Technological progress in Croatian perennial agriculture

The agricultural sector in Croatia has declined or stagnated since the 1980s. Despite the high subsidies and EU accession, it failed to improve its production level, but the underlying causes of the subsidy inefficiency remain unclear. Trade liberalization and bear prices of agricultural products in the EU are some of the frequently cited arguments. On the other hand, government interventions in the form of direct subsidies have always been significant. Following the prevailing theoretical body of literature, we assumed that these interventions were at least in part aimed at achieving sustainable competitive position of the agriculture sector vis-à-vis foreign markets. Therefore, this paper analyzes Croatian perennial agriculture in detail with the aim to reveal whether subsidies in this sector led to technological progress and productivity increase. A panel data set for all Croatian legal entities doing business in the field of perennial agriculture in the 2008-2014 period was used to construct a production function in order to extract the total factor productivity and determine whether the K/L ratio is properly set. It is shown that the K/L ratio is entirely inadequate, while also indicating the decreasing returns to scale which should have been overcome with technological progress (TFP). The TFP in perennial agriculture remained constant throughout the period despite the changes in subsidies. Moreover, the majority of perennial subsectors have displayed significant decrease in the TFP. Finally, a TFP model was built to determine the factors that affect the TFP growth. By employing a set of 301 variables which describe the companies? internal and external properties, only two remained significant: export and subsidies, but with almost inexistent effect, revealing that exports and current subsidy distribution cannot be a drive for perennial or for non-perennial agriculture growth in Croatia.