Transcript Agriculture and transition in Slovakia and other CEE countries

Agriculture and Transition in
Slovakia and other CEE countries:
A general introduction to rural development
Jan Pokrivcak
SAU Nitra, Slovakia
[email protected]
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
1960s
1970s
1980s
4.5
3.6
2.8
0.8
3.7
4.5
2.8
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
%
-5
-10
-15
-20
-25
-30
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
The Slovak Experience
Economic growth
6.0
5.2
3.6
3.9
4.0
5.0
4.0
3.0
2.0
1.0
0.0
2001
2002
2003
2004
Czech Republic
2005
Hungary
2006f
Poland
2007f
2008f
Slovak Republic
average
The Slovak Experience
Unemployment rate
20%
19%
18%
17%
16%
15%
14%
13%
12%
11%
10%
93
94
95
96
97
98
99
00
Core Unemployment (average)
01
02
03
LT average
04
05
The Slovak Experience
Structure of Economy
Agriculture
3,5
Services;
67,1
Industry;
29,4
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
US (1)
Germany (4)
Poland (22)
Czech
Republic (40)
Hungary (44)
Slovak
Republic (50)
GDP (EURbn)
Relative to
German
market
Populat.(m)
Relative to
German
population
10,119
513
265.6
324
1,973
100
81.9
100
403
20.4
38.7
47
170
8.6
10.3
13
139
7.0
10.1
12
62
3.1
5.4
7
Note: GDP adjusted by Purchasing Power Parity, 2004 data. Source: EUROSTAT
The Slovak Experience
Productivity comparison
GDP per hour worked Germany = 100
US
Germany
Austria
UK
Source: OECD
108
100
99
94
Hungary
Slovakia
Czech Republic
Poland
52
49
45
41
Mexico
32
The Slovak Experience
Working habits
Hours worked per year
# of hours
Czech Republic
Poland
Slovakia
USA
UK
Italy
Austria
Germany
France
Netherlands
Source: OECD
1 972
1 956
1 814
1 792
1 673
1 591
1 550
1 446
1 431
1 354
OECD Rank Germany=100%
2
3
7
12
16
18
21
24
25
26
136%
135%
125%
124%
116%
110%
107%
100%
99%
94%
The Slovak Experience
Education
% of population 25-64 having completed at least
upper secondary education
Czech Republic
Slovakia
Germany
UK
Poland
Austria
Hungary
Netherlands
France
Source: Eurostat, 2002 data
Percentage
Rank
87.8
85.8
83.0
81.7
80.8
78.2
71.4
67.6
64.1
1
3
5
7
9
11
14
15
17
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
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.
3
The Slovak Experience
Doing business
140
120
100
80
60
40
20
0
Ease of Doing
Business
Slovakia
Starting a
Business
Dealing w ith
Licenses
Czech republic
The smaller the number, the better
Source: World Bank, Doing Business 2006
Hiring and
Firing
Hungary
Registering
Property
Poland
Getting Credit
Germany
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
Germany
23
16.3
The Slovak Experience
FDI inflow
% of GDP
12
6.0
5.0
4.0
3.0
2.0
1.0
0.0
R
ia
s
us
)
l
)
(*
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d
a
a
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si
ex
Br
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k
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(
a
a
d
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n
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ce
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ol
ga
ai
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p
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S
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S
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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
Mass consum
Heavy industry
Telecommunication
Transport
Tourism&leisure
Telecom
Hi-tech services
Chemicals
Hi-tech equipment
Real estate/construction
Financial industry
Pharmacy
0%
28%
28%
27%
19%
16%
12%
12%
11%
11%
10%
9%
9%
7%
5%
10%
15%
20%
25%
30%
The Slovak Experience
Hourly labor costs in EUR
% of CE
% of EU15
avg
1996
2004E
Feb-06
2.6
5.5
6.5
116.3
24.6
2.7
2.7
2.3
5.2
4.2
4.4
5.7
5.1
5.1
101.0
91.4
91.3
21.3
19.3
19.3
CE Average
2.6
4.8
5.6
100.0
21.1
EU Average
20
25.9
26.6
100.0
25.3
30.4
31.0
116.4
Czech
Republic
Hungary
Poland
Slovakia
Germany
The Slovak Experience
Corporate profit taxation
Hungary(*)
Slovakia
Poland
Czech Republic
Germany(**)
Netherlands
France
Austria
EU15 average
2004 Corp
tax rate(%)
2006 effective
tax rate(%)
Tax on
dividends(%)
17.6
19
19
28
39.35
34.5
34.3
34
31.3
18.1
16.7
18.0
21.1
36.0
20.0
0.0
20.0
15.0
23.5
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
1998
2003
Slovakia
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
ha
Workers/Tractors per
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
124 770
7
1
10
Ukraine
3 930
145
11
13
Uzbekistan
13 637
77
7
11
Turkmenistan
Farm size during communism
Albania
Bulgaria
Czechoslovakia
Hungary
Poland
Romania
Estonia
Latvia
Lithuania
Average
farm size
(ha)
1 907
19 464
2 988
3 559
1 157
2 696
4 490
4 041
3 094
Armenia
Azerbaijan
Belarus
Georgia
Kazakhstan
Kyrgyzstan
Russia
Tajikistan
Turkmenistan
Ukraine
Uzbekistan
Average
farm size
(ha)
1 621
2 765
3 417
2 148
75 555
21 626
8 473
8 352
124 770
3 930
13 637
Farm size in market economies
Average farm size (ha)
Japan
EU-15
USA
1.24
18
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.
2.
3.
4.
Privatization
Farm restructuring
Price liberalization
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,
Turkmenistan) privatization limited.
Kazakhstan,
Distribution
Albania
Bulgaria
Czech R.
Hungary
Slovakia
Romania
Estonia
Latvia
Lithuania
Armenia
Azerbaijan
Georgia
Kyrgyzstan

Russia

Ukraine

Restitution
Distribution and
restitution












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
Share on land
Farm size (ha)
(%)
Albania
Bulgaria
Czech R.
Hungary
Poland
Romania
Slovakia
Slovenia
Estonia
Latvia
Armenia
Azerbaijan
Belarus
Georgia
Kazakhstan
Russia
Tajikistan
Turkmenistan
Uzbekistan
Ukraine
96
44
28
59
87
55
12
94
63
90
32
9
16
24
20
11
7
0.3
4
17
1
20
4
8
2
42
2
12
Transformed coops
Share on land (%)
4
55
72
41
13
45
88
6
37
10
68
91
84
76
80
89
93
99.7
96
83
Farm size (ha)
861
937
312
274
1185
327
297
6 100
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
Index
Czech R.
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
Czech Republic
Hungary
Poland
Slovakia
Albania
Bulgaria
Romania
Slovenia
Estonia
Latvia
Lithuania
Belarus
Moldova
Russia
Ukraine
Years after start GAO index in
reform with
year of lowest
lowest GAO
GAO
5
6
5
10
2
7
3
3
8
9
9
9
9
8
9
75
69
77
68
77
57
75
65
41
37
64
57
42
58
51
GAO index after GAO index after
5 years of
10 years of
reform
reform
75
70
77
77
100
63
93
81
55
50
69
61
66
64
69
77
73
85
68
113
62
93
79
55
50
69
61
66
64
69
Growth of ALP (Output per Farm Worker) (index equals
100 in first year of reform)
Country
Czech Republic
Hungary
Poland
Slovakia
Albania
Bulgaria
Romania
Slovenia
Estonia
Latvia
Lithuania
Belarus
Moldova
Russia
Ukraine
Year with
lowest ALP
1
1
3
0
2
9
9
3
1
8
5
4
8
5
8
ALP index in
year of lowest
ALP
99
99
96
100
77
60
59
61
76
49
62
69
41
63
52
ALP index after
5 years of
reform
ALP index after
8 years of
reform
126
175
99
110
108
69
67
85
139
54
62
71
58
63
65
177
220
144
132
104
63
63
Na
163
65
77
87
41
65
52
Growth of Input Use Indexes in Transition Countries (index
is 100 in first year of reform)
Country
Czech Rep.
Hungary
Poland
Slovakia
Albania
Bulgaria
Romania
Slovenia
Estonia
Latvia
Lithuania
Belarus
Moldova
Russia
Ukraine
Fertilizers
Tractors
Land
Labor
Animal Stock
5
10
5
10
5
10
5
8
5
10
29
15
35
17
19
25
27
56
17
21
10
25
42
11
24
24
18
38
15
14
14
17
52
20
53
16
40
2
9
11
58
72
114
89
74
69
106
56
106
82
118
92
93
82
92
82
61
113
77
68
51
110
118
109
89
137
62
78
61
68
103
94
99
100
101
98
100
91
107
99
100
98
102
98
100
103
95
98
100
102
98
100
83
106
97
100
97
102
98
99
54
43
89
71
92
92
118
95
40
79
113
8
114
100
106
44
37
97
60
107
99
110
87
35
77
103
73
111
92
102
69
59
81
65
121
47
63
86
50
38
52
79
64
74
75
53
51
69
46
107
42
50
82
32
6
41
64
32
47
41
Growth of Index of Agricultural Yields in Transition
Countries (100 in first year of reform)
Country
Czech Rep.
Hungary
Poland
Slovakia
Albania
Bulgaria
Romania
Slovenia
Estonia
Latvia
Lithuania
Belarus
Moldova
Russia
Ukraine
Average agricultural yield
after 5 years of transition
96.3
79.7
87.3
92.3
94.0
68.7
100.7
Na
86.0
82.7
80.7
72.3
Na
72.3
78.3
Average agricultural yield
after 10 years of transition
115.3
98.0
100.0
107.3
100.0
75.7
102.7
Na
100.3
103.7
91.3
75.3
Na
74.7
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
In te rve n ti on pri ce /worl d pri ce
(Ratio of EU and world prices)
500
400
300
200
100
0
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000
Wheat
Beef meat
Barley
Maize
Sugar
P
Price
Support
Demand
DD
PD
PD
Export subsidy=
(PD - PW)*(QP –
QD)
P*
Domestic eq. no
trade and CAP
World
Price
PW
QD
QD =
Consumption
with price
support
Supply
Q*
QP
Export = QP - QD
Q
QD =
Production 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.
100
100
80
80
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 (%)
Podiel SPP na celkovom rozpočte (%)
Mliard Euro
Expenditures on CAP
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
20022004
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.
100
100
80
80
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 (%)
Podiel SPP na celkovom rozpočte (%)
Mliard Euro
Expenditures on CAP
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
budget
(‘top-up’)
Total
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
Firm
P; 120<P<100 120-P 120<P<100
120
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
Property right lies
Firm
Fishermen
Total
with
120
0
120
120-P 120<P<100 P; 120<P<100 120
Firm
Fishermen
Coase example 3
Same as example 1, but there is an option to buy
filters that eliminate negative effects of pollution.
Firm
Net revenue
Fishermen
Total
70
120
190
100
90
190
Property right lies
with
Fishermen
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
consumption
Excludable
Nonexcludable
Nonrival in
consumption
Private goods Artificial
scarce goods
(food)
(software)
Common res. Public goods
(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
(A,B)
Agent Coop
A
Cheat
Agent B
Coop
Cheat
-1, -1
-5, 0
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
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