Economic structure and performance in the food and agriculture sector of central and Eastern European countries 1
Economic structure and performance in the food and agriculture sector of central and Eastern European Countries: A commentary
Group discussion on "Structure and performance in the food and agriculture sector"
1 Prepared by Csaba Csaki, World Bank and Budapest University of Economics, for Seminar on Beliefs and Values Underlying Agricultural Policy of CEE Countries, September 1996, Hungary. The Paper reflects the opinions of the author and should not be construed as representing in any way the official views and policy of the World Bank.
by Csaba Csaki
Agriculture in the Central and Eastern European (CEE) countries is undergoing a fundamental transformation. The far reaching changes surpassing the reforms of earlier years characterise the agricultural economies of Central and Eastern Europe. Under present economic and political conditions the CEE countries have no alternative to the establishment of market-driven agricultural sectors based on private ownership. The process of reform has yet to be completed in any of the countries concerned, and it is now clear that the transformation is essentially more complicated and complex process than predicted by domestic and foreign experts and politicians. This paper intends to cover the process of change regarding the overall economic structure of agriculture and the change in underlying values and beliefs in order to get a better understanding of current developments as well as the forecasted course of developments in agricultural policies.
The heritage of the centrally planned system
In the 1950s and 1960s, in all CEE countries, the so-called socialist reorganization of agriculture was carried out. In practical terms this meant a collectivisation of the predominant small-holders agricultural system according to Soviet models. By the middle of the 1960s, the state farms and agricultural cooperatives became predominant in all the countries, except Poland. The organization of the socialist 'large-scale farms,' as they were called, was accompanied by the introduction of central planning, and by the establishment of the agricultural production system directed according to centrally determined and planned figures.
The agricultural policies in this period in the respective countries were based on the premise that agriculture forms an integral part of the centrally planned national economy. The basic targets for agriculture were formulated in the national economic plans. The most important objective of agricultural policy was to produce the quantity of food needed for the planned level of personal consumption and to satisfy the industrial demand for agriculture products. These general targets of course depended on the specific conditions and on the actual economic situation in each country. In spite of the similarities in the basic structure of the agricultural sector, no uniform agricultural policy spread throughout the countries regarding the implementation of the overall planned targets. In the classic system of centrally planned agriculture the overall national targets for agriculture were implemented by the integrated system of smaller-scale plans designed for specific sub-sectors of agriculture, for regions, and for individual farms. Obviously, in this system the freedom of decision making at the lower levels was rather limited. In some countries, for certain periods, even the production technology was assigned for individual farms. During the more recent years, in some countries, the goals of the overall targets were implemented by using indirect methods, and various instruments of market economy such as prices, profit motivation, etc. It has to be underlined that even in these cases (e.g., Hungary and Poland in the late 1970s and 1980s) the plan always had a priority over the market, and the market instruments were used to implement the planned targets rather than as major instruments of controlling the agriculture.
The agricultural investment policy was also developed according to central plans and was determined by central planners. The scale of investment in agriculture or its share of the total at any time reflected the overall strategy of planners. In general, the development of industry was central to the economic policy, and part of the income generated by agriculture was often redistributed for the development of industry. Sometimes, however, when the planning authorities gave priority to the increase in personal food consumption, the agricultural sector would receive considerable investment resources, often much higher than its eventual contribution to the national income.
An important universal general characteristic of the agricultural policy was the vigorous effort for self-sufficiency. In each country, planners put an emphasis on meeting domestic demands for all commodities that could be produced in the given country as far as possible from domestic production. In those countries where natural conditions are favourable to agriculture, the maximisation of foreign currency receipts from agricultural foreign trade was also a rather important target for planners. Under this philosophy, quantity had a priority over quality, producing more was the crucial objective put before efficiency and competitiveness.
As a result of the priorities in plans, the domestic prices, and the income situation did not reflect actual economic performance. Domestic prices were mainly tools to aggregate various types of products rather than to reflect values and actual supply-demand relations. The whole system was based upon the philosophy of low food price and low wages. Food prices were kept artificially low and unchanged in order to be able to keep wages low and unchanged. As a result, the financial performance of a single farm had no real relation to the efficiency of production at that given unit. Production expenses were often higher than the procurement prices imposed by the state distribution system. Deficits or losses were always covered and farms were never liquidated.
The real markets for agricultural products and inputs did not exist, the only exception were the products of the household farms and those of small gardens. Both agricultural outputs and inputs were distributed rather than marketed. The domestic prices, therefore, had no market clearing role and had no direct relationship to the border price of the products. Foreign trade obviously was also part of the central planning system with the state foreign trade agencies holding a full monopoly. This system was in reality equivalent to a high level of protectionism, although this was implemented by the planners' decisions and not by the market economies' methods. Foreign trade decisions reflected planned targets and not domestic market situations.
The agricultural policy considered the so-called socialist large-scale enterprises, cooperative and state farms, to be the fundamental pillars of agriculture. With the exception of Poland, these farms were dominant in both land use and output (Table 1). Private production was considered to be a temporary phenomenon which was allowed but not supported. Only the household plots belonging to the co-operative farm members were regarded as an integral part of the large-scale farming system. In spite of this hostile environment, private agriculture provided a significant portion of agricultural output due to the better utilisation of resources and benefits gained informally through their links with the large-scale farms.
After a relatively short time it became evident that the administrative central direction regulating the agricultural production limited the growth of the sector and the signs of the unsatisfactory performance of the system appeared relatively early in the 1960s. The first reform attempts date to this period. The history of socialist agriculture is a history of reforms that proved to be unsuccessful or produced only partial results. In the first phase of the reform, in the 1960s, attempts were made to improve the planning methods and to develop the means to implement the planned targets. In the successive reforms, the decentralisation, the increase in farm independence, the need for the application of economic incentives became central. All of these reforms, however, could not step beyond the limits of the socialist economy as a whole, therefore they did not result in a visible improvement in agricultural performance. Even Hungarian agriculture, which was the most successful among all the centrally planned economies due to early implementation of indirect and market type control methods, showed signs of serious efficiency problems by the mid 1980s.
TABLE 1. Socialised farm enterprises and land held in the private sector before reforms (1989)
|
Country |
State farms |
Collective farms |
Land in private sector (% of total land)** |
||
|
Number |
Average area (ha) |
Number |
Average area (ha) |
||
|
Albania |
70 |
2,400 |
420 |
1,270 |
- |
|
Bulgaria* |
536 |
9,692 |
NA |
NA |
10 |
|
Czechoslovakia |
226 |
6,204 |
1,677 |
2,605 |
9 |
|
East Germany |
465 |
945 |
3,904 |
1,370 |
11 |
|
Hungary |
128 |
7,598 |
1,270 |
4,195 |
15 |
|
Poland |
1,258 |
2,665 |
2,342 |
297 |
80 |
|
Romania |
419 |
4,895 |
4,363 |
2,093 |
15 |
|
USSR |
22,690 |
16,051 |
26,660 |
6,370 |
2 |
*Total number of agricultural units in 150 agro-industrial complexes.
**Land used in individual production, not necessarily privately owned land.
Source: Csaki & Lerman, 1994.
The aftermath of decades of socialism is largely similar throughout the region. The food and agriculture of CEE countries on the eve of the transition was characterised by:
· Large inefficient farms and food processing enterprises with excessive scale of production and eroded incentives for efficient and profitable production.· High levels of food consumption relative to market economies of comparable prosperity.
· Subsidised food prices and excess demand for food and subsidised prices.
· Artificially controlled trade and pricing policy which distorted the sector priorities and incentives.
· Excessive transfer of financial resources which neither addressed the underlying structural problems nor resolved efficiency issues.
· A widespread monopoly in food processing and distribution.
· The absence of institutions required by private, market-based agriculture.
The decades of planned economy obviously had an impact on values and beliefs related to agricultural policy and to agriculture in general. While the almost half century of centrally planned agriculture was not long enough for a fundamental change in attitudes and aspirations, it was long enough to result in changes which need to be taken into account when the current development and future perspective in agriculture policies are being assessed. The major impacts are:
· Quality lost importance to quantity as a measure of success.· Performance was given a new interpretation: subjective evaluation of planners became dominant.
· Limited understanding of market functioning.
· Declined entrepreneurship.
· Decreased confidence in Government and institutions, including the legal frame-work in general.
· Bias against private business and foreign ownership.
· Risk avoidance and a high degree of suspicion in both political and economic environments.
· Lack of trust in collective efforts and search for individual survival techniques.
Progress in creating a new economic structure in agriculture
The political changes that affected the entire region in the late 1980s and early 1990s created new conditions for reforms in agriculture. The former goal of reforming the socialist agriculture system was replaced throughout the region by the new goal of changing the regime and creating a market type agrarian economy based on private ownership. The current ongoing agrarian reforms in CEE countries are aimed at realising the latter objective. The creation of a market economy and privatisation in agriculture involves the following actions:
· The creation of a new macro-economic framework for agriculture: price and market liberalisation.· Land reform and creation of a new farming structure based on private ownership of land and productive assets.
· The creation of a competitive environment for agriculture: privatisation in agro-processing, input supply, services, and trade.
· The creation of a rural financial system, serving the needs of privatised agriculture and agricultural services.
· Institutional reform creating institutions and public services required by a market economy.
In theory, Central and Eastern Europe has the possibility of shaping a legislative and regulatory system which, combined with adequate capital input, can bring about the creation of the farming structure most suitable for the market circumstances. At present, the region has only partly taken advantage of this possibility. What is the reason for this? One of the most important features of the past few years has been the predominance of politics over economic rationality. In all the CEE countries, agricultural transformation is taking place fundamentally as a process guided by political, often short-term, motivations in which the economic considerations and the effort to create an efficient new structure, as rapidly as possible, play a secondary role. The beliefs inherited from the communist period, distorted and often illogical views of the market economy have played a significant role in Central and Eastern Europe. As a result of the ideologically-charged prejudices against the inherited structure and the overemphasis on seeking justice and reprivatisation, the output has fallen by a greater extent than necessary, the loss of fixed assets has been greater than justifiable, land ownership has become fragmented, and people not engaged in fanning have acquired a substantial share of land ownership. On the other hand, the political conservatism and the mistrust of private production and market relations often demand the continuation of subsidies in general and the preservation of the remaining larger-scale farms.
Beyond the common overall objectives the picture is far from being uniform in the region when it comes to the concrete forms and the implementation of the various tasks of transition (Table 2). There are substantial differences among countries in practically all the areas of reforms listed in the previous paragraph. However after five years of transition, it can be stated that the CEE countries have made significant progress in transforming their food and agricultural sector. It should be noted, however, that some countries, in particular the Czech Republic, Hungary and Poland, have made faster progress in their global transition, than in their agricultural sector reforms.
Key to numerical ratings used in Table 2
Price and market liberalisation
1. Direct state control of prices and markets.
2. Deregulation with indicative prices, and price controls.
3. Mainly liberalised markets constrained by the absence of competition.
4. Liberal markets and liberal trade policies with not fully developed domestic markets.
5. Competitive markets with minimal government intervention.
TABLE 2. Overview of the status of agricultural reforms in CEE countries (early 1996)
|
Country/area of reform |
Price & market liberalisation |
Land reform |
Privatisation in agro-processing |
Rural financing |
Institutional framework |
Overall score |
|
Bulgaria |
3 |
3 |
2 |
3 |
3 |
2.8 |
|
Czech Rep. |
4 |
4 |
4 |
3 |
4 |
3.8 |
|
Estonia |
5 |
3 |
4 |
3 |
4 |
3.8 |
|
Hungary |
4 |
4 |
5 |
3 |
3 |
3.8 |
|
Latvia |
3 |
4 |
3 |
3 |
3 |
3.2 |
|
Lithuania |
3 |
3 |
3 |
3 |
3 |
3.0 |
|
Poland |
4 |
4 |
3 |
3 |
4 |
3.6 |
|
Romania |
3 |
3 |
2 |
3 |
2 |
2.6 |
|
Slovak Rep. |
4 |
3 |
3 |
3 |
3 |
3.2 |
|
Slovenia |
3 |
5 |
4 |
3 |
4 |
3.8 |
|
Average |
3.4 |
3.5 |
3.1 |
2.8 |
3.1 |
3.36 |
Source: Author's estimates.
Land reform
1. Sovkhoz/Kolkhoz type system dominates.
2. Legal framework for land privatisation and farm restructuring, yet only recent implementation.
3. Advanced stage of land privatisation, but large-scale farm restructuring is not fully complete.
4. Most land privatised, but titling is not finished and land market is not fully functioning.
5. Fanning structure based on private ownership and active land markets.
Privatisation of agro-processing and input supply
1. Monopolistic state owned industries
2. Spontaneous privatisation and mass privatisation in design or early implementation stage.
3. Implementation of privatisation programmes in progress.
4. Majority of industries privatised.
5. Privatised agro-industries and input supply.
Rural financial systems
1. Soviet type system. Agrobank sole outlet.
2. New banking regulations are introduced.
3. Restructuring of existing banking system, emergence of commercial banks.
4. Emergence of financial institutions serving agriculture.
5. Efficient financial system for agriculture and agro-industries.
Institutional framework
1. Institutions of command economy.2. Modest restructuring of government and public institutions.
3. Partly restructured governmental and local institutions.
4. Government structure has been refocused while research, extensions, and education is being reorganised.
5. Efficient public institutions focused on the needs of private based market agriculture.
Looking at the analysis presented in Table 2, we can conclude that:
· the reform process in agriculture is more difficult than projected;· the results do not exactly meet original expectations;
· the Central European countries, namely Slovenia, the Czech Republic, and Hungary, have made the most significant progress, while the transitions in Lithuania, Bulgaria and Romania are still far from completion;
· the most significant progress can be seen in price and market liberalisation while rural financing, institutional reform, and privatisation of agro-processing seem to be lagging behind in the process.
It seems that the most critical issues which will determine the further progress in agricultural reforms are: a) the success in restructuring the agro-processing industries and trade; b) the speed in establishing an efficient support service environment, particularly a well functioning rural financial system to support privatised agriculture, farmers and processors; and c) the progress in creating public institutions consistent with the market economy, and particularly with EU standards. Efforts to strengthen liberal trade and market policies, and to consolidate private agriculture, need to be continued.
A competitive and efficient agriculture cannot be developed in CEE countries without recovery of the global rural economy. The productivity increase in agriculture requires a massive reduction in the agricultural labour force. The experience of the Czech Republic and Hungary indicates that this can be achieved only if the non-farm employment opportunities are in place, and if the rural services are improved significantly. Unfortunately, in most countries, the non-agricultural rural business activities are developing slowly, making the agricultural transition process more difficult. More attention, therefore, needs to be given to complex rural development, including the improvement of rural infrastructure.
The transformation of agriculture in Central and Eastern Europe is still far from being finished. The overview presented in Table 2 summarises not only the results achieved, but also the difficulty of transition. The transformation was further hampered by the decline in output (Table 3) which accompanied the first phase of the transition process and can be attributed only partly to the economic crisis and decline in demand. The rebound effect of the transformation is also considerable. The shift from large-scale farming to privatisation is generally a process of dismantling, and not a process of constructing. This is especially true for the first stage of the process. The loss of a part of the stock of fixed assets and other disorders are an unavoidable side effect of such a process. Unfortunately, the behaviour of the governments concerned has tended to strengthen rather than counterbalance these unavoidable negative effects.
There is a lack of general management of the transformation and a lack of comprehensive, consistent and carefully contemplated agrarian strategy. Instead, the process of transformation is being handled in an ad hoc manner with frequent changes and amendments, some having retroactive effects and some made during the process of its implementation. The legislation that underlies the agrarian transformation is not based on a clearly pondered and formulated programme, realised through a broad social consensus. The implementation of some of the new laws is beyond the administrative capacity of a country's state administration.
A further serious problem affecting the transformation is the shortage of capital and the conditions of the immediate economic environment surrounding agricultural production. One of the most restrictive factors for restructuring agriculture is the insufficiently developed and the centralised and monopolistic nature of the trade and processing structures, accompanied by the primitive financial system. It would appear that the debate concerning land ownership and the transformation of large-scale farms has obscured the recognition of the real impact of transformation in these fields. In the absence of a functioning market, private agriculture is defenceless. But without a stimulating macroeconomic environment and availability of investment sources, the development of agriculture is inconceivable. For this reason, the strengthening of the market framework with the creation of fair market competition, a functioning rural banking system, an active land market, and competitive trade and processing industry are the conditions of vital importance for further advancement in the agricultural sector.
TABLE 3. Evolution of agricultural production (1994 indices; 1989 = 100)
|
Country |
Gross agro product (value) |
Cereals |
Oilseeds |
Sugar |
Milk |
Beef |
Pork |
Chicken |
|
Poland |
78.6 |
81 |
48 |
77 |
73 |
71 |
87 |
93 |
|
Hungary |
65.6 |
75 |
83 |
84 |
70 |
70 |
59 |
78 |
|
Czech Rep. |
72.2 |
93 |
151 |
66 |
64 |
68 |
84 |
83 |
|
Slovak Rep. |
74.6 |
87 |
105 |
65 |
40 |
50 |
63 |
73 |
|
Slovenia |
118.2 |
107 |
100 |
110 |
94 |
70 |
77 |
63 |
|
Romania |
101.0 |
99 |
78 |
45 |
90 |
121 |
92 |
79 |
|
Bulgaria |
70.2 |
73 |
126 |
18 |
53 |
79 |
52 |
39 |
|
Lithuania |
47.7 |
80 |
42 |
66 |
51 |
54 |
33 |
44 |
|
Latvia |
- |
57 |
33 |
48 |
47 |
53 |
35 |
26 |
|
Estonia |
56.4 |
43 |
200 |
- |
60 |
37 |
30 |
28 |
|
All the CEE |
- |
84 |
80 |
68 |
67 |
70 |
73 |
74 |
Source: Agricultural Situation and Prospects in the Central and Eastern European Countries: Summary Report, European Commission, Directorate-General for Agriculture (Summer 1995).
Impact of the transition upon individual components of economic structure in agriculture
Role of government
The transition to a market agriculture based on private ownership requires a fundamental change in the role of government in the agricultural sector and in the economy as a whole. Direct government intervention in agriculture, such as establishing mandatory targets for production and/or delivery of goods and central allocation of investments and inputs, must cease. The government's role should extend beyond the management of the difficult transition process: the government should establish general rules and facilitate the conditions for smooth operation of markets and independent business entities. This role is no less important than the previous one; however, it requires a different philosophy, as well as different means and institutions.
Agriculture in the Central East European countries has made the first fundamental steps toward a market driven system based on private ownership. Under these circumstances, the most important task for the governments and for the agriculture policy specifically, is to liquidate the obstacles preventing the emergence of a more competitive and efficient production system. The governments need to create the enabling environment for private sector growth, rather than remain directly involved in production management, according to the practice of the former regime. Unfortunately, for most of the governments, the transition to this new role is not a smooth and continuous process. The emergence of the new role of the government is constrained by the inherited beliefs that the government should take care of everything. The mix of social and agricultural policies is an additional typical problem. The governments try to resolve transition related social problems in rural areas by agricultural policies, rather than by appropriate social measures. The influence of various interest groups, such as farm managers, newly-emerged private salesmen, and trade unions also slows down the emergence of the new role for the government.
As the consequence of the above-mentioned problems, during recent years, the agrarian sector in the region has been controlled by rules and regulations which are loosely connected and sometimes inconsistent. There are a great number of uncertainties affecting the farms: significant measures are often adopted with delay, and important agricultural policies are the outcome of bargaining over concrete individual situations. There is a need for a clear agricultural policy framework, for a comprehensive set of agricultural policy decisions oriented, not only towards managing the transition, but which will also create the foreseeable and reliable long-term conditions for the restructured and privatised agricultural sector. The major goals of the agricultural policy and the related system of instruments, with special reference to the budgetary consequences, have to be formulated for at least three to five years, similar to the practice of developed market economies, e.g., the US Farm Bill.
In most countries the agricultural policy is obviously closely connected to the aspirations of various political and interest groups. Presently, the interests of producers and the trading sector are very clearly expressed. In most countries, however, representation of the consumers' interests is still very weak. The budgetary implications of agricultural policies are not well known. There is a strong need for a clear, transparent agrarian budget, which clearly illustrates the costs of various policy measures and shows who pays the bills. Subsidies are probably the most debated elements of the agricultural policies in the region. The general belief is that agriculture cannot function without subsidies and that the transition and the forthcoming EU accession, make the subsidisation of agriculture indispensable. There is less than a full understanding of benefits and shortcomings of the protective policies.
The dismantling of the bureaucratic structure inherited from the period of central planning is a very important task. Various ministries should not merely change their names, but need to undergo radical modification and/or merger. Units related to central command and direct intervention should be eliminated, while those remaining should be organised and managed to meet the needs of a free market system. As the transition proceeds, the whole structure can be simplified further, with fewer institutional units and fewer employees. Structural changes are needed in the regional units. In many countries, the large regional bureaucracies implementing central control, are still very strong. There is no need for then-existence in their present forms. A relatively small local administration would be adequate to enforce agricultural regulations, promote development, and provide extension and market information services.
Given the uniqueness of the region, its history and politics, it is not possible to define an exact structure of a modernised government administration of food and agriculture for the countries concerned. However, within a market-driven economic system the government should continue to play three roles: regulation, provision of public goods and support services, and information and analysis. Regulation should include food inspection, seed inspection, establishment and enforcement of grades and standards, establishment and control of phytosanitary standards, epidemiology and livestock disease control. The essential public services to be provided by the government should include domestic and foreign market information, agricultural research, farm advisory services, and higher education in agriculture. Finally, the government should monitor, review, and diagnose the implication of changing circumstances and develop options for public policy.
Land reform and farm restructuring
Inherited beliefs and values probably have been playing a more significant role in the course of changing the land ownership and the farm restructuring than in any other area of transition. On the one hand, among many people there is a deeply rooted belief in the superiority of private ownership and family farming over state and collective structures. While, on the other hand, the socially positive experience of collective fanning had an impact on the view of many other people. As a result, the land reform as it has been carried out in the region, reflects these conflicting views and beliefs.
Creating private land ownership
The creation of private land ownership is the starting point for land reform. It is around this issue that an intense political debate is raging in virtually all the countries in the region. Two closely linked tasks are involved here. One is the creation of a legal framework for private possession of land, and the other is me transfer of land into private ownership, the actual privatisation of land. In other words, it had to be decided who would receive land, by what procedures, and on the basis of what criteria. In Central East Europe, the legal recognition of private land ownership did not meet with strong opposition. Land in these countries has never been fully nationalised, and a tradition of private land ownership continued after World War II. The return to traditional values enjoys the full support of public opinion.
Eligibility, meaning the determination of who is entitled to receive land, is one of the major issues related to land ownership: one approach is to return land to the former owners (so-called restitution or reprivatisation of land), and the other is to distribute land to new beneficiaries regardless of the former ownership rights. The two approaches are not necessarily mutually exclusive: land remaining after the claims of the former owners have been satisfied can be distributed to other beneficiaries. Moreover, restitution is not always implemented by actually returning the original plot of land to the former owner: due to technical considerations a substitute plot may be allocated or, instead of land, money compensation may be offered.
When the policy of land distribution, regardless of the former ownership rights, or the distribution of unclaimed land, is adopted, the legislators must decide the exact configuration of the beneficiaries. A number of different definitions of beneficiary groups have been considered in the CEE countries. The possible combinations of beneficiaries are listed below in the order of progressively more encompassing eligibility for land and non-land assets:
· only those who work the land ("land to the tiller"), usually including tiller-pensioners;· all members of collective farms, including those not engaged in farming;
· all members and hired workers of collectives;
· all members and hired workers of the collective, as well as people employed in rural agricultural service enterprises and social services;
· the whole rural population;
· the whole rural population, as well as former rural residents satisfying certain criteria;
· sell the land on an open market.
In Central and Eastern Europe, reprivatisation or restitution dominates, supplemented by various schemes designed to provide land to agricultural producers who were not former owners. The Central and Eastern European countries in general recognised the rights of the former land owners. Compensation was provided in various concrete forms, varying from actual land restitution to financial compensation to allowing purchase of alternative land if desired. Albania is an example of full and rapid privatisation of the land. There, the vast majority of land previously part of the co-operatives and state farms was divided among the rural population, according to the size of the family, regardless of the former ownership. In Romania, the land of the co-operatives was transferred to former owners and co-operative members relatively quickly, in the space of approximately six months. The process is advancing more slowly in Bulgaria and the declared goals, which include the creation of private farms of a rational size, understandably complicate the process. In both, the Czech and the Slovak Republics, the former owners can recover their land if they decide to cultivate it. In Hungary, the compensation of former owners has been based on a voucher system. As a result of this process, the great majority of agricultural land in Central and Eastern Europe will be privately owned in the near future, although the legal settlement of ownership rights will still take some time. The Baltic states, like the CEE countries, adopted a strategy of restitution to the former owners. Individual land users who are not former owners have to purchase land from the state reserve or from the new owners who do not wish to farm. Otherwise, they keep their rights to use the land, but they do not obtain the ownership rights.
Farm restructuring
In the process of developing private ownership and property markets in the former socialist agricultures, it is strategically important to separate the privatisation of land and assets from the restructuring of agricultural production. Though the possibility exists for a fast and simultaneous privatisation of both, land and non-land assets (as the dismantling of the large-scale farms in Albania demonstrates), this method would be acceptable only under very specific political and economic circumstances. Under the typical circumstances, land and non-land assets are allocated to private owners without a complete fragmentation or dismantling of the existing farm structure. With land and assets transferred to individual ownership, the process of restructuring agricultural production is guided by the free will of the individual owners, who choose to assign their land and assets to the organizational form which best satisfies their needs and preferences. This has to be an open-ended dynamic process in which the new owners learn through the choices made regarding the management of their land, and adjust these choices over time in response to the experience gained.
The role of the government is to provide the framework for a smooth and flexible restructuring process. This process should be based on the individual decisions of the beneficiaries, who select freely among the various forms of farm management and land use. The government should, therefore, provide a legislative and policy framework which clearly recognises these various options and the freedom of choice of the beneficiaries, and reinforce it with an appropriate public information system.
Expeditious implementation of transfer and registration of land ownership depends entirely on allocation of sufficient resources for the registration and demarcation system. The physical registration process is hindered by the lack of suitable modem equipment and qualified personnel, but both, the equipment and training are a function of money and expertise, which can be provided by international donors. However, the frequent political opposition of special interest groups, that object to both private ownership of land and to the allocation process, represent a serious obstacle. The political opposition can be overcome only by educating the public as to their rights, options, and the exact nature of the process related to the change in the land ownership. This is a long-term process that requires political willingness and resolution to challenge the special interest groups.
Farm restructuring involves the creation of a market-oriented, profit-motivated farming structure, based on clear individual ownership of land and assets, and an incentive system encouraging individual responsibility and rewarding individual effort. The new farm structures may take a variety of forms. Some people will keep their land and shares of other assets and establish private (family) farms. Others will pool their land and assets and create small partnerships or farming cooperatives. Yet others may choose to lease their land to active agricultural producers and assume the role of 'inactive investors,' or, alternatively, focus on development of private farm support services. The former collectives will, thus, gradually break up into individual or smaller private farms or other fanning organizations in which the production will be based on privately owned land and assets. These new producers need to be supported by market services, some of which are provided by new private entrepreneurs (individually or in groups) while others may be based on former collective management structures that will redefine their role and become service firms or co-operatives.
The results of restructuring in the CEE countries indicate that large-scale farming still plays an important role at this stage of the reform (Table 4). Yet the restructuring goes far beyond a mere 'changing of the sign on the door.' Most large-scale farms actually reorganised into several smaller functionally specialised units, built around the land and asset shares of their member-owners. The shareholders underwent fairly radical voluntary regrouping in the process of downsizing of the original farms. A significant degree of separation between ownership and management has been achieved in these new structures, which no longer guarantee employment to their shareholders. The new large farms in the CEE countries are thus definitely moving away from the traditional syndrome of the 'labour-managed firm' that in the past plagued the socialist economies.
The current features of the economic environment in most countries regarding restructuring are transitory. As the economic environment supportive of private activity outside the traditional farms improves, more holders of the land and asset shares will seek to withdraw shares and form new ventures, either individually or in combination with other shareholders. In view of the fact that the economic environment is still changing, and it is still severely behind in the development of market infrastructure in most of the Central and Eastern European countries, it is desirable that the options for restructuring remain open. Thus the recipients of the land rights who choose to remain in the collective-type enterprises should retain the right to exit with their land and assets at any point in the future. Whether the exit rights are protected, or property rights devolve to the enterprise when a shareholding company is formed, the withdrawal issues depend on the existing relevant laws, and on the enterprises' by-laws' treatment of such issues.
TABLE 4 Farm structure in East Central Europe and the Baltics
|
I. Share in total agricultural land(%) |
||||||
|
Country |
Collective farms* |
State farms** |
Private farms*** |
|||
|
Pre-1990 |
Current |
Pre-1990 |
Current |
Pre-1990 |
Current |
|
|
Albania |
75+ |
0++ |
23+ |
12++ |
3+ |
88++ |
|
Bulgaria |
- |
41 |
90 |
40 |
10 |
19 |
|
Czech Rep. |
61 |
48 |
38 |
3 |
1 |
49 |
|
Slovak Rep. |
68 |
63 |
26 |
16 |
6 |
13 |
|
Hungary |
80 |
55 |
14 |
7 |
6 |
38 |
|
Poland |
4 |
4 |
19 |
18 |
77 |
78 |
|
Romania |
61 |
35 |
14 |
14 |
25 |
51 |
|
Estonia |
45+ |
33 |
50+ |
NA |
5+ |
67# |
|
Latvia |
57+ |
17 |
38+ |
2 |
5+ |
81# |
|
Lithuania |
62+ |
33 |
30+ |
NA |
8+ |
67# |
|
II. Average size (hectares) |
||||||
|
Albania |
300+ |
0++ |
2.000+ |
400++ |
NA |
1.4++ |
|
Bulgaria |
- |
750 |
13,000 |
1,100 |
0.4 |
0.6 |
|
Czech Rep. |
2,561 |
1,430 |
6,261 |
498 |
4.0 |
16.0 |
|
Slovak Rep. |
2,654 |
1,665 |
5,162 |
2,455 |
0.3 |
1.0 |
|
Hungary |
4,179 |
1,702 |
7,138 |
1,976 |
0.3 |
1.9 |
|
Poland |
335 |
400 |
3,140 |
2,000 |
6.6 |
6.7 |
|
Romania |
2,374 |
170 |
5,001 |
2,002 |
1.5 |
1.8 |
|
Estonia |
3,689+ |
567 |
3,816+ |
NA |
0.5 |
2.1# |
|
Latvia |
3,900+ |
706 |
4,200+ |
547 |
0.5 |
5.8# |
|
Lithuania |
3,000+ |
567 |
3.300+ |
NA |
0.5 |
3.1# |
* Collective farms and co-operatives pre-1990, private producer co-operatives and associations currently.** State managed or controlled farms pre-1990, remaining state farms and state held farm enterprises currently.
*** Household plots and small individual farms pre-1990, individual (including part-time) farms and other business entities (limited-liability partnerships, joint-stock companies, etc.) currently.
+ Based on pre-1990 statistical abstracts of the respective countries.
++ World Bank data.
# Includes subsidiary household plots.
Source (except for items denoted by + and ++): Agricultural Situation and Prospects in the Central and Eastern European Countries: Summary Report, European Commission, Directorate-General for Agriculture (Summer 1995).
The rate of the increase in the number of individual private farms across the region is far behind the original expectations (both local and international) and behind the possibilities provided by the legal framework. Different explanations, based on theoretical considerations and speculations, are given by the politicians and experts. The World Bank surveys conducted among the rural population indicate that the reluctance to becoming a private farmer is due to the lack of supportive conditions for private fanning. The cautious behaviour is thus an expression of the sober and realistic judgement of the situation of the peasantry. The present generation of CEE peasants has only limited or no skills necessary for successful private family farm management. However, in today's CEE, the most restrictive factor inhibiting the expansion of private farming remains the relatively modest income compared to the high risks involved. Progress down the path towards a market economy will gradually establish the conditions that encourage further transformation of the fanning structure.
Land market
The allocation and distribution of land to individuals in the process of land reform is only the fast step toward the creation of a new and efficient farming structure. The system must facilitate the future exchange of land parcels between the individuals who wish to establish a farm of the size suitable for efficient farming, given the skills and resources in each particular case. The establishment of such farm sizes requires a functioning land market, where land parcels can be bought and sold, leased in and out, or exchanged. Without such markets, land will remain locked into an inherently inefficient distribution pattern despite private ownership. This was the case of Poland throughout the Communist period, where, in the absence of a land market, privately owned land could not be transferred to more efficient and more enterprising users. If the land markets are allowed to develop, land owners who are the least risk averse and most motivated to farm individually will be able to increase their initial holding over time by renting or purchasing land from other, less active owners. Some beneficiaries may not want to farm individually at the first stage (or ever), and to avoid the underutilisation of valuable land resources, a legally clear process must be defined for inactive land owners to lease or sell land to those who want to farm. Procedures must also be developed to facilitate the consolidation of privately owned land into larger parcels as their new owners make the medium term decision about land utilisation. The development of a land market is still in the first stages, even in the most advanced CEE countries, which have already reached an advanced stage in the formulation and implementation of a legal framework for privatisation. However, the prevailing ideas about the rules that will govern land market functioning and private land ownership are extremely varied and not entirely reassuring. There are strong reservations about the possibility of the emergence of large, privately owned farms. Many people fear the repetition of the old system of big estates and absentee owners, or at least rapid concentration of land ownership in a few hands. As a result, practically all countries impose various limitations to private land ownership.
Current and pending legislation in all countries of the region circumscribes owners' rights in the important areas of land transfer, land utilisation, and size of holdings. Typical restrictions on land transfer in various countries vary from an outright ban on buying and selling of land (indefinitely or during a long moratorium) to restrictive provisions which allow alienation only to residents in the same village, to local farm enterprise, or through intermediation of the state. Even the right to lease land to other farmers is still not universally accepted. Restrictions on land use typically include the obligation to farm the land, and to observe sound conservation practices. Failure to observe this rule can result in expropriation. Restrictions on size of holdings are universal. The maximum size of private farms is limited to 20-30 hectares in Bulgaria, 50 hectares in Latvia, and 100 hectares in Romania. Restrictions on the rights of owners are intended to prevent absentee ownership and underutilisation of land resources. They are also intended to prevent new owners from becoming victims or beneficiaries of speculative land transactions. The restrictions on property rights reflect fundamental ambiguity regarding private land property, even where private ownership is legally recognised. The restrictions on land ownership rights are among the most contested issues of agricultural reform.
Various restrictions related to ownership rights, while often understandable in the historical and political context, are inconsistent with the principles of a market economy. These restrictions may become a serious obstacle to the shaping of an efficient economic structure based on private ownership and, in the final analysis, harm the competitiveness of agriculture in the region. Restrictions regarding land buying and selling and the size of holdings are not consistent with the need to stimulate the emergence of efficient farms. The requirement that land in agricultural use at the time of transfer of ownership remains indefinitely in agricultural use can inhibit much needed adjustments in land use patterns. Because of legal restrictions on transactions and because land rights, distribution has not been completed in a number of countries. Land markets are still not functioning and the correct market values of land are ignored. Valuation of land is often performed on the basis of administratively decided formulas and models.
What are the prospects for the future?
It is now clear that, contrary to the original expectations, the transformation of large-scale agriculture will be a lengthy process. It is extremely difficult to foresee what type of units will emerge as dominant. The future agriculture in the region probably will be characterised by a variety of forms of farming operations. Private farms, restructured cooperatives, commercial farms of various sizes, and small part-time subsistence farms producing mainly for their own consumption will coexist side by side. Applying the major lessons of the first phase of the transition to assess the prospects for the future (without attempting to make more concrete predictions), the following issues deserve attention:
· The region's agriculture must adjust to the basically new internal and external circumstances. Rapid expansion of internal demand cannot be expected and capturing a permanent share of external markets requires a basic improvement in efficiency, quality, and competitiveness. In this situation, the level of output will remain for some time lower than that reached in previous years, which means that agricultural production cannot become the engine for general economic recovery. What is even more important, private production is emerging under conditions of strict efficiency requirements, hard budget constraints, and intense market competition, and this process will have losers as well as winners.· A relatively large number of private farms may not be able to operate profitably, despite the initial support that many of them receive. It would be a serious mistake to keep these farms alive with further inflow of resources from the state budget. State support, if it is given at all, should serve to improve the general income conditions of agriculture and to enhance international competitiveness. A stratum of private farmers dependent on central government support could easily become an economic and political burden.
· The transition to a profitable and efficient agricultural structure should be completed as quickly as possible. The establishment of unequivocal and clear land-ownership relations is essential. In the future, the development of the farming structure should be shaped basically by the market relations and market tools, principally through an efficiently functioning land market. This means minimising the restrictions on land ownership and land use, as well as on ownership and lease rights. The transfer of ownership and lease rights should be simple and cheap. The greater the government intervention in the operation of the land market, the slower and more costly the shaping of the new farming structure will be. The leasing of land will have a very important role in shaping an efficient farming structure, and the conditions for leasing must be determined fundamentally by the supply and demand relation.
· It is unlikely that family fanning of the Western European type and scale will become the generally accepted model, not even over a longer period. The countries in the region cannot afford to provide state subsidies over a long period in order to keep alive farms that are not viable under free market conditions. For this reason, the desirable farm size and form of farming must be capable of generating self-sustainable profits without subsidies or with relatively small support. These farm sizes almost certainly will be many times larger than the average size of independent, family based private farms in CEE today (2-20 hectares), and possibly larger than farm sizes in some of the Western European countries.
· Given the traditional dual structure of former socialist agriculture and the emphasis on the household plots in the process of reform, it seems likely that the distinction between the subsistence fanning and the commercial farming will persist for some time in the future throughout the region. The success of the ongoing process of land reform and farm restructuring will be judged by the gradual increase in the number of commercially viable small and medium-size farms and continued downsizing of the traditional large-scale structures. Persistence of a dual structure of small subsistence plots and large subsidy-dependent capital-intensive farms will surely signal failure of the process.
· In international practice, agricultural production co-operatives have proven less efficient than individually owned farms, especially in environments with adequately functioning markets. The development of market forces will lead to further disintegration and transformation of many agricultural production co-operatives that still exist in these countries. Because of the social and political implications, the changes should be achieved not through administrative intervention but through the market and efficiency instruments, just as in the case of privately owned farms.
· The strengthening and the expansion of processing, marketing, purchasing, and other service co-operatives is expected to gain momentum in the future. These service cooperatives will provide a viable support framework for the growth of private farms which will be detached from the collective sector still undergoing the process of transition. The development of service cooperatives calls for government attention and support.
· Rural finance is one of the components of the farm support system which at present is still not developed in any of the CEE countries. The traditional financial system in the socialist countries is not oriented to meet the needs of the new private agriculture. Debt writing off and interest rate subsidies will be eliminated as agriculture moves toward the market. Both banks and borrowers will have to pay attention to the concept of creditworthiness and will have to take loan repayment seriously. A mortgage finance system will have to be developed as soon as private land ownership and land titles are instituted and the legal restrictions on the use of land as collateral are removed. Rapidly some new, creative financial solutions may emerge as alternatives to the scarcely developed banking system. This could include suppliers' and marketers' credits associated with farmers' product delivery. Development of village-level credit societies and mutual credit arrangements is also a possibility for meeting the financial needs of a small private farmer.
· Finally, special attention should be paid to the social aspects of the transformation in agriculture. The decline in production and the change of ownership structure are obvious sources of social problems and tensions. Agriculture will be able to contribute to the solution of these problems only within the framework of efficient and profitable production. The fundamental objective of agrarian policy thus should be the achievement of an efficient and profitable farming structure based on private ownership. The governments should avoid the pitfalls of using agrarian policy to resolve social issues, and leave the solution of rural social problems to social policy instruments. Any deviation from this direction will have tangible negative economic consequences.
There are many problems to be solved, but the basic final message is not the one of despair. Most of the countries concerned are not poor and most of them can be self-sustaining, creditworthy and have access to markets. But we must recognise the complexity of the changes taking place; the social costs; the political strains; the investments needed in nation-building. It is necessary to face the reality, the future tasks and problems, and take into account the time required to solve them. In particular, the following points should be emphasised:
· Dedicated people are at work trying to change the system and make the new approaches work. But there is fear of the future.· This is not a question merely of revealing a pool of latent entrepreneurial talents. Generations of experience have taught risk avoidance, suspicion, and survival techniques aimed at circumventing the system.
· The scale of the problem is unprecedented.
· All previous discussions about sequencing have become academic.
· Speed is essential but also difficult. Efforts need to be focused on:
* actions which will show results quickly (retail privatisation, SME development in opportunities);* actions which will offer opportunity to more people and involve them in the process.
No one today is in a position to project where the agricultural sector of various Central and Eastern European countries will be at the end of the decade. We can only state with some certainty that:
· They will not all have evolved in the same way, nor at the same pace.· Not all transformations which have been initiated will be fully completed.
· Progress will not be linear. There will be setbacks.
· Institutional weaknesses, social structures, attitudinal changes will slow down structural change and growth in agriculture.
To avoid disappointments, it is better to be realistic from the beginning. The early euphoria envisioned a quick transformation, followed by an equally quick supply response. But developments thus far, and the experience of both the Central and Eastern European countries and East Germany, suggest otherwise. Gradually, the perception is growing that the process will be slower than anticipated and that, consequently, the social and political strains on very fragile systems, greater. However, one also has to be convinced that the whole task is not impossible. The region has all natural, economic and human resources to become a fully integrated and prosperous part of the developed world and the European Union, specifically, in the foreseeable future.
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by Aart de Zeeuw
After the break down of the communist system in the CEE countries in 1989, the agricultural sector faced a very difficult position. After five years of democratic development the situation is much better, but not yet back to the level of the 1980s.
Most reports about future development show a more or less optimistic view, but all of them conclude that in these countries it is necessary to develop an agricultural policy, which is focused on shaping a solid legal basis, a better market and infrastructure, credit facilities, clear rules regarding health and quality of agricultural products and a better system of research, education and extension, as well as privatisation.
The position of the EU towards the CEE countries is ambiguous
Politically, the EU wants to give the CEE countries the possibility of becoming full members rather quickly. On the other hand, the EU realises that access in the short term is almost impossible because of the great differences between the EU countries and the CEE countries, economically, socially and legally.
Adaptation takes time!
Most of the EU countries also fear that a rapid accession would slow down the process of further unification within the EU; only the UK does not want a further unification of the EU on social, foreign and defence policy. In my view, the only way to solve this dilemma is through a process of formal access in the rather short term together with the introduction of a transition period in which certain border measures are implemented to prevent economic and social chaos.
The length of the transition period and the content of the border measures can vary from country to country, and will be the result of negotiations. From a legal point of view it is formally not possible to introduce a transition period, since the EU has accepted the 'Single Market,' which means that at the moment of formal accession the market becomes completely open. This procedure has occurred with the accession of Finland, Sweden and Austria. This was possible because the economic and social structure in these countries did not differ too much from the existing members of the EU.
The case of the accession of the CEE countries is different, which is why I think that if there is a political need to accept an early formal accession of these countries, the old procedure (followed in the accession of Spain, Portugal and Greece) with a rather long transition period will be necessary.
Another important argument for a rather long transition period is based on the probability of a change of the CAP in the EU toward replacing price support with direct income support and an integration of agricultural policies into rural development policies.
These changes also need time, in my view at least five to ten years. It is obvious that the development of agricultural and rural policies in the CEE countries need to fit in this probable development in the EU and that also takes time.
Are there differences in beliefs and values between the members of the EU? In my comments on the papers of Petit and Doucha I concluded that we need to emphasise the general and global belief that the agricultural community is one of the important pillars sustaining the development of rural areas. This is true for all member states in the EU as well as all countries in central and eastern Europe.
Differences between member states in the EU are the result of different views on how to support farmers and their families. The discussion focuses mainly on the alternative between price and income support. More market-oriented countries like UK, Denmark, Netherlands, parts of France (not the southern part) and Sweden more easily accept the change from price to income policy, than countries like Germany, Greece, Portugal, Spain and Italy.
In accordance with what has been said, the solution for the EU and also for countries who want to become members of the EU is:
· accepting a process of gradually lowering prices in the EU; with a view of an ongoing process of liberalisation of agricultural markets during the first decade of the next century;· replacing price supports with direct income support, in particular, in regions where restructuring is necessary to become competitive with efficient fanning regions and in regions where direct income support is necessary to support farming for social and environmental reasons.
Agricultural policy needs to become more and more integrated into rural development policy.
My conclusion is, that in the EU the member states do not differ in their belief, that agriculture is of great value for the society, in particular, for the rural areas, but that they differ in the way agricultural and rural policies need to be implemented.
The discussion of the situation in Central Europe focused on some of the differences in the individual countries and on some of the similarities. It was pointed out that in Poland there had been a land market, even during the communist period. That market was limited by numerous rules, but it was possible to buy and sell land. The land market in Poland is now functioning within limits, mostly created by restrictions against foreign ownership of farmland. However, most of the limitations on the functioning of the land market in Poland come from the economic position of farmers and not from legal restrictions placed by policies.
There was general agreement that none of the Central European countries have agricultural policies aimed at supporting or speeding the restructuring of their agricultural systems. The major criteria for policies seems to be that they not be heavy drains on national budgets. Moreover, the policies that are put in place focus more on rural development, rural infrastructure, and environment, than on improving the structure and efficiency of agriculture in the countries. In addition, there has been little or no attention to the restructuring of the upstream and down-stream parts of the food and agriculture sector. This further handicaps the farms in Central Europe in terms of competition with farms in Western Europe or elsewhere.
In the Czech Republic an organization called the Agrarian Chamber serves as an umbrella organization to reduce the conflicts between farmer-producers and monopolistic processors and input suppliers. When some producer groups tried to establish co-operatives to market products to processors, the Ministry of Competitiveness forced them to stop their independent action and become members of the Agrarian Chamber.
In Hungary there are non-governmental product councils of processors, traders, and raw material producers. These groups discuss the market situation, make proposals for government fixing of minimum prices, and agree on the minimum price the processors will pay for the product in that season. Sometimes these councils decide who is going to produce or export and operate to limit supply and raise prices. The privatisation of sugar processing has brought in some foreign processors which compete with those that are owned locally, but they all belong to the Hungarian Sugar Producers Association that is sort of a cartel. The input supply industry is fairly competitive because it is fairly easy to buy supplies in nearby countries if prices are too high in Hungary.
One of the major problems in Hungary is the lack of credit facilities for farmers. Land cannot be used as collateral and there are no government subsidies for credit. Therefore, much of the credit for production of products such as grain comes from elevators and traders who sign forward contracts for grain in exchange for credit advances to producers. This, of course, leaves the producers in a weakened position.
The discussion brought out that many countries in Western Europe have laws designed to prohibit the ownership of farms by foreigners, and to maintain family-sized farms. In France there is a Society for The Improvement of Land and Establishment of Rural Settlement. This organization is a private entity that receives public money and is very involved in the land market. When farms are sold, there are restrictions on who can bid for them and get the allocations. This institution was set up initially to encourage farm consolidation and modernisation, but it now may be inhibiting restructuring in the name of the family farm, while at the same time reducing the competitiveness of the agricultural sector.
In general the discussion indicated that there are continuing problems in the process of restructuring of agriculture in the former communist countries. Some of the problems are created by conflicting values about how the sector should be structured, who should own the resources in the sector, and what government policy toward the sector should be. However, on examination it turns out there are many of the same conflicting values on the same issues in Western Europe. In both Western and Central Europe there is widespread support for government intervention in the land market to affect who owns farms.
