GEVERNMENT UNDERSTANDING of FOOD SECURITY IN Armenia

(Challenges and Recommendations) November 15, 2009 Prepared by AM Much of the debate in Armenia regarding food security has focused on national food self-sufficiency. However, food security and food self-sufficiency are not inter-changeable terms. Internationally recognised definitions of achieving food security are based on income levels and self-reliance, not national self-sufficiency. Thus the interventions that government is pursuing is aimed at to maintain national food self sufficiency, through export bans and administrative controls provides a disincentive for producers by increasing the disparity between domestic price formulation and international prices. Given this situation many countries have adopted a move towards market development and trade liberalization as an alternative option to maintain national food security which is potentially less costly and more effective. In Armenia, the government’s principle tool to ensure household food security has been through ensuring bread at an affordably low price is available to urban consumers. The current policy objectives do not distinguish between those who are chronically food insecure and those who are transitory food insecure. The chronically food insecure include those sectors of the population which lack adequate income, assets and/or resources at the household level to produce or otherwise gain access to the basic food needs of the household. Chronic food insecurity results from structural problems (through the inability to generate adequate incomes to access cereals and other basic food items) and as such cannot on its own be overcome by non-targeted interventions of subsidised bread. The transitory food insecure are those households which, under normal circumstances, are able to produce or gain access to their basic food needs but are vulnerable to supply problems when external shocks affect their food production systems or distribution chains for a limited period of time. By their nature events resulting in transitory food insecurity are usually of limited duration, such as the current cereals production season, and, once conditions return to normal, the affected population is usually able to rapidly recover its food security. Thus transitory food insecurity may require one-off interventions which sustain and rapidly build household assets. As indicated above, food security requires not just adequate supply of food at the aggregate level but also enough purchasing capacity with the individual / household to demand adequate levels of food. This approach recognises the complementarily of domestic production and international trade. Therefore, in order to ensure food security, there is need to ensure the development of a robust rural economy and sufficient rural incomes. Measures that contribute to distortions in rural markets and subsequently to a poorly functioning rural economy are likely to lead to increased food insecurity and poverty at the household level. In this respect rural poverty in Armenia has seen gradual increases since 2003, as measured by both the Ministry of Economy measures of poverty or through recent World Bank estimated

measures1. Over the past 4 years urban residents have seen their incomes rise and their poverty rates decline, whilst the incidence of poverty has actually increased among farmers and farm labourers during the same time period. Rural poverty is primarily a function of rural income, which in Armenia is driven by: profits from farming owned or rented land; earned (wage) income from agricultural and non-agricultural labour; and transfers, both formal transfers from the state and private remittances from abroad. Thus although there has been significant movement on liberalisation both of land and many of the agricultural input markets, farm gate prices and ultimately farm incomes have witnessed downward pressures over the past 4 years due to periodic administrative controls in output markets, particularly for cereals, through export bans and the control of prices of bread. Furthermore, the indirect consequence on reducing the number of intermediaries and competition involved in the cereals marketing chain, which has the potential to further depress prices and ultimately rural incomes. In addition rents, which are frequently based on in kind payments of crop have also been negatively affected by weather induced shocks and developments in the domestic market. The combined impact of these outcomes has been to reduce the incentive of producers to invest in productivity enhancing inputs such as seed and fertiliser, as well as maintaining adequate crop rotations. This has resulted in land degradation and declining yields and productivity of cereals over the past 5 years. Due to the political sensitivity associated with the cereal sub-sector and its importance as a generator of foreign exchange and in terms of national food security, the Government of Armenia continues to retain some supervisory influence and involvement within it, aiming to ensure that the market is adequately providing for the needs of producers and consumers. Thus it continues to pursue implicit policy objectives of ensuring that: (i) the country produces sufficient cereals to meet national food self-sufficiency; (ii) bread at an affordably low price is available to urban consumers; and (iii) the value added of cereal exports increases. The government continues to pursue a policy of national grain self-sufficiency as the basis of ensuring food security in cereals for its population through a combination of export bans and administrative controls during times of drought and weather induced shocks.

The affects of the government intervention to maintain national food self sufficiency, through export bans and administrative controls provides a disincentive for producers by increasing the disparity between domestic price formulation and international prices has multi-dimensional effects and include: Expanding the rural – urban differential with a very significant urban bias, resulting in

out-migration of the rural workforce without an associated increase in productivity that is crucial for the reduction of rural poverty.

Depressing the rural economy through the suppression of producer prices and ultimately increasing rural household food insecurity.

1 The World Bank and MEC rates for poverty differ although the basic source is the household budget survey. This is primarily due to technical reasons, with the World Bank measure: excluding some expenditures from consumption; consumption is based on a per capita rather than a per adult equivalent basis; and applying a slightly lower assumption for minimum calories.

Depressing domestic cereal production by reducing the incentives to invest to increase productivity and improve quality.

Stunting the growth of bakery sector and reducing the domestic marketing channels available to Armenian cereal producers.

By depressing production, the current set of instruments has negatively impacted on exportable volumes, foreign exchange revenues, and incomes of farmers.

Furthermore, these instruments have contributed to suppression in trade. Given these significant negative impacts of cereals policy, in spite of world market prices for cereals reaching all time highs, there is urgent need for a fundamental appraisal of the instruments and objectives that the government is pursuing. There is now considerable empirical evidence2 worldwide that demonstrates the significant contribution that agricultural growth and productivity can make to reducing poverty. The situation in Armenia is characterised by continued declines in cereal productivity, a poor investment climate, and policy uncertainty within the sector. These are some of the causal factors that have contributed to modest increases in rural poverty in Armenia, in spite of broad economic growth and rising remittances. It is important to note that even in highly liberalised economies, the Government remains a significant actor in a market economy, but its role is different, more as a facilitator or catalyst to address markets that are not working, as in the case of Armenia’s cereal market which has manifested itself through high transaction costs, product wastage and losses, wide marketing margins, poor market integration, etc. Thus government needs to harness market forces to address these failures, rather than through direct and unpredictable interventions in the market which perpetuates risks and ultimately impacting negatively on investment and growth within the sub-sector.

Main Priorities must include: Institutional capacity building Information system development Adverse Market Power Risk Management Price Stabilisation trough market liberalization Development of Targeted Social Protection Interventions Development of Transparency and Predictability

That’s why the GoV needs to focused on:

1. Acceleration of the privatization processes and reorganization of industrial enterprises aimed at raising the efficiency of their activity and attracting foreign and local investments; work out development programs for certain industrial and regional sectors aimed at attracting investments,

2 Thirtle et al (2001) found that, at the national level, a 1 percent increase in agricultural yields decreases the percentage of population living on less the US$1 per day by 0.48 percent. Furthermore, Recent World Bank Research (WDR 2008) shows that amongst 42 developing countries over 1981–2003, 1 percent GDP growth originating in agriculture increased the expenditures of the three poorest deciles at least 2.5 times as much as growth originating in the rest of the economy

identifying and implementing certain specific methods for increasing the investment activity of enterprises. 2. Implementation of quality management systems within enterprises according to ISO 9000 standards. 3. Creation of the legislative basis on promoting innovative centers and parks of technological transfer aimed at supporting advanced technology production with minimum consumption of energy resources and non-polluted technologies. 4. Modification of legislation aimed at improving mechanisms for stimulating local and foreign investments. 5. Improvement of the legislative framework on the transparency of investment mechanisms, privatization and objective information on the activity of enterprises and equity market. 6. Creation of a national system of integrated monitoring of pollutants, including GHG emissions and industrial wastes. 7. Improvement of packing industry aimed at natural resources conservation and capitalization of glass, cardboard, paper, plastic, polyethylene, wood, and other waste products. Creation of technical committees to develop and approve technical instructions in the field. Development of packing standards. 8. Development of the infrastructure to promote export of industrial products, render informational services and consultations, preferably in purer technologies.

How can Armenia 's agriculture sector respond to the current world/ regional demand for food security? by improvement and diversification of crop variety or species; by development agriculture calendar according to the seasonal changes caused by climate

changes; new crop varieties; increasing the quality and quantity of cattle breeding production, applying

biotechnologies in the zootechnics sector, using non-polluting growth stimulators, active biological and veterinary substances.

by improvement of irrigation system and water supply management; inputs management (fertilizer, tillage methods, grain drying, other field operations); by promotion of agro forestry, adaptive management with suitable species and

silvicultural practices policy development and capacity building 3

What are the key steps that the government needs to take to ensure it maximizes the performance of the agricultural sector? ■ identifying present vulnerabilities; ■ adjusting agricultural research priorities; ■ protecting genetic resources and intellectual property rights; ■ strengthening agricultural extension and communication systems;

3 Adaptation to climate change, FAO 2007

■ adjustment in commodity and trade policy; ■ increased training and education; ■ reduction of food security risk; ■ identification and promotion of (micro-) climatic benefits and environmental services of trees and forests ■ liberalization of cereal market and bread prices

What are the main challenges faced by but also the opportunities in the food making industry in Armenia? The Government adopted the Concept of Agriculture Sector Development. The programs developed in this area are well grounded, but the objectives and the tasks are impossible to be achieved, since the real possibilities of the State Budget and capacity to credit of commercial banks providing them with financial resources were not taken into account. Often, actions provided in programs cannot be carried out because of the insufficiency of organizational activity of institutions in this area, of state and local state authorities. Main objective of Government must be Community Empowerment and Livelihoods Enhancement that will contribute sustainable economic growth and reduction of vulnerability to climate change by promoting partnerships in rural development. It will also improve the livelihoods and food security of rural populations trough:

Promoting ecological production and implementation of non-polluting technologies; Improving and complete the legal framework according to the European standards

(norms on emissions) Using of recyclable energy sources (solar, wind, biogas, natural freeze) as a means to

reduce traditional fuel consumption Using of agricultural and processing industry waste.