Policy, Researth, and External Affairs WORKING PAPERS Agricultural Policies Department The World Bank October 1991 WPS 793 Decollectivization and the Agricultural Transition in Eastern and Central Europe ,,-e 1' '. 'D uu , -su aa 1~ II.O WJ An agricultural transition when demand is constrained is more difficult to manage than when the fruits of institutional change and productivity grow\th find ready outlets. Any progress on the demanid side- b increasing domestic demand or improving perfonnance in export markets - will give a major impetus to the institutional chanrws needed on the splnplv side. Thc Po.1hy. RCscirch. and E:xicrna! Aff.irs Comnp!:x dis:nbitc, I'RI: Working Peprc iodLs%c minax Lhe fndirg, of nurk In progrcs, a nd to encouragc he exchangc of idcas armo.ng Bank staff and d!! OthCrC interested Li devc!opnlrsn ess'cs TI:hesC papcri carrT the nanmes of the auLhors, reflect or l their * iews, and shou;i he "sLd and cilcd according!v I he findings. intcrpreta:nons. ind conc lasons arc the at:rhor' ov n The) shoodd not he: datL'ited to Llhc WroJd 13[ank. :Ls li[ard or D:rcs tors, s nian gernw, r dar.) of j - n- cnher COuflLrs Policy, Research, and External Affairs 0- : Agricultural Policies WPS 793 This paper - a pioduct of' the Agricultural Policies D)ivision, Agriculture and Rural Development DLepartment --- is part of a larger eflort in PRE to analyze changes in Eastern and Ccntral European agriculture. Cop)ies arn available f'rcc 1romi the World Bank. 1S18 H-1 Street NW, Washington, DC 20433. IPlease contact ('iccly Spoonier. room . N8-037, extension 30464 (4() pages). October 1991. The agriculItral1 transition in Eastenl anid Ce ntral sion of the new land laws and distribution ol' Europe is about a ear anid a hal 'old, if wc daite land would be incomprehensible without atten- its start from the Polish big bang of Januar\ tion to conditions that shape the value of land 1990 Likc many a recalcitrant to1ddlcr, it rcluses and the income that owners can carn from it. IL behavc ais expected. The countries of iFastem anid Central Europe 'I'hc agricultural tranisitioin is an essentiial pirt operated under a common ideology in the past, ot stabilization and adjustment in Eastem and but within bounds set by that idcology they Central Europc becausc agri.ultural sectors are exhibited significant diffcrences in agricultural large and food is important. But ihc transitioni is policy and farm organization. To draw lessons not the stor book variety. Agricultural producers that transcend those particularities. Brooks cannot spin collectivized straw into market- creates a stylized countrN with thc general oriented gold and deliver it in the monming to the featurcs of each and the uniqueniess of none. She ministcr of linance. Thr -upply responsc that takes that stylized country though an agricultural many within and outside ihc regioni expected to transition, indicating how the initial conditions emergc early and cxpeditiously is complicated affcct thc path of trans'lion. by the removal of consumner subsidics and constrainied cxport demand. Shc concludcs that an agricultural transition when demand is constrained is more difficult to In an atmosphere of acute economic uncer- manage than one in which the fruits of institu- uiuili) wid d&Jin-ling farm incomes, the distribu- iiomial cliwaige aund pioductivity growth f-ind rcady tion of agricultural land is proceeding. Brooks outlets. Moreover, although price movements arc traces thc liberalization of food prices and the not Net clear, it appears that removing subsidics disitibutioni olf'asricultural land to date. A Ol feed, credit, fertilizer, machinery, and energy detailc(i exposition of the gencral framework for will movc thc terms of' trade againist agriculture thc agricultural transition describes the conticxt in - particularly against the large livestock sector. "mif 1p1f ile Iml i.tl/.utilliad die dimsiliullon of Tile LicCCi Lo increasc procuctivity win inus be laind can be understood. Changes in land tenure even greater than in the past. and use in Eastcrni and C'entral Europe in 1991 cannot be properl) uliderstood out of'conitext. Productivity grovth will be difficult to The essence of' the agricultural transition is the achieve if'demand is conistrained. An) progress state's withdrawal from its traditional role as on the demand side - by increasing domestic residuai ciaimant of (positive and negative) reiits demanid or improving lperlormance in export for thc use ol' agricullural resources i'hiis role markets - \ ill thus ave at major impetus to the w ill pass in "tIags to owvners of land. A discus- institutional clhanges needed on thie suppl) side. i[ho PkR i: V Tr',In. Popet Sot J ,d- i nctox dont ( ifA orik undot \ a;! in tdi Bank's l3uticv, Rcscukh. anid E\temal A I liii C ( ollplO \ Anl ,hl. Lt :o ) t 't'h . '01c .i xtz tt1 i,c fttidtt , out quickt! . o( o n tf p roxcnmattons ai c tcsW thanl tuttlx rtthcd. The finditn'. intotp:o)ilo d i.tti toii11 01 ptop'. dpprs do not n(cosxar\ rTCprTos`Ct offmtal Bank POhI-\. IProduce(d h! th; [IRE Disscminainon Center Table of Contents A Framework for the Agricultural Transition 7 Initial Conditions at the Outset of the Transition 7 Agriculture and the Larger Legacy: Politics, Ecology, and Gender 15 The Politics of Dysfunctional Development 15 The Environmrent 17 Women and Development 18 The Transition 20 Distribution of Agricultural Land 26 Price Liberalization 34 Conclusion VI Bibliography 38 * Rory O'Sullivan, Michael Gould, and Jean-Jacques Dethier provided useful comments on an earlier draft. DECOLLECTIVIZATION AND THIE AGRICULTURAL TRANSITION IN EAST CENTRAL EUROPE The agricultural transition is approximately a year and a half old, if we date i.s start from the Polish big bang of January, 1990. Like many a recalcitrant toddler, it refuses to behave as expected. A properly behaved agricultural transition is a cornerstone of the framework of stabilization and structural adjustment in East/Central Europe. The agricultural "supply response" should be an early bright spot in an otherwise bleak picture of slow and costly industrial restructuring and deteriorating real incomes. Man may not live by bread alone, but more bread is very welcome when there is less of so much else. The supply response is to result from better incentives for producers of food, achieved largely by giving them ownership of land. The distribution of agricultural land is viewed as simple compared to the complexity of industrial privatization and restructuring. Once rural people have possession of their land, they are to welcome their unemployed relatives dismissed from defunct factories. Agriculture is thus expected to defy the laws of gravity that pull down production in other sectors. It is to absorb unemployment while contributing to an improved trade balance. These feats are to be accomplished largely on the strength of the land reform, and the improved efficiency that new land ownership brings. The foreign community assists this process by encouraging the land reform, lending to the "emerging private sector," providing newly private farmers appropriate machinery and access to better processing, and offering temporary food aid. Tnis is the agricultural transition that many people expect, but it is not the one that we have. Rural people produce less, rather than more food, and have increasing -2- difficulty selling their products. The land reform does not produce many individual private farmers, because few individual farmers can survive the harsh economic realities of the early transition. Consumers would like to have more food, but cannot afford to buy what is available. Donated food aid sits in warehouses unless it is priced significantly lower than international trading pnces, raising uncomtortable questions of fair trade practices. These are not the attributes of a conventionally well behaved transition, but they are fully consistent with the economic logic underlying the process. The supply response needed throughout East/Central European agriculture is a contraction coupled with restructuring to increase efficiency. Both within and outside the country the need for greater efficiency is recognized, and the resources of the donor community are targeted toward this goal. Recognition of the needed contraction has been slow to come, yet its logic is inescapable. Domestic average disposition of food in each of the countries has been close to that of Western Europe, although real incomes are much lower. Price liberalization raises the relative price of food and reduces domestic demand. Intraregional trade in food has collapsed, and access to world markets is poor. Traditional collectivized agriculture was enticed into capital intensive production practices by negative real interest rates. The combination of d3e.C1ininr dnmestir dpmind, ndnor export prospects, positive real interest rates, and discriminatory partial price liberalization overwhelms any positive response that might come from land reform. The contraction is in progress, and in some places it is severe. Throughout the region the agricultural transition has brought excess supply for food at the current price and income structure. The domestic policy community has had so little past experience with excess supply that the problem is not properly recognized; how can there be excess supply when production is falling, producers want to sell, and consumers want to buy? Foreign observers looking for a repeat of China's experience are sirnilarly blinkered. Attention focuses on subsidiary problems; e.g., incomplete price liberalization, continued monopoly in processing and marketing, and closed export markets. These exacerbate, but do not create the fundamental problem. Centrally planned economies channeled an inordinate proportion of resources into food production. In a perverse economic triumph they managed, despite inefficiency, to deliver a better diet than consumers could afford in the long run, or would choose to buy at unsubsidized prices. In the medium and longer term domestic demand for food will recover along with the economy more generally, but economic growth will have to be quite substantial before domestic consumers buy the amount of food they formerly bought at subsidized prices. If the Soviet economy turns around, the USSR can resume its position as a major buver of East/Central European food. Both the Middle East and Western Europe are potential customers for East/Central European food, depending on economic growth and trade restrictions. Significant progress in libmalization of agricultural trade and reduction of policy-induced surpluses in world trade would improve export markets for East/Central European products. With favorable developments in export markets the traditional supply response; i.e., more food produced more efficiently, would be good for the sector and the economies as a whole. At present, however, both domestic and export markets are depressed, and will remain so throughout much of the transition. TIhe contraction is already underway, particularly in the livestock sector, and it is very painful for rural people, especially the fully exposed newly private farmers. -4 - Prior to price liberalization, the lack of economic infrastructure supportive of small scale private farming was enough to keep all but a few producers within the cooperative (Brooks 1990). Now that the contraction has begun, life as an independent producer is even grimmer. Private producers report that they cannot sell their animals because with declining demand processcrs can get adequate quantities from the cooperatives. As interest rates rise demand for agricultural credit has fallen. This factual statement inadequately conveys agricultural producers' astonishment and apprehension as they observe the impact of decontrolled interest rates on the capital intensive farming practices they were encouraged to adopt in the past. The cooperatives have inherited capital assets and a potential to grow theIr own animal feed, and are thus better able to wait out transitory spikes in nominal interest rates. Most private producers do not have that capacity. In the current economic stress, an agricultural sector is emerging in the formerly collectivized countries that is private in name, but largely collective in fact. Genuine private producers will be squeezed out by the economically stronger cooperatives. Households wiU receive their land rights, and sign them over to managers of voluntary "privateH producers' cooperatives. These cooperatives will be private in the sense that they will be required to pay dividends to their owners and will operate without automatic state subsidy. They will nonetheless have the conflicts between collective and individual incentives that have impeded the competitiveness and long term economic viability of agricultural producer cooperatives throughout the world. These cooperatives, maoreover, will not represent a clear enough break with the institutions of the past to bring new behavior. The problem is not primarily that retrograde managers will cling to their nowers and thwart the independence of members; . 5 - many managers are skilled and conscientious and welcome the new order. The greater problem is that new managers will end up acting much like the old; assigning workers, counting hours, and cross-subsidizing activities. The new cooperatives will resemble collective farms of East/Central Europe in the early period after collectivization, when they were relatively small, still paid rent for land, and had a greater degree of managerial autonomy and financial independence than they retained later. These may be the necessary institutions of the transition; forced decollectivization should not be pushed on rural people. The new producers' cooperatives are surely not the foundation of a competitive market oriented agriculture in the future. As new producers' cooperatives appear through the land distribution, many observers both within and outside the countries mistake them for the private voluntary marketing cooperatives that have served agriculture well in many economic settings. As long as the new cooperatives have major activities in agricultural production, they should not be grouped with that loose agglomeration of firms called "the emerging private sector." They should be sympathetically recognized for what they are, "the receding collective sector." Their divestiture of collective production and transformation into marketing and service cooperatives should be assisted. Many rurai households in East/Centrai burope throughout the socialist era retained formal property rights to their land, even though these rights were meaningless. Reconstructing and redistributing those rights at great cost will be a tragic-comic exercise in futility if rational producers have little choice but voluntarily to sign them over to the cooperatives again, and those cooperatives do not speedily deconstruct into genuinely priv:te farms. One is reminded of the vodka trucks that used to follow the paymaster in Soviet factory towns to collect and recycle the cash on payday. If the intemational -6- community fails clearly to understand the new cooperatmves and their role in the transition, donated and borrowed dollars will fuel the recycling of property rights. It is in this atmosphere of Rcute economic uncertainty and declining farm incomes that the distribution of agricultural land is proceeding. Romania leads with swift implementation of a land law passed in February, 1991. Many owners expect to take possession of their land after the harvest in fall of 1991, although few will thereafter farm individually. The Bulgarian land law was also passed in February of 1991, but implementation has been delayed and the approach taken implies a more lengthy process. Land laws in Hungary and Czechoslovakia were passed in April and May, respectively, of 1991. The following paragraphs trace the progress of liberalization of food prices and distribution of agricultural land to date. A detailed exposition of the general framework for the agricultural transition describes the context in which price liberalization and the distribution of land can be understood. Many readers would undoubtedly prefer to go directly to the main issues without the more general view. Land is, after all, the central agricultural resource, and one should be able to discuss changes in land tenure and in price policy without reviewing the agricultural transition in its entirety. IT 1991 in East'Central Europe, however, changes i-a Iand tejijire d uscanno be properly understood out of context. The essence of the agricultural transition is the state's withdrawal from its traditional role as residual claimant of (positive and negative) rents to use of agricultural resources. That role will pass in stages to owners of land, where it ordinarily resides in a ma7ket economy. A discussion of the new land laws and distribution of land would be incomprehensible without attention to conditions that shape the value of land and the income that owners can earn from it. A FRAMEWORK FOR TIIE AGRICULTURAL TRANSITION' Initial Condtions at the Outset of the Transition The countries of Eastern and Central Europe comprise a large and diverse agricultural region even if the Soviet Union is excluded. In the northern tier, in Poland, the Czech and Slovak Federal Republic, and the former GDR grains (except for maize), roots, and specialty crops dominate the field crops, and imports augment domestic production of feed to sustain a large livestock industry. In Hungary, Romania, and northern Yugoslavia moisture and warmth are adequate for maize ard oilseeds, and mixed grain/livestock farming predominates. Farther south in Yugoslavia and Bulgaria irrigation becomes more important, as do viticulture, orchards, and tobacco production. If the Soviet Union is included, the agroclimatic range of Eastern and Central Europe is replicated, and augmented by the largest area of irrigated agriculture in the world, in Soviet Central Asia. The countries of the region operated under a common ideology in the past, but within bounds set by that ideology, exhibited significant differences in agricultural policv and farm organization. The greatest difference is between those that collectivized (GDR, Czechoslovakia, Hungary, Romania, Bulgaria, Albania, the USSR) and those that did not (Po IvnA, Yugoslavia). Each faces a unique set ot tasks and constraints during the transition. In order to draw lessons that transcend the particularities of the individual countries, we create in the following paragraphs a stylized country with the general fea ures of each, but the particular uniqueness of none. We take the stylized country I This section draws on material in Brooks et al., JEP, 1991. -8 through an agricultural transition, indicating how the initial conditions affect tlhe path of transition. Agricultural production in the stylized country was collectivized. Approximately one third of farms were state farms, and two thirds were collective farms (cooperatives), but there was in practice little diff.ence between the two. State farms specialized in agricultural production. On these farrms, workers were salaried employees of the state, and the state owned all farm assets, including much of the land. Collective farms were also large, and had diversified processing and sideline activities in addition to agricultural production. Many members of collective farms in theory retained title to collectively managed land, but ownership rights in the past were so attenuated as to be meaningless. For various reasons, some private owners deeded their land to the collective. Lands managed by the collective farms were thus owned by individuals and by the collective, but rarely by the state. The exception to this pattern is the USSR, whure all l;.nd was nationalized. On both side and collective farms, workers had a high degree of job and wage security, little responsibility for the financial performance of the farm, and little incentive to improve productivity. Both farms were protected from bankruptcy by a soft budget constraint. raLill clspluyuzc iliuag,it d lhuubuhuid piuL ul dUUUL uLC naif hecLare in addiuon to their work on the large farm. Ln this small area they used inputs provided or purchased from the large farm plus famil .abor to produce food for their own use or for the market. The structure of production was thus dual, with very large units of 2,000 and 3,000 hectares plus many mini-farms of one half hectare. The private and socialist sectors were intimately linked in one agricultural system, and interacted symbiotically. Each would have faced significantly higher costs of production if forced to function - 9 - independently of the other. The large farms contracted out some of the more labor intensive tasks, such as caring for very young animnals, to the mini-farms. Private producers, in turn, depended on the large farms for inputs and services not available elsewhere since markets for them did not exist. This dual structure and the constrailits on private landholding that produced it had the greatest impact on the livestock sector. The highest value that many households could receive from their tiny plots was in livestock products, but they could not grow feed on a half hectare. The large farms rarely had the flexibility or incentive to make high quality pasture available f . pr vate use, and the livestock sector, both collective and private, became dependent on concentrate feed. Private animals tethered for grazing on highway rights-of-way and even median strips .in full view of poorly tended collective pastures provided vivid testimony of the constraints on management of the livestock sector. Agriculture employed 25 percent of the work force, and produced 20 percent of GNP. In developed market economies, agriculture is capital intensive and the share of agriculture in the labor force is smaller than its contribution to GNP. In our stylized country, capital investment in agricultural production has also been substantial. This inv,estment w in p-t niecessitated by the political decision to replace small scale private agriculture by large scale collective agriculture, with the resulting need for land reclamation, large buildings, and large machines. In part the investment implemented the pursuit of higher output and increased domestic self sufficiency in food. Rarely was investment guided by calculus of economic returns. A° a consequence the high rates of investment did not release as much labor as in market economies. Accumulated investment per unit land was quite high, sfthough - 10- high rates of depreciation of buildings and machinery reduced the value of the physical capital stock. The retained labor force in agriculture was higher still, and ratios of capital per worker were lower than in Western Europe and North America where the natural endowment resembles that of East/Central Europe. In this curious defiance of conventional economic measures, East/Central European agriculture was and is both capital and labor intensive. The point has important implications for investment policy during the transition. In countries that lag in restructuring state and collective farms (the USSR and perhaps Czechoslovakia) budgetary inertia buttressed by powerf"l agricultural lobbies can continue to channel large amounts of money into land reclamation, large buildings, and large machines of dubious long term value. If the new cooperatives of Hungary, Romania, and Bulgaria are mistaken for private firms and offered subsidized credit, the pattern of investment will continue. In debates about whether to subsidize agricultural credit or not, one often hears that agriculture has wasted so much money in the past that now it can fend for itself. Creation of a policy environment and financial institutions (e.g., full price liberalization, demonopolization of marketing, tax reform, and mobilization of rural savings) that allow agriculture to fend for itself is an essential task of the transition. It is not enough simply to cut agriculture out of the budget. Poor incentives and relatively low capital stock per worker in the stylized economy reduced labor productivity. Severe price distortions complicate measurement of labor productivity and the contribution of agriculture to GNP, but it is likely that labor productivity was lower than in industry. Agricultural wages were in rough parity with those of other sectors. When earnings from private plots were taken into account, agricultural incomes exceeded those of other workers on average. High wages were - 11 - sustained by regular increases in controlled purchase prices for agricultural products plus recurrent loans and grants to farms.8 Yields of grains and field crops were not as high as in Western Europe, where farmers receive the support of the Common Agricultviral Policy, but they equaled yields of major commercial exporters in other parts of the world. Fertilizer use per hectare was lower than in Western Europe, but higher than in North America. Use of other agricultural chemicals was quite low, but poor storage and management practices resulted in environmental damage and health problems even at low levels of application. Technical productivity in the livestock sector was lower than in crops. Lags in breeding and protein deficient feed rations reduced productivity. Milk yields per cow lagged those of Western Europe by about one third. The -institutional constraints of collectivized agriculture hit the livestock sector harder than the crop sector, and it is in livestock production that the most substantial adjustment will have to take place. Use of labor, fertilizer, and feed grain was high per unit output, and agricultural costs of production were high and rising just prior to the beginning of the transition. With the drastic realignment of exchange rates at the outset of the transition, costs of production and farm purchase prices no longer look high by comparison with world ces. w'iih iiie increased ability to compare domestic prices to world trading prices that a reasonable and unified exchange rate brings, it appears that agricultural producers are substantially discriminated against, since semi-controlled producer prices lag world prices. For example, most Romanian wheat will be purchased this season at $35 per ton at the market and interbank exchange rate of 200 lei to the dollar. (The official exchange rate is still 60 lei to the dollar.) Bulgarian producers are locked into - 12 - a semi-controlled producer price structure based on seven leva to the dollar, while the official and market rate is between eighteen and twenty leva to the dollar.2 These costs and prices, however, still embody distortions in input prices, since fertilizer, energy, and machinery are not yet priced at world trading prices. Part of the distress of the early transition is caused by the more rapid approach of input prices to world levels and slower adjustment of producer prices. As the economies make their ways in fits and starts to a price structure more consistent with world trading prices, it appears that agricultural incomes will increase less than the general price level. This is not necessarily a manifestation of a textbook type of urban bias, although some of the instruments for restraining agricultural earnings, such as Bulgaria's ban on the export of some food products, are standard tools for the. transfer of income from rural to urban people. Falling farm incomes now are a symptom of partial liberalization, but they also signal the needed longer term adjustment; more efficient production of products for which domestic and foreign demand exists under the new price structure. Agroindustry was highly concentrated, and food processing, distribution, and input supply were managed by several large state monopolies. With pervasive excess demand for food, processors paid little regard for product definition and quality. Moreover, processing technology was outdated and technoiogicai consiraini rcducW 'Lie efficiency and quality of processing. Since retail prices were controlled at low levels, investment in better processing equipment could not be recovered on a commercial basis, and modernization of food processing was dependent on direct budgetary allocations. With the fiscal burden of the direct food subsidy rising, the agricultural sector did not 2 This paper reports on events up to June, 1991. Excharnge rates and price policy are volatile. - 13 - compete successfully for additional budgetary funds to modernize processing. Moreover, food processing was considered light industry, and as such was not given high priority. The processing and retailing infrastructure inherited from the past is very primitive. The former long lines in meat stores were due only in part to excess demand at subsidized prices. Part of the wait was simply while the butcher took his axe to a carcass. The stylized country was a middle income country, with per capita GNP of about $6,000 using the purchasing power parity methodology, and $2,500 using the exchange rate methodology. In recent years the country sustained aggregate consumption despite declining aggregate growth by borrowing heavily abroad. Agriculture's contribution to the growth in net foreign indebtedness derived from increased demand for imported feed grains, and diversion of food from export markets to (subsidized) domestic consumption. Per capita consumption of food was comparable to countries with income levels considerably higher. Caloric consumption was the same as that in market economies with higher levels of income, and consumption of meat exceeded that in many more prosperous market economies. This consumption pattern was a result of food subsidies, particularly for livestock products. Retail food prices changed little in nominal terms for several decades, despite growth in nominal incomes. Real food prices (at official prices) $ kA. A 4dA. S.ir, ,:,r _a_ Ak.t -kU hAUL C.Xat L A .. ULIL UIG- _' Us I kI. U *l * people paid were higher than official prices. Consumers' expectations about what they should be able to purchase, however, were formed on the basis of official prices. The most highly subsidized food items were meat and dairy products, and official prices for these products were approximately half the cost of delivery. Subsidization of items with low income elasticities is often considered to benefit poorer people, but the most highly subsidized items in the stylized economy were those with high income - 14- elasticities. The food price subsidy delivered more benefits to the wealthier groups who consumed more of the most highly subsidized products, and fewer benefits to poorer people. Each country camouflaged the growing gap between costs of consumption and production by passing the costs to the state through subsidies, and increasing imports or reducing exports of food. The increase in consumption of food and other goods that came with the post-Stalin thaw was one that the underlying productive economies could not deliver on a sustained basis. The degree of subsidization varied by country and its impact on the macroeconomy also varied, but in each case the burden of food subsidies was very high. Subsidized sausage for the relatively wealthy cut into budgetary funds available for investment in education, health care, physical infrastructure, and environmental protection. ITe damage done by the food subsidies and more general price distortions transcended their very considerable contribution to destruction of macroeconomic balance. Those who emphasize the importance of "getting prices right" are often accused of a shallow understanding of the subtle institutional complexity of successful development. Yet in the centrally planned economies where the institutional apparatus shvuld have nmuted the damage done by pILCw distVIUViIb, i;Ie U i.i)uUia WC1C bUU tremendously destructive. Energy and raw materials were wasued, depleting non- renewable resources and degrading the environment. The wastage was built into the capital stock, making remedies even more costly. Distorted consumer prices were damaging even though quantity controls regulated the flow of consumer goods. The official prices, not implicit shadow prices, appear to be the ones that consumers used in evaluating the performance of the system. Perhaps ordinary citizens were the only ones - is - who took overvalued official exchange rates seriously, and then wondered why, if they were so rich, they lived so poorly? Quantitative controls were not adequate to counter the impact of price distortions in the real economy. The distortions were an economic component of a multi-dimensional disjunction between what actually was; i.e., what people experienced with their own lives, and what was publicly presented; i.e., the official line. The disjunction recurred in politics, culture, personal life, and scientific inquiry. The narrow economic cost of price distortions was large. The costs of the larger distortion, of which cheap energy and sausage lines were a small part, is even greater. This larger distortion; the attempt to override reality and resulting confusion about what is real, has been the central subject of the distinctive East/Central European literature, art, film, and music of dissent, and it remains an important component of the legacy. Economists are now forced to confront this distortion in the less aesthetically appealing medium of enterprise balance sheets and national accounts; we do not actually know the worth of a firm or a nation when we have no instruments for measurement. Those who emphasize the importance of "getting prices right" are, within the confines of our admittedly narrow discipline, simply arguing for telling the truth. AGRICULTURE AND THE LARGER LEGACY: POLITICS, ECOLOGY, AND GENDER The Politics of Dysfunctional Development That politics and economic growth are linked is clear, yet the search for a formulaic prescription for the politics of successful development has not gone far (Ruttan, 1991). Casual observation shows authoritarian regimes with rapid economic growth and democratically elected govemments with disastrous economic programs, plus all possible - 16 - combinations. Lack of political democracy did not cause the economic program of Soviet style central planning to fail, but once it began to fail, authoritarianism and suppression of dissent delayed the day of reckoning, and hence increased the costs. A degree of public transparency about economic policy and protection of political pluralism and dissent would seem to be necessary checks on economic policy and institutions gone wrong. Rights of expression and. political association are defended now as basic human rights. Support for these rights could be bolstered by designating them basic instruments of economic development, for they are one safeguard against massive waste of world resources earmarked for development. If these rights are basic to the development process, then their protection could be made a condition for receipt of development assistance from the intemational community. It would not be appropriate for the intemational community to mandate a particular form of government, and including protection of rights of expression and association in the conditionality for assistance would be far from interference in domestic politics. The disastrous legacy of East and Central Europe and the USSR is not just a domestic problem for the people of the region. When the costs of undoing economic damage are to be shared by the world community, uic cummIzIiun4iy defends its best interest by ern,powC1jag, %i.iULCSe w;10 au wa-n of ald perhaps slow the damage. Had the rights of expression of rural people been protected, the sector might have been spared some of the more damaging campaigns. It would be naive to argue that protection of dissent is sufficient to secure good policy. It can nonetheless be very important for those who best know the likely impact of a policy to inform society more generally of the costs ahead. - 17 - The Environment The degree of environmental damage in East/Central Europe and the USSR is not fully known, but it is clearly substantial. To clean the air, soil, and water of contaminants would be so costly that it cannot be done. Emissions will be reduced by raising the prices of formerly subsidized pollutants, such as energy and fertilizer, by using cleaner technology in new investments, and by adding some emissions control to existing plants. Many environmental problems that affect agriculture originate outside the sector; e.g., soil contamination with industrial pollutants, and the impact of airborne particles on crop yields. Others originate in agriculture and affect both the sector and the economy more generally; overutilization of- water for irrigation in arid areas, contamination of ground water with fertilizer and animal wastes, and degradation of soil quality by improper rotations and excessively heavy machinery. A full assessment of the degradation of agriculture's natural resource base has not yet been undertaken. It appears that anecdotal reports of compromised food safety due to environmental problems are exaggerated, but problems in some localities have been documented. The ecology of Eastern Europe and the USSR is graphic evidence that market t^:1~~~~...^ :n ** ..1_. .. -.--. .ii - . ..* ,== -AG ot 'Lll o %J&nly way to Luul a riest. 71iW-LJU`(.41ky, 't;e Stic s'nfuuw 'nave inmcuu the full social cost of environmental degradation in the planning process, since the state would ultimately have to clean up the residue. If the state, however, was unable to impose the full cost of a sausage upon the user, it is not surprising that the costs of environmental degradation were not internalized. Moreover, a centrist state must clean up the environment only if citizens are empowered to demand that it do so. - 18 - WQmenl an Development Equal opportunity for women and non-discrimination by sex were central to the official ideology of the socialist countries of East/Central Europe and the USSR. There has been some success in remedying traditional discrimination against women and many failures. Despite the official formal commitment to equal opportunity, structural characteristics of central planning made these societies particularly burdensome for women. The suppression of private household based economic activity is a clear case in point, and one particularly relevant for agriculture. The suppression of the household sector and constraints on direct marketed activities between households hit women hardest and put them at a disadvantage in the formal labor market. Many women in poor countries and particularly in rural areas engage in household based petty manufacturing and trade in goods and services. When this sector is wiped out by regulations against private activity, women are forced into wage work where they earn little return to entrepreneurial talents. They must still buy food, clothing, and household services, but the costs of these items have been increased by the requirement that they originate in the formal sector and pass through state monopolies. Substitutes for household based child care are of lower quality for nmmmrshle. enct, nrnd even with lnroP qt2tia invsatmant ;n A,t care, the .elffre ^f children declines when women are denied part time work and home based private day care. Since traditional family roles change with a lag, if at all, the high costs that suppression of the private household sector impose on family life fall most on women. Women's economic opportunities are constricted and their economic burdens increased when private activities between households are banned. - 19- The wage structure on collective and state farms was highly discriminatory in practice. The highest wages were reserved for the "mechanizers," men who drove machines, and the biggci the d ac..hivi .I, hig1,; hc, vave. \Vm "rk'ed alnmost exclusively in livestock, manual field work, and clerical positions. Of these, the highest paying jobs were in livestock, but the work had long hours incompatible with caring well for young children, and was physically very taxing. Rural women provided much of the labor for the household plot, and shared in the marketing of produce. Prices they received for food on the free market were increased by subsidies and excess demand for food in the state market. Women's activities in private production and sale of food constituted a very primitive level of entrepreneurship, however, and many activities that had high value added and high earnings were foreclosed to the household sector. The resurgence of the household as an economic unit in the countryside and the demise of the official wage structure for agricultural work is likely to have an important and beneficial impact on economic opportunities for women. A counter concern has been raised by some observers of the early stages of increased private agriculture in the poorest and most backward parts of the region, particularly in Soviet Central Asia. There the fear is that girls will be kept home from school in order to work on larger private family holdings, and that women's obligations to cultivate larger fields will increase their already considerable domestic burdens. This could in fact result if collective farms continde to exist and serve. as a conduit for subsidized wages to underemployed men so plentifully evident in tea shops throughout the working day. The particular problems of Soviet Central Asia, with its extreme - 20 - resource constraint, high population density, and unique cultural tradition differ from those of the European couniAes. The Transition The agricultural sector on the eve of the transition is characterized by: (a) Large inefficient farms with high input use (primarily fertilizer, labor, and feed) (b) High levels of food consumption relative to market economies of comparable prosperity (c) Subsidized food prices (d) Excess demand for food at those prices (e) Macroeconomic imbalance, including budget deficit and foreign debt (f) Pervasive monopoly in food processing and distribution The macroeconomic imbalance in the stylized country is substantial, and the transition is initiated by a program of stabilization (see Blanchard et al., 1990). Fiscal outlays are reduced, the money supply tightened, and the overvalued currency devalued. The macroeconomic stabilization affects the agricultural sector in several ways. The food subsidy is the most visible target for significant fiscal savings. Although food is not the only subsidized item, it is the largest one that appears directly in the budget. Moreover, at about five percent of GNP it represents a significant chunk of the budget deficik. Retention of the food subsidy is inconsistent with macroeconomic stabilization, and the subsidy is removed. It is replaced by a program of partial direct income compensation. - 21 - Without the subsidy, meat prices approximately double, and food prices rise on average by 50 percent. Demand for food declines, but the fall in demand is moderated by the ability of wealthier consumers to draw savings out of the monetary overhang and maintain expenditures on food. All consumers, both rich and poor, spend more on food. The impact on other consumer goods depends critically on the magnitude and form of compensation. The price increase does not reduce caloric intake on average, but does induce shifts away from more expensive foods, particularly meat and cheese. The price liberalization frees processors with market power to act like monopolists, and many respond by raising prices to consumers and pressuring producer prices. The price increase that accompanies liberalization is thus in part due to removal of subsidies, and in part due to the exercise of market power by those who have it. The price liberalization does not raise prices that producers receive. In an open market economy, devaluation will raise agricultural producers' prices, since most food and fiber is tradeable. The stylized economy is not fully open yet, and transmission of changes in world prices and exchange rates is weak. Moreover, producer prices in the past exceeded retail prices by the amount of the subsidy. The increase in retail prices removes the wedge that formerly divided them from producer prices without appreciably affecting farm level prices. In a world of partial price liberalization, the formal freeing of retail food prices is sometimes accompanied by retention of controls at the wholesale level, as governments try to insure themselves against too rapid a rise in food prices. Processors' market power allows them to pass controls back to producers. This partial decontrol is very evident and damaging in Pomania and Bulgaria, and observers praising the "liberalization" of retail prices have failed to check farther back in the food chain. - 22 - Producers are unable to push the former volume of production through markets at lower prices, since for products requiring processing, they cannot bypass the processing monopolies. Producers are thus hostage to the pace of change in the processing, marketing, and distribution of food and fiber. The hope of a quick improvement in agriculture that will facilitate change in other sectors is illusory unless a concerted effort to increase competition and the technological performance of food processing and marketing brings early results. Excess supply appears at the farm level. Some of this can be exported, and it is more competitive than in the past due to the devaluation. Institutional linkage between producers and international markets, however, is weak, and product definitions and quality are not conducive to quick switching between domestic and export markets. Producers face higher costs for fertilizer and imported animal feed, and the combination of higher costs and reduced demand puts pressure on farm income. The crucial variables in determining the impact of macroeconomic stabilization on the agricultural sector are the relative magnitude of the food subsidy, the amount of excess demand for food ante-liberalization, and the degree of concentration in processing. If the food subsidy is small, if its removal approximately absorbs excess demand, and if processors have limited market power, the adjustment process will be less disruptive for producers. If, however, the shock to the demand side is large and the economy shifts abruptly from excess demand to excess supply, producers will face a substantial adjustment. Problems in food processing are apparent even prior to the transition, and many participants in the food economy have argued for increased investment to modernize food processing. The investment is sought both from domestic and extemal sources, and the - 23 - goal of the investment is usually construction of new plants and/or purchase of more modem equipment. A visitor assessing the "needs" of food processors of East/Central Europe can amass requests amounting to several billion dollars in a few weeks in the field. Few of these, when viewed as commercial investments rather than "basic needs," pass careful scrutiny. Unless price liberalization is well underway and changes in food demand are better understood, new investment in food processing is likely to respond to the wrong signals. It will be devoted to the wrong commodities, placed in the wrong locations, and purchase technology inappropriate for the post-transition factor costs. Some kinds of food processing stand out as particularly poor targets for investment in the early period. Plants that operate wholly or in part with imported raw materials but sell their products on the domestic market, such as oilseed crushers, will be particularly hard hit as foreign exchange risk is passed to them but domestic prices lag world prices. Meat processors and dairy plants in areas dependent on subsidized imported feed are poor targets. Investment in simple packaging technology and materials for products with export markets can be relatively safe and productive. The focus of change in food processing in the early period of the transition should be deconcentration of existing plan:s, and introduction of comp..'toii u.-gh puu of ^zia; -caic private transport and other means. New investment should promote competition rather than simply expand or modernize processing capacity. After the price liberalization has settled down alternative investments in food processing will be easier to assess. If producers have poor access to markets because reorganization of processing and distribution is stalled, they will demand direct government subsidies to forestal declines in farm income. Governments will be pressured to embark upon programs of price - 24 - support that they can ill afford. Tariffs are costless to the budget, but have obvious implications for inflation. Moreover, if producers' difficulties stem in part from lack of domestic competition in processing and marketing, tariffs will not address the basic problem, and may worsen it. Poland, which has led in many aspects of the economic transition, issued agricultural tariffs in May, 1991, designed to protect the troubled dairy industry. Given the inherited concentration in food processing, a concerted demand for tariff protection against imported food is a predictable feature of the political economy of agriculture during the transition. Producers may be drawn into alliance with processors when their longer term interests are not well served by protection of processors' monopolies. Producers throughout the region are calling for subsidized interest rates, and the domestic politics are such that they will probably get them. An economic argument can even be made in favor of subsidized interest rates for agriculture, (i.e., lower than the current nominal market rates of 33-50 percent and higher) since as the price level stabilizes, long term rates will come down, and a subsidy now may simply embody confidence that the stabilization will succeed. The dangers of subsidized rates are also clear and very high. Interest rate subsidies lead to credit rationing (Braverman and Guascii, 1991). Those best armed to compete for rationed credit are the economically strong cooperatives, especially those of the new type. Even under the more stringent calculus of credit risk in which bank staff members are now being trained by foreign advisors, the new "private" producers' cooperatives will look better than genuinely private producers, who have had to leave most of their potential collateral with the cooperative. Subsidized interest rates will make capital intensive production practices - 25 - and capital intensive products, such as livestock, more attractive, when in fact they should be less attractive. With subsidized credit, it is likely that investment will go into more large machines and large buildings