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THE Azerbaijan Agricultural Development and Credit Project




1. Azerbaijan Agricultural Development and Credit Project 10

Background 10

Agriculture in Azerbaijan 10

Legal Framework 11

World Bank Pilot Farm Privatization Project 11

Project Rayons: A Snapshot of the Official Information 13

Main Stakeholders 15

Internally Displaced People 17

Residents of the Caspian Sea Rise Environmental Disaster Area 18

2. Social Assessment 19

Objectives and Methodology 19

Social Aspects of Agricultural Development in Europe and Central Asia Region 19

SA Procedures to Date 20

Summary of Main Findings 21

3. Detailed Findings of the Social Assessment 23

Household Characteristics 23

Income Levels 25

Relative Wealth in Project Rayons 27

Agricultural Production 28

Conduct of Privatization 31

Land Privatization 31

Formation of Cooperatives and Associations 33

Interest in Private Initiatives 34

Farm Machinery and Equipment Privatization 34

Access to Credit 35

Formal Borrowing 35

Informal Borrowing 36

Demand for Credit 37

Access to Agricultural Inputs 37

Market Conditions 38

Irrigation 40

Access to Information 42

Social Assets and Services 42

Women in Farm Privatization 43

Women’s Employment and Access to Credit 45

Women’s Workload and Family Relations 46

Effect of Privatization on Rural Life 48

4. Implications 50

Privatization 50

Improving Farm Inputs 50

Marketing Improvements 51

5. Preliminary Social Impact Monitoring and Evaluation Indicators 52

Executive Summary: Social Assessment of Azerbaijan Agricultural Development and Credit Project
Ayse Kudat

A sharp deterioration of agricultural output and the large problem of refugees and internally displaced populations have led to decline in living standards in rural Azerbaijan since 1988. The situation was exacerbated by the environmental crises caused by the Caspian Sea. Currently, up to 60 percent of the rural population are living below the poverty line and this situation is compounded by continuing erosion of the previously guaranteed access to social services. “With the distribution of land, there is danger of a rapid increase in rural unemployment and poverty, as the new small holdings may often be too small to maintain a family and land concentration is likely to occur. Independently of oil developments, the prospects for a substantial proportion of Azerbaijan’s rural population depend on the recovery of agricultural output and the re-establishment of growth in agriculture and agro-industry” (FAO/CP 1998: vi)1. The Government of Azerbaijan (GOA) and the Bank agree that the agricultural sector faces two major challenges. The first is the completion of the transition to a privatized system and the second to minimize the risk of further loses in agricultural output that may be caused by the anticipated oil and gas revenues. The GOA has invited the Bank to help support its efforts to meet these challenges through a new project on Agricultural Development and Credit.
The Social Assessment
The SA aimed to identify the social development concerns of relevance to the project, evaluate the institutional and social organizational issues, define a participation framework for stakeholders with a focus on the small holders, and establish mechanisms for monitoring and evaluation (M&E) to ensure that development effectiveness objectives of the Project are met. To carry out the SA, several basic steps were followed. First, the relevant global, regional and country specific experience was reviewed and lessons learned were incorporated in the SA. Secondly, a rapid qualitative assessment of the results of the Bank-financed Pilot Agricultural Privatization Project was carried out with a team of Bank and local social scientists. The next step of the SA included a survey of 800 households in five regions where the Bank-financed Pilot Project is being implemented2. Also, focus group meetings were held in fifteen communities of these regions, and consultations were carried out with a range of stakeholders. The preliminary SA results were disseminated through stakeholder seminar which was attended by central and local government representatives, local social scientists, women’s organizations, and donor representatives. This report captures the findings of the SA process at the project identification stage and raises a number of new issues that need to be addressed through the SA process during the pre-appraisal, appraisal and implementation stages.
The key social development concerns of the SA focused on social inclusion. The SA attempted to find mechanisms to enhance equitable integration of small holders, including women, in the agricultural reform process. These mechanisms are necessary to ensure that they are better informed of legal and procedural changes and have access to know-how and skills required to make a transition from a wage based rural economy to one in which peasantry will be dominant. They are also crucial in guaranteeing that male and female farmers receive equitable access to farm inputs, technology and marketing facilities. This involved an understanding of current problems and constraints farmers face and the institutional mechanisms that need to be modified to enhance reform benefits to rural people. It also required an in-depth understanding of the potential solutions farmers felt to be appropriate for the solution to their problems. The SA raised the question of how best to sustain participation of small holders in the restructuring of agriculture sector in Azerbaijan.
Another important concern was the displaced populations dispersed throughout the country. Internally displaced populations (IDPs) constitute a large percentage of the population of Azerbaijan; their problems have been addressed by other Bank-financed projects. Although the proposed project will not specifically deal with the needs of IDPs, the capacity created within the agricultural sector will no doubt be of direct support to those who are being re-integrated in liberated areas. Nonetheless, the SA incorporated a focus on issues of post-conflict reconstruction, based on the results of sequential SAs carried out in the context of the Azerbaijan Reconstruction Project, Azerbaijan Poverty Assessment and the Caspian Sea environmental crises. The GOA aims to re-integrate IDPs in their original settlements and thus does not include them among beneficiaries of land privatization in their host communities. As land registration systems and advisory and credit services become more widely available, returning IDPs will also benefit. The current SA recommends that the policy development component of the proposed farm privatization project focus on the viability of addressing the needs of the IDPs primarily through the reconstruction effort.
There are three levels of institutional issues of relevance to the SA. At the micro level, the SA noted the newly strengthened role of the family and the household in the restructuring of rural Azerbaijan. It showed that as transitional vulnerabilities increased, and the wage economy lost its predominance, the family started to cushion adverse impacts of farm restructuring. Also, the household based economic interdependencies augment and home plots gain increased importance in the family subsistence base. At the community level, voluntary associations of farmers emerged as a new phenomena, building on pre-transition work habits and leadership structures. At the regional and national levels, new institutions are expected to emerge and/or be strengthened: rural credit unions, irrigation associations, extension services, land titling/registration systems, etc. The extent to which these new institutional requirements will be met through private sector provisioning or will have to be provided by the public sector is being debated, but the need to ensure transparency in the delivery of these services is clearly indicated by the SA.
Defining the participation framework for the proposed project requires: (a) the definition of the participation structure for the SA; and, more importantly, (b) the identification of participation structure for project implementation. The participation framework for the SA consist of systematic and qualitative consultations with a range of stakeholders with a focus on the small holders. As for the Project, there is need for the next steps of the SA to further define the framework of participation for key stakeholders. Assuming that the proposed project will have four main components--policy development, advisory services, credit, and land registration, the SA focuses primarily on the participation framework for small holders. Other stakeholders, however, also require consideration. This can be best achieved by incorporating an Information/Communication (I/C) component to the proposed Project and by specifying I/C requirements of each Project component.
Monitoring and Evaluation: Helping define a monitoring and evaluation framework for the project is the fourth key element of an SA. This will involve the identification of input, process, output and impact indicators for the Project to ensure that its development objectives are achieved. In the main body of this Report, a preliminary list of M&E indicators are provided. It is also suggested that a strong participatory element is built into this component so that stakeholders have an opportunity to provide feedback on Project implementation arrangements and on its development effectiveness. Since the proposed Project is intended to provide long-term continuous support to agricultural development through an adaptable lending instrument, M&E is central to defining the next steps in lending. In this context, it is also important that the proposed Project’s monitoring and impact assessment activities aim to integrate the development effectiveness of the agricultural component of the Reconstruction Project and the Pilot project.
SA impacts on Project design: The SA process covers the identification stage of project preparation; both active research and consultation elements of SA are continuing to guide the pre-appraisal and appraisal stages. Therefore, it is yet too early to list the impacts of the SA on project design. Nevertheless, based on the various stages of the SA process completed to date as well as preliminary technical, economic and financial assessments, implications for project design are listed with respect to four basic elements: (a) policy design, (b) land registration, (c) advisory services, and (d) credit. The SA confirms that these elements meet the priority needs of the people. In addition, the SA identifies a more detailed specification of these elements and outlines additional issues which, at this moment, fall outside of the scope of the proposed project but will nonetheless have to be addressed in the future. Continuous SA activities, as formulated by the SA, will provide further inputs for implementation arrangements.
(a) Policy: Azerbaijan offers high potential for agricultural production. The transitional problems caused by agricultural restructuring, on the one hand, and the expectation that the oil potential of the country would provide sufficient income for all decreases the motivation of the youth to engage in agriculture and pushes them out of the rural areas in search for jobs. This undermines the productive capacity of the country and poses a threat for the well being of large numbers of people. An equitable integration of small holders into the agricultural sector is not feasible without a solid policy base that specifically addresses the question of what motivates able-bodied men and women to productively engage in agricultural production. It is therefore essential to develop strategic options for agricultural developments through a broad-based feedback mechanism.
The SA, therefore not only supports a policy focus but proposes participatory arrangements for its development. It suggests that an information/communication strategy be built into the project to support the policy development objective of the project as well as the other components. Since there is a general tendency for policy makers to plan primarily on the basis of technical inputs, there is need to institute mechanisms of consultation as alternative policy scenarios are being prepared. In addition, there is need for a specific focus on key stakeholders in the implementation of this component so that the alternative policies developed consider the future roles of the public, private and civil society sectors, as well as those of the small holders, the women and other social groupings.
(b) Land registration: The needs to increase the transparency of the privatization process and to ensure that rights to land are actually transferred to people emerge strongly from the SA; it also justifies a sharp focus of the project on supporting a system to implement land registration. The SA shows that prolonged implementation processes in privatization and land and asset distribution reduce people’s trust in reform. Likewise, of land ownership without receipt of title and ability to trade assets hinders the reform process. The SA therefore recommends that a land registration system be developed through Bank financing. The SA also demonstrates that once security of ownership is ensured, people’s ability to pull their resources together, to form production associations and to have access to credit will be enhanced. If land markets are to develop and land is to serve as collateral to activate the credit systems, it is particularly important that gender and regional equity is ensured. Project monitoring should therefore address issues of social inclusion and equity.

The participation framework for this component would primarily focus on the need to ensure that the right to land ownership granted by the GOA to all its citizens, including women and children, not be eroded in the process of registration. In addition, global and ECA-specific experience shows that small holders and less influential members of local communities are often subjected to corrupt practices in their attempts to obtain titles to their land. Therefore, measures should be instituted to avoid similar practices in Azerbaijan. To avoid the erosion of entitlements and reduce risk of corrupt practices, the proposed Project will have to ensure that the land registration component is adequately supported by a well designed I/C activity. Although the GOA disseminates new laws and regulations through newspapers, it is difficult for ordinary citizens, despite their relatively good educational backgrounds, the content or implications of the laws. Therefore, it is important that farmer friendly information/communication strategies are developed in the course of project implementation to inform farmers of their entitlements, including those relating to land registration, credit and advisory services.

(c) Advice: The transition and privatization processes have created substantial knowledge and skill gaps in the country side. Many people who received land do not have a farming background. Others who were once responsible for specialized tasks within the collective state farm system are unfamiliar with diverse aspects of farming. Farm inputs are obtained in different ways than before and each farmer, rather than a specialized farm specialist, is expected to make a judgment about quality of these inputs. Likewise, farm outputs are no longer marketed through the state farms but by individual farmers or associations.
The knowledge base required to support a major shift from a rural society consisting primarily of wage earners to a largely peasant society is weak. Likewise, the management and financial knowledge needed to support the household and the new contractual relationships is lacking. These observations, based on the SA, suggest that the proposed Project support the provision of improved advisory services that are prioritized and targeted. This will require the establishment of new institutional arrangements including those that would facilitate the ability of women to gain access to appropriate information and farm advice.

The existing institutional framework is inadequate both in terms of capacity and know-how and in its organizational structure, to deliver advisory services to individual farmers. The pre-transition institutional arrangements allowed each state farm to work with its own staff of experts and specialists. The transition to the peasant mode of production requires, however, that all farmers have broader know-how and have skills. It also requires that the capacity for extensions services be developed outside of the state farm system to respond to the needs of peasant farmers as well as those farming units which pool resources of a group of farmers into production associations.

In the long run, advisory services should be made available by the private sector and thus it is desirable to provide early support to the private sector to build the relevant capacity. However, given multiple constraints in getting access to critical farm inputs (seed, fertilizer, pesticide, machinery, irrigation water, credit, know-how) farmers will have to establish priorities for their purchases and investments. Although the ability of newly independent farmers to farm more productively depends critically on know-how, given their acute cash shortages, advisory services is a low priority for the majority of small farmers. Thus, without subsidies, advisory services provided by the public or private sector will be unlikely to be accessible to small holders in the short run.
Throughout ECA, people increasingly rely on garden plots to meet many food requirements; this is also the case in Azerbaijan. There is little knowledge however concerning the constraints households face in making effective use of their garden plots. Considering that people view the amount of land distributed to be far too small and rely heavily on garden plots, it is appropriate to expect advisory services to stimulate increased specialization and intensification of cultivation. Likewise, know-how for home based processing opportunities would be welcomed. It is therefore important that project’s advisory services and credit components pay specific attention to increasing the efficiency of garden plots.
(d) Credit: Farmers face many problems, of which the lack of credit is just one. The lack of good quality seed, affordable pesticides and fertilizer, and opportunities to market produce are among the most pressing problems for the small holders. Larger land owners and those who have been able to assume the management of newly established collectives experience these constraints less and can make more effective use of credit. The capacity of the rural society to ease input and output constraints depends upon availability of capital to re-build agri-businesses or create new ones (including facilities to produce, import and/or distribute farm inputs and production or distribution units that may purchase farmers’ produce). The SA shows that credit is needed first and foremost to alleviate major input and marketing constraints of farmers. Secondly, credit is needed by farmers associations that pool the assets and labor of farming families. Thirdly, small holders have also demand for credit, but primarily for purchase of livestock as they are less certain of their ability to pay back the loans. Given that credit is needed for different purposes by different stakeholders, it would be important to include in the Bank financed project a credit component that has sufficient flexibility to meet different needs.
Next Steps: Continuous SA Process. There is need to continue the SA process since the conditions in the project areas are rapidly changing, resulting in corresponding changes in actual living conditions and people’s perceptions. Also, the information and consultation. The next phase of the SA should identifiy new institutional arrangements to provide targeted advice, including to women, and the nature of the advice most needed will be incorporated into the next stages of the SA process. Consultations are already initiated and planned to continue in the next phase of the SA with local women’s organizations will help women gain equitable access to advisory services and credit, and that their needs are taken into consideration in the design of agricultural strategies and land registration processes.

Another important follow-up to the SA is the need to understand better the formation and functioning of voluntary association of farmers for production purposes and to assess the feasibility of introducing water user associations. Also, there is need to carry out a separate assessment of how people utilize their garden plots and what they may need in order to maximize the returns to their investments (including labor) in these. In addition, there is need to assess the institutional arrangements required to target credit to individual small holders or to their production associations.

Yet another need for the SA is to have a better understanding of the farmers’ needs beyond the five regions in which the recent qualitative and quantitative data gathering activities hitherto focused. Unfortunately, this will not be an easy task, given resource constraints. There is also need to review the types of corruption and its impacts on the poor and on independent farmers. Finally, there is need to have a better understanding of municipal and state land allocations to enhance trust in the reform process.
The dynamic nature of the rural transition in Azerbaijan requires flexible project design and implementation arrangements and an intensive monitoring process. Therefore, the next stages of the SA will also help identify elements and procedures for monitoring and evaluation of the project to ensure that the advice provided reaches the intended beneficiaries and the expected behavioral changes take place

Some of the specific findings and recommendations of the SA are listed in the main document.

Issues that fall outside the scope of the Project: There are many useful findings of the SA that cannot be accommodated within the proposed project. First, the SA points to the rapid evolution of a peasant society in rural Azerbaijan. The transformation of the rural society into a peasant society requires the establishment of a diverse economic base, including but not restricted to agriculture. The development of the non-agricultural base of the rural society thus falls on other sector projects, but the credit component could help support agro-industries and create industrial employment. Secondly, a number of issues emerge that point to current and future vulnerability of the rural populations outside the productive systems. For instance, the restructuring of the state farms and collectives and the growing number of unemployed in rural communities signal to an increased number of people, mostly women, who will not have pension incomes in the future. Private pension insurance systems do not exist and are unlikely to be attracted to rural areas in the near future. However, the need to respond to rural social protection systems also falls outside the framework of the proposed Project.
Other sets of problems rural people face concerns social assets and infrastructure. Rural education and health systems have been adversely affected and much of the infrastructure is broken down. Shortages of electricity directly affect farm production and irrigation. Deteriorated transport infrastructure likewise has direct adverse impacts. The rapid loss of social assets constitutes a major push factor and induces out-migration. There is little that the proposed Project can do about these. However, the Project’s policy development component will have to take these issues into consideration as the availability of labor in rural areas will depend upon the availability of social services and social insurance systems among other things.

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