Major Trends and Developments in the Agribusiness and Agricultural Sectors in CEE and NIS. Johan F.M. SWINNEN 1

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1 Major Trends and Developments in the Agribusiness and Agricultural Sectors in CEE and NIS Johan F.M. SWINNEN 1 Katholieke Universiteit Leuven & Centre for European Policy Studies (CEPS) Paper presented at the EBRD/FAO conference on Investment in Agribusiness and Agriculture in CEE and the CIS Budapest 20/21 March 2002 Introduction It is now more than a decade ago that the Berlin Wall fell and signaled the beginning of a vast set of changes throughout the countries of the former Soviet Bloc. The changes affected society in a multitude of ways. They affected the way the political and economic system operated but also the social organization of society, the psychology of the people living in the countries, and the culture of day to day life. This paper presents and analyzes the major trends and developments in the agribusiness and agricultural sectors of the countries during transition, the causes behind them, and the policy lessons they imply. My analysis in this paper relies heavily on work I have done with various co-authors on these issues and I refer to these publications (see my website) for details on some of the issues and arguments which I will forward here somewhat (too) briefly to do justice to the complexity of the issues. Decline and Growth during Transition When looking at the transformation of the agri-food sectors one observes at the same time several similar characteristics and very diverging patterns. It is precisely from confronting the similarities and the diverging experiences that one can learn and try to identify the factors affecting the economic behavior of the systems. Conclusion 1: Output changes are similar in the initial stages of transition but diverge strongly in the second half of the 1990s Figures 1 and 2 illustrate how all countries have gone through an initial output decline, both in agriculture and in the general economy. However the figures also 1 Department of Economics, KULeuven, Belgium Johan.Swinnen@econ.kuleuven.ac.be

2 illustrate that after the initial decline output evolutions diverge strongly. A striking divergence is obvious from the general economy: while several CEECs have recorded growth after the initial declines, and in particular Poland has recorded spectacular growth rates since 1992, GDP in Russia and Ukraine has continued to collapse. In agriculture the output fall has bottomed out in the mid 1990s in many CEECs, and started recovering in some, while agricultural output has continued to fall in Russia, Ukraine and some other NIS. Looking at productivity indicators yields even more diverging patterns. For example, labor productivity in agriculture (ALP), i.e. output per worker, has fallen in the NIS, while it has increased dramatically in some Central European countries (figure 3). For example, in Hungary ALP almost doubled over the first transition decade, even while output declined. While part of these ALP changes are due to statistical adjustments in labor measuring, these adjustments occurred early on and much of the continued growth in ALP reflects real productivity increases. Initial Effects Conclusion 2: The initial decline in GDP is primarily caused by institutional disruptions, or creative destruction The socialist system left a badly distorted system of input, output, and trade. The reorganization of this system, and the institutional changes associated with it, caused major disruptions and thereby declines in investment and output. While a variety of models have been developed to explain the mechanism -- e.g. some have focused on information problems (Blanchard and Kremer, 1997), others on search costs (Roland and Verdier, 1999) and yet others on contract enforcement problems (Gow and Swinnen, 1998) -- all agree that the organizational disruptions negatively affected output and investment during transition. Or, as Kornai's (2000, p.4) put it more simply: "Correcting this structure called for creative destruction. Because destruction is rapid, whereas creation proceeds more slowly, the two processes led to a deep recession". This process is obvious from the GDP developments in figure 1: GDP has fallen in all countries with the disruptions during the initial transition years. Conclusion 3: In agriculture, the negative output effect of institutional disruption is reinforced by declining terms of trade caused by price and trade liberalizations and subsidy cuts. In many countries, macro-economic reforms coincided with price liberalization and subsidy cuts in the early years of transition (Hartell and Swinnen, 1998; Trzeciak- Duval, 1999). These combined reforms had two major impacts on agricultural and food prices. First, all prices rose dramatically. Figure 4 illustrates how food prices rose by over 500% between 1988 and 1990 in Poland. The figure also illustrates that the huge inflation was brought to more reasonable levels in 2-3 years time. Second, during the period of major price adjustments, not only did nominal prices change dramatically, also relative prices changed. Figure 4 illustrates how input prices increased much more than output prices in Polish agriculture. The same happened in

3 most countries, as reflected in the strong declines in terms of trade for agriculture in figure 5. These terms of trade effects resulted from a combination of cuts in producer and consumer subsidies, price liberalization, reduced demand with falling incomes, and reduced foreign demand with the collapse of the CMEA trading system, the planned inter-country trading regime that guided international trade of most CEECs and FSU countries. The latter led to trade disruptions in many countries, especially in those where CMEA trade integration was strongest. The impact of this terms of trade effect was significant. In Macours and Swinnen (2000) we estimate that this factor caused 40-50% of the decline of crop output over the period, based on data from eight CEECs; and in Macours and Swinnen (2002) we show how output declined in all countries where the terms of trade declined. Reforms and Medium Term Effects While the GDP and GAO developments between 1989 and 1992 are quite similar, the trends clearly diverge afterwards. The reason behind these diverging patterns is differences in reform policies of the governments. Conclusion 4: In order to have creation follow destruction one needs to implement basic reforms. An essential element for sustainable growth is macro-economic stabilization, including the reform of fiscal and monetary institutions. Rapid overall liberalization and sustained macroeconomic stabilization have laid the basis for gradual institutional change in the more advanced transition countries, while stabilization has been jeopardized by the persistence of soft budget constraints in the less advanced countries (EBRD, 1999). While such reforms require a fundamental redefinition of the role of the state, it does not imply a withering away of the state. However, in Russia the state has not taken on a different role, but merely withered away in many important aspects, and has been unable to fulfill some key roles for the development of a market economy (Schleifer, 1997). The state has eroded in establishing the rule of law and in collecting taxes and establishing the basic conditions for macro-economic stability. For example, estimates put the share of transactions which are carried out as barter (mutual nonpayment) or with money substitutes at percent in Russia (Bruszt, 2000). The progress in general reforms and liberalization is summarized in the "liberalization indices" in table 1. The indicators show several groups in terms of reform progress. The first are Central European countries such as Hungary, Poland, and the Czech Republic which have advanced most. The slowest reforming countries are in Central Asia. Conclusion 5: The transition countries that have implemented reforms fastest and more thoroughly have performed best.

4 At the outset of transition, there was a large debate on the optimal sequencing of policies, often called the "Big-Bang" versus "gradualism" debate. The gradualists often referred to China as an example of a successful reform strategy, which combined an initial reform of property rights with a gradual liberalization process and thus created growth without the negative effects of disruptions. Others argued that the initial conditions and the economic structure of China were so different from CEECs that little could be learned from China and that the best policy in those countries was to liberalize and reform everything at once: the so-called Big-Bang option. Several studies comparing economic performance of transition strategies in the non- Asian economies seem to vindicate the Big-Bang argument. Taking into account differences in initial conditions and external factors, such as regional conflicts, those countries which have reformed earliest and most radically are now doing best (Aslund et al, 1996; de Melo and Gelb, 1996; Fischer et al, 1996; Wyplosz, 2000). Reforms and Agriculture Conclusion 6: The general reforms have strongly affected agricultural transition and performance, in particular with regard to creating stability, better access to capital and technology, and privatization. These general reforms have strongly affected the climate in which the agricultural transition has taken place. For example, the inflow of foreign investment and the associated inflow of technology, know-how and capital infusion in the agri-food chain have been most important in countries where the progress of the general reforms, the macro-economic situation, and in CEECs, the prospect of EU accession, have created an environment more conducive to foreign investments. Macro-economic stabilization and general reform progress have not only improved access to foreign capital, technology, and know-how, but also access to domestic credit and capital sources for the farms. Credit markets have worked notoriously imperfect with disruptions due to privatization and overall restructuring caused major problems for farms, not only for investment purposes but even for working capital (Calomiris, 1993; Swinnen and Gow, 1999). These resulted in reductions in output; and the success of the recovery in some countries is at least partially due to improvements in the general economic climate which improved the working capital situation for the farms. Another general reform with important impacts on agriculture is privatization of companies involved in supplying inputs (fertilizer, pesticides, etc.) and credits (banks) to farms as well as food processing and distribution companies. The privatization procedures have differed significantly between countries. In a review of the successes and failures of privatization, Kornai (2000) concludes that privatization strategies directed at selling of state companies, preferably to majority ownership structures, such as in Hungary, has been more successful than privatization strategies based on some form of free distribution of property rights in state-owned companies among the country's citizens e.g. through vouchers. The latter has mostly led to insider privatization in which managers have been able to collect a large share of the assets, as e.g. in the Czech Republic and more extremely in Russia, while the previous has

5 stimulated the emergence of many small enterprises and the inflow of capital, as e.g. in Hungary. This has certainly had a major positive impact on the performance of the entire agri-food sector in Hungary, also because much of the capital inflow came from foreign companies' investments. Key reforms specific to agriculture were land reform and farm restructuring. There is by now a large literature on these issues (e.g. Csaki and Lerman, 2000; Lerman, 1999; Mathijs and Swinnen, 1998; Swinnen, 1999). Here I will just summarize some key aspects of the reforms. Conclusion 7: The nature of the land rights allocated in land reforms is more important than who gets them. In CEECs land was either restituted to former owners, distributed to farm workers in delineated boundaries, or leased to new farms (in attendance of sales). In particular the process of land restitution to former owners created major political debates and opposition, because it was argued that restitution would separate ownership from those using the land with devastating consequences. Looking back now, it appears that although these land reforms were complex and difficult to implement, they ended up with stronger and better defined property rights for the new landowners than for the land reforms in several FSU countries, such as Russia and Ukraine. In these countries, land was given to the users of the land, and distributed as paper shares or certificates to workers of the collectives and state farms. However, individuals cannot identify the piece of land that belongs to any given share, causing weak land rights for individuals and undermining their ability to withdraw land from the large farms. As a result, family farming is emerging only slowly, and large farms have little incentive to restructure (Lerman, 1999). It appears that the transaction costs involved in land exchanges after clearly defined land rights are given to individual owners are, however substantial, still considerably less than those in accessing land when land rights are incomplete or not defined clearly. The first process at least has satisfied a basic condition for land exchange to develop, although often a lot remains to be done, in contrast to the second process where not even the basic conditions are fulfilled, notwithstanding that formally the land is given to those presumably most likely to use it. Conclusion 8: Farm restructuring and its effects yield a more complex picture than expected ex ante. At the outset of transition, there were two extreme views. One view held that collective and state farms were so inefficient that they would collapse and fall apart when government controls over the farm structures would be removed. The other view said that individual farming would not emerge because farm workers in CEECs had no experience in running a farm business themselves. The empirical evidence shows a large variation in developments (table 2). In some countries an almost complete shift to individual farming has taken place, while in others the opposite has happened, and most CEECs have a mixed evolution. These differences are not accidental: they reflect differences in incentives and costs of shifting to individual farming, caused both by policies and structural conditions. For

6 example, the break-up of the former collective and state farms has been strongest in countries where these farms were least efficient and most labor intensive, which reduced the costs of production fragmentation and increased the gains of improved labor governance, and where government policies reduced constraints for individuals to start up their own farms (Mathijs and Swinnen, 1998). The shift was also higher in regions where at least some private farming survived during Communist rule (Rizov et al., 2001). Although the share farmed by large corporate farms keeps falling gradually in most transition countries, it is a slow process and it is not obvious that they will disappear for quite a while, either because policies favoring them or because institutional barriers constrain individual farming, or because they provide up- and downstream activities substituting for missing markets. In many countries a dual farm structure is emerging with a few very large-scale farms and many (very) small-scale individual farms (Sarris et al.,1999). Conclusion 9: There is scope for significant productivity improvement through better farm management and by hardening budget constraints Many studies show that the difference in efficiency between farms within a country are large and that improvements in management hence can lead to significant overall productivity increases. However, policy is important. Where farms were forced to restructure and budgets were hardened, productivity increased strongly and the gap between different organizations diminished while elsewhere efficiency actually may have declined during transition (Mathijs and Swinnen, 2001; Sedik et al., 1999). Input & Labor Adjustments in Agriculture While much research has been focused on trade liberalization, price reform, farm restructuring, privatization, land reform, etc., relatively less attention has been directed towards capital markets, although these are key to recovery and sustainable growth in agriculture (see further). However, arguably least attention has been paid to labor market changes, although these obviously play a key role in creating rural development and in improving rural welfare. Conclusion 10: Input use has declined everywhere in rather similar proportions, except for agricultural labor adjustments which have differed widely among CEECs and between regions. In general, the decline in terms of trade and subsidy cuts provided major incentives for reducing input use in agriculture. Across countries this has caused important reductions in the use of capital inputs such as machinery, and in particular fertilizer. Fertilizer use, initially highly subsidized, declined by 80% on average in transition countries. In contrast, land use remained relatively stable. While these adjustments are relatively similar across countries, the one factor where there are major differences between countries is in labor use. During the first five years of transition, labor employment in agriculture declined dramatically (around 50%) in the Czech Republic, Slovakia, and Hungary (figure 6).

7 However, in contrast, agricultural employment increased during the first five years of transition in countries such as Russia and Ukraine. The most dramatic labor inflow occurred in Central Asia. For example in Kyrgyzstan agricultural employment increased by 60%. External economic conditions as well as government policies have affected the outflow of labor from agriculture during transition, with major implications for agricultural productivity and rural incomes, as improvements in labor productivity (see figure 3) have been strongly correlated with the outflow of labor from agriculture. Conclusion 11: Food security concerns and farm management practices have constrained labor outflow in low reform countries, while liquidation of state and collective farms and effective restructuring have caused strong outflows in faster reforming CEECs. In the NIS and the less developed CEECs household food security concerns limited the labor outflow from agriculture, or in some cases induced an inflow during early transition (Seeth et al., 1998). However labor restrictions in Russia and Ukraine also take the form of former state farms continuing to provide social services, such as housing and health care, which increase mobility costs for workers to move to other sectors or regions, with poorly developed housing markets (Brooks et al., 1996). Moreover in Russia most companies are now paying wages in kind and through fringe benefits rather than cash. Because most of the goods and services provided cannot be converted into cash, workers cannot finance the costs associated with moving to other regions (Friebel and Guriev, 1999). Reductions in labor use are strongly interrelated with farm restructuring. The outflow of labor is strongest in countries such as Czech Republic, Slovakia and Hungary where the large-scale farms have remained dominant in agriculture (table 2). The shift to individual farms is much stronger in transition countries such as Romania, countries which experienced an inflow or preservation of the labor force in agriculture during the first years of transition. In contrast, reformed collective and state farms with independent company management have laid off a large amount of workers, beyond those that voluntarily left the farms for other employment. Family labor on small private farms has mostly stayed in agriculture, while many workers employed on the large state farms have been laid-off in the process of privatization and transformation of these state farms. Hence, the statement that agriculture is playing a "buffer role" is valid for the small family farms and household plots, but not for the transformed state farms. Medium Term Effects in CEEC Agriculture : Recovery Through Productivity Increases Conclusion 12: While the initial decline in agriculture is affected by institutional disruptions and terms of trade effects, the recovery is driven by productivity increases where the necessary reforms have been implemented.

8 Where the necessary reforms have been implemented, productivity increases have emerged in the second half of the 1990s. For example, figures 7-9 illustrate that yields have increased strongly in some countries. Furthermore, figure 10 illustrates, based on data for the CEEC sugar market, how the increase in productivity has driven output recovery. While the initial decline in sugar output is price driven (and through institutional disruptions (not observed)) the recovery in the second half of the 1990s is largely productivity driven, part of which is through solving the institutional disruptions. Conclusion 13: An essential ingredient in recovery and productivity increases is the development of institutions for contract enforcement and access to capital. An important source of increased productivity in agriculture is the emergence of new institutions for information, product exchange and contract enforcement. Pretransition systems were strongly vertically integrated. The central planner provided the information and enforced contracts involving exchanges between the various agents in the chain. The removal of the central planning and control system, in the absence of new institutions to enforce contracts, distribute information, and finance intermediation caused serious disruptions throughout the economy (Gow and Swinnen, 1998; Stiglitz, 1999). New enforcement institutions have come in a variety of forms. Frequently, the most successful ones have depended on private enforcement mechanisms within the framework of specially designed contracts or institutional arrangements. Increasingly contracts between private agents act as substitutes for missing or imperfect public enforcement institutions (McMillan, 1997). Successful institutions have offered enough flexibility to allow producers, suppliers, and buyers to adjust to the continuously changing environment during transition. For example, while land lease contracts initially often took the form of short (one-season) informal contracts, gradually they have evolved into more formal and longer-term contracts, reflecting reduced uncertainty and improved understanding of the market environment by both the owner of the land and the tenant. Leasing, not only of land, but also of equipment is another example of an institutional innovation adapted to transition as it mitigates farms collateral problems in financing new equipment. Conclusion 14: Vertical integration, especially with foreign direct investment, has played an important role in the reemergence of the institutions of exchange Vertical integration, especially with foreign direct investment, has played an important role in the re-emergence of the institutions of exchange (Gow and Swinnen, 1998). The share of total FDI going to the agro-food sector is around 15% on average. The vast majority of agro-food FDI has been directed to the agro-industry, rather than to primary agriculture. Within agro-industry, most FDI has been directed into the sugar and confectionery, the tobacco and the soft drink sub-sectors. Alcoholic beverages and milk and dairy production also attracted substantial FDI. However, meat processing, for example, has received relatively little investment from foreign firms (OECD, 1999). Vertical integration in various forms has improved access to capital, inputs, and technology for farms. Beyond supply of capital, agribusiness firms, in search for

9 guaranteed and high quality raw materials (or product markets), have offered farms a number of arrangements to encourage greater production and marketing and to overcome constraints that have limited economic activity since the onset of transition. For example, food processors have negotiated contracts with banks and input suppliers to provide farms with inputs that enable them to deliver high quality products to their company. Similar, input supply firms have been involved with assisting farms to find guaranteed outlets for their products in order to stimulate farms demand for the company s products. Foreign companies have played a leading role in this development. While processors have contracted with a variety of farms, both large and small, often because of the necessity to obtain sufficient supplies they are assisting small farms in upgrading their equipment and in optimizing the scale of their operation. For example, dairy companies assist their small suppliers in improving milk quality, through advice and investment support, and in upgrading their equipment and cattle stock, through leasing and credit assistance. As a result, Dries and Swinnen (2001) found that in a case study of six dairy companies in northern Poland, the share of supplying farms with on-farm cooling tanks increased from 5 per cent in 1996 to 33 per cent in Furthermore, the study shows that the share of milk deliveries that is up to EU quality standards (extra class) increased significantly since 1996 (figure 11). EU Enlargement, Trade, WTO, and the CAP Conclusion 15: Since the beginning of transition, agri-food trade between EU and CEEC has increased dramatically, and net exports of the EU strongly increased. While EU agri-food imports from CEECs have doubled, EU exports to CEECs have increased almost tenfold (figure 12). As a result the net trade balance for the EU has improved from negative 1 billion to a positive 2 billion. The nature of agri-food trade has changed as well. While trade has increased in most categories, exports of processed products from the EU to CEECs have increased considerably more than exports of primary products. Imports of the EU from CEECs have increased more or less the same across different categories. Accession to the EU will dismantle remaining barriers to trade, which will further intensify trade relations between the EU-15 and the CEECs. The integration of the CEECs into the CAP will admit the CEECs to trade protection and subsidies under the CAP and is likely to cause an increase in agricultural production, and in net exports of food and agricultural products in CEECs. This causes concerns because of its potential conflict with the WTO agreements and with budgetary constraints. Specifically, the concern is that enlargement with accession to the CAP will cause an increase in CEEC agricultural prices and, hence, in production, and that this would imply more export subsidies in the unified EU, and hence put pressure on the EU budget and conflict with WTO agreements on agricultural trade.

10 Conclusion 16: The impact on the EU-15 will be more limited than initially expected / feared although uncertainly remains in particular regarding the interaction with WTO. First, behind the EU-CEEC agri-food trade development are, besides EU export subsidies, quality differences and the competitiveness of the EU food marketing, processing, and retailing industry, and the more developed institutional framework. Quality, hygiene and health requirements, are extremely important for agricultural and food products. Recent food crises (dioxine, BSE, ) have reinforced the importance of these characteristics, and in this perspective the growing trade deficit of the CEECs versus the EU-15 is less surprising. Exports from the EU-15 to CEECs may therefore further increase when CEEC import constraints are removed with accession. The imposition of higher standards on CEEC products comes both from demands by private processing and distribution companies concerned about consumer and export demands 2 and from government regulations through the adaptation of the regulatory framework to EU standards as a prerequisite for accession. Higher standards 3 will have two (opposite) effects on exports from the CEECs to the EU-15. Transaction costs for the trade of CEECs agricultural and food will reduce and quality standards will increase, which will improve access to the EU-15 market. However, the implementation of the standards will require significant investments which not all CEECs producers and processors will be able to make. Hence the production which satisfies these requirements will be less than the current output. Second, in comparison to the immense reduction of trade barriers since 1989 future changes are moderate. For example, recent market and policy changes have reduced the price and output effect of CAP integration. Specifically, the price gap between EU and CEECs in agricultural products has diminished since the earlier 1990s, because of three reasons. First, reforms of the CAP (1992 MacSharry Reform and Agenda 2000) have reduced support prices for some of the most protected commodities. Second, increases in agricultural protection in CEECs since the mid 1990s, partly because of CAP-imitation in anticipation of accession, but primarily because of domestic political pressure from CEEC farmers. Figure 13 illustrates how PSEs in CEECs were by 1998 almost half of the EU PSE, but for some commodities, such as milk, close to the EU protection levels. Since then protection has increased, partly in response to the depressing market effects of the Russian crisis. Third, the appreciation of real exchange rates in CEECs has further reduced the nominal price gap between EU and CEECs. In combination, these developments have reduced the price gap between CEECs and EU, and hence the trade effects of enlargement. 4 For example, figure 14 illustrates the decrease in the price gap wheat. Figure 15 shows that even for milk, a product with little policy reform in the EU, the price gap has decreased over time. Prices for some other agricultural commodities are now close or even higher in the CEECs than in the EU. 2 Foreign direct investment in the food processing and retail industry will play an important role here. 3 An important part of the agricultural acquis communautaire (the set of rules and regulations of the EU that the CEECs have to implement) focuses on health and hygiene requirements for food and agricultural production. 4 Significant price increases with the accession should only be expected for beef, sugar, milk (and

11 Simulations indicate that, taking into account the combined effect of these factors, the impact of introducing the CAP in CEECs on agricultural prices in CEECs is relatively small on average (Münch, 2000). It now appears that future developments of production in the CEECs, and the likelihood of a conflict with WTO constraints after accession, will largely be dominated by trends/changes in productivity, rather than by the introduction of the CAP. At this moment, agricultural productivity in CEECs is considerably lower than in the EU-15. As shown above CEEC agricultural productivity has started to grow since the mid 1990s, and is expected to increase further with enlargement both because of the economic conditions that will have been fulfilled and because of the improved access to capital, technology, etc. which results from enlargement. However there is no consensus about the extent to which these productivity increases will emerge in the next decade. Productivity increases since the mid 1990s are considerable in countries such as Hungary with much foreign investment in the food industry. The latter has resulted in better access to inputs, capital, and technology for the farms contracting with these companies, and to positive spillover effects to other sectors. However productivity increases seem to be lagging in the two large countries, Poland and Romania. Both are largely characterized by unfavorable production structures. The majority of Polish and Romanian land is used by (very) small-scale family farms. Empirical evidence indicates that these small-scale family farms have not been conducive to rapid restructuring and productivity growth over the past years. They are characterized by hidden unemployment, low skills, difficult access to inputs and inefficient scales. Given the large share of total CEEC land and labor employed by these farms, this will be an important additional constraint on future productivity and output growth for the CEECs. Furthermore, while there clearly has been a recovery in yields since 1994, one should not forget that yields in the EU-15 continue to increase significantly as well, hence the gap has not decreased on average. While one should be careful with this comparison, looking at the impact of Southern enlargement (Greece, Portugal, Spain) on productivity and input use also suggest that one should not necessarily expect a quick catch-up in productivity to emerge with accession or in the years immediately afterwards. The likelihood of a WTO conflict, and the impact on the CAP, will depend more on the outcome of the negotiations in the WTO Millennium Round than on enlargement. If, as a result of a new WTO agreement, either the EU needs to change the implementation or the extent of the direct payments, or if export subsidies need to be significantly reduced, the CAP will need to be reformed significantly, irrespective of enlargement.

12 References Aslund, A., P. Boone and S. Johnson (1996), "How to stabilize: Lessons from Postcommunist countries", Brookings Papers on Economic Activity, 1, pp Berkowitz, P. and W. Münch (2000), The Competitiveness of Meat and Milk Production in Central and Eastern Europe - Challenges for the EU?, Paper presented at the Conference Globalization, Production Siting and Competitiveness of Livestock Products at the Federal Agricultural Research Center, Braunschweig, Germany, September 25, 2000 Blanchard, O. and M. Kremer (1997), Disorganization, Quarterly Journal of Economics, 112, 4, Brooks, K., E. Krylatykh, Z. Lerman, A. Petrikov and V. Uzun (1996), Agricultural Reform in Russia, A View from the Farm Level, World Bank Discussion Papers 327, World Bank, Washington. Bruszt, L. (2000), Constituting Markets: The Case of Russia and the Czech Republic, in M. Dobry (ed.), Democratic and Capitalist Transitions in Eastern Europe, (Kluwer Academic Publishers). Calomiris, C.W. (1993), Agricultural Capital Markets. In: Braverman, A., Brooks, K.M. and C. Csaki (eds.) The Agricultural Transition in Central and Eastern Europe and the Former U.S.S.R., Washington DC, The World Bank. Csaki, C. and Z. Lerman (2000), Structural Change in the Farming Sectors in Central and Eastern Europe, World Bank Technical Paper no.465 (Washington: World Bank). Csaki, C. and J. Nash (1998), The Agrarian Economies of Central and Eastern Europe and the Commonwealth of Independent States: Situation and Perspectives (Washington: World Bank). Csaki, C. and L. Tuck (2000), Rural Development Strategy: Eastern Europe and Central Asia World Bank Technical Paper no.484 (Washington: World Bank). de Melo, M. and A. Gelb (1996), A comparative analysis of twenty-eight transition economies in Europe and Asia, Post-Soviet Geography and Economics, 37, 5, Dries, L. and J. Swinnen (2001), The Impact of Globalization, Transition and EU Accession on the Polish Dairy Sector, PRG Working Paper (Katholieke Universiteit Leuven). EBRD (1999), Ten Years of Transition, Transition Report 1999 (London). Fischer, S., R. Sahay, and C. Vegh (1996), Stabilization and Growth in Transition Economies: The Early Experience, Journal of Economic Perspectives, 10, 2, Friebel, G. and S. Guriev (1999), "Why Russian Workers Do Not Move: Attachment of Workers through In-Kind Payments", RECEP working paper no.5, Russian- European Center for Economic Policy, Moscow.

13 Gow, H. and J. Swinnen (1998), Agribusiness Restructuring, Foreign Direct Investment, and Hold-Up Problems in Agricultural Transition, European Review of Agricultural Economics, 25, 4, Hartell J. and J. Swinnen (1998), Trends in Price and Trade Policy Instruments in Central European Agricultural and Food Markets, The World Economy, 21, 2, Kornai, J. (2000), The Road to a Free Economy -- Ten Years After, Transition, 11, 2, 3-5. Lerman Z, (1999), Land reform and farm restructuring: What has been accomplished to date? American Economic Review, 89, 2, Macours, K. and J. Swinnen (2000), Causes of Output Decline in Economic Transition: The Case of Central and Eastern European Agriculture, Journal of Comparative Economics, 28, 1, Macours, K. and J. Swinnen (2002), Patterns of Agrarian Transition Economic Development and Cultural Change, forthcoming. Mathijs, E. and J. Swinnen (1998), The Economics of Agricultural Decollectivization in East Central Europe and the Former Soviet Union, Economic Development and Cultural Change, 47, 1, Mathijs, E. and J. Swinnen (2001), Production Organization and Efficiency during Transition: An Empirical Analysis of East German Agriculture, The Review of Economics and Statistics, 83(1): McMillan, J. (1997), Markets in Transition, in D. Kreps and K.F. Wallis (eds.), Advances in Economics and Econometrics: Theory and Applications, vol. 2 (Cambridge: Cambridge University Press). Münch, W. (2000), Effects of CEEC-EU Accession on Agricultural Markets in the CEEC and on Government Expenditure, in S. Tangermann and M. Banse (eds.), Central and Eastern European Agriculture in an Expanding European Unio. (CAB International). OECD (1999), Agricultural Policies in Emerging and Transition Economies (Paris: OECD). Rizov, M., Gavrilescu, D., Gow, H., Mathijs, E. and J. Swinnen (2001), "Transition and Enterprise Reorganization: Farm Restructuring in Romania" World Development, 29(7): Roland, G. and T. Verdier (1999), Transition and the Output Fall, Economics of Transition, 7, 1, Sarris, A., T. Doucha, and E. Mathijs (1999), Agricultural Restructuring in Central and Eastern Europe: Implications for Restructuring and Rural Development, European Review of Agricultural Economics, 26(3): Schleifer, A. (1997) Government in Transition European Economic Review, 41, 3-5, Sedik, D.J., M.A. Trueblood and C. Arnade (1999), Corporate farm performance in Russia, : An efficiency analysis, Journal of Comparative Economics, 27, 3,

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15 Table 1: Reform progress in 1999 Liberalization index (in %, 1997) Agricultural reform index (1999) Czech Republic Hungary Poland Slovakia Central Europe Albania Bulgaria Romania Slovenia Balkan Estonia Latvia Lithuania Baltics Belarus Moldova Russia Ukraine European NIS Kazakhstan Kyrgyzstan Tajikistan Turkmenistan Uzbekistan Central Asian NIS Source: The World Bank, and Csaki and Tuck (2000)

16 Table 2: Farm Individualization Index (FII), 1998 FII Albania 95.0 Czech Republic Armenia 89.2 Kazakhstan Latvia 86.5 Ukraine Lithuania 85.7 Russia Romania 75.6 Uzbekistan Hungary 47.6 Turkmenistan Bulgaria 46.5 Slovakia Georgia 36.4 Belarus Kyrgyzstan 34.4 Tajikistan a The FII is calculated by dividing the difference between the share of individual farms in total agricultural (IND89) by 100 minus the share of individual farms in total agricultural land in 1989: FII=(IND98-IND89 Source: Mathijs and Swinnen (1998), Csaki and Nash (1998) and national statistics

17 Figure 1: Changes in GDP since Change in GDP Bulgaria Romania Slovak Rep Slovenia Czech Rep Hungary Poland Russia Ukraine Source: OECD Figure 2: Changes in gross agricultural output (GAO) 110 GAO Index Years after start reforms Central Europe Balkan Baltics European NIS Central Asian NIS Source: FAO

18 Figure 3: Changes in agricultural labor productivity (ALP) Change in ALP Central Europe Balkan Baltics European NIS Central Asian NIS Years after start of the reforms Figure 4: Changes in food and agricultural input and output prices in Poland Input price Output price Retail food price

19 Figure 5: Changes in agricultural terms of trade since Agr. producer price/ agr. input price Czech Rep Hungary Poland Russia Ukraine Figure 6: Change in agricultural labor use 180 Change in agr. labour use Kyrgyzstan Tajikistan Russia Ukraine Czech Republic Hungary Romania Bulgaria Slovakia years after start of the reforms

20 Figure 7: Changes in yields (Average for Poland, Czech Republic, Slovakia and Hungary) Change in yields (%) Sugar Beet Milk Coarse Grain Oilseed Source: FAO Fig. 8: Changes in Coarse Grain Yields 110 Change in coarse grain yield Central Europe Balkan European NIS Central Asian NIS Baltics years after start reforms Source: USDA

21 Fig. 9: Changes in Milk Yields Change in milk yield years after start reforms Central Europe Balkan Baltics European NIS Source: ZMP (2001) Figure 10: Evolution of output, relative prices and yields of sugar beet in CEECs Price Output Yields CEECs: Average for Poland, Hungary, Czech Republic and Slovakia Source: Swinnen, Gow and Maviglia (2002)

22 Figure 11: Change in the share of extra class milk deliveries Share of Extra Class Milk in Total (%) Mlekpol Mleczarnia Kurpie Mazowsze ICC Paslek Warmia Dairy Source: Dries and Swinnen (2001) Figure 12: Trade between CEECs and EU-15 in Agricultural and Food Products (Billion ) Billion EURO EU Import EU Export EU Balance

23 Figure 13: Agricultural protection in CEECs in 1998 (% PSE for total and milk) PSE total PSE milk 10 0 Latvia Russia Estonia Poland Romania Hungary Czech Rep Slovakia EU USA Source: OECD Figure 14: The development of CEEC a -EU price gap for wheat Price Gap (%) EU CEEC a CEEC is the average for Czech Republic, Hungary, Poland, Romania and Slovakia Source: European Commission

24 Figure 15: The Development of CEEC-EU Price Gap for Milk % price gap Czech Republic Estonia Hungary Poland Slovenia EU World (e) Source: Berkowitz and Münch (2000)