The transformation of centrally planned economies

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Although important, the economic reforms that took place in developed market economies and in developing countries were far less dramatic and profound than those that followed the collapse of the centrally planned economies and the political systems of Eastern and Central Europe and the former USSR.

Attempts at economic reform began in the 1970s and accelerated in the 1980s as economic conditions worsened. Then, in 1989, the political systems in Central and Eastern Europe and the former USSR began their sudden collapse, leading to the abandonment of the centrally planned system and a move towards a market-based economy. These interrelated political and economic events continue to have a significant effect on world agricultural markets and on world trading patterns.

A pricing system that kept consumer food prices well below world market levels and below the level that would balance supply with demand, combined with inefficient production and distribution systems, resulted in excess demand for food in many areas. Consequences of this excess demand were rationing, queuing and importing from outside the trading bloc. These imports were largely in the form of bulk commodities from Organisation for Economic Cooperation and Development (OECD) countries and had to be paid for in hard currency. (However, the former USSR also imported large quantities of sugar from Cuba on a barter arrangement for petroleum products.)

In all cases the collapse of the old economic and political system resulted in sharp initial declines in real per caput GDP (Table 18). This was accompanied by inflationary pressure as the central banks attempted to mitigate the economic decline or to prevent the collapse of state enterprises. Inflation ranged from serious to near hyperinflation, depending on the macroeconomic policies followed and the difficulties of adjusting to those policies. For the first time unemployment became a major issue in these countries, as inefficient industries disappeared or were restructured to function in a market economy while the unemployment and underemployment that had been disguised under the old system became impossible to hide. In most countries the retail prices of most products were freed, although in some cases the prices of certain basic food products, such as bread, are still subsidized or controlled.

The shift from a socialist to a capitalist economy and the consequent removal of most internal subsidies have resulted in shifts in relative prices and in food consumption patterns. The relative prices of meat, poultry and dairy products have risen and consumption of these products has declined sharply, as consumer incomes have fallen and unemployment has increased. These products are now readily available only for those who can afford them at the new unsubsidized prices.

Other factors are also likely to affect the demand for food. As public subsidies for items such as housing, transportation and other services are reduced or removed, some reallocation of personal spending is likely to occur, away from food and towards these other goods and services.

Indicators of economic and agricultural performance for selected countries in Central and Eastern Europe and the former USSR

Real GDP

  1986 1987 1988 1989 1990 1991 1992 1993 1994
  ( ........................percentage changes over preceding year.....................)
Hungary 1.5 4.1 -0.1 0.7 -3.5 -9.9 -5.1 -2.0 ...
Poland 4.2 2.0 4.1 0.2 -11.6 -7.6 2.6 3.8 ...
Romania 2.3 0.8 -0.5 -4.3 -7.4 -15.1 -13.5 ... ...
Former USSR 2.3 1.6. 4.4 2.5 -4.0 ... ... ... ...
Russia ... ... ... ... ... -13.0 -19.0 -12.0 ...

Open unemployment

  1986 1987 1988 1989 1990 1991 1992 1993 1994
  (....................percentage of economically active population......................)
Hungary ... ... ... ... 2 8 12 12 11
Poland ... ... ... ... 6 12 14 16 17
Romania ... ... ... ... 1 3 6 9 11
Russia ... ... ... ... ... ... 5 5 6

Consumer prices

  1986 1987 1988 1989 1990 1991 1992 1993 1994
  (..........................percentage changes over preceding year .......................)
Hungary 5.3 8.6 15.7 16.9 29.0 34.2 23.0 22.5 ...
Poland 17.8 25.2 60.2 251.1 585.8 70.3 43.0 35.3 ...
Romania 0.7 1.1 2.6 0.9 4.7 161.1 210.3 256.0 ...
Former USSR 2.0 1.0 1.0 1.9 4.7 ... ... ... ...
Russia ... ... ... ... ... 92.7 1353.0 915.3 ...

Agricultural production

  1986 1987 1988 1989 1990 1991 1992 1993 1994
  (.............percentage changes over preceding year.....................)
Hungary 0.8 -0.7 6.1 -2.1 -5.7 6.6 -25.7 -7.3 6.4
Poland 5.7 -5.8 2.5 3.2 3.3 -5.9 -12.5 8.1 -16.4
Romania -4.3 -9.4 5.9 -1.5 -10.3 0.8 -17.5 19.1 5.1
Area of former
6.3 -0.1 -0.1 4.6 -0.3 -13.1 -7.7 -3.4 -20.6
Per caput food production
Hungary 1.2 -0.2 6.9 -1.5 -5.4 6.8 -25.6 -6.9 7.2
Poland 5.0 -6.2 2.4 3.5 2.9 -6.1 -12.6 8.1 -16.4
Romania -4.4 -10.0 6.2 -1.3 -9.8 1.4 -17.5 19.7 5.0
Area of former USSR 6.1 -0.7 -1.1 4.5 -0.6 -14.2 -7.0 -3.8 -21.9

Dietary energy supply

  1986 1987 1988 1989 1990 1991 1992 1993 1994
  (........................................kilocalories per caput per day............................)
Hungary 3 578 3 749 3 633 3 720 3 687 3 499 3 503 ... ...
Poland 3 466 3 489 3 521 3 529 3 390 3 338 3 301 ... ...
Romania 3 218 3 195 3 211 3 234 3 317 3 105 3 051 ... ...
Former USSR 1 355 3 396 3 391 3 360 3 406 3 071 ... ... ...

Sources : (for all Tables 18) FAO; IMF World Economic Outlook, October 1994; Economic Survey of Europe, several issues.

Thus, in the short to medium term, internal economic pressures will tend to reduce the demand for foodstuffs in the former Council for Mutual Economic Assistance (CMEA) countries and thus reduce the demand for imports. The time that will be required for income growth and food demand to reach levels comparable to those that prevailed prior to the reforms is difficult to predict. It will depend on a number of factors, generally related to the capacity of the countries concerned to maintain the political and social stability necessary to pursue and intensify consistent programmes of reform. The depth of the economic recession and related problems in several of these countries suggest that full recovery will be a much longer process than initially estimated. Whatever the extent and pace of such recovery, the levels and patterns of per caput food consumption are bound to be affected significantly and are not likely to return to those of the past.

This is so not only because of falling average incomes during the phases of transition, hut also because different income distribution patterns are likely to emerge, with a wider gap between the higher and lower income groups.

While adjustments in demand have already been significant, and are likely to continue in the short to medium term, little progress has yet been achieved with regard to production and marketing systems, except for in some countries that are relatively advanced in the process of reform. Privatization has proved to he a difficult undertaking and will not solve per se many of the problems. In particular, in some cases public: monopolies have simply become private monopolies. As the process takes hold, however, shifting to private ownership of the products in the marketing system should provide incentives for reducing waste anti increasing quality. The appearance of imparted consumer goods may also provide competition to internal processing and marketing activities.

The following section reviews various attempts at quantifying the foreseeable changes in supply and demand patterns in the transition economies, and the effects these changes are likely to have on trade.

The years to come

FAO projections to the year 2010 indicate that recovery from the sharp fall in agricultural output that took place in the initial years of the reform will he slow and that aggregate production growth between 1990 and 2010 may be only half that of the previous 20 years. The sharp reduction in per caput consumption in the initial years of the reforms will probably be reversed, but future levels are unlikely to be above those of the prereform period. For example, the average annual per caput consumption (all uses) of cereals in these reforming countries is projected to be 660 kg compared with 780 kg in 1988/90 (in clean weight). This would be the result of slightly lower per caput food consumption of cereals and livestock products, little growth in livestock production, reductions in post-harvest losses, smaller quantities of cereals being used as seed and less cereal feed being used per unit of livestock output. In the case of meat, per caput consumption is expected to revert to near the prereform levels of about 70 kg, but with more poultry and less beef being consumed.

Overall, gross agricultural production growth is expected to decline, from an annual 1.2 percent during the period 1970 to 1990, to 0.4 percent yearly between 1988/90 and 2010. An even more pronounced decline is expected in domestic demand growth, from 1.4 percent to 0.2 percent during the same period.

Such differentials in domestic supply and demand expansion would result in significant shifts in the trade balances of the countries concerned.

In the case of cereals, from being large net importers in the past decades (their aggregate cereal net imports amounted to 40.3 million tonnes in 1979/81 and 36.4 million tonnes in 1988/90), these countries are expected to emerge as net exporters of 5 million tonnes in 2010.

Other estimates confirm the direction of changes in trade balances suggested in the FAO study, but some consider that the former centrally planned economies may emerge as far greater exporters by the year 2010. One noted analyst of the former USSR estimated that consumption adjustments could reduce cereal use by as much as 35 million tonnes annually and that savings in postharvest losses could amount to another 10 million tonnes annually or 5 percent of production. If feeding efficiency were to be increased by 15 percent (which represents about one-third of the gap between feeding efficiency in the former USSR and in Germany), 20 million tonnes would be saved annually. Meanwhile, improved seed and seed use could save another 10 million tonnes of cereals. Additional savings could be achieved by the use of improved pasture and hay to replace grain concentrates. While these estimated savings and improvements may not be additive they confirm that, even without the development of new varieties or animal breeds, the food deficit economies currently in transition are likely to become self-sufficient, if not net exporters, of a number of products.

Another recent study concluded that changes in the former USSR may have a significant impact on worldwide trade. Since livestock products were highly subsidized compared with grains, liberalization should raise the production of grain and reduce that of livestock (thereby reducing feedgrain demand). With demand for grain falling and producer prices and output rising, a surplus in grain seems inevitable. By the year 2000, the Russian Federation's net grain exports could amount to nearly one-fifth of those predicted for the United States.

The collapse of the CMEA

At the very time when there is a perceptible trend towards the formation of new, or the expansion of existing, regional trading blocs, one of the oldest and tightest - the CMEA has disintegrated. This bloc had been established by the former USSR to tie together the centrally planned economies of Central and Eastern Europe and of some other areas.

The foreign trade system organized by the former USSR was designed to complement the internal centrally planned and controlled economic systems of the other CMEA states. Trade was conducted by state entities and payments took place in nonconvertible roubles, with CMEA serving as a clearing-house system. CMEA was organized with some concepts of specialization in mind and with a view to maximizing self-sufficiency within the bloc. In general, the former USSR exported heavy manufactured goods, as well as oil, gas and other natural resources, to the countries of Central and Eastern Europe, which in turn exported consumer goods, including foodstuffs, to the former USSR. Exchanges took place at prices set by the state trading agencies rather than at world market prices.

The strength of this trading bloc can be seen by the fact that in 1988 all Eastern European countries except Hungary destined 70 percent or more of their total exports to other centrally planned economies, more than two-thirds going to CMEA countries. All except Hungary also received more than two-thirds of their imports from centrally planned economies, almost entirely from CMEA countries. Even Hungary sent half of its exports to CMEA countries and received 49 percent of its imports from them.

The pattern was similar for most agricultural exports and imports, which were also primarily effected among CMEA countries. Poland was an exception, because its agricultural trade, in contrast to its non-agricultural trade, was heavily oriented towards Western Europe and the United States.

Some countries, such as Hungary and Poland, had attempted to shift trade towards non-CMEA countries even before the demise of central planning. As the centrally planned economies broke down, the CMEA ceased to function and trade between the countries collapsed. What remains of it now is effected in convertible currencies and at world prices.

The effect of these changes on trade is already apparent. The members of the former bloc have changed from being major importers of cereals and oilseeds to being self-sufficient, or close to it, at lower consumption levels. Moreover, countries that were exporters of foodstuffs to the former USSR have now lost this market and are looking for other outlets.

Thus, one of the major events shaping agricultural trade over the period ahead will be the entry of over 350 million consumers and a massive amount of agricultural resources (which have, until now, largely been used inefficiently) into the market-oriented world trading system. This is occurring at a time when major institutional changes are being introduced throughout the system itself.

The problems of transition to market-oriented trading systems have been exacerbated by difficulties of market access. Despite major efforts to gain market share for their products, the transition economies have often been unable to surmount protectionist barriers, especially in the developed market economies and in particular for agricultural products. To make matters worse the transition economies have faced competition from subsidized agricultural products troth in their own domestic and in third-country markets.

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