LSE - Small Logo
LSE - Small Logo

Kira Gartzou-Katsouyanni

February 21st, 2024

From statism to cooperation for export-oriented production? The case of contract farming in Greece

0 comments

Estimated reading time: 10 minutes

Kira Gartzou-Katsouyanni

February 21st, 2024

From statism to cooperation for export-oriented production? The case of contract farming in Greece

0 comments

Estimated reading time: 10 minutes

Inter-firm and bank-firm cooperation aimed at export-oriented production can have transformative effects for economic development, but it is difficult to create in places that don’t already have it. This is particularly so in countries where entrenched patterns of interaction among economic and political actors follow a different rationale, such as the rent-seeking logic that is characteristic of clientelistic systems like pre-crisis Greece (Doxiadis 2014).

This project explains the puzzling emergence of a lending instrument that facilitated both bank-firm and inter-firm cooperation for export-oriented production in the Greek agri-food sector during the Eurozone crisis, namely tripartite contract farming. Through this instrument, the bank provides working capital to agricultural producers and agri-food firms or cooperatives based on a contract that specifies the quantity, quality, and price of the agricultural input to be delivered on a given year. Contract farming addresses the challenge of getting credit to small agricultural producers differently than in pre-crisis Greece, where agricultural credit was often distributed on clientelistic criteria. What accounts for this transformation? Why was the clientelistic system of agricultural finance replaced, and why did a system relying on cooperation, rather than mere arm’s-length market exchange, take its place? What can we learn from this case about the introduction of coordinating institutions in a statist environment more generally?

The project addresses these questions through a range of sources, including, firstly, semi-structured interviews with policymakers and stakeholders from the banking sector who were directly involved in the process of reforming Greek agricultural finance during the Eurozone crisis, complemented by primary and secondary literature on the topic. Secondly, to understand potential challenges in the implementation of contract farming on the ground, I selected the olive sector as an economically significant agricultural sub-sector that wasn’t one of the first ones to adopt the programme. I conducted interviews with producers and representatives of firms and cooperatives in two olive-producing areas, namely Halkidiki and Sitia, which varied in terms of the local producers’ associational capacity, as, according to the literature, a higher associational capacity is usually linked to improved participation in contract farming for smallholders (Otsuka et al. 2016). Finally, I analysed quantitative data about the participation of producers and firms or cooperatives in the contract farming programme in 2013-2019 by NUTS-3 region. Overall, the project relies on 25 semi-structured interviews, documentary sources, and quantitative data.

Before the crisis, agricultural credit was largely distributed via the Agricultural Bank of Greece (ATE). In a banking system with a traditionally strong statist orientation (Pagoulatos 1999), the Agricultural Bank was particularly vulnerable to political influence. It regularly gave out loans to cooperatives due to pressures stemming from the party connections of their management boards, rather than based on performance criteria (Efthymiou 2017). Banking liberalisation in the 1990s and 2000s in some ways aggravated the situation, as the Agricultural Bank also started liberally giving out other types of loans, such as consumer loans, expecting that in case of trouble, the state would come to its rescue. An interviewee remembered a “notorious” TV advertisement of the Agricultural Bank from 2005, which asked viewers to picture themselves drinking coffee in Manhattan and invited them to take out a loan to realise that dream.

The situation came to a head at the start of the Eurozone crisis, when the Agricultural Bank found itself in grave financial trouble. The “good” parts of the bank were sold to a private bank in 2012, in one of the earliest applications of the new EU regulatory framework of bank resolution in Greece (the main provisions of the draft EU directive on bank resolution had been incorporated in Greek law in 2011, even though the directive was only adopted at the EU level in 2014). At the same time, the new EU banking supervision framework defined stricter criteria for bank lending, which were credibly enforced. The combination of the Agricultural Bank’s privatisation due to the crisis and the new EU regulatory framework for banking resulted in a situation where “party-political loans have become a rare exception” in Greece today, as an interviewee who used to be involved in the banking sector put it.

While the EU’s involvement was a necessary condition for the disruption of the old, clientelistic system of agricultural finance, it does not explain why an arrangement that privileges cooperation, and not just arm’s-length market exchange, took the old’s systems place. After all, we know from the literature that in countries lacking a tradition of broad-based cooperation for export-oriented production, the retreat of the state is more likely to lead to further liberalization rather than to improved coordination (Ornston and Vail 2016).

Based on my research, the introduction of the contract farming programme, which is based on bank-firm cooperation and also facilitates inter-firm cooperation along the agri-food supply chain, can be attributed to leadership by a small group of boundary-spanning domestic actors in the banking sector. These actors used their translocal networks to acquire deep contextual knowledge of the obstacles to export-oriented production in the agricultural sector; find private-sector partners who could provide digital support services for the new lending programme; identify good potential clients; and convince those clients to join the programme. In terms of how they underpinned the emergence of a coordinating financial instrument in Greece, these translocal networks compensated for Greece’s lack of domestic “embedded policymaking” capacities, i.e. for the absence of institutionalised, systematic forms of reciprocal information exchange between the public sector and stakeholders such as business associations and banks.

However, the olive sector case studies and the quantitative analysis for the project underline that relying on personal translocal networks rather than institutionalised embedded policymaking also has costs, as participation in the contract farming programme tends to remain geographically concentrated in the areas where the leading actors’ networks were densest, rather than spreading evenly across the country. In Halkidiki, where the producers’ associational capacity is low and the processing firms have considerable bargaining power, many processors were reluctant to use contract farming, as they saw no benefit in paying interest rates to provide working capital to the olive producers. Conversely, in Sitia, which still has several active cooperatives, it was the producers who viewed contract farming with suspicion: “Why should I sign a contract? For you to tell me what to produce and how much, and then be the sole buyer? And what if the market price goes up?” a producer asked. According to one of the architects of the contract farming programme, addressing both types of concerns requires the bank to build relationships with the firms and producers, and to explain how the programme works and its potential benefits. For example, a dynamic peach cooperative in northern Greece first adopted contract farming after bank representatives met “with 800 farmers” and discussed the programme “till the morning”. In the absence of well-functioning, sectorally representative institutions, there is a risk that this kind of relationship-building will be limited in scope by the breadth of the personal networks of a small group of leading actors.

Given the importance of cooperation for export-oriented production in a country with so many small firms, Greek policymakers should consciously strive to create coordinating institutions with broad-based sectoral representation, helping to spread the economic benefits of cooperation widely across the country.

 

*The Hellenic Observatory hosted a research seminar on the topic on 6 February 2024. For more information please visit the event page.

Note: This article gives the views of the author, not the position of Greece@LSE, the Hellenic Observatory or the London School of Economics.

References

Doxiadis, Aristos. 2014. Το Αόρατο Ρήγμα: Θεσμοί Και Συμπεριφορές Στην Ελληνική Οικονομία [The Invisible Rift: Institutions and Behaviours in the Greek Economy]. Athens: Ikaros.

Efthymiou, Petros. 2017. ‘Επιχειρηματικοί Συνεταιρισμοί Νέου Τύπου’ (‘Entrepreneurial Cooperatives of a New Type’). Report. Athens: Dianeosis.

Ornston, Darius, and Mark I. Vail. 2016. ‘The Developmental State in Developed Societies: Power, Partnership, and Divergent Patterns of Intervention in France and Finland’. Comparative Politics 49 (1): 1–21. https://doi.org/10.5129/001041516819582964.

Otsuka, Keijiro, Yuko Nakano, and Kazushi Takahashi. 2016. ‘Contract Farming in Developed and Developing Countries’. Annual Review of Resource Economics 8 (1): 353–76. https://doi.org/10.1146/annurev-resource-100815-095459.

Pagoulatos, George. 1999. ‘The Greek Banking System and Its Deregulation: History, Structure and Organization in a European Context’. In Modern Banking in the Balkans and West-European Capital in the Nineteenth and Twentieth Centuries, edited by Kostas Kostis, 98–133. Aldershot, England: Ashgate.

Print Friendly, PDF & Email

About the author

Kira Gartzou-Katsouyanni

Dr Kira Gartzou-Katsouyanni is a Leverhulme Early Career Fellow at the Department of Politics and International Relations (DPIR) of the University of Oxford.

Posted In: Economy | Greece

Leave a Reply

Your email address will not be published. Required fields are marked *

Bad Behavior has blocked 341 access attempts in the last 7 days.