AGRICULTURAL AND RURAL DEVELOPMENT POLICIES
BETWEEN MARKET ORIENTATION AND PROTECTIONISM IN CEECs

Dr. Janos V. Budavari

International Economist
Food and Agriculture organization of the United Nations
Rome, Italy

INTRODUCTION

The trade policy aspect of developing successful agricultural and rural development policies has always been in the limelight of interest in Europe. It has acquired a new accent by the Uruguay Round Agreement on Agriculture (URAA) which saw the start of its implementation at mid-1995. The increased interest is due to the fact that several provisions of the URAA aim at directly influencing national agricultural policies from the point of view of creating more liberal conditions for international trade in agricultural and food products.

In general terms, nations find it beneficial to participate in international agricultural trade due to the great diversity of production conditions among regions, because of decreasing costs of production of some food products and also due to differences in taste. The ultimate argument for trade in agriculture and processed food products, however, is the desire to benefit from national comparative advantages.

For that reason, many economists tend to have a great preference for free trade and even for completely liberalized trading conditions also in agriculture. On the other hand, they incline to condemn any measure aiming at import protection. They also have a strong dislike of all kinds of government intervention in domestic agricultural markets.

The present brief essay undertakes to contribute to those efforts aiming at a more differentiated approach to this controversial issue in the case of Central and Eastern European Countries (CEECs). The main objective of such an approach is supposed to be striking a balance between the necessity of market orientation in eastern agri-food sectors and targeted policies aiming at a limited market protection.

Recent, in part negative, practical experience stimulates us to do so and, in fact, policy makers in CEECs are searching for such a balance. Such a dynamic balance is supposed to be the function of the specific nature of agricultural markets, on the one hand, and of specific national characteristics and situations, on the other. Above all, it should more and more reflect the emerging new multifunctional role of European agricultural and rural areas and their population.

ACTIVE MARKET POLICIES REQUIRED

Within a market based international economy, markets for non-agricultural products and markets for agricultural commodities have many common principles whereas they show also important differences. Common to both is the crucial regulating role of prices. They are the most important indicators for managerial decisions about supply and investments as well as for decisions about consumption. At the same time, they are also the result of the complex interaction of supply and demand (and also of some other factors).

One basic difference in the behavior of different commodity markets is the great instability inherent to international markets for agricultural products. This manifests itself in great price fluctuations due to the specific characteristics of agricultural commodities. Some of their specific features are: inelastic supply and demand; strong short term changes in supply due to unforeseeable events; production and price cycles; as well as great quantities of subsidized exports from traditional market economies.

Experience has shown that such price fluctuations may have extremely negative impacts on the income development and social situations in the national rural sectors. The more open the country's economy is, the stronger the negative impact may be, in particular, when a given sub-sector's market power is very little vis-a-vis its mighty international competitors. It is a fact that presently, most transition countries of CEE fall in this category.

Another persisting source of market instability in CEECs is the great discrepancy in economic potential and bargaining power between producers of the primary sector and the subsequent processing and marketing stages. The legal dissolution and/or sale of monopolies downstream (and upstream) have not eliminated at once the economic base for their existence. Even if partly decentralized and privatized, processing plants, retail trade enterprises and foreign trade companies are continuing to capitalise on their earlier territorial position, business contacts and expertise. Producers, especially the emerging group of new private farmers have no possibility to influence prices and to defend themselves against strong market fluctuations.

One serious negative consequence of "imported" and "home-made" instability of the domestic agricultural market is discouraging agricultural investments. This is affecting the long-term position and economic existence of the agricultural sector with the possible final effect of socially destabilizing parts of rural regions. Apart from other factors (like the uncertainties connected with the restructuring process), the lack of market stability entailed a serious reduction of agricultural investments in the CEECs during the nineties.

During the past decade, in fact, parallel to the Uruguay Round negotiations the awareness grew in Europe that beyond their economic function (i.e. food production) agricultural and rural areas also perform valuable ecological and socio-cultural functions for the society as a whole. These functions seem to increase in importance in western European and also in some CEECs. For those functions to be performed, however, the stability and gradual evolution of rural structures in their widest sense is absolutely necessary. This is true even if the ecological and socio-cultural services rendered by the rural population are to be preferably paid for by direct payments (within the obvious financial limits) and not by continuing price subsidization.

Abrupt out-migration from the rural sector as a result of strong market fluctuations is not desirable at the present stage of economic transition in eastern European countries. In fact, the rural sector has been playing a useful bumper role in the labor market by absorbing part of the unskilled labor set free by urban employers in most CEE countries during the early nineties.

The above reasons clearly call for and justify active market policies to be pursued by CEE governments including targeted market intervention and qualified import protection in order to create a minimum stability on the domestic agricultural market. It is obvious that this should occur within the framework set by the multilateral trade agreements.

Moreover, the above reasoning also seems to explain the course of agricultural policies pursued by CEECs during the early nineties. In that period, the initial rapid trade liberalization was first followed by ad-hoc measures of market intervention and import protection. Then, the individual measures gradually developed into a more or less consolidated package of policy measures and instruments in several CEECs.

It is hardly deniable that without a reasonable minimum of market stability, no sound structural policy can be pursued in order to overhaul the obsolete agricultural and rural structures in transition countries. However, it is the modernization of those structures which forms the key precondition for improved competitiveness and better living conditions in the agricultural and rural sector.

THE COUNTERPART: ACTIVE STRUCTURAL POLICIES

What has been briefly referred to in the previous section, i.e. CEECs do have to pursue an active market policy, is only one side of the same policy issue: designing balanced agricultural and rural development policies for the specific needs of countries in transition in CEE. Namely, the necessary counterpart of market regulation policies must preferably be an active structural policy aiming at the modernization of agrarian structures (including ownership and farm structure; rural infrastructure; output patterns of agriculture and forestry; overall economic structure of rural areas; rural occupational structure, etc).

It has to be pointed out right from the beginning that the use of scarce budgetary resources for price guarantees and export subsidies is only rational if they help to introduce some structural development measures aiming at the improved viability of a certain sub-sector. Likewise, the use of import protection measures is only justifiable if simultaneous efforts are undertaken to improve the international competitiveness of the protected sub-sector and its products. Furthermore, the horizon of structural measures has to reach beyond the boundaries of agricultural production. They have to address the whole economic, social and ecological complex of rural areas with an eye on the criteria of sustainable development.

According to general policy experience, today's structural health of a given agricultural sub-sector and its economic environment decides about its success or failure in the medium to long term. Therefore, it seems to be essential that a major share of the tight agricultural budget and international financial assistance be devoted to structural and human resources development and not to market support programs. If actions of market policy and structural policy are not simultaneously and consistently adopted, funds spent on market support may result in the contrary of what they were meant for. They will entail misallocation of resources, decrease of competitiveness, higher food consumer prices, more political pressure for more subsidies, overstrained agricultural budget, etc.

Consequently, market protection and import protection measures introduced for minimum market stability should not be generalized and should not be continuing long-term. In order to be effective, they should be:

• × targeted
  (Pursuance of a clearly defined structural objective in a given sub-sector);
• × provisional
  (To be phased out according to a preestablished short- to medium-term schedule);
• × predictable
  (Concerning its effect on enterprise profitability during implementation and after phasing out).

The CEECs have already set, no doubt, an impressive record of market oriented agricultural restructuring by the mid-nineties. They stand now at very different stages of the overall transition process. For long-term development, active structural policies should focus above all on international competitiveness rather than on output growth. This seems to be valid particularly for CEECs with the most open economies. Improving competitiveness will be important even for preserving a reasonable share of the domestic market for the sake of national food security. Furthermore, structural policies have to reflect the fact that by the nineties the meaning and content of comparative advantages in the agri-food sector have significantly changed. They do not mainly rely on good physical conditions and producer traditions any more.

Improving competitiveness of products and services lies primarily in the responsibility of farming, processing, marketing and trade enterprises. Governments, apart from creating a stable macroeconomic environment as the most fundamental prerequisite, have to facilitate this process by specific structural policies. At the present stage of the agricultural transition process, the following priorities for structural measures seem to be of particular relevance:

• × Speeding up real privatization of land and agricultural property and delivery of formal and recognized land titles for the security of property;
• × Developing the institutional framework for an operational land and tenancy market and a mortgage system as important instruments for further necessary adjustment of farm structures;
• × Creation of a clear and coherent body of law and regulations for the agricultural and food business, marketing and trade (including the one for the preceding two points as well as for company and bankruptcy law, commercial and competition law, food standardization, basic ecological regulations, etc);
• × Diversifying the economic base of rural areas by introducing non-agricultural income producing activities including direct payments for urgent ecological reconstruction works;
• × Facilitating the creation and evolution of voluntary, participatory organizations of farmers which in cooperation with other economic actors later could constitute a sound base for self-reliance of rural areas.
• × Policies, programs and services for human resource development in rural areas in order to develop the necessary new skills for private farming (in particular in farm management, marketing and ecologically sound production techniques) and for new non-agricultural activities hereby utilizing the potential in international cooperation and practical training methods like training on the job and "learning by doing";

The foregoing list of priorities for structural policies would, of course, need further refinement for the purposes of any one transition country, however, it covers the main issues deserving special attention presently. Meeting these and other priorities by market-oriented adjustments, however, will presumably require a substantial amount of time in most CEECs.

CONCLUSIONS

Under conditions of a market oriented transformation process in the agri-food sectors of CEECs, instability of domestic agricultural markets due to fluctuations in the international markets could submit agricultural and rural regions to extreme economic and social strains. This could lead to a destabilization of rural regions or even to a quasi collapse of national food systems.

During the period of intensive structural adjustments, a minimum of market stability is therefore essential. This justifies active market policies on the part of governments including targeted market intervention and qualified import protection measures. The free trade concept, as theoretically being the best for resource utilization and economic development should not become an exclusive trade ideology or even a dogma to be applied indiscriminately throughout the eastern European agriculture. Like its western European

counterpart, also CEE agriculture is developing towards a multifunctional type of agriculture. It also performs important socio-cultural (and hopefully later ecological) functions which are worth to be preserved in the long-run.

It is essential for the CEECs that the two principal groups of agricultural policy mechanisms, i.e. market policies and structural policies follow harmonized objectives and be complementary. Both types of policies have to be active simultaneously and consistently. By ensuring this, provisional market protection may create the sufficient time for structural measures to be active. The latter, on their turn, may reduce the necessity of providing renewed market protection in the future.