Implications of Alternative Options for Future Levels of Support for Agriculture in Central and Eastern Europe

Abstract

In the process of political, economic, and social transformation since 1989, agriculture in the Central and Eastern European countries (the CEECs) is undergoing dramatic changes. Privatization and decollectivization of farms, not yet completed in all CEECs, are creating a completely new structure of the farming industry (Buckwell). Replacement of central planning by market forces has uprooted commercial relationships between farms and upstream and downstream industries and has caused problems in input supplies to and marketing opportunities for agriculture (Brooks et al.). The persistence of monopoly structures in the food chain has resulted in high marketing margins, depriving farms of some of the revenues they could earn in a more competitive economy (Ivanova et al., OECD 1995a). A significant decline in domestic food demand and, even more pronounced, shrinking export demand from other countries in the former Council of Mutual Economic Assistance, above all the Former Soviet Union, have grossly reduced the size of the market to which CEEC agriculture can sell (Jackson and Swinnen, Karp and Stefanou). In addition to these and other fundamental changes in the economic environment of agriculture in the CEECs, agricultural support as provided by domestic and trade policies has kept changing during the transformation process (Swinnen). In the prereform period, agriculture was heavily subsidized in most CEECs. When the reforms began, most CEECs rapidly began to open up their markets, liberalize prices, and eliminate subsidies. As a result, support to agriculture declined drastically. Real producer prices for farm products dwindled and farm incomes decreased. At the same time, and as a consequence of these changes in the economic environment, agricultural output in the CEECs dropped. In the process, farmers began to lobby for more support, and governments in most CEECs responded positively to these political demands. They introduced policies such as intervention purchases, guaranteed minimum prices, higher tariffs, variable levies, export subsidies, and input and credit subsidies.' As a result, agricultural support, which had declined sharply during the early stages of the transition process, is on the rise again in many CEECs. For example, the net producer subsidy equivalent (PSE) in Poland's agriculture fell from 36% in 1986 to minus 18% in 1990, and rose again to (positive) 16% in 1993 (OECD 1995b). When CEEC governments began to intervene again in agricultural markets to provide more support to their farmers, one of the explanations they gave for this change in policy direction was that they had to prepare for joining, ultimately, the European Union (EU) and, hence, that they needed to harmonize their policies with the Common Agricultural Policy (CAP) of the EU (Swinnen). Indeed, some of the agricultural policy measures introduced in recent years in the CEECs resemble, though often only vaguely, the policies that have been employed by the CAP for a long time. No timetable has so far been set for eastern enlargement of the EU, nor is it clear in which sequence the individual