Eastern Europe
Agriculture sector

After a brief period of liberal agricultural policies, Central and East European (CEE) countries are increasingly resorting to price subsidies and trade restrictions, which reflect both habits created under socialism and the example of the West. In Discussion Paper No. 814, Research fellow Larry Karp and Spiro Stefanou argue that commodity-specific tariffs or subsidies provide producer support at excessive cost. Commodity programmes encourage unproductive lobbying that increases demands on the budget and create unnecessary distortions; they also become capitalized into land values and therefore do not support general agricultural prosperity. Any available support for this sector should be used instead to underwrite collateral for bank loans, which encourages the development of the banking sector and has useful insurance properties. They also reject assertions that producers need assistance to face up to monopsonistic processors; that they should follow the Western example to achieve a level playing field or prepare for integration with the EC; and that adjustment costs and market failures can be remedied by government intervention.

Karp and Stefanou maintain that problems within CEE agriculture are not qualitatively or quantitatively different from those in other sectors, which require a mix of policies including privatization, demonopolization, removal of subsidies, open trade and restructuring or elimination of old debt. Agricultural market distortions in the OECD countries and in CEE under socialism were of similar orders of magnitude, and consumers appear to be better off overall under free trade than under pre-liberalization policies with explicit subsidies. Western markets have become increasingly important for CEE agricultural exports, and their composition resembles that of exports to Eastern markets more closely than for general commodity trade; these two factors have diminished the damage to CEE agriculture resulting from the disruption of Eastern trading relations. Finally, a review of the CEE economies' Association Agreements with the EC and the recent Central European Free Trade Agreement demonstrates that agriculture remains largely excluded from the liberalization process.

Domestic and Trade Policy for Central and East European Agriculture
Larry Karp and Spiro Stefanou

Discussion Paper No. 814, November 1993 (IT)