May 22, 1998 TRANSITION ECONOMIES: INTERNATIONAL AGRICULTURE AND TRADE -- SUMMARY May 1998, WRS-98-2 Approved by the World Agricultural Outlook Board ------------------------------------------------------------------------------- This SUMMARY is published by the Economic Research Service, U.S. Department of Agriculture, Washington, DC 20036-5831. The complete text of TRANSITION ECONOMIES: INTERNATIONAL AGRICULTURE & TRADE will be available 1-2 weeks following this summary release. ------------------------------------------------------------------------------- Economic Reform's Initial Impact Has Been Lower Production, Lower Productivity Economic reform in the transition economies of Central and Eastern Europe and the New Independent States (NIS) of the former USSR has initially reduced both agricultural output and productivity. The livestock industry has been particularly hurt. The main way by which agricultural output can rebound in the transition economies is through productivity growth, which by lowering costs of production, would make domestic output more competitive with foreign imports. The first of three articles presented in this report examines restructuring in the livestock sector; the second presents long-term forecasts (to 2005) of Russian and Ukrainian agricultural production and trade; and the third analyzes the effect of reform on the economic efficiency of Russian crop producers. The main effect of economic reform on agriculture in the transition economies has been the severe contraction of the livestock sector. Since reform began, both livestock inventories and output in most countries of the region have dropped 30-50 percent. The contraction has been mainly due to the reform policies of price and trade liberalization, which means that the downsizing has been an inevitable part of market reform. Price liberalization and the reduction of producer subsidies have led to a worsening of producers' terms of trade (as input prices rose much more than prices for output). With trade liberalization, producers were suddenly exposed to higher quality and less expensive agricultural imports. In some countries, all this was compounded by disruption following land reform and the liquidation of agricultural cooperatives. However, in certain transition economies, such as Poland and Hungary, the livestock sector is beginning to stabilize, and even rebound. For example, hog inventories have stopped falling in both countries, and poultry numbers are clearly rising. The main reasons for the resurgence are that productivity (especially of feed) and the quality of output are improving, and the institutional supports for market-oriented agriculture are being created. All these developments allow domestic producers to compete better with imports, and even to export certain products. Incentives to improve productivity and quality of output have been greater in Poland and Hungary than in the slower reformers because the two countries have more extensively privatized their agriculture and enacted policies to prepare for accession to the European Union. Although Poland and Hungary are among the faster reformers of the region, Russia and Ukraine are the transition countries whose agriculture most affects world markets. USDA forecasts that Russia will remain a major importer of meat, with net imports at about 2.5 million tons in 2005. The forecast assumes slow recovery in GDP, which will increase consumer demand, and only modest productivity growth within the livestock sector. The modest growth in productivity will not be sufficient to overcome Russia's current comparative cost disadvantage in meat production. Russia is forecast neither to return to the large grain imports of the pre-reform period nor to become a large grain exporter. Net grain imports by 2005 are predicted at about 2.5 million tons, the bulk being wheat. Ukraine, however, is forecast to be a modest net exporter of grain. The main way that agriculture in the transition economies can become more competitive on the world market is by raising productivity, that is, getting more output from a given amount of input, which would reduce unit costs of production. A concept related to productivity is economic efficiency, defined for producers as attaining maximum output from a given quantity of inputs. The Economic Research Service is completing a study that examines the efficiency of Russian crop producers during the reform period. The study finds that although under reform agricultural efficiency has generally decreased throughout the country, those regions that were more efficient under the Soviet regime have experienced only a slight decline in efficiency. However, those regions that were less efficient have suffered a major decline in efficiency under reform. A likely explanation is that farms that were relatively less efficient at the beginning of reform, say because of poor management, have had a harder time coping with the challenges of reform. They have therefore performed even less well than before compared with more efficient farms. Yet, farms in less efficient regions are likely to be favored with state subsidies, which have the effect of both keeping the farms in business and reducing incentives to improve performance. The study also concludes that farms tend to be more inefficient (1) the larger they are (in area); (2) the more heavily subsidized they are; and (3) the more diversified they are in their output mix. The last point indicates that Russian farms become more efficient the more they specialize in producing crops in which they have a comparative cost advantage. For more information, contact William Liefert (202) 694-5156. Printed copies of Transition Economies International Agriculture and Trade Report will be available in about 2 weeks. END_OF_FILE