A Exploring the Potential of Agriculture in the Western Balkans B i Exploring the Potential of Agriculture in the Western Balkans A Regional Report September 2018 ii Acronyms AKIS Agricultural Knowledge and Information Innovation System ARDP Agriculture and Rural Development Project BiH Bosnia and Herzegovina CAP Common Agricultural Policy CEFTA Central European Free Trade Area1 CIS Commonwealth of Independent States EBRD European Bank for Reconstruction and Development EU European Union FAO Food and Agriculture Organization FDI Foreign Direct Investment GDP Gross domestic product GFCF Gross fixed capital formation IPARD Instrument for Pre-Accession Assistance for Rural Development IRAOI Investment Ratio Agricultural Orientation Index KfW Kreditanstalt Für Wiederaufbau (German Development Bank) MFI Microfinance Institution NMS New Member States SME Small and medium enterprise TFP Total factor productivity USAID United States Agency for International Development USD United States Dollars WB Western Balkan (region, country) iii Table of Contents Acknowledgments...................................................................................................................................................................1 Executive Summary.......................................................................................................................................1 I. Introduction........................................................................................................................................... 4 II. Structural Transformation of Agriculture in the Western Balkans..................................................... 6 Structural dynamics.................................................................................................................................................6 Productivity patterns................................................................................................................................................6 Drivers..........................................................................................................................................................................7 Regression analysis on drivers of agricultural productivity........................................................................... 11 Output growth and multiplier effects................................................................................................................ 13 III. Trade and Competitiveness of Agriculture.........................................................................................16 Agricultural trade.................................................................................................................................................... 16 Agricultural competitiveness............................................................................................................................... 19 Geographical, political and regional competitive advantages....................................................... 23 Market accessibility................................................................................................................................. 25 Factor competitiveness........................................................................................................................... 26 Business environment............................................................................................................................. 26 Labor costs................................................................................................................................................. 29 Agricultural policy.................................................................................................................................... 29 Market development............................................................................................................................... 32 Climate and risk management.............................................................................................................. 32 Agricultural credit..................................................................................................................................... 34 IV. The Pathway to Change: A framework towards improving productivity and increasing competitiveness of agriculture in the Western Balkans.................................................................... 37 References.............................................................................................................................................................................. 39 Annex A. Trade patterns....................................................................................................................................................40 Annex B. Market accessibility Index............................................................................................................................... 43 Annex C. Agri-finance in the WB Countries................................................................................................................. 45 iv List of Figures Figure1. The path to structural transformation in agriculture ...............................................................................................5 Figure 2. Agricultural transformation in the Western Balkans is accelerating ...................................................................7 Figure 3. Productivity and output are increasing in the Western Balkans, in real terms ................................................ 8 Figure 4. The gap in agricultural labor productivity with the EU-28 is growing ................................................................ 9 Figure 5. Cereal yields (kg/ha) in the region are improving .................................................................................................. 9 Figure 6. Agricultural output per hectare is generally constant and below the EU-28.................................................... 9 Figure 7. Growth in agricultural total factor productivity ......................................................................................................10 Figure 8. (A and B) Western Balkan economies have low capital intensity in agriculture ............................................10 Figure 9. Agricultural output is growing in the Western Balkans ........................................................................................14 Figure 10. Trade of primary and processed food products in the Western Balkans ..........................................................17 Figure 11. Type and concentration of agricultural exports in the Western Balkans ..........................................................17 Figure 12. Production and trade growth in the WB region for cereals and industrial crops, average 2011-2016.......18 Figure 13. Production and trade growth in the WB region for fruit, average 2011-2016...................................................18 Figure 14. Production and trade growth in the WB region for vegetables, average 2011-2016.......................................19 Figure 15. Land cover and market accessibility in the Western Balkans ............................................................................. 26 Figure 16. Labor costs per hour, EUR ............................................................................................................................................29 Figure 17. Budgetary transfers to agriculture are not correlated to growth of value added ........................................... 31 Figure 18. Average temperature and rainfall .............................................................................................................................. 33 List of Tables Table 1. Public services for AKIS in the Western Balkans .....................................................................................................11 Table 2. Determinants of agricultural productivity in the Western Balkans ................................................................... 13 Table 3. The WB countries perform poorly in key drivers of agricultural productivity ................................................. 13 Table 4. Multiplier estimates: Agriculture and food processing .........................................................................................15 Table 5. Competitiveness Index for cereals and industrial crops, 2018...........................................................................20 Table 6. Competitiveness Index for vegetables, 2018............................................................................................................21 Table 7. Competitiveness Index for fruit, 2018........................................................................................................................21 Table 8. Competitiveness Index for livestock, 2018............................................................................................................... 22 Table 9. Summary of competitive advantages by country .................................................................................................. 25 Table 10. Factor competitiveness level and trends ................................................................................................................. 27 Table 11. The Western Balkans rank poorly in the Global Innovation Index ....................................................................28 Table 12. Average wage by sector ...............................................................................................................................................30 List of Boxes Box 1. Digital agriculture ...........................................................................................................................................................12 Box 2. Regional market for raspberry and sour cherry ......................................................................................................19 Box 3. BiH and Turkey vegetable oil trade – the entire region benefits......................................................................... 24 Box 4. Relocation of Gherkin production ..............................................................................................................................30 Box 5. Apples: a success story or an ever-growing risk for Serbia?............................................................................... 33 v Acknowledgments This report was produced by a task team led by Svetlana Edmeades (Team Task Leader) and Edinaldo Tebaldi from the World Bank. Research inputs for the report were provided by Leah Soroka and Panos Varangis from the IFC, Demetris Psaltopoulos and Kostas Kounetas from the University of Patras (Greece), Hrvoje Horvat (Croatia), and a team in SEEDEV (Serbia), including Goran Zivkov, Dragana Tar and Ivana Dulic. The task team is grateful for comments received from peer reviewers Holger Kray (Lead Agriculture Economist) and Sergiy Zorya (Lead Agriculture Economist) and the guidance provided by Julian Lampietti (Practice Manager, Agriculture Global Practice) and Linda Van Gelder (Country Director, Western Balkans). vi 1 Executive Summary Agriculture and food systems in the Western Balkans are undergoing a process of structural transformation. Primary agriculture, an important source of income and em- ployment in the past, has diminished its contribution to the diversifying economies of the region. This, however, is con- sistent with the structural transformation of the sector and its linkages with the rest of the economy, rather than with a perceived decline in the importance of agriculture for the rural economy. On the contrary, the declining share of pri- mary agriculture in GDP and employment signals a process of transformation that provides ample opportunities for de- veloping a modern, dynamic and more competitive agri-food system, able to generate better jobs up and downstream and improve income and livelihoods in the rural space. Agricultural transformation in the region is accelerating. Despite the uneven pace across countries, labor and land productivity in the region are showing signs of improvement. The sharp increase in rural-urban migration is a factor in the upward trends of labor productivity. Land productivity, measured in terms of cereal yields, is gradually improving, with cereal yields in Serbia exceeding those of the region and the EU-28, and those of Bosnia and Herzegovina (BiH) and Albania converging to the EU-28 average. These im- provements in labor and land productivity have contributed towards the expansion of agricultural output. This is import- ant for the transformation of primary agricultural production into an agri-food system. The expansion of agricultural output leads to an increase in the supply of raw materials at lower costs to agri-processors, which in turn supports a much larger scale of operation, promotes horizontal integra- tion, and reduces overall costs, all factors that increase the competitiveness of the whole agri-food system. However, further improvements in productivity are re- quired for the transformation of the sector. While the improvement of total factor productivity (TFP) growth in the Western Balkans has been significant, the region’s TFP growth must outpace that of other European economies if the region is to close the productivity gap. The gap in agricultural labor productivity with the EU-28 is growing. Value added per worker is low in the region, which drives the process of outmigration from rural areas and towards 2 other European countries where agricultural wages are agriculture is comparatively high for both direct and total much higher. This has created important labor shortages in jobs. The employment creation capacity of the food process- the agricultural sector in the region, rather than improve- ing industry could be augmented by leveraging investments ments in overall labor productivity. Agricultural output to increase the competitiveness of the sector. (value added) per hectare is generally constant across the region and below that of the EU-28. The multiplier effects of For this to happen, the private sector can play a critical agriculture up and downstream are weak. This hinders the role. Private sector investments in capital intensification, process of transforming the expansion of agricultural output knowledge formation, and innovation in agriculture are im- downstream and of unlocking the potential of the agri-food portant drivers in the structural transformation of the sec- industry in the region. In addition, the analysis suggests tor. For these to increase in type and volume, however, the that efforts to re-orient public support to agriculture from returns on the investments must be attractive. Large pro- coupled payments to productivity-enhancing decoupled ducers in the region are already benefiting. For medium and support could contribute to increase productivity in the WB small producers, the (transactions) costs often exceed the countries. benefits of private sector investments. Access to credit is an important catalyst of private sector investment and financial For this to happen, targeted investments in key drivers of inclusion is critical for enabling all types of producers to be agricultural transformation are needed. The findings in this part of the agricultural transformation. Risk management report suggest that focusing on agricultural capital invest- mechanisms (such as agricultural insurance, associations, ments and on research and development (R&D) is critical for etc.) can provide the means for risk sharing that would make increasing agricultural productivity in the Western Balkans. investments more attractive. Through private sector invest- Capital intensification in agriculture in the region has been ment, the forward and backwards linkages of the sector slow, with all Western Balkan (WB) countries exhibiting low can also be strengthened, which can be critical for jobs and levels of capital formation compared to the EU-28 average. growth in the region. The findings suggest that closing one quarter of the gap in the stock of agricultural capital per worker relative to EU-28 Effectively linking producers to markets and identifying levels would increase agricultural labor productivity by 76 comparative advantages in agri-food trade would add percent in Albania, 82 percent in BiH, 30 percent in Serbia value to agriculture and further unleash the potential of and 6 percent in Montenegro. There are significant varia- the sector in the region. The WB region has an important tions in the state of development of the agricultural knowl- potential in growing the fresh produce trade, while also edge and information innovation system (AKIS) across WB developing the agri-processing industry. Export growth countries. In general, the AKIS public services are weak and from the WB region has been particularly strong for cere- private participation is limited. Without AKIS, productivi- als, industrial crops, and fruits and vegetables, with Serbia ty improvements and, hence, the pace of transformation, driving the cereal growth in the region. Export diversifica- will be slow. The model estimates indicate that increasing tion is, however, relatively low in terms of the number of investment in R&D so as to close one quarter of the R&D products destined to foreign markets. Fruits are found to gap relative to EU-28 levels would increase agricultural be the most competitive group of agricultural products in productivity by 15 percent in Albania, 25 percent in BiH, 16 the region, with vegetables holding an important potential. percent in the Republic of North Macedonia, 18 percent in Livestock production and the meat sector are important but Montenegro and 6 percent in Serbia. not competitive in general, due to their very small scale of production. The growth and competitiveness of the live- In addition to productivity improvements, to complete stock and meat sector, in particular, and of fresh products, the transformation process, agricultural competitiveness in general, depends on how well the WB countries can meet must improve in the region. The downstream food value the sanitary and food safety standards of the EU and other chain will benefit from the structural transformation of agri- trade partners. This is also related to how well are producers culture only if expansions of output, due to improvements in integrated to respond to market signals. productivity, can lead to investments upstream in the agri- food industry. This will promote horizontal integration and The complexity of the food system in the WB region and reduce the costs of doing business. Investments (in capital the accelerated changes in productivity underlying the and knowledge) for modernizing the agri-food industry are process of structural transformation require a new ap- therefore also critical. The employment creation capacity of proach. Digital agriculture (DA) can be an important “bro- 3 ker” in the agricultural transformation in the region. DA can facilitate the process of capital accumulation and knowledge sharing at lower costs. It can also enable the linkages be- tween producers and markets, shortening value chains and reducing transactions costs. This is potentially critical for the Western Balkans, considering the structural characteris- tics of the countries in the region—small scale of agricultural production, diversity of agro-ecological conditions, weak value chains and high transaction costs to link to market, as well as limited use to financial services in agriculture. The potential gains in productivity associated with new, low- cost, data-intensive on-farm digital technology applications are large. The impacts of DA are potentially even larger on the upstream, midstream, and downstream markets asso- ciated with farming, especially in the context of reaching consumers within and beyond the WB region. The World Bank Group can play an important role in un- leashing the potential of the business of agriculture in the Western Balkans. Support to the process of structural transformation can be provided through targeting invest- ments towards the modernization of agriculture on and off farm, stimulating the development of AKIS while recogniz- ing the role that both public and private sector play in it, enabling linkages between producers and markets, while taking advantage of the opportunity that digital technology brings about disrupting the traditional economies of scale and capital intensity pathways that agriculture has followed, while enabling small and medium producers to integrate. Identifying the comparative advantages of the region, while diversifying the productive base and job creating potential of the sector is also a good proposition in the efforts towards EU alignment. 4 I. Introduction 1. The agri-food industry is a vital part of the WB econ- omy and culture. It has historically been an important contributor to GDP, jobs and a critical source of export revenues. In 2017, exports of primary (predominantly fruits and vegetables) and processed food and beverage prod- ucts accounted for 11 percent of the region’s total exports. Although most of the region’s agri-food exports (45 per- cent) go to the EU-28 countries, nearly a third (32 percent) of the regional trade flows are among the CEFTA partners including Moldova. 2. Yet, despite their potential as agri-food producers, the Western Balkans have become net food importers (except for Serbia), experiencing a trade deficit of USD 1.1 billion in processed food products in 2016. This is due to multi- ple factors spanning from low productivity of the primary sector to an insufficiently developed food processing sec- tor, including the small scale of production and the use of traditional production practices, poor value chain/market integration and infrastructure, as well as weak food safety systems that greatly limit these countries’ export opportuni- ties, particularly of animal products. Moreover, a wide array of other issues pertaining to the regulatory framework and business environment (e.g. quality systems, certification costs and procedures, practices and regulations regarding the use of agro-chemical products, etc.) additionally curb their agri-food export potential. This particularly affects the fruit and vegetables sector, where many WB countries have the advantage of supplying the EU market with early season products. 3. WB economies are undergoing a process of structural transformation that has profound implications for the agri-food system, international trade, and livelihoods in the rural space. The structural transformation is marked by the industrialization and modernization of agriculture, significant increases in labor productivity across sectors, rural-urban migration, and a reduction in the share of ag- riculture in total employment and in GDP (Kuznets, 1957; Bustos et al., 2016). All WB countries, however, can still be classified as “incomplete transformers” (see Figure 1) be- cause of the relatively low productivity and competitiveness of the agri-food system, high shares of GDP and employ- 5 FIGURE 1. THE PATH TO STRUCTURAL TRANSFORMATION IN AGRICULTURE Modernized Agri-food system is dynamic and competitive. Incomplete transformers Primary sector accounts for a Low productivity and small share of GDP and competitiveness of the employment. agri-food system. Rural-urban gap closes The primary sector’s share of significantly. GDP and employment is high. Poverty is delinked from Signficant rural-urban divide agriculture and the rural space. Lagging (income, poverty, etc.). Very low productivity and Poverty is stil linked to competitiveness of the agriculture and the rural space. agri-food system. Primary sector represents a high share of GDP and employment. High poverty incidence in rural and urban areas. Source: World Bank. ment that still depend on the primary sector, the rural-urban address these knowledge gaps and support the dialogue on divide (income, poverty, etc.), and a link between poverty the transformation of agriculture into a modern and compet- and agriculture. This context, however, offers opportunities itive sector in the region. To the extent possible, depending to modernize and transform agriculture, create better jobs on data availability, country-specific inferences are also pro- and incomes, improve livelihoods in the rural space, and in- vided to guide country-specific directions for improving the crease the overall competitiveness of the agri-food system productivity and competitiveness of the sector. in the WB countries. 6. The report explores the structural dynamics of the 4. This report aligns to the framework of structural trans- sector rather than EU pre-accession options. There is a formation1 to identify opportunities for development in wealth of information on the challenges and opportunities the agriculture sector in the Western Balkans, while also for agriculture in the context of EU pre-accession, both in exploring patterns of trade and factors for improving agri- terms of instruments and measures, as well as in terms of cultural competitiveness in the region. To build a pathway policy and resources. The value added of this report is the to modernization and to accelerate the agricultural trans- focus on structural dynamics, productivity patterns and their formation in the Western Balkans, the linkages between drivers, as well as multiplier effects and determinants of ag- production, access to markets and trade flows need to be ricultural competitiveness in the region. These are explored better understood. Focused strategies and interventions can from the perspective of pathways for change to accelerate improve the competitiveness of the agri-food sector, with the structural transformation of the sector and increase its wide-ranging impacts on food and nutrition security, export competitiveness. revenues and, ultimately, on domestic jobs and economic growth. 5. The report provides a regional perspective on the chal- lenges and opportunities for the sector. It builds on infor- mation from a variety of sources and own analytical work to 1 In general terms, structural transformation is defined as the reallocation of economic activity across three broad sectors (agriculture, manufacturing and services) that accompanies the process of modern economic growth. Within agriculture, structural transformation refers to the process of improve- ments in total factor productivity (land, labor, capital) that are driven by technological change. 6 II. Structural Transformation of Agriculture in the Western Balkans 7. The process of structural transformation of agriculture is gradual but necessary. The structural transformation of agriculture follows a path where capital intensification, through mechanization, together with enhanced knowledge on farming practices (e.g. fertilizer, pesticides, tilling, etc.) unleashes significant increases in agricultural output due to higher labor and land productivity. In turn, the mechaniza- tion and increased labor productivity tend to displace rural workers who usually migrate to peri-urban areas or cities to find employment in other sectors. The surplus generated by the increases in productivity gets reinvested. Major changes also occur in the rural space including increases in income per capita and reduction in poverty density and poverty rates, which altogether improve livelihoods in rural areas. Structural dynamics 8. The process of structural transformation in the Western Balkans is incomplete and uneven. In 2016, primary agri- culture accounted for 40.7 percent of employment and 22.9 percent of gross domestic product (GDP) in Albania, num- bers that are much lower than the shares observed in the early 1990s in the country, but much higher than the shares in neighboring countries (Figure 2). Employment in the primary sector is between 17 and 19 percent in BiH, Serbia, and North Macedonia and 7.6 percent in Montenegro. The contribution of agriculture to GDP is around 8 to 10 percent in BiH, North Macedonia, Montenegro and Serbia. These figures exceed those of advanced economies. For instance, in the EU-15 area primary agriculture accounts for 3.7 per- cent of employment and 1.6 percent of GDP. These uneven patterns are associated with the pace of structural transfor- mation in the Western Balkans. Productivity patterns 9. Yet, the process of agricultural transformation in the re- gion is accelerating. Despite Albania’s lagging position, the change has been remarkable. The leap has also been large in BiH, pointing to an acceleration of changes in its rural space. These include an increase in agricultural labor productivity and a sharp increase in rural-urban migration (in the case of Albania), which led to a decline in the share of the rural pop- 7 28, and those of BiH and Albania converging to FIGURE 2. AGRICULTURAL TRANSFORMATION IN THE WESTERN BALKANS IS ACCELERATING the EU-28 average (see Figure 5). However, when land productivity is measured in terms of agricul- 60 ture value added per hectare, a slightly different picture emerges (see Figure 6). While Albania’s 1991 agriculture is highly labor intensive, with low labor Agriculture value added (% of GDP) productivity, it outpaces the EU-28 average in land 40 productivity. In 2016, agricultural output per hect- 1994 are reached 2,093 USD in Albania, compared to 1,405 USD in the EU-28. Montenegro has a rela- 2016 tively high labor and land productivity (it produces 1995 20 1,571 USD of value added per hectare), also out- 1991 performing the EU-28 in terms of land productivity. 2016 2016 On the other hand, the value of agricultural output 2000 2016 per hectare is significantly low in Serbia (922 USD), 2016 2016 1991 0 North Macedonia (737 USD) and BiH (522 USD). 0 20 40 60 80 Employment in agriculture (%) 12. The growth rate of agriculture total factor pro- EU-15 North Macedonia Montenegro Serbia BiH Albania ductivity has increased in the region. Agricultural total factor productivity (TFP) increased 0.1 percent Source: Based on data from the World Development Indicators. from 1991 to 2000 and 1.5 percent from 2001 to 2014 in the “transition economies” of Europe,2 ulation (see Figure 3). There was also a significant decline in compared with an increase of 2.1 percent from 1991 the share of the rural population in Montenegro and Serbia, to 2000 and 1.9 percent from 2001 to 2014 across other no significant change in BiH, and a small increase in the size EU economies (see Figure 7) (Fuglie, 2015).3 While the im- of the rural population in North Macedonia during the last provement of TFP growth in the Western Balkans has been two decades. The growth of agricultural labor productivity remarkable, if the region is to close the productivity gap, its has been modest in BiH, North Macedonia and Montenegro. TFP growth must outpace that of other European economies. 10. Despite the increasing trends in labor productivity in Drivers the region, the gap with the EU-28 is far from closing. From 2006 to 2016, agricultural labor productivity increased at an 13. To continue the path of structural transformation and annual average rate of 2 percent per year in the WB region, productivity enhancement, key investments in the driv- compared to an increase of 3.5 percent in the EU-28, which ers of transformation are required. Capital intensification caused the labor productivity gap between these regions to in agriculture in the region has been slow. The EU-28 uses, increase further. As of 2016, labor productivity in agriculture on average, 710 tractors per 100 square km of arable land, in the WB region represented only 38 percent of the aver- while Serbia uses 20 and Albania 120. In some countries age labor productivity in the EU-28. In 2016, average value there are signs of over-investment, with North Macedonia added per worker was 5,390 USD in Albania, 6,039 USD in boasting 1,200 tractors per 100 square km of arable land. BiH, 6,907 USD in Serbia, 7,920 USD in North Macedonia Given the sector productivity patterns and the vast re- and 24,238 USD in Montenegro, compared to 26,854 USD sources allocated to agriculture through IPARD and nation- in the EU-28 (Figure 4). al programs, investments in agricultural equipment require careful assessment to ensure their role in enhancing pro- 11. There are significant differences in agricultural land ductivity. Otherwise, equipment (or other capital-intensive productivity in the WB region. Land productivity, measured technologies) alone, without adequate knowledge and a in terms of cereal yields, is gradually improving, with cereal clear investment strategy, would be a sunk cost rather than yields in Serbia exceeding those of the region and the EU- a driver of transformation. 2 The “transition economies” in Europe include Albania, all countries that belonged to the former Yugoslavia, Bulgaria, Hungary, Poland and Romania. 3 ‘Europe’ refers to the aggregate TFP growth in 26 countries for which data are available. 8 FIGURE 3. PRODUCTIVITY AND OUTPUT ARE INCREASING IN THE WESTERN BALKANS, IN REAL TERMS ALBANIA BiH Real GDP Population Real GDP Population Agric. value added (% GDP) Rural population Agric. value added (% GDP) Rural population Agric. labor productivity Agric. labor productivity 250 250 200 200 150 Index 2000=100 Index 2000=100 150 100 100 50 50 0 0 -50 00 02 04 06 08 10 12 14 16 00 02 04 06 08 10 12 14 16 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 NORTH MACEDONIA MONTENEGRO Real GDP Population Real GDP Population Agric. value added (% GDP) Rural population Agric. value added (% GDP) Rural population Agric. labor productivity Agric. labor productivity 200 250 200 150 Index 2000=100 Index 2000=100 150 100 100 50 50 0 0 00 02 04 06 08 10 12 14 16 00 02 04 06 08 10 12 14 16 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 SERBIA Real GDP Population Agric. value added (% GDP) Rural population Agric. labor productivity 250 200 Index 2000=100 150 100 50 0 00 02 4 6 08 10 12 14 16 0 0 20 20 20 20 20 20 20 20 20 Source: Based on data from the World Development Indicators. Note: Real GDP, agriculture value added and agriculture labor productivity are adjusted for inflation. 9 45,000 FIGURE 4. THE GAP IN AGRICULTURAL LABOR PRODUCTIVITY WITH THE EU-28 IS GROWING 45,000 40,000 USD) 40,000 USD) 45,000 added 35,000 2010 added 40,000 USD) 35,000 30,000 2010 value (constant 30,000 added 35,000 25,000 2010 value (constant 25,000 30,000 20,000 Agriculture value (constant 20,000 25,000 15,000 Agriculture worker 20,000 15,000 10,000 Agriculture worker 10,000 15,000 5,000 per worker per per 10,000 5,000 0 0 5,000 90 90 90 92 92 92 94 94 94 96 96 96 98 98 98 00 00 00 02 02 02 04 04 04 06 06 06 08 08 08 10 10 10 12 12 12 14 14 14 16 16 16 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 0 EU-28 Albania Montenegro North Macedonia Serbia BiH EU-28 Albania Montenegro North Macedonia Serbia BiH EU-28 Albania Montenegro North Macedonia Serbia BiH Source: Based on data from the World Development Indicators. FIGURE 5. CEREAL YIELDS (KG/HA) IN THE REGION ARE IMPROVING 7,000 7,000 6,000 7,000 6,000 5,000 6,000 5,000 4,000 Kg/ha 5,000 4,000 Kg/ha 3,000 4,000 Kg/ha 3,000 2,000 3,000 2,000 1,000 2,000 1,000 0 1,000 0 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 19 6 19 7 19 8 19 9 20 0 20 1 20 2 20 3 20 4 20 5 20 6 20 7 20 8 20 9 20 0 20 1 20 2 20 3 20 4 20 5 20 6 0 9 9 9 9 0 0 0 0 0 0 0 0 0 0 1 1 1 1 1 1 1 19 19 19 19 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 9 EU-286 97 98 9 9 00 01 Albania 02 0 3 04 05 Montenegro 06 0 7North 0 0 9 10 11 8 Macedonia 12 1 3 14 Serbia 15 16 BiH 19 19 19 19 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 EU-28 Albania Montenegro North Macedonia Serbia BiH EU-28 Albania Montenegro North Macedonia Serbia BiH Source: Based on data from the World Development Indicators. FIGURE 6. AGRICULTURAL OUTPUT PER HECTARE IS GENERALLY CONSTANT AND BELOW THE EU-28 2,500 USD) 2,500 USD) 2,000 2010 2,500 USD) 2,000 2010 productivity 1,500 hectare, 2,000 productivity 2010 1,500 hectare, 1,000 productivity 1,500 hectare, per per 1,000 Land 500 added 1,000 Land 500 added per 0 Land (Value 500 added 0 (Value 00 00 00 01 01 01 02 02 02 03 03 03 04 04 04 05 05 05 06 06 06 07 07 07 08 08 08 09 09 09 10 10 10 11 11 11 12 12 12 13 13 13 14 14 14 15 15 15 16 16 16 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 0 (Value EU-28 Albania Montenegro North Macedonia Serbia BiH EU-28 Albania Montenegro North Macedonia Serbia BiH Source: Based on data from the World Development Indicators. EU-28 Albania Montenegro North Macedonia Serbia BiH 10 2.5 2.1% capital formation are correlated with a low (private) invest- FIGURE 7. GROWTH IN AGRICULTURAL TOTAL FACTOR 1.9% 2.0 PRODUCTIVITY ment ratio agricultural orientation index (IRAOI),4 which is below one for all WB countries (Figure 8b). An IRAOI less TFP growth (%) 1.5% 1.5 2.5 than one reflects a lower orientation towards the agriculture 2.1% sector, which receives a lower share of private investment 1.9% 1.0 2.0 relative to its contribution to economic value-added. TFP growth (%) 1.5% 0.5 1.5 0.1% 15. There are significant variations in the state of devel- 0 1.0 opment of an agricultural knowledge and information innovation system (AKIS) across WB countries. An AKIS 0.5 1991-2000 2001-2014 is essential to support agribusiness by providing training, 0.1% Europe, Transition Europe, Southern technical advice and critical information for production and 0 cross-compliance related to environment preservation, public 1991-2000 2001-2014 and animal health, and animal welfare. Research and educa- tional institutions are also an important element of any AKIS Europe, Transition Europe, Southern as they not only create knowledge, but very often also provide advisory services. Food companies, including agricultural Source: World Bank staff using data from Fuglie (2015). inputs sellers and private advisors, should also be part of an AKIS because they usually offer with their products, certain 14. Low capital intensity hinders growth and slows down kind of advisory services or production cooperation. The pri- the agricultural transformation in the Western Balkans. vate sector can also play an important role, especially in farm While capital formation per worker in Montenegro is rela- advisory and veterinary services. For that to happen effective- tively high compared to other WB economies, all WB coun- ly, not only resources and incentives are required, but also the tries exhibit low levels of capital formation compared to the integration of producers into agri-food value chains. EU-28 average. In 2015, capital formation per worker was 465 USD in Albania, 608 USD in North Macedonia, 776 16. The institutional capacity in the Western Balkans for USD in Serbia and 4,691 USD in Montenegro, compared to the provision of AKIS is generally weak and underfunded. 11,091 USD in the EU-28 area (Figure 8a). These low levels of All AKIS public services in Albania, BiH and Kosovo are unde- FIGURES 8A AND 8B. WESTERN BALKAN ECONOMIES HAVE LOW CAPITAL INTENSITY IN AGRICULTURE Figure 8a. Gross capital formation per Figure 8b. Investment Ratio Agricultural worker in agriculture, 2015 Orientation Index (IRAOI), 2014 12,000 2 11,091 Figure 8a. Gross capital formation per 1.7 Figure 8b. Investment Ratio Agricultural Gross capital formation in agriculture, 1.8 10,000 worker in agriculture, 2015 Orientation Index (IRAOI), 2014 per worker (2005 prices, USD) 1.6 Albania 12,000 2 11,091 1.4 8,000 1.7 BiH Gross capital formation in agriculture, 1.8 10,000 1.2 Montenegro per worker (2005 prices, USD) 1.6 IRAOI 6,000 1 0.9 Albania 0.82 4,691 1.4 0.75 Serbia 8,000 0.8 BiH 4,000 0.56 1.2 North Macedonia 0.6 Montenegro IRAOI 6,000 1 0.9 0.4 0.82 EU-28 Serbia 2,000 4,691 0.75 0.24 0.8 4,000 776 608 0.2 0.56 465 North Macedonia 0.6 0 0 0.4 EU-28 2,000 0.24 608Indicators. 776 0.2 465 Source: World Bank staff using data from FAO and the World Development 0 0 4 IRAOI is calculated as the share of gross fixed (private) capital formation (GFCF) in agriculture per unit of value added in agriculture over the share of GFCF in other sectors per unit of value added in those sectors. 11 veloped and face increasing difficulties to deliver the required phone applications to highly automated farm machinery veterinary, phytosanitary, food safety and educational ser- equipped with a vast array of sensors coupled with satel- vices to farmers and agribusiness (see Table 1). Montenegro lite and drone imaging (see Box 1). The successful devel- has made progress in several AKIS areas, but still has an un- opment of a DA market in the WB region requires creating derdeveloped agricultural R&D infrastructure and agricultural an integrated environment that builds on synergies among education. Overall, in these countries there is no clear role and innovators and agri-businesses. Innovators must have di- strategy for extension services, which are usually overloaded rect access to farmers, universities, research centers and with administrative tasks to support other government func- innovation hubs as well as market incentives to invest in tions (e.g. collect data, manage subsidy applications, etc.). product development that introduce DA either as their There is also a strong orientation towards the public provi- mainstream product or as a complementary service to sion of extension services, which limits the engagement and their existing portfolio. investment by private extension service providers. On the pri- vate side, knowledge services are input-related and provided Regression analysis on drivers of agricultural by input suppliers, making their scope limited. productivity 17. Serbia and North Macedonia have made signifi- 19. Capital stock, fertilizer use and R&D are key deter- cant progress in strengthening their AKIS institutions. minants of agricultural labor productivity in the Western However, in Serbia, the recent deterioration of the system Balkans. The regression analysis carried out for this report and professional staff leaving both the veterinary and phy- shows that there is a positive and statistically significant tosanitary directorates poses a risk to maintaining the qual- relationship between agricultural labor productivity and ag- ity of services. Moreover, both Serbia and North Macedonia ricultural capital accumulation, R&D spending and fertilizer rely mostly on public institutions to deliver extension ser- use in the region (see Table 2). vices for the growing requirements to meet international phytosanitary and food safety standards. The lack of strong 20. The low capital formation in the Western Balkans, on private extension services requires new investments in the the one hand, and the large gap compared to the EU aver- public AKIS to meet these increasing needs of the sector. age, on the other, reduce productivity and slow down the modernization of the sector. These factors affect the sec- 18. Digital agriculture can be an important driver of AKIS. tor’s overall competitiveness in regional and global markets With the need to produce more food using fewer inputs, and, thus, put farmers in a disadvantaged position. The coef- the agri-food sector is seeking new products, practices and ficient estimates imply that closing one quarter of the gap in technologies to reinvent itself and accelerate a structural the stock of agricultural capital per worker relative to EU-28 transformation that leads to increased productivity and levels would increase agricultural labor productivity by 76 efficiency. On a global scale, this structural transforma- percent in Albania, 82 percent in BiH, 30 percent in Serbia tion has been shaped by emerging digital agriculture (DA) and 6 percent in Montenegro. Because of the low levels of technologies. DA is an umbrella term that encompasses a capital per worker in North Macedonia, increases in agricul- variety of cross-cutting technologies ranging from mobile tural capital accumulation are expected to produce sizable TABLE 1. PUBLIC SERVICES FOR AKIS IN THE WESTERN BALKANS North Public service Albania BiH Kosovo Macedonia Montenegro Serbia National payment scheme for agriculture (SPS) Veterinary services Farm advisory service Research and development Agricultural education Phytosanitary services Food safety services l = Underdeveloped l = Moderately developed (set of specific measures exists) l = Developed 12 BOX 1. DIGITAL AGRICULTURE Digital agriculture (DA) is a game-changer for the agri-food system, capable of drastically improving productivity, efficiency, competitiveness and promoting a sustainable use of natural resources. DA is a powerful driver that has already started to trans- form the entire farming and food domain into smart webs of connected objects that are context-sensitive and can be identified, sensed and controlled remotely. It will also have significant impacts on a broad range of stakeholders across the agri-food sys- tem including farmers, food processors, logistic services, waste management and consumers. DA is affecting the entire agri-food system Food • Agricultural management Waste Production • Produce more with less • Monitoring and control of soil parameters • Reduce waste by increasing food durability (temp., moisture, conductivity, nutrients...) • Control of food quality by sensing physical • Detection of weeds, pests, diseases attributes • Optimization of water and nutrient application Food Consumers • Food quality control in food processing • Stable, quality food Processing • Detection of chemical residues, microbes • Detection of freshness and quality indicators and bacteria presence • Communicate food quality status to • Detection of water and nutrients present consumer Logistics • Increasing shelf life of products • Innovate packaging technologies • Control of the quality of food during transportation (chemical, microbiological, contaminants) • Control of physical environment and properties including the composition of gases • Decision support systems DA technologies can improve management of resources and the efficiency of agri-food production processes. Agriculture ac- counts for approximately ten percent of total greenhouse gas emissions and waste in Europe. DA technologies focused on managing land and waste production may lead to changes that impact agriculture and the environment in profound ways, from productivity growth, to improved rural livelihoods, to reducing environmental impacts and strengthening resilience to climate change. Overall, DA has the potential to contribute to meet Sustainable Development Goals (SDGs), thus investments in DA can be part of a broader approach to confront social, economic and environmental problems in rural areas in the WB region. The WB region can benefit from opportunities created by a dynamic and evolving DA market by establishing a legal and regula- tory framework that supports the development of new services and products, resolves potential conflicts regarding the owner- ship of data and intellectual property related to DA, and fosters the demand for DA products and services. This can be accom- plished by leveraging push and pull development instruments to address weaknesses in the agricultural innovation system and build on strengths to create and expand digital agricultural activities and markets in the region. impacts on agricultural labor productivity in this country. percent in North Macedonia, 18 percent in Montenegro and Overall, the estimates suggest that public and private capital 6 percent in Serbia (see Table 3). investments in agriculture are critical to improve the overall performance and competitiveness of the sector. 22. Small productivity gains are expected in the WB region by fostering additional use of fertilizer. Average fertilizer 21. The low rates of R&D spending reduce knowledge use in Serbia and Montenegro between 2011 and 2015 was creation and dissemination (e.g. through the AKIS) and higher than the EU-28 average, thus additional use would negatively impact agricultural productivity in the Western not generate meaningful impacts on productivity. In addi- Balkans. Significant improvements in productivity could be tion, increase in fertilizer use is also estimated to produce achieved by fostering R&D, particularly in primary agricul- very small changes in agricultural productivity in Albania, ture and food-processing. The model estimates indicate that North Macedonia and BiH. increasing R&D investment so as to close one quarter of the R&D gap relative to EU-28 levels would increase agricultural 23. The type of public support to agriculture matters. The productivity by 15 percent in Albania, 25 percent in BiH, 16 model estimates suggest that rural development support 13 TABLE 2. DETERMINANTS OF AGRICULTURAL PRODUCTIVITY IN THE WESTERN BALKANS Model 1 Model 2 Model 3 Model 4 Ln Fertilizer (kg/ha) 0.0641* 0.0779** 0.0748** 0.0638* [0.0354] [0.0301] [0.0322] [0.0353] Ln Capital per worker 0.253** 0.211** 0.203* 0.254** [0.1050] [0.1029] [0.1146] [0.1035] R&D Expenditure as % of GDP 0.180** 0.156** 0.151** 0.180** [0.0762] [0.0758] [0.0706] [0.0769] Ln Pillar 1- Coupled support per hectare -0.0176* [0.0094] Ln Pillar 1- Decoupled support per hectare 0.0117* [0.0064] Ln Rural development support 0.00922 [0.0161] Constant 6.547*** 7.043*** 7.066*** 6.425*** [1.0423] [1.0446] [1.1486] [0.9776] Observations 380 380 380 378 Overall 0.747 0.728 0.739 0.746 Within 0.281 0.295 0.293 0.281 Between 0.755 0.738 0.744 0.754 Source: World Bank staff. Note: Standard errors in brackets, * p < 0.10, ** p < 0.05, *** p < 0.01. Dependent variable: natural log of agriculture value added per worker (constant 2010 USD). Coefficient estimates are from fixed effects models using 2000-2015 data from 27 EU member states and five WB countries (Kosovo is not included due to lack of data). The variables were taken from the World Development Indicators (WDI), FAOSTAT, Eurostat and country statistical offices. All covariates are in constant 2010 units. TABLE 3. THE WB COUNTRIES PERFORM POORLY IN KEY DRIVERS OF AGRICULTURAL PRODUCTIVITY North Variable EU-28 Albania BiH Macedonia Montenegro Serbia Panel A: Averages from 2011 to 2015 Fertilizer consumption (kg per ha of arable land) 165.56 91.08 114.63 65.81 177.87 181.35 R&D expenditure as % of GDP 2.00 0.42 0.27 0.39 0.36 0.80 Net capital stock per worker (constant 2010 USD) 111,733 7,258 6,731 984 53,847 17,009 Panel B*: Effect on agricultural labor productivity if a country would close a quarter of the gap in... Fertilizer consumption (kg per ha of arable land) 1.6% 0.9% 3.0% -0.1% -0.2% R&D expenditure as % of GDP 14.6% 25.4% 16.1% 17.9% 5.9% Net capital stock per worker (constant 2010 USD) 75.9% 82.3% 593.7% 5.7% 29.4% Source: World Bank staff. * Estimates are obtained utilizing coefficients from column 2 of Table 2 and figures from Panel A, which were used to calculate the relative change (%) required for each covariate to close a quarter of the gap compared to EU-28 levels. does not seem to have a statistically significant effect on pled support could contribute to increasing productivity in agricultural productivity and that support coupled to the the WB countries. production of specific crops reduces agricultural produc- tivity. Decoupled support appears to have a positive and Output growth and multiplier effects significant effect on agricultural productivity. These findings are consistent with other reports and studies (World Bank, 24. Agricultural output has been expanding, but growth 2018; Latruffe et al., 2009; Zhu and Lansink, 2010; Zhu et al., is uneven across WB economies. From 2006 to 2016, the 2012). Thus, efforts to re-orient public support to agriculture total value added of agriculture increased 39 percent in from coupled payments to productivity-enhancing decou- Albania, 25 percent in Kosovo, 18 percent in Montenegro, 12 14 percent in North Macedonia, 6 percent in BiH and 4 percent household consumption and rather weak inter-sectoral in Serbia, compared to growth of 6 percent in the EU-28 area linkages. The declining backward and forward economic (see Figure 9). The performance of the agricultural sector in links seem to be associated with the economic structural the WB region is linked to the transformation process and transformation and lack of investments to modernize the fundamental forces driving the overall growth of the sector agri-processing industry. The employment creation capacity including labor and land productivity. of agriculture is comparatively high for both direct and total jobs. The employment creation capacity of the food process- 25. Transforming agriculture is beneficial downstream. ing industry could be augmented by leveraging investments The expansion of agricultural output leads to an increase in to increase the competitiveness of the sector. The direct the supply of raw materials at lower costs to agri-proces- employment effects of food processing are comparatively sors, which in turn supports a much larger scale of opera- low, but the size of total employment effects is much larger tion, promotes horizontal integration and reduces overall and comparable to that of other sectors including manu- costs, all factors that increase the competitiveness of the facturing. Indirect employment effects are very high mainly whole agri-food system. However, for this to materialize, due to the links of the agri-processing industry to primary the existence of the right incentives and enabling conditions agriculture. Agriculture outperforms food processing in the for private sector participation is critical. The relative weak case of forward effects, while the opposite holds in the case performance of agri-processors and the large trade deficit of backward ones. This finding indicates a weak integration in processed food and beverage products in the Western of food processing with the rest of the economy. Balkans suggest that structural problems from the farm gate to agri-processor doors and to consumers must be ad- dressed to improve the overall performance of the sector, up and downstream. 26. The multiplier effects of agriculture up and downstream are still weak. In Albania and North Macedonia, integration within the agri-food sector and between agri-food and the rest of the economy is relatively low (see Table 4). Backward and forward economic linkages have been declining for both primary agriculture and agri-food processing. Agriculture, however, has very strong and increasing direct links with FIGURE 9. AGRICULTURAL OUTPUT IS GROWING IN THE WESTERN BALKANS 140 130 120 (constant USD, 2006=100) Agriculture value added 110 100 90 80 70 60 50 40 19 0 19 1 92 93 19 4 95 19 6 97 19 8 99 20 0 01 20 2 03 20 4 05 20 6 07 20 8 09 20 0 20 1 12 13 20 4 15 16 9 9 9 9 9 0 0 0 0 0 1 1 1 19 19 19 19 19 20 20 20 20 20 20 20 20 20 EU-28 Albania Kosovo Montenegro North Macedonia Serbia BiH Source: Based on data from the World Development Indicators. 15 TABLE 4. MULTIPLIER ESTIMATES: AGRICULTURE AND FOOD PROCESSING Albania North Macedonia 2000 2013 2005 2013 Multiplier Rank Multiplier Rank Multiplier Rank Multiplier Rank TYPE I Output Multipliers - Backward Agriculture 1.61 3 1.34 12 1.56 17 1.44 35 Food Processing 1.57 6 1.64 3 1.84 6 1.85 3 TYPE II Output Multipliers - Backward Agriculture 8.31 11 6.84 7 9.13 16 10.29 17 Food Processing 4.81 15 5.41 16 8.45 26 9.50 32 Output Multipliers - Forward Agriculture 1.76 7 1.33 9 1.38 19 1.68 27 Food Processing 1.41 11 1.16 10 1.25 40 1.12 48 Direct & Indirect Value-Added Coefficients Agriculture 0.80 11 0.78 5 2.39 17 2.08 36 Food Processing 0.39 15 0.54 12 3.14 7 3.13 5 Direct & Indirect Employment Coefficients Agriculture 4.50 3 1.28 1 4.11 4 2.59 6 Food Processing 1.48 6 0.58 6 2.12 19 1.52 20 Value Added Multipliers Agriculture 1.52 5 1.30 12 4.66 32 3.77 45 Food Processing 3.42 1 2.18 1 10.90 5 12.67 10 Employment Multipliers Agriculture 1.33 11 1.24 11 1.37 30 1.29 48 Food Processing 6.24 2 2.75 2 4.46 6 3.73 4 Source: World Bank staff calculations. Note: The rank identifies the position of the sector multiplier vis-à-vis the other sectors of the economy. The number of sectors in the analysis is – for Albania: 15 in 2000 and 16 in 2013; for North Macedonia: 59 in 2005 and 64 in 2013. 16 III. Trade and Competitiveness of Agriculture Agricultural trade 27. The WB region has an important potential in growing its fresh produce trade, while also developing its agri-process- ing industry. Exports of primary food products have increased faster than imports leading to a trade surplus in 2016; on the other hand, growing demand for processed food products has caused a trade deficit of 1.1 billion USD in such products (see Figure 10). This indicates an improvement in the competitive- ness of exports of primary products, but it also highlights that challenges persist in developing a competitive agri-process- ing industry in the WB region. Serbia is the only country in the region that has experienced increasing trade surpluses in both primary and processed food products since the mid-2000s (see Annex A). 28. In the Western Balkans agricultural exports are rela- tively concentrated in a few products. The Gini index for exports ranges from 0.61 in BiH to 0.82 in Montenegro (see Figure 11). Fruit and vegetables, cereals and industrial crops, and beverages account for the majority of exports in most WB countries. For instance, in 2016 fruit and vegetables accounted for approximately 45 percent of Albania’s and North Macedonia’s exports, 33 percent of Serbia’s, 23 per- cent of BiH’s and 15 percent of Montenegro’s exports. Fish accounts for 40 percent of Albania’s exports, and beverages for 43 percent of Montenegro’s exports. While low export diversification might indicate a comparative advantage on specific commodities, it also exposes the country to sig- nificant financial and economic risks in the case that these commodities are subject to either domestic (e.g. bad climat- ic condition affecting that crop) or international shocks (e.g. price drop or decrease in demand). 29. Export growth from the WB region has been partic- ularly strong for cereals, industrial crops, and fruits and vegetables. Competitive cereal production in some areas of the region (Vojvodina and parts of Central Serbia and BiH) has contributed to increased production and export growth. From 2011 to 2016, exports of wheat increased 52 percent, barley - 40 percent, sugar beet - 57 percent and sunflow- er - 22 percent. Exports of soybean, however, decreased 10 percent (see Figure 12). 17 Primary Processed Primary Processed 1,600 300 4,000 0 1,600 10. TRADE OF PRIMARY AND PROCESSED FIGURE 300 200 PRODUCTS FOOD 4,000 IN THE WESTERN BALKANS 0 USD) (million USD) Imports and exports (million USD) 1,400 3,500 200 100 -500 USD) Primary Processed Imports and exports (million USD) 1,400 3,500 1,200 3,000 (million) balance (million) 100 0 -500 (million 1,200 1,600 300 3,000 4,000 0 Trade balance (million) Trade balance (million) 1,000 0 -100 2,500 -1,000 200 and exports 1,000 -100 -200 2,500 and exports (million USD) 1,400 3,500 balance 2,000 -1,000 800 100 and exports -200 -300 -500 800 2,000 (million 1,200 3,000 -1,500 Trade balance (million) (million) 600 -300 0 1,500 -400 -1,500 IImports Trade Trade balance Trade 600 1,000 -400 -100 1,500 2,500 -500 1,000 -1,000 IImports 400 and exports -500 -200 1,000 -2,000 400 800 -600 2,000 -2,000 200 -300 500 -600 -700 -1,500 200 500 1,500 600 -700 -400 0 -2,500 0 -800 -500 0 1,000 -2,500 IImports 0 -800 Imports 400 -2,000 20 98 20 00 20 02 20 004 20 06 20 008 20 010 12 14 16 04 8 06 00 08 02 10 04 12 06 14 08 16 10 12 14 16 20 199 -600 19 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 2 2 98 00 02 04 06 08 10 12 14 16 98 0 02 500 00 200 19 20 20 19 20 2 -700 Balance Imports Exports 0 Balance Imports Exports -2,500 0 Balance Imports Exports -800 Balance Imports Exports 98 00 02 04 06 08 10 12 14 16 98 00 02 04 06 08 10 12 14 16 19 20 20 20 20 20 20 20 20 20 19 20 20 20 20 20 20 20 20 20 Balance Imports Exports Balance Imports Exports Source: World Bank staff using data from Comtrade. FIGURE 11. TYPE AND CONCENTRATION OF AGRICULTURAL EXPORTS IN THE WESTERN BALKANS 100 100 100 100 4.8 Beverages GINI 4.8 0.6 7.1 7.1 7.8 Beverages GINI 0.2 0.6 0.2 0.3 0.3 0.2 3.2 7.8 15.7 15.7 BiH: BiH:0.61 0.61 90 90 0.2 3.2 2.9 5.8 Miscellaneous Miscellaneous Serbia: 0.64 2.9 5.8 Serbia: 0.64 5.5 5.5 6.2 6.2 4.9 4.9 0.3 stuff Feeding stuff 100 Albania: Albania: 0.7 0.7 Feeding % of total agricultural exports, 2016 80 0.3 North Macedonia: 0.73 % of total agricultural exports, 2016 80 100 9.2 3.6 3.6 3.8 3.8 North Macedonia: GINI0.73 4.8 9.2 7.1 42.6 2.3 tea Coffee, Coffee, tea Beverages Montenegro: Montenegro: 0.82 0.6 42.6 6.27.8 cocoa, spices 70 70 0.2 0.3 0.2 3.2 6.2 2.3 cocoa,15.7 spices BiH:0.82 0.61 9045.3 45.3 2.9 5.8 Sugars Miscellaneous Sugars Serbia: 0.64 23.1 60 60 23.1 5.5 1.1 6.2 4.9 Vegetables 0.3 & Vegetables & Feeding stuff 50 Albania: 0.7 fruit 50 ia of total agricultural exports, 2016 80 1.1 0.6 0.6 3.6 33.0 fruit45.9 3.8 North Macedonia: 0.73 9.2 3.733.0 45.9 Coffee, 3.7 0.142.6 Cereals & Cereals &tea 50 50 0.1 6.2 2.3 cereal prep. cocoa, cereal spices prep. Montenegro: 0.82 70 5.5 5.5 15.0 15.0 Sugars 45.3 Fish Fish 40 40 23.1 60 21.0 21.0 1.1 Dairy & eggs Vegetables & fruit& eggs Dairy 50 0.6 45.9 14.4 14.4 3.7 33.0 30 30 50 0.1 Cereals & Meat Meat & meat prep. prep. prep. & meat cereal 2.1 2.1 40.2 40.2 0.2 0.227.9 27.9 5.5 8.7 8.7 0.7 0.715.0 20 20 40 Live animals Fish Live animals 17.8 17.8 21.0 21.5 21.5 Dairy & eggs 10 10 30 16.4 16.4 0.6 14.4 0.2 0.6 0.2 0 0 3.6 2.7 2.7 0.7 0.7 0.7 2.1 3.6 3.6 6.2 3.6 6.2 Meat & meat prep. 0 20 0 40 20 60 40 80 60 100 80 100 1.4 1.4 40.2 0.7 0.1 0.2 0.11.6 27.9 0.2 0 0 20 0.4 0.4 8.7 0.7 1.6 0.2 Live animals Ideal Ideal Lorenz: Serbia Lorenz: Serbia % H ro ia ia 17.8 nia egH ro onia ia Bi n rb ten Bi edrb on eg 21.5 ba 0 ba 16.4 0.6 Se 0.2 10 acSe ed ten Lorenz: Albania Lorenz: Albania Al Lorenz: North Macedonia Al Lorenz: North Macedonia ac on 3.6 2.7 on 0 20 40 60 80 100 M M M 0.7 3.6 6.2 M rth 0.7 0.1 th 1.4 0.2 0 1.6 Lorenz: BiH Lorenz: BiH Lorenz: Montenegro Lorenz: Montenegro No or 0.4 ia N Ideal Lorenz: Serbia nia H ro nia Bi rb eg ba do Se ten Source: Based on Comtrade data. Lorenz: Albania Al e Lorenz: North Macedonia ac on M M rth Lorenz: BiH Lorenz: Montenegro 30. Serbia has been the driver of cereal production growth in producer in Europe. Prior to 2008, Serbia had low yields, poor No the region. Export growth of cereals and industrial crops from infrastructure and exported no more than half a million tons the WB region has been driven mostly by significant increases of grains annually. The sharp increase of cereal prices in 2008 of production and competitiveness in Serbia, which accounts gave way to dramatic changes in Serbian production and for approximately two thirds of the WB region’s production competitiveness, leading Vojvodina to record an average yield and exports of these commodities. Serbia has successfully of approximately 5 tons/ha of wheat and 6.7 tons/ha of corn. used the opportunity created by higher world cereal prices Serbia exports reached 2.4 million tons of cereal in 2016. to increase its exports and the profitability of growers, also improving the structure of farms and its logistics capacities. 31. Fruit is the most competitive group of agriculture prod- This allowed Serbia to become a highly competitive cereal ucts in the Western Balkans. Fruit production has been 18 4 60 10 60 50 WB REGION FOR 8 FIGURE 12. PRODUCTION AND TRADE GROWTH IN THE 50 2011-2016 CEREALS AND INDUSTRIAL CROPS, AVERAGE 3 40 610 40 4 60 60 Production growth (%) Production growth (%) 2 30 30 Trade growth (%) Trade growth (%) 50 4 8 3 50 20 20 40 40 1 2 6 10 Production growth (%) Production growth (%) 10 2 30 30 Trade growth (%) Trade growth (%) 0 4 0 0 0 20 20 -10 1 -2 2 -10 10 10 -20 -1 -20 -4 0 0 0 0 -30 -10 -2 -30 -6 -2 -40 -10 Sugar beet Wheat Barley Maize Sunflower Soybean -20 -1 -20 -4 Cereals Industrial crops -30 -2 line index growth Trade -30 Production line index growth -6 line index growth Trade -40 Production line index growth Wheat Barley Maize Sugar beet Sunflower Soybean Cereals Industrial crops Trade line index growth Production line index growth Trade line index growth Production line index growth Source: SEEDEV.. modernizing in recent years, stimulated by the potential to exports to the EU fruit market, holding 28 percent of rasp- export fresh fruit to Russian markets and frozen fruit to the berry exports, 18 percent of sour cherry and 10 percent of European markets. From 2011 to 2016, the WB region had a plum exports. From 2011 to 2016, export growth has been significant share of the production in the combined Western strong for pears (120 percent), sour cherries (93 percent), Balkans and EU area, accounting for 58 percent of the pro- apples (70 percent), raspberries (70 percent), strawberries duction of plums, 39 percent of sour cherries, 32 percent of (55 percent) and blueberries (55 percent). Serbia is the larg- raspberries and 22 percent of watermelons (see Figure 13 est producer and exporter of fruit in the region. and Box 2). At the world level, the WB region produced 14 percent of raspberries, 12 percent of cherries and 7 percent 32. The WB region holds a significant share of the pro- of plums. The region also controls a significant share of the duction of vegetables compared to the EU, but produc- FIGURE 13. PRODUCTION AND TRADE GROWTH IN THE WB REGION FOR FRUIT, AVERAGE 2011-2016 16 150 14 120 12 Production growth (%) 10 Trade growth (%) 90 8 16 150 6 14 60 4 120 12 Production growth (%) 2 30 10 Trade growth (%) 90 08 0 -2 6 60 -4 4 -30 2 30 m ar ch e ple y ot rry rry n y rry err ap err elo Plu Pe ric a be be be Ap Pe Gr Ch ch 0 Ap erm sp ue aw 0 ur Ra Bl at Str So -2 W -4 Fruits -30 m r ch e le y ot rry rry n y rry a err ap rr Trade line index growth Production line index growth elo p Plu Pe ric a be be he be Ap Pe Gr Ch Ap erm sp ue c aw ur Ra Bl at Str So W Source: SEEDEV.. Fruits Trade line index growth Production line index growth 19 BOX 2. REGIONAL MARKET FOR RASPBERRY AND SOUR CHERRY Raspberry and sour cherry produced in the WB region are competitive as frozen products in the EU market. Plums and blackber- ries are also part of the same value chain because aggregators with cold storage capacity are purchasing and marketing several fruits. Fruit from the region is becoming increasingly competitive because: • EU producers are giving up production of frozen fruit due to the intensive labor requirement for harvesting and the lower profits per ha compared to the fresh market or other fruit species; • The competition among processors (cold storages with freezing capacities), which are the central point of small and stone fruit value chains for the frozen fruit market in the region. They operate as collection points, organizers of production, and also market the product. The majority of fruit exports from the WB region is exported via EU intermediary import compa- nies, which supply to EU processors or retail. The other export path is direct marketing from the company owning the cold storage facilities to the EU retail and processors. Cold storage capacities with freezing regime are about 310,000 tons in Serbia, 30,000 tons in BiH and 8,000 tons in Kosovo. In BiH and Kosovo there are ongoing investments and expanding of cold storages, while in Serbia the process of concertation is ongoing. • Fruit production is operated by smallholders, where family members actively participate during the harvest, and thus keep- ing labor costs relatively low compared to those in the EU area. tion is not large enough to drive global markets. The for cucumber and gherkin (62 percent/year), beans (49 region accounts for a substantial share of the production percent/year), cabbage (42 percent/year), onion (39 of paprika (27 percent), beans (30 percent), cucumber percent/year), tomato (33 percent/year), carrot (30 per- (13 percent) and cabbage (12 percent) at the EU level (see cent/year) and paprika (27 percent/year). Figure 14). However, the export market for vegetables produced in the WB region is relatively diversified mean- Agricultural competitiveness ing that the WB exports to the EU represent a small share its trade of vegetables, except for cabbage for which the 33. Competitiveness index. This report utilizes a multidi- region accounts for 7 percent of the EU trade (SEEDEV, mensional measure of competitiveness for agricultural com- 2018). The growth of vegetable exports from 2011 to modities, which uses data from 27 indicators including pro- 2016 in the WB region has been quite strong, particularly duction, trade, area harvested, yield, and unit value for each FIGURE 14. PRODUCTION AND TRADE GROWTH IN THE WB REGION FOR VEGETABLES, AVERAGE 2011-2016 6 70 60 Production growth (%) 4 Trade growth (%) 2 50 40 0 30 -2 20 -4 10 -6 0 s ion t o o e r er an rro pe ag t at mb ma Be On p t Ca bb Po Pe To cu Ca Cu Vegetables Trade line index growth Production line index growth Source: SEEDEV.. 20 product/group of products. The competitiveness index5 is sold all year round. While maize is a crop option for many calculated in comparison to countries in the EU, CEFTA and smallholders in the region, structural changes are expected the Commonwealth of Independent States (CIS),6 which are to affect this model, and investments in alternative crops the traditional competitors and markets for WB exports.7 may be required to keep smallholder production viable in the Western Balkans. 34. Serbia is the only country in the WB region that is com- petitive in cereals and industrial crops (see Table 5). For 36. Despite similarities in agro-ecological conditions, instance, Serbia accounts for over 80 percent of the produc- competitiveness in vegetable production differs across the tion and 95 percent of maize exports in the region. From 2011 WB countries. Albania, Montenegro and North Macedonia to 2016, maize production in Serbia increased on average of are classified as competitive or highly competitive in most 12 percent per year, compared to an average of 8 percent vegetable sub-groups including pepper, cucumber, toma- globally. Serbia also accounts for 76 percent of wheat pro- to, cabbage, tomato, bean and onion. BiH is competitive duction and 91 percent of wheat exports. Approximately two in potato, pepper, cucumber and cabbage (see Table 6). thirds of the wheat and maize trade is transported by water, North Macedonia accounts for 60 percent of the regional along the Danube river, to the Constanta port in Romania. paprika (pepper) trade (annual average of 14 million USD), It is marketed by large traders that purchase cereals at FOB followed by Serbia with 27 percent. Albania, which accounts market in Serbia. Other Serbian traders focus on redirecting for 5 percent of the regional market, has experienced the cereals sales to the EU and the CEFTA markets given that fastest growth in paprika production in the region. North producers in BiH, North Macedonia, Montenegro, Albania Macedonia is also the origin of 78 percent of all cabbage and Kosovo are less competitive. exports from the region (21 million EUR). The high quality of North Macedonian cabbage has secured its leadership 35. Maize continues to be an important crop for smallhold- position in the region and a significant share of the EU mar- ers in the WB region. Smallholders engage in maize pro- ket (6 percent). Serbia is competitive in carrot, cabbage and duction because investments are relatively feasible, service pepper, but is relatively uncompetitive in other vegetables. costs are low (there is usually a large number of available Serbia accounts for 80 percent of the regional carrot trade. machines in each village), storage costs are small with the The production of cucumber and gherkin is characterized by use of natural drying techniques, and the production can be growth in most countries in the region. The leading export- TABLE 5. COMPETITIVENESS INDEX7 FOR CEREALS AND INDUSTRIAL CROPS, 2018 Crop Albania BiH North Macedonia Montenegro Serbia Maize 0.43 0.51 0.37 0.39 0.67 Wheat 0.32 0.46 0.41 0.38 0.51 Barley 0.32 0.38 0.51 0.46 0.42 Sugar beet 0.45 0.46 0.23 0.53 0.67 Sunflower 0.36 0.48 0.43 0.27 0.58 Soybean 0.39 0.52 0.25 0.37 0.60 l = High competitiveness l = Competitive l = Low competitiveness l = Not competitive The color of each cell represents the competitiveness of the crop compared to other crops within the same country. The number in each cell represents the competitiveness of the crop in one country compared to that of the same crop in other countries. 5 The country’s competitiveness index is the weighted sum calculated as follows: where mi is the score for the product i; xi – rank of the product i for the specific criteria; x– rank of the product i for the criteria j ; n – total number of prod- ucts in the analysis. Products are scored 1-10 so the formula determines the tenth of all products in which the products’ rank is in for the specific criteria and assigns a corresponding score. The product competitiveness index ranges from zero to one, with higher values indicating higher competitiveness. 6 The CIS comprise 12 States—Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Russia, Tajikistan, Turkmenistan, Ukraine and Uzbekistan. 7 The cells of the competitiveness index table are colored based on a country’s relative position in a commodity within a group of comparators that includes EU-28, CIS and CEFTA countries. The cells are coded as follows: top quartile: green (highly competitive); second quartile: blue (competitive); third quartile: yellow (low competitiveness); and bottom quartile: orange (not competitive). 21 TABLE 6. COMPETITIVENESS INDEX FOR VEGETABLES, 2018 Vegetable Albania BiH North Macedonia Montenegro Serbia Potato 0.56 0.50 0.41 0.58 0.39 Carrot 0.53 0.38 0.39   0.52 Pepper 0.74 0.62 0.78 0.71 0.65 Cucumber 0.72 0.63 0.64 0.53 0.46 Onion 0.66 0.41 0.57 0.50 0.42 Tomato 0.74 0.44 0.62 0.63 0.41 Cabbage 0.65 0.63 0.75 0.74 0.52 Bean 0.62 0.45 0.51 0.75 0.43 l = High competitiveness l = Competitive l = Low competitiveness l = Not competitive The color of each cell represents the competitiveness of the crop compared to other crops within the same country. The number in each cell represents the competitiveness of the crop in one country compared to that of the same crop in other countries. ers of salad cucumber in the region are North Macedonia BiH already accounted for 25 percent of WB production and Albania, while Serbia and BiH are the largest exporters and Kosovo also became an important producer. The pro- of gherkins. North Macedonia accounts for 48 percent of duction in the region increased from 74,000 tons in 2014 exports of cucumber and gherkin, followed by BiH (25 per- to 88,000 tons in 2016. BiH almost doubled its production cent), Albania (11 percent) and Serbia (11 percent). Exports to a total of 22,000 tons in 2016. Kosovo’s production of onion and tomato represent approximately 1 percent of increased from 105 tons in 2013 to 6,250 in 2016. In the the EU market. Onion trade in the region is dominated by region, North Macedonia is the country with the most fa- North Macedonia (42 percent) and Serbia (39 percent), vorable conditions for out-of-season raspberry production, while North Macedonia (53 percent) and Albania (25 per- but production is currently limited. The production of plum cent) are the leading tomato exporters in the region. in the region is in transition from being extensive to be- coming more intensive, further increasing the fruit’s com- 37. WB countries are competitive in several fruit crops. petitiveness potential. While Serbia is the largest producer For instance, among the EU, CIS and CEFTA countries, and exporter of sour cherry, plum, peach and strawberry Serbia and BiH are among the top ten most competitive in the region, the other WB countries are also benefiting producers of raspberry (see Table 7). In 2012 Serbia pro- from increased competitiveness in this group of agricultur- duced 91 percent of the region’s raspberries, but in 2016 al products. Geo-political changes, however, have affected TABLE 7. COMPETITIVENESS INDEX FOR FRUIT, 2018 Fruit  Albania BiH North Macedonia Montenegro Serbia Apple 0.66 0.58 0.64 0.48 0.56 Plum 0.68 0.72 0.63 0.73 0.62 Cherry 0.77 0.58 0.60 0.64 0.59 Raspberry 0.57 0.78 0.53 0.67 0.73 Grape 0.63 0.48 0.76 0.71 0.40 Peach 0.68 0.57 0.63 0.70 0.65 Sour cherry 0.56 0.68 0.72   0.80 Strawberry 0.64 0.59 0.50 0.55 0.58 Hazelnut   0.29 0.36   0.23 Blueberry 0.38 0.58 0.58 0.76 0.53 Apricot 0.55 0.29 0.72 0.32 0.64 Pear 0.65 0.70 0.50 0.56 0.63 Watermelon 0.76 0.48 0.74 0.79 0.55 l = High competitiveness l = Competitive l = Low competitiveness l = Not competitive The color of each cell represents the competitiveness of the crop compared to other crops within the same country. The number in each cell represents the competitiveness of the crop in one country compared to that of the same crop in other countries. 22 the fruit market since 2014, as producers from Poland and production. Only BiH is self-sufficient in poultry and Serbia Hungary lost access to the Russian market and influenced in sheep. The number of slaughtered animal heads for meat competition in the EU market. This caused trade flows production decreased approximately 20 percent from and price changes leading, for instance, to an increase of 2001 to 2016. There was, however, a slight increase in total exports of fresh fruit to Russia and of frozen fruit to the meat and milk output, which is associated to more efficient EU—predominantly to Germany. The trade of frozen fruit production systems. It is worth noticing that while Serbia’s (plum, raspberry and sour cherry) requires adequate cold meat production accounts for a large share of the region’s storage infrastructure as part of the consolidation of the output, the sector is not competitive when compared to long value chains for these agricultural products. Overall, other producers in the EU and CIS regions. Montenegro the trends are positive and justify investments in process- is competitive in pig, poultry and sheep meat, as well ing and storing capacities in the region. as in milk production (see Table 8). Meat production in Montenegro, however, is relatively small and accounts for 38. Apples are a competitive product for most WB coun- a small share of the regional production, although livestock tries and have become one of the most attractive agricul- is a key agricultural activity in the country and represents tural products. In 2016, Serbia accounted for about 50 per- approximately 45 percent of total agricultural production. cent of apple production in the WB region, followed by North Montenegro has built its processing industry on the basis Macedonia and Albania with 17 percent each, and BiH with 11 of the quality of traditional products “going mainstream” percent. While apple production is more competitive than a or entering industry facilities. Tourism and the hospitality decade ago, 84 percent of the region’s exports are destined industry as well as exports of high-quality fresh meat (pork to the Russian market under preferential conditions and with mostly) to countries such as Spain, Denmark and Germany no major competition due to Russia-imposed sanctions to the for processing are also key channels for marketing meat EU. Therefore, the market for apples is highly concentrated produced in Montenegro. and poses significant risks for producers should preferential conditions change. It would be important to identify new mar- 40. Meat and milk production in the WB region is based kets for apples produced in the WB region. in small farms. For instance, in Serbia, over half of all registered farms keep up to 5 Live Stock Units and an 39. Livestock production and the meat sector are import- estimated 35 percent of all animals in Serbia.8 Much of ant for the region but not competitive. This is due to the this production is for own consumption, and character- large number of households involved in production as well ized by a large share of small producers, meat processing as its relevance for personal consumption and food secu- at the household level, short value chains (direct sale rity. WB countries are not self-sufficient in meat or dairy to the final consumer), relatively low prices, and lack of TABLE 8. COMPETITIVENESS INDEX FOR LIVESTOCK, 2018 Product Albania BiH North Macedonia Montenegro Serbia Cattle meat 0.52 0.50 0.24 0.44 0.31 Pig meat 0.36 0.39 0.45 0.57 0.45 Poultry meat 0.41 0.55 0.33 0.53 0.30 Milk 0.46 0.65 0.41 0.67 0.41 Sheep meat 0.68 0.47 0.58 0.61 0.41 Cattle 0.42 0.51 0.58 0.69 0.38 Pigs 0.49 0.41 0.39 0.50 0.44 Poultry birds 0.42 0.68 0.36 0.64 0.30 Sheep 0.75 0.50 0.62 0.66 0.52 Wine 0.45 0.40 0.74 0.76 0.55 l = Competitive l = Low competitiveness l = Not competitive 8 Agricultural Census 2012. 23 control of safety and phytosanitary conditions. There is 44. The diasporas are potential investors and consumers. a strong gastronomic identity linked to meat products in The majority of the regional diaspora lives in developed the region. A consumer survey conducted by the EBRD- countries (Germany, Austria, France, Switzerland and Great FAO project indicates that small food businesses have an Britain), where income is higher. This creates demand for important role in the food sector and that quality is often the region’s products because diasporas tend to prefer the linked to small-scale, artisanal, less processed products. products they used to consume in their country of origin. Milk production across the WB countries is highly frag- The diasporas, thus, can serve as a direct consumer or as mented and dependent on small dairy farmers that lack a platform for the intensification of exports of processed the scale to negotiate with and supply dairy processors goods from the region. In addition, expatriates’ savings may that are coming under mounting pressures from retailers be redirected back to their country of origin as remittances for consolidation. or investments. 41. Demand for poultry is growing in the region. Poultry 45. Highly favorable trade agreements are one of the production is largely industrialized, with a short production biggest competitive advantages of the region. The cycle that does not require large areas compared to other CEFTA agreement, which was signed on December 2006, types of livestock. BiH is experiencing growth in poultry includes Albania, BiH, Croatia, North Macedonia, Moldova, meat production and may soon obtain authorization to ex- Serbia and Montenegro. The agreement enables a market port to EU countries, which will provide a further boost to its expansion for all products, as well as trade under identical poultry sector. conditions for all producers, opening up a wider market for trade and investments. The agreement fosters the lib- 42. The growth and competitiveness of the livestock and eralization of public procurement, attracting alternative meat sector depends on how well the WB countries can investments and increasing the chances to enter European meet the sanitary and food safety standards of the EU and markets under preferential conditions. other trade partners. Poor safety conditions led the EU to impose a ban on pork imports from the WB region due to the 46. Preferential status to access the Turkish market. All lack of vaccination against African Swine Fever, which affect- countries in the region have signed trade agreements with ed domestic and regional meat production and trade with the Turkey. These agreements do not imply full access to the EU. Resolving this and similar barriers is a long and costly pro- Turkish market, but rather preferential treatment for sensitive cess that requires intense engagement with institutions that products. BiH, for instance, has preferential status to export can ensure the necessary compliance with animal and food sunflower oil, wheat flour, beef and beef products to Turkey. safety regulations. This remains the biggest challenge for the Serbia is negotiating agreements with Turkey for the same livestock, meat and dairy sectors in the WB. products, yet within quotas, just like Kosovo (see Box 3). Geographical, political and regional competitive 47. Duty-free access to the EU market is a major motivator advantages for the agribusiness sector to make investments and ad- justments to conform to EU standards and increase their 43. The “historic memory” of a single market, as well as competitiveness. The WB countries have the status of can- inherited ties and relationships, matter in the Western didates or potential candidates for EU membership. Albania Balkans. The former Yugoslav market, excluding Albania, (2014), Montenegro (2010), North Macedonia (2005) and has approximately 17.5 million consumers and, up until Serbia (2012) are EU candidates. BiH and Kosovo have initi- 1992, constituted a fully integrated market. The ex-Yugoslav ated negotiations and have a clear prospect of becoming EU republics together with Albania comprise a market of more candidates in the near future. Accession to the EU means than 20 million consumers. In this context, the historical access to a rich market of 500 million people and signifi- memory and consumers’ preference for certain brands are cant investments by the private sector. The EU Common still present, as well as connections between producers and Agricultural Policy (CAP) budget provides for numerous processing industries in different countries. Past ties repre- development incentives and financial support for agricul- sent a potential for the expansion of certain products from ture. The European market also ensures more predictability one country to another, either through retail chains, or using in terms of demand and prices, which mitigates domestic regionally produced raw materials. fluctuations and, in turn, attracts foreign investors. 24 BOX 3. BiH AND TURKEY VEGETABLE OIL TRADE – THE ENTIRE REGION BENEFITS In recent years, BiH has represented an exit gate (to countries in the WB region) when it comes to the exports of crude and refined vegetable oil from the region, primarily to Turkey. After receiving Turkish preferential status in 2013, BiH has become the biggest exporter to this closed market, being responsible for as much as 95 percent of Turkey’s refined vegetable oil imports and 5 to 8 percent of the crude vegetable oil imports in the last five years. Serbia also has preferential access to the Turkish market, but interstate agreements have not worked to date, thus vegetable oil exports are shipped through BiH. BiH produces approximately 500,000 tons of sunflower a year; and in the last three years it has exported some 30,000 tons of crude and 35,000 tons of refined vegetable oil on average, with a total export value of around 100 million USD. Serbia produces approximately 500,000 tons of sunflower a year, while it exports on average 70,000 tons of refined and 50,000 tons of crude vegetable oil per year. The preferential status of BiH in the Turkish market has contributed to the expansion of the production (growth rate of 29 per- cent in the last 5 years) and competitiveness of the Serbian sunflower (the average yield of sunflower in Serbia is 27 percent higher than in EU countries), as well as to the construction of new processing facilities in BiH (three new refineries in the last three years). Exports of sunflower, BiH Exports of crude oil, BiH Exports of refined oil, BiH 3 50 60 2.5 40 50 Million USD Million USD 2 40 Million USD 30 1.5 30 20 1 20 0.5 10 10 0 0 0 10 011 012 013 014 015 016 017 10 11 12 13 14 15 16 17 20 2 2 2 2 2 2 2 20 20 20 20 20 20 20 20 10 11 12 13 14 15 16 17 20 20 20 20 20 20 20 20 Serbia Turkey Russia Others Turkey Others Turkey Croatia Austria Slovenia North Macedonia Others Exports of sunflower, Serbia Exports of crude oil, Serbia Exports of refined oil, Serbia 80 80 120 60 60 90 Million USD Million USD Million USD 40 40 60 20 20 30 0 0 0 10 11 12 13 14 15 16 17 10 11 12 13 14 15 16 17 10 11 12 13 14 15 16 17 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 BiH Hungary Ukraine BiH Montenegro Slovenia Montenegro North Macedonia BiH Russia Slovenia Others Croatia Slovakia Others Slovakia Croatia Others 48. The EAFRD and IPARD Funds offer significant incen- EU agri-businesses base their investment decisions on the tives for agri-businesses. IPARD funds offer up to half of their existence of these financial incentives. In the EU, practically investments as non-refundable grants to producers, and are everything has been built with the support of such grants. intended to stimulate investment in the sector in the region. Therefore, the region must leverage the benefits of the IPARD 25 funds to the maximum, and thus secure the necessary initial exports the majority of its cereals by water, through the investments for agriculture and rural development. Danube river, the most cost-effective way of transporting goods to the Black Sea port of Constanța in Romania. The 49. Climate in the WB is well-suited for agricultural pro- port of Bar in Montenegro is also used, albeit to a lesser duction. Countries located more southward from the largest degree, primarily for exporting to Mediterranean countries. EU markets are particularly suitable to produce fruits and North Macedonia’s exports of agricultural produce via sea vegetables. The Vojvodina region of Serbia and some other represent a small share (less than 8 percent) of its total ag- areas are located in the so-called corn belt, where weath- ricultural exports. The ports of Thessaloniki and Piraeus in er conditions are ideal for the production of cereals and Greece and Durrës in Albania are used to a lesser degree, oilseeds. Snowy winters and rainy springs provide enough usually as alternative routes. The competitive advantages moisture to the soil and moderate temperatures during the described in this section are summarized in Table 9. summer allow for a gradual ripening process of the crops resulting in high-quality produce. Market accessibility 50. Albania, Montenegro and BiH have access to the Adriatic 52. Accessibility to regional markets is critical for Sea, which facilitates international trade. In Albania, the farmers in the WB region. The geographical location port of Durrës is responsible for more than 90 percent of sea of cropland vis-à-vis markets is particularly relevant for trade. The port made significant investments in 2012, when smallholders who might not have the necessary resourc- new terminals were built, and is currently connected to 63 es to store and transport their production to consumers ports all over the world. It has recorded increases in trade with and agri-processors. For example, the region of Vlorë in an annual growth rate of 10-12 percent. The port of Durrës is the South of Albania has a vast cropland, but poor ac- well connected with the rest of Albania through road and rail- cess to regional markets, which increases transaction way infrastructure. The port of Bar in Montenegro operates costs for farmers willing to access those markets and container, bulk and general transport of goods. The port has a contributes to the predominance of short value chains in major development capacity and good connections with large the region. Most of Montenegro and BiH’s croplands are regional centers through roads and railway. BiH has access to also located in regions with relatively low accessibility to the sea through an extremely narrow strip of coast that in- regional markets (see Figure 15).9 Government support cludes the town of Neum, which is oriented to tourism. The and interventions can mitigate poor accessibility to mar- sea trade of BiH operates via the port of Ploče and the auxil- kets and reduce transaction costs for farmers operating iary port of Metković (a part of the port of Ploče) in Croatia. in these poorly connected regions. Digital agriculture can also significantly contribute to improving the linkages 51. Serbia and North Macedonia have no sea access but between producers and markets. In contrast, Vojvodina have agreements that facilitate international trade. Serbia and Belgrade in Serbia are large agricultural production TABLE 9. SUMMARY OF COMPETITIVE ADVANTAGES BY COUNTRY North Albania BiH Kosovo Macedonia Montenegro Serbia Diaspora CEFTA Access to EU market Preferential access to Turkish market EU perspective Access to EU funds Climatic conditions Access to sea Access to Danube l = High advantage l = Medium advantage l = Low advantage l = Very low advantage 9 The figure presents the market accessibility index calculated for the WB region as an integrated market. Annex B presents the maps with the market accessibility index within each specific country in the WB region. 26 FIGURE 15. LAND COVER (LEFT) AND MARKET ACCESSIBILITY (RIGHT) IN THE WESTERN BALKANS Source: World Bank staff. regions and have relatively good access to markets in the affect agriculture and how a country is equipped to mitigate WB region. Agricultural producers in neighboring areas those risks through irrigation infrastructure and insurance such as Pristina (Kosovo) and Skopje (North Macedonia) markets among others; (vi) institutions: development of are also well connected to regional markets. These re- institutions important for agribusiness including those that gions’ transportation infrastructure facilitates the phys- manage food safety and phytosanitary rules, research and ical access of farmers to markets and is an important extension; and (vii) access to finance: interest rates, loan element for agricultural competitiveness. availability, maturity and collateralization. Factor competitiveness Business environment 53. The agricultural sector in the region is influenced by 54. There are hurdles for creating a dynamic and com- many factors that together determine the degree of com- petitive agribusiness environment in the region. A weak petitiveness of a country. Table 10 lists the main factors af- rule of the law is one of the key obstacles for development fecting competitiveness and provides a relative assessment in all the WB countries and no significant improvements for each country compared to some of its main competitors have been observed over the last few years. Business se- including new member states (NMS) and EU-15 countries. curity also varies from country to country, but in general The indicators are organized around the following dimen- it is becoming worse due to high political influencing and sions: (i) business environment for farming and agribusiness, intervention, which undermines credibility and long-term including rule of law, business security and macroeconomic planning. In addition, the region is still healing from past conditions; (ii) labor: cost, availability and quality of labor; economic crises. The recovery has been slower than ex- (iii) agricultural budget: size, and quality of programming, pected, but conditions are improving. implementation and budget predictability; (iv) market de- velopment: market openness, accessibility to producers and 55. Albania: The business environment is relatively weak market organizations; (v) risk management: risk factors that in Albania, but improvements are taking place in key areas. 27 TABLE 10. FACTOR COMPETITIVENESS LEVEL AND TRENDS General situation North Factor Albania BiH Kosovo Macedonia Montenegro Serbia Level* Trend Business environment Significantly Slowly Rule of law é û é é û ê weak improving No major Improving Business security é é é ê û ê problems except Serbia Macro economy é é é é é é At risky level Improving Labor Cost ê ê ê ê ê ê Good Worsening Starting to be Fast Availability ê ê ê ê ê ê problematic deterioration Quality û û û û û û Weak Stable Agrarian budget Increasing Size é û é û é û Low to medium trend Becoming Quality û û ê ê é é Majority low worse No Predictability û û ê ê û û Very low improvement Highly No Implementation û é ê ê û ê politicized improvement Market development Openness é é é é é é Quite open Improving Access to input é é é é é é No obstacles Improving Becoming Market possibility é é é é é é Exists closed Risk management Becoming Occurrence ê ê ê ê ê ê Not too often worse Irrigation é é é é é é Small Improvement Low Insurance é é é û é û penetration Improvement Institutions Ministry and PA û û é ê é û Too centralized Stagnating Research and Without extension û û û û é ê Weak progress Biggest Slow Food safety é û é û é ê challenge improvement Access to capital Improving Interest rate é é é é é é Reasonable significantly No major Loan availability é é û é û é Must be better improvement No Maturity û û û û û û Could be better improvement Collateralization é é û é û û Improving Improving Note: The ranking has been formulated by the task team for this study. Positive High Medium Lower Low Negative é Positive trend ê Negative trend û No changes *Level in comparison with main competitors like NMS and EU-15 countries. 28 The government has emphasized public administration re- 58. North Macedonia: The country has one of the lowest form and innovation and these efforts aim to increase overall revenue-to-GDP ratio in Europe and the Western Balkans, efficiency and improve transparency in the country. The high a growing deficit in the pension system and higher interest public debt has been properly managed and is currently de- payments, which together create risks to fiscal sustainabil- clining due to a prudent fiscal policy. The country has also ity, thus undermining confidence in the economy and busi- received high inflows of FDI, which contributed towards ness environment. A credible fiscal reform program directed meeting internal capital needs. to making public spending more efficient and broadening the tax base would help stabilize public debt, rebuild fiscal 56. BiH: The reform agenda is advancing in BiH, but the buffers against shocks and increase investors’ confidence. overall business environment for agribusiness is particularly delicate and no significant changes have been observed in 59. Serbia: Macroeconomic conditions are improving, but terms of improvements in the rule of law in the country. The challenges remain to improve the rule of law and business reforms are expected to increase the overall competitive- security in the country. To enhance growth and increase ness of the economy and of agriculture, leading to a moder- business competitiveness, reforms are needed to reduce the ate increase in exports. However, a large demand of imports government’s intervention in the economy and restructure for infrastructure projects and a growing food demand will the energy and transport sectors in the country. Optimism most likely outpace export growth. In addition, a prudent, regarding future EU membership together with a relatively efficient and effective fiscal policy that addresses persistent good business climate and high FDI are expected to encour- unemployment and continues to safeguard the banking age private investment and foster growth. However, vulnera- sector will remain central to the BiH reform agenda and the bility to risks related to domestic politics and weaker growth development of a strong agribusiness in the country. in Europe are a threat to growth. 57. Montenegro: The country faces significant challenges 60. The innovation environment is relatively weak in to improve its business environment. The high and growing the Western Balkans. Agriculture and food innovation levels of public debt, external trade imbalances and high systems are complex and constantly evolving. Innovation external vulnerability pose a threat to business invest- is necessary to accelerate the transformation of the sec- ments. Efforts are underway to improve the rule of law and tor and foster the growth of agribusiness. The Global business security, but no clear outcomes are yet visible Innovation Index 2017, however, shows that the innovation from government efforts to reform procurement, the labor environment in the Western Balkans is far from being able market, the business environment, transport regulation, to deliver on sector transformation, particularly in Albania and education. and BiH (see Table 11). TABLE 11. THE WESTERN BALKANS RANK POORLY IN THE GLOBAL INNOVATION INDEX Albania BiH North Macedonia Montenegro Serbia Global Innovation Index 93 86 61 48 62 Institutions 62 71 45 48 50 Human capital 91 39 77 49 54 PISA scales in reading, math, & science 57 N/A 68 52 43 Tertiary enrollment, % gross 44 N/A 66 48 43 Gross expenditure on R&D as % GDP 95 88 69 72 40 Infrastructure 66 96 80 54 62 Market sophistication 41 79 59 65 99 Business sophistication 102 90 56 58 79 Knowledge & technology outputs 118 92 83 57 53 New businesses 65 77 32 17 53 Creative outputs 100 98 56 48 70 Note: Rank out of 127 countries. 29 Labor costs 63. For agriculture, permanent and seasonal migration of labor has significant implications. The following paths 61. Labor costs are much lower in WB countries than have been observed in WB countries where agricultur- in most EU-15 countries and, despite recent increases, al worker wages are lower than average wages in other should remain so in the foreseeable future. Labor costs sectors: (i) migration towards urban areas and to formal in the region are comparable to costs in the EU’s NMS (see employment in other sectors; (ii) seasonal workers moving Figure 16). Low labor productivity, however, offsets low labor towards seasonal jobs out of agriculture (for example in costs, inhibiting this cost advantage from translating into a tourism in Montenegro and Albania); and (iii) seasonal comparative advantage for the region. However, there are workers moving towards seasonal jobs in EU countries some examples of transfers of production to the region from where seasonal jobs in agriculture receive relatively higher the EU-15 area due to lower labor costs (cucumber and gher- wages (e.g. fruit and vegetable harvest jobs in Italy and kins production in BiH and Serbia, see Box 4) or the compet- Germany). itiveness of some products (raspberry, sour cherry, plum). In Albania, North Macedonia and Serbia, agricultural wages Agricultural policy are lower than the overall average and than the average for manufacturing (see Table 12). However, in Montenegro, 64. The WB agricultural policy is a mix of EU accession average wages in agriculture are higher than the overall obligations and divergence between the needs of the sec- average as well as wages in manufacturing. In BiH, wages tor strategic objectives and policy implementation. Weak in agriculture are lower than the overall average, but higher public institutional capacity exposes policy-making to polit- than average wages in manufacturing. ical influences and implementation strategies (budget allo- cations) that fail to address policy goals and sector needs. In 62. Shortages of labor in agriculture are a problem in the addition, there is lack of results-driven and evidence-based region, but labor availability is still better in the WB than agricultural policy in the region, which limits the ability of in NMS and EU-15 countries. The WB region has a number the public sector to formulate strategic directions for sector of worrying demographic and employment trends. Poverty development. and unemployment have stimulated emigration from WB countries. The long period of economic transition has dis- 65. Regional problems may need regional solutions, while couraged many WB citizens of hope for a prosperous future; still aligning to EU policies in the sector. All WB countries people are leaving the region attracted by better perspec- are in the process of accession to the EU, which requires tives and higher wages in the EU and other parts of the world. them to adapt to CAP policy and institutions. WB countries FIGURE 16. LABOR COSTS PER HOUR, EUR 40 34.7 37.3 35 32.6 31.4 29.1 30 22.3 24.4 25 21.1 EUR 20 15.6 15 9.4 9.4 9.7 9.8 10 7.3 8.3 5.8 6.5 6.5 3.5 3.8 4.6 5.1 5 2.2 0 Ki in d e en nia ia ria ia on ia Lit ro ia Hu a y d Re a Slo c kia nia m 8 ly Ge ia y bli ar an nc lan i i lan -2 Ita on an rb an tv ite Spa at str do g ed lga va ba ng to ne EU Fra pu rm La Cz Cro Se Fin m hu ed Po Au ng Sw Es Al Bu te Ro ac M h d M ec rth Un No Source: Eurostat. 30 BOX 4. RELOCATION OF GHERKIN PRODUCTION In 2014, Germany increased the minimum wage, which negatively influenced the competitiveness of labor-intensive crops such as gherkins. Therefore, major producers of gherkins in Germany relocated their production to the WB region, primarily in BiH and Serbia, but also in Kosovo, North Macedonia and Albania. In Vojvodina (Serbia), gherkin production involves large vegetable producers using harvest platforms with a minimum surface area of 17 ha, which is the operation capacity of a single platform. Another production model, which is dominant in the rest of the WB region, involves small surface areas which can be harvested by a family. Each model has its specific advantages and both are sustainable. The initial success and the production/export boom, however, can be expanded by using methods to increase the yield and the share of first-class products, by opening more processing factories (the largest of them is located in Vojvodina) and the diversification of exports to other destinations. Trade balance for Trade balance for cucumbers and gherkins from Serbia cucumbers and gherkins from BiH 20 10 15 8 10 6 Million USD Million USD 5 4 0 2 -5 0 -10 -2 06 07 08 09 10 11 12 13 14 15 16 17 06 07 08 09 10 11 12 13 14 15 16 17 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 Import Export Trade balance Import Export Trade balance TABLE 12. AVERAGE WAGE BY SECTOR Albania BiH North Macedonia Montenegro Serbia (Lekë) (KM) (Denari) (Euro) (RSD) 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 Average 47,522 48,967 853 862 23,457 23,850 499 510 46,097 47,893 Agriculture 34,062 36,264 785 757 16,909 17,847 539 527 38,595 41,820 Manufacturing 40,334 43,104 626 645 18,832 20,581 431 426 39,212 41,038 Wholesale, retail 33,984 34,627 613 626 21,100 22,225 528 539 36,144 37,810 Source: SEEDEV using data from each country’s statistical offices. are developing formal strategic documents to align with the 66. Public spending in agriculture displays significant vari- EU requirements, but the policies are not always addressing ations and is not correlated with output growth across WB the sector needs. A key issue is the wide use of the EU as countries. Between 2010 and 2015, total budgetary transfers a justification for the creation of direct payment measures, to agriculture as a proportion of GDP was just 0.26 percent in which are not in line with the CAP. WB countries use many Albania, 0.49 percent in Montenegro and Kosovo, 0.51 per- different forms of direct support and they vary greatly from cent in BiH, 0.72 percent in Serbia and 1.14 percent in North country to country. The number of payment schemes is Macedonia (see Figure 17). During the same period, growth of increasing while changes towards less distorting and more agricultural value was 14.8 percent in Albania (lowest relative EU-like schemes are rare. budget envelope) and 14.4 percent in Montenegro, compared to a decline in agricultural value added of 2.3 percent in North 31 Macedonia (largest relative budget envelope) and BiH, 5 per- analyses, objectives, measures and plans that are already in cent in Serbia and 10.1 percent in Kosovo. force and have been implemented within the framework of the Entity strategic documents. 67. Albania: The overall budgetary support for agriculture increased in 2015, with structural and rural development 69. Kosovo: The budget for supporting agriculture was 57 measures receiving 61 percent of the overall financial support, million EUR in 2017, which is above the average of the WB up from 39 percent in 2014. General measures related to ag- countries considering the size of Kosovo’s agriculture (per riculture covered about 24 percent, while direct payments ac- hectare and per farmer). The sector has been supported counted for 15 percent of the overall budget. Market support through direct payments (subsidies) and rural develop- measures have not been implemented in Albania, although ment measures (grants). Both measures are equally dis- the increased budget investments directed to structural mea- tributed. In 2016, total support through direct payments sures via investments is a positive development. was 26.1 million EUR, although the initially planned budget was 23 million EUR. In 2016, the program served 43,000 68. BiH: The agricultural budget covers a large number of dif- beneficiary farmers. ferent direct payment schemes for both crops and livestock. In 2011, most of the price support payments were replaced 70. North Macedonia: From 2010 to 2015, an average of by area payments in the Federation. The dairy sector receives about two thirds of total direct support went to the crops more than half of the total direct support (57 percent in 2015), sector, mostly tobacco (about 30 percent), vineyards and while the rest is divided between other sectors. Republica field crops (about 13 percent each). Regarding structural Srpska increased the budget in 2018 from 60 to 71 million KM, support, North Macedonia was eligible for EU funds through but it still keeps the complicated direct payments (price sup- the first IPARD program 2007-13 (IPARD 1), which started port) scheme for a large number of commodities. The eligibil- with a public call in 2009 and finished with payments to end ity criteria (most area- and animal-based payment schemes users on December 31, 2017. IPA 2014-2020 will provide require the sale of products to the market) indicate that the 104 million EUR for North Macedonia’s agriculture and rural direct support policy is directed towards market-oriented pro- development over seven years, of which 60 million EUR have ducers, which are a minority in the country. In January 2018, been programmed under IPARD 2 to support its farmers, its BiH adopted an agriculture and rural development strategy food processing sector and rural small businesses. relevant to the whole country. The document accounts for FIGURE 17. BUDGETARY TRANSFERS TO AGRICULTURE ARE NOT CORRELATED TO GROWTH OF VALUE ADDED Total budgetary transfers to agriculture, Agricultural value added, % of GDP (2010-2015 average) inflation-adjusted growth from (2011-2015) 1.2 1.14 Albania 14.8 1.0 Montenegro 14.4 0.8 EU-28 0.72 0.72 5.1 0.6 North Macedonia -2.3 % 0.51 0.49 0.49 0.4 BiH -2.3 0.26 Serbia -5.0 0.2 Kosovo -10.1 0.0 -20 -10 0 10 20 28 KD NE S B B H KO AL SR - BI EU M M Inflation-adjusted growth (%) Source: APM database, OECD and World Development Indicators. 32 71. Montenegro: Direct support is mostly aimed at the barriers introduced by Albania and North Macedonia to dairy subsector, accounting for 50 percent of total funds. flour imports from Serbia; (iii) the obstacles from North The eligibility criteria for direct payments are mostly set Macedonia to wine imports from Serbia, etc. in favor of larger producers (rather high minimum require- ments and no upper limits), which are not strongly rep- 75. There is a small number of agricultural producers op- resented in the Montenegro farm structure. Montenegro erating in modern market chains in the WB region. This is is the only country in the region in which the budget and due to largely uncompetitive commercial producers operating institutional capacities for rural development investments through informal channels while the costs of their produc- have been increasing year after year. tion’s standardization is high. In addition, there is low com- petition among processing facilities. Low competitiveness 72. Serbia: There have been significant changes to the in primary production combined with lack of competition in schemes used to support agriculture in Serbia since 2010. food processing creates a significant problem for the develop- Direct payment schemes, payment rates and specific eligi- ment and expansion of agribusiness markets in the Western bility criteria for payments have changed several times since Balkans. Failure to attract investments to the food processing 2010. For instance, until 2011 the vast majority of direct sup- sector, the inability to meet EU export standards for a large port was granted in the form of input subsidies for crop pro- number of products, the unreliability of policy support, under- duction (seeds, fuel and fertilizers). The livestock sector was developed institutions, and high tariff protection significantly supported only by a dairy premium and some headage pay- affect the competitiveness of agribusiness in the WB region. ments for high-quality breeding animals. In 2012, a single area This results in short market chains for small producers, usu- payment for crops was introduced, and the number of input ally ending on the local green market, in the neighborhood or subsidies and their payment rates decreased in the following with a wholesale buyer. However, there are several examples years to the point in which input subsidies were canceled, the of value chains that are almost exclusively export-orientated: area payment decreased to 2000 RSD (less than 20 USD per e.g. high-protein soybean products and apples from Serbia ha) and the budget was transferred to livestock-related direct (see Box 5), and raspberries from Serbia, Kosovo and BiH. support. During the last 3 years, direct support amounted to 71 percent of the budget structure, and payments for rural Climate and risk management development measures doubled. The Ministry of Agriculture consolidated institutional capacities and 3 public calls for 76. While climate in the WB region is well-suited for ag- IPARD were announced in 2018. The IPARD funds assigned to riculture, droughts combined with high temperatures are Serbia for the 2014–2020 period total 175 million EUR. a hazard for agricultural production. Droughts in 2000 and in 2012 affected the entire region. The year 2011 had Market development even less rainfall than 2012, but yet average production was better in 2011 because the low precipitation was not accom- 73. WB countries are well positioned in terms of market panied with high temperatures (see Figure 18). Droughts openness, access to inputs and overall market potential. affect spring crops the most, including maize, soybean, sun- In addition, the overall expected trend is that further market flower and sugar beet. Wheat, barley and oilseed rape are integration will take place, particularly within the European affected less frequently; variations in the yields of this crops Union. This will increase the market size and enable larg- are smaller because their vegetation is more likely to end er-scale production for farmers and agri-processors in WB before the beginning of a drought period. However, this does countries. not mean that wheat is not affected by unfavorable weath- er during the harvest (lots of moisture, cold weather), not 74. The WB region has access to major markets including enough moisture collected in the soil during the winter, or by the EU and CEFTA, as well as bilateral agreements with early droughts in May or June. Fruit and vegetables are af- Turkey, but still protects its own markets. Access to other fected by drought as much as cereals and oilseeds. However, markets has not been reciprocated because the Western providing that they are mostly grown in zones covered by Balkans have not entirely opened their own markets to other irrigation or in enclosed spaces, droughts may still affect the countries and often introduce custom and non-custom bar- yield though to a lesser extent and cost. riers for certain products. Typical examples include: (i) a uni- lateral breach of the SAA with the EU when Serbia increased 77. Floods and hail are quite ordinary but have localized customs for meat and milk imports; (ii) the non-custom impact on agriculture in the region. Floods are frequent and 33 BOX 5. APPLES: A SUCCESS STORY OR AN EVER-GROWING RISK FOR SERBIA? Between 2006 and 2017, the value of apple exports from Serbia to Russia increased from 13 million USD to more than 140 million USD. Serbia became the largest apple exporter to the Russian market. More than 200 Serbian producers and companies export apples to Russia. Is this trade pattern sustainable? This boom occurred primarily due to Russia’s political decision to ban fruit imports from the EU, thus another political decision may cause the boom’s collapse. Once an if the ban is lifted, cheaper apples produced, for instance in Poland and in other EU countries, would largely push Serbian apples out of the Russian market. A very Apple exports from Serbia Export concentration of apple exports from Serbia high concentration of exports to a single market (Russia accounts for 86 percent of Serbian apple exports) represents a major 160 vulnerability and entails a considerable risk for producers. 100 140 80 120 Serbiaexports from Serbia Apple exports fromApple Export concentration of apple Export concentration of apple exports from Serbiaexports from Serbia 160 160 100 60 100 100 Million USD 140 140 80 80 40 80 120 120 60 60 20 60 100 100 40 Million USD Million USD 80 80 40 0 40 20 0 10 20 30 40 50 60 70 80 90 100 60 0 60 20 20 40 40 Equidistributed exports Lorenz 06 07 08 13 14 15 16 17 09 10 11 12 20 20 20 20 20 20 20 20 20 20 20 20 0 0 20 20 0 10 20 30 0 40 10 50 20 60 30 70 40 80 50 90 60 100 70 80 90 100 0 0 Equidistributed exports Lorenz Equidistributed exports Lorenz 06 07 08 20 6 20 7 20 8 13 2014 15 2016 20 3 2017 14 15 16 17 2009 2010 2011 12 20 9 20 0 11 20 2 0 0 0 1 1 1 0 20 20 20 20 20 20 20 20 20 20 20 FIGURE 18. AVERAGE TEMPERATURE AND RAINFALL The average monthly temperature (right axis) and rainfall (left axis) for one extremely bad (2012), one average (2011) and one good (2014) year 1,200 30 25 1,000 The average monthly temperature The (right axis) average monthly and rainfall temperature (left (right axis) axis) and rainfall (left axis) for (2012), for one extremely bad one average one extremely (2011)one bad (2012), andaverage one good (2014) (2011) andyear one good (2014) year 20 800 Degrees Celsius 1,200 1,200 30 15 30 Mm 600 25 10 25 1,000 1,000 20 5 20 400 800 800 Degrees Celsius Degrees Celsius 15 0 15 200 Mm Mm 600 600 10 -5 10 0 5 -10 5 400 400 n ar b ay r n l g p t v c Ju Ap Oc De No 0 0 Ja Fe Ju Au Se M M 200 200 Temperature 2011 Temperature 2012 Temperature 2014 -5 -5 0 0 Cumulative rain 2011 Cumulative rain 2012 Cumulative rain 2014 -10 -10 n n ar ar b b ay r r n ay l n g l p g t p v t c v c Ju Ju Ap Ap Oc Oc De De No No Ja Fe Ja Fe Ju Ju Au Se Au Se M M M M Source: SEEDEV. Temperature 2011 Temperature 2011 Temperature 2012 Temperature 2012 Temperature 2014 Temperature 2014 Cumulative rain 2011 Cumulative rain 2011 Cumulative rain 2012Cumulative rain 2014 Cumulative rain 2012 Cumulative rain 2014 34 bound to generate the greatest damage in the Serbian plains, 80. The water for irrigation is either free or very cheap, but fast mountain rivers can cause damage too. Floods are but the cost of irrigation is nevertheless high, due to the usually a local problem and rarely affect large territories consumption of gasoline. Serbia and BiH have so-called (except in 2014, when major damages were recorded in solidarity water payments (where everybody pays more or Serbia, BiH and Croatia). Hail is frequent during the sum- less the same amount—12 EUR/ha in Serbia—whether they mer months, which affects crop production. However, these irrigate their crops or not). Albania and Kosovo charge for damages are localized, occurring in some villages or parts of water according to consumption and prices are somewhat municipalities. North Macedonia, Serbia and BiH have orga- high. Overall, the relatively low price of water in the region nized anti-hail systems based on anti-hail rockets. Producers represents one of its competitive advantages. But, on the of highly-valuable fruit productions cover plantations with other hand, the power network is underdeveloped in the rural anti-hail nets. The mounting of this nets is usually partly areas and this has a major impact on the costs of irrigation. subsidized through public funds. 81. Agricultural insurance is underdeveloped in the re- 78. The irrigated surface area in the region is relatively small. gion, regardless of efforts to improve the situation. The However, the quality of the irrigation data is questionable penetration of agricultural insurance is approximately 10 throughout the region. In Serbia, for example, wells do not need percent in Serbia, which is the highest in region. Almost to be legalized if they are up to 50 meters deep, and even if this always, only one type of indemnity insurance is offered in depth is exceeded, they sometimes remain unreported. Furling the WB countries although there have been efforts to in- irrigation systems (tifon) can be moved from plot to plot and troduce index-based insurance products. Serbia, BiH and perform irrigation to their maximum capacity. Statistics records North Macedonia subsidize the cost of insurance premiums their total number but not the total area in which they are used. starting from 40 percent of the cost in Serbia to 80 percent There are numerous reasons why the total surface covered in North Macedonia. The main reasons for an underdevel- by irrigation is so hard to identify, but it is quite clear that the oped agricultural insurance sector include: (i) an unsuitable available statistics underestimate the scope of irrigation. For farm structure, where the owners of bigger, less-tenured and example, Serbia officially irrigates 32,600 (2015) ha and BiH more highly-leveraged farms are more prone to pay crop 2,300 ha. Yet, intensive fruit and vegetable production is incon- insurance, but where insurance is too expensive for small ceivable without irrigation, and the area dedicated to just these farmers; (ii) low value crops’ production still dominates the crops in the two countries is a few times larger than what the region and low outputs per hectare decrease the need for official data on total irrigated land indicates. insurance; (iii) ad hoc compensation by the government. Farmers are aware that they will be compensated by the 79. Commercial producers usually irrigate fruit and veg- state or local government and that it is thus more important etables plantations, but producers of field crops face to lobby the them through media and farmers associations financial constraints to make the required investments in than to have insurance; (iv) the low profitability of agricul- irrigation. Small non-commercial producers use traditional tural insurance in comparison with other insurance products methods to water their gardens, or they do not water their demotivates insurance companies to prioritize agriculture. crops at all. The level of irrigation in the region is primarily influenced by the structure of production and producers, Agricultural credit followed by the technical possibilities to easily access water, and the access to investment capital. Regarding open field 82. Many factors influence agricultural lending and only cultures, the irrigation of wheat is not profitable, soybean a comprehensive approach can facilitate access to credit and sugar beet almost always require irrigation, while maize and promote financial inclusion in the WB region. While would often need it but this usually proves to be unprofit- competition among banks is relatively high in BiH and able. Considering that the structure of the production and Serbia, there is little competition for agricultural financial producers has been changing slowly but steadily, irrigation services in Montenegro, Kosovo and Albania. In addition, totals have also been on the rise, but are still lower than in de- access to information about farmers’ credit worthiness and veloped agricultural countries, and do not meet the region’s agricultural conditions is limited in all countries, which in- needs. In the countries in which water cannot be obtained creases the costs of banks’ operations and loans. There are from shallow wells and the state must provide water, such as also significant problems with the collateralization of agri- Albania, Montenegro, BiH and the regions of Dalmatia and cultural land in Kosovo and Albania. It is worth noting that Central Serbia, the growth of irrigation has been slow. financial institutions are investing in digital technologies 35 with the objective of providing standardized analyses and 85. There is a lack of risk management instruments. Banks reduce transaction costs in the WB region. Country-specific choose the lower risk clients for which they can obtain infor- observations are included in Annex C. While there are some mation at low cost due to their (client) size. This relationship significant differences in the agricultural and finance sec- -banking approach, and the fact that larger clients do have tors amongst the five WB countries (Albania, BiH, Kosovo, financial statements and business plans, enables banks to Montenegro and Serbia), their agricultural finance systems assess credit risks and serve these clients at a very low cost. share many common elements. There are opportunities for countries to set up credit guar- antee schemes focusing on riskier clients for which currently 83. Banks (some/several but not all) are interested and such programs do not exist. Unlike more developed coun- have liquidity to lend to agriculture. The banking sector tries, guarantees do not have a country “institutional” home in the WB countries is competitive and banking systems and rely on programs by IFIs and donors. EBRD and IFC,for appear quite liquid. Banks are interested in serving the agri- example, do offer risk sharing facilities but the up take is cultural sector and several that already do, have invested in limited since they require “soft” money to take first losses credit approval systems, loan products and specific training (10-20 percent) and banks are still not willing to take risks for staff to cater to agricultural clients. Many of the banks for smaller clients even with RSF. There are some European that cater to the agriculture sector are of foreign ownership funds, like EIF, that offer highly-subsidized partial credit (NLB, Raiffeisen, Credit Agricole, ProCredit, Intesa, etc.), guarantees but these are, again, utilized by certain banks offer financing at competitive rates, and benefit from the and mostly for general SME portfolios. Agricultural insur- know-how of their parent companies. Banks report relatively ance can be found in some countries (e.g. Serbia and per- low NPLs and profitable margins. There are some differenc- haps Albania) but tends to be unsophisticated, covering the es amongst countries, being that banks (and MFIs) in Serbia, “easy” risks (like hail) and relying on copying products from BiH and Albania are more interested in agricultural finance, other countries. The lack of reliable and timely agri-climatic compared to those in Montenegro and Kosovo. and production data limits the development of products and make it a challenge to adapt products from other countries 84. Banks tend to focus on larger and less risky clients. to local conditions. In addition, there is lack of awareness by Banks focus on larger farmers and medium and large farmers about insurance which is often linked to the exis- agribusinesses. For these clients, banks offer both short- tence of off takers’ and input suppliers’ agreements which er-term working capital credit and longer-term loans for are limited for small farmers unconnected to markets. equipment, machinery and silos. The lack of collateral and financial records, the lack of awareness on the farmers’ 86. Lack of aggregation mechanisms. Unlike many coun- part, and informality are some of the reasons why banks do tries in Northern Europe (Netherlands, Germany, Austria, not cater to smallholder farmers and small agribusinesses. France, etc.), where small producer associations and co- Also, the nonexistence of information systems that enable operatives have played a critical role in linking smallholder banks to assess risks, needs and agricultural conditions, in farmers to finance, inputs and output markets, such produc- order to develop the right financial products, as well as the er associations and cooperatives are weak or nonexistent absence of information about farmers’ creditworthiness, in the WB countries, and are often associated with the past are other key reasons to explain why banks prefer to focus regimes and have bad reputations. There are very few such on larger clients for which such information is easier to ob- cooperatives and producer organizations that seem to be tain. In some countries with MFIs, such as Albania, BiH and functional. As such, aggregation mechanisms are missing Kosovo, smallholder households have access to financial that could enable smaller farmers access to finance, inputs services but at quite a high cost. Also, credits tend to focus and output markets. Traders and off takers do provide ag- on short-term financing needs and not on longer-term in- gregation services, but the balance of power is clearly tilted vestments needed to raise farmers’ productivity, improve towards them with smallholder farmers getting the smaller the value added of their products and/or connect them to percentage of value added in their transactions with such markets. In several countries, off takers and input suppliers entities. provide some financing in terms of inputs to smallholder farmers but such financing is usually to cover short-term 87. Key areas that would enable financial institutions to needs. Because these providers prefer that banks lend di- extend more credit to agriculture, particularly to smaller rectly to the farmers, they have been reducing their portfo- farmers, based on the analysis of the five WB countries agri- lios over the recent years. cultural finance systems (see Annex C) include: 36 • Market, agro-climatic and production information sys- clude the analysis of risks and the design of suitable insur- tems that enable banks to assess the agricultural condi- ance products to market to these farmers. tions and needs of smallholder farmers and design and market the right products for them; • Linkages between smallholder farmers and off takers. Financial products, such as insurance and credit, are much easier to design and distribute to smallholder farmers when they are part of a package of other non-fi- nancial products and services, most often associated with linkages between farmers and off takers; • DA services will generate new data and increase the flow and transparency of information. For example, digitizing payments in agriculture will provide valuable information to banks on the cash flows to these farm- ers. Digital platforms connecting farmers to markets will reduce market risks. Precision farming with digital technologies will reduce costs, improve yields and re- duce climatic risks making smallholder agricultural pro- duction less risky. Digital financial services (or DFS) can lead to substantially lower distribution costs to reach smallholder farmers; • Evolution of new risk management instruments. Credit guarantee schemes with suitable local institutional backing, as well as agricultural insurance, can provide a significant level of comfort and replace traditional collateral for banks’ lending to smallholder farmers. Insurance and credit guarantees can benefit substan- tially from improving information systems for agricul- ture. Without such information systems it is almost impossible to map risks, price them and design risk management mechanisms to address these risks; • Raising awareness and promote farmer training. There is a huge scope to raise awareness and train farmers on finance and insurance issues. Awareness raising and training should be accompanied by information sys- tems in financial services and insurance. 88. Refocus government policies. The usual instrument of governments to promote bank lending to agriculture con- sists of interest rate subsidies (to lower the cost of credit). However, interest rates in many WB countries are already low and banks are liquid, yet lending is limited for small- er farmers. It is not a matter of cost but more of manag- ing risks and creating the conditions for banks to lend to smaller farmers. Reducing transaction costs and promoting risk management instruments could be a better focus for government policies moving forward. Similarly, the govern- ments’ response to insurance adoption is to offer premium subsidies which are not enough if farmers do not see the value added of insurance and if information and data pre- 37 IV. The Pathway to Change: A framework towards improving productivity and increasing competitiveness of agriculture in the Western Balkans 89. The successful transformation of agriculture can unleash on- and off-farm economic growth, create jobs, raise income and improve the livelihoods of people in rural areas through- out the WB region. Identifying the drivers of the structural transformation and designing effective interventions are criti- cal to accelerate the process and produce outcomes that meet both economic and social goals. The macro-drivers of the transformation include: (i) strong institutional capacity, (ii) a well-developed strategy for the sector, and (iii) targeted policy interventions that act as both pull and push mechanisms to incentivize a behavior change in farmers and agri-processors, and support the sector to overcome development hurdles (e.g. low capital investments and R&D spending).10 90. To achieve this, WB countries need to improve the productivity and increase the competitiveness of the ag- ricultural sector. The results of the analysis presented here point towards capital investment and the expansion of the knowledge and innovation agenda as the two critical factors to accelerate the structural transformation of the agricultural sector. These can significantly increase the labor and land productivity of agriculture and strengthen the forward and backwards linkages of the sector with the agri-food indus- try. For example, closing a quarter of the gap in the stock of agricultural capital per worker relative to EU-28 levels would increase agricultural labor productivity by 76 percent in Albania, 82 percent in BiH, 30 percent in Serbia and 6 per- cent in Montenegro. The effects on jobs and growth can be significant.11 91. The public sector can play an important role in driving this process. Improving the institutional capacity of the pub- lic sector and aligning financial resources towards productive ends are important factors for improving the productivity of 10 See Boettiger, Denis and Sanghvi (2017) for a detailed discussion of the drivers of the agricultural transformation. 11 The input-output analysis carried out in a World Bank report finds that in Albania the agri-food industry is responsible (directly and indirectly) for almost half of economy-wide jobs, while in North Macedonia (where the economy has already embarked in a diversification process) it creates nearly a third of employment (World Bank, 2017). 38 the sector. Targeted and business-motivated capital invest- 93. Getting the incentives right is a challenge. With a long ments (through rural development measures) and strength- history of agricultural production, favorable agro-ecological ening the research and development capacity of the public conditions, geographical position vis-à-vis major markets and sector (for knowledge generation and dissemination related pre-accession financial resources, the Western Balkans have to on-farm and off-farm production needs, as well as sanitary favorable conditions for completing the process of structural and food safety needs) are critical drivers of sector growth. transformation. However, identifying the right incentives for The findings suggest that Pillar 1 decoupled support per hect- improving productivity and enabling private sector participation are has small but significant positive impact on productivity, and competitiveness in the sector has been a learning process. while coupled support per hectare reduces it significantly. Linking strategic vision with specific sector objectives that are Pillar 2 (rural development) support does not appear to sta- driven by improvements in productivity rather than other fac- tistically impact productivity, which can be attributed to the tors, has limited the effectiveness of public investments in the very low absorption of this agricultural policy instrument in sector. Going forward, better understanding of the structural the region.12 On the other hand, increasing R&D investment dynamics of the sector within the context of each country so as to close a quarter of the R&D gap relative to EU-28 lev- and linking those to support systems can yield better results. els could increase agricultural productivity by 15 percent in Targeting measures to typologies of producers and production Albania, 25 percent in BiH, 16 percent in North Macedonia, 18 needs is also important for productive inclusion and overall sec- percent in Montenegro and 6 percent in Serbia. Global expe- tor growth. Overall, public spending can be improved and better rience shows that capital investments alone cannot achieve targeted to produce better outcomes in the region. the desired outcomes, without improvements in knowledge and capacity and vice versa. 94. DA can play an important role in the transformation process. WB economies can accelerate their structural 92. The private sector is a key driver in the process of transformation and harvest significant social and economic structural transformation of agriculture. Private sector dividends by taking advantage of opportunities created by investments in capital intensification, knowledge formation, emerging digital agriculture technologies to connect farmers and innovation in agriculture are important drivers in the to markets, increase productivity and efficiency and place the structural transformation of the sector. For these to increase region on a strong competitive position in international DA in type and volume, however, the returns on the investments and food markets. The adoption of digital agriculture tech- must be attractive. Large producers in the region are already nologies requires government interventions and investments benefiting. For medium and small producers, the (trans- to lower barriers to entry, incentivize the private sector to actions) costs often exceed the benefits of private sector develop products suitable to the sector and region, and boost investments. Access to credit is an important catalyst of demand that could jump-start a domestic and regional DA private sector investment and financial inclusion is critical market. DA can be a driving factor in the improvement of the for enabling all types of producers to be part of the agricul- AKIS agenda in the region. tural transformation. Risk management mechanisms (such as agricultural insurance, associations, etc.) can provide the 95. Reaching the potential. The agricultural sector in the means for risk sharing that would makes investments more Western Balkans has an enormous potential. Improvements attractive. There is a need to implement targeted measures to in factor productivity (land and labor) will require a more increase access to agricultural finance, particularly for small concerted and targeted effort of investing in capital and and medium-size farmers and agri-businesses that are sub- knowledge together, and across the board, reaching the ject to high-interest rates and conditions that are difficulties large and the small producers. Public and private resources to meet given the land structure and high transaction costs to and knowledge are needed to transform these productivity mitigate risks, and asymmetric information. Through private improvements in the primary sector forward and backwards sector investment, the forward and backwards linkages of across the agri-food industry. For productivity improvements the sector can also be strengthened, which can be critical for to translate into increases in competitiveness, clear, well-de- jobs and growth in the region. fined investment strategies need to be developed by pro- ducers, where production responds to market signals, where scale and uniformity of quality are generated, where credit 12 The economic impacts of direct support to farmers (under Pillar 1 of CAP) are not negligible, but support allocated under rural development is easily accessed and used, where risk sharing mechanisms program (Pillar 2 of CAP) has double the effect on increases in employ- are enabled and functional, and where the public sector pro- ment, with farm modernization and food processing being important generators of jobs due to their labor intensity (World Bank, 2017). vides the right incentives for support. 39 References Boettiger, Sara; Denis, Nicolas; and Sanghvi, Sunil (2017). Successful agricultural transformations: Six core elements of plan- ning and delivery. McKinsey Insights. Available at https:/ /www.mckinsey.com/industries/chemicals/our-insights/ successful-agricultural-transformations-six-core-elements-of-planning-and-delivery Fuglie, Keith O. (2015). “Accounting for Growth in Global Agriculture.” Bio-Based and Applied Economics, Volume 4, Issue 3: 221–54. Latruffe, L., Bravo-Ureta, B.E., Moreira, V.H., Desjeux, Y. and Dupraz, P. (2011). Productivity and Subsidies in European Union Countries: An Analysis for Dairy Farms using Input Distance Frontiers. Paper presented at the EAAE 2011 International Congress, August 30 – September 2, Zurich. Latruffe, L., Guyomard, H. and Le Mouel, C. (2009). The Role of Public Subsidies on Farms’ Managerial Efficiency: An Application of a Five-Stage Approach to France. Working Paper SMART-LERECO No. 09-05, Rennes. World Bank. 2017. Agriculture for Jobs and Growth in the Western Balkans: A Regional Study. World Bank. 2018. EU Regular Economic Report: Thinking CAP - Supporting Agricultural Jobs and Incomes in the EU (English). EU Regular Economic Report; no. 4. Washington, D.C.:The World Bank. __________. 2018. Leveraging Digital Agriculture to create a competitive, resilient, and smart agri-food system in Croatia. Zhu, X. and Oude Lansink, A. (2010). Impact of CAP Subsidies on Technical Efficiency of Crop Farms in Germany, the Netherlands and Sweden. Journal of Agricultural Economics, 61: 545–564. Zhu, X., Demeter, R.M. and Oude Lansink, A. (2012). Technical Efficiency and Productivity Differentials of Dairy Farms in three EU Countries: the Role of CAP Subsidies. Agricultural Economics Review, 13: 66–92. 40 Annex A. Trade Patterns Food and beverage trade, Albania, 1998-2016, million USD Primary Processed FIGURE A-1. FOOD AND BEVERAGE TRADE, ALBANIA, 1998-2016, MILLION USD 300 0 trade, Albania, 1998-2016, Food and beverage 600 million USD 0 Primary Processed -50 250 -50 500 (million USD) (million USD) 300 0 600 0-100 (million USD) (million USD) -100 -150 -50 200 400 250 -50 500 USD) USD) -200 -100 USD) USD) exports exports 150 -150 300 -250 (million (million -150 balance balance 200 -100 400 (million (million -300 -200 and and 100 -200 200 exports exports 150 -150 300 -350 -250 Trade Trade Imports Imports Trade balance Trade balance -400 -300 50 -250 100 Imports and Imports and 100 -200 200 -450 -350 0 -300 0 -500 -400 50 -250 100 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 -450 0 -300 0 -500 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Balance Imports Exports Balance Imports Exports Balance Imports Exports Balance Imports Exports Source: Based on Comtrade data. FIGURE A-2. FOOD AND BEVERAGE TRADE, BIH, 2003-2016, MILLION USD Food and beverage trade, BiH, 2003-2016, million USD Primary Processed 600 Food and beverage 0 trade, BiH, 2003-2016, million USD 1,400 0 Primary -50 Processed -100 (million USD) (million USD) 500 1,200 600 0-100 (million USD) (million USD) -200 1,400 0 400 -150 -50 1,000 -300 -100 USD) USD) 500 1,200 -200 -100 -400 USD) USD) 800 -200 exports exports 300 (million (million -500 Balance balance 400 -250 -150 1,000 -300 (million (million 600 -600 and and 200 -300 -200 800 -400 exports exports -700 Trade Trade 300 400 Imports Imports -500 Trade Balance Trade balance -350 -250 100 600 -800 200 -600 Imports and Imports and 200 -400 -300 -900 400 -700 0 -450 -350 0 -1,000 100 -800 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 -400 200 -900 0 -450 0 -1,000 Balance Imports Exports Balance Imports Exports 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: Based on Comtrade data. Balance Imports Exports Balance Imports Exports Imports and exports (million USD) Imports and exports (million USD) Imports and exports (million USD) Imports and exports (million USD) 0 200 400 600 800 1,000 1,200 0 20 40 60 80 100 120 140 160 0 200 400 600 800 1,000 1,200 0 20 40 60 80 100 120 140 160 2005 Source: Based on Comtrade data. Source: Based on Comtrade data. 2005 2006 2006 2006 2006 2007 Balance 2007 Balance 2007 Balance 2008 Balance 2007 2008 2008 2009 2008 2009 2009 2010 2009 2010 2010 2011 2010 2011 2011 Primary Primary 2011 2012 Primary Primary 2012 2012 2013 Imports 2012 Imports 2013 Imports 2013 Imports 2013 2014 2014 2014 2014 2015 2015 2015 2015 2016 2016 2016 0 2016 0 -80 -60 -40 -20 0 -140 -120 -100 -80 -60 -40 -20 0 -140 -120 -100 Exports 100 200 300 400 500 600 700 Exports Exports 100 200 300 400 500 600 700 Exports Trade balance (million USD) Trade balance (million USD) Trade balance (million USD) Trade balance (million USD) Imports and exports (million USD) Imports and exports (million USD) Imports and exports (million USD) Imports and exports (million USD) 0 50 100 150 200 250 300 350 400 450 500 0 50 100 150 200 250 300 350 400 450 500 0 200 400 600 800 1,000 1,200 1,400 FIGURE A-4. FOOD AND BEVERAGE TRADE, SERBIA, 2005-2016, MILLION USD 0 200 400 600 800 1,000 1,200 1,400 2005 2006 2005 2006 2007 Balance 2006 2007 FIGURE A-3. FOOD AND BEVERAGE TRADE, MONTENEGRO, 2006-2016, MILLION USD Balance 2006 2008 Balance 2007 2008 Balance 2007 2009 2008 2009 2008 2010 2009 2010 2009 2011 2010 2011 2010 2012 Processed 2011 2012 Processed 2011 Imports Processed 2012 2013 Imports Processed 2013 Imports 2012 2014 Imports 2013 2014 2013 2015 2014 2015 2014 2016 2015 2016 2015 0 2016 0 -50 2016 -450 -400 -350 -300 -250 -200 -150 -100 -50 0 Exports -450 -400 -350 -300 -250 -200 -150 -100 0 Exports 100 200 300 400 500 600 Exports 100 Trade balance (million USD) 200 300 400 500 600 Exports Trade balance (million USD) Trade balance (million USD) Trade balance (million USD) 41 42 FIGURE A-5. FOOD AND BEVERAGE TRADE, NORTH MACEDONIA, 1998-2016, MILLION USD Primary Processed 180 50 700 0 160 40 600 -100 Imports and exports (million USD) Imports and exports (million USD) 140 30 Trade balance (million USD) Trade balance (million USD) 500 120 20 -200 100 10 400 -300 80 0 300 60 -10 -400 200 40 -20 100 -500 20 -30 0 -40 0 -600 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Balance Imports Exports Balance Imports Exports Source: Based on Comtrade data. 43 Annex B. Market Accesibility Index ALBANIA BiH KOSOVO NORTH MACEDONIA 44 MONTENEGRO SERBIA 45 Annex C. Agri-finance in the Western Balkan Countries Agricultural credit in Albania they have been lending to agriculture for a long time. FED In Albania, 350,000 farmers, representing 50 percent of the Invest has 26 years of experience in social finance with a 3.4 population in rural areas, contribute more than 20 percent billion lek portfolio in lending and savings covering 1,500 of GDP, but their financial inclusion or the presence of agri- villages with 51,000 members. It started activities with culture financing is low. Agriculture comprises less than 3-4 20,000 USD from the World Bank in 1992, and since 2015 percent of all lending in Albania. Although financial institu- is conformed by 70 savings and credit unions focusing on tions’ CEOs have stated that agriculture requires millions of agriculture knowledge capacity building and lending. Fifty Euro of investment, the lack of financing to the agriculture percent of its portfolio is in agriculture, providing financing to sector is due, among others, by the challenges to develop 70 percent of rural members. capacity for agricultural lending in rural areas, the absence of cash flow-based lending, a lack of property titles for secu- Banks lend at interest rates ranging from 4.6-4.8 percent ritized lending, and no/very limited agriculture insurance to whereas MFIs lend at interest rates of around 20 percent. In mitigate weather risks. Albania is prone to weather related general, banks finance agriculture value added processing, risks such as flooding, spring frosts on horticulture, and hail. distribution or retail and, as of January 1, 2018, they can only Agriculture insurance is not available to provide stability to finance entities with audited/public financial statements. farmers businesses in case of such weather related events This means that only MFIs will/can finance small primary making lending to agriculture a risky proposition. Farmers production. The above-mentioned risk sharing program diversify their risks by planting multiple crops. There is some requires financial institutions to pay 1.5 percent of their semblance of agriculture insurance, with the odd company exposed portfolio. Most debt is short or medium term. The copying agriculture insurance products from other countries, share of NPL in the country as a whole is approximately 13.4 but with no adaptation to local data/conditions, resulting in percent. Some MFIs, like NOA, have a basic understanding of excessive payouts and failure. the costs of production. In conjunction with EBRD, the government (which contrib- Though banks and other financial intermediaries are increas- utes 30 percent) is part of a risk sharing program to under- ingly interested in the agriculture sector, they charge high write 100 million EUR of agriculture credit. However, even interest rates, are not deeply knowledgeable on agriculture though the program is in its third year, so far it has only lent practices/costs/risks, and do not have the training and tools 20 million EUR, with on-lending provided by Society General, necessary to support sustainable agriculture financing. ProCredit (9 million EUR with a minimum loan size of 30,000 Financial institutions that provide credit, typically do so with EUR), Intesa and 2 MFIs: NOA (with 30 percent of its port- high collateral requirements on a sector that is small in struc- folio in agriculture and an average loan size of 3,000 EUR, ture and, thereby, lacks collateral for current financing prac- credits up to 15,000 EUR without collateral for good clients, tices. These financial institutions do not perform appropriate a few loans up to 100,000 EUR and NPL at 4 percent); and client and business credit risk assessments, rarely mitigate Fondi BESA (with 16 percent of their portfolio in agriculture, the risks that are common and inherent to agriculture (i.e. plans to expand to 25 percent in 2-3 years, and 5 million EUR with agriculture insurance), and do not have the appropriate of risk sharing with EBRD, of which 3 million EUR are com- agriculture lending products such as pre-season finance, mitted with EBRD TA inclusive of new product development). cash flow-based lending, forward contracts and other fi- Within the EBRD risk sharing program, if the client reaches nancial products available in other countries. Because these certain ratios, collateral requirements are lowered by 20 per- types of products require a knowledge of agriculture that cent. Banks lend to value added processors and MFIs lend to these institutions lack in order to reduce their collateral re- farmers in general. There is a new idea to pre-approve credit quirements, they view agriculture as risky and tend to “cher- for farmers to speed decision making and disbursement in ry-pick” agriculture lending opportunities, thereby limiting critical seasons and to time their payment post-harvest after access to finance to select enterprises versus supporting the crop has been sold. Savings and credit unions do well as good managers with good cash flow opportunities. 46 Farmers are ill prepared to understand agriculture finance, uncovered by financial services. After 2014, which saw a their responsibilities to provide the information and evi- historically high NPL rate of 14 percent, banks have become dence of ownership (land lease, title, registration) that can increasingly conservative and the agricultural portfolio has formalize their application for collateralized debt. A lack of stopped growing despite the opportunities created by the record-keeping and good accounting reflects badly on the country’s newly acquired preferential status to access the farmers’ possible solvency, revenue generation and stability, Turkish market (for the export of flour, beef and sunflower and the lack of standardization can lower loan assessment/ seed oil) and a significant growth of labor intensive crops loan transaction costs. Farmers need to learn how to prepare such as cucumber and raspberry. their property documents, basic financial statements, and ar- ticulate their plans for the use and repayment of credit. There Agriculture in BiH, together with agricultural lending, main- is a suggestion to create an agriculture financing platform to ly depend on the trends in Serbia and, to a certain degree, link EPARD applications with bank lending and non-financial Croatia. Due to the full openness and mutual connections services (training to prepare financial documents, business with those markets, prices in BiH are identical to those in plans, EPARD applications) in order to facilitate agriculture Serbia, and the majority of input suppliers and processors lending and foster productivity in agriculture. perceive these countries as a single market. Furthermore, in order to understand the trends in Bosnia, one must be ac- All types of agriculture data are fragmented or unavailable in quainted with the trends in Serbia. Banks operating locally Albania. To build agriculture insurance, weather and produc- that understand this use a regional approach for agricultural tion data is required. To provide financing services to agricul- crediting, with common methodologies, practices, techno- ture, the costs of inputs and production, pricing and market logical maps, and even credit officers. information, as well as land registries are required among others. To maximize the uptake of EPARD, farmer registries Agricultural credit in Kosovo would be useful. In addition, the need for statistics on agri- The agricultural portfolio is modest and has significant po- culture production, diseases, new crop introduction, sourcing tential for growth. Many obstacles on both sides—demand of supply, financing, etc., has been highlighted by FAO, the and supply—are causing the agriculture portfolio to be ser- government and other stakeholder agencies. These informa- viced at a significantly lower level than what the sector’s tional systems are a prerequisite for full EU accession. importance demands. Banks and MFIs are not able or ready to satisfy this demand because they either do not understand Agricultural credit in BiH or are unable to manage the required regulations and market BiH has a highly competitive market of agricultural loans. risks posed by agricultural producers. Lack of information and This is the result of considerable competition among banks, documentation in the agricultural sector and clearer/better generally owned by the agricultural lending leaders in the opportunities to service other sectors result in a conservative region (ProCredit, Intesa, UniCredit, NLB, Raiffeisen) com- approach to the evaluation of collateral and business plans in bined with the relatively small size of the market. Besides, the rural areas. BiH does not have any other particular sector (like tourism in Croatia and Montenegro, or commerce in Kosovo) that could Overall, the outstanding agricultural loan portfolio is stag- generate a sufficient number of clients to lure banks away nant at 70 million EUR/year. Among banks, agriculture is not from building up their agricultural portfolio. However, BiH a popular sector for lending. Bank loans contribute 80 per- has limited agricultural resources—a small number of good, cent of the overall portfolio, the lowest share since data start- large-scale clients and a large number of small-scale farmers ed being recorded. The share of agricultural loans in overall operating in a gray area. bank financing was only 3.6 percent in December 2017 and decreasing. On the other hand, the agricultural loan amounts Small family farms are responsible for most of the agricul- provided by MFIs significantly exceed the importance of agri- tural production, and mostly obtain financial services from culture in the overall economy, amounting to 26.7 percent of MFIs that charge high interest rates. This is the reason why their portfolio and being persistently above 25 percent in last over 35 percent of the MFIs’ portfolio consists of credits to six years. NPL are reasonably low, at 5 percent for all sectors, agriculture, even though the share of agricultural lending in and have never exceeded 8.7 percent, not even during the to SMEs as a whole is just 3.8 percent. Banks are focused global financial crises or in 2012 when severe drought affect- on large clients, so small commercial farms, too large for ed the whole region. MFIs and yet too risky and expensive for the banks, remain 47 Collateral is one of the issues preventing farmers from ap- sale, reducing one of their main sources of profit; (v) the need plying for larger loans. Banks are more focused on covering for loans for land purchases resulting from restitution, which their risks, concentrating less on the business opportunities amounts to some 100,000 hectares (experience shows that and more on the collateral. They usually value land at 30–50 70 percent of the land is offered to be sold and 20 percent to percent of its market value since it has become more difficult be rented); (vi) continuation of farmland consolidation will to sell land in the market in the event of loan failure and to re- require banks support through credit lines; and (vii)integra- cover losses through the liquidation of assets. An even more tion with the EU will requires further investments to modern- specific problem is the formalization of mortgages, since it ize farms across the country. is difficult to transfer land ownership even after the comple- tion of court proceedings. This is an ongoing and seemingly intractable problem. Agricultural credit in Montenegro Agricultural loans in Montenegro are granted by banks and MFIs that are connected to a range of agricultural funds such as the IPARD, the IFAD fond, credits from the Arabian Fund, etc. Agriculture is not a priority sector for traditional banks and the number of clients is too small for banks to develop resources geared toward the sector. Additionally, a substan- tial number of banks operate exclusively in Montenegro and are thus unable to transfer lending practices and methodolo- gies for credit worthiness assessment from other countries. Agricultural loans in Montenegro, when available, are subject to less favorable conditions for farmers than what is typically available to agricultural producers in other parts of the region. Agricultural credit in Serbia A number of banks are engaged with the agriculture sector and have developed capacity to target the sector. These in- stitutions have well developed risk evaluation methods and focus on efficiency. The majority see agriculture as a sector in which they should, however, be selective and only deal with the best clients or opportunities (e.g. subsidized government loans with high margins). Because of constant increases in the minimal credit line, small farmers (with credit require- ments below 5,000 EUR) are nor served by these banks. The agricultural portfolio is growing, reaching 467 million EUR in December 2017. The number of credit clients is also increasing—from 37,383 in December 2016 to 43,024 in December 2017. NPL are still high (10.2 percent in December 2017). The main reasons for portfolio growth include: (i) con- tinued low prices of cereals reduce farmer’s profits and their possibility to finance crop planting with their own resourc- es; (ii) growth in vegetable and fruit production requires additional investment; (iii) IPARD is increasing demand for investment credits (175 million EUR + 20 percent state contribution + around 50 percent beneficiary contribution); (iv) aggregators have had two consecutive bad years, where prices have remained stagnant from harvest to the time of 48