Market Imperfections and Subsistence Farming: The Case of Kosovo

Rural areas in Kosovo, although covering 60 per cent of the population, do not contribute much to the economic growth. One of the reasons for this situation is that agriculture is stagnating because most of the farms produce for self-consumption. Imports are thus required to meet the urban demand, particularly of wheat, milk and dairy products (Lingard, 2003). Transforming agricultural households into more commercialised farm operators would help generate additional income in rural areas. This paper investigates whether there are market deficiencies on input or output side, which would require government intervention in order to facilitate farm commercialisation. Agricultural households might not have access to output market due to an underdeveloped downstream sector and a lack of contractual relations with processors and traders. On the other side, local producers might not be preferred in comparison to imports as their production level is low with unsatisfactory and variable quality due to constraints on the input markets. This might be the case in Kosovo due to a lack of off-farm opportunities (and thus oversupply and underemployment of labour on-farm), a limited access to credit (resulting in underinvestment and low quality inputs used on-farm) and a high land fragmentation but missing institutions for land consolidation. The only exception is a pilot project Agriculture Land Utilisation project (ALUP) funded by the European Agency for Reconstruction (EAR) which mainly provides technical assistance but does not have the financial capacity to proceed with a wide coverage of land consolidation in practice. To answer these questions, data from the Agricultural Household Survey (AHS) of 2004 are used and a methodology derived from a household model framework is applied.