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CENTRAL AND EASTERN EUROPE AND THE COMMONWEALTH OF INDEPENDENT STATES

CENTRAL AND EASTERN EUROPE

Decelerating economic growth and weaker agricultural performance

Following encouraging developments during the previous year, 1996 proved to be a difficult year for the transition process as a whole in Central and Eastern European countries.59 While still standing out as the fastest growing area in Europe, GDP growth decelerated from 5.6 to 4 percent in the subregion. However, this lower aggregate growth covered sharply contrasting economic trends between countries. Except for Hungary, where GDP growth fell to 1 percent in 1996 as a consequence of a tough but successful stabilization programme, the core group of countries forming the Central European Free Trade Agreement (CEFTA)60 achieved significant expansion. Poland and Slovakia stood out with the highest growth rates of 6 and 7 percent, respectively. On the other hand, several countries in southeastern Europe experienced major reversals, with Bulgaria in particular recording a dramatic 10 percent fall in GDP in 1996. In Bulgaria as well as in Albania and Romania inflation rates increased two- to tenfold. These developments seemed to confirm earlier signs of the existence of a "two speed" transformation process towards a market-based economy in the subregion, the "fast reforming" countries being those in CEFTA.

The slowdown in overall economic development of the subregion was the combined effect of several factors. An important influence was the economic slowdown in some of Central and Eastern Europe’s main trading partners in Western Europe. Furthermore, countries at a more advanced stage of transformation could no longer resort to cheap labour and strong devaluation as a means to maintain competitiveness. In addition, high inflation in several fast-reforming countries (e.g. 24 percent in Hungary and 19 percent in Poland) hindered domestic capital formation.

Increases in real wages generally outpaced those in productivity, consequently accelerating unit labour costs and fuelling inflation in most Central and Eastern European countries.

Hit by adverse weather, the subregion’s agricultural production declined by about 4.6 percent in 1996,61 returning close to the levels of 1994. Encouraging exceptions were Hungary, Slovakia and Croatia, with the latter two showing particularly high growth rates of 6 and 8 percent, respectively. The most dramatic decline in agricultural output (-30 percent) was recorded in Bulgaria, where total crop and livestock production in 1996 was down to only about half of the 1989 level. The overall weaker agricultural performance of the subregion chiefly reflected a decline of more than 12 percent in grain production. The decline was relatively moderate in Poland and Hungary but dramatic in Bulgaria, Romania and Yugoslavia (of 46, 28 and 19 percent, respectively, with yields per hectare falling by 35, 21 and 14 percent). The shortfall generally reflected poor climatic conditions and financial constraints which limited the use of inputs in the latter countries. During the past difficult years of transition, a reduced use of industrial inputs, particularly fertilizers and pesticides, has made the subregion’s grain sector much more vulnerable to weather conditions. Benefiting from the favourable crop harvest of the previous year, the output of livestock products in 1996 suffered a less dramatic decline. Thus, meat production in the subregion as a whole fell by around 2 percent in 1996, with occasional short-term increases caused by distress slaughterings in southeastern Europe.

The setback in agricultural output, particularly grain, combined with high international cereal prices, resulted in pronounced rises in producer prices all over the subregion. Grain producer prices rose by about 40 percent in the Czech Republic and Poland in 1996, while the futures price for wheat in Hungary doubled within a year. In Romania, the procurement price offered by the state for the 1996 harvest was 40 percent higher than in 1995, while still falling far behind the free market price.

Higher producer prices for grain had strong transmission effects on prices of other products such as rapeseed in Poland, milk and dairy products in Romania and livestock for slaughter in several countries. As the increase in producer prices outpaced the overall rate of inflation, domestic agricultural terms of trade tended to improve, notably in Slovakia, Hungary and the Czech Republic. In the latter, the improvement was also due to a better organization of producers in some subsectors.

Price rises at the farmgate also resulted in increasing consumer food prices in 1996, although the full effect was expected to develop only in the course of 1997. Consumer food prices increased by 19 to 20 percent in Poland and Hungary in 1996, well below the producer price increases. On the other hand, consumers in some countries of southeastern Europe were confronted with exploding food prices (57 percent in Romania and 311 percent in Bulgaria in 1996), reflecting high consumer price inflation overall as well as tight domestic supply for some basic food items.

Central and Eastern Europe’s agricultural policies were further aligned with those of the EU. Limited but still growing support to producers and agricultural markets was granted through production quotas and guaranteed floor prices (e.g. for milk in Hungary and Slovakia). While still significantly below EU levels, the producer subsidy equivalent (PSE) indicator62 tended to increase in some countries (e.g. in Hungary from 11 to more than 20 percent between 1992 and 1996). The new agricultural programme of the Czech Republic included provisions for the protection of agriculture and rural regions in a broad sense, with over half of the growing state aid to agriculture to be provided as direct payments to farms.

Facing disruptions in their agricultural production and domestic supplies, some countries of southeastern Europe introduced ad hoc or emergency policy measures in 1996 (such as sharp increases in regulated prices, export bans, recourse to food aid) which brought short-term relief. However, at the root of the acute problems of these countries were the half-hearted structural reforms of past years and the institutional vacuum left after the dismantling of the former system of economic organization in the agrifood sector. The sustainability of the new market-based agrifood system in southeastern European countries will hinge on their capacity to build institutional and policy delivery mechanisms that are both operational and supportive of structural changes.

Developments in agrifood trade

As economic transformation and trade liberalization were progressing, the overall trade balances of all Central and Eastern European countries slipped into deficit in the mid-1990s. This deficit deteriorated substantially from $20 billion to $32 billion during 1996, while the net capital inflows were reduced from $24 billion to $15.4 billion during the same year. The agrifood sector contributed significantly to the overall trade deficit. While agrifood trade showed great dynamism between 1993 and 1995, the growth of imports (+20 percent) outpaced that of exports (+17 percent). In 1995 and 1996, only Bulgaria and Hungary maintained a surplus in their trade of agricultural and food products.

The agrifood trade balances turned increasingly negative, reflecting in particular the economic slowdown in Western Europe and growing imports resulting from demand for high-quality and high-value food products on the part of a minority of affluent consumers in Central and Eastern Europe. From mid-1996, the reduced agricultural output also put a brake on exports in some countries.

Internal pressure to increase protection (to compensate for low competitiveness) and, on the other hand, external pressure to comply with international (WTO and CEFTA) commitments imposed difficult choices on policy-makers in Central and Eastern Europe. As a consequence, policies were often characterized by variability. Many countries used trade policies as short-term means for addressing domestic market problems. While import surcharges that had been introduced earlier were being reduced (e.g. in Hungary, Poland and Slovakia), several countries (sometimes the same ones) applied new import tariffs to specific products for limited periods in order to protect domestic producers. This certainly did not help stablilize business conditions or build investors’ and traders’ confidence.

As a positive development, trade liberalization among CEFTA countries helped intensify trade flows within the group, with trade in food and agricultural products expanding at a faster rate than total intra-CEFTA trade. The dynamic expansion of intra-CEFTA trade had varying effects on the agrifood trade balances of the various member countries (e.g. a positive impact in Slovakia but a negative impact in Poland in 1995). One reason for the asymmetric trade performances of the various countries was that they entered CEFTA with different initial levels of tariff protection. A recent significant step towards further intra-CEFTA trade liberalization was the decision taken in 1996 to apply a zero tariff rate to more than half of all agrifood products traded among the member countries. It was further decided to abolish all border restrictions by 1999.

Implementation of the CEFTA treaty in the future will require further efforts to reduce market protection to a minimum and eliminate the existing differences in market and trade policies. Such growing convergences in policies will no doubt add further momentum to agrifood trade within the area.

Agricultural trade relations between Central and Eastern Europe and the EU were strengthened further in 1996, with annual increases in the EU import quotas granted under preferential trade agreements, although the rate of utilization of such quotas varied, in extreme cases remaining under 50 percent. The countries in Central and Eastern Europe have experienced a gradual deterioration of their agrifood trade balance with the EU since 1993. This phenomenon resulted from the subregion’s lower competitiveness and greater demand for high-quality food products, but other factors related to the system of quotas also played a role.

The EU import quotas under the Europe Agreements were established on the basis of pre-reform trade patterns of the Central and Eastern European countries. The fact that much trade is occurring outside the quotas shows that the system no longer fully corresponds to the present, more market-oriented, export structure of the eastern partners. Furthermore, past experience has shown that EU importing agents captured the bulk of the economic benefits through the use of quotas. In other words, the Europe Agreements did not guarantee improved export prices for the supplier countries of the East. This was a consequence of the current system of administration of the preferential EU quotas. Central and Eastern Europe could derive economic gains from a modification of the system in a way that ensures a better sharing of the preference margin as well as from an expansion in the volumes of export quotas.

From policy negotiations and discussions throughout 1996, it appeared that the enlargement of the EU towards the East would not take place before the year 2003. By that time, the EU’s common agricultural policy (CAP) is likely to have undergone important changes. In this sense, the goal of adjusting to a future CAP presented itself very much as a moving target for the Central and Eastern European countries which, by 1996, had announced their wish to join the EU. Moreover, both in the EU and the WTO member countries of the subregion, the Uruguay Round Agreement on Agriculture is expected to have an important impact on future agricultural policies. On the one hand, agricultural tariff bindings for Central and Eastern Europe have in many cases been set so high that their reduction during the lifetime of the present WTO agreement would bring little real liberalization of imports. On the other hand, WTO commitments involve increasing pressure for more liberal agricultural policies in the subregion.

Market-oriented reform and food security

In the pre-reform era, countries in the subregion had generally enjoyed a more than adequate average per caput dietary energy supply (DES), except Albania, as well as a relatively diversified diet. An abundant supply of food, affordable by all, had been a major policy objective of communist governments and had been achieved through extremely low consumer prices supported by heavy subsidization.

The process of market-oriented reform and the discontinuation of consumer subsidies, together with reduced real incomes for large segments of the population, had a profound negative impact on food demand and nutrition patterns in all countries. Average per caput dietary energy and protein supplies declined in most countries. In Bulgaria, the per caput DES declined from 3 620 to 3 160 kcal/day between 1979-81 and 1990-92, and developments in more recent years may have brought a further deterioration. In Hungary, a surplus producer of food, per caput daily protein supplies were reduced from 96 to 89 g between 1979-81 and 1992-94. In the fast-reforming CEFTA countries, food supply at the national level was not seriously affected by the reform but localized food access problems emerged, causing household food insecurity among the poorer population groups. According to some estimates, 20 to 40 percent of people in those countries were affected by poverty in the early 1990s. Their nutritional and health standards deteriorated and they received minimal attention in the form of very limited social schemes. With the generally declining trend in output, agrifood trade gained importance for the food security of countries in CEFTA.

Particularly for southeastern Europe, serious problems emerged with regard to the other fundamental dimensions of food security, i.e. the availability and stability of food supplies. In order to meet domestic food requirements, Romania had to more than double food imports during the 1990s (while its exports declined sharply). Even more serious were the experiences of Bulgaria and Albania where economic disruptions, along with failures of stockholding and trade policies, brought about grave food crises in the course of the 1990s. Since financial means for importing food on a commercial basis were not always available, Bulgaria had to resort to food aid in 1991, 1993, 1994 and 1997, as did Albania in 1997. These developments suggest that failure to deepen and consolidate economic transformation can negatively affect all dimensions of food security, even in those countries of the subregion that are best endowed with natural resources for food production.

Reduced production intensity and its environmental implications

The transition process in Central and Eastern Europe occurred along with a dramatic decline in industrial input use and investments in agriculture, thereby entailing a less intense production process. This raised the interesting question of whether such developments increased prospects for a more sustainable pattern of agricultural development in the subregion.

The reduction in the intensity of production manifested itself in drastic declines (by 55 to 75 percent) in fertilizer and pesticide use between 1989/90 and 1994/95; widespread declines in crop yields, ranging from 25 to 35 percent in grains; and important reductions in livestock density and productivity. Related aspects included a widespread appearance of subsistence farming, a reduced rate of utilization of cultivable land and an increase in agriculture’s share in total employment in southeastern Europe (e.g. from 18 to 22 percent in Bulgaria and from 28 to 36 percent in Romania). In the fast-reforming countries, a declining agricultural output was accompanied by a sharp reduction in agricultural employment (e.g. by about two-thirds in Hungary and the Czech Republic from 1990 to 1996). Such declines were less accentuated in countries relying traditionally on a small-scale farm structure, i.e. in Poland and Slovenia.

Although the reduced production intensity reflected changed farm input and price structures following reductions in subsidies, it was a major factor contributing to the general fall in agricultural output, investment, real agricultural incomes and profitability in the subregion. This factor was also associated with declining national food self-sufficiency rates and the deteriorating net trade position of several countries and subsectors. A positive aspect of this process was, as mentioned above, the reduced pressure on the environment.

The experience of Western Europe provides a comparative reference for examining this issue. In 1996, intensity levels of Central and Eastern European agriculture (measured by its output patterns, yields and the use of fertilizers, pesticides and machinery) lagged far behind those in Western Europe; in fact, they had been lower even before the onset of the transition process. However, already then, they had sometimes entailed very severe environmental pollution problems. Such problems were caused by unprofessional and environmentally damaging practices (such as improper storage and application of industrial inputs, high concentrations of livestock and policies exclusively oriented towards increasing physical output) rather than by very high levels of industrial inputs. The resulting ecological damage required environmental relief measures in many areas of the subregion.

In the case of Western Europe, environmentally unsound side-effects of certain agricultural practices (impacting on water, soil, natural flora and fauna as well as on produce quality) became increasingly visible during the late 1980s and early 1990s. In response, efforts were made to integrate individual agro-environmental measures into an overall policy framework. Economic incentives and administrative measures were introduced to reduce the use of fertilizers and pesticides and improve application techniques and farming practices as a means of reducing nitrate leaching, phosphorus emissions and pesticide residues. Combined with environmental conservation programmes, such measures resulted in a gradual extensification of agricultural production in several countries. In several subsectors, however, the important reduction of fertilizer and pesticide application that took place did not result in lower yields, but rather in slower progress in land productivity. Successful results were achieved in organic farming in some EU countries (e.g. Austria, Finland and Germany), from both ecological and economic viewpoints.

What differentiates the process of extensification in Central and Eastern European countries vis-à-vis countries in Western Europe is that, in the former, it was a spontaneous process brought about by economic and financial difficulties at the farm level, while in Western Europe it was the result of deliberate policies aiming at a better balance of agricultural supply and demand as well as achieving sustainable agricultural and rural development.

Although some countries did introduce a number of laws and regulations with regard to the use of pesticides and the problem of residues in food, sustainable agriculture has yet to be placed in an integrated policy framework and treated as a major development objective in the subregion. With a few exceptions, such as those of Slovenia and the Czech Republic, the approach that puts output growth first, still prevailing in Central and Eastern Europe, does not yet adequately address sustainability concerns. However, such neglect of sustainability aspects could be expected to change slowly with the progressive alignment of policy-thinking with that of the EU.

With recovering economic development and hence the growing demand for food, production intensity can be expected to increase again in the years to come. Agriculture in the subregion could then take a more sustainable route. Some of the essential conditions for this to take place include:

RUSSIAN FEDERATION

This year’s subregional review of the Commonwealth of Independent States (CIS) focuses on the Russian Federation, which is continuing its transformation into a political democracy and market economy. Its macroeconomic performance has continued to improve, particularly in the area of monetary and price stabilization and, although official GDP fell in 1995 and 1996 by 4.2 and 6 percent, respectively, these declines compare favourably with the 8.7 and 12.6 percent decreases in 1993 and 1994. Further, the drops are probably overstated, given the likely understating in official statistics of new private economic activity. The decline in output can be viewed as part of the Russian Federation’s vast reallocation of resources and restructuring of output as consumers’ preferences replace those of state planners as the driving force of production and the country is integrated into the world economy. The country’s stricter stabilization policies in 1996 paid off well, as inflation fell to 22 percent, compared with 215 and 130 percent in the two previous years, and the exchange rate stopped plummeting. In 1996, the rouble depreciated against the United States dollar in nominal terms by only 16 percent, after a total depreciation in the two previous years of 73 percent. Yet major problems remain, the most immediate being a breakdown in tax collection and economy-wide payment arrears.

The reform-induced restructuring of Russian output has strongly affected agriculture. From 1990 to 1996, total agricultural production fell by 38 percent, with the sector’s share in GDP dropping from 22 to 12 percent (according to official figures, with shares in GDP measured in current prices). While production of both crops and livestock products has declined, the share of the latter in total agricultural output decreased over the period from 63 to about 45 percent. Whereas the contraction of Russian agriculture, particularly the livestock subsector, is considered to be a disaster within the sector, it can probably be more realistically assessed as an inevitable part of long-term market reform and the result of an irrational use of resources previously.

Institutional reform

Two main elements can be distinguished in Russian agricultural reform: institutional reform and economic restructuring. Institutional reform involves privatization, land reform and the creation of market infrastructure, such as systems of commercial law, rural banking and finance. Economic restructuring, on the other hand, involves changes in the flow and use of real resources and goods in the agricultural and food economy, as indicated by changes in the volume and mix of production, consumption and trade.

Since economic reform began in early 1992, institutional reform of Russian agriculture has been slow. The state and collective farms inherited from the Soviet period continue to dominate the sector, having changed in nature and function only cosmetically. In 1996, these farms accounted for about 63 percent of the total output of livestock products and 47 percent of that of crops (including 95 percent of grain production). In 1992-93, the central government required all state and collective farms to reorganize. Their main options were to become joint stock companies (the most common choice made), partnerships, associations or cooperatives, to break up into private farms or to retain their current status. However, the official reorganization of farms has done little to change their real organization, managerial behaviour or internal incentive structure. The decline of the planned command economy in agriculture has strengthened farm managers, who resist fundamental reform in agriculture, especially to the extent that it affects their farms.

Early in the reform period, the federal government encouraged the development of private farming. The number of private farms hit its peak in 1994 at about 280 000 (although not all were functioning) and has declined slightly since then. In 1996 the share of private farms in total agricultural land was a meagre 6 percent.

A major impediment to private farming has been the absence of a meaningful land reform that establishes secure property rights in land. Land reform to date has been based mainly on a presidential decree of October 1993 (The Regulation of Land Relations and the Development of Agrarian Reform in Russia), buttressed by another presidential decree of March 1996. According to the 1993 decree, the (former) state and collective farms take initial possession of the land they hold and then give each farm member a land share. The share entitles the holder to a plot of land within the farm. Shareholders may farm the land obtained, rent it either to another farmer or to their parent farm, or invest their share in the parent farm. The land can only be used for agricultural purposes and cannot be sold outside the parent farm.

Although the presidential decrees have established certain rights for potential landholders, effective land reform requires enabling legislation (specifically a land code) that establishes secure property rights in land, allowing landholders to inherit, buy, sell, lease or mortgage land freely. In summer 1995, a land code cleared its first hurdles for passage in the Russian legislature (Duma), but the Federation Council (the upper house) has rejected the code. The proposed code would recast land shares as shares in the enterprise and would no longer entitle holders to an automatic claim to land. Unanimous consent by all farm stockholders would be required to allow people either to sell their stock share or use it to establish an independent farm. Such a law would not only fail to create property rights in land, but could also block the distribution of land to aspiring private farmers. Thus, without a legislative code, land reform in the Russian Federation remains in limbo.

Another obstacle facing private farmers is the underdevelopment of the Russian Federation’s commercial infrastructure, support services and credit in the rural economy. Farmers need a system for quick and inexpensive dissemination of market information, a financial system that allows fast and affordable access to capital and a strong system of commercial law that upholds contract rights. A commercial credit system for agriculture is particularly necessary. However, the lack of private property in land is retarding its development, since land cannot be used as collateral for loans. Although vulnerable private farmers are the most in need, all enterprises within the agricultural and food economy would benefit from a more developed commercial market infrastructure.

Although private farming has hardly flourished during the reform period, the share of agricultural output produced on private plots has grown to about 46 percent (while still comprising only about 6 percent of total farmland). These plots produce the bulk of the country’s potatoes and vegetables and about half of its meat and milk. Most of the output is either consumed by the plot holders or sold directly to consumers in farmers’ markets.

The main reform-induced institutional change in Russian agriculture has been the erosion of the state procurement system, as a growing share of output is being sold through private channels. In 1996, state procurement of grain equalled only 12 percent of production, with the bulk of purchases being made by regional rather than federal authorities. Although commodity exchanges were the first private marketing channel for grain, private traders have since eclipsed them. Compared with the state, private traders have offered producers higher prices and prompt payment.

Economic restructuring

Although institutional reform in Russian agriculture has been slight, economic reform has triggered major economic restructuring. The policy changes that have spurred the restructuring most have been price liberalization and the reduction of subsidies to the agricultural and food economy. Although price liberalization and decreases in subsidies have been imposed on agriculture mainly as part of the government’s larger macroeconomic stabilization programme, the policy changes have substantially affected farms’ decisions concerning input use and output.

The price liberalization begun in early 1992 has freed prices for almost all agricultural inputs and output. The exceptions are: continued (although diminished) state procurement, resulting in some de facto fixing of producer prices; controlled energy prices kept below world prices (although they are rising); and regional and local governments’ continued regulation (to a certain degree) of consumer prices for foodstuffs. In 1990, Soviet subsidies to the agricultural and food economy equalled 10 percent of GDP, while in 1995 and 1996 Russian agricultural subsidies represented only about 4 percent of GDP. Furthermore, the nature of subsidies has changed: explicit budget subsidies (especially for inputs) have fallen while indirect subsidies have increased, the two main types being tax exemptions and the writing-off of debts to the state.

The main development in the economic restructuring of Russian agriculture has been the severe contraction of the livestock sector. From 1990 to 1996, inventories of cattle, hogs and poultry dropped by 32, 43 and 33 percent, respectively. Output of meat decreased over the period from 10.1 to 5.4 million tonnes, milk from 55.7 to 36 million tonnes and eggs from 47.5 to 31.5 billion pieces.

By the late 1980s, Soviet per caput consumption of most livestock products equalled that of many OECD countries. Since real per caput Soviet GDP was at most only half the OECD average, the former USSR was producing and consuming high-value livestock goods at a much greater level than one would have expected, given the country’s real wealth and income.

When economic reform liberalized prices and reduced subsidies, consumer prices jumped in response to the high costs of production, not only for foodstuffs but for all consumer goods. With prices rising more than wages, consumers’ real incomes fell. As a result, demand for foods with a high income elasticity,63 such as meat and other livestock products, dropped. Demand for food with a low income elasticity did not fall by much, and in the case of such staples as bread and potatoes it actually increased.

Price liberalization also had the negative supply side-effect of worsening producers’ terms of trade, not only for the livestock sector, but for agriculture as a whole. From 1991 to 1996, the percentage increase in agricultural input prices was four times that for output prices. The deterioration in terms of trade following price liberalization was a result of the fact that, during the Soviet period, agriculture was not only subsidized through direct subsidies but also indirectly through the price system.

Another way in which reform has hurt the livestock sector is by opening the country up to foreign competition. From 1992 to 1996, total Russian meat imports increased from 700 000 to 2.2 million tonnes. Poultry led the surge, with imports soaring over the period from 55 000 to 950 000 tonnes. The growth of meat imports is part of a more general shift in Russian agricultural and food imports towards high-value products, especially in trade with countries that were not part of the former USSR. In 1996, high-value products accounted for about 90 percent of Russian agricultural and food imports from these nations.

The main reason why meat imports have grown, despite falling consumer demand for livestock goods in general, is that the Russian Federation is a high-cost producer of meat. During the 1980s, the USSR had a greater comparative disadvantage in the production of meat than in machinery and equipment, and also a greater disadvantage in meat compared with grain.64 Since the Russian Federation is a higher-cost producer of meat than Ukraine or Belarus, if the former USSR in the aggregate had a comparative disadvantage in meat, this is particularly so for the Russian Federation.

The price of Russian meat is uncompetitive, not only because of the high costs of primary production but also because of the considerable expense of transporting output from production sites to the locations in the Federation (mainly the large cities) where domestic output competes with imports. These distribution costs are high largely because of deficiencies in the physical and institutional infrastructure for interregional movement of agricultural output. Another advantage of imported meat over domestic output is its superior quality, not necessarily in terms of the pure product but for its variety, packaging, shelf-life and ease of preparation. The growing inequality of income distribution resulting from reform has created an upper-income class of Russian consumers who particularly value higher-quality Western foods.

The crop sector has also been restructuring. Although production of vegetables has remained stable, that of potatoes has increased, while output of grain and sugarbeet has dropped substantially. Average annual grain production fell from 104 million tonnes in 1986-90 to 71 million tonnes in 1994-96, while the corresponding drop for sugar beet was from 33 million to 16 million tonnes.

The contraction of the livestock sector has strongly affected the grain economy, by reducing the demand for animal feed. Production of grain, as well as that of other crops, has also suffered the shock of worsening terms of trade following price liberalization. For some years now, Russian fertilizer producers have been exporting the bulk of their output for hard currency, and energy producers can also obtain higher prices by selling on the world market than to domestic farms. With the state no longer guaranteeing input supplies and farms facing much higher real prices for resources, crop producers have severely reduced their use of inputs – machinery, fertilizer, pesticides and fuel. Yet for most crops, yields have dropped by a much lower percentage than input use. In fact, the average annual grain yield of 1.44 tonnes per hectare during the 1990s is almost unchanged from the 1980s. This suggests that higher prices and reduced input availability have motivated farms to use their limited resources more productively.

The downsizing of the livestock sector has also substantially reduced Russian imports of grain and virtually eliminated imports of soybeans and soybean meal. In 1994/95 (July/June) and 1995/96, Russian net grain imports equalled only 0.2 and 5 million tonnes, respectively, compared with an average annual figure for 1987-92 of 22 million tonnes. Net annual imports of soybeans and soybean meal in 1995-96 averaged only 8 000 and 57 000 tonnes.

Trade policy

Since the beginning of reforms, Russian agricultural trade policy has switched from controls on exports to restrictions on imports. In 1992, the government closely controlled agricultural exports, using quotas, licences, taxes and even complete bans on exports. By 1994, almost all export controls at the national level had been lifted and import restrictions began to be imposed. There are two main reasons for the shift in trade policy. The first is that reform is forcing farms to become more self-financing and more responsible for marketing their output, i.e. to function like competitive, market-oriented producers. The new overriding concern to sell their output (and at the highest possible price) has motivated farms to lobby for the type of state support that is more common to market than planned economies – for instance measures restricting foreign competition.

The second reason is that the substantial appreciation of the rouble in real terms during the reform period has hurt the competitiveness of producers (not only in agriculture, but throughout the economy) by making imports less expensive relative to domestic output. Indeed, although the rouble has depreciated in nominal terms, the inflation rate has exceeded the rate of nominal depreciation, thereby leading to an appreciation of the currency in real terms. Thus, since the end of 1992, the rouble has appreciated in real terms vis-à-vis the United States dollar by about 600 percent.

Russian import restrictions are nevertheless moderate. Tariffs range from 2 to 10 percent for most crops and 10 to 30 percent for livestock products. There are no quotas or other quantitative restrictions on imports. However, pressure for greater protectionism from the agricultural establishment is growing. Although attempts in 1996 to create import quotas for sugar, ethyl alcohol and vodka failed, licensing has been established for imports of the latter two products.

Two factors which should check the pressure for agricultural protection are opposition from the main import-consuming areas (mainly the large cities) and the Russian Federation’s desire to join WTO (the country applied for accession to the General Agreement on Tariffs and Trade in 1993, which WTO replaced as an organization in 1995). The Agreement on Agriculture, negotiated during the recently completed Uruguay Round, forbids import quotas and any other quantitative import restrictions (although it allows tariff rate quotas). As a condition of WTO membership, the Russian Federation must also accept negotiated maximum allowable tariffs for agricultural products.

Long-term outlook and policy issues

The Russian livestock sector will probably continue to contract for another two to three years, and any subsequent growth is unlikely to be rapid. The country is also likely to remain a major importer of meat and high-value products in general for a long time to come.

Budget stringency and opposition from reform liberals should preclude any return to the generous subsidies on livestock production in previous years. A substantial strengthening of trade protection for the industry is also unlikely, for the reasons mentioned above. One development that could conceivably help the sector would be increasing consumer demand stemming from rising real incomes. Some experts consider that the country’s real GDP will probably begin to grow within one to two years, and evidence indicates that real incomes are already increasing. However, given that the Russian Federation is currently uncompetitive in livestock production vis-à-vis the world market, in terms of both costs and quality, the bulk of any rise in consumer demand would probably be met by an increase in imports rather than domestic output.

For these reasons, any major increase in livestock output and drop in imports would require a reduction in domestic production and marketing costs. Lowering production costs involves input prices and productivity. Although livestock producers’ terms of trade improved slightly in 1995, they appear to have worsened again in 1996. Since Russian energy prices are still below world levels, although they are steadily approaching them, aggregate real input prices are likely to rise rather than fall in the near to medium term. Nor are the prospects for farm productivity growth encouraging, as no major institutional reforms are foreseen that could significantly improve incentives to use inputs more efficiently. The unreformed former state and collective farms continue to dominate production, private farming is stillborn and private plots, where livestock output has been growing, cannot serve as the basis for modern competitive agriculture. In addition, commercial market infrastructure, which is necessary to lower domestic transaction costs, is likely to continue developing only slowly.

If the Russian meat industry fails to cut its costs of production and distribution, the country’s comparative disadvantage in meat will persist. The industry is also unlikely in the near future to improve the quality and appeal of output relative to imports. For these reasons, Russian annual net meat imports for the next ten years could well remain at about 2 million tonnes, with poultry perhaps accounting for about half that volume.

A bright spot, however, is that in 1996 the rouble stopped appreciating in real terms against Western currencies, thereby eliminating the exchange rate as a cause of worsening trade competitiveness. If prices and the nominal exchange rate continue to stabilize, which appears likely, the rouble will also remain generally stable in real terms.

In the early 1990s, a number of studies forecast that successful economic reform in the Russian Federation could turn the country into a non-trivial exporter of grain, with possible net exports of 10 million to 20 million tonnes.65 A major assumption behind the forecasts is that agricultural reform would improve productivity in the grain economy. After five years of reform, however, the country is still a net grain importer (5 million tonnes in 1995/96).

The studies did not anticipate the worsening of agriculture’s cost structure as input prices move towards world market levels following price and trade liberalization. Although higher input prices and a reduced use of inputs have motivated grain producers to use resources more efficiently and waste less, the deeper institutional reform that could improve productivity even more has not yet occurred. Without the cost reduction that would follow from this productivity growth, Russian grain will probably not be sufficiently competitive on world markets to result in major exports. Yet the Russian Federation is also unlikely to return to being a major grain importer. The contraction of the livestock sector has ended its large demand for imported feedgrain for the long term. Also, in contrast to meat, the country does not appear to be such a high-cost producer of grain vis-à-vis the world market; grain is a more homogeneous product, which lowers the potential quality difference between foreign and domestic output, and it is also less perishable than meat, which means the costs and risks in internal transport are relatively lower.

Thus, in the absence of major institutional reform, the Russian Federation is likely to be either a small net importer or exporter of grain, with its trade balance probably not exceeding 5 million tonnes either way.66 If it does export, the most likely products are barley and other coarse grains. The large imports of soybeans and soybean meal are also unlikely to return, although annual soybean meal imports of a couple of hundred thousand tonnes are possible.

The only feasible reform-consistent way by which agriculture can rebound and improve its competitiveness vis-à-vis the world market appears to be through institutional reform that improves productivity and lowers production and distribution costs. Regardless of how primary production is organized, the sector needs a stronger system of supportive commercial infrastructure, in particular a system of rural finance, and a land code that establishes secure property rights in land. These two supports are particularly important for the growth of private farming.

Some observers of Russian agriculture argue that institutional reform of the sector can proceed only if the government breaks up the former state and collective farms. One development, however, that would help these farms function in the new market-oriented environment would be to relieve them of the burden of providing for their workers’ social welfare needs (housing, health, education, entertainment). Although, in some areas, local governments have begun to take over these responsibilities, the process could be accelerated.

Effective agricultural policy must also be consistent with the general policy goals of economic reform. The main reform objectives are likely to remain macroeconomic stabilization, privatization and development of the institutional base of a market economy, and integration into the world economy (with admission to WTO as a top priority). The implications of these goals for the agricultural and food economy are that markets must be the fundamental determinant of prices for inputs and output, subsidies to agriculture must continue to fall, trade barriers must remain mild and privatization must be reinvigorated.

The policy goals of the conservative Russian agricultural establishment differ from those of the more reformist federal government. The main stated objective of the former is to achieve as high a level of agricultural self-sufficiency as possible. The identified means to this end, for which agricultural interest groups lobby strongly, are increased state subsidies, "price parity" (which would require the government to fix prices for inputs and output to agriculture’s advantage) and protection against imports. The conservative agricultural establishment fails to provide inspiration for, and often blocks, reform within the sector. Pushing reform forward without the support of the country’s main agricultural interests remains one of the government’s top challenges.

59 For the purposes of this subregional overview, the Central and Eastern European countries include: Albania, Bosnia and Herzegovina, Bulgaria, the Czech Republic, Croatia, Hungary, Poland, Romania, Slovakia, Slovenia, The Former Yugoslav Republic of Macedonia and the Federal Republic of Yugoslavia.

60 CEFTA includes the Czech Republic, Hungary, Poland, Slovakia and Slovenia.

61 The average excludes Albania and Bosnia and Herzegovina.

62 The PSE percentage measures total support to producers for a given product or group of products as a percentage of the overall value of production of that (those) product(s).

63 High income elasticity indicates that a change in consumers’ income will lead to a large change in their demand for a given good; low income elasticity, on the other hand, implies that consumers’ demand for a good is less sensitive to their level of income. This will typically be the case for staple foods.

64 R. Koopman. 1991. Agriculture’s role during the transition from plan to market: real prices, real incentives, and potential equilibrium. In Economic Statistics for Economies in Transition: Eastern Europe in the 1990s, p. 127-156. Washington, DC, US Bureau of Labor Statistics and Eurostat; W. Liefert, R. Koopman and E. Cook. 1993. Agricultural reform in the former USSR. Comparative Economic Studies, 35: 49-68; R. Tyers. 1994. Economic reform in Europe and the former Soviet Union: implications for international food markets. Research Report No. 99. Washington, DC, IFPRI.

65 See footnote 64, p. 212.

66 The studies previously identified (footnote 64, p. 212) predict that, in the absence of productivity gains stemming from agricultural reform, the Russian Federation would be a small net importer of grain. In addition, the studies forecast that, with less than strong reform, the country would remain a net importer of meat.

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