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The Effects of European Economic Integration on Romanias

Agricultural Sector

Claudiu-Mihai Ronu

January 2015

Abstract
When the negotiations for Romanias integration in the European Union were underway,
a great deal of public opinion was in agreement with the benefits of being part of the politico-
economic bloc. The most extensive chapter discussed in the process was concerning agriculture.
Among the most promising objectives of the reform we can mention the facilitation of the end
consumers with lower priced agro-products, the rise in the productivity of agricultural workers
and the creation of a complex policy of rural development based on stable incomes and a
corresponding standard of living for farmers.

After almost 8 years of activity under the EU framework, the results of the Romanian
agriculture, shaped by the Common Agricultural Policy (CAP), can be assessed. This paper
summarizes the evidence on this issue and also compares it with preceding data for increased
objectiveness. The findings may be surprising.

Introduction
Between 2004 and 2011 the share of agricultural exports from total exports more than
doubled, from 1.9 percent to 5.2 percent, with the most distinct growth just after 2007. Moreover,
in the same period, the share of agricultural imports fluctuated around an average of just 2.2
percent. Just looking at these variables, one would be inclined to think that due to the increased
economic integration, the agricultural sector brought prosperity. After all, given its 14.6 million
hectares of agricultural area, Romania is clearly endowed in land and consequently has a definite
comparative advantage in food production.

Up to a limited extent this assumption is true but looking at the broader picture it is clear
that this advantage is eroded by a collection of domestic factors. It is correct to presume that with
the drop of custom duties, the financial stimuli granted for this sector and the access to a market
of 500 million inhabitants, the farming industry should flourish. Actually the opposite is correct:
a continuous trend of stagnation in both productivity and returns can be observed.
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In this article I cover the evidence which undermines the growth of the agricultural
sector, despite the newly facilitated trade conditions and the positive influences of CAP. Three
main topics are analyzed: the role of the faulty structural division of land in ceiling the workers
productivity, the influence of price volatility over the standard of living of farmers and factors
which hold back the share of agriculture in both national accounts and international trade.

Labor, land and productivity

Out of the total of 20 million Romanian inhabitants, approximately 50% live in
predominantly rural regions. Given this huge share of population living in the countryside, one
might expect a proportionate share of employment to carry its activity in the same territorial
limitations. 42% of the total employment can be found in mainly rural settlements and between
2004 and 2011 a constant one third of total employees were engaged in some sort of agricultural
work. The shares are impressive and the portions of agricultural areas are equally remarkable.
14.6 million hectares serve as arable land, pastures, hayfields, vineyards and orchards, with
arable land dominating in size, 9.3 million hectares.

Now taking into account these figures the general supposition would be that agriculture
accounts for a great part of exports. It does not. The main reasons for this failure are that
agricultural products have low value added, which is common knowledge, but mostly because
Romanian farmers have depressed levels of productivity. Both before and after 2007 labor
productivity for agricultural workers greatly fluctuated, with a peak of 3350 euro/person in 2008.
What is more surprising is that after this record value, the productivity per worker decreased
even below the level of 2004. While the effects of the financial crisis may be undeniable and
correspond to the post-integration period, other factors also constitute the culprit of this
disequilibrium of the inputs/outputs ratio.

The CAP, while having good intentions, fails to treat a critical variable which tears apart
agricultural labor productivity: the fragmentary characteristic of agricultural land. By dividing
agricultural holdings according to their size (below 5 ha-class C, 5-20 ha-class B, above 20 ha-
class A), we can observe a pyramidal structure, with class C forming the base and class A at the
top (Appendix 1). So wide is the base that in 2004 it was constructed out of 4 million holdings
with an area smaller than 5 ha. This kind of areas is usually in the property of peasants and fit
into the category of subsistence agriculture. Characterized by low outputs, they cannot have a
market orientation no matter how much subsidies and tax cuts they get. They are seen as a safety
net which provides survival in the absence of other employment opportunities but the high
number of traditional farmers who use rudimentary technologies and grow cheap crops (maize or
potatoes are the most relevant and also have the biggest share of the total agricultural output)
drag down the average productivity level for the agricultural sector. On the other end of the
pyramid are found the industrial farms. With more than 20 ha of land and highly mechanized,
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these intensive farming facilities are designed to get the most yields per hectare possible. They
represent the main components of external economies of scale. Unfortunately, they represent
only a minority, with 15200 of establishments in 2004. In the course of time though, the
dynamics of the pyramid changed slightly towards a wider top. In 2010, the number of class C
agricultural holdings decreased to 3.5 million while class A farms more than doubled their
number to 38600. This improvement in efficiency can be observed in the increase of value for
the agricultural production in the time period analyzed. Although presenting fluctuations, mostly
because of extreme weather conditions in certain years, production value rose from 13.65 million
euros in 2004 to 18 million euros in 2011. This goes to show the importance for a prosperous
economy of not only the endowment in a certain production factor (here land) but also the
organizational structure through which economies of scale are achieved and the level of
technology currently in usage.

Still, agriculture appears as an inefficient activity because labor force costs exceed
productivity (Toma, 2008). Even though the number of agricultural employees is small, because
more than 90% are self-employed, in terms of opportunity cost this branch fares worse than the
others. Furthermore, while in the selected period the other economic braches registered a clear
increase in productivity, agricultural productivity stagnated.

Price variation
One fundamental promise of CAP is to ensure a fair standard of living for the
agricultural community. Primarily this would be accomplished by raising the individual
incomes of agricultural workers. Increased incomes should, according to the Ricardian model,
attract employees from other sectors which offer lower compensations. But with a third of the
working population already in the agricultural sector it is hard to believe that this hyper-saturated
area of activity can attract other workers.

Furthermore, those incomes are closely related with the price of the products sold.
Looking closer at the share of each agricultural commodity in both Romanias agricultural output
and in EU-28s output the first thing that strikes the reader is the impressive outputs of both
maize and potatoes. 22.1 percent of the total production of corn in EU-28 comes only from
Romania and the country also supports 10.6 percent of the production of potatoes in the same
trade bloc. The two commodities happen to be also the lowest priced ones in the whole range of
crops. The rationale goes to show next that the objective of the agricultural reform cannot be
attained in the present state of cultivation structure and a higher rate of other more valuable crops
needs to be stimulated.

While it may appear that the average monthly earnings of an agricultural employee rose
after 2007 by a mean of almost 100 euros, the real income has actually decreased. The decline in
agricultural real wages in Romania shows that the growth ratio of prices paid for inputs of
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industrial origin is inferior relative to the growth ratio for sold agricultural products, intensifying
the price scissors phenomena. Due to this situation, Romanian agricultural workers cannot or
can partially cover the expenses of restarting the crop production process. Proof for this
statement stands the variation in the park of tractors and main agricultural machinery, which is at
best insignificant for the period analyzed. Also if the quantity of fertilizers is taken into account,
a minor rise in the chemical ones can be observed, canceled by a significant drop in the usage of
natural substances.

To cap it all, Romania doesnt have a standardized system of contracts and transparent
trade through agricultural exchanges and en-gross markets. Thus, much of the agricultural output
remains unexploited, being destined to enlarge the subsistence type of agriculture. The other part
of output that makes it to the market is often bought at extremely low prices (often below
production costs) and then sold expensively to the customer. This is due to the fact that
hypermarkets and supermarkets import most of their products which translates into higher end
prices. In this situation a great share of domestic output is left outside the market and in the same
time prices for agro-products remain high.

National accounts and international trade

Having analyzed two major factors which shape the agricultural economic picture, the
focus is now oriented towards the movement of the output of the primary sector. This section
allows for a more in depth correlation with the fundamental trade models (i.e. Ricardian and H-O
models) through operating directly with the end result of the sector analyzed.

When looking at the share of agriculture in GDP it is easy to observe a descending trend.
In the pre-integration period, this share was around 10% with the highest value in 2004 (12.5%);
after 2007 a mean value of 6.2% represented the contribution of agriculture. Although it is still
three times the mean of EU-28 (2%), the decline in agricultural share helped to diminish the
GDP fluctuations in light of unstable climate conditions and reduced capitalization of farms
(Toma, 2008). The gap was filled with contributions from other, more productive sectors, leading
to economic growth. The reduction in agricultural contribution to GDP was parallel with an
increase in net investments in the primary sector. After 2007 the investment increased with a
modest 1%. Given its seasonal characteristic and the rudimentary of its technology, current
agriculture should absorb more than a mere 3.7% of total net investments. Modern agriculture
implies a higher level of technology per worker precisely because of the seasonal usage of a
large part of fixed capital and the necessity of insuring food security for the population.

If we are to observe the variation in agricultural exports for the period 2004-2011, there is
no denying that a significant increase appears right after 2007. The increased economic ties after
the integration might be directly related with the growth. Another key element is represented by
the devaluation of the national currency, which without a doubt stimulated exports, not only
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agricultural but as a whole. On the imports side though, a steady increase until 2008 is
noticeable, then the graphic follows a stagnation trend until 2011. In the whole period the volume
traded constantly increased but each year the import dynamics were superior to those of exports
(Appendix 2). With Romanias endowment in land, one cannot but wonder how such a country
can run a trade deficit in the sector in which it has plenty of resources. The answer can be
obtained if we analyze the structure of both imports and exports. Romania exports mainly raw
materials destined for industrial usage and imports finished goods designed for household
consumption and which are the result of processed raw materials. If the productivity analysis
revealed the uttermost importance of technology, for the value added yet again differences in
technological advancement lead to a distribution of prosperity towards those who are most
advanced. This only validates one of the 3 biases of the Heckscher-Ohlin model, that differences
in technological development alter the outcome of a sector in the favor of those which are most
superior.

Conclusion
The widespread view that European integration would enhance the performance of the
Romanian agricultural sector due to increased economic ties and a standardized framework does
not live up to its expectations. If classical economic models were to guide our judgment entirely
we would be inclined to believe that under the conditions of facilitated trade, the primary sector
(in which Romania would definitely have a comparative advantage) would flourish. This belief is
flatly discredited by the data which clearly shows just a minor improvement in both trade with
agricultural products and in the market orientation of the economic agents which activate in the
field.

Several factors contribute to the inability of the sector analyzed to become competitive at
a supra-national level. First, the fragmentation of the total arable land impedes the achievement
of an economy of scale. Instead, subsistence agriculture is widespread and most products never
enter the market. Second, due to low revenues the restart of the crop cycle is a painful one.
Adding the fact that the few products are then bought almost below costs and resold to prices
aligned to the imported goods, we end up with two disadvantaged sides: producers and
consumers. Last, the combination of rudimentary technology and low valued crops perpetuate a
vicious cycle of inferior returns.

Just because there is a proper framework to operate under, it does not mean that a sector
will automatically succeed, even if it possesses clear advantages. The attachment offered by the
collective mentality to the above mentioned sector only preserve the status quo and such myths
like Romania, the breadbasket of Europe are irrational for the present situation.
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References
1. Member State Factsheets: Romania. (2014, June 1). Retrieved January 1, 2015, from
http://ec.europa.eu/agriculture/statistics/factsheets/pdf/ro_en.pdf
2. OECD (2004), Agricultural Policies in OECD Countries 2004: At a Glance, OECD
Publishing. http://dx.doi.org/10.1787/agr_oecd-2004-en
3. OECD (2008), Agricultural Policies in OECD Countries 2008: At a Glance, OECD
Publishing. http://dx.doi.org/ 10.1787/agr_oecd-2008-en
4. OECD (2011), Agricultural Policy Monitoring and Evaluation 2011: OECD Countries and
Emerging Economies, OECD Publishing. http://dx.doi.org/10.1787/agr_pol-2011-en
5. Prumbcean, C. (2010). The Common Agricultural Policy and Its Implementation in
Romania.
6. Romanian National Institute of Statistics. (2006). Statistical Yearbook 2006. Retrieved from
http://www.insse.ro/cms/files/Anuar%20arhive/serii%20de%20date/2006/ASR_2006.pdf
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http://www.insse.ro/cms/files/Anuar%20arhive/serii%20de
%20date/2009/pdf/ASR_2009_Romana.pdf
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%202011_romana.pdf
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10. Toma, E., Dachin, A., & Alexandri, C. (2009). Agricultura Romaniei in procesul de integrare
europeana (Vol. 1, p. 202). Bucharest: Ars Academica.
11. Toma, E. (2010). Agricultura Romaniei in procesul de integrare europeana: Evaluari si
prognoze (Vol. 2, p. 110). Bucharest: Ars Academica.
12. Toma, E., Kleps, C. (2009). Romanian agricultural landscapes changes past, present,
future. Research Institute for Agricultural Economics and Rural Development Bucharest.

Appendixes
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Appendix 1

0.02
4.5 0.25
0.03
4 0.04
0.37 0.23
3.5

Millions of 2.5
Category A
holdings
2 4.07 Category B
3.45 3.46
1.5 Category C

0.5

0
2003 2007 2010

Year

Appendix 2

4000

3500

3000

2500

2000
Million euro
Exports
1500 Imports

1000

500

0
2004 2005 2006 2007 2008 2009 2010 2011

Year