ir I 1 �� :iь � � ,� � , + �,����у�,�,� ; � ,�� ,�,� , �� ..,� , .�.�~;;��л�,�%�!r,л�,?������ KYRGYZ REPUBLIC: DEVELOPING AGRI-FOOD VALUE CHAINS Policy Note Agriculture Global Practice The World Bank Group o 2018 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessariLy reflect the views of The WorLd Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data incLuded in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the Legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. Because The World Bank encourages dissemination of its knowLedge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as fuLL attribution to this work is given. Any queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H -Street NW,Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@ worldbank.org. Technical editor: H.SteeLe Cover design: Expert Ltd Contents Contents A b b re v ia t io n s ............................................................................................................................................. V I A c k n o w le d g m e n ts..................................................................................................................................... In t ro d u c t io n ................................................................................................................................................ 2 Opportunities for the Kyrgyz Agri-Food Sector ........................................................................................ 5 Stagnating Productivity as Barrier to Realizing the Potential of High-Value Agriculture ..................... 7 W eak Market Linkages and Unrealized Potential for Smallholders ..................................................... 11 P o lic y R e c o m m e n d a tio n s ....................................................................................................................... 18 Recom m endation 1. Expanding Markets and Im proving Com petitiveness.........................19 Recom m endation 2. Linking Sm all Enterprises and Farm ers with Markets ............................19 Recom m endation 3. Creating an Enabling Environm ent ......................................................31 C o n c lu s io n ................................................................................................................................................ 2 3 R e fe re n c e s ................................................................................................................................................ 2 6 @ 2018 Agriculture Global Practice. The World Bank Group Kyrgyz Republic: Developing Agri-Food Value Chains Boxes Box 1. C om petitive (M atching) G rant Program s .....................................................................18 Box 2. Productive Partnerships to Promote Farmer Collective Action ................................... 20 Box 3. A Funding Mechanism to Support Linkages in Agri-Food Value Chains and Foster Innovation: The China Technology Transfer Project..............................................21 Box 4. Enabling the Business of Agriculture Results for the Kyrgyz Republic ........................... 23 Figures Figure 1. Proposed Policy Tracks to Support Government Priorities..........................................4 Figure 2. Projected Income Growth in Selected Countries.......................................................5 Figure 3. Geography of Agricultural Trade in Central Asia, 2015..............................................6 Figure 4. Export and Import of Agriculture and Food Products ................................................ 6 Figure 5. Agricultural Value Added Growth Relative to GDP Growth......................................7 Figure 6. Value Added per Worker: Labor Migration to Urban Areas.......................................7 Figure 7. Smallholder Farmers and Labor Productivity: A R e g io n a l P e rsp e c tiv e ...............................................................................................................8 Figure 8. Agricultural Total Factor Productivity Growth Rates in Se le c te d C o u ntrie s, 199 1-20 13 ............................................................................................. 10 Figure 9. The Depth of the Food Processing Industry (Food Manufacturing/ A griculture Value A dded), average, 2006-13 .........................................................................12 Figure 10. The Depth of the Food Processing Industry and Food Manufacturing as Share of Total M anufacturing, average, 2006-16...............................................................12 Figure 11. Formal and Informal Retail Trade in the Kyrgyz Republic: S h a re o f To ta l R e ta il....................................................................................................................1 3 IV @ 2018 Agriculture Global Practice. The World Bank Group Figures Figure 12. Output of the Food Manufacturing a nd Tota l M a nufa cturing Secto rs, 2005-13 ..............................................................................14 Figure 13. Number of Establishments in Food Manufacturing a n d To ta l M a n u fa c tu rin g ..........................................................................................................14 Figure 14. Employment in Agriculture and Food Processing Industries .................................. 15 Figure 15. Share of Agriculture Public Expenditure in Agriculture GDP..................................16 Table Table 1. Yields of Selected Fruits: Cross-Country Comparisons, to n s/ h e c ta re , 2 0 1 4 .......................................................................................................................9 V Kyrgyz Republic: Developing Agri-Food Value Chains Abbreviations CAGR compound annual growth rate CEE Central and Eastern Europe CGPs Competitive (Matching) Grant Programs CIS Commonwealth of Independent States EAEU Eurasian Economic Union EBA Enabling the Business of Agriculture EU European Union FAO Food and Agriculture Organization of the United Nations FSU countries Former Soviet Union countries GAO gross agricultural output ha hectares ICT information and communication technology PO producer organization SPS Sanitary and Phytosanitary TFP total factor productivity UNIDO United Nations Industrial Development Organization WTO World Trade Organization VI Acknowledgments Acknowledgments of the Kyrgyz Republic, which helped set the priorities of the policy note and organized a stakeholder consultation in Bishkek to discuss the This policy note was prepared by the World Bank recommendations of the policy note. Agriculture GlobaL Practice team comprised of Artavazd Hakobyan (Team Leader and Senior The team is very grateful to peer reviewers Sergiy Agriculture Economist), David Tuchschneider Zorya, Tumurdavaa Bayarsaihan, Bekzod Shamsiev, (Senior Rural Development Specialist), and Saule Burkitbayeva, and Johan Swinnen for their Talaibek Koshmatov (Senior Agriculture Specialist). detailed comments and suggestions on draft The extended team that conducted background versions of the policy note. research includes Dariga Chukmaitova and Nuritdin DjamankuLov (Consultants). Akimbek Bektenaliev Last but not least, the team appreciates the strong and Ulan Tungatarov (FAO Consultants) conducted support of BoLormaa Amgaabazar (World Bank a survey of smaLL-scale agri-enterprises to inform Country Manager for the Kyrgyz Republic) and the findings of this policy note. Julian Lampietti (World Bank Practice Manager of Agriculture Global Practice). The team coordinated with representatives of the Ministry of Agriculture of the Kyrgyz Republic and Last but not least, the team is very grateful to Irina is grateful for the support of Erkinbek Choduev Prusass and Natalya losipenko for their assistance (Deputy Minister). The team is also grateful for throughout the process, and to Hope SteeLe for her the support of the Office of the Prime Minister excelLent editorial support. @ 2018 Agriculture Global Practice. The World Bank Group Kyrgyz Republic: Developing Agri-Food Value Chains Introduction and smaLL enterprises. As a result, the downstream agri-processing sector faiLs to deliver the types of benefits for the agriculture sector that normally Lead This policy note contends that the prevalence of to productivity, competitiveness, and job creation. small farmers and small-scale agri-food processors These benefits are desired from the policy makers' creates unique challenges for agri-food value-chain point of view because they improve smaLLholders' development. That is, the Kyrgyz farm structure incomes and Livelihood opportunities. Thus, in itself, with its dominance of smaLL farmers, is one of cases when smaLL farmers and small agri-food the main constraints for the effective functioning processors dominate the sector and represent most of modern value chains, preventing them from of the potential supply base, public policies need delivering high incomes and improved livelihoods to be taiLored to support effective participation of deliseesmall-scalenpooeucers andrprocessorsiinoth for smaLLholders. But this structure also provides one these smatt-scale producers and processors in the of the main opportunities for developing the value supply chains. chain. Small-scale agri-food processors are rarely successful in estabLishing sustainable partnerships In this context, investments in agricultural research and extension, rural infrastructure, and large with small farmers unless there are strong market signals that facilitate these partnerships irrigation networks, which globally show Long- term returns and development outcomes, would (Hakobyan 2015). Such strong market signals for need to be complemented with market pull and Kyrgyz agri-food producers/processors are found in niche and premium markets of products that push mechanisms that help farmers and small- scale processors link to markets. Experience from require specialized and Labor-intensive agricultural past and current projects in the Kyrgyz Republic production. Therefore, when market failures are dmst a ot of donor a estic demonstrates that a Lot of donor and domestic addressed by public policy interventions, smal.l public support has been rightly directed toward farmers and small-scale agri-food processors have rural. infrastructure development, including improved access to markets, more opportunities to roads, water and irrigation networks, connectivity, capture value, and more opportunities to improve and so on. Considerable support has been also their Livelihoods. given to developing agricultural research and advisory services that provide knowledge transfer Market failures-such as inefficient functioning to farmers, although with variable reach and of input markets; Lack of service provision (e.g., effectiveness (Swinnen, Van Herck, and Sneyers agricultural advice, transport, marketing services) 2011). The absorption capacity of the benefits of and high transaction costs (associated with access these investments has been low for two reasons. to essential inputs and services such as water, First, the investments have been predominantly electricity, Logistics, etc.); information asymmetries donor-financed and their benefits have not been (associated with a Lack of technologyand knowledge fully captured. Second, these investments have not of modern practices, price and quality information, yet considered market puLL and push mechanisms etc.)-Lead to weak Linkages between smaLL farms that could have augmented their results.1 1 The World Bank-supported Agribusiness and Marketing Project applied market push and putt mechanisms to support selected agri-enterprises for market access and competitiveness (see Pant et at. 2018). Lessons Learned from this project could be considered in designing any new support programs. 2 @2018 Agriculture Global Practice. The World Bank Group Introduction This policy note advocates for supporting market on promoting high-value agri-food production push and puLL mechanisms that would boost the and organic agriculture, improving the quality and performance of the agri-processing sector, which safety of agri-food, and orienting assistance to in turn can puLL the farming sector by Linking producers of those groups of agricultural products farmers with markets and expanding markets for (selected fruits and vegetables, Legumes, dried agricultural products. The note provides examples fruits, etc.) that have the potential to generate high of policies and strategies that could help Link value-added in export markets. farmers to markets, expand markets, and create an enabling environment for market-based drivers At the same time, the government's program is of agriculture sector development. However, not specific about what policy tools and public these recommendations are not provided in investment options should be employed to isoLation. The note continues to recognize the promote this growth. The government's program need for infrastructure development-especially identifies the dominance of smaLL-scaLe production productive service at the rural community Level (both upstream primary agricuLtural production to support commerciaL agricuLture deveLopment- and downstream food processing) as one of the key and investment in agricultural research and bottlenecks for market access, productivity growth extension, since the benefits of such investments in agricuLture, and improving LiveLihoods in rural have been widely documented around the world, areas. It suggests that cooperatives and producer including established linkages with poverty poliies organizations could become potential elements reduction and job and income growth. The pfor public policy and investment support. However, we propose could help augment the benefits of suhivsmns the government program lacks specific options such investments. for public support for promoting cooperation and This note is produced at a time when the new productive partnerships, including through market government of the Kyrgyz Republic has declared its mechanisms. This note offers severaL directions policy priorities for agriculture sector development. for poLicy and pubLic investments to address the In this context, the note delves into international government priorities. experience for addressing these policy priorities. A considerable amount of analytical material is already The policy note proposes achieving the decLared available on agriculture sector performance and its government objectives on three tracks: chaLLenges; therefore we Limit the discussion to only those issues that are the most relevant in addressing 1. expanding markets-public sector assistance the above chaLLenges. for promoting niche marketing and high-value products; Realizing the potential of high-value agri-food 2. Linking farmers to markets-public sector exports is the cornerstone of the new government's assistance for farmer coLLective action, improved policy objectives for agriculture development. Two funding for smaLL-scale rural infrastructure (roads, policy objectives stand out: increasing exports irrigation, etc.), and focused assistance for food and expanding agricultural markets, and boosting safety and better hygienic practices; and value addition in the agri-food sector. The new 3. creating an enabling environment-reducing the government has declared that its priorities for risk of public investment and promoting new agriculture sector development are going to focus investment opportunities in the agri-food sector @ 2018 Agriculture Global Practice. The World Bank Group 3 Kyrgyz Republic: Developing Agri-Food Value Chains as weLL as expanding new financial products to Figure 1. Proposed Policy Tracks to Support smaLL farmers (Figure 1). Government Priorities This note is organized into four sections. The first section presents the analytics to demonstrate that Kyrgyz agri-food products have considerable market Expanding potential and can be competitively positioned in markets traditional (the Russian Federation, Kazakhstan) and non-traditional (China) markets. Access to such markets requires developing trade infrastructure (obviously) and boosting the quality and conformity of Kyrgyz agri-food. The second section contends Creating Linking that stagnating productivity is one of the bottlenecks enabling farmers with to realizing the potential of high-value agriculture. environment markets Stagnating farm productivity indicates that public policies have not been fuLLy successful in delivering economic benefits to farmers. The third section presents the agri-food processing sector-a sector dominated by smaLL enterprises. It shows that this sector has the potential to play the part of the puLL factor in the farming sector by improving market Linkages. The fourth section provides three recommendations: Linking farmers with markets, expanding markets, and creating an enabling environment. Opportunities for the Kyrgyz Agri-Food Sector Opportunities for the Kyrgyz exporting their produce. In preparation for this report, we surveyed 57 agri-food enterprises to understand the chaLLenges faced by these enterprises in linking agri-food enterprises with farmers and Linking agri-food enterprises Inocasd danfd frig-au ayrisingripuLatul with markets. Our objective was to get a quick products and food driven by rising population adgnrloeve ftesco hlegs incomes in Kazakhstan, China, and Russia creates so the samples coLLected were not statisticaLLy opportunities for the Kyrgyz Republic to realize representative, afthough this does not excLude economic growth by expanding and diversifying credibLe concLusions. Our survey found that 21 out its agri-food exports (Figure 2). High-value of 57 agri-food enterprises export their products. agricultural exports, such as selected fruits and Of these 21 enterprises, only 6 export products vegetables, entaiL an important potential for worth more than 8 million Kyrgyz soms (around raising ruraL incomes of smaLLholder farmers US$100,000) per year. Most of the enterprises' in the Kyrgyz Republic and maintaining the exports are for less than 8 miLLion soms each. How competitiveness of the sector because of the do enterprises compete with other Larger food Labor-intensive production systems, where Labor producers (including multinational corporations) costs are relatively Lower. both domesticaLLy and internationalLy if their exports and sales are only a "drop in a bucket"? Figure 2. Projected Income Growth in Selected How do public policies ensure that such small- Countries scale enterprises stay competitive and are able to 50 5.0 identify and maintain their market niche, though o o very smaLL? o 0 40 04.0 0 aey feh fut n eealshv 3o 3.o Estimates show that Kyrgyz agri-food products- nameLy fresh fruits and vegetabLes-have 20 2.0 considerable market potential in the two major to 1o nearby markets China and Russia (World Bank, forthcoming). It is expected that both Russia's and China's marketswilLexperiencesteadyannualgrowth in the food categories, where Kyrgyz producers may have a competitive advantage. Between 2017 and 2017 2050 QAverage annual growth rate, % 2030, China is predicted to show, on average, an Source: World Bank, forthcoming. annual growth of 1 percent in fruit and vegetable demand; the Russian market is expected to Fresh fruits and vegetables are the most common demonstrate similar growth. Can Kyrgyz exports be Kyrgyz agricultural exports. They comprise around part of this growth? According to the recent study 15 and 41 percent, respectively, of US$260 miLLion by the World Bank Agriculture Global Practice (World agri-food exports of the Kyrgyz Republic. Most Bank, forthcoming), Kyrgyz agri-food exports are not Kyrgyz agri-food enterprises, including those that yet widely present in China, whiLe they are oriented export, are smaLL-scale producers. They must rely toward Russian and Kazakh markets. Of US$264 predominantly on middlemen/consolidators for miLLion agri-food exports in 2017, aLmost half went @ 2018 Agriculture Global Practice. The World Bank Group 5 Kyrgyz Republic: Developing Agri-Food Value Chains to Russia, Kazakhstan, and other former Soviet Competing for export markets can start Locally, Union countries. Exports to China were negligible, at which can be less risky and Less costly than US$8.4 million (Figure 3). competing globaLLy. Building local processing capacities, establishing Local value chains from In 2016 and 2017, the aggregate monetary value inputs to retail markets, creating an able work of imported and exported primary agriculture force and innovative talent, and gaining experience products were roughLy equal but imports of in competing against foreign competitors in the processed food items exceeded exports five and domestic market can position Local agribusinesses four times, respectively (Figure 4). This not only to expand successfully into export markets. But illustrates the relative weaknesses of the Local this does not exclude the possibility of better- food processing industry but also reveals great prepared businesses focusing primariLy on export potential market opportunities. OveraLL, the agri- markets from the outset. The current geography food sector's contribution to total exports and of exports-Kazakhstan, Russia, Turkey, some imports of the country varies between 13.4 and countries from the European Union (EU), the 14.5 percent, but this can be improved because Islamic Republic of Iran, China, and so on-prove some commodities-for example, beans and dairy that successfuLLy focusing on export markets can products-show promising potential to expand in occur and can be expanded. export markets. Figure 3. Geography of Agricultural Trade in Figure 4. Export and Import of Agriculture and Central Asia, 2015 Food Products 100 700 US$111.3 600 60 mU 4 US$47 In 500 00400 US$396.6 40 m linl 0 40 300 From Kazakhstan From Kyrgyz Republic From Tajibstan Fmm Uzbekistan 0 *to other world countries to other FSU countries tothe EU 016 2017 2016 2017 uto China to Ukraine to Russia Eport Import to Kazakhstan to Belarus ___________________________________________L,__...___t,ck___F,,,troc ,r,gro ,t,bl,,, -d thn,rcrop p,,d,ctr Pr.......d F,,d-c Source: FAOSTAT database, http://www.fao.org/faostat/en/#home. Source: Kyrgyz National Statistics Committee data. Note: DoLLar amounts are US$, miLLions. EU = European Union; FSU countries = Former Soviet Union countries. 6 @2018 Agriculture Global Practice. The World Bank Group Stagnating Productivity as Barrier to Realizing the Potential of High-Value Agriculture Stagnating Productivity potential. Sector performance can be divided into three periods (Figure 5). First, a period of transition, from 1991 through 1995, when agriculture moved Potential of High-Value from a collective, Soviet-style farm production Agriculture system to private ownership of Land. This period was characterized by a sharp drop in agriculture value-added as well as an overaLL decline in GDP. . The second period, from 1996 to 2005, was one The orl Bak's ystmatc Cuntr Dignotic of sustained growth, when the country reaped the report for the Kyrgyz Republic (World Bank 2016) bfi o rvt wnersiund ructa recognizes that the agriculture sector, together with b o adjustments, as well as inflows of investment from mining and energy, plays a central role in the new a . international assistance programs. Agriculture growth model of the country and in its ability to . . performance was largely positive, with an continue to progress toward the World Bank's twin average of 7 percent growth in value-added per goals of eliminating extreme poverty and boosting yea e thir period, from th e pe year. The third period, from 2005 to the present, shared prosperity. Agriculture's importance is critical has been characterized by sporadic growth and not only for household income and Livelihoods underutilization of agriculture potential, in in rural areas, where most Kyrgyz people Live, but principle because of uncoordinated and inefficient also because of its significant potential to generate public policies and external shocks, including higher-paid and higher-skilled jobs in downstream political and weather-related shocks (Broka et al. processing and off-farm agricultural services. The 2016). This period includes occasional peak years objective of this note is to offer policies for realizing followed by troughs with an average growth of this significant potential. 1 percent per year. Because of the relatively Lower agricultural growth during this period, the share Agriculture sector performance has been of agriculture in GDP dropped from 32 percent in characterized by erratic, slow growth and 2005 to 17 percent in 2014 (Figure 5). considerable underutilization of the existing Figure 5. Agricultural Value-Added Growth Relative Figure 6. Value Added per Worker: Labor Migration to GDP Growth to Urban Areas 20 60 2000 1 800 15 so 1600 101 00 5 40 1400 5 20 s 1200 C -0 30 1000 ) 93 9699 1998 2000 2002 200 ?'06 2000 201 S00 5 \20600 0 -010 400 -15 200 -20 199019921994199619982000200220042006200820102014 25 Agriculture, value added (% of GDP) Agi ulture, value added (annual % growth) - Agriculture value added per worker (constant 2010 US$) GDP growth (annual %) Source: World Development Indicators database, https://data.worldbank.org/products/wdi. @ 2018 Agriculture Global Practice. The World Bank Group 7 Kyrgyz Republic: Developing Agri-Food Value Chains Despite the rising agricuLtural Labor productivity The Kyrgyz Republic is in the group of countries with observed in Figure 6,the average agricultural value very Low agricultural Labor productivity and with a added generated by Kyrgyz farmers has remained Large share of smaLLholder farm units (Figure 7). veryLowin international comparison. Between 2000 Smallholder farmers operate on smaLL plots of Land, and 2014, the agricultural value added per worker typically grow several higher-value crops, and raise in constant 2010 U.S. dollars-a proxy of farm few Livestock. Globally, the Labor productivity of Labor productivity-increased by 167 percent, from such farms tends to be Lower than that of Larger US$721 to US$1,200, using World Development farms as a result of a number of market failures. Indicators data. For comparison, agricultural Labor To counteract this Low Labor productivity, proactive productivity in Europe and Central Asia, excluding public policies in the Kyrgyz Republic promote high-income countries, grew by 200 percent-from higher-value crop production, niche marketing, US$1,310 in 2000 to US$3,573 in 2014. In East and quality improvement to help smaLL farms Asia and Pacific, excluding high-income countries, maximize their Limited resources. Focusing on it doubled during this period, from US$3,612 to improving Labor productivity is important because US$7,352. this indicator demonstrates farmers' potential to increase their income from agriculture, whereas Figure 7. SmalthoLder Farmers and Labor Productivity: A Regional Perspective 20000 * Czechia Hungary * Estonia 15000 *Slovakia aBulgaria * Lithuania 10000 Latvia Poland aUkraine Russian Federation 000 Sloveria Romaia Kyrgyzstan Kazakhstan Tajikistan 0 0 10 20 30 40 50 Smallholders % in GAO Note: Smallholders refer to farm; with less than 2 ha of land" for CEE and "households" in CIS statistics- Source: Swinnen and Burkitbayeva, forthcoming; reprinted with permission. Note: CEE = Central and Eastern Europe; CIS = Commonwealth of Independent States; GAO = gross agricultural output; ha = hectares. @ @2018 Agriculture Global Practice. The World Bank Group Stagnating Productivity as Barrier to Realizing the Potential of High-Value Agriculture Land productivity demonstrates farmers' potential investment-both public and private, including to improve food security. As such, policies oriented foreign direct investment. TechnoLogy improvement toward improving Labor productivity could help in agriculture remained very Low, since the enhance farmers' incomes. Public policies should public sector did not invest much in research and also support farmer collective actions, such as development. Infrastructure, including access to productive partnerships or cooperatives, input and output markets, improved only sLightly, and that improvement depended on external donor While increasing Labor productivity is an ultimate assistance programs. Agricultural machinery, on- objective of public policies, its measurement in Low- farm irrigation networks, and extension services for income countries such as the Kyrgyz Republic is a farmers have alL depended heavily on Limited foreign chaLLenge. The challenge is not only the result of assistance and donor support programs. poor farm Labor statistics, but also because some Kyrgyz farmers are likely to be part-time farmers, The low level of agricultural Land productivity in spending Less time on agricultural activities than the Kyrgyz Republic has also been reflected in a full-time agriculturaL worker would. The data on low yields. For example, all major fruits, in which actual time (hours) spent on farming activities are the Kyrgyz Republic seems to have a comparative not available, making cross-country comparisons advantage and export competitiveness, have much not fully accurate. A more accurate indicator for smaller yields than the yields in the peer countries cross-country comparisons is agricultural Land (Table 1). The fruits and nuts presented in Table 1 productivity measured as a value added per hectare were chosen because a recent analysis by the World of agricultural Land. Bank that calculated the Revealed Comparative Advantage of Kyrgyz agricultural products found that Between 2000 and 2014, the land productivity these fruits and nuts have the highest comparative of Kyrgyz farmers grew annually by only 2 advantage in Chinese and Russian markets (World percent, compared with 4 percent growth in farm Bank, forthcoming). Labor productivity. In international comparison, agricultural Labor productivity grew by 3 percent Low partial land and Labor productivities have led in Europe and Central Asia and by 4 percent in East to the relatively low total factor productivity (TFP) Asia and Pacific. Generally, agricultural productivity in the Kyrgy Republic. TFP was actually negative in the Kyrgyz Republic has been suffering from Low between 2001 and 2013 (Figure 8). DecLining Table 1. YieLds of Selected Fruits: Cross-Country Comparisons, tons/hectare, 2014 Fruit Kyrgyz Republic Uzbekistan Turkey Chile Cherry 5.1 8.6 6.4 n.a. Walnut 4.7 9.2 n.a. n.a. Apricots 3.0 11.0 5.0 n.a. Plums 6.2 n.a. n.a. 17.00 Source: FAOSTAT database, http://www.fao.org/faostat/en/#home. Note: n.a. = not applicabLe. @2018 Agriculture Global Practice. The World Bank Group 9 Kyrgyz Republic: Developing Agri-Food Value Chains productivity adversely impacted the sector's Linkages and weak value chains. The Last two are performance, restricting opportunities for recovery especiaLLy important for addressing the priorities that would capture the benefits of high-value identified by the government. When compared agricultural exports. The consistency of decline in with other similar post-Soviet countries that agricultural TFP points to several major structural have smaLLholder-dominated agricultural systems weaknesses in the Kyrgyz agri-food sector, including (Figure 8), Kyrgyz agriculture TFP performance ineffective policies to support productivity growth, differs from most of them by demonstrating a inadequate research and extension services to consistent decline in TFP growth rate. support agricultural growth, and inadequate market Figure 8. Agricultural Total Factor Productivity Growth Rates in Selected Countries, 1991-2013 6,0 4,0 0 I 2,0 1 .1 . I.. -64,0 Countries II 1991-2000 2001-10 2001-13 2004-13 Source: USDA InternationaL AgriculturaL Productivity database, https://catalog.data.gov/dataset/internationaL-agriculturat-productivity. Note: TFP = totaL factor productivity. 10 @ 2018 Agriculture Global Practice. The World Bank Group Weak Market Linkages and Unrealized Potential for Smallholders Weak Market Linkages and Below we discuss the importance of the agri-food i Pprocessing sector in promoting agriculture sector performance, white at the same time considering Smallholders that productive service provision and smaLL-scale infrastructure remain important areas for the consideration of public support. Enhancing the Kyrgyz Republic's agri-food sector performance depends on reversing the consistent The agri-food processing sector is not competitive productivity decline, creating non-agricultural either domestically or internationally. In the jobs in rural areas, improving market access, and Kyrgyz Republic, a competitive agri-processing sustaining the value creation of agri-food products. sector could provide a natural entry point to To achieve these outcomes new investments are increase the productivity of the agriculture sector required in Kyrgyz agri-food sector so that it can and create much-needed off-farm employment benefit from the increasing demand for quality in rural and urban areas. A weLL-developed produce and processed food both domesticaLLy food-processing industry can stimuLate higher and from neighboring countries. The country has agricultural productivity and higher agricultural a unique opportunity to boost its agri-food sector growth. However, the food processing industry in performance given its membership in both the the Kyrgyz Republic is still smaLL relative to the World Trade Organization (WTO) and the Eurasian country's primary agriculture sector and has not Economic Union (EAEU) and its proximity to large demonstrated dynamic growth characteristics. The markets in Eurasia, Asia, and South Asia. What are depth of the food processing sector-an indicator the chaLLenges for achieving these goals? We discuss that measures the extent to which the country's them below in detaiL. agri-food processing is developed compared with its primary agriculture-is quite Low, even when The agri-food sector in the Kyrgyz Republic compared with other regional comparator countries is dominated by smaLLhoLders both upstream (Figures 9 and 10). and downstream. Three main factors affect Low productivity in the smaLLholder farming sector. First, It is expected that the food processing sector wiLL existing agricultural research is not of high enough develop as a response to consumption growth- quality to support productivity growth. It does not that is, as people's incomes increase they switch enable the adaptation of new varieties and breeds on to higher-value and convenience food items. As a large enough scale to benefit smaLLholders. Second, is common in other countries, consumption and public investment in productive service provision is income growth Leads to an increase in formal retail Low. Although considerable investments have been trade-so-caLLed supermarketization-which in turn made in large public infrastructure for agriculture- promotes domestic food processing (Reardon et aL. such as irrigation canals, major roads, electric 2003). Data from the National Statistics Committee grids, and so on-they have not been reinforced by of the Kyrgyz Republic show a consistent increase adequate small-scale infrastructure to promote on- in "formal food retaiL"-that is, in the share of retail farm service provision and market access. Third, the trade in kiosks, organized stores, and supermarket Linkage of farmers with markets and with agri-food chains. According to the National Statistics enterprises has not been strengthened,which results Committee of the Kyrgyz Republic data, the share in missed opportunities for market puLL mechanisms. of supermarkets in total retail trade is around @ 2018 Agriculture Global Practice. The World Bank Group 11 Kyrgyz Republic: Developing Agri-Food Value Chains Figure 9. The Depth of the Food Processing Industry (Food Manufacturing/Agriculture Value Added), average, 2006-13 2,00 1,80 1,60 1,40 1,20 S1,00 0,80 0,60 0,40 0,20 0,00 Source: WorLd Development Indicators database, https://data.worLdbank.org/products/wdi. Figure 10. The Depth of the Food Processing Industry and Food Manufacturing as a Share of Total Manufacturing, average, 2006-16 Moldova Azerbaijan ............ Kyrgyz Republic ::::::::::::: ______________ .............. Kazakhstan 0,00 0,05 0,10 0,15 0,20 0,25 0,30 0,35 0,40 0,45 0,50 Percent Food manufacturing/total manufacturing M Food manufacturing/agriculture value-added Source: WorLd Development Indicators database, https://data.worLdbank.org/products/wdi. 16 percent. The growth in the formal retail sector especially for smaLLholder farmers. AdditionaLLy, demonstrates that this share is likely to increase traditional markets are of great importance for in the future (Figure 11). However, our survey supplying consumers with keyfood items.Very often conducted for this study shows that traditional and public policies and public investments neglect such sometimes informal markets (e.g., bazaars) continue traditional markets, which very often suffer from to serve as the major channel for food trade, poor hygiene and sanitation (Reyes et aL. 2016). 12 @ 2018 Agriculture Global Practice. The World Bank Group Weak Market Linkages and Unrealized Potential for Smallholders Figure 11. Formal and Informal Retail Trade in the Kyrgyz RepubLic: Share of Total Retail 100 90 80 70 -60 cu 50........ S 40.......... II Formal retail trade Informal retail trade Source: National Statistics Committee of Kyrgyz Republic. Growth in the formal retail sector in the Kyrgyz The number of registered agri-food processing Republic does not seem to have led to an increase establishments in the Kyrgyz Republic dropped in food processing, but rather to an increase in relatively quickly-from 500 in 2005 to 335 in imports. Food imports grew more than 4.0 times 2013. This reflects the decline in the number between 2006 and 2013, whereas agri-food of enterprises in the overall manufacturing processing output grew by only 2.2 times during sector-that is, this decline is not unique to food the same period.' The agri-food processing sector processing (Figure 13). This may reflect a positive would be expected to grow faster than the overall trend, since competitive firms strengthen their manufacturing sector because the demand for positions in the market and non-competitive firms food and processed food products is relatively exit. Such strengthening of the food processing consistent as consumers' incomes grow, and because firms could have led them to attract more jobs. access to technology becomes easier and domestic In fact, the share of food sector employment in investments become more available. However, in the total manufacturing has grown over the same Kyrgyz Republic, agri-food processing sector growth period, indicating the potential of the food was slower in 2005 through 2013 than overall sector to attract jobs (Figure 14). It is, however, manufacturing growth. Agri-food processing grew counterintuitive to see relatively flat output in with the compound annual growth rate (CAGR) of the food manufacturing sector (Figure 12) when 33 percent in from 2005 to 2013, whereas overall it is attracting jobs (Figure 14). There could be manufacturing grew with CAGR of 37 percent during problems with reporting,' or with a low level of the same period (Figure 12).2 technology and high labor intensity. For the time 1 Based on FAOSTAT data. 2 CaLculations are based on data from UNIDO0's Statistical Database, available at https://stat.unido.org/. 3 Most rural workers are considered self-employed. This actually creates a problem because they often do not quaLify for sociaL assistance or unemployment benefits since they are not considered poor, because they were distributed Land and some assets after the de-cottectivization. @ 2018 Agriculture Global Practice. The World Bank Group 13 Kyrgyz Republic: Developing Agri-Food Value Chains Figure 12. Output of the Food Manufacturing and Total Manufacturing Sectors, 2005-13 3,500 3,000 2,500 0 2,000 1,500 1,000 500 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 - Food and beverages Total manufacturing Source: UNIDO Manufacturing Value Added Database, https://stat.unido.org/database/MVA%202018,%2OManufacturing. Figure 13. Number of Establishments in Food Manufacturing and Total Manufacturing 2,500 E 2,000 -C - 1,500 V, o 1,000 E 500 z 0 - Food and beverages Total manufacturing Source: UNIDO Manufacturing Value Added Database, https://stat.unido.org/database/MVA%202018,%2OManufacturing. being, cheap Labor may not have a significant A strong case can be made for the need to analyze impact on costs, but with growing wages, agri- the current state of agri-food processing and food enterprises would have to upgrade their manufacturing enterprises and determine the technological capacities to remain competitive. underlying factors that constrain their growth 14 @ 2018 Agriculture Global Practice. The World Bank Group Weak Market Linkages and Unrealized Potential for Smallholders Figure 14. Employment in Agriculture and Food Processing Industries 60 50 40 30 cu 20 10 0 c'. r m M - Ln) I. r-. 00 0) 0 r- m1 M ' Lnl .0 r' 00 M~ 0 ,- rJ M -z Ln m o o o o o o M 0 0 0 0 0 0 0 0 0 0 0- 0 0- 0- 0- 0- - ~ ~ ~ ~ ~ ~ ~ ~ 1 r14 r1- ~ - -~,~,~ ~ J rN r1i rN J r1 N eN N eN eN N eN N eN -Share of agriculture in total employment Share of food and beverage in manufacturing employment Source: National Statistics Committee of the Kyrgyz Republic. and competitiveness both domesticaLLy and production and markets, which they would need internationally. to compete. They normally do not follow market trends; they produce traditional products and Lack Agri-food firms are too small and informal to innovation. They are seldom profitable enough to be competitive, attract investments, and create be able to invest their own funds in technology and jobs. National Statistics Committee data show competitiveness. They also cannot establish effective that around 70 percent of agri-food production is linkages with primary agricultural producers, and concentrated in the relatively small- and medium- thus fail to facilitate the absorption of benefits that scale enterprises (those with fewer than 200 developed agri-food processing sector brings. Finally, employees). A survey commissioned for this report smaLLfirms have difficultyentering markets, especially confirms that downstream agri-food processing in export markets. However, such smaLL firms can be sectors are dominated by smaLL enterprises. The competitive and profitable in premium, niche, and survey of 57 enterprises found that 79 percent of specialized markets if they can produce the quantity them process a volume of Less than 8 miLLion soms and quality of products that traders demand, and if (US$123,000) of raw material (fruits, vegetables, they comply with various food safety and Sanitary and milk, meat) annuaLly. Accordingly, around 80 percent Phytosanitary (SPS) regulations and standards. of surveyed enterprises report annual sales of Less than 8 miLLion soms. Small firms also have difficulty accessing markets and technology. Most surveyed firms cannot access Small firms tend not to be competitive in mainstream export markets because they do not have enough markets because they face strong competition from resources (human and financial) to promote their large firms, including multinationals. They Lack access products. In domestic markets, our survey found to capital to invest in new technologies to expand that around 57 percent of companies use informal @ 2018 Agriculture Global Practice. The World Bank Group 15 Kyrgyz Republic: Developing Agri-Food Value Chains Figure 15. Share of AgricuLture Public Expenditure in AgricuLture GDP 12 10 CL 8 X 6 U 4 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Kyrgyz Republic - Small CIS countries average Europe and Central Asia average Source: International Food Policy Research Institute, SPEED Database. Note: CIS = Commonwealth of Independent States. channels (marketplaces or informaL traders) to seLL is especially important for agri-food sector their products, 25 percent sell through smaLL kiosks performance because the sector does not attract and neighborhood stores, and only 18 percent are new investments to benefit from the increasing able to access supermarkets to seLl their products. demand for quality produce and processed food SmaLL firms also have difficulty upgrading their either domesticaLLy or from neighboring countries. technology. Around 50 percent of surveyed firms This is a particularly important missed opportunity point to old equipment and facilities as the main for the Kyrgyz Republic given its membership in bottleneck to their development. both the WTO and EAEU and its proximity to Large markets in Eurasia, Asia, and South Asia. The enabling framework continues to be risky, despite significant strides to improve key laws Public expenditure in agriculture is very low. The and regulations. A recent Enabling Business of . level of public expenditure does not facilitate Agriculture report (World Bank 2017), which AgriuLtur 60 ountri ard thek world , onvis technological progress in agriculture (Figure 15). ranks 60 countries around the worLd on various performance indicators for agricuLture and Funding support for agricultural research and extension is very Limited. UsuaLLy, in the absence of agribusiness sector regulations, ranks the Kyrgyz Repbli faorblyon om iniaos. fnne adequate public funding for agricultural research e aand extension, private agri-food firms tend to market access, and agriculture machinery regulation) and less favorably on others (especially fiLL some of the gap. Such firms support farmers transport and seed). Such mixed performance and farmer groups (cooperatives, productive points to a weak policy framework and weak alliances, associations, etc.) that supply them political environment, which-combined with with agricultural produce by promoting adaptive Limited market potential, Low incomes, a difficult research and extension advisory services. These geography, and deteriorated infrastructure- firms also invest in Local community infrastructure diminish the attractiveness of the country to with the objective of building Long-term supplier foreign investors and reduce domestic firms' relationships with farmers and agricultural competitiveness. The enabling environment producers. 16 @ 2018 Agriculture Global Practice. The World Bank Group Weak Market Linkages and Unrealized Potential for Smallholders This section highlighted three bottlenecks for Republic has made Large strides in improving key agriculture sector performance in the Kyrgyz regulatory frameworks. The third is that public Republic. The first is that the agri-food sector is spending is not enough to support productivity dominated by many smaLL agri-food enterprises, growth and technology spilLovers for smaLL agri- which are having difficulty competing in domestic enterprises. and export mainstream markets. Such smaLL enterprises have opportunities to compete in What are the public policy options for addressing premium and niche markets, but they need capacity these bottlenecks? What is the role of the building to up their game in terms of product government? Does the private sector have a role offerings and food safety and quality. The second to play? How can finance be mobilized to address is that the sector is characterized by an uneven these bottlenecks? The next section provides regulatory environment, even though the Kyrgyz recommendations for policy options. @ 2018 Agriculture Global Practice. The World Bank Group 17 Kyrgyz Republic: Developing Agri-Food Value Chains It is critical to expand the markets for Kyrgyz agri- food products. This could be done on two tracks. The first track is niche marketing and moving up The vision for agriculture sector development the value chain by promoting the higher-value described in the Kyrgyz government's program is and premium agri-food products demanded by anchored in two policy objectives. The first is to the growing affluent classes of consumers (e.g., increase exports and expand markets for agri-food organic and natural products, high-value fruits and products with a focus on ecologically clean and vegetables, traditional and healthy food items, etc.). organic production. The second is to increase value addition in the agri-food sector while promoting Supporting the development of new food products coordination and cooperation and strengthening market Linkages. How can these policy objectives be catering to changing tastes and preferences of achieved? What are the potential public investment consumers would lead to improved competitiveness options? The following proposes policies for of small agri-enterprises. These enterprises could addressing the government objectives for the be weLL placed to produce niche products and to agriculture sector. cater to very specific tastes and preferences of a variety of consumers. In the meantime, changes in diets, health consciousness, and the "gLobalization Recommendation 1. Expanding of tastes" create demand for food products that Markets and Improving have price premiums and are highly demanded by Competitiveness affluent urban populations. Box 1. Competitive (Matching) Grant Programs Competitive (Matching) Grant Programs (CGPs) focus on commercially oriented, smaLL- to medium- size farmer groups and small rural businesses. Although CGPs work with poor farmers, they prioritize commercially oriented ones. The CGPs focus on business and market-oriented activities and emphasize adapting and adopting existing technologies (but not exclusively). Grants include funding for investments to set up the innovative activity, for external technical assistance, and for technology transfer and demonstration to other farmers and stakeholders. A CGP initially operated in Albania, and similar schemes were implemented in Armenia, Azerbaijan, and Kazakhstan. In Armenia, for example, many successful CGPs funded new market development activities, such as new and innovative products (e.g., honey cheese, garlic powder); new packaging (e.g., adapting new forms of crates for efficient transporting of fruits and vegetables); and food safety and quality investments (e.g., improving the hygiene in a processing facility). Such grants included financing for hardware (building renovation, procurement of equipment) as weLL as a mandatory component for advice and technoLogy transfer. Source: Authors and WorLd Bank 2012. 18 2018 Agriculture Global Practice. The World Bank Group Policy Recommendations Recommendation 1. Expanding Markets and Improving Competitiveness Niche marketing and moving up the value chain Export promotion (firm level) (government agency level) * Provide matching grants for new product development, * Support small and medium agri-enterprises for compliance food safety and quality improvement with export requirements * Provide advisory/extension programs for agri-food small * Provide direct (exhibitions) and indirect (advertising) and medium enterprises for technology transfer, product support in export markets development, and marketing * Work with destination market governments to remove non- market barriers Public sector assistance could promote product competitiveness and the availability of exports from development in smaLL agri-enterprises. This other countries. To compete in this environment, assistance could be in the form of matching grant Kyrgyz products have to be of high quality and support (Box 1) to competitively selected agri- be positioned in niches where smaLL and medium enterprises and cooperatives that can demonstrate producers have more opportunities to compete. innovative products with market demand or that can Public policy should be directed to facilitating create a sustainable market demand by introducing Kyrgyz producers' compliance with export market new products. The experience of other countries requirements, and possibly to developing export suggests that successful support mechanisms promotion programs through direct (exhibitions) promoted linkages with small farmers and ensured and indirect (advertising) export promotion. that successful experiences can be demonstrated to a broader group of farmers. Advisory and extension services targeted to specific value chains comprise Recommendation 2. Linking Small another avenue for providing such assistance. The Enterprises and Farmers with Markets government could finance advisory/consulting programs for smaLL food enterprises that are willing to improve their products and invest in product The Kyrgyz Republic's agriculture production is development. The government could also co- fragmented: many smaLL farmers and producers are finance selected marketing costs for new products, involved in food production, and average farm size especially if these products are considered healthy, is very small. SmaLL farms are typically unable to traditional, and naturaL. effectively access markets unLess they organize into farmer groups, cooperatives, associations, and so on. The second track for expanding the markets is However, this type of collective action often fails to promote exports of Kyrgyz agri-food products because trust among farmers and between farmers by focusing both on quality and safety and on and processors is Lacking. There are numerous conducting on export promotion activities. The successful examples in other countries, however, Kyrgyz Republic has two relatively weLL developed where development programs helped promote such export markets where Kyrgyz agri-food products market-oriented farmer organizations, resulting have strong growth potential: Russia and in Lower production costs, higher-quality products, Kazakhstan. Both are sophisticated markets in their and larger sales volumes. Improved competitiveness regulatory chaLLenges and requirements and both Leads to access to higher-value markets, increased have high transportation costs, which can constrain incomes, and better Livelihoods for farmers. Public @ 2018 Agriculture Global Practice. The World Bank Group 19 Kyrgyz Republic: Developing Agri-Food Value Chains Box 2. Productive Partnerships to Promote Farmer Collective Action A productive alliance or partnership is a commercial agreement between a producer organization (PO) and a buyer. It specifies (1) the quality, quantity, timing, and delivery specification of the product generated by the PO; (2) the payment and price determination methodology; and, often, (3) the additional obligations of the buyer to assist the PO in the production process. The buyer may be a qualified (i.e., capable, financially sound) aggregator, wholesaLer, Large-scale retaiLer, agro-processor, or exporter. In some cases, it can be a government entity such as a school district in charge of delivering meals to students. The PO may be a cooperative, a civil association, or any other legal form permitted in the country. The agreement itself need not be a contract. Contracts are often not enforceable and the idea in an alliance is to build a relationship of trust. Everybody benefits in good alliances. Buyers are interested in entering into partnerships with POs because these arrangements Lower the transaction costs (agreeing, enforcing, collecting) and risks that arise from dealing with multiple smaLLholder producers. Farmers are interested in alliances because POs reduce their production costs and facilitate product upgrading (through bulk purchases of inputs and services) and increase their bargaining power. Alliances thus are a prime mechanism for dealing with farm fragmentation and transactional insecurity in a context of increasing demand for farm products. ALLiance projects build platforms for financing productive partnerships at scale. These projects facilitate encounters between POs and buyers; help them build joint business plans if their agreements have market and income-generating potential; and assist POs in achieving higher-value marketable products and in building the institutional capacity to maintain adequate levels of service provision for their members. Financing aLLiances is usually the responsibility of POs. The objective of this financing is to reach the agreed product specification and to create the conditions for sustainable production at the Level of the farms and of the PO itself. Financing can be provided through matching grants, credit, or a combination of both. Buyers may be supported through credit and guarantee facilities. Experience with productive aLLiance projects in Latin America, and increasingly in Africa and Asia, proves that this is a mechanism that successfully helps smaLLholder farmers to enter higher-value supply chains. This can generate significant impacts on farm and household income, reducing poverty Levels in rural areas.Wider impacts are felt in regions through increased investments by input suppliers and other actors along value chains, and by the spillover effects these have on additional farmers. policy could support programs that promote such such as productive partnership programs (Box 2), associative actions among farmers and between show that these coLLective or associative actions them and buyers. Good international practices, are best achieved through incentives allocated 20 @ 2018 Agriculture Global Practice. The World Bank Group Policy Recommendations Box 3. A Funding Mechanism to Support Linkages in Agri-Food Value Chains and Foster Innovation: The China Technology Transfer Project At the end of 1990s, China's agri-food sector was in a phase of urgent and chaLLenging structural transformation dictated by Lagging agricultural production that was insufficient to meet domestic demand, natural resource pressure, changing consumer demand, pressure to advance domestic food processing and marketing, and opportunities to compete in globaL markets. Critical bottlenecks for the transformation that was required in the agriculture sector were the slow transfer and adoption of technology and a Lack of knowledge-intensive agriculture. Because of its fragmentation, the farming sector was unable to effectively connect with higher-value markets, and the domestic food manufacturing sector was unable to effectively source raw materials to cater to changing consumers' tastes and preferences. One way to respond to these chaLLenges was to promote a viable model for implementing public investments that would promote the modernization of agricultural production, strengthen Linkages with food manufacturing, and improve marketing. A World Bank-funded project helped introduce a model of public-private partnership that helped facilitate public sector support to the agri-food sector and establish a national framework for targeted implementation of public investments for agri-food sector. Among others, the project helped in the following areas: Combining public sector support for research, extension, and training with private investments. The government funded the development and dissemination of public goods, but these activities were implemented by the private sector to foster the integration of public and private investments. Establishing farmer associations that would benefit from learning and technology transfer, and at the same time collectively supplying raw materials to food manufacturing enterprises. Funding support for food manufacturing enterprises was contingent on their agreement to directly support farmer associations that provide raw materials to these enterprises. Source: World Bank 2012. competitively to self-created and self-managed help improve their productivity, that introduce and farmer organizations. In contrast, mandating that promote newtechnologies, and that facilitate market farmers create cooperatives as part of any public Linkages. Such services (see Box 3) include animal support program usuaLLy does not work. Building and plant health services, advisory and extension trust requires time and effort, and funding support programs, research and development, and so on. alone is not sufficient to build such trust. They also include services that expand the benefits of modern digital technologies to farmers and Linking farmers to markets also requires that farmers agri-food producers. And third, they include public and small entrepreneurs have access to services that infrastructure development, such as rural roads and @ 2018 Agriculture Global Practice. The World Bank Group 21 Kyrgyz Republic: Developing Agri-Food Value Chains rural Internet connectivity, water and sanitation markets. Some infrastructure improvements networks, smaLL-scale irrigation, and so on. are also needed in marketpLaces. For example, marketplaces can be upgraded to benefit from Public funding should be directed to promoting better water supplies, drainage, and waste rural productive services. Past and current donor- management. Investments to upgrade rural road funded projects have been focused on promoting infrastructure are needed to reduce food losses, those services that promote agricultural extension make gas or electricity available, and improve and advisory programs, animal health, and to water and sanitation for smaLL food producers. some extent adaptive research. It is more critical Food enterprises would benefit from improved now to extend public funding to promoting smaLL- processing equipment and facilities, though scale rural infrastructure that would support public support in this case should be Limited to and enhance opportunities for commercial promoting innovation and new technologies rather agriculture development. Especially important is than granting new equipment to enterprises. But to enhance on-farm water productivity through what is needed more to promote safer food is the improved on-farm irrigation schemes. In addition, implementation of better practices. Around the investments in connectivity-both rural roads and world, food safety is mostly achieved not through Internet connectivity-would improve transfer of better equipment and facilities-though these technologies and market Linkages. are also essential-but instead through good production and manufacturing practices, clean Another method for linking farmers to markets and hygienic food production environments, and relates to improving food safety and quality. Both weLL-trained staff. regulatory aspects of food safety and production practices need to be brought up to date to support Expanding the benefits of modern technology to safe, high-quality food production. Considerable betterconnectfarmerswith markets can be supported advances have been made in making the country's through public programs. Current and future public regulatory framework and public food safety investments in connectivity infrastructure offer enforcement capacityalign with Eurasian Economic opportunities for expanding Internet access and use Union requirements; however, improving food in remote areas. Public support could help improve safety practices along the value chain, specificaLLy access to these technologies by supporting the for smaLL producers and processors, would be one development of interfaces and content relevant to practical step toward improving access to export farmers and agri-food producers. Recommendation 2. Linking Small Enterprises and Farmers with Markets and Promoting VaLue Addition Productive partnership programs Supporting infrastructure upgrades (linking small and medium agri-firms with small farmers) (linking with markets) * Provide market-based programs to support productive * Invest in upgrading marketplaces (better water supply, groups (cooperatives, associations, alliances, etc.) waste management, sanitation) * Expand benefits of modern technology, supporting * Invest in small infrastructure in rural areas to bring connectivity productive services to farmers and small and medium agri-firms (on-farm small irrigation schemes, water and sanitation, rural roads, gasification, electricity) 22 @2018 Agriculture Global Practice. The World Bank Group Policy Recommendations Recommendation 3. Creating an investment, especiaLLy the foreign direct investment, Enabling Environment in the agri-food sector is very Low. Public sector support should concentrate on reducing the risk for The main question to be asked when addressing private investment and promoting new investment regulatory framework improvement for agri-food opportunities in the agri-food sector. This could be enterprises is: What constrains private investment? done by advancing business environment reforms There is a perception that aLL major regulatory and improving the environment for both large and improvements had been made in the Kyrgyz smaLL investors. The Kyrgyz Republic should set as a Republic Long ago, but that these improvements in goaL the achievement of significant improvements in the business environment have not resulted in de- the World Bank's Enabling the Business of Agriculture risking the space for private investors (Box 4). Private (EBA) scores. Box 4. Enabling the Business of Agriculture Results for the Kyrgyz Republic Countries' regulatory quality is associated with economic growth and Levels of development. High- income countries have better agribusiness regulations as measured by Enabling the Business of Agriculture (EBA), and this outcome is shown across aLL topics. However, there are exceptions; some countries perform better on EBA indicators than their income Level would suggest. That is the case of Vietnam for fertilizer, machinery, and transport; Kenya for seed, finance, water, and information and communication technology (ICT); and the Kyrgyz Republic for finance, markets, and machinery. The Kyrgyz Republic ranks in the top 15 (out of 90) for markets and machinery, showing efficient processes for exporting agricultural goods and tractor registration, but it places in the bottom 10 for seed and transport as a result of the Lack of regulations on seed quality control and trucking Licenses. Figure B4.1: The Kyrgyz Republic EBA Scores vs Global and Regional Averages Kyrgyz Republic vs. Global Averages Global so Comparison -50 Seed Fe!tzer MacInery Frace Markets TranspoI Wvater CT Kyrgyz Republc vs. Regional Averages - Europe & Central Asia 50 Regional o -- Comparison - - c Seed Frther er achhezy Finance Marets Transport Waael CT Source: World Bank 2017. @2018 Agriculture Global Practice. The World Bank Group 23 Kyrgyz Republic: Developing Agri-Food Value Chains Over the years there has been a proliferation of network. More needs to be done to expand credit to microcredit in the Kyrgyz Republic. Various donor small farmers and smaLL agri-enterprises. This could programs have supported the development of an include the introduction of modern mobiLe payment advanced microcredit system. But these programs systems, innovative tools for collateral assessment, Largely focused on making capital available to and alternative credit scoring systems. Local banks and creating an advanced microcredit Recommendation 3. Creating an Enabling Environment Promote investment Promote access to services (financial and non-financial), improve input markets * Improve the business environment and regulation * Promote modern technologies for financial and non- financial services * Change banking and financial service regulations to allow and promote the use of new credit/financing instruments (e.g., non-collateralized loans based on structured deals) 24 @2018 Agriculture Global Practice. The World Bank Group Conclusion Conclusion policy objectives stand out: more exports and the expansion of agricultural markets, and an increase of value addition in the agri-food sector. This policy note provided three recommendations for policy Realizing the potential of high-value agri-food directions to help achieve these goals: expanding exports is the cornerstone of the new government's markets, Linking farmers and agri-enterprises with policy objectives for agriculture development. Two markets, and creating an enabling environment. @ 2018 Agriculture Global Practice. The World Bank Group 25 Kyrgyz Republic: Developing Agri-Food Value Chains References Broka, Sandra, Asa Giertz, Garry Christensen, Charity Hanif, Debra Rasmussen, and Rhoda Rubaiza. 2016. Kyrgyz Republic: Agricultural Sector Risk Assessment. Agriculture Global Practice Technical Assistance Paper. World Bank Group Report Number 103078-KG. Washington, DC: World Bank Group. Hakobyan,Artavazd. 2015. "Negotiating Sustainable Partnerships in the Food Supply Chain:' Paper presented in the 24th Annual World Symposium of the International Food and Agribusiness Management Association. Cape Town, 2015. Pant, Anupa Aryal, Blair Edward Lapres, ELLen OLafsen, Loraine Ronchi, and Peter A. Cook. 2018. Case Study: An Agribusiness and Marketing Project in Kyrgyz Republic through a World Bank Loan (English). Partnership for Growth: Linking Large Firms and Agro-Processing SMEs. Washington, DC: World Bank Group. http:// documents.worLdbank.org/curated/en/5 71431525411789056/Case-study-an-agribusiness-and- marketing-project-in-Kyrgyz-Republic-through-a-World-Bank-Loan. Reardon,Thomas, C. PeterTimmer, Christopher B. Barrett, and Julio Berdegu6. 2013. American Journal ofAgricultural Economics 85 (5): 1140-46. Reyes, Byron, Marco V6squez, Francesca Larosa, Lorena G6mez, Milagro Espinal, Jenny Wiegel, Irene Van Loosen, Matthias Jager, Iv5n Rodriguez, and Mark Lundy. 2016. Traditional Markets for Poverty Reduction and Food Security: Exploring Policy Options in Honduras and Nicaragua.> CIAT Policy Brief No. 29. Cali, Colombia: Centro Internacional de Agricultura Tropical (CIAT). Swinnen, Johan and SauLe Burkitbayeva. Forthcoming. "SmaLLhoLders in Agriculture in Transition Economies:' Forthcoming in Journal ofAgrarian Change, 18 (4). Swinnen, Johan, Kristine Van Herck, and Astrid Sneyers. 2011. The Kyrgyz Republic: Opportunities and Challenges to Agricultural Growth. FAO Investment Centre. Country Highlights (FAO). Leuven: LICOS Centre for Institutions and Economic Performance. http://www.fao.org/3/a-i2711e.pdf World Bank 2012. Agricultural Innovations Systems: An Investment Sourcebook. Washington, DC: World Bank. http://siteresources.worldbank.org/INTARD/Resources/3 35807-1330620492317/9780821386842.pdf 2016. Kyrgyz Republic: Systematic Country Diagnostic Concept Note. From Vulnerability to Prosperity. Draft, November. https://consultations.worldbank.org/Data/hub/files/consuLtation-tempLate/kyrgyz-republic- systematic-country-diagnostic/en/materials/kyrgyz_republic_scd_roc_concept_note.pdf 2017. Enabling the Business ofAgriculture 2017. Washington, DC: World Bank. doi:10.1596/978-1-4648- 1021-3. Forthcoming. "China (and Russia) 2050: ImpLications for Agriculture in Central Asia:" World Bank Agriculture Global Practice Working Paper. Washington, DC: World Bank. 26 @ 2018 Agriculture Global Practice. The World Bank Group IBRD* IDA The prevalence of small farmers and small-scale agri-food processors creates unique challenges for agri-food value-chain development in Kyrgyzstan. That is, the Kyrgyz farm structure itself, with its dominance of small farmers, is one of the main constraints for the effective functioning of modern value chains, preventing them from delivering high incomes and improved livelihoods for smallholders. But this structure also provides one of the main opportunities for developing the value chain. Small-scale agri-food processors are rarely successful in establishing sustainable partnerships with small farmers unless there are strong market signals that facilitate these partnerships. Such strong market signals for Kyrgyz agri-food prod ucers/processors are found in niche and premium markets of products that require specialized and labor-intensive agricultural production. Therefore, when market failures are addressed by public policy interventions, small farmers and small-scale agri-food processors have improved access to markets, more opportunities to capture value, and more opportunities to improve their livelihoods.