Definition of Agro Industry Cluster

Cluster-based economic development, including agro industry cluster has received increasing attention from researchers and many organizations, including OECD, European Commission, the U.S. National Governors Association, and USAID. Also a large number of regions and nations have launched initiatives to develop or strengthen clusters.

The cluster concept is mainly motivated by the research work of Michael Porter. Porter (1990), clusters are groups of companies and institutions co-located in a specific geographic region and linked by interdependencies in providing a related group of products or services. "Because of the proximity, both in terms of geography and activities between them, voters take clustered economic benefits of various types of externalities of location.

Clusters arise because they increase productivity by allowing companies to compete. Development and improvement of the cluster is an important agenda for governments, businesses and other institutions. Cluster development initiatives are important new direction in economic policy, based on past actions and macroeconomic stabilization, privatization, open markets and reduce costs of doing business.

Investment Environment of the Agro-Industry Sector in Kazakhstan

In 2003, Kazakhstan newly enacted the Act for New Foreign Investment after abolition of the Act for Foreign Investment and the Law on State Support for Direct Investment. Under the new law, there is no discrimination between domestic and foreign investors. Investment favors are provided in priority sectors, which include following sectors: industrial infrastructure, processing industry, agriculture, agro-industry, housing, the social sector and tourism infrastructure. The incentives for direct investments in the priority sectors are: property tax and income tax exemptions for up to five years respectively, and exemptions or reductions in customs duty on materials necessary for completion of the investment project.

In 2002, the new law on taxation was enacted. Taxation system of Kazakhstan generally seems to be coincident with international standards. However, there are so many taxes imposed on enterprises, which may distort profit structure of enterprises. The maximum tax rates are different across according to sources of taxes: 30 percent for corporate tax, 15 percent for value added tax, 21 percent for social security tax. It is estimated that 32-35 percent of total revenue accounts for taxes paid by enterprises, implying that the tax burden is high.

Table 1. Selected Tax Rates in Kazakhstan

Types	Tax Rate
Corporate Tax Value Added Tax Land Tax Property Tax Social Security Tax Commodity Tax Transportation Tax Auction Tax	Up to 30% Up to 15% varies by use 1% Up to 21% varies by commodities varies by transportation types 3%

Source: Korea EXIM Bank, 2005

Kazakhstan has tried to improve the investment climate to attract FDI to more sectors including oil industry since its independence from the Soviet Union in 1991. For this purpose, Kazakhstan enacted four major legislations relating to foreign investment, such as the Act for Foreign Investment in 1999, the Act for State Support for Direct Investment in 1997, the Act for Government Procurement in 1997 and the Tax Code in 2001.

As a result, Kazakhstan has been fairly successful in attracting FDI, which supported economic recovery. During the period from 1993 to 2003, gross FDI inflows to Kazakhstan totaled USD 23.4billion. As of 2003, crude oil and natural gas extraction accounted for 51.8 percent of gross FDI, while agriculture, forestry and fishery accounted for 0.04 percent. Food industry, which is based on agriculture, is predominantly domestic market oriented and not lucrative due to low market demand for the local food products, implying that it is less attractive to foreign investors.

Table 2. Foreign Direct Investment (FDI) in Kazakhstan by Sector
Unit: million USD, ( %)

	1993-2000	2001	2002	Jan.–Jun.2003
Agriculture etc. Mining Manufacturing Transport, etc Finance Real estate Electric power Others	7.4(0.1) 7,841.2(62.4) 1,766.4(14.1) 160.0(1.3) 206.4(1.6) 1,432.8(11.4) 433.0(3.4) 715.0(5.7)	5.0(0.1) 3078.1(67.7) 641.4(0.7) 161.1(161.1) 44.4(1.0) 456.5(10.0) 33.8(0.7) 124.3(2.7)	2.5(0.1) 2107.7(51.7) 829.5(20.4) 95.2(2.3.) 11.8(0.3) 841.4(20.7) 17.5(0.4) 167.9(4.1)	1.1(0.04) 1148.4(51.8) 433.3(19.5) 45.0(2.0) 7.8(0.4) 433.6(19.6) 58.4(2.6) 91.2(4.1)
Total	12,562.2(100.0)	4,544.6(100.0)	4073.5(100.0)	2218.8(100.0)

Source: National Bank of the Republic of Kazakhstan

Tajikistan’s Agriculture and Agro-industry Sector

Agriculture is Tajikistan’s major sector endowed with unique geographic and climatic environment. Due to its environment, Tajikistan can cultivate virtually almost all agricultural crops. The agricultural sector contributes nearly 30 percent to the country’s GDP and employs more than half of the total employment. In addition, it is responsible for more than 30 percent of exports. Especially, cotton alone provides 30 to 40 percent of budget revenues in taxes.

During the past years, about 400 agricultural producers have been restructured into over 14,000 farms with 3.8 million hectares of cropland. The agrarian reform significantly affected Tajikistan’s agricultural sector and related institutions. 85.3 percent of meat, 86.5 percent of milk, 81.5 percent of eggs, 56.7 percent of vegetables, and 66.3 percent of fruit and berries were produced by the private sector in 2001. However, the major part of the most valuable irrigated land is still controlled by state and collective farms.

The major food and agricultural commodities produced in Tajikistan are wheat, potatoes, cow milk, cotton seed, and cotton lint. Cotton lint is the major exporting agricultural commodity followed by onion and fruit products. Sugar, wheat, flour, and beef are major importing agricultural items of Tajikistan.

Cotton is the major crop whose production covers more than 50 percent of the country’s irrigated land. Before the independence, Tajikistan’s cotton yield per hectare was the highest in the central Asian region with an earning capacity of 60 to 70 percent of production costs. However, cotton production dramatically declined after the independence and halt of centralized supplies of material and technical resources. Furthermore, world lint cotton prices have dropped by more than 50 percent in the past years while prices of fuel, machinery, and fertilizers keep growing.

In Tajikistan, cotton marketing and production are subject to the state administrative system, there is no competition among participants. Also local government imposes extra charges on cotton sales to boost its tax collection.

Agriculture and Agro-industry Sector of Kyrgyz Republic

The Kyrgyz Republic’s economy is predominately driven by agriculture and has relatively small manufacturing industry. The agricultural sector contributes nearly 40 percent to the country’s GDP and employs about half of total registered employment. Following the break-up of state owned enterprises, the agricultural sector has increasingly moved away from large scale collective farming to smaller subsistence level of family farming. Specifically, 40 percent of agricultural output is produced by private farmers and 54 percent from family farms.

The major food and agricultural commodities, produced in Kyrgyz Republic are potatoes, wheat, cow milk, sugar beets, and maize. Cotton lint and tobacco leaf are the major exporting agricultural commodities and wheat and sugar are major importing agricultural items.

As part of its effort to stimulate the development of the cotton sector, the government has set aside about 3 percent of total arable land for cotton production. This resulted in growth of cotton production from 75,000 ton in 1995 to about 122,000 ton in 2004. Nearly 80 percent of the cotton is grown by private farmers, which generates almost 5 percent of the total value of the country’s exports. However, high production costs from lack of fertilizers, pesticides, and herbicides weaken the industry and negatively affect country’s cotton export potential. Tobacco is also an important cash crop for the Kyrgyz agricultural sector. However, most of tobacco is grown by state owned enterprises and local value-added production activities are very limited.

Mongolian Agro-industries and Agro Processing

Due to the lack of processing equipments and lagged technology development, the rates of value-addition are low in agro-industries. Mongolia produces about a quarter of the world output of cashmere. Small-scale cashmere processing factories are scattered in Mongolia. In 2003, there were five domestic and 80 foreign invested cashmere processing factories, of which there were 42 primary-level, 37 knitting, and 6 complex-level processing factories. Substantial amounts of raw or primary-level processed cashmeres are exported to China, hindering additional value creation within the borders of Mongolia.

Besides livestock production, food self-sufficiency is low. Crop farming is relatively new activity and was developed primarily through large state farms, although now those state farms are completely privatized. Wheat production in 2003 was 164,400 ton, which is not sufficient for feeding the people; Mongolia imports heavy amount of wheat flour from abroad including Kazakhstan. Vegetables and fruits had been produced sufficiently until the early 1990s, but they are now imported from China.

Review of Agricultural Commodities of Uzbekistan

The major food and agricultural commodities produced in Uzbekistan are wheat, cow milk, cotton seeds and lint, and tomatoes. Cotton lint, grapes, tomatoes and onions are the major exporting agricultural commodities and flour of wheat, sugar, and vegetable oils are major importing agricultural items.

A survey administered by the International Finance Corporation (IFC) proportionally sampled SMEs throughout the country, and 56 percent of the respondents are working at agricultural sector. It can be estimated from the survey, therefore, that the number of agro-industry enterprises amounts to 130 thousand because the number of active SMEs in 2004 is 237.5 thousand (IFC, 2003, 2004).

Uzbekistan is the seventh largest cotton producing country and the second biggest exporter of cotton after the U.S. in the world. About 60 percent of population is working in the cotton industry, meaning the importance of the sector in national economy is substantial. Cotton took up about 20 percent of total export amount in 2003, and therefore the state revenue from the cotton products in the world market is the largest in agricultural sector. The heavy dependence on raw mineral and agricultural products exposes the country to the risk of financial crisis stemming from unstable international demands and prices.

The world price of cotton is moving upward over the long term, but competition in world market is getting severer; China, the United States, India, and especially West African countries are competing with Uzbekistan with their cheap labor cost and production cost.

Wheat production amounts to about 4.8 million ton, which is quite enough for the self-sufficiency, but some amount of flour of good quality is imported from Kazakhstan.

Review of Agriculture and Agro-Industry Sector in Kazakhstan

Although the share of agriculture (and agro-industry) out of GDP is only 8 percent, agriculture (and agro-industry) is a very important sector in Kazakhstan, since over 40 percent of population still resides in rural areas and 20 percent of labor is employed by the agricultural sector.

Kazakhstan is one of the world’s largest grain producer and exporter. The main grain crop is wheat. It is specialized in the cattle-breeding and fruit-growing. Livestock production accounts for about 40 percent of the agricultural production in value. Livestock production has been a key economic activity in Kazakhstan for centuries and will continue to be a major source of employment, food supply, and income for the rural population. The production of meat and milk satisfies domestic demand, while vegetables and fruits partially satisfy domestic demand because of the logistic difficulties associated with transportation and storage.

Agricultural input industry such as agricultural machinery, fertilizer and agro-chemicals have not been developed due to the lack of investment. Thus, the availability of agricultural input is too low, limiting yield increase across all agricultural sectors.

Food processing in Kazakhstan is one of the strategically important industry in provisioning high quality food for the population. Food processing industry consists of more than 30 specialized sectors, sub sectors and separate manufactures. It includes about 5,151 plants and manufacturers, 80 percent of which are small and medium–size enterprises. The SMEs employs 69.4 thousand people that is 10.3 percent of total employees in all industries of the country.

The major segments of food processing industry include flour-and-cereals, meat processing, dairy, fruits and vegetables processing. Flour and cereals account for 74.3 percent of the total enterprises in terms of the number of enterprises.

Table 1. Distribution of Agro-industry by Commodity Types in Kazakhstan, 2004

Sectors of Agro-Industry	Ratio (%)
Flour and cereal Meat processing Dairy Fruits and vegetable processing Others	74.3 14.1 8.5 2.7 0.4
Total	100

Source: Ministry of Agriculture, Kazakhstan

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Review of Agriculture and Agro-Industry Sector in the CIS

The CIS countries began their economic transition in 1989-1990 based on the common institutional and organizational heritage in agriculture. In the past, there was no land ownership, and most land was cultivated in the form of large-scale collective farms sized at thousands of hectares. Each farm employed hundreds of workers.

Product markets and input supply channels were largely controlled by state organizations under the command economic framework with virtually no budget constraint. This was the Soviet model of socialist agriculture that dominated the region since the early 1950s. The inefficiency of socialized agriculture was a result of the command economy, which curbed the farms from the contact with market economy, set central targets with no consideration of consumer preferences, and allowed farms to function under soft budget constraints without proper profit accountability.

The missing of market signals resulted in inefficiency in the agricultural marketing and food processing industry. Agro-processing industries, or simply agro-based industries, can be described as industries that add value to agricultural raw materials, both food and non-food, through processing them into marketable, usable or edible products, while enhancing the income and profitability of the producers (UNESCAP, 2003).

During the economic transition, the lack of investments and serious budget constraints affected development of agriculture and agro-industry. While recent successful land reform processes in the countries were positive steps toward market-oriented agro-industry, suboptimal input use, such as low fertilizer, chemical supply and old machineries, is still problematic.

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Agriculture and Agro-Industry Sector in the Commonwealth of Independent States (CIS): Macroeconomic Indicator

Before the Soviet Union was disintegrated and the Commonwealth of Independent States (CIS) was formulated, the region was a unified market and an integrated production and trading network under the Soviet economic system, including products of agriculture and agro-industry sector. In the region, employment, income and social indicators were broadly average level, and poverty was virtually unknown. After the Soviet Union disintegration, however, national borders and import controls were created, converting these countries into small, segmented market economies with limited growth potential.

Table 1. Macroeconomic Indicators of Selected CIS Countries (Year 2003)

	Kazakhstan	Uzbekistan	Mongolia	Kyrgyz Rep.	Tajikistan
Total Population (million)	14.91	25.7	2.5	5.0	6.6
% of Urban Population	56.6	36.5	53.4	34.8	26.5
Employed (million) - Agriculture and Forestry - Industry - Others	7.0 2.4 0.9 3.7	9.5 3.0 1.2 5.3	0.9 0.4 0.1 0.4	1.8 0.9 0.2 0.7	1.9 1.3 0.1 0.5
Unemployed (million)	0.7	0.4	0.03	0.2	0.05
Employment rate (%)	8.8	29.4*	3.5	8.6	2.4
GDP (current US$)	29.7 bill	9.9 bill	1.3 bill	1.9 bill	1.6 bill
% of GDP - Agriculture - Industry - Services	7.9 35.1 57.1	33.1 23.5 43.4	20.1 25.3 54.6	37.2 23.3 39.5	28.2 28.1 43.7

Source: ADB and WB.
*: calculated

Table 1 shows that selected CIS countries are suffering relatively high unemployment rate from limited industrial development compared with agriculture. In most selected CIS countries, especially in Uzbekistan, Kyrgyz Republic, and Tajikistan, agriculture is the major industry of providing employment opportunity and considerable share of GDP. At the end of 2003, average per capita incomes of Uzbekistan, Kyrgyz republic, and Tajikistan were less than US$ 400, which is below the average per capita incomes of South Asia ($460) and sub-Saharan Africa ($450). Average per capita incomes of Mongolia and Kazakhstan recorded about US$ 457 and US$ 1,300 respectively.

Kazakhstan is the biggest recipient of foreign direct investment (FDI) followed by Mongolia and Uzbekistan among selected CIS countries. The economies of Mongolia and Tajikistan rely on import and export of goods and services. This indicates that the countries' domestic market is still weak.

Table 2. Trade and Finance Indicators of Selected CIS Countries (Year 2003)

	Kazakhstan	Uzbekistan	Mongolia	Kyrgyz Rep.	Tajikistan
Exports of goods and services (% of GDP)	50.4	36.7	67.6	38.0	60.0
Imports of goods and services (% of GDP)	44.2	29.6	53.4	34.8	26.5
Foreign direct investment (US$)	2.1 bill.	70.0 mill.	131.5 mill.	45.5 mill.	31.7 mill.
Present value of debt (US$)	23.1 bill.	4.8 bill.	1.1 bill.	1.6 bill.	0.9 bill.
Short-term debt outstanding (current US$)	2.8 bill.	221.0 mill.	285.2 mill	38.7 mill.	81.7 mill.
Aid per capita (current US$)	18.0	7.6	99.7	39.1	22.9

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What is Agro-industry?

Agroindustry or agro-industry (agroindustrial or agro-industrial) is industry dealing with the supply, processing, and distribution of farm products. Agro-industry is related to the large-scale production, processing, and packaging of food using modern equipment and methods.

An 'agro-industry' means a unit which adds value to agricultural produce / intermediates / residues; both food and non-food; by processing them into products which are marketable or usable or edible, or by improving storability, or by providing a link from farm to the market or a part thereof. Agro-industry also includes hitech agriculture, biotechnology based agriculture and the certified/ truthful label seed producing industry.

'Agricultural products' would include produce of Agriculture - Horticulture - Sericulture - Floriculture - Medicinal plants - Fisheries - Poultry - Apiculture - Dairy products and also includes minor forest produce and live stock based products.

It would also include industries which are engaged in the utilisation of agriculture waste or its disposal.