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					   Agriculture and Transition in
Slovakia and other CEE countries:
A general introduction to rural development


               Jan Pokrivcak
            SAU Nitra, Slovakia
          jan.pokrivcak@uniag.sk
                    Contents
•   Communist years: some theory and empirics
•   The case of Slovakia
•   CEE Agriculture in the historic perspective
•   CAP and Rural Development
Communist years: some theory
      and empirics


            Part I
General Overview of Communist Economic System




• Communist economic system EQUALS
    central planning PLUS
    state ownership of production factors
General Overview of Communist Economic System

             Behind Iron Curtain




                    Source: DeLong: Macroeconomics
General Overview of Communist Economic System




• It turned out that communist economic system
  is less efficient than free market system
General Overview of Communist Economic System
       Planned Economy vs. Market




                    Source: DeLong: Macroeconomics
General Overview of Communist Economic System

There were still some positive
outcomes of communist economies
   •   equitable distribution of incomes,
   •   general access to education, health care,
   •   job security,
   •   industrialization (from agrarian countries)
   •   growth of production (in early years)
General Overview of Communist Economic System


But negative outcomes prevailed
• shortages or surpluses,
• slow economic growth in later periods
• technological backwardness because of slow
  innovation
• environmental damage by heavy industry
• stagnating social indicators, health, life expectancy,…
• intrusive government due to lack of private incentives
• governments NOT maximizing social welfare but
  seeking own advantages (principal-agent problem)
• lack of freedom – dictatorship
General Overview of Communist Economic System


 Why communist economies poorer
     than market economies?
      – Initial conditions (communist countries were
        poorer in the first place)
      – Communist economies generated lower
        rates of economic growth
General Overview of Central Planning
  Economic growth in communist period
          (% per capita p.a. )
   Period                      EAST     WEST
   1950s                         4.5      3.7
   1960s                         3.6      4.5
   1970s                         2.8      2.8
   1980s                         0.8      2.0


Communist economy good at mobilizing resources in
short term, not able to sustain growth in long term.
General Overview of Central Planning

What caused poor growth rates of
communist economies?
• Central planning

• Property rights
General Overview of Central Planning


Problems with central planning
  Imbalances NOT eliminated by price adjustments.
  Prices do not send signals.

  Central planners managed the whole economy like a
  single firm: poor info and incentives.

  PRICE MECHANISM PERFORMS BETTER THAN
  CENTRAL PLANNING, FREE MARKETS
  NECESSARY FOR A POSITIVE DEVELOPMENT OF
  AGRICULTURAL MARKETS, NOT SUFFICIENT
  THOUGH.
General Overview of Central Planning

Problems with property rights
• Rights to use assets and enjoy income from the
  use of assets
• In communism all assets owned by the state
• Prices and profits irrelevant.
• Managers not motivated to make profit but to
  fulfill quantitative plans, punishment for
  increasing efficiency and innovation.
• Inability to motivate people to work hard
Transition

Collapse of communist experiment
and transition
• Communist system failed and was followed by TRANSITION
  from central planning to market economy

• During TRANSITION all “rules of the game” (constitution, laws,
  codes of behavior, habits, property rights) changed.
      i.e., Market economy based on profit seeking
      entrepreneurial behavior while entrepreneurship in
      communism is considered to be speculation and
      trying to avoid hard work and therefore illegal.
Transition


  Outcome of transition depends on
• Initial conditions
      Some countries remembered pre-communist
      period and had market skills
      Some countries implemented institutions from the
      scratch (Slovakia)
      Some countries started transition with stable
      economy while others from macroeconomic
      imbalances
Transition


  Outcome of transition depends on
• Liberalization and stabilization policies
   – In general the stronger the liberalization the faster recovery
     of production
   – Stabilization macroeconomic policies crucial
   – Important to establish hard budget constraint
Transition


  Outcome of transition depends on
• Privatization and regulation
     Private firms more efficient than state owned
     Financial regulation, labor code, regulation of
     pension system, taxation
     Enforcement of contracts
     Functioning of legal system
Transition


  Outcome of transition depends on
• Political system
     Avoidance of government failure
     Elimination of redundant redistribution and rent
     seeking
     Economic and legal predictability
     Sequencing of reforms
     EU accession
The Case of Slovakia

       Part II
The Slovak Experience


       Slovak Republic
Area: 49 036 km2
Population: 5.4 million
Pop. density: 109 per sq km
Pol. system: parl. democracy
Ethnicity of the population:
Slovak (86%)
Hungarian (10%),
Romany (2%), Czech (1%),
Rusyn, Ukrainian, Russian,
German, Polish and others(1%)
GNI per capita (2005):
US$ 7,600
GDP growth (2007): 8.7%
The Slovak Experience



                    Short history
• Before 1918 Slovakia a part of Austro-Hungarian
  Monarchy
• 1918 -1992 Slovakia part of Czechoslovakia.
• 1948 -1989 - communist country.
• 1993 - Independent Slovakia in 1993.
• 2004 - a member of the European Union.
The Slovak Experience


   Short economic history – communist
                 years

   • Most of Slovakia agrarian before 1948
   • 1950s – industrialization and economic
     growth
   • 1960s – 1980s – economic stagnation
   • 1990s – transition to market system and
     democracy
The Slovak Experience


   Short Economic History – Transition
                Years
   • Initial decline of output caused (1990 – 1992)
          - Creative destruction
   • Economic recovery (1993 – 97)
          - Fruits of economic reforms / stabilization and
     liberalization
   • Slowing down and fiscal problems (1999 – 01)
          - Lack of institutional reforms and bad politics
   • Strong economic growth (2002 – current time)
          - Institutional market reforms and EU accession
The Slovak Experience

       Current economic performance
   • Currently, Slovakia is a fast growing economy
     with GDP growth of about 10 % in 2007
   • Unemployment rate remains high but declining
     (around 10 % in 2009).
   • Regional differences: rich Western Slovakia,
     poor Eastern Slovakia.
   • ABOVE OPTIMISTIC DATA SHOW REALITY
     BEFORE THE FINANCIAL CRISIS
The Slovak Experience

                             GDP Growth in Slovakia
         15


         10


          5


          0
               1991   1992   1993   1994   1995   1996   1997   1998   1999   2000   2001   2002   2003   2004   2005   2006   2007   2008

          -5
     %




         -10


         -15


         -20


         -25


         -30
The Slovak Experience

                    Economic growth
    6.0
                                                                                          5.2
    5.0                                                                                 3.6
                                                                                    3.9
                                                                                      4.0
    4.0

    3.0

    2.0

    1.0

    0.0
          2001   2002       2003     2004    2005      2006f      2007f     2008f   average

                        Czech Republic   Hungary    Poland     Slovak Republic
The Slovak Experience


                   Unemployment rate

   20%
   19%
   18%
   17%
   16%
   15%
   14%
   13%
   12%
   11%
   10%
         93   94   95   96   97     98    99    00     01      02    03   04   05

                         Core Unemployment (average)        LT average
The Slovak Experience

                Structure of Economy

                                Agriculture
                                    3,5       Industry;
                                                29,4



                    Services;
                      67,1
The Slovak Experience


   • In the world perspective, SLOVAKIA is a
     high income country with a Gross National
     Income per capita of US$ 19 340 in 2007.
   • In European perspective, Slovakia
     achieves about 72% of average income of
     27 countries of the EU in 2008
The Slovak Experience


                           Size of the market
                                                 Relative to                           Relative to
                      GDP (EURbn)                  German             Populat.(m)        German
                                                    market                             population
US (1)                           10,119                      513               265.6          324

Germany (4)                        1,973                     100                81.9          100

Poland (22)                           403                   20.4                38.7           47
Czech
                                      170                     8.6               10.3           13
Republic (40)
Hungary (44)                          139                     7.0               10.1           12
Slovak
                                        62                    3.1                5.4            7
Republic (50)


  Note: GDP adjusted by Purchasing Power Parity, 2004 data. Source: EUROSTAT
The Slovak Experience


            Productivity comparison
          GDP per hour worked Germany = 100
                   US               108
                   Germany          100
                   Austria           99
                   UK                94

                   Hungary           52
                   Slovakia          49
                   Czech Republic    45
                   Poland            41

                   Mexico            32

    Source: OECD
The Slovak Experience



                    Working habits
                   Hours worked per year
                        # of hours   OECD Rank Germany=100%

  Czech Republic            1 972            2        136%
  Poland                    1 956            3        135%
  Slovakia                  1 814            7        125%
  USA                       1 792           12        124%
  UK                        1 673           16        116%
  Italy                     1 591           18        110%
  Austria                   1 550           21        107%
  Germany                   1 446           24        100%
  France                    1 431           25         99%
  Netherlands               1 354           26         94%
    Source: OECD
The Slovak Experience

                                Education
 % of population 25-64 having completed at least
           upper secondary education
                                Percentage   Rank

  Czech Republic                      87.8      1
  Slovakia                            85.8      3
  Germany                             83.0      5
  UK                                  81.7      7
  Poland                              80.8      9
  Austria                             78.2     11
  Hungary                             71.4     14
  Netherlands                         67.6     15
  France                              64.1     17
  Source: Eurostat, 2002 data
 The Slovak Experience


                               Economic freedom
                            Czech Republic
                                 (21)



                              Slo vakia (34)                              big impro vement in 2004



                               Hungary (40)



                                P o land (41)



                                                2     2.2       2.4        2.6        2.8       3


                                                         2003 2004 2005 2006
Source: The Heritage Foundation and Wall Street Journal, Index of Economic Freedom.



   The lower the value, the greater the economic freedom.
The Slovak Experience


                                Doing business
           140
           120
           100
            80
            60
            40
            20
            0
         Ease of Doing      Starting a     Dealing w ith   Hiring and   Registering   Getting Credit
           Business         Business        Licenses          Firing     Property

                 Slovakia           Czech republic         Hungary         Poland         Germany


The smaller the number, the better

       Source: World Bank, Doing Business 2006
The Slovak Experience


                Informal economy
                             % of GNI
                                  Informal economy
                                       (% GNI, 2003)

                Slovakia                       18.9
                Czech Republic                 19.1
                Hungary                        25.1
                Poland                         27.6
                CE average                       23


                Germany                        16.3
      R




                     0.0
                           1.0
                                 2.0
                                       3.0
                                             4.0
                                                   5.0
                                                         6.0
          us
             sia
     M
        ex
            ic
Th              o
    ai
      la
         nd                                                    % of GDP
              (*
                 )
       Br
M          az
                                                                                       The Slovak Experience




 al             il
     ay
        si
          a(
               *)
       C
         hi
              na
    Sp
        ai
           n(
Po             *)
    rtu
        ga
 G           l(*
   re            )
      ec
          e(
               *)
                                                                          FDI inflow




      Po
          la
              nd
   H
     un
         ga
              ry
   Sl
       ov
         ak
               ia
   C
     ze
         ch
  Ire          R
      la
        nd
              (*
                 )
                                                               12
The Slovak Experience



        FDI inflow: CE comparison
                    Slo vakia



                     P o land



                    Hungary



              Czech Republic


                            -1,000   1,000      3,000      5,000    7,000
                                                                   US$
                                         1989-1999   2000-2008
The Slovak Experience


       Most attractive sectors in CE in the future
         according an Ernst&Young Survey
                 Car industry                                               28%
               Mass consum                                                  28%
              Heavy industry                                              27%
         Telecommunication                                    19%
                   Transport                            16%
            Tourism&leisure                     12%
                     Telecom                    12%
            Hi-tech services                  11%
                   Chemicals                  11%
          Hi-tech equipment                 10%
    Real estate/construction               9%
           Financial industry              9%
                   Pharmacy           7%

                            0%   5%        10%    15%         20%   25%     30%
The Slovak Experience


             Hourly labor costs in EUR
                                           % of CE
                  1996    2004E   Feb-06           % of EU15
                                               avg
  Czech
                    2.6     5.5      6.5     116.3      24.6
  Republic
  Hungary           2.7     5.2      5.7     101.0      21.3
  Poland            2.7     4.2      5.1      91.4      19.3
  Slovakia          2.3     4.4      5.1      91.3      19.3

  CE Average        2.6     4.8      5.6     100.0      21.1
  EU Average        20     25.9     26.6               100.0

  Germany          25.3    30.4     31.0               116.4
The Slovak Experience


           Corporate profit taxation
                         2004 Corp    2006 effective         Tax on
                        tax rate(%)      tax rate(%)   dividends(%)
 Hungary(*)                   17.6             18.1            20.0
 Slovakia                       19             16.7             0.0
 Poland                         19             18.0            20.0
 Czech Republic                 28             21.1            15.0
 Germany(**)                 39.35             36.0            23.5
 Netherlands                  34.5
 France                       34.3
 Austria                        34
 EU15 average                 31.3
The Slovak Experience


                 Personal tax rate
                                 2004 marginal
                                       tax rate


                Slovakia                    19

                Czech Republic              32

                Hungary                     38

                Poland                      40
The Slovak Experience



    Government’s role in the economy
                          revenues as % of GDP
    55

    50

    45

    40

    35

    30
         Czech Republic      Hungary                 Poland   Slovakia

                                       1998   2003
The Slovak Experience
    Government’s role in the economy
                 revenues as % of GDP
                 Conclusions
• Communist experience taught us that:
  – Government failure bigger problem than market
    failure
  – Governments lack information and incentives to
    manage economy appropriately
  – Property rights play an important role, common
    property invites shirking, hinders activity
                  Conclusions
• Transition taught us that:
  – Free market mechanism indispensable
  – Soft budget constraint invites irresponsible behavior
  – Private property rights important
  – Institutions “rules of the game” that reward
    productivity rather than redistribution of income are
    crucial, “people respond to incentives”
  – Good legal system “enforcing contracts” decisive
  – Transparent politics promotes economic growth
CEE Agriculture in the historic
        perspective
             Part III
                    Introduction

• In communist countries (before 1989) all economic
  activities directly regulated by state, the whole
  economy like a single firm.
• Central planners set:
  – What firms have to produce
  – Trade flows among companies
  – Allocation of resources among companies
• Prices set centrally and did not send right signals to
  producers and consumers.
                 Introduction cont.

• Agriculture centrally regulated too.
• Land and farms (cooperatives) de facto owned by
  state. Decisions made centrally.
• Land concentrated into large cooperatives.
• Average farm size 1 457 ha in Poland 124 770 ha in
  Turkmenistan.
• Farm size in market economies (USA, EU, …) much
  smaller.
                 Average farm size   Workers per 1000 ha   Tractors per 1000   Workers/Tractors per
                                                                  ha             1000 ha (B/C)
Albania               1 907                 628                   20                   32
Bulgaria              19 464                156                   10                   15
Czechoslovakia        2 988                 156                   24                    6
Hungary               3 559                 158                   10                   16
Poland                1 157                 259                   29                    9
Romania               2 696                 209                   15                   14
Estonia               4 490                  92                   16                    6
Latvia                4 041                 102                   15                    7
Lithuania             3 094                 109                   15                    7
Armenia               1 621                 167                   10                   16
Azerbaijan            2 765                 164                   10                   17
Belarus               3 417                 125                   14                    9
Georgia               2 148                 209                   10                   21
Kazakhstan            75 555                 9                    1                     7
Kyrgyzstan            21 626                 41                   3                    14
Moldova               2 519                 279                   25                   11
Russia                8 473                  50                   7                     7
Tajikistan            8 352                 114                   9                    12
Turkmenistan         124 770                 7                    1                    10
Ukraine               3 930                 145                   11                   13
Uzbekistan            13 637                 77                   7                    11
             Farm size during communism

                    Average                    Average
                   farm size                  farm size
                      (ha)                        (ha)
Albania              1 907     Armenia           1 621
Bulgaria            19 464     Azerbaijan        2 765
Czechoslovakia       2 988     Belarus           3 417
Hungary              3 559     Georgia           2 148
Poland               1 157     Kazakhstan       75 555
Romania              2 696     Kyrgyzstan       21 626
Estonia              4 490     Russia            8 473
Latvia               4 041     Tajikistan        8 352
Lithuania            3 094     Turkmenistan    124 770
                               Ukraine           3 930
                               Uzbekistan       13 637
        Farm size in market economies


                         Average farm size (ha)

Japan                            1.24
EU-15                             18
USA                              197
                  Introduction cont.
• 1989 – The Fall of Berlin Wall – collapse of
  communist regimes in CEE and FSU
• Transition from centrally planned economy to market
  economy.
• Transition involves institutional change (change of
  rules of the game in the form of laws, regulations,
  property rights, norms, …).
• Institutions constrain behavior of individuals and
  through this have impact on productivity of the
  economy.

• Market institutions support private incentives.
  Communist institutions hinder private incentives.
                          Introduction: cont.

•    Transition of agriculture involves:
    1.   Privatization
    2.   Farm restructuring
    3.   Price liberalization
    4.   Formation of market institutions
                      Privatization
• During communism land and cooperatives
  owned by state. State ownership inefficient.
  Incentives to work higher in the case of private
  ownership of resources.
• To increase efficiency property rights transferred
  from state to private hands – privatization.
• Privatization in agriculture:
  – Privatization of land
  – Privatization of assets of cooperatives and state farms
                          Privatization cont.

• Privatization of land in FSU and CEE:
   – Restitution to former owners
   – Distribution to farm workers
   – Combination of restitution and distribution
• Restitution to former owners:
   – Land restituted to owners from before nationalization and
     collectivization. Historical injustice caused by communism
     undone.
   – Restitution took place in CEE (except Albania) and in Baltic
     States.
   – Restitution      feasible   because      nationalization and
     collectivization took place in recent past (after WWII),
     documentation exists and former owners or their children
     still alive.
                       Privatization cont.
• Distribution of land among farm workers :
   – Land distributed among farm workers in order to create
     equitable land ownership.
   – Applied in FSU and Albania.
   – Restitution infeasible in FSU because of search costs, missing
     documentation. Communist regime introduced in FSU after
     WWI.
   – Combination of distribution and restitution :
   – Some land restituted to former owners and some land
     distributed among farm workers.
   – Applied in Hungary and Romania.

• In some countries (Byelorussia,                   Kazakhstan,
  Turkmenistan) privatization limited.
               Distribution       Restitution         Distribution and
                                                           restitution
Albania            
Bulgaria                              
Czech R.                              
Hungary                                                     
Slovakia                              
Romania                                                     
Estonia                               
Latvia                                
Lithuania                             
Armenia            
Azerbaijan         
Georgia            
Kyrgyzstan         
Russia             
Ukraine            
Belarus                       Limited privatization
Kazakhstan                    Limited privatization
Turkmenistan                  Limited privatization
                       Privatization cont.



• Privatization of farm assets :
   – Privatized by restitution and distribution.
   – Restitution served to undo former injustice while distribution
     compensated workers for their contribution to farm surpluses
     created and invested back into cooperatives.
                Farm restructuring
• During communism cooperatives and state farms
  centrally managed. Farms had to fulfill central plan.
• Restructuring aim was to transform farms such that
  they would react to market signals (prices and
  competition).
• Two approaches to restructuring:
   – New owners could withdraw land from cooperatives
     (cooperatives could be dissolved) and establish family farm,
     these are the farms prevalent in developed market economies.
   – Remaining       cooperatives     transformed.       Communist
     cooperatives changed into cooperatives of owners of
     property, joint stock companies or limited liability companies.
              Farm restructuring cont.

• During restructuring process the average farm
  size declined.

• In Slovakia, Czech Republic and in most FSU
  countries there are transformed cooperatives
  after restructuring.
• In Albania, Baltic States family farms are
  dominant.
• Both types of farms present in other countries.
                         Family farms                      Transformed coops
               Share on land      Farm size (ha)   Share on land (%)   Farm size (ha)
                      (%)
Albania            96                                     4
Bulgaria           44                  1                  55               861
Czech R.           28                  20                 72               937
Hungary            59                  4                  41               312
Poland             87                  8                  13
Romania            55                  2                  45                274
Slovakia           12                  42                 88               1185
Slovenia           94                                     6
Estonia            63                  2                  37               327
Latvia             90                  12                 10               297
Armenia            32                                     68
Azerbaijan          9                                     91
Belarus            16                                     84
Georgia            24                                     76
Kazakhstan         20                                     80
Russia             11                                     89              6 100
Tajikistan          7                                     93
Turkmenistan       0.3                                   99.7
Uzbekistan          4                                     96
Ukraine            17                                     83              2 100
              Price liberalization
• Prices are important in market economy. Prices provide
  signals to market participants how scarce commodities
  are.
• High price may signal high demand. Profit maximizing
  firms therefore increase production. Firms allocate
  resources to goods with the highest demand which
  results in efficient allocation of resources.
• In communism prices regulated by the state. Prices
  actually used only as an accounting tool to monitor
  state owned firms. Communist regimes therefore
  created surpluses of some goods and shortages of other
  goods.
                  Price liberalization cont.



• Price liberalization was an integral part of reforms.

• Generally price liberalization lead to increase of price
  level.

• The highest increase of prices observed for agricultural
  inputs while prices of agricultural outputs increased
  less. The reason was shortage of inputs and surplus of
  outputs prior to liberalization.
Development of prices in Slovakia
Development of prices in Hungary
Development of prices in Russia
             Price liberalization cont.

• Ag. prices increased in East Asia (China, …) in
  transition causing raising production.
• Ag. prices declined in CEECs and CIS leading to
  decrease of production.
• Price (terms of trade) development affected
  production development.
• In both cases the allocation of resources has
  improved. Why?
  (Production therefore not a good measure of
  transitional success, productivity a better one)
            Price liberalization cont.

• Development of subsidies paralleled price
  development.
• In most countries subsidy cuts at the start
  of transition, they pick up later. Why?
• An example: In Baltic States subsidy cuts
  were more pronounced than in the
  CEECs. The effect was that in CEECs
  output fall was smaller than in Baltic
  States.
    Formation of market institutions
• Former communist countries had to create institutions
  supporting market system.

• They include the creation of safe private ownership
  rights, regulations supporting competition and contract
  enforcement.

• Many countries, especially FSU, adopted laws
  preventing sales and renting of land which lead to
  inefficient allocation of resources.
           Formation of market institutions cont.
• Some countries lacked full definition of ownership
  rights.

• For example, in FSU new owners received shares of
  cooperatives not entitlement to a particular parcel.
  Direct relationship between land and individual was not
  created.

• Better informed managers could constrain rights of less
  informed owners.

• There was less of the problem in CEE.
       Formation of market institutions cont.

• In overall, in CEE and Baltic States ownership rights
  and law enforcement was stronger than in FSU.
          Formation of market institutions cont.

• Socialism characterized by state controlled
  large farms with workers earning wage – farms
  the same as factories.
• What is wrong with this?
• Incentives, shirking
• Bad incentives = POOR PERFORMANCE
• Workers exert minimal effort. Why?
• Is there a difference between industrial firm and
  agricultural farm?
• Yes, the nature of production.
           Formation of market institutions cont.



• Facing problems government reformed property rights
  (control and income rights)
   – Reforms to realign incentives
• Privatization (establishing better incentives).
   – Forms of privatization (restitution/distribution)
• The impact of privatization on performance?
          Formation of market institutions cont.

• Restructuring of farms follows (reducing information
  requirements – size) – different structures Slovakia vs.
  Albania, Bulgaria.
• Property rights in the CEECs are better defined and
  protected than in the CIS, which implies that farms in
  CEECs face harder budget constraints than farms in
  CIS.
• Owners of agricultural assets are therefore better
  motivated to increase efficiency than owners of
  agricultural assets in CIS.
          Formation of market institutions cont.


• Family farms solve monitoring problem easier than
  transformed cooperatives – output increase in Albania,
  Rumania.
• Economy of scale reduced in family farms.
• Economy of scale vs. ease of monitoring.
       The impact of transformation on
           agricultural production

• All transition countries experienced the fall of
  agricultural production in the first years of transition.
• After 4 years of transition agricultural production
  decreased by 40% in Baltic States, 30% in FSU, and by
  20% in CEE.
• The initial fall reflected the destruction of the old
  system of exchange of commodities while the new
  system was just being implemented.
• After the initial fall stabilization ensued. Production in
  many countries started to rise. The biggest increase
  occurred in Albania, Slovenia and Romania.
      The impact of transformation on
       agricultural production cont.
• Agricultural production reached pre 1989 level only in
  Albania, Slovenia, and Romania.

• In FSU decline of production was bigger than in CEE
  and the subsequent rise smaller. The reason is that
  property rights were better defined and law
  enforcement was stronger in CEE. Agricultural
  resources were therefore more efficiently used in CEE
  than in FSU.
    Development of agricultural production in transitive countries



                                                                                         Kazakhstan

                                                                                         Russia
        100
                                                                                         BRSZ

                                                                                         Albania

                                                                                         Czech R.
Index




                                                                                         Poland

                                                                                         Romania

                                                                                         KVSE

                                                                                         Estonia

                                                                                         Baltic States

                                  Počet rokov od začiatku transformačného obdobia
         30
              0   1   2   3   4      5      6      7      8      9     10     11    12
  Growth of GAO in Transition Countries (index equals
              100 in first year of reform)
Country          Years after start GAO index in     GAO index after GAO index after
                 reform with       year of lowest   5 years of      10 years of
                 lowest GAO        GAO              reform          reform
Czech Republic          5                75               75               77
Hungary                 6                69               70               73
Poland                  5                77               77               85
Slovakia               10                68               77               68
Albania                 2                77              100              113
Bulgaria                7                57               63               62
Romania                 3                75               93               93
Slovenia                3                65               81               79
Estonia                 8                41               55               55
Latvia                  9                37               50               50
Lithuania               9                64               69               69
Belarus                 9                57               61               61
Moldova                 9                42               66               66
Russia                  8                58               64               64
Ukraine                 9                51               69               69
Growth of ALP (Output per Farm Worker) (index equals
             100 in first year of reform)
Country          Year with    ALP index in     ALP index after   ALP index after
                 lowest ALP   year of lowest   5 years of        8 years of
                              ALP              reform            reform
Czech Republic         1             99              126               177
Hungary                1             99              175               220
Poland                 3             96               99               144
Slovakia               0            100              110               132
Albania                2             77              108               104
Bulgaria               9             60               69                63
Romania                9             59               67                63
Slovenia               3             61               85               Na
Estonia                1             76              139               163
Latvia                 8             49               54                65
Lithuania              5             62               62                77
Belarus                4             69               71                87
Moldova                8             41               58                41
Russia                 5             63               63                65
Ukraine                8             52               65                52
Growth of Input Use Indexes in Transition Countries (index
               is 100 in first year of reform)
Country       Fertilizers    Tractors       Land            Labor       Animal Stock
              5       10     5     10   5          10   5           8    5      10
 Czech Rep.   29      24    58     82   103    103       54      44      69     53
  Hungary     15      18    72     61    94     95       43      37      59     51
   Poland     35      38    114   113    99     98       89      97      81     69
  Slovakia    17      15    89     77   100    100       71      60      65     46
   Albania    19      14    74     68   101    102       92     107     121    107
  Bulgaria    25      14    69     51    98     98       92      99      47     42
  Romania     27      17    106   110   100    100      118     110      63     50
  Slovenia    56      52    56    118    91     83       95      87      86     82
   Estonia    17      20    106   109   107    106       40      35      50     32
    Latvia    21      53    82     89    99     97       79      77      38      6
  Lithuania   10      16    118   137   100    100      113     103      52     41
   Belarus    25      40    92     62    98     97        8      73      79     64
  Moldova     42      2     93     78   102    102      114     111      64     32
   Russia     11      9     82     61    98     98      100      92      74     47
   Ukraine    24      11    92     68   100     99      106     102      75     41
Growth of Index of Agricultural Yields in Transition
      Countries (100 in first year of reform)
  Country       Average agricultural yield    Average agricultural yield
                after 5 years of transition   after 10 years of transition
 Czech Rep.                 96.3                          115.3
  Hungary                    79.7                          98.0
   Poland                    87.3                         100.0
  Slovakia                  92.3                          107.3
   Albania                  94.0                          100.0
  Bulgaria                   68.7                          75.7
  Romania                   100.7                         102.7
  Slovenia                    Na                            Na
   Estonia                  86.0                          100.3
    Latvia                   82.7                         103.7
  Lithuania                  80.7                          91.3
   Belarus                  72.3                           75.3
  Moldova                     Na                            Na
   Russia                   72.3                           74.7
   Ukraine                  78.3                           71.0
CAP and Rural Development
              CAP development
• Before the creation of CAP each Member State
  had its own agricultural policies.

• The Treaty of Rome created CAP in 1957.
  Main objectives:
  – Increase productivity
  – Increase income of farmers
  – Stabilize markets
  – Adequate supply of food
           CAP Development cont.


Two (three) stages:
• „OLD“ CAP: from creation to 90s

• MacSharry reform a Agenda 2000: partial
  decoupling.

• MTR of 2003 (or decoupled CAP): from
  2005.
                   OLD CAP
Main instruments of old CAP:
• Price support:
• Import tariffs/quotas
• Export subsidies
                       Old CAP : cont.
Old CAP:
•   EU prices high, above world prices.
•   Behavior of farmers?
•   Price support affects directly production.
•   OLD CAP is coupled.
                                                               Old CAP : cont.


                                          Comparison of EU prices and world prices
                                                       (Ratio of EU and world prices)

                                          500
In te rve n ti on pri ce /worl d pri ce




                                          400

                                          300

                                          200

                                          100

                                            0
                                            1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000
                                                        Wheat          Barley        Sugar
                                                        Beef meat      Maize
                          Price
        Demand
    P                     Support
                                            Supply
                 DD                 PD

   PD                                                Export subsidy=
                                                     (PD - PW)*(QP –
                                                     QD)

   P*
                                         Domestic eq. no
                                         trade and CAP
                                                  World
  PW                                              Price


                 QD      Q*   QP                     Q
QD =                                         QD =
Consumption                                  Production with
                      Export = QP - QD       price support
with price
support
          IMPACT OF OLD CAP
• Growth of production due to high prices. Incomes
  up.
• Consumers worse of.
• Government expenditures up.
• World markets distortions and angry trading
  partners.
• Environmental damage
                                      Impact of old CAP cont.

    Produkcia/spotreba                        Self-sufficiency


                         100




                           0
                           1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000

                                    Psenica      Jacmen     Kukurica

          Self-sufficiency growing until 1990s
                             Impact of Old CAP cont.

                              Expenditures on CAP
              100                                                        100




                                                                               Podiel SPP na celkovom rozpočte (%)
               80                                                        80
Mliard Euro




               60                                                        60


               40                                                        40


               20                                                        20


                0                                                        0
                1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000

                                   Výdavky SPP
                                   Celkový rozpočet EU
                                   Podiel SPP na celkovom rozpočte (%)
            MacSharry Reform

Reasons for reform:

• Old CAP created distortions because it
  was coupled.
• High expenditures on CAP.
• WTO negotiations, UR GATT.
• EU enlargement.
• Unjust distribution of income
              MacSharry Reform cont.


1992 MacSharry Reform.

Main elements of the reform:
• Reduction of intervention prices.
• Introduction of compensatory payments.
                 MacSharry Reform cont.
MacSharry Reform and decoupling:
• Instead of high prices farmers received direct payments.
  Direct payments were paid on number of hectares or
  animals, not on unit of production.

• Total number of hectares and animals was set at the
  average of years 1989-1991. So the support was partially
  decoupled from production.

• Farmers in order to obtain direct payments had to
  produce some commodities or animals. But the
  incentive to increase production was lowered.. .
              MacSharry Reform cont.
MacSharry Reform and rural development:
• Three schemes introduced
   – Early retirement of farmers
   – Agri-environmental payments
   – Afforestation of agricultural land

  – Meassures to improve structure of farming and
    reduce production
                          Direct Payments
                          1993   1996   1998   1999   2001   2002-
                                                              2004
Cereals        euro/t       25     54     54     54     63     63

Oilseeds       euro/t       70     90     94     94     72     63




Suckler cows   eur/unit     84     84     84     84     84     84



Sheep          eur/unit     21     17     23     22     13     20
                      Agenda 2000

Next reform took place in 1999,
Known as Agenda 2000.

Main Reasons:
• Surpluses: UR GATT limits export subsidies and EU
  enlargement.
• Budget: limits set by Berlin Council
• DDA WTO.
• Preferences of citizens change: environment,
  education, research rather than primary agriculture
                               Agenda 2000

Main Elements:
• Agenda 2000 continued MacSharry reform.
• Intervention prices further reduced.
• Higher support through direct payments.
• Financial framework 2000-2006
• SAPARD for new member states
• Voluntary modulation
• TWO PILLARS
  – Market and income policies
  – Rural Development
     • Agrienvironmental measures
     • Voluntary cross-compliance on national level
 Impact of MacSharry reform and Agenda
                    2000
• EU prices converged to world prices,
  imbalances reduced.
• Consumers better off.
• Budget expenditures increased, however.
• Expenditures on CAP under check.
• Enlargement possible.
• WTO pressure remains.
                                      Impact of old CAP cont.

    Produkcia/spotreba                        Self-sufficiency


                         100




                           0
                           1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000

                                    Psenica      Jacmen     Kukurica

          Self-sufficiency growing until 1990s
                             Impact of Old CAP cont.

                              Expenditures on CAP
              100                                                    100




                                                                           Podiel SPP na celkovom rozpočte (%)
               80                                                     80
Mliard Euro




               60                                                     60


               40                                                     40


               20                                                     20


               0                                                      0
                1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000
                              Výdavky SPP
                              Celkový rozpočet EU
                              Podiel SPP na celkovom rozpočte (%)
         Reform of CAP in 2003 - Fischler

Reasons for further reforms of CAP:

• Partially decoupled CAP still creates distortions.
• WTO negotiations.
• Citizens demand environmentally friendly agriculture
  and stressing countryside maintenance.
• CAP loosing support in Commission and society
  – Farmers = polluters,
  – Tougher competition for EU funds in Commission
• MTR agreed on in 2003, came into effect in 2005.
               Decoupled CAP : cont.

Main Elements of MTR Reform:
• Total direct payments computed on hectare and
  farmers receive direct payments irrespective of
  production, farmers obtain Single Farm Payment.
• Stress on environment: CROSS-COMPLIANCE
• Greater emphasis on rural development:
  environment, quality, animal welfare, production
  standards
• Farmers receive direct payments because they look
  after the environment and maintain countryside.
                 Decoupled CAP : cont.

MTR:
• Farmars obtain direct payments even without
  production. Have to keep land in good condition.
• Farmers have to react to price signals and produce
  what is profitable. Reaction to signals of consumers
  not signals of Brussels’ civil servants and politicians.
• Modulation: 5 percent
• Farm Advisory System
• Financial framework untill 2013
              EU Enlargement



• In 2004 EU accepted 10 new members and in
  2007 additional 2 members.

• In new members national agricultural policies
  replaced by CAP.
               EU Enlargement: cont.
Direct payments in new member states:
• New member states had to implement post
  AGENDA 2000 CAP.
• AGENDA 2000 CAP administratively intensive
  requiring investment.
• Single Area Payment Scheme offered.
• Payment per hectare.
               EU enlargement: cont.

Direct payments in new member states:

• Farmers in the new members do not obtain full
  direct payments.

• Two sources of direct payments:
  – EU budget
  – National budget
                EU enlargement: cont.
Distribution of direct payments in new member states
  relative to old EU-15
                 EU budget    National    Total
                                 budget
                             (‘top-up’)
    2004            25          30         55
    2005            30          30         60
    2006            35          30         65
    2007            40          30         70
    2008            50          30         80
    2009            60          30         90
    2010            70          30        100
    2011            80          20        100
    2012            90          10        100
    2013            100          0        100
               EU Enlargement: cont.

EU enlargement and decoupling:
• Payments per hectare irrespective of production.
• No requirement to produce, just to keep land in
  good conditions.
• Full decoupling.
                 Conclusions
• Old CAP fully coupled.
• MacSharry reform and Agenda 2000 partially
  coupled.
• CAP reform 2003 fully decoupled.
• CAP in NMS fully decoupled.
• Shifting emphasis on Rural Development due to
  change of preferences
Externality and public goods
                  Externality

• Economic development causes smog, acid rain,
  polluted water, air or soil. WHY? Must
  unhindered markets lead to environmental
  degradation?
• Pollution is a side effect of production of goods.
  If we want to consume goods we have to
  accept by-products.
• Is there too much pollution caused by
  unregulated markets? YES.
                  Externality


• While benefits of pollution accrue to the firm costs are
  incurred by the whole society, they are external to the
  firm.
• External cost (externality) is uncompensated cost that
  an individual or firm imposes on others.
• Market system produces inefficient outcome in the
  presence of externality, because MSC of market level
  of pollution exceed MSB.
                          Externality

• When externality exists there is a divergence between
  private and social costs (Pigou).
   – Either government involvement is necessary.
   – Or markets should be established and externality
     internalized.
• Why are there then externalities which are not
  internalized?
   – Because the costs of making transactions to internalize
     externality are higher than expected benefit.
• Externality exists only in the presence of
  TRANSACTION COSTS
     Externality – Private solution
• Ronald Coase (1960) argues in what is known Coase theorem
  that even in the presence of externalities an economy can
  always reach an efficient solution provided that the transaction
  costs of making a deal are sufficiently low.
• Coase theorem: If parties affected by externality can negotiate
  at zero transaction cost the outcome is efficient solution
  irrespective of the initial assignments of property rights.
• Externality is the problem of non-existence of property rights,
  nobody or everybody owns air, clean water, ….
• The efficient outcome is not dependent on distribution of
  property rights if there are no transaction costs.
                Coase example 1
    There is a firm which has annual net revenue of 100
    and Union of Fishermen with annual revenue of 120.
    Fishermen need clean pond while firm pollutes the
    pond. Irrespective of the assignment of property rights
    net revenue will be 120 and the firm closes down.

                        Net revenue

Firm           Fishermen          Total    Property right lies
                                           with
0              120                120      Fishermen
P; 120<P<100 120-P 120<P<100      120      Firm
                Coase example 2
   There is a firm which has annual net revenue of 120
   and Union of Fishermen with annual revenue of 100.
   Fishermen need clean pond while firm pollutes the
   pond. Irrespective of the assignment of property rights
   net revenue will be 120 and the fishermen leave the
   pond.
                       Net revenue
Firm               Fishermen     Total    Property right lies
                                            with
120                0              120       Firm
120-P 120<P<100    P; 120<P<100 120         Fishermen
                  Coase example 3
     Same as example 1, but there is an option to buy
     filters that eliminate negative effects of pollution.

                         Net revenue
Firm                 Fishermen    Total       Property right lies
                                              with
70                   120            190       Fishermen
100                  90             190       Firm
     Externality – solution through
      standards, taxes, permits
• Private solution to externality suffers from the
  problem of high transaction costs.
• Government steps in by setting environmental
  standards – rules that specify actions of
  polluters like installing catalytic converters,
  filters, building sewages, ….
• These standards reduced pollution, but
  according to economists at high costs.
• Emission taxes can achieve the desired
  outcome at lower cost.
 Externality – private versus social
                costs
• Sometimes we cannot directly control pollution
  but only the amount of activity that causes
  pollution.
• There is then a difference between private and
  social costs.
• Production of livestock produces methane gas.
• To decrease the amount of methane gas we
  have to reduce production of livestock. No
  filters or similar devices exist for this problem.
   Pigouvian Subsidies in Agriculture


• Many agricultural economists argue that
  agriculture production provides positive
  externality, benefits to the society like
  landscape maintenance, rural social network,
  and …
• Difficulties:
  – Measurement difficulties
  – Political difficulties
                Public goods

• Private goods are excludable (individuals who
  do not pay will not get it) and rival in
  consumption (the same unit can be consumed
  by one person only).
• Most goods like cars, bread, house are private.
• There are however some public goods
             Classification

                Rival in       Nonrival in
                consumption    consumption

Excludable      Private goods Artificial
                (food)          scarce goods
                                (software)
Non-            Common res. Public goods
excludable      (fish in ocean) (defense,
                                research)
               Public goods

• Rational consumers do not pay if the good
  is non-excludable, they free ride.
• In a large group where individual members
  of the group are more or less unanimous
  and unidentifiable, it is impossible to reach
  a voluntary arrangement to cooperate.
       The Free-Rider Problem
• Assume all individuals are identical. To provide the
  public good everybody has to pay the same
  (voluntary) tax amount. Each individual understands
  that contributing his tax will not significantly affect the
  total amount of tax revenue that is collected, and
  therefore, will not affect the provision of the public
  good. S/he therefore has every incentive to behave
  opportunistically and not contribute. Since each
  individual will act in this way, nobody will contribute,
  and hence, the public good will not be provided.
 The Prisoner’s Dilemma
Pay-off         Agent B
(A,B)
              Coop     Cheat

Agent Coop    -1, -1   -5, 0
 A
      Cheat   0, -5    -3, -3
        Free-rider problem
• Private individuals can sometimes
  overcome free-rider problem
  –Donations to finance research
  –TV financed by advertisement
  –Social pressure
Ways to cope with market failure –
         private initiative
• Sometimes market failure can be solved
  by private initiative.
• Families or charities help poor people and
  provide public good to the society.
• If government steps in private initiative can
  be hindered.
Ways to cope with market failure –
         doing nothing
• Doing nothing (except for taxing) is better than
  banning negative externality causing drinking,
  drug use, or smoking.
• Some regulatory mechanisms (like regulating
  supermarkets that are supposed to abuse its
  monopsony power in dealing with producers)
  caused more harm than solved problems.
 Ways to cope with market failure –
  improve the working of market
• Governments foster the flow of information (grading
  food, collect information on economic activity,
  accredits institutions, set health and safety standards,
  enforce product warranties) and thus improve
  functioning of the market.
• Legal system enforces contracts and protects property
  rights.
• Governments engage in antitrust actions (price
  collusion of food processors in Slovakia).
  Ways to cope with market failure –
  measures requiring certain behavior
Govts. can dictate what should be produced,
how, and sold at what price, what cannot be
consumed
– Well known price regulation (fixed prices)
– Product quality regulation (use of food additives)
– Regulation of production process (environmental
  reasons)
– Regulation of workplace safety, because of financial
  externality
   Ways to cope with market failure –
       Government Incentives
Payments to individuals who create positive
externalities and taxing individuals creating
negative externalities (education vs. pollution)
Provision of public goods (including
redistribution of income)
             Government failure
• In many instances the effort of the government to rid of market
  failure leads to even bigger disruptions (government failure)
  Stiglitz (1997) states 4 reasons for government failure:
• Limited access to information. Outcomes of many decisions are
  complicated and unpredicted. The government cannot predict
  the consequences of its decisions.
• Limited control over reactions of private sector.
• Limited control over bureaucracy which has different goals as
  the government.
• Limitations due to the essence of political process
  characterized by decision-making process in a representative
  democracy and approach of politicians to max. of their own
  welfare.
    Thank you

Jan.pokrivcak@uniag.sk

				
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