25829 __ M October 30, 2002 '17 ~ ~ ~ - . j *rE FYR Mlacedonia Agriculture Sector Review Rapeepun Jaisaard Garry Christensen Garry Sm-ith David Gue Aleksandar Nacev Environnentally & Socially Sustainable Development Europe and Central Asia Region World Bank Washington, DC FYR Macedonia Agriculture Sector Review Rapeepun J aisaard Garry Christensen Garry Smith David Gue Aleksandar Nacev Environmentally & Social Sustainable Development Europe and Central Asia Region World Bank October 30, 2002 ii TABLE OF CONTENTS TABLE OF CONTENTS .......................................................... II TABLE OF FIGURES .......................................................... IV ACRONYMS ...........................................................V EXECUTIVE SUMMARY .......................................................... VI 1. THE CONTEXT FOR AGRIGULTURE SECTOR DEVELOPMENT ..............1................ Macroeconomic And Institutional Situation ...........................................................1 Macroeconomic Trends ........................................................1I Structural and Institutional Reforms ........................................................1I Agricultural Trade ...........................................................2 Trade Patterns .........................................................2 Trends in Agricultural Exports .........................................................3 Trade Agreements .........................................................3 Competitiveness in International Markets .........................................................4 The Rural Economy ...........................................................6 Agricultural Developments to Date ........................................................6 Farm Structure .........................................................7 Agroprocessing .........................................................8 The Incentive Structure ........................................................9 Marketing Infrastructure for Fresh Produce ........................................................ 10 2. RURAL POVERTY ..11 Incidence of Rural Poverty ..11 Government programs for poverty alleviation .13 Poverty Topics .13 Employment of Women .13 Youth Concerns .14 Overall Strategy for Alleviation of Poverty .15 Strategy and Key Issues . 15 3. ISSUES OF THE PRIVATE SECTOR IN AGRICULTURE . ............................................ 17 Country Assistance Strategy ................................................................. 17 Connecting Supply with Demand ................................................................. 17 Impact of Changing in Market Conditions ............................ ................................... 17 Goals ofAgriculture Restructuring Need to be Realistic ........................................................... 18 CEE and SEE Export Markets ............................................................... 19 Picking Winners ............................................................... 19 Scenario Analysis of Trade and Price Policy Reform: the Cases of Wheat and Lamb .............. 19 Enabling Environment for Private Sector Investment ............................................................. 21 Impediments to Demand-Driven Production and Investment .................................................... 21 Undeveloped Land Market ............................................................... 21 Inadequate Rural and Agriculture-Related Finance ............................................................... 23 Donor Financed Credit Programs ............................................................... 24 Inadequate Infrastructure ............................................................... 25 Privatization Inadequacies and Company Management and Governance ................................ 26 Constraints to Foreign and SME Investment ............................................................... 26 iii Supports for Production and Export Performance ........................................................ 27 Markets, Technology, Seeds, Breeds .......................................................... 27 Farmer Support System .......................................................... 27 4. ]REQUIREMENTS FOR RESTRUCTURING I[N KEY SUB-SECTORS .......................... 28 Agroprocessing Industries ........................................................ 28 Central Role ofAgroprocessors .......................................................... 28 Industry Structure .......................................................... 28 Milk Processing .......................................................... 30 M eat Processing .......................................................... 30 Fruit and Vegetable Processing .......................................................... 31 Wine Industry .......................................................... 32 Agriculture and Hlorticulture ........................................................ 33 Climate and Resources .......................................................... 33 Irrigation .......................................................... 34 Crop Production .......................................................... 35 Agricultural Services .......................................................... 36 Livestock ........................................................ 37 Structure and Performance .......................................................... 37 Institutional Issues .......................................................... 38 Forestry ........................................................ 41 Present Situation and Reform History .......................................................... 41 Unworkability of Proposed Reform Program .......................................................... 42 5. NEED FOR INSTITUTIONAL STRENGTHENING AND REFORM . .42 Public Institutional Framework .43 Irrigation Institutional Structure .44 Farmers 'Associations and Cooperatives .46 6. STRATEGY AND RECOThENDATIONS. .47 Summary of Key Tasks for Government and Donors .47 Reform Policy to Reduce the Distortions in the Incentive and Competition Structure 48 Make Resources in Ex- and Current AKs and State Forests Productive .49 Expand Rural Credit and Rural Financial Institutions. 50 Improve the Climate for Private-Sector Investment and SME Development. 50 Improve Irrigation and Other Rural Infrastructure .51 Develop and Modernize Public Agricultural Institutions .52 Develop and Modernize Private-Sector Agricultural Institutions .55 Alleviate poverty by increasing employment andfamily incomes .56 ANNEX 1. STATISTICAL TABLES ............................................ 58 ANNEX 2. MAFWE ORGANIZATION CHART ............................................ 65 ANNEX 3. TRADE AND PRICE POLICY REFORM SCENARIOS: VFIEAT AND LAMB, 2001-2007 ............................................ 66 ANNEX 4. AGRICULTURE SECTOR ACTION PLAN ............................................ 68 iv TABLE OF FIGURES Box 1: Agricultural Comparative Advantage in Central and Eastern Europe 5 Box 2: Export Potential: Bovin Winery, Negotino 35 Chart 1: Trade Openness: Southeast Europe, 1998 2 Chart 2: FYR Macedonia: Direction of Trade, 1995 & 2000 2 Chart 3: FYR Macedonia: Nominal Protection Coefficients" 4 Chart 4. FYR Macedonia: Poverty Incidence, 1996- 12 Chart 5. FYR Macedonia: Poverty Gap, 1996- 13 Table 1. Trends in Export Value, 1995-2000 (1995= 100) 3 Table 2. FYR Macedonia: Area or Production, Major Crops and Livestock Numbers, 7 Table 3. FYR Macedonia: Illustrative Tariff Rates 10 Table 4. Scenario Model Demonstrating Impact of Trade and Price Policy Reform, Snapshot for 2005 22 Table 5: Major Agroprocessing Industries in FYR Macedonia 31 Table 6. FYR Macedonia: Major Agroprocessing Industries, Production, 1997-2001 32 Table 7: Macedonia: Major Agroprocessing Industries, Capacity Utilization, 1999 33 Table 8: Livestock Developments, Individual Farms v. Enterprises, 1990- 2000 42 Table 9. Productivity, Selected Livestock Products: Individual Farms as Percent of Enterprises, 1995- 2001 43 Table 10. MAFWE Budget, 2000 48 v ACRONYMS ADUR Agency for the Development of Underdeveloped Regions AK Agro-kombinat - State Owned Agricultural Enterprise CAP Common Agriculture Policy of the EU CEEC Central and Eastern European Countries DOF Forestry Department EU European Union Fl Forestry Inspectorate FTA Free Trade Agreement FYR Former Yugoslav Republic HACCP Hazard Analysis and Critical Control Point IRRP Irrigation Rehabilitation and Restructuring Project ISO International Organization for Standardization MAFWE Ministry of Agriculture, Forestry and Water Economy MECC Macedonian Economic Chamber of Commerce NPC Nominal Protection Coefficient PFE Public Forestry Enterprises PFSP Private Farmner Support Project SAA Stabilization and Association Agreement SEE Southeastern Europe SFE State Forestry Enterprise SOCR State Office for Commodity Reserves VEU Veterinary Epidemiology Unit WMO Water Management Organization WUA Water User Association Acknowledgements This report was prepared by the World Bank in cooperation with the Macedonian Government and the International Cooperation Unit of the Dutch Embassy in Skopje. The Bank report preparation team comprised Ms. Rapeepun Jaisaard (Agricultural Economist, Task Team Leader) and Messrs. Garry Christensen (Macro Economist), Garry Smith (Livestock Specialist), Aleksandar Nacev (Agriculturist) and David Gue (Agro- processing Specialist). Early contributions were made by Simmon Berkum (International Trade Economist) and Engelbert de Kleinjn (Horticulture and Marketing Specialist). On behalf of the Dutch Embassy, Messrs. Johan Wolfs (Embasador) and Jan Plantinga and Ms. Magriet Struijt (Embassy staff) and Mr. Gerrit Meester (Specialist on Trade with the European Union) provided valuable assistance in report planning and substantive contributions. The Macedonian experts who worked very closely with the team were Ms. Natasa Ljubeckij and Messrs. Vlaimir Dzabirski, Saso Risteki and Vladimir Cvetinovski. In the Ministry of Agriculture, Forestry and Water Economy, H.E. Marjan Gjorcev (Minister), Mr. Ninad Georgiev (Permanent Secretary) and Ms. Elizabeth Angelova (Advisor, Ministry of Agriculture) gave continuous and invaluable help in report planning, preparation and revision. Following the change of government in December 2002, H.E. Slavko Petrov (Minister of MAF WE) warmly received the completed report. The first draft of the document was completed in June 2001, but the planned mission to discuss it with the government was postponed due to unrest in the country. The final report has taken changes in the country situation and the country's desire for membership in the WTO and EU into account. Issues of international agricultural trade and competitive agriculture were emphasized in the agriculture strategies and discussed fully during the roundtable discussion involving Macedonian agricultural policy makers, mission members and representatives of other donors in April 2002. The final report was sent to the government on November 15, 2002. The main authors of this report were Rapeepun Jaisaard, Garry Smith and Garry Christensen. Peer reviewers were Messrs. Csaba Csaki, Mark Lundell, Rodrigo Chaves, John Nash and Cees van de Meer. Numerous comments were received from donors, Macedonian academics, Erika Jorgensen (Country Economist) and Andras Hovai (Country Officer). Comments were also received from World Bank managers, Mr. Joseph Goldberg (Sector Manager), Ms. Laura Tuck (Director) and Mr. Christiaan Poortman (Country Director). vi EXECUTIVE SUMMARY Macroeconomic and Institutional Situation 1. Economic progress in FYR Macedonia has been variable and slow overall during the last 10 years, as the country achieved independence in the break-up of the Yugoslavia Federation and endured a succession of regional and domestic crises. This slow progress is attributable to the succession of political and economic shocks, and the failure to complete economic reform. Due to the recent security crisis GDP dropped by 4.1 percent and substantially higher-than-planned fiscal and trade deficits occurred in 2001. They were 6% and 10% of GDP, respectively. While ethnic tensions remain, the possibility of further unrest has receded, and modest growth of 3% in 2002 and 4% in 2003 is projected. 2. Agriculture is an important sector in the Macedonian economy, with production and processing contributing around 18% of GDP. Extensive structural reforms have been realized in agriculture since 1994, including partial privatization of public enterprises (in agriculture known as agro-kombinats - AKs) and a major reduction in the level of budgetary support. Some rationalization of institutions has also begun, and the private sector is becoming increasingly influential. But the potential benefits to the rural sector from these changes in the legal, institutional and economic frameworks have been slow to materialize, due to political and economic shocks, incomplete reforms and the continued use of inappropriate policy. Agricultural Trade and the Incentive Structure 3. As a small economy with a structural deficit in most food commodities, agricultural trade is essential for FYR Macedonia. Current agricultural trade policy, however, constrains agricultural trade. Most Macedonian imports (over 75 percent) are covered by free trade agreements with the EU under the Stabilization and Association Agreement and with regional trading partners, but some imports continue to face a combination of high tariffs and variable levies, and import and export licenses and quotas apply to some commodities. Fortunately, a comprehensive reform of current trade policy is now scheduled following accession (subject to Macedonian parliamentary approval) to the World Trade Organization (WTO), in October 2002. The new trade regime will have a major impact on the incentive structure for Macedonian agriculture, with profound medium and long-term implications for the level and composition of agricultural output. The FTAs with regional trading partners are characterized by widespread use of tariff quotas for agricultural products and will not be affected by WTO membership 4. Direct support for agriculture derives from the budget of MAFWE and the activities of the State Office for Commodity Reserves (SOCR). Budget support is minimal due to the severe current fiscal restrictions. Most direct support comes from the SOCR, through its purchases of wheat and tobacco to maintain official floor prices. In both cases these floor prices are well above import parity prices. 5. As a result of the trade and direct support policies, nominal protection coefficients (NPCs') are high for most major agricultural commodities (wheat, maize, potatoes, tomatoes, cucumbers, milk, butter), which indicates that they are uncompetitive in export markets and maybe in the more open domestic markets that are coming). 6. High NPCs are not inevitable, however, as agriculture in lowland FYR Macedonia benefits from good climate, fertile soils and natural upland pastures. Evidence from the Central and Eastern European countries further ahead in their transitions indicates that transition countries with good agricultural resource endowments are potentially competitive at least in crops. Depending on what happens ' Nominal protection coefficients are the ratio of domestic price to border price vii elsewhere in the economy, effective agricultural and other economic policies could spark a significant improvement in agricultural efficiency. Even at this time and under present policies, high average NPCs do not-indicate that there are no competitive farmers and processors. The most market-aware farmers currently appear to be drawn to horticultural products (i.e., fruit, berries, mushrooms, flowers, and early season vegetables) and may have already developed comparative advantage within this product category. If labor supply problems are solved, FYR Macedonia may also have comparative advantage in small ruminant production on natural upland pastures. The Rural Economy 7. Agriculture is an important sector in the Macedonian economy. Using 2000 data, it currently contributes an estimated 10% to GDP and is the only sector to have increased output since independence. Adding marketing and processing activities raises agriculture-related production to about 18 % of GDP. Similarly, agricultural exports, consisting mostly of wine, tobacco, horticultural products and lamb, amount to about 17% of total exports. Imports of agricultural products are about 13% of total imports, as well. It is difficult to assess agriculture's true share of employment, which is measured at 12%, but about 45% of the population (some 800,000) and 36% of the labor force live in rural areas. Approximately the same number live in the five largest cities, with the remainder in smaller towns. 8. FYR Macedonia has 1.28 million ha of agricultural land, about half cultivable and half pasture, the latter mainly upland and one million ha of forest. Individual farms (mostly highly fragmented very small farms) contained 79% of cultivable land in 1999 and produced 67-99%, of all crop and livestock varieties, except sunflower. Agricultural enterprises (privatized ex-AKs, as yet unprivatized AKs and cooperatives) farmed and produced the remainder. All socially owned land was nationalized in 1993, financial support to the AKs formally ended in 1995, and more than 50% of AK assets has been privatized. Existing irrigation schemes, which once covered 40% of the area suitable for irrigation, has been reduced to 13% coverage. The state of the country's irrigation system, however, is poor, and crop damage during the variable summer dry period is prevalent. Agroprocessing and Wholesale Marketing Facilities 9. FYR Macedonia inherited an inordinately large agro-industrial sector with about 425 agroprocessing enterprises. Many of these had production and processing capacities to provide food products for the larger market of Former Yugoslavia and, in some cases, significant exports to the EU and the region. Most of these enterprises were parts of 147 parent AKs. Privatization was delayed, but by September 2002, all but 16had been sold, mostly through staff buyout. Many of the ex-AKs are essentially insolvent. Debt service costs and excess employment absorb available cash flow and prevent management from re-tooling with the up-to-date technology necessary for competitiveness. A limited but growing number of new, smaller, private-sector agro-enterprises have been developing alongside the former AKs. In contrast to many former AKs, they tend to be business-and market-oriented with a focus on profit, growth and market. 10. The post-harvest assembly, distribution and management system for fresh produce in FYR Macedonia is highly rudimentary. Produce quality suffers from lack of needed infrastructure supporting post-harvest treatment and packing. These activities are essential to compete in export markets and, increasingly, in the domestic market that is now being influenced by international supermarket chains, which are becoming dominant players in Eastern Europe and the Balkans. The purchase of bulk loads by supermarket chains has tremendous opportunities in terms of volume, but these volumes must meet stringent quality standards, which Macedonian products do not now meet. There are very few farm- produce assembly stations in FYR Macedonia and even fewer with facilities for sorting, grading, cooling, packaging and storing fruit and vegetables. Wholesale markets are basically large fields where farmers' vehicles park in the sun for a day or two or until they have sold their load. Urban green viii markets are similarly rudimentary. Although there is some need to upgrade market facilities in the medium term, the wholesale market system will probably be by-passed in the longer term by individual traders who carry out post harvest sorting and packing and sell directly to supermarkets from their own cool stores. Rural Poverty 11. Poverty incidence sharply increased between 1993 and 1995 as the economic transition took hold and reached 21% in 1998. Median monthly adult equivalent consumption in 2001 was MKD 10,610 (US$ 150), giving (at 60%) an official monthly poverty line of MKD 6,366 (US$ 90). Poverty is more extensive in rural than in urban areas: 25% in 1998 compared to 17% for the urban poverty rate. Non- agricultural rural households have replaced agricultural households as the largest group of poor. The government provides social assistance to 13% of the population and has a small development program for underdeveloped regions. Unemployment of rural youth is a serious problem; particular attention needs to be given to secondary education. 12. Women constituted 48% of the labor force (1994census). Female-headed households actually have a lower poverty rate than male-headed households. Formal employment of women in agroprocessing is low at 30%, but employment of women takes on pivotal importance in alleviating poverty, since two wage earners in a household protect against poverty, virtually regardless of the level of earnings. For small farms, promotion of income generation for women can also be a powerful weapon against poverty. It is, thus, more beneficial to foster employment of women in poverty households than to aim at putting a floor under the wage rates for male household heads. For women in farm families, such employment could be in micro livestock, herbs, mushrooms or agro-tourism. 13. An increase in the value of agricultural production, which derives from effective policies and investments and involves small farmers, processors, traders and their spouses can have a large impact on poverty, first of all through incremental family income, which has been shown in FYR Macedonia to powerfully reduce poverty, and, second, through the derived increase in off-farm employment in related agriculture-support, business support and retail activities. Other poverty-amelioration approaches, to reach the chronic poor or as provide effective secondary education, will require targeted assistance programs. The Government has prepared a National Poverty Reduction and Strategy Paper (PRSP) develops a long-term agenda for poverty reduction and sustained economic growth. Issues of the Private Sector in Agriculture 14. In line with the latest Country Assistance Strategy agreed between the Bank and FYR Macedonia, the priority areas for agriculture, the expansion of production and increase in productivity, require that resources be available to efficient, private producers, including efficient small ones, at every stage in the production, processing and marketing chain, so that they can expand in areas where they are competitive. This will require a comprehensive restructuring of government policies and support. At present, farm structure, the land market, rural credit institutions and practices, processing and input monopolies, trade restrictions, and investment rules and restrictions present a set of interlocking constraints that inhibit the ability of efficient farmers (including efficient small and farmers foreign investors) to expand production. 15. The chain of logic on how FYR Macedonia's agriculture can be restructured for greater competitiveness starts with the recognition that, in a modem agricultural economy, competitive agriculture-based products can only be produced by specialized industries that have sufficient economies scale at each level in the value chain to keep costs down and that also make use of overall economies of scope to capture information and technological externalities. Small farms contributing to a value- chain do not necessarily have high unit cost, for instance, but small slaughterhouses probably ix do. 16. To survive, Macedonian producers will need to be competitive in their domestic market with the products of foreign firms that can climb the moderately protective wall that will remain under WTO and FTA rules. In export markets, Macedonian industries will need to be able to compete with the same foreign producers but on more demanding terms. Both domestic and export markets are continually changing under relentless developments in technology, materials and communications. Producers must be able to access the investment finance necessary to stay competitive. 17. It is uncertain how successful Macedonian producers can be in either the domestic or export market in the future and, thus, highly uncertain that Macedonian agricultural production will expand overall even in the medium-to-long term. It may, rather, severely contract. As liberalization following WTO membership proceeds, currently viable producers may be hard-pressed to maintain their current share of the small domestic market, let alone expand production. If sustained expansion in any significant subsector does take place, it is, therefore, likely to be in export markets, which are typically huge relative to Macedonian production capability. 18. When the minimum size of production needed for competitiveness with imports in a domestic market is larger than the market share it can obtain, that industry is headed for rapid decline unless it can achieve the needed size and competitiveness to export its way to profitability. This is doubly true for higher-value products, where the internal market will usually be very small. Stated another way, many agricultural products will be imported for lack of efficient Macedonian producers despite import protection and natural barriers. This reality looks likely to force significant variety changes on commercial crop and livestock producers as the agricultural economy liberalizes. 19. The main impediments to FYR Macedonia developing competitive farms and processors concern land, finance, irrigation and transport, investment conditions, regulatory burden, company govemance and management, and legal and govemment institutions. Certain technological supports are also crucial. These impediments and crucial supports and the requirements for restructuring in key sectors are discussed in some detail in the main text. The overall strategy should be to help all elements in agriculture value chains to become entrepreneurial and dynamic by reducing impediments and ensuring the availability of technological supports. Government should not attempt to "pick winners" by favoring particular commodities, industries, work forces, types of enterprise or export destinations but rather aim to develop an enabling environment for investment and production. Fast-moving intemational and increasingly competitive domestic markets will pick the winners (and losers) on a continuous basis. Governmental regulations and "help," which insulate their intended beneficiaries from the consequences of poor market performance, ultimately, cause the "beneficiaries" to fall far behind. 20. A simple spreadsheet model, with three scenarios -base case and gradual and rapid reform - was used to analyze the impact of policy reform on producers and consumers of wheat and lamb. The model demonstrates that getting trade and price policy right will be important after FYR Macedonia joins the WTO. A key conclusion from the analysis is that a sharp drop in the wheat tariff would result in a small rise in consumer prices for wheat products, while a gradual drop in the tariff would result in a sharp rise in consumer prices. The current high lamb tariff, however, is shown to have little impact on either consumer or producer prices; thus, abolishing the tariff or setting it at a low level could rightly be on offer in the WTO negotiations. Requirements for Restructuring in Key Sub-Sectors 21. Processing and Trading. Marketing cooperatives potentially have an important role in high- quality post-harvest activities and some processing, but private, entrepreneurial agroprocessors and traders will have the leading role in developing competitive high-value agricultural production, if - a x big if - there is a conducive business environment for them to operate in and grow. The reasons for the non-responsiveness to demand of most large processors milk processing, meat industries, fruit and vegetable processing and wine production undoubtedly reflect the ills of the ex-AK processors in inadequate management, dysfunctional ownership structure, lack of working capital, antiquated equipment, out-of-date processing technology, high cost, low volume of marketable products, poor packaging, poor quality raw material, non-compliance with export standards, etc. There are dozens of small, cottage-industry-scale agroprocessing companies emerging from rural communities, retail stores and petty traders, however, typically manufacturing a single product line in competition with ex-AKs and imported products. A number of these have already reached medium-scale, for example, producing yogurt or canned vegetables, and on a level playing field may simply grow and displace existing large, but uncompetitive incumbents. Foreign direct investment should have a constructive role to play in bringing management skills, market knowledge and technology in both domestic and export markets. 22. Agriculture and Horticulture. There is considerable scope for improving the quality and yields of all crops. Traditionally, crop yields and productivity were lower on private farms compared to the AKs, since the latter had better access to inputs and technical advice. Following recent changes in Government policy, however, this trend is now being reversed, with the private sector having better access to inputs and technical advice and a limited amount of financial resources with which to access them (mainly through remittances). Recent changes have encouraged the development of a more dynamic private-sector farming community with a growing number of entrepreneurial farmers accessing new technology and inputs from an input-supply and powered-implement sector that includes support from EU and other international companies. Irrigation, which is needed for supporting most high-quality, high-yield crops and farming systems during the dry summer season, is serious disarray due to low efficiency, low coverage and institutional meltdown. Substantial investment and capacity building will be required to establish a modern seed regime. Despite the emergence of private input supply companies with an array of advanced products, usage is still low. With neither the input supply companies nor financial institutions providing sufficient seasonal credit, this situation is likely to persist. Marketing of fresh horticultural produce is now largely dominated by small private traders, but there is only rudimentary wholesale marketing of horticultural produce and little standardization or grading of produce. 23. Livestock. Livestock production in FYR Macedonia is characterized by a large number of very small, subsistence oriented farm households, a limited but growing number of small, commercially oriented family farming businesses and a decreasing number of large, specialized poultry and pig enterprises, former AKs. While the pig industry has grown substantially and the dairy industry modestly, the cattle, sheep and poultry industries have contracted markedly, the latter due to the collapse of AK and ex-AK production. A view widely held in the country is that the livestock industry will prosper through support of the large livestock enterprises. In fact, the limited research available suggests that family farming in FYR Macedonia provides equal and possibly better returns to land, labor, and capital than enterprise farming. The Government appears to have provided AKs and ex-AKs with long term leases for state land, including pastureland, initially rent free. Charging market rates for reasonable-length leases or denationalizing land in accessible-size parcels in transparent transactions would result in higher land productivity and higher incomes for successful lessees, buyers and workers. Veterinary and livestock laws and regulations need to be revised to reduce the regulatory burden and be consistent with EU laws and international obligations. Animal identification, disease epidemiology, product inspection, resource protection and market promotion services to name a few are not effective enough to provide a sustainable base for competitiveness in domestic and international markets. Fish, sheep, cattle and pig breeding services need to be privatized. Private farmer access to world-class livestock genetics is severely constrained. Livestock products have traditionally an export item, but there is limited capacity to compete effectively in international markets. 24. Forestrv. Because of FYR Macedonia's mountainous nature, forests cover about I million ha (39% of the country's land area), and virtually all of it is state-owned. Both the environmental xi protection needs and the economic potential of this vast forested area remain largely unanalyzed, but it is clear that output, productivity and contribution to the economy of the forest and wood products sector are far below its potential. Problems in the forestry sector are primarily the result of a weak forest policy. The basic technical problems are poor tree quality, inefficient production technologies and products that are inappropriate for contemporary markets. Current forest management policy permits annual off-take of 600,000-900,000 m3, equal to 1.8-2.3% of total stock. Of this, 73% is consumed as fuel rather than an input to lumber and wood products industries. Limited access to some forested areas also means that some areas are still over exploited despite the apparent sustainability of off-take volumes. New plantings have declined to less than 1,000 ha annually, which also does not allow for regeneration of harvested areas or soil conservation in uplands areas. The absence of any tax incentives for forest establishment has contributed to this poor result. Superficially privatized forest-operations companies, formed starting in 1997, are dominated by an ineffective, overstaffed public monopoly. At the same time, illegal wood cutting, pest infestation and fire damage have increased. Need for Institutional Strengthening in the Rural Sector 25. As elsewhere, the government needs to do better the things that only government can do and to avoid doing things that impede or should be done by the private sector. The essential tasks in the rural sector include facilitation and regulation of the agricultural economy, protection of the environment, reduction of rural poverty and provision of welfare services to the rural poor. 26. MAFWE and Other Autonomous Operating Agencies. The Ministry of Agriculture, Forestry and Water Economy' main roles are policy analysis and development, regulation, monitoring and supervision. In all these areas, the ministry's capacity is still weak. An 18-month EU-financed capacity- strengthening project is set to commence in 2002. Despite the fact that most of the subsidies once administered by MAFWE have now been removed or set low at inoperative levels, agricultural support is still the largest item in its budget. Major internal MAFWE institutional restructuring is needed in connection with reforms in forestry, extension, research and irrigation: 27. Forestry. When Macedonia Forest monopoly is eliminated, MAFWE will need to greatly increase and strengthen its forestry staff. Extension: The extension service is now an independently budgeted agency, its operations have been reoriented toward training for private farmers, farm-level adaptive trials, promotion of farmer associations, and cost recovery and eventual privatization. The extension agency needs to reorient its organizational structure further along regional lines and to find its market niche in the context of other sources of technical support, such as, input suppliers, NGOs and an emerging private consultant industry. Agricultural Research: Agricultural research output is deficient in applied research, partly due to its funding through research institutes by the Ministry of Science and Education rather than MAFWE. The latter has no formal responsibility for agricultural research, although it is consulted on major issues and can fund specific research projects. With project support, a program of 25 applied research projects offered through MAFWE was completed. 28. Irrigation. The multiplicity of essentially insolvent non-performing Water Management Organizations (WMOs) controlling portions of deficient irrigation schemes, engaging in other businesses and ineffectively interfacing directly with individual large and small users has only partly been reformed to date under the ongoing Bank/Netherlands-financed irrigation project (IRRP). Once reformed WMOs are established public watershed monopolies and private water user associations (WUAs) have been put on a commercially effective and financially sound basis, it will be MAFWE's responsibility to keep them performing and disciplining those that are not. MAFWE is not now close to having this capability. MAFWE will also need to have the institutional ability to develop a revised water law and a national irrigation plan. Despite the fact that individual farmers are the dominant producers of most crop and livestock varieties, there is little systematic knowledge about their overall irrigation situation or the extent of their use of informal, traditional irrigation technologies. xii 29. Farmers' Associations and Cooperatives. The Macedonian Economic Chamber of Commerce (MECC) claims to represent the interests of small farmers as well as AKs although it had registered only one private farmers' association. Well functioning associations can provide their members with a range of technical, supply, packing, grading, storage, transport, credit, information, training and market facilitation services Though most of the newer associations tend to be commodity based, few are capable of effectively servicing their members or building coalitions with other associations in support of their objectives. Legislation to permit farmer organizations to engage in business has been prepared but not yet enacted. The legal framework for the structure of cooperatives also needs to be thoroughly updated to provide membership on a one-member-one-vote basis, with fees-proportional to throughput, and management and membership separated. Producer and trader organizations need to be promoted and strengthened, so that an infrastructure of associations with many horizontal and vertical linkages will come into existence, providing some of the economies of scope referred to above. Strategy and Recommendations 30. A non-controversial goal with wide acceptance is to engender a sustained process of increasing agricultural production in value terms, thereby raising rural incomes in farming, agri-business and retail services and reducing rural poverty. A focus on efficient small farmers, processors and traders and their families is consistent with this strategy. Other poverty-amelioration approaches, such as provision of effective secondary education, will require targeted assistance programs. The essence of the best overall strategy to increase the value of agriculture-related production is to create the conditions in which clusters of farming and agri-business can develop and become competitive in domestic (and in some cases international) markets for selected agricultural products. These clusters need size, scope and the spur of competition within their ranks, from imports and from foreign firms. Firms in the cluster become efficient as they face and succeed in that competition. The task for public policy is to free the creativity of the whole population of farmers, processors, suppliers and traders and help rather than hinder the most productive producers. Government and donors should focus on the following (detailed list in main report): * Reduce the distortions in the incentive and competition structure (e.g., reform trade policy and commodity-reserve system, end monopolies in input supply and processing); * Make productive the resources in ex- and current AKs and in state forests (e.g., rationalize AK use of public land, privatize or dissolve remaining AKs, reform forestry institutions); * Expand rural credit and rural financial institutions (e.g., develop viable rural credit institutions, reform all aspects of land market, provide training in agricultural loan evaluation); * Improve the climate for investment and SME development (e.g., reduce regulatory burden, improve contract enforcement and tax administration, improve product standards); * Improve irrigation and other rural infrastructure (e.g., develop national irrigation plan, develop mechanisms to ensure sustainability and accountability of WMOs and WIUAs, determine transport priorities, assess state of wholesale markets); * Develop and modernize public agricultural institutions (wide-ranging program of restructuring and capacity building for central ministry, extension, research, education, and forestry); xiii n Develop and modernize private agricultural institutions (e.g., revise laws on associations and cooperatives, provide technical assistance and promote farmer, trader, processor and apex associations, organize trade fairs to promote agricultural exports); and n Alleviate poverty by increasing employment and family incomes, which will come from a buoyant agriculture-related rural economy, level playing fields for small farmers, processors, traders and transporters, education and access to land and credit for young farmers, mobilization of the household labor of farm women. Government programs of social assistance are still needed for aged, sick and handicapped. Action Plan 31. Reform priorities for the agriculture sector were discussed during Roundtable Discussions in April 2002 attended by participants from the government, the private agricultural sector, NGOs and the donor community, using this report as input. A sector action plan, presented in Annex 4, was developed during the Roundtable and later approved by the Minister of Agriculture. The reformns listed in the Action Plan are divided into "Short- to Medium-Term Action Plan" and "Longer-Term Structural Reforms". Sequencing of Reforms 32. A detailed list of reforms in agricultural subsectors is located at the end of the full report. All are worthwhile but all cannot be done in the short-to-medium term. Nevertheless, the process of developing a competitive agriculture and related agri-business requires change across a broad front. Thus, concentrating on a small number will not be effective. The following is a pared-down list of reforms to be done initially. They should be done first either because they will have the most beneficial immediate impact or because they are prerequisites for other important and necessary reforms. They will hopefully be supported by donors with technical assistance and investment funds in many cases. Incentive Structure, Trade and Competition Policy D Design continued reform of agricultural trade policy and implementation to support the WTO agreement and other trade negotiations. o Limit SOCR's mandate to genuine strategic reserves, reduce the number of agricultural commodities covered, reduce wheat support to below import parity, lower the tariff and subject all imports to it, and end the tobacco program and privatize all tobacco firns. D Markedly reduce transit time at border crossings by improving border infrastructure; negotiate same with neighboring countries transited by Macedonian goods. o Revise the legal framework and enforcement to reduce monopolistic practices in agroprocessing and input supply. R eform of AK and Ex-AK Land and Other Lan d Reforms o Strengthen legislation governing the use of state-owned land by agricultural enterprises, set the criteria for market lease rates. o Implement land taxation to give AKs, ex-AKs and individuals the incentive to divest unproductively used land. o Develop an effective, flexible real estate system based on secure and tradable rights in ownership and a variety of leasing and other less formal agreements. xiv • Establish an independent land cadastre office controlled by a registrar of lands to oversee the real estate cadastre, now being computerized. X Review, revise and integrate the laws affecting the land market.2 Rural andAgricultural Credit X Provide training to improve the financial, economic and agricultural skills of commercial bank and savings house staff to improve their ability to assess risk and manage loans. * Give technical assistance to rural lenders to develop working capital lending products for private suppliers and processors so that they can extend in-kind credit to farmers for such items as seed, fertilizer and equipment. • Expand successful micro-credit programs. * Improve the collateral recovery system with land and administrative reforms. Improve the Climate for Private-Sector Production and Investment * Reduce regulatory burden, e.g., time-consuming registration requirements and other red tape, reduce corruption. * Improve court capacity for contract enforcement, which is now seen as unreliable in result and delayed in execution. * Improve tax administration, which is perceived as non-transparent. * Revise standards and regulations to be consistent with EU standards where possible to facilitate exports and ability to supply international supermarkets. * Provide technical assistance to develop and implement plans to assist SME agricultural processors and suppliers. * Form a working group to prepare proposals to standardize export regulations and export credit facilities for producers and exporters. * Provide management consulting assistance to criteria-selected (i.e., potentially viable) ex-AK agribusinesses to analyze their business plans, corporate governance, social- obligation commitments, investment needs and proposed restructuring plans. Develop and Modernize Public and Private Agricultural Institutions * Establish a policy analysis unit in MAFWE, which is urgently needed to analyze proposed policy changes, especially in the area of price and trade policy. * Revise legislation and regulations for seeds, ex-AK preferences, product trade barriers, input trade barriers, livestock breeding and genetic material. * Define food sanitary and phytosanitary inspection roles, support internationally certified laboratories in these areas and in plant protection and animal health, incorporate relevant EU law and standards, and reform the institutional framework to monitor/enforce them. a Increase, through oversight boards and in other ways, stakeholder participation in the management of public agricultural institutions serving or regulating agriculture. * Ensure sufficient funding of disease monitoring and border control programs, including stakeholder contributions; develop a brucellosis eradication program. 2 Primarily the Law on Land Survey, Cadastre and Registration of Real Property Rights, the Law on Administration of Registries, the Laws on Executive Procedure, Contractual Mortgage and Pledges and the Law on Inheritance. xv D Reorient extension staff to provide strong support to small-scale, private farms, which dominate agricultural production. D Establish an agricultural research advisory council with stakeholder participation under MAFWE to coordinate and allocate funds for all applied research; reorient research and university curricula toward commercial small-scale agriculture. a Enact a new law and new regulations on cooperatives and producer and trader associations to ensure that they are democratically oriented to the needs of their members. a Provide technical assistance to groups of small traders and processors of agricultural commodities to establish associations. Direct Action to Alleviate Rural Poverty o Improve the prospects of rural youth by making secondary education accessible and relevant to them; o Focus on reforms that help energetic young people gain access to farmland and farm inputs and establish themselves as small processors, traders and transporters and in other rural businesses. • Mobilize the household labor resources of women by disseminating knowledge about activities, such as micro livestock, herbs and small processing operations. i PE3MIME MaKpoeKOBOMCKa H HHCTHTyIlHOHLaia cocToj6a 1. Bo TeKOT Ha nOCJIneHHTe 10 rOgHHH, eKOHOMCKHOT HanpegOK BO BJP MaKegoHHja 6exne ripOMeHJiHB H orIIITO, 6aBeH, 6HgejkH 3eMjaTa ce 3go6H Co He3aBHCHoCT no pacnagoT Ha JyrocJIOBeHCKaTa 4DeAepagHja H npeTpne cepHja perHoHanIHH H AoMaILIHH KpH3H. OBoj 6aBeH HallpeRoK ce AOK4KH Ha cepHjaTa riojiHTHHKH H eKOHOMCKH IUOKOBH H Ha HeycneXOT Ha iAejiOCHa eKOHOMCKa peq)opMa. KaKo pe3ynJTaT Ha CKopeUIHaTa 6e36eAHocHa Kp3aM, Bn onagHa 3a 4,1 npogeHTi H BO 2001 ce nojasu4ja 3HaH1HTeJIHO IIOBHCOKH OA nnAaHHpaHHTe 4HCKaJIHH H TprOBCKH gecpHnHTH. THe 6ea 6% H 10% og B)IH, niocJiegoBaTeJIHo. T(ogeKa eTHH'KHTe TeH3HH ocTaHyBaaT , MO)KHoCTa 3a nOHaTaMOIHH HeMHpH e rioMaJiKy BepojaTHa, H ce npoeKTHpa cKpoMeH pacr og 3% BO 2002 H 4% BO 2003. 2. 3emjoAen'crEoTo e Ba)KeH CeKTOp BO maKeOHCKaTa eKOHOMja, co eCTBO Ha HPOH3BOACTBOTO H npepa6oTKaTa o0 OKOJIY 18% og BJIrI. Bo 3emjogeJICTBoTo ce peaniH3Hpaa UHPOKH CTpyKTypHH pecmopMm oA 1994, 3KJny'iyBajiKH geiyMHa npHBaT43aiAHja Ha jaBHHTe npeTrlpHjaTHja (BO 3eMjogeJICTBoTo nO3HaTH KaKo arpo-KoM6HHaTH-AK-H) H KpynHO HamayBae Ha cTeieHOT Ha 6yueTcKa nogpLUKa. 3anOlIHa H HeKaKBa pa9RoHajiH3aIMja Ha HHCTHTyIJHHTe, a BIIHjaHHeTO Ha nipHBaTHUOT ceKTOp e BO nopacT. Ho, foTeHgHjaAHHTe ripHgo6HBKH oA OBHe npoMeHH BO rIpaBHa, HHCTHTyIIHOHanJHa H eKOHOMCKa pamKa 6aBHo ce MaTepHjaJH3HpaaT 3a pypaIHHOT ceKTOp, nopagn nOJIHTHrKHTe H eKOHOMCKHTe IIOKOBH, HeaienjOCHHTe pecopMH H npo oHHKeHaTanpHmeHa Ha HeCOOABeTHa rIoj¶HTHKa. TprOBHja CO 3eMjOAeJIcKH IIpOH3BOAH H CTpyKTypa aCTHMYJIaHCH 3. KaKO Maia eKOHoMHja co cTpyKTypeH geCHLHT BO nOBekeTo npexpaH6eHHgo6pa, TproBHjaTaco 3eMjOAeJICKH IPOH3BogH e O0 CY.LITHHCKO 3HaHeI-e 3a BJP MaKeXoH4ja. MefyToa, MoMeHTHaTa TproBcKa nOJ¶RTHKa 3a 3eMjogejicKH HPOH3BOgH ja orpaHH'lyBa TprOBHjaTa. rloroj¶eMHoT geni Og MaKeAOHCKHOT yBo3 (HaA 75 npoIeHTH) ce nOKPHBa ripeKy gorOBOPHTe 3a c.no6oAHa TprOBHja co EY cropeg goroBopOT 3a CTa6MHA3aiwja H acoIIjai.Hja H co perHOHaIHHTe TprOBcKKH napTHepH, HO HeKOj YBO3 npogoAJxKyBaa a ce coomyBa CO KoM6HHagija oA BHCOKH TapH4)H H UnpOMeHJIHBH gaBatKia, a 3a HeKOH IpOH3BOgH BaxaT A03BOJIH 3a yBo3 H H3BO3, KaKO H KBOTH. 3a cpeKa, cera ce maiaSupa IUHPOKa pecopMa Ha aKTyenHaTa TproBCKa nIOJIHTHKa, no rp(cranyBaHeTo(npeMeT Ha ogo6peHe oA MaKe;OHCKOTO Co6paHHe) KOH CBeTKcTaTa TproBcKa OpraHH3agHja (CTO), BO OKTOMBpH 2002. HOBHOT TprOBCKH pexKM Ke HMa KpynHo BJiHjaHHe BP3 cTpyKTypaTa Ha cTHMyjiaHcHTe BO MaKegOHCKOTO 3eMjogenHe, co g.ra6oIu Cpe;HHOPOxHH H goJirOpO'HH HMnIHJIaKawm BP3 cTeneHOT H cocTaBOT Ha 3eMjoenCKHTe pe3ynTaTH. gorOBopHTe 3a cjio6OAHa TproBHja co perOHaHTe TprOBCKH napTHePH ce KapaKTeP3HpaaTCO pacnpocrpaHeTa ynoTpe6a Ha TapHcHH KBOTH 3a 3eMjoXejiCKHTe IPOH3BOAH H HeMa ga 6HgaT norogeHn og, 4ieHCTBOTO BO CTO. 4. JHpeKTHaTa IoggpgMKa 3a 3eMjogeJcCTBOTo npoZ3neryBa oA 6yIeTOT Ha M3I1B H aKTHBHoCT=Te Ha gp)KaBHaTa KaHileiiapHja 3a CTOKOBH pe3epBH (gKCP). ByueTCKaTa noggpLUKa e MHHHMaJHa KaKO pe3yJITaT Ha aKTyeJIHHTe OCTpH C1HCKaJAHH orpaHHMyBaiba. rIoronieMHOT geji AHpeKTHa noAgpmKa goara og ,KCP, npeKy Hej3HHHTe OTKYIIH Ha IHeHHIAaH TyTyH, 3a ga ce ogp)KaT o)HUHjaJIHHTe rapaHTHpaHU MHMHRHMJIHH ileHH. Bo gRaTa cjiyqaja OBHey eH]H ce MHory Hag YBO3HHTen iapHTeTHH iMeHH. 5. KaKO pe3ynITaT Ha TprOBCKaTa H IOJIHTHKaTa 3a gHpeKTHa noggpmKa, HOMHHaJIHHTe Koe4)HIHeHTH Ha 3aUITHTa (HK3') ce BHCOKH 3a noBeieTo rniaBHH 3eMjogejicKH rpOH3BOAH (nqeHH1a, ixieHKa, KOMrIHPH, gOMaTH, KpacTaBHijH, MjieKO, nyTep), IITO yKa)KyBa geKa THe Ce HeKOHKypeHTHH Ha H3BO3HHOT na3ap, a Mo)Ke6H H Ha nooTBopeHROT gomaiueH na3ap IlITO gonpBa Aoara. ii 6. BHCOKHTe HK3 cenaK He Ce HeH36exKHHH, 6Hgejkfl 3eMjoejicrBOTO BO HH3HHCKHOT AeJI Ha BPJ MaKeAoHHia ja KOpHCTrH o6paTa KnAMa, IIfIOAHaTa rQoxIBa H IIpHpOXHHTe nacrInuTa BO IIJIaHHHHTe. flogaTO1HTe og UeHTpaJIHO H 14CTOMQHo-eBpOQCKHTe 3eMjH TflTO Ce noHanpeg BO HHBHaTa TpaH3HHja, 36opyBaaT AeKa 3eMjHTe BO TpaH3HgHja Co Xo6pH 3eMjoQXencKH pecypcH Ce nOTeHiLjaIiHO KoHKypeHTHH 6apeM Co 3emjogeWCKHTe pacTeHHj a. Bo 3aBCHocHT o0 Toa ifTO ce ciiy-yBa BO gpyrHTe ;tejIOBH Ha eKOHoMUjaTa, ec4eKTHBHa 3eMjoQejicKa H gpyra eKOHOMCKa nOJIHTHKa Mo)Ke Xa nloTTHKHe 3HaqHTenjHO nQgo6pyBaHe BO 3eMjogenCKaTa ece H HM npogaBaaT; HpeKTHO Ha cyepmapKeTHTe 0 HHBHHTe conCTBeHH pa3naAHH CKnagOBH. Pypaima cHpoMamTHja 11. 3aqecTeHocra (xHHnjeHmyaTa) Ha cHpoMalUTHja gpamaTHqHo nopacHa nomery 1993 H 1995 co OABHBaibeTO Ha eKOHoMcKaTa TpaH3HLlja H gocCTrHa 21 % BO 1998. CpegHaTa Mece'Ha noTponlyBaqKa Ha BO3paCHH iiyfe Bo 2001 6eine 10 610 myg (150ycx), 3eMajKH ro npeABHX (Ha 60%) o¢HiHjanHHoT npar Ha cHpoMaluTaja oA 6366 MKA (90ycg). CHpoMaUiTHjaTa e nopaunIpeHa BO pypaiHHTe OTKOjiKy Bo yp6aHHTe cpegHHH: 25% BO 1998 BO cnope;6a co 17% 3a caRnKaTa Ha yp6aHa cHpoMalITHja. He3eMj oeJ¶CKHTe pypaJIHH goMakHHcTBa rH 3aMeHHja 3eMjoxejiCKHTe goMakHHCTBa KaKO HairojieMa cHpoMaUHa rpyna. )pxAcaBaTa o6e36egyBa coltHjaAHa nOMOlU Ha 13% oA HaceJieHHeTO H HMa mana pa3BOjHa nporpama 3a Hepa3BHeHHTe perHoHH. HeBpa6OTeHocTa Kaj pypanHaTa MnaAHHa e cePHO3eH npo6neM; oco6eHO BHHMaHHaeTrpe6a ga ce riocBeTH Ha cpeXHOTo o6pa3OBaHHe. 12. )KeHHTecoxmHyBaIe 48% og pa6oTHaTacHiia(cnopeAr iorCQT oT 1994). RoMakHHcTBaTacorQiaBa Ha ceMejCTBOTO KeHa, BCYIUHOCT HMaaT noMania cTanKa Ha cHpoMaDlTHja og goMakHHCTBaTa Ha'e3¶o co Max. topmanHaTa Bpa6oTeHocT Ha )KeHHTe Bo arpo-npepa6oTyBaaKaTa e HHCKa, 30%, HO Bpa6oTyBaH%eTo Ha KeHHTe 3a3eMa K.y'Ha BaKHCocTBO HamayBaieTO Ha CHpoMaiJTHjaTa, 6HxejKH gBajia niyre co ruTaTa, BoeQjHO goMakHHCTBO IUTHTaT O09cHpoMalnTHja, rpaKTHqHo 6e3 pa3JIHKa Ha CTeneHOT Ha 3apa6oTyBa'Ka. 3a MaJIHTe capMH, HpMOBHpaieTO Ha npO BeyBaHe IpOq)HT 3a )KeHHTe MoQe, HCTO TaKa, ga 6Hge MOKHO opyxKje ripoTHB cHpoMaiuTHjaTa. TaKa, nOKOPHcHo e ga ce nOTrHKHyBaEBpa6OTyBaHe Ha xKeHHTe BO cHpoMaDlHHTe AoMaKHHCTBa, OTKOJIKY ga ce iAeJIH KOH yTBpgyBai-be Ha ;loiHa rpaHHa Ha HaAHHDHTe 3a MaIKHTe rniaBH Ha ceMejcTBa. BaKBO Bpa6oTyBaH3e 3a xKeHHTe BO 3eMjoQejiCKHTe ceMejCTBa, MoKe ga HMa BO oAriieyBa%e CHTeH go6HTOK, TpeBapCTBO, ne'lypKH HIiH arpO-TypH3aM. iv 13. 3roneMyBameTo BO o6eMOT Ha 3eMjogeACKo nlpOH3BAOCTBO, IITO nlpOH3jeryBa oA eCpeKTHBHa no3iHTHKa H HHBeCrHIUHH, H FH BKnyYyBa MaJIHTe 3emjogeJ¶1XH, npepa6oTyBalH, TprOBIy H HHBHHTe COnpyaKHHJJJ, MowKe aa Hma rojieMo BjiHjaHRe Bp3 cHpoMaIuTHjaTa, npeg ce npeKy pacTemuK cemeeH npHXoA, IUTO BO BJP MaKexoHHja ce nOKaXKa geKa CHJIHO ja HamanyBa CHpoMainTHjaTa H BTOPO, npeKy nopaCTOT Ha Bpa6oTyBaHie HaABOP og cpapMaTa, BO noggp1JKaTa nOBp3aHa CO 3eMjogejicTBOTO, genoBHaTa nogupmKa H aKTHBHOcTHTe 3a npogawK6a Ha Manjo. JIpyrH MeTOAH 3a nogo6pyBaibe Ha cocToj6aTa co CHpoMaIJITHjaTa, IIITO rpe6a ga gocerHaT 9o XpOHHIHO CHpoManiHTe H ga o6e36egaT eCpeKTHBHo CpegHO o6pa3oBaHHe, Kce H3HcKyBaaT TapreTHpaHH uiporpaME 3a nOMOIu. BnagaTa H3rOTBH HaiMoHaiieH goKyMeHT 3a HaMayBaHibe Ha cHpoMamTHjaTa H 3a cTpaTerHjaTa, KOjIUTO pa3BHBa goQjrop'eH nnaH 3a HamanyBai e Ha cHpoMamITHjaTa H 3a ogpxKIHB eKOHOMCKH pacT. ]UIpama[ESa H2 HU1PSITHEOT CeVTOP BO 3eMjogej1CTBOTO 14. Bo corniaCHOT CO HajHOBaTa CTpaTeruja 3a nOMOmI Ha 3eMjaTa goroBopeHa rioMefy CBeTcKa BaHKa H BJP MaKegoHHja, npHopHTeTHHTe o6nacTH 3a 3eMjogejcrTBOTO, npOuHpyBaHe Ha iipOH3BOQCTBOTO H 3roiiemyBaaie Ha npogyKTHBHocTa, 6apaaT pecypCHTe ga 6HgaT pacnoiioxKH Ha eEHKaCHH, IIPHBaTHH IpoH3BOAHTeJIH, BKJInyyBajKH H ecfHKacHH ManH nUpOH3BoHTeJiH, BO ceKoja cpa3a OA CHHUHPOT Ha IpOH3BOgCTBOTO, 1ipepa6OTyBaqKaTa H nJIacMaHOT, TaKa IUTO THe ga Mo)aT ga ce iipoiuHpyBaaT BO o6nacTH KaAe UITO ce KOHKYpeHTHH. OBa Ke H3HcKyBa KpyrIHO pecrpyrypHpale Ha BnIaAuHaTa noJnTHKa H rioAgpmKa. Cera, cipyTaTa Ha cIapMHTe, na3apoT Ha 3eM]jUMTe, HHcTHTyixHHTe 3a pypaniH KpelHTH H npaKTHKIH, MOHOHOJIHTe BO npepa6oTyBa'nKaTa H CypoBHHHTe, TprOBCKHTe orpaHHiyBai-a H HHBeeCIWHOHHTe ripaBHna H pecTpHKyim ripeTcraByBaaT IBpTm orpaHuHyBa%a MTO ja HHxH6HpaaT ciioco6HocTa Ha epHKaCHHTe 3eMjoge¶guH (BK y'yBajKH rH H ecpHKacHHTe MauH H 3eMjogejUiH-cTpaHcKH HHBeCTHTOpH) ga ro iipoiuHpyBaaT npOH3BoACTBOTO. 15. JIorHKaTa 3a Toa KaKO 3eMJogenICTBOTO Ha BJP MaKegoHuja Mocez ga ce pecrpyKTypHpa 3a noronema KOHKypeHTHOCT noxHYa CO IIPH3aHaHHeTO geKa, Bo egHa mogepHa 3eMjogejiCKa eKoHoMHja, npOH3BOAHTe IUTO ce 6a3HpaaT Ha KoHKypeHTHO 3eMjogeJICTBo Mo)Kce eHHCTBeHO ga ce ripOH3BegaT og CTpaHa Ha crie1xHjajiH3HpaHH HHgyCTPHH KOH HMaaT gOBOJIHa eKOHOMEja oA o6eMoT 3a gpeKeHe Ha TpoiuoLHTe HHcKo, Ha ceKoe HHBO o0 BpeAHOCHHOT CHHVHp H KOH, HCTO TaKa, H3BjieKyBaaT fOJI3a og onHUTeHeKOHOMHuH OA o6eMoT oA KaAe jioBaT HH43opMailHH H HagBopeiuu TexHojoiUKH gocrHrHyBaHa. Ha ilpamep, He Mopa Aa 3HaH geKa ManHTe apMH UTo npOHecyBaaT KOHBpeHOCHHOT CHHUHp HMaaT BHCOKH TPOIIIImQ nO egHHH1ga rpOH3BOA, HO ManHTe KaHHAH BepojaTHo HMaaT. 16. 3a ga oncTaHaT, MaKeAOHcKHTe npOH3BogHTeniH kerpe6a ga 6[gaT KoHKypeHTHH Ha gOMaiuHHOT na3ap BO OAHOC Ha CTpaHCKHTe IIpOH3BOAH HiTO Mome ga ro CoBnagaaT ymepeHo 3aUITHTHHOT SHg KOJ Ke ocTaHe cnopeg ripaBHJ1aTa Ha CTO H UCT. Ha H3BO3HHTe na3apH, MaKegOHcKHTe EHgycCTPHH fe Tpe6a ga Moxe ga Ce HaTpCeBapyBaaTco HTHTepaHCKH UpOH3BogHTenH, HO cnopeg MHOry 11OH3HCKaTeJIHH yCJIOBH. 14 AOMaIIHHTe H H3BO3HHTe na3apu nocTojaHo ce MeHyBaaT cnopeg KOHTHHYHpaHHOT pa3BOj BO TeXHoJIorHjaTa, MaTepHjaJIHTe H KoMyHHKaiwHTe. rIpOH3BOAHTej¶HTe mopa ga MoQe Ra HMaaT npHcTarl KOH HHBecTrHiHOHH 4)HHaHCHH HeonxogHH ga ce ocTaHe KoHKypeHTeH. 17. HeH3BecHo e KOJIKy yCIeuLHH MomKe ga 6HgaT MaKeAOHCKHTen IPOH3EOAHTeJIH Ha OMoUIHHOT HuIH Ha H3BO3HHOT na3ap BO ugHuHa, na TaKa, mHory e HeH3BecHo gaAH MaKeOHCKOTO 3emjogeJIcKo npOH3BOAcTrO KZe ce IpOIMlH BO LXejiOCT, gypu H Ha CpegeH go gour pOK. Moxce, gypH H lioBepojaTHo, mHory ga ce cMaIiH. Bugejiu no xLTIeHcrBOTO BO CTO, nH6epanH3agHjaTa npoAouDIyBa, MoMeHTHO Op)KAuHBHTe npOH3BOgHTeJIH MoxKe a 6HgaT CHJIHO IPHTHCHaTH caMo ga ro ogp)KaT HHBHHOT aKTyeneH gen og MaiHoT gomaiueH ria3ap, a KaMO nIH ga ro ripouipyBaaT IIpOH3BOgCTBOTO. AKO ce Cfy1iH ogpxHnBa eKcnaH3mja BO 6Hno KOj 3HaHaeH noTceKTop, HajBepojaTHo Toa Ke 6Hge Ha H3BO3HHTe na3apH, KOH ce orpOMHH BO cnopeA6a CO cnoco6HocTa Ha MaKeAOHCKOTO HpOH3BOACTBO. v 18. Kora MHHHMaJIHOHOT o6eM Ha IIPOH3BogcTBO HeonxogeH 3a KOHKypeHTHOCT BO OAHOC Ha yB030T Ha AoMam1HHOT ria3ap e noroiiem og geJIOT o0 na3apoT IITO MowCe ga ro OCBOH, Torain HHAyCTpHjaTa paIHHHO notrnyBa ga onara, OCBeH aKO He ro nocrHrHe noTpe6HHoT o6eM H KOHKypeHTHOCT 3a HaoaraH e Ha nIaTOT go rxpo4PHTa6HJIHOcTa. OBa yInTe noBeKe Ba;XH 3a npOH3BOAHTe CO IIOBHCOKa BpegHOCT, Kage AOMafIIHHOT na3ap o6HnHo e MHory MaJI. HIOHHaKy KaxcaHo, MHory 3eMjogejicKH ipOH3BOgH Ke ce yBe3yBaaT nopagm HeAOCTHr Ha e4tHKaCHH MaKe;OHCKH npOH3BOAHTeJIH H noKpaj 3alIITHTaTa OA YBO3 H ripHpOgHHTe 6apHepH. OBaa peajIHOCT, CO IIOHaTaMOIflHa nH6epa1lH3aHIIja Ha 3emjogeJICKoTO CToraHCTBO, BepojaTHo Ke iipegH3BHKa 3HaHajHH pa3HOBHAHH npOMeHH Kaj KoMep1LHjaJIHHTe npOH3BOARTeniH Ha 3eMjogeJ¶CKH H cTomapcKH npOH3BOgH. 19. rIiaBHHTe rIpeHKH BJP MaKegoHHja ga pa3BHe KOHKypeHTHH 4iapMH H npepa6oTyBa'H ce BO BpCKa Co 3eMjaTa, (¢HHaHCHHTe, HaBoAHyBaH,eTO H TpaHCnOpTOT, HHBeCTHLHOHHTe yCJIOBH, TOBapOT Ha peryniaTHBaTa, ynpaByBaHfeTo H paKOBogeH eTO Ha 4HpMHTe H rIpaBHHTe EH BJiaAHHHTe HHCTHTyIHH. CYMITHHCKa e H ogpegeHa TeXHOJIOIUKa noggplmca. BaKBHTe npeqKR H CYIUTHHCKaTa nogApuKa, KaKO H 6apaibaTa 3a peCTpyKTypHpaFbe BO KJInyqHHTe CeKTOpH lOAeTaJIHO ce pa3rniegyBaaT BO rniaBHnOT TeKCT. BKyrIHaTa crpaTernja Tpe6a ga 6Hge BO HaCOKa Ha nomarai%7e CHTe enieMeHTH BO 3eMjogejiCKnTe BpeAHOCHH CHHUHPH ga cTaHaT npeTIpHemaxKH H gHHaMHmHH rIpeKy HamanyBai-e Ha npeqKHTe H o6e36egyBal*e TeXHOJIO1IlKa nogpIuIKa. BnaAaTa He Tpe6a ga ce o6HgyBa ga "og6Hpa io6eAHHAH" ripeKy CpaBOpH3HpaH,e ogpegeHH IpOH3BOgH, HHgyCTpHH, pa6oTHa cHJIa, BHAOBH npeTnpHjaTHja, HJI H3BO3HH AeCTHHagHH, aMH Tpe6a noBeiZe Aa ce CTpeMH KOH pa3BHBsaibe nOBOYIHa CpegHHa 3a HHBeCTHiiHH H IpOQH3BOgCTBO. Bp3HTe meryHapogHH H pacTeHKHTe KOHKypeHTHH goMaIUHH lia3apH nocTojaHo Ke rH og6HpaaT no6eAHHLEHTe (H ry6HTHHIAHTe). BnagmHaTa peryjiaTHia H "IIOMOIL". InTO rH H3ojiHpaaT HHBHHTe cpaBOPH3HpaHR KOpHCHHIH oA nocJiegHiHTe oA JIOUIH nia3apHH pe3yJITaTH, Ha KpajoT, npeA3BHKYBaaT 'KOpHCHHigHTe" coceMa Aa 3aocTaHaT. 20. Beeme yrnorpe6eH egeH eAHocTaBeH mogen CO TpH cueHapHja-OCHOBeH cJIy-qaj, nocTeneHa H 6p3a pe4opMa- 3a ga ce aHaJIH3Hpa BJIHjaHHeTo Ha pecpopMaTa BO rioJIHTHKaTa Bp3 UpOH3BOgHTeJIHTe H noTpiuyBawHTe Ha nreHHga H jarHemKo. Moge.noT ;eMOHcpHpa geKa OTKaKo BJP MaKegoHHja Kce ce IpTHKRy'qH KOH CTO, Ke 6Hge BaEKHO HcnpaBHO ga ce pa36epe TprOBCKaTa H geHOBHaTa noJIHTHKa. KYnyqHHOT 3aKjiyl1OK og aHaJIH3aTa e geKa gpaMaTHqeH nag BO TapHcl3aTa Ha H'IeHHIaTa 6H pe3ynTapan BO Man nopacT Ha nioTpoUjIyBa'qKHTe iLeHH Ha nxieHHxIHHTe npOH3BOAH, gogeKa nocTreneH nag BO TapHqpaTa 6H pe3ynmTpan BO ocTap nopacr Ha rioTpliyBa1KHTe UeHH. CenaK, ce noKaxKyBa AeKa MoMeHTHaTa BHCOKa TapHcpa Ha jarHeIlKo HMa MaJIo BJIHjaHHe 6Hnio Bp3 noTpoInyBaHKHTe, 6Hnio Bp3npOH3BOAHHTe geHH; TaKa, BO CperOBOpHTe CO CTO 6H MoXejio y6aBo Aa ce nOHyAH YKHHyBaHbe Ha TapH4paTa HnH Hej3HHo ronemo HaManiyBaH,e. Bapaba 3a peDTpyKTypnpaHe BO FJIaBHHTe InOTCeKTOpH 21. rTpepa oIwaUTproBnj.a. 3agpyrHTe nOTeHltHjanHO HMaaT Bax)Ha ynora BO BHCOKO KBanHTeTHH nocT- )KeTBeHH, nocr-6ep6eHH aKTHBHOCTH H BO HeKOH rnpepa6oTyBa'qKH HHgyCTpHH, HO BogetiKa yniora BO pa3BHBaH-e KOHKypeHTHO, BHCOKO BpegHO 3eMjogeJIcKo npOH3BogcTBO iZe fMaaTTnpHBaTHHTe, npeTnpHemaKH arpo-npepa6oTyBa'H 14 TproBnH, aKo-egHo roiemo taKo"-HMa nOBOJIHa geInoBHa cpegHHa 3a HHBHO c)yHKIIHOHHpaH-e H pacT. npHEHHHTe 3a Hepearmpai%eTo Ha no6apyBaqKaTa Ha nOBeIZeTO ronemH npepa6oTyBa'nH KaKO MieWHH, MeCHH, H HHgYCyTpHH 3a npepa6oTKa Ha OBonje H 3neHqyK, KaKO H 3a npOH3BOACTBO Ha BHHO, HecoMHeHO rH ogpa3yBaaT JIOUIIHTe IOTe3H Ha nopaHeaIHHTe arpOKoM6HHaTH BO HeageKBaTeH MeHa1iMeHT, AHC(pyHKLrHOHaJIHa COrCTBeHHtIKa CTpyKTypa, HegocrHr Ha o6pTeH KaHHTaii, cTapa onpeMa, 3acapeHa npepa6oTyBatqKa TexHojiorHja, BHCOKH TpoioiH, Man o6eM Ha IpOH3BOgH WTO MoKe ga ce npogagaT, nowa aM6anaJKa, HeKBaJIHTeTHH CypOBHHH, HeCOOgBeTcTByBaibe CO H3BO3HHTe cTaHgapgH HTH. CenaK, i7ma y3HHa ManH npepa6oTyBaiKH ciHpMH co roieMHHa Ha eAHa KyKa EUTO ce rlojaByBaaT og pypanHHTe 3aegHHIH, iipogaBHH1H Ha MajiO H ManIH TprOBIH KOH o6HqHO HPOH3BeAyBaaT egeH e HHcTBeH npOH3BO EBO KOHKypeHgHja co nopaHeUIIHHTe AK-H H yBe3eHHTe npOH3BOAH. H3BeceH 6poj oA HHB BeiKe gocrHrHane cpegeH o6eM, Ha npHmep oHHe lITO npOH3BegyBaaTjorypT HJIH KOH3epBHpaH vi 3eieHMyK H BO H3egHaqeHH YCJIOBH MOace, egHocraBHo, ga nopaCHaT H ga rH eniHMHHHpaaT rIOCTOjHHTe rojieMR, HO HeKOHKypeHTHH Hrpa[H. CTpaHCKHTe gHpeKTHH HHBecTHIHH Tpe6a ga ogHrpaaT KOHcIpyKTHBHa ynora BO 9oHecyBaHieTo MeHavepCKE BeHITHHH, ria3apHo 3Haeibe H TeXHOjiOrHja H HagoMalIHHOT H Ha H3BO3HHTe na3apH. 22. 3eMjoIeJire U xopTHTcyJITypa. rIOCTOH 3HaqHTenieH npocrop 3a nogo6pyBalbe Ha KBaiHTeToT H ripHHOCOT Ha cHTe pacTeHHmja. TpaXRI-HOHaRHO, ripHHOCHTe H IIPOAYKTHBHocTa 6u-e riOHHCKH Ha ripHBaTHHTe cpapMH BO cnopeg6a co AK-HTe, 6HgejkH BTOPHTen Mane nogo6ap npHcTan KOH CypOBHHH H CTPY"HH COBeTH. MefyToa, no HeoamHeHTe npoMeHH BO IOJIHTHKaTa Ha BnagaTa, oBoj TpeH cera e o6paTeH, CO TOa IIITO HpHBaTHHOT CeKTOp HMa noro6ap llpHcTanr o MaTepHjaAiH H TexHHqKH COBeTH H orpaHHnqeH H3HOC Ha 4XHHaHCHCKH pecypcH CO KOH HITO Mowe ga gojge xo HHB (rnIaBHo npeKy AO3HaKH). CKopeInHHTe npoMeHE ro norHKHaa pa3BOjOT Ha rOHHam HanpHBaTHo-3eMjogenCKa 3aeAHHIa co pacrexKH 6poj npeTnpHeMatKH 3eMjoAejnIH KOHrH npHMaaT HOBaTa TexHojiorHja H MaTepHjaJlH og ceKTOPOT 3a 3ajaKHaTa HMniieMeHTaiHja, IUTO ja BKiiy'yBa noAgpHlKaTa oX EY H gpyra MefyHapogHi KoMnaHHH. HaBOgHyBaibeTO, IUTO e HeonxOAHO 3a noggpxyBai*.e Ha noroniemHoT; Aen BHcoKo KBan3HTeTHH H 3eMjogeJICKH HpOH3BOAH CO BHCOK IIpHHOC, KaKO H 3a 3eMjogencKHTe cHcTeMH BO TeKOT Ha cyBaTa JieTHa ce3oHa, e CePHOH3O HpaHO KaKo pe3ylTaT Ha HHCKaTa eHKacHocT, cIa6aTa rioKpHeHOCT H HHCrHTYAHOHaJIHHOT pacnag. Ke 6HgaT noTpe6HH 3HaHHTeJIHH HHBecThRH H H3rpag6a Ha KanaiHTeTH 3a ga ce YTBPX?H MoAepeH ceMeHcKH pex(HM. H fOKpaj nojaBaTa Ha nipHBaTHH Ha6aBHH KOMnaHHH co rpyna HanipeXHH RpOH3BOAH, ynorpe6aTa e ce yurre Maia. Be3 Ha6aBHH KOMnaHHH H 6e3 4)HHaHcHcKH HHCTHTYIHH IUTO o6e36eMyBaaT XOBOJIHO ce3HOCKH KpegHTH, oBaa cHTyaHja BepojaTHo iCe npogonKH. rIoHygaTa Ha CBeiKx XOpTHKYJITYPHH rIpOH3BOAH cera e Ha IIHPOKo rioA AOMHHaiHja Ha ManiH npHBaTHH TprOB1,H, HO IIOCrOH CaMO pygm4eHTHpaHa npogaxc6a Ha roiiemo H mana cTaHgapgH3aHja HiiHn1 rpaARpai>e Ha npoH3BoAHTe. 23. CToQapcTRo. CToHapcKoTo UPOH3BOgCTBO BO EJP MaKegoHija ce KapaKTepH3Hpa co ronem 6poj mHory MajiHx, 3eMjogeJIcKH gOMKaHHcTBa OpHeHTHpaHH caMO KOH er3HcTeHIAHja; orpaHH'eH, HO pac'reHKH 6poj MaiH, KoMep1wHjaAHo opjeHTHpaHH ceMejHH 3eMjogejicKH 4jHpMH H onataxIKH 6poj ronemH, cneiH)jaAH3HpaHH xKHBHHapcKH H CBHH,apcKH ripeTnpHjaTHja, nopaHeuiHH AK-H. ,ogeKa CBHHbapCTBOTO 3Ha'IHTeJIHO riopaCHa, a MnieHHaTa HHgycTpHja nopaCHa yMepeHo, rOBegapCTBOTO OBHapCTBOTO H )KHBHHapCTBOTO 3a6ene)KHTeJIHo ce HaMaJIHja, riociieRHOTO KaKO pe3yaITaT Ha npoiafaH>eTO Ha AK-HTe H HHBHOTO TpoH3BOACTBO. CTaBOT IITo e pacnocipaHeT HH3 3eMjaTa e geKa cToqapcTBoTo Ke npocnepHpa npeKy rioggpuKa og rojieMHTe croIapcKH npeTnpHjaTHja. BCYIIHOCT, orpaHHweHoTo HcTpaxyBaffe noKa)KyBa AeKa CeMejHOTO 3eMjogejicTBO BO B.JP MaKegoHHja o6e36egyBa egHaKBH H BepojaTHo nogo6pH nOBpaTH Ha 3eNja, Tpyg H KanHTan3 oA oHa BO rojieMHTe npeTTIpHjaTHja. H3rJiega geKa BnagaTaHa AK-HTe H nopaHeI1IHHTe AK-H mx o6e36egana gonropoqeH 3aKYII Ha ApxcaBHa 3eMja, BKIyxiyBajIKH rH naC UTaTa, KOH Ha no-IeToKoT 6Hne ocio6ogemn og peHTa. HannaiKai-e iia3apHH geHH 3a pa3yMHo gonir 3aKyU HnH geHaiwOHann3HpaH-e Ha 3eMjaTa BO pa3yMHo roiiemH napiueiiH npeKy TpaHcrapeHTHH TpaHcaKiUH 6H pe3yniTHpaJIo BO noroniema npogyKTHBHocT Ha 3eMjaTa H riOBHCOKH npHXOAH 3a ycnerUHHTe 3aKy1i1rH, KyrlyBaMIH H pa6oTHmgH. BeTepHHapHHoT H cToxapCKHOT 3aKOH H perynaTHBa Tpe6a ga ce peBHgHpaaT 3a ga Ce HaManiH perynaTHBHHOT TOBap H 3a ga ce 6Hge BO corJiacHocT CO 3aKOHHTe Ha EY H MefyHapogHHTe o6rnHraUigH. O6enexKyBam.eTo Ha )CHBoTHHTe, enHgemHonorHjaTa Ha 6ojnecrHTe, HHcneKiIHjaTa Ha rIpoH3BoAHTe, 3aIuITHTaTa Ha peCYPCHTe H HegOBOJIHHOT 6poj ycjiyrH 3a ripoMoIHja Ha na3apOT He ce AOBO3IHo e4HKacHH ga o6e36egaT OAPXaCHBa 6a3a 3a KoHKypeHTHocT Ha goMarIHHOT H MetyHapogHHTe na3apH. PH6oAOBOT, oBHapCTB0TO, rOBegapCTBOTO H CBHH,apCTBOTO Tpe6a ga ce npHBaTH3HpaaT. rIpHcTarOT Ha IIpHBaTHHTe 3eMjogenitH KOH CTOqapCKH COpTH oA CBeTCKa Kiaca e orpaHHweH BO BHCOKa Mepa. CToMapCKHTe HPOH3BOAH TpaAHiHOHaJIHO yIecrByyBaaT BO H3BO30T, HO KanaU1HTeTOT eq)eKTHBHO ga Ce HaTrpeBapyBaaT Ha MefyHapgoHHTe na3apH e orpaHHIeH. 24. llymapcTBo. rlopagH rmaHHHCKaTa ripHpoga Ha BJP MaKegoHHja, myMHTe HOKPHBaaT OKOJIY 1 MHJIHOH xeKTapH (39%o0 3eMjIIHHoT 4OHA Ha 3eMjaTa), H IpaKTHHHO CHTe ce BO concTBeHOcT Ha gp)KaBaTa. H noTpe6HTe 3a 3amITHTa Ha cpegHHaTa H eKOHOMCKHOT nOTeH1HjaJ1 Ha oBaa orpOMHa rioniymeHa nOBpU1HHa ocTaHyBaaT pexHCH HeaHaAH3HpaHH, HO jaCHo e geKa pe3yJITaTHTe, IpO,YKTHBHOCTa H npH,OHeCOT KOH vii CeKTOpOT Ha uIyMapCKH H U PBHH npOH3BOAH ce gaiieKy nOX noTeHiHjaJloT. fIpo6neMHTe BO lyMapCTBOTO ce ripMHapHo pe3yJITaT Ha cnia6a uiymapcKa nojITHKa. OCHOBHHTe TexHHIKH npo6JIeMm ce jioiu KBanjHTeT Ha gpBjaTa, Hee4pHKaCHH npOH3BO9HH TexHojiorIH H HeCOOBeTHH npOH3BOAH 3a COBPeMeHHTe na3apH. MoMeHTHaTa nOJIHTHKa 3a yiTpaByBaH%e CO IIIYMHTe 903BonyBa roIIltlHa celia og 600 000 go 900 000 M3, IuTO e egHKaBO Ha 1,8-2,3% o0 BKyIIHHOT IUYMCKH 4)OHg. 0 OBa, 73% ce KOHCYMHpa KaKO rOpHBO OTKOJIKY KaKo rpara H MaTepHjaJ[ 3a ApBHHTe UHHyCTpHH. OrpaHHMeHHOT nlpHcTanl AO HeKOH InO1yMeHH o6nlacTH, HCTO TaKa 3HaH ReK alHeKOU o6JIacTH ce ceyIUTe npeeKcnnoaTHpaHH noKpaj oxHrniegHaTa Op3KXIHBOCT Ha KonJiwecTBaTa ce'a. HOBOTO nomryMyBaH-e onagHa Ha rioManKy oA 1000 xeKTapH rOAHMHO, IUTO HCTO TaKa, He OCTaBa nlpOCTOp 3a pereHepanHja Ha coroJneHHTe o6nacTH HuH 3a COqyByBaH,e Ha nlOMBaTa BO nnaHHHCKHTe perHoHH. OTcycrBOTO Ha 6HjiO KaKBH gaHO)KHH CTHMIynaHCH 3a o6HoByBal>e Ha IlyMHTe IpIiHoHece KOH OBOj 31o011 pe3ynJTaT. rIPHBHJHO IIPHBaTH3HpaHHTe IUyMCKH npeTnpHjaTHja, c)opMHpaHH noIHyBajKm og 1997r; ce nog AOMHHanHja Ha Heec4HKaceH, npeBpa6oTeH jaBeH MOHOHOJI. I4cToBpeMeHo, ce 3ro.ieMHja HineraiiHaTa ce'a, rpnpOAHHTe lIlTeTHHIH H noKapHTe. H1oTpe6a 3a HHCTHTYIAnOHnaHO jaKHen e BO pypa&iJOT CeKTOP 25. KaKO la Ha Apyro MecTo, BnagaTa Tpe6a nogop6o ga rH BPIUH pa6oTHTe IuTO caMO Taa MO)Kxe a rH 3aBpUlH, 3a Aa H36erHe pa6oTH HITO Ke ro nonpetyBaaT HunH LuTO Tpe6a ga 6HgaT HaripaBeHH OR IpHBaTHHOT CeKTOp. C)IUTHHCKHTe 3agaqH BO pypaJIHHOT CeKTOp BKjiyIyBaaT oJiecHyBai-e H peryjiHpa>be Ha 3eMjoecTBOTO, 3aTHTa Ha CpegHHaTa, HaMajiyBaHe Ha pypaIHaTa cHpoMaMmTja ia o6e36egyBaxi,e coixHjajTHH ycuxyrH 3a pypanHaTa cHpoMamiTHja. 26. M3ITIRB u gpyr aRToTOMHiT onepaTRHtTn areHTnHH. rnaBHwTe ynlorH Ha MHHHcTepCTBOTO 3a 3eMjogeaIHe, uiyMapCTBO H BoAocToriaHCTBO ce aHa1IH3a Ha r1O0IHTHKaTa H pa3BojoT, peryjiHpabe, cueAeH%e H cynepBH3Ha. KanalHTeToT Ha MHHHcTepCTBOTo e ce yIITe cuia6 BO CHTe OBHe o6nac'ria. Bo 2002 rogmia rpe6a ga oTnoHe 18-MeceYeH npoeKT 3a 3ajaKHyBaIbe Ha KaragTeTHTe PHHaHCHpaH og EY. 14 noKpaj cPaKTOT geKa rIOBeKeTO cy6BeH9HH I lpeTXO0HO BO HaiiAe)KHOCT Ha M3IIB, cera ce TprHaTH HJIH CBegeHH Ha HeonepaTHBHO HHBO, noAgpIUKaTa BO 3eMjogejiCTBOTo e ce yuTe HajroJieMa cTaBKa BO HerOBHOT 6yveT. Bo BpcKa co pe4)opMHTe BO iiyMapcTBoTo, COBeToaBHaTac yHK1Hja, HcTpaxyBaHeTO H HaBOgHyBaH,eTO noTpe6Ho e KpynHO BHaTpeIIIHO HHCTTYIIHOHaJIHO pecTpyKTypHpaise Ha M31IB: 27. llia2cTso. Kora xZe ce eJIMHHHpa MOHOIIOJIOT Ha MaKegOHCKH UiyMiyH M3IIB Ke mopa gocra ga rH 3ajaKHe CBOHTeD yMapcKn pa6oTHHIW H ga ro 3rojI-M HHBHHOT 6poj. CogeTogaBHa cHKBHOTfia COBeTogaBHHTe ycjiyrm cera ce gaBaaT oA cTpaHa Ha He3aBHCHo 6yIeTHpaHa areHlyja. Hej3HHHTe aKTHBHocTH 6ea npeopjeHTHpaHH KOH o6yKa 3a IPHBaTHH 3eMjogejilH, SaTanTHBHH npo6H Ha HHBO Ha CjapMa, IpOMogija Ha 3eMjogejlcKH 3gpy;KeHHja, IIOKPHBaHte Ha TpOIUO1ZHTe H KoHeIHo, KOH npHBaTH3a1lHja. COBeTogaBHaTa areHgHja rpe6a yIUTe ga j a npeopHeHTHpa cBojaTa opraHH3a.HCKa crpyKTypa KOH perHOHaHTenorpe6H H ga Cc ro Hajge cBoeTO MeCTO Ha ria3apOT BO KOHTeKCT Ha gpyrH H3BOPH TeXHHMKa nOMOIf, KaKO go6aByBaqH Ha MaTepjaiiH, HeB31agHHH opraHH3aiAHH H HOBOHaCTaHaTH npHBaTHH KoHCyJITaHTH. 3emioenjicKo nca aF;e pe3yJITaTHTe o0 3eMjogeJICKoTo HcTpaKyBaHie ce ge4f3H9HTapHH BO 1pImeHeTOTO HCTpa)KyBaH,e, genJyMHO nopaAH HerOBOTo HHaHcHpaH%e npeKy HHCTHTyTHTe ripH MHHHCepCTBOTO 3a HayKa H o6pa3oBaHHe, a He npeKy M3IUB. M31IIB HeMa 4PopMaJ1Ha OgrOBOPHOCT 3a 3eMJOgeJICKH HcTpaxKyBaiba, HaKO Toa ce KOHCYJITHpa 3a KpynHH npamIaiba H Mo)Ke ga (pUHaHCHpa KOHKpeTHH HcTaxcyBa KH npoeKTH. Co npOeKTHaTa rioggpIUKa 6exie 3aBpiueHa nporpama oA 25 rpoeKTH Ha npHMeHeTO HcTpa)KysBaIe, roHygeHH npeKy M3LUB. 28. 4pnraixija- MHory6pojHocTa Ha BO CYIUITHHa HeCOJIBeHTHH, 6e3 pe3ynJTaTH opraHH3aAHH 3a ynpaByBaxi-e CO BoAaTa IUTO KOHTpOJIHpaaT XeJIOBH Og geC(pHiaTapHHTe HpragiHCKH iueMH, BKjiy'yBajKH ce H BO gpyra gejHocT H cOoIyBajKH ce AHpeKTHO CO roeAHHeMHH roJIeMH H ManH KOpHCHHLK, Aocera e caMo geJIYMHO pe4fopMmpaHa cnopeg TeKOBHHOT npoeKT 3a HpHraluija (pHHaHcHpaH og BaHKaTa Ha XouaHgija (rIPPHi). OTKaKO iZe ce cpopMHpaaT pecpopMHpaHH opraHH3aHIjHH 3a ynpaByBaH>e Co BogaTa (OYB), a jaBHHTe BogoCTonaHCTBa-MOHonOJIH H 3gpyxCeHHjaTa Ha H1pHBaTHH KOpHCHHyH Ha Boga (311KB) Ke ce viii c'raBaT Ha KoMepiHjanAHo e4¢HKaCHa H 4¢HHaHCHCKH 3xpaBa OCHOBa, M3IIB Kce 6Hge OgrOBOpHO Aa rH OgpxH Co ;xo6pH pe3yJITaTH H A rH AHcnHnnHHHnpa OHHe IITO He AaBaaTR o6pH pe3yJnTaTH. Cera MHHHrepcrTBOTO He e HH 6JrncKy go HMaibe TaKBa Cnoco6HoCT. M3I1B iKe Tpe6a Aa HMa H HHCTHTYIWMOHaJHacCioco6HocT ga pa3BHe peBHAHpaH 3aKOH 3a BOAH H HaiHOHaneH HpHraiHOHeH ruaH. rlOKpaj cbaKTOT AeKa noeAHHeHHHTe 3eMjogeJiiiH ce AOMHHaHTHH HPOH3BOAHTeJiH Ha noBeKe BHAOBH paCTHTeJIHH CTomapCKH rpOH3BOAH, rIOCTOH MaJlO CHCTrMaTCKO 3HaeHfe 3a oHlnTaTa HpHrag cKacocroj6a Kaj HHB, HJIH 3a cTreieHOT Ha HHBHaTa ynOTpe6a Ha Hec¢OpMaJIHH TpaAHgHOHaJHH TeXHOjorIHH 3a HaBogHyBaHbe. 29. 31npyNxeHvja La3eMjOUeJHIH u 3agpym-. MaKeAOHCKaTa cronaHcKa KOMopa (MCK) TBpAH geKa rn 3acTanyBa HHTepecHTe Ha ManiHTe 3emjogeJnJW, KaKO H Ha AK-HTe, HaKO HMa perncipHpaHo caMo eAHO 3py)KHmHe Ha iipHBaTHH 3eMjogeJiiiH. 3ApyxKeHHja IUTO go6po cyHKLRK oHRpaaT MOxKe xa HM o6e36eAaT Ha CBOHTe 'UIeHOBH ycjiyrH 3a TexHHKn, Ha6aBHH, naKyBa'KH, rpagHpaKH, cKKiagHpaqKH, TpaHCnOpTHH, KpeAHTHH, HH4opMaTHBHH, o6y'yBaqKH n na3apHH noMaraiia. HaKO IIOBekeTO og nOHOBHTe 3gpyxeHHja ce 4OKycHpaaT Ha IIpOH3BOHTe, MajiKy o0 HHB ce croco6HH ecPHKacHo ga rH oncJyxcaT CBOHTeq RnHOBH HRH Aa rpaAaT KOaIHIAHH CO ApyrH 3gpyXeHHja KOH rH nOApX)KyBaT HHBHHTeg enIH. rIogroTBeHa e iierHCJIaTHBa Koja HM 9O3BoIyBa Ha 3eMjogejiCKHTe opraHH3ag1H ga ce BKjyiaT BO XejHOcTa, HO Taa ce yuJTe He e yCBoeHa. Tpe6a genocHo ga ce OCOBpeMeHH H npaBHaTa pamyca 3a r Ha 3agpyrnTe 3a ga ce o6e36egH xmeHCTBO no IIPHHIWUOT egeH xmeH-eAeH rnlac, co 1IeHapHHH r1pOnOp1HOHaOJHH CO yMecTBoTo, H CO OJBOeH MeHauMeHT 09 'jieHCTBOTO. rIpoH3BOgHHTe H TprOBCKHTe opraHm3agHH rpe6a ga ce ripoMoBHpaaT H ga ce 3ajaKHaT, TaKa urro Aa gojge 9o co3AaBaH%e Ha HH4)paCTpyKTypa o0 39pyceHa co MHOry XOpH3OHTaJIHH H BePTHKaJiHH BpCKH, o6e36eAyBaj1C HeKOH og eKOHOMHHTe og o6eMOT KOH 6ea cnoMeHaTH norope. CTpaTerNja H mpenopaxN 30. lHIpOKO IIpH4)aTeHa HeKOHTPOBep3Ha yei e ga ce ripeIH3BHKa Ogp)KHB Ilpon;ec Ha pacTexKo 3eMjOAej¶cKo HpOH3BOACTBO QcMHcjia Ha BpegHocT Ha TOj Hax1HH CO3gaBajKH HpypaHH npHxOgH BO 3eMJogeJIcTBOTO, arpo-6H3HHcOT H yc3iyrHTe Ha Manio H HaMa.nyBajKH ja pypaiiHaTa CHpOManUTHja. (DOKYCOT Ha ec¢HKacHH MaIH 3eMNJoej¶1jH, iipepa6oTyBaxm H TprOB1EH H HHBHHTe c3aMHJUH e gocuiegeH Ha oBaa cTpaTerHja. lIpyrH MeTOAH 3a HaMaanyBaHie Ha cHpoMaUiTHjaTa, KaKO o6e36exyBaiHe e4eKTHBHO cpegHo o6pa3oBaHHe, Ke 6apaaT TapreTHpaHH nporpaMH 3a roMooiu. CyurrHHaTa Ha Hajgo6paTa oiniTa cTpaTerHja 3a 3rouiemyBaaie Ha BpeAHocTr Ha npOH3BOACTBOTO nOBp3aHO CO arpHKyJTypaTa, e ga ce cO3gaAaT YCJIOBH BO KOH rpynaiUg o0 3eMjogej¶CKH H arpo-6H3HHCH MOwKe ga ce pa3BHBaaT H ga craHaT KOHKypeHTHH Ha gomamHHTe (a BO HeKOH cfly'anH H Ha MeryHapogHHTe) na3apH 3a cenJeKTnpaHH 3eMjogej¶cKH pOH3BOAH. Ha OBHe rpyraimH HM e noTpe6Ha BeEIHqHHa, AOMeH H nOTTHK 09 KOHKypeHixHjaTa BO HHBHHOT paHr, og YBO3OT H OA cTpaHcKHTe cpHpMH. 4HpMHTe BO rpynainmjaTa cTaHyBaaT e4HKaCHH Kora Ke ce cooqaT CO KOHKypeH1lHjaTa H Kora Kce nocTHrHaT ycnex BO Hea. 3agaqaTa Ha ApxaBHaTa noj1HTHKa e ga ja ocio6ogH KpeaTHBHOcTa Kaj CHTe 3eMjogeHiAH,n pepa6oTyBaxH,g o6aByBa'IH H TprOBiH HA a HM noMorHe, a He ga rH nonpexyBa HajHpOgyKTHBHHTe IpOH3BOgHTeJii. B.nagaTa H AOHaTOPHTer pe6a Aa ce KoHeHpHpaaT Ha cJie1HOBO(geTaneH CnHCOK BO rniaBHHOT H3BeLuTaj): o )a ce HaManiaT H3o6J[Htypa1baTa BO cTpyKTypaTa Ha CTMYIynaHcHTe H KOHKypeHIHjaTa (Hanp., Aa ce pecopMHpa TprOBCKaTa OJIHTHKa cHCTeMOT Ha CTOKOBH pe3epBH, ga ce cTaBH Kpaj Ha MOHOnO31HTe BO Ha6aBKaTa Ha MaTepHjaAH H npepa6OTyBaqKaTa); o ga ce HanpaBaT" POAYKTHBHH pecypcHTeBO nopaHeUIHHTe H aKTyeJIHHTe AK-H H BOEQ pKaBHHTe myIMz (Ha rip., ga ce palXHaH KOaHpeHCTeTO Ha AK-HTe Ha jaBHoTo 3eMjHlnTe, Aa ce pHBaTH3HpaaT HJIHga Ce 3aTBOpaT oCTaHaTHTe AK-H, Aa ce pecpopMHpaaT nyMapCKHTe HHCTHTyuHH); ix * )a ce npoUiHpaT cPHHaHCHCKHTe HHCTHTY4LHH 3a pypaniHH KpeXHTH (Hanp., ga ce pa3BHjaT OAP)KAHBH pypanIHH KpeAnTHH HHCTHTYJHH, ga ce pec)opMHpaaT CHTe acrieKTH Ha na3apOT Ha 3eMjHinTe, ga ce o6e36eAH o6yKa 3a npo;eHKa Ha 3eMjogencKH KpeAMT); e )a ce nogo6pH KHMHaTa 3a HHBecTH1ym H 3a pa3BOj Ha MCII (Ha rip., Aa ce HaMaJII peryJIaTHBHHOT ToBap, ga ce nogo6pH cnpoBegyBaiHeTo Ha gorOBOPHTe H gaHOqHaTa aAMHHHcTpalHja, ga ce nrogo6paT lpOH3BOAHHTe cTaHAapgH); * Aa ce riogo6pH HaBOAHYBaiibeTO H gpyraTa pypanHa HH4pacTpyKTypa (Ha np., ga ce pa3BHe HaI1OHaHieH nIiaH 3a HpHraLHja, ga ce pa3BHjaT MeXaHH3MH IUITO Ke rapaHTHpaaT OAp)KJnHBOCT H ogroBOPHocT Ha OYB H 3KB, ga ce ogpegaT TpaHCnOpTHH rIpHOPHTeTH H ga ce npolyeHH COcToj6aTa Ha na3apHTe Ha roJIeMo); e Aa ce pa3BmjaT H MoepHH3HpaaT HPHBaTHHTe 3eMjogencKH HHHcrHTYUHH (Ha np., ga ce peBrgHpaaT 3aKOHHTe 3a 3gpyxKeHHja H 3agpyrH, ga ce o6e36eAH TeXHIKa riOMOIi H Aa ce npOMOBHpaaT 3eMjogencKH,TprOBCKH, npepa6oTyBa'Kii H 3py)KeHHja 3a o6e36egyBaSe noeBTHHH aBHo-6HIeTH (ArIEKC), ga ce opraHH3HpaaT caeMH 3a ga ce npOMOBHpa 3eMjOAeflCKHOT H3B03); H * )a ce onecHH CHpoMailTHjaTa npeKy 3roAeMyBaH)e Ha Bpa6OTyBaibeTO H ceMejHHTe iipHxOgH, rjfTo Kie AojAaT oA ycneurHa pypanHa eKOHoMHja nOBp3aHa Co 3eMjogejicTBOTO, paMHonpaBHH YCJIOBH 3a MaiilTe 3eMjoAejTLH, npepa6oTyBaqHTe, TprOBIAHTe, H npeBO3HHIMTe, o6pa3oBaHHe H npHcTan Ao 3eMjnIuTe H KpeXHTH 3a MAagH 3eMjogeyAgH, Mo6H3H3agHja Ha pa6OTHaTa cn3ia BO oMaKZHHcTBOTO H Kaj )KeHHTe-3eMjogejuii. BjiaAHHHTe nporpaMH 3a cOyijaAHa noMoID ce yurre ce noTpe6Hm 3a cTapH, 60AHH H xeHqiiKenHpaHH. TIInaH 3a aKyzja 31. Bo anpHii 2002 3a Bpeme Ha TpKa.ne3HaTa Maca ce gHCKyTHpaiue 3a pecfOpMCKHTe nHpOpHTeTH BO 3eMjogeJIHeTO, Kage HMaine yMecHHgH og BnagaTa, npHBaTHHOT 3eMjogejicKH CeKTop, HBO H 9oHaTopcKaTa 3aegHHta, KOH ro KopHcTea OBOj H3BeifTaj KaKo MaTepHjan. CeKTopCKHOT aKyHOHeH nIIaH, pe3eHTHPaH BO flpinor 4, 6eine pa3BHeH 3a Bpeme Ha TpKarre3HaTa Maca H noAogia ogO6peH oA MHHHcrepOT 3a 3eMjogeiHe. PefopMHTe Ha6pojaHH BO AK1nHOHHOT IinaH ce nogJeIeHH Ha "KpaTKo go cpegHopoqeH aKBHOHeH nunaH H "nogoAropOI1HH CTpyKTYPHH pecpopMZ. PeAocjieA Ha pe(OPMHTe 32. Ha KpajoT og iAejiOCHHOT H3BeIlfTaj e gaAeH geTaeH CIIHCOK Ha pec¢OpMm BO 3eMjogejicKHTe noTceKTOpH. BaxCHH ce CHTe, HO He Moxce ga ce ciipoBegaT Ha KYC go cpegeH pOK. KaKo H ga e, rpOLeCOT Ha pa3BHBaHie KOHKypeHTHa 3eMjOgeYIcKa H peieBaHTHa arpo-gejHOcT, 6apa npoMeHH BO MHory c4epH. TaKa, KOHyeHTpHpaHfeTO Ha ManI 6poj pepOpMH HeMa ga 6HAe ec1eKTHBHO. CJIegHOBo e CKpaTeH CIIHCOK Ha peeopMMH ITO Tpe6a ga ce CnPOBegaT Ha UO1qeTOKOT. THe Tpe6a ga ce HanpaBaT fpBO, 3apagH TOa irTo iZe HM,aaT HajKOpHCHO HenocpegHo BjiHjaHHe, HJIH 3apagn Toa liTO ce ripegycJIoBH 3a gpyrH BaKHH H HeonXOAHH peq)opmR. Ce HageBame geKa Ke 6HgaT noggp)KaHH o0 XOHaTOPH CO TeXHH'Ka HOMOII H BO MHOry cy"aH, co HHBecTHLyHOHH c~OHgOBH. CiipyKIUypa na ciuumynaacu, iupzoocica u iu ouauwca Ha lconHypenyuja o )la Ce H3rOTBH KOHTHHyHpaHa pe4)opMa Ha 3eMjogejiCKaTa TproBcKa IOJIHTHKa H ripMHeHa, 3a ga ce rIOApXKH gorOBOPOT CO CTO H gpyrHTe TprOBCKH nperoBopH. o Qa ce orpaHHtIH MaHgaTOT Ha IKCP Ha BHCTHHCKH cTpaTelnKH pe3epBH, ga ce HaManiH 6pojoT Ha nOKPHeHHTe 3eMjogejicKH npOH3BogH, ga ce HaMaJIH noggpIuKaTa 3a nmeHHUaTa go napHTeT nog x YBO3HHOT, Aa ce HaMaiaT TapH4JHTe H genIHOT YBO3 ga ce rogflO)KH Ha Toa, ga ce 3aBPIUH TYTYHCKaTa nporpaMa H ga ce rlpHBaTH3paaT CHTe TYTHCKH C4HpMH. * 3Ha"IHTeJIHo ga ce HaManH BpeMeTO Ha TpaH3HT Ha rpaHHnHHTe npeMHHH unpeKy nogo6pyBaI-be Ha rpaHH'IHaTa HH4¢pacTpyKTypa; ga ce nperoBapa 3a HCTOTO Co cocegHHTe 3eMjH BO KOH paH3HTHpaaT MaKeAOHCKH go6pa. o ga ce peBHAHpa npaBHaTa paMKa H cnpoBeAyBaaie Ha 3aKOHOT 3a Aa ce HaMaiiaT MOHOnOJICKHTe ripaKTHKH Bo arpo-npepa6oTyBaIKaTa H Ha6aBKaTa Ha MaTepHjanH. Pe4popmu Ha 3eMjuweumWo na AK-uiue u iopaueuHuiiie AK-u u i)pyiu 3eMjUUIU pe4pomu * o a Ce 3ajaKHe IierHc3IaTHBaTa IfTO ja peryniHpa ynoTpe6aTa Ha gp>KaBHa 3eMja oA cTpaHa Ha 3eMjOAeJIcKH npeTnpHajTHja, Aa ce niocTaBaT KpHTepHYMH 3a na3apHH peHTH. * aa ce npHMeHH 3eMjHUIH o oaHotyBaHie 3a a ce cTHMyjinpaaT AK-HTe H nopaHenrnwre AK-H KOH oc.ro6ogyBaibe OA HenpOAYKTHBHO HCKOpHCTeHaTa 3eMja. o Ja ce pa3BHe eeeKTHBeH,ecjneKcH6HneH CHTeM 3a HeABHKeH HMOT 3aCHOBaH Ha CHrypHH H COnCTBeHHnKH npaBa CO KO Moxe a ce TpryBa H 3a 6pOjHH gorOBOPH 3a 3aKyn H APyrH nOMajiKy 4)OpMaiHH AorOBOpH. o )la ce cjopMHpa He3aBHceH KaTacTap KOHTPOJIHpaH OA perHcTap Ha 3MjEHifeH (1OHg, 3a Aa ce IlpeABAHJ KaTaCTapOT Ha HeABBESeH MOT, HITO BO MOMeHTOB ce KOMnjyTepH3Hpa. * Ua Ce pa3rnjeAEpa, aT HTerpHpaaT 3aKOHHTe TO BJIHjaaT BP3 ria3apOT Ha 3eMja.2 Pypainu u 3emjo6eacicu icpe6)uiiu * a ce o6e36eEH o6yKa 3a noAo6pyBaHe Ha CHHaHCHCKHTe, eKOHOMCKHTe H 3eMjoAeJIcKHTe BeIITHHH Ha Bpa6OTeHHTe BO KoMepgHjanHHTe 6aHK H EaTegMHIHH1HTe 3a Aa ce noxo6pH HHBHaTa cnoco6HOcT 3a npogeHyBaai>e PH3HK H pa6oTe-be co KpeAHTH. * a ce gage TeXHHtIKa IIOMOM Ha pypaIHHTe KpeToaBaTe 3a Aa ce pa3BHjaT KpeARTHH HHcTpyMeHTH 3a o6pTeH KanHTaJI 3a npHBaTHHTe Ao6aByBam H npepa6oTyBaHH, 3a Aa HM ce OBO3MO)KH ogo6pyBaHte KpeAHTH Ha WN ogenTe3a pa6oTH KaKO CeMe, fy6pHBo H onpeMa. * a ce IPOILHpaTTycCieUHHTe MHKPOKpeAHTHH nporpaMH. O a ce noo6pH CHCTeMOT Ha OTrITiaTa CO 3ajior, CO 3eMjHLIHH H agMHHHCTpaTHBHH pecpopMH. /!a ce iiobo6pu KAuMaiua 3a UpoU360)cuJeO U uHecWu4uu o 6upu6a&HuouJ ceKIdop * )a ce HaMaEH perynaTHBHHoT ToBap. Ha np., 6apaH*a 3a perHcTpaLHja uITO 0o3eMaaT MHory BpeMe H Apyra 6HpoKpaTHja, ga ce HaManH KopymHjaTa. * Ja ce nOAo6paT KanaiTeTHTeHa CYAOBHTe 3a CnpOBeAyBaaHe Ha AOrOBOpHTe, KOH cera Ce CMeTaaT 3a HeCHrYPHH BOpe3yTaTHTe H 6aBH BOE H3BpIuyBaH)eTO. * Aa ce IIOAo6pH gaHo'IHaTa agMHHHCTpagHja, 3a Koja ce CMeTa AeKa e HeTpaHcnapeHTHa. 2npHMapHo 3aKoHoT 3a 3eMjHUlllTe, KaTacTap H perMcTpaixHja Ha ripaBa Ha HeABHNKeH HMOT, 3aKoHoT 3a aAMHHHcTpaiJHja Ha perHcTpHTe, 3aKOHHTe 3a H3BpiIHa nocTanIKa, xHnoTeKa no AoroBop H 3ajior, H 3aKoHoT 3a HacJ1egcrBo xi * Aa cepeBHAHpaaTcTaH apAHTe H peryaTHBHTeBO coriaCHOCT CO CTaHapHTe Ha EY, oHaMy Kage IUTO Toae MO)KHO, 3a ga ce ojieCHH H3BO3OT H MO)KHOcTa3a cHa6gyBaFbe Ha MefyHapOgHHTe cynepMapKeTH. o )la ce o6e36egH TeXHHKan IOMOIU 3a ga ce pa3BHjaT H HMIJIeMeHTHpaaT InIaHOBH WTO Ke HM rioMorHaT Ha Man3HTe H cpeAHHTe 3eMjogeACKH rpepa6oTyBaqH H Ao6aByBaqH. * )la ce (opmHpa pa6oTHa rpyna IIITO Ke nOgrOTByBa pejiO3H 3a cTaHgapH3HpaeHa H3BO3HHTe peryjiaTHBH H H3BO3HHTe KpegHTHH ojiecHyBaHia 3a rIpOH3BOXHTeJIH H H3BO3HH9H. e ga ce o6e36eAxA KOHCY3ITaHCKa nOMOIU 3a MeHaIMeHT Ha nopaHeiiHH AK-H og6paRH cnopeg gageH KPHTepHyM (T.e 1oTeHgHjaAHO ocTBapjiHBH) 3a ga ce aaH3HpaaT HHBHHTeR ejiOBHH riiiaHOBH, KOpnopaTHBHOTO yripaByBaH-e, coi]gjaiHHTe o6BpcKH, HHBecTH1'HOHHTe noTpe6H H ipegnoweHHTe niiaHOBH 3a pecTpyKTypHpaibe. ,L4a cepaaeujau u wobepHu3upaaFuja6Huu5e u upueaFuHuuie 3eMjoi0eAc1Cu UHCWiui1yuUU *a ce OCHOBa egHHHga 3a aHaJIH3a Ha IIOJHTHKaTa BO M3UIB, mTo e HTHO noTpe6Ha 3a aanimpaH-e Ha ripegJIO)KeHHTe IpOMeHH BO nOYIHTHKaTa, oco6eHo BO o6niacra Ha ileHOBHaTa H TproBcKaTa rIOJIHTHKa. * )a cepeBApa ierHciaTHBaTa H peryniaTHBaTa 3a ceMHHa, npeq)epeHIWTe Ha nopaHeInmiTe AK-H, npoH3BogHo-TprOBcKHTe 6apHepH, 6apHepHTe npH Ha6aBKHTe, pacHTe 3a paciviog H reHeTHHKHOT MaTepHjaii. e a ce gecpHHHpaaT YJIOrHTe Ha iipexpaH6eHaTa caHHTapHa H 4HTOcaHHTaPHa HHceriK1Hja, ga ce noggpxKaT MeryHapoAHo OBjiacTeHH na6opaTopIM BO OBHe o6iiacm H BO 3aUITHTaTa Ha pacTeHHjaTa H 3gpaBjeTo Ha )KHBOTHHTe, ga ce HHKopnopHpaTT peeBaHTHH 3aKOHH H caHgapAH OA EY H ga ce pecopMHpa HHcTyHoHaIHaTa pama 3a THe Aa Mowe ga cee negaT/lCnpoBegyBaaT. e ga ce 3rojieMH, rIpeKy HaA3opHH og6o0pH H Ha xgpyrH Ha'HHH, ymeCTBOTO Ha 3aHTepecHpaHHTe cTpaHH BO ynpaByBaH,eTO Ha jaBHHTe 3eMjoXejiCKH HHCTHTYAHH IlTO rO OncJIYX(YBaaT HJIH peryniHpaaT 3eMjogeACTBOTO. * ga ce OCHrypaT AOBOJIHO cpexCTBa 3a cniegeibe Ha 6ojiecTHTe H 3a riporpaMH 3a KOHTpofla Ha rpaHHlna, BKjiyxiyBajKH HPHAOHeC Ha 3aCHTepecHpaHHTecpaHH; ga ce pa3BHe nporpama 3a HcKopeHyBaibe Ha 6pygeno3aTa. * )a ce ripeopjeHTHpa IePCOHajiOT Ha coBeToaBHaTaareHigHja KOH o6e36eAyBalibe CHnJIHa noAApUKa Ha ManIH no o6eM, InpHBaTHH cpapMH, IUTO AOMMHHpaaT BO 3eMjogejiCKOTO ripOH3BOgcTBo. * fla ce 4opMHpa COBeTOgaBeH cOBeT 3a 3eMoenCKO HCTpaxyBameco y,eCTBO Ha 3aHHTepecHpaHHTe cTpaHx, nOR HagiieKHOCT Ha M3IIB 3a Toa Aa rH KOOPAHHHpa H pacnpegeniyBa cpexcTBaTa 3a ceTo ripHMeHeTo HCTpaxcyBabe; Aa ce peopjeHTHpaaTHacTaBHHTe aHOBH Ha HHCTHTYTHTe H YHHBep3HTeTHTe KOH KoMepijanHO MaJIoo6eMHO 3eMjogeJiHe. * Aa ce goHece HOB 3aKOH H HOBa peryniaTHBa 3a 3aApyrH H 1IPOH3BOAHH H TprOBCKH 39pyxceHHja, 3a ga ce rapaHTHpa xeKa THe ce AeMOKpaTCKH opjeHTHpaHH KOH noTpe6HTe Ha HHBHHTeq tUeHOBH. * aa ce o6e36eAH TeXHHMqKa nOMOW 3a OCHOBaHie 3gpy)KeHHja Ha rpynH MaIH TproB1JH H npepa6oTyBatrH Ha 3eMjogeJICKH HpOH3BOgH. xii ,)upeiciima axiluja 3a ojiecny6aibe ua pypaAQaula cupomauzieuja o Ja ce nogo6paT H3rnewHTe Ha pypaJIHaTa MaiagHHa npeKy gocTafHOCT KOH cpegHo o6pa3oBaHHe UITO e PenIeBaHTHO 3a HHB; o )la ce KOHgeHTpHpa Ha pe4OpMH 1UTO HM nomaraaT Ha eHeprH MnagH iye BO go6HBaH%e 3eMjoge31cKa 3eMja H 3eMjoge31cKH MaTepHjaAH H HHBHO BocTaHOByBaH e BO MaiiH npepa6oTyBaqH, TproBlJH H npeBO3HH1AH H uiTO nomaraaT BO gpyrH pypanHH AejHocTH. o Ia ce Mo6HHH3HpaaT pa6OTHHTe peCYPCH Ha KeHHTe BO omaKHcTBaTa npeKy HcTpH6y1Hja Ha 3Haebe 3a aKTHBHOCTHTe, KaKO MHKpocTo'apCTBO, TpeBapcTBo H ManH rpepa6oTyBa'KH aKTHBHOCTH. 1 1. THE CONTEXT FOR AGRIGULTURE SECTOR DEVELOPMENT MACROECONOMIC AND INSTITUTIONAL SITUATION Macroeconomic Trends 1. Economic progress in FYR Macedonia has been variable and slow overall during the last 10 years, as the country achieved independence in the break-up of the Yugoslavia Federation, endured a succession of regional and domestic crises and began the process of economic transition and reform. The break up of Yugoslavia, the Greek trade blockade, the international sanctions on FR Yugoslavia, and the conflicts in Bosnia-Herzegosovo and in FRY Macedonia itself, all had major economic and social impacts on the country. Traditional markets collapsed, road links were closed, port access was denied, sanctions were imposed on and by neighboring countries, budgetary transfers ceased, the economy stagnated and, by 1998, unemployment had risen to 34.5%, where it has approximately remained (30.5% in 2001). This is the highest level in Eastern and Southern Europe except for Bosnia and Herzegovina. Despite the Kosovo crisis, economic growth resumed in 1999 and 2000 (4.3% and 4.5% growth in GDP in the two years), but per capita GDP of $US1,766619 in 2000 was still about 25 percent below its level in 1990. 2. The modest growth of 1999-2000 was then cut short by the domestic security crisis of 2001, and GDP declined by 4.1% for the year. Public spending increased substantially and public revenues fell as a result of reduced economic activity. The fiscal deficit increased to 6% of GDP for 2001, and the current account deficit rose above 10% of GDP. An internationally mediated peace framework agreement improved stability, but growth has been slower than anticipated. Assuming continued political stability, the prospects are for a resumption of modest growth, 3.0% in 2002 and 4.0% in 2003. Inflation should remain low and the exchange rate stable. The country's peg to the euro is not in jeopardy, but pressures could arise if exports and private transfers do not respond sufficiently to the improved economic conditions and if fiscal policy is not well managed. 3. In 1994, the Government adopted a major program of stabilization and structural adjustment with assistance from the IMF and the World Bank. Under this program, extensive structural reforms have been realized, including partial privatization of public enterprises (in agriculture known as agro- kombinats -AKs). Prices have been liberalized, the exchange rate has stabilized, inflation fell to 5.5% at the end of 200 13, and the banking system has been strengthened. The current account balance improved from 1996 to 2000. Fiscal rigor also improved markedly and produced a budget surplus (excluding grants) in 2000. As noted, the security crisis during 2001 was a major fiscal setback, but nevertheless foreign exchange reserves remain strong, covering 4.6 months of imports in 2001. Structural and Institutional Reforms 3Inflation decreased to an average 1.8% during the 1996-1999 period, but increased in 2000 to 5.8% with the introduction ofthe VAT and in 2001 to 5.5% due to the internal conflict and the increase in oil-prices. 2 4. Progress with privatization in 2000-2001 included sale of the country's largest bank (Stopanska Banka) to foreign investors, and the sale or closure of several loss-making state-owned enterprises, including the Okta oil refinery and the Feni nickel smelter. The telecommunications company was also privatized and government stated its intention to use the exceptional $323 million revenue, equivalent to Chart n: Trade Openness: Southeast 10% of GDP, to pay down external debt, finance Europe,1998 pension reform and fund new public investment. 5. In 2000, key legislation was passed to reform 0 90 ___ labor regulations and the pension system. As part of , 80-- _ civil service reform, employment in the public 70 administration was reduced by 6'/2% in the first half of s_ 2001, through voluntary separation and early 40 retirement. Further reduction of public employment is 2 planned. The legal framework was improved by 1 . amendments to the bankruptcy, collateral, securities 0- - _ _ and company laws. Some rationalization of institutions e was also initiated, and the private sector is becoming 4 increasingly influential. 6. Reform priorities for the agriculture sector were Note Trade opemess,a measureof mtadedependomcy. discussed during Roundtable Discussions held April 4- SourcedF W p odN/edtbyCP 5, 2002 in Skopje. The Roundtable was attended by over 50 participants from the government, the private agricultural sector, NGOs and the donor community. An earlier draft of this report was the principal input into the discussions. A sector action plan, emphasizing reforms in agricultural policy, other aspects of agricultural competitiveness, the Chart 2: F 2R Macedonia: Direction of lrade, agricultural land market and the irrigation sector, 1995 & 2000 was developed during the Roundtable and later approved by the Minister of Agriculture. It is 60 presented in Annex 5. t 50 0 l 40 AGRICULTURAL TRADE o Trade Patterns 0 _u 7. Unsurprisingly for a small, land-locked E0 country, intemational trade plays a large role in 0-l FYR Macedonia, in fact larger than in any other EU SEE Other EU SEE Other Exports Imports Southeast Europe (SEE) country, except Ep Donrt Trpot Bulgaria, where it is equally important (Chart 1). Almost half of FYR Macedonia's trade in 2001 was with the EU (42% of imports and 49% of exports), with Germany, Italy and Greece being the principal trading partners. The share of the EU in exports grew substantially in the last half-decade, to 49% in both 2000 and 2001 from 34% in 1995(Chart 2). This growth in the share of exports going to the EU was mainly at the expense of the rest of the world (not including FYR Macedonia's SEE trading partners), since the share of SEE remained approximately constant at about 30% (Chart 2). Exports to SEE remained relatively steady because of long-established commercial links, but these links did not hold up for imports, partly a result of Serbia's economic decline during the 1990s, with FYR Macedonia shifting its imports away from SEE toward the EU. 3 8. In 2000, food and agricultural products accounted for 17% of total exports, with tobacco, wine, lamb and horticultural products as the major export commodities. Food and agricultural products also accounted for 13% of total imports, as FRY Macedonia has a structural deficit in most (but not all) agricultural products. In agricultural trade, trade with regional partners was even stronger than in trade as a whole. In contrast to total imports, agricultural imports in 2000 came largely from neighboring countries - 22% from FR Yugoslavia, 11% from Slovenia, 8% from Croatia and 8% from Greece. Including Greece, the EU was nevertheless the origin of 26% of agricultural imports. Agricultural exports followed the same pattern, with almost half of Macedonian exports (46%) going to the same four neighbors. Still, the EU again was the largest single trading partner, with 27% of exports. The political and economic difficulties in neighboring countries in the last decade have had a profound impact on FYR Macedonia's agricultural trade. Increased trade liberalization and the globalization of food distribution are likely to be equally disruptive of traditional trading patterns in the future. Trends in Agricultural Exports 9. Trends in agricultural exports, according to official figures, indicate that an expansion of beverage (predominantly, wine) and tobacco exports has prevented total agricultural exports from declining (Table 1). Beverages and tobacco constituted 68% of agricultural export value in 2001, up from 41% in 1995. In contrast, fresh and processed fruit and vegetables and meat (mostly, lamb meat) declined over the 1995-2001. Why this occurred may have more to do with the disruption in Balkan markets than in any deterioration of competitiveness, but in post-conflict Southeastern Europe, increasingly competitive markets will challenge Macedonian exporters to improve quality and reliability at an attractive price. A demand-centered strategy should aim to develop producers who can successfully operate in increasingly competitive domestic and Table 1. Trends in Export Value, 1995-2000 (1995=100) international Jan- markets. Product Category 1995 1996 1997 1998 1999 200 Trade Agreements Total agricultural products 100 109 114 122 106 55 Of which: 10. FYR Meat and edible meat offal 100 100 22 22 0 78 Macedonia signed Edible vegetables 100 51 43 49 36 19 an agreement to join Edible fruits and nuts 100 110 75 50 55 25 the WTO in Preparations of vegetables, fruit, nuts 100 41 41 32 45 23 October 2000. Beverages, spirits and vinegar 100 134 203 200 150 94 Membership Tobacco 100 202 202 142 198 77 requires the Source: Statistical Office of Macedonia termination of licenses and quotas (other than tariff quotas4 in existing free trade agreements), the abolition of variable levies and export subsidies, a phased reduction of import tariffs and reform of the SOCR. These reforms will have a far-reaching impact on the incentive structure for Mace-donian agriculture and will undoubted-ly lead to significant changes in the level and composition of agricultural output, in agribusiness and in the food distribution system. 11. FYR Macedonia was also the first SEE country to sign a Stabilization and Association 4 Typically, tariff quotas allow duty-free imports up to a certain level (the quota). Above that level the regular tariff applies. So metimes, the within-quota trade is tax ed at a lower-than-normal tariff rather than being allowed in duty free. Quotas are typically set on the basis of historical trading volumes. 4 Agreement (SAA) with the EU, which took effect in June 2001.5 As a condition of this agreement FRY Macedonia is required to negotiate Free Trade Agreements (FTAs) with each of its Balkan neighbors. As part of the SAA, most barriers to the entry of Macedonian agricultural goods into the EU have been removed, but restrictions in the form of tariff quotas on baby beef, fish and wine remain. Significant non-tariff barriers also remain for Macedonian exports to the EU in the form of phyto-sanitary and veterinary requirements. In return, FYR Macedonia has agreed to duty-free entry for seeds, seedlings, breeding animals and animal feed; and tariff quotas and/or reduced tariffs on sugar, whey, poultry, eggs, meat and a range of animal products. The trade relationship with the EU will not be a static one, since the common agricultural policy (CAP) of the EU is rapidly evolving and will present opportunities as well as barriers to the development of key Macedonian agricultural sub-sectors. 12. FYR Macedonia also has bilateral FTAs with Bosnia, FRY, Croatia, Slovenia, Bulgaria, Ukraine and Turkey. All of these agreements apply tariff-quotas to the imports of selected agricultural commodities, typically with zero tariffs on imports within the quotas. Quotas are renegotiated annually. Some of these quotas are allocated on a first-come-first-serve basis to Macedonian exporters, but most are allocated on a discretionary basis by government, which predisposes the allocation to corruption and increases transactions costs. 13. These FTAs have and will continue to have a major impact on the agricultural sector. In 1999, the EU, FRY, Slovenia and Croatia alone accounted for 67% of agricultural imports and 60% of exports. In general, FTAs increase the opportunities for trade by selectively lowering barriers. But trade displacement and the inefficiencies, inequities and corruption often associated with quota allocation inevitably distort producer incentives. The annual renegotiation of tariff quotas may also create a new source of instability in regional commodity markets. As FTAs themselves are not a subject of under negotiation for WTO membership, they will probably be a continuing feature of agriculture trade throughout the region. The formulation of future trade policy will thus need to place a much higher emphasis on FTA issues, and the capacity to negotiate them on the basis of sound economic analysis will need to be developed within FYR Macedonia. Competitiveness in Internaftonal Markets 14. The evidence available is that, on average, many Macedonian agricultural commodities are currently uncompetitive in intemational markets. This evidence is a set of 2001 nominal protection coefficients (NPCs6) calculated for wheat, corn, potatoes, tomatoes, cucumbers, cow milk and butter. The NPCs for these commodities range from 1.29 to 2.08 (Chart 3). NPC's less than 1.0 indicate that a commodity is competitive, while NPC's greater than 1.0 indicate that imports would have a price advantage in the internal market if they could Chart 3 1YR MacDoi NoinD Pr i enter without border charges. Coefficients" 5~~~~~~~~~~~~~~~~~~~~~~~~~ 5 FYR Macedonia also has a free trade agreement with ti 6 Nominal protection coefficients are the ratio of domesl such as effective protection coefficients or producer o- _ impact of input protection and government subsidies on P . ^. ff . without more data than currently exist and considerab i, '6 $Ž (* \ exchange rate misalignment. .0 ' 9° 'I Source World Bank staffestimates 'Calculated i,m,ng data from indicated vears 5 15. These high average NPCs do not mean Box 1: Agricultural Comparative Advantage in that there are no competitive farmers and Central and Eastern Europe processors in FYR Macedonia. Evidence from the Centr-al and Eastern European countries Some of the worst distortions in intemnational trade in further aead in Etei Eaiopn inictrest agricultural products and food have removed as the CEE further ahead i their transitions idicates that countries joined the WTO and concluded bilateral transition countries with good agricultural agreements with the EU and regional trading partners. resource endowments are potentially But with agricultural markets still constrained by large competitive at least in crops (Box 1). The distortionary elements held over from the socialist era, relatively high prices of agricultural agriculture as a whole is not intemationally competitive commodities in the internal market merely in most countries, with imports of agricultural and food mean that marginal producers are high-cost products exceeding exports by wide margins in most and that low-cost producers lack the means to CEECs except Hungary and Bulgaria. Because of the expand. High import protection allows them to distortions, actual agricultural and food trade data do not continue operating nevertheless. It also demonstrate any underlying comparative advantage encourages Macedonian producers to sell (table). internally rather than in lower-price export Importsfrom EUasPer-entofExportsto EU, 1996-98 markets. But the fact that there are substantial Czech Republic 43% Romania 55% agricultural exports indicates that some Estonia 13% Slovakia 30% producers are able to compete in markets Latvia 10% Slovenia 17% abroad. The most market-aware farmers 31% FYR Macedon.ia currently appear to be drawn to horticultural products (i.e., fruit, berries, mushrooms, Cost studies, however, have generally concluded that flowers, and early season vegetables) and may when international prices for inputs and outputs are used have already developed comparative as benchmarks, CEEC crop production of all kinds advantage within this product category. If appears at present to have comparative advantage, but labor supply problems are solved, FYR animal production does not. Together with the fact that Macedonia may also have comparative most CEE countries (along with Macedonia, Croatia and advantage in small ruminant production on Serbia) have favorable basic agricultural and labor resource endowments, this is encouraging, because the natural upland pastures. development of comparative advantage is now severely limited by all the factors impeding the functioning of the 16. The competitiveness of many market system in agriculture. agricultural products can also be improved. Most such factors discussed in this report on FYR The fertile soils and favorable climate of the Macedonia - inadequate policies, incomplete lowland areas in FRY Macedonia are privatization, fragmented farm structure, poor irrigation appropriate for a wide range of agricultural infrastructure, undeveloped land and credit markets, products. Land and labor are also relatively inadequate institutions, and ineffective input supply, cheap. Many factors limit the ability to obtain processing and marketing performance - also apply to competitive production from this resource most CEECs, except for the factor of fragmented farm base, however. Dry summers mean that structure, which applies only to Poland. The CEECs irrigation is essential. Small farm size, farthest ahead in the transition have also already fragmented land holdings, poor technology, experienced major penetration by international inadequate working capital, low investment supermarket chains, one among many factors that are and a distorted incentive structure result in low increasing competition from imports in domestic markets and disorte incntiv strctur reslt i low for agricultural and processed produ cts. land and labor productivity. lack of effective marketing and logistics also increases production costs. Measures to address these constraints will be essential if the ability to compete is to improve, and getting agricultural trade policy right will be the key to developing a better incentive structure. 17. The time-frame for increasing competitiveness is relatively short. Agricultural import protection will fall steadily once WTO membership is obtained, together with the progressive lowering of import protection formalized in the SAA and the regional FTAs. Given the medium-term need for continued fiscal constraint, the capacity to mitigate increased competition through increased budgetary support for 6 agriculture will be limited. Hence, those elements of the agricultural sector which are unable to respond to increased competition, or which respond too slowly, will probably contract. THE RURAL ECONOMY Agricultural Developmenmts to Date Table 2. FYR Macedonia: Area or 18. Agriculture is an important sector in the Production, Major Crops and Macedonian economy. Using Year 2000 data, it Livestock Numbers, 2001 currently contributes an estimated 10% to GDP and has increased output since independence. Adding Area, marketing and processing activities raises Crop or or Int ,. , ~~Or IndivdalVU agriculture-related production to about 18% of Livestock Number Farms GDP. Similarly, agricultural exports, consisting mostly of wine, tobacco, horticultural products and lamb, amounted to about 18% of total exports in Cereals (ha) 221,235 72% 2001. Imports of agricultural products are about Wheat 121,669 64% 13% of total imports, as well. It is difficult to assess Barley 49.988 70% agriculture's true share of employment, which is officially measured at 12%, but about 45% of the MaiZe 37,488 97% population and 36 percent of the labor force live in Indus.Crops (ha) 54,941 91% rural areas. In comparison, approximately the same Tobacco 22,785 97% percentage of the population lives in the five largest Sunflower 6,006 42% cities, with the remainder in smaller towns. Vegetables (ha) 45,940 97% 19. FYR Macedonia has a land area of 2.57 Potato 13,665 99% million ha of which 1.28 million ha, 51%, are Beans 9,274 100% classified as agricultural land, about half cultivable , and half pasture, the latter mainly upland. Of the Tomato 6,784 95% remaining 1.27 million ha, approximately Grapes (ha) 26,530 71% one million ha (39% of the country) is forest and Fruit (m ton) 133,618 88% about 2% is taken up by lakes, of which Lakes Ohrid, Prespa and Dojran are the largest. Individual Apples 84,275 89% farmers owned or leased 79% of cultivable land in Plums 23,421 99% 1999, with the remainder owned or leased by Peaches 9,512 61% agricultural enterprises (privatized ex-AKs, as yet Livestock ('000) unprivatized AKs and cooperatives. The percentages are reversed for pasture, in a mirror Cattle 265 96% image, with enterprises owning or leasing 79% and Pigs 204 57% individual farmers 21%. Sheep 1,285 93% 20. Although FYR Macedonia receives annual Goats 56 100% precipitation of 500-1000 mm, it is uneven from Poultry 3,713 53% year to year. It is also seasonal, with average Source. Statistical Yearbook (2001) rainfall during May to September of only 190 mm, which is much lower than the 640 mm average evapotranspiration requirement of crops. The summer dry period also coincides with the prime growing season. The yield response to irrigation in the country is generally high, displaying an increase of 90%- 300% for cereal, perennial, industrial and forage crops. Irrigation is also essential for commercial vegetable and fruit operations to obtain marketable quality production and reduce the climatic risk. 7 With reduced risk, farmers receive greater return to costly inputs and so are more willing to invest in them, a virtuous circle. Thus, irrigation is a fundamental requirement for a productive commercial agriculture in Macedonia. The state of the country's irrigation system, however, is poor. Existing irrigation schemes, which once covered 40% of the area suitable for irritation, has been reduced to 13% coverage. An ongoing project financed by the Bank and the Government of the Netherlands,7 which was initiated in 1998, is providing funds for the partial rehabilitation of the system. 21. Prior to independence agriculture sector development was constrained by the policies of the former Yugoslav Federation, including the policy of achieving self-sufficiency in food production, the misguided pursuit of scale efficiencies through inefficient AKs, and controls over trade and input and output prices. Agriculture was dominated by 147 AKs and 64 (old-style) cooperatives, which during that period occupied some 30% of the cultivated area and controlled most of the agricultural processing facilities, as well as input supply and the marketing of outputs that were considered strategic. Small- scale farmers, who throughout the pre-independence period privately managed the remaining 70% of the cultivated area, were largely ignored and depended on the AKs and coops for all support services, including processing and marketing of controlled products. Agricultural support services were also weak, centered on the AKs and command driven. 22. A more market-driven policy stance towards agriculture has been advocated by government since independence. But progress has been slow, due FYR Macedonia's limited progress toward an open trade regime, a lack of coherent strategies and policies for agricultural and forestry development, monopsonistic practices, processing monopolies, lack of farmer organizations, poor market information, weak technical support for producers, lack of quality seeds and breeding services, and inadequate access to credit. Farm Structure 23. Smallholdings have traditionally been highly fragmented, and there is evidence of further fragmentation in the 1980s and 1990s. The 458,000 ha of cultivated land in the private sector is owned by some 178,000 farm families (1994 census), providing an average of about 2.6 ha per family. The last census (1981) to document the size distribution of holdings, showed about 45% of farm families owned less than one ha of cultivated land and almost 67% owned two ha or less. This prevalence of very small holdings is unlikely to have improved, as there are now approximately 10% more private farmers than at the time of the 1981 census. The small size of private holdings is due to a combination of Former Yugoslavia's limit on private ownership to 10 ha and on inheritance patterns, which further divided already small farms. Most small holdings are fragmented further into four or more non-contiguous parcels. Compared to the social sector and ex-social sector farms, private farmers are generally located on poorer soils and have less access to irrigation. 24. In 1990, there were 211 social sector farms (147 AKs and 64 old-style co-operatives), employing some 30,000 people and owning or leasing 22% of the arable area and 443,000 ha of pastures. All socially owned land was nationalized in 1993, and financial support to the AKs formally ended in 1995. Subsequent reform has seen more than 50% of the agroindustrial assets of the agrokombinats privatized, with the balance in an accelerated privatization process. Few are operating near their potential due to credit constraints, aging and inefficient equipment, and high social obligations with associated costs. In 1999, the currently and formerly socially owned agricultural enterprises retained 136,000 ha (21%) of cultivable land and 458,000 ha (7 1%) of pastures, mostly under rent-free leases from the state. Agricultural, Horticultural and Livestock Production 7The Irrigation Rehabilitation and Restructuring Project (IRRP). 8 25. Individual farmers dominate the production of virtually all major crops and livestock, with more than 90% of the area, production or numbers of animals in most major specialties (Table 2). For instance, in 1999, private farms had 95% of the hectarage of corn, 98% of tobacco and 99% of potatoes; 94% of the production of apples; and 95% of the cattle and 92% of the sheep. Enterprise farming has a large but still minor share of wheat, barley and grape hectarage (35%, 31%, and 24%,respectively) and of pigs and poultry (33% and 30%, respectively). It dominates the production scene only in industrial crops other than tobacco, such as oil seeds, farming 56% of the area planted to them. 26. Cwrrent and Ex-Social Enterprises. Typically, the AKs were developed as vertically integrated production and processing complexes with arable land areas averaging 1,140 ha, while the average cooperative had 106 ha. Social enterprises ranged from relatively small, intensive operations such as egg and table poultry production, to extensive arable farms of several thousand hectares. These arable AKs were generally highly mechanized with a substantial labor force, were located on favorable soils and benefited from extensive irrigation investment. 27. Private Farmers. Although there has been a recent trend toward intensification and specialization, particularly with livestock and vegetable production, private farms tend to be highly diversified and grow a comparatively large number of crops. This diversification is partly due to a tradition of self-sufficiency in basic food needs and partly a risk-aversion strategy in response to climatic variation and unreliable markets. Typically, for subsistence, the smallholder farmer produces cereals, vegetables, fruit and livestock and, for cash, a similar mix, plus tobacco and grapes. There is some geographical specialization within private farming wherein lowland or valley farmers mainly grow arable, fruit tree and horticultural crops for sale, primarily in the local market, while in hill and mountainous areas, ruminant livestock predominates. 28. Virtually all private farms maintain some livestock, principally dairy cattle and sheep, which are an important source of farm income. Cattle are kept primarily for milk production, with herd size typically between 2-5 head. Sheep, mostly indigenous, wooled-dairy types and some crosses are used for spring lamb and subsequent milk production. A flock of 100 ewes would be considered large. Extensive shepherding is common in summer. Poultry for domestic egg supply is a feature of all private farms, though an increasing number of commercially oriented broiler and egg laying units are seen in the private sector. A similar situation exists with pigs. Private farmers with mixed arable and livestock enterprises plant alfalfa, maize and other forage crops and typically graze their large ruminants on lowland meadows and small ruminants on extensive upland pastures. The use of improved pasture for livestock grazing is not common. 29. Private farms are operated almost exclusively by labor of the extended family, although casual labor may be employed during peak demand periods, particularly with vegetable production and sheep herding. Although labor-intensive farming systems are common, many private farms are nonetheless over-mechanized, the result of an extended period of subsidized credit, low farm machinery prices and the promotion of mechanization as a "modem" farming practice in the Former Yugoslavia. Enterprise farming continues to be highly mechanized, as it was before the breakup, but those enterprises using antiquated equipment in the context of low profitability and limited access to credit are increasingly unsustainable. Agroprocessing 30. Before the breakup of Former Yugoslavia, the Republic of Macedonia was a major agricultural supplier for the whole federation. At independence it thus inherited a very large agro-industrial sector, while its domestic market fell to only 2 million people. Many agroprocessors had production and processing facilities with the capacity to provide food products for the larger market of Former Yugoslavia and, in some cases, significant exports to Greece, EU, SEE and CEE. Most of the 425 9 agroprocessing enterprises were parts of 147 parent AKs, and some were cooperatives. At its peak, the industry employed about 25,000 full time employees, most in vertically integrated production, processing and marketing operations. The 30 largest AKs and coops employed more than 80% of this labor force. A limited but growing number of new, smaller, private-sector agro-enterprises have now developed alongside the former AKs. In contrast to the former AKs, they tend to be business-and market-oriented with a focus on profit and growth. 31. After independence, the difficult Balkan political and economic situation of the 1990s created severe difficulties for the industry by disrupting regional markets and trade routes for Macedonian agricultural products. Routing agri-produce and processed goods through Bulgaria, Romania and Hungary, instead of Kosovo or Greece typically added 30% to distribution costs. Quality, never very high in the protected Yugoslav and East bloc markets, was reduced further by inefficient border crossing facilities and other transport delays. Meat and live animal exports were restricted by an outbreak of foot and mouth disease in 1994 and again in 1998. The restrictions to EU markets were lifted in early 2000. Table 3. FYR Macedonia: Illustrative Tariff Rates 32. Privatization started in the late 1980's, and resumed in the early 1990's under the auspices of the Privatization Live Animals, Meat, 1640% Agency, but didn't get very far and was delayed until 1998 Eggs & Preparations 14° awaiting legislation on AK land holdings. In September 2001 Dairy Products 25-35% the Agency reported that 420 agriculture-based companies, including those extracted from AKs and cooperatives, had Fresh Vegetables 40-60% been privatized, with an employee base of 19,993, and equity Fresh Fruit 30% E 198million. A further 25 AKs remain to be privatized, with . 16 an employee base of 1,162 persons and equity of E 14 Preparations 15-60% million. Beverages, spirits' 35-60% 1/ Preparations of fruit, vegetables, cereals, flour 33. The coritraction of traditional markets and the 2/ Including wvne (50-60%) constraints on exports caused many of the former AK's and coops to reduce production below viable operating levels. Financial pressures on the companies increased as they tried to maintain high production (and unsold inventories) in line with their commitment to maintain employment. Debt service costs also absorbed available resources and prevented management from re-tooling their factories to focus on their more profitable and exportable product lines. The Incentive Structure 34. Trade Protection. High import protection and restrictive trade practices8 are by far the main current vehicles for support to agricultural production. Thus, the major financing of agricultural incentives comes from consumers, in the form of higher prices. Moderate to high tariffs apply to most of the commodities produced in FYR Macedonia (Table 3). Additional variable levies on many s The following current trade restrictions affecting the incentive structure will probably not survive entry into the WTO: (i) export licenses for wheat, flour, crude sunflower oil and white sugar, (ii) import licensing and import quotas for wheat, flour, tropical fruit, and rice, which restrict the right to import to those processors to traders who purchase domestically produced raw materials, and (iii) the requirement that wheat and flour can only be imported by mills that pay government floor prices for domestic wheat. 10 commodities add a further 20%-40% to some tariff rates.9 In addition to import taxes, there are various other charges, including a VAT of 5-19% depending on the tariff schedule and 1.1 % customs recording and miscellaneous taxes. Even this very high nominal protection is not the whole story. Some processors receive even higher 'effective' protection due to low or zero import charges on imported raw materials The numerous free trade agreements to which FYR Macedonia is a signatory only partially offset the general import protection, as the tariff quotas for most agricultural commodities in most of the FTAs are fairly restrictive. Overall, effective levels of import protection are very high, as indicated by internal prices that are considerably above border prices, despite significant smuggling. 35. Direct Support. Direct support for agriculture was heavily reduced in 1994-1995 as part of the stabilization and adjustment program, but remnants of the structure remain in the government's continued reserve operations for wheat and tobacco, its limited bread subsidy and very limited producer and export subsidies. 36. The State Office for Commodity Reserves (SOCR), an agency of the Ministry of Finance, is responsible for acquiring and storing reserves of food and non-food commodities considered strategically important. Under this mandate it purchases wheat and tobacco at official floor prices, which are well above border prices. In theory, SOCR has wide-ranging discretionary powers to intervene in domestic markets to "stabilize" domestic food prices, when this is deemed necessary, and to provide general support to agriculture. (It has invoked this latter mandate to provide seasonal finance to some of the unprivatized AKs, in the form of fertilizer and fuel, which is exchanged for wheat at harvest.) It also subsidizes the production of flour for "dark bread," which is sold at controlled prices as a means to support low income people.'° Precise data on the cost of these activities is withheld on grounds of national security. Available data indicate that the SOCR purchases about 40-50,000t of wheat and 25,000t of tobacco annually. 37. MAFWE's contribution to direct support is now small. Its total expenditure of 853 million denars (before cost recovery) in 2001 is onlyl .6% of total budget expenditure and 0.35% of GDP. Of this total budget, only 64 million denars ($US 0.91 million) was used for producer and export subsidies, including a temporary export subsidy on lamb (35 denars/kg), introduced in 2001 to help the export lamb industry recover from foot and mouth disease and the accompanying 1997-1999 EU embargo. Marketing Infrastructure for Fresh lProduce 38. The post-harvest distribution and management system for fresh produce in FYR Macedonia is rudimentary, and produce quality suffers from lack of needed infrastructure. Farmers can access several types of markets. The most rudimentary are "buying spots" where farmers deliver produce to the vehicles of large traders at a designated location, as arranged by village middlemen working for the traders. Big wholesale traders service up to 30 such buying spots. Traders' warehouses, to which the produce is transported, rarely have modern facilities for sorting, grading, cooling, packaging and storing. 39. A second type of market for farmers are the wholesale markets in Strumica (one private and one 9 Variable Levies, 2001: ComModitV Variable Levy (denars/ke1 Commodity Variable Levy (denars/ko) Cheese 38 White Sugar 9 Live Pigs, Pork Products 26-27 Tomatoes, Cucumbers, Peppers, Oranges, Mandarns, Bananas 10-12 Onions, Cabbage 2-7 Marganne and Refined Oil 6-12 Chicken, Beef, Milk 3-6 Wheat, Wheat Flour 9 Fruit Juice 4 10 Anecdotal evidence is that only very early morning risers are able to queue up and buy the limited amounts subsidized bread available, however, a crude but effective self-targeting mechanism. 11 Chart 4. FYR Macedonia: Poverty Incidence, 1996-2000 public) and Skopje (public). These markets are patronized by small traders and retailers. Because of quality problems, 0 - Country however, large traders, especially those 350 ! Rural involved in the export trade, do not usually 30.0 0 Urban use them. The wholesale markets do not 25.0 have buildings or cooling facilities but are basically large fields where farmers' vehicles park in the sun for a day or two or . until they have sold their load. The market 10 0 in Skopje has some non-cooling storage 50 _ facilities. 001 40. The third type of market for farmers 1996 1997 1998 1999 2000 is the green market. There are 15 in Skopje Poverty Rate of Rural or Urban Population and typically one in each of the other Source StateStatistical Bureau towns. These are retail outlets where Note: Incidence measured as percent of population below offic farmers and small traders sell local and erty line imported produce. The latter include pov tropical fruits. In most cases, the markets are on public property, but the facilities are rudimentary. Supermarkets, as yet, have not taken a major part of the retail produce business. 2. RURAL POVERTY INCIDENCE OF RURAL POVERTY 41. Poverty" in the FYR Macedonia is not a new phenomenon, since it was the poorest constituent republic of the former Socialist Federal Republic of Yugoslavia prior to independence. The state nevertheless provided a comprehensive protection system resulting in a low poverty rate. In 1990, the poverty rate was 4%, but it sharply increased between 1993 and 1995 as the economic transition took hold and reached 18% in 1996, by which time average real wages were only 53% of the level of 1989. Median monthly adult equivalent consumption in. 2001 was MKD 10,610 (US$ 150)12, giving (at 60%13) an official poverty line of MKD 6,366 (US$ 90) per month. 42. Using data through 2000, poverty is both more extensive and more severe in rural FYR Macedonia than in urban areas. The rural poverty rate (percent of households below the poverty line) was 29% in 2000 compared to 18% for the urban poverty rate (Chart 4). Data from 1996, the most recent year for which extensive poverty data exist, show that the 45% of the population then living in rural areas contained two-thirds of the population below the official poverty line. " This and other sections on poverty draw on Jan J. Rutkowski, "Labor Market Developments and Poverty: The Case of Macedonia," Background Paper for the Macedonia Poverty Assessment Study, World Bank, January 1998; Ian Jones, "IFAD Agricultural Financial Seryices Project - Formulation Report, ANNEX III: Rural Poverty and Target Group", Jorde Jakimovski, Report on Rural Poverty (for PRSP), October 2001, and World Bank, Former Yugoslav Republic of Macedonia - Focusing on the Poor', Report No. 19411 -MK, June 11, 1999. 12 Economist Intelligence Unit Country Report, February 2002 13 FYR Macedonia uses a relative definition of poverty based on OECD assessment formula. The official poverty line is expressed as 60% of the median adult equivalent consumption of the population. 12 43. Not only was the incidence of poverty higher in rural areas, but as measured by the poverty gap,'4 it was also somewhat more severe there, with the average consumption of the rural poor in 2000 being 6.2% below the poverty Chart 5. FYR Macedonia: Poverty Gap, 1996-2000 line, compared to that of urban poor, which was 4.0% below the poverty line. (Chart 5). According to the available data, poverty E Country did not deepen to any great extent in either 8 a * ral sector from 1997 to 2000(Chart 5), except 7 in Skopje where poverty deepened 6 significantly due to the national crisis - 5 from a poverty gap of only 2.8% in 1997 to one of 8.3% in 2000, a gap higher even 2 3l- than in rural areas in 2000. 44. While poverty remains a strongly __ l 9 __ rural phenomenon, non-agricultural rural 0 households have replaced agricultural 1996 1997 1998 1999 2000 households as the largest group of poor. Poverty Gap of Rural or Urban Population The unemployed, both urban and rural, Source State Statistical Bureau have emerged as the new group of poor Note: Poverty gap, a measure of severity, is average percentage shortfall of poor and have the highest incidence of poverty, persons' income from the poverty line (percent of poverty line followed by farmers and wage earners. Three distinct groups of poor may currently be identified in the FYR Macedonia.'5 These are: • The 'traditional' poor, who are agricultural households with more than three children, low education status, an older household head and surviving exclusively on agricultural income derived from small plots or seasonal labor. These households have the highest incidence of poverty in the country; * The 'new' poor who are the principal casualties of transition. They are the members of non- agricultural rural households with unemployed heads and dependence upon social transfers. They have replaced agricultural households as the largest group of poor households; and * The 'chronic' poor, who are the elderly, disabled or institutionalized. These people are least capable of work and the least likely to benefit from economic growth, except as its fiscal impact increases transfers. 45. The poverty of agricultural households, as distinct from rural households, is a function partly of overall low agricultural incomes but also private as opposed to public sector wage structures. The private sector accounts for more low-paid jobs than the public sector. Low wage rates are associated with low levels of education, female gender, economic sector and location of employment. Agricultural workers eam less than in all other industries. Household heads employed in the agricultural sector are much more likely to be poor. In effect agriculture is characterized by the 'working poor'. 46. The incidence and depth of poverty is actually less among female-headed households than male- headed households. This is because they are largely de facto rather than de jure household heads as a result of their husbands being away working. They benefit consequently from remittances. Even in households where they are dejure heads they are less likely to be poor because their families are at an older stage of the family cycle. Dejure women household heads are likely to be older widows in non- 14 Average shortfall of poor persons' income from the poverty line (percent of poverty line). '5 World Bank Report No. 1941 I-MK, p. iii. 13 farm employment or in receipt of pensions and with fewer under-age children. 47. The regional distribution of poverty in the FYR Macedonia, as identified by the 1996, show that the north and west of the country (with the exception of Skopje) is the poorest part of the country. For targeting purposes, it is important to take into account the inter-regional differences in the composition and characteristics of households. Thus the northwest has a greater proportion of farmers, while the northeast has a greater proportion of unemployed and pensioners reflecting the depopulation of farming communities in this region. GOVERNMENT PROGRAMS FOR POVERTY ALLEVIATION 48. An autonomous Agency for the Development of Underdeveloped Regions (ADUR) was established in January 1994 with a view to revitalizing and developing poor rural areas through a Fund for the Development of Underdeveloped Regions, which was allocated US$ 8.6 million from the budget in 2000. In 2000, ADUR identified a total of 963 settlements as meeting the criteria for support from the fund, including 857 villages in underdeveloped regions and 106 rural centers. ADUR can assist underdeveloped regions with: • 70% of the cost of essential infrastructure; * up to 50% of new agricultural, tourist and industrial enterprises; * up to 50% interest rate subsidy on production-related credit; * wage subsidies for new jobs; * grants for scientific studies relevant to the development of underdeveloped regions; and * grants for training and technical assistance. 49. The government's social protection program provides a minimum level of income security for Macedonian households irrespective of location, with single-member families eligible for MKD 1,700 monthly (US$ 28.5) and families of five or more members, MIKD 4,200 (US$ 60). The social protection law also provides for long-term financial support for persons unable to work and also lump sum cash support for situations of social risk. In 2000, social assistance was distributed to 13.0% of the total population. Of social-assistance households, 51 % where rural and 49% urban. POVERTY TOPICS Employment of Women. 50. According to the 1994 Census, women constituted 48% of the labor force. The legal position of Macedonian women is comparable with that of most European countries. Farm women play an important part in animal husbandry, sowing and low-technology crafts such as smoking and pickling foods, sausage-making, spinning, weaving and sewing. Despite their omnipresent contribution to subsistence agriculture, formal employment of women in FYR Macedonia in agriculture and agroprocessing is relatively low, with women employed in seasonal harvesting and as 30% of processing plant employees. Very few have senior staff status. Some NGO activities have been targeted at this problem. 51. The wage gap between women and men is significant, although not beyond the range observed in other European countries. A female worker earns about one-fifth less than her male counterpart 14 employed in the same area, industry and sector, and with the same education and labor market experience. It is worth noting that in neighboring Bulgaria the gender wage gap is significantly larger. However, it is only in urban areas where the gender wage gap is relatively modest (18%), as in rural areas it is still substantial. In these areas, women earn on average one-third less than men with comparable education and tenure. It is noteworthy, that the male/female wage gap in FYR Macedonia is not accounted for by education differentials, since women have, on average, higher educational attainment than men. If women had the same human capital endowments as men, then the wage gap would be even larger. 52. The gender wage gap is much larger in the private sector than in the public sector. All else being equal, in the private sector women earn about 40% less than men, while in the public sector the gap is only 15%. There is also anecdotal evidence that the reduction in employment in privatized AKs has particularly affected women. It should be noted that private sector discrimination against women is not a pattern uniform to all transition countries. For example, in Poland the situation is reversed, and women benefit from private sector employment more than men do. 53. Employment of women takes on pivotal importance in alleviating poverty, since two wage earners in a household appears to be the best protection against poverty, virtually regardless of the level of earnings. The relevant finding from the 1996 data is that households with an employed woman are rarely in poverty. In the agricultural setting, this implies that promotion of income generation for women may be a powerful weapon against poverty. Youth Concerns 54. Unemployment of rural youth is unsurprisingly a serious problem in the context of very high rural unemployment. Overall unemployment in 1999 was 77% for workers aged 15-19 and 57% for those aged 20-29 but only 27% and 12% for those aged 30-39 and 40-49, respectively. Despite this sharp demographic gradient, the current educational profile of new labor demand is not that different from the profile of the unemployed. Thus, those with less than secondary schooling have not had greater difficulty in getting a job than those with more education of the same age. This has been particularly true of those living in rural areas, as occupations using low-skill labor have been expanding and may continue to do so. Beyond the medium run, however, economic growth is likely to create more skilled than low-skill jobs. Unemployment of low-skill school leavers'6 could then become a particularly difficult structural addition to long-term unemployment, leading to the development of a rural underclass. 55. Particular attention needs to be given to secondary education for rural young people, who face inhibitions in attending secondary school on both the supply and demand sides. In addition to making sure that there are enough secondary school places for the rural age group, that artificial barriers do not disadvantage rural children in enrolling in secondary schools and that the curriculum is appropriate for the eventual urban employment of most of these children, there are elements on the demand side that need to be looked into. These include transportation for poor children from villages to secondary schools, outreach activities to minimize dropouts and, in some communities, special efforts to ensure the education of girls. 16 Gross enrollment ratio of 87% (1996) in basic education indicates that large numbers of children drop out of school in the basic education years. It is likely that the number of dropouts is greater in rural than in urban areas. 15 OVERALL STRATEGY FOR ALLEVIATION OF POVERTY Strategy and Key Issues 56. The overall objective is to trade off optimally among (a) incentives for labor supply, labor demand and entrepreneurship, (b) income maintenance for the poor, and (c) budgetary expenditure. This review will not look in depth at the issues of social assistance for household members who are unable to work because of severe disability, juvenile status, or old age, except to note that social- assistance issues are complex in and of themselves and interact with many other aspects of poverty, such as the income of recipient households and the productivity of small farms. 57. The main issue treated here is how to resolve the conflict between policy prescriptions that attempt to maintain the wage levels of poor workers and those that aim to create jobs. Bank analysis for this issue in FYR Macedonia (using data up to 1996) has found that unemployment in FYR Macedonia is much more powerfully related to poverty than are wages. The rationale as to why this is true is that low-wage earnings tend to go to or be lost by the secondary earners in a household, and the income from even low-wage jobs, when it is contributed by a spouse or child, will tend to lift the family out of poverty (or move it close to that goal) as long as the head of household is also employed, which in FYR Macedonia is the usual case. This is true even when the household head is employed at a low wage. 58. From a practical poverty-reduction perspective, it is thus more beneficial to foster the employment of women in poverty households than to aim at putting a floor under the wage rates for male household heads. The negative effect of low wages on household income is likely to be more than offset by the positive effect from an increase in employment among secondary earners. In many cases, it is women's (spouses') labor force status that determines household welfare. All else being equal, if a woman is employed, the family is virtually protected from poverty, regardless of her earnings. Conversely, if the spouse is not employed or if only one person can seek employment, the family runs a considerable risk of poverty. 59. This implies that government policies should not seek to reduce wage flexibility, so that low- productivity workers will be able to price themselves into the labor market. Among other things, this involves lowering the costs of labor through lowering payroll taxes, especially at the bottom of the wage distribution, and encouraging flexible forms of employment, such as part time employment and flexible hours, which target the special needs of female workers. 60. The above analysis applies specifically to wage employment, but there is a corollary for subsistence farm workers, which applies to the large number of women living on subsistence farms. They are often classified as not in the labor force in official unemployment statistics. The important thing for them is to increase both their labor supply and their productivity. In FYR Macedonia, interventions such as assistance in helping them develop small livestock operations by ensuring the provision of advanced breeds of, say, rabbits, plus micro-credit and advice on how to conform to EU livestock regulations may be quite effective in improving family income in the many very poor rural households. It will also be essential to ensure the availability of modern, entrepreneurial slaughterhouses and cold stores. Niche micro-livestock products, such as rabbit meat or snails, may be able to access EU, CEE and wider international markets. In many mountain areas, there is scope for the collection, processing and packaging of medicinal and culinary herbs and wild mushrooms. Finally, with FYR Macedonia's climate and natural beauty, there is some potential for agro-tourism'', which could provide income and also demand for handcrafts such as traditional clothes and embroidery. 61. While economic growth is necessary for poverty reduction, it may be not sufficient. In particular, 17 The College of Tourism in Ohrid might provide training. 16 the unfavorable structure of Macedonian unemployment, i.e., the extremely high share of the long-term unemployed and skill mismatches, may cause unemployment to persist despite growth in output. Special measures targeted at the long-term unemployed and those with inadequate skills may be necessary to help reintegrate a substantial part of the rural labor force into the national labor market. FYR Macedonia is fortunate to have resumed positive economic growth, but the impact of this on disadvantaged rural sectors is likely to be minimal unless economic growth increases substantially and persists over the indefinite future. 62. Agriculture and the rural sector generally will likely continue to shed labor even if agricultural production grows. A set of measures to keep the smaller rural labor force from shrinking further and keep it demographically balanced should include the following: 3 Reform of inheritance laws, development of a land market and assistance to young farmers in acquiring farms through lease and borrowing, D Promotion of rural economic growth based on small and medium enterprises and reduction of current constraints on financial, land, labor and produce markets, o Investment in the quality of rural human capital so that rural residents are better able to engage in higher-value-added agricultural and rural enterprises, o Provision of well-targeted financial support to sustainable enterprises benefiting poor rural workers, and o Investment in social and economic infrastructure to realize the full productive potential of rural areas. 63. The Bank and the Government are preparing a Poverty Reduction and Strategy Paper (PRSP). The PRSP develop a long term agenda for poverty reduction and sustained economic growth. It attempts to fill gaps in the government's knowledge of how macroeconomic policies and sectoral policies affect poverty. Analytical work to better understand the political constraints on the speed and depth of reform in a multi-ethnic state will also be carried out. It is expected that the PRSP will help the government to develop feasible strategies that will have the greatest possible impact on improving poor people's lives. 64. An increase in the value of agricultural production, which derives from effective policies and investments and involves small farmers, processors, traders and their spouses can have a large impact on poverty, first of all through incremental family income, which has been shown in FYR Macedonia to powerfully reduce poverty, and, second, through the derived increase in off-farm employment in related agriculture-support, business support and retail activities. Other poverty-amelioration approaches, to reach the chronic poor or as provide effective secondary education, will require targeted assistance programs. 17 3. ISSUES OF THE PRIVATE SECTOR IN AGRICULTURE COUNTRY ASSISTANCE STRATEGY 65. In line with the Country Assistance Strategy agreed between the Bank and FYR Macedonia, the priority areas are private sector growth, job creation, enhanced efficiency and poverty alleviation."' For agriculture, increases in production and productivity require that resources be available to efficient, private producers, including efficient small ones, at every stage in the production, processing and marketing chain, so that they can expand in areas where they are competitive. This will require a comprehensive restructuring of government policies and support. At present, farm structure, the land market, access to rural credit, processing and input monopolies, trade restrictions, and investment rules and restrictions present a set of interlocking constraints that inhibit the ability of efficient farmers (including foreign investors and efficient small farmers) to expand production. Most of these constraints are the result of inappropriate government policies, inadequate legal and regulatory institutions and misdirected government support. CONNECTING SUPPLY WITH DEMAND 66. The chain of logic on how FYR Macedonia's agriculture can be restructured for greater competitiveness starts with the recognition that, in a modern agricultural economy, competitive agriculture-based products can only be produced by specialized industries that have sufficient economies of scale at each level in the value chain to keep costs down. Such industries also need to make use of overall economies of scope in key subsectors to capture enough inforrnation and technological externalities to stay competitive. In the immediate future and for the foreseeable future, Macedonian agriculture-based producers will face two segmented, competitive markets: (1) The domestic market. Producers will compete among themselves and increasingly with imports from EU, regional and international producers as import protection falls in response to WTO membership and an increasing number of Free Trade Agreements. (2) The export market. Macedonian producers will compete with the same regional and international producers but in markets that are even more demanding in terms of product quality and knowledge of consumer preferences. While some Balkan markets for a time will continue to accept lower-quality agricultural products, with the spread of international supermarkets across Eastern Europe and the Balkans, these markets will diminish. Impact of Changing in Market Conditions 67. The over-riding context for agriculture sector analysis is that both of these markets for agriculture products have changed and will continue to change under relentless developments in technology, materials and communications. Producers must continually invest and adapt to be competitive. In competitive markets, non-competitiveness means poor profitability (a cash flow insufficient to support needed investment) and sudden or slow disappearance in the absence of corrective adaptation. To regain competitiveness, the entire industry will need to make costly investments in equipment and facilities to upgrade to ISO standards and, for the milk, meat and processed foods industries, to HACCP standards of sanitary control. Without these standards they will not be able to export profitably to the EU or supply domestic supermarkets. 18 Country Assistance Strategy for FYR Macedonia, July 14, 1998 and FYR Macedonia: CAS Progress Report, May 17, 2000. 18 68. While Macedonian producers do compete in both domestic and export markets now, given the forthcoming changes in the incentive structure and the accumulated changes in global technology and markets, it is uncertain how successful they will be in either of these markets in the future. Individual Macedonian agroprocessors, packers or new-style marketing cooperatives may be able to tightly manage product characteristics, quality and costs in their own production and in supporting parts of their value chains and succeed and even dominate in individual subsectors (provided they restructure in time). But it is highly unlikely that Macedonian agricultural production will expand overall, even in the long term. Parts of the sector may contract severely. 69. For a small country like FYR Macedonia, much of what happens in agriculture will depend on macroeconomic factors operating through the exchange rate and the price level. These will be largely determined by what happens externally and in other sectors in the Macedonian economy. In any case, effective restructuring of agriculture will be needed, even in pessimistic macroeconomic scenarios, in order to minimize the deterioration of competitiveness and slow agricultural decline. In more optimistic circumstances, restructuring will be needed to allow clusters of expansion to develop and place agriculture on an upward trajectory. Goals of Agriculture Restructuring Need to be Realistic 70. As trade liberalization proceeds, Macedonian agriculture may be hard pressed to maintain its share of the domestic market, let alone expand it. The primary task of Macedonian agriculture, therefore, must be to improve product quality, packaging and the ability to compete on price, initially on the domestic market. From this base it can then expand into regional and EU export markets. Though export markets offer the potential for growth based on competitiveness, they presently account for a relatively small part of the value of total agricultural output. And products for export must continually meet the cost, quality, product-characteristic, delivery, and reliability requirements of evolving foreign consumer demand. The limited number and value of export commodities and the difficulty of meeting export market requirements, limits the capacity of agricultural exports to pull the whole sector into sustained growth or even to prevent decline. The goals of agricultural restructuring in FYR Macedonia, therefore, need to be realistic as to the overall outcome in both domestic and export markets. 71. For competitiveness, different levels in any value chain require different minimum scales of operation- for efficiency, and there can be efficient operation at more than one scale. For instance a commercial farm with its own packing operation might need 100 hectares or more for efficient operation. But a group of farmers with five hectares each might be equally efficient if they band together in an association or cooperative that centralizes packing, marketing and other member services.'9 Such a farm or cooperative might be efficient for some operations but not for others. In either case, production needs to be organized so that specialized and efficient equipment, an adequate level of human resources, and efficient support industries are available. 72. Scope economies, which are essential to be competitive on both domestic and export markets, require access to information and logistic and marketing networks that allow producers to compete in diverse markets. Achieving scope economies may require associations of efficient processing firms managed by effective entrepreneurs. These associations of firms will in turn need a large production base (farmed by either competitive larger farms or organized competitive small ones), as well as transporters, marketing facilities, industry groups and regulatory structures of a certain minimum size and capacity. 73. When the minimum size of production needed for competitiveness with imports in a domestic 1 A distinction needs to be made between a small commercial farmer and a micro farmer, with a farm of, say, 1.5 ha divided into 5 parcels. There are many farms of this size in FYR Macedonia, and it is doubtfiil that very many of them are or can be farmed efficiently. 19 market is larger than the market share it can obtain, that industry is headed for rapid decline unless it can achieve the needed size and competitiveness to export its way to profitability. This is doubly true for higher-value products, where the internal market will usually be small. Stated another way, many agricultural products will be imported for lack of efficient Macedonian producers, despite import protection and natural barriers, particularly in the absence of a strategy that first focuses on ensuring effective competition in the domestic market. In this, FYR Macedonia is no exception; it is generally true for all small open economies. These realities look likely to force wrenching variety and husbandry changes on commercial crop and livestock producers. They will also provide impetus and support for a thorough-going program of restructuring once it becomes clear that there is no alternative. CEE and SEE Export Markets 74. In the newly competitive and expanding markets of CEE and SEE, attempts to recover former Macedonian market share are unlikely to succeed unless a critical mass of producers becomes efficient and efficient producers can expand. Trading patterns from the era of state trading and barter persisted until 1995, when total exports to CEE countries (not including SEE countries) were 37.5% of total exports, but that quickly fell apart during the Balkan crisis. By 1998, exports to CEE countries had plummeted to 8.3% of total exports. Similarly, Macedonian producers should not expect the newly reopened Serbian market to accept low-quality Macedonian goods as before. It may come as a shock that this market, like other international markets, has or almost immediately will have access to products with price and quality unimagined a decade ago, when it was Macedonia's largest market. From now on, producers from diverse global locations will compete for Serbian consumers. 75. Macedonian producers need to react quickly if they are to retain market share in both domestic and export markets. Both markets continue to become more sophisticated and competitive than previously, which means that Macedonian producers are aiming at a moving competitiveness target. The problem is how to assist Macedonian producers to profitably satisfy the price, delivery and quality requirements of these markets. Picking Winners 76. Government should not attempt to "pick winners" by favoring particular commodities, industries, work forces, types of enterprise or export destinations, but rather aim to develop an enabling environment for investment and production. Increasingly competitive domestic and international markets will pick the winners (and losers) on a continuous basis. Governmental regulations and "help" typically insulate their intended beneficiaries from the consequences of poor market performance, distort their incentives, prevent the adjustments necessary to retain market share, prevent the transfer of resources to firms and farmers that can adapt, and ultimately, counterproductively, cause the "beneficiaries" to fall far behind. Scenario Analysis of Trade and Price Policy Reform: the Cases of Wheat and Lamb 77. A simple spreadsheet model, with three scenarios, was used to analyze the impact of policy reform on producers and consumers of wheat and lamb. One scenario models the continuation of current policy and two model different policy options under the likely agreement with the WTO. A snapshot of the scenario results for 2005 is presented in Table 4. The full model tables for 2001, 2003, 2005 and 2007 are presented in Appendix 3. The scenarios are: Scenario 1: Base Case. Policy stays the same as current policy. Production and trade are driven by forecast trends in world prices and the exchange rate. Consumption depends on demographic factors and consumer prices. 20 Scenario 2: Gradual Reform In this scenario, there is a gradual reduction of import protection (as would be allowed under the prospective WTO agreement) and a moderate floor price for wheat. In this scenario (and in Scenario 3), pursuant to the WTO agreement, there would be immediate removal of licenses, trade restrictions and producer and export subsidies with no significant adjustment period. Scenario 3: Immediate Reform. This scenario is Table 4. Scenario Model Demonstrating Impact of Tirade and Price the same as Scenario 2 except that tariff Policy Reform, Snapshot for 2005 equivalents are Gradual Immed. immediately reduced to Base Case Reform Reform 30% for wheat and 0% for lamb meat, and the floor Wheat price for wheat is Border Pricea (den/ton) 9,877 9,877 9,877 Total Wheat Production (tons) 311,375 311,375 311,498 78. The model Tariff Equivalent (%/6) 81% 50% 30% demonstrates that getting Producer Price (den/ton) 10,000 10,000 11,433 trade and price policy Consumer (Mill) Price (den/kg) 9.9 12.8 11.4 right will be important Net Import Requirementb (tons) 138,121 134,309 136,250 after FYR Macedonia joins the WTO. In either SubsidyExpenditure(mden) 310 0 reform scenario, both of Lamb which envisage membership in the WTO, Border Price, Lamb Meat a (den/kg) 266 266 266 licenses, restrictions, and Total Lamb Meat Production' (tons) 7,363 7,363 7,363 producer and export Producer Price (den/kg liveweight) 168 133 133 subsidies would all be Consumer Price' (den/kg) 372 266 266 abolished. Protective NetExportSd(tons) 4,131 3,659 3,659 tariffs, which would be Net Expend(tons) 41 3 3 agreed at moderate levels Subsidy Expenditure (m den) 145 0 with the WTO, would Note: Full model results in Appendix 3. Tables there present results for 2001,2003,2005 and 2007 constitute the protective Footnotes For wheat see Appendix 3, Table 1, for lamb Appendix 3, Table 2. structure for agriculture. FYR Macedonia would be allowed to reduce current high tariff levels gradually to agreed moderate levels. 79. A gradual reduction of the wheat tariff, hoWever, would not be good policy. Scenario 2 shows that gradual reduction of the wheat tariff would cause a sharp rise in the prices of consumer wheat products. If existing wheat duties, which are equivalent to an ad valorem tariff of 86%, are only gradually reduced in line with what will be allowable under the WTO agreement (e.g., to 50% in 2005), this would cause consumer prices to increase by 43% by 2003 compared to 2001. Prices would still be higher by 35%in 2005. 20 The reason for the consumer price rise would be that, while the current licensing system allows mills to import wheat duty-free, the only duty-free wheat imports allowed after licenses are abolished will be those under FTA tariff quotas. The mills' average price would therefore build the reduced tariff into a larger percentage of their wheat imports. Consumer prices would rise sharply even while producer prices remained constant. 80. Compare this result to that of Scenario 3, where the wheat tariff would drop immediately to 31 % in 2003 and to 30% in 2005. Under this scenario, the consumer price would rise only by 15% by 2003 and by 21% by 2005, with about half the rise caused by the projected increase in the international wheat 20 See Appendix 3, Table I for scenario years 2001, 2003, 2005 and 2007. 21 price built into the analysis. Thus, a sharp drop in the tariff would result in a small rise in consumer prices, while a gradual drop in the tariff would result in a sharp rise in consumer prices. 81. Conceming lamb, the government has necessarily agreed with WTO negotiators to remove the export subsidy. It was originally intended to be a temporary support in any case. Beyond this, government negotiators have, however, shown themselves to be reluctant to reduce the lamb import tariff of 40%. The scenario analysis presented here indicates that this stance is counterproductive. Underlying this conclusion, economic analysis of domestic markets indicates that both producer and consumer prices are currently determined by the international lamb price and the export subsidy. It also indicates that the import tariff has no impact on either consumer or producer prices, because there are virtually no lamb imports, and the market clears on the basis of export prices. 82. Removal of the lamb export subsidy and tariff was modeled using a similar scenario approach to that used for wheat (Table 4). The base case assumes that the export subsidy (which was operational in 2002) would remain in effect and would affect consumer prices. The reasoning is that producers would rather sell in the export market and receive the subsidy than sell in the domestic market, unless local buyers pay producers the same as they can get in the export market (which includes the subsidy). 83. In the reform scenarios, the subsidy is removed and both producer and consumer prices drop. Scenario 2 assumes gradual removal of the 40% tariff, while Scenario 3 assumes immediate removal. Since (virtually) no lamb is imported, the tariff has no impact on the consumer price (and, of course, on the export price). It also makes no difference whether the tariff is removed gradually or all at once. The two reform scenarios for lamb therefore have identical impacts (Table 4). The conclusion from this for the WTO negotiations is that abolishing the tariff or setting it at a low level would have no cost to either Macedonian producers or consumers and that either of these actions could rightly be on offer in the WTO negotiations. ENABLING ENVIRONMENT FOR PRIVATE SECTOR INVESTMENT Impediments to Demand-Driven Production and Investment 84. The main impediments to FYR Macedonia developing competitive farms and processors are weak policy, an underdeveloped land market, access to finance, inadequate infrastructure particularly irrigation, regulatory burden, company governance and management, and inefficient government institutions. The overall strategy should be to help all elements in agriculture value chains to become entrepreneurial and dynamic by removing or reducing these impediments and raising stakeholder participation. Somewhat different sub-strategies apply to small farmers, larger farmers, privatized processors and packers, and new private processors and packers. If privatized AK processors prove unable to compete, rapid growth of a dynamic, fully private processing industry to a dominant position can render the poor performance of former AKs less important. Likewise, if farm consolidation by dynamic small farmers produces a large number of nimble medium-sized farmers with sufficient access to land and other resources, the continuing poor productivity of other small farmers may be able to be seen in the proper rural poverty context. Undeveloped Land Market 85. A crucial element in the strategy for increased agricultural productivity and responsiveness to the market is that appropriate land resources be located in the hands of producers who will efficiently produce for the market (product selection, quality, timing, price, etc.), whether these producers are small-to-medium farmers or larger enterprises. Those who are successful need to be able to acquire the needed land resources. At present this is difficult, since the agricultural land market in FYR Macedonia 22 is severely underdeveloped and constrained. As in other countries with similar problems, the issues concern unclear land titles, land registration difficulties, legal restrictions on land sales, inheritance laws, inefficient dispute adjudication and contract enforcement, continuing public land ownership, burdensome public land sale and lease terms, restrictions on parcel size, restrictions on sale to citizens and foreigners, restrictions on lease terms, dysfunctional restrictions on land use, problems with use of land as collateral, legal and practical restrictions on collateral recovery/sale, and counterproductive regulation of financial institutions. 86. The government has moved expeditiously to correct some of these problems but much remains to be done. For instance, law revisions originally proposed for 2001 but now scheduled for 2002 look to establish a central property registration system for registration of rights in real estate, mapping of property boundaries, systems for recording change and a public data base. These changes, while necessary, are not sufficient to improve the operation of the land market. Also needed is compulsory registration of changes in land rights, a title insurance mechanism, training programs for land professionals, real estate market laws and establishment of professional bodies. At the level of government institutions, the appointment of a Registrar of Lands with powers to write regulations and determine and adjudicate titles is needed. 87. Land fragmentation is severe in FYR Macedonia. At the time of the last agricultural census in 1981, 99% of farm holdings were owned by private persons and 98% of these farm households held farms of 8 ha or less, with a median holding size of about 1.2 ha. The average number of parcels per holding was 7.7, with average parcel size of 0.14 ha. More analysis is needed than can be done with the census, but 39% of farm holdings were owned by households that did not include a farmer, probably rendering the fragmentation less severe than indicated, since relatives or neighbors in many cases may have farmed their parcels. On the other hand, the land may have been misclassified or may have remained fallow.21 Current 1999 data indicate that fallow and uncultivated arable land was 34% of the total. How much of this land was fallow because of traditional fertility restoration techniques is not known, but all in all fragmentation plus non-farmer ownership plus large amounts of uncultivated land imply huge inefficiencies in smallholder agriculture. (This is not to imply that the "enterprise agriculture" of larger farms developed on the former AK holdings are any more efficient; the limited research comparing the smallholder and enterprise sectors does not support this stereotype.) 88. A well functioning land market will facilitate farm enlargement and consolidation, but additional measures may be needed to ensure that land is used productively in agriculture. For instance, reform of land taxation to reflect land values rather than "registry income" would encourage farmers to move land into its most profitable use, and changes to the inheritance laws would discourage further fragmentation.22 A program to allow older farmers to purchase inflation-adjusted (or euro- denominated) annuities with the proceeds of land sales could free some land up for more productive use and serve to reduce poverty. For the poorest farmers, the value of these annuities might also be topped up as a welfare measure. 89. The lease market should be an important element of the land market in FYR Macedonia. In particular, state-owned agricultural land, insofar as it continues to be state owned, should be offered to enterprises and individual farmers in transparent transactions at market rates using long-term, transferable leases. Public land management should be seen as a continuous, dynamic process with clear market-oriented objectives and a transparent management and review process administered by competent professionals and a supporting information and monitoring program. This does not yet exist 21 The 1994 population census reported 95% of land holdings less than 8.0 ha and an average farm size of 1.4 ha with 1.2 ha of arable land. This survey, however, only recorded 251,000 ha of arable land against the statistical record of 545,000 ha, a gap of 3.05 ha per holding. 22 Fragmentation increased markedly between 1931 and 1981, with median farm holding decreasing from about 2.8 to about 1.2 (approximation based on proportion of land area interval). 23 in MAFWE or the related public agencies responsible for natural resource management. Inadequate Rural and Agriculture-Related Finance 90. Macedonian agriculture does not have an effective formal credit-delivery system. The banking sector is characterized by small retail commercial banks, which have concentrated available funds in profitable short-term lending secured by cash-equivalents. Not all short-term lending is attractive to the banks; international traders, including agricultural exporters, have difficulty in obtaining trade finance, with banks able to charge very high fees for letters of credit and other international trade services, which in turn has been a disincentive for agricultural exports. Agriculture as a whole is perceived by bankers as risky and unremunerative, and few resources are directed at developing the competence to analyze potential lending opportunities in the sector. There are, additionally, the serious problems with the recovery of collateral referred to above. 91. Informal credit structures are also weakly developed in rural areas. Moneylenders, who had played an important role in village credit in Yugoslavia prior to 1950, disappeared completely under socialism and have not reappeared during the transition. Anecdotal evidence is that loans among villagers also do not appear to have an important role in agriculture. They are today almost exclusively social loans intended for emergency situations and ceremonial expenditures like weddings. 92. There is also little evidence of credit being extended to private farms through the private trading and agri-business sector, either directly or through deferred payment agreements. In fact, farmers are probably a net source of credit for processors and traders, who often delay payments for farm off-take. In sum, little credit is supplied to private farmers today in FYR Macedonia through either formal, informal or trade-finance financial channels, and this contributes to the result that the private agriculture sector is severely under-capitalized. 93. Prior to independence, virtually all formal credit for agriculture was allocated to AKs or cooperatives. The government directed it at subsidized rates through the commercial banks (primarily Stopanska Bank's 24 branches). Private farmers were served informally through the AKs, which provided working capital in the form of inputs with repayment in kind at harvest. Equipment loans were also available through the AKs. However, the flow of credit to private farmers through the AKs and to the AKs' own agroprocessing and farming operations declined precipitously when government-directed credits mostly ceased after 1994. Due to their own difficulty in obtaining bank credit and their lack of sufficient cash flow, successor privatized agroprocessing enterprises and newly established SME processing and supplier firms alike have not able to provide farmers with any significant amount of credit in total. On the contrary, farmers often finance processing firms by receiving delayed payment. 94. The current financial system has not filled this vacuum, despite improved access to capital and progress with reform and restructuring. In 2001, there were 22 licensed banks, 17 savings houses (savings and loan associations), and the non-bank financial services sector that includes 5 insurance companies, the Macedonian Stock Exchange, and an embryonic commodity exchange. Stopanska Bank has been broken into several independent banks and recapitalized through the transfer of many non- performing assets to a rehabilitation agency. The parent bank, which at end-2000 still held 35.8% of total deposits, has been sold to a Greek bank. Other commercial banks hold 61.2% of deposits and savings houses (savings and loan associations) the remaining 3%. Significant capital investment into the Macedonian banking sector occurred in 2000, which increased the share of foreign capital in domestic banks from 19.3% to 40.8%. This also changed the level of foreign ownership, with 7 of the 22 banks under foreign ownership at the end of the year. The large inflow of deposits at the end of 2001, when people began to change their European currencies for euros, provided a further source of capital. Despite this investment, a high level of non-performing loans remain a feature of the balance sheets of all domestic banks. Provision for bad and doubtful debts is currently 34.8 % of the aggregate 24 commercial bank loan portfolios.23 95. Savings houses are also a poor source of rural credit. In the early 1990s they offered a means to mobilize savings and provide credit in underserved areas, but this was undone by uncontrolled lending. As a result, their number was reduced from 140 to 17, and their activities were severely curtailed. They are not allowed to make "business loans" directly and must channel such funds through commercial banks. But they generally assume the liability for repayment and make their own assessments of risk, and have now been reformed to the point where they could become significant rural credit institutions. Further reform is needed to improve supervisory regulation, and so improve client confidence, while relaxing counter-productive restrictions on lending. A functioning land market that allows land to be effectively used as collateral would also improve the capacity of savings houses to lend to farmers and small, private agri-business. 96. A number of reforms have been proposed as part of the proposed Bank-financed Second Financial and Enterprise Sector Adjustment Loan, including better enforcement of existing law, a restructured deposit insurance scheme, and a new integrated law on moveable and immovable collateral. The latter reform would be especially important for small agricultural borrowers, considering that land is by far their most important asset. While this and other reforms will be a necessary condition for increasing Bank lending to agriculture, they will not be sufficient. Banks will need to gain experience, develop expertise and recognize profitability in agriculture-related lending. The incentive to do so, however, will not be there until there is more competition in the banking system. An increase in the level of operations of foreign banks would be a major way of increasing competition and delivering a full range of services, as it has in other countries. 97. On the demand side, private farmer interest in working with the commercial banking sector is also depressed due to widespread mistrust of the banking system emanating from past scandals and arbitrary actions. Many farmers are also unwilling to apply for loans from existing donor agricultural credit programs because of not-unrealistic expectations that their farming activities will be unprofitable or because of perceived risk. The same is not true of many of the thousands of rural agro processing and trading businesses that have developed since independence. At the start, these were appropriately financed mainly by savings or loans from family and friends, but many have now expanded to the point that they would provide strong demand for formal credit if it were available on appropriate terms. Donor Financed Credit Programs 98. The government and donors have long recognized the need for agriculture-related credit and have moved to fund credit programs, often directed at small farmers in particular and sometimes making use of the savings house system. IFAD- and World Bank- financed programs have had the most experience, with USAID, the Soros Foundation, EU-PHARE and the Netherlands Government also financing credit programs to benefit farmers, traders and processors. 99. The IFAD Southern and Eastern Rural Rehabilitation Project illustrates the importance of demand side constraints. When it began in mid-1998, this program focused on lending to 393 poor, rural communities in mountain areas. At the end of 1999 it was expanded to southem and eastem FYR Macedonia. The project is administered as a "revolving credit fund" (RCF) through Investbanka to provide credit to smallholders for livestock (80% - mainly dairy) and crops (20% - notably viticulture), along with small scale traders and processors. Demand for these loans has been very weak. As of September 2000, 620 loans totaling USD $3.2 million had been disbursed or approved out of the total project credit line of USD 8.0 million. A significant proportion of these loans are now chronically in arrears. Loan recovery improved during 2000, but the cumulative recovery rate (including insurance, 23 National Bank of Macedonia, Annual Report 2001. 25 which adds up to 9% per annum to the market based cost of the livestock loans) was still only 60%. The RCF is not sustainable at these recovery rates. A second modest IFAD-funded effort of USD 8 million was agreed in December 2000. It will shift the credit risk to commercial banks and savings houses, but will offer variable discounting to them as an incentive to lend to profitable agricultural investments in rural areas. Loans will also be available for activities other than farming, such as packing, processing, marketing and trading. 100. The World Bank-financed Private Sector Development Projects I (USD 12 million, fully disbursed) and II (USD25 million) have provided finance for larger agricultural and processing enterprises. USAID-funded initiatives are managed by local NGOs affiliated with international ones. The first (MOZNOSTI), which has made approximately 1,500 loans averaging USD 3,500 as of end- 2000, operates through a commercial bank but does all loan evaluation and assumes the credit risk. MOZNOSTI is presently exploring the opportunity of registering as a commercial bank. The second (also a local NGO) owns savings houses. USAID provided the minimum subscribed equity of about USD 500,000 and all branches together had 429 members and saving of USD 162,000. The Netherlands Government-funded project, which received a grant of USD 3 million provides sub-loans in Western and Central parts of the country primarily through input suppliers and traders, via a local administering NGO and commercial banks. The participating credit institutions bear the credit risk, which are fully indexed. The Soros Foundation, has opened a line of credit for smallholders through a commercial bank and follows procedures similar to the IFAD-funded project. Lastly, the EU-PHARE program for support of small and medium-sized enterprises does not lend for primary production, but does lend for to small-to-medium agroprocessing enterprises. Inadequate Infrastructure 101. Inadequate transport, energy, telecommunications and irrigation infrastructure are serious impediments to the development of agriculture and agricultural exports in FYR Macedonia. Improvements to each would lower production costs and facilitate international trade. At this stage, transport services and irrigation are the most important for agriculture. With transport disruptions because of the Balkan wars and the Greek embargo now in the past, the focus should be on reducing the degradation of perishable agricultural goods caused by poor road maintenance and slow border crossings. The Bank-sponsored Trade and Transport Facilitation Program for SEE aims for a near- simultaneous implementation in six countries, including FYR Macedonia, of physical improvements to border crossings, technical assistance to customs administrations, electronic filing of customs declarations, coordination of operating practices at each pair of border control units and alignment of regulatory schemes with EU practices. 102. The irrigation system is both inadequate in scope and performance. Only about 40% of the arable area suitable for irrigation is within the command of the existing system, and only about one-third of this is irrigated, mostly at low efficiency due to deterioration and insufficient water storage. Macedonian summers are dry and hot leaving crops with a water deficit of around 450mm in the east to 250mm in the west in an average year. Irrigation is essential to all high value summer and perennial crops, not only providing higher yields but improving quality, timeliness and a reduced-risk environment to encourage investment in the sector. Irrigation is also an essential ingredient to the dairy and livestock industry providing secure forage and grain supplies. All neighboring countries rely extensively on irrigation, and competitiveness in Macedonia's agriculture will depend on reliable and cost-effective irrigation. Extension of irrigation beyond areas dominated by ex-AKs would be an essential element in raising rural incomes and reducing poverty. Donors, including the Bank, are providing finance to rehabilitate irrigation schemes in three production regions and to decentralize control over management and water allocation to users. 26 Privatization Ilnadequacies and Company Management and Governance 103. Ineffective privatization via employee-manager purchases of shares of the former AKs hampers the development of the private sector in agriculture in several ways. Conversely, the slow development of a profitable private sector hampers the privatization effort. Evaluated at border prices, many of the ex-AKs are undoubtedly value subtractors. Their continued existence in their present state due to high protection, rent-free land access and the non-transpartent award of government contracts locks up valuable skills within their labor forces and some valuable physical capital (although much of the latter other than land is now obsolete and of little value). Part of their problem is poor management and large social obligations; part is undercapitalization. In turn, the undercapitalization continues because few investors are interested in unprofitable investments even at the bargain prices offered by the Privatization Agency. Strategic investors, including foreign investors, have not yet positively evaluated the existing opportunities to any extent, as well. 104. For many of the enterprises, effective dissolution and sale of assets may be the only long run solution. Some may, with luck, gradually and successfully climb out of their present dire straits. Others may succeed with an infusion of strategic investment together with improved management, cost control, quality focus and marketing effort. All successful ones will need adequate working capital to expand production. 105. The continued, but stagnant operation of many of the agroprocessing, supplier and trading firms that have been spun off from the ex-AKs has wider impact on private agriculture than just their and their workers future. Because of their weakened state, these firms are not able to provide sufficient, cost-effective services (including supplier credit) to the wider industry to enable them to produce lower- cost, higher-value competitive commodities. While they continue in operation, sometimes under semi- soft budget constraints, other more efficient firms may be inhibited from entering and providing these services. Constraints to Foreign and SME Investment 106. The government and the wider society needs to do much more to create the conditions under which both local and foreign investors will provide finance, technology, and risk-taking, management and marketing skills. SMEs make up the vast majority of private businesses in FYR Macedonia and are and will continue to be the largest source of employment growth in agri-business. As part of a restructuring strategy, it is both inevitable and desirable that foreign firms be involved on both the export and import sides. A symbiotic relationship often develops between foreign investors and any large intemationally competitive Macedonian firms on the one hand and SMEs on the other. The foreign firms and the competitive local ones are customers, transmitters of demand signals and sources of technological, management and marketing expertise, sources of staff, etc. 107. Thus, the continuing impediments in FYR Macedonia to efficient business operation, such as time-consuming registration requirements, difficult logistics, red tape, corruption, unreliable contract enforcement, legal vulnerability, non-transparent taxation, standards and regulations that are inconsistent with those of the EU, etc. need to be addressed. The govemment has started the reform process, but much remains to be done. The still unwelcoming business climate affects both foreign investors and, even more, the SMEs, which have fewer resources to invest. 27 SUPPORTS FOR PRODUCTION AND EXPORT PERFORMANCE Markets, Technology, Seeds, Breeds 108. Agricultural export markets provide the major significant opportunity for FYR Macedonia to expand agricultural production, and this entails exporting to specialized international markets that are both available to FYR Macedonia and in which it can be competitive (i.e., processed commodities, seasonal varieties, specialty crops, multiplied seeds). These commodities will typically involve significant inputs of specialized, modem but not necessarily complex technology, which can be accessed primarily through seeds and breeds and investment in modem processing equipment. Agricultural credit from financial institutions and suppliers, through which farmers can acquire these items, becomes increasingly important. In some commodities, cost saving through improved cultural practices may also be important, and here as elsewhere, where farmers need to learn new techniques, research, extension and demonstration are important. Quality assurance, i.e., the reliable production and delivery of the qualities that Macedonian farms and firms can produce competitively, is also essential for export market access and profitability. Selling into international markets also involves good market information, effective marketing techniques and reliable logistics. Farmer Support System 109. The support system for small and private farmers is still limited, in comparison with the support system for state-operated and privatized AKs, which itself is in need of radical reform. Some experience in reforming agricultural extension for small farmers has been gained through the Private Farmer Support Project (PFSP), including privatization of veterinary and services and stimulation of private extension services. A 1998 law dissolved the state-run extension service and created an autonomous national extension agency centered in Bitola, which is organized on a regional basis. The extension service is expected to reach more than 50% self-financing within ten years. The new structure, however, has not as yet provided any significant quantity of useful services. Under PFSP, MAFWE is being supported in fostering the pilot development of voluntary farmers associations. These are important both for provision of information services and for encouraging a critical mass of small-scale producers for procurement of inputs and coordinated production, processing and marketing.. 110. Since independence a network of private crop and livestock inputs suppliers has emerged, and quantities are generally sufficient for the present, low-input farming system. The system may not be effective in disseminating new seed technology, however, since the quality and timing of inputs is still uncertain. For instance, EU and other foreign seed companies are not free to sell directly to farmers. FYR Macedonia is not yet a member of ISTA and UPOV; thus it is unlikely that local seed operations can attain sufficient scale and quality to be internationally competitive. Attempts to protect them through trade and investment restrictions simply deprive local farmers of the advanced technologyneeded for export growth. 28 4 REQUIREMENTS FOR RESTRUCTURENG EN KEY SUB- SECTORS AGROPROCESSING 1NDUSTRES Central Role of Agroprocessors 111. The producers who are best placed to sell in export markets, and thereby gain the volume necessary for competitiveness and market penetration, are packers and processors. Marketing cooperatives and some larger farms may have a direct role in the export of some commodities, but private, entrepreneurial agroprocessors will undoubtedly have the leading role, if - a big if - there is a conducive business environment for them to operate in and grow. The major agroprocessing industries in FYR Macedonia are listed in Table 5: 112. Processors in all transition countries, including FYR Macedonia, will be acutely affected by new EU legislation requiring all meat, milk and processed food products to be from HACCP-registered processing plants by January 1, 2004. This new deadline Table 5: Major Agrolr°essing lndustries in FYR Macedonia leaves the Macedonian industry with considerable, costly work to be done in a very short time to bring their Milk processing Milk, fruit juice, yogurt, sour milk, UHT mil processing plants up to HACCP fermented cheeses standards. Many plants will not be able to finance the costs of modem Meatprocessing Beef, lamb and mutton, pork and poultry equipment meeting ISO standards and fresh and extended life products may have to drop out of supplying EU importers at least temporarily. Frozen, dried, concentrate, canned, preserved tomatoes, peppers, ajvar, cabbage, cucumbc Industry Structure Fruit and vegetab gherkins, onions, garlic, melons, apple processing plums, pears, raisins, peaches. 1 13. Looked at from the point of view of ownership structure, there are three Vranac, merlot, cabemet sauvigno potential segments where entrepren- Wine smederevka, chardonnay, riesling, zilavk eurial agroprocessors may develop: zupljanka n Privatized ex-AK enterprises, o Successful medium-sized companies emerging from the group of small, new private processing companies, and • Joint ventures or companies with controlling direct foreign investment. 114. Privatized Ex-AK Enterprises. The formal privatization of the agroprocessing sector is now largely complete - 420 enterprises privatized and only 25 remaining. The privatization process since 1993 has been on the basis of share purchase, typically as employee and management buyout of shares at a deep discount, and recently, the process has become more transparent. A 10% sample of Privatization Agency (PA) records24 of privatized agroprocessing firms in September 2000 estimated 24 Purposive sample aiming at representativeness by covering all processing industries. 29 Table 6. FYR Macedonia: Major Agroprocessing Industries, that the formal ownership Production, 1997-2001 structure was 48% owned by private shareholders, Product Category 1997 1998 1999 2000 2001 5% by the government (not for sale) and 47% for Meat Production (t/y) sale by the government (34% as shares for sale by Beef 9,000 8,400 8,700 8,800 8,700 the PA for itself and some Pork 8,700 9,800 11,000 11,200 10,800 government agency ,_,__,_ creditors and 13% for sale Lamb/mutton 6,800 6,000 7,200 7,600 8,200 by contract to attract large investors). While the Poultry 5,600 5,200 5,300 5,700 6,300 government would like to Total (ty) 30,100 29,300 32,100 33,300 34,000 sell the 47% as quickly as , ,_,__ possible, the poor Processed Milk (t/y) n/a n/a n/a 112,000 115,000 prospects of the Fruit & Vegetables (ty) 25,000(?) companies make it difficult to find buyers, Wine (I/y) 100,000,000 - 130,000,000 probably because in many cases investors have Source. MAMA and MAFWE correctly evaluated them as having little value. In some cases, the managements of the firms have been using their firms' cash flow to buy shares at the deep discounts offered by the PA. 115. Many of the privatized agroprocessors are now in a fairly desperate financial state. Firms in this position typically own large, outdated production facilities with excess employee numbers. Their costs are high, their capacity utilization is low, their management is weak, especially in marketing, and they struggle to maintain market share in the face of competition from new entrants. They are short of working capital with which to expand production, and they also have very little access to longer-term capital to invest in new processes. Some of the larger ones have so far been able to maintain long-term relationships with export markets (such as bulk wine to Germany), but these are low quality, low value products that do little to improve operating margins, and even lower-price global competitors may be emerging. 116. The commercial potential of the majority of the AKs is quite low. Their often elderly managements must both solve their current difficult financial problems, rationalize operations, adopt a new management style, limit their obligations to their employee stockholders, handle any labor unrest, fend off political pressures to maintain employment, face competition in their most remunerative product lines from new, fully private entrants and imports, acquire finance to support process modernization and product development and penetrate export markets to gain scale economies. This would be a tall order for any management and may be too tall an order for all but a minority of ex-AK agroprocessing survivors of the shakeout that seems inevitable. 117. Successful Medium-Sized Private Processing Companies. There are dozens of small, small and medium scale agroprocessing companies emerging from rural communities, retail stores and petty traders, typically manufacturing a single product line in compete-tion with ex-AKs and imported products. 118. Joint Ventures and Direct Foreign Investment. Foreign investment has been relatively low in agroprocessing to date, with only US$5.7 million being invested in 9 companies of which more than 50% was an investment by a Netherlands firm in a tobacco company. To give an indication of the small size of these investments, $5.7 million would only be sufficient to build a medium capacity (I 50,0001/d) modern-dairy plant. 30 Milk Processing 119. Milk processing in FYR Macedonia uses a substantial amount of sheep milk as raw material (20%) in addition to cow's milk and produces about 112,000 tons per year of products (Table 6). Most of the approximately 80 milk processing plants have very simple facilities or equipment and processes, which were installed more than 15 years ago. By today's standards, they would be considered badly out-of-date. This means that regenerative heat recovery systems, product loss control and cleaning-in- place (CIP) are not as efficient as in modem plants and have variable product quality. A few plants have recently invested in modem packaging systems with the latest technology (particularly the high speed 3,600 packs per hour Tetrapak line at Nasto Dairy) and can be considered as equipped to export standard. 120. Like other agroprocessing industries, most milk processing plants are operating way below capacity - in the case of the milk industry, at a roughly estimated average 65% (Table 7). The plants operating at this level and lower levels - the majority of plants - will probably not be viable in the medium run without major investment unless barriers to competition prevent the more efficient plants from expanding market share. 121. Milk and milk product exports declined sharply in 2001, by 46%, due to the closure of the exceptional Year-2000 Kosovo market, but they are expected to recover in 2002.. Cheese exports in particular could be further developed and expanded. The local cheese is highly salted, but some cheeses are otherwise excellent in flavor and texture and could be developed with lower salt content for several export markets including Greece and the Middle East. Meat Processing Table 7: Macedonia: Major Agroprocessing Industries, 122. There are about 32 Capacity Utiization, 1999 slaughterhouses/meat- Capacity Capacity products plants in FYR Industry Number (tons/day or mil. liters/year) utili- Macedonia, with a total of Plants Large Medium Small Tot zation processing capacity of 162 Scale Scale Scale o a tons per day of meat. It is reported that only five plants Milk 80 230 193 56 479 -65% have export licenses with a _ total of 26t/d processing Meat 32 90 55 17 162 50% capacity. Very few of the I plants have modem Fruit and equipment, and most would Vegetables 25 n/a n/a n/a n/a n/a not meet the latest ISO and HACCP25 requirements for Wine 15 119 56 8 183 -64% export of fresh, chilled or Source. MAMA and Bank staff estimates frozen meat on the world I/ Rough estimates based on estimates of home consumption, exports and percentage of market. All of the plants are imports Drocessed in Macedonia. reported to produce extended life products, two sell long life products, but only six sell fresh, chilled or frozen meat. There are no processors with capacity above 100 t/d; in fact, the five largest have combined capacity of 90 tld. The next 13 have only another 55 t/d capacity. 25 The EU will require all food processing industries supplying EU markets to be Hazard An alysis and Critical Control Point (HACCP) certified by the 1" of January 2004. 31 123. Good data do not exist on production, but total meat production is about 33,000 tons per year. Capacity utilization is almost certain to be below 50% and may be as little as 30%. Even more so than in the milk industry, a meat industry shakeout seems inevitable. Incremental domestic consumption (about 3% annual growth) is not likely to support much expansion of the industry in the near future, although some farn-based slaughtering for home consumption could be transferred to commercial slaughterhouses. Imports (44% of meat supply) are the largest sector in which domestic production could compete and expand with import substitution. Exports (only 5% of production in 2000) are a second target, where meat production, processing and marketing could be expanded. However, expansion will depend on substantial investment in the efficient, entrepreneurial firms of the industry. The existing spring lamb and processed meat products appear to have good potential for expansion. 124. The meat industry in FYR Macedonia is supported by the USAID funded Land 'O Lakes project, Macedonian Agribusiness Marketing Activity (MAMA), which has 125 processor members. As in the milk industry, MAMA works extensively to advise commercial processors on best practices in the meat industry, and analyzes products and markets for potential growth. Its "Seal of Quality" also applies to meat products, and firms that use the seal of quality have developed new product formulations and packaging for 132 products. Fruit and Vegetable Processing 125. There are about 20-30 recognized fruit and vegetable processing companies, not counting wine firms. This figure undoubtedly misses hundreds of cottage-industry-scale processors.26 Consequently, good data do not exist on production. What data do exist indicate that exports of finished products (canned or bottled) are estimated to be 21,500 tons per year out of 25,000 tons of product from the recognized processors. These include Balkan specialties like roasted red pepper, gherkins, ajvar (a canned pasta of roasted sweet pepper and garlic) and pindjur (a typical Macedonian salad preparation), which are exported to ordinary retailers in CEE and SEE and ethnic retailers and recently supernarket chains in the EU and North America. The Macedonian variants compete in export markets with Hungarian and Turkish varieties, whose agroprocessors offer stable quality, good prices, dependable delivery and annual shipment plans. 126. The transitional state of the industry is indicated by the low annual exports of semi-finished (frozen and dried) products, estimated at less 3,500 tons per year. In FYR Macedonia, most of the semi- finished products (except frozen sour cherries) are available only in modest quantities, allowing only ad-hoc purchasing. Partners in Germany, which have been demanding more than can be supplied by Macedonian processors, are interested in commitments on the basis of annual plans. 127. The reasons for the non-responsiveness to existing demand undoubtedly reflect the same ills exhibited by the ex-AK processors in the milk and meat industries: inadequate management, dysfunctional ownership structure, lack of working capital, antiquated equipment, out-of-date processing technology, high cost, low volume of marketable products, poor packaging, uneven quality' raw material, non-compliance with export standards, etc. Recognizing the difficulty in getting near-term solutions to these problems, some traders have recently started their own production operations to assure raw material supply and control quality. Some are able to pre-finance growers by providing seeds, fruit tree seedlings, fertilizer and technical assistance. Others have gone directly into raw material production by acquiring greenhouses for production of early vegetables, for instance. 26 An indicator of probably incomplete statistics (probably not reflecting an erratic industry) is the data in the 1999 Statistical Yearbook giving raw material inputs into the industry in the years 1996, 1997, 1998, and 1999 as 29, 5 ,23 and 50 thousand tons per year, respectively. 32 128. At present, there are significant problems in achieving quality from small producers. Common practice now is for traders to collect produce from small farmers to make up full loads for export. Crops are picked and packed in the evenings and loaded at night to keep them cool. The product is cooled in the refrigerated truck, but is un-sorted and un-graded, and only in the early season do traders find export sales without difficulty. During the flush season they may tour numerous markets to sell their loads. There have been some efforts to improve quality from small producers with the development of farmer associations. At least one marketing company has been formed, MACFRESH (a brand for three associations) with good brand imaging, but this needs to be followed through into successful marketing. The associations are in their infancy and need long term support and guidance, and their bilateral and multilateral assistance programs are nearing completion. Wine Industry 129. As in the food processing industry generally, globalization has brought many new entrants to world wine markets and extended the reach of others. Some (like Australia and Chile) have excellent products, high quality standards, and adaptability to market trends and others (such as Algeria) mainly sell bulk wines internationally for whatever price they can get. Like other low-quality wine countries, FYR Macedonia is stuck largely at the low-value end of the wine market. Some Macedonian wineries have been able to maintain long-term bulk-wine relationships with export markets (notably in Germany), but these low-quality, low-value products return only low operating margins. In line with Serbia's reentry to normal international economic relations, the EU has reduced FYR Macedonia's wine quota by reallocation in favor of other FRY countries. This has effectively halved the export of bulk wine to the EU and is likely to badly hurt the short-term production prospects of Macedonian wineries, especially the two largest wineries at Povardarie and Tikvas. The wine industry hopes to replace this lost market with exports to former Soviet states, but this low-value market is unlikely to be very profitable. 130. There are 15 active wineries in FYR Macedonia, with a total processing capacity of Box 2: Export Potential: Bovin Wimery, about 183 million liters per year of wine (Table Negotino 7). This compares with overall production of 100 to 130 million liters per year and indicates This small, new, privately owned plant produ, capacity utilization of 55% to 71%. Most plants high priced bottled wines. It currently has capac are operating below their cash breakeven points of of 500,000 liters per year but can expand wit] about 70%. They would need to operate at above the existing buildings to double that capacity. 1 80% capacity to have a cash flow that could products are of excellent quality, well present support needed investment in modernization and high priced, and aimed at top-end restaurants expansion. the domestic and regional markets. The output this plant is limited only by its access to work 131. There are three large-scale processors each capital that, in the wine industry, is a ma with greater than 20 million liters per year constraint. The owners have a program capacity. The three have about two-thirds of all expansion into grape production and expect commercial wine processing capacity in the double their present capacity within two yeE country. Four plants rate as medium scale (12 to They are conscious that expanding production v 16 million I/yr with 31% of total capacity), and 8 put stress on their quality control, but they plants are small, with capacities less than 2 aware of improved processes and equipment t million I/yr and with only 4% of total production would enable them to maintain the consistent h (Table 7). At the smallest scale - and not covered quality that they need at the higher volume. T in official statistics - home production possibly winery would appear to have good potential accounts for an additional 18 million liters per export fine wines. year, or 10% of commercial production. 33 132. Most of the large and medium-scale wineries are ex-AK wineries and own large, outdated and overstaffed production facilities. Their capacity utilization is low and they are short of working capital with which to expand production. They also have had very little access to capital to invest in new processes, although some investment has recently been supported by bank loans. The wine firms need a new marketing strategy, if they are to survive to post-privatization profitability in the new global wine market. With effective strategic investment and improved management, however, the wine industry could export higher quality, more profitable bottled wines instead of the low-grade bulk wines currently exported. Large markets outside the EU, such as in North America, have largely been ignored, but these markets, while large, are highly competitive and can be penetrated only by effectively marketed wines with an attractive price-quality combination. 133. FYR Macedonia does have a small fine wine capacity. MAFWE holds a registry of wineries that produce appellation-controlled wine with registered locational and organoleptic properties (Box 2). These fine wines are usually bottled in the production area and are the largest value-added component of the wine industry. But few Macedonian wine firms will be likely to produce wines of this type in any volume in the near future. Those that can will have a significant profitability advantage, which would aid their survival in the event of a shakeout in the industry. 134. According to the stereotypical image, good quality wines are produced in old and simple wineries, and this is sometimes true, but in the modem industry, wines of consistent quality can be and are produced in large volumes if good grapes receive very good post harvest treatment, if effective process control technology is used at all stages of wine production and if optimal ageing of vintages is carried out. Reduction of air contact with the grapes after harvesting and through reception and pressing is one of the most important aspects of pre-fermentation quality control, as airborne yeasts can contaminate the grapes and change the flavor of the wine. Minimizing grape contact with the air is usually achieved by short grape transit times, spraying and membrane pressing. Constant temperature within an optimal range is also important during fermentation and maturation. The two largest wineries are reported to have major grape reception bottlenecks during the harvest period, do not use up-to-date processing technology, have limited underground storage capacity, and do not lay vintages down to any extent. Increasing their quality would require large investments in up-to-date facilities and in working capital to retain vintage wine. AGRICULTURE AND HORTICULTURE Climate and Resources 135. Rainfall typically varies between 500-800 mm but is poorly distributed, requiring irrigation for intensive agriculture to be viable at all in some regions. In other areas, irrigation is needed in dry periods during the summer. Recent years have seen frequent drought and the dramatic reduction in water reserves, thus restricting irrigation. Temperatures also exhibit a wide maximum and minimum range. Maximum summer temperatures in most regions can reach 400 C and the lowest winter temperatures fall to about -30° C. During the last few years extremely low temperatures have also damaged vines and orchards. 136. Within the country, some 1.28 million ha (50%) of the total area of 2.57 million ha is classified as agricultural land27. Ofthis resource, 633 000 ha (51%) is classed as cultivated land and 649 000 ha as permanent pastures (mainly upland). The cultivated land is largely centered on valley or old lake basins 27 In Macedonian land statistics, agricultural land includes cultivable land and pastureland. Cultivable land includes land available for arable crops, plu s land planted to orchards, vineyards and improved pastures. Arable land includes land planted to annual crops (cereals, indu strial, vegetable and fodder crops), plus nurseries and fallow land. 34 and an extensive area of it is irrigated. The climate is transitional between Mediterranean and Continental with typically cold winters in the mountainous uplands and warm to hot summers in the valleys and lower elevations. In 1999, approximately 175,000 ha of agricultural land remained fallow, including 34% of state-owned arable land and 28% of privately held arable land. 137. The small farm size is due to a combination of inheritance patterns and the former Government regulation (now removed) limiting individual land ownership to 10 ha. The land holding is also typically fragmented into four or more parcels that are not contiguous. Compared to the formerly social and now state-owned AK land, individual farmers are located generally on poorer soils and have less access to irrigation. 138. Traditionally, crop yields and productivity were lower on private farms compared to the AKs, since the latter had better access to inputs and technical advice. Following recent changes in Government policy, however, this trend is now being reversed, with the private sector having better access to inputs and technical advice and a limited amount of financial resources with which to access them (mainly through remittances). Recent changes in policy towards support of the private farmer, combined with the outward migration of some smallholder farmers, have seen an increase in both the purchase and sale of land and in land rental. This has encouraged the development of a more dynamic private sector farming community with entrepreneurial farmers accessing new technology and inputs from a growing input supply sector that is receiving increasing support from companies within the EU and other industrial countries. 139. Farm machinery has, in the past, been mainly obtained from Serbia and other Eastern European countries. Observations from farm visits, supported by the statistics, suggest that machinery is available in adequate numbers. Tractor numbers have steadily increased in recent years with the vast majority being owned by a minority of individual farmers. The land: tractor ratio is now 9.6 ha of cultivated land per tractor. However, there is a serious shortage of powered implements suitable for use on small and upland farms. Over capacity has usually been the consequence of mechanizing operations on a small farm, but farmers with tractors use sharing and renting arrangements to reduce their overhead and earn extra income. Irrigation 140. FYR Macedonia is divided into three main catchment areas: the Vardar catchment receiving 72% of the annual runoff, the Cri Drim catchment receiving 23% of it, and the Strumica catchment receiving 5% of it. Of the about 350,000 ha that is suitable for irrigation, representing 54% of the arable area, about 140,000 ha had been brought within the command of the irrigation system byl980. Of this area part has been lost to urbanization; other parts never received water, so that the current potential extent of the formal irrigation service area is 127,800 ha. Since construction, large parts of the system deteriorated badly, due to deferred maintenance, poor original design, poor original build quality and ineffective management, even in the years before independence. This deterioration continued after independence, with the total irrigated area shrinking from 78,000 ha in 1990 to 36,000 ha in 2000 and, due to insecurity, to 27,000 ha in 2001. The Bank/Netherlands-financed [RRP is providing funds for the rehabilitation of the Tikves, Bregalnica and Polog schemes, pilot development of Water User Associations and other institutional reforms. Most of the irrigated land is within the enterprise sector (including privatized ex-AKs), with about half irrigated by surface irrigation methods and half by sprinkler systems. 141. Irrigation efficiencies are low, in some cases not exceeding 30%, due to losses in both the conveyance and distribution systems, both of which are in urgent need of rehabilitation. In particular, pumping equipment is old and unreliable with breakdowns and the lack of spare parts interrupting water supplies. Because of inadequate storage and distribution of water, even the irrigated areas are subject to serious drought impacts, which can easily cut crop yields in half under Macedonian conditions when 35 irrigation is restricted. In times of water shortage, private farmers feel that they are discriminated against in favor of the enterprise farms. Except for the IRRP, most of the improvement schemes to the existing systems have been stopped due to lack of funds. The financial situation of the Water Management Organizations (WMOs) is generally perilous, with some reduced to barter transactions. Considering that only 2% of the irrigated area is double cropped, improved water management and usage have the potential for substantially increasing production, of forage crops, for instance, following wheat. Crop Production 142. Area and production data for the main crops between 1990-2000 are given in Table 2, (Page 7, above) and in Annex 1, Tables 1 and 2. . Of the cultivable area of 611,000 ha in 2000, a total of 512,000 ha or 88% is classified as arable. An estimated 30% of this is left fallow each year although this may be due more to insufficient finance and absentee owners rather than deliberate rotational practices on working farms. 143. Cereals. Wheat, maize, barley, rye, oats and rice account for about 41% of annual planted area, with wheat the main crop at 21% of cropped area, followed by barley (9%), corn (7%), rye (1.2%), rice (0.8%), and oats (0.5%). The area planted to cereals has remained relatively stable in recent years, with the principal exception of rice, which has declined due to the removal of subsidies and reductions in irrigation water supply. The area of rye and oats, both minor crops, has also declined. Yields of cereals, particularly wheat and barley, are low and have averaged about 2.6 and 2.3 mt per ha respectively in recent years. The average oat yield has been only 1.1 mt/ha, while the yields of corn and rice, both irrigated crops, have also been well below potential at 3.4 and 4.5 mt/ha, respectively. These low yields are due to low input use, low seed quality and drought. There appears to be little difference in yield (kg/ha) between enterprise and individually owned farms with dry land cereal production; with irrigated crops, however, enterprise farms have higher corn yields (+34%). 144. Industrial crops. The main industrial crops in 2000 were tobacco (71% of area planted to industrial crops), sunflower (19%), and sugar beet (6%). Other minor industrial crops were cotton, poppy seed and paprika pepper. There has been a marked drop in the area of sunflower planted in recent years (from 27,775 ha in 1993 to 6,034 ha in 2001), reflecting the recent problems associated with AK production and processing. As a result a substantial proportion of edible oils are now imported. With only 1,700 ha of sugar beet planted in 2001, concentrated around the now privately owned factory at Bitola, the viability of this industry is in question. Yields of tobacco and sunflower are similar in the enterprise and individual farming sub-sectors. 145. Vegetable crops. Commercial vegetable production is concentrated around the market town of Strumica where a combination of good soils, very favorable climatic conditions and good roads allow high quality production for local and export markets. Crops include field-grown cabbage, beans, waternelons, potatoes, onions, garlic and salad crops with tomato, pepper and cucumber grown under plastic structures or glasshouses. These plastic houses vary from basic wooden-framed, plastic covered structures to modem imported buildings that have computer controlled heating, irrigation and environmental controls. Methods of heating vary from unsophisticated to modem. Suppliers, mainly from the EU, area important for the producers using modern methods, enabling them to obtain modern technology linked with input supplies. 146. The area planted has remained remarkably constant over the last five years; more recently, the move has been to produce early crops particularly of tomatoes and cucumbers to catch the high market prices available during April to May. With the proximity of the FYR Macedonia to the Yugoslav, Bulgarian and EU markets, together with well developed local markets, there is potential to further exploit the early season characteristic of the region and expand protected cropping of selected 36 vegetables. Prices, for example, of fresh tomatoes can vary from MKD 80-100 per kg in early April down to MKD 15 per kg at the peak of production in July and back to over MKD 40 per kg by October. 147. There is considerable scope to improve the quality and yields of the crops grown under plastic tunnels through the introduction of more efficient heating systems linked with temperature controls and combined with use of modem irrigation and liquid fertilizer injection systems. Seed quality and plant disease control are also areas where improvements could pay off in productivity. 148. Fruits and Nut Orchards and Grapes. Apples and plums are the largest orchard crops, with 89% and 99%, respectively, produced by individual farmers in 2000. Sour cherries, peaches and pears are other significant orchard crops. The enterprise sector has a significant production share only in sour cherries and peaches. In general, average yields of fruit crops are low compared to Western Europe with average yields of 27, 18 and 5 kg/tree for apples, plums and sour cherries, respectively, in 2000. The yields in the enterprise sub-sector are disastrously low compared with those of individual farmers (in kg/tree): 14 v. 31 for apples, 8 v. 19 for plums and 3 v. 19 for sour cherries. Progressive orchard owners reach much higher yields than the average, e.g., 60-80 kg/tree compared with the average of 27 for apples. 149. Most of the present fruit production is sold locally, but some farmers are exporting to Bulgaria and, in more limited amounts, due to quota restrictions, the EU. There is considerable scope for improvement in the quality of apples through the introduction of varieties that will store for longer periods. To be useful, this longer storage capability needs to be linked with better storage, grading and packaging techniques. Farmers are aware of these new methods, but in the present state of transition of the country, lack the necessary finance, training and access to the new technology. The main nut trees are walnut and almond with some 175,000 and 212,000 bearing trees, respectively. Individual farners own almost all of the walnut trees, but while enterprises have 90% of the almond trees, they produce only 44% of the almond output, indicating serious problems. 150. Grapes are an important crop grown on approximately 27 000 ha (1999 data) with 60% are for wine production, 30% for table grapes and 10% for the dried raisin and sultana market. The individual farm sub-sector accounts for about 64% of total production from 76% of the productive planted area. Tikves AKT is one of the largest wine producers in Europe with 2,000 ha of its own plantings and 5,500 ha under contract. Recently MAFWE has encouraged expansion of the industry and is promoting the replanting of the traditional vine with imported grafted vines of red and white grape varieties originating from USA and Europe; these are supplied from Serbia through the Viticulture Institute. Production in the smallholder sector is expanding with both replanting and planting of new areas, particularly in the favorable soils and climatic area around Gevgelia in the south of the country. Agricultural Services 151. Seeds. FYR Macedonia produces most of its own open pollinated seed, mainly in govemment institutions, although some wheat seed is imported from Serbia, Croatia, Hungary and Poland and one private company is bulking wheat seed. About 80% of hybrid seed is imported. One enterprise is multiplying hybrid corn imported from the USA. About 20 companies are registered to trade in agricultural seeds and, though the number is uncertain, another 20 may be in the process of registering. A new seed law was passed in May 2000. The law has been reviewed by both the Organization for Economic Cooperation and Development (OECD) and the International Seed Testing Association (ISTA). No law on plant variety rights, however, has yet been prepared for consideration by the International Union for Protection of New Varieties of Plants (UPOV). Legal revisions are likely to be required prior to FYR Macedonia's entry to these international conventions. The new seed law establishes a Seed Directorate within MAFWE with a budget of only MKD 6 million (US$ 860,000), 37 financed 50% by government and 50% through industry charges. There has, however, been no move yet to implement these provisions. Substantial investment and capacity building will be required to establish MAFWE managed seed sites and programs, including those required to rehabilitate a laboratory to meet ISTA seed testing standards. 152. Fertilizer. Under the former system, private farmers could not purchase inputs such as fertilizer, seeds and chemicals directly from suppliers but had to access them through AKs or coops, frequently paying through an exchange of produce. The incentive to supply quality products at competitive prices on either side was lacking. Farmers now have a range of good quality inputs available from a growing number of traders and suppliers. Compound fertilizer is manufactured, largely from imported ingredients, in a parastatal factory located at Veles, which is operating well below its capacity of 150,000 mt per annum and is scheduled for privatization. With the abandonment of the fertilizer subsidy in 1992, consumption halved from 77,000 mt in 1989 to just over 40,000 mt in 1992, but climbed back to about 70,000 mt28 in 1999, reflecting still low usage by European standards. Without access to seasonal credit, it is difficult to see how private farmers can increase fertilizer use. Nevertheless, in this context strong private input supply companies have emerged in association with international and European companies. 153. Marketing. Marketing has been a major area of reform in the FYR Macedonia, changing from a centralized, socially controlled system to a free-market, responsive to market signals and consumer demand. These reforms have been hampered, however, by a declining, but still dominating influence on trade and processing by the marketing arms of the AKs. The bulk of produce sold for processing, such as industrial crops and canned vegetables or canned fruit, is still sold through contracts with the progressively privatizing AKs. Within this system, there has been little incentive to produce quality products. 154. Marketing of fresh horticultural produce is largely dominated by private traders, but there is only rudimentary wholesale marketing of horticultural produce and little standardization or grading of produce. The exception is the small amount of produce exported fresh to Western Europe, which may be graded according to EU standards and is frequently re-packed by European importers before leaving the country. Initiatives in marketing, supported by an NGO, where products, such as cheese, are packaged attractively with a seal or guarantee of quality, have resulted in dramatic increases in both price and marketability. Similar opportunities exist with most processed commodities and should be encouraged. LIVESTOCK Structure and Performance 155. The livestock sub-sector in FYR Macedonia is characterized by a large number of very small, subsistence oriented farm households, a limited but growing number of small, commercially oriented fanily farming businesses and a decreasing number of large, specialized livestock enterprises, the former AKs. As indicated in Table 2 (Page7, above), individual farms own 67%-100% of the major livestock species. All production systems are constrained by limited access to credit, a weak genetic and research base, inadequate market and technical information networks and the lack of an effective policy framework for the industry. These constraints are central to the current low profitability of most livestock production in FYR Macedonia. Family farms are further constrained by their limited access to land, particularly state-owned agricultural land, and the ineffectiveness of smallholder farming lobby groups of significant parts of it. 2S Estimate based on customs records and production and exports of the Veles plant. 38 156. Changes in the livestock herd size between 1990-2000 by livestock type and ownership are summarized in Table 8. While the pig industry has grown substantially and the dairy industry modestly, the cattle, sheep and poultry industries have contracted markedly. The largest reductions have been in the sheep and poultry industries, which have shrunk by 45% and 35%, respectively, since 1990. In the sheep population, the reduction has been proportionally about the same in both the individual farm and enterprise sub-sectors. It has happened because of a number of contributing factors, namely the periodic loss of international markets, the cessation of subsidies for lamb production and, for upland shepherding, rising labor costs and reduced labor availability for a task that appears to have lost its appeal to younger people.29 The contraction of the poultry Table 8: Livestock Devellopm ents, Indilvidual 1F arms v. Enterprises, industry is primarily due to 1990-2000 the collapse of the enterprise component of the industry. Percent Change (1990-2000) This was the result of the loss This diethed results of 1995, llTotal Livestock Enterprise Individual Farm of directed credits in 1995, Population Sub-sector Sub-sector which created a cash flow Cattle -7.7% -55.6% -2.6% crisis in this heavily Cows and heifers 3.3% -43.4% 6.8% capitalized industry as a time of shrinking demand due to Pigs 14.3% -5.6% 31.4% falling incomes. The Sows and gilts 29.9% 2.9% 47.9% enterprise poultry sector, Sheep -45.5% -51.5% -45.0% however, grew very Ewes 45.0% -47.5% -44.7% significantly in 2000 (by Poultry -35.2% -50.6% -10 4% 79%), but this only allowed it Source Statistical Office of Macedonia to reach half its level of 1990. 157. A view widely held in FYR Macedonia is that the country's livestock industry and agriculture in general will prosper through support of the large livestock enterprises. This conviction is driven by a combination of AK history, untested and internationally unsupported opinions concerning the benefits of economies of scale at the farm level, and the beliefs about the effects of land fragmentation on smallholder livestock production. In fact, the limited research available suggests that family farming in FYR Macedonia provides equal and possibly better returns to land, labor, and capital than does enterprise farming. That research also challenges the perception that land fragmentation is a serious constraint to the efficiency of livestock production. 158. When combined with laws that err on the side of over-regulation and the protection of enterprise interests, the government risks stifling efforts to invigorate the dominant family-farming component of the livestock sector. In any case, government data show that the family farming sub-sector is closing the productivity gap with the enterprise sub-sector, despite the policies that continue to favor the latter (Table 9). The reduction since independence of institutional obstacles and also the freer access by individual farmers to inputs and markets, including land, is probably responsible for the productivity gains of individual farmers. Institutional lIssues 159. The Government appears to have facilitated agricultural enterprises to secure long term leases for state land, initially rent free, despite the law providing for the competitive tender of leaseholds. Government should review its leasing policy and create an open market for the long-term leases of 29 It is not clear how a labor shortage in shepherding can coexist with an unemployment rate of over 30%. The most plausible answer is that low profitability in the sheep industry keeps wages offered below the level demanded by unemployed workers as compensation for leaving informal-economy activities, including subsisterice farming. 39 moderate-size parcels of state agricultural land, including pastureland, without bias toward the successor enterprises of the AKs. While such a policy might carry an immediate social cost, this is likely to be compensated by higher rents, higher land productivity and the improved welfare of successful lessees, their families and their hired labor. In the longer term, government should develop a strategy for the progressive denationalization of state agricultural land other than that required for defense, heritage and resource conservation. 160. At an institutional level, government should Table 9. Productivity, Selected Livestock Products: Individual Farms as review, revise and Percent of Enterprises, 1995-2001 consolidate its Production Per veterinary and livestock Cow, Ewe or 1996 1997 1998 1999 2000 2001 laws into a single law Layer consistent with EU and Cows Milk 30% 29% 390/o 44% 45% 43% other international laws and obligations. As a Sheep Milk 129% 142% 142% 144% 111% 175% part of this process the Egg Production 31% 42% 52% 86% 70% 56% staff qualification Source State Statistical Office of Macedonia barriers to the delivery of animal breeding and other livestock services should be reduced or removed and the legislative framework for industry self regulation substantially strengthened. Preferred positions for the delivery of services presently enjoyed under the law by the Institute of Animal Science and the Veterinary Institute should be removed and the legal environment for open, competitive livestock health, breeding and nutrition industries established. Part of this process should involve the establishment of independent, industry appointed management boards for government livestock agencies and institutes. 161. Government financial support for livestock production, albeit modest at MKD 99.5 million (USD 1.42 million) or MKD 18 (USD 0.25) per dry sheep equivalent in 2002, should be used to provide broad support to the sub-sector. Instead of trying to pick "winners" in terms of species, production and processing systems or type of economic organization, the government should direct its resources into industry training, competitively allocated funding for policy and production research and the improvement of services where there is a clear legal, health and safety or capacity reason for government's involvement. Animal identification, disease epidemiology, product inspection, resource protection and market promotion services to name a few must be substantially strengthened to provide a sustainable base to the sub-sector and protect and develop domestic and international markets. 162. In this process the role of the Institute of Animal Science, presently Government's main conduit for subsides to the sector, should be thoroughly reviewed. In an improved policy environment, the Institute's fish, sheep, cattle and pig breeding services could be provided by private enterprise or farmer's associations, its research transferred to the better resourced agricultural faculty to which it is already closely linked, and its feed production and analytical services privatized. In essence, the services presently provided by the Institute could over time be privatized or transferred and the Institute sunsetted. 163. Despite its tendency to favor enterprise farming, government policy for the livestock industry is more remarkable for its absence than its content. Government should establish a policy analysis capacity sufficient that decision makers and the public are aware of the costs and benefits of all major policy choices. The starting point for change must be a program of capacity building for policy analysis and adequate funding for research within Government, specifically in MAFVWE. An EU Phare funded project has just begun this process; however, its staffing and funding must be put onto a sustainable basis, possibly with the support of industry levies. As well as securing sustainability, industry support would have the added advantage of bringing greater transparency and accountability to the policy 40 setting process. 164. At the production level, a large genetic resource and technology gap is severely limiting the realization of FYR Macedonia's livestock potential. Private farmer access to world-best livestock genetics is severely constrained and the genes and breeding services that are available frequently fail, in part due to monopolistic positions secured under the Law on Animal Husbandry by government institutions and now-privatized former government agencies. The privatization of clinical veterinary services is currently transforming the animal health sector, a similar approach to animal breeding services would also bring substantial benefits. 165. Livestock market and market information services are limited but improving. SSOM now provides weekly livestock market price and quantity data for some products, broadcast through mass media outlets and the MAMA project supports a livestock situation and outlook analysis, however, both services are in their infancy and not yet sustainably funded. Most farmers sell livestock and livestock products into local markets or to trusted traders as they have little market knowledge themselves. Only a few companies have the capacity to compete effectively in international markets. 166. Livestock services are limited and their development is constrained by legal provisions defining who can provide specific services. The laws governing the sector require revision and unification with a view to closer EU alignment and livestock service market liberalization. Animal health services are sufficient and enjoy a high level of cost recovery, however, the establishment of an epidemiology program will raise costs as well as effectiveness and require highly motivated and qualified staff. Government should consider performance incentives for Veterinary staff engaged in economically critical disease monitoring and inspection work and regularly review service fees to ensure full cost recovery. Animal breeding and livestock extension services are insufficient and un-competitive creating a serious constraint to livestock development. Weakly organized and disaggregated farmers livestock associations add little value to the industry at present. Inadequate laws on associations and cooperatives are partly to blame for this situation. Government should have a clear policy supporting the development of democratic and broad-based farmers associations with a view to their taking control of Macedonian livestock breeding and advisory services. 167. Agricultural research in FYR Macedonia is woefully under funded and frequently detached from the industry it is expected to support. The absence of effective private fanner's organizations contributes to this situation through their lack of an effective political voice and their inability to support or participate in the research agenda. Govemment can make agricultural and livestock research more contestable and transparent, including the appointment of industry representatives to national research management boards, however, this will be of limited benefit if the farming community remains unable to democratically elect representatives or co-finance areas of research interest. The dispersed nature of FYR Macedonia's agricultural scientific community and research infrastructure compounds the funding constraints and limits the pursuit of integrated, systems oriented research. The almost total inability of the scientific and technical support community to assess the financial or economic merit of research proposals or technical outcomes is another overwhelming constraint. Pasture science is almost non- existent, as is farm economics. In such an environment it is particularly difficult to ensure optimal rationing or the sustainable use of the pasture resource. 168. These constraints to the emergence of a more efficient and productive Macedonian livestock sub- sector are soluble, but not without a clear policy shift within government, a commitment to institutional reform and a preparedness by farmers to better organize and cooperate for the development of their businesses. capacity building amongst its policy, technical and science agents. Government needs to: o Consolidate staff and facilities to provide critical mass for its programs; -Continue liberalization of markets, particularly of land and genetic resources; 41 * Provide for contestability in the allocation of publicly owned or funded resources; * Insure the connection of stakeholders to industry p6licy' development and research management; and * Encourage the contribution of stakeholders to research funding and information dissemination. FORESTRY Present Situation and Reform History 169. Because of FYR Macedonia's mountainous nature, forests cover 39% of the country's land area (about 1 million ha in all). Except for 136,000 ha (6%), which is privately owned, all forest is state- owned, although an estimated 6% of the state forest resource is expected to be denationalized in the near future. Of the total, 91% is broad-leaf, 4% coniferous and 5% mixed. At present, both the environmental protection needs and the economic potential of this vast forested area remain largely unanalyzed. Eighty-five percent of the I million m3 annual timber production is cut in state-owned forests, so it is clearly a pressing area for policy. 170. Partial privatization of forest operations commenced in 1997, when, under a new Forestry Law, 30 socially owned commercial forestry enterprises were merged to form a single State Forestry Enterprise (SFE) - Macedonia Forest. At the time of the merger, most of the forest enterprises' equipment was divested and transferred, along with many of their 3,700 employees to a set of new public forest enterprises (PFE). Macedonia Forest, which now employs 3,060 staff, is responsible for: (i) contracting with the PFEs for logging and related services and monitoring their performance; (ii) negotiating the sales of timber to domestic wood processing enterprises and other domestic and foreign buyers; (iii) planning and inspection of forest production activities; (iv) construction and maintenance of forest roads; (v) reforestation and (vi) other asset management. In addition to the bulk of the national forest resource, its assets include dams and other civil works, hotels and hunting lodges, timber mills, livestock and fish farms, an essential oils factory and a transport company. 171. Current forest management policy permits up to 1,350,000 m3 off-take annually, equivalent to 73% of the total growth or 1.8-2.3% of total stock. Average off-take is about 600,000-900,000 m3, of which some 73% is consumed as fuel and only 18% as manufactured timber products. The limited access to some forested areas, however, means that some areas are still over exploited despite the apparent sustainability of off-take volumes. About 80% is from clear-cut harvest and 20% from routine maintenance. With private production only about 15% of the total, Macedonia Forest has a near monopoly on the domestic supply of timber. Only about 10,000 m3 of timber are exported annually (equivalent to about 5% of total production), mostly in the form of sawn wood and poles. 172. The output and productivity of the forest sector and its contribution to the economy are far below their potential. This has resulted from a weak forest policy, with production still dominated by public sector enterprises and, since 1997, by the Macedonia Forest monopoly. The basic technical problems are poor tree quality, inefficient production technologies and products that are inappropriate for contemporary markets. Organizationally the sector suffers from monopoly controls over production and marketing, lack of modem timber transport, inadequate communications, and dilapidated processing. Forest output could make a greater contribution to the economy through value added from manufacturing than from the current predominant use as fuel. At end-2001, Macedonia Forest had accumulated debts of about EIO million plus salary-payment arrears of E6 million. The company is insolvent, and the only thing separating the company from bankruptcy is its public ownership. 42 Unworkability of Proposed Reform Program 173. The MAFWE Forestry Departrnent (DOF) is proposing to transfer the forest resource component of Macedonia Forest to shareholding companies, initially owned by Government, but to be eventually privatized. Under this plan, now before Government, forestry assets would be divested to 16 limited liability companies, initially to be held under a single holding company. The remaining forestry licensing, management and monitoring functions presently assigned to Macedonia Forest would be transferred to DOF. Ten-year concessions for 278 hunting blocks would also be offered for tender to national and international hunting associations, with award based on price and management plan. An independent organization would establish the user rules and manage the hunting blocks. National parks in forest areas would fall under the Agency for National Parks within the Ministry for the Environment. 174. Within MAFWE, DOF is responsible for forest management and regulation and presently employs 60 technical/administrative staff, including 20 national inspectors, together with about 100 forest police, who work with the forest guard departments of the PFEs. Under the proposed restructuring, the forest police force would rise to 700-800 staff (one per 300-400 ha of forest) employed by the planned shareholding companies, with most staff recruited from Macedonia Forest. The 20 national inspectors are currently responsible for all aspects of forest and hunting regulation and would have a supervisory role under the new structure. 175. The proposed reforms are unattractive. It will be difficult to mix government and private ownership of the cutting rights held by the shareholding companies, particularly if as proposed, MAFWE retains the right to appoint the holding company manager. The transfer of the forestry police role from one of protecting national assets to that of protecting company interests is also likely to be untenable. An alternative, which has been applied successfully in other countries, would be to privatize the PFEs and expand the services they can provide to include contractual management in the 170 forest- management units throughout the country. The right to harvest a designated amount and type of timber and, at the same time, perform specified forest management tasks, would be auctioned to qualified PFEs. Privatization of Macedonia Forest functions in this way would require a corresponding significant increase in MAFWE's capacity for forest regulation. 176. Since 1994, new plantings have declined to less than 1,000 ha annually, which does not allow for regeneration of harvested areas or soil conservation in uplands areas. At the same time, illegal wood cutting, pest infestation and fire damage have increased due to lack of DOF capacity. The absence of any tax incentives for forest establishment has also contributed to this poor result. A more proactive forest policy might see planting expand into the approximately 30% of crop land that remains fallow annually. 177. A thorough assessment of all aspects of FYR Macedonia's forest management and forest industries is needed, including sustained yield potential, domestic and export timber markets, linkages to wood products industries, environmental impact of logging, protection of monuments and regions of endemism, recreational possibilities, current industry and regulatory structure, etc. A strategy and action plan should then be defined for managing the country's forest resources. Forestry is one more area where it will be desirable to move quickly to harmonize the regulatory framework with EU standards. 5. NEED FOR C STKTUTflONAL STRENGTHENING AND REFORM 178. Government's responsibilities in the rural sector are diverse. As elsewhere, the government needs to do better the things that only government can do and to avoid doing things that impede or should be done by the private sector. The essential tasks in the rural sector include facilitation and regulation of 43 the agricultural economy, protection of the environment, and reduction of rural poverty through rural development and provision of welfare services to the rural poor. Public Institutional Framework 179. AL4FWE. The Ministry of Agriculture, Forestry and Water Economy is the central organization with administrative responsibility for different aspects of agriculture, livestock (including epidemiological services and livestock disease control), forestry, fisheries, rural development, natural resource management and protection of flora and fauna. It is not responsible for agricultural extension, research or agroindustry. The ministry employs about 420 staff with less than 20% based at headquarters. The organization structure of MAFWE is shown in Annex 2, Chart 1. The ministry is responsible for: (a) formulation and implementation of agricultural policy and related strategies; (b) drafting legislation; (c) planning and administration of government-funded programs and investments including bilateral and international programs; and, (d) provision of monitoring, inspection and regulatory services. 180. The ministry is still fairly weak in its capacity to undertake policy development and analysis, with only a small core of professional staff concerned with policy issues and the preparation of legislation. An 18 month EU-financed capacity-building project will begin in May 2002, to strengthen these activities. The MAFWE is currently preparing legislation for a new institutional framework, a new regulatory framework, enterprise changes, water resources, forestry, veterinary service privatization, a farmer association framework, and EU harmonization. 181. The other main current role of MAFWE, that of regulation, monitoring and supervision, is also weak. Some inspectorate staff posts at regional and district (opstina) levels have not been filled, and the recent expansion of the number of districts will require additional expenditure. The ministry is also responsible for the administration of subsidies, a role which will increase in complexity as support policies and farm registration procedures become more closely aligned with EU policy that is itself evolving in response to its prospective expansion into Eastern and Central Europe. The administration of production subsidies to Table 10. MAFWE Budget, 2000 producers was formerly an important role of ('000 US$@ 70:1) MAFWE, with the large AKs and coops being the main beneficiaries. Most of these subsidies have Expenditures now been removed or set low at inoperative levels. Personnel 1,393 14% It was still the largest item in MAFVWE's budget Goods, Services, Other 306 3% in 2000 at 35% of expenditures (Table 10.), but Agriculture Support 3,486 35% this declined to 17% of expenditures in 2001. Protection of Rivers and Lakes 321 3% 182. Forestry. DOF, with 5 employees, is Transfers to Gov't Institutions 2,386 24% responsible for designing policies for the forest Total Current Expenditure 7,892 79% sector, drafting forest law, deciding forestry Capital Expenditure 2,057 21% strategy and planning forestry management. The Total Expenditure 9,949 100% Forestry Inspectorate (FI), with 32 professional Cost Recovery staff is responsible for implementing and enforcing Veterinary Inspection Fees 2,671 27% regulations related to forest management, trade in wood products, reforestation, conservation and Plant Protection Fees 357 4% hunting. The Forest Police Service employs 299 Forestry Fees 1,214 12% people (100 forestry police plus contracted PFE Total Cost Recovery 4,243 43% staff). Twelve percent of MAFWE's budget comes Net Cost to Government 5,707 57% from forestry fees. Even with the current forestry industry structure, DOF and Fl are both Source MAFWE 44 understaffed and in need of increased forestry policy analysis and formulation capability. If the Macedonia Forest monopoly is eliminated, MAFWE will need to greatly increase and strengthen its forestry staff. 183. Extension. By a 1998 Act of Parliament, the extension service is now an independent agency, namely, the National Center of Agricultural Extension with its own budget schedule. It operates with professional staff of 104 from six regional centers and 30 branches that cover all districts. Prior to receiving support from the PFSP, the extension service relied on MAFWE for salaries, vehicles, materials and operating costs in each region. As a result, it was under-funded particularly in the case of vehicles, field demonstration equipment and field testing kits that left it largely ineffective in its operations with farmers. Links with research were also inadequate. Reforms under the 1998 legislation and PFSP unified the agency, changed its focus toward training private sector farmers, established a farm-level adaptive trials program, promoted farmer associations, and started it on the road to cost recovery and eventual privatization. The law specifies that the agency's budget be reduced by 5% per year. Under the PFSP, participating farmers' associations are expected to sign service contracts with extension advisers and contribute 25% of the service costs in the first year, rising to full cost recovery in the fourth year. 184. In this context the extension agency needs to move quickly from a still basically top-down organization to one that responds more effectively to the needs of private farmers. The new regional extension advisory boards need to be given management responsibility to enable the agency to compete with other sources of technical support, such as, input suppliers, NGOs and an emerging private consultant industry. 185. Agricultural Research. The agricultural research system is composed of 5 research institutes together with the Faculty of Agriculture at the University of St Cyril and Methodius located in Skopje and is funded through the Ministry of Science and Education (MOSE) rather than MAFWE. MAFWE has no formal responsibility for agricultural research although it is consulted on major issues and can fund specific research projects. In the past, most agricultural applied research was directed towards and substantially financed by the AKs, with almost no resources applied towards the private farming sector. The method of funding has recently changed with the MOSE now primarily providing core funding for salaries. 186. Because of under funding, research staff cannot be fully utilized and morale tends to be low. In order to survive, research institutes are devoting greater efforts to providing services for which they can charge rather than doing research, including seed production and sale, seed crop inspections, artificial insemination services, and provision of advice to farmers. With PFSP support, a program of 25 applied research projects offered through MAFWE was completed. With the Ministry expected eventually to take over the funding, it is essential that interest in applied research is generated and that a coherent policy is defined. The Macedonian agricultural research system needs to be strengthened by transferring funding authority to MAFWE, restructuring research institutions, and developing an improved system of stakeholder-led research prioritization and funding, primarily for applied research. Irrigation Institutional Structure 187. The existing, but deteriorated irrigation system is managed by three main regionally based, state- owned Water Management Organizations (WMOs), which control the main systems (dams, reservoirs, diversions and main canals) and manage some of the subsidiary distribution network. Other minor WMOs, some AKs and recently the pilot Water User Associations (WUAs) established under the IRRP also manage parts of the distribution network. In addition to their irrigation responsibilities, most WMOs engage in other business activities, ranging from construction to hotels and tourist facilities. This institutional structure, only partly altered to date under the IRRP, is unsuitable for servicing a 45 wholly private commercial and competitive agriculture, particularly its dominant smallholder component. Even on its own terms, with its clients mainly AKs and ex-AKs, the institutional structure is unsustainable. Deferred maintenance has continuously reduced system performance and, consequently, the ability of the WMOs to collect water charges and finance investment. This has resulted in a downward spiral that continues to the present in most parts of the irrigation system. 188. The fundamental strategy behind IRRP was to obtain the most effective use of the existing irrigation infrastructure of three important schemes (Tikves, Bregalnica and Polog) schemes through essential physical rehabilitation of the main structures and the overhaul of institutional arrangements. At the time of preparation in 1997, the Government was unwilling to commit to wide reform, so the project's institutional restructuring program was modest, centering on the pilot introduction of Water Users Associations (WUAs) and their assumption of management responsibility for tertiary distribution systems in their areas. As implemented, the project gave only limited support to the reform of the WMOs, pending their expected restructuring under the proposed Water Law of 1997. The mid-term review in November 2000 found that the project had got off to a slow start. While it had made progress on both rehabilitation and WUAs, it was faced with a weak water law and unrestructured WMOs. The review committed project resources to assist the government by helping to draft revisions to the water law and develop restructuring plans for the WMOs. The civil disturbances of 2001 made it difficult for the government to address these issues and even threw up additional issues concerned with the distribution of irrigation resources. 189. Based on experience with the IRRP, the government (and the project team, within the confines of the existing project as revised at mid-term) are committed to a more holistic approach to physical and institutional rehabilitation of the irrigation system. On the physical side, the original project had no provision for improvements in the secondary and tertiary distribution systems of project schemes, and transfer of deficient tertiary distribution systems to the newly formed WUAs has been a problem. The repair and improvement of distributions systems are now need to be addressed as part of WUA development. Secondary repairs would be done only if there is sufficient coverage by WUAs, and tertiary rehabilitation would require contributions and design involvement by the involved WUAs. 190. On the institutional side the Water Law needs to be revised to mandate the reform of the WMOs and their effective interface with WUUAs, which would be expanded in number and coverage to service most agricultural users within the three project schemes. The plan is to consolidate the WMOs within each large irrigation scheme into a single WMO, which would become a regulated monopoly provider of bulk water to large buyers. A medium-sized WMO might, for instance, sell to 200-400 WIUAs, rather than 5,000-10,000 separate customers as at present. It would charge on a volumetric basis and be able to withhold service for non-payment. The WMOs' management boards would be part composed of members elected by users and part appointed by a new MAFWE Supervisory Office. Charges would be on a scheme-specific basis and would cover maintenance specific to each scheme. Current inflated WMO payrolls would need to be pruned by an estimated 70% or more in order to make currently insolvent WMOs financially independent and sustainable. Restructured WMOs would need to be recapitalized and have balance sheets adequate to their operations. 191. All parties now see the expansion of the WUAs as a crucial element of the irrigation strategy. A number were piloted in the first half of the IRRP and demonstrated their value and effectiveness. A very large task, which is commencing during the remainder of the IRRP, is to increase the number of WUAs to achieve full coverage of each of the three project schemes (as of February 2002, 8 WUAs with 1,850 ha had been established). Each WUA would assume management responsibility for irrigation within their service areas. It would be responsible for delivering irrigation water to all users in its area, both members and non-members, setting and collecting fees, negotiating bulk water purchase agreements with the WMO, making timely payments for water received, preserving good financial standing, and maintaining the tertiary distribution system serving its area. A key task they face is to negotiate viable 46 terms for their assumption of responsibility for the tertiary distribution system, including clear agreement on the financing of its rehabilitation and their contribution to it. Likewise, there has to be a judgment that proposed WUAs are financially and managerially sustainable before they are allowed to operate and a mechanism to ensure that they continue to operate sustainably. 192. The focus of attention on the three IRRP schemes has had a salutary effect on thinking realistically about the resuscitation of irrigation in FYR Macedonia, but several major policy areas are not addressed by the IRRP, which covers 3 schemes of 48,000 ha out of a total of 94 schemes of (theoretically) 164,000 ha. The most important unaddressed issue concerns the strategy and associated investment plan to extend irrigation to private farmers outside the service area of the three IRRP schemes (which originally estimated 24,000 private farmer beneficiaries out of 178,000 private farm families in the country). Despite the fact that individual farmers are the dominant producers of most crop and livestock varieties (Table 2, Page 12), there is little systematic knowledge about their overall irrigation situation or the extent of their use of informal, traditional irrigation technologies, including groundwater and water storage for dry-season use. If further investment is directed toward other existing formal irrigation schemes, one criterion that would be important in judging candidates for rehabilitation is the number of small farmers to be served,30 their attachment or potential attachment to the market, and their ethnic balance. Also, with large cultivated areas outside the command areas of existing or former irrigation schemes, farmer coverage rates and economic rates of return on investment need to be calculated on alternative investment proposals, including investment in informal systems. Farrmers' Associations and Cooperatives 193. In addition to older associations from pre-socialist and socialist times, 45 farmer associations were formed under the Private Farmer Support Project, bringing the tota1 number of farmers associations to more than 300. Many of the newer associations were established as part of the drive to privatize extension, with farner members expected to contribute an increasing share of the cost of accessing advice from extension staff. Though most associations tend to be commodity based, few are capable of effectively servicing their members or building coalitions with other associations in support of their objectives. A 1998 study of the law on associations and foundations concluded that the law does not remove the inhibitions to farmers' associations engaging in business and thus being able to sustain themselves with business profits. In the short-term, this has been overcome by associations registering separate businesses for profit-oriented activities. 194. The interests of enterprises are represented through associations that are included in the government structure under the still functioning Macedonian Economic Chamber of Commerce (MECC). The MECC claims to represent the interests of small farmers, although it has registered only one private farmers' association. A law now before parliament will split the MECC into four chambers covering industry and trade, agriculture and forestry, tourism and crafts, all with voluntary membership. The new law also provides for regional chambers under the four main chambers. It remains to be seen whether this will result in a structure that can better represent the interests of small farmers. Individual associations need to be empowered to form larger unions that have the political and economic power to deliver their message to the wider public and to the government. Within such a reformed structure, rural leadership could also be made more effective through widespread leadership training. The PFSP is presently working with groups of farmers associations to this end. For instance, according to one proposal, there should be an umbrella fruit growers association and an umbrella vegetable growers association in each of three regions and corresponding national associations. The end result should be an infrastructure of associations with many horizontal and vertical linkages. 195. The legal structure for cooperatives should be thoroughly updated. At present FYR Macedonia 30 This was also one of the criteria in the selection of the three IRRP systems. 47 continues to use the former 1989 Yugoslav Law on Cooperatives. A 1997 study revealed that 60 of the remaining ones were more or less moribund but retained 1-30 employees, while 35 retained some land assets and were active in agricultural production, not a dynamic picture. The 1989 law is not fitted to the modem conditions of private agriculture, where effective marketing coops could have a significant role in assisting farmer-members, provide market infornation and transmit other demand-side signals. The obsolete law does not direct that cooperatives operate on the time-tested rules of Western European coops, which typically operate on a one-member-one-vote basis, with fees-proportional-to-throughput and management and membership separated. 196. Strengthening producer and trader associations is important for a number of reasons. Small farmers and traders are small individual units with very little market strength. Associations can increase their market and political power, with the result that their interests are considered by government and any big processing or buying entities in national or international markets. However, livestock, growers and traders associations have little market or political power and need to be structured into regional and national associations. For instance, according to one proposal, there should be an umbrella fruit growers association and an umbrella vegetable growers association in each of three regions and corresponding national associations. The end result should be an infrastructure of associations with many horizontal and vertical linkages. 197. When functioning well, associations can also provide their members with a range of technical, supply, packing, grading, storage, transport, credit, information, training and market facilitation services. For instance, traders hoping to sell large quantities of an export product grown by small farmers to a large EU supermarket chain might need the support of a growers association to furnish information on available supply, provide an assembly point for loads of consistent quality, and provide technical assistance to its members on how to meet the order's quality and delivery requirements. 6. STRATEGY AND RECOMMENDATIONS 198. A noncontroversial goal with wide acceptance is to engender a sustained process of rapidly increasing agricultural production in value terms and thereby raising rural incomes. The essence of the best overall strategy to do this is to set conditions for the development of clusters of private farms and agri-business that are competitive in domestic and international markets for selected agricultural products. These clusters (but not necessarily the individual farms or processors) need size, scope and the spur of competition within their ranks and from imports. They become efficient as they succeed in that competition. The task for public policy is to free the creativity of the whole population of farmers, processors, suppliers and traders and help rather than hinder the most productive producers to expand. Summary of Key Tasks for Government and Donors 199. The government and donors should focus on the following to improve the competitiveness of Macedonian agriculture and reduce rural poverty: * Carry out policy reform to reduce the distortions in the incentive and competition structure; * Make productive the resources in ex- and current AKs and in state forests; 48 o Expand rural credit and rural financial institutions; o Improve the climate for investment and SME development; • Improve irrigation and other rural infrastructure; a Develop and modernize public agricultural institutions; 3 Develop and modernize private agricultural institutions; o Alleviate poverty by increasing employment and family incomes. Reform Policy to Reduce the Distortions in the Incentive and Competition Structure 200. For small countries like FYR Macedonia, a transparent, relatively liberal trade regime - comprising a simple system of moderate tariffs - is the best instrument for an incentive system for agriculture. With moderate import protection where necessary, farmers using existing technology will have adequate incentives to produce and invest in a range of products for the domestic market as long as internal economic conditions are not badly constrained. Price signals (cushioned by tariffs) will be readily transmitted from international to domestic markets, giving producers a clearer idea of how to allocate their resources. A trade-based incentive system reduces the need for direct budgetary support in the form of subsidies and is easiest to administer. Current ad-valorem tariffs - raised even higher by specific and other levies - are much too high on most agricultural products produced in FYR Macedonia, providing protection to very inefficient farmers and severely penalizing consumers. An unintended effect of the high nominal protection is that the agroprocessing industry, insofar as it imports inputs at lower rates, receives sometimes astronomical rates of effective protection. This is not the way to create agricultural products that can compete with imports in domestic and markets or be competitive intemationally. 201. Trade Policy o Provide technical assistance to help design continued reform and liberalization of agricultural trade policy and implementation and to help firm up the basis for trade negotiations, including those with the WTO and regional trading partners. 3 Reduce tariffs on all agricultural products to moderate levels in compliance with WTO agreements. D Limit the use of tariff quotas in bilateral trade agreements and improve the transparency of quota allocation. 3 Convert bilateral preferences with regional trading partners to multi-lateral preferences. o Markedly reduce transit time at border crossings by improving border infrastructure; negotiate same with neighboring countries transited by Macedonian goods. 202. Producer Subsidies and the State Office for Commodity Reserves. Direct support for agriculture from the MAFWE budget is no longer a significant source of distortion in agricultural markets (because the overall level of spending is low). Most of this support is directed to market-neutral activities associated with plant and animal breeding, irrigation, and institutional support. In contrast, the activities of the SOCR continue to severely distort the incentive structure and markets for wheat and tobacco. 49 * Reform the conceptual and legislative basis for operation of the SOCR to limit its mandate to strategic reserves and reduce the number of agricultural commodities covered. * Transfer responsibility for price support to the MAFWE. * Reduce the support price below import parity and consider eventual phase-out. Carry out reforms of the state reserve system. This should be done in conjunction with reform in the wheat import regime. The tariff should be lowered and all wheat imports subject to it. * End the guaranteed price program for tobacco. This commodity has long-standing export markets and so is efficient in international markets over the cycle. It also has a strong tradition of private investment and thus has minimal need for direct government support. All processing firms should be privatized. 203. Competition Policy * Provide technical assistance to propose improvements in legal framework and enforcement to reduce monopolistic practices in agri-business, especially agroprocessing and input supply. Make Resources in Ex- and Current AKs and State Forests Productive 204. A considerable amount of the productive land and agricultural human resources of the country are tied up in the remaining AKs and the ex-AKs that are crippled by poor corporate governance and high social/political obligations. Increased investment is unlikely to be available for most of these firms. Much of the buildings and equipment they possess would be of little value in competitive agri-business, but the land and skilled manpower should be freed up to be used productively by private entrepreneurs. The poor performance of most of the ex-AK processors is also inhibiting improvement in the farming sector. High tariffs, roll-overs of non-performing loans and non-payment for rent of state-owned land are the major mechanisms keeping them from bankruptcy. The State Forestry Enterprise continues to stifle competition in exploiting the country's large forest resources. * Provide technical assistance to analyze the use of state-owned land by agricultural enterprises, propose what terms the government should impose so as to receive market lease rates, and review and amend the legislation associated with the use of state-owned land. * Tighten commercial bank prudential regulation so as to prevent new and roll-over loans being made to the worst cases and insulate lending from political pressure. * Consider privatizing the remaining 25 AKs, most of which are not commercially viable, by dissolution and auction of assets. * Reform bankruptcy procedures so that ex-AKs in financial trouble can be kept as going businesses if they would be viable under new management. * Provide management consulting assistance to criteria-selected potentially viable agribusiness ex-AKs to analyze their business plans, corporate governance, social obligation commitments, investment needs and proposed restructuring plans. * Implement land taxation, both for enterprises and individuals to give AKs and ex-AKs an incentive to divest themselves of unproductively used land, which would then be available to the family farming sector. "**==>This document did not complete OCR process. <==**"