At a lunchtime meeting on 12 March, Larry Karp presented results of recent research on the transition of Poland's agricultural sector from state to private ownership. Karp is Reader in Economics at Southampton University, Associate Professor of Economics at the University of California at Berkeley, and a Research Fellow in CEPR's International Trade programme. His remarks were based on his CEPR Discussion Paper No. 622, `Polish Agriculture in Transition: Does it Hurt to be Slapped by an Invisible Hand?', written jointly with Spiro Stefanou. Financial support for the research presented in this paper and for the meeting was provided by the Ford Foundation, as part of its support for CEPR's research programme on Economic Transformation in Eastern Europe. The views expressed by Dr Karp were his own, however, and not those of the Ford Foundation nor of CEPR, which takes no institutional policy positions.

Karp noted that Poland embarked on a radical programme of reform at the beginning of 1990. Agriculture accounts for some 16% of GDP, and it is a key item in the GATT negotiations. Poland's agricultural price reform of 1989 and the subsequent de-control of most non-agricultural prices initially led to increased unemployment and excessive inflation, but conditions have now stabilized and improved. Industrial production fell by some 23% in 1990 and 10% in 1991, while agricultural output fell by less than 3% in each year; unemployment rose from zero in 1989 to 11% in 1991.

Karp noted that Poland differs from the rest of Eastern Europe in having a severely bi-modal size distribution of farms: the average size of private farms is a mere six hectares (with five cows and sixteen pigs), while that of the 1,200 state farms is 3,300 hectares. Efficient production will require the consolidation of private farms and the break-up of state farms; both will be difficult, but the latter will probably occur more quickly. The need to reform the monopolistic, inefficient state- owned processing and distribution sector is more pressing; scale economies in distribution are considerable and the potential for private sector competition correspondingly limited, although the share of commercial production marketed by state firms did fall from 85% in 1988 to 67% in 1990.

Karp noted that Poland had been a net importer of agricultural products for most of the 1980s, a net exporter in 1990, and again a net importer in early 1991, as the former Soviet Union began to replace its exports from Eastern Europe with Western products financed by subsidies and credits. In 1990, Poland received a relatively liberal quota from the European Community, and agriculture accounted for 25% of its exports to the Community. The EC Association Agreement allows traditional trade levels to increase by 10% over the next five years and levies on listed food products to fall by 69% over three years, but export demand seems unlikely to expand sufficiently to spur growth in agriculture.

Karp then considered the choices of regulatory framework faced by Poland's Antimonopoly Office, which must choose between judging each case of suspected anticompetitive behaviour on its merits and developing simple regulatory rules. Recent theoretical models in the literature on industrial organization indicate that there are plausible circumstances associated with combinations of market imperfections in which rules based on common sense and intuition from standard neoclassical theory lead to incorrect decisions. The disadvantages associated with discretionary policy, in particular the great uncertainty and the incentives for rent-seeking, nevertheless seem to outweigh such possibilities. Karp therefore favoured simple rules as the soundest basis for regulatory policy in Poland, despite the theoretical caveats.

Liberal trade policy also provides market discipline, but it is unlikely to substitute for active regulation. Karp cited the limited empirical support for the view that trade disciplines domestic oligopolists effectively and maintained that a liberal trade policy may in any case be difficult to sustain in the face of opposition from special interest groups, which are actively lobbying against the regime adopted in Poland. Karp maintained that it is too early to pass judgement on the Polish reform or its eventual effects on agriculture, but its design was probably essentially correct. The OECD economies' agricultural policies are a bad example and detrimental to Poland; imitating them would only compound its difficulties.