As in previous accession negotiations, EU negotiators will be concerned about the impact of accession agreements on the EU treasury, while CEEC governments will be attentive to their implications for national budgets. Furthermore, many producer groups in the West will be nervous about granting market access to Eastern competitors; the political clout of these interests will constrain the negotiations. As with the accession of southern members Greece, Portugal, and Spain, the new members would be substantially poorer and less technically developed than those currently in the Union, raising the possibility of the need for substantial technical assistance. In the case of the CEECs, other issues arise that have no clear precedent. First, there is the unusual size and importance of agriculture in these countries. Depending on the chosen measure, these nations would increase the size of the Union’s agricultural economy by roughly one third. 1 In each nation, agriculture accounts for a larger share of employment and GOP than is typical in the current Union. Second,hydroponic nft these countries share with their western neighbors a similar continental, temperate climate, and similar growing conditions.
In the long run, after a period of restructuring, their agricultural sectors could display patterns of comparative advantage similar to those in the current EU member states, a prospect that makes concerns about competition even more pronounced than in past expansions . Third, these countries are presently going through a profound process of economic transformation that hopes to shed the legacy of the socialist period in favor of a market-based system of production. Eastern governments will have to consider how an accession agreement will affect the ongoing process of market development and enterprise restructuring currently unfolding in these emerging economies. Finally, the requirements of the Uruguay Round of the GAIT -will be an important new factor regulating agricultural trade, imposing new constraints on allowable treaty terms. The overall success of the accession accords may be determined primarily by factors outside agriculture. Nonetheless, the treatment of agriculture promises to play a central, and delicate, role in the accession negotiations. Nearly a decade after the region embraced market economics, their agricultural sectors continue to struggle with the transition from a socialist production system.
While it is problematic to make generalizations across the entire region, we can identify a few of the key characteristics of today’s CEEC agriculture that are likely to have first-order impacts on the prospects for long term performance . Farm enterprises in these countries can be broadly grouped, by size, into two types: large enterprises that are primarily the successors to state and collective farms organized during the socialist period; and smaller, usually privately-owned, operations. These latter farms, sometimes covering less than one hectare, have often been established by former members of the collective farms who have taken their land out of collective enterprises in an attempt to “make it on their own.” Both types of farms are typically undercapitalized, or have a mix of capital goods inappropriate to the kind of production in which they are engaged. In the face of woefully imperfect capital markets, farms are typically unable to undertake investments to improve their efficiency, even in cases in which such investment would be profitable , depending, of course, on the cost of debt. Short-term finance is typically only available at abnormally high rates of interest. Credit constraints are a particularly severe problem for the smaller farms, which tend to lack either demonstrable collateral or social clout. Persistent problems with land titling, and generally with the development of a market for land, impede the ability to offer land as collateral, further exacerbating problems in the market for long-term credit.
Capital market imperfections are, therefore, one of the key barriers preventing an improvement in the technical efficiency of East European farms, which consistently lags that in the EU. These problems are aggravated by the poorly developed state of public goods in rural areas, including transport and storage infrastructure and market information . In the socialist period, much of this rural infrastructure was provided from within the large enterprises. A system of infrastructure supporting independent farms has not yet emerged. These features the split between large and small farms, the low level of technical development on most farms, imperfections in market for agricultural finance, poor provision of public goods, and a history of government-controlled prices-define the landscape of agriculture in Central and Eastern Europe. These are the initial concerns that government policymakers in the region have to consider as they chart their agricultural strategies over the coming years. Official statements from CEEC policymakers have expressed multiple goals for agriculture during the transition. To the Czech Ministry of Agriculture, for example, an ideal scenario would include the transformation of agriculture along free-market lines; preparation for eventual integration to the EU’s CAP program, and maintenance of a “domestic equilibrium” that would keep farm incomes and output from collapsing during an excessively violent transition . A central motivation for the present paper is the observation, under-appreciated in policy circles, that these goals may be Inconsistent, and that there are points of tension between the goal of creating agricultural economies that respond rationally to market signals, and the desire to bring agriculture into alignment with the heavily-regulated CAP programs of the EU. In particular, a single-minded focus on convergence to EU norms can inappropriately distract policymakers from steps that create incentives to improve productive efficiency. Policies that encourage the restructuring of agricultural enterprise during the interim period prior to joining CAP allow factors to flow toward efficient uses. The terms of agriculture under the treaties of accession will have important implications for CEEC decision makers choosing pre-accession agricultural support policies. If CAP is maintained substantially unchanged from its current form , then producers in the new environment will enjoy higher prices,hydroponic channel supported through commodity subsidy programs and trade barriers. If a version of CAP covered Central and Eastern Europe, the current owners of land would reap windfall profits, as these benefits became capitalized into land values . . CEEC governments have a number of instruments that they can deploy in order to encourage such transformation. They can adopt policies to encourage the reorganization of agricultural enterprises, to move from a system dominated by huge state and cooperative agricultural enterprises into one more responsive to market signals, including a mix of large and small farms. CEEC governments can also control spen~ing on relevant public goods such as public information and rural infrastructure. They can vary the degree of the economy’s openness to foreign trade, through the erection of tariff and import quotas, export subsidies, and other trade management activities.
Commodity price supports and other market manipulation schemes will also continue to offer their rent-seeking temptations. Indeed, price supports and tariff barriers can have desirable effects, from the theory of the second-best: in the presence of a distortion in one input market-that for credit-a government imposed distortion in the output market can have beneficial effects, by transferring resources to producers that are able to use it efficiently. At the same time, however, distortive policies can create price instability. In this context, free trade can substitute for price supports as a market stabilizing mechanism, operating more effectively and at lower cost. Both distortive and laissez faire approaches may, however, compare unfavorably with policies that address market imperfections directly. Of course, use of any instruments has associated costs, both directly taxing the government treasury and indirectly imposing adjustment burdens on society. Thus, in bargaining over the treatment of agriculture in accession, and in selecting appropriate pre-accession policies, CEEC policymakers must therefore be prepared to juggle a complicated set of interactions and trade offs. The nature of these trade offs can be clarified through a heuristic version of a comparative statics exercise. Suppose that a government knew with certainty the date and terms under which it would join the CAP, and was cbn templating a restructuring program that would appropriately position the agricultural sector for successful entry. For a given date of entry, a relatively aggressive restructuring program would create multiple effects, including an increase in the efficiency and flexibility of the agricultural sector; an increase in producer profits and aggregate national wealth in the long term following CAP integration; a short-term decrease in output, as established patterns of production are disrupted; an ambiguous effect on output in the long term; and an increase in the short-term costs of adjustment, including social costs such as unemployment. The government’s fundamental decision problem is how to balance these trade offs, i.e., how to deploy judiciously the policy instruments at its disposal in order to position the agricultural sector for a successful entry into CAP while keeping it robust during the interim period and, perhaps, subsequent to a major reform in the CAP. To be sure, a number of questions concerning the interaction between the terms of accession to the EU and pre-accession policies naturally arise. Let us assume that the CAP will not be altered in the near term and, therefore, that the program’s current form represents a credible policy commitment by the EU, both to its own farmers and to prospective member states of Eastern Europe. How will alternative accession scenarios impact the budgets of the EU and the CEEC national governments, respectively? Under what forms of the accession contract, if any, should the CEECs use the pre-accession period to mimic the EU by adopting CAP-like policies? Do price supports encourage or inhibit efficiency-enhancing restructuring of farm enterprises? Should the restructuring process receive public subsidy? In other words, how should the burdens of the restructuring process be divided between the public and private sectors? Can open trading relationships substitute for direct government price supports in order to stabilize markets? More generally, how should CEEC governments allocate a limited budget amongst alternative forms of agricultural support, including commodity price supports, provision of public goods, and subsidies to restructuring? The goal of this paper is to analyze the effect of alternative accession scenarios and policy choices on the performance of CEEC agriculture, with particular attention to the process of enterprise restructuring. We analyze the decision problem facing a CEEC policymaker contemplating integration of his country’s agricultural sector into the EU, through use of a simulation model of production, trade, and enterprise restructuring in the agricultural economies of the CEECs. We focus particularly on how pre-accession agricultural trade and support policies affect social welfare, under alternative assumptions concerning the form of the “accession contract,” i.e., the terms governing the country’s entry into CAP. We approach the questions highlighted above with a partial equilibrium analysis; we do not address the general eqUilibrium effects that link agriculture to other economic sectors, nor the overall macroeconomic performance of these countries. A maintained assumption throughout is that no major reform in the CAP is presumed to be carried out prior to accession. The paper is organized as follows: Section 2 presents the analytical framework. Section 3 describes the data used to calibrate the simulation modeL In section 4, we present the results of several simulation experiments. Section 5 concludes with the key points learned through the exercise. Simulation experiments were performed using a dynamic model of agricultural production, trade, and enterprise restructuring in a three-region partial equilibrium framework, subject to policy interventions and random shocks. The first region, called the CEEC, represents a generic Central and East European Country in which farmers hire land, labor, and a composite variable input to produce a homogenous output. The effective price of the variable input depends on the CEEC governments’ expenditure on infrastructure and other public goods. Profits depend on the realization of random variables governing the domestic harvest and the prices prevailing in the other two regions, the EU and the Rest of the World .Trade flows are affected by tariff rates in the EU and the CEEC. In between production periods, some farm enterprises in the CEEC make investments to restructure their operations, thereby improving production efficiency. There is also a migration of land between the large state and collective farms, and smaller private operations, in response to profit differentials between those types of enterprises.