Reform and efficiency an empirical illustration

Observations on changes in crop output, fertilizer use, and average productivity from three transition countries, China, Russia, and the Czech Republic, illustrate the relationship between agricultural reforms and efficiency (see Table 3.2). First, in response to the price and property rights reforms, our model predicts that the output and input level should rise in 'Country 1', a nation in which the farmers were taxed by pricing policies during the pre-transition era. The effect on average productivity is ambiguous. In the case of China, an example of a nation in which leaders heavily taxed farmers with pricing policy during the Socialist era, price reform induced a strong increase in the grain to fertilizer price ratio (37 per cent over the first five years of transition). After this price reform fertilizer use rose by 68 per cent and cereal output rose by 27 per cent. Average productivity,

Table 3.2 Changes in price ratios, fertilizer use, grain output, and average productivity in China, Russia, and the Czech Republic during the initial five years of transition

A Grain to fertilizer price ratio (%)

A Fertilizer use (%)

A Grain output (%)

A Average grain productivity of fertilizera(%)

China

+ 37

+ 68

+ 27

-7

Russia

-73

-89

-40

+ 103

Czech Republic

-50

-71

-17

+ 61

Note: The initial five years of transition are 1979 to 1984 in China and 1991 to 1996 in Russia and the Czech Republic.

a Average grain productivity of fertilizer is grain output divided by fertilizer use. Sources: Tables 2.3 and 2.4.

Note: The initial five years of transition are 1979 to 1984 in China and 1991 to 1996 in Russia and the Czech Republic.

a Average grain productivity of fertilizer is grain output divided by fertilizer use. Sources: Tables 2.3 and 2.4.

however, fell by 7 per cent. This is consistent with the hypothesis that the average productivity decline due to the price effect was slightly stronger than the average productivity gain due to the technical efficiency gains with the property rights reforms.

Second, our model predicts that the aggregate reform effect is positive on average productivity for 'Country 2', a nation in which the farmers were subsidized by pricing policies during the pre-transition era. The impact on output and input levels is conditional on the relative partial effects: output should decline due to the price reform but increase with technical efficiency gains due to property rights reforms. Table 3.2 shows how in Russia and the Czech Republic, two nations that heavily subsidized agriculture in the pre-transition era, the grain to fertilizer price ratio declined by more than 50 per cent due to the price reform. Average productivity rose more than 60 per cent in both countries, consistent with the predictions.

Table 3.2 also shows that farmers in Russia and the Czech Republic sharply reduced input use: fertilizer use declined by more than 70 per cent in both countries. Moreover, cereal output fell by around 20-40 per cent after price reform. These numbers suggest that the reductions in inputs and output due to the dramatic price effects (-50 per cent and -71 per cent) were much stronger than the gains due to technical efficiency gains over the first five years of the reforms.4

In summary, these aggregate figures in China, Russia, and the Czech Republic, as reported in Table 3.2, move in a way consistent with the theoretical predictions in Table 3.1. In the next chapter we will provide more substantive and detailed empirical evidence to document the reform differences and their effects.

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