V. Central and Eastern Europe and the Commonwealth of Independent States

REGIONAL OVERVIEW

Macroeconomic trends and agricultural performance

Economies of the countries in transition of Central and Eastern Europe and the Commonwealth of Independent States⁹⁸ (CIS) marked a respectable growth for the third consecutive year in 2001.⁹⁹ Real GDP in these countries grew at a rate of 4.9 percent in 2001, although this figure was less than that of the previous year (6.3 percent).

As in the preceding two years, the strongest performance was recorded in the CIS, with an estimated growth of 6.1 percent (5.8 percent in the Russian Federation and 6.8 percent in the remaining countries of the CIS), while growth in the Central and Eastern European countries was an estimated 3.0 percent. The slightly weaker performance is largely a consequence of lower growth rates in the region's chief gas and oil producers - Azerbaijan, Kazakhstan, the Russian Federation and Turkmenistan - as well as the slowdown in economic growth in Poland, the largest economy in Central and Eastern Europe. Nevertheless, the fastest-growing economies of the region in 2001 were primarily oil and gas producers such as Azerbaijan and Turkmenistan.

Net agricultural production (crop and livestock) in the transition economies grew more than GDP in 2001, at 5.9 percent.¹⁰⁰ The poor harvest in 2000 in most of the region, particularly in Central and Eastern Europe, was a factor in this improvement. Agricultural output in the countries of the former Soviet Union marked a positive growth in 2001 for the third consecutive year, while in Eastern Europe output growth in 2001 followed three preceding years of declining production. Net agricultural production grew fastest in Turkmenistan (38 percent), Azerbaijan (25 percent), Hungary (17 percent), Romania (16 percent) and Georgia (13 percent).

Seen from a longer-term perspective, the most recent trends in the growth rates of GDP and net agricultural production are quite promising. Over the past eight years (1993-2001) the GDP and net agricultural production of transition economies have shrunk by an average of 0.4 and 1.9 percent, respectively, each year. After several years of "transitional recession", significant GDP growth resumed for most transition countries by 1999. However, agricultural production did not follow this turnaround until 2001. The substantive output growth in 2001 points to the first year of expansion for the region since the beginning of the economic reform process. Although the growth was to some extent a reflection of recovery from the poor crops of the previous year, it might be seen as a sign that the agriculture sector in the region could also be emerging from the adjustment recession.

LAND AND FARMS IN CENTRAL AND EASTERN EUROPE AND THE CIS IN THE PERIOD OF CENTRAL PLANNING

The general trends outlined above do not capture the significant institutional changes that have taken place over the past ten years in the countries of Central and Eastern Europe and the CIS; nor do they reflect the substantial country-level differences in performance. In the following paragraphs, a review is made of developments in one of the most fundamental institutional changes in agriculture in the region: land reform.

Before 1989-90, the countries of Eastern Europe and the former Soviet Union had similar organizational and institutional structures in agriculture. The "Soviet model" of state planning, supply and procurement on collective and state farms predominated in these countries. Land was owned primarily by the state, and farming was organized into two main sectors.

Predominant was the state and collective sector, characterized by large farms employing wage labour. These farms received inputs from state supply organizations and delivered output to state procurement organizations. Prices for commodities marketed by state and collective farms were state controlled, as were the prices of processed food products sold in state stores.

The second was the private sector, consisting of small (0.1-0.2 ha) plots farmed by collective and state farm employees who grew fruits, vegetables and potatoes, and raised livestock for meat and milk in their non-working hours. The private sector had very little land and produced mostly for self-consumption. Inputs were distributed by or taken from collective and state farms. Farm workers were allowed to market their surplus production in urban markets, where prices were usually higher than in state stores. However, restrictions on the size of private plot land holdings limited both the type and quantity of commodities that could be produced.

This dualistic Soviet model of agriculture was originally imposed in the 1930s in the former Soviet Union and the 1950s in Eastern Europe as a means of "squeezing agriculture" to ensure a source of food at constant prices for industrial cities. Starting in the 1960s, however, the Stalinist period policies¹⁰¹ were largely abandoned for two reasons: stagnant productivity growth in the sector,¹⁰² and the need to supply "prestigious" livestock products. The latter requirement was met by the development of an industrialized livestock sector with large state investments and increased production incentives.

While the nature of the Soviet model of agriculture was changing in the former Soviet Union and the more orthodox countries of Eastern Europe, other countries went so far as to virtually abandon the model. In postwar Poland and Yugoslavia, efforts at collectivization were relatively limited from the beginning and land was farmed predominantly by small, private farmers. Hungary and Yugoslavia rejected the Soviet model of agriculture in the 1960s: agricultural and food prices were partially liberalized; planning was abandoned and farm "cooperatives", rather than collective and state farms, were encouraged.

However, even these quite palpable and fundamental reforms did not change what can be seen as the key features of socialist agriculture after the Second World War. First, all farming - even in Poland and Yugoslavia, where private property arrangements existed - operated within an environment of controlled prices for inputs and commodities and pervasive state controls over marketing and input availability. Continued perverse incentives and state control were the chief reasons why the reformed socialist agriculture of Eastern Europe did not deliver the large increases in productivity expected. Second, even the farming cooperatives of Hungary and Yugoslavia operated in an environment of soft budgetary constraints in which bankruptcy was virtually unknown.

LAND AND FARM REFORM IN CENTRAL AND EASTERN EUROPEAN AND CIS COUNTRIES

Building a market agriculture in the post-socialist economies consists of replacing these key features of socialist agriculture with the environment and institutions of a market economy. This task involves much more than just "getting the prices right". The old bureaucratic organizations need to be replaced by new institutions that respond flexibly to market signals and are allowed to fail if they are not competitive. This involves a fundamental change in the relationship between the state and producers, in terms of the role the state can play in the economy and the tasks and responsibility of producers.

Three main aspects of land and farm reform have been particularly significant in the construction of a market agriculture. The first is the establishment of secure, clear and transferable land-tenure rights. Secure land tenure may include the right to utilize land as one sees fit without state interference, the right to reap returns on investments in land without confiscatory taxation, and the right to buy and sell land. Reliable court enforcement of contracts and land ownership registration can ensure secure tenure rights, which form a basis for transparent and efficient land and capital markets. Secure land-tenure rights are also a sign that the relationship between the state and producers has been fundamentally altered.

The second way in which land and farm reform can contribute to building a market agriculture is by ensuring an efficient ownership and management structure for farms. An efficient ownership structure minimizes transaction costs and clearly assigns ownership rights to the land, assets and income of the farm. An efficient management structure supports production at minimum cost.

All countries in Central and Eastern Europe and most CIS countries have come to recognize that the cooperative, collective and state farms of the socialist period had inefficient ownership structures and failed to encourage production at minimum cost. With the exception of a few CIS countries, this realization led to the privatization of farms. In Central and Eastern Europe, however, and in the Caucasus region and Moldova in the CIS it has also been recognized that privatization per se does not lead to the creation of farms with a clear (and therefore efficient) ownership structure. "Private" farms formed on the basis of the old state and collective farms have all too often continued to operate in similar ways to those of their predecessors. They have continued receiving state handouts, usually via agricultural bank credits (which are seldom repaid), and operating with excessive numbers of employees. In short, the privatization of farms by itself does not solve the problem of "soft budgets".

This recognition combined with a desire to return their agriculture to one of privately owned family farms encouraged most Central and Eastern European and a few CIS countries to dismantle the large, socialist-size farms by restoring land to previous owners or distributing land to farm employees. The creation of a family farm agriculture has thus been an important aim of agricultural reform in these countries.

The family farm, however, is not the only ownership-management structure found in farms in the transition economies. In both Central and Eastern European and CIS countries, farm ownership may be structured as a joint stock company, a limited liability company, a partnership or a
family-run (single-owner) farm. As noted below, many CIS countries have had limited success in making these structures work efficiently.

The third way in which land reform can contribute to the building of a market agriculture is by creating a class of mid-sized commercial farms. Such farms are large enough to participate actively in markets, while being profitable and flexible enough to survive in a competitive international market environment. They are larger than "micro" subsistence farms, but considerably smaller than socialist-era large farms.

Just as with the previous two tasks, the creation of a class of mid-sized, commercial farms is not achieved by privatization alone. Subsistence farms do not utilize markets, while large privatized farms with soft budgets tend to distort them. Proactive policies promoting land consolidation, land leasing and land markets are therefore required, as well as the dissolution of large privatized farms with soft budget constraints.

The establishment of clear and secure rights of land tenure

There was wide agreement, even in the CIS countries, that land reform should include farm privatization and an increase in the area under individual land tenure. There were several reasons for this. The lack of incentives of collective and state farms was an obvious problem. Second, in Central and Eastern Europe, decollectivization was seen as a way to reintegrate agriculture into mainstream Western market development. Third, the process of land reform in China (the best-known land reform of the socialist world at the time), which involved the expansion of private plots and long-term leases of land, spurred the growth of agricultural production and the economy as a whole. Finally, the higher productivity of private plots compared to Soviet-type collective and state farms seemed to offer convincing proof of the superiority of private farms.¹⁰³ There was a widespread preference for privatization in Central and Eastern European and CIS countries (Table 32). Only Belarus, Kazakhstan, Tajikistan and Uzbekistan do not yet permit private ownership of land.

A small private farm in Hungary
The land (approximately 5 ha) and the tractor are the farmer's property. In Central and Eastern Europe most agricultural land is today cultivated by individual farmers.

- FAO/20951/R. FAIDUTTI

The principle of privatization must be distinguished from the strategy of how it is achieved. Various strategies of privatization have been adopted.¹⁰⁴ The Central and Eastern European countries, with the exception of Albania, chose restitution to former owners or a combination of restitution and distribution. In the CIS, countries that chose a strategy at all opted for distribution among farm members.

Two mechanisms have been employed in the distribution of land among farm members. In the Central and Eastern European countries, and in the Caucasus region and Moldova in the CIS, land and property were divided into physical plots (land parcels) and distributed among members as private property. In the remaining CIS countries, land and property were divided into shares representing claims to a notional portion of the total land and assets of the farm.

The privatization of farms and farmland has thus not necessarily implied the establishment of clear and secure rights of land tenure. In many countries where farmland has been allocated via shares rather than physical plots, privatization has failed to establish such rights. In Table 32, columns 3 and 4 illustrate these differences. Ukrainian and Russian land-share owners experience difficulties in converting their paper shares into physical plots, and it is doubtful that they would be able to trade such shares.¹⁰⁵

The creation of farms with an efficient ownership and management structure

Recognizing that privatization alone does not ensure an efficient ownership and management structure, Central and Eastern European countries and several CIS countries dismantled the large farms by restoring the land to previous owners or distributing it among farm employees. In the remaining CIS countries there has been little agreement on the appropriate governance structure of farms. These countries have preserved the large farms, albeit usually with private ownership. In many cases, collective farms were privatized by insiders, with the ownership of assets falling to the management and employees. But the distribution of assets (including land) was never clearly defined. This lack of clearly defined ownership has often allowed the de facto governance structure to continue. This can be summed up as:

• persistence of large landholdings with excess labour;
• permanent job rights;
• limited interest in the profits of the farm;
• residual claim on income by the state through discretionary taxation and debt collection;
• continued poor financial performance.

The primary objection to the dissolution of large farms has been the belief that large farms are more efficient than smaller farms because they enjoy economies of scale. In reality, however, neither size nor economies of scale are the issues at stake: far more important are the efficient ownership and management of farms, which require clearly assigned ownership rights to land, assets and income.

By dividing the farm into notional ownership shares the "privatized" successors of collective farms do not clearly assign these rights. To do so in an equitable manner the buildings, machinery and land assets would need to be divided up into physical plots and pieces, as is done in the dissolution of such farms. Instead, such insider share privatization simply represents another form of collective property with all its ensuing problems.

In a number of CIS countries there have been attempts to resolve this dilemma. For example, in Kazakhstan, the Russian Federation and Ukraine large companies have been allowed to lease or buy the notional shares in the farms. This has often resulted in improved management, new investment and increased profitability. Such farms may appear to square the circle of reforming socialist-era farms. They are often larger than even the largest corporate farms in the United States and are run in a business-like manner. However, it is difficult to tell whether such farms will remain viable in the longer run.

By contrast, farm individualization into private family-run farms has generated a large portion of land in individual family farms in most Central and Eastern European countries (Table 33). By 1997, Albania, Latvia and Slovenia had farming sectors with a share of land in individual farming comparable with those in developed market economies, and the same was true of Armenia and Lithuania by 2000.

The formation of a class of mid-sized commercial farms

The experience of other developed countries seems to support a certain (rather wide) range of farm sizes appropriate for modern, competitive commercial farming. "Micro" farms below 0.5 ha produce primarily for themselves, and thus are not part of commercial agriculture. Large socialist-type farms have not been sustainable in Western countries. Between these two extremes lie what may be called "middle-class" farms, neither "micro farms" nor socialist-type behemoths.

Once again, privatization in the Central and Eastern European and CIS countries did not immediately result in the formation of a substantial middle class of competitive, commercial family farms. On the contrary, in the Central and Eastern European countries, the Caucasus region and Moldova, restitution and land distribution initially resulted in a large number of small farms, often consisting of numerous scattered land parcels. These farms are usually too small to be significant commercial production units, though they do produce for the market. In the remaining CIS countries, where socialist-size farms have been privatized, the ownership (and sometimes management) structure is collective, rather than individual and family based.

In countries where secure tenure rights have been established - including the right to buy, sell and lease freely - there is reason to believe that the still sizeable inequalities in land distribution may be temporary. As successful farmers lease or buy more land and as the assets of unsuccessful corporate farms are sold, the distribution of farms will gradually become more equal through the transfer of land and farm assets. Farm surveys support part of this evolutionary hypothesis in that they show that much of the land held in Central and Eastern Europe is currently leased, and that operational units are larger than ownership units. Agricultural policy can assist in this transition by facilitating the operation of land markets and allowing competition to alter the structure of farming, including allowing uncompetitive individual and corporate farms to fail. Public assistance for the consolidation of small plots to build a more competitive farm structure can also help.

There is greater concern regarding the distribution of land in countries where secure land-tenure rights have not been established and where farm restructuring has involved share distribution. Without secure land-tenure rights, including the right of transfer, an evolutionary consolidation of small land plots into mid-sized farms is unlikely. Indeed, without the distribution of land shares in the form of physical plots, it is unlikely that corporate farms will break up. A long-term consequence of unequal land distribution is therefore likely to be the low growth of agricultural incomes in these countries.¹⁰⁶

Conclusions

Central and Eastern European countries, the Caucasus region and Moldova seem to have made more progress towards providing a viable base for a market economy agriculture than the remaining CIS countries. The allocation strategies chosen by the latter countries have not succeeded in ensuring secure, clear and transferable land-tenure rights and an efficient farm ownership and management structure. Although all countries in the region now have augmented rights of individual tenure and more family farms, more robust reform is still required in many countries, especially CIS countries.

Women on a private farm preparing sacks of onions for sale at the general market of Budapest
The creation of a class of mid-sized commercial farms is an important way in which land reform can contribute to the building of a market agriculture.

- FAO/20956/R. FAIDUTTI

The task of building a competitive and sustainable market agriculture in the post-socialist economies consists of creating the policy environment and institutions of a market economy and fostering new commercial farms that respond flexibly to market signals and produce and market competitively. Privatization alone has not accomplished this task. Rather, experience has shown that the establishment of clear rights of land tenure, efficient ownership and management structures and the creation of a class of mid-sized commercial farms are the result of more comprehensive policies.

These include measures to transfer land and other production assets to individuals, measures to facilitate a well-functioning market for land sales and leasing, and a policy environment that allows farms to adjust in response to market conditions and does not prop up the old, uncompetitive structures.

NOTES

98 Macroeconomic estimates and projections in this section are drawn from IMF. 2001.World Economic Outlook, December. Washington, DC.

99 Preliminary figures. FAO.

100These policies were characterized by strict production planning, low wages, little investment and (in the former Soviet Union) considerable controls on movement of the rural population.

101 L. Wong and V. Ruttan. 1990. A comparative analysis of agriculture productivity trends in centrally planned economies. In K. Gray, ed. Soviet agriculture: comparative perspectives, pp. 23-47. Ames, IA, USA, Iowa State University Press.

102 Z. Lerman. 1998. Does land reform matter? Some experiences from the former Soviet Union. European Review of Agricultural Economics, 25: 307-330.

103 J. Swinnen. 1997. The choice of privatization and decollectivization policies in central and eastern European agriculture: observations and political economy hypotheses. In J. Swinnen, ed. Political economy of agrarian reform in central and eastern Europe. Aldershot, UK, Ashgate.

104Z. Lerman, K. Brooks and C. Csaki. 1994. Land reform and farm restructuring in Ukraine. World Bank Discussion Paper No. 270. Washington, DC; and M. Pugachev. 2000. Organizational forms of the new agricultural enterprises in Ukraine. Ukraine Agricultural Policy Project discussion paper. Kiev, Ukraine, Iowa State University, Institute for Policy Reform.

105 C. Csaki, Z. Lerman and S. Sotnikov. 2001. Farm debt in the CIS: a multi-country study of the major causes and proposed solutions. World Bank Discussion Paper No. 424. Washington, DC.

106 Macroeconomic estimates and projections are drawn from IMF. 2001. World Economic Outlook, December. Washington, DC.