II. Developed country regions

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Central and Eastern Europe and the new independent states of the former USSR
A profile of Kazakhstan's agricultural reforms

Central and Eastern Europe and the new independent states of the former USSR


Recent trends in economic and agricultural sector performance

In 1994, the countries of Central and Eastern Europe progressed further towards market-oriented economies. A general trend of economic stabilization and improvement has been observed. Average GDP grew by almost 4 percent and inflation rates decelerated considerably in 1994, although the level of unemployment remained high in most countries.

The performance of the agrofood sector also showed signs of recovery in most Central and Eastern European countries. Had it not been for the drought in Poland, aggregate agricultural output for the whole region would have grown for the first time in the transition period. Provisional figures for 1994 suggest an aggregate increase in total grain production in the region for the second consecutive year, with an increase of an estimated 8-9 percent following that of 6-7 percent in 1993. Cereal production was higher than in 1993 in most countries of the region, the exceptions among the major producers being Poland and the Baltic republics, all of which suffered from drought. Output in the livestock sector continued to decline in most Central and Eastern European countries, largely as a result of continuing adjustment to decreased demand. Supplies became tight in some countries leading to further increases of consumer prices, e.g. for milk in Poland and pork in the Czech Republic. In general terms it appears that the decline in livestock production may now have bottomed out, as indicated by some degree of herd buildup in, for example, Poland and Albania.

The economic situation in the 12 New Independent States of the former USSR differs markedly from that of Central and Eastern Europe. In 1994 Russian Federation GDP fell by 15 percent, and there were even larger declines in some other New Independent States. A further drop in economic activity is expected in 1995. Although most New Independent States have made progress in controlling inflation, it still remains high.

In most of the New Independent States, the performance of the agricultural sector continued to deteriorate in 1994. Gross agricultural output in the four principal food-producing New Independent States (Belarus, Kazakhstan, the Russian Federation and Ukraine) has fallen by between one-third and one-half over the last five years and there are doubts whether it will recover in 1995. Much of the difficulty in 1994 can be attributed to unfavourable weather conditions. Drought affected yields in the southern Ukraine, some major Russian grain areas and northern Kazakhstan, while Belarus reported a harvest failure. Yet some of the problems can be attributed to the cumulative effects of disruptions in input supply, marketing and agricultural credit. The livestock sector has been particularly hard-hit since 1991. Herd size and overall production have decreased significantly and continue to decline.

Domestic demand for food continued to contract in the Central and Eastern European countries as well as in the New Independent States. Particularly affected have been high income-elasticity products such as meat and dairy products, where the total fall has been around 2030 percent. However, before 1991 consumption of these products had been very high relative to per caput GDP because of huge consumer subsidies, so major shifts in consumption with the removal of these subsidies were to be expected.

Food supplies in Central and Eastern European countries and in most of the New Independent States were generally satisfactory. In rural areas of the New independent States food supplies were quite stable because of small-scale private plot and garden production. Although an inefficient distribution and marketing system led to somewhat irregular supplies of certain products in larger cities, there were no major breakdowns in supplies of basic foods, which also seem unlikely to occur in the foreseeable future.

Farm structural reform

During the prereform period, large state or collective farms worked almost all of the farmland in all of these countries, with the exception of Poland where private family farms predominated. Different strategies have been followed for putting land into private ownership and/or operation:

The use of diverse reorganization strategies has led to a variety of new farm types; in all countries new individual enterprises have been established, ranging from family farms to new cooperatives and corporate (joint stock) farms. The latter are more frequent in the New Independent States. In these farms, land and asset shares have been recommitted to the new enterprise in return for stock certificates. Their internal operations have not changed very much, so it is doubtful whether these corporate farms will be able to survive in the medium and long term.

Concern is frequently expressed about the fragmentation of large farms into many very small, presumably higher-cost and less efficient farming enterprises. A distinction should be made, however, between fragmented ownership and fragmented operation. The former does not necessarily imply the latter. With the exception of Romania and Albania, excessive fragmentation of agriculture has not occurred. Hungary and the Czech Republic are good examples of fragmented ownership not turning into fragmented operation. In these countries very few new or restored owners have become new small farmers and the land has largely been leased to transformed cooperatives.

Many of the old large-scale farms wasted resources and had very high overhead and management costs. Evidence from the Organisation for Economic Cooperation and Development (OECD) countries suggests that, after a certain farm size is achieved, there are few additional economies of size to be gained by further expansion and that optimal farm size also depends very much on the product mix. Other factors, such as quality of management, technical skills and access to credit, become more important determinants of efficiency than size. Therefore, the concept of an ''optimal" farm size has little meaning and can mislead policy-makers into attempting to achieve or retain some physical size of farm.

Land markets and financial reforms

The establishment of functioning land markets is a very sensitive and important issue. In the Central and Eastern European countries, land has not been bought and sold for more than 50 years. In many New Independent States, a land market has never really existed.

Advocates of market-oriented reform have stressed the importance of creating land markets by permitting mortgages to facilitate structural adaptation. Creating a land market that permits land to be used as collateral, however, will not by itself lead to a functioning system of agricultural finance. Education and institutional development, such as the establishment of an efficient banking sector, will also be needed to stimulate a private agricultural credit market. Financial institutions play a crucial role in the development of the agrofood sector. In order to enhance the establishment of functioning institutions, many countries provide incentives for bank recapitalization and implement prudential regulation measures and privatization. Some modest success has been achieved in the Central and Eastern European countries, whereas in the New Independent States financial sector reform has barely begun.

Privatization in the upstream and downstream sector

Progress with the restructuring of upstream and downstream agrofood industries has been very mixed, but is in many cases lagging behind the privatization of the agricultural sector. While privatization of the mostly smaller downstream enterprises, such as the retail sector, has been quite successful in many countries, large state-owned supply and processing industries, such as meat-packing, grain storage and similar facilities, are more difficult to privatize, particularly as they are often burdened with heavy debts and characterized by poor technical standards and overcapacity. In spite of this, a large number of food processing industries have now been quite successfully privatized in the more advanced Central and Eastern European countries.

The availability of foreign capital is another important determinant of the progress in privatizing up and downstream industries. Hungary, for instance, which was very open to foreign investors, has seen significant progress in the privatization of these industries. Poland, in contrast, has been slower in privatizing larger-scale businesses as a result of a more restrictive approach to foreign investors.

The persistence of inefficient monopolistic up- and downstream enterprises continues to affect the farming sector because monopolistic powers can be exercised by these companies in the absence of any competitors. In addition, the modernization of the food industries is important for trade prospects for agricultural goods, since export opportunities are better and achievable profit margins higher for processed and high-quality products than for raw materials and low-quality products.

Trade relations and policy issues

Most Central and Eastern European countries have tried to reorient their agricultural trade towards western European countries after the dissolution of the Council for Mutual Economic Assistance (CMEA) trading system. Preferential agreements have been concluded to facilitate the access to West European markets. However, exports of agricultural products from Central and Eastern European countries have still been very limited as a result of difficulties in meeting western quality standards and in competing with subsidized products. Instead, imports, especially of value-added agricultural products from West European countries, have increased. As a consequence, the aggregate agricultural trade balance of the Central and Eastern European countries has deteriorated significantly compared with prereform levels. The slight improvement of the trade balance in 1994 resulted mainly from increased exports to the New Independent States.

Association agreements, so-called Europe Agreements, have been concluded between the EC and six "associated countries" - the four Visegrad States (the Czech Republic, Hungary, Poland and Slovakia), Bulgaria and Romania. For the Baltic states and Slovenia, Europe Agreements were initialled and are expected to be formally signed in the course of 1995. The agreements will gradually lead to free trade in most goods and services. Completely free trade is, however, not envisaged for agriculture and food products, which will remain subject to certain quotas and tariffs.

Although varying by country and product, there has been an apparent underutilization of many of the agricultural tariff quotas under the Europe Agreements. Some quotas were very underused in 1992 and 1993, partly because of differing veterinary standards and product shortages resulting from unfavourable weather conditions, but also because the cumbersome administrative arrangements for some products deterred exporters from Central and Eastern Europe from taking full advantage of the concessions. Utilization was somewhat greater in 1994, and the Action Plan for Coordinated Aid to Poland and Hungary (PHARE) programme is now assisting the countries to overcome problems caused by a lack of market information and limited experience in such trading.

Some transition economies have adopted agricultural market regulation systems inspired by OECD country models such as, for example, the Common Agricultural Policy of the EC. However, as these countries face severe budget constraints as well as consumer resistance to higher prices, they have not been fully applying these new mechanisms and so far have kept the level of support to agriculture below the OECD average. The experience of OECD countries, however, has shown that once such mechanisms are in place they can easily become vehicles for delivering support that is highly economically distorting without being efficient in achieving the main policy objectives for rural areas.

There are a number of reasons why high price supports and their associated protective trade policies would be particularly inappropriate in the development of a competitive market-oriented agriculture in transition economies, whether or not those economies are prospective EU members. High price supports would impose high costs on taxpayers and on low-income consumers who, in all transition economies, spend a large part of their incomes on food. In addition, such policies would be economically distorting and would weaken competitiveness at a crucial point in the development of transition into market economies.

Belarus, Kazakhstan, the Russian Federation and Ukraine are still adjusting their trade relations to reflect their recent independence. Under the Soviet system, the flow of goods was determined administratively, not by market signals, so the collapse of the USSR severely disturbed the flow of goods among the New Independent States. Some previous production specializations, such as Belarus' focus on meat and dairy production using feedgrain produced in other parts of the former USSR, have already become difficult to sustain. Attempts to re-establish and expand trade ties based on intergovernmental agreements rather than market exchanges have repeatedly been made among the successor states of the former USSR, loosely organized as the Commonwealth of Independent States (CIS). In the absence of functioning currency markets, most trade between the New Independent States continues to take the form of large-scale barter arrangements.

At the end of November 1994, the CIS Council of Foreign Trade Ministers approved in principle the creation of a ClS-wide free-trade zone. In March 1995 the CIS agricultural ministers agreed to recreate a common agricultural market. Although these plans included the removal of barriers to intra-CIS trade, a formal customs union has been postponed. These decisions clearly reflect the tension between the desire of the other former USSR states to regain and enlarge their share of the Russian market and their desire to avoid compromising their independence and once again becoming subordinate to a Russian centre.

In the New Independent States, governments continued to provide large subsidies to the farm sector. Very few, if any, of even the least productive farms have ceased operations or stopped receiving their share of available state-distributed production resources. Since very few of the large farms in the New Independent States can compete with, often subsidized, western exports, agricultural interests, especially in the Russian Federation, have been successfully lobbying for higher protective tariffs and market regulations along western lines (export subsidies, threshold or intervention prices, etc.). Yet these countries are unlikely to be able to afford to sustain such protectionist measures, which will weaken their competitiveness.

Implications of the Uruguay Round

Hungary, Poland, the Czech Republic, Slovakia and Romania are World Trade Organization members. Other Central and Eastern European countries and New Independent States are in various stages of application for membership.

The Uruguay Round further liberalized world trade, which should lead to increased economic welfare and improve the entire region's agricultural trading position. World Trade Organization members from Central and Eastern Europe were allowed, as were developing countries, to offer tariff ceiling bindings essentially unrelated to base period conditions, rather than tariff bindings based on estimates of the tariff equivalents of trade restrictions in the base period. Many Central and Eastern European countries therefore bound tariffs at very high levels compared with previously practiced tariff levels, thus keeping open the possibility for future tariff increases. Although governments may decide not to use this margin, it is likely that producer interests will press for taking fuller advantage of the opportunity to increase protection. Governments will need to resist such pressures in order to avoid economic distortions and increased costs to consumers and taxpayers.

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