II. DEVELOPED COUNTRY REGIONS

CENTRAL AND EASTERN EUROPE
OECD COUNTRIES

CENTRAL AND EASTERN EUROPE

Economies in transition
Bulgaria
Romania
The Russian Federation

This section reviews the status of economic and agricultural reform in Central and Eastern Europe and focuses more specifically on the experiences of Bulgaria, Romania and the Russian Federation.

Economies in transition

The year 1992 saw further contractions in overall output in the transition economies of Central and Eastern Europe. However, there were significant variations in economic performance between countries, largely reflecting differences in the pace and stage of their economic reform process.

According to the IMF,³⁹ real GDP in the Central European countries ⁴⁰ in 1992 declined by 7.5 percent, following a 13.5 percent fall in 1991. Forecasts point to a further 1.5 percent decline in GDP in 1993 and a resumption of positive growth from 1994, initially at a rate of 2.6 percent. Within this average, individual country positions differ markedly, however. On the one hand, former Czechoslovakia, Hungary and Poland are already showing signs of economic recovery, although the breakup of highly economically integrated Czechoslovakia into two independent states, the Czech Republic and Slovakia, has created additional uncertainty. On the other hand, economic activity in Bulgaria and Romania continued to decline significantly in 1992, although at a slower rate than the previous year. The civil strife in former Yugoslavia, SFR, a source of immeasurable human suffering, is at the same time seriously disrupting the local economy and negatively affecting the economies of neighbouring countries, especially Albania, Bulgaria and Romania. The first of these is particularly vulnerable to destabilizing influences since it only recently initiated economic reforms.

³⁹ IMF. World Economic Outlook, April 1993.

⁴⁰ Albania, Bulgaria, the Czech Republic, Hungary, Poland, Romania, Slovakia and former Yugoslavia, SFR.

In most Central and East European countries, the agricultural sector continues to be affected by the negative short-term impacts of reform and the uncertainty surrounding privatization and future property rights. However, a severe drought is probably the most important single factor behind the 12 percent drop in Central Europe's agricultural production in 1992, which followed a decline of 4 percent in 1991 and of 3 percent in 1990. In the former USSR, on the other hand, the decline in agricultural production in 1992 was limited to 4 percent, compared with 13 percent in 1991. A partial recovery in cereal production, following the 28 percent drop recorded in 1991, almost offset further declines in other crops and in livestock products.

As reported in The State of Food and Agriculture 1992, the major policy areas affecting agriculture in Central Europe and the former USSR include price and market liberalization, land reform, privatization and demonopolization and trade liberalization.

The liberalization of prices is still the policy area in which most progress has been made. Virtually all countries have taken significant steps. Following measures already undertaken in this area by the Central European countries, a price liberalization programme was carried out in 1992 in Belarus, the Russian Federation and Ukraine, soon followed by Kazakhstan and then the other newly independent states of the former USSR. In spite of these efforts, complete liberalization has not been achieved and, in many cases, price controls are still in place on a number of products, including some agricultural and food products. In most countries, price liberalization, together with the elimination or reduction of subsidies on farm inputs and products, has resulted in a deterioration in agricultural terms of trade, as input prices have risen at a quicker pace than farmgate prices. This tendency reportedly continued in 1992. The significant shifts in relative prices following price liberalization as well as the increased cost of and reduced access to credit following credit market reform put pressure on the farm sector to increase productivity through better resource use.

TABLE 5

Indices of agricultural production in Central Europe and the former USSR

	1985-89 Average	1989	1990	1991	1992
CENTRAL EUROPE
Crops	110.3	112.5	106.1	103.8	83.9
Livestock	103.7	102.5	104.0	95.6	90.0
Agriculture	108.9	110.0	106.5	102.6	90.6
FORMER USSR
Crops	111.1	114.5	116.7	94.2	104.8
Livestock	118.6	125.6	125.8	116.9	101.7
Agriculture	116.4	120.6	120.2	105.1	100.6

Note: 1979-81 = 100.
Source: FAO.

Likewise, in the field of privatization and demonopolization, which has a bearing on the upstream and downstream sectors of agriculture, progress has been uneven. Significant steps have been taken, particularly in former Czechoslovakia, Hungary and Poland, while other countries are progressing at varying speeds and by different methods. Thus, in the Russian Federation a voucher privatization scheme similar to the one applied in former Czechoslovakia was introduced in 1992 and the distribution of vouchers to citizens was begun, although subsequent progress has been slow. No less important than the privatization of existing state enterprises, however, is the creation of new private enterprises at all levels, a spontaneous process that has gained ground in all the transitional economies. Available statistics point to steady increases in the contribution of the private sector to GDP.

One serious problem emerging from the disruption of traditional trading patterns is the risk of creating new barriers to intraregional trade. The experience that followed the breakdown of the Council for Mutual Economic Assistance (CMEA) risks repeating itself with the breakup of former Czechoslovakia into two independent republics and with the disintegration of economic relations between republics of the former USSR. Indeed, the future role of the Commonwealth of Independent States (CIS) appears uncertain and, in addition, the three Baltic republics and Georgia have opted not to join the CIS. There are signs, however, that at least some of the transitional countries are attempting to counter these negative developments and strengthen regional trade relations. Thus, in 1992 the Czech Republic, Hungary, Poland and Slovakia decided to constitute the Central European Free Trade Area, with effect from March 1993. This constitutes a politically significant development, although the agreement is not as far-reaching as originally hoped. Furthermore, trade restrictions for agricultural products are set to be removed much more slowly than for industrial goods.

Bulgaria

The agricultural sector
Policy reform
The impact of agricultural reform
Prospects and policy issues

The agricultural sector

Agriculture is a moderately important sector of the Bulgarian economy. It accounts for about 12 percent of GDP and employs 17 percent of the labour force. Agricultural and food products account for about 20 percent of exports and 7 percent of imports. Major crop products are grains (mainly wheat and corn), sunflowerseed, tobacco, fruit (apples, grapes, peaches, plums, cherries and others) and vegetables (tomatoes, peppers, onions, potatoes, cucumbers). Major livestock products are pork, dairy products - mainly cheese and yoghurt - and wool.

Throughout its history, Bulgaria has been a net exporter of agricultural products. In a typical year, it exports wheat, tobacco, sunflower oil, fresh and processed fruits and vegetables, wine and livestock products. It imports oilseed meal, cotton and, in some years, maize. However, during the communist period, about 80 percent of Bulgaria's exports went to the former CMEA countries, with some 70 percent going to the former USSR. These export markets have all but collapsed with the dissolution of CMEA trading arrangements and the breakup of the USSR.

Under communism, almost 99 percent of Bulgaria's agricultural land was organized into state and cooperative farms. In theory, state farms were state-owned enterprises and the workers had the status of employees working for fixed wages, while workers on cooperative farms were members and shared in the profits of the farm. However, the distinction became blurred as the farm structure was reorganized several times over the 40 years of communist rule. During the 1970s the state and cooperative farms were consolidated into huge agro-industrial complexes averaging 24 000 ha in size. Beginning in 1986, these were broken up into smaller units and, during the final years of the communist regime, the agro-industrial complexes were dissolved and the original cooperative farms were reconstituted. The other type of farm organization is the state-owned hog and poultry complexes.

The private sector consisted of plots, usually 0.5 ha in size, which were allotted to cooperative farm members for personal cultivation. Such plots accounted for about 16 percent of arable land. However, the private sector accounted for about 25 percent of total gross output and as much as 40 percent of total meat, fruit and vegetable production.

Both suppliers of inputs and purchasers of output were state-owned monopolies, a typical feature of all communist regimes.

Policy reform

Retail prices. The government removed most retail price controls in February 1991 but began a system of "monitoring" the prices of 14 basic food items. These included flour, bread, four types of meat, certain sausages and other processed meats, vegetable oil and sugar.

In August 1991, the system of price monitoring was transformed into retail price controls. Projected prices for the 14 food items were set to cover costs and a "normative" profit margin was established at 12 percent for processors and 3 percent for retailers. In April 1992, the list of monitored foods was reduced to six: bread, flour, milk, yoghurt, white cheese and fresh meat. The projected prices were raised at the same time.

Producer prices. Most producer prices were also liberalized in February 1991. However, prices of wheat, pork, poultry meat, calves and milk have continued to be under some form of control. In 1991, with a view to monitoring prices, projected prices for these commodities were established, covering costs plus a 20 percent normative profit. In April 1992, this was replaced with a system of minimum prices for the same products. In theory, both state-owned and private purchasing companies were required to pay these minimum prices to producers. However, these prices were not so rigorously enforced in the case of private firms.

Even the minimum prices established in 1992 are well below world levels and the fact that average 1992 procurement prices were very close to the minimum prices suggests that these are in fact being treated as price ceilings. Furthermore, average 1992 prices of uncontrolled commodities such as maize and barley are also well below world prices. Some of the reasons for these low prices are:

· The monopsonistic structure of the state-owned purchasing and processing enterprises. These are technologically inefficient with high costs but, in the absence of competition, they have no incentive to cut costs. Rather, they maintain their profit margins by squeezing producers.

· The system of export quotas and bans which are periodically in effect tend to hold down producer prices.

· Because of the need to repay credit and the lack of farmer-owned storage, producers are under pressure to sell their crop immediately after harvest when prices are at their seasonal low.

Despite the overall movement away from non-tariff barriers, the government has introduced a series of temporary licensing and quantitative restrictions on certain commodities, motivated by concerns about possible food shortages. For most of 1992, exports of grain, sunflowerseed oil and other strategic commodities were subject to quotas. In August, these quotas were abolished and replaced with a system of export taxes, set to capture the difference between domestic and international prices. Initially, these taxes were 8 percent for barley, 12 percent for wheat and corn and 15 percent for wheat flour. In January 1993, these were raised to 15, 20 and 25 percent, respectively.

The result of the lifting of the export quotas was a dramatic surge in exports. At least 600 000 tonnes of grain, including 313 000 tonnes of wheat and flour, were exported in the last quarter of 1992, as traders took advantage of the gap between domestic and world prices. These exports led to fears of possible shortages. While there appear to be adequate supplies of bread grains, there are signs of very tight supplies of feedgrains. In response to such fears, the government imposed a ban on grain exports in March 1993, which was to remain in effect until the end of September 1993.

Land restitution. The Law for Agricultural Land Ownership and Use was passed in February 1991 and a series of amendments were enacted in April 1992. The main provision of the law is to return land to the pre-1946 owners or their heirs. According to the amended law, reinstatement will take place within the boundaries of the original piece of land wherever possible; in other cases, former owners will receive plots equivalent in size and quality. The amended law allows land sales (the original law prohibited land sales for three years following restitution) but imposes a maximum of 30 ha on land acquired through either restitution or purchase. There are no restrictions on leasing, however.

The process of land restitution is proceeding rather slowly, as the municipal land commissions who are in charge of the restitution are facing shortages of technically qualified personnel. As of April 1993, 22 percent of applicants had received temporary certificates of ownership, covering about 15 percent of agricultural land. In spite of the difficulties, the government hopes to be able to restitute 50 percent of the land within 1993 and to finish the process by the end of 1994.

The amended land law also calls for the liquidation of cooperatives. For each cooperative, municipal authorities have appointed a liquidation council responsible for the valuation and physical distribution of non-land assets to former owners and members and for the management of the cooperative until its liquidation. For the valuation it must rely on the services of individuals or companies authorized by the Privatization Agency or the Ministry of Agriculture. Once members receive their share of cooperative assets, they are free to pool those assets to form new cooperatives.

Privatization and demonopolization. The process of demonopolization began in 1990 and accelerated in May 1991 when the Law for the Protection of Competition was passed. In November 1990, most of the state trusts responsible for purchasing and processing agricultural products were split up into a number of independent enterprises which could compete with one another. The actual effect of this action, at least for agriculture, was to set up regional, rather than central, monopolies. Although all legal restrictions on the formation of new private firms have been removed, few private firms have in fact emerged to compete with the state enterprises to date. Thus, the market power they hold in the upstream and downstream agricultural sectors remains.

The May 1991 law extended the monopoly breakup across most sectors and provided definitions for monopolies. It provides for price controls on monopolies and bans acquisitions or mergers resulting in a monopoly. The price controls are effected through regulations defining "normative profit margins" for enterprises identified as monopolies.

The state-owned enterprises are to be transformed into commercial companies, after which shares are to be sold through auctions or tenders. The privatization process as such is, however, only in its initial phase. Under the Ministry of Agriculture, 461 agro-industrial state enterprises are destined for privatization. By June 1993, only a handful of auctions or tenders for these companies had taken place.

Credit markets. Two major constraints facing both private and cooperative producers are the difficulty of obtaining credit and the high real cost of credit to farmers in view of the unfavourable relative price movements they have experienced. While below the inflation rate, the current nominal interest rate is still prohibitive for most producers, whose net returns are increasing at a much slower rate than inflation. Banks are also reluctant to lend in the current climate of uncertainty about future landownership.

The government has attempted to alleviate the situation through several programmes, but without much success. In the autumn of 1992, it offered to guarantee credit to finance planting costs, but no interest subsidy was offered and producers were required to repay the loans immediately after harvest, which forced them to market their crop at a time when prices were at their seasonal low.

In May 1993, another bill was passed authorizing low-interest credit to help finance the costs of spring planting. Banks that are still under more than 50 percent state ownership are obliged to offer this low-interest credit; the programme is voluntary for private banks. Even though the interest subsidy is financed by the government, banks - including the state-owned banks - are reluctant to participate because the credit is not guaranteed.

The impact of agricultural reform

The immediate effect of reform has been to plunge Bulgaria into a deep recession. GDP fell 17 percent in 1991 and another 10 percent in 1992. Further, a big external debt, estimated to be $13.5 billion, has been left over from the pre-reform regime. In addition, Bulgaria was hit particularly hard by the collapse of its important trade with the former USSR as well as by the trade embargoes imposed on Iraq and later Serbia and Montenegro. Consumer prices rose by 334 percent in 1991, mainly reflecting the February price liberalization and administrative increases in energy prices. Inflation abated in 1992 but remained extremely high at 110 percent. Unemployment in 1992 was estimated to be 15 percent as compared with 11.7 percent in 1991 and 1.6 percent in 1990.

The impact on agriculture. Since 1990, there have been significant supply-side adjustments in the crop and livestock sector. Bulgarian agriculture has suffered the same deterioration in terms of trade as the other Central European countries: input prices rose by between four and eight times in 1991, while output prices merely doubled. This has been compounded by the uncertainty surrounding land restitution and the liquidation of the cooperatives. The other main factor affecting agriculture is the collapse of the Soviet market.

The most dramatic adjustments have been in the livestock sector. Between 1989 and 1992, cattle inventories declined by 38 percent, hogs also by 38 percent and poultry by 51 percent. Livestock production has become extremely unprofitable, as feed costs have risen while government policies have combined with reduced consumer demand to hold down producer prices. The problems have been greatest in the state-owned hog and poultry complexes, which continue to depend on very expensive compound feed. Private livestock producers have been quicker to adjust their feeding practices to the new economic reality, feeding from their own grain production.

The livestock situation has also been deeply affected by the liquidation of the cooperatives. Cattle have been affected by this process more than other animals because the majority of cattle were on cooperatives rather than state livestock complexes. The first cooperative assets to be disposed of tend to be the animals. As a result, a large number of private individuals have found themselves the owners of two or three cows. Many of the new owners have not been able to provide proper housing or adequate feed. At the same time, large-scale livestock facilities on the cooperatives lie abandoned. The result has been a severe liquidation of herds.

There has been less of a visible adjustment in the crop sector. Grain yields have fallen as a result of a decline in input use, the use of low-quality seeds, drought and delays in planting. Wheat area, after falling in 1992/93, should be back to its previous levels in 1993/94, despite continuing low prices.

Maize area, after an increase in 1992/93, is expected to decline significantly this spring, mainly because sunflowerseed has proved to be more profitable. Sunflowerseed prices are higher and sunflowers are also easier to cultivate. Bulgaria is subject to frequent droughts, causing a substantial variation in maize yields. Much of the maize traditionally grown in Bulgaria is in irrigated areas. As water and irrigation services have grown significantly more expensive, producers have become reluctant to plant maize.

Fruit and vegetable production has suffered greater shocks from the transition. Over half of Bulgaria's fruit and vegetable output went to the processing industry while 80 percent of its processed production was exported, mostly to the former USSR. With the loss of the Soviet market, processing plants are working at one-tenth of their former capacity, leading to a virtual collapse of fruit and vegetable marketing. The most evident result of this situation is a 36 percent drop in vegetable production between 1989 and 1992, including a 53 percent drop in tomato output.

The negative impact on fruit production has so far been less evident but a very negative trend is expected to emerge in 1993 and 1994. Much of the land occupied by the orchards is in the southern part of Bulgaria where restitution has proceeded quickest. As this land is restituted, the new owners do not have the funds to apply optimal levels of pesticides or irrigation.

Prospects and policy issues

It will probably be a long time before the shape of Bulgaria's future farm structure becomes clear. A whole set of institutions is needed to support the new private farmers. In the meantime, the government is under pressure from the short-term negative effects of reform to slow down the pace of reform and implement more interventionist policies. Bulgarian agriculture has the potential to become a significant source of hard currency export earnings but major obstacles remain.

Particularly pressing are the interrelated issues of land restitution and liquidation of the cooperatives. It is feared that the thrust of the current law will take Bulgaria back to its pre-Second World War farm structure, dominated by tiny and fragmented farms. The average size of new plots at the national level is about 0.5 to 0.7 ha. In the immediate future, it is expected that the majority of landowners will want to form new and smaller voluntary production cooperatives which will allow the pooling of fragmented plots. In the long term, the problem of fragmentation should disappear with the development of land markets. However, efficient land markets are hindered by the lack of institutions needed to provide financing, brokerage services, surveying and recording of transactions and by the lack of an information system. Land sales are also slow because of the currently low profitability of agriculture.

The liquidation of cooperatives is also creating great uncertainty. There have been technical difficulties connected with the valuation of assets and legal disputes about the allocation of assets to former owners and cooperative members. Liquidation councils have been accused of incompetence and negligence, resulting in poor preparations for sowing and planting delays.

In the past, the cooperatives were responsible for many essential services to agriculture, such as maintaining the irrigation systems and ensuring phytosanitary controls on marketed produce. In addition, they were the primary marketing channel for private sector production. As the cooperatives are liquidated, no alternative channels are being developed to provide these services. There is also an insufficient system of extension services to help private producers make their production decisions, seek alternative marketing options or form new cooperatives which might manage the irrigation system or provide veterinary or other services.

Bulgaria has the potential to become a surplus producer of wheat and livestock products. However, world market conditions could make it difficult for the country to expand its exports. Even in 1992, the former USSR was still the largest purchaser of Bulgarian grain (purchased under barter arrangements for oil and natural gas). Bulgaria may have to continue to rely on this market as the main customer for its wheat and livestock products, and these exports will depend crucially on developments in the republics. If incomes begin to rise, this market could expand. On the other hand, with successful economic reform, the Russian Federation, Ukraine and Kazakhstan could emerge as serious competitors for Bulgaria in the world wheat market.

Fruit and vegetables, the other major source of export earnings, has been battered by the collapse of the Soviet market. Exports of field tomatoes, unpeeled canned tomatoes and apples have fallen to a fraction of their previous level. At the same time, exports of early tomatoes, greenhouse tomatoes and green peppers have remained strong, with exports going mainly to Germany and Austria as well as Poland, former Czechoslovakia and former Yugoslavia, SFR. Markets could be developed for other greenhouse vegetables. However, this potential is gravely threatened by the current difficulties of the sector. The greenhouses are slated for privatization and are suffering the same financial difficulties faced by state-owned firms. It is entirely conceivable that some of the greenhouses could end up abandoned or destroyed.

The processing industry is in a particularly depressed state. Plants are technologically outdated, they are often working at a fraction of their capacity and they need a large infusion of capital to finance the renovation needed to meet the quality standards of Western markets.

Romania

The agricultural sector
Policy reform
The impact of economic reform
Prospects and policy issues

The agricultural sector

Agriculture accounted for 19 percent of Romania's GDP in 1991 and employed 29 percent of the workforce. By far the most important crops grown in Romania are cereals, with wheat and maize covering about one-third of the country's arable land. During the period 1986-90, wheat production averaged 7.3 million tonnes while maize production averaged 9.8 million tonnes. Other important crops are oilseeds: sunflowerseed production averaged 700 000 tonnes during 1986-90 while soybean production was typically around 300 000 tonnes per year. The country's most important livestock product is pork.

Romania was for some time a significant net agricultural exporter, exporting significant amounts of wheat and, in some years, maize. Other major exports have been livestock products, sunflower oil, fruit and vegetables. Throughout most of the communist period, Romania imported large amounts of soybean and, in some years, maize. However, during the final years of communist rule, the Romanian Government's drive to eliminate the country's foreign debt led to greatly reduced imports of feedstuffs and the vigorous promotion of agricultural exports. The result was severe domestic shortages of most basic foods.

During the communist period, Romania's farm structure was dominated by state and cooperative farms. State farms, averaging 5 000 ha, covered 20 percent of agricultural land and 16 percent of arable land. These were state-owned enterprises in which the workers had the status of employees. Cooperative farms averaged 2 000 ha. Workers on cooperatives had the status of "members" rather than employees and their income was theoretically linked to the cooperative's performance. In practice, there was little difference in the operation and management of these two types of farm. However, privatization of the two types of organization is proceeding in different ways.

There was a significant private sector during the communist period, however. About 9 percent of the agricultural land continued to be privately owned, although this land was mainly in mountainous regions that were unsuitable for large-scale collectivized agriculture. Another 8 percent of the land was in 0.5 ha plots allotted to cooperative farm members for their personal use. The private sector contributed close to 40 percent of the meat, fruit and vegetable output.

Policy reform

Compared with other transitional countries in Central Europe, the Romanian reform process has been characterized by a high degree of gradualism and caution in an attempt to protect the population and limit the recessionary impact of the structural reforms.

Retail prices. A first round of liberalization took place in November 1990, when price controls were removed for all but a list of 22 essential items whose prices were fixed by the government and subject to subsidies. Thus, staple foods, together with energy and communications, remained under a price control system. In a series of steps during 1991 and 1992, administrative price ceilings were raised, food subsidies paid to processors to cover losses incurred through retail price ceilings were cut and the number of products subject to price ceilings was reduced. From September 1992, formal price ceilings persisted only for bread, butter, milk and milk powder. On 1 May 1993, the remaining formal retail price ceilings were lifted, leading to a more than fourfold increase in bread prices. Yet food subsidies remain for beef, pork, poultry and milk. These subsidies are paid to state-owned processors who respect the government-established minimum farmgate prices.

Producer prices. Prices in peasant markets were freed soon after the 1989 revolution, but the government has set minimum prices for basic commodities to be paid by all state-owned purchasing enterprises. These prices have been raised a number of times but, in general, have not risen as fast as the rate of inflation. From 1 May 1993, minimum prices remained in force for wheat, maize, pork, beef, poultry and milk. The continued de facto monopoly power of the state purchasing enterprises tends to keep prices close to the minimum levels. Privatization has been slow in the downstream sector and producers still have very few alternatives to selling to state purchasing agencies. The low profit margins of the state-owned companies and their preferential access to state subsidies allows them to advance inputs and financing to farmers in exchange for forward purchasing contracts; however, this has resulted in de facto barriers to the entry of new private agents in agricultural supply and marketing.

Trade policy. The government's first act following the revolution was to ban all agricultural and food exports, reversing previous policies of maximizing exports regardless of the effects on domestic food supplies. At the same time, imports of crucial inputs were authorized. These imports were initially possible because of the hard currency reserves that had been built up during the previous year.

In 1991 most imports and exports were liberalized, although export bans and quotas continued to be applied for many agricultural products. The leu was devalued and made partially convertible, hard currency auctions were authorized and the state monopoly on foreign trade was abolished. Beginning in January 1992, exporters were allowed to retain their hard currency earnings.

From 31 May 1993, export bans on agricultural products were lifted, except for wheat and butter. Agricultural imports are subject to rather high tariffs, although these are frequently waived for "emergency imports" in response to perceived shortages.

Non-agricultural privatization. Small-scale privatization began in February 1990 when a decree was passed that allowed the formation of private businesses employing up to 20 people. The Commercial Societies Law, passed in November 1990, removed most restrictions on the establishment of new businesses. Also from this date, the leasing of state-owned assets has been pursued. By the end of 1992, outside the farming sector, there were over 200 000 private businesses in Romania (including both new private firms and privately managed state-owned units) employing some 1.4 million people.

Large-scale privatization began with an August 1990 law which called for the reorganization of all state enterprises into either commercial companies, in which the government continued to hold all the shares but which are destined for privatization, or so-called regies autonomes, which were to remain state property. Theoretically, the regies autonomes were to be located in perceived strategic industries (defence, energy, mining, public utilities). A law passed in August 1991 established the target of privatizing the state-owned commercial companies within seven years. For this purpose, the law created five private ownership funds, holding some 30 percent of the shares of the commercial companies, and one state ownership fund, holding the remaining 70 percent. The state ownership fund will develop and implement annual privatization programmes leading to complete privatization over seven years. The five private ownership funds are joint stock companies in which Romanian citizens hold share certificates. The funds are supposed to develop methods whereby shareholders can exchange their certificates for actual shares in the companies themselves.

The process of privatization itself is only in its initial phase. In agriculture, the large-scale privatization programme will apply to both state farms and companies in the upstream and downstream sectors, affecting a total of 2 200 commercial companies. For 1993, 500 of these have been proposed for privatization.

Land restitution. The redistribution of land began spontaneously soon after the revolution, as cooperatives disbanded and members divided their assets among themselves. Formal land legislation was passed in February 1991, according to which cooperative members who contributed land, as well as members who did not, are entitled to claim up to 10 ha, a quota constrained by the availability of land. In areas with excess land, up to 10 ha may be given to landless families from other localities who would then be obligated to take up residence and cultivate the land. Most citizens are free to buy and sell land, but no one may own more than 100 ha. There is a ten-year ban on land sales by new owners who did not own land in the past. Foreign citizens may inherit land but must sell it within one year.

Former owners whose land is now in state farms may not reobtain that land. Instead, the 176 000 owners whose land was expropriated by state farms have become shareholders in the state farms.

Romania's land restitution has proceeded more quickly than in any other Central or East European country. By June 1993, 90 percent of claimants had received land. Privately owned land increased from 1.4 million ha in 1989 to 10.3 million ha in 1991 and now accounts for more than 70 percent of Romania's agricultural land (80 percent of arable land). However, the process has caused a return to the pre-Second World War farm structure which was dominated by small, fragmented holdings. The average size of new private holdings is about 2 ha, often consisting of two or more non-contiguous plots, which is also a reflection of the pre-war farm structure. The return to this fragmented farm structure has had a very negative short-term impact on Romania's agricultural performance.

In the longer term, the consolidation of these holdings could be accomplished through a land market. The sale or transfer of land requires the seller to have the final title to his land, and the process of titling has been very slow. Of the approximately five million new landowners, by mid-1993 only 300 000 had received final titles. The government expects that about 700 000 more will receive titles within 1993 and that, by 1995, 80 percent of new owners will have final titles to their land. Would-be purchasers of land also find it very difficult to obtain financing. Mortgages are offered at high interest rates with a five-year repayment period.

Another serious problem faced by new landowners is the lack of suitable machinery. Most of the country's tractors are still owned by the state machinery stations known as "Agromecs". The 611 Agromecs own 70 000 tractors and 27 000 combines, while there are only 36 000 tractors in the private sector. The government has introduced a soft loan programme, offering low-interest credit to producers who want to buy tractors from the Agromecs. However, the fact remains that many of the current tractors are too large to be used on small private farms.

The formation of new cooperatives. To counter the negative effects of land fragmentation, the government has actively encouraged new private farmers to join associations. There are two types of association: loosely organized groups, ranging from small "family associations" (typically with three, four or five families) to somewhat larger but still informal groupings and more formally structured, legally registered associations. In several cases, farmers with several non-contiguous plots belong to two or more such associations, which allow the pooling of adjacent pieces of land for joint cultivation.

Agricultural credit. The government has undertaken several initiatives to help farmers obtain credit, which continues to present difficulties for most. Market interest rates of 70 percent or more are prohibitive for most producers, given the low rate of increase in agricultural prices. Most agricultural credit is provided by Agrobank. Before the revolution, Agrobank had just 10 000 clients; now it has 150 000. It has also become increasingly independent of the National Bank of Romania, on which it now depends for only 27 percent of its resources. However, 80 percent of Agrobank's loans are short-term and 60 percent are to Romcereal, the state grain company. Agrobank also administers a soft loan programme on behalf of the National Bank of Romania. These loans carry an interest rate of 15 percent and can be used by producers to buy inputs. However, demand for these loans greatly exceeds the supply: 23 billion lei were made available for this programme while applications have been submitted for 250 billion lei.

The impact of economic reform

Romania has seen a decline in most economic indicators that is no less severe than that of most other Central European countries. GDP declined by 14 percent in 1991 and a further 15 percent in 1992. The inflation rate accelerated from 161 percent in 1991 to 210 percent in 1992. Unemployment rose from 2.7 percent in 1991 to 6 percent in 1992 and is still on the rise.

The impact on agriculture. Agricultural output declined by 14 percent in 1992 as a result of confusion regarding land distribution, lower input use and the severe drought in the summer of 1992. Declines were registered in most crops and livestock products. The cumulative decline in agricultural production from 1989 to 1992 amounts to 25 percent.

Total grain production in 1992 was down by 38 percent. With wheat area declining from 2.1 million to 1.5 million ha, production declined by 42 percent. Wheat was less affected by the summer drought - yields were down only slightly from 1991 - than by disruptions caused by land redistribution. Maize output, severely affected by the drought, declined by 35 percent. Planted area increased by almost one-third, as the new private producers sought to produce the feed necessary for their animals, but yields declined by 50 percent.

Oilseed production has undergone major structural shifts. Sunflower area increased by 56 percent between 1990 and 1992, while soybean area declined by 13 percent in the same period. As in Bulgaria, private producers have found sunflowers easy to cultivate and they are relatively drought-resistant. The communist government had strived for an increased soybean output in order to come closer to self-sufficiency in feed production, but yields remained low. Once freed from government directives, producers have clearly lost interest in soybean.

The initial negative effects of land redistribution may now have passed. Wheat area for 1993/94 is estimated to be 2.3 million ha, which is back to historical levels. Maize area is expected to be very close to that of 1992/ 93 and sunflower area slightly higher.

Romania has suffered dislocations in its livestock sector similar to those of Bulgaria. Cattle herds, being more difficult to keep on small private farms, have declined the most - by 31 percent between 1990 and 1992. Hog numbers declined by 16 percent in the same period because of the country's inability to import sufficient maize or soybean meal. Milk production declined by 14 percent from 1990 to 1992.

Prospects and policy issues

Romania may be suffering some of the worst disruptions compared with any country in Central Europe, with the exception of Albania. The fact that Romania, once a major exporter, had to import more than 1 million tonnes of cereals in 1990, 1991 and 1992 is an indicator of the magnitude of the problems it is facing. At the same time, inflation continues to be high, large-scale privatization is proceeding slowly and the government seems to be more hesitant than others in the region to implement reform fully. Still, such a cautious approach has not spared Romania the disruptions and severe, immediate recessionary impact also experienced by the region's other reforming countries.

Romania has the potential to become a significant exporter of several agricultural products but the realization of that potential will depend on the government carrying its reform programme through completely. Romania clearly illustrates the problems involved in rapid privatization without the simultaneous creation of the institutional infrastructure needed to support the new private sector. One of the most pressing needs appears to be an acceleration of granting final titles to restituted land. Without permanent title, landowners are unable to sell their land and contribute to the consolidation of landholding.

Another important need would be the development of a greater diversity of marketing and input supply alternatives. Most purchasing and input supply is still in the hands of costly and inefficient state-owned monopolies which maintain their profit margins by holding down prices paid to producers. In this context, an important contribution could be the development of a more extensive network of cooperatives. The associations currently being encouraged are production cooperatives, which pool adjacent pieces of land to achieve more efficient cultivation. These associations, however, are still at a serious disadvantage when dealing with input suppliers or procurement organizations. There appears to be a need for marketing and input cooperatives in addition to the current production cooperatives.

The development of better extension and information systems would also play a positive role in improving the prospects of Romanian agriculture. Present efforts are aimed at improving the structure of information transmission as regards channels of distribution, market information and agricultural production forecasts.

The development of Romanian agriculture could also be greatly enhanced by the removal of remaining export restrictions, which hold down producer prices and ultimately inhibit supply. If Romania wishes to reduce or turn around its negative trade balance, it will eventually have to encourage exports. Agriculture is one of the sectors with the greatest potential to generate export earnings in the short term.

The Russian Federation

Food supply
Agricultural production in 1992/93
Agricultural policies
Barter operations and foreign trade
Prospects for agriculture

Food supply

During the 1980s the growth in agricultural production was double that of population, with the livestock sector showing particular dynamism. Average incomes, however, increased even faster than agricultural production with the result that, although average per caput consumption grew, food demand - especially for animal products - continued to exceed supply. This prompted leaders of the former USSR to put increased food production high on their economic policy agenda. However, the inefficiencies of the production and marketing systems necessitated high and increasing subsidization and rendered evident the need for reform.

The urgency of reform became imperative by 1990 when agricultural production began to shrink, accentuating the supply/demand imbalance and rendering even more manifest the shortcomings of the country's marketing and distribution systems. The excess demand situation persisted through 1991 but was reversed in 1992 when consumer prices rapidly increased following partial liberalization, causing a contraction in the demand for foods. In the case of animal products, the reaction of the processing industry was to reduce meat and milk purchases from farms instead of lowering their sales prices. Underlying the increasingly precarious overall food demand/supply balance was a significant reduction in consumption, particulary of livestock products.

A parallel phenomenon that may have mitigated the imbalance of the food economy to a certain extent was the slowing in population growth which, from 0.7 percent annually up to the late 1980s, was expected to turn negative by 1992. This reversal was linked to the deterioration of living conditions and fears and uncertainties arising from the recent economic and political transformations.

As regards food consumption patterns, official estimates for the first quarter of 1993 indicate declines in per caput consumption below the level of the period January-March 1989 (the most favourable among recent years) of 21 percent for meat products, 34 percent for milk products, 7 percent for eggs, 5 percent for fish products, 13 percent for sugar and confectionary and 32 percent for fruit. On the other hand, consumption increased by 22 percent for grain products, 4 percent for potatoes and 8 percent for other vegetables during the same period.

Consumption of animal proteins, which had already fallen slightly in 1990 from the levels of 1989, seems to have declined further by about 20 percent during 1991 -92. These were proteins partially substituted by starchy foods. Overall, per caput calorie intake fell to about the level of the 1970s, although other estimates point to even lower figures.

Although average food intakes still appear relatively high, considerable pockets of malnutrition emerged among less favoured regions and population groups. Food access problems were accentuated by the reduced control on farm marketing operations and barter deals as well as by the regionally and locally different systems of fixing and/or subsidizing consumer prices for some foods (the latter measure having been legalized by a presidential decree of 27 March 1993). Price differentials among cities remained wide, despite some reduction over time which was probably caused by the response of economic agents to the opportunities for arbitrage that such a situation offered. By the end of March 1993 the discrepancies between the highest and lowest levels of consumer prices among cities were 1:70 for bread, 1:34 for milk, 1:16 for beef and 1:10 for vegetable oil, potatoes and other vegetables. Even those groups of the population that were less affected by the unequal distribution of food supply still experienced a deeply felt qualitative deterioration in their diets.

The overall situation may nevertheless be less gloomy than suggested by the official statistics to the extent that these do not comprise the unknown quantities of food that is privately produced and sold outside the official sphere in more or less legal ways.

Agricultural production in 1992/93

Agricultural production was estimated to have fallen by about 6 percent in 1992, with meat, milk and egg output decreasing by as much as 12 to 15 percent.

Among individual crops, only cereals, pulses and potatoes recovered substantially from the setback of the previous year. The area under grain expanded slightly in 1992 to 62.4 million ha and still further in 1993. Of significant bearing on animal feed supplies was the decline in pasture, from 28.8 million ha in 1986 to 23.3 million ha in 1992.

One of the factors limiting the growth of crop yields is the degradation of soils. This process has been going on for more than 100 years but Russian soil scientists point out that it has greatly accelerated during the past ten to 20 years.

The explanatory factors include widespread neglect of anti-erosion techniques, insufficient crop rotation, soil compaction through overuse of heavy machinery, an unbalanced use of mineral fertilizer and salinization through excess irrigation and insufficient drainage. The detrimental effects are difficult to quantify but are commonly recognized to weigh heavily on potential yield growth.

In 1992 total livestock numbers declined by 5 percent for cows, 6 percent for other cattle, 11 percent for pigs and 9 percent for sheep and goats. The decline on collective and state farms was only partially offset by increases in private farms. Up to 1991, the rate of decrease in the overall herd was smaller than that of meat and milk output, thereby implying slowly rising animal productivity. For 1992, however, the official statistics report diminished productivity.

Herd numbers and animal production further declined during the period January-March 1993 and will most likely continue falling for the rest of the year, although perhaps at a slower pace than in 1992 thanks to higher government procurement prices. Shortages and/or high prices of feed remain the major reason for this decline.

The 1992/93 agricultural year started with autumn ploughing and sowing being reduced by one-fifth compared with normal rates, but with moderate frost-lifting of grain. Depending on summer and autumn weather, crop production in 1993 could improve slightly over the results of 1992 yet will not compensate for the decline in livestock production. Overall, agricultural production is likely to decrease by 5 percent or more.

Agricultural policies

Agrarian reform is generally perceived to be a prerequisite for enhancing growth of agricultural production, balancing demand and supply, raising nutrition standards and improving the performance of downstream activities linked to agriculture.

The conceptual and operational implications of reform are loosely defined by such slogans as restructuring, marketization and plurality of socio-economic formations. There are strong divergencies of opinion as to the nature, speed and depth of the process.

The institutional instability surrounding agrarian affairs is illustrated by the fact that the Centre of Land and Agro-industrial Reform was created in June 1992 and subsequently abolished in May 1993. Various government agencies and regional authorities are influential in implementing reform laws and decrees in their own ways. Another actor, represented in most provinces and counties, is the Association of Peasant Farms and Cooperatives of Russia (AKKOR).

Reorganized and new farms. There is general agreement that, in the foreseeable future, the bulk of primary food products will have to be generated by the collective and state farms, whether in their traditional form or after reorganization. In 1992, their share in gross output was some 60 percent and that in marketed output even larger. However, a new sector of family and private "peasant farms" is coming into existence, although it still accounts for a minor part of the country's agricultural output.

Yet, how fast should private farming expand and what should be its relationship with collective and state farms? Should the latter remain as huge as in the past or be broken into smaller but still large (by Western standards) units? The farmers remaining on the reorganized state or collective farms shall be awarded shares in assets and land, but should such shares be assigned in physical or in value terms? Although a number of laws, decrees and ordinances have been issued on these and other questions, they are still disputed and implemented locally in different ways.

In principle, private full ownership is already granted by law, but the selling or buying of privately owned farmland for non-agricultural purposes remains prohibited by law and constitution. In late 1992, full private ownership was finally granted by law only for garden and household plots, and two corresponding constitutional amendments were also approved.

Reforming and privatizing the huge public farms while minimizing losses and disruptions is no less important than setting up new individual farms. Disagreements exist as to the speed, depth and form that these parallel processes should take.

Up to the end of 1992, out of a total 25 609 collective and state farms, 19 719 were "reregistered". Thirty-five percent of these kept their previous status while 65 percent reorganized in "other forms of ownership". The majority of the latter (8 551) became "societies" with limited liability or "mixed societies", while another 2 410 formed "agricultural (production) cooperatives" and "associations of peasant farms". Some split into smaller cooperative units, among which a number evolved into what can be considered wholly independent peasant farms. Overall, the extent to which the reorganized farms can be considered private is a question of definition.

During 1992, 134 700 new family and private, small group farms came into existence, bringing the total to 183 700 by the end of the year. As most of them were set up after spring 1992, their contribution to that year's agricultural output was only 2 to 2.5 percent. Up to mid-1993, their number grew to more than 250 000 and they farmed about 10.4 million ha or 5 percent of the Russian Federation's agricultural land. The average area per farm was 43 ha. Family and private farms have begun to organize cooperatives for buying, leasing and servicing machinery as well as for processing, marketing and banking. Forming such cooperatives is often made difficult by the absence of relevant legislation, which leaves them in a semi-legal status. Moreover, the small number of private farms that usually exists in a given locality is not sufficient to support viable cooperation.

The sector of household plots and gardens has greatly expanded in recent years in terms of quantity and value of output. Including the rural "personal" plots, this private sector as a whole accounted for 80 percent of the total output of potatoes (produced on 73 percent of their plantations) and 55 percent of the other vegetable output. Some reformers hope that the rural household plot farming will expand, as it is a less costly and more realistic way of establishing genuine family farms.

Price parity. Another major economic as well as political bone of contention in 1992/93 was price policy. Advocates of intersectoral equality want agricultural producer prices to rise at a similar pace to those of the industrial inputs. Nevertheless, the prices for such inputs are estimated to represent only 25 to 40 percent of agriculture's production costs. Labour, intrafarm or interfarm inputs, land, management (or organization of farming) account for the greater part of these costs.⁴¹ In any event, it is unlikely that an alignment of price increases between agricultural output and industrial input would by itself greatly help agriculture or reduce the need for greater efficiency within the sector.

⁴¹ Land, long denied as a cost factor, was at last indirectly assigned a price, although a low one, with the introduction of land taxes, rents and limited selling and buying of land in 1991.

On the whole, domestic terms of trade developments in 1991 and the first rime months of 1992 did not appear to penalize agriculture unduly. Indeed, industrially produced inputs had previously been supplied at extremely low costs.

The issue became worrisome only in late 1992 when prices of industrially produced inputs and services were largely liberalized. During the last three months of that year input prices rose 3.3 times faster than agricultural output. The wholesale prices for industrially produced inputs rose 1.9 times during the first quarter of 1993, with a 2.1 -fold increase for trucks and tractors and a 2.4-fold increase for mineral fertilizer and feeds.

No less detrimental to farmers than the increases in input prices as such were the delays (frequently extended over several months) in payments for agricultural products as well as in credits and inflation compensations. More recently, these delays were somewhat shortened by all payments being made through the country's central bank. Still, given the above price increases, a one-month delay alone means roughly a 25 percent value decline of the money available for input purchases. However, in most cases industry and services demanded immediate or even advance payment.

In early 1993, the Russian Federation Government made an effort to re-establish "price parity" and to compensate at least partly for the effect of payment delays. A decree of 23 January 1993 provided for several forms of financial support for the food economy, including compensations of 30 percent on input cost rises. Following the decree, the government sharply raised the 1993 procurement prices for all categories of farmers producing grain, oilseeds and sugar beet.

Procurement prices for grain which, in August 1992, were fortyfold more than the average prices for 1990, were again more than doubled in February 1993 and raised slightly further in March. The new prices are to be revised every three months in the light of changes in input prices and production costs on the basis of negotiations between the Ministry of Agriculture, the state purchasing organization and the "Agricultural Union". Moreover, half of the price will be paid in advance on conclusion of a sales contract. By April 1993, milk was paid roughly twice, and meat about ten times, the price of grain.

State purchases now only account for the smaller part of the marketed farm output and their importance varies greatly by region. Even so, they may help maintain minimum price levels in the case of excessive declines in market prices. Whether budgetary constraints will allow the state to honour its purchasing commitments fully is a different question.

From the late 1980s, the state began reducing its role in food marketing and distribution. Even though 1992 was a relatively good harvest year, state procurement of the main crops was much smaller than during the period 1986-1990. Nevertheless, procurements exceeded planned targets for most major products except grain and potatoes. A decree of 17 December 1992 requires that each region should aim at creating its own grain fund and subsidizing the consumer price of bread. For 1993 planned purchases through the central fund are only 12.6 million tonnes of grain, 2.6 million tonnes of potatoes, slightly more than 1 million tonnes of meat and 6 million tonnes of milk.

Since 1991, collective and state farms have been permitted to sell part of their livestock products through their own marketing organizations. Such sales were small in 1991 but, by 1992, amounted to roughly 20 percent of total meat output. Another 30 percent is produced privately with only a small part sold to state agencies, mainly through the collective and state farms. Thus, about half of the meat output is self-consumed or marketed outside the official trade system. The corresponding percentages are smaller for eggs and milk and larger for potatoes and vegetables.

By a decree of 12 February 1993, the state president requested that central and regional public food funds should guarantee adequate food supplies to some zones which, because of adverse climatic conditions or population size, are not self-sufficient. Beneficiaries are Moscow and St Petersburg, a number of northern and industrial zones, the army and some other state organizations. Purchases to this end are to be effected on the basis of voluntary contracts, partly through privatized trade organizations on behalf of the state. Purchases abroad and from states of the former USSR are also to contribute to the central fund.

Barter operations and foreign trade

The reduced role of central purchases has not yet given way to a functioning market, but a primitive form of market is operating under galloping inflation and with some remnants of the former command economy. In 1992 food processing was still largely a monopoly of state-owned firms. Sugar is a special case: part of the refined sugar output is returned to the beet producers on the basis of contracts while another smaller part is retained by the refineries, thus being consumed and marketed outside the state system. Similar practices are observed for mixed feed.

The volume of free grain trade in 1992 is estimated to be around 15 percent of production, with 2 percent going through the commodity exchanges (birzhy). Barter trade among farms, non-industrial enterprises and territorial administrations has expanded. An example is the "barter fund" of Vologda province, which exchanges metal, timber and machines for animal feeds and other foods from Kazakhstan and some Russian provinces. Throughout the Russian Federation, many farms barter meat and other farm products in exchange for needed inputs. About 30 percent of industrial farm inputs are estimated to be acquired outside the parastatal AGROSNAB system, and this share is expected to reach 45 to 50 percent in 1993 and subsequent years. Such transactions, even where legal, are only officially recorded in part.

Up to autumn 1991, food trade among the republics of the former USSR was only recorded for individual republics and was not published systematically. The first statistical yearbook, published by the Russian Federation, contained data on main food commodity imports and exports from former Soviet republics without a breakdown by trading partners. Most likely, these data only cover exchanges through state-owned firms and the procurement system using public funds. Apart from grain, former Russia's agricultural imports from other republics in 1989 consisted mainly of meat and meat products (876 000 tonnes), milk and milk products (4.5 million tonnes), 847 million eggs, 3 million tonnes of vegetables, fruit, grapes and melons and 2.6 million tonnes of sugar. On the other hand, former Russia's deliveries of these products to other republics were negligible, except for eggs and potatoes. Since then, the quantities (including those from Georgia and Baltic states) have greatly declined. Even the reduced agreements concluded for 1991 were not fulfilled.

The main suppliers of meat and milk were Ukraine, the Baltic states and former Belarus. Ukraine also supplied most of the eggs and former Belarus most of the potatoes. Central Asia, Ukraine and Moldavia were the main suppliers of vegetables, fruit and melons. The main supplier of grain from within the former USSR to Russia was and still is Kazakhstan.

The above refers to the so-called "near abroad" as distinct from "far abroad" trade, the latter referring to trade vis-à-vis countries outside the former USSR, which now include the three Baltic states. For grain, the Russian Federation heavily depends on imports from far abroad, the other most important import items being sugar, meat, vegetable oil and oilseed meal. According to official data, far abroad wheat imports in 1992 increased from 12.4 million tonnes in 1991 to 20.6 million tonnes, but maize imports were more than halved from 11.8 million tonnes to 5 million tonnes. Far abroad imports of meat in 1992 decreased to 380 000 tonnes (in 1991 they were 693 000 tonnes) while those of vegetable oil increased fourfold, from 108 000 to 452 000 tonnes, and those of sugar from 3,6 million to 4 million tonnes.

Barter trade operations are also reported between territorial administrations and partners far abroad, e.g. between St Petersburg and Poland or Hungary; or the Ufa oil and Vorkuta coal vis-à-vis Lithuanian meat.

Prospects for agriculture

It will not be before two or three years, perhaps even more, that the 1986-1990 farm production levels can be expected to be reached again. This applies more to the livestock sector where rebuilding the animal herds will take time. One may even question whether regaining earlier output levels should be a primary goal. Rather, the emphasis may be shifted to: i) better integration of downstream activities linked to the food sector; and ii) adjusting to the changes in consumer demand that may be expected when real incomes recover - although regaining their previous level may be an even lengthier process.

Renewed growth in agricultural output will probably be sought by increasing productivity without raising capital and labour costs per unit of output. Cost reduction, even more than physical growth objectives, could become the main contribution of the new individual farms. The collective and state farms and their reorganized successors still have to prove their ability to render this service to the food economy, all the more so since direct and indirect subsidization of agriculture is growing again. To this must be added the cost of higher state purchase prices and the subsidies on livestock products in 1993 as well as central and local consumer subsidies. If agriculture does not reduce its production costs, it will remain a major factor of inflation and, thereby, become increasingly a factor of economic distortions itself.

The solution of these problems in the long term will require the settlement of currently conflicting views among policy-makers, from top to local levels. Political and economic uncertainty are the greatest obstacles to the reform and recovery of the Russian Federation's agriculture.

OECD COUNTRIES

Overview
United States
European Economic Community
Japan

Overview

The OECD countries' policy actions in agricultural trade and the macroeconomy affect the welfare of the developing countries often as much as or more than these countries' own policies. The combined macroeconomic policies of the developed countries have a heavy influence on the global economic growth and inflation rates, interest rates, exchange rate structure and, therefore, the levels of trade and capital flows among countries. The domestic agricultural and agricultural trade policies of the developed countries also strongly influence the well-being of developing countries' agricultural sectors and rural communities. For these reasons, The State of Food and Agriculture reports each year on changes in the world economic environment in its World review, and on changes in the agricultural and trade policies of OECD countries in its Regional review.

The State of Food and Agriculture 1993 highlights some of the likely impacts of the reform of the Common Agricultural Policy (CAP) of the European Economic Community (EEC), having reported on the CAP reform measures in 1992. With a new administration and agricultural legislation (which expires in 1995) in the United States, the relevant section raises some of the major issues and likely options that will be considered in adjusting United States agricultural policy to changing realities. Finally, as the world's largest net importer of agricultural products, Japan has announced a sweeping agricultural policy reform package. The section on Japan highlights the changes taking place in the country's agricultural sector, both as part of and apart from the announced reforms.

United States

The budget deficit and its impact on agricultural policy
The recent situation and policy developments

The budget deficit and its impact on agricultural policy

A new administration, committed to increased economic growth and a phasing out of the budget deficit has taken over in Washington, DC. The major preoccupation has been how the new austerity programmes to reduce the budget deficit will affect different societal and economic groups, including agriculture. The changes and shifts in direction of agricultural policy that are likely to occur over the next several years are important to United States agriculture but they are no less important to the global community, since that country's agriculture plays a predominant role in the global agricultural arena. Following is a brief analysis of the general consequences of possible changes in United States agricultural policy in the coming months and years.

A desire to reduce the government's budgetary deficit has led the United States administration to propose a package of measures to Congress, aimed primarily at cutting government expenditures and increasing revenues. Some of the measures would modify existing agricultural programmes, while other more general actions, such as those proposed in the area of tax policy, would affect agriculture as part of the overall economy. The administration proposed phasing in the agricultural reforms from FY 1994 to 1997 and requested legislation to make some of the changes immediately while leaving others until the 1995 farm bill.

The administration's agricultural proposals represent an adjustment of programme mechanisms rather than a fundamental change in the form of farm programmes. Even the measures proposed for inclusion in the 1995 farm bill do not imply a radical change in structure, although they conceivably could prompt consideration of more fundamental reforms. Under the current proposals, the target price/deficiency payment mechanism for supporting farm incomes remains in place, as do the loan rate and production control mechanisms for supporting prices. The administration explicitly ruled out an early reduction in export subsidies on the grounds that it would not be appropriate to "disarm" unilaterally before the issue was resolved in GATT's stalled MTNs.

The two changes that would have the greatest budgetary and programme impact, and which would become effective for 1996 crops, are: an increase in the mandatory area from which production is not eligible for support payments under the so-called "triple base" programme⁴² from 15 to 25 percent of base acreage; and the elimination of the so-called 0/92 and 50/92 programmes. Under the 0/92 programme for wheat and feedgrains, producers may plant from 0 to 100 percent of their acreage eligible for production support (payment acreage) but still receive deficiency payments on 92 percent of that payment acreage without suffering a reduction in the farm's future programme acreage base. The benefits are calculated in the same way for rice and upland cotton, except that farmers must plant at least 50 percent of their payment acreage (50/92).

⁴² See The State of Food and Agriculture 1992.

Eliminating these programmes may also affect farmers' decisions concerning the Conservation Reserve Program (CRP). Many CRP contracts will begin to expire in 1996. What will owners do with this land then? Until now, the likely choices have included a renewal of the CRP contracts; the continued idling of some or all of that land, but under the 0/92 and 50/92 programmes; or the return of the idled land (for which farmers retain a base) to production. Elimination of the 0/92 and 50/92 programmes would remove one option, and there is uncertainty about the CRP renewal option.

It is unclear whether or not Congress will honour the new administration's request for funding in 1994 and 1995 to enrol the additional 1 million ha in the CRP to meet the target set by the 1990 Food, Agriculture, Conservation and Trade Act (FACT). How it may deal with reauthorization of the CRP when its authority expires at the end of 1995 is also a question to be considered. Some critics of the CRP have suggested that the $1.8 billion now spent annually on CRP rental payments could be put to better use in other approaches to conservation. The increased output which could result from the elimination of these options might be offset by increases in the ARPs for programme crops.

Other policy changes proposed by the administration with the aim of achieving budget savings include: directing subsidies to farmers with an off-farm income below $100 000; increasing loan origination fees and assessments for certain programme crops; reforming crop insurance and disaster assistance programmes; and phasing out subsidized sales of timber from public lands.

The long-term implications of these proposals to cut the United States federal budget may make the farm programmes less attractive to potential participants. As programme benefits for farmers are further reduced by the increase in mandatory flexible acres and the possible required increase in ARPs (if the CRP and 0/92 and 50/92 programmes are eliminated), some farmers may find it is to their advantage not to participate in the programmes. They would still be able to take advantage of higher domestic prices for commodities as a result of the programmes but, at the same time, they would be able to produce whatever amount of any commodity they chose. The government would be less effective in controlling the supply of a commodity, which is the mechanism used in the commodity programmes to maintain price levels.

The CRP and other conservation measures in the farm programmes have also provided a means for the United States Government to help control soil erosion and pesticide runoff on farms. Participating farmers must meet certain conservation requirements to be eligible for programme payments. With reduced programme participation, the farm programme would be less effective in this role. Without these measures to control the adverse environmental effects of agriculture, the government would need to find new ways of responding to the general public's growing pressure to regulate such issues. One likely result would be new laws enacted by individual states as a means of control. Such laws would vary by state and would therefore affect farmers differently depending on the location of their farms.

Farmers still participating in the programmes may also be adversely affected if increasing numbers of farmers choose not to participate in the farm programmes. If supplies increase, programme pressure may be placed on participating farmers to reduce their production further as a means of controlling supply. Such control would be effected by increasing the level of the ARP, which would further reduce the programme payments that a farmer could receive and thus also reduce the incentives for participating in the programme. The cuts may also have the opposite budget effect to that intended, since they may actually increase government spending on farm programmes. An increased supply resulting from programme changes would lower the market price for a commodity while deficiency payments would rise as the difference between the market price and the target price widened. The higher payments to participating farmers would increase government expenditures, depending on how many farmers remain in the programme and on the amount of increase in the payments.

The United States Government is committed to its export programmes as long as similar programmes exist in other major agricultural producer countries. Levels of assistance, provided under schemes such as Public Law (PL) 480 and the credit guarantee programmes, are mandated by Congress and will remain in effect through 1995.

If further increases in acreage ineligible for support under the triple base were to reduce the number of farms participating in farm programmes, a major challenge for the United States Government would be to maintain levels of commodity stock in the Commodity Credit Corporation (CCC), which is used to provide food assistance.

The long-term outlook for export programmes will depend on budgetary issues facing the United States Government when the present farm act expires in 1995. The amount of money appropriated to different export programmes and food aid will depend on what pressures exist at this time with regard to government spending. Programmes such as PL 480 are likely to continue at similar levels. However, export programmes such as the Market Promotion Program may be reduced. The future of the Export Enhancement Program (EEP) is more likely to be determined by what happens at the GATT negotiations and by perceived competition from other developed countries rather than by the budget.

The effect of the contemplated programme changes on decoupling and market liberalization is unclear. Elimination of the 0/92 and 50/92 programmes would be a retrenchment from decoupling while the increase in mandatory flexible acres ineligible for support payments from 15 to 25 percent would enhance the decoupling process. Increased supply, including for export, from lower programme participation would lower prices in world markets and, to the extent that this would precipitate further government intervention to control supplies, the earlier movement towards market liberalization would be reversed.

The recent situation and policy developments

Situation. Relatively strong prices at planting time, a relaxation of government planting restrictions and generally favourable weather conditions led to larger harvests of nearly all major United States programme crops, particularly maize, in 1992. Despite stronger exports, privately held stocks of nearly all cereals (especially maize) - including the Farmer-Owned Reserve (FOR) - grew during the 1992/93 marketing year. Government-held stocks remained near the minimum needed to maintain the 4 million tonne Food Security Wheat Reserve (FSWR) and to operate food relief programmes.

Export assistance. It was proposed that the level of export credit guarantees be maintained at the same level in FY 1994 as in 1993 - $5 billion for short-term guarantees, $500 million for medium-term guarantees and $200 million for guarantees of sales to emerging democracies. The administration's budget proposal assumes as much as $1 billion in EEP bonuses in 1994 compared with an estimated $1.2 billion in 1993 and $968 million in 1992.

Food aid. PL 480 food assistance was estimated to be $1 698.9 million in FY 1993 compared with $ 1 604.5 million in 1992. A reduction to $1 618.1 million was proposed for 1994 as part of the administration's deficit-reduction programme. The proposal for 1994 would finance an estimated 6.3 million tonnes of commodities, about the same amount as in 1992 but approximately 200 000 tonnes less than was estimated for 1993. East European countries are increasingly becoming recipients of United States food aid under PL 480 Title I credit sales, accounting for 37 percent of the 2.5 million tonnes of commodities that had been allocated as of mid-May 1993. In addition, the United States in April 1993 pledged $700 million (including $200 million for transport costs) to the Russian Federation: this was to finance $433.5 million in credit sales of agricultural commodities and $66.5 million in donations under the Food For Progress (FFP) programme. An additional $194 million is to be used for direct food aid donations provided under the Section 416(b) surplus disposal programme and FFP programme.

European Economic Community

Common Agricultural Policy reform
Farm production
Farm incomes and farm structures
CAP reform and the environment
What the CAP reform does not do

Common Agricultural Policy reform

The State of Food and Agriculture 1992 presented an overview of the main elements of the Common Agricultural Policy (CAP) reform, approved in June 1992. This section views the reform package in the context of the problems it intends to address and the effects it is expected to have in the coming years.

The reform of the CAP constitutes a response to a series of problems that had been building up within the European Economic Community (EEC) over a number of years. The price-driven support system was leading increasingly to overproduction, as a continuously expanding farm output was outstripping demand. The budgetary costs associated with the disposal of increasing surpluses through stockpiling and export subsidies had continued to grow steadily in spite of virtually static producer prices since 1985. Attempts to cut costs and curb surpluses throughout the 1980s had proved insufficient. Furthermore, in spite of the high budgetary costs of maintaining the price support system in addition to the costs borne by consumers through higher prices, it was felt that the CAP no longer provided the desired support to farmers, particularly small farmers and those in less favoured regions, who were unable to take full advantage of more intensive production methods and, therefore, to benefit from the price support mechanisms in the same way as larger farming units. Indeed, prior to reform, more than 80 percent of EEC spending on agricultural support went to less than 20 percent of the Community's farmers. An additional problem in many areas of the EEC was the overexploitation of land with intensive fertilizer use.

The specific elements of the reform package agreed in 1992 were presented in greater detail in The State of Food and Agriculture 1992. The agreed reforms will be phased in gradually over the marketing years 1993/94, 1994/95 and 1995/96. When fully implemented, the reforms should have a major impact on EEC agriculture, at once affecting production, farm incomes, farm structures and the environment.

Farm production

Farm production will be affected by the various changes in the market regimes as well as by some of the accompanying measures such as the afforestation and environmental programmes. For arable crops (cereals, oilseeds and protein plants), various elements in the reform package will have a limiting effect on production. This should be the case for the significant cereal price cuts, which will bring the intervention price down to 100 ECU per tonne by 1995/96, and the abolition of guaranteed prices for protein crops from 1993/94 (guaranteed prices for oilseeds were already abolished from the marketing year 1992/93).

In addition, the set-aside requirements for producers to qualify for the direct payments designed to compensate for the price cuts will have a limiting effect on the production of arable crops. The initial set-aside requirement has been fixed at 15 percent of arable cropland on a rotational basis, but this can be modified yearly in the light of the market situation. Small farmers who produce less than 92 tonnes of cereals will, however, be exempt from the set-aside obligation and will still qualify for compensatory direct payments. Land devoted to arable crops may also be reduced through the absorption of land by forestry as a result of the afforestation programme.

The production of arable crops may be further reduced by some of the elements in the new environmental programme; namely, measures to promote extensive of crop production, long-term set-aside for environmental reasons and the conversion of arable land into extensive pasture.

Although the total effect of all the above measures on arable crops is very difficult to quantify, the Commission of the European Communities (CEC) has attempted to estimate production for 1999. For cereals, production estimates for 1999 were based on a hypothetical set-aside rate of 15 percent and the absorption of 1 million ha of arable land by the long-term set-aside and afforestation schemes.

These assumptions signify a drop in total EEC cereal area from 36 million ha in 1991/92 and 35.7 million ha in 1992/93 to 33.3 million in 1999/2000. On the further assumption of yields stabilizing at the levels of 1991/92, total EEC cereal production in 1999/2000 is projected to be 167 million tonnes compared with 181 million tonnes in 1991/92 and 166 million tonnes in the drought-affected crop year 1992/93. If yields are assumed to continue increasing at 1 percent per year (somewhat lower than the 1.8 percent annual increase recorded over the last five years), production in 1999/2000 should reach 177 million tonnes.

Meat production will be affected mainly by the changes in the beef regime and the decrease in feed prices following the cereal price cuts. Beef producers will be directly affected by the 15 percent cut in intervention prices but this will be counterbalanced by the decrease in feed prices following the price cuts for arable crops. Farmers raising beef cattle on grazing land will be compensated through direct payments in the form of increases in the various premiums paid for livestock units. However, to encourage extensive production, premiums will only be awarded for livestock units not exceeding established maximum density limits (livestock units per hectare of forage area). Smallholdings with less than 15 livestock units will, however, be exempted from these limits. The impact of density requirements on production may be somewhat limited, since exceeding the maximum density does not imply forfeiting premiums on the entire herd, but only on the livestock units in excess of the maximum density limit. As for other animal products, no changes have been introduced to the marketing regimes for pork, poultry and eggs, the producers of which, on the other hand, will benefit from the lower feed prices. This should tend to stimulate production of these products and make EEC producers more competitive.

Overall, CEC projections of meat production in 1999 reflect the expected impact of the reform on various products. Indeed, a reduction is forecast for beef production, which should drop to 8.1 million tonnes in 1999 from 8.7 million tonnes in 1991 and 8.4 million tonnes in 1992. Pork production, on the other hand, is projected to reach 15.3 million tonnes in 1999 compared with 14.3 million and 14.2 million tonnes in 1991 and 1992, respectively, while poultry production is projected to increase from 6.7 million tonnes in 1991 and 6.9 million tonnes in 1992 to 7.8 million tonnes in 1999.

Milk production in the EEC is largely determined by milk quotas, which are to be reduced by 2 percent if required by market conditions. At the same time, the butter price will be cut by 5 percent. Consequently, a shift is to be expected from butter production towards cheese and fresh dairy products in line with present trends in the consumption of dairy products.

Farm incomes and farm structures

As for farm incomes, the impact of the price cuts in the reform package will be offset by direct payments to farmers in the form of compensatory amounts or premiums not related to current production. For arable crops, the price cuts are designed to be offset by direct payments, provided farmers comply with the annual set-aside requirements for land devoted to arable crops. The compensatory payment, granted on a per hectare basis, will be calculated regionally on the basis of the average of certain past yields (tonnes per hectare) which will be multiplied by the compensatory amount (ECU per tonne). Thus, per hectare compensation payments will vary between regions.

The compensatory payment is designed to deliver, on average, full compensation for the price cuts (or for the abolition of guaranteed prices). However, compensation within each region will be biased in favour of producers with yields below the regional average and who will be more than compensated for the loss in their income caused by the price cuts. More efficient producers with higher yields will suffer a loss. As for animal production, the cuts in beef prices will be compensated by the reduction in feed prices and by premium increases. The maximum density limits for premiums will favour producers practising less intensive cattle production, while limits on the total number of animals per herd eligible for premiums will limit payments made to large producers. With no changes introduced in the market regimes for pork, poultry and eggs, the lower feed prices may have a positive impact on producers' incomes for these products, although increased production may lead to lower margins.

Based on representative samples of holdings from the European Communities' Farm Accountancy Data Network,⁴³ the Commission has simulated the effect of the reform on arable crop producers as well as beef and dairy farmers.

⁴³ Agra Europe, 5 March 1993.

In general terms, the reform of the CAP implies a closer direction of farm support towards the smaller and less efficient producers, although this effect is significantly less pronounced than it would have been with the original reform proposals submitted by the CEC in 1991.

The effect of the reform on farm structures is not clear-cut. Generally, one of the aims of the reform is to maintain the viability of small family-based farms and to slow down the rural exodus. The somewhat improved targeting of support towards this type of farm and more extensive forms of agriculture will work to such an effect. However, the reform of the market regimes is accompanied, inter alia, by an early retirement scheme which aims at releasing land either for the enlargement of holdings to improve their economic viability or for non-farm purposes.

CAP reform and the environment

The reform of the CAP is designed (and is expected) to have a positive impact on the environment. Positive effects should be derived from both the reform of the market regimes and the afforestation and the agro-environmental action programme accompanying the market reforms. As far as the reform of the market regimes is concerned, the price cuts will reduce the incentives to increase production through intensification. In addition, there are specific incentives to adopt less intensive production practices.

The afforestation programme in its turn will provide financial aid to farmers who wish to use agricultural land for the development of forestry. The financial support can cover: aid for afforestation costs; a per hectare allowance to cover maintenance costs for afforested areas during the first five years; an annual allowance to cover income losses resulting from afforestation of agricultural land; and investment aid for the improvement of woodlands. The precise impact of the programme is difficult to foresee and will depend in part on implementation at the national level.

The agro-environmental programme has a broader scope and will provide financial assistance for a series of measures aimed at improving the rural environment.

These include:

· the adoption of farming practices that reduce agricultural pollution;
· the "extensification" of both crop and livestock farming;
· land use that is compatible with the protection of the environment, soil and landscapes;
· the preservation of local breeds;
· the upkeep of abandoned farmland and woodlands where necessary for ecological and safety reasons;
· long-term set-aside of land for environmental reasons;
· the training of farmers in environmentally friendly farming and in the upkeep of the countryside.

What the CAP reform does not do

Although the reform approved in 1992 will introduce far-reaching changes to the CAP, it will not change some of its basic principles and mechanisms such as common prices decided by the European Council of Ministers, common protection against agricultural imports by the use of variable levies, the use of export subsidies to render EEC products competitive on world markets and public intervention in agricultural markets. Thus, the reform may serve to reduce production and internal surpluses for some products as well as levels of export refunds. However, because of reduced feed prices, the production of pork, poultry and eggs will probably be stimulated.

Generally, however, the reform will not change the rules of access for agricultural imports to the EEC market or for EEC agricultural exports to the world market. For most products the preferential treatment of EEC producers vis-à-vis importers on the internal market remains. Insofar as the double pricing system stays in place, i.e. internal guaranteed agricultural prices are set independently of world market prices, EEC farm producers and consumers will continue to be largely isolated from price changes on the world market as long as world market prices do not rise above the internal guaranteed price levels.

Japan

An agriculture in transition
The agricultural sector
Agricultural marketing policy
Agriculture and the environment
New policy directions

An agriculture in transition

For the past couple of decades Japanese agriculture has been undergoing a quiet revolution and the forces of change, both internal and external, have been intensifying. In recognition of this mounting pressure, in May 1991 the Ministry of Agriculture, Forestry and Fisheries set up a task force to develop new basic policy directions to meet the changing situation and challenges in the food and agricultural sector and in rural areas. In June 1992, the ministry issued the task force's report, The Basic Direction of New Policies for Food, Agriculture and Rural Areas, which it then adopted as its future policy guidelines, submitting several bills and budgetary proposals to the 1993 session of the Diet.

This section of The State of Food and Agriculture 1993 reports on the current situation of Japanese agriculture, the forces being exerted both for and against change and the problems that must be faced and overcome as Japanese agriculture is further integrated into the international trade and economic system leading up to the twenty-first century.

Setting. With a total land area of 378 000 km², Japan is larger than Italy but smaller than Sweden and Thailand. It is largely mountainous and abundantly forested, more rugged and precipitous than most of western Europe and has rivers that flow more rapidly. Situated in the southern part of the temperate zone, the climate ranges from subtropical in the south to much colder conditions on the northern Hokkaido Island where severe winters are common. Approximately 70 percent of Japan is mountainous with only 14 percent of the total land area devoted to agriculture, of which slightly more than half is paddy field for rice production. With 124 million people, Japan has the fourth largest population in Asia and the Pacific.

The Japanese political system is a bicameral parliamentary democracy. The government is highly centralized with executive power vested in the Cabinet headed by the prime minister, the leader of the parliamentary majority. The Liberal-Democratic Party, which had held the majority in the Diet from the postwar period until July 1993, had come under serious political pressure from Japanese voters, including business and labour union leaders, who wanted a drastic political reform, and farm groups who opposed liberalization of the domestic agricultural market.

After decades of being the miracle economy of the industrialized world, Japan is in the midst of a serious economic slow-down. According to the World Bank Atlas 1992, GNP real growth for the period 1980-1991 averaged a strong 4.3 percent annually. Per caput income growth averaged 3.7 percent annually during the same period. The weakening of the economy, which began in the last quarter of 1991, led to a decline in GDP growth to 1.8 percent in 1992 from 4.4 percent in 1991 and 5.2 percent in 1990. However, estimated unemployment and inflation remained low at 1.9 percent and 2.2 percent, respectively.

Agriculture accounted for 2 percent of GDP in 1991, while 5.9 percent of the total population was counted as agricultural. Since 1988, Japan has been the largest net importer of agricultural products, importing a value of $29 billion in 1991.

The agricultural sector

Total agricultural land in Japan in 1991 was 5 204 000 ha, of which 2 825 000 ha, or 54 percent, was paddy field. Since 1975, agricultural land has been declining in favour of non-farm uses at an average annual rate of about 22 000 ha, almost all of which has been taken out of paddy production. The number of farm households dropped from six million in 1960 to 3.7 million in 1992 (9 percent of total Japanese households) and is expected to decline further to less than three million by the year 2000.

Another distinguishing characteristic of Japanese agriculture is the small size of landholdings per farm household. Of all commercial farms in 1991, fully 58 percent were less than 1 ha while only 13 percent were more than 2 ha in size. But the size of holdings tells only part of the story. Landholdings are also very fragmented, with a single household's landholdings scattered around a farm village in a complicated system of cross-holding to reduce the risk of total crop failure. For example, of the country's 2.7 million ha of paddy land, while 50 percent are consolidated in plots of 0.3 ha or more, only 3 percent are in plots of 0.5 ha or more. The target is to enlarge their size to an average of 1 ha or more during the next ten years. In effecting land consolidation and restructuring, the removal of berms and the reconstruction and levelling of paddy fields into larger sizes is a labour- and investment-intensive operation.

Of the 3.7 million farm households in Japan, 23 percent are classified as non-commercial, with the remaining 77 percent classified as commercial. Of the 2.9 million commercial farm households, only 16 percent are full-time farm households, while the remaining 84 percent are classified as part-time. Part-time farm households fall into two categories: Type I households, which receive more than 50 percent of their income from farming, and Type II households, which receive less than 50 percent of their income from farming. Type I farm households account for 19 percent and Type II for 81 percent of part-time farms. Thus, of the 3.7 million farm households in 1992, only 897 000 were commercial, engaged either full time or part time in farming and with more than 50 percent of their income (Type I) derived from farming. Moreover, only about 7 percent of the income of Type II farm households comes from farming, with the rest coming from non-farm sources. This means that the actual amount of labour devoted to farming has declined much more dramatically than the decline in the number of farm households would suggest.

Some basic trends related to the agricultural sector include the decline of agriculture as a portion of total GNP; continued rural-urban migration; an ageing population of farmers with few new entrants; and a relatively slow increase in average farm size. In fact, the labour shortage in agriculture has become acute. Today, 4 to 5 percent of the land classified as agricultural is idle, mainly because of a lack of labour. New graduate entrants to agriculture have declined rapidly and, at present, number only about 2 000 per year. The reasons are lower per caput income in agriculture; harder work and more onerous working conditions, including longer hours than those of urban counterparts; and the uncertain outlook for agriculture, exacerbated by the GATT talks and external pressures to liberalize. In addition, in the more remote areas young women tend to migrate to the city, making it difficult for the young men who remain to find wives. While farm household disposable income is 133 percent of non-farm household disposable income, per caput disposable income is only 92 percent, since farm households comprise more members than non-farm households.

Agricultural marketing policy

One of the main instruments of Japanese agricultural policy is the Staple Food Control System, administered by the Food Agency of the Ministry of Agriculture, Forestry and Fisheries. The objective of the Staple Food Control System is to control the supply, based on estimated demand, and the price of rice, wheat and barley. Although the bulk of staple grains are sold through collectors and agricultural cooperatives directly to wholesalers rather than to the government, the whole system is controlled by the Food Agency.

The mechanisms for controlling rice differ from those for wheat and barley. Japan is self-sufficient in rice, its major staple food, whereas it is far from self-sufficient in wheat and barley. Direct quantitative control of supply is applied to rice. Under the Food Control Law, an annual basic plan is drawn up to project the next year's rice demand, and supply is then adjusted to meet that demand through the use of production controls, including crop diversion. Each producer must then sell a specified quantity of rice to the government for the purpose of stabilizing volume and price. Standard-priced rice is government rice sold through registered wholesalers and retailers, with the government setting the maximum price that can be charged to the consumer. Standard-priced rice is a standard-quality rice sold at a lower price than voluntary marketed rice (VMR) to meet market demand.

VMR, which was instituted in 1969, still comes under government control. While the government sets the price for its rice purchases, the price for VMR is negotiated between national collectors' organizations and wholesale organizations. In order to overcome the lack of transparency and the rigidity of the pricing mechanism, VMR exchanges were established in August 1990 in two locations (Tokyo and Osaka), and the rice marketed through those exchanges is sold by tender.

Annual rice consumption in Japan is approximately 10 million tonnes. As 3.5 million tonnes are consumed by producers, 6.5 million tonnes are sold into the market and 2 million of these are purchased by the government as standard rice and for market control. The remaining 4.5 million tonnes are sold as VMR, of which 1 million tonnes are sold by auction at the Tokyo and Osaka exchanges. The auction price is allowed to fluctuate by approximately 7 percent between established maximum and minimum prices. This is the VMR price discovery mechanism. Rice distributors estimate that 2 to 3 million tonnes of rice flow through the "open under-the-table market", or open black market, with most of the remainder flowing through the agricultural cooperatives directly to rice wholesalers and on to the retail market.

A growing market economy in rice distribution has been exerting its power in many ways, even though the food control law is still in force. In the face of a declining demand for rice, growers are increasingly producing high-quality rice for regional brand names and high-quality products. Organic rice, i.e. rice produced without chemicals, whether they be pesticides or mineral fertilizers, can be sold directly by farmers to consumer groups under contract. In addition, private mail order systems have been developed to deliver rice directly from farmers to consumers in remote cities.

Since rice carryover stocks have declined in recent years, the government has relaxed the production adjustment control scheme in order to obtain sufficient stocks for market control and provide enough standard-quality rice to the retail shops.

The mechanism for controlling the wheat and barley markets is indirect with a guaranteed minimum producer price. While it is not a requirement, domestic producers sell virtually all their wheat and barley to the government. The government sets the purchase and sale prices and agricultural cooperatives are encouraged to negotiate quantity distribution contracts with end-users. The Food Agency purchases domestically produced wheat at a subsidized producer price that is substantially higher then the price it charges to processors. Based on projections of requirements, each week the government issues licences through the Food Agency for wheat and barley imports, thus maintaining market stability. The Agency is the sole buyer of imported wheat and barley.

Agricultural cooperatives. Agricultural cooperatives are pervasive in the lives of Japanese farmers. There are two types of agricultural cooperative: the multipurpose type which engages in marketing farm products, input supply, credit, mutual insurance, processing, advisory and other services; and the single-purpose type which concentrates on marketing the products of certain specialized sectors such as fruit, vegetables and livestock products.

There are three tiers to the organization of these cooperatives: the local-level cooperatives; the prefectural cooperative federations, which specialize in various kinds of services such as credit, savings, marketing, purchasing and insurance; and the national cooperative federations.

The national tier includes: the Norinchukin Bank which, with 50 percent of farmer savings, ranks number one in deposits and credits; the Zenkyoren National Mutual Insurance Federation of Agricultural Cooperatives; a medium-sized insurance company; an import and export trading firm; a national medical and welfare federation; a national press and information federation; a publishing house; a tourist corporation which ranks sixth in the country; and the National Federation of Agricultural Cooperative Associations (ZEN-NOH), a conglomerate which ranks eighth among Japanese trading companies and involves about 140 companies and affiliates with annual sales of around $60 billion, as well as the federation's policy-making body and political lobbying arm, the Central Union of Agricultural Cooperatives (ZENCHU). The agricultural cooperative structure has been described as giving cradle-to-grave service to its members as well as having a powerful political influence via the ruling party over government policies affecting agriculture.

Farmers constitute the regular members of the cooperatives who have voting rights. There is also a non-voting associate member class for non-farmers who want to take advantage of cooperative services. While almost all farmers are members of the cooperatives, associate members number about one-third of total membership. Farmer members have declined (from 5.9 million in 1970 to 5.5 million in 1990) while associate members have increased (from 1.3 million in 1970 to 2.9 million in 1990). Employees of the multipurpose cooperatives number about 300 000; that is, one employee for every 18 farmer members.

The government implements much of its agricultural policy through the cooperative system. When agricultural products are covered by government price support subsidies, the subsidies are paid to the producers through the cooperatives. In addition, the rice land diversion programme (through which one-third of paddy land has been diverted to other crops, since the per caput consumption of rice fell from a high of 118 kg in 1962 to 70 kg in 1989) is implemented at the local level by the cooperative system together with the administrative authorities. In 1989, about 95 percent of rice, 96 percent of wheat, more than 90 percent of barley and more than 50 percent of fruit, vegetables, beef cattle and milk was marketed through the agricultural cooperative system. In addition, on the input supply side, more than 90 percent of fertilizer, 70 percent of farm chemicals, 64 percent of petroleum used on farms, 50 percent of farm machinery and 40 percent of feed was purchased from the cooperative system.

The cooperatives do not compete with each other at the local level and the system operates according to egalitarian principles. Farmers often have little alternative but to sell to the local agricultural cooperative and are likewise pressed to buy inputs from the cooperative. Given the egalitarianism, large farmers cannot receive significant favourable returns from their cooperatives, such as volume discounts for inputs or volume premiums for sale of their products, which they usually expect from rural commercial firms. Thus, they cannot benefit from economies of size in their marketing or input purchasing activities.

The agricultural cooperative system is having to adjust rapidly to a new set of realities. In addition to financial problems related to the slowing of the general economy and financial deregulation, the volume of agricultural products flowing through the cooperatives is declining. There is a tendency for larger producer members to shift from their traditional marketing channels through cooperatives to others, including direct marketing to consumers.

Local cooperatives are being merged and consolidated with the aim of reducing the number of general purpose cooperatives to about 1 000, less than one-third of the present number, by the year 2000. In addition, integration of the prefectural federations with the national federations is being considered as local-level cooperatives are consolidated.

Beef market liberalization. After protracted negotiations, Japan decided to end the quota system on beef imports in 1988. The quota system was replaced by tariffs which began in 1991 at 70 percent ad valorem, dropping to 60 percent on 1 April 1992 and to 50 percent on 1 April 1993. Beef stocks increased because supplies, including imports, exceeded demand in 1989 and 1990 before returning to 1988 levels by early 1992. During this period, the price of high-grade beef, including Wagyu beef, remained relatively stable while the low-grade price, that is for dairy beef, dropped by about 25 to 35 percent, depending on the grade. In addition, there was a dramatic shift in demand from frozen to fresh and chilled beef. The high-grade beef price has dropped recently, mainly because of the tightening of the economy.

Since the major impact of liberalization was on the relatively low-grade beef coming from the dairy herds, dairy farmers were the most severely hurt. While milk prices were unaffected, the price of dairy beef calves sold to feeders dropped significantly.

To help compensate for the dairy producers' losses, the government provides deficiency payments to cattle feeders. Feeders are expected to pass these payments back to dairy producers by paying higher prices for their feeder calves. Still, since the liberalization of the beef market, the number of dairy farms has decreased by 20 percent. Interestingly, however, the size of the national dairy herd has not been reduced, so a considerable consolidation of dairy herds has been achieved in the process.

The liberalization of the beef market has lowered domestic prices and introduced a market competitiveness to which Japanese farmers have responded by aiming for quality. Dairy beef feeders welcome the lower calf prices, while the government subsidizes the calf prices paid to dairy farmers by the feeders with deficiency payments.

Per caput beef consumption in Japan now stands at 6.2 kg per year, with the rate of increase having slowed from 10.9 percent in 1989 and 1990 to 1.6 percent in 1991.

Agriculture and the environment

Throughout Japan's history there has been a close relationship between water management and agriculture. Japan has rapidly flowing rivers because of its very steep mountains and there is consequently little pollution buildup in the rivers. However, at the outlets of the rivers, pollution is beginning to appear in the sea. Agricultural pollution comes mainly from agricultural chemicals and fertilizers and animal husbandry wastes. Paddy comprises just over half of the total cultivated area and acts as a reservoir, filtering water to the groundwater level. On uplands, nitrogen fertilizer becomes nitric acid. On paddy, there is no oxygen so nitrogen fertilizer is transformed into ammonium which is fixed in the soil while some nitrogen is released as gas. Thus, there is noticeably more chemical- and fertilizer-induced pollution of groundwater in upland areas than in paddy areas.

Japanese Government policy first addressed sustainable agriculture in FY 1992. Sustainable agriculture is defined by the country's Ministry of Agriculture, Forestry and Fisheries as agriculture using lower than normal inputs of chemicals and fertilizer. It must meet two basic criteria: sustainable yields and quality; and the reduced use of chemicals and mineral fertilizer.

Two major technologies introduced to encourage sustainable agriculture are time-release fertilizers and biological and integrated pest management. Another means of insect control that has been used in Japan is to lure male insects into a concentrated area by using the scent or sound of the female insect and then disposing of them in that limited area.

Another programme being promoted by the Ministry of Agriculture, Forestry and Fisheries is the recycling of animal waste. Animal waste is processed into fertilizer under contracts between crop and livestock farmers. The ministry helps by establishing facilities to process the manure, by establishing demonstration farms and by providing extension services.

The incentive for farmers to engage in sustainable agriculture at present is not so much an economic factor but rather more an altruistic caring for future generations. There is technology evolving that should reduce input use and costs. For example, there is now a rice transplanter with a chemical applicator that puts the chemicals and fertilizer in close proximity to the seedling, thereby reducing overall use.

The ministry is now concentrating on fruit and vegetable farms where chemical use is the largest. In general, however, it instructs prefecture governments to review and revise their fertilizer application and pest control standards for the purpose of maintaining environmental quality.

New policy directions

Several factors and trends are converging at present and leading to major structural changes in Japanese agriculture as well as to a rethinking of agricultural policy. The more important of these factors are the following:

· The strengthening of the Japanese yen, which means that agricultural imports are less expensive and will continue to increase.

· The depopulation of rural areas, the deterioration of rural infrastructure and the loss of amenities as the number of farm successors and new entrants decline and the ageing of the farm population accelerates because of lower incomes, hard work and long working hours as well as more favourable job opportunities outside farming.

· The declining demand for rice, resulting in the conversion and abandonment of paddy fields which, in turn, has a deleterious impact on water quality and the environment.

· The small and fragmented structure of agricultural holdings, which reduces or prevents farmers from introducing cost-saving technology such as direct rice planting.

· The need to liberalize the agricultural import markets further as the internationalization of agriculture continues.

· The declining food self-sufficiency ratio in terms of national calories supplied, which stood at 46 percent in 1991.

Under the new policy, the structural targets - which constitute the heart of the plan to make Japanese agriculture more efficient and competitive - relate to the size of holdings and the form of management. At the end of ten years, the target is to have 300 000 to 400 000 individual farm management bodies (single farm households), 150 000 of which will be engaged in rice cultivation, including 50 000 in single-crop rice farming with 10 to 20 ha and 100 000 in multiple-crop farming (including rice) with 5 to 10 ha. In addition, there would be 40 000 to 50 000 organized farm management bodies (management associations of several types, including agricultural producer cooperatives, small-scale corporations and agricultural production associations) managing single-crop rice holdings of 30 to 50 ha.

As part of the implementation of the new policy, new laws that were passed in 1993 provide for each community to set its goals for agricultural reform under the policy and to determine how to organize itself, e.g. into an individual cooperative or a limited partnership, in order to increase the size of farm management holdings. In the end, more than 3 000 municipalities will govern the reform along the lines of their own objectives, with the national government supporting their decisions with price and structure policies. The necessary budget has been appropriated in FY 1993 for carrying out this policy at national, prefectural and municipal levels.

The future envisioned for Japanese agriculture and rural communities will require enormous investments, and many difficult problems will have to be solved. The price of farmland in the area covered by the Urban Planning Law is extremely high. The law concerning reserved farmland in the urbanization promotion area was revised in 1991 and aims at promoting the conversion of farmland for urbanization and at easing the pressure on land prices and on the housing market. Formerly, farmland was protected from urbanization and was valued for tax purposes as agricultural land, thereby giving farmers a major tax break. Under the new law, farmers in the urban fringe can declare their land either agricultural or ready for urban development. If they declare their land agricultural, they must do so for 30 years, in which case they are eligible for the lower agricultural tax rates. If they declare the land ready for urban development, they will be taxed based on the higher urban market price. This should ease farmland prices and rental values, at least for the 1 percent of total farmland affected by the law.

The tradition of ownership and cross-holding is also a constraint to increasing the size of farms. Prefectural corporations for land aggregation and farmland development purchase land and rent or sell that land to other farmers in an effort to accelerate land consolidation and the increase in farm sizes. These corporations are likely to be used by the Ministry of Agriculture, Forestry and Fisheries to help implement the new policy. This would mean that the ministry would infuse the corporations with rather large amounts of funding in order to accelerate their ability to purchase and resell or rent agricultural properties.

Some analysts suggest that the government plan to incorporate a number of farms into a single legal entity, such as a limited partnership, may meet with limited success, even though there are already 3 800 agricultural production corporations in existence. If all of the shareholders are family members, it may work - at least for the first generation - but non-family members may not be willing to subject themselves to others managing their property. However, there is an agricultural committee system responsible for the administration of farmlands under ministerial direction. There are committees in each of the prefectures which, in turn, have a network of committees at the municipal level. These agricultural committees appear to have a major function in observing the terms of sale and rental of farmland in each of the various municipalities and communities in Japan. The agricultural committees, the technical advisors in the agricultural cooperatives and the agricultural extension officers are likely to be consolidated into a comprehensive system in each jurisdiction. This system would then become the focal point for the promotion of family and non-family corporations or limited partnership farms and for promoting the full use of agricultural land. The latter will obviously be an attempt to incorporate the land that is now held by Type II part-time farmers into more serious production units.

Progress made in achieving the objectives of the new policy would help Japanese agriculture operate in a global economy. The enlargement and consolidation of paddy fields would lower labour inputs and improve rice production efficiency. The direct seeding of rice rather than transplanting would allow a huge decrease in labour input, from 50 hours to produce 0.1 ha of rice down to five hours. This, along with other economies of size that could be realized under the new policy directions, could reduce production costs by more than 50 percent.

However, some large and powerful political forces are resistant to change. Past attempts to decentralize government activities and to reduce the role of government, including in the agricultural sector, have been opposed by state employee labour unions. The cooperative system's employee labour union also views the status quo as the best protection of their own interests. The strong resistance to change in Japanese agriculture amounts, in part, to a labour issue involving both government and agricultural cooperative employees as well as farmers. This issue will need to be resolved in order for the full reforms visualized in The Basic Direction of New Policies for Food Agriculture and Rural Areas to be achieved.

Having begun the reform of its agriculture during a period of weakened general economic activity, the necessary steps for reform will be more difficult to implement than they would have been when the economy was booming. The recent slowing of the general economy will at least make the allocation of the necessary investment funds for agricultural reform more difficult. The reforms suggested in the new policy report represent a massive undertaking for the planned ten-year period but the Japanese Government has taken the initial legal and budgetary steps to effect the indicated reforms and appears committed to seeing them through.