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CHAPTER 4 BELIEFS AND VALUES REGARDING THE ROLE OF GOVERNMENT IN MARKET INTERVENTION


Western European beliefs and values regarding government intervention in agriculture and food prices1
Beliefs and values regarding government intervention in agriculture and food prices: A commentary - Case of the Czech republic
Group discussion on "Beliefs and values regarding government intervention in markets"


Western European beliefs and values regarding government intervention in agriculture and food prices1

by Michel Petit2

1Paper presented at the Seminar on Beliefs and Values Underlying Agricultural Policies, Lake Balaton, Hungary, September 18-24, 1996.

2Michel Petit is Director of the Agricultural Research Group at the World Bank, Washington, D.C. The following paper does not necessarily represent the official policies of the World Bank.

The purpose of this paper, as indicated by its title, is to review the set of beliefs, attitudes and values which have affected Government price interventions for agriculture and food in Western Europe. Such interventions constitute a major component of the Common Agricultural Policy of the European Union since price and market interventions have indeed led to the largest budget expenditures and they have caused the greatest friction with outsiders as these issues figured prominently in the recent Uruguay Round of GATT negotiations. These interventions also will probably constitute the major obstacle to overcome for the enlargement of the European Union to Central Europe. So it is important to understand the main determinants of those Government interventions.

Accepting the framework presented in the introductory chapter of this book on the role of beliefs and values in agricultural policy formation, in this chapter we first will review the developments of government interventions on agricultural markets in Western Europe and identify the beliefs and values revealed by that evolution, as well as variations in these beliefs and values. There are indeed major differences in these across countries of the European Union, and they also vary through time, but this evolution is slow and relatively steady. As a result it is predictable, and this predictability offers us an intellectual handle to discuss the future of market interventions on agricultural markets in Western Europe. This will be the topic of the second part of this chapter.

The development of government intervention on agricultural markets in Western Europe reflects strong beliefs and values

There is no space in such a paper to do justice to all the details of the process of development and evolution of government intervention on agricultural markets in Western Europe. This history spans almost a century and actually it varies greatly from country to country3. Yet a summary of this evolution will be useful here to reveal the beliefs and values underlying the development of those interventions, and to illustrate how those beliefs and values have actually affected policy development in this domain.

3For an excellent, overview presentation, see M. Tracy, Agriculture in Western Europe: Challenge and Response, 1880-1980, 2nd ed. London: Granada, 1982.

Major features of the evolution of agricultural market interventions

For this purpose it is useful to go back to the late nineteenth century when the development of transportation and the opening of new lands in North America and Oceania led to increased competition for agricultural production in Western Europe. Western European countries reacted very differently to these developments. The UK for instance was the first to liberalise, some said to sacrifice, its agriculture, with the repeal of the corn laws in the 1840s. By contrast, France and Germany decided to protect their agriculture. In the case of France this was heightened in the late 1870s, and during the 1880s. The German case was, of course, influenced by the use of the customs union, the 'Zollverein,' as an instrument to bring German political unification. Some countries chose an intermediate posture. Such are the cases of The Netherlands and Denmark, who decided to import grain freely, but to develop, on this basis, a livestock industry, which itself was somewhat protected and geared to the growing export markets in the UK. and in Germany. These differences in the history of agricultural protection in the nineteenth century have had a lasting impact. And one can say that they continue to influence the attitudes of the various members of the European Union today. Thus, in recent debates, it is often the case that the UK and Dutch government representatives advocate trade liberalisation, reduction in price support, no quantitative restriction of production, and to let market mechanisms determine the levels of production. In France and Germany the support for higher level of price support has traditionally been strong, even if that meant the imposition of administrative restrictions on the volume of production.

In spite of these differences, it is striking that all Western European countries were led after World War I to adopt new policy instruments leading to direct government intervention in domestic markets. This is to be contrasted with the period of the late nineteenth century when the main debate, besides the level of the tariffs to be imposed on imports, was revolving around how to check the local monopoly power of private merchants through the creation of farmers co-operative and mutual credit organizations. The extraordinary situation of the inter-war period, with very low prices on agricultural markets accompanying the Great Depression, explains this new found uniformity. Clearly there remained significant differences from country to country in the precise instruments being used and in the level of government intervention. Yet it is striking that all countries adopted price support measures which were found everywhere to require government purchases on domestic markets and the provision of storage facilities funded by the Government to ensure that the price support level was respected. In other words, the Government had to affect directly the domestic balance between supply and demand in order to ensure that market prices were indeed higher than, or a least equal to, the price support level decreed by Government. Note that these major policy innovations took place roughly at the same time in many countries, including outside Europe, particularly in the United States.

The destruction and disruptions caused by the Second World War of course changed the situation on domestic markets. The problem was then how to cope with scarcity, how to provide enough food to the population once outside supplies, particularly from North America, were cut off by the war. Everywhere the order of the day was to boost production in a period of rapid inflation. Therefore, price support was no longer an issue. After the Second World War, the main policy objective became economic reconstruction. This included agriculture and again the main task was to boost agricultural production. But soon, in the early 1950s, surpluses of agricultural products became more and more widespread and the main issue of the agricultural policy debate, particularly on the continent, was again how to support farm income through market interventions, without a cost to taxpayers, and sometimes to consumers, which would be unbearable. It is in this context that the common agricultural policy of the new Common Market was developed.

The Rome Treaty, establishing the European Economic Community among six original Western European countries, (i.e., Germany, The Netherlands, Belgium, Luxembourg, France and Italy) was actually the result of a protracted process of negotiations also involving several other countries. The idea of forging a larger community indeed faltered on disagreements regarding the desirable orientation of agricultural policies. The UK particularly did not want to adopt a policy of support to farm income through market interventions, because these were judged too risky in terms of potential budget costs. Note that because of its past policies, the UK had developed an agrarian structure, which was quite different from those on the continent, the liberalisation of the nineteenth century having led to a drastic reduction in the number of people working in agriculture. This permitted the emergence of large farms which turned out in the twentieth century to be more suited for mechanisation and, therefore, to be more productive, and hence required less high prices in order to provide a decent income to farmers than those on the continent.

The development of the Common Agricultural Policy among the six original members of the Community took hard negotiations, however, and was indeed difficult. It eventually emerged as composed first of a system of market interventions funded by the so-called First Section of the European Fund for Orientation and Guarantee (FEOGA, according to its French acronym) which was essentially a pursuit at the Community level of the government interventions on agricultural markets which had been initiated in all member countries prior to the Second World War, as described earlier. Later on, these interventions on agricultural product markets were complemented by what are known as structural policies, essentially interventions in input markets, particularly land and labour. These structural policies were much slower to develop and required considerable debate because those policies proved more costly to the budget, and they provoked very serious internal conflicts within Western European societies. Thus it was much more difficult to reach a consensus on those policies than it was on market intervention policies.

It is interesting to note that after the UK joined the European Economic Community, together with Ireland and Denmark in the early 1970s, the debate about me main features of the Common Agriculture Policy (CAP) was not reopened. The CAP was explicitly presented as part of what had been achieved in terms of construction of a Community by the six original members. This 'community achievement' was not to be re-opened for negotiations at the time of the entry of new members. Accordingly, the main instruments of government intervention on agricultural markets were left intact. It might be interesting to speculate what could have happened if the UK had been an original member of me Community. But this turned out to be a moot point.

The evolution of interventions under the Common Agricultural Policy has of course been important over the years. It has led to very bitter internal controversies, and many marathon sessions of the Council of Ministers in Brussels - at least once a year at the time of the so-called price review when the level of price support for the next crop year is being set. One can say, broadly speaking, that two major economic forces have determined the evolution of those market interventions, budget pressures on the one hand, and international trade liberalisation on the other. The main impact of budget pressures over 20 or 25 years has been the introduction of measures designed to reduce or limit the growth of government expenditures to finance those market interventions. This has included the establishment of coresponsibility levies, whereby producers are contributing to the funding of the cost of market interventions, and then measures designed to restrict the level of production. This was done to reduce the growth of expenditures resulting from the fact that domestic supply grew faster than domestic demand plus potential exports on the world market. Because of government interventions, prices in the Community were traditionally higher than on world market, and, therefore, an export subsidy had to be paid to make exports possible. The first major measure limiting production was the establishment of milk quotas in 1984. It was followed in 1992 by provisions for land set-asides, i.e., limits to the areas devoted to the cultivation of various crops.

The second major economic force driving changes in the CAP has been the trends towards international trade liberalisation. This trend has been, of course, the result of outside pressures, culminating in the pressures from both the United States and the so-called Cairns group during the Uruguay round of GATT negotiations to include agriculture significantly in the negotiation. The 1992 reform of the CAP, which was briefly discussed above, was really the result of those outside pressures. It had become obvious to European policy makers that they had to adjust the CAP if they were to be able to reach an agreement with their trading partners in the Uruguay Round. This illustrates that the overriding economic objective of promoting general economic growth through general trade liberalisation prevailed over the sectoral interests of agriculture, which hoped to keep its protected status but failed to do so, at least as much as they would have liked.

The results of the Uruguay Round were that the European Commission agreed to engage into commitments regarding the use of trade distorting practices, namely it agreed to some limitation on the use of export subsidies, and to the conversion to tariffs of barriers to import. These tariffs are also committed to decline progressively. The result of those pressures domestically was, as indicated above, the limitation on cultivated areas for farmers who want to benefit from government measures and the de-coupling of those government payments. By de-coupling we mean here the fact that those government payments are not linked to the volume of production but are based on past production patterns. They are supposed to be payments made to compensate farmers for the losses incurred by the reduction in the level of price support and in the volume of production.

This very brief review of the evolution of government policies illustrates the hypothesis presented above that, in the long run, the evolution of market intervention policies is driven by long-term economic forces. But the differences in positions taken by the various member countries, themselves subjected to the same long-term economic forces, illustrate that government attitudes vary from country to country, and this is where social beliefs and values play an important role. This brief review also illustrates that as policies evolve through time, the sequence of events is important in shaping that evolution. For instance, the UK rejected major government interventions on agricultural markets prior to the Rome Treaty and refused to join the Community because of this issue. When they eventually joined, they had to accept those measures. One can speculate, as indicated above, on what would have happened if the sequence of the events had been different. Nobody really knows but this very case illustrates me importance of the sequential nature of the process. This point could be demonstrated more clearly by a discussion of the process in more detail. This is beyond the scope of this paper, but it has been done by several authors in other publications (for instance, see Petit et al., 1987).

Revealed beliefs and values

What beliefs and values does the evolution of these government interventions on agricultural market reflect? The early measures designed to promote the development of marketing cooperatives in the late nineteenth and early twentieth centuries reflected the desire to check the monopoly power of local middle men and merchants. These measures were based on the beliefs that local merchants were cheating on quality of products and were exploiting their local monopoly power to charge high prices on the inputs which they sold and to pay unfairly low prices on the products which they purchased. These practices were seen as unfair, calling for remedies. This led to the adoption of various policy instruments, particularly measures promoting the development of cooperatives, but also the development of standards and grading systems as well as farmer marketing information systems. Generally speaking, one can say that those beliefs and values reflected an insufficient recognition of the fact that middle men do play a socially useful function in a market economy. But the belief that economic agents when they enjoy some degree of market power will exploit it at the expense of producers and consumers certainly remains very widespread, and probably quite valid. It leads to the conviction that such behaviour is unfair, and that government interventions to restrict this market power are legitimate. This can be done through antitrust legislation and through the provision, as a public good, of better market information. The debate on such legislation, however, has changed over the years with the growing awareness that, in many sectors, there are gains to be made from exploiting economies of scale and, therefore, that large corporations, or large production units may be socially desirable. In addition, international trade liberalisation has established competition over much larger areas, leading to fewer concerns about local monopoly power. But even though beliefs and values about market power are not as sharp as in the past, one can say that they continue to influence government intervention today.

The second set of beliefs and values revealed by the evolution of Western European government interventions on agricultural markets relates to price instability. There is a widespread belief that, unless they are somehow corrected, markets are inherently unstable. Because of the relatively low elasticities of supply and demand for agricultural products, particularly in the short run, small variations, or small shocks due to the weather or to other outside circumstances, lead to great price instability. This feature justifies government intervention because everybody suffers from instability. So a greater degree of price stability is seen as a potential public good. The difficulty faced by all Western societies with this set of beliefs and values is that it has led to unanticipated, practical consequences which have been rather negative. First of all, it has been very difficult to agree on, or even to detect, the long term trend in prices around which one should stabilise. As a result, the policy making decision process has often been hijacked by agricultural interests which, under the guise of price stability, have in fact imposed price support policies at a level of support higher than the average or long term trend.

The second problem with government interventions to ensure price stability on domestic markets has been the cost of those interventions. In most cases, stability is achieved through public storage and the cost of maintaining stocks can become very high. Economists tend to point out these costs. However, the fact that policies leading to price stability have been maintained for long periods suggests that the beliefs and values underlying the position that price instability is bad and that it is worthwhile to expand resources to reduce it have remained quite strong in Western Europe, as reflected, for instance, in the debate among many European agriculturists regarding the need for some degree of protection for agriculture in developing countries.

Third, price support measures reflect clearly the belief that low prices for farmers are unfair and that measures to increase the average level of prices are justified. This is based on the conviction that competition from abroad is unfair. It is true that because of the Uruguay round of GATT negotiations measures have been taken that lead to a reduction in the level of price support in the European Union. But, it is probably fair to say that those reforms have been imposed by the international community. Yielding to these outside pressures has been seen widely in Europe as a price to pay for benefiting from global trade liberalisation, the benefits being understood as global but less clear-cut in the case of agriculture. Note that the idea that prices may be too low is related to the dynamics of change of agriculture in Western Europe. Agriculture is seen as having undergone profound transformation, farmers having been active participants in that process. Farmers are seen as working hard, subjected to enormous pressures, and having made valiant efforts to adjust. And, this warrants the support of the public at large, since clearly these farmers' efforts have had a positive impact on society at large. They led to increased food security. In some countries, such as France, The Netherlands and Germany, the growth of agriculture has provided a significant sectoral surplus on the balance of trade. Finally it has helped ensure a generally high quality of food products. Admittedly, prices may be higher than they could be; yet they are seen as reasonable, and in any case they have declined in real terms over time.

But beliefs and values change through time: consequences for the future of market interventions

However slowly, beliefs and values change through time and space. These changes and their limitations can be seen first by considering the attitudes towards competition from abroad. As already indicated, there has been for a long time a significant difference of attitudes between continental countries and the UK, the latter having decided in the mid-nineteenth century, with me repeal of the corn laws, to submit its agriculture to the rigor of competition from abroad. At the same time, by contrast, several continental countries chose to protect their agriculture, particularly Germany, Austria, Switzerland and France.

The attitudes on the continent, however, have varied from country to country, and they certainly vary through time. This led in recent years to the widespread conviction that a 'fortress Europe' strategy would be impossible. This view that Europe needed to be part of the general world movement towards trade liberalisation had significant support outside of agriculture, everywhere in Western Europe. Regarding agriculture, trade conflicts with the United States, which have occurred in recent years and occupy the front pages of newspapers for a few days, often appear as ridiculous to the public at large. This was already true in the 1960s at the time of the so-called chicken war. The popular expression 'chicken war' itself is revealing of the derogatory tone of the comments from those who were not involved. The soybean embargo in the 1970s and later the disputes on corn-gluten feed or the boycott of French and Italian wines on US markets were always seen as unnecessary skirmishes reflecting the ineptitude of governments unable to reach negotiated settlements. The political nature of the conflicts among countries, the seemingly small stakes involved compared to the high stakes of a common defence or common security arrangements, or even of the need to unite against terrorism, more recently, probably contributed to convincing public opinion that some kind of compromise on those issues would be more desirable, leading to the acceptance of the restrictions on domestic sovereignty regarding international trade of agricultural products which were made in the Uruguay round of the GATT. This has helped to convince Europeans at large that other instruments for supporting agriculture may be justified and called for.

It is interesting to note, however, that this change of values is brought about by a competing value regarding the appropriate place of Europe in the world, and particularly in international trade. The basic premise of government market intervention, namely that government measures to support the price level are legitimate, has not been challenged. This has been confirmed repeatedly by public opinion polls indicating that on the continent, at least, the main features of me Common Agriculture Policy were not questioned seriously.

A second aspect of changes in beliefs and values has to do with price instability and the use of better protection instruments. It is probably true that the underlying beliefs and values have been eroded, not so much because of the cost of storage, but because in the name of fighting instability, governments have found themselves in a position to change the balance between supply and demand, leading to surpluses which are difficult to export. Those surpluses have generally been seen as evidence of malfunctioning markets and market interventions. However, the very fact that exports are currently taxed because me world market price for some products has been above the decreed domestic price level, confirms that the attachment to price stability remains strong. If that were not the case, everybody would agree that Europe would be better off taking advantage of high prices on world markets by exporting.

Third, beliefs and values on die role of middle men and on their ability to exploit local monopoly powers certainly have changed since the last century when the first measures to limit their power of exploitation were introduced: Better communications, and better infrastructure have tended to eliminate the problem. There is a concern today that outlying rural areas are not properly served, and that there are not enough middle men. Thus, it is not the exploitation of middle men which is feared now. The objective situation has indeed changed. Markets are now extremely diversified - many farmers have formed co-operatives of various sorts; there is competition among those co-operatives and with private merchants. When several farmers are dissatisfied with the existing marketing channels, they tend to form new groups. In particular numerous initiatives have been taken recently to market specific, high quality products from small geographic areas of origin which are assumed to have more character, and, thus, to be of higher quality. As a result the issue of exploitation of market power does not attract the attention which it did in the past.

By contrast, the emergence of a new set of beliefs and values regarding the environment, the use of land, the spatial distribution of activities, as they affect rural landscapes and more generally the role of agriculture in the management of natural resources, is striking. One probably can argue that in fact a new social contract may be in the process of emerging on this score. Public opinion at large seems to be willing to pay for environmental amenities, e.g., some conservation of the landscapes in specific areas. This explains why, in some instances, local communities pay farmers to cut grass in mountain areas to prevent the risk of avalanches. In some regions, or some member states of the European Union, authorities intervene and provide farmers with subsidies to compensate them for restrictions on their practices in order to reduce pollution, for instance, or to enhance some environmental purpose. Other measures have been taken also in the name of protecting the environment at the national, and at the Union level. The expression of a 'new social contract' used above reflects the fact that those public moneys are not devoted just to support agriculture. They are provided in exchange for specific services or in compensation for specific restrictions on the use of land placed on farmers. In this respect, the emergence of these values seems to be widespread in Western Europe. It is clearly more intense in some places than in others. The Swiss example (although Switzerland is not a member of the European Union) comes to mind. There, the restrictions in some cantons, brought about by public referenda, are very severe. But that same movement takes other shapes in other countries. In France for instance, the identification of local culture, the production of local products with a clear geographic origin is certainly an evidence of this new set of beliefs and values. It is quite clear that concerns associated with those issues are going to carry more and more weight in the policy debate regarding agriculture, including market interventions. Of course, me latter tend to be more general than the measures regarding the environment and the management of natural sources, which are inspired by this new set of beliefs and values. But the debate on the environmental costs of agricultural intensification, which is now very lively, will undoubtedly influence the future of market interventions.

In addition, the emergence of a new social contract leads to questions regarding the overall allocation of public moneys to agriculture. (See for instance a recent issue of the review Economic Rurale, entirely devoted to 'direct payments to farmers' (Economic Rurale, 233, May-June 1996). In this context, one can predict that the large compensatory payments, which were part of the 1992 reform, to offset the impact on farmers income of reduced levels of price support, are probably not socially and politically sustainable for many years at their current level.

In conclusion

It is clear that beliefs and values have played an important role in the evolution of government intervention on agricultural markets in Western Europe. The exact mechanism whereby this role is being played can only be hypothesised, and an approach has been suggested above; but there is no doubt about the importance of this role. What is clear also is that those beliefs and values change through time in ways that are not fully understood, but which have to do with long-term changes in public opinion and perceptions. These are obviously related to better education and to greater awareness of the bad, unintended consequences of some policies.

The pollution of water tables resulting from intensification of agriculture, particularly from large concentrations of livestock, is an example of such an unintended policy consequence, which has an impact on the beliefs and values underlying the policies concerned. Predicting what changes will occur and how they will influence future policy directions will remain a challenging task because of our limited understanding of how beliefs and values affect policies, and of the mechanisms which determine how those beliefs and values evolve. But it is clear that, in the future, market intervention policies will continue to evolve because of changes in beliefs and values.

Beliefs and values regarding government intervention in agriculture and food prices: A commentary - Case of the Czech republic

by Tomas Doucha

Recently I have had the opportunity to speak with representatives of the government and the Agrarian Chamber, with top managers of big farms and family farmers, and with different professionals as well. The main topic of our discussions was government intervention: if government intervenes, what should be the level of intervention and which instruments should be used. In the Czech Republic these issues have a political urgency because of the shifts in social and economic policies since 1989. Many believe current policies have deep roots that go back to the communist period. My comments on "Beliefs and Values Regarding Government Intervention" is written from the perspective of the Czech Republic, which shares a fate of interrupted development punctuated with periods of revolutionary change with the other Central and Eastern European (CEE) countries.

The comments that follow reflect my personal opinions, enriched by the discussions referred to earlier and by intense discussion with close friends and family. These are my personal opinions and do not represent any official position or policy.

Preliminary statements

· Because of the heritage of the regimes in the Czech Republic before reforms, the role of the state in agriculture cannot be isolated now from the role of the state in the whole society and in the national economy.

· In discussing the state, for our purposes we will differentiate between the government (elected, e.g., every four years) and the state bureaucracy.

· Development without continuity punctuated with periods of revolutionary change leads to homogeneous beliefs and values in a society that are only temporary. During periods of revolutionary change ideology surmounts reality.

· When a society undergoes major reform, new social and economic interests develop, gradually causing previously homogeneous beliefs and values to diverge.

· Because many emerging market countries have underdeveloped social infrastructure, these countries tend to be more vulnerable to the activities of better organised, more informed and educated interest groups and to the loss of the social utility function.

· One of the most educated and informed interest groups is the state. The government aims to be re-elected and the bureaucracy intends to maintain or increase its power. This is particularly evident in the agriculture sector.

· In this context, the state plays an ambiguous role in the development of the country. The state is gradually reducing controls in various areas in the agricultural sector (e.g., production quotas, use of inputs) while it is struggling to increase its power and control of the market.

· Agriculture is supported both visibly and invisibly. As a rule, beliefs and values are linked only with the visible supports.

· The transformation and reconstruction in agriculture have proceeded substantially quicker than the same processes in other sectors of the national economy (capitalistic agriculture is surrounded by a post-socialist structure).

· Agricultural policy in the first stage of reform (1989-1995) reflects beliefs and values concerning the weak position of agriculture in the markets and the unfair income of farmers. By the second stage of reform (after 1995), agricultural policy reflects more beliefs and values concerning consumers and the stability of the market.

· The concept of public goods in agriculture is beginning to develop.

· The farm sector does not share a homogeneous structure (as it does in Western countries), and it is also perceived by the society in that way.

The situation before reform

Because of its history, the Czech Republic has a rich experience with the role of the state as the main factor providing or influencing the social utility function. In the previous communist regime there was a supposition that only a state led by the communist party was able to provide an optimum social utility value. The state prevailed in all spheres, including the market4. In principle, the generally perceived societal beliefs and values supported the idea of the almighty state. The state was controlled by one political force - the communist party. The selective character of party membership determined the social stratification of the society. It also contributed to the reality that beliefs and values were not held in the society homogeneously.

4However, Marxist theory understood the role of the almighty state as only a temporary phenomenon.

Any imperfections within the society or the market the public perceived as a natural part of the development of the system and were associated with the asymmetrical distribution of wealth and power that came from imperfect central, directive controls. The perception was that any problem could be centrally and directly remedied. The main approach to resolution was improving central control.

The reform forces saw the diminishing role of the state and the introduction of a free market and plural democracy as a solution to flaws in the system. One example often referred to is the situation in the 1960s with its peak in The Prague Spring of 1968. However, when we evaluate our reform experiments, it is necessary to consider that the main pillar in beliefs and values during the communist regime was a conscious feeling (sometimes more a powerless feeling) that it was not possible to change the regime nor to substitute it with a Western democracy. The mostly passive resistance or schweik5 behaviour of common people corresponded to this feeling. Some people did not accept this passivity and actively resisted. They were often physically 'liquidated' in the 1950s, persecuted in work in the 1970s, or found themselves outside the society - they became dissidents.

5 Jaroslav Hasek, a famous Czech writer, wrote the book The Good Soldier Schweik just after World War I. Schweik has become a synonym for the behaviour, often seen as typical of the Czech population, of appearing to go along with authorities that are foreign or hostile to common people (e.g., Austrian, German, Russian and communist authorities in the last two centuries), in a reasonable way. The behaviour combines a pretended obedience and naivete with the very healthy common sense of the Czech people. It means a mixture of a passive and an active resistance to hostile authorities.

The more technocratic forces of the society wanted to amend the system by a more perfect monitoring of the economy and by applying mathematical instruments to model a societal and market 'equilibrium.' The rapid development of information systems and computers contributed to this orientation. In this connection there were never-ending struggles to build and introduce hierarchical management information systems (in the CEE countries: Automatic Control Systems).

During the period preceding reform, the state decided which sectors of society and the economy would receive preference. Agriculture (fully in the hands of co-operatives and state farms) became a 'permanently preferred' sector; meanwhile, the state also 'permanently' supported consumers by relatively low food prices. These and similar policy decisions depended upon a huge redistribution process in which economic criteria had no priority. In addition to the permanent deterioration of the national economy (particularly compared to the growth of national economies in the Western countries) these redistribution programmes had a special effect - the state developed sophisticated know-how which it used to train its bureaucrats. This experienced bureaucracy, as we shall see later, has played an important role even after 1989.

The velvet revolution and the first stage of reform

In 1989, there were new opportunities available of which people could only dream before. The population seemed to develop a common set of beliefs and values very quickly:

· Get rid of the old system, old structures and old international commitments, as quickly as possible.

· Live in a democratic, pluralistic society in order to have real freedom.

· Increase substantially the standard of living, with the understanding that there might be a temporary period of 'belt tightening'.

· Become an integral part of a developed, democratic Europe -become a member of the EU.

Since the beginning of reform, a consensus prevailed about how a commonly shared set of beliefs and values could be attained. Practically, this meant removing state control of the society ('the king is dead'), privatising the national economy, and moving to a more market-oriented economy. The consequences of these steps, including the rise of previously unknown social or class distinctions, people perceived as positive.

The goals of the first stage of reform (1989-1995) were:

· Complete formal privatisation.
· Develop a new structure of firms and entrepreneurs.
· Introduce a new social structure characterised by a new distribution of income and wealth.

These objectives were completed successfully in a very short time with great acclaim. However, the rapidity with which these goals were met was, to some extent, offset by what was perceived as unfair results. An absence of laws on conflicts of interest, on regulation of the 'shadow economy,' combined with gaps in financial market regulation contributed to the 'unfair results.'6

6 Perhaps this absence existed because laws and regulations would have formed an obstacle to rapid progress.

It is symptomatic of the overall situation that these problems occurred (despite the repeated warnings of then-President Vaclav Havel, among others, of the need to apply moral principles in the reform process) at this stage of the reform. People perceived these inequalities as an inevitable tax paid for the rapid progress made during reform. The unfair results were also in accord with the beliefs and values prevailing at the beginning of the reform.

While privatisation and the market (price) liberalisation occurred relatively quickly, the reduction of state intervention in the society and the national economy have gone forward with delay and hesitation. The government set itself a goal of transforming the national economy while maintaining social peace. Society was persuaded that it was entering an unconstrained free market paradise, but in reality, the maintenance of the social peace was conditioned on the less visible, but still strong, influence of the state on the national economy. The state maintained a significant share in the most important sectors and firms (banks, certain industries, e.g., elevators, etc.). Many sectors of the economy (which affected a large part of household expenditures) remained strictly regulated, including non-tradable goods (housing/rent, energy, heating, water).

The prevailing ideology of an almighty free market led to a paradoxical situation. While the production capacities and the market of 'traditional' private goods (including food) were mainly left under strong state control, the privatisation process and the free market was encouraged in the sectors in which there was a public interest or in which natural monopolies existed - health care, education, culture, transportation and energy.

The state still prevails in many spheres, and as in the past, in a central - and sometimes ad hoc - manner with one improvisation. One could say that the state has brought to perfection the old, centrally-based system, having used it up to the maximum.7

7 For example: (a) the administrative split of the country into the Czech and Slovak Republics in 1993, which the majority of the people evaluated as negative, and (b) the hesitation of the state to implement a new national governmental structure - one with regions of the country linked by a decentralised national or state power.

From another point of view, we can call the result of the first stage of the reform 'nomenclature capitalism.' The interests of the state bureaucracy and parts of the private sector are linked. This feature is more obvious at the beginning of the second stage of the reform, characterised by the very discernible property concentration and the concentration of economic power with all real and potential consequences that could result from this arrangement. It may be only a matter of time until the 'real' economic power decides to break its links with the state and maximise profits at any public cost, regardless of the desire of the government to maintain the social peace. At the beginning of the reform, the populace shared basic beliefs and values; it is becoming less clear where there is consensus. A desire for more social justice has started to prevail. The results of the last elections in 1996 undoubtedly reflected these changes and shifts in the perceptions, beliefs and values of the people.

During the first stage of the reform the government continued to support agriculture -albeit at a lower level than before 1989. The government tried fast to support a policy that maintained that agriculture is a sector like every other sector. It needed no specific measures to protect it. Nevertheless, in subsequent years support for agriculture was rationalised by the major decline in demand for agricultural products and food after the abolition of the direct food price subsidies and after price liberalisation, which resulted in the opening of the price scissors for agriculture. Another argument for agricultural support was connected with the deterioration of the market position of farmers during a period of extremely high agricultural surpluses. At that time only the first steps toward privatisation and the dismantling of the state monopoly in the up-stream and down-stream sectors had occurred.

All public opinion surveys demonstrate the continued willingness of the citizens to support agriculture. However, the public perceives only the visible part of supports from taxpayers, not the invisible support from customers, that are much higher as a rule.

The visible supports were dramatically reduced, especially after 1992. This approach of the government has been criticised by farmers, of course. The criticism concerned not only the level of supports, but also their instability. The Czech farmers argued by comparing their position with that of farmers in developed countries with generous agricultural policies, particularly those in the EU.

The invisible part of the supports from consumers is disclosed by the Producer Subsidy Equivalent (PSE) calculated according to the OECD methodology. Using this indicator the invisible supports accounted for up to 75 percent of all supports in 1994, representing in nominal terms the amount of about 15-16 bio CZK per year, or about 1500-1600 CZK per capita per year. How the citizens would react if they had this information at their disposal is questionable.

Czech agriculture is not a homogeneous sector as it is in the Western countries, and it is not perceived as such by the society. In the fast stage of the reform, there was a question of splitting agriculture into two parts: non-privatised and non-transformed farms, and newly established and already transformed farms.

The legal transformation concerned only the co-op farms. The discussions on the transformation and restitution laws became an arena for conflicts between quite different opinions on the substance (position) of co-ops and, from this, on the substance of farming itself. These opinions ranged from the conception of co-ops as fully private entities to the identification of co-ops as full state entities. A compromise was accepted by the parliament, one that is more disadvantageous for co-ops and one that reflects the desire for a political, rather than an economic decision on the future of co-ops. The discussions on the law took place in the fast years of the reform when a nostalgic view of farm structure (original peasantry with very small farms) prevailed.

A very important political consequence of the transformation of co-ops is the fact that millions of citizens became co-owners or rather creditors of newly-established (transformed) co-ops. This newly-created legal linkage of a large number of the population with agriculture is a factor to be considered when we evaluate beliefs and values of the government, political parties and citizens towards agriculture today and in the near future.

Nevertheless, a belief in the vitality of collective farming has started to prevail in the society citing the advantages of large-scale production and the social aspects of the co-op movement. Of course, both aspects can be met by substituting other types of fanning as the critics of co-ops have stated, pointing to past behaviour of members and the continuing lower labour productivity in co-ops. The second group of farms form large-scale private farms, coming largely from the privatisation of the previous state farms. These farmers are really industrial entrepreneurs, as a rule, using hired labour and strictly using the profit criteria. The third big group of farms form smaller and small enterprises established, as a rule, on the basis of restitution and family farming.

At the beginning of the reform, the state supported establishing and stabilising family farms (which corresponds with the nostalgic phase of the reform). After completing the transformation of co-ops, support was available (without discrimination) to all legal forms of farming.8

8 Co-ops that had been transformed could qualify for support only if they had met their restitution obligations.

For the further development of Czech agriculture it is very important that each of the present groups of farms and farmers - transformants, privatisants, restituents - takes over into the future the high and specific debts and obligations (towards the state, citizens, other farms, banks). A strict economic assessment of this situation could suggest Czech agriculture as a sector potentially going into bankruptcy. The government is now considering the problem of what to do with this indebtedness, whether any help would be offered, in which way and to whom. The first suggestions of the government are neutral at least, considering help (e.g., writing off all or part of debts) to be acceptable to all groups of farms.

Start the second stage of the reform

There were some significant shifts at the beginning of the second stage of the reform after 1995 and after the elections in 1996. Property concentration has started in the upstream and down-stream sectors (linked with the 'second wave of privatisation'). This concentration also enabled by the state, which has started to get rid of (sell) its shares in these sectors. Now there is a certain equilibrium between supply and demand on the agricultural market, and food prices - following the changes on the world market as well -show a tendency to increase more quickly than the prices of other goods and services, pushing the rate of inflation up. Under these conditions the government is looking for measures to lower inflation and protect consumers, to the detriment of farmers.

So on the one hand, the government is abandoning more direct control of key enterprises, and on the other hand, it is intent upon seizing responsibility for certain markets (e.g., cereals market), using the instruments of a state semi-monopoly. The idea is particularly supported by the state bureaucracy ('the king is dead, long live the king!'). Farmers very carefully consider priorities: if they prefer a more liberal market forming new opportunities and (obviously short-term) higher profits, or if they should prefer a stable market, with a state guarantee of a satisfactory level of prices. It seems that farmers want to be back in a regime with fixed state offers for their production and with guaranteed prices. The Common Agricultural Policy of the EU is a big incentive for this position.

Some governmental officials believe that the market infrastructure (food chains) is imperfect, that it does not generate trustworthy information, and that the food chains are managed (controlled) by 'bad people' against the interests of both farmers and consumers. The magic circle is almost closed: the state will intervene substantially in the agricultural market because of the imperfections of food chains, and it is going to apply measures preventing the needed healthy development of food chains. However, not all governmental officials and members of the Parliament agree.

The Czech food chain will have to go through a further restructuring. The arguments of the government on the protection of farmers against the up-stream and down-stream sectors are to some extent already out of date. The processors have one big weakness - over-capacities. With these over-capacities and with the decline of agricultural production, the market power on some segments of the market is on the side of farmers at present (probably only temporarily). Farmers have managed to organise quickly to force their interests against processors. An example is the establishment of co-ops for purchase and distribution of milk from producers and dairies. It is symptomatic that these co-ops became an object of interest of the anti-monopoly authority and that several co-ops were even penalised (but not liquidated). On similar principles and for similar purposes, farmers concentrate then-property shares to acquire joint stock companies in the down-stream sector.

The decision regarding which agricultural policy will be finally accepted for the second stage of reform is a task for the coming months. I hope that new policy will aim at maximising the social utility function more than at satisfying interests of any lobby, not excluding - as I tried to explain before - the state.

Without doubt farmers will try to transform the policy into an 'Agricultural Law.' However, our society is missing a long term vision, not only for agriculture. I think that one of our main duties is to start thinking, formulating and evaluating the possible options and visions, to prepare our society for more fundamental decisions about agriculture, respecting its new roles.

Group discussion on "Beliefs and values regarding government intervention in markets"

There was a discussion of the values that appear to be driving agricultural polices in the Central European countries. One value is that private fanning structure is preferable and that agriculture should not be considered as being different from other industries. However, there is a conflicting view in some quarters that the large scale farms under the old system had advantages, including a better social support system. Thus, despite an initial push in most countries to go back to small farms and peasant agriculture, in most countries the system has evolved with a mixture of types of farms.

Most producers in Central Europe are demanding greater price stability as they have been faced with declining demand for food as food subsidies were removed and they have been squeezed between rising input costs and stable or lower farm prices. However, whereas in the EU price stabilisation programmes have been turned into income transfer programmes, in Central Europe there simply are not enough resources to undertake significant income transfers. Therefore, whatever income transfers occur come from border protection and not in the form of direct transfers from government.

In most countries there is suspicion of middlemen and processors. Farmers feel that they have no market power, and agricultural bureaucrats stand ready to engage in market control and intervention in the name of equity.

It was pointed out that there appears to be greater uniformity in the beliefs and values regarding government intervention in Western Europe than in Central Europe. It was agreed that this greater uniformity leads to more coherent policies and wide support for agricultural policies.

The history of government intervention in markets in Western Europe seems to be efforts by the government to adjust markets and market forces to the farm structures. In the United States and to a large extent in Central Europe, much of the policy is aimed at helping farms and other parts of the sector adjust to the market. One exception to this trend is some of the activities described in the Czech Republic which are attempting to adjust markets to fit structures that are in transition.

It was pointed out mat new values were coming into force in the EU which are bringing new sets of government intervention. These are values relating to conservation and environment where policies pay farmers to change production practices, maintain green space, and protect me rural environment. This is a case where government policies are being used to adjust agriculture to the perceived market for public goods (environmental services) rather than to adjust markets to reflect the values of farm producers. This appears to represent a new social contract relating to agriculture. As yet the demand for these public goods has not appeared in Central Europe and, thus, they have not yet moved in this policy direction.


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