Manufacturing productivity in Northern Ireland: a re examination

The Economic and Social Review, Vol. 26, No. 3, April, 1995, pp. 307-314

Manufacturing Productivity i n Northern Ireland:

A Re-Examination

S T E P H E N R O P E R *

Northern Ireland Economic Research Centre, Belfast

Abstract: T h i s paper considers the influence of plant-level productivity and industry-mix/plant-size structure on manufacturing productivity in Northern I r e l a n d . I t demonstrates that from 1981-91 around two-thirds of the productivity gap between the U K and Northern I r e l a n d was due to the region's structural weakness rather than shortfalls in the productivity performance of individual plants. T o m a i n t a i n or increase the wealth creating potential of Northern I r e l a n d manufacturing, future policy w i l l need to address both firms' competitive position a n d the region's structural disadvantage. .

1 I N T R O D U C T I O N

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S e c t i o n I I o f t h e p a p e r o u t l i n e s t h e b a c k g r o u n d to t h e c o m p a r i s o n s a n d d e s c r i b e s t h e m e t h o d o l o g y to be u s e d . S e c t i o n I I I d i s c u s s e s t h e d a t a a n d

s u m m a r i s e s t h e m a i n e m p i r i c a l f i n d i n g s . S e c t i o n I V c o n c l u d e s w i t h s o m e b r i e f c o m m e n t s o n t h e i m p l i c a t i o n s of t h e r e s u l t s for i n d u s t r i a l d e v e l o p m e n t policy i n N o r t h e r n I r e l a n d .

I I M A K I N G P R O D U C T I V I T Y C O M P A R I S O N S

V a l u e a d d e d , t h e difference b e t w e e n t u r n o v e r a n d p u r c h a s e s , m e a s u r e s a f i r m or p l a n t ' s a b i l i t y to c r e a t e w e a l t h . V a l u e a d d e d p e r e m p l o y e e , or l a b o u r p r o d u c t i v i t y , h a s t h e r e f o r e b e e n u s e d e x t e n s i v e l y to e x a m i n e differences i n w e a l t h c r e a t i o n b e t w e e n p l a n t s , f i r m s , r e g i o n s a n d n a t i o n a l e c o n o m i e s .1 A t a r e g i o n a l or n a t i o n a l l e v e l the, s i m p l e s t form of c o m p a r i s o n r e l a t e s economy-w i d e a v e r a g e p r o d u c t i v i t y i n one a r e a to t h a t i n a n o t h e r . F o r e x a m p l e , i f e^ i s e m p l o y m e n t i n i n d u s t r y i ( i = l , . . . , m ) , p l a n t s i z e - b a n d j ( j = l , . . . , n ) i n t h e U K a n d Vy i s t o t a l v a l u e a d d e d i n t h e s a m e i n d u s t r y / p l a n t s i z e - b a n d , t h e n a v e r a g e p r o d u c t i v i t y i n N o r t h e r n I r e l a n d m i g h t be c o m p a r e d to a v e r a g e p r o d u c t i v i t y i n t h e U K , i.e.,

I l G y j V i j / e y )

Xi = ^—Z = £ £ni j P i j

X S e y i j i j

w h e r e , n ^ = / Z i S j e y a n d py = v ^ / ey. S u c h e c o n o m y - w i d e c o m p a r i s o n s p r o v i d e a u s e f u l g u i d e to t h e r e l a t i v e l e v e l of w e a l t h c r e a t i o n i n e a c h e c o n o m y . H o w e v e r , t h e y r e f l e c t b o t h t h e u n d e r l y i n g d i f f e r e n c e b e t w e e n i n d i v i d u a l p l a n t s ' p r o d u c t i v i t y a n d t h e effects of i n d u s t r y - m i x a n d p l a n t s i z e s t r u c t u r e . P r o d u c t i v i t y d i f f e r e n c e s b e t w e e n i n d u s t r i e s a r e p r o n o u n c e d . I n 1 9 9 1 t h e U K C e n s u s of P r o d u c t i o n i n d i c a t e d t h a t v a l u e a d d e d p e r e m p l o y e e r a n g e d f r o m a l o w of £ 1 1 , 7 0 0 i n t h e c l o t h i n g s e c t o r to £ 3 9 , 5 0 0 i n p l a n t s m a n u f a c t u r i n g c h e m i c a l s . S i m i l a r l y , v a l u e a d d e d p e r e m p l o y e e d i f f e r e d s i g n i f i c a n t l y b e t w e e n m a n u f a c t u r i n g p l a n t s of different s i z e s . E x c e p t i n g n o n -m e t a l l i c -m i n e r a l s a n d t e x t i l e s , p r o d u c t i v i t y w a s positively l i n k e d to p l a n t s i z e i n e a c h U K m a n u f a c t u r i n g s e c t o r . T h i s a c c o r d s w i t h e v i d e n c e f r o m I t a l y ( I n v e r n i z z i a n d R e v e l l i , 1 9 8 6 ) a n d J a p a n ( S a s a k i , 1 9 8 1 ) , b u t c o n t r a s t s w i t h t h e s i t u a t i o n i n A u s t r i a w h e r e p r o d u c t i v i t y a p p e a r s h i g h e r i n s m a l l e r p l a n t s ( A i g i n g e r a n d T i c h y , 1 9 8 4 a n d 1991; B a r t e l , 1990; S c h n e i d e r , 1991; S c h n e i d e r a n d L e n z e l b a u e r , 1 9 9 3 ) .2 T h e i m p l i c a t i o n i s t h a t i f t h e a r e a s b e i n g c o m p a r e d

L F o r some interesting comparisons of value added at firm level see K a y (1993), and the references cited there. A t national level see, for example, papers by V a n A r k (1990) and (1990a).

h a v e s i g n i f i c a n t l y d i f f e r e n t i n d u s t r i a l s t r u c t u r e s , or d i s t r i b u t i o n s of p l a n t s i z e s , t h e n a l t h o u g h e c o n o m y - w i d e p r o d u c t i v i t y c o m p a r i s o n s p r o v i d e a v a l i d g u i d e to w e a l t h c r e a t i o n t h e y c a n n o t be i n t e r p r e t e d a s i n d i c a t i v e of t h e r e l a t i v e p r o d u c t i v i t y of i n d i v i d u a l p l a n t s .

A t t e m p t s to d i s e n t a n g l e t h e s t r u c t u r a l a n d p l a n t l e v e l e l e m e n t s of economyw i d e p r o d u c t i v i t y d i f f e r e n c e s h a v e t y p i c a l l y i n v o l v e d e i t h e r i n d u s t r y b y -i n d u s t r y c o m p a r -i s o n s or economy-w-ide c o m p a r -i s o n s a d j u s t e d to t a k e a c c o u n t o f d i f f e r e n c e s i n i n d u s t r i a l s t r u c t u r e . A r e c e n t e x a m p l e of i n d u s t r y b y -i n d u s t r y p r o d u c t -i v -i t y c o m p a r -i s o n s -i s t h e s t u d y b y H -i t c h e n s , W a g n e r a n d B i r n i e ( 1 9 9 0 ) , w h o u s e d C e n s u s of P r o d u c t i o n d a t a to c o m p a r e l a b o u r p r o d u c t i v i t y i n over 8 0 N o r t h e r n I r e l a n d i n d u s t r i e s to t h e i r G B e q u i v a l e n t s i n 1 9 7 9 a n d 1 9 8 4 . T h e a l t e r n a t i v e a p p r o a c h h a s b e e n to m a k e e c o n o m y - w i d e c o m p a r i s o n s b a s e d o n i n d u s t r y - b y - i n d u s t r y p r o d u c t i v i t y a n d a c o m m o n i n d u s t r i a l s t r u c t u r e . F o r e x a m p l e , R o p e r ( 1 9 9 3 a ) c o m p a r e d N o r t h e r n I r e l a n d m a n u f a c t u r i n g p r o d u c t i v i t y to a U K f i g u r e c o n s t r u c t e d b y w e i g h t i n g U K p r o d u c t i v i t y i n e a c h (4-digit) i n d u s t r y b y e m p l o y m e n t i n N o r t h e r n I r e l a n d i n t h a t i n d u s t r y , i.e.:

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W h e r e E y i s e m p l o y m e n t i n i n d u s t r y i , p l a n t s i z e - b a n d j i n N o r t h e r n I r e l a n d a n d N y = E y / X i S j Etj . A l o n g s i m i l a r l i n e s i t i s p o s s i b l e to c o n s t r u c t a U K c o m p a r a t o r w h i c h w e i g h t s U K p r o d u c t i v i t y i n e a c h p l a n t s i z e - b a n d b y e m p l o y m e n t i n t h e s a m e p l a n t s i z e - b a n d i n N o r t h e r n I r e l a n d . I n t h i s c a s e , a c t u a l a v e r a g e p r o d u c t i v i t y i n N o r t h e r n I r e l a n d w o u l d be c o m p a r e d to:

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I t c a n e a s i l y be s e e n t h a t t h e f o u r U K c o m p a r a t o r s a r e i d e n t i c a l i f t h e p r o p o r t i o n a l d i s t r i b u t i o n of e m p l o y m e n t b e t w e e n i n d u s t r i e s a n d s i z e - b a n d s i s i d e n t i c a l i n N o r t h e r n I r e l a n d a n d t h e U K (i.e., i f Ny = n y for a l l i a n d j ) . M o r e o v e r , i f t h e r e w a s t h e s a m e d i s t r i b u t i o n of e m p l o y m e n t b e t w e e n p l a n t s i z e - b a n d s i n N o r t h e r n I r e l a n d a n d t h e U K (Xj N y = Z j n y ) , t h e n t h e p l a n t s i z e - b a n d a d j u s t e d c o m p a r a t o r ( X3) w o u l d be e q u a l to t h e u n a d j u s t e d m e a s u r e ( X i > . S i m i l a r l y , i f e m p l o y m e n t w a s e v e n l y d i s t r i b u t e d b e t w e e n i n d u s t r i e s i n t h e t w o a r e a s (i.e., X ; Ny = X , n y ) , t h e n t h e i n d u s t r y a d j u s t e d i n d e x ( X2) w o u l d e q u a l t h e u n a d j u s t e d m e a s u r e ( X i ) . T h e a d j u s t e d i n d i c e s , X2 a n d X3, m a y a l s o e q u a l t h e u n a d j u s t e d i n d e x X1( w h e n X ; N y ^ X i n y a n d X ; Ny * X i ny i f p r o d u c t i v i t y dif f e r s b e t w e e n s i z e - b a n d s w i t h i n e a c h i n d u s t r y or b e t w e e n i n d u s t r i e s w i t h i n t h e s a m e s i z e - b a n d .

T h e r e l a t i v e p r o d u c t i v i t y i n d i c e s a r e t h e r a t i o of a c t u a l v a l u e s for N o r t h e r n I r e l a n d to e a c h of t h e four U K c o m p a r a t o r s . A c t u a l v a l u e s for e a c h y e a r w e r e o b t a i n e d d i r e c t l y f r o m t h e U K C e n s u s of P r o d u c t i o n S u m m a r y R e p o r t s , a n d r e l a t e to a l l m a n u f a c t u r i n g p l a n t s .3 C o n s t r u c t i o n of t h e U K c o m p a r a t o r s w a s m o r e c o m p l e x , c o m b i n i n g U K p r o d u c t i v i t y a n d w a g e c o s t p e r e m p l o y e e i n e a c h i n d u s t r y / p l a n t s i z e - b a n d w i t h N o r t h e r n I r e l a n d e m p l o y m e n t w e i g h t s for e a c h p l a n t s i z e - b a n d a n d i n d u s t r y . D a t a l i m i t a t i o n s m e a n t t h a t t h e o n l y f e a s i b l e i n d u s t r y b r e a k d o w n w a s a t t h e 18 i n d u s t r y , two-digit l e v e l , a n d t h a t o n l y t h r e e p l a n t s i z e - b a n d s c o u l d be d i s t i n g u i s h e d (1-99 e m p l o y e e s , 1 0 0 - 4 9 9 e m p l o y e e s , 5 0 0 p l u s e m p l o y e e s ) .4 P e r e m p l o y e e p r o d u c t i v i t y a n d w a g e cost i n f o r m a t i o n for t h e U K w a s t a k e n from t h e C e n s u s of P r o d u c t i o n ,5 w h i l e d a t a

3. T h e a n a l y s i s for Northern Ireland covers a l l manufacturing excluding the manufacture of other transport equipment ( S I C 80 36). T h i s was excluded to remove the influence of two large companies w h i c h were publicly owned throughout the 1980s ( H a r l a n d and Wolff and Short Brothers).

4. Ideally a finer industry and size-band adjustment would have been made. However, it is r e a s s u r i n g that the indices presented here based on a 2-digit industry adjustment closely reflect those reported elsewhere which use a finer 4-digit framework (see Roper, 1993).

5. I n the published a n a l y s i s no value added information is given for plants in the 1-99 size-b a n d , w i t h the information size-being aggregated into the next size-size-band (usually 100-200 em­ ployees). I n each U K industry, value added per employee in the 100-200 employees size-band was therefore assumed to apply also to establishments w i t h 1-99 employees. A s value added per employee in the U K typically increases w i t h establishment size, this assumption is likely to overestimate the productivity of smaller production units, and depress apparent relative pro­ ductivity in Northern Ireland.

for t h e s i z e - b a n d / i n d u s t r y s t r u c t u r e of e m p l o y m e n t i n N o r t h e r n I r e l a n d w a s c o l l e c t e d f r o m t h e S i z e A n a l y s i s of U K B u s i n e s s e s . C o n f i d e n t i a l i t y r e s t r i c ­ t i o n s m e a n t t h a t s i n c e 1985, 15.2 p e r c e n t of c e l l v a l u e s i n t h e i n d u s t r y / p l a n t s i z e - b a n d e m p l o y m e n t b r e a k d o w n h a v e b e e n s u p p r e s s e d .6 I n m o s t c a s e s , h o w e v e r , a l t h o u g h d a t a m a y h a v e b e e n a b s e n t for a p a r t i c u l a r i n d u s t r y / p l a n t s i z e - b a n d c e l l for one y e a r , v a l u e s w e r e t y p i c a l l y a v a i l a b l e for t h e s a m e i n d u s t r y / p l a n t s i z e - b a n d i n t h e p r e v i o u s a n d s u b s e q u e n t y e a r . T h i s a l l o w e d m i s s i n g d a t a v a l u e s to be i n t e r p o l a t e d w i t h a d e g r e e of c o n f i d e n c e .7

U s i n g t h i s d a t a t h e four U K c o m p a r a t o r s w e r e c o n s t r u c t e d for v a l u e a d d e d p e r e m p l o y e e a n d w a g e cost. C o m p a r a t o r s w e r e a l s o d e r i v e d for t h e n o n - w a g e e l e m e n t of v a l u e a d d e d , w h i c h w e d e n o t e o p e r a t i n g s u r p l u s . I f t h e U K c o m p a r a t o r s a d j u s t e d for N o r t h e r n I r e l a n d ' s e m p l o y m e n t s t r u c t u r e w e r e g r e a t e r t h a n t h e u n a d j u s t e d c o m p a r a t o r , a p o s i t i v e s t r u c t u r a l effect w o u l d h a v e b e e n i m p l i e d . I n fact, e a c h of t h e a d j u s t e d c o m p a r a t o r s w a s l e s s t h a n t h e u n a d j u s t e d m e a s u r e t h r o u g h o u t t h e 1 9 8 1 - 9 1 p e r i o d ( T a b l e 1). T h i s i m p l i e s t h a t N o r t h e r n I r e l a n d h a d a g r e a t e r c o n c e n t r a t i o n of e m p l o y m e n t i n l o w p r o d u c t i v i t y i n d u s t r i e s a n d p l a n t s i z e - b a n d s t h a n t h e U K . I t a l s o m e a n s t h a t e v e n i f a l l N o r t h e r n I r e l a n d p l a n t s h a d h a d U K a v e r a g e p r o d u c t i v i t y , r e g i o n a l p r o d u c t i v i t y w o u l d h a v e b e e n s i g n i f i c a n t l y below t h e U K a v e r a g e .

T h e s c a l e of t h i s s t r u c t u r a l d i s a d v a n t a g e i s e v i d e n t w h e n a c t u a l p r o d u c ­ t i v i t y , w a g e cost a n d o p e r a t i n g s u r p l u s i n N o r t h e r n I r e l a n d a r e c o m p a r e d to t h e four U K c o m p a r a t o r s ( T a b l e 2 ) .8 F o r e a c h v a r i a b l e , a n d t h r o u g h o u t t h e 1 9 8 1 - 9 1 p e r i o d , t h e s t r u c t u r a l l y a d j u s t e d c o m p a r i s o n s s u g g e s t s i g n i f i c a n t l y s m a l l e r p r o d u c t i v i t y , w a g e c o s t a n d o p e r a t i n g s u r p l u s s h o r t f a l l s t h a n t h e u n a d j u s t e d m e a s u r e s . F o r p r o d u c t i v i t y , a n u n a d j u s t e d c o m p a r i s o n s u g g e s t s t h a t N o r t h e r n I r e l a n d l a g g e d b e h i n d t h e U K b y a n a v e r a g e of 14.2 p e r c e n t a g e p o i n t s f r o m 1981-91. H o w e v e r , once t h e effect of p l a n t s i z e a n d i n d u s t r y - m i x i s r e m o v e d t h e s h o r t f a l l i s r e d u c e d to a n a v e r a g e of 4.2 p e r c e n t a g e p o i n t s .

6. T h e percentage of data values i n Northern Ireland which were suppressed were as follows: 1982, 38.9; 1983, 37.0; 1984, 29.6; 1985,14.4; 1986, 13.3; 1987, 14.4; 1988, 21.1; 1989, 15.6, 1990, 8.9 and 1991,18.9.

7. T h e industry/size-band information prior to 1984 also suffers from two other limitations. F i r s t , no information exists for 1981, and so in estimating the U K comparators for 1981 we use the 1982 employment structure. Also, the employment information which does exist for 1982-84 relates only to companies with more than 20 employees. T h i s is pro-rated up using 1985 propor­ tions to give a n estimate of total employment in Northern Ireland in 1982-84.

Table 1: UK Comparators Adjusted for Northern Ireland Employment Structure as a Percentage of the Unadjusted Comparator

1981 1983 1985 1987 1989 1991 Value Added

Unadjusted Industry Adjusted Size-band Adjusted Industry and Size Adjusted Wage Cost

Unadjusted Industry Adjusted Size-band Adjusted Industry and Size Adjusted Operating Surplus

Unadjusted Industry Adjusted Size-band Adjusted Industry and Size Adjusted

100.0 100.0 100.0 91.4 93.6 90.8 96.8 96.4 96.9 90.4 92.8 90.1

100.0 100.0 100.0 86.9 90.8 89.7 96.7 97.0 97.1 85.6 89.7 88.7

100.0 100.0 100.0 98.0 97.0 92.1 97.0 95.7 96.7 97.4 96.6 91.8

100.0 100.0 100.0 90.5 88.2 91.7 96.3 96.0 96.9 89.4 85.2 89.1

100.0 100.0 100.0 89.3 88.9 89.8 97.5 97.7 97.5 87.5 86.8 88.1

100.0 100.0 100.0 91.6 87.4 94.4 95.1 94.2 96.0 91.3 83.5 90.5

Source: C e n s u s of Production Summary Reports, Size Distribution of U K Manufac­ turing Businesses.

Table 2: Value Added Per Employee Wage Cost and Operating Surplus in Northern Ireland as a Percentage of the UK

1981 1983 1985 W87 1989 1991 Value Added

Unadjusted 95.3 Industry Adjusted 104.2 Size-band Adjusted 98.4 Industry and Size Adjusted 105.4

Wage Cost

Unadjusted 90.9 Industry Adjusted 104.7 Size-band Adjusted 94.0 Industry and Size Adjusted 106.3

Operating Surplus

Unadjusted 101.3 Industry Adjusted 103.4 Size-band Adjusted 104.5 Industry and Size Adjusted 104.1

90.0 85.2 83.1 82.4 87.9 96.1 93.8 91.9 93.5 95.8 93.3 87.9 86.3 85.8 90.7 96.9 94.6 93.0 96.8 98.6

87.2 84.6 82.9 81.2 78.7 96.1 94.3 92.8 91.2 87.7 89.9 87.1 85.1 83.0 80.7 97.2 95.4 94.8 93.5 89.4

93.4 86.0 83.3 83.8 100.2 96.3 93.3 90.9 95.8 106.1 97.5 88.9 87.6 88.9 104.3 96.7 93.6 91.2 100.4 110.7

T h i s s u g g e s t s t h a t t w o - t h i r d s of N o r t h e r n I r e l a n d ' s p r o d u c t i v i t y s h o r t f a l l r e l a t i v e to t h e U K d u r i n g t h i s p e r i o d w a s d u e to a s t r u c t u r a l d i s a d v a n t a g e , w i t h t h e r e m a i n i n g t h i r d a t t r i b u t a b l e to p l a n t l e v e l d i f f e r e n c e s . S i m i l a r o b s e r v a t i o n s c o u l d be m a d e r e g a r d i n g w a g e costs a n d o p e r a t i n g s u r p l u s p e r employee.

I V C O N C L U S I O N

P a s t a n a l y s e s of N o r t h e r n I r e l a n d m a n u f a c t u r i n g p r o d u c t i v i t y , b a s e d o n e c o n o m y - w i d e a n d i n d u s t r y - b y - i n d u s t r y c o m p a r i s o n s h a v e s u g g e s t e d t h a t t h e p r o d u c t i v i t y g a p b e t w e e n N o r t h e r n I r e l a n d a n d t h e U K w a s d u e p r i m a r i l y to l o w e r p r o d u c t i v i t y i n i n d i v i d u a l N o r t h e r n I r e l a n d p l a n t s . T h i s h a s b e e n e q u a t e d to a low l e v e l of c o m p a n y c o m p e t i t i v e n e s s , a n d h a s c o n t r i b u t e d to a policy b a s e d o n t h e p r i n c i p l e of b a c k i n g w i n n e r s . T h e a n a l y s i s p r e s e n t e d h e r e c o n f i r m s t h a t p r o d u c t i v i t y i n N o r t h e r n I r e l a n d p l a n t s d i d l a g b e h i n d s i m i l a r U K p l a n t s f r o m 1981-91, b u t i n d i c a t e s t h a t p l a n t - l e v e l p r o d u c t i v i t y s h o r t f a l l s a c c o u n t e d for o n l y a t h i r d of N o r t h e r n I r e l a n d ' s o v e r a l l p r o d u c t i v i t y deficit. T h e r e m a i n i n g t w o - t h i r d s w a s d u e to a s t r u c t u r a l d i s a d v a n t a g e r e l a t e d to N o r t h e r n I r e l a n d ' s i n d u s t r y - m i x a n d p l a n t s i z e d i s t r i b u t i o n . T h e i m p l i c a t i o n i s t h a t e v e n i f p r o d u c t i v i t y i n a l l N o r t h e r n I r e l a n d m a n u f a c t u r i n g p l a n t s w a s r a i s e d to t h e U K a v e r a g e l e v e l for s i m i l a r p r o d u c t i o n u n i t s , r e g i o n a l p r o d u c ­ t i v i t y w o u l d r e m a i n s i g n i f i c a n t l y below t h e U K a v e r a g e .

N o r t h e r n I r e l a n d ' s s t r u c t u r a l d i s a d v a n t a g e r e f l e c t s a g e n e r a l t e n d e n c y a m o n g t h e U K r e g i o n s for s t r u c t u r a l factors to r e i n f o r c e p l a n t l e v e l p r o d u c ­ t i v i t y differences. I n d e e d , s i m i l a r a l t h o u g h l e s s e x t r e m e s t r u c t u r a l d i s a d v a n ­ t a g e s r e l a t e d to i n d u s t r y - m i x a n d p l a n t - s i z e a r e a l s o o b s e r v e d i n t h e E a s t M i d l a n d s of E n g l a n d a n d Y o r k s h i r e a n d H u m b e r s i d e ( R o p e r , 1994). F o r t h e s e r e g i o n s t h e c o e x i s t e n c e of s i g n i f i c a n t s t r u c t u r a l a n d p l a n t l e v e l w e a k n e s s e s s u g g e s t s t h e i n a d e q u a c y of policy d e s i g n e d solely to i m p r o v e t h e c o m p e t i t i v e p o s i t i o n of e x i s t i n g p l a n t s . I n s t e a d , t h e r e i s a n e e d to adopt a m o r e s t r a t e g i c a p p r o a c h d e s i g n e d to develop t h e c o m p e t i t i v e n e s s of e x i s t i n g p l a n t s a n d a l s o to s t i m u l a t e economic a c t i v i t y i n h i g h e r v a l u e a d d e d s e c t o r s a n d p l a n t s i z e -b a n d s .

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