Foreign Investment and Land Acquisitions in Eastern Europe: Implications for Africa

Foreign Investment and LandAcquisitions inEastern Europe:Implications for AfricaPresented by: Jo Swinnen LICOS Centre for Institutions & Economic Performance KU Leuven & Centre for European Policy Studies (CEPS) www.agrodep.org AGRODEP Workshop on Foreign Direct Investment and Land Markets: Challenges and Opportunities for Africa June 8, 2011 • Dakar, Senegal Please check the latest version of this presentation on: http://www.agrodep.org/first-annual-workshop

Foreign Investment and Land Acquisitions in Eastern Europe : A iii i E E Implications for Africa p JO SWINNENLICOS Centre for Institutions & Economic Performance f i i & i f KU Leuven & Centre for European Policy Studies (CEPS)AGRODEP ‐ IFPRI Conference, June 2011, Dakar Senegal

outline• CEE vs SSA : similarities & differences• Land FDI in CEE, concerns & policies d i C & li i• FDI Spillovers (capital, technology & productivity)• An Example of “Land Grabbing” from Senegal p g g

Similarities between CEE & SSA Similarities between CEE & SSA• Major shock induces rapid FDI inflow Major shock induces rapid FDI inflow• Major income gaps with “FDI source countries”• Underperforming agri‐food system d f i if d• Undercapitalized, low technology, know‐how, … • Need for integration in international markets• Poorly developed land rights Poorly developed land rights• Poor/not functioning land markets

DifferencesCEE : CEE :• higher incomes; • Better infrastructure & human capital Better infrastructure & human capital• FDI to (also) supply local markets• FDI i FDI primarily in food industry and agribusiness il i f d i d t d ib i• Objections from farmers and land owners• Objections initially driven by ethnic/border disputes

FDI in agriculture (EURO MN)1000 Abania Bulgaria 900 Czech R bli C h Republic 800 Estonia 700 Croatia Hungary H 600 Lithuania 500 Latvia 400 Macedonia M d i Poland 300 Romania 200 Russia R ssia 100 Slovenia Slovakia 0 Ukraine 2003 2004 2005 2006 2007 2008 2009

Yearly inflows of FDI (million US $) per region, 1970 – 2006 1600000 Africa 1400000 1200000 Latin America and Carribean 1000000 Asia and Oceania 800000 600000 Transition countries 400000 200000 Developed countries 0 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 197 197 197 197 197 198 198 198 198 198 199 199 199 199 199 200 200 200 200Source: Calculated from UNCTAD

FDI stocks as percentage of GDP, 1980 – 2006 40 35 Developed Countries p 30 Africa 25 20 Latin America and the Caribbean 15 Asia and Oceania O 10 5 Transition Countries 0 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005Source: Calculated from UNCTAD

FDI flows compared to ODA flows to developing countries1970 ‐ 2006 Resource flows to developing countries ((US $ billion)) p g 1970 1975 1980 1985 1990 1995 2000 2003 2006 FDI 3.9 39 9.7 97 7.7 77 14.2 14 2 35.9 35 9 116.0 116 0 256.1 256 1 178.7 178 7 379.1 379 1 ODA 5.4 9.2 17.0 21.2 38.5 40.5 36.1 49.7 77.0Source: Calculated from UNCTAD

Industries offering the best opportunities for FDI in SSA Source: UNCTAD

Foreign acquisition of land in CEE Foreign acquisition of land in CEE• Objections particularly strong where ethnic/border disputes• Not a major issue, until EU Accession: – Single market regulation since 1992 in EU g g – In principle, removes any objection against foreign ownership of land (part of capital market regulations !)• => temporary derogations p y g

Legal restrictions Legal restrictions1. Aft EU After EU accession, foreigners can not purchase agricultural i f i t h i lt l land for a transitional period in the NMS7. 2. The transitional period is 7 years (12 years for Poland). h ii l i di ( f l d)3. There are differences between the NMS7 in the implementation of these restrictions 1. in the way ‘foreigners’ are defined 2. in conditions for foreigners to acquire land4. There are generally no restrictions on renting agricultural land to foreigners.

Conceptual issues• Land transactions stimulate development by: •Shifting land to most productive users •Allow the exchange of land when the off‐farm economy develops d l •Facilitate the use of land as collateral• Hence, in principle, any restrictions that p p y constrain land exchanges and the optimal development of the land market would also p negatively affect development.

• To what extent is the restrictions on foreign ownership really affecting the efficiency of land ownership really affecting the efficiency of land exchanges and of land allocations, and productivity growth? – Look at broader perspective of a variety of factors that affect the functioning of land markets, in general and in the NMS7 more specifically. p y • Restrictions on foreign OWNERSHIP, not on USE • Other factors affect land transactions  Constraints in other markets (eg credit)  Transaction costs  Imperfect property rights  Spill‐over effects !!

Land sales versus land rental Land sales versus land rental• Are restrictions on ownership important for land Are restrictions on ownership important for land use ?• How important is land ownership in land use? p p

Share of rented land (%) 2005 2007Slovakia 91 89Czech Republic 86 83Malta 80 81Bulgaria 76 79FranceF 72 74Belgium 67 67Germany 62 62Luxembourg 54 57Hungary 57 56Cyprus 50 54Estonia 48 50Lithuania 53 48Sweden 40 39Finland 34 34Greece 32 32United Kingdom 31 32Denmark 25 29Slovenia 30 29ItalyIt l 23 28Austria 26 27Spain 28 27Latvia 24 27Netherlands 26 25Portugal 24 23Poland 20 20Ireland 18 18Romania 14 17

Land Tenure and Farm Structures (% single holder in land use) (% single holder in land use) 2003 2005 2007Ireland 100 100 100Greece 100 100 100Luxembourg 100 100 100DenmarkD k 97 98 95Slovenia 94 95 95Norway 96 95 94Malta 92 93 93Netherlands 92 92 93CyprusC 93 93 92Finland 93 92 91Latvia 89 90 91Belgium 92 92 90Poland 88 90 90United Ki dU it d Kingdom 89 85 87Italy 88 82 87Lithuania 88 88 86Sweden 81 82 81Austria 83 83 81PortugalP t l 77 75 72Germany 69 69 68Spain 69 69 68Romania 55 65 65Estonia 59 56 52Hungary 50 49 48Bulgaria 42 47 47France 54 50 46Czech Republic 28 29 29Slovakia 15 18 20

Land Tenure and Farm Structures in Romania i i 100Sh are o wn ed l an d in to tal u sed lan d (% ) % 90 80 70 60 50 40 30 20 10 h 0 less than 1-2 ha 2-5 ha 5-10 ha 10-20 ha 20-30 ha 30-50 ha 50-100 ha More 1 ha than 100 ha h Farm size

EURO/ha 0,00 5000,00 10000,00 15000,00 20000,00 25000,00 30000,00 30000 00 35000,00 40000,00 45000,00 Belgium-20 006 Denmark-20 07 Germany-20 06 Ireland-20 05 Spain-20 08 Italy-20 01 Lu uxembourg-20 008 Malta-20 08 Ne etherlands-200 08 Finland-20 08 Agricultral land sales prices* 08 Sweden-200United Kingdom-20 d 008Czech Republic-20 008 Latvia-20 08 008 Lithuania-20 Slovakia-20 008 Bulgaria-20 008 Land sales prices in the EU 27 Land sales prices in the EU‐27 Romania-20 008

CEE land prices and EU Accession CEE land prices and EU Accession Agricultural land sales prices - Romania 140.00 1600 120.00 1400 100.00 1200 Euro/ha 80.00 1000 60.00EURO/ha 800 40.00 600 Bulgaria (rental) 20.00 400 200 0.00 2000 2001 2002 2003 2004 2005 2006 2007 2008 0 999 1999 2000 000 2001 00 2002 00 2003 003 2004 00 2005 005 2006 006 2007 007 2008 008 2009 009 Agricultural land sales price- Lithuania Agricultural land sales price - Latvia 2400450.0400.0 2200350.0 2000300.0250.0 1800200.0 1600150.0 1400100.0 50.0 1200 0.0 1000 2000 2001 2002 2003 2004 2005 2006 2000 2001 2002 2003 2004 2005 2006 Real Prices - Lats/ha Real Price - LTL/ha

Our conclusion Our conclusion• Nature of land contracts: Nature of land contracts: – equilibrium between security of operation and allowing for adjustments to reflect changes in allowing for adjustments to reflect changes in market conditions – Multiple equilibria ? May depend on local Multiple equilibria ? May depend on local institutions etc

Our conclusion Our conclusionIf political/social opposition too strong for full liberalization: • Propose moderate changes – Politically least sensitive y – Economically most effective • Examples: – Increase minimal size which one can easily acquire (Estonian model) – Allow non‐land operation to be purchased – Establish transparent (and enforceable) medium term rental contracts p ( ) for rest of the land… • Both cases would avoid issue of “foreign take‐over” of rural g areas, but would allow foreing farms to develop based on more efficient “owned/rented” balance

Major difference between SSA and CEE • Spill‐over effects of FDI and technology Spill over effects of FDI and technology transfer etc occur via FDI in Agribusiness and Food Industry Food Industry• H Huge in agribusiness and food industry FDI in i ib i df di d FDI i CEE through supply chain restructuring & VC• => may affect optimal policies ! y p p

FDI & Supply Chain Restructuring (Vertical Coordination)• Problem: processors/traders/retailers face lack of supplies, because farms are not able to supply the type/quality of products required• Reason: factor(*) market constraints (inputs, credit, technology, …)• Solution requires some form of contracting : – Price/quality – Supplier assistance : inputs, technology, extension services, management, … » (*) output market with agribusiness ( ) p g

“Vertical coordination” includes : Vertical coordination• Input supply programs• Trade credit• Investment assistance program• Bank loan guarantee programs• Extension services (technology and management)• ..... Variations reflect market imperfections, investment security, …

Some Examples ofContracting Models d l

Proces./Retail – guaranteed supplier loans: JUHOSUKOR in Slovakia i Sl ki & KONZUM in CroatiaRetail/Processing Co. • Retailer/processor provides loan Farm guarantees f b k for bank loans to suppliers Bank

Leasing dairy equipment by joint project Wimm Bill Dann -- De Laval in Russia Processor Project Farm Equipment Seller q p

Dairy Processor Becomes Financial Institution: DANONE i Romania I tit ti in R i • Processor takes onProcessing banking function: – provides loans to p farms – based on business plans Farm – takes collateral • Provides payment Bank Input Supplier guarantee for input suppliers

Efficiency Effects• Important Direct Effects : – Enhanced QUALITY (& higher PRICES) – Increased PRODUCTIVITY – Increased INVESTMENTS• Important Indirect Effects: Spillovers – Contract replication by other companies – Farm assistance replication – Household level spillovers

Change in Quality g Q y Dairy in Poland 1996-2001 100 otal (%) 90 80 Mlekpol pShare of Extra Class Milk in To 70 Mleczarnia 60 Kurpie 50 Mazowsze M s 40 30 ICC Paslek 20 Warmia Dairy E 10 0 1996 1998 2001S

Effect on Investment :Farm cooling equipment in Poland 1995-2003 100 90Share of suppliers with own c.t. (%) 80 70 60 Mlekpol h Lowicze 50 Mazowsze 40 Kurpie s 30 20 10 0 1995 1998 2001 2003

Impact on LOANS and Investment Small farms in Polish Dairy sector Size Invests Uses loan Uses dairy Uses bank(# of (% of to invest loan loancows) total) (% of A) (% of B) (% of B) A B C D 1-5 52 54 41 506-10 78 51 43 70>10 92 74 43 75ALL 76 58 43 69

VC farm assistance : Dairy companies in CEE (Bulgaria, Slovakia Poland) (Bulgaria Slovakia, Credit Inputs Extension p Vet. Bank Total PL 50 67 50 0 50 431994 SK 0 0 83 17 17 23 BG 9 18 9 0 0 7 PL 83 100 83 17 83 731998 SK 17 17 83 17 33 33 BG 45 64 18 18 18 33 PL 83 100 83 17 83 732002 SK S 100 00 33 83 17 50 0 57 BG 82 91 73 18 36 60

Farm assistance by food companies in CIS (Armenia, Georgia, Moldova, Russia, & Ukraine) % of firms % of farmsCredit 43 51Prompt payments 42 87Physical inputs 36 53Quality control 34 78Agronomic Support 21 81Farm loan guarantees 21 15Investment loans 6 0

FDI in SSA Agric & Land : g A case from Senegal

Comparative Analysis: 3 Cases Comparative Analysis: 3 Cases Small Small‐ Industry Industry High value High value holders structure exports to EUMadagascar 100% Monopoly yesgreen beans contractSenegal green Mixed & Competition yesbeans changingSenegal cherry 0% Monopoly yestomatoes

Senegal horticultural exports 30,000 25,000 xport volume (ton) 20,000 15,000 10,000 Ex 5,000 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Year French bean Tomatoes Mango Other fruit & vegetables

Data• Research area: Senegal River Delta Research area: Senegal River Delta• Firm level interviews (Sept 2005 and March 2006)• Household survey (Febr April 2006) Household survey (Febr‐April 2006) – 2 rural communities – 18 villages 18 villages – 299 households – Recall data (2001) x

Worst Case Scenario ? tomato export in Senegal1. Poor country2. FFV sector: Increasing standards (private and 2 FFV sector: Increasing standards (private and public)3. Extreme consolidation Extreme consolidation4. Foreign owned multinational company5. Full vertical integration5 Full vertical integration6. Complete exclusion of smallholders7. FDI of land ( Land grabbing )7 FDI of land (“Land grabbing”)

Definition of Land Grabbing Definition of “Land Grabbing” 1. Large scale land acquisition (purchase or lease) by Large scale land acquisition (purchase or lease) by foreign investor for agricultural prod.2. Transnational commercial land transaction focusing on commercial nature3. Taking possession/control of scale of land which is gp / disproportionate in size to average land holdings in the region

Data• Research area: Senegal River Delta h l l• Firm level interviews (Sept 2005 and March 2006)• Household survey (Febr‐April 2006) – 2 rural communities – 18 villages 18 ill – 299 households – Recall data (2001) Recall data (2001) x

Employment S h a re o f h o u s e h o ld s 50% 40% 30% 20% 10% 0% 2003 2004 2005 2006 Year Gandon G d Ross Béthio R Bé hi Total T l• More than 3000 workers employed in 2006 p y• Almost 40% of households in the region have at least one member employed by GDS

Household participation Household participation• No bias of employment towards better‐off or more No bias of employment towards better off or more educated households• Bias towards households with smaller per capita p p landholdings

Income effects 2500 A v e ra ge tota l ho e hold in c om e 2000 (1 ,0 0 0 FC FA ) 1500 ous 1000 500 0 Total sample Households with Households without members employed in members employed in the tomato export the tomato export industry industry Total income Income from tomato export industry wages Income from farming Income from self-employment Income from other wages Non-labour income

Poverty effects 50% Sh are o f h o u seh o ld s 40% h 30% 20% 10% 0% Households without members Households with members employed in the tomato export employed in the tomato export industry industry Poverty Extreme Poverty • Poverty: 35% with vs 46% without employment Poverty: 35% with vs. 46% without employment • Extreme poverty: 6% with vs. 18% without employment

Comparative Analysis: 3 Cases Comparative Analysis: 3 Cases Small Small‐ Industry Industry High value High value holders structure exports to EUMadagascar 100% Monopoly yesgreen beans contractSenegal green Mixed & Competition yesbeans changingSenegal cherry 0% Monopoly yestomatoes

Contract motivations for farmersSub Sahara Africa Madagasc. Madagasc Senegal SenegalReasons for contracting (%) 2004 2005Stable pricesStable prices 19 45Higher income 17 15Higher prices g p 11Guaranteed sales 66Access to inputs & credit 60 63Access new technologies 55 17Stable income 66 30Income during lean period 72 37Source: Maertens et al., 2006; Minten et al., 2006

Effects on technology adoption, income & land use (biodiversity)• Land use in the off‐season on rice fields • Vegetable export contributes for 47% to household income• Additional positive effect on hh income through Additional positive effect on hh income through • technology spillovers • increased rice productivity (with 64%)• Sharp improvement in food security• Reduced pressure on forests

Table: Impact of vegetable contract‐farming on the length of the “hungry” season in Madagascar 5 4 months 3 2 1 0 currently contracted contracted similar households household households before wihtout contract the contractSource: Minten et al., 2009

Green beans in Senegal Green beans in Senegal• % rural household participation 60% 50% 40% Employed 30% Contract C t t Participation 20% 10% 0% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Income effectsA verag e h o u seh o l d in co m e (1,000 F C F A ) 7000 6000 5000 4000 3000 2000 1000 0 Total sample Non- Agro-industrial Contract participants employees farmers Total household income Income from farming Income from agr. wages Income from non-agr. sources

Poverty effects (Green beans in Senegal) 60 50 incidence of poverty lds 40 incidence of extreme% of househol (food) poverty 30 20 10 0 Scenario "No Scenario Actual situation exports" "Contract"Source: Maertens and Swinnen, 2009

Gender effectsFemale employment in Senegal horticulture export sector Source: Maertens and Swinnen, 2009

Importance of female income in total household income Case-study "Les Niayes" - all households Case-study "Senegal River Delta" - all households Transfers Total income Transfers Total income Male income Male income Female income Female income Self employment Self employment Wages - other Wages - otherWages - FFV export Wages - FFV export industry industry Farming Farming 0 500 1000 1500 2000 0 100 200 300 400 500 Household income (1,000 FCFA) Household income (1,000 FCFA) Case-study "Les Niayes" - households employed in FFV export Case-study "Senagl River Delta" - households employed in the industry FFV export industry Transfers Total income Transfers Total income Male income Male income Self employment Female income Self employment Female income Wages - other Wages - otherWages - FFV export Wages - FFV export industry industry Farming Farming 0 200 400 600 800 1000 1200 1400 1600 0 200 400 600 800 1000 1200 1400 Household income (1,000 FCFA) Household income (1,000 FCFA)Source: Maertens and Swinnen, 2009

In conclusion In conclusion• FDI is potentially major force for growth FDI is potentially major force for growth • Large‐scale foreign acquisition of land: – Serious concerns and important opportunities Serious concerns and important opportunities – Efficiency and rent distribution• Nature of land contracts: – equilibrium between security of operation and allowing for adjustments to reflect changes in market conditions – Multiple equilibria ? May depend on local institutions etc• Very little careful research – and hard to do it right• Beware of the simplistic arguments

More info1. Swinnen and Vranken, Land and EU Accession, Centre for European Policy Studies (freely downloadable from www.ceps.eu)2. Dries, L., Germenji, E., Noev, N. and J. Swinnen, 2009, “Farmers, Vertical Coordination, and the Restructuring of the Dairy Sector in Central and Eastern Europe”, W ld D l R i f h D i S i C l dE E ” World Development3. Dries, L. and J. Swinnen, 2004, “Foreign Direct Investment, Vertical Integration and Local Suppliers: Evidence from the Polish Dairy Sector”, World Development4. Dries, L. and J. Swinnen, 2010, “The Impact of Interfirm Relations on Investments: Evidence from the Polish Dairy Sector”, Food Policy5. World Bank, 2005, The Dynamics of Vertical Coordination in the Agro Food Sectors of Europe and World Bank, 2005, The Dynamics of Vertical Coordination in the Agro‐Food Sectors of Europe and Central Asia, World Bank Publications 6. Maertens and Swinnen, 2009, “Standards, Trade, and Poverty”, World Development7. Maertens and Swinnen, 2009, “Gender and Modern Food Supply Chains”, LICo Discussion Paper (www.econ.kuleuven.be/licos)8. Maertens, Colen and Swinnen, 2011, “Globalization and Development in Senegal: A Worst Case Scenario ?”, European Review of Agricultural Economics S i ?” E R i f A i lt l E i9. Swinnen, 2007, Global Supply Chains, Standards & the Poor, CABI

Foreign Investment and Land Acquisitions in Eastern Europe: Implications for Africa

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Foreign Investment and Land Acquisitions in Eastern Europe: Implications for Africa Presentation Transcript