Latvia, a member of the European Union since 2004, is a small, dynamic and open economy that has successfully transitioned from central planning to a market economy. The reforms undertaken have driven progress, although from generally low levels and at a slower pace in agriculture than for the economy as a whole. This report examines the conditions under which farms and businesses in the food and agriculture sector in Latvia undertake innovation to become more productive and environmentally sustainable. It identifies opportunities as well as challenges that need to be addressed. These include economy wide skills shortage, emigration and population decline and urban concentration of population and services. At the sectoral level, these include the use of agricultural payments to support a large number of non-commercial farms and the high level of unpaid farm labour. To meet these challenges, agricultural innovation can be harnessed to improve the sector’s productivity, as well as the sustainability and efficiency of the food system. This report provides a series of recommendations that should allow agricultural policies to contribute to a well-functioning innovation system that can meet the challenges that lie ahead.
Innovation, Agricultural Productivity and Sustainability in Latvia
Abstract
Executive Summary
In the past 25 years, Latvia has transitioned from central planning to a market economy. It joined the European Union in 2004 and the euro area in 2014. Latvia has been a member of the OECD since 2016. Today, as a small, dynamic and open economy, Latvia deploys a broad range of reform initiatives that have driven progress, although generally from low levels, in many of the areas that would nurture future innovation‑based economic‑growth. However, progress has been slower in agriculture and more needs to be done to equip this sector with a well-functioning innovation system, and a policy environment facilitating productivity and sustainability improvements.
Agricultural innovation must be harnessed to improve the sector’s productivity and the efficiency of the food system. Innovation can also be channelled to increase the sector’s resilience to future challenges, including climate change adaptation and mitigation and the accelerated propagation of pests and diseases.
While Latvia’s agriculture faces challenging climatic conditions with a short vegetation period, it enjoys high levels of land and water availability and quality. Its environmental performance is high and, although there may be local environmental stress, no area of national concern has been identified so far despite intensification of mineral fertiliser use over the past decade. The sustainable drainage of excess water in soils is the main issue with regards to water management. Continued and improved monitoring of the impact of agriculture on the environment is needed.
Today, cereals and dairy farming make up most of Latvia’s agricultural output. The structure of commercial farms is dual; livestock farms are typically smaller than the average EU farm, whereas cereal farms are mostly large and export-oriented. Cereals are Latvia’s top agro-food export commodity group. At the same time, half of the farms do not market any agricultural goods at all.1 They weigh on the sector’s performance, divert resources and support from the productive segments of the sector and may contribute to informality.
While Latvia is mostly a service economy, its agriculture holds a relatively large share in the economy (3%), in exports (17%) and in employment (8%) compared to EU and OECD averages. Accession to the European Union and implementation of the Common Agricultural Policy stopped the sector’s decline and contributed to its relatively large share in the economy. The decline of agricultural land use stopped and agriculture increased its land area, although not to historical highs. Agricultural incomes have risen, both as a result of direct payments, and indirectly through structural adjustment and support to investments that have contributed to labour productivity growth, to higher yields and ultimately to higher agricultural Total Factor Productivity (TFP).
Agricultural TFP growth has been strong and sustained, although from very low levels and the sector has not yet reached its full efficiency and productivity potential. While labour productivity has improved significantly, it remains low. Low labour productivity, lower wages and higher unemployment in rural areas partly explain rural poverty and urban migration.
Infrastructures and services have improved, but they serve the urban population better than the sparsely populated rural areas. These must be strengthened to improve the attractiveness of rural areas and connect them to markets. This is all the more critical considering the growth opportunities for the food and agriculture sector arising from better connectedness to markets.
The share of the food industry in GDP and employment has declined and its structure has evolved since 2005. Today, food processing counts fewer large businesses and more numerous small ones. Farming suffers from value chain inefficiencies and it exports raw or low value-added products. This is the case for milk, for example. Markets also lack for the subsidy‑stimulated organic farming sector, which sells more than half of its milk and eggs, approximately one-third of its meat, and cereals and one‑tenth of its vegetables as conventional products.
This review takes stock of progress and success and identifies policy areas where more needs to be done to ensure that the agricultural sector continues its transition to higher productivity and sustainability.
The main findings and recommendations are summarised below.
Note
← 1. Farms that do not market any agricultural goods, hereafter “non-commercial farms”, include households with agricultural land, kitchen gardens, and subsistence and hobby farms.
