II. Developed country regions
CENTRAL AND EASTERN EUROPE AND THE COMMONWEALTH OF INDEPENDENT STATES
CENTRAL AND EASTERN EUROPE: SUBREGIONAL OVERVIEW
Improving economic trends and agricultural performance
Market-oriented progress further strengthened in the Central and Eastern Europe subregion in 1995 with some of the countries approaching a post-transition stage in their general economic and agricultural modernization. Measured by real GDP growth, Central and Eastern Europe30 stood out as the area with the most rapid economic development (over 5 percent) in Europe in 1995 showing an acceleration over the preceding year (4 percent). The average still covered wide variations within the subregion, ranging from falling outputs in Croatia and The Former Yugoslav Republic of Macedonia (where GDP fell by 1.5 and 3 percent, respectively) to rapid growth in Albania and Poland (at 13 and 7 percent, respectively). Stabilization policies were rewarded with sharply declining inflation rates (except in Hungary) and by a remarkable tripling of net capital inflows (to US$31 billion) into the subregion compared with the previous year. In five small economies (among others Croatia, the Czech Republic and Slovenia), inflation rates could be measured in single digits, between 4 and 9 percent. Unemployment levels, a field of general concern in CEEC, increased at a slower average rate. Indeed, employment started to expand in five countries including Albania and Poland.
Such developments created good general prospects for a further improvement in 1996 even if the positive economic performance did not seem to be evenly distributed among countries of the subregion. There were still countries struggling with very high unemployment rates. Moreover, nearly 90 percent of the capital inflow benefited just three countries, the Czech Republic, Hungary and Poland. Overall, it was the more developed member countries of the Central European Free Trade Agreement (CEFTA)31 which formed a core group of economies with rapid economic growth of 5 to 7 percent (except for Hungary with 2 percent) and dynamic structural development. There was also accelerated growth in Romania (6 percent) and Bulgaria, at a slower rate (3 percent), in 1995.
While the recovery in CEEC was based mainly on the revival of industry (and, to a far lesser degree, on the service sector), the agrofood sector also did better than in the previous year. Very probably, 1995 marked the first year in the transition period in which the aggregate agricultural output of CEEC achieved positive growth. This relied on two principal components: first, the grain output of the subregion attained growth of around 3 percent, caused mainly by a good wheat harvest in 1995; and, second, in livestock production the subregion as a whole succeeded in halting the declining trend and, in a few countries, output in some of the livestock branches began to regain previous levels.
The upswing in total grain production of the subregion was, above all, based on considerably improved harvests in Poland and Romania with increases of about 15 and 6 percent, respectively, and there were slight increases also in the Czech Republic and Slovakia. This easily compensated for decreases in a few countries, such as Hungary and Bulgaria. The state of livestock production offered an improving, although still strongly varying, picture. In most countries, the pig and poultry sectors led the recovery with increasing stock numbers and growing output. In Hungary and Poland, cattle stocks were also rebuilding, although the dairy sector seemed to continue the declining trend throughout most of the subregion (except for the Czech Republic).
Provisional figures suggest that the increase of agricultural output relied in part on productivity improvements. In Poland, the significant upswing in cereal production was attained through improved yields on a decreased harvested area for the principal cereal types. In Romania also, higher yields boosted wheat output while maize production expanded mainly because of an extension of the area sown to this crop. Nevertheless, yields recorded in the main grain-producer countries in 1995 were still lagging behind their prereform results. As compared to 1987-89, wheat yields per hectare in 1995 were still 2 and 17 percent lower in Poland and Hungary, respectively. Maize yields were 10, 25 and 35 percent lower in Poland, Bulgaria and Hungary, respectively, than in 1987-89. By the mid-1990s, corresponding productivity levels in the European Union (EU) were superior with maize yields being twice as high and wheat yields about one-third higher than the CEEC average. With reduced inputs and still weak investment activities in CEEC agriculture, major improvements could not yet be expected in most subsectors in 1995.
Producer prices in most cases improved more slowly than the general price rise. In the Czech Republic, for instance, farm prices increased by over 7 percent and overall consumer prices by more than 9 percent in 1995 (in the preceding year they increased by 5 and 10 percent, respectively). In Hungary in 1995, agricultural producer prices rose by just 15 percent compared with an increase of 28 percent in consumer prices. The generally depressed state of domestic food markets certainly continued to play a role in this. However, the weak negotiating position of agricultural producers, relying on their new, in part fragmented, farm structures and having only a small share in processing and marketing activities, might have played a greater role. Such conditions (with Poland as an exception) still left farmers at a disadvantage in the price formation process vis-à-vis the superior market power of highly concentrated procurement and processing enterprises.
Nevertheless, after the severe but inevitable adjustments of the preceding years within the agricultural price system, producer prices fluctuated less dramatically in several countries. Trends in the development of terms of trade for agricultural producers were still mostly negative, even though some positive modifications started to emerge in a few countries at a more advanced stage of economic restructuring. Thus, for example, the terms of trade index for Polish farmers improved by 4 percent in 1995 over 1994. Obviously, this less unfavourable trend in price relations for producers was in part a result of their more flexible output response. Furthermore, the more active policy of price stabilization pursued by governments (including the introduction of guaranteed minimum prices for a varying number of products from country to country) also played an important role.
Domestic food demand continued to be slack throughout the subregion with livestock products being in weak or even further decreasing demand. Compared with prereform levels, food expenditure still took a greatly increased share of total household expenditure. In 1994 this share averaged about 31 percent for the CEFTA countries (with Hungary showing a further increase in 1995) as compared to 22 percent in the EU. Moreover, in Bulgaria and Romania, the shares were substantially higher, at 48 and 60 percent, respectively.
In several countries, shifts in demand patterns were characterized by a further weakening of interest in products in the medium price range and an increasing demand for cheap (mainly non-livestock) products. Some increase in demand for (often imported) processed products in the high price range could also be observed, however, with these products accounting for just a small portion of overall food consumption. After the introduction of a severe stabilization scheme affecting real incomes, food retail sales fell by about one-fifth in Hungary in 1995. In some countries, including the Czech Republic and Hungary, food retail prices showed a more rapid increase than the general price rise in 1995.
Led by Poland and Hungary, the principal agricultural exporters of the subregion, trends of expanding agricultural trade continued in 1995. Agricultural and food exports from Poland and Hungary rose by 20 and 25 percent, respectively. Romania succeeded in reducing its agricultural trade deficit, while a few nations increased their net exports. In Hungary, this was achieved on the basis of a fourfold growth of wheat exports supported by an 8 percent import tariff surcharge on all imports and by a strong devaluation of the national currency. The Czech Republic, Poland and Slovakia, however, showed continuing deficits in their agricultural and food trade.
In 1994-95, the subregion of CEEC as a whole seems to have returned to an expansionary path in its agricultural trade, particularly in exports. Countries with important production and export potential appeared to be ready to use the opportunities given to them by the World Trade Organization (WTO) agreement. In addition to new WTO tariff rates, tariff surcharges appeared in several countries including Bulgaria, Romania and Slovakia. In Hungary and Slovakia, however, they were intended only for short-term application. Slovenia abolished its import surcharge on agrofood products simultaneously with the tariff adjustments required by the WTO agreement for 1995. In order to safeguard domestic market stability, some countries introduced export restrictions and/or even export bans for grain in the face of rapidly increasing prices on international markets. Overall, the level of state intervention in international trade in agricultural and food products did not seem to be declining in the subregion in 1995.
A remarkable development of the year was, however, the renewed expansion of intraregional trade and of trade between the CEEC and Commonwealth of Independent States (CIS) regions in agricultural and food products. Poland more than doubled its agrofood trade (in US dollar terms) with the other CEFTA countries, mainly as a result of threefold imports from those countries. Hungary expanded its exports to the CEFTA area by almost one-half. Both Poland and Hungary stepped up their agrofood deliveries to the CIS region by more than one-third with Poland being the main supplier to that area. The two countries' combined exports of agricultural and food products to CIS countries amounted to more than US$1.5 billion in 1995, marking an expansion of 37 percent over 1994. Within total agrofood exports from Hungary, the combined Eastern European share was already slightly higher than the EU share as a result of this most recent reorientation of trade in 1995.
Such changes appeared to shift regional patterns of agrofood trade towards a new balance in the whole of Eastern Europe, marking the beginning of a process whereby traditional intraregional trade could regain its importance under market-oriented conditions. The new CEFTA agricultural agreement was expected to render a further positive impact as from 1996.
Continuing lack of harmony in the process of structural reforms
Privatization of land, including state farms, progressed further in the subregion in 1995, with the exception of Slovakia (where several policy changes led to a slow-down in the privatization of state enterprises and a new law reversed the system of land privatization by vouchers started in 1993). Nevertheless, this key process within the transition strategy seemed to be drawing towards an end in most countries. As a result, a highly varying farm structure was emerging, with privatized large-scale farms retaining an important position in some countries, including the Czech Republic and Hungary. The extent of privatization in the up- and downstream sectors varied greatly, with attractive food industry and retail trade companies taking the lead in being privatized.
Nevertheless, in most CEEC countries, the structural state of agriculture and that of the up- and downstream sectors were rarely the same. Monopolistic positions, of state-owned or privatized companies, still prevailed in many downstream branches. This continued to have a negative effect on both the bargaining position of agricultural producers and on consumers' economic interest, and the 1995 changes in price relations seemed to exacerbate the effect. With economic activities recovering in several countries, producer prices were increasing less and food consumer prices more rapidly than the average price rise (with the exception of Poland). For instance, in Hungary, where the general price rise amounted to 28 percent, producer prices increased by 15 percent and food consumer prices by 29 percent in 1995. Thus (with the exception of Poland), highly concentrated downstream companies seemed to benefit most from the recent changes in price relations. Weak competition on the retail market and the lack of organic connections among segments of the domestic market were becoming more obvious in the separated national markets of CEEC. The negotiating weakness of emerging professional organizations of agricultural producers was clearly also contributing to this situation.
The new privatized and, in some countries, fragmented farm structure, should have been given more flexibility by an operational land market and leasing schemes which would be essential for more factor mobility and for financing agricultural operations. Progress was, however, still limited in all CEEC countries in 1995. Positive developments, such as the increasing number of leasing arrangements in some cases, have not yet brought dramatic improvements. The main difficulties included delayed sharing out of land titles, an incomplete legal framework for the transfer and lease of land property and various restrictions imposed on the emerging national land markets.
Even though the fragmentation of agricultural operations was mitigated by the use of leasing arrangements in Hungary, no legal provisions covered leasing or the legal position of partners. In the same country, reinstated land property was subject to a sales ban for five years and legislation prevented cooperatives and other legal entities and individuals from owning land. In Albania, the sale of farmland was bound to a prerogative option in favour of specifically defined groups of buyers. In some countries, a considerable proportion of the new owners of reinstated land property were urban residents (e.g. 43 and 80 percent in Romania and Bulgaria, respectively). This emphasized the need for operational land markets to be established. Land property was accepted by banks as collateral in very few cases.
The capital scarcity and financing problem of agriculture, thus, could not receive much help from the land market. In line with privatization and the restructuring of national banking sectors, some progress was made in creating specialized banking and credit institutions for the agrofood sector in a few countries. Subsidized credit was available (but not sufficient) in several countries, including Poland, Slovenia and Hungary. Such credits were allocated to farmers in exchange for delivery commitments in Romania. In Hungary, the cooperative rural banking network expanded and channelled state development funds to farmers and small rural enterprises. In the Czech Republic, a state support and guarantee fund contributed much to the flow of subsidized and guaranteed credit to agriculture. A similar institution financially assisted small and medium-sized enterprises in food processing.
In spite of this progress, a comprehensive and sound financing system for agricultural and related operations has not yet been created in any of the CEEC countries. Many factors contributed to this situation, including the poor profitability and low internal accumulation in agriculture as well as debt problems within the sector. The restricting effect of macroeconomic stabilization and foreign capital favouring primarily retail and processing branches was not helpful in this respect either. As a sign of some relief, however, in countries with the highest increase in agricultural output and/or exports, the financial situation of farming organizations showed an improvement for the first time in 1995.
Having been at the centre of interest ever since the transition process began, the creation of market institutions made further considerable progress in several countries during 1994-95. In the Czech Republic, a good example was the establishment of 15 regional cooperatives for the marketing of milk to processors, resulting in improved milk producer prices. In the grain and pork sectors of Poland the new diversity of marketing channels allowed individual bargaining for farmers. In Hungary, the 1995 amendment of the law concerning market regulation provided for considerably more participation by commodity boards (called product councils) in the development and implementation of official market policy. In various CEEC countries both producers and consumers have by now had their first positive (or sometimes difficult) experiences of the available (or lacking) market institutions. This has resulted in a more flexible approach to entrepreneurial decisions and an improved awareness of market conditions throughout the whole vertical chain.
The main lesson of agricultural market developments in 1995 appeared to be the recognition of the need for more market transparency and more market integration both domestically and internationally. In Albania, where there is a somewhat fragmented farm structure, a free and simple system of weekly price information was established throughout the country in 1994. During the following year this was recognized as an accelerator of agricultural development. On the other hand, lack or non-use of export market information could cost higher profit losses for a subsector than the total amount of state subsidies paid to its producers during a whole year. Such a situation arose for grain producers in Hungary, a major grain-exporting country in the subregion, in 1995.
Development of private small-scale farming
By the mid-1990s, the progress of private family or peasant farming offered a rather unbalanced picture as a result of agricultural restructuring in most countries of the subregion. As a result of the enormous efforts of farmers, however, private small-scale farming had developed into a significant economic and social factor of the agrofood sector. In terms of its share in land and labour use, local food supply, commercial production and agricultural GDP, this sector acquired an important place in most CEEC countries. In Slovenia and Poland, where private farming remained important throughout the communist period, small-scale private farming used four-fifths of agricultural land and contributed 80 and 89 percent, respectively, of gross agricultural output in 1994. The corresponding figures in Bulgaria and Hungary reached about 40 percent for land use and 81 and 49 percent, respectively, for agricultural output. According to national sources, in Poland, Bulgaria and Hungary, 90, 79 and 33 percent, respectively, of total agricultural labour was engaged in small-scale agricultural activities in 1994-95.
After six years of transition, however, private small-scale farmers continued to face many insufficiencies in their own resources and in their economic and institutional framework; sometimes, for example, they had to operate in a controversial political and social climate. In spite of varying national conditions, the principal difficulties of private farming remained very similar across the subregion and included land fragmentation (particularly in Albania Bulgaria and Romania with farm sizes of 1 to 2 ha), inadequate land legislation, unclear property rights, scarce capital and credit supplies, underdeveloped and often monopolized up- and downstream relations and scarce market information. Behind the farmgate, farmers still had to face a deficit in knowledge of management, marketing and small-scale sustainable production techniques. They also indicated unwillingness to cooperate among themselves. New extension services, however, gained increasing appreciation from private farmers, particularly in Slovenia, Poland and Hungary.
By the mid-1990s, the concept of private family or peasant farming seemed to be more accepted in countries such as Poland, Slovenia and Romania than in Hungary or Slovakia. In a few countries with important traditions in this type of farming, including Poland and Slovenia, the development of such enterprises and their institutional framework appeared to be more dynamic and complete. Even in these countries, however, farmers were struggling with severe structural problems stemming in part from small farm size, of an average 8 ha in Slovenia and Poland. In addition, an increasing share of small-scale farms were operated part-time and were thus economically more stable, while a significant number operated at the subsistence level (particularly in Albania and Romania) and/or in the informal economy.
Fundamentally, many of the problems faced by private farmers in most countries stemmed from the lack of a clear and committed long-term policy concept for private family or peasant farming, particularly for young farmers. In some cases inconsistent policy measures towards small-scale farmers (for example, the withdrawal of some forms of support in Hungary) further complicated the situation.
The persistence of many of the problems of transition in this sector was also related to the absence or low level of genuine cooperation among individual farmers. Many of them could not overcome the psychological barrier to voluntary cooperation and association in the related up- and downstream activities, which were essential in times of scarce (financial, technological, managerial and often moral) resources in order to pave the way for the structural adjustment that was inevitable for small farms in order to improve their competitiveness. Nevertheless, relying on their modest resources and on ample experience gained from western Europe, emerging organizations of private farmers were already making increasing efforts in this direction. They were attaining some success in arranging for more producers' cooperation in marketing in a few countries including Albania, Bulgaria and the Czech Republic. For a better international coordination of their activities, several national small farmers' associations established the Central European Council of Farmers in 1995.
Development of human resources, i.e. adult training in modern, environmentally sound techniques and business aspects, appeared to be an urgent task for development policies aimed at the small-scale sector. As experience from western Europe has shown, the long-term solution is the establishment of national systems for the vocational training and installation of young farmers with the necessary expertise to manage their family-type enterprises. Special attention should be paid to establishing young farmers' associations.
Increasing orientation of agricultural policies towards the EU policy model
The declared objective of most CEEC countries to join the EU (five CEEC countries had expressed such a desire by January 1996) dominated the modifications introduced to their agricultural and trade policies in 1995. This was the case even for the WTO member countries among them, which also had to proceed to the first stage of implementation of the Uruguay Round agreement on agriculture. Several of these countries actually increased tariff protection. State support to agricultural producers and to the domestic market seemed to be stabilizing in Hungary, Poland and Romania, but the already modest budgetary provisions for this purpose could not be increased in real terms. In line with its different policy priorities, the Czech Republic reduced its 1995 budget for agricultural market regulation. Nevertheless, the general trend for the more advanced CEEC countries became to align their agricultural policies, policy institutions and mechanisms more closely with those of the EU.
Policy-makers attempted to strike a balance between market orientation and minimum protection for domestic markets, while the need for the two principal groups of agricultural policy mechanisms, i.e. market regulation and structural policies, to follow harmonized objectives and to be complementary became even more evident. Both types of policies need to be active simultaneously and consistently. Minimum market protection must be provisional, targeted and predictable in order that transitory market protection operates only long enough for structural measures to become active. The effect of the latter, in turn, is expected to reduce the necessity of providing renewed market protection in the future.
Part of the 1995 policy experience was thus the continuation of state intervention in the agricultural markets of the subregion. Apart from refining further the mechanisms for market support, credit facilitation, export stimulation and import protection, export restrictions and bans also appeared in several countries. In Croatia, price policies applied floor prices in order to protect the producer prices of key agricultural products. As a consequence, domestic agricultural prices were protected by tariffs and special levies in 1995 and a
1 percent surcharge was imposed on all imports. While state expenditure on market regulation was reduced by over 50 percent in the Czech Republic, ad hoc application of licences (particularly for export) appeared in 1995. In Romania, input subsidization increased and minimum price guarantees prevailed for wheat and milk. For the latter, and for bread, consumer prices were also regulated by the state. The corresponding trade policy was characterized by a high level of import protection with sharply increased tariffs on wheat and dairy products in 1995. In Hungary's three-stage market regulation system, the number of directly controlled product markets had increased by 1995 to include wheat, maize, milk, pork and beef. Export subsidies amounted to about 50 percent of all agricultural support in 1995.
In the same year, the Czech Republic and Hungary subjected grain exports to licensing and to a virtual export ban in the latter country later in the year in order to maintain domestic market stability.
In the meantime, however, additional agreements concluded under CEFTA in 1995 aimed at eliminating some of the existing trade barriers as from 1996. Policy-makers' recognition of the long-term damages of permanent market protection strengthened slowly. The use of scarce budgetary resources for price guarantees and export subsidies can be rational only to the extent that it helps to implement structural development measures for the improved viability of a certain subsector. Likewise, import protection measures can only be justifiable if simultaneous efforts are undertaken to improve the international competitiveness of the protected subsector and its products. In the long term, however, protectionism decreases competitiveness rather than improving it, because it acts as a disincentive to the export of production from the protected subsector, increases food prices and results in the misallocation of resources.
The unfavourable agricultural trade balance of CEEC countries as a whole with the EU and developments on their domestic retail markets for food emphasized the urgent need for specific policies to improve the international competitiveness of the agrofood sector in CEEC countries. This was seen as a major prerequisite for their successful accession and operation within an enlarged EU market at the beginning of the next century.
The necessity for improving competitiveness in the CEEC agrofood sector
By the mid-1990s some CEEC countries had successfully reoriented their agrofood exports to western European markets. This was regarded as a necessary and positive step on the adjustment path towards establishing international market conditions. Nevertheless, the new trade orientation made the eastern agrofood sectors more dependent on both general economic trends and on specific requirements of markets in western Europe and this produced a special challenge in terms of international competitiveness for the CEEC nations.
The principal exporter countries of the subregion were trying to benefit further from their earlier comparative advantage in agrofood exports. There seemed to be little recognition of the fact, however, that the meaning and content of comparative advantage in agrofood production and trade had undergone substantive changes in Europe during recent decades. In the past, agrofood production and trade were related primarily to natural (geographic, climatic, soil, etc.) conditions and national production traditions. By the 1990s, comparative advantage within the agrofood sector had largely become a knowledge- and technology-specific factor of competitiveness. It was related more strongly to the adaptation of modern production techniques and knowledge (including high-level technical, ecological, management and marketing skills throughout the food chain) and less to natural conditions.
This explains why some western European countries with less favourable physical conditions for agriculture were showing a more successful output and market performance than CEEC countries with better natural conditions and long traditions of food production and trade. In recent years, repeated underuse of EU import quotas for CEEC countries was a case in point. Long years of weak investment activity and particularly the lack of high-technology investments left CEEC agriculture at a great disadvantage in the competition with western suppliers. This manifested itself in the continuing high share of unprocessed products in their exports and in the expanding share of western value added food products in CEEC domestic markets. In CEEC agrofood exports to the EU, grain, livestock, meat, fruits and vegetables occupied a share of well over 50 percent in 1994-95. In Hungary, for instance, the export share of these products increased to 67 percent, while the import share of value added food products amounted to 72 percent in 1995. Such proportions demonstrated well the structural weakness of CEEC agrofood trade.
To improve their competitiveness (on both domestic and external markets), agrofood enterprises of the subregion require primarily qualitative upgrading of their operations rather than a development in terms of increasing output. The enlarged EU market is bound to be competitive regarding the qualitative attributes of products and services. Moreover, the interpretation of produce and food quality is undergoing rapid changes on the European market particularly because of an increasing inclusion of consumer health and sustainability aspects into the concept of quality (e.g. concern about healthy nutrition practices, chemical residuals, the ethics of animal husbandry, organic production and environmental protection).
Being closely related to the quality aspect of competitiveness, the problem of human capital and resource development appears to be a factor of key importance for the subregion. A further substantial reduction of the agricultural labour force is seen as necessary for CEEC as a whole if it is to arrive at levels of labour productivity comparable with those of the EU. The remaining labour force within a rather varied farm structure would require substantial retraining in sustainable production techniques, farm management, marketing and general business subjects. This will involve the implementation of specific training programmes with the cooperation of relevant national and international institutions and organizations.
A special feature of post-transition agricultural development is expected to be the continuing presence of a great number of large-scale farms in some countries, at least in the short to medium term (for example, in Hungary there are more than 2 000 enterprises with an average land area of between 1 100 and 1 700 ha). This raises the special challenge of developing and improving farm management systems for large agricultural enterprises under the conditions of a market-oriented economy. In the meantime, the issue of long-term viability of such enterprises seems to remain an open question, related to the specific technical nature of each subsector.
Obviously, the improved international competitiveness of the CEEC agrofood sector depends on new investments. In its present transitional state and given its scarce resources, however, the agrofood sector of the subregion would benefit more from investment in qualitative improvement and the substantive development of human resources than from investments for rapid output growth and export expansion.
COMMONWEALTH OF INDEPENDENT STATES: SUBREGIONAL OVERVIEW
Economic performance and policies
Most Commonwealth of Independent States (CIS) countries32 have experienced negative growth rates of real GDP since the beginning of the transition process in the early 1990s, and the average yearly decline remained above 10 percent between 1991 and 1994. The downfall started to decelerate in 1995, when the weighted average GDP declined by 5 percent in real terms and, according to European Bank of Reconstruction and Development (EBRD) projections, 1996 should be the first year of positive growth for the subregion as a whole. Real output is expected to increase for the first time since 1990 in the Russian Federation, Georgia, Kazakstan and Kyrgyzstan, while positive growth had already been recorded in 1995 in Armenia and the Republic of Moldova. However, further output contraction (albeit at a considerably slower pace than in recent years) is still expected in some countries, including Belarus and Ukraine. Real GDP in the CIS countries as a whole in 1995 was just 53 percent of its 1989 level, and the projected 1996 recovery would only bring it to 54 percent. It must be stressed, however, that official figures overstate the decrease in output, since they do not cover the growth of activity in the informal sector, which has been substantial in the CIS.
Progress in macroeconomic stabilization has been more significant than output recovery. In 1992 registered consumer price inflation was at four-digit levels in virtually all 12 countries of the subregion. This number had shrunk to seven in 1994 and to two countries (Tajikistan and Turkmenistan) in 1995, although Belarus, the Russian Federation, Ukraine and Uzbekistan still retained inflation levels above 100 percent. Projections for 1996 show further progress, since inflation is expected to be controlled at under 100 percent in all countries except Tajikistan and Turkmenistan. A key role in the drop in inflation has been played by tight fiscal and monetary policies endorsed by the International Monetary Fund (IMF), as the large fiscal deficits associated with the deep recession have been cut down through expenditure reduction, in part linked to the reform process (reductions of enterprise and consumer subsidies). In addition, price liberalization was for the most part undertaken in the early stages of transition and its inflationary effect is fading.
Price liberalization is the area of reform where progress has been most uniform and substantial throughout the CIS. Virtually all countries have liberalized most prices, although, in general, control has been retained on energy and utility prices, and have largely phased out state procurement at non-market prices. Progress in other areas of the transition process has been less uniform. The private-sector share of GDP in mid-1995 ranged from 15 percent in Belarus, Tajikistan and Turkmenistan to 55 percent in the Russian Federation. Between these extremes were Armenia (45 percent), Kyrgyzstan and Ukraine (35 percent), Georgia and Uzbekistan (30 percent) and Azerbaijan and Kazakstan (25 percent). The privatization of small-scale enterprises has been comprehensive in the Russian Federation and Kyrgyzstan, and substantial numbers of small-scale enterprises have been privatized in most other countries, while privatization of large- and medium-scale enterprises is generally less advanced. Almost all countries have achieved some liberalization of trade, the exchange rate regime and interest rates. Progress has been slow in other areas of banking reform, however, and in the development of non-banking financial institutions, as well as in the areas of competition policy and the establishment of an adequate set of legal rules on investment.
Recent developments include the implementation of the government mass privatization programme, based on vouchers, in Ukraine; further progress of government privatization programmes in the Russian Federation and Kyrgyzstan; and progress towards cost-recovery levels of energy prices in the Russian Federation, Uzbekistan and Ukraine. The 1994 agreement on the creation of a free trade zone among CIS countries has so far made only limited progress in the creation of a custom union among the Russian Federation, Belarus and Kazakstan.
Recent performance of the agricultural sector
The decline of agricultural output, which has affected the subregion since the beginning of transition, continued in 1994 and 1995. The sector has been hit by the demise of former support policies, demand decline linked to real income reduction, the difficulties of the farm-restructuring and enterprise-privatization processes and the disruption of trade among the republics of the former USSR. In 1994, according to official statistics, only Armenia and Turkmenistan avoided lower agricultural output, in 1995 the only two countries to experience output growth were Armenia and Moldova. In the Russian Federation agricultural GDP declined between 1991 and 1995, albeit generally at a slower pace than the rest of the economy .
As for sectoral trends in the major food-producing countries,33 both total cereal and total wheat production declined in the Russian Federation between 1993 and 1995 because of yield and, to a lesser extent, area reductions. Similar trends, although more marked, were recorded in Kazakstan, while in Ukraine output has recovered in 1995 after a sharp contraction in 1994. Given normal growing conditions, projected 1996 output is expected to exceed 1995 levels in all three countries, with significant recoveries in Kazakstan and the Russian Federation, largely because of yield increases. The three countries have experienced virtually continuous decline in all aggregates of animal husbandry between 1991 and 1995. The cumulative 1991-95 drop of inventories has varied between 21 and 45 percent for swine, sheep and goats and poultry, but has been more moderate for cattle, especially cows. These trends have been amplified by productivity declines and have resulted in cumulative output reductions generally about 20 to 30 percent for milk,
30 to 55 percent for eggs and 40 percent for meat.
The severe crisis of the livestock sector has been a common feature of the transition process in all CIS countries; the sector had benefited, more than crops have, from significant state support and the impact of the elimination of producer and consumer subsidies has therefore been serious. Furthermore, income changes have had negative effects on demand. In the four major food-producing countries, annual per caput food consumption in 1995 was generally one-third lower than its 1990 level for livestock products and between 49 and 64 percent lower for sugar; the consumption of cereals and potatoes was, conversely, generally close to or above 1990 levels.
According to the Organisation for Economic Co-operation for Development (OECD)34 trade in bulk agricultural commodities among the CIS countries has continued its declining trend in 1995, following a general pattern of trade decline among the republics of the former USSR. Most official trade still occurs through bilateral agreements,35 although there is a continuous decline in the quantities established by such agreements and in their fulfilment, and an increasing importance of individual, unofficial trade flows and of direct food supply agreements among single provinces.
Political pressure to restrict imports because of concern over increasing food imports in the Russian Federation - about one-third of all imports in 1995 were foodstuffs and processed food products - resulted in higher import taxes on foodstuffs, with a maximum tariff of 30 percent on most items.
The present structure of farms in the CIS is the result of a historical evolution of the land-tenure system, in which there was virtually no private property, and of a process of reform that, as a consequence, in most cases has been centred on the distribution of formal ownership rights to farm workers, rather than on the restitution of land to previous owners. In the Russian Federation the process of farm restructuring has occurred in two major initial stages: a distribution of underused state and collective farmland, on the basis of heritable lifetime tenure, was implemented in 1990; and a general distribution of entitlements to farm and non-farm assets of state and collective farms to their workers was undertaken in 1991. Such assets were claimed as shares in the large farms reorganized as joint-stock farms or collective enterprises or they could be withdrawn for independent farming, leased or sold to other farmers.
A variety of approaches have been followed in farm restructuring throughout the subregion, from Armenia's comprehensive land reform programme, which allocated land according to family size and resulted in a pattern of agricultural ownership and farming based on very small holdings, to Tajikistan's complete lack of reform to date. The Russian Federation approach has been adopted in most countries, although in Belarus a 1993 Supreme Soviet decision nullified the 1991 law on reorganization, while Kazakstan restricted reform to state farms.
At present there are four types of farms in the major food-producing CIS countries: large farms, most of which are reorganized farms in the Russian Federation and Ukraine, occupied between 88 and 96 percent of land in the four countries in 1995; individual farms, resulting either from the distribution of underused land or from withdrawal from large farms, held between
1 and 5 percent of land; garden plots owned by urban residents have increasingly been devoted to food production; and household plots, to which all workers and employees of large farms were already entitled under the Soviet system, occupy about 10 percent of land in Belarus and Ukraine and far smaller percentages in Kazakstan and the Russian Federation. The share of household plots in production is however much larger and has increased virtually constantly in all four countries, representing in 1995 the bulk of production of potatoes, fruits and vegetables and between 30 and 70 percent of production of main livestock products, partly as a result of the increasing use of payment in kind or through unofficial transfers from the large farms. Although they are private, household plots are closely linked to the structure of large farms, on which they depend for inputs and support services, and their increasing importance can be interpreted partly as a shift to subsistence production within such farms.
A number of factors have contributed to orient the farming system towards the maintenance of large enterprises (albeit reorganized) rather than towards the development of individual medium-sized farms. Legal obstacles have played a crucial part, for instance, in the Russian Federation, Ukraine and Kazakstan, land shares are still not linked to physically identified plots and, throughout the CIS, the definition of rules regarding both freedom of withdrawal and land transactions has been extremely controversial and uncertain in many countries. The legal framework has generally provided security of land use and heritability to cultivators, but transferability, which is an essential feature of private property, is limited to various degrees. As for rules of withdrawal, in some cases there have been attempts to introduce a requirement of unanimity of consent from all shareholders.
There are however also economic reasons for the perpetuation of a farm structure based on large farms. The near absence of private agricultural credit markets, which is in turn partly linked to the incomplete definition of individual property rights to land, creates a capital constraint on the establishment of individual farms; the lack of a private and/or public supply of agricultural support services, which have traditionally been provided by large farms, further discourages individual farming; and the recessive and unstable economic environment makes individual farming risky. In addition, the large farms have traditionally dispensed a range of social services, such as medical care and schooling, and farmers may have chosen not to withdraw their land shares in order to avoid the risk of loosing such services.
The extent to which the issue of property rights on land is unresolved and controversial is revealed by recent legislative developments in the Russian Federation and Ukraine (as well as in Belarus and Moldova). Although the new Russian Constitution, adopted in December 1993, removed the constitutional bar to the purchase and sale of agricultural land, and although a new Civil Code providing enlarged freedom in land transactions was adopted in 1994, the complete legal framework needed to implement the theoretical rights to purchase and sale has not yet been developed. The Civil Code was to go into force only after the approval of a new Russian Federation Land Code. A draft Land Code has been discussed since 1994 and a 1996 version passed by the State Duma and opposed by President Yeltsin would introduce severe limitations to land transactions. In the meantime, many provincial governments adopted their own legislation and, although a 1995 Presidential Decree established some provisional norms along the non-restrictive lines of the new Civil Code, it appeared that this would not overrule regional laws. In Ukraine a draft law, establishing that the allocation of land shares in large farms should be completed by the end of 1995 and lifting restrictions on land leasing and sales, was rejected by the Supreme Rada in November 1995.36
Upstream and downstream sectors
The sharp deterioration of the terms of trade between agricultural producers and input suppliers which has taken place since transition began has caused dramatic decreases in usage, sales and production of inputs. Between 1991 and 1995 tractor production decreased by a factor of 18 in Kazakstan and by a factor of 8 to 9 in the Russian Federation and Ukraine, while the reduction of mineral fertilizer and compound feed production has generally been less dramatic; between 1994 and 1995 machinery production declined in the three countries, while mineral fertilizer production has since recovered in Kazakstan and the Russian Federation.
In the Russian Federation the government resisted farmers' requests to reintroduce state controls on input prices, but in 1994 it created a machinery leasing programme - in practice a time-repayment plan - intended to support the agricultural machinery producers as well as farmers. A large share of the inputs acquired by farms in 1995 were supplied through such plans, for which allocations were established by the federal Ministry of Agriculture, the regional authorities and a former government agency, reorganized as a joint-stock company, which acted as the sole distributor to farmers, who could pay in cash or through delivery of grains to the state. Agricultural input provision, thus, seems to have occurred in 1995 along lines which bear many similarities with pretransition methods, including the link between input supply and state procurement. In Ukraine the state also still distributed inputs as part of advance payments for procurement in 1995. Indeed, state provision of inputs remains tied to state procurement in most CIS countries. Emerging alternative arrangements are still based on input-for-crop barter, with international agribusiness companies (in Ukraine and the Russian Federation) or with local machinery rental stations.
In the agroprocessing sector, the CIS countries have inherited a structure characterized by the existence of local monopolies, because under central planning each district was to have only one or two processing firms and the transportation infrastructure was built accordingly. Such monopolistic positions are reinforced by other factors, such as, in the case of the Russian Federation, legal restrictions on movements of produce, intended to ensure local food procurement, and the poor state of the transport infrastructure and its insecurity caused by criminality. This has rendered the privatization of food processing enterprises a contentious issue, as farmers' requests to have some control over the privatized enterprises was frustrated in both the Russian and Ukrainian privatization programmes since farms did not have the resources to compete with other bidders. In the Russian Federation complaints about the privatization of the food processing industry induced President Yeltsin to issue a decree in 1994 requiring the State Committee on Management of State Property to re-examine privatization. In Ukraine, in 1995 the Rada adopted a law establishing that agrofood processing enterprises should reorganize as open joint-stock companies with 51 percent of their shares to be given free of charge to their suppliers and failure to comply implying a return to state ownership. The law was vetoed by the president, represented in a slightly modified version in 1996 and vetoed again.
The share of total produce bought up by the traditional procurement agencies, including payments in kind for workers and barter of produce for inputs, fell in recent years throughout the CIS at the expense of private marketing channels. The share of produce that bypasses the state channels varies greatly from state to state and tends to be greatest in those countries where reforms are relatively more advanced or in countries where central management has been eroded by civil strife (Georgia and Tajikistan) and least in countries where centralized control continues to be important. Procurement tends to absorb the bulk of production which requires industrial processing or specialized storage, because there tends to be a considerable degree of state control on such downstream activities, and to have a very limited role for produce which can be marketed directly.37
As a percentage of production, state procurement of grains, vegetables, potatoes and livestock declined sharply between 1991 and 1995 in Kazakstan, the Russian Federation and Ukraine. In 1995 state purchases absorbed virtually all production of fibre flax in all four major food-producing countries and a high proportion of sugar beet in Ukraine and Belarus. At the opposite end of the spectrum, the role of procurement is generally minimal for potatoes and vegetables. State procurement of grains was still around 30 percent of officially reported production in Belarus in 1995, 17 percent in the Russian Federation, 15 percent in Ukraine and 8 percent in Kazakstan. For livestock products, the state still absorbs 35 to 54 percent of production in the Russian Federation and lower percentages in Ukraine and, especially, Kazakstan.
The decline of the role of state purchases is caused by several factors. Low prices and long delays in payments because of the agencies' lack of funding are at the origin of farmers' unwillingness to deliver their product to the state agencies. As a result, most of the state procurement agencies are unable to meet their purchasing targets; this was the case in 1995 in both the Russian Federation and Ukraine, where a presidential decree has abolished the system for all agricultural products except grain.
Subsidies, price and credit policy
In the former USSR, state support to agriculture was based essentially on the price and subsidies mechanism and on credit policy. Procurement prices consisted of a base price plus bonuses based on quantity, quality and the financial needs of farms. Weak state and collective farms received price bonuses in an effort to improve their financial position; such differential price bonuses were the most significant category of agricultural subsidies in the 1980s. Farm inputs were subsidized, and consumer subsidies, usually paid to the processing industries, kept consumer prices down. Credit was allocated to state-owned enterprises by the government banking system. Concessional interest rates and periodic loan forgiveness effectively transferred income to selected groups and enterprises and state-allocated credit was widely used to bail out inefficient and high-cost producers. As state and collective farms rapidly accumulated debt in the 1970s and 1980s, debt rescheduling and debt forgiveness became frequent practices.
With transition, producer and consumer subsidies were mostly cut or eliminated and farmers faced rising production costs and depressed output prices because of low demand. Monopoly positions in the inputs supplying industry and widespread control of basic food prices in the early stages of transition exacerbated the price-cost squeeze.
Government attempts to introduce new support mechanisms for agriculture are at the basis of the establishment of agencies which are supposed to offer contracts at guaranteed prices to support producers in the Russian Federation, Kazakstan and Ukraine. However, the Russian Federal Foodstuffs Corporation and the Kazak Commodity Credit Corporation differ fundamentally from similar agencies in the west in that they are also entrusted with state procurement. Furthermore, production credit is generally tied to guaranteed deliveries.
In the context of a continuing crisis in the agricultural sector, the old support mechanism through credit has not been entirely abandoned; in 1995 the Russian Federation resorted to agrofood sector debt rescheduling and debt write-off, the latter amounting to more than all the explicit support for agriculture provided in the same year's budget. In Ukraine the main subsidies to agriculture took the form of negative interest rates and non-enforcement of repayment terms. However, the sector was taxed by a combination of low procurement prices and delayed payments coupled with high inflation and restriction of imports, which actually offset subsidies.
The development of a private agricultural credit market which may reduce agricultural sector dependence on state credit and its demands on state budgets is a very important and unresolved issue in the CIS. Credit supply is rationed economywide because of accumulated debts, general economic decline and insufficient international financing. In the case of agriculture, the incomplete definition of private property rights on land hampers the development of a land market and of a rural credit market based on the use of land as collateral. In addition there are complex problems of reform of the financial institutions since, for instance, the heritage of the former USSR is a system where deposit mobilization in rural areas through the savings bank and lending to agriculture through Agroprombank were in practice separated and interests paid on deposits were low and inflexible, so that the banking system did not fulfil a role of financial resources reallocation in rural areas.
AGRICULTURAL AND ECONOMIC REFORMS IN BELARUS AND THE REPUBLIC OF MOLDOVA
The Republic of Moldova and Belarus are new countries, formed in 1991 from the splintered Union of Soviet Socialist Republics (USSR). Economic reform in Moldova, although troubled, has generally been more resolute than in Belarus. While Moldova continues to receive support from the international financing agencies (the International Monetary Fund [IMF], the World Bank and the European Bank for Reconstruction and Development [EBRD]), loan disbursements to Belarus from these agencies were suspended early in 1996. Both countries have faced the demise of the Soviet rouble and old planning relations with Russia and the shock of greatly increased prices of raw materials purchased from the Russian Federation and other republics.
Moldova adopted a stabilization programme relatively early among the countries of the former USSR. In 1995 GDP was at only 40 percent of its 1990 level but in the same year moderate positive growth was recorded for the first time (at 2 percent according to EBRD). Agricultural production also grew, by 5 percent. Since mid-1994 monthly inflation has been in the low single digits and in 1995 it was the lowest in the Commonwealth of Indendent States (CIS). The national currency introduced in November 1993, the leu, became convertible on current account transactions in July 1995. The money supply is extremely tight, however, and barter so prevalent that much of the economy has been referred to as "demonitized".
Belarus was one of the last countries of the former USSR to introduce reforms and adopt a stabilization programme, and inflation has been among the highest in the CIS. Not until October 1994 did Belarus make the Belarussian rouble its sole currency. Delay in initiating a reform programme allowed Belarus to delay contraction, but real GDP dropped by 20 percent in 1994 and by 14 percent in 1995. The prospects for positive economic growth are further away in the future than for Moldova.
By December 1995, prices in Belarus had increased 8.1 times over the previous year, compared with a CIS average of 3.5 times. In late 1995 and early 1996 monthly inflation was officially low, but international economics agencies questioned the methodology of its measurement. They also considered the fiscal policy in Belarus to be unsustainable, since it matched revenue shortfalls with temporary freezes and the accumulation of arrears. Most central bank credit continues to be directed and subsidized, perpetuating the expectation of continual credit bailouts.
IMF stopped granting credits to Belarus in September 1995. The reasons for this involved the central bank's reimposition of exchange controls and its reluctance to let the rouble depreciate (a "crawling peg" has since been adopted) or to create excessive credit for agriculture. In early 1996, the World Bank suspended payment of a US$37 million loan because of inadequate progress in privatization.
The human costs of austerity
In both Moldova and Belarus the costs of austerity in terms of human suffering have been significant. As in many other transition economies, unemployment in both Moldova and Belarus is officially low, but official statistics probably underestimate actual unemployment. In Moldova, where official unemployment was only 2 percent in 1995, a survey using broader criteria set the figure at 11 percent (excluding Transdnestria). For those working, arrears in wage payments are a perennial problem. Statistics showing the average decline in consumption (discussed below) do not reflect the larger decline among the growing segment of the population who are officially poor.
Soviet agricultural subsidies and Moldova's and Belarus' specialization and trade within the former USSR
Adjustments in Belarus and Moldova to the break-up of the former USSR have to be examined within the context of the complex pattern of subsidies to agricultural production and consumption which characterized Soviet interrepublic trade. These subsidies emanated from Moscow and were largely eliminated in 1992. For the former USSR as a whole, budget subsidies for agriculture in the late 1980s were roughly 10 percent of GDP. Exact measures of the benefit of Soviet-era subsidies to agriculture in Moldova and Belarus are not available, but those paid to Belarus appear to have been larger than those to Moldova because of the greater capital intensity of production and the greater relative specialization in highly subsidized livestock in Belarus. Moldova's agriculture is less capital-intensive and its exports were concentrated more in unsubsidized horticultural products, sugar and oilseeds.
With a territory of 280 000 km2, Belarus is the sixth largest of the 15 former USSR republics.
Some 80 percent of Belarus' population of 10 million is by nationality Belarussian and most of the rest are Russian or Ukrainian. Over 80 percent of the population speaks Russian fluently. Except for the western region, which was annexed from Poland after the Second World War, the collectivization of agriculture was completed in the early 1930s. Belarus' per caput gross social product (GSP) was among the highest of the 15 Soviet republics. Of the former USSR republics, it has been the most active in seeking economic integration with the Russian Federation, and in May 1996 Belarus ratified an agreement with the Russian Federation to form a new economic and political union, the Community of Sovereign Republics (CSR).
Belarus has few natural resources except for peat, potash and its strategic location which allows it to contain the rail, road and pipeline routes connecting the Russian Federation to central and western Europe. The population is one-third rural and two-thirds urban. The country's industry depends heavily on imported raw materials and semi-manufactured goods; 90 percent of energy needs are imported from the Russian Federation.
Before the breakup of the former USSR, agriculture accounted for 21 percent of the republic's GSP, against an average of 16 percent for the USSR. Some 30 percent of the labour force was directly employed in agriculture.
Winters in Belarus are fairly short and summers long, moist and cool. The vegetative period lasts from 175 days in the northeast to 205 days in the southwest, and average yearly rainfall varies from 700 mm in the north to 500 mm in the south. Three-quarters of the territory of the country is classified as agricultural land and two-thirds of that is arable. The remainder is evenly divided between meadowland and pasture.
Historically, Belarus has specialized in flax and potato production. Although feeding efficiency was inferior to that of western Europe, Belarus was known in the former USSR for relatively high-performance dairy cattle and pigs. Most grain is spring grain, with only a small quantity of winter wheat and maize. Rye is particularly suited to Belarus. A relatively high, but diminishing, share (40 percent) of sown land is devoted to fodder crops, including maize for silage.
Both Belarus and Moldova participated in the USSR interrepublic grain and livestock trade complex as net exporters of subsidized livestock products and net importers of subsidized grain. During 1986-1990, Belarus imported one-third of its average annual grain consumption of over 10 million tonnes. Of this, about 2.2 million tonnes was foreign grain imported with foreign exchange centrally allocated by Moscow. Moldova was dependent on imports from other former USSR republics for approximately 20 percent of its grain consumption. In 1990, Belarus exported 19 percent of its meat, 25 percent of its milk and 4 percent of its egg production to the other former USSR republics. For Moldova the figures were 25, 8 and 16 percent, respectively.
With a territory of 33 700 km2, Moldova is the second smallest of the former USSR republics and its 4 million inhabitants make it also the most densely populated. Moldova shares a common culture and language with Romania to the west; approximately 65 percent of the population are ethnic Romanian, one-half of whom do not speak Russian fluently. Slavs, about one-quarter of the population, are concentrated in the capital city, Chisinau (formerly Kishinev), and Transdnestria, which is a sliver of land between Ukraine and the Dniester river containing one-quarter of Moldova's territory. Since 1992, Transdnestria has sought unsuccessfully to secede from Moldova. As part of Bessarabia, present-day Moldova was part of the Russian Empire from 1812 until 1918, but (except for Transdnestria) was independent or part of Romania until annexed by the USSR after the Second World War. Collectivization of agriculture was not completed until 1950, and many people still remember the small freeholds which previously characterized agriculture in Moldova.
Soils are predominantly rich chernezem and chestnut. Rainfall varies from an average 550 mm annually in the north to 375 mm in the south, and the country is subject to frequent drought. Of 2.1 million ha of arable land, 100 000 ha are irrigated. Conditions are suitable for a diverse variety of long-season crops and about one-fifth of the arable land is in permanent orchards and vineyards - Moldova's most notable specialization is fruit, including table and wine grapes. About three-quarters of arable land is sown to grains, including equal areas to winter wheat and maize and about 10 percent each to pulses and winter barley. Other crops include sugar beet, sunflower and tobacco. Only 12 percent of Moldova's agricultural land is meadowland or pasture. Moldova's northern region had some of the best dairy yields in the former USSR. Pigs are important throughout Moldova as are sheep, especially in the south.
Moldova's per caput GSP was the lowest of the former USSR's European republics. Including labourers in private plots, 47 percent of the population was directly engaged in agricultural production, the highest such share in the European USSR. The share of agriculture in GSP was the highest in the former USSR (27 percent against an average of 16 percent). One-half of industry is involved with the processing of livestock products, vegetables, fruits and wine. Moldova was and is totally dependent on the Russian Federation for energy resources.
Consumption of livestock products sold at controlled state retail prices was highly subsidized by Moscow. For example, price specialists calculated that the average budget subsidy for beef in 1989 was approximately 250 percent and, for milk, 100 percent. (That is, the retail price of beef, which was nearly uniform across the entire former USSR, was 3.5 times the average cost to the Soviet state of production and trade.) For pork it was about 100 percent. On this basis, subsidies for retail prices of foods produced from crops (e.g. wheat bread, sunflower and sugar) were generally negative. The latter, which are exported by Moldova, were taxed at the rates of 5 and 35 percent. For Belarus, except for milk, the budget subsidies expressed in this manner were somewhat larger than in Moldova; the beef subsidy was 264 percent compared with 234 percent in Moldova, milk was 67 percent compared with 70 percent and pork, 120 percent compared with 91 percent.
Consumption of domestically produced feed grains was subsidized by the monopolistic Soviet state grain procurement system. This system acquired grain at differentiated zonal prices which extracted land rent from low-cost grain producers.
Among crops, Belarus delivered mainly flax and potatoes to other republics, while importing from them significant quantities of vegetables, fruit, sugar and vegetable oil, as well as milling wheat and feed grains. Among major agricultural commodities, Moldova imported feed grains and milling wheat. In 1990, Moldova exported (almost entirely to the former USSR) 20 to 25 percent of its fresh and processed vegetables and fruit, including approximately 80 percent of both canned vegetables and fruit. Moldova also exported to the former USSR about one-third of its sugar production and one-half of its vegetable oil production. Tobacco was another important export.
The structure of input use suggests that since 1991 increases in energy and other agricultural inputs imported from the Russian Federation have hurt Belarus' agriculture more than Moldova's. In the late 1980s, the share of capital per agricultural worker in Belarus was one-third higher than in Moldova. The expenditure on electricity per farm worker was two-thirds higher and the rate of application of mineral fertilizer per sown hectare (266 kg in 1986-90) was approximately double the Moldovan level.
Food price liberalization and budget support
Both Moldova and Belarus inherited the macroeconomic imbalance and repressed inflation which played a large role in the demise of the former USSR.
The Russian Federation's price liberalization in early 1992 forced Moldova to liberalize most prices in 1992. The republic delayed completely freeing food prices until June 1994, however, when the last budgetary subsidies for milk and the cheapest types of bread were eliminated. This was accompanied by increases in direct assistance to the poor.
A comparison of prices for a number of food items in Chisinau's retail stores and collective farm markets at the end of December 1995 and beginning of 1996 indicates that retail prices were the same in both, i.e. that prices in retail stores mostly cleared demand.
As of late 1995, the international economics agencies questioned whether Belarus had really freed retail food prices. There had been several administrative increases of both farm and retail prices, including substantial increases (by factors of 10 to 20) in August 1994. The latter occurred only after it was increasingly apparent that subsidized food products were being exported through shuttle trade to the Russian Federation. Officially, all retail food prices were freed by December 1994, but in the same month the central government issued Decree No. 249 which urged regional governments to regulate trade and food processing margins. Pressure from IMF led to a formal repeal but the practice is thought to continue to be widespread.
A survey of reported prices in Mensk retail stores and collective farm markets in December 1995 indicated a congruency of prices in both channels for most goods. Eggs were an exception; their price was 80 percent higher in the market than in city stores.
Post-reform adjustments in consumption, agricultural production and trade
Domestic livestock consumption and trade. Prior to reform, average per caput meat consumption in the USSR, at more than 60 kg on a comparable basis, was higher than in some countries in western Europe where income levels were several times higher.38 With price liberalization, income decline and the reduction or elimination of subsidies throughout the economies in transition, consumers have substituted other foods, including potatoes and bread products, for livestock products. Moldova's 1995 per caput consumption of all livestock products (as officially measured) declined to approximately half the 1990 levels. The decline in consumption in Belarus was less; 27 percent for meat, 17 percent for milk products and 7 percent for eggs.
Livestock production and trade. Moldova's and Belarus' livestock exports went mainly to the Russian Federation, where per caput consumption of meat and dairy products each dropped by approximately one-third between 1990 and 1995.39
In 1994, Moldova's official meat exports to the CIS (mainly the Russian Federation and Azerbaijan) were only 38 percent of 1990 exports, while Belarus' exports were down to only 26 percent of the 1990 level. In dairy products, Moldova exported 4 percent of the 1990 level and Belarus only 17 percent.
Reflecting the drop in domestic and export demand, Moldova's 1995 meat, milk and egg production were respectively 53, 51 and 60 percent lower than in 1990. In Belarus the decline in meat production was similar (46 percent) with milk and egg production falling somewhat less (32 and 7 percent, respectively).
The actual decline in value added in livestock production is not as high because, previously, large amounts of feed were imported by both countries. From average annual imports of over 2 million tonnes in the second half of the 1980s, Belarus' net grain imports dropped to an average of 1.5 million tonnes in the two marketing years 1992-93 and 1993-94, and to less than 800 000 tonnes in 1994-95 and 1995-96. Moldova's net grain imports dropped from just under 600 000 tonnes per year to an average of less than 500 000 tonnes from 1992-93 to 1994-95; most of these imports were on concessionary terms connected with the 1992 and 1994 droughts. Moldova had estimated net grain exports from its 1995 grain crop of 110 000 to 230 000 tonnes.40
There are indications in Moldova and Belarus, as in other former USSR countries, that the cumulative contraction of livestock supply and better grain harvests in 1995 and 1996 are finally improving the profitability of livestock raising.41 In January 1996 swine and poultry numbers in Moldova rose compared with the previous year. Egg production rose by 14 percent in Moldova and stabilized in Belarus, compared with 1995. In both countries (as elsewhere in the CIS) there has been a recent rise in egg production, reflecting poultry's more efficient conversion of feed.
Input adjustment and grain production. Crop production in most of the former USSR has proved to be more profitable during the transition than has livestock production. This is in spite of the increase in prices of energy, fertilizer, other chemicals and equipment used in production, and is in large part caused by farms' ability to get by with fewer purchased inputs, which, in turn, reflects the wastage and inefficient use of many inputs that used to occur, particularly in grain production. The reduction is especially apparent in the use of mineral fertilizer. In Moldova, for example, in 1995 the mineral fertilizer application (active ingredient) was 9 kg per hectare of sown area, only 6 percent of the level for 1989-91. Fertilizer use per sown hectare has also fallen significantly in Belarus; to 39 kg of nitrogen, 52 kg of potash (both less than half their 1990 levels) and 12 kg of phosphate (less than one-fifth of the previous level).
Changes in crop area and production. Given Moldova's reduced imports of wheat from the former USSR, the area planted to winter wheat have increased since 1989, from 287 000 ha in 1990 to approximately 400 000 ha for the 1996 harvest. The areas planted to vegetables and sugar beet have remained approximately stable, while sunflower areas have increased and the areas under fruit orchards and vineyards have continued an upward trend that started in the early 1980s. Officially reported production of all these crops has fallen to between two-thirds and three-quarters of 1986-90 levels, reflecting drought, possibly reduced fertilizer use and possibly changes in reporting methods related to privatization.
In Belarus total sown area declined by 4 percent during 1991-95 compared with the previous five years. The area sown to feed crops declined by 5 percent and grain area has shifted towards wheat. The area sown to vegetables and potatoes has increased somewhat and shifted drastically to private production. Sugar-beet area had declined during the late 1980s and early 1990s, but it began increasing in 1992; rape area doubled in 1994. Labour-intensive flax area (at its peak of 340 000 ha in 1956) fell 50 percent from 149 000 ha in 1990 to 96 000 ha in 1994, but increased to an estimated 102 000 ha in 1995.
Agricultural trade. Moldova has continued to export vegetable oil and sugar to the CIS, although at lower levels than before. These are products for which CIS prices had been lower than world prices; some of them, including sunflower seeds, are now being exported to non-CIS countries. Moldova has retained much of its export to the CIS of canned and fresh fruits, including grapes, and of quality wines. Belarus continued to export flax and small quantities of potatoes to the CIS.
In 1994, both Moldova and Belarus were small-scale net exporters of livestock products to, and net importers of plant products from, the non-CIS countries. For Moldova, net exports of livestock products were about US$12 million and crop imports, $11 million. Belarus had net exports of livestock products to the non-CIS of about $9 million and net imports of crop products of $11 million. Both countries have received western grain through the use of commodity credits.
The World Bank has commissioned a study of the changing costs of production of various agricultural products in Moldova and Belarus with a view to seeing how unsubsidized agriculture can compete in export markets.42 According to this study, in Belarus the only crop with undisputed high potential for export is flax, followed possibly by rapeseed. Beef and perhaps dairy products have the potential to become major efficient exports if feeding efficiency is improved. On the other hand, Belarus appears to be a relatively high-cost producer of grain, sugar beet, pork and poultry products.
Moldova's export possibilities are considered more diverse. Sugar-beet production costs are low, as are those for winter wheat and maize. In 1995 Moldova exported grain and, given its low costs, is seen as being a future regular exporter of grain. Moldova's costs of sunflower seed and oil are also a fraction of the world price. Exports of horticultural products, including wine, depend in part on investment to improve varieties and processing and packaging to world levels. The same is true of Moldova's livestock products.
The prospects for future trade in both countries also depend on the trade regimes they establish. Moldova has applied to join the World Trade Organization (WTO), and sought to keep tariffs below 20 percent. Belarus recently raised tariffs on some products to bring them into line with those of the Russian Federation, which has a customs union with Belarus.
Procurement price and credit. Marketing through state channels has been reduced for many commodities, to a greater extent in Moldova than in Belarus, where in 1995 30 percent of grain, nearly 90 percent of sugar beet, 70 percent of meat and almost 60 percent of milk production were still sold to state organs. The degree to which state purchases still dominate agricultural transactions is an important indicator of reform. The Soviet-era state procurement system from which Moldova and Belarus are evolving involved complex direct subsidy and cross-price subsidization which discouraged the development of alternative unsubsidized private business and marketing channels. Subsidized inputs were available as quid pro quo for marketing through state procurement organizations. Traditionally, even when farms could legally sell products produced "above plan", retail subsidies were only available to products marketed within state channels.
In Belarus the procurement system has continued to be used to implement subsidies, including soft credit. Core to state intervention is the idea of farm price parity, according to which farm prices should increase by the same percentage as farm input prices. Adherence to this idea, however, impedes restructuring.43 Belarus' formal policy commitment to this idea was so strong that during 1994, the government linked procurement prices to an index of inputs and increased them almost weekly.
The mechanisms used to try to obtain parity have ranged from preferential allocation of imported Russian fuel to budget subsidies for agriculture amounting to 22 percent of budget expenditures in 1992 and 7.2 percent in 1995. An extrabudgetary agricultural support fund with its own extrabudget share of value added tax (VAT) revenues was created in 1995. Recent interventions in agriculture have mostly involved directed low-interest soft credits. Typically, these funds have been tied to participation in seasonal input purchase and state procurement. Subsidized credits continued into 1995 and (despite IMF proscriptions) into the 1996 planting season.
By contrast, in Moldova directed credit for 1996 seasonal inputs originated in auction (at nominal rates of about 20 percent annually) from the central bank and was made available to farm supply organs and farms on commercial terms, where nominal rates were approximately 3.5 percent monthly in March 1996. The inflation rate was then approximately 2 percent monthly. In late 1995, the Government of Moldova relented under domestic pressure and also made some direct loans to agriculture.
Transformation and privatization in agriculture
Of the CIS countries Belarus has the highest share of employment in state enterprises (agricultural and other) at 64.1 percent while Moldova has one of the lowest at 38.9 percent. In most Belarus joint-stock companies the majority of stock is owned by the state. Belarus drew up plans in 1995 for converting agricultural processing enterprises into joint-stock companies, to be owned by state and collective farms. Although Moldova's progress in privatization has been slower than its progress in stabilization, it is faster than it is in Belarus.44 Among all enterprises, the percentage of private or "mixed" ("transformed enterprises" in which the state continues to own part of the stock) increased from 34 percent in 1994 to 62 percent in 1995. Moldova accelerated its privatization process in 1995 along the lines of the Czech model, using patrimonial bonds or vouchers distributed to the population. These were used to purchase over 2 200 large, small and medium-sized enterprises; most of them being purchased in 1995. There have been some cash sales and the next stage of privatization is expected to rely more on this type of transaction.
In 1989, Belarus had approximately 900 state and 1 600 collective farms, each with about 450 workers and an average cultivated area of 2 100 ha. As of mid-1995, 14 percent of state farms and 31 percent of collective farms had gone through a preliminary valuation of assets and nominal share division among workers and members according to their past work contribution. Belarus had 3 000 individual private farms on 1 January 1996, the same number as the previous year. The average size is 21 ha, their total area of 62 100 ha is 0.6 percent of total agricultural land area. The number of farms is forecast to increase to only 5 100 by the year 2000.
In 1990 Moldova had between about 1 000 and 1 100 state and collective farms and other "interfarm" crop or livestock enterprises. By early 1996, state and collective farms in the process of reformulating their legal structure had created 160 joint-stock companies (80 of them in 1995), 194 agricultural production cooperatives (63 in 1995) and 146 associations of individual peasant farms (79 new in 1995). Shares in 660 state enterprises, which are to be privatized free of charge, were distributed to approximately 850 000 people (including pensioners and service workers). As of 1 December 1995, individuals on 422 (64 percent) of these farms had received (undivided) property shares and 28 percent of these shareholders have received actual certificates. Under Moldovan law, individuals or individuals with family members are free to apply to the farm and local authorities to receive actual land plots and, as of 1 January 1996, 48 000 applicants (half of those who had applied) had received actual physical land plots.
Moldova was slower initially than a number of former USSR republics in starting peasant farms; it had only five at the end of 1991,45 although in 1995 the number of individual peasant farms registered in the republic grew by 2 100, to 16 100. Moldova's individual farms average only 1.6 ha. Together, registered and unregistered (of which there are approximately 30 000) individual farms cover a reported 58 000 ha of land; three-quarters of which is ploughed land, with the remaining one-quarter shared almost equally between fruit orchards and vineyards. The area covered by peasant farms is equal to 2 percent of the total agricultural area.
Private plot agriculture in Moldova and Belarus
Owners of "subsidiary" plots retain their membership or employment in the collective or state farm or its successor. Even before current reforms, both Moldova and Belarus had substantial areas covered by the private plots of rural people. Together with the far more numerous but smaller suburban gardens and "orchards" of city dwellers, Moldova had about 200 000 ha in such arrangements - about 11.5 percent of total arable land (or 7.8 percent of all agricultural land). Belarus had approximately 609 000 ha in such holdings, accounting for some 10 percent of arable land. These were relatively high percentages, compared with 3.5 percent for the Russian Federation, 7.5 percent for Ukraine and only 2.6 percent for the former USSR as a whole.
In Belarus, the area of agricultural land used privately in "subsidiary activities of the population" has more than doubled in recent years. Moldova's first stage of agrarian reform raised the limit on family holdings from 0.2 ha to 0.3 ha, and up to 0.75 ha for very large families. The area covered by such plots increased to 325 000 ha in 1995. This, together with the area of individual farms, was approximately 18 percent of Moldova's arable land.
Private crop and livestock production is increasing in Belarus, particularly as a share of total agriculture, but is still concentrated in expanded, traditional "subsidiary" plots.
Lessons and long-term objectives from Moldova's and Belarus' comparative experiences
Stabilization. Recent economic performances in the region seem to confirm the importance of stabilization as a prerequisite for recovery. By 1995, 15 transitional economies which had successfully reduced inflation to less than 50 percent per year experienced positive economic growth.46 The reform experiences of Moldova, where a stabilization programme has proved successful, and Belarus, where success is questioned, show some of the factors that determine the political ability to bear the hardships of austerity:
Agricultural finance. This remains perhaps the most critical problem for agriculture in stabilized economies in transition. Evidence suggests that in the transitional economies, hard budget constraints curtail the abuses of soft credit and promote needed adjustments in resource allocation, even among firms that remain state owned.47 Still, without the development of a finance system, long-term growth is not possible. In Moldova, for example, there is no long-term credit for investment in new grape plantings suitable for quality wine production. In spite of the reduction in inflation, the risk of credit default was reflected in a spread between the central bank rediscount rate and commercial bank short-term lending rates approaching 100 percent.
The inadequacy of agricultural financing reflects to a large extent the absence of property rights that afford sufficient collateral, as well as the absence of bankruptcy laws. Establishment of these may help, but there is the danger that legislation does not suffice and austerity will end, its benefits wasted, unless other steps are taken. Observers of Central and Eastern Europe note that, after a long experience of mass credit default and forgiveness, it takes a long "drought" of credit to cause borrowers to invest voluntarily in reputations for credit worthiness.48 Alternatives to traditional agricultural banks need to be investigated, such as the revolving funds managed by small groups of borrowers which reinforce repayment among themselves.
Privatization. Property "transformation" has consisted simply in "changing the signs" on enterprises which continue a codependent relationship with the state. On the other hand, evidence from several Central and Eastern European countries indicates that hard budget constraints force even state-owned firms to respond to market incentives.49 These facts suggest that privatization may be considered the ultimate goal of the transition process rather than an immediate objective.
Moldova, as a country with relatively favourable conditions, presents some of the surviving complexities of privatization of farming. As in other former USSR countries, including Belarus, rural workers in Moldova have a formal right to withdraw from the state or collective farm with a share of land and capital assets. Much attention has been focused on the legal prohibition of land markets as a reason for not implementing this right more fully. Land markets could facilitate farm restructuring by allowing the assimilation of land tracts, collateral for loans and reduction of risk through the ability to sell the land if the farmer's attempt to establish a private farm does not succeed. However, in Moldova polls show declining support for private ownership of land and in spring 1996 the parliament rejected a proposal to shorten the present moratorium (until 1 January 2001) on the sale and mortgage of land.
There are various reasons for the less than full support of private property in agriculture and these will probably diminish as prospects for agricultural profits increase and the present evolutionary developments continue. A very apparent fear of rural people is that they have few options for the disposal of their land shares and might be forced to surrender them with little benefit. The remarkable expansion of the size of family subsidiary plots and livestock inventories among farm workers occurs within a traditional set of rights and responsibilities between workers and the farm, which provides machinery services, feed, marketing and credit. In time, and with economic growth and improved profitability of agricultural production, small farm entrepreneurship developed within this framework will increase the market for the asset shares of those who opt out. Development of full property, registration and markets for garden plots may gradually re-establish social expectations with regard to the security of property in farmland.
Economic relations with the Russian Federation. In 1992 and 1993 the Russian Federation's programme of price liberalization and stabilization forced an end to the prior economic relationships with Belarus, Moldova and other former USSR republics. This in turn forced first Moldova and then Belarus to liberalize prices and adopt stabilization programmes. The Russian Federation is now pursuing new economic relations with former USSR countries within several frameworks: a revised CIS; a customs union with Belarus (and also with Kazakstan and Kyrgystan); and a special Community of Sovereign States with Belarus, formed in May 1996. For successful reform throughout the former USSR, the most promising outcome would be for reforms in the Russian Federation to continue and to be transmitted to the other republics. Macroeconomic discipline would continue and there could be mutual agreements for state institutions to guarantee economic rights and establish market infrastructure to ease customs procedures or eliminate tariffs, establish common commercial codes, reduce transportation bottlenecks and provide market information systems.
A significant backward step would be the reintroduction of orders and bilateral clearing as an attempt to create markets for goods in various industries that have not yet fully restructured and are not yet competitive at world prices. The attractiveness of bilateral clearing with state orders to support it grows out of the collapsed demand for inferior production. It also stems from the absence of normal financing for supportable production, and restricted access to alternative Western markets. For example, Belarus exported 4 million tonnes of mineral fertilizer, worth approximately US$260 million in 1994 (only potash exports from Canada and the United States exceeded this amount), but encountered charges of dumping in western Europe. Western cooperation, tutelage and guidance leading to full World Trade Organization status are needed.
30 For the purposes of this subregional overview, the Central and Eastern European countries (CEEC) includes the following countries: Albania, Bosnia and Herzegovina, Bulgaria, the Czech Republic, Croatia, Hungary, Poland, Romania, Slovakia, Slovenia, The Former Yugoslav Republic of Macedonia and Yugoslavia.
31 CEFTA includes the Czech Republic, Hungary, Poland, Slovakia and Slovenia.
32 The CIS comprises all the countries of the former USSR, except the Baltic states, i.e. Armenia, Azerbaijan, Belarus, Georgia, Kazakstan, Kyrgyzstan, the Republic of Moldova, the Russian Federation, Tajikistan, Turkmenistan, Ukraine and Uzbekistan.
33 These are the Russian Federation, Kazakstan, Ukraine and Belarus.
34 OECD. 1996. Agricultural policies, markets and trade in the Central and Eastern European countries (CEECs), selected New Independent States (NIS) of the former Soviet Union, Mongolia and China, 1994 and 1995. Paris.
35 The reduction in trade has been associated with the general downturn of activity, although in the initial stages of transition export restrictions, the loss of confidence in the rouble and the deterioration in the rouble payment mechanism have also played a role. The latter two factors have also led to the creation of an extensive network of bilateral trade agreements regarding intergovernmental or interenterprise barter. See World Bank. 1992. Trade and payments arrangements for states of the former USSR. Studies of Economies in Transformation, Paper No. 2. Washington, DC.
36 See OECD, op. cit., footnote 34, p. 221; Agra Europe. 1996. East Europe. London.
37 FAO. 1995. Preliminary assessment of 1995 foodcrop production and 1995/96 cereal import requirements in the CIS. Rome, FAO.
38 The World Health Organization has observed that norms for livestock consumption in the former USSR and Eastern Europe were in excess of recommendations for western Europe and not justified by differences in climate. See United Nations Children's Fund (UNICEF)/UN. 1994. Crisis in mortality, health and nutrition. Economies in Transition Studies, Regional Monitoring Report No. 2. Florence, Italy.
39 According to household budget data, Russian per caput vegetable oil, fruit and vegetable consumption increased on average in 1995 over 1994, especially for higher-income people, constituting a movement towards western-type diets.
40 Estimates of USDA, Economic Research Service.
41 Belarussian calculations indicate that the farm price parity ratio fell each year to a level equal to two-thirds of the 1986 ratio, but rose in 1995 to a level equal to 78 percent of the 1986 relation. Organisation for Economic Co-operation and Development (OECD). 1995. Review of agricultural policy and trade developments in Belarus. AGR/EW/EG (95) 40. Paris.
42 World Bank. 1996. Agricultural trade and trade policy:a multi-country analysis, Moldova Technical Report; World Bank. 1995. Agricultural trade and trade policy: a multi-country analysis, Belarus Technical Report. Washington, DC.
43 See the criticism of application of the idea of price parity in Russian agricultural policy in FAO. 1993. The State of Food and Agriculture 1993. p. 193-195. Rome.
44 It is difficult for various reasons, including the practice of "privatizing by merely changing the signs", to measure and compare privatization through statistical measures. Much must be judged by attitude as, for instance, by the fact that Belarus has retained the names state and collective farm.
45 By comparison, Belarus had over 700 peasant farms and the Russian Federation had 50 000. Armenia, whose policy was to decollectivize early, created 165 000 individual farms by the end of 1991, each averaging a little over 1 ha.
46 S. Fischer, et. al. 1996. Stabilization and growth in transition economies: the early experience. Journal of Economic Perspectives, 10(2): 45-66.
47 J.C. Brada. 1996. Privatization is transition - or is it? Journal of Economic Perspectives, 10(2): 80.
48 A. Rapaczynski. 1996. The roles of the state and the market in establishing property rights. Journal of Economic Perspectives, 10(2): 102.
49 Brada, op. cit., footnote 47.