Croatia's EU Accession: Socio-economic Assessment of Farm Households and Policy Recommendations

Croatia is very close to meeting the requirements necessary for becoming a member of the European Union (EU). On February 6, 2008, the European Enlargement Commissioner Olli Rehn said that accession negotiations with Croatia are moving ahead well. As in all new member states (NMS), the agricultural sector and food processing chain are core issues within the negotiation process. Successful negotiation requires intimate knowledge of the issue at hand, including the socio-economic situation and the fears and strategies of the stakeholders, particularly small-scale farmers. This report attempts to close some of these knowledge gaps by reviewing Croatia’s rural development dynamics and farm structures, as well as agricultural and rural policies. Based on an empirical research component, the report provides unique, detailed insights into the ongoing structural change in two typical rural regions of Croatia. Special focus will be placed on socio-economic developments within farm households. Farmers’ views, perceptions, and strategies are challenged by a competitiveness analysis of Croatia’s farming sector, particularly in dairy farming. The opportunities and challenges for Croatia’s rural regions are discussed vis-à-vis lessons learnt from the Slovenian accession experience. This executive summary provides a review of the major findings and policy recommendations. The recommendations follow those of the OECD in placing emphasis on regions rather than sectors and investments rather than subsidies in rural development policy. The recommendations refer to two important policy fields: (1) policies to develop, structurally adjust and diversify agriculture, and (2) territorial approaches for policies to create and secure employment (the wider rural economy). Main findings The findings for Croatia are derived from the analysis of secondary sector data as well as micro-economic data from approximately 140 farm households surveyed in 2007. Furthermore, a domestic resource costs (DRC) analysis looked into the competitiveness of the Croatian small-scale dairy sector. Expert interviews in Slovenia provided valuable lessons with regard to negotiating the Agricultural Chapter with the European Commission (EC). In the following, the main findings for accelerating both, rural and agricultural sector development, and smoothing the negotiation of the agricultural chapter are summarised: Small-scale family farms. A considerable number of farms are quite small, with three hectares or less. Few family farms exceed ten hectares. Dairy farms. Dairy production plays an important role in Croatia's agricultural sector; with roughly 25% of total revenue, it is the largest sub-sector. Further, 95% of dairy cows are kept in family farms, with an average of about three heads per farm. The DRC analysis was based on a small sample of farms which were divided into two groups: those with less than 16 cows (four on average), and those with 16 or more (an average of 47).The DRC value for the former was 3.0, and the latter was 2.2. These high figures indicate that all dairy farmers must greatly improve their efficiency. Compared to Slovenian dairy farmers, Croatian milk producer use feed, especially feed concentrates, in an inefficient way. Improvements can especially be made by investing in better breeds and cowsheds. Also, investments will be needed for reaching EU hygiene standards in the coming years. This will put an additional burden on dairy farms for staying in business. Food processing chain. Analysing revealed comparative export advantage indicators of agro-food commodities showed that the processing industry is rather efficient; the deeper the level of processing the more competitive Croatia’s food sector becomes on EU markets. This observation is made for trade in agro-food in general as well as in dairy products. Types of farms. Seventy-five per cent of all farms surveyed are part-time farms. Based on the share of receipts from non-farm activities, we grouped the part-time farms into those with 10-50% (called ‘complementing’) and those with more than 50% (called ‘subsidiary’). Twelve per cent of the farms in the sample are complementing farms and 63% are subsidiary farms. Overall, non-farm income accounts for over a third of the total income over all types of farms. Professional training, education & farm-related topical information. Successful farm and non-farm businesses require improved access to appropriate professional training, education and topical information. Compared to Slovenia, professional training in agriculture does not play a big role in rural Croatia. The average level of educational attainment is not fully satisfactory, with only 36% of farm family members having attended primary school and 46% having had secondary school education. Family farm income. Even if most part-time farms derive only a supplementary income (less than 50%) from farm activities, their livelihood is interwoven, to a certain extent, with their (semi-)subsistence farm activities. Especially when non-farm activities are badly paid and insecure, farming activities are maintained as a fallback option. This makes it quite unlikely that the subsidiary farms will give up farming in the medium-term. Full-time farms are economically much better off and more productive when it comes to cultivating their land: the average annual per capita income within full-time farm families is € 7,675, followed by part-time farms with € 6,386, and subsidiary part-time farms trail far behind with € 4,718. Farm returns to land and labour. Especially full-time farms show higher returns to land and used labour, probably due to a more intensive production, particularly in the animal production, and also a better endowment with physical capital: Their economic performance is reflected by, on average, four times higher incomes per hectare compared to small-scale subsidiary farms. Nevertheless, a poorly-functioning land market restrains land consolidation and thus productivity. Farm labour productivity presently appears to be insensitive to education levels. However, non-farm labour returns increase along with increased years of education. Thus, the importance of professional training and overall educational attainment cannot be overemphasised in the process of a shrinking farm sector and a non-farm sector that becomes more decisive for rural livelihoods. Farm expansion, farm exit and diversification. Approximately one-tenth of all surveyed farms intend to expand their farming activities within the next five years, and roughly the same share claim they plan to give up farming. Determinants that increase the chance that a farm will be expanded are a positive perception about the capability of the farm to adapt and good infrastructural links, as well as access to land. An exit from farming becomes more probable if the farm is located closer to an urban centre (here, Zagreb), which may facilitate access to lucrative non-farm activities. Also, negative attitudes towards farming, unfavourable farm prospects and no access to subsidies work in the same direction. However, a significant share of farm families (almost 40%, including hobby farmers) plans to take steps towards diversification and non-farm incomes. If individual employment choices are considered, pluriactivity, i.e. the combination of farm and non-farm work, can be seen as a first step out of farming: 25% of pluriactive people intend to concentrate on non-farm work in the future, and those who leave the farming sector prefer not to return. However, even if (semi-)subsistence farms disappear gradually, developments in Slovenia show that hobby farming could become a non-negligible factor keeping small farms alive. Almost 20% of the family farms plan to continue at a (semi-)subsistence level or as hobby farmers. This means that in the medium-term these farms will be relatively insensitive to policy measures directed towards structural change. Expectations from EU accession. The attitudes of Croatian farmers towards the anticipated EU accession are largely negative. There are very few positive aspects, such as law and order that are expected. Among the negative aspects, the one most frequently mentioned was that farmers consider EU regulations as a threat to the survival of their farms. Farmers also fear the prospect of becoming uncompetitive due to open markets and their small-scale farming structure. These fears, however, do not prompt the Croatian farmers to apply for the Instrument for Pre-accession Assistance (IPA), which co-finances farm investments and investments to upgrade community standards. The Slovenian example shows that the opinion towards the EU and its agricultural policy could improve as soon as the (financial) benefits become obvious to the farmers. Therefore, the negative attitude could also be seen as a sign of lacking information. Policies versus politics in the negotiation process of the Agricultural Chapter. One general important lesson from the Slovenian accession experience is that the harmonisation of legislation is not only an issue of adopting the relevant laws and regulations. It is also about the harmonisation of administration and policies. Although the EU clearly carries more weight in the negotiation when it comes to influencing the content of the Agricultural Chapter, it is important that the national interest groups formulate their policy objectives very clearly, set aside national political concerns, and act in concert. Consequently, the negotiation team must have a common strategy and rely on the same background information for the negotiations. Policy pointers The following summarises the policy recommendations derived from the above findings. Recommendation 1: Balanced structural change in agriculture Agricultural sector measures and in particular agricultural subsidies alone should not constitute the public policy portfolio for rural regions. In Croatia this is recognised, but traditional sector measures still play an important role. Small-scale farm structures lacking the prospect of future prosperity are the main problem in Croatia. Therefore, structural policies should be at the heart of sector-related policies. With that in mind, seven fields of actions are critical: Factor market mobility. Land markets are not fully functional. A careful land consolidation policy would therefore be helpful. Inter-sectoral labour mobility is already a reality. Nevertheless, professional training and education is crucial, particularly for successful participation in the non-farm sector. 'This implies the need to improve access to education and professional training at all age levels. It may also somewhat dampen if not reverse the rural-urban migration trend to some degree. Croatian farmers hardly participate in the capital (credit) market. Whether this is due to reluctance on the farmers’ side or a lack of financial intermediaries specialising in micro-credit requires further analysis. In any case, access to credit is important for structural adjustment. Badly designed credit schemes can become a burden on public budgets, therefore, any endeavour in this direction needs to draw on successful experience from other countries. Farm enterprise development. Full-time farmers (25% of the sample) do relatively well compared to part-time farmers. Eleven per cent of the surveyed farm families intend to expand farming within the next five years. This should be the main target group for the extension service and investment-related policy measures. If investments are credit-financed, adequate business plans are crucial and care should be taken not to put the farms at too much risk if the investment fails. Innovative credit and micro-credit schemes may be an option here. Dairy farming. The analysis of Croatian dairy farming has revealed that it is not competitive at present. Certainly the larger dairy farms are somewhat more competitive. However, improving the milk collection infrastructure and investing in dairy processing (though presently rather efficient compared to primary production) could improve the competitiveness of the larger units at least. If Croatia wants to maintain its dairy sector and allow for the prosperity of dairy farmers, the output per unit of land and labour must considerably grow. This can only be attained through better management through e.g. improved extension work and investment into the production structure. However, introducing the milk quota system of the EU in Croatia is not recommendable for now. This would be a burden on the budget, as it implies heavy investment in the administration and would last only for some years. Farm subsidies. A high level of farm subsidies paid from EU funds is certainly one of the goals of the negotiations. Yet, when choosing finance measures, it is important to avoid common pitfalls. Economic theory provides two rationales for government intervention: correction of market failures and income redistribution. However, many subsidies distort markets. Often they are not precisely enough targeted and, because of this, tend to consolidate structures instead of promoting structural change. Generally, all farm subsidies should be brought in line with EU measures as early as possible, which means that if direct farm support is desired, Croatia should opt for direct payments which are decoupled as much as possible. Direct payments have proven useful for securing certain income levels, for example in Slovenia. But compensation payments which aim at tiding over the adjustment pressures should be designed according to a clearly-defined transitional period; i.e. such payments should not be made permanent since their distortion potential would increase and lead to a slowdown of structural change. Exit schemes for farmers. Only about 10% of the farms want to exit farming within the next five years, while 45% of the farms intend either to retain their present state of development or continue as hobby farmers. However, for successful structural change, farm exit is crucial as a driver of farm development. Incentives are needed to convince farmers to give up farming and release their land to those who are willing to expand. Therefore, (semi-) subsistence and hobby farms should be excluded from regular farm subsidy programmes. Positive incentives for farm exit could be set, for example by an early retirement scheme as offered within the EU, or other monetary or social benefits that are offered under the condition of giving up farming. Food processing sector. Generally, the question applies, and could not be finally answered in this study, whether the lack of competitiveness at farm level can be compensated somewhat at processing level. It is likely, however, that this assumption is true to some degree, as with increasing depth of processing Croatia’s food sector becomes more competitive on EU markets. However, this issue should be looked into more closely in order to further accelerate structural change in the agricultural sector. Agricultural extension service. The manpower and background of the extension service in Croatia is sub-optimal and needs to be strengthened substantially in order to come to terms with the challenge of structural change in the Croatian farm sector. As of 2007, 215 extension workers (thereof 198 agricultural specialists) within the Croatian Agricultural Extension Institute (CAEI, founded in 1997) potentially service 448,000 thousand family farms. This means every extension worker is responsible for more than 2,000 farms. Obviously, the overwhelming task ahead requires many more qualified extension workers. These ought not to be solely experts in agronomy, but also agricultural economists and persons experienced in regional rural development. Furthermore, to advise interested farmers in the correct application procedures, the development of business plans, and the assessment of associated risks, these workers will need professional training with regard to the various national and/or EU investment schemes that are available to the farmers. Recommendation 2: The wider rural economy As stated earlier, rural development is a spatial challenge. Apart from sectoral policies for agriculture and agro-food processing, policies addressing all rural sectors are at the heart of sustainable rural development. Five actions are important in this area: Rural employment opportunities. Farming can provide a prosperous future for many, but not for all. For those who want to diversify into the rural non-farm sector, professional training and education is crucial. Hence, it is necessary to provide opportunities to improve human capital at all age levels. Unemployment is still rather high at around 11% of the workforce. This situation, combined with the relatively low level of education among the farming population, dampens the prospects of non-farm employment. Increasing the employment rate and improving the employability of the labour force must therefore be a key objective of social policy and labour market policy in Croatia. In order to increase employment of those with a low level of education, or of those with knowledge and skills that are not in demand in the labour market, it is necessary to continue shifting the emphasis to active forms of assistance, i.e. training and education in accordance with changing labour market needs. Policies that enable farmers to find secure and lucrative employment in the non-farm sector promote exit options as shown above. Economic development. Rural regions are heterogeneous. Therefore, little scope exists for generalist recommendations with regard to rural economic development policies. A wide variety of policy interventions may be required which should be tailored to the local necessities. Decentralised and participatory decision-making may be necessary to identify the right policy mix for each region. In this context, the promotion of local action groups (LAGs) à la LEADER (= Liaison entre actions de développement de l'économie rurale) prior to the EU accession (as done in Poland or Romania) can greatly facilitate regional policy decision-making. The challenge in this context is to ensure that more decentralised decision-making does not compromise the government’s distributional objectives. Small-scale farm families in particular may not benefit from decentralisation since it is possible that better-off farmers will be better placed to take advantage of decentralised funding and implementation mechanisms, or that within a given community the priorities of the local economic or political elite are more effectively articulated than those of the marginalised population groups. Cross border cooperation & networking. In the context of regional rural development, the work of the Regional Rural Development Standing Working Group (RRD SWG) needs to be pointed out (http://www.seerural.org). The RRD SWG was founded based on a common wish to establish an informal organisation, consisting of representatives of those institutions responsible for rural development in the respective countries and territories of South Eastern Europe (SEE), to work on rural development based on sustainable principles, through networking and permanent cooperation between all stakeholders of rural development in the region. By the end of 2008, Croatia has joined this network. Hard infrastructure and institutional environment. Although not at the heart of this analysis, experience shows that hard infrastructure (such as roads, markets and public transport, etc.) and information technologies (IT, such as telephone, internet etc.) are decisive when comparing successful regions to those lagging behind. Therefore, investments in this area should generally be of high effectiveness. Apart from regional investments in infrastructure and IT, internet access for farm households could also be supported explicitly and thus give the owners the opportunity to be informed about markets and policies relevant to them. Awareness campaigns. The rural population feels generally insecure when facing the anticipated changes that will come with EU accession. Awareness campaigns could help with both reducing fears and informing farmers and the rural population about how they can efficiently adapt to meet the demands of changing economic structures. In the farming sector, the extension service should be closely involved in such activities, including appropriate training offers for extension workers. Recommendation 3: What can be learnt from Slovenia's EU negotiation process In many aspects, the situation of Croatia vis-à-vis the EU and the country's aspirations with regard to negotiating the Agricultural Chapter is similar to that of Slovenia some years ago. Key recommendations were therefore derived from interviewing the Slovenian negotiation team and associated experts. Three actions are particularly necessary: Negotiation tactics & networking. Sound and fair negotiation tactics and networking are everything. It is very important to clearly define policy objectives and express demands for rural development funds. Negotiation tactics refer to a clear strategy, based on analytical results and political considerations, in terms of what the negotiation team should achieve, including minimum and maximum outcomes. The tactics should thus aim for a pre-defined outcome of the negotiation process. The strategy and goal ought to be backed-up by a coherent statistical data base and analytical work on simulations of possible solutions and their implications upon which the networking negotiation team and resource persons can rely. Regular consultations on results and on open questions in the negotiation process are important. It is therefore highly recommended that all relevant policy stakeholders agree on the anticipated negotiation outcome and work together to reach it. International networking in the RRD SWG may also be useful in terms of learning from other accession countries or NMS with regard to their negotiation experience. Introduce the main lines of the CAP soon. Based on the experience of Slovenia, Croatia should strive to introduce the main lines of the reformed CAP before the final stage of negotiations, also by utilising the national budget. This not only signals the EU that Croatia is ready to accede, but also provides the relevant policy-makers some leeway to gain experience prior to accession, which generally allows smoother adaptation. In addition to harmonising the legislation and adoption of relevant laws and regulations, particularly important are the efficient implementation and harmonisation of institutions and policies. When implementing CAP measures, it is important to assure the participation of agricultural extension services from the very beginning. Rural development funds. Similar to Slovenia, it makes sense for Croatia to place a strong focus on a high level of rural development funds. Rapidly equalising the level of payments with other EU countries could also be desirable in terms of income goals, although the trade-off with structural goals might be considerable. Therefore, contrary to Slovenia, Croatia would be well-advised to concentrate not so much on less-favoured area payments, but rather on measures related to regional development that encompass the wider rural sector, i.e. including non-farm issues. Generally, it is important to ensure that the chosen policy measures are not contradictory. Since the cause and effect of certain measures are not always identifiable, and results may only appear in the medium- and long-term, indicators that fairly capture policy impacts should be defined.