The pre-reform economy heavily taxed the farm sector

Improvements in labor productivity have been strongly correlated with the outflow of labor from agriculture. In China, government restrictions on rural mobility constrained the outflow of labor from agriculture until the mid-1980s . The development of township and village enterprises created non-agricultural employment in the rural areas which was crucial for labor productivity to increase in agriculture after the productivity enhancing effects of decollectivization . In the FSU nations and some of the less developed CEECs household food security concerns limited the labor outflow from agriculture, or in some cases induced an inflow during early transition . However, some of the most important labor movement constraints in Russia and Ukraine today take the form of the social services, housing and health care . Mobility costs for workers are high due in a large part to poorly developed housing markets. Moreover in Russia most companies are now paying wages in kind and through fringe benefits rather than cash. Because most of the goods and services provided cannot be converted into cash, in some cases workers cannot finance the costs associated with moving to other regions .As argued above, a key aspect of the success of the reforms in creating sustainable agricultural growth is the reform of the state itself,nft system and its role in the economy. This does not apply only to its role in the creation of market institutions, but also regarding public investments .

In pursuit of institutional reform of rights and markets, and in the wake of financial and fiscal restructuring that frequently cause severe budget shortfalls, transitional governments have often reduced investments in and maintenance of the infrastructure that agriculture needs to be productive. In China, for example, central government investment in water and agricultural research plummeted in the first decade after reform. Several studies show that total factor productivity has been negatively affected by reduced investments . Observations from almost all transitioning countries report this fall in investment . One needs to be careful, however, to equate a drop off of government investment as a net fall in total investment, since in some cases the private sector will pick up the slack. In other cases, such as in Vietnam, instead of investing in its own agricultural research and development, its new open door policy has allowed better access to the international agricultural research system’s technology.Despite the possibility in some instances of substituting private for public capital, in agricultural some of the most expensive, but most productivity-enhancing projects are public goods. In these cases, it will be the role of the state to make the investments. In fact, if one examines agriculture productivity in the long run, by far most of the rise in TFP of successful agriculture economies in both developed and developing economies ultimately depends on investments in water control and public agricultural research and extension. One of the most often debated types of question is why have some countries adopted one set of policies or a certain reform strategy and others have not. In its most fundamental form, this is a question of what determines a country’s choice of reform strategy.

While there are a number of idiosyncratic factors that might be identified as the main reason for adopting a policy, we believe that the political necessity, or the nature of a country’s political economy, and initial conditions frequently determine policy choice. In this section we examine how political ideology and initial conditions help determine the choice of reform strategy. Before we do, however, we first want to raise a cautionary warning about how when addressing questions like this we often oversimplify a nation’s reform strategy, trying to group countries into a well-defined category. Using the example of Big Bang versus Gradualism, we show how the choice of reform strategy is not usually clear cut, but in reality is often more subtle. After the fall of the Berlin Wall, the debate on optimal reform for transition countries focussed on policy sequencing. China was often referred to as an example of a successful reform strategy, which combined an initial reform of property rights with a gradual liberalization process and thus created growth without the negative effects of disruptions. Others argued that the initial conditions and the economic structure of China were so different from Russia and CEECs that little could be learned from China and that the best policy in those countries was to liberalize and reform everything at once: the so-called “Big-Bang” option. Looking back, the insights emerging from the experience of transition countries so far suggest that the road to successful transition is more subtle.

Given the extraordinary growth in China’s economy, the resulting increase in income, and the wholesale reduction of poverty, the experience in China between 1980 and 1995 has been referred to as possibly “the greatest increase in economic well-being within a 15 year period in all of history” . Even if such a statement is only a fraction correct, it is hard to dispute the conclusion that China’s so-called “gradualist approach” to reform has been successful. However, several studies comparing economic performance of transition strategies in the non-Asian economies seem to come to a different conclusion. If one takes into account differences in initial conditions and external factors, such as regional conflicts, those countries which have reformed earliest and most radically are now doing best . Such a finding, if true, would suggest the superiority of radical reform. Based on our analysis, we believe that, first, the successful transitions in Asia and Europe have elements of both gradualism and rapid, one-stroke reform, and second, that to reconcile these apparently conflicting conclusions one needs to look at both the political environment and the initial conditions at the time of reform.In China, the successful reforms were initiated by a Communist Party that remained and continues to remain very much in charge of the nation. Especially in the early stages of reform, there was relatively little political change that coincided with the economic initiatives. Initially, agricultural reforms were implemented by the Communist Party as an attempt to reduce pressure from the rural population following dramatic failures of the Cultural Revolution. Although there was a turnover in power from Mao to Deng that gave the opportunity to implement a new set of policies, the directives and implementation of the reform measures were designed, tested, and revised within the context of a continuing government-party hierarchy. Somewhat paradoxically, while the reforms in China are often referred to as “gradual,” the initial property rights reforms in some ways led to more radical reform of land use rights and more complete decollectivization than in either Russia or CEECs. Because of the sharp, decisive change, affecting the incomes and livelihood of more than 70 percent of the population, the agricultural reform had a tremendous impact on the whole economy. The rise in food production and increases of supplies in the countryside and city took the pressure off the government. In addition, the rise of incomes created an immediate surge in demand for non-food products. Ironically, these actions, which initially looked like moves away from Socialism,hydroponic gutter probably did more to consolidate the rule of the Communist Party than any other measures taken during this period. In contrast, pre-1989 attempts by Communist Parties in some European countries to give more autonomy to collective farms were much less radical and had little impact. Even if agricultural reforms had been successful, fewer people would have been affected since only a relatively small share of the population was still employed in agriculture, and they were unlikely to satiate the demand for significant changes in the rest of society.But while this is a general characterization of what happened in the non-Asian transition states, in fact, the speed and the extent of the reforms differed dramatically between CEECs and the former Soviet Union. Perhaps unsurprisingly, political and administrative feasibility played an important role. As Wyplosz concluded: “With hindsight, the old debate, Big Bang versus gradualism, is more a question of feasibility“. In terms of political feasibility, the one factor that certainly has played an important role in determining the speed and extent of reform is the political and social consensus to move towards a market economy and democratic political institutions. For a variety of political, geographical, and cultural factors, the consensus was much stronger in CEECs, including the Baltic countries. Simply put, after decades of Soviet domination these countries were strongly motivated to move towards “the West.”

The same push and lesser opportunities made such radical moves less compelling for Russia. In terms of administrative feasibility, optimal policy sequencing of a gradual reform strategy, especially in more developed economies in Europe , would have required extensive information on the transformation process and the economy. Most observers question the feasibility of plotting out a rational, systematically-executed reform path ex-ante. As McMillan puts it: “If it were possible to plan the transition it would have been possible to plan the economy.” Moreover, in some key agricultural reforms, institutional constraints and explicit political objectives affected the final choice. For example, one of the most hotly disputed policies in agriculture was land reform. In CEECs the proposal to restitute farm land to former owners, many of whom were no longer active in agriculture, was vehemently opposed by collective farm managers and workers, and by many economists and advisors who supported land-to-the-tiller policies. However, a combination of institutional constraints — as individuals had retained nominal title of their land in most CEECs any other land reform procedure would have required land expropriation by the market-minded governments — and political objectives — in the Baltics restitution ensured that Russian immigrants would be excluded from land ownership — made land restitution the most common process of land reform in Europe from the Baltics to the Balkans .Although other factors also played a role, the initial technology played a decisive role in creating the success of the break- up of China’s collective farms .Agricultural production in China was much more labor-intensive than in CEECs or Russia. With labor intensive technology, the cost of a break-up of the collective farms in terms of losses of scale economies was smaller, and the gains from improved labor incentives from the shift to family farms were larger. The length of time under Socialism also matters. Central planning and Communist rule was imposed for a much longer time in Russia and most other former Soviet states and has certainly affected both the emergence of new institutions and the response of individuals to new opportunities and incentives. The lack of experience with market institutions decreases the demand for institutional change. Furthermore, surveys confirm that responses from households and individuals in regions where a tradition of private farming existed clearly differs from where this was not the case. Similarly, pre-reform trade patterns had an important impact. Repkine and Walsh show that across sectors recovery in the CEECs is primarily driven by companies that had links with Western markets before the reforms. Investment demand shocks marginalized companies and sectors producing for CMEA markets. At the same time, a gradual expansion in products of companies traditionally producing for Western markets occurred. With the FSU countries depending much more on CMEA markets than the CEECs, countries like Russia and the Ukraine experienced a stronger disruption of their demand system, and consequently suffered greater output declines. Finally, the pre-reform differences in the relative price faced by producers relative to those that prevailed in international markets can account for a significant part of the initial differences in performance of transitional agricultural economies. In China, shifting prices more towards international levels meant a favorable rise in the output to input price ratio for many crops.When prices were moved up towards international price levels, producers responded favorably. In contrast, in CEECs and Russia, where agricultural producers were heavily subsidized under the old regime, the removal of subsidies meant a steep plunge in the real price of output relative to inputs. Hence, even without the collapse of procurement and supply channels, one would expect rational producers in Europe and Russia to cut back on input use and reduce output. So, does the importance of initial conditions reduce the responsibility of reform era leaders for the poor performance that some transitioning countries have suffered? In some sense, the answer has to be yes.