Table of Contents

INTRODUCTION

I. THE IMPACT OF THE TRANSFORMATION PROCESS ON THE POSITION OF THE FOOD ECONOMY

1. Background

2. Structural factors impacting on the role of the agrofood economy

3. Shifts in the position of the agrofood economy during transition as measured by several macroeconomic indicators (1990-1996)

4. Changes in the social and environmental functions of the agricultural

4.2. Bipolar farm structure

4.3. Expanding entrepreneurship

4.4. Positive social role of rural areas

4.5. Environmental exchange

II. THE POLICY RESPONSE AND THE NATURE OF TRENDS IN THE MEDIUM-TERM

1. Policy response to the new development situation: the new medium-term

National Agricultural Programme (1997)

1.1. Concept and principal objectives

1.2. General policy approach

1.3. A few specific issues

2. Long-term trends or short-term changes?

2.1. High growth potential in the rest of the economy

2.2. Productivity squeeze and employment in agriculture

2.3. Gradually weakening export trade role

2.4. Some short-term changes

III. CONCLUSIONS ON THE ROLE OF THE AGROFOOD ECONOMY AND THE AGRICULTURAL SECTOR

1. Period of economic and social transformation

Transition recession period (1990-93)

Transition recovery period (1994-96)

2. Targeted medium-term role: from transition helper into a growth sector

Agrofood economy as development priority.

Emphasis on the supply side

Uncertainty on the demand side

Limited competitiveness of agriculture

Agricultural policy mix.

Emancipation of policies for rural development vis-a-vis agricultural policies

The relative position of the agrofood economy in the medium-term.

REFERENCES

STATISTICAL ANNEX

Table 1 GDP in the Hungarian economy and Gross Value Added in the food economy

Table 2 Terms of trade for agriculture and consumer price index

Table 3 Changes in the position of the food economy within the national economy during transition

Table 4 Changes in inter-sectoral relationships of agriculture and the food industry, 1984 and 1994

Table 5 Development of the net balance of agrofood trade and of the current account during transition

Table 6 The effect of agrofood trade on the net trade balance of Hungary (Current Account Impact Coefficient)

Table 7 Subsidies and taxes as a percentage of agricultural output, I 1980-1985

Table 8 Subsidies and taxes as a percentage of agricultural output, II 1990 - 1996

Table 9 Breakdown of total returns from sales of large-scale farms

Table 10 Returns from the food processing business of large-scale farms 1985 - 1993

Table 11 Distribution of land property by size and by landowners

Table 12 Contribution of individual private farming to gross agricultural output, 1988/90 - 1994/96

Table 13 Self-sufficiency rates in major agricultural products 1990 - 1994

Table 14 Share of leased land in different farm categories in 1995

INTRODUCTION

FAO is carrying out a research project on "The role of agriculture in the transition process to the market economy" under its Sub-programme 2.2.3.2. Agriculture in Economic Development. To this aim, FAO finances three comprehensive country studies in Bulgaria, Poland and Slovakia. The present brief study is dealing with the relevant experience gained in Hungary, a transition country belonging to the core group of fast reforming Central and Eastern European Countries, which, however, is not covered by the comprehensive country research referred to.

The objective of the study has been to analyse briefly the evolution observed in the different roles of the sector under the impact of the transformation process and also to make indications to the possible medium-term development to the respect. Since agriculture exists in the vertical context of the whole agrofood economy (including also food processing), both the agrofood economy as a whole and, within it, agriculture were taken separately into consideration where available statistical data has made it possible. Moreover, owing to their relevance, also experience with some social aspects of the role of the sector were considered.

The new medium-term National Agricultural Programme of Hungary (started in early 1998) represents an important policy response to trends concerning the position of the agrofood economy and agriculture, on the one hand, and to the challenges of the future accession of the country to the European Union, on the other. In the paper, principal development trends are examined for their short- or longer-term nature and for the possible impact of the recent agricultural policy decisions on them. Some conclusions are suggested regarding the role of the sector during the periods of "transition recession" and "transition recovery" in Hungary. Aspects of the new development strategy with regard to the targeted future role of the agrofood economy are also discussed. The statistical data base for the analysis was provided by the Hungarian Central Statistical Office.

I. THE IMPACT OF THE TRANSFORMATION PROCESS ON THE POSITION OF THE FOOD ECONOMY

1. Background

When looking at the main macroeconomic processes of the national economy and major developments in the agrofood economy¹ during the late eighties and the beginning of the nineties, one of the outstanding features appears to be the continuity of the most important structural trends. This stemmed, on the one hand, from the smooth political transition and the virtual absence of a political crisis when political power was passed over to democratic forces in 1989. On the other hand, Hungary and particularly its agricultural sector entered the era of the nineties at a more advanced stage of economic reforms (implying some market orientation) than the other countries of the central and eastern European subregion.

Already prior to political transition, a two-tier banking system was set up by the end eighties. Also, the basis of a modern taxing system (operating with the VAT concept and personal income tax) was created . In several sectors of the national economy, comprehensive reform measures, in fact, an initial liberalisation process were already underway. Obviously, the early reform measures "did not arrive by themselves" or by the courtesy of "good political leaders". They were introduced under the ever growing pressure of serious macroeconomic and sectoral imbalances which had become quite apparent since the mid eighties. In spite of the long-standing and gradual reformist approach (which lacked inner coherence), the failure of the centrally planned economic model had already been proven and widely discussed in the Hungarian society during the late eighties.

Thus, during the early nineties, the continuity of structural trends actually meant a further deterioration of some negative processes both in the national and the agrofood economy marking the era of transition recession. Two of the outstanding macroeconomic features of this state of affairs were the extremely high external debt and the double digit inflation rate since 1988. In the agrofood economy, contribution to GDP measured at constant prices was steadily decreasing with a continuous decline in both sectors (agriculture and food industry) between 1988 and 1994 (Table 1 and 2). The same trend characterised both agricultural investments and productivity. Generally speaking it can be stated that the period of economic transition for the Hungarian agrofood sector had already commenced in the mid eighties which was then accelerated by the political transition begun in 1989.

During the period of "transition recession" ending in 1993, very significant structural changes developed in the Hungarian economy and in its institutional framework. Renewed growth in GDP was first recorded in 1994 (2,9 per cent). Sharp macroeconomic adjustment dampened GDP growth in 1995-96 which accelerated again to 4 per cent in 1997. Amidst the upheavals of restructuring, it took another year for the agrofood economy to turn around the negative trend and to present positive growth in the sector's contribution to GDP in 1995 and 1996 (4,6 and 1,4 per cent, respectively (Table 1). Thus, the years 1994-95 marked a new era, i.e. the beginning of transition recovery for Hungary.

For the present study, the dynamics of changes in different roles performed by the agrofood economy and agriculture itself are of major interest which might be observed between the onset of full-scale transition (1989-91) and the most recent period of the transition recovery (1995-96) for which complete statistical data is available.

2. Structural factors impacting on the role of the agrofood economy

Behind declining output and productivity figures, various factors of a deep structural crises were at work already in the pre-transition era in the Hungarian agrofood sector. At the same time, the sector faced also an institutional and ownership crises. At its roots lay the principal objectives of the earlier agricultural policy:

- highest possible self-sufficiency in food;

- minimisation of agrofood imports;

- forced generation of export revenues with products of low value added content;

- administrative price setting and exclusion of external market impulses;

- rigid maintenance of the large-scale farm structure operating on appropriated (or confiscated) land;

- neglect of the infrastructural background of agriculture;

- overall central management of the agrofood sector (even if "spiced" with small entrepreneurial freedoms).

In spite of periodic reform attempts of the eighties, such a policy concept generally prevented the application of market based economic efficiency criteria in investment and production decisions. The latter were, of course, taken on the basis of distorted cost-price and exchange rate relations. In decisions at the farm level, the value of land never entered the domain of cost analysis. Vast and subsidised investments in large-scale "industry like" production had tended to freeze structural change. As a result of the constant misallocation of resources, great structural imbalances had developed in the agrofood sector of including e.g. an overweight of the livestock sector in agriculture and a low share of value added in the output of food industry, etc.

First comprehensive reform measures of the transition era could not but add new components to the structural crises such as:

- high rate of inflation due to price and trade liberalisation measures;

- sharp and continuous deterioration of agriculture's terms of trade due to price liberalisation and ceasing of input subsidisation (Table 2);

- radical deterioration of self-financing capacity and growing indebtedness of production units also due to insolvency of state food processing enterprises;

- sharp decline in demand for Hungarian food products on the domestic and international markets;

- start of land privatisation ceasing the vertical links which had widely operated between household or part-time farms and large-scale co-operatives farms;

- insufficient management and marketing knowledge in the majority of new enterprises;

- uncertainty stemming unavoidably from the ongoing restructuring which was disturbing short- and medium-term decisions on production and investment at the farm level.

By the mid-nineties, the difficult period of transition recession ended in Hungary, no doubt however, with a considerable social price. During that first part of the transition process, several underlying key issues of the crises could be grosso modo solved. They included privatisation in agriculture and food industry; new type of vertical relationships between raw material production and processing/marketing; changing output and trade patterns in favour of processed products; more liberal agricultural and trade policies and creation of the basic institutional framework for a market oriented food economy. Eventhough "much remained to be done", the structural adjustment already led to remarkable changes or confirmations in the roles of the agrofood sector in national economic development.

3. Shifts in the position of the agrofood economy during transition as measured by several macroeconomic indicators (1990-1996)

In a country with long traditions of agricultural production, food processing and trade like Hungary, agriculture has always existed in the vertical context of the whole agrofood economy. Consequently, also the new institutional framework has been created along the vertical product chain linking primary production to processing and trade. Accordingly, where applicable, it is more meaningful to look at the weight of the whole food economy (agriculture + food processing industries) in the national economy than just at the role of the agricultural sector. (Table 3)

3.1. Gross Domestic Product

In the course of the transition process so far, the contribution from the agrofood economy to total GDP was declining from 13,0 to 9,3 per cent (1990-96). At the same time, there has been a positive structural change within the aggregate output. The share of food processing increased from one-fourth to over one-third within the GDP originating in the agrofood economy (Table 3). This meant, in other words, the output of relatively more processed (value added) products for domestic and foreign markets. Behind this structural change, agriculture's share declined from 9,9 to 5,8 per cent of total GDP (1990-96). However, due to the modernisation of the Hungarian statistical system, the methodological changes introduced in 1991 (i.e. registering non-agricultural activities of agricultural enterprises under the food industry or under other economic sectors) somewhat over-emphasised the decline in agriculture's share between 1990 and 1996. Nevertheless, this did not change the main trend for agriculture's share which declined from 8,4 to 5,8 per cent (measured in accordance with the new classification) between 1991 and 1996.

3.2. Intermediate consumption

For following up the evolution of inter-sectoral flows before and after the introduction of economic reforms, input-output tables for 1984 and 1994 (as the latest year) are available in the Hungarian official statistics (7). Input-output relationships of agriculture and the food industry were influenced by technological factors, on the one hand, and by major structural changes of the transition process, on the other. The impact of opening up the Hungarian economy can be well detected by figures relating to intermediate consumption (Table 4).

While agriculture used the same share (23 per cent) of its own output in 1984 and 1994, food industry used one-third less of domestic agricultural output (i.e. 30 per cent) at the end of the period. This appeared to be the combined effect of both the liberalisation of import trade and also an increasing role of foreign capital in the Hungarian food industry. Trade liberalisation allowed food processors to select from a much wider range of intermediate products and qualities. All domestic industries used 10 per cent less, i.e. around 60 per cent of domestic agricultural output. On the food industry side, slightly higher shares of its output were used by itself and by domestic agriculture. However, the use of intermediate products by all domestic industries was reduced from 34 to 26 per cent of the food industry's output.

Furthermore, opening up the national economy had a strong diversifying effect on the pattern of intermediate consumption by the food industry. By 1994, it acquired nearly 20 per cent less (i.e. 62 per cent) of such consumption from all domestic industries in Hungary. Agriculture, on the other hand, continued to acquire more than half of its intermediate consumption from all domestic industries in 1994.

Overall, due to economic reforms and technological development, the food industry speedily diversified its input relations towards international suppliers. This probably brought efficiency gains to the food processing sector and also reduced its dependence on domestic Hungarian agriculture. In turn, agriculture's input relationships did not change much. However, its dependence on sales in foreign markets increased significantly despite a reduced total output. As a combined effect of these trends, the aggregate share of the food economy (agriculture + food industry) in total intermediate consumption was reduced from 24 to 18 per cent between 1984 and 1994.

3.3. Investments

Demand impulses sent by the agricultural sector and rural regions to the rest of the economy were conditioned by the new (deteriorated) real income situation in the sector. Agriculture's share in total investments truly reflected the evolution of the sector's terms of trade throughout the periods of transition recession and transition recovery (Table 2). This share first decreased from 5,9 to 2,9 per cent (the lowest figure) in 1994. It improved slightly to 3,1 per cent during the first years of transition recovery (Table 3). In the end effect, lower investment activities for more than a half decade dealt a hard blow to both production capacities and to the weak infrastructural background of the sector.

For the same reason, also production input use fell sharply (e.g. fertiliser application per hectare by 56 per cent; 1990-96; (2)). On the other hand, production inputs were used in a more selective and efficient way. This allowed yields to decline much less than input use both in plant growing and livestock production. Overall, agriculture's demand for investment goods, technical inputs and services did not send stimulating impulses to the rest of the economy during the transition recession. However in 1996, the second year of renewed agricultural growth, investments in the sector increased at a much higher rate than the national average (at current prices by 56 and 29 per cent, resp.) (3). In 1997, corresponding increase was 33 per cent in agriculture in 1997, above all, due to higher government support.

Low investments and reduced input use were also related to scarce agricultural credit which, in turn, was connected with the incomplete state of agricultural restructuring in the

mid nineties: continuing lack of an operational land market (absence of collateral) and weak rural credit institutions. Owing to continuing high (two-digit) inflation, commercial banks charged high interest rates and they also required extremely high collateral. As a result, only 13 per cent of private farmers applied for credit in 1995-96 (2).

3.4. Employment and per-capita incomes

Due to restructuring of large-scale farms and deteriorating terms of trade for agricultural producers, agricultural employment went through drastic changes. Its share in total employment declined from 18 to 8 per cent (1990-96) (Table 3). As a structural effect, however, such a change implied a considerable improvement of agricultural labour productivity at sectoral level since employment decreased much stronger than agricultural output ( -65 and -25 per cent, resp.). Nevertheless, the real productivity effect might have been less than suggested by the important difference between the two figures. Namely, the new system of agricultural labour statistics covers only labour in farming units employing more than 10 persons. Thus a great number of new small-scale and mini farms are not considered by the official labour statistics.

By 1996, the main part of agricultural employed (54 per cent) worked in private farms, about one-third in co-operative units and the rest in the remaining state farms. The rate of unemployment in rural areas was somewhat higher than the national average (5,7 and 4,7 per cent, resp.) (2). However, unemployment was lower among rural women than urban women.

Decreasing demand for consumer goods in rural regions was conditioned by the employment situation and the general decline in real per-capita incomes (-14 per cent for all strata; 1993-96). The gap between registered income in agriculture and in the rest of the economy also seemed to deepen from -16,3 to -25,1 per cent (1990-96). Nevertheless, it appears to be a safe estimate that an important part of this difference may have been compensated by unregistered or informal incomes of the rural population (particularly due to a great number of new small-scale units not registered or not covered by official statistics). In fact, per-capita food consumption was by a surprising 38 to 40 per cent higher in rural regions than in urban areas in 1996 due to the widespread subsistence production of food.(2).

3.5. Food consumption and self-sufficiency rates

In international comparison, the rather moderate impact of the transition process on Hungarian consumption patterns was well demonstrated by the fact that the share of food in total household expenditure continued to follow its declining trend throughout the transition process (from 37,0 to 28,4 per cent; 1990-95). This occurred despite the considerable fall in real disposable incomes. In other words, average per-capita food consumption was equally sharply reduced from an absolute high level to a moderate one.

During this process, particularly the per-capita consumption of animal proteins as well as alcoholic beverages and tobacco was affected. At the same time, vegetables and value added import food items have acquired an increasing share of the Hungarian domestic market. When analysing consumption statistics, it should also be noted that average consumption figures at the end of the transition recession hid much wider differences between social strata than in the pre-transition era. This reflected a wider differentiation of personal incomes during the transition period.

One important consequence of the decline of domestic food consumption was the maintenance of high self-sufficiency rates for many of the important agricultural products due to a more moderate fall in production (Table 13). In 1994, e.g. this rate stood at 147 per cent for wheat, 116 per cent for pigmeat and 139 per cent for poultry meat. This situation prepared the ground for a sustained role of agrofood export trade in the Hungarian economy.

3.6. Foreign trade

Agriculture's role in foreign trade and in the net export balance can fully be appreciated only in the context of the whole agrofood economy (Table 3 and 5). Throughout the period, its share in total exports has been the double of its GDP contribution. Its share in total imports, on the other hand, has been roughly the half of its share in GDP, only. During the period of 1990-96, the contribution of agrofood exports to total exports gradually declined from 23 to 18 per cent while its value increased to US $ 2892 million (by 21 per cent). While agrofood imports increased by 76 per cent (to US $ 1297 million), its share in total imports declined from 8 to 5 per cent. The significance of agrofood exports was also underlined by the fact that recent economic growth in Hungary has been export driven in the mid nineties.

Agrofood trade patterns presented similar structural developments to those observed within the GDP output of the sector. The share of value added products increased in both exports and imports. This (and decreased domestic demand) allowed an accelerating export growth during the period of transition recovery despite the strongly reduced production base.

3.7. Current account impact

Given the continuing difficulties with the Hungarian current account and the heavy foreign debt service, it was first of all the high net export balance of the agrofood economy and its positive impact on the current account which was determining the special importance of the sector during the whole transition period. This net export balance was moving around the average of US $ 1.600 million in the period 1990-96 (Table 3). A modest positive current account between 1990 and 1992 could only be achieved due to the net contribution of the agrofood sector. During the subsequent period, the positive agrofood trade balance considerably mitigated the heavily increased current account deficit which amounted to

US $ 1.678 million in 1996 (Table 4).

By comparing the development of the net trade balance of the agrofood sector, to those recorded by the other sectors and by the national economy as a whole, we can discover the exact measure of the positive effect exercised by agrofood trade during the transition period in Hungary. Figures in the last column of Table 6 show the Current Account Impact Coefficient. It indicates the percentage by which agrofood trade improved the negative trade balance produced by the rest of the national economy since 1991. This compensation effect showed a declining trend from a very high level (between 65 and 79 per cent) towards a lower but still important level (of 42 and 34 per cent in 1995 and 1996, resp.) throughout the period. According to recent estimates, the compensation effect from the agrofood trade balance may have increased again in 1997.

3.8. Balance of subventioning and taxing

Parallel to the growing imbalances in the national economy, the extraction of resources from the agricultural sector had became stronger during the eighties. (Table 7). Subsidies taken as a percentage of gross output from state and co-operative farms were steadily declining (from 11 to 7 per cent; 1981-85). In turn, total taxes paid by them were increasing (from 11 to 15 per cent of their output value) in the same period. Thus available data for the early eighties showed a quickly growing net resource transfer from the agricultural sector towards the rest of the economy.

Restructuring of the Hungarian agrofood economy brought a fundamental change to the systems of subventioning and taxing. Market oriented economic reforms implied the discontinuation of most forms of subsidies to agriculture. At the same time, the emerging and extremely varying farm structure (comprehending over 2 million land owners) could be much less submitted to taxing than earlier. In addition, deteriorating terms of trade conditions for agriculture significantly weakened the whole tax base. As a result, the apparent change in the balance of subsidies and taxes turned out to be a positive one for the agricultural sector during the transition period (Table 8).

Following nominally declining agricultural subventions in 1990-92, they again entered a nominally growing phase from 1993 through 1996 (nevertheless, strongly deflated by the prevailing high rates of inflation). Simultaneously, expressed as a share of gross agricultural output, taxes actually paid fell sharply behind subsidies received by agriculture. While the shares of paid taxes amounted to 3,2 and 3,4 per cent, shares of total subsidies amounted to 13,9 and 10,3 per cent in 1994 and 1995, respectively (at current prices; Table 8).

In the end-effect, the new positive balance of subsidies and taxes of the transition period might have somewhat compensated the losses suffered by producers due to worsening conditions of terms of trade. However, it should be pointed out that only a smaller part of agricultural subsidies landed definitely with farming units. The main part was shared between food processors and exporters. The corresponding shares in subsidies were 20 per cent for farming units, 39 per cent for food processing enterprises and 41 per cent for exporter companies and enterprises of other sectors as shown by the 1995 annual financial reports of enterprises. It is estimated that such proportions prevailed during subsequent years, as well (1)².

Finally, quite an important part of the picture is that in the mid nineties the rather abnormal situation persisted in the field of commercial farm registration, declaration of revenues and tax collection for hundreds of thousands of mini and small-scale farmers in Hungary. Tax evasion was considered to be high. Understandably, the agricultural sector was not the only one living with this phenomenon: according to official Hungarian estimates made in 1997, the size of the country's informal economy amounted to 20 to 30 per cent of GDP (as compared to 10 to 15 per cent in the big EU member countries). Nevertheless, further consolidation of farm structures in Hungary and the unavoidable strengthening of the (local) institutional background in view of EU accession was expected to result in a considerably higher rate of tax revenue from agriculture in the medium term future.

4. Changes in the social and environmental functions of the agricultural and rural sector during transition

Conventional macroeconomic indices commonly used for "indicating the role of agriculture" may be considered as narrow spotlights directed at parts of the reality, only. Agriculture exists in the context of multiple economic, social and cultural relationships of rural regions and their entourage. Those spotlights do not often show the changing socio-economic interrelationships which have been impacting on the fabric of rural society during the process of transition in Hungary.

4.1. Separation of economic and social roles

Prior to transition, large-scale co-operative and state farms actually operated as socio-economic institutions in the Hungarian countryside. They represented the overwhelming economic and social factor of rural areas.³ Relying on some state subventions and even more on their own multiple economic activities they acted as the source (or at least as transmitters) of rural "welfare". They took the lion's share in creating the basic rural infrastructure in villages (from water works through housing construction down to kindergartens and public catering and village reconstruction, etc.)

The financial base for those social and communal services was provided by the widespread off-farm activities in food processing and marketing, construction business and manufacturing carried out by the agricultural enterprises. From the late seventies, they reached the Hungarian capital and other urban centres as well with their products and services. At sectoral level, returns of large farms from such off-farm activities matched those earned with primary agricultural activities. Directly before the transition period, those off-farm activities earned already 54 to 55 per cent of all returns in co-operative and state farms. At that time, the share of food processing business amounted to around 18 per cent in state farms (Table 9).

Since the "socialist" large-scale farms operated on appropriated or confiscated land, compensation and privatisation (conditioned by the underlying legislative process) were destined to solve the ownership crises and to create a new base for an efficiency oriented management of the restructured farms. Understandably, this brought a drastic re-adjustment of all agrarian structures and the discontinuation of nearly all social services rendered by the former large-scale farms to the agricultural employed and to rural communities. Off-farm activities of former large farms were separated and privatised or ceased.

The food processing business of such farms shrank to one-fourth within three years from the start of restructuring (Table 10). This occurred also due to the break-up of the earlier paternalistic relationships between the large-scale "socialist" farms (as "integrators")and small-scale household farms (as "integrated" raw material suppliers) . With the financial base vanishing, social roles of large-scale enterprises disappeared, as well. This has left the new local authorities with the difficult task of assuming at least a basic social role to fill the gap. Obviously enough, they did not seem to be able to perform this task in the absence of a supporting background of integrated rural development policy measures (to be initiated by the state) and active local participation.

4.2. Bipolar farm structure

As a result of land privatisation, an extremely varied farm structure emerged in the Hungarian countryside (Table 11). It may be characterised as a bipolar farm structure based on a number of large farms (i.e. transformed co-operatives and private agricultural companies) and on hundreds of thousands of small-scale and mini farms operating on a few hectares. Indeed, within the latter group, farm distribution by size brought the farm structure closer to the old conditions of the mid 1930s than to the structure which issued from the land reform of 1945! Besides the newly restructured and registered agricultural enterprises and co-operatives, 1,8 million households owned agricultural land in 1996 as a result of privatisation. Only 70 per cent of such households (1,26 million) lived in rural areas. 80 per cent of them owned less than 1 hectare of land and 18 per cent had a land area between 1 and 10 hectares (2).

Most of the mini properties, however, were subsequently leased to restructured large farms and/or co-operatives as well as to private individual farmers. In many cases, this allowed the separation of agricultural operations from scattered ownership to the benefit of both the owner (often a city dweller) and the farming enterprise. Thus, widespread leasing tended to reduce the negative efficiency impact of scattered ownership (Table 14).

The emerging varied farm structure appeared to be able to absorb a part of the agricultural labour force which had been laid off by or left the large-scale farms. They were absorbed by the newly established commercial family farms, part-time farms as well as by subsistence farming and also by the informal agricultural economy. Moreover, rural regions as a whole appeared to be able to accommodate the backflow of some additional population from urban areas. Indeed, this even brought along a small increase in the share of the rural population (from 35,9 to 37,1 per cent; 1994-96) and a decline of the urban population in Hungary during the transition period (2).

4.3. Expanding entrepreneurship

During the transition recovery, rural regions have played an important role in spreading small- and medium-scale entrepreneurship. Against the background of the past centrally planned management of agriculture, this development was representing an important social achievement for the sector and its market orientation. The contribution of private farms to gross output of agriculture significantly expanded during transition from 38 to 57 per cent (1988/90-1994/96; Table 12).

The expansion of small- and medium-scale entrepreneurship also included a wide range of new off-farm production and service activities. By 1996, less than 20 per cent of all employed in rural areas had agriculture as their main source of income (2). The rest earned its main income with jobs in manufacturing industries, construction and in the expanding service sector (a very weak link in the "socialist heritage" of rural regions). Furthermore, most of the rural households also continued with their mini plots producing food for own consumption and in part for the local/urban market as well.

Through such additional efforts, the real income situation of rural households actually became more comparable with that of urban areas than suggested by the official statistics. In fact, at the same level of education, per-capita net income was higher in rural regions than elsewhere in the country (2). Real income of small-scale farms were sustained in 1996 while it declined by 6 per cent on the national average (2). During the nineties, housing construction was more dynamic in rural regions than in towns and by 1996 one-third of rural households owned a second flat (2).

4.4. Positive social role of rural areas

Overall, as a result of restructuring of the former "socialist" large-scale co-operatives and state farms, the overdue separation of the economic function from the social role of enterprises was carried out. Developments suggested that rural regions acquired an important social role during the difficult years of structural adjustment. From the social point of view, the emerging new and varied farm structure together with its human resource background proved to be quite flexible so far (however, not without building up tensions). As a whole, up to the mid nineties, rural regions conserved their capacity to retain the rural population and even attracted former city dwellers.

Nevertheless, the farm structure was still far from being considered as stable and consolidated, and under the pressure of economic realities, the medium-term stability of the emerging new situation was very questionable. In the rural milieu, important regional differences were further existing. In less favoured regions of Hungary, they were accentuated by higher than average unemployment. In the wake of both agricultural restructuring and general economic adjustment, particularly the north-eastern regions of the country experienced serious difficulties entailing social consequences. In turn, Transdanubia (western Hungary) presented a more consolidated development.

4.5. Environmental exchange

Finally, also the main experience of the environmental exchange between agriculture and the rural milieu deserves a quick look since it might have a bearing on future roles to be played by the sector. Production practices of the former "socialist" large-scale farms (oriented exclusively to physical output growth) have dealt a serious and lasting damage to the Hungarian natural environment. (The damages have been obviously less important than the ones caused by forced industrial development, however.). Physical, chemical and biological deterioration of soil conditions has been general. Chopping down of alleys and hedges and consolidation of land into vast parcels of several hundred hectares have degraded natural landscape, biodiversity and habitat and furthered erosion. By the time of the onset of the transition process, the first water supplying layer was already contaminated all over the country. Already then, this water reserve was unsuitable for preparing it for human consumption (6).

In some cases, the upheavals of restructuring and privatisation first added new damages to the existing ones, e.g. erosion of uncultivated land, uncontrolled cutting in newly privatised forest land, etc. The sharp decline in fertiliser and chemical inputs and animal density during the subsequent transition recession, produced a spontaneous extensification effect in most subsectors of agriculture (e.g. nitrate contamination of ground waters decreased by the mid nineties). Such a change in intensity, however, could not bring much relief to the natural environment of agriculture. The existing ecological damage was hardly mitigated by a spontaneous extensification since it was not the result of a specifically designed policy concept. The situation further required the urgent development of an adequate concept for the sustainable development of agriculture and rural areas in Hungary. This urgency was underlined by the fact that agricultural production was recovering and intensity was growing again during the first years of transition recovery in 1995-96.

II. THE POLICY RESPONSE AND THE NATURE OF TRENDS IN THE MEDIUM-TERM

Hungary experienced momentous changes and shifts concerning the weight and roles of its food economy and agricultural subsector in a relatively short period of time (1990-1996). For the medium-term prospects of the agrofood economy, i.e. up to the EU accession (assumed by this author around 2003-2006), the nature of experienced development trends is of great importance, i.e. whether they have had a long-term or short-term character and whether they could be expected to slow down or to accelerate in the course of the transition recovery period. Furthermore and equally importantly, such a process will certainly be influenced by the way in which official economic policy has perceived changes and is reacting to development trends in the future course of transition recovery.

1. Policy response to the new development situation: the new medium-term National Agricultural Programme (1997)

The new economic and social situation in the agrofood sector prompted a re-evaluation of the sector's "assets and liabilities" as well as its future place in the national economy of Hungary. With privatisation and restructuring drawing to an end and the EU-membership becoming a realistic perspective for the country, growing pressure emerged in the sector to adopt a new development strategy for the agrofood economy.

The government initiated and guided the process of elaborating a medium-term development programme for the food economy in 1997. Agriculture has been traditionally an "over-politicised" sector in Hungary. Thus, the "thinking process" comprehended all relevant organisations, indeed, the whole existing institutional framework of the agrofood economy. The initial government concept was further developed through several stages involving both the competent government agencies, sectoral and producers' organisations as well as scientific and research institutions and political groupings.

By the end of 1997, the resulting National Agricultural Programme (NAP) defined the principal strategic priorities for the agrofood sector to be pursued during the medium-term period leading up to accession of Hungary to the EU. Subsequently, those priorities were confirmed by the Agricultural Development Act (ADA-97) adopted by the parliament and followed by several government/ministerial decrees concerning the implementation of the Act. The ADA-97 and several related decrees came into force on 1 January 1998 and afterwards(13). They represent the specific policy response to be given to the internal and external challenges resulting from the restructured agrofood economy, on the one hand, and from the future EU-membership of the country, on the other.

1.1. Concept and principal objectives

The basic principles of the medium-term development concept have been defined as follows:

1. The agrofood economy (comprehending agriculture, food processing, forestry, the game sector and fishery) represents a sector for priority development within the national economy. This is regarded to be essential for accomplishing the transformation process as a whole in the country. To this aim, the agrofood economy is defined as a growth sector in future Hungarian economic development.

2. Financial support to agricultural and rural development is to be increased in real terms at an annual rate which corresponds (as a minimum) to the annual growth rate of GDP taking 1998 as base period. The gap between the Hungarian and EU subsidisation levels should be gradually reduced during the medium-term period.⁴

3. Responsibility for the implementation of the above principles is placed with the government who is to submit an annual report to the parliament about the state of agriculture and the use of budgetary funds earmarked for agricultural development and support.

Relying on the above fundament enshrined by the ADA-97, the principal medium-term objectives of agricultural policy in Hungary were defined as follows:

- through improved competitiveness and market regulations, meeting domestic demand for food preferably from domestic production;

- creating equal economic opportunities for the agricultural sector as a whole and for agricultural producers alike;

- furthering an export-oriented development based on economic efficiency criteria;

- improvement of the potential of rural areas to retain the rural population through furthering the creation of alternative income sources;

- aiming at a harmony between agricultural operations and the requirements of environmental conservation and sustainable development of agriculture;

- furthering the development of human resources and innovation.

- developing the capacity in the food economy for meeting the accession standards set by the EU and for taking over l'aquis communautaires fully within the shortest possible transition period.

1.2. General policy approach

Overall, the new medium-term NAP and the ADA-97 adopted for the agrofood sector appear to create ample room (or even obligation) for state intervention and places only a modest emphasis on market competition. With such a concept, of course, Hungary is not alone in Europe. Obviously, the programme is aiming at maintaining and preferably increasing the present dimension of the agrofood economy and agriculture itself until the time of EU-accession in order to strengthen the sector's negotiating position. This is reflecting the supposition that the future size of production quotas entailed by EU-membership for Hungary would have a long-standing impact on agriculture into the early next century.

With this in mind, the related policy measures have created a remarkable arsenal of financial support and subsidisation benefits. They can be obtained by production units in many cases by going through a tendering process and in numerous cases under the condition of co-investing own capital to the same specific purpose. This aims to reduce the normative character of support and to favour viable units. The overall extent of financial support to be accorded annually to the agrofood sector is currently foreseen at around 2,5 per cent of the GDP (as compared with 1,3 per cent in 1995; Table 8). The high number of financial support measures are classified into ten categories as follows (14):

- support to production;

- support to marketing and measures to improve competitiveness;

- land improvement and irrigation;

- forestry production and development;

- support to investments and to less-favoured areas;

- soil protection and land utilisation;

- support to animal breeding;

- fishery development;

- game economy;

- support to special programmes (farm restructuring; disaster relief;

agrofood information systems).

Stemming from the very nature of agricultural support systems in general and relying also on conceptual remainings of the centrally planned economy, structural policy elements seem to have received an inferior role as compared to the dominating elements of production support and market regulation in the concept. This is already reflected by the distribution of budgetary provisions for 1998. Under ADA-97, the government is to ensure an annual improvement of terms of trade for the agricultural sector through supports and other regulative measures.

Support to production is forming the essential part of the concept (listing 36 types of different support forms in 13 sub-categories) and it covers most of the "problem areas" of agricultural production. While the whole concept is geared to further agricultural growth, many measures are targeting also quality aspects of production (including extension service, vertical integration, plant and animal health, processing hygiene, forestry research, infrastructure and information systems with the latter acquiring a great emphasis). A few measures are destined to support structural change in agriculture targeting e.g. land consolidation, organic farming, agrotourism and new forestry development.

With regard to the crucial question of future market demand for Hungarian products, the NAP appears to follow an optimistic judgement of future demand for food. Up to 2000, an annual expansion of 2 per cent of the domestic market is supposed which is foreseen to accelerate to 3 per cent after that date without presenting convincing arguments to support it and without checking it against the expected production growth (around 3 to 3,5 per cent per annum) (15). This again indicates a certain survival of the old "production policy approach" to modernisation issues of the Hungarian agrofood economy.

1.3. A few specific issues

Regarding the issue of market policy, the main task is defined as creating the institutional framework for market regulation and support which matches the corresponding institutions and their management practice in the EU. To this aim, the establishment of a reliable production and market information system backed by the corresponding advanced information technology is envisaged. Moreover, an Agricultural Intervention Centre has already been set up operating under the direct supervision of the minister for agriculture. It is destined to implement and monitor the government's policy for regulation and support to domestic agricultural markets and agrofood exports. Furthermore, it is in charge of implementing and co-ordinating state intervention on the domestic agricultural markets.

Since 1994, several product markets are directly regulated through a system of producer price guarantees tied to maximum production quotas and intervention prices (milling wheat, fodder maize, pigs and cattle for slaughter and cow milk). The system directly supports the farm gate price. For another group of products (sugar beet, poultry, rapeseed, sugar, isoglucose), an indirect market regulation is in operation. The rest of important products falls under the so called influenced market regime. The system is completed by import regulations and export subsidization with the latter covering over 170 products and consuming about half of total budgetary spending for agriculture. At present, there is growing pressure from producers' representations to place new products (e.g. sugar) into the directly regulated commodity group.

With regard to farm structural policy, both the NAP and the ADA-97 emphasise the neutral policy approach to be applied by the state to both small-scale family farming and large-scale co-operatives and enterprises. This, however, actually translates into continuing with the policy of favouring the more competitive large-scale sector. Specific support earmarked for co-operative and vertically integrated organisations strengthens this policy trend. The proposed amendment of the Land Act (which would allow also for legal entities and economic associations to own land in addition to individuals) is indicating into the same direction. From this amendment, it is hoped to obtain a revitalising effect for the ailing land market and for agricultural crediting. Also, it is to stimulate the development of a more rational farm structure away from the bipolar pattern (discussed above). Financial support offered to land purchases for land consolidation is to serve the same objective.

A notable discrepancy seems to exist in the treatment of the rural development issue, i.e. between declared policy objectives and envisaged measures of implementation. In view of the rural social impact of agricultural transition, its importance is emphasised en principe. It is intended to apply "different support measures" to the non-commercial sector of part-time and subsistence farming (comprehending 1,2 mini farms). Nevertheless, no distinct policy concept for integrated rural development is presented. Even more lacking is an elaborate system of rural development measures and supporting financial instruments something comparable and complementary to what is presented for agricultural production and market support.

At present, competence for issues related to rural development is distributed among several ministries (pursuing their own priorities) and so are the corresponding budgetary provisions. As to the agricultural ministry, related issues and funds are managed under the sub-chapter dealing with investment support in less-favoured areas. The issue of co-ordinating related policy measures among ministries does not appear to be satisfactorily resolved by the Rural Development Committee within the National Council for Regional Development, a lower level organisation than the ministries themselves.

2. Long-term trends or short-term changes?

The food economy's medium-term weight in the national economy will most probably be influenced by the combined effect of several factors as follows:

- some of the experienced trends discussed earlier might have a long-term character;

- some trends were accelerated by the transition recession, however, might

slow down during recovery;

- the impact could be expected to be different for agriculture, on the one hand, and food industry, on the other;

- actual growth potential of the rest of the national economy vis-a-vis the agrofood economy under market based conditions;

- medium-term impact of agricultural policy (NAP) on the above trends.

2.1. High growth potential in the rest of the economy

Declining trends in the sector's share in GDP and in intermediate consumption from domestic supply were, no doubt, long-term trends in Hungary and they were accelerated by the introduction of economic reforms. Agriculture's GDP share was nearly halved between 1990 and 1996 with a slow-down of the trend towards the end of the period, however. In turn, food industry's GDP contribution suffered a slight decline, only (Table 3).

Looking beyond the sectoral boundaries, it has to be pointed out that the transformation process actually liberated a high growth potential in the rest of the national economy. This was owing to the greater "reform reserves" in those sectors which were also supported by important Foreign Direct Investments (FDI) of which agriculture did not see much. This was not expected to leave unaffected the future GDP share of the agrofood economy (and agriculture). Also some branches of the food industry (and food trade) greatly

benefited from technological modernisation relying on high FDI ⁵. Obviously, this prevented an even stronger reduction in the food industry's economic weight in the national economy.

Overall, due to the expected more dynamic development of the other (particularly service sectors) of the domestic economy, further declining trends might be expected in the relative GDP contribution of the agrofood sector. This would occur, however, at a slower rate than so far due to different reasons. First, the fundamental structural changes (privatisation and restructuring) have already been accomplished. Second, higher state support envisaged by the NAP and ADA-97 will have a similar effect on recovering production and markets. Third, the more competitive food processing subsector is expected to play a certain sustaining role. The latter's economic weight could be expected to expand further within the food economy at the expense of agriculture's share due to the increasing output of value added products.

Diversification in the intermediate consumption of food industry and the rest of the economy towards foreign suppliers was a long overdue process because of earlier policies favouring high rates of self-sufficiency (with the resulting efficiency losses). Due to efficiency considerations in the food industry, it is not to be expected that processors with foreign capital share would long adhere to their "commitments" concerning the preferential use of domestic raw materials if their price-quality relationship is not satisfactory.⁶ Thus, agriculture's share in intermediate consumption of the rest of the economy could be expected to decline further in the medium term. The need for modern technology investments in both agriculture (e.g. in the new small- and medium-scale sector as well as in the fundamental grain sector) and food processing has been high. In case of actual investments, however, investors mainly relied on foreign manufacturers due to the technological weakness of the domestic upstream sector.

2.2. Productivity squeeze and employment in agriculture

The continuing trend towards a declining share of agriculture in total employment, too, could be seen as a trend with long-term character. It was drastically accelerated by land privatisation and through the separation of economic activities from social roles in large farms during the transition recession. This tendency, too, decelerated during the first years of recovery. In the wake of the experienced strong decline in agricultural jobs, a further (slower) descending trend could be assumed under the pressure of the future EU accession due to factors as follows:

- considerable productivity gap vis-a-vis the EU ( e.g. about 50 to 70 per cent in plant production and 12 per cent in milk production in 1995-96 (2,11);

- the high self-sufficiency rates with produce in the medium- and low quality range seemed to be unsustainable in view of the general market situation;

- expected further pressure on unit costs by increasing land rental prices and land prices in the medium-term;

- growing foreign competition in the domestic market;

In view of the above, any substantive increase of employment in rural regions was expected to occur outside agriculture proper underlining the pressing problem of rural development.

2.3. Gradually weakening export trade role

The trend in agrofood exports was pointing to "new records" (in US $ terms) in both 1995 and 1996 (and also in 1997) (Table 5). Still, their share in total Hungarian exports was slightly declining in the transition recovery period. This seemed to indicate the long-term character of the trend with some underlying structural changes as the main reason.

Market oriented transformation supported by FDI did an important positive impact on the rest of the economy: exports from other sectors, above all manufacturing and engineering were increasing even more rapidly than agrofood exports since the beginning of the recovery period (1994-95). Foreign sales of machinery, spare parts and semi-finished products were expanding their export shares. It is notable that such change in export patterns occurred during a period when international agricultural prices were strongly improving while demand for industrial products in western Europe was slack. Furthermore, one can not ignore that in order to achieve the same net balance of agrofood exports, increasing export volumes were needed during recent years and the Current Account Impact Coefficient was showing a steady declining trend (Table 6). All this seemed to suggest a weakening trend in the export role of the agrofood sector in the mid-term perspective.

Nevertheless, even if declining, the very dimension of the agrofood export share (around 20 per cent) and particularly its net balance were going to remain medium-term factors in Hungarian economic development. They represent a progress in quality aspects since they have been achieved in part by a shift to the sale of more value added food products relying on a reduced primary production base (as compared to 1989-91) (10). The new medium-term NAP attributes great importance to this role of the sector and it is aiming at maintaining it by all possible measures within the range of WTO conformity.

2.4. Some short-term changes

Several of the changes with a bearing on the weight and role of the agrofood sector during 1990-96 could be qualified as short-term ones. Among them, earlier reduced domestic per-capita food consumption was expected to pick up again with the economic recovery underway (GDP: + 4 per cent in 1997; + 5 per cent in 1998 (official forecast). Declining inflation would also support somewhat this process (from a high 18,4 per cent in 1997 to a still high 13-14 per cent in 1998 (official forecast) (12).

By the end nineties, consumers have been faced by a completely modernised food supply side in Hungary. Processing and trading firms with foreign capital share have been specialising mainly in the domestic food market benefiting from their advanced marketing know-how and technology. This sector has become more competitive in Hungary and is expected to give renewed stimulus also to agricultural production. Processors built up new vertical structures integrating raw material output, processing and marketing (both by buying-in and by vertical contracting). Apart from the expansive business activities of firms working with foreign capital, the impact they have exercised on quality and organisational aspects of agrofood operations is very considerable. In the mid-term perspective this may give new impulses to domestic food consumption, as well.

The remaining question is, however, the real extent of the expected increase in food demand. It should be pointed out, however, that only increasing real personal incomes could form a base for improving per-capita food consumption. In case of steadily increasing food prices, e.g. due to growing subsidization and with continuing two-digit inflation, the domestic market outlook may not be judged to be very optimistic and depressed consumption levels may improve only slowly. In addition, while the growth strategy targets the commercial sector, an important share of consumers may continue to get their food supplies from the informal sector.

The earlier disruptive effects (on agricultural output) of the drastic changes in farm structures from a large-scale to a bipolar farm structure could also be expected to have had a short-term character. They have appeared to be gradually compensated by efforts in land consolidation and leasing in the commercial farming sector. The latest survey of the Hungarian Central Statistical Office (HCSO) showed that the area expansion of small- and medium-size farms as well as the reduction in the number of large farms (over 500 hectares) became a dominating trend by 1995 (2). As a result, the area under large-scale farms (above all co-operatives and agricultural companies) was declining (between 1994 and 1996 by 20 per cent). At the same time, the total area cultivated by private individual producers was strongly increasing (by 50 per cent in the same period). Despite the nostalgia of a part of producers, agricultural workers and some local agricultural experts, not viable co-operative farms were gradually terminated (9 per cent less in 1995), yet leaving behind more than 1900 large co-operatives apart from around 6900 agricultural companies and joint ventures.

The bipolar farm structure could be expected to remain a medium-term characteristic of Hungarian agriculture without endangering, however, the prospects for future efficiency improvements. Widespread land leasing was helping to neutralise part of the efficiency loss which might have resulted from the new and more scattered farm structure. Over one-third of privately owned land was given to rent in 1995. In large farms (over 50 hectares), about three quarters of cultivated land were rented.. Within the bipolar farm structure, the continuation of the earlier division of labour could be observed: the commercial small- and medium-size farms were specialising in labour intensive products (e.g. horticulture and livestock), while large farms specialised more in arable products (e.g. grains). After the painful restructuring and property compensation exercise, such a new structure could be considered as a basis for future improvements in the sector's competitiveness. Efficiency improvements are to be expected from the implementation of the new agricultural policy measures which de facto favour viable large farms vis-a-vis other farm types.

Nevertheless, despite the relative success of land leasing, it seems to be clear that further adjustment (rationalisation) of farm structures and agricultural financing would be hardly possible without having an operational land market. This issue has obviously been a hotly debated political question in Hungary. Apart from commercial units, the small-scale farm sector still includes hundreds of thousands of mini farms "operating for survival" in the subsistence and informal sector without registration and without a Producer's Certificate. They would form, no doubt, the objective of further structural adjustment. Surveys have shown that many commercial farms had the intention of expanding their area by acquiring additional land. Thus, the medium-term development in farm structures might be expected to be more dynamic provided that also legislation (underway) kept up with requirements and expectations.

III. CONCLUSIONS ON THE ROLE OF THE AGROFOOD ECONOMY AND THE AGRICULTURAL SECTOR

1. Period of economic and social transformation

Transition recession period (1990-93)

With regard to sectoral interrelationships, the centrally planned economy of Hungary was a closed economy in terms of a market based economic development policy. It was oriented at the highest possible degree of import substitution. Opening it up meant to reduce the planned interdependence of domestic economic sectors by applying new criteria of economic efficiency in decisions at the enterprise level. Indeed, this reduced the contribution of all domestic sectors to the GDP entailing the latter's decline. During this first phase of the transition period both the agrofood economy as a whole and agriculture itself performed a "trailing role" in economic development. Compared to the overall shrinking of GDP by an aggregate 17,5 per cent, decline in agrofood and in agriculture ( -37 and -35 per cent, resp) was nearly the worst of all sectors, second only to construction industries (1989-1993).

Other than in the reign of macroeconomic indicators, agriculture clearly played the role of the "positive transformation helper" in structural adjustment and social aspects,. By its quick turnaround in foreign market orientation, it retained its highly appreciated positive impact on the current account. Moreover, due to consequently implemented privatisation and restructuring, its core output potential was fundamentally conserved unlike in several other transition countries. Finally, despite the drastic reduction in agricultural employment, agricultural and rural regions retained their population and even absorbed people from urban areas in difficult times of change.

Transition recovery period (1994-96)

For the recent short-term period under review, the agrofood economy and agriculture kept well pace with the general growth trend marked by an aggregate expansion of 6 per cent in GDP (1994-1996). In this second phase of transformation, the highest growth rates were attained by manufacturing as well as by communication, transport and storage activities. From these sectors, also export activities sped up and companies working with foreign capital contributed nearly three-quarters of total exports. The dynamism of the rest of the economy began to squeeze down the share of agrofood exports below 20 per cent. Yet, through its aggregate growth of 5 to 7 per cent and foreign trade results, the agrofood sector was clearly performing a "leading role" in this short-term development period.

With regard to agriculture's positive social role, it was still maintained with great difficulties amidst growing regional differentiation. The existence of hundreds of thousands of mini farms and subsistence units could only mean a provisional solution. They represent a factor of structural and social fragility and require a new and specific policy approach.

2. Targeted medium-term role: from transition helper into a growth sector

Agrofood economy as development priority.

The most recent policy developments concerning the agrofood economy represent an explicit and strong commitment for a growth and export oriented development of the sector in Hungary. For the implementation of the medium-term NAP, both policy instruments of market support and regulation as well as some measures of structural policy are going to be simultaneously applied. They are backed by increasing funding tied to the growth of GDP and including both subsidies and repayable support. The main declared objective is to strengthen and modernise the whole agrofood economy up to the level of EU-conformity and EU-maturity by the end of the medium-term period.

For obvious reasons, policy institutions in Hungary have "important traditions" of central economic management at their disposal whereas from the agricultural sector there is a strong demand for more state leadership and support in the development of the sector. Therefore, a possible far reaching impact of the NAP and the ADA-97 on the medium-term development of the agricultural sector appears to be obvious.

Emphasis on the supply side

Assuming further GDP growth, it may be expected that by implementing the above programme, agriculture could be maintained on the growth path on the supply side during the medium-term period leading up to EU accession. Obviously, the question regarding the economic price to be paid for such a strategy is justified. Spending increasing funds for agricultural growth implies at the same time the discrimination of another perhaps more dynamic sector of the Hungarian economy.

Nonetheless, the apparent willingness of policy makers to take such a development course seems to be linked to "food security considerations", on the one hand, and to the very important social and environmental dimension of the issue, on the other. The development programme does not specify, however, the willingness of consumers to co-finance the growing agricultural support through increasing food prices. At the present level of real disposable incomes, the availability of such a willingness is not clear.⁷

Uncertainty on the demand side

The market demand side of the growth strategy remains a major concern and would urgently need further analysis regarding both its domestic and export components. In view of the actual production potential and current self-sufficiency rates, it should be particularly noted that even an expanding domestic market due to its small size may result to be too narrow to absorb the additional output resulting from a successful strategy for supply side growth in the medium-term. This may be even more so if food prices are to rise in the medium term.⁸ Consequently, a key role has to be attributed to the expansion of export markets for Hungarian agricultural and food products.

Limited competitiveness of agriculture

With regard to both domestic and foreign markets, the international competitiveness of Hungarian agriculture may set a major constraint to the growth concept. It should be pointed out that the often listed arguments in Hungary according to which 66,5 per cent of the land area are cultivable and the share of arable land area is 51 per cent are no factors of competitiveness with the latter being a qualitative requirement.⁹

Meaning and content of competitiveness in the agrofood sector have greatly changed during recent decades. While earlier it was more related to natural (climatic, soil, water, etc.) conditions and production traditions, the relevance of such factors considerably diminished for Hungarian products by the nineties. In accordance with market signals, competitiveness is based today on advanced food science and food technology, food safety and the comprehensive systems which guarantee them. In addition to the basic price-quality relationship for a specific product, export competitiveness is nowadays more strongly related to the adaptation of those qualitative elements and marketing skills than to favourable natural conditions. This explains why some western European countries with less favourable physical conditions have shown a better production and trade performance than Hungary. Under-utilised EU import quotas of Hungary may be a good case in point.

Indeed, regarding international competitiveness, the relative position of Hungarian agriculture is presently weaker than it was at the beginning of the transition era. In order to turn around the present negative trend, high investments and targeted measures of structural policy will be needed very soon. In turn, some processing subsectors have greatly improved their competitive edge. However, they do not include such strategic sectors for Hungary like milling and feedstuffs industries, processing of meat (with a few exceptions), poultry and fruits/vegetables as well as dairy processing.

Agricultural policy mix.

Finding the right balance between the two principal groups of agricultural policies, i.e. market policies and structural policies emerges as a critical issue in Hungary. The policy mix applied by the medium-term NAP seems to be strongly favouring production and market support as a first priority. It is clear that during a period of profound economic and social change a minimum of market stability is essential. However, the necessary counterpart of market regulation policies must preferably be an active structural policy in Hungarian agriculture with the aim of improved competitiveness in all aspects.

The use of scarce budgetary resources for price guarantees and export subsidies in Hungary could be only rational and successful if they helped to change significantly the orientation of production and introduce organisational and technological measures. Otherwise, market regulation policy is bound to conserve the developmental status quo as it actually occurred under central planning. It is remarkable that the increase of the subsidisation level per se is set up as a policy objective even if it occurs with a view to EU accession (13). Rather, all subsidisation measures should be conditional of implementing specific structural, organisational and technological measures by production units whith a view to improved competitiveness. Moreover, in order to be effective, such measures should be targeted, provisional and predictable (16).

Emancipation of policies for rural development vis-a-vis agricultural policies

With regard to the present positive social role of agriculture, it should be pointed out that it is currently a spontaneous phenomenon and the problem of rural development, which is bound to increase, can not be resolved through agricultural development measures any more. In the medium term, a positive social role of rural areas can be maintained only under the following conditions (as minimum requirements):

- elimination of the division of competencies at the highest policy levels for rural development related issues;

- the development policy mix has to include a coherent and complementary rural development concept;

- separate budgetary line should support the implementation of rural development objectives both at national and regional levels;

- ignition of a process of local participation by all (economic and non-economic) actors of the rural scene to substitute for the "top-down" approach by decentralisation and specific programme strategies for individual rural areas.

The relative position of the agrofood economy in the medium-term.

Even if agriculture might be maintained on a medium-term growth path, owing to the historical development lag in industries and above all in the whole of the tertiary sector, these areas will most probably undergo a more dynamic development than the agrofood economy in Hungary. These sectors, in part backed by important FDI, are opening up new markets both in Hungary and outside while the agrofood sector is struggling with problems of oversupply already now. Thus, it is realistic to expect the relative position of the agrofood economy, even as a "growth sector", to decline further (at a slower rate) within the national economy in terms of macroeconomic indicators in the medium-term. This would correspond to the long-standing experience with structural development in the international economy.

Furthermore, the relative position of the agricultural sector is expected to undergo a similar change within the agrofood economy whereby the weight of the processing (and marketing) sectors is bound to increase further. The medium-term programme does not foresee a structural re-orientation of agriculture towards non-food production and the provision of public goods and services (such as environmental services, landscape management, rehabilitation of natural areas etc.). This would entail the exclusion of some development opportunities which otherwise could contribute to the consolidation of the economic and, in particular, social role of agriculture. Most probably, however, the absence of such objectives will not prove to be a long-term trend in development concepts for Hungarian agriculture.

REFERENCES

1. Direct supply of statistical data by the Hungarian Central Statistical Office (HCSO), 1988.

2. Tenyek es adatok a mezogazdasagrol es a falusi eletkorulmenyekrol (Facts about agriculture and rural living conditions). HCSO, Budapest, 1997.

3. Statistical Yearbook of Hungary 1996. HCSO, Budapest, 1997.

4. Economic Survey of Europe, UNECE, Geneva, 1992, 1994, 1997, 1998.

5. Statistical Yearbook of External Trade, 1990, 1992, 1994, 1995, 1996, HCSO, Budapest.

6. Dr. Cs. Szekely: Legislation and measures for the solving of environmental problems resulting from agricultural practices. FAO/ECE Working Party on Economics of the Agri-food sector and Farm Management. Wageningen, 1990.

7. Input-output tables, 1980-1985, 1994. HCSO, Budapest, 1987, 1997.

8. Agricultural Policies, Markets and Trade in Transition Economies, OECD, Paris, 1996, 1997.

9. Mezogazdasagi es Elelmiszeripari Statisztikai Zsebkonyv (Statistical Pocketbook for Agriculture and Food Industry); different years, HCSO, Budapest.

10. J. Szucs - A. Szakacs: The role of multinational companies in Hungarian agribusiness.

Hungarian Agricultural Research, No. 4, 1997, Budapest.

11. Eurostat Statistical Yearbook: Agriculture. Luxembourg, 1997.

12. Statement of the Chairman of the Hungarian National Bank at the 1998 Davos World Economy Meeting, in Nepszabadsag 31 January 1998, Budapest.

13. 1997. Evi CXIV. Torveny az agrargazdasag fejleszteserol. (Agricultural Development Act, No. CXIV, December, 1997) Budapest, 1997.

14. 273/1997. (XII.22.) Kormanyrendelet az agrartamogatasok igenybevetelenek altalanos felteteleirol. (Government Decree No. 273/1997 (22 December) about the general conditions of conceding financial support in the agrofood economy) Budapest, 1997.

15. A. Goncz: A szakmai igazsag oldalan (For a correct strategic judgement). Statement by the President of Hungary at the National Agrarian Forum at Godollo. Ministry of Agriculture, Budapest, 1997.

16 Dr. J.V. Budavari: Agricultural and rural development policies between market orientation and protectionism in CEECs. (In "Analysis of agri-food sector developments in Central and Eastern European countries.") Selected papers.

Network for Agricultural Policy R and D, Rome 1996.

STATISTICAL ANNEX

Table 1 GDP in the Hungarian economy and Gross Value Added in the food economy

1989 - 1995

Note: As from 1992, in accordance with the new Hungarian Standard Industrial Classification which equals to ISIC Rev. 3. at 2-digit level.

Source: (1)

Table 2 Terms of trade for agriculture and consumer price index

1990-1996

Source: (3)

Table 3 Changes in the position of the food economy within the national economy during transition

1990 - 1996

(percentage shares)

Note: Agriculture includes forestry, the game subsector and fishery

Source: (2, 8)

Table 4 Changes in inter-sectoral relationships of agriculture and the food industry, 1984 and 1994

(as percentage share of the gross output of the sectors)

Source: (1)

Table 5 Development of the net balance of agrofood trade and of the current account during transition

(US $ million)

Note: Agrofood trade includes trade in agricultural and food industry products

Source: (4, 8)

Table 6 The effect of agrofood trade on the net trade balance of Hungary (Current Account Impact Coefficient)

(Million HUF)

Note: Current Account Impact Coefficient indicates the percentage improvement caused by the net balance of the food economy in the balance of the current account

Sources: (3, 5)

Table 7 Subsidies and taxes as a percentage of agricultural output, I 1980-1985

Sources: (1)

Table 8 Subsidies and taxes as a percentage of agricultural output, II 1990 - 1996

Note: Current prices

Source: (1, 2)

Table 9 Breakdown of total returns from sales of large-scale farms

1985 - 1991

(percentage)

Source: (9)

Table 10 Returns from the food processing business of large-scale farms 1985 - 1993

Million HUF

Sources: (9)

Table 11 Distribution of land property by size and by landowners 1996

Source: (2)

Table 12 Contribution of individual private farming to gross agricultural output, 1988/90 - 1994/96

(percentage share)

Note: Percentage share on the basis of current prices

Source: (2)

Table 13 Self-sufficiency rates in major agricultural products 1990 - 1994

(per cent)

Source: (2)

Table 14 Share of leased land in different farm categories in 1995

Source: (2)

1 For the purposes of this study, the agrofood economy includes agriculture and the food processing industries (with agriculture including forestry, the game sub-sector and fishery)

2 It is to be noted, however, that subsidisation of agriculture was about 1,5 times higher in the average of EU member countries than in Hungary in 1995.) (OECD).

3 In 1989, the average area of co-operative farms was 4200 hectares and that of state farms 7100 hectares.

4 In 1995, average subsidisation level in the EU was 1,5 times higher than in the Hungarian agriculture (OECD).

5 In 1995, the share of foreign capital in the food industry was over 50 per cent and it was nearly 40 per cent in companies engaging in agricultural and food trade. In the vegetable oil and sugar industries, the share of foreign capital in total assets achieved 100 per cent. One of the main incentives for FDI appeared to be capturing those domestic markets which had good prospects for later expansion. As a result, Hungary today possesses one of the most advanced food processing sectors in central and eastern Europe. The high concentration of foreign (and also Hungarian) capital, however, has also led to near-monopoly positions in some processing subsectors (e.g. vegetable oils, sugar and poultry).

6 At the time of privatisation, one of the main official directives was to commit foreign investors to rely on domestic raw material supplies "in the long run".

7 The actual results of investigations concerning the "food price impact" of the future EU membership of Hungary were not published as of early May 1998. The OECD-calculated CSE, the implicit tax imposed on consumers by agricultural policy, stood at -6 per cent in 1995, i.e. consumers were actually taxed..

8 From 1990 to 1995, the OECD-calculated PSE increased from 8 to 16 per cent (as compared to 49 per cent in the EU).

9 The corresponding figures for the EU are 45 per cent (cultivable area) and 23 per cent (arable land).