Innovation, Agricultural Productivity and Sustainability in Latvia

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.

 

Main findings	Recommendations
Agriculture
Non-commercial farms account for about half of farms. They divert productive resources and agricultural support from the sector and may contribute to informality.	Address social issues with social policies. Use advisory services and retraining to support the transition of non-commercial farmers to market oriented activities, within or outside the agricultural sector.
Support accounts for more than 60% of average farm income.	Target support currently based on area or production to the sector’s longer-term productivity: education, farm management, investment, co-operation.
Latvia’s CAP payments have supported farm incomes and productivity.	Increase incentives to produce higher value products. Address bottlenecks along the value chain.
Farming suffers from value chain inefficiencies and exports raw or low value-added products.	Use CAP RDP funds to strengthen the value chain through producer groups and the processing industry; facilitate co-operation in the creation and diffusion of innovation.
Regulations on land ownership and lease may hinder a more efficient allocation of land resources.	Ease regulations on land ownership and lease to support a well-functioning land market. Consider other instruments to guarantee farmers’ access to land and prevent speculation.
Access to credit has improved, from low levels. National policies support farm access to credit.	Evaluate the recent restructuring of Altum and the adequacy of the institutional framework for the sector’s credit needs.
Latvia’s CAP RDP choices support investments to improve the overall performance and competitiveness of agricultural holdings. Production-distorting support remain in specific commodity sectors. Voluntary coupled support absorbs half as much budget as the annual expenditure under the CAP RDP competitiveness priority.	Align policy signals, reduce commodity-specific support and use budgets to encourage the longer-term productivity and competitiveness of the sector.
More than two-thirds of farm labour is unpaid.	Accompany the transition of unpaid family labour into the formal labour force. Provide a legal status to unpaid agricultural labour and adjust tax, social security and pension systems accordingly. Improve job opportunities in and outside the sector for unpaid farm labour through education and better connection to job markets.
Unemployment is higher in rural areas. Labour costs have increased while they remain below EU28 levels.	While taking into account job quality aspects, increase recourse to contracting for farm labour and farm services and consider relaxing wage obligations for non-EU labour to encourage employment, increase farm productivity and the viability of rural areas.
Subsidies per head of livestock tend to intensify livestock production and increase the environmental load. Diesel fuel and natural gas used in agriculture benefit from reduced excise tax rates and add to the sector’s environmental load.	Eliminate support based on animal numbers and production volumes that adversely affect the environment. Payments per ha of grass rather than per animal head could be a first step towards less environmentally harmful practices. Gradually reduce the excise tax rebates for diesel fuel and natural gas used in agriculture and encourage the use of renewable energy.
Innovation dissemination and take-up
Little is known on the factors that drive the adoption of innovation at farm level.	Use CAP RDP funds to support farmer access to advisory services farmer participation in innovation networks Identify and monitor factors that drive the adoption of innovative technologies, practices, at the farm level and along the food chain.
Advisory and education services in agriculture and food production have become more widely available. At the same time, there is a skills shortage in the farm workforce.	Bridge the skill gap and improve the educational attainment of farm holders and train qualified specialists. Further strengthen knowledge transfer activities to facilitate better access of the farming workforce. Harness the farm advisory system to facilitate the participation of farmers in training and expand innovation take up. The system can also be used to support small farms’ assessment of their profitability and transition to more profitable activities in and outside the sector.
Latvia has directed very little CAP RDP funds to risk management instruments. While innovation can improve farm resilience; associated investments may increase farmers’ financial vulnerability.	Promote risk management and strengthen risk management tools.
Education
Adult participation in training has increased significantly, although from low levels and mostly in non-formal education.	Strengthen the availability, accessibility and affordability of lifelong development opportunities both in qualifying and informal agricultural education.
The education system needs to adapt to the changing demography. The Employment Council, established in 2016, addresses labour market issues, including those related to education and the impact of demographic trends.	Attract foreign students and encourage lifelong learning to enlarge the pool of students.
The share of Latvia’s tertiary educated students in the science, technology, engineering and mathematics (STEM) fields is below the OECD and the EU average rates. More students have chosen STEM fields since 2015.	Encourage student participation in STEM fields to offer a supportive environment for the creation, adoption and acceptance of innovative technologies
Research and innovation
The ZTAI sets general innovation policy objectives for innovation in the bioeconomy in general. Numerous policy instruments in place and available public funds are significant for agricultural innovation.	Define a specific agricultural innovation strategy using a bottom-up approach to identify the sector’s specific needs and gaps in the agricultural innovation system. Improve the co-ordination among the policy instruments and public funds. Monitoring their implementation, evaluate their direct outcomes and socio-economic and environmental impacts.
There is insufficient participation of research institutions in EU and other international initiatives.	Ensure stable funding for the research infrastructure in food and agriculture to strengthen capacity to participate in collaborative efforts. Maintain public funding to enable co-operation with private companies and with foreign research organisations
Latvia’s research and innovation capacity lacks a critical mass to contribute to the needs of the agricultural sector.	Foster regional collaboration in research and innovation to overcome the market-size limitations.
Little private expenditure is invested in agro-food R&D	Use public procurement to stimulate innovation. Strengthen public-private co-operation, in particular on projects directed towards the market introduction of research results.
Better information and better data are needed to support better decision making from field to policy making.	For farm managers: use farm level data and improve access to information on markets, regulations and policy instruments to enhance farm and risk management choices. For policy makers: better data allows better targeting of policy instruments to objectives and needs, a more accurate monitoring of outcomes and, altogether, improve policy relevance. Improve capacity by participating in internationally comparable data collection and reporting exercises.

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.