The economics of agricultural transition

In the first part of this book our primary goal was to understand the linkages between the shifts in pricing and subsidy policies, property rights reform and farm restructuring, and market liberalization and economic performance. Although striking differences have appeared in the nature of the reforms and their effects across the transition world, several strong empirical regularities linking reform strategies to performance have emerged.

First, pricing policy and shifts in relative prices between the pre-reform and post-reform eras have played an important role in output changes. In one sense these policies are what is in common in all transition countries. Virtually all nations experienced large shifts in relative prices due to pricing and subsidy policy changes. In most cases, the price shifts occurred in the initial year (or years) of reform. The objective of the policy—to bring agricultural output and input prices into conformance with those observed internationally—was also a common one.

Despite these commonalities, however, price and subsidy policies, more than any other factor, explain why agriculture output grew in East Asian transition economies in the immediate post-reform years and why it did not in CEE and the CIS nations. Virtually all reformers sought to bring their pricing structure more in line with international prices so they would better reflect the relative scarcities of resources and consumer demands. In the process of eliminating the distortions, however, relative prices moved in one direction in East Asia and the opposite elsewhere. During the planning era, China and Vietnam had tried to force industrialization in part by taxing agriculture with low prices in order to keep wages of industrial workers low. Their counterparts in most of CEE and the CIS nations, in contrast, had tried to stimulate food production by subsidizing inputs and providing high bonuses for marketed surplus. Hence, in the rationalization of prices, reformers in East Asia raised the prices of output, which strengthened the output-to-input price ratio. At the same time, their counterparts outside East Asia eliminated planning and many or all of the input subsidies and output premiums, which led to plummeting output to input price ratios. Since producers in all transition economies responded to price changes similarly (increasing output as output prices rose and decreasing output as input prices rose and vice versa), the direction of the price changes after reform helps explain why East Asia's output moved up in the initial post-reform era and those of CEE and the CIS nations trended down.

Beyond changes in relative prices, market liberalization policies reinforced the shifts caused by relative price changes and also help explain the sharp collapse in CEE and the CIS nations during early transition. When reformers took control they typically outright shut down the planning ministries in most CEE countries and curtailed their power in CIS countries. As a result, in most countries the systems through which the pre-reform producers had purchased their inputs and sold their output disappeared. Hence, it is easy to understand why production and productivity fell so dramatically in the first year or two after reform. In retrospect such a fall should have been expected since it is hard to conceive how completely new institutions of exchange could emerge in a matter of months. Perhaps more surprising is the speed with which institutions of exchange re-emerged in a number of CEE nations. Although deep markets characterized by the meeting of numerous buyers and sellers still had not materialized after several years of reform, the CEE experience shows how alternative institutions appeared to facilitate exchange. In those countries in which the institutions emerged, output and productivity began to recover by the mid-1990s and productivity growth has continued since. In those countries in which such institutions did not emerge, productivity continued to lag.

In East Asia reformers moved more gradually and in the initial years almost made no change to the state-dominated marketing channels that were set up during the planning era. So while market liberalization did not play much of a role in pushing up output and productivity of East Asian producers in the initial years after reform, it did not hold it back. In the longer run, however, policies in East Asia facilitated the entry of thousands of private traders, and the gradual rise of markets in the post-reform era has been linked with positive, albeit small, productivity increases.

Perhaps more than any other policy shifts, property rights reform and the farm restructuring that it facilitated are responsible for the rise of productivity in transition countries. It certainly was true in East Asia. In several Central European countries empirical studies almost all identify the strong positive links between property rights reform and productivity. It is probably safe to say that one of the necessary conditions of productivity rises during the first decade of transition was implementation of property rights reforms; it is hard to think of a single country that experienced positive productivity growth that did not have an aggressive and successful property rights reform programme.

But while the effects of land reform have been both positive and strong, the mechanism that has led to enhanced performance in East Asia and Central Europe has been quite different. In East Asia income and control rights were given to producers, creating millions of new family-run farms. Landownership remained with the state and privatization of land is still being debated today. The partial reforms, however, appear to have provided enough incentives and improved decision-making capacity to have ignited the rapid rise in output and productivity in Asia.

In contrast, privatization through restitution characterizes the main way that Central European reformers implemented the reforms. The reforms themselves, however, were not enough, since many of the new landowners had long since moved to the cities. Instead, the emergence of land leasing contracts allowed the growth of individual farms and the survival of large corporate farms (albeit with less labour which was systematically laid off by large reorganized farms in the most advanced Central European economies) (Vranken and Swinnen 2003, 2005). These institutional innovations have been essential ingredients of the rise in productivity in Central Europe.

While the picture in the literature on the CIS nations was fairly bleak in terms of property rights reform-induced productivity rises, it may be that the CIS nations are finally being affected by the reforms. During the early years after reform, the lack of clear rights that linked income to effort and inability to provide farmers with a way to restructure their farms held back any rights-generated output or productivity rises. Recent empirical work in Russia, Ukraine, and Kazakhstan (mostly on economic performance in the second decade of reform) may finally be showing that improvements in property rights and farm restructuring are affecting productivity. If so, it may be that the main difference between CEE and the CIS nations is the nature of the lag between reform and a turnaround in output and productivity.

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