Labor productivity in the agriculture, structural shifts and economic growth in the central and eastern European countries

Note. In parenthesis t-statistic. Source: author's estimation

The results of the study of the pre-crisis period from 1996 to 2008 and after the crisis period indicate an increasing impact of the growth of value added in the services sector (the coefficient increased by 4 times) and agriculture (the coefficient increased by 2 times). The impact of the increase in value added in industry is decreasing, but remains the highest on the economic growth of countries.

Therefore, we have confirmed that the agricultural sector is gaining weight in the economic growth of the CEE countries, the influence of the service sector is increasing, although together they do not exceed the influence of the growth of value added in industry. Such research results encourage the implementation of an effective industrial policy that would contribute to raising labor productivity in the agricultural sector and the service sector. Governments should stimulate the inflow of investment in agriculture to catch up with productivity in industry, as well as to preserve and increase the fertility of arable land in the long term, as well as to improve cropping patterns.

In general, structural changes in the economy are a rather painful process that affects the way of life of large groups of the population, changes in their place of residence and employment. S. Kuznets pointed out that government policy and institutional change must minimize costs and reduce resistance to the structural changes needed to achieve high economic growth [1]. M. McMillan et al. emphasized that the speed with which this structural transformation takes place is the key factor that differentiates successful countries from unsuccessful ones [32]. Structural changes are designed to reduce the level of imbalances in the economy, use resources more efficiently and allocate them in certain areas to accelerate technical change and achieve dynamic efficiency of society.

Our research made it possible to obtain significant results regarding the evolution of labor productivity and structural shifts in the countries of Central and Eastern Europe for the entire period from the beginning of market reforms in the 1990s. We paid special attention to the study of the structural transformation of agriculture and its impact on changes in labor productivity, identified the reasons for the initial decline of the agricultural sector, and then for its sharp rise. The research period covered the time of the economic boom - 2002-2008, as well as the post-crisis recession, which covered the whole world. The currency and financial crisis of 2008, as our research showed, was a turning point and the reason for the slowdown in economic growth and, accordingly, a decrease in labor productivity in the countries of Central and Eastern Europe. This global shock caused significant structural transformations in the sources of labor productivity growth in general in the economy. Labor productivity in agriculture grew in a number of countries at a significant pace and, in fact, agriculture became the dominant sector along with services in raising the productivity of the economies of Central and Eastern Europe.

Industry got the biggest hit, although the structural dynamic effect began to grow, and in certain branches of industrial production, there was an increase in labor productivity while the general process of decreasing employment was observed.

The growth rate of labor productivity for the period 1996-2019 was very high, on average - 5%, which was 3.3 times higher than in the USA and 6 times higher than in France, which indicates a catch-up, which the CEE countries have achieved in their economic development, increasing the level of added value per employee by 2.2 times on average over 23 years. In the pre-crisis period of 1996-2008, the CEE countries demonstrated extremely high growth rates of labor productivity - 6.25%, which sharply decreased in the post-crisis period by almost 3 times to 2.09% per year. In the USA, the rate of labor productivity fell by only 1.5 times, and in France, such a phenomenon was not observed at all.

What sectors of the economy were dominant in this impressive increase in labor productivity in the economy? Labor productivity grew at the fastest rate in the agricultural sector of the economy, on average almost 12% per year. The highest achievements were in Slovakia - 48.2%, Estonia - 21.5%, Latvia - 14.8%, Lithuania - 11.6%, Ukraine - 14.2%. Analysis by country shows that agriculture is dominant in terms of labor productivity growth rates in almost all countries, except for Poland, Belarus, Bulgaria and Albania. Slovakia, Estonia and Ukraine showed particularly phenomenal results.

In general, during the period from 1996 to 2019, the growth of labor productivity in the economy by almost 66% was provided by the service sector, the contribution of industry is measured by 30.4%, and agriculture - 3.6%, respectively. If we consider the period before and after the crisis, we will find certain differences in the sectoral structure of labor productivity growth. During the period of economic boom of 1996-2008, the contribution of the service sector was 59%, industry - 38%, and agriculture 2.3% on average for the sample. After the crisis of 2008, the contribution of the service sector increased significantly, to almost 78%, and industry fell more than 2 times, to 18.8%, and the contribution of agriculture grew to 3,4%, and in almost all countries except Estonia and Hungary. It can be stated that the growth of labor productivity in agriculture in the post-crisis period was the highest. The growth within the industry in all sectors of the economy in the CEE countries occupies a dominant position and its share is on average 88.5%, and the structural effects are as follows: the dynamic effect is almost 1%, the static effect is 10,4%.

After the crisis, the dynamic effect has become negative, the static effect has increased to 14%, in the pre-crisis period the dynamic structural effect was almost 2%, and the static effect was 9.9%. In most countries, the dynamic effect has negative values. This means that labor force flows to the sector with lower productivity.

During the entire period of post-socialist economic growth, the dominant factor was the growth of value added in industry with a coefficient of 0.52, which indicates that an increase of value added in industry by 1% point will cause an increase of 0,5% points in the rate of economic growth, an increase in value added in the service sector it affects with a coefficient of 0.11, in the agricultural sector with a coefficient of 0.04.

We also analyzed the period before the accession of CEE countries to the European Union and after the accession to date and compared. Analysis showed that the impact of the growth of value added in industry decreased from 0.54 to 0.41, and the growth of value added in the service sector increased from 0.06 to 0.41, and in the agricultural sector, the growth of value added changed from a negative and statistically insignificant impact before the entry of countries the EU to a positive and statistically significant impact on economic growth with a coefficient of 0.065. The results of the study of the pre-crisis period from 1996 to 2008 and after the crisis period indicate an increasing impact of the growth of value added in the services sector (the coefficient increased by 4 times) and agriculture (the coefficient increased by 2 times). The impact of the increase in value added in industry is decreasing, but remains the highest on the economic growth of countries.

Especially interesting processes took place in the agriculture of Ukraine. We carried out a detailed analysis of Ukrainian agricultural development, starting from 2000. The increase in world prices for food products in 2008-2010 and maintaining its high level during the following years, as well as the growing demand for technical crops for the needs of the energy sector acted as the main factors of demand, in our opinion, caused the rise of the agricultural sector in Ukraine. In addition, agricultural production does not require significant investments in fixed capital, as well as access to new technologies of grain production, high-yield crop varieties, seed material, pesticides and mineral fertilizers. Besides, new imported agricultural machinery allowed increasing dramatically labor productivity in crop production. All the above - mentioned factors affected the supply of agricultural products and increased efficiency of their production. The change in the structure of cultivated areas in favor of industrial crops increased the export potential and profitability of agricultural production.

In almost all CEE countries, the contribution of agricultural production to total labor productivity has increased over the past 12 years, although the level of labor productivity still falls short of the level of other sectors. In further research, it will be valuable to determine spillovers of technology between industrial sector and agricultural sector, as well as the impact of innovative technologies on employment in agricultural production in the countries of Central and Eastern Europe, influence of global COVID-19 pandemic on agriculture development and also the prospects of structural changes in the agricultural sector of Ukraine in the post-war period.

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