Comparative Advantages, Transaction Costs and Factor Content in Agricultural Trade:

Empirical Evidence from the CEE

Pavel Ciaian, d'Artis Kancs and Jan Pokrivcak

Work in progress!

Catholic University of LeuvenSlovak University of Agriculture

Background

1 Introduction

• Factor content in the agricultural good trade little researched yet;virtually no studies on factor content in the CEE trade

• Because of high share of agriculture in GDP and employmentfactor content in agricultural trade more important in CEEthan in developed countries

• There is evidence that transaction costs and market imperfectionsdistort CEE respecialisation and reorganisation from central planning to market economies (e.g. Ciaian and Swinnen AJAE 2006)Do they also affect the specialisation and the pattern of trade?

Objectives

1 Introduction

• Examine factor content in the CEE agricultural goods

• Farm output

• International trade

• Examine the potential role of transaction costs and market imperfections

• The potential role of transaction costs in determiningfarm output

• The potential role of transaction costs in determiningagricultural trade

Data

• Farm Accountancy Data Network (FADN)Agricultural production data by farm type, region and sector

• GTAP Data BaseTrade and consumption data, and input-output coefficients

• COMEXT (Eurostat)External trade between all EU member states and withnon-member countries in CN, SITC Rev2, SITC Rev3

1 Introduction

Coverage

• Cross section for 2004

• 8 CEE accession countries (Czech Republic, Estonia, Hungary,Latvia, Lithuania, Poland, Slovakia and Slovenia)

• 66 FADN regions

• 7 sectors (cereals, oilseed and protein crops; root crops andtechnical crops; horticulture; permanent crops; milk; grazing livestock;sheep and goats; pigs/poultry) + rest of agriculture

1 Introduction

Factor content in agricultural goodsof CEE transition countries

2 Factor content in the CEE agricultural goods

• Examine factor content in farm output

• Examine factor content in agricultural trade

• Imports and exports of factor services

• Net trade of factor services

Factor content in farm output in 2004

Land Labour Capital

Czech R. 2.5 22.0 75.5

Estonia 0.9 21.2 77.9

Latvia 1.8 19.6 78.6

Lithuania 3.2 25.7 71.1

Hungary 4.6 17.9 77.5

Poland 2.8 21.1 76.1

Slovenia 1.7 35.5 62.7

Slovakia 3.0 15.9 81.0

Percentage share in total costs. Source:Own

calculations based on the FADN (2008) data.

2.1 Factor content in farm output

Labour and land ratio in agriculturalgoods and farm structure in CEE

CZE

SVK

SVN

POL

LTU

LVA

ESTHUN

SVN

POL

LTU

EST

LVA

CZE

SVK

HUN

Labour/ha = 0.047x2 - 3.9851x + 123.58

R2 = 0.80470

50

100

150

200

250

0 20 40 60 80 100 120IF share in land use, %

Lab

ou

r p

er h

a in

pro

du

ctio

n

0

0.2

0.4

0.6

0.8

UA

A p

er c

apit

a, h

a

Labour/ha UAA per capita (ha)

2.1 Factor content in farm output and farm structure

Labour content in agricultural goodsand farm structure in CEE

HUN

EST

LVA LTU

POL

SVN

SVK

CZE

HUN

SVKCZE

LVA

EST

LTU

POL

SVN

Labour share = 0.1606x + 23.333

R2 = 0.6064

15

20

25

30

35

40

45

0 20 40 60 80 100 120

IF share in land use, %

Lab

ou

r sh

are

in p

rod

uct

ion

0.2

0.3

0.4

0.5

0.6

0.7

0.8

UA

A p

er c

apit

a, h

a

Labour cost share UAA per capita (ha)

2.1 Factor content in farm output and farm structure

Land Labour Capital

Imports Exports Imports Exports Imports Exports

Czech R. 2.4 3.0 31.8 26.1 65.9 70.9

Estonia 0.9 1.0 27.2 25.6 72.0 73.4

Latvia 2.1 2.5 27.6 26.3 70.3 71.2

Lithuania 3.1 3.2 25.8 24.0 71.1 72.8

Hungary 4.1 4.3 22.0 20.4 73.9 75.3

Poland 3.3 3.0 23.9 24.0 72.8 73.0

Slovenia 2.8 2.5 30.7 29.8 66.5 67.8

Slovakia 3.4 4.0 15.2 16.6 81.4 79.4

Percentage share in total costs. Source:Own calculations based on

GTAP (2008) and Eurostat (2007) data.

2.2 Factor content in agricultural trade

The direction of trade in factor services:agricultural commodities in 2004

Net trade of factor services:agricultural commodities in 2004

Cze

ch R

.

Est

onia

Latv

ia

Lith

uani

a

Hun

gary

Pol

and

Slo

veni

a

Slo

vaki

a

Land 0.19 (0.36)

Labour -1.43 (2.04)

Capital 1.24 (1.93)

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

Net

fac

tor

trad

e, % Land 0.19 (0.36)

Labour -1.43 (2.04)

Capital 1.24 (1.93)

2.2 Factor content in agricultural trade

Farm structure and the content of factor services in agricultural trade in 2004

HUN

ESTLVA

LTUPOL

SVN

SVK

CZE

CZE

SVK

HUN

LVAEST

LTU POL

SVN

y (imports) = 0.0008x + 0.3026

R2 = 0.0942

y (exports) = 0.0012x + 0.255

R2 = 0.3491

0.15

0.2

0.25

0.3

0.35

0.4

0.45

0.5

0 20 40 60 80 100 120IF share in land use, %

Lab

ou

r/ca

pit

al-l

and

rat

io i

n t

rad

e

Imports Exports Trend (imports) Trend (exports)

2.2 Factor content in agricultural trade and farm structure

The potential role of transaction costsand market imperfections in determining

trade of factor services

3 The role of transaction costs and market imperfections

• Examine the potential role of transaction costs and marketimperfections in determining farm production

• Examine the potential role of transaction costs and marketimperfections in determining agricultural trade

Farm organisation and size in CEE in 2004

IF share land IF share output Average farm size

% % ha

Czech R. 11.8 19.5 250.1

Estonia 63.5 48.9 119.6

Latvia 55.2 63.9 64.0

Lithuania 77.4 83.8 42.5

Hungary 36.2 47.5 53.2

Poland 94.5 96.2 15.8

Slovenia 99.9 99.9 12.7

Slovakia 10.8 13.6 535.5

Source:Own calculations based on the FADN (2008) data.

3.1 Farm organisation and production technology

Factor intensity differences in productiontechnology between IF and CF

CF IF

2.3

7.7

17.3

7.1

14.1 14.0

6.9

0

12

24

36

48

60

Cereals,oilseed &protein

Root &technical

crops

Horticulture Permanentcrops

Milk Grazinglivestock

Pigs &poultry

Lab

ou

r/ca

pit

al

rati

o,

%

3.1 Farm organisation and production technology

Productivity and labour intensityby farm type in 2004

Labour cost share Profitability IF/CF

10% 0.07

10-20% 0.14

20-30% 0.24

30-40% 0.38

40-50% 0.59

50-60% 0.84

60% 1.26

Source:Own calculations based on FADN (2008) data.

3.1 Farm organisation and production technology

The relative endowment of CEE's withland, capital and labour in 2004

Arable land/worker Capital/worker Agricultural labour

Ha Thousand Euro %

Czech Republic 0.36 4.07 9.6

Estonia 0.57 3.41 16.3

Latvia 0.71 3.28 19.5

Lithuania 0.76 2.92 18.0

Hungary 0.58 4.06 17.5

Poland 0.43 4.36 25.8

Slovenia 0.25 6.54 8.4

Slovakia 0.36 3.95 10.7

Source:Own calculations based on the Eurostat (2008) and FAO (2008) data.

3.1 Factor endowment

Labour content in agricultural goodsat farm gate in CEE, 2004

17.1(3.49)

22.7(4.62)

34.6(9.01)

33.9(6.16)

24.8(4.50)

27.9(6.47)

14.6(4.53)

0.0

10.0

20.0

30.0

40.0

50.0

Cereals,oilseed &technical

Root &technical

crops

Horticulture Permanentcrops

Milk Grazinglivestock

Pigs &poultry

Lab

ou

r co

nte

nt

in a

gri

cult

ura

l p

rod

uct

s, %

3.1 Factor endowment

Comparative advantages of farmorganisation and labour endowment

Slovakia

PolandSlovenia

Czech Rep.

Hungary

Lithuania

Latvia

Estonia

0

50

100

0.0 15.0 30.0

Agricultural labour endowment

Share

of

IF f

arm

s, %

3.1 Relative comparative advantages of the CEE’s agriculture

Farm type differences in cereal, oilseedand protein crop production

and productivity in percent, (IF<0<CF)

SVK 6

POL 788

HUN 12

HUN 11

CZE 4100

- 50%

- 30%

- 10%

10%

30%

50%

CF- IF output share CF- IF profitability

3.2 Transaction costs of farm (re)organisation

Farm type differences in root andtechnical crop production

and productivity in percent, (IF<0<CF)

3.2 Transaction costs of farm (re)organisation

HUN 9

CZE 2100

SK 7

HUN 11HUN 12

POL 788

- 50%

- 30%

- 10%

10%

30%

50%

CF- IF output share CF- IF profitability

Farm type differences inhorticultural production

and productivity in percent, (IF<0<CF)

3.2 Transaction costs of farm (re)organisation

CZE 6200

HUN 3

POL 793LVA 11

- 50%

- 30%

- 10%

10%

30%

50%

CF- IF output share CF- IF profitability

Farm type differences inpermanent crop production

and productivity in percent, (IF<0<CF)

3.2 Transaction costs of farm (re)organisation

HUN 3

LVA 11POL 803

HUN 11

POL 788

- 50%

- 30%

- 10%

10%

30%

50%

CF- IF output share CF- IF profitability

Farm type differences inmilk production

and productivity in percent, (IF<0<CF)

3.2 Transaction costs of farm (re)organisation

POL 796

LVA 40

CZE 5100

HUN 12

SVK 6

- 50%

- 30%

- 10%

10%

30%

50%

CF- IF output share CF- IF profitability

Farm type differences ingrazing livestock production

and productivity in percent, (IF<0<CF)

3.2 Transaction costs of farm (re)organisation

CZE 5100

SVK 5

POL 796

CZE 4100

- 50%

- 30%

- 10%

10%

30%

50%

CF- IF output share CF- IF profitability

Farm type differences inpig and poultry production

and productivity in percent, (IF<0<CF)

3.2 Transaction costs of farm (re)organisation

POL 803

POL 789

HUN 14

CZE 5200

- 50%

- 30%

- 10%

10%

30%

50%

CF- IF output share CF- IF profitability

Conclusions

• Factor content in the CEE agricultural trade rather similarbetween exports and imports

• Technological differences and factor endowment are weakdeterminants of agricultural trade in CEE

• Transaction costs can explain a significant portion of mismatchbetween the specialisation pattern suggested by the theory ofcomparative advantages and the specialisation pattern observedin CEE

4 Conclusions and policy implications

Policy implications

• Optimisation in farm organisation would better employ region andcountry comparative advantages (both technology and factorendowment) and hence increase factor rewards

• The agricultural policy in CEE need to be aimed at decreasing transaction costs rather than fixing prices and distorting agricultural, markets or supporting farmers through direct farm payments

4 Conclusions and policy implications

Thank you for attention!

Output share and profitability ofcereal, oilseed and protein crop

production by region in 2004

Sectoral profitability

Region's top profitability

0

15

30

45

60

CZ

E 2

10

0

CZ

E 3

20

0

CZ

E 4

20

0

CZ

E 5

20

0

CZ

E 6

10

0

CZ

E 7

10

0

CZ

E 8

10

0

HU

N 1

3

HU

N 1

1

HU

N 8

HU

N 2

0

HU

N 1

4

HU

N 5

HU

N 1

2

HU

N 1

5

HU

N 3

HU

N 6

LVA

11

LVA

20

LVA

40

LVA

52

PO

L 7

87

PO

L 7

89

PO

L 7

92

PO

L 7

94

PO

L 7

97

PO

L 7

99

PO

L 8

02

PO

L 8

04

SV

K 2

SV

K 4

SV

K 6

SV

K 8

Sh

are

of

cere

als

and

oilsee

d, %

0

30

60

90

120

Pro

fita

bilit

y,

%

3.3 Transaction costs of inter-industry (re)specialisation

The classification of sectors based on FADNSector FADN classification

Cereals, oilseed and protein crops 13. Specialist cereals, oilseed, protein crops

Root crops and technical crops 141. Specialist root crops

142. Cereals and root crops combined

143. Specialist field vegetables

144. Various field crops

Horticulture 201. Specialist market garden vegetables

202. Specialist flowers and ornementals

203. Generalmarket garden cropping

Permanent crops 31. Specialist vineyards

32. Specialist fruit and citrus fruit

33. Specialist olives

Milk 41. Specialist dairying

Grazing livestock 42. Specialist cattle-rearing and fattening

43. Cattle-dairying, rearing and fattening

44. Sheep, goats and other grazing livestock

Pigs and poultry 50. Specialist granivores (pigs and poultry)

Rest of agriculture 60-82. Rest of agricultural activities