.73 livery of public goods and better coordination and informa- Although there is a great variety of producer associations tion flows between public and private sectors both inside in the Western Balkans, including associations representing and outside the value chain.74 While industrial clusters specific (group) interests as well as inter-branch associa- often evolve spontaneously over decades, well-designed tions representing the interests of all the stakeholders in a cluster initiatives involving public-private dialogues at given value chain, many cease to exist shortly after being all levels of government can accelerate the process and established as a result of overly ambitious goals, poorly de- catalyze complementary development. Several WB coun- fined roles, or political interferences. tries have developed cluster initiatives, including Serbia, North Macedonia (wine, lamb and cheese clusters), and 58. Agri-food industry clusters could strengthen sector Albania (meat processing, herbs and spices).75 However, competitiveness by linking key support services to agri- recent research suggests that while cluster members in food value chains. Well-functioning agri-food value chains Serbia and North Macedonia recognize the benefits from depend on the provision of quality agribusiness support improved access to information, business partners and services, including physical input supplies (e.g. seeds or supporting institutions, they reportedly have not gained packaging materials), technical services (e.g. field spray- better access to suppliers, skilled labor or financial institu- ing, storage, transport, laboratory testing, management tions.76 Furthermore, all WB countries have set up special training, market research and processing) and financial economic zones (SEZs), science and technology parks and services. In fact, business support service providers (which other similar concepts. However, the administrative capac- can be private, public or civil society actors) play a crit- ity to implement these incentives credibly and consistently ical role in facilitating value adding processes as well as is often weak. 71 Cooperative legislation in the Western Balkans constrains the development of modern cooperatives by laying out overly complex, detailed and pre- scriptive rules as opposed to regulating the formation and functioning of cooperatives. In addition, cooperative assets are usually considered common property and legislation does not distinguish profits derived from mutual trade from profits derived from cooperative assets. This prevents cooperative members from investing different amounts in acquiring assets and distributing profits accordingly. Furthermore, tax systems often do not differentiate between agricultural cooperatives and other agribusinesses, which renders cooperative members subject to double taxation. Producers in the Western Balkans therefore tend not to invest in producer cooperatives, but opt for the establishment of limited liability companies instead. Moreover, legal trade through cooperatives is also discouraged by the absence of VAT payments at the level of green and wholesale markets, which misdirects agricultural production, in particular fruit and vegetables, towards the informal sector. Finally, governments generally do not provide stable support programs to promote and incentivize investments in producer groups. See Zivkov, G. (2013) Association of Farmers in the Western Balkan Countries, Policy Studies on Rural Transition No. 2013-1, FAO Regional Office for Europe and Central Asia, Budapest, 35pp. 72 Older cooperatives are usually administered by employees (as opposed to farmers) and they are primarily focused on managing cooperative assets instead of market development. Most cooperatives in the Western Balkans operate in a manner similar to private businesses. They provide services to farmers, but they do not include them in decision-making processes opting for sub-contracts instead. A survey conducted by the Ministry of Agriculture of Serbia in 2010 showed that agricultural cooperatives have 4 to 5 times more contract farmers than cooperative members. Moreover, since these “pri- vate” cooperatives mainly focus on consolidating cereal and industrial crop production outputs for manufacturers, they often lack assets, which prevents them from offering credit instruments. See Zivkov, G. (2013) Association of Farmers in the Western Balkan Countries, Policy Studies on Rural Transition No. 2013-1, FAO Regional Office for Europe and Central Asia, Budapest, 35pp. 73 Zivkov, G. (2013). Association of Farmers in the Western Balkan Countries, Policy Studies on Rural Transition No. 2013-1, FAO Regional Office for Europe and Central Asia, Budapest, p20. 74 World Bank. 2009. Clusters for Competitiveness – A Practical Guide & Policy Implications for Developing Cluster Initiatives, International Trade Department, PREM, World Bank, Washington D.C., p1. 75 Grozdanic, R. (2013). Agribusiness and Agro-Industrial Strategies, Policies and Priorities for Achieving Higher Competitiveness, Employability and Sustainability in the Western Balkans Region, Friedrich Ebert Stiftung and European Federation of Food, Agriculture and Tourism Trade Union (EFFAT), Belgrade, p30. 76 VII Balkan and Black Sea Conference. 2016. Days of Clusters 2016: Creating Cluster-based Economic Development for a Sustainable Region, 22-24 September, Ohrid, North Macedonia, Conference proceedings available at: https:/ /blacksea-horizon.eu/object/document/696/attach/1_DofC-2016- Conference-Proceedings.pdf 31 FIGURE 17. EXAMPLE OF AGRI-FOOD INDUSTRY CLUSTER Seeds Nurseries Crop Processing Equipment Fertilizer, Insecticides, Herbicides State Government Transportation and Donor Agencies Farm Equipment Packaging Services Storage Facilities Public Relations, Advertising Growers Processors Irrigation Technology Specialized Publications Cluster of Other Agricultural Products Financial Services Educational, Research and Cluster of Buyer/ Trade Operations Consumer Industries Source: World Bank (2009). Clusters for Competitiveness – A Practical Guide & Policy Implications for Developing Cluster Initiatives. International Trade Department, PREM, World Bank, Washington D.C. c) Incentivizing innovation and entrepreneurship increasing number of policy instruments and actors involved in their innovation systems. In this context, they are empha- 59. Public funding for research and innovation must be sizing the need for international and regional co-operation. increased on the basis of well-coordinated innovation poli- North Macedonia is currently the most advanced in terms of cies and systems. Under the European Framework Program moving forward its innovation agenda. It adopted a dedicated for Research and Innovation, “Horizon 2020”, the EU aims to national innovation strategy in 2013, established independent invest 3 percent of the EU’s GDP in R&D by 2020. Since July funding agencies and created national policy coordination 2014, all countries of the Western Balkans, with the exception mechanism in the form of a National Committee for Innovation of Kosovo, have been “associated countries” of Horizon 2020. and Entrepreneurship under the Prime Minister’s Office, as However, while increasing between 2009 and 2012, the WB well as an Advisory Group for Innovation. Although Serbia and countries (except for Serbia) currently invest less than 0.5 per- Albania have set up independent agencies to implement inno- cent of their GDP on R&D compared to the EU average of 2 vation programs, other countries still manage implementation percent. On average, 10 percent of gross domestic expenditure through line-Ministries.77 As a result, the relationship between on research and development in the region stems from inter- national innovation policies and agri-food innovation instru- national sources (primarily Horizon 2020), which is the same ments remains weak in most WB countries. percentage as in the EU countries. In order to enhance the im- pact of public funds for research and innovation, government 60. Collaborative research and innovation can further expenditures must be underpinned by strong policy gover- enhance the socio-economic impacts of public funding nance systems. This includes the development of dedicated in- for research and innovation. Collaboration between gov- novation strategies, national policy co-ordination bodies (with ernments, research institutions and industry are playing an representatives from relevant ministries, academic institutions increasingly important role in developing innovation and and the private sector), independent implementing agencies transferring technologies that are beneficial to both industry and funding instruments, and policy monitoring and evaluation and society. EU countries have developed and implemented systems. Most of the countries in the Western Balkans are several mechanisms to overcome stakeholder coordina- preparing general innovation strategies to better manage the tion challenges in their innovation systems. They include 77 OECD. 2016. Competitiveness in South East Europe: A Policy Outlook, Competitiveness and Private Sector Development, OECD Publishing, Paris, p137. 32 innovation vouchers,78 business-led collaborative grants packaging (e.g. physical packaging, provision of consumer programs79 (example in Box 7), technology transfer offic- information), marketing methods, and rebranding, as well as es,80 joint innovation and technological networks, as well as organizational and managerial changes. Innovation relevant regional consortia-led projects. In the WB region, few insti- to the agri-food industry can moreover take place in other tutions and policy instruments currently support innovation segments of the agri-food chain, including suppliers and collaboration between the business and academic research related industries such as the chemicals and packaging sec- communities. Although WB countries have introduced tors.84 As a result, agri-food SMEs require targeted technical some form of competitive project funding in addition to in- and investment support to improve their processing and stitutional funding to research institutions, very few have in- marketing capacities in line with market needs. cluded patents or co-operation with industry as grounds for awarding projects. Montenegro is the only economy in the 62. Access to finance remains the most important con- region to have introduced a dedicated collaborative grant straint to innovative agri-food SMEs and start-ups. While scheme.81 In addition, beyond a pilot scheme in Kosovo, bank financing is relatively well developed throughout the innovation vouchers have not been used systematically in region and is businesses’ primary source of finance, access the Western Balkans to build linkages between companies to bank finance for SMEs and start-ups is generally con- and researchers.82 Finally, although universities in the WB strained by high interest rates, limited competition, complex region have started setting up technology transfer offices, procedures and collateral requirements.85 Moreover, funding they remain the most underdeveloped form of institutional for research and innovation is particularly difficult to access support for innovation. as it is often too long-term and high-risk for investors. Some WB countries have been providing grants for private 61. Targeted technical and investment support for agri- sector research and innovation activities. For example, the food SMEs and start-ups is required to facilitate mar- Innovation Fund of Serbia has been supporting business ket-driven innovation. According to a study conducted by research and innovation activities since 2012 and includes FoodDrinkEurope in 2014, consumer needs and expectations an agri-food sector window (see Box 8). North Macedonia, are the main driving forces for innovation in agri-food value for its part, has recently set up its Fund for Innovation and chains.83 In general, innovation in the agri-food industry goes Technology Development. However, there are currently well beyond traditional R&D focused on new or improving few other policy instruments to stimulate private sector re- existing products. It also includes the implementation of search and innovation activities. While technology incuba- new processing or formulation techniques (e.g. new types of tors86 are the most developed form of institutional support conservation, additives and flavors), logistics and food chain for innovative start-ups, these initiatives tend to be largely management arrangements (e.g. farm-to-fork approach), donor-funded and often struggle to achieve sustainability. 78 Innovation vouchers are small lines of credit that enable SMEs to purchase services from public knowledge providers. They are designed as incentives for small firms to introduce innovations (new products, processes or services) in their business operations. Innovation vouchers are also important as they afford SMEs opportunities for greater exposure to public knowledge providers such as universities and research organizations. They thus help SMEs overcome obstacles like their perceptions of public institutions as irrelevant to business or their reluctance to take on the costs of identifying relevant providers. 79 Cooperative grants programs give businesses opportunities to launch joint research initiatives with researchers. Typically, they require the joint participation of research organizations and businesses and often require some level of co-financing. Such partnerships can be short- or long-term and are often centered on a firm-specific problem. 80 Technology Transfer Offices (TTOs) assist public research organizations in managing their intellectual assets and transforming them into benefits for the wider economy and society at large. TTOs also help facilitate the transfer of knowledge to the private sector either through spin-offs or licensing agreements. They also facilitate contractual research and assist in the protection and management of intellectual property, all of which generate reve- nues for higher education. TTOs have recently taken on another function—the funding of proof-of-concept type activities through their own seed funds. 81 Under its Higher Education and Research for Innovation and Competitiveness Project (HERIC), R&D funding is given to consortia where there is at least one domestic and one foreign R&D institution, and one business partner. 82 OECD. 2016. Competitiveness in South East Europe: A Policy Outlook, Competitiveness and Private Sector Development, OECD Publishing, Paris, p159. 83 FoodDrinkEurope (2014). Data & Trends of the EU Food Industry 2013-2014. 84 Product packaging innovations have become particularly important to food and beverage manufacturers in enabling the success of new products by building stronger connections with consumers and reducing waste. Innovations focused on packaging represented 30 percent of innovations in the mod- ern retail sector in the EU in 2012 compared to just 6 percent in 2004. By contrast, the shares of new product varieties and range extensions decreased from 40 percent in 2004 to 30 percent in 2012. 85 For example, foreign and domestic banks continue to apply interest rates that are higher than the EU average of around 6.3 percent. While rates in Serbia exceed 18 percent, they hover around 9 to 10 percent in the other SEE economies. 86 Examples include the Innovation Centre in Kosovo, the Innovation Centre in Banja Luka and the Business Technology Incubator of Technical Faculties in Belgrade. 33 BOX 7. THE UK SUSTAINABLE AGRI-FOOD INNOVATION PLATFORM The Technology Strategy Board (now called InnovateUK) is a business executive-led, non-department public body reporting to the Department for Business, Energy and Industrial Strategy dedicated to promote research, technology, and innovation (http://www.innovateuk.org). The Sustainable Agri-food Innovation Platform was launched by the Technology Strategy Board in October 2009 in partnership with the Department for the Environment, Food and Rural Affairs (Defra) and the Biotechnology and Biological Sciences Research Council (BBSRC). Over five years, it invested up to £90 million in business-led collaborative projects (matching the investment by industry) to develop new technologies in support of global food security and environmen- tal sustainability. Priority areas included crop protection (2009), sustainable protein production (2010), food processing and manufacturing (2011), measurement technologies (2012) and engineering for agri-food (2013). The competitive call in 2014 in- vested over £11 million in business projects to improve the resource efficiency and resilience of the food and drink supply chains. The aim was to help companies develop innovative ways to: reduce the production of waste; use resources such as energy, water and raw materials more efficiently; improve the productivity of food manufacturing and processing operations; improve the resilience of the food supply chain by making better use of resources; and reducing environmental stresses on food systems. Source: https://connect.innovateuk.org/web/sustainable-agriculture-and-food-innovation-platform BOX 8. SERBIA’S INNOVATION FUND The Innovation Fund in Serbia was established by the Law on Innovation Activity in 2011, and is funded by the EU’s Instrument for Pre-accession Assistance (IPA) with expert support from the World Bank. The Fund’s main goal is to support innovation in science and technology, and commercialize technology transfer in Serbian enterprises. In three years of functioning it has spent €6 million on 53 projects, and continues working on new projects to support commercialization of research and development (R&D) through encouraging collaboration among stakeholders. The Innovation Fund provides financial help for R&D and innova- tion in commercial enterprises in Serbia. It is among the few sources providing risk financing, as other sources of private funding for businesses in initial stages of development, such as business angels’ networks, crowd funding and venture capital, barely exist in the country. It therefore complements existing government support for innovation projects. The Fund operates through two different programs: mini grants and matching grants. Both programs require applicants to be ma- jority owned Serbian enterprises, and the projects can be targeted at any field of science and technology as well as other sectors. Mini grants are aimed at early-stage micro- and small enterprises that have market-oriented technological innovation with a high potential for commercialization. Projects must be designed to be completed in under a year, and those receiving awards get an unconditional grant amounting to a maximum 85 percent (or €80,000) of the total funds necessary for successful execution. Matching grants target existing micro-, small- and medium-sized enterprises (defined by a revenue ceiling in the last two years) looking to scale up their production and translate research efforts into commercial projects. A project must be designed to be completed in under two years and the Fund is willing to dispense a maximum of 70 percent (up to €300,000) of its cost, with the remainder having to be secured by a co-financer independent from the Fund. Grants in this category are not unconditional. If the project is successful, the applicant will be required to pay royalties or pay back the grant with interest. The risk of not succeeding is shared between the applicant and the Fund and, in cases of unsuccessful commercialization, no payment is required. In three years of functioning, the Fund went through four public calls for projects, with 471 applications, mostly from hi-tech companies in ICT, energy efficiency and nanotechnology, but also food and agriculture, machine and mechanical engineering and electromechanical device production. It disbursed all planned funds, equally divided between mini grants and matching grants. By 2014 the results had been encouraging. Out of 53 awarded projects, 23 patent applications had been submitted (plus 8 trademark and 6 copyright applications), 13 companies had established new business relationships or partnerships, 11 com- panies had generated revenue from the sale or lease of products or services, and 7 companies had established strategic inter- national cooperation. Currently, the Innovation Fund is preparing a Serbia Research, Innovation and Technology Transfer Project, supported by €6.9 million from IPA funds, with the goal of promoting technology transfer and commercializing R&D efforts by stimulating collaboration between academia and industry, in addition to offering collaborative R&D grant schemes. The Fund is also actively representing the government of Serbia in the dialogue and designing of new financial instruments for private sector development within the framework of the Western Balkans Enterprise Development and Innovation Facility. Source: Sanfey, P. et al. (2016). How the Western Balkans can catch up, EBRD Working Paper No. 186, London, p43. 34 63. Successful innovation among agri-food SMEs and facilitate school-to-work transition as it gives young people start-ups could be further promoted by building an en- valuable professional experience and the opportunity to ac- trepreneurial culture and strengthening financial literacy. quire practical skills. WB countries have adopted policy doc- Entrepreneurial learning is not only a priority in the Small uments articulating medium- and long-term visions for their Business Act for Europe (2008), but also in the EU’s overar- VET systems. They also perform skills gap analyses using the ching Europe 2020 strategy and its Entrepreneurship 2020 outcomes of business surveys conducted by employment Action Plan. Despite increasing efforts to incorporate entre- services to inform the design of short-term training schemes. preneurial learning in their education and training systems, However, current systems are ill-equipped to identify agri- WB countries still face challenges in promoting a culture of food sector-specific needs. The business community should market entrepreneurship. In particular, policy coordination also take a more active role in VET policy making and partic- and partnerships between key public and private players ular attention should be given to quality assurance policy and must be further developed to align entrepreneurial learning practice in work-based learning.90 Sector-based skills councils with sector-based education strategies, SME development, could be established that use the outcomes of training needs employment and R&D. Furthermore, aspiring entrepreneurs analyses as a basis for a more evolved dialogue about train- are often ill-informed on financial markets and the financing ing requirements between government, business and (small) options that are available to them due to a lack of financial business support service providers (example in Box 9). literacy and investment-readiness throughout the region.87 Financial literacy training could educate entrepreneurs in the e) Promoting foreign direct investment and trade workings of the financial system, help them understand the different types of financing instruments available and how 65. Foreign direct investment can play an important role in to access them. Programs could also include courses on how transferring technology and improving access of agri-food to design and present business plans to possible investors. businesses to international markets. While it may be unre- While Serbia and Kosovo have introduced financial literacy alistic to expect WB countries to become innovation leaders and investment-readiness programs,88 North Macedonia in the near term, businesses could move closer to the tech- and Albania are in the early stages of program development. nological frontier by adopting technologies that have been National strategies and policies addressing financial readi- developed elsewhere with, occasionally, some adjustments ness have not yet been put in place in BiH. to the local market. Foreign direct investments (FDI) can be an effective vehicle for this kind of transfer of technology d) Building sector-specific human capital and know-how to the region. They also enable businesses to participate in the international value chains often associ- 64. Education and training programs must be closely ated with foreign investments, which may in turn incentivize matched with agri-food industry needs. WB countries further innovation compared to businesses involved in more have a well-educated workforce at the secondary level, but local activities. Governments could further facilitate FDI by quality issues and higher-level skills gaps persist.89 Countries establishing one-stop shops for foreign investors to obtain in the Western Balkans generally lack a coordinated ap- the permits and support needed to establish their business proach to matching education outcomes with labor market operations, ease foreign investors’ access to land, and es- needs. Employment in the agri-food industry could thus be tablish FDI-SME linkage programs to help foreign investors strengthened by using skills gap analyses to introduce cur- adapt to local markets and support domestic suppliers. All riculum-based solutions in the education systems of WB WB countries have created investment promotion agencies, countries. VET systems are another key part of efforts to but they are still in the process of establishing services such 87 OECD. 2016. Competitiveness in South East Europe: A Policy Outlook, Competitiveness and Private Sector Development, OECD Publishing, Paris, p128. 88 Between 2014 and 2020, Serbia is running an investment-readiness program as part of the Integrated Innovation Support Program, funded by the EU’s Pre-Accession Fund. Kosovo, for its part, operates a voucher scheme for companies to utilize for training purposes, while the government has devel- oped a program specifically aimed at female and young entrepreneurs. 89 Whereas the share of the labor force with a higher education in the WB countries (with the exception of Montenegro) is about half that of the EU average, the share of workers with a secondary education is relatively larger in WB economies, particularly in BiH. However, PISA data indicates that student performances in mathematics, reading and science in SEE are well below the OECD average in Albania, Montenegro and Serbia. The share of science, tech- nology, engineering and mathematics (STEM) students in tertiary education, which is an important indicator capturing human capital crucial for adopting and creating technologies, is a bit lower on average than in EU countries. The exception is Serbia, which has double the share of students in this category compared with the other WB countries given the importance of Belgrade as a regional university center. 90 OECD. 2016. Competitiveness in South East Europe: A Policy Outlook, Competitiveness and Private Sector Development, OECD Publishing, Paris, p103. 35 BOX 9. AUSTRALIA’S AGRI-FOOD INDUSTRY SKILLS COUNCIL Industry skills councils in Australia are (i) recognized and funded by the government; (ii) governed by independent and indus- try-led boards; and (iii) non-profit companies limited by guarantee. Their role is to focus on: (i) providing integrated industry intelligence and advice to government and enterprises on workforce development and skills needs; (ii) actively supporting the development, implementation and continuous improvement of high quality training and workforce development products and services, including training packages; (iii) providing independent skills and training advice to enterprises, including matching identified training needs with appropriate training solutions; (iv) working with enterprises, employment service providers, regis- tered training organizations and government to allocate training places; and (v) engaging with State and Territory Governments, State and Territory industry advisory bodies and peak representative bodies in their area of industry coverage. The Agri-Food Industry Skills Council was established in May 2004 as the peak body for agri-food industry skills and workforce development in Australia. The council represents the agri-food industry through its 14-member private sector board and five industry standing committees representing the broad industry sectors (food processing, rural and related industries, meat, seafood, racing). The council’s strategic intent is to improve the business performance of the agri-food industry through the development and implementation of innovative skill and workforce solutions. It operates in close partnership with these sectors to sustain and simplify high-quality, nationally-recognized training products and services. The council also seeks to ensure that training providers deliver outcomes that serve industry needs. The council reports to the Federal Government for funding and operational performance through the Department of Education, Science and Training. Source: http://www.ivet.com.au/a/35.html as one-stop shops and linking foreign investors with SME promotion services provided by specialized agencies may supplier databases. In addition, the design and promotion include the development of single portals that provide mem- of FDI incentive schemes are not fully developed, strategic bers with up-to-date information on standards, regulations investor targeting is still an emerging practice and aftercare and other marketing requirements (Box 10). Services may services are limited. Although foreign investors are generally also include support to accessing trade finance or export in- allowed to purchase or lease farm land, administrative pro- surance. While all WB countries have export promotion pol- cedures for doing so are often more burdensome for foreign icies in place, their level of implementation varies.92 Lastly, than for domestic investors and some countries may restrict agri-food exports can be facilitated by streamlining customs foreign ownership of certain types of land to ensure food and border crossing procedures. While WB countries have self-sufficiency or control inflation.91 made significant progress in reducing time and costs to import and export, important administrative barriers re- 66. Export promotion and trade facilitation measures can main, especially with respect to enquiry points, customs further boost agri-food export growth. In addition to pro- documentation, automation and the implementation of risk- moting compliance with international food safety and qual- based customs procedures and processes.93 ity standards, agri-food exports can be supported through promotional activities and campaigns such as participation 67. Digital marketplaces could help food and beverage in trade fairs, missions and buyers forums. Success of these manufacturers forge direct links with buyers and con- activities depends above all on a clear stance on the posi- sumers. While digitalization has been a growth driver in the tioning of national product offerings abroad, in combination distribution of food and beverages, the agri-food industry is with an in-depth understanding of consumer preferences generally somewhat lagging behind leveraging e-commerce and other requirements in the export markets. Given the platforms (Box 11). However, food and beverage manufactur- level of expertise and wide range of services involved, many ers could use online marketplaces as effective tools to sell countries have created specialized agencies (e.g. ApexBrasil, on a business-to-business or business-to-consumer basis. ProChile) to support the private sector on exports. Export First of all, e-commerce platforms enable manufacturers to 91 OECD. 2016. Competitiveness in South East Europe: A Policy Outlook, Competitiveness and Private Sector Development, OECD Publishing, Paris, p43. 92 North Macedonia and Serbia have the most complex programs, offering a wide range of services and export promotion activities. Albania and Montenegro have integrated export promotion programs, but they are more limited and, particularly in Montenegro, financial support for them has declined. BiH and Kosovo have only a limited export base and their export promotion initiatives are conducted on an ad hoc basis. 93 OECD. 2016. Competitiveness in South East Europe: A Policy Outlook, Competitiveness and Private Sector Development, OECD Publishing, Paris, p73. 36 BOX 10. AGRI-FOOD PROMOTION PORTAL A new online tool has been launched to help European agri-food producer organizations in their efforts to promote their prod- ucts. The new agri-food promotion portal is managed by the Consumers, Health, Agriculture and Food Executive Agency (CHAFEA) on behalf of the European Commission, and is a designed to be a one-stop-shop for organizations to find out how to get EU funding for their promotion programs, search for potential program partners and find useful information on entering new export markets. Interested visitors will find a wealth of information on a wide range of useful topics, from the rules on develop- ing promotional programs to networking techniques designed to help find potential partners. They will also find all the latest information on events and campaigns organized by the Commission, mainly outside the EU, and learn how to go about joining Commissioners’ high-level visits to potential new markets. The new portal is also designed to help SMEs with information about market access and market entry, protection of intellectual property rights, sanitary and phytosanitary measures (on plant and animal health), market research and other vital information for anyone looking to push their products into new export markets. Designed to be an interactive tool, the portal offers tailor-made webinars to help organizations design their promotion activities and share examples of current campaigns to help inspire them. It also allows registered organizations to find potential partners through an online ‘speed dating’ tool. Source: CHAFEA, Promotion of Agricultural Products. Available at: http://ec.europa.eu/chafea/agri/ BOX 11. E-COMMERCE – A PROMISE UNFILLED FOR THE AGRI-FOOD INDUSTRY? The internet creates immediate opportunities for food and beverage manufacturers to reach both B2C and B2B. Datassential, a Chicago-based food research firm, recently examined the food e-commerce market and identified three different markets: (i) prepared meal delivery; (ii) meal kit delivery; and (iii) grocery/packaged goods delivery. E-commerce has expanded rapidly as retailers and other marketers of consumer packaged goods offer consumers the ability to shop online, letting them shop when and where they want. The agri-food industry, however, has been the slowest major consumer sector to expand into e-commerce growth, due to issues such as freshness, product damage, low margins compared to other consumer products and logistical challenges. However, a review of food and beverage e-commerce initiatives suggests that the agri-food industry’s e-commerce challenge is a marketing one more than a logistics one: while logistics play an important role in the economics of e-commerce, the e-tailers that best understand consumer needs are likely to win the future. Since the advent of e-commerce, B2C e-com- merce players have expanded into B2B, and vice versa. However, because differences exist in the economics of warehousing, inventory management, order fulfillment and delivery functions for B2C and B2B, food and beverage manufacturers must decide which of these audiences to pursue. Source: http://www.foodlogistics.com/article/12021908/food-and-beverages-push-into-e-commerce-raising-questions-for-the-supply-chain reach and communicate with businesses and consumers agriculture and more will work in upstream segments of the directly, build brand loyalty and gain feedback about ex- value chain. In the EU-15, for example, less than 40 percent isting and new products faster and more cost effectively.94 of the workforce employed in the agri-food sector is involved Digital marketplaces also create new opportunities for the in primary production, whereas more than 60 percent is in- market entrance of smaller, single-focus food and beverage volved in value adding manufacturing and service activities manufacturers. Finally, they offer the possibility of produc- (Figure 18). There thus remains significant scope in all WB tion-on-demand, which may help the agri-food industry countries for further transforming their agri-food sectors into to micro-manufacture in line with buyer and consumer purveyors of decent jobs upstream of core agri-food value demands. chains. However, even if such transformation creates new and more rewarding agri-food system jobs, the sector alone f) Diversifying the rural economy is unlikely to absorb all the current surplus labor in rural areas. Complementary development initiatives focused on creat- 68. Successful agri-food sector transformation depends on ing diversified and knowledge-based rural economies that the creation of employment opportunities upstream of agri- provide decent jobs beyond core agri-food value chains are food value chains and beyond. As national economies and needed to ensure success. agri-food sectors modernize, less people will work in primary 94 https://ec.europa.eu/research/innovation-union/pdf/Six_perspectives_on_Retail_Innovation_EG_on%20Retail_Sector_Innovation_web.pdf 37 FIGURE 18. SHARE OF AGRI-FOOD SECTOR EMPLOYEES BY AGRI-FOOD SUB-SYSTEM, 2012 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% North Macedonia Albania BiH Serbia Montenegro EU-11 EU-15 EU-28 Agriculture Food, beverage and tobacco manufacturing Food services Source: : ILOSTAT, FAOSTAT, UNIDO. 69. Leveraging the agri-food sector’s multiple functions food as an immaterial cultural heritage, which can enhance and cross-sector linkages can be a powerful driver for the reputation of destinations worldwide and differentiate diversified and knowledge-based rural economies. The po- locations. Specialty foods are thus becoming an essential tential of the agri-food sector to unlock broad-based growth component in destination choice motivation and gradually and decent jobs in rural areas is significant. Food is not only replacing geographical location as part of the destination an industry, but also a social, cultural and health commod- marketing mix.96 By linking food tourism, which is perceived ity, which has the power to connect people of various ages, as a high-yield market, to other products such as cultural cultures, religions and social backgrounds with local cultures and natural heritage sites, the Western Balkans could pro- and landscapes. The agri-food sector is also one of the most vide a comprehensive tourism offer. cross-cutting sectors that links with, among others, the areas of biotechnology, information and communication 70. Participatory development approaches that are sup- technologies (ICT), research and education, transport and ported by different levels of Public Private Partnerships logistics, tourism, health and wellbeing, natural resource are key to integrating modern agri-food value chains in the management, sustainability innovation, and cultural and broader rural economy. Given the wide-ranging character- creative industries. The linkages between the agri-food and istics of rural areas, there is no “one-size fits all” approach to tourism sectors are particularly relevant in the context of the integrating modern agri-food value chains inside diversified Western Balkans given that the tourism sector contributes and knowledge-based rural economies. In fact, a mix of ap- significantly to the regional economies.95 In general, the proaches and tools currently exists to support place-based, OECD revealed that food can play an important role in the cross-sectoral development strategies. At the local level, the development of tourism services given that it often com- so-called LEADER approach has been a key component of prises 30 percent or more of tourist expenditure and this the EU’s rural development policy for more than 20 years. money is regularly spent directly with local businesses. As a It constitutes a bottom-up method for involving local pub- result, tourism’s economic impact can be important not only lic, private and civil society partners in rural communities for businesses that directly provide food for tourists (such in shaping local development through so-called “Local as hotels, restaurants and attractions), but also throughout Action Groups” (LAG). A new term, “Community-Led Local the agri-food value chain, especially if the food provided is Development” (CLLD), is now used for a wider application supplied locally. Furthermore, a recent report released by of the LEADER approach.97 At the regional level, “smart the World Tourism Organization stresses the importance of specialization” is a new policy approach to regional devel- 95 In 2013, receipts from international tourists amounted to 21 percent of GDP in Montenegro and 13 percent of GDP in Albania. 96 Cavicchi, A. and K. Ciampi Stancova (2016). Food and gastronomy as elements of regional innovation strategies, European Commission, Joint Research Centre, Institute for Prospective Technological Studies, Spain. 97 Since 2014, it is possible for a single Local Development Strategy (LDS) to be supported by several EU funds (known as multi-funded CLLD) in order to: (i) enable LAGs to comprehensively integrate local needs and solutions; (ii) enable Leader-type support to be better coordinated with local develop- ment support from other EU funds; and (iii) reinforce the links between rural, urban and fisheries areas. 38 opment and regional innovation planning. This approach is ping into their core competences and combining them with grounded in a so-called Entrepreneurial Discovery Process other skills and knowledge inputs with a view to create new (EDP), which builds on region-specific assets, strengths, combinations that foster unique areas of activities.98 Agri- potentials, capacities, critical mass and expertise. A specific food related priorities are one of the most prominent priority characteristic of the approach is its focus on the diversifi- areas selected by EU countries and regions as part of their cation of regional economies alongside specialization. The smart specialization strategies, along with Key Enabling central idea is that a limited number of areas of activities is Technologies (KETs), health, energy and the digital agenda selected through the EDP to stimulate regional growth, job (example in Box 12).99 The sub-areas most frequently se- creation, and collaboration among research and knowledge lected included agri-food new technologies (23 percent) institutions, businesses and investors. Regional entrepre- followed by agri-food and tourism (20 percent) and food neurs who are active in research, development and business, with higher added value (13 percent).100 drive the identification of new business opportunities, tap- BOX 12. THE FOOD SMART SPECIALIZATION STRATEGY OF LAZIO, ITALY A strong relationship between food and local territory is an expression of tradition and culture in the Italian region of Lazio. Food is functional and complementary to tourism, cultural activities and health, which are essential economic activities in the region. The potential for cross-fertilization with Key Enabling Technologies (ICT, nanotech, new materials, biotechnology, etc.), life science, environment and the green economy has been identified as crucial for innovation and technology advancement. Agri-food has been identified as a smart specialization priority through an entrepreneurial discovery process carried out in focus groups involving representatives of the business community, business associations, research institutions and local universities. The entrepreneurial discovery process was complemented with the results of the regional eco-system analysis and fieldwork outcomes: Lazio Deli98 and The Call 4 Innovators@EXPO 2015. In the region of Lazio, there are approximately 3,400 agri-food enterprises that employ approximately 16,626 workers. The larg- est number (2,656 agricultural companies out of which 329 with direct sales) is concentrated in the capital city of the region — Rome. This makes the city one of the largest agricultural municipalities in Europe. The agri-food sector in Lazio represents 5 per- cent of the national turnover per year and 3 percent of the total wealth of the entire regional economy. Export of food products accounts for €580 million (3.3 percent of total manufacturing export). The R&I system is also well supported by a large number of academic and research institutes including the CRA (Council for Research and Experimentation in Agriculture), AINRAN (National Research Institute for Food and Nutrition)—now CRA-NUT—, INEA (National Institute of Agricultural Economics), ARSIAL (Regional Agency for Development and Innovation of Agriculture of Lazio), ENEA (Italian National Agency for New Technologies, Energy and Development sustainable economic), CNR (National Research Council), IZSLT (Instituto Sperimentale Zooprofilattico Lazio and Tuscany) and Agri BIC Lazio (an incubator of food and agriculture). Additionally, large logistical plat- forms that make the region significantly important for the commercialization of agri-food products are crucial players in regional agri-food ecosystem and global value chains. The largest regional platforms are the Agribusiness Centre of Rome (CAR), the Fruit and Vegetable Market in Fondi (MOF) and the Fruit and Vegetable Market of Latina (MOL). In terms of international collab- oration, Lazio seeks to promote and position better quality products that are characteristic of the local culture and linked to local gastronomy in international markets. At the same time, the region seeks to intensify the exchange of know-how and technology transfer in the fields related to food processing including precision farming, plant production in challenging environments, pack- aging and preservation, certification and inspection, etc. Source: Cavicchi, A. and K., Ciampi Stancova (2016). Food and gastronomy as elements of regional innovation strategies, European Commission, Joint Research Centre, Institute for Prospective Technological Studies, Spain, pp. 30-31. 98 Cavicchi, A. and K. Ciampi Stancova (2016). Food and gastronomy as elements of regional innovation strategies, European Commission, Joint Research Centre, Institute for Prospective Technological Studies, Spain. 99 Eye@RIS3 database is an open access database managed by the S3 Platform. The database contains information on S3 priorities selected by EU countries and regions. As of December 1st, 2015, 25 countries and 178 regions encoded their priorities. The database is available at the S3 Platform webpage: http:/ /s3platform.jrc.ec.europa.eu/map 100 The most frequent key words used by EU countries and regions to describe “agri-food new technologies” specialization are biotechnology, (food) technology, KETs and ICT. The most frequent key words used to describe “agri-food and tourism” are (sustainable) tourism, eco-tourism, experi- ence-based industry, and health and wellness tourism. The most frequent key words used to describe “food with higher added value” are health, healthy (organic) food, nutrition and life sciences. 39 Annex 1. Input-Output Analysis Input-Output (IO) analysis is ‘an adaption of the neoclas- sical theory of general equilibrium to the empirical study of the quantitative interdependence between interrelated economic activities’. It is a quantitative technique for study- ing the interdependence of the producing and consuming units within an economy. An IO table identifies the major industries in an economy and the financial flows between them over a stated time period (usually a year). It indicates the sources of each sector’s inputs, which are purchased from the same or other sectors in the economy, imported, or earned by labor (household’s wages and salaries). It also provides a breakdown for each sector’s output, which can be sales to other industries and to final demand (household consumption, government consumption, capital formation, and exports). The interdependence between the individual sectors of the given economy is normally described by a set of linear equations, representing fixed shares of input in the production of each output. IO modeling at national level incorporates sectoral analysis into a macroeconomic framework, thus creating a basis for an evaluation of sectoral or/and investment policies to na- tional goals such as GDP, employment and the balance of trade. Also, IO analysis provides more general information compared to a partial equilibrium model, which concen- trates on one sector and more disaggregated information compared to a “pure” macroeconomic model. An IO model can be used to estimate the indirect effects of a change in the level of final demand for the output of a particular sector (impact analysis). These effects may be measured as output, income, and employment changes, calculated using sectoral multiplier coefficients, which ex- press the ratio of total effect to the initial change in demand. Impact information is available in disaggregated as well as total form, and policy makers can thus be provided with in- formation on which industries or sectors are impacted by a specific event and by how much. In more detail, this analysis was carried out for two case studies, namely Albania and North Macedonia, as these were the only countries in the region for which IO tables were available (both for year 2013). FADN (North Macedonia) 40 and survey (Albania) data was utilized to disaggregate the els, but rural development supports only agri-food sector, while in the case of North Macedonia, sup- investment in rural infrastructure. ply and use tables were processed to construct an IO table. Scenario 6 – Rural Income Diversification Pillar 2: Agricultural and rural development To estimate economic impacts associated with agri-food policy measures and expenditure fixed activity, different types of scenario, were specified and their at 2011-2015 levels, but rural develop- impacts on economy-wide output, value added and employ- ment supports only investment in rural ment, estimated. The first type was associated with changes diversification. in agricultural and rural development policy, while the sec- Scenario 7 – Re-orientation of Support: Agricultural ond type dealt with changes in economic structures, and support (Pillar 1) is fixed at 2011-2015 namely, an increase in the (currently low) economic linkages levels, but rural development support between agriculture and food processing and increases in observes IPARD 2014-2020. agri-food output. Finally, another Scenario was run and in- Scenario 8 – Rebalancing Scenario: Agricultural sup- volved the assumption that the agri-food sector ceased to port (Pillar 1) decreases by 20 percent exist in both countries. and the equivalent amount is added to IPARD 2014-2020 funds. Policy scenarios specified reflect either different mixes of agricultural and rural development policies, while structural Further, a number of country-specific structural scenarios scenarios reflect policy needs identified by other assign- were also specified. ments of the project and various background reports dealing with agri-food sector in the region. Finally, the “no agri-food” In the case of Albania, these are as follows: scenario was run in order to assess the full economic im- pacts of the sector in the two economies. Scenario AL1 – No Agri-food: The agri-food sector ceas- es to exist. Eight common policy scenarios were specified and com- Scenario AL2 – Double Livestock Production: Meat and pared to the 2011-2015 baseline; these are as follows: milk production doubles, compared to 2013 levels. Baseline Scenario 0 – Status Quo/No Change in Policy: Scenario AL3 – Double Fruit and Vegetables Production: Agricultural and rural development policy Fruit and vegetables output doubles, measures and expenditure fixed at 2011- compared to 2013 levels. 2015 levels. Scenario AL4 – Double Links of Livestock Production: Scenario 1 – Pillar 1 Support: Policy support is specific The agri-food sector doubles its purchas- only to Pillar 1 (Market and direct produc- es of domestically-produced livestock, er support). compared to 2013 levels. Scenario 2 – Pillar 2 Support: Policy support is specific Scenario AL5 – Double Links of Fruit and Vegetables only to Pillar 2 (Rural development). Production: The agri-food sector doubles Scenario 3 – Farm Modernization Pillar 2: Agricultural its purchases of domestically-produced and rural development policy measures fruit and vegetables, compared to 2013 and expenditure fixed at 2011-2015 levels, levels. but rural development policy supports Scenario AL6 – Double Links in the Agri-food Chain: The only farm modernization. agri-food sector doubles its purchases of Scenario 4 – Food Processing Pillar 2: Agricultural and domestically-produced agricultural prod- rural development policy measures and ucts, compared to 2013 levels. expenditure fixed at 2011-2015 levels, but rural development policy supports only In North Macedonia, the structural scenarios are as follows: food processing. Scenario 5 – Rural Infrastructure Pillar 2: Agricultural Scenario MK1 – No Agri-food: The agri-food sector ceas- and rural development policy measures es to exist. and expenditure fixed at 2011-2015 lev- 41 Scenario MK2 – Double Livestock Production: Meat and scenario, while Tables 11 and 12 present percentage changes milk production doubles, compared to (compared to 2013 levels) in output, value added and em- 2013 levels. ployment of the structural scenario impacts. Scenario MK3 – Double Fruit and Vegetables Production: Fruit and vegetables output doubles, compared to 2013 levels. Scenario MK4 – Double Forage Production: Forage output doubles, compared to 2013 levels. Scenario MK5 – Increased Links in the Agri-food Chain: The agri-food sector doubles its purchas- es of domestically-produced agricultural products, compared to 2013 levels. Scenario Results Tables 9 and 10 summarize and attempt to interpret the policy scenario impacts for both countries in comparison to the impacts generated by the status quo/no change in policy TABLE 9. IMPACTS OF POLICY SCENARIO COMPARED TO STATUS QUO (RATIO: SCENARIO IMPACTS/STATUS QUO IMPACTS), ALBANIA Impacts compared to no change in policy Change in output Change in value Added Change in employment ALBANIA Pillar 1 Support - 12% - 8% 6% If all policy funds go to Pillar 1, economy-wide output and value added decrease (due to agriculture’s low links with the rest of the economy), but employment increases by 6%, as agriculture is characterized by a comparatively high labor intensity. Pillar 2 Support 14% 14% 13% If all policy funds go to rural development, economy-wide output, value added and employment increase by 13-14%, as sectors which benefit have comparatively higher (compared to agriculture) economic links with the rest of the economy. Pillar 2: Farm modernization -1% 7% 10% If Pillar 2 funds are used for farm modernization, employment increases by 10% mainly due to the fact that the trade sector (which provides a large share of investment goods) is labor intensive. Pillar 2: Food processing 0% 6% 10% If Pillar 2 funds are used for food processing modernization, employment increases by 10% mainly due to the fact that the trade sector (which provides a large share of investment goods) is labor intensive. Pillar 2: Rural infrastructure 0% -4% -6% If Pillar 2 funds are used for rural infrastructure, employment decreases mainly due to the fact that the construction sector (which provides a large share of investment goods) generates a comparatively lower (to other sectors) number of jobs per output unit. Pillar 2: Rural income diversification 0% -1% -2% If Pillar 2 funds are used for rural diversification, employment decreases mainly due to the fact that the construction sector (which provides a large share of investment goods) generates a comparatively lower (to other sectors) number of jobs per output unit. Re-orientation of support/rebalancing 14% 17% 18% The implementation of IPARD is projected to generate a significant increase in output, value added and employment due to the increase of policy funds. 42 TABLE 10. IMPACTS OF POLICY SCENARIO COMPARED TO STATUS QUO (RATIO: SCENARIO IMPACTS/STATUS QUO IMPACTS), NORTH MACEDONIA Impacts compared to no change in policy Change in output Change in value added Change in employment NORTH MACEDONIA Pillar 1 Support 0% 2% 1% If all policy funds go to Pillar 1, economy-wide impacts increase marginally, as agriculture is characterized by comparatively high links with the rest of the economy. Pillar 2 Support -1% -7% -3% If all policy funds go to rural development, economy-wide output, value added and employment decrease, as sectors which benefit have comparatively lower (compared to agriculture) economic links with the rest of the economy. Pillar 2: Farm modernization 0% 0% 1% A focus of rural development funds on farm modernization creates marginally positive employment impacts, mainly due to the fact that the trade sector (which provides a large share of investment goods) is labor intensive. Pillar 2: Food processing 2% 3% 4% If Pillar 2 funds are used for food processing modernization, economic impacts are positive mainly due to the fact that the trade sector (which provides a large share of investment goods) has comparatively high links with the rest of the economy. Pillar 2: Rural infrastructure -1% -2% -2% If Pillar 2 funds are used for rural infrastructure, impacts are marginally negative, due to the fact that the construction sector (which provides a large share of investment goods) is characterized by its low economic links with the rest of the economy. Pillar 2: Rural income diversification 0% -1% 0% If Pillar 2 funds are used for rural diversification, impacts are marginally negative, due to the fact that the construction sector (which provides a large share of investment goods) is characterized by its low economic links with the rest of the economy. Re-orientation of support/rebalancing -2% -1% 0% The implementation of IPARD is projected to generate a marginal decrease in output, value added and employment mainly due to the decrease of policy funds. 43 TABLE 11. IMPACTS OF STRUCTURAL SCENARIOS Changes compared to 2013 (%) Change in output Change in value added Change in employment ALBANIA No agri-food sector -19.73% -23.91% -47.22% Economic impacts of the agri-food sector are extremely significant, as this sector accounts (mainly directly) for a very significant share of economic activity. It is noted that indirect links of agri-food with the rest of the economy are rather low, reflecting the relevant economic development context. Double livestock production 6.01% 5.70% 15.31% If livestock production doubles, economic impacts are significant and much higher than those associated with changes in policy expenditure and mix. Double fruits & vegetables production 2.49% 4.10% 11.63% If fruit and vegetables production doubles, economic impacts are significant and much higher than those associated with changes in policy expenditure and mix. NORTH MACEDONIA No agri-food sector -19.06% -18.15% -30.14% Economic impacts of the agri-food sector are very significant, as this sector accounts (mainly directly) for a significant share of economic activity. It is noted that indirect links of agri-food with the rest of the economy are higher than those in Albania. This reflects the higher development level of North Macedonia and the existing higher economic interdependence amongst economic sectors. Double livestock production 2.40% 2.75% 6.25% If livestock production doubles, economic impacts are significant and higher (especially for employment) than those associated with changes in policy expenditure and mix. Double fruits & vegetables production 1.15% 1.73% 3.12% If fruit and vegetables production doubles, economic impacts are notable and, in the case of employment, higher than those associated with changes in policy expenditure and mix. Double forage production 0.72% 0.87% 1.94% If forage production doubles, economic impacts are notable. 44 TABLE 12. IMPACTS OF STRUCTURAL SCENARIOS Impacts compared to no change in policy (2013) Change in output Change in value added Change in employment ALBANIA Double livestock links 2% 2% 5% If the agri-food sector doubles its purchases of domestically-produced livestock, employment in the economy increases by 5%. Also there is a 2% increase of output and value added. These increases are much higher than those associated with changes in policy expenditure and mix. Double fruits & vegetables links 2% 2% 6% If the agri-food sector doubles its purchases of domestically-produced fruits and vegetables, employment in the economy increases by 6%. Also there is a 2% increase of output and value added. These increases are much higher than those associated with changes in policy expenditure and mix. Double food chain links 3% 3% 9% If the agri-food sector doubles its purchases of domestically-produced farm products, employment in the economy increases by 9%. Also there is a 3% increase of output and value added. These increases are much higher than those associated with changes in policy expenditure and mix. NORTH MACEDONIA Double food chain links 16% 16% 21% If the agri-food sector doubles its purchases of domestically-produced farm products, employment in the economy increases by 21%. Also there is a 16% increase of output and value added. These increases are much higher than those associated with changes in policy expenditure and mix and are attributed to the fact that already-existing high links double and hence, impacts are very significant. 45 46