eItg PIJOM. Wel-ld -uead ing; P-} Urkpo ::-: 9966N AN AGRICULTURAL STRATEGY FOR POLAND REPORT OF THE POLISH * EUROPEAN COMMUNITY * WORLD BANK TASK FORCE Copyright © 1990 The International Bank for Reconstruction and DevelopmentllIHE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First printing December 1990 This report is published with the least possible Thematerialin thispublication is copyrighted. delay for the use of governments and the aca- Requests for permission to reproduce portions demic, business and financial, and development of it should be sent to Director, Publications communities. The typescript of this paper Department, at the address shown in the copy- therefore has not been prepared in accordance right notice above. 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An agricultural strategy for Poland: report of the Polish- European Community-World Bank Task Force. P. cm. ISBN 0-8213-1708-3 1. Agriculture and state-Poland. 2. Rural development- -Government policy-Poland. 3. Capitalism-Poland. I. International Bank for Reconstruction and Development. II. Title. HD1995.7.Z8P64 1990 338.'8438-dc2O 90-21181 CIP ii Foreword In April 1990, the Polish government decided future, the strategy proposes the creation of that it urgently needed to formulate a strategy structures and methods that will take at least a for the agricultural sector. During discussions few months to establish. with the World Bank, it was agreed to appoint a jointtask force tohelp prepare a proposal, which The Task Force was chaired by Mieczyslaw was to be submitted to the government by the Stelmach, Undersecretary of State, Ministry of end of July 1990. The Commission of the Euro- Agriculture and Food Economy, and led by pean Communities supported the effort by fi- ClaudeBlanchi. TheothermembersoftheTask nancing consultants. Force were: This document is the result of the work of the Gottfried Ablasser, Zdzislaw Adamczyk, Karol Task Force. It was submitted to the Ministry for Adamik, Ronald Anderson, Pascale Binon, Agriculture and Food Economy, which, after FranciszekBlok,TadeuszBorek,KarolBorzuta, review, presented it to the Council of Ministers Barbara Dabrowska, Cornelis de Haan, for its consideration. The document is divided Jean-Jacques Dethier, Andrzej Dygnarowicz, into a main report and 21 annexes. The main Piotr Eberhardt, Malgorzata Ellert, Izoslaw report combines the Task Force findings and Frenkel, Maria Halamska, John Hayward, recommendations; it assumes the reader is Manuel Hinds, Oskar Honisch, Stanislaw conversant with Poland's economic background Jablonski, Zdzislaw Jablonski, Ulrich Koester, and the main characteristics of its agricultural Andrzej Kolodziej, Wladyslaw Korcz, Tadeusz sector. Kowalak, Tadeusz Kowalski, Odin Knudsen, Because of the short time available to the AndrzejKwiecinski,MarianKrol,GaryLuhman, Task Force (May 28 to July 27, 1990), the pro- Wladyslaw Lukasik, Wales Mack, Stefan posed strategy is only a broad framework. It Malecki, Jan Malkowski, Kamil Matuszewski, covers essential actions and decisions to be John McCarrick, Krystyna Milewska, Adrian taken immediately or in the near future, but Moens,KnudMunk,MariaNowak,PeterOram, doesnotpretendto cover completelythe detailed Jan Pawlak, Zdzislaw Piasek, Andrzej actions that must accompany and complement Pilichowski, Elzbieta Piotrowska, Jerzy Plewa, these major decisions. Wherever possible, the Lorenz Pohlmeier, WlodimierzRembisz,Ryszard main reportidentifies those areas wherefurther Rozwadowski, Orlando Sacay, August studies and review are required. Schumacher, Anna Tuz, Roman Urban, Jerzy While many ofthe strategic recommendations Wilkin, Nick Young, Montague Yudelman, and imply that decisions should be taken in the near Ryszard Zrobek. Warsaw, July 1990 . LIST OF TASK FORCE MEMBERS Task Force Chairmarn Mieczyslaw STELMACH Undersecretary of State, Ministry of Agriculture and Food Economy, Warsaw Task Force Leader: Claude BLANCHI Senior Operations Adviser, Europe, Middle East and NorthAfricaRegional Office, The World Bank, Washington, D.C. Task Force Members: Gottfried ABLASSER European Department, The World Bank, Washington, D.C. Zdzislaw ADAMCZYK Ministry of Agriculture and Food Economy, Warsaw Karol ADAMIK Dairy Institute, Warsaw Ronald ANDERSON Universite Catholique de Louvain, Louvain-la-Neuve, Belgium Pascale BINON Technical Department, The World Bank, Washington, D.C. Franciszek BLOK Ministry of Agriculture and Food Economy, Warsaw Tadeusz BOREK Independent Farmers' Solidarity Trade Union, Warsaw Karol BORZUTA Institute of Meat and Fat Industry, Warsaw Barbara DABROWSKA Consultant, The World Bank, Washington, D.C. Cornelis de HAAN Agriculture and Rural Development Department, The World Bank, Washington, D.C. Jean-Jacques DETHIER European Department, The World Bank, Washington, D.C. Andrzej DYGNAROWICZ Ministry of Agriculture and Food Economy, Warsaw Piotr EBERHART Institute of Geography and Spatial Organization, Polish Academy of Sciences, Warsaw Malgorzata ELLERT Ministry of Agriculture and Food Economy, Warsaw Izoslaw FRENKEL Institute of Vi'lage and Agricultural Development, Polish Academy of Sciences, Warsaw Maria HALAMSKA Institute of Village and Agricultural Development, Polish Academy of Sciences, Warsaw John HAYWARD Technical Department, The World Bank, Washington, D.C. Manuel HINDS Technical Department, The World Bank, Washington, D.C. Oskar HONISCH Technical Department, The World Bank, Washington, D.C. iv Stanislaw JABLONSKI Ministry of Agriculture and Food Economy, Warsaw Zdzislaw JABLONSKI Institute of Meat and Fat Industry, Warsaw Odin KNUDSEN Agriculture and Rural Development Department, The World Bank, Washington, D.C. UTrich KOESTER University of Kiel, Kiel, Germany Andrzej KOLODZIEJ Institute of Planning and Organization of Rural Areas, Agricultural Academy, Wroclaw Wladyslaw KORCZ Ministry of Agriculture and Food Economy, Warsaw Tadeusz KOWALAK COPA-COGECA-EFA Committee for Agriculture and Rural Development in Poland, Warsaw Tadeusz KOWALSKI Ministry of Agriculture and Food Economy, Warsaw Marian KROL Institute of Crops, Fertilizers and Soil Science, Pulawy Andrzej KWIECINSKI Warsaw University, Warsaw Gary LUE3MAN European Department, The World Bank, Washington, D.C. Wladyslaw LUKASIK Council of Ministers, Warsaw Wales MACK University of California, Berkeley, USA Stefan MALECKI Ministry of Rural Welfare, Warsaw Jan MALKOWSKI Institute of Agriculture and Food Economics, Warsaw Kamil MATUSZEWSKI Independent Farmers' Solidarity Trade Union, Warsaw John McCARRICK Dairy Consultant, Dublin, Ireland Krystyna MILEWSKA World Bank Resident Mission in Warsaw, Poland Adrian MOENS University of Waageningen, Waageningen, The Netherlands Knud MUNK Commission of the European Communities, Brussels Maria NOWAK Caisse centrale de coop6ration economique, Paris, France Peter ORAM International Food Policy Research Institute, Washington, D.C. Jan PAWLAK Institute of Building, Mechanization and Electrification of Agriculture, Warsaw Zdzislaw PIASEK Zootechnical Institute, Krakow Andrzej PILICHOWSKI Institute of Sociology, Lodz University, Lodz Elzbieta PIOTROWSKA Institute of Sociology, Lodz University, Lodz Jerzy PLEWA Institute of Human Nutrition, Agricultural Academy, Warsaw Lorenz POHLMEIER Technical Department, The World Bank, Washington, D.C. u Wlodimierz REMiBISZ Central School for Planning and Statistics, Warsaw Ryszard ROZWADOWSKI Ministry of Agriculture and Food Economy, Warsaw Orlando SACAY Technical Department, The World Bank, Washington, D.C. August SCHUMACHER European Department, The World Bank, Washington, D.C. Anna TUZ Supreme Cooperative Council, Warsaw Roman URBAN Institute of Agriculture and Food Economics, Warsaw Jerzy WILI]N Department of Economics, University of Warsaw Nick YOUNG Centre for European Agricultural Studies, Wye College, University of London, Wye, United Kingdom Montague YUDELMAN World Wildlife Fund, Washington, D.C. Ryszard ZROBEK Institute of Planning and Organization of Rural Areas, Agricultural Academy, Olsztyn vi Table of contents An agricultural strategy for Poland The macroeconomic context of Polish agriculture 1 The social context of Polish agriculture 2 The obstacles to transformation 4 Market prospects for agricultural products 6 The future of rural Poland 7 Strategy for the agribusiness sector 8 Strategy for strengthening the rural infrastructure 12 Changing the role of government 14 Developing rural institutions: cooperatives and rural financial systems 17 Sector-specific strategies 20 Postscript: Addressing the present surplus production crisis 26 vii List of annexes Annex 1 The macroeconomy and agricultural adjustment 29 Annex 2 Rural development strategy 47 Annex 3 Changes in food demand, January 1989 - April 1990, and food demand projections 69 Annex 4 Agricultural trade policy strategy 91 Annex 5 Privatization of agro-industrial enterprises 117 Annex 6 Agricultural cooperatives 135 Annex 7 Structural reform of state farms 167 Annex 8 The agricultural and food marketing system and the agrifood industry 179 Annex 9 The transformation of grain marketing 193 Annex 10 Agricultural research 203 Annex 11 Seed production and distribution 215 Annex 12 Agricultural extension 221 Annex 13 Rural finance 231 Annex 14 Agrarian structure, land consolidation, and farmland management 249 Annex 15 Farm production and profitability 257 Annex 16 Soil fertility, acidity, and requirements for fertilization 269 Annex 17 Land amelioration 273 Annex 18 Agricultural mechanization 279 Annex 19 Agriculture, pesticides, and the environment 287 Annex 20 Livestock production sector 293 Annex 21 The dairy sector 307 viii An agricultural strategy for Poland Poland embarked on the road toward a market the rural sector keep its population, develop economy with its economic reform program of employment, and relieve pressures on the ur- January 1990, aimed at stabilizing the ban sector until the latter adjusts to the new macroeconomy. The productive sectors, includ- economy. ing agriculture and related industries, will be * Technical improvements at farm levels are able to build on the solid foundations of this possible but will occur only if the proper envi- program. But the productive sectors are diffi- ronment is created. cult and time consuming to reform, and it is not * While the government must not interfere always easy to identify the actions that will with production and marketing, it has an es- bring about the desired changes and differentiate sential role to play in creating favorable condi- them from those that slow down the reform tions for agricultural and rural development. process. Both categories often look dangerously alike. A strategic plan is needed to help orient One of the major and most unfortunate lega- decision-makersin themaze ofcomplex relations ciesfrom the previous social system is the scarcity and detailed actions that are constantly re- of Polish personnel, both in the public and pri- quired. The agricultural sector, because of its vate sectors, trained in modern economic and social and economic importance, has the po- financial concepts. Another is the habit of tential to be either a brake or an engine for the dependence on the state for everything - com- reform program. The present farm crisis is only bined with a fundamental distrust of the state's a reminder of this fact. actions. Training and education in the new This report is an attempt to define such a concepts must be an essential activity. Devel- strategyforagriculture. Itis articulatedaround oping public and private staff capable of creat- a few basic ideas: ing the conditions for change will depend on the success of these programs. * The immediate problems of agriculture re- side mostly in the agribusiness sector and not on The macroeconomic context of Polish the farms themselves. agriculture * The key to solving agribusiness problems lies in the privatization and demonopolization When the Mazowiecki government took power process pursued by the government, which will in September 1989, it inherited a difficult eco- force an increase in efficiencythrough increased nomic situation. Inflation was reaching triple competition. digit rates, the budget deficit was about 8% of v Rural development is indispensable to help GDP, and debt service was five times export I e , sidization of the economy, and ductivity. The expectation in Poland is that the ,-~-_-X-.-t.W,-V r-y" "state enterprises, which com- changed economic system, and particularly the pe ' th e industrial sector and con- increased efficiency that can be expected from a Ld I .; exports, was so high and marketeconomy,willunleashhithertorepressed ii - me budget revenues that the productive forces and that this can happen ba,7F, t ''.c 'eached 29% of expenditures in quickly. S '. Per capita income had Until very recently, the agricultural sector in Se J-i a. 20% over the previous 10 Poland wELs closed and inward-looking. Agricul- yes? a ,IIOU t-armers and part-time farmers tural policy was based on notions of income -v-zie s:i a. netrer position than the rest of the parity with. the urban sector and on food self- C';Ai-;s, <'lhei. real incomes had declined sufficiency. To achieve those objectives, prices :SY . - o respectively. The economy were manilpulated, subsidies were given, pro- e bankrupt. duction targets were established, and imports s kenbythenewgovernment and exports were controlled with little consid- n cr1 over the budget and eration given to economic costs. Since prices -uorocedurestolettheworst were not allowed to reflect scarcity, central I a: was accompanied by allocation had to be used, resulting in large *-.tar--r iestraintsand distortions and waste. Although about 75% of .' n ana complete liberaliza- total agricultural land in Poland is farmed by c C. N.iseO z-ricet mechanisms were then private farmers, they were entirely dependent t fle -mistefficient enterprises. on state agencies and state-controlled coopera- Is --qas X- recogmzed that this process would create tive sectors for input purchases and sale of their b_ b--t that it was expected to products. In the state and cooperative sectors, .--yard efficiency through com- capital was immobilized, since investment was .eultura was expected to become always a government decision and bankruptcy .Xe: a coir petitive, to deliver prod- of public fi:rmns was not allowed. Similarly, labor -kets at p-rices closer to world was immobilized because housing and other e- s.'-eeviously existing shortages, social benefits were linked to employment, itself age od the devaluation by consideredaebasicright. Theresultwasahighly i-c.itu aiexports, despite che de- distorted sector that was unable to realize its na<- stion of subsidies. The sector economic advantage. -;-. :thelpabsorbtheunemployed by transforming some of the The social context of Polish agriculture Der -,. 0% of the farming popula- -yn -i1e; far I ers. Unlike many countries of Western Europe, the £Cy',g 28% of the work force, Polish rural sector is of major importance to the J --oane X-sP creates only 12% of GDP. social and economic equilibrium of the country. ; 11 3, *e '7 e ,yw figure hides the fact that Its main characteristics, which should be kept '1-'9¾.'n'=' p n son agriculture for 87% of its in mind while designing an agricultural strat- t-Ye d p s su mpt.e. Similarly, 20% of industrial egy, are described in the following paragraphs. e - '3S from agro-industries, which in The rural population has remained approxi- turr 'e on agriculture for 90% of raw ma- mately at the same level (15 million) since 1950 w sector is thus much more important and is now 40% of the population. This popula- 1v ohan its size would indicate. tion stabilitv, largely the result of easier access eec.ons assign an important role to to housing and food, is a major advantage for the he s.x;--o i.s s-upposed to grow at 3-4% per economy during the present crisis. Theoreti- gnq-' -n 'K rthe next five years, and is also cally, it m.ay enable the rural sector to act as a axp ette T Treaseits exports substantially, to buffer and absorb some of the unemployed. 'rJtmThutionl to GDP. The ambitious However, beyond a certain level, this can onlybe tar, ge-t7'` Ch ewvifanycountrieshaveachieved, done at the expense of agricultural efficiency. will requ.ire major changes in the agricultural The average farm size is 6 ha. The approxi- production and processing sectors. Sustained mate breakdown of holdings is as follows: eiculf..al Fgrowth on that scale cannot be e- .. (.w m f't< br.gh normal gains in pro- Size of farms % of farms structure and the low quality of life are impor- tant determinants of migration of women and Very small 0.6 to 2 ha 24% Small 2 to 5 ha 27% young people. Medium 5 to 10 ha 28% The behavior of the rural population is a Large over 10 ha 1% direct consequence ofa perverse system in which private farming had to survive in a centralized environment. This semicapitalist, semisocialist There are 21 persons per 100 ha in Poland, system, as well as the policy of repressive toler- about three or four times the number in EC ance, has created behavioral patterns that are countries. However, it must be noted that wide often contradictory and can be described as regional differences exist, resulting from the follows: history of partition of the country into three regions as well as from unequal regional indus- * farm management that is based principally trialization and development. on a logic of survival rather than on a logic of Although the rural population is generally development. This is expressed in a propensity stable, its composition has changed with time. to minimize risk rather than maximize profit, to The share of the rural population working out- ensure self-financing mostly through multiple side agriculture increased from 15.7% in 1950 to employment, and to take advantage of all labor 40.7% in 1988. Only 20% of the actively farming resources of the family; population derive their income exclusively from * an attitude of resistance to, but also de- farming; 40% supplement their income with pendenceon,thestate. Thisbehavioraldualism outside activities, and the rest are part-time expresses itself in rejection and distrust of farmers. This high level of nonfarming activi- anything that derives from the state, yet, at the ties directly related to the small size of farms is same time, in complete dependencyvis-A-vis the a major structural characteristic of the rural administration. It also creates a habit of unlim- population. Itrepresents flexibility, an assetfor ited demands by farmers on the state as well as the future that can help develop rural economic an acquired helplessness toward market regu- activities upstream and downstream from ag- lation by the state; riculture. * differences in behavior between the private The Polish rural sector represents a unique and state sectors. Private farmers are tied to combination of the private economy, dominant the land and this enables them to remain inde- at the farm level (75% of area, employing 85% of pendent. In contrast, farm workers in state the active agricultural population), and coop- farms are wage earners benefittingfrom specific eratives and state enterprises, dominant in ac- advantages, particularly housing. The same tivities other than agriculture (92% of the active differences exist between private farmers and nonagricultural population). Historically, this workers in cooperatives upstream or down- combination of decentralized and centralized stream from agriculture. economies is a result ofthe failure of agricultural collectivization and of the subsequent policy of Structural changes in agriculture are likely to indirect collectivization. It should be noted be slow, given that farms are small and the however that, in addition to the official private agricultural population is aging. Small farms, sector outside agriculture, there is an important contrary to what is commonly thought, will not unrecorded informal sector. be eliminated by the crisis. They will simply The rural population lives in 2,121 gmina withdraw from the market and only disappear (counties), comprising 42,000 villages, 82% of when their owners retire without successors. which have fewer than 500 inhabitants. Except Commercial farms (which are more dependent for a recently developed road network, infra- on the market) will be in a difficult situation, structure and public services are much less with a risk of economic regression. They will developed than in the cities. The weakest as- have to use labor-intensive methods, yet at the pects are water supply (only 29% of villages same time reduce their costs and improve quality have a piped water system), sewerage, and tele- to survive and develop in the medium term. phone (only 8% of villages). The quality of However, the population's habit of off-farm schools and health services is also weaker than work and the semiprivate character of the rural in the cities. The poor quality of rural infra- economy offer the possibility of more rapid de- 3 velopmentofprivateinitiativesandinvestments, adequate or well-distributed, farm infrastruc- both in the upstream sectors that sell to or ture, a well-developed rural road network, and service agriculture and in downstream sectors electricityavailableinnearlyallvillages. Heavy that buy from it. This potential needs to be farm subsidies during the past 10 years have at actively tapped, as it represents an essential least equipped the sector with machinery, ingredient for the progress of agriculture itself without creatingmuch indebtedness at the farm It also represents the possibility of generating level. This should alleviate the need for costly rural employment (notagricultural employment, investments in the immediate future. which is likely to decrease when on-farm effi- * Poland is geographically well situated for ciency increases), thus helping reduce overall export markets in both the West and the East, unemployment while creating a market possesses an appropriate exchange rate and a economy. The rural sector could thus play a convertible currency, and has a largely free social role, in addition to its traditional pro- trade regime. ductive one, and make a significant contribution * Most important, Poland has a good techni- to the economic reform process. cal knowledge base, and a substantial number Implementing a new agricultural strategy of farmers, particularly younger ones, are well presupposes a gradual reduction in the dual educated. Crop husbandry is sound, but can be perspective of farmers and, particularly, the substantiallyimproved: althoughyieldincreases adoption by farmers of market-related behav- have been high over the past 10 years, they ior. It also presupposes a reduction in the remain largely below their potential. Animal antagonism between farmers and the state, an husbandry is basically sound and veterinary antagonismwhich,underpresentcircumstances, standards are high. could be exacerbated by the sudden fall in ag- riculturalincomeandbytheuncertaintieslinked The obstacles to transformation to the absence of market signals. The only solutions to reduce the antagonism are: Despite some signs of adjustment in the sector, particularly evidence that exports have in- * immediatedefinitionofcleareconomicrules creased despite an end to export subsidies, the to enable farmers to define their own holistic agricultural sector is presently beset by major strategy in a stabilized environment; obstacles to transformation that are outside the * establishment of transition mechanisms to farming sector itself. Symptoms of these ob- buffer the collapse of prices; wherever possible, stacles are that price transmission mechanisms use of welfare policies that increase demand for have not functioned: there are large gaps be- food; tween Polish and world market prices for agri- * development of rural employment, based on cultural products; stocks have accumulated the creation ofgainful activities centered around, (dairy products, grains); little competition is and servicing, agriculture. present on agricultural markets; and credit re- mains so expensive that many agro-industries Poland's agriculture possesses many positive are facing acute difficulty and farmers are un- characteristics which should help it through the willing to borrow. transition from a command economy to a mar- The rural sector, although mostly private, ket economy: was, and still is, totally dependent on the state and cooperative sectors for the procurement of * Comparedwithothercountriesintransition, all inputs and services and for the sale of all the private farm sector is large and has deep- production. The previous economic system had rooted traditions. successfully discouraged private wholesale and * Polish farmers have consistently demon- retail trade, and producers were tied to coop- strated their resilience and survival abilities; eratives that enjoyed territorial monopolies. All although the economic transition is difficult and marketing systems, whether for grain, milk, or sudden, they have the imagination, strength, animals, were and still are largely vertically and willingness to make it on their own - integrated. The producers had no access to essential ingredients for future entrepreneurs. markets above the level of their cooperatives, * There is an abundant, albeit not always which in general they did not control. In prac- 4 tice, therefore, a largely private rural sector was The consequences of inefficiencies in the in fact completely dependent on an omnipresent agribusiness sector go much beyond the agricul- state and cooperative sector that enjoyed mo- tural sector. In fact, they threaten the stabiliza- nopolistic and monopsonostic privileges. tion program. Farmers find it difficult, if not This situation has not changed significantly impossible, to sell their products; consumers see since the economic reform program was started. no decrease in food prices; dairies are unable to The upstream and downstream agribusiness purchase milk; and buying prices are not being structure remains the same as before, and no announced by purchasing agencies. Farmers actual competition has emerged to challenge therefore ask with increasing insistence for the powers of existing enterprises, which are government-guaranteed crop prices. Because of operating fully independently. The state and very low prices, sometimes much below produc- cooperative agribusiness sectors still respond to tion costs, and, as in the case of milk, well below the same pre-reform incentives and not to mar- world prices, farmers feel justified in demand- ket incentives. Their primary objective, since ing minimum prices or even minimum income they are managed by labor, is to maintain the guarantees. Because the cost of credit has labor force at pre-reform levels, and to retain all remained at prohibitively high levels, farmers social benefits. In this, they have largely suc- are also asking for preferential credit at fixed ceeded, as can be seen by the very low number of and lower interest rates. The government rec- jobs lost in the state and cooperative sectors. ognizes that the crops must be bought at rea- They still have no incentive to maximize return sonable prices, and in the very near future. on capital invested, since there is no advocate Because time is so short before harvest, the for efficient capital utilization in their man- government has few practical options to modify agement. Because they still enjoy monopolistic the faulty structures, to create new ones, or to privileges, their preferred solution, when con- let the private sector find its own ways. It is, fronted with a decrease in demand, is to keep therefore, under considerable pressure to re- their margins constant by manipulating prices, turn, at least partially, to the old system of rather than by increasing efficiency through a direct government interventions. This would, reduction in costs and an increase in sales at however, bea severe setback to the establishment lower prices. It even seems possible that some of a market economy. The very large and sud- state industries (not only in the food sector), by den cash outlays demanded from the Treasury extending credit to each other through exces- would fuel inflation. The entire economic pro- sively delayed payments, are contributing to gram would be in jeopardy. the perpetuation of inflation. It is, thus, clear that the agribusiness sector is This situation, worrisome in itself, is made critical to the development of agriculture, and worse by the fact that the food-processing sector indeed of the economy, and that the roots of the (the downstream sectorfor most ofthe farmers), present agricultural crisis are to be found there, is particularly inefficient in Poland. It ranked rather than on the farms themselves. The second to last in a review of the 17 major Polish present crisis is clearly not one of lack of pro- industrial groups, declining in productivity by duction atthefarmlevel: thegovernmenthas to 5.1% from 1978 to 1982. During the overall deal with a glut rather than a shortage. Cer- resurgence in output growth between 1982 and tainly, on-farm efficiency needs to improve and 1985, food industry sector productivity grew by can do so. However, farmers are not going to 1.2% but still ranked second to last in growth. make the needed efforts if the benefits are lost Nationally, the food industry showed negative to an inefficient trade and processing industry. value added at world prices in 1986, and 90% of It would not be efficient to invest at the farm the loss-making public enterprises were in the production level if downstream industry and food-processing sector. This gross inefficiency trade are not capable of handling the products means that there is no incentive for farmers to more efficiently. Government priority actions improvetheirqualityorproductivitysincethose should therefore be directed toward increasing gains are likely to be confiscated by subsequent agribusiness efficiency. processing. This inefficiency also further rein- forces self-sufficiency attitudes in farmers, with negative consequences for productivity. 5 Market prospects for agricultural income and consumption in Poland is typical of products middle- to high-income countries, that is, that consumption increases quickly at low levels of DOMESTIC DEMAND FOR FOOD income, stabilizes, then remains constant at higher levels of income. The projections indicate Households have experienced a 30-40% reduc- that, in per capita terms, food demand grows at tion in real income in the first quarter of 1990 as an average rate never exceeding 1.2%. Because a result of the removal offood subsidies and the of population increase, however, total food liberalization of food prices. Their overall con- demand shows amore pronounced upward trend. sumption of food has declined by 10-15%. Theprojectionsindicate that, inthelongterm, Households spent on average 55% (65% for total food demand in Poland will be mainly pensioners) of their incomes on food in January- driven by population growth. On a per capita April 1990, compared with 39% last year. Fifty- basis, and in both income growth scenarios, food four percent of food expenditures was spent on demand will not increase at high rates. More- meat and dairy products, compared with 45% over, increased prices and better food availabil- last year. ity will reduce food wastage. The fall in household demand for most food The transition to a market-based economy is items is lower than commonly thought. This is likely to induce a worsening distribution of due to hoarding by households of nonperishable income for three to four years. Demand for basic food before the price increases of October 1989, food items will be higher than the projections and to households having reduced or deferred indicate inview of this worseningincome distri- their nonfood expenditures. Households have bution. As real incomes increase after 1993 and restructured their expenditures according to more people move to higher income groups, the relative price changes but have attempted to food budget share and the income elasticity will maintain approximately their past food con- decline sharply, and the latter may come close to sumption levels. zero, as in the high-income OECD countries. Average nutritionalintakes comparefavorably When the economy recovers, growth in food with those of Western European countries. demand will slow down, implying that projected However, average figures mask the increasing figures are biased upward for the years 1993- number of people who are below the poverty line 2000. As income increases and the share of the and nutritionally at risk as a result of the fall in poor in total income decreases, demand for more their real incomes and limited income opportu- processed and more expensive food items will nities due to rising unemployment. The per- increase and demand for primary, unprocessed centage of households below the poverty line is food will decline. estimated to be 37% among pensioners and 30% Supply-side factors, such as the opening ofthe among workers' households. economy and the restructuring ofthe food sector, There is thus a need to reinforce and expand will have a profound effect on consumption the existing social welfare system by transfer- patterns. There will be a reduction in seasonal ring income to low-income groups and by ex- consumption fluctuations linked to the pandingexistingtargetednutritionalprograms seasonality of processing industry production for vulnerable groups to cover those nutrition- andtothevirtualabsenceoffoodimports. Inthe ally at risk. short term, food demand is expected to adjust to During the period of economic adjustment, relative consumer price changes until food real incomes can be expected to fall until they markets are in equilibrium. There will also be attain a macroeconomically sustainable level. substitution overtime within majorfoodgroups. Projections have been carried out for two The availability of imports, together with the scenarios: the more optimistic predicts a 14% greater choice and quality ofconsumer products, decline in real terms in 1990 followed by growth will lead to a differentiation of consumer tastes at a real rate of 5% thereafter; the more andaconsequentdifferentiationoffoodmarkets. pessimistic predicts that real GDP will decline by 20% in 1990 and by 5% in 1991, will not grow FOREIGN TRADE PROSPECTS in 1992, and will then grow at an annual real rate of 3% thereafter. Estimated income Poland's agrifood exports accountforabout20% elasticities show that the relationship between oftotal exports, butthe share ofexports compared with total agricultural production is relatively competitive in export mark-ets, argel;; &e. small: 9.5% in 1989 and 1990. The Polish trade of upstream and downstream inefi icies. A balancebecamepositive overthefirstfive months strategy of exportexpansion would -reuireelarge of 1990, partly due to an increase in exports of export subsidies or other -Forms of sbsidi`es an d agricultural products, but mostly because of a is not affordable in the present cnntexv- Buclt tile decrease in imports (mainly feedstuffs), which export potential for specialized agri-rul ral is a dangerous development for future meat and products for which Poland currentliy has an dairy production. Agrifood exports were sup- advantage in terms of low labor costs S' "De oD ported in the past by disproportionately large identified and exploited. Thnmos in export subsidies and enjoyed a greater effective quality standards could assist iln rate of protection than other sectors. There are such specialized exports. A sociallly a~cajpt ble indications that exports of processed food are way to reduce excess capacity in agr -e less competitive than exports of agricultural wouldbeto aimtoproducesornewha beiowself- commodities. Profitable exports of processed sufficiency. In such a case, bhe seco&r w\e nt products will therefore depend on the ability of require major government intei.ve-roion or fi- agro-industry to increase efficiency. Inefficient nancial outlays. Such an ptnion v, -uld iynply food-processing sectors will have to be reorga- that consumer prices in Poiand woula f# d.nate nized and restructured. Export markets are around import parity levels, and st,-. _;9e w4-e-ll importantforPoland's agriculture, andthe shift below pricespaidby consumrnes in tl-eE-, e ropean to a market economy should help the industry Community. It would aiso rnean 12bat- consolidateandimproveitspositionontheworld taxpayers would avoid the cosLs t ub- markets. However, there are serious limitations sidies or other government snppoofo arisingfrom the characteristics ofthose markets for agriculture. that should be kept in mind. Although it would be good for Poland to obtain The future o Zi n La n increased access to European Community (EC) markets, increased tariff quotas are unlikely Withthe abovebackgroundio.4.iif-,:i. o. under the generalized system of preferences to set goals for the developn - (GSP) or other schemes, since it is unlikely that and the rural sector, ad, er ..d - the Common Agricultural Policy of the EC will tions. be modified to accommodate Poland. Of course, Agriculture in Poland 2hou.s Poland could negotiate special agreements al- nationally and internationPahly, . lowing privileged access for Polish products ibility and responsiverness to nnket si gi als5 t that have a comparative advantage (such as exploit its comparative va-nr,age, ai Pro- fruits and berries); in return, privileged access duce competitively for both dames f-_ e , to the Polish market mightbe granted for other markets. This means that the d-ri ve< EC products, including agricultural products autarky, which is the tradiPoae,sio not produced in Poland. However, the possibili- Polish farmers, must progress:v8ly-, ve :ra- ties of significantly expanding agricultural ex- a production pattern that a's mcst.l£; ' ly ports toward the EC are not great. oriented. The prospects for exports to the Soviet Union Agriculture and its upstreaman-dd -wi amn and other Eastem Eu-ropean countries are bet- sectors should strive for efli-cien .- a w kow ter. Experience proves that exports are greatly mobility of labor and capital. I.-9borg an sdpital facilitated if the exporter enjoys a strong and markets should be developed ani . 3 ,`n- stable domestic market. Given that income tion as freely as possible. levels in those countries and in Poland are Agricultureshou]dbed .v _ similar, the quality requirements for export of and be private; agricultural produis" - Si-.5 agrifood products will probably be similar to beonlandthatisessent.allyp.rivai;e. .riw those of Poland's domestic market. This would marketing, transport, process-ing, anel svo- age permit the expansion of exports. However, activities should be private; as for prif'eSs, they these markets are unlikely for some time to offer should be determined by m.arket fo- -S prices higher than, or even equal to, world Agriculture should be free to u9e al!. trade markets. possibilities, boti domestical]y and Jnltenla- Most Polish agricultural products are not tionally, since this is the only way it can fully 7 exploit its comparative advantage at any given agricultural sector is given the freedom to de- time. cide how and where to invest, as well as access The rural sector should be a dynamic and toall thetoolsandinformation thatallowfarmers integral part of society; it should provide diverse and processors to make informed investment sources of income by creating employment out- decisions and to reap the benefits (as well as side the farming sector and should consistently bear the costs) of their decisions. improve the quality of life in rural areas;holistic rural development should thusbeaprioritygoal Strategy for the agribusiness sector to help create employment in the rural areas outside of, but connected to, agriculture. This MODIEYNG OWNESmflP AND PRIVATIZING STATE would compensate for the loss of rural employ- ENTERPRISES ment and possibly also help absorb some of the urban unemployed. Improving the efficiency of the agribusiness The foreseeable long-term structural changes sector should be the first priority of an agricul- in the sector (increase in average farm size, tural strategy. The causes of the present ineffi- decreaseinoverallfarmingpopulation, increased ciencies are well known and understood in Po- specialization ofproduction) will be progressive. land. They are to be found in their structure These changes should be promoted by govern- rather than in the quality of management or ment action but not forced upon the rural equipment. While both need great improve- population. For some time to come, an in- ments, these cannot be achieved until the creasingly modern and high-performance ag- structures are profoundly modified. At present, riculture, not only on the large farms but also on the state enterprises dealing in agro-industries small, modem, and highly intensive ones, will and input supplies do not respond to market coexist with the more traditional small-farm incentives because they were built to be large sector. The interests of both must be safe- monopolies insulated from market pressures by guarded. an almost total lack of competition. Further- Since parts of the rural population will suffer more, because they are generally vertically in- from the consequences of those changes and tegrated and large, they prevent the introduc- maynotbe abletobe self-employed, non-market- tion of new entrants into the market. distorting social safety nets should be designed, State enterprises do not respond to profitability principally through subsidies uncoupled from incentives because they are controlled by production and prices. workers' councils. However ambiguous the Agriculture should be protective and support- ownership of the enterprises remains, the owner ive of the environment; appropriate regulations (the state in the case of state enterprises, and an and incentives should be designed and enforced. undefined owner in the case of enterprises As will be described later, major changes in previously belonging to the cooperative unions) the structure of agricultural production cannot in the final analysis is responsible for enter- be foreseen. Grains and livestock (including, of prises'losses. Untilnow,this systemhasallowed course, dairy) will remain prominent for social workers and managers to extract a maximum and technical reasons. There are no miracle from enterprises under the form of various crops waiting to take over the Polish fields once compensations, andthe statehas always covered markets are free, but changes can be expected losses. with new demandformore elaborate food (fruits In such circumstances, it is clear that those and vegetables); a lower consumption of animal who control the enterprises have no reason to fats will probably induce more demand for take, or accept, decisions that could harm their vegetable oils (rapeseed); and changes in mod- immediate interests, and a drive for em agro-industries may create changing de- demonopolizationandincreasedefficiencywould mands for new crops (including industrial ones clearly harm a part of the work force, even if, in such as flax). Government research, at the the long term, it might benefit those who stay. cutting edge of development, should be on the Their strategy is therefore to reinforce their lookout for opportunities, and agriculture (in- control of the enterprises through acquisition of cluding its supporting services) must be posi- the shares at the occasion of the privatization tioned to respond to changing market needs. drive; and to obtain capital either from the The best way to achieve this is to ensure that the state, banks, or foreign partners (through joint 8 ventures) to renew and augment the enter- will not need to be forced to do it since the prises' fixed assets, which are seen as the only sanction for nonprofitability is bankruptcy. reason the enterprises face difficulties. Their Enterprises should also be relieved of the rationale is to maintain the monopoly situation social functions and goals they now carry as a they inherited. result of the previous social organization in Remedies to these structural problems lie in Poland. Such functions are not compatible with the privatization objectives of the government a market orientation. Social security, such as and in the law that has been recently voted by medical coverage, insurance, pensions etc., Parliament The entire agribusiness sector, shouldbe assumed atthe communityornational andparticularlythose parts ofitwhich are most level, and not as an adjunct to an employment important for farmers, such as product market- contract, except for the normal employer's ing and processing, transport, services and in- contribution. Similarly, housing should not be put supply, should be demonopolized and a consequence of an employment contract. The privatized as a matter of urgency. Moreover, stock ofhousingbelongingtoenterprises should, this process should affectthe entire sectorin the therefore, be separated from other assets, and same fashion: it would be harmful to leave some distributed in full ownership to their occupants monopolies-monopsonies intact for some time, either free or on very favorable terms. This forthis couldinduce distortions and undesirable would ensure that the loss ofjobs that will come shifts in production patterns. Such distortions with the efficiency drive is not rendered more would cause imbalances that would be costly to painful for the worker by loss of housing. Such correct. The privatization drive should affect a decision would remove one of the major wor- the agribusiness sector homogeneously. Sev- ries that workers have regarding privatization eral basic decisions should be taken following of enterprises. A housing distribution program the enactment of the Privatization Law. would also help create a housing market and First, public ownership mustbe reestablished. develop labor mobility in Poland. Following the reestablishment of public own- Rapid and massive privatization should be ership, temporary new government agencies initiated in the agribusiness sector, particularly should be created to control the management of in the food-processing, transportation and farm enterprises until these can be transferred to input sectors. new owners. The temporary agencies should be Criteria for appraising investment proposals geared to maximize economic return and mini- should be developed to ensure that public sector mize the time needed for the next step, enterprises targeted for privatization do not privatization. They should be sufficiently small continue to claim public resources unless they to avoid creating very large holding agencies demonstrate their ability to use them efficiently. that could accumulate too much economic and Access to financial resources either public or thus political power and be able then to develop private, other than self-financing, should be their own agendas. submitted to strict a priori controls by the con- Conglomerates, agrokombinats, and all other trolling institutions. monopolies and monopsonies should be broken There are many waystoapproachthe complex down into smaller concerns to promote compe- issue of privatization and very little relevant tition. The present integration allows compen- experience on which to draw lessons. The Polish sation of losses between different units at the situation is difficult to compare with that of cost of overall efficiency. The conglomerates other countries that have privatized part of should be divided into profit centers capable of their public sectors, if only because of consid- operating independently. erations of scale. The principles which should While this recommendation is largely outside govern anyprivatization can be stated asfollows: the scope of an agricultural strategy, it should be mnentioned that the promulgation of a mod- * The privatization drive's main goal is to ern accounting and auditing system capable of improve enterprise management and result in clearly measuring the profitability of enter- an optimal dispersion of ownership. This dis- prises is an urgent priority. Public enterprises persion should be sufficient to create an active not yet privatized and those not immediately capital market, improve income distribution, subject to privatization should apply this new and avoid too much economic concentration, system as soon as possible. Private enterprises which would lead to inefficiencies. It should not 9 be so large as to dilute ownership excessively state farms are not particuiarlv effincient; al- and prevent owners from exercising their con- though they tend to have better yields than trol over management. private farms, their overall efficiency of use of * The process should be as rapid as possible. production factors is below that of the private The present inefficiencies of the agribusiness sector. A number of them are integrated hon- sector are cripplingfor the economy and hamper zontally and vertically (agrokom,binats)', which stabilization and economic growth. They also allowsforcompensation oflossesbetweenunits, threaten consumers with food shortages and at the cost of overall efficiency. high prices, while imposing low prices and glut State farms, particularly the largest ones, conditions at the farm level. Moreover, the cannot easily be broken down Into - edium-size public enterprises remain the responsibility of units without a major temporary loss of effi- thegovernment,whichbearstheblamefortheir ciency. Their lands cannot be distributed with- inefficiencies and, eventually, will have to cover out creating a major population miigration that their losses. Speed in the process is also neces- would be socially and financial:y costly in the sary to limit the process ofspontaneous short term. Moreover, suduenlv placing large privatization that is now taking place and is an tracts of land on a narrow land rnrarket would undue appropriation. seriously depress land values. L't is therefore * The privatization process should be equi- advisable to take a gradual approach to state- table. Poland is on the verge of distributing owned land distribution, synclnronized with the assets accumulated over 40 years (and more) development of a land market and related insti- and paid for by the population through low tutions. Apart from those state faryns that are standards of living. This distribution, whatever structurally unprofitable and coulid be sold to form it takes, should be equitable, if it is not to adjacent private farmers, the others should be create future social tensions. If shares are allowed to operate as large enterprises, but with transferred without payment (in part or in to- some fundaimental changes to £tee tn state or tality), they should be given equally to all citi- its agencies from the task ofrunning agricultural zens. If they are sold, buyers should pay the production inits and covering their losses, and right price for them. to ensure that the new units are as efficient as possible. To achieve the above. the fo'ilowing Enterprises shouldnotbetechnicallyimproved strategy is proposed: before being transferred. Privatization is the prerequisite for management and efficiency * As with other public enterprises, housing improvement, and before this happens, there is should be delinked from state farms and dis- no certainty that the amount spent on refur- tributed to the workers, after w7hch tnre stafe bishing the assets of the enterprise will be farmsshouldbelegallyre, o ssessed- thestate recouped through its sale. and the managerial power ofw crkerse councils rescinded (this would probably be covered as MODIFYNG OWNERSHP AND PRIVATIZING STATE part of the legislation on public enterprises). A FARMS new management control system should be es- tablished, through holding cornpanies, as in the Although state farms are not principally part of case of other public enterprises. the agribusiness sector, their role in * Ownership of land and buildingsshou.ld be agroprocessing is large, and their situation is legally separated from the right of isage of similar to that of state enterprises. There are these assets. The land and buildings should be 1,300 statefarms, consistingof5,000 agricultural transferred to a state land agencyS whose only units and enterprises, on about 4 million ha, mandate would be to own state lan, , 'nd lbuld- providing employment to more than 470,000. ings, to make sure that they a --nlainined in They account for about 24% of agricultural out- good agricultural condition5 ana >e;ease oru sell put, and 35% of marketed output, and are re- them to private farmners or ind-ustes. A state sponsible for about 25% of agricultural exports. land-leasing policy sholuld be developed to en- It is clear that such an important subsector sure that the leases are fixed at levels repre- must be included in any reform of agriculture. sentingtheir true economic value. quch a policy State farms benefit from government subsidies, would also influence the prices of private lease estimated at about $100 million a year. But agreements. 10 * The conglomerates (agrokombinats) should vided by the Cooperative Law of 1982. It follows be broken down into smaller, independently that since the primary cooperatives own the managed units that would operate as autono- cooperative unions, all assets of the cooperative mous, financially independent, cost and profit unions, including the industrial assets accumu- centers. lated over the years in the industrial enter- * Privatization of management should be ini- prises are owned by the primary cooperatives. tiated for each of the independent units. The * It cannot be claimed that the assets of these industrial parts of state farms shouldbe treated enterprises were financed by state subsidies. as industrial public enterprises. The agricul- Subsidies were passed on to consumers and tural parts should be offered on lease to private cooperatives were heavily taxed. In 1988, 27% enterprises, including workers' cooperatives. of the income of cooperatives went to pay taxes. Leaseholders would take the entire commercial Cooperatives were also indirectly taxed, as 21% responsibility for management of production of their income was spent for social purposes. units. A bidding system should be developed to * The cooperative system was largely self- ensure equity of opportunity to purchase. financed. A total of 32% of the income of coop- * As with other privatized public enterprises, eratives was allocated to different funds (re- state farms not yet under private management source fund, 14%; investment fund, 9%; and should not have unrestricted access to new fi- development fund, 9%). The development fund, nancing and should not be given preferential which averaged 9% but was as high as 25% of treatment over private farms. income for individual cooperatives, went to the * To facilitate and guide this effort, a state central unions and in turn was used to finance farm agribusiness restructuring group should the establishment and operation of enterprises. be constituted from the current state farm task * These enterprises (agroprocessing, whole- force, with members from MAFE, Treasury, saling, transport, etc.) are part of a marketing BFE and state farms. chain. To suddenly break these linkages would create further disruption in the system and Part of the land belonging to state farms could aggravate the already difficult situation in the be used to start a land market. Land at the food industry. periphery of state farms could be offered for sale * Appropriation of these enterprises by the toneighboringfarmerstoenablethemtoincrease state would be a step backward for the the size of their enterprises to viable levels. privatization process. Primary cooperatives are Smaller state farms might be sold in their en- private enterprises and retaining the assets of tirety. In some cases, lessees may not wish to cooperativeenterprisesbyprimarycooperatives take over all land previously belonging to the would have the effect of privatization or state farm. In this case, residual land should reprivatization. Privatization in this sense remain with the State Land Agency, which will means releasing these enterprises from state lease it or sell it to private farmers. Land found control. unattractive to leaseholders might be turned over to publicforestry or conservation activities. The state had control of these enterprises through the cooperative unions, but this does RESTRUCrURING COOPERATIVE ENTERPRISES OF not establish its proprietary rights. Neither is LIDATE UNONS there justification for favoring the takeover of these enterprises by their workers, as the liq- Many agro-industries, and especially the dair- uidation law permits. These assets should be ies and fruit-processing ones, were created and kept within the cooperative system, but the owned by the cooperative unions, which were enterprises should be transformed into joint- dissolved at the beginning of 1990 and are stock companies with the primary cooperatives undergoing liquidation. It appears that the as shareholders and operating exactly like pri- primary cooperatives are the legitimate owners vate firms, without special privileges. Those of those enterprises. The reasons for this are as that operate unsuccessfully will go bankrupt. follows: Those not claimed by primary cooperatives should be treated as public enterprises and *The primary cooperatives organized and liquidated if they are redundant. registered these unions with the courts as pro- TheliquidationprocessundertheCooperative 11 Law of January 1990 has had negative conse- agriculture. Any development strategy must, quences for the entire cooperative system be- therefore, go beyond production aspects to en- cause marketing linkages, previously managed compass the full spectrum of rural activities. by the unions, have been severed. Thousands of What is needed is a rural development strategy. economic enterprises owned by cooperative The objectives of such a strategy can be de- unions have been orphaned and operate without scribed as follows: effective ownership representation. Their ac- cess to financing is in doubt and their ability to * in the short term, maintenance of the pro- enter into joint-venture arrangements has been ductive potential of agriculture and of its role in crippled. providing employment; the rural sector should Those appointed to liquidate the unions have act as an employment buffer for the economy as been given full authority to decide on future a whole; ownership of the unions' enterprises and to * in the medium term, creation of a rural manage them until new owners take over. It is market economy through privatization and de- clear that these liquidators are not prepared to velopment of nonagricultural activities; this assume these decisive roles and have no clear rural economy would be an engine of growth for guidelines or supervision to perform their du- the economy as a whole. This will be achieved ties. Some 400 unprepared liquidators operate through the development of local markets, of largely individually in restructuring most ofthe itinerant trade, of handicrafts, of cottage in- country's agroprocessing and trade enterprises. dustries, and of rural services. In addition to To prevent further deterioration of the situa- small and medium-size enterprises, there will tion, it is proposed that any decision to award be self-employment and many microenterprises, ownership of cooperative unions' assets be de- corresponding to the investment and manage- layed until a cooperative restructuring organi- ment capabilities of individuals; zation includingregional restructuringteams is * in the long term, regional planning and formed. It is proposed that the cooperative multisectoral development of rural areas will restructuring organization be managed by a raise rural living standards and decentralize national committee of representatives of the the national economy; this will improve utili- Ministry of Finance and the Supreme Coop- zation of productive factors and promote a more erative Council (composed of 98 elected repre- harmonious regional distribution of rural assets. sentatives of primary cooperatives). At the regional level, the committee should have a In the short term, over the next few months, similar organization. These bodies would have the following actions should be undertaken: the responsibility of immediately ensuring pro- fessional managementofcooperative enterprises * incorporate the specific requirements of the with the participation of the legitimate owners. agricultural cycle in fiscal, credit and This would allow more time for restructuring privatization policies as they apply to the rural enterprises along efficient lines, proper evalu- sector; ation of assets, and identification of prospective * reduce the present instability of the rural buyers and joint-venture arrangements. economy through measures leadingto stabiliza- tion of producer prices and interest rates, by Strategy for strengthening the rural developing access to storage of products and by infrastrucutre disseminating information about prices and markets to increase market transparency. Such DEVEOPING AND DIVERSIFING TEE RURAL measures should not involve direct interven- ECONOMY tions in price fixing or direct buying by the state or its agencies. The rural sector in Poland contributes much more to the economy than food and fiber. It In the medium term, incentives for private houses a large proportion of the population, and initiative to develop must be put in place. Nor- has the potential to create employment through mal mechanisms to create a network of small the reestablishment of a network of productive production units, entrepreneurship and capital and trade activities normally associated with accumulation in rural areas have been blocked 12 for 45 years. Outside of agriculture, where oping individual strategies, management and multiple jobs and the liberal credit policy of the marketing (the use of active and participatory Gierek period have permitted savings to de- training methods, until now unknown in Po- velop, the only means of accumulating capital land, would be very efficient); and group action- were informal. They included: illegal appro- training for small rural activities, delivered at priation of means of production (private use of the work place; public resources, includingworkers'time, assets * afinancingpolicyfacilitating access to credit and inputs); informal trade made possible by by new economic agents. Since interest rates distortions in the economy; and unrecorded re- should not be subsidized, it is necessary to mittances from labor abroad. The creation of a create mechanisms to compensate for the new rule of law and of a market economy presup- entrepreneurs' lack of equity contribution or poses the elimination of distortions and privi- assets by granting temporary exemption from leges, but also deprives economic agents ofthese taxes and social security contribution (without previous sources of cheap capital. reduction in benefits), by giving them start-up The reform policy, and particularly the drive grants to help in project preparation, and by for increased efficiency, will create massive supervisingthestart-upoftheiractivities. These unemployment, estimated at 2 million by the two mechanisms necessitate two forms of sub- end of 1990. Clearly, the policy cannot be sidies, one at the level of the entrepreneur and limited to simple welfare, which wastes human the other at the level of the bank or local de- potential and perpetuates and increases de- velopment agency. Both would require financ- pendence on the state. State involvement in ing from the state budget; welfare is at present limited to a small part of * a favorable environment. For this it is the population. The economic reform program necessary to eliminate useless regulations and calls for a more active policy, supporting the modify the administration's arbitrary and slow disadvantaged and giving everyone an oppor- behavior; to develop a clear, coherent legal and tunity to generate employment. This supposes fiscal framework (this is currently being elabo- that access to capital is facilitated. Obviously, rated); to implement an information policy re- resource limitation means that such a policy garding markets, technologies and new behav- must be precisely targeted. It is also a powerful ioral patterns; to facilitate access to appropriate tool for reawakening private initiative and for machinery by reorientation of national produc- developing local markets in which the income of tion toward small-scale equipment, permitting one creates the market for another. It is also a the import of small-scale machinery, including means of providing opportunities for entrepre- secondhand equipment (given the high relative neurs. cost of such equipment in Poland, it would be Thiskind of self-employmentpolicyis unusual helpful to create the legal framework for the in industrialized countries, where wage labor development of leasing contracts); and to fa- has killed the concept of independent labor and cilitate access to land and building to establish where society accepts the need to offer perma- workplaces. nent support to a high percentage of unem- ployed. It nevertheless reflects the modern To prepare for the long term, it will be neces- industrial revolution, in which a multiplicity of sary: technologies and markets fosters a new pro- duction model based on closely linked small * to put in place a capacity for regional plan- productionunits. Thisdevelopmentisfacilitated ning and undertake the development of rural by progress in telecommunications and infor- infrastructure; priority should be given to the mation technology. This model, in the medium supply of piped water, energy and telephones, term, could be the objective of rural job creation. and also to cultural, educational and health The three major instruments of such a self- infrastructure; employment strategy are: * to enact regional development policies and land set-aside policies for reforestation, hunting, o a training policy with two basic compo- fishing, and tourism; nents: a reawakening of private initiative * to promote decentralization of the indus- through management seminars based on devel- trial structure, following the privatization of 13 monopolies, for storage, transport and process- * ensure that the level of price stabilization is ing. not above the average c.i.f. world price available To implement such a strategy, the state must to Poland, so that exports can cover the cost of provide a legal and administrative framework stabilization when purchased products cannot and necessary budget allocations. Local agen- be sold on domestic markets. cies and governments should take responsibil- ity for economic and social development at the In the medium term, Poland will need to local level. Both state and local governments establish a system to limit major fluctuations in should avoid getting directly involved in eco- domestic prices principally for grains, pigs, nomic activity. Local rural organizations and poultryanddairyproducts. Since Poland willbe nongovernmental organizations (agricultural close to self-sufficiency and will switch from chambers, the Church, foundations) can play an imports to exports, domestic price fluctuations important role, particularly in information will be induced by world market price fluctua- transfer and training. tions and, more important, by the f.o.b.-c.i.f. differential. In addition, small farmers under- Changing the role of government going modernization and specialization will need relatively stable prices. Social reasons also MARKET REGULATION justify price stabilization. Border measures will play an important role in such a policy. The Government will always be called upon to in- temptation to remonopolize part of the trade to tervene in market regulation. The case can be avoid inter-Polish competition, which may made that, until the transition period is over, sometimes occurin such asituation, is dangerous domestic marketsbeingimperfectandmonopoly and not justified by the relatively small size of forces still existing in the country, government the export sector compared to the domestic intervention is necessary to provide some degree market. However, minimum export prices can of stability and predictability to prices both for be imposed at the borders to prevent Polish commodities and credit. Interventions should exports at unnecessarily low prices. be designed to promote responsible actions by Modern trading techniques used in national the private sector, avoid the creation of unjus- and international trade are not developed in tified rents, and limit open-ended and Poland. Financial matters must be separated unsustainable budgetary commitments. The fromphysicalpossessionofassets. Forinstance, interventions and protection granted by OECD traders should hold certificates of ownership or countries to their agricultural sectors are often supply contracts, not grain or oil. Introducing given as examples for Poland. It should be those modern techniques and setting up a sys- remembered, however, that Poland's industrial tem for buying and selling such certificates are and service sectors are notyetgeneratingvalue- essential steps for developing trade in Poland; it added surplus that can be transferred to agri- is the indispensable complement of the culture. Similarly, the capacity of urban dwell- privatization drive and of the modernization of erstopayhighfoodpricesisseverelylimited. In Poland's banking sector and accounting and such circumstances, lasting protection over av- auditing profession. A speedy modernization of erage world prices cannot be sustained finan- the Commercial Code, making it compatible cially. Such interventions also distort produc- with the laws, regulations and practices in force tion patterns. The basic rules to follow should in Poland's tradingpartners, is urgently needed. be as follows: SOCLAL INTERVENTION * avoid direct state intervention in buying, storing and selling commodities in favor of ne- One of the most important roles of government gotiable financial instruments and deferred istoprovideasocial safetynetforthoseadversely purchasing contracts. Avoid price fixing, which affected by economic adjustment and those who creates state purchase obligations if the private cannot benefit from new opportunities for job sector does not buy above the level fixed; creation or self-employment. Such a safety net * make sure that budget transfers for price is beingdeveloped by the government, and there stabilization mechanisms are explicit and de- is little to add here, except concerning the fol- cided ex ante; lowing: 14 o As stated previously, it is advisable to sepa- favoring, through noncoercive means, the rate the provision of housing from employment transfer of farms; and welfare centers, which contract, and to distribute, under favorable arebeing createdinthe countryside and citiesto terms, the present stock of state farms' and channel financial aid, in-kind help and food aid; state enterprises' housing; all these channels are appropriate and need 4 S: cial benefits over and above the public only to be developed. norms are often distributed by firms on an ad hoc basis. It would be desirable to have those AGRICULTURAL RESEARCH regrouped progressively into national or regional schemes, again to avoid the dispersion of ac- Research has a major role to play in helping tivities inside enterprises. In any case, when farmers increase productivity, find new oppor- enterprises have to adjust to the new economic tunities, and catch up with other countries. The conditions, they are likely to reduce social ex- agricultural research sector is large (six central penses to be competitive. It will be a serious laboratories, 16 institutes, 90 substations, and economic and social loss if the infrastructure 80testingstations). Itemploysmorethan8,300 created is not managed to the benefit of the people and appears to be overadministered and community at large. underfunded. Polish scientists are of a high B Assistance is justified for those who are less scientific and technical level, and have achieved able to adust to the new economic circum- important scientific results. The major con- stances. The government has introduced un- straints seem to be the following: employment compensation and special centers to deliver food to the poor and unemployed. * lack of a comprehensive agricultural re- Food distribution to, or income supplementation search policy; of, the poorer segment of the population can * lack of coordination and duplication in re- in crease overall demand for agricultural prod- search because there is no central management, ucts, since the poor have a high marginal pro- such as an agricultural research council; pensity to purchase food. This form of assistance * inconsistencies in financing (all research is is technically preferable to general food subsi- program-based) have produced distortions in dies, which tend to distribute benefits both to long-term research; those who need it and to those who do not. Its * the Ministry of Agriculture and Food budgetary costs can be defined in advance and Economy (MAFE) system is too dispersed and kept under control. Thetargetpopulation needs lacks integration and focus; to be clearly identified, and the distribution well * research has been until now largely pro- focused on intended beneficiaries only. Several duction-oriented, geared to large state farms ways exist, including: food stamps, which were and cooperatives. This has created an increas- envisaged by the government in the fall of 1989 ing gap between actual and potential yields. and have been successful in other countries, The system is not attuned to economic analysis; school and pensioners feeding programs, and * major gaps exist in research coverage; direct distribution to the neediest. The assistance * linkages between research and extension of philanthropic organizations in identifying need reappraisal and reinforcement; target groups and in distributing food would * scientific salaries and operating budgets greatly help the government, reduce its costs are very low by world standards, thus promot- and increase the distributional efficiency. To ing a dangerous brain drain, and most of the avoidcreaatingopen-endedentitlement,benefits equipment is obsolete. Core funding of key shouald not be given for fixed periods of time and scientific salaries is essential to promote conti- renewable. They should be financed by ex ante nuity of effort. budget allocations. Poland does not merely need an adaptation of Welfare mechanisms to implement a social existing agricultural production techniques, but policy already exist in Poland. They are: unem- afundamentalrealignmentofagriculturalpolicy ployment benefits included in the Labor Fund with emphasis on private farms and on eco- (of mlimited duration); the social security sta- nomic efficiency rather than maximizing yields. tus of farmers, which is presently undergoing Research will be essential to find solutions to revisiontoensurepensionandhealthcarewhile those problems at the conceptual level and to 15 develop more cost-efficient methods of produc- between Polish scientists and foreign research tion. Additional investment in basic science is institutions; unnecessary atthis time as Polish science should * structure training efforts for institute staff, first adapt international findings to its own especially to bridge major disciplinary and needs. Significant economies and increases in subject matter gaps; efficiency are possible if a significant reordering * institute an award system for demonstrated of research resources is carried out. The main research achievements, particularlyfor evidence recommendations for immediate actions are the of adoption and impact rather than for academic following: publications. * shift the emphasis of research policytoward Given the present inefficiencies in the system, economic efficiency at farm level. Examples are: the above strategy can be substantially achieved efficient use of inputs, minimizing pollution by reallocating existing resources and rede- hazards; more responsive crop varieties; more ploying staff. It is expected that the national efficient feed conversion factors for livestock; cost of agricultural research would decrease, integrated pest management; all production but its contribution to farming would increase. research should involve an assessment of eco- nomic response levels. Research on the social AGRICULTURAL EXTENSION acceptability of technical findings is essential; is reinforce MAFE procedures for policy for- The existing extension service (WOPR) is inef- mulation and resource allocation to agricultural ficient, fragmented, and uncoordinated. Like research by creating a policy-making and the research system, it is geared toward maxi- management unit to coordinate the national mization of output and production targets, and system through the establishment of a national not efficiency. Extension mostly disperses its agricultural research council under a deputy activities into larger production units, analogous minister; to state farms. Overall, itis mistrusted, particu- * establish sound procedures for evaluating larly by small private farmers. However, the research proposals before their submission to rural sector is now subject to dramatic shifts in the National Scientific Research Council for farm input/output price relationships which funding; generate great uncertainties regarding farm * develop a blueprint for a more rational management decisions; these shifts will bring structure of agricultural research; differentpressurestobear on different groups of * initiate new research programs as a com- farmers. In these circumstances, there is a ponent of an agricultural research policy, with great need, for an effective extension service, the aim of closinggaps in crop research, economic capable not only of passing information to farm- evaluation, animal feeding, and environmental ers, but also of informing the research estab- management. lishment about problems at farm level. The government is considering a proposal to For the medium term, actions to be taken are transfer ownership of extension to farmers as follows: through the Chamber of Agriculture (COA) at voivodship level. The proposal seems fraught * establish a new regional research organiza- with problems, principally regarding: tion based on well-equipped centers in each of the country's seven main agro-ecological zones * the mixing of public and private funds, and to replace the uncoordinated mass of more than the private system for disbursing them; 200 substations; * the dominant role that large farmers will * strengthen technology transfer by improv- play in these COAs, which may perpetuate a ing linkages between research and extension. lack of attention to smaller farmers' problems; Extension should not undertake research on its * possible conflict of interest situations; own; * the risk that the COAs will become self- * update scientific and management compe- serving, profit-making organizations with little tence, to meet the new knowledge and changing relevance to the needs of the majority of farm- technological and socioeconomic dynamics. Im- ers. prove exchanges and networking arrangements 16 Although the concepts of coordinating public The consequences ofthe above strategy would and private sector activities and increasing be that: farmers' influence over advisory agencies are sound, the present plan to entrust extension * The government and the voivodships would responsibilities to the COAs needsto be critically be faced with the responsibility of retrenching reviewed and modified. The following is recom- the number of staff. The remaining staff would mended for the immediate future: have to be fully funded by government. * Technical assistance would be needed for a * Extension shouldimmediatelyberedirected variety of tasks. toward efficiency and awayfrom achievement of * Commercial farmers could expect better high production targets. No production target farm management advice and more efficient goals should be issued. diagnostic facilities, but at full cost that they * Extension staff should be retrained toward could possibly offset against taxes. Smaller business orientation and efficiency of farm farmers would have greater interaction with management, using technical assistance. AUR staff, whose performance evaluation cri- * Performance criteria should be designed teria would be geared toward more farm effi- and published on the basis of an identification of ciency. All farmers would gradually increase theserviceneedsofrepresentativefarms. Tech- their influence over extension through the Ag- nical assistance will be needed. ricultural Advisory Board and the Chamber of e WOPR advisory functions should be sepa- Agriculture. rated from its production units, which should then be treated as state farms. The advisory Financial and technical assistance from bi- service should be renamed to reflect its new role lateral and multilateral sources is likely to be and break with the past (suggested name: Ag- available, often on a grant basis, to support ricultural Service Agency, Agencja Uslug reforms of the research and extension system. Rolniczych(AUR)); * Staff levels at the AUR level should be Developing rural institutions: reviewed. A ratio of one advisor to 250400 cooperatives and rural financial systems farmers, depending on the region, seems appro- priate. TheAURshouldbesupportedbyappro- Two sets of rural institutions are particularly priate budget commitment, and operating critical for the future of the rural sector: the budgets must be kept at a proper level vis-a-vis cooperatives and the rural financial system. It salaries (65:35 seems appropriate). is essential to envisage their transformation to make them responsive to the evolving needs of For the medium term, the recommendations agriculture. cover the diversification of extension activities to respond to the needs of almost all rural AGRICULTURAL COOPERATIVEs communities, notonlyfarmers. Also essential is the revision of agricultural school and univer- Initiated in the middle of the 19th century, sity curricula to emphasize farm economics and primary cooperatives are an important part of ruraldevelopment. Itwillbenecessarytoreview the economy, contributing about 11% of GNP AUR operations and develop a full cost assess- and employing almost 2 million people. Coop- ment to permit phasing over the longer term of eratives figure prominently in agriculture: they full-cost payment for agricultural advice and channel consumer goods and production inputs service. The AUR should be coordinated at in rural areas; they serve as purchasers as well voivodship level by advisory boards of farmer as processors of 60% of agricultural products; representatives, government agencies and pri- and they controlled until recently the entire vate agribusiness. The AUR may need dairy and most of the horticulture industries. reequipping to allow it to perform efficient Cooperatives collectively hold the largest assets analysis and diagnostics. Finally, it will be in rural areas. In the absence of an active necessary to study the operation of the Cham- private sector, and also to make sure that they bers of Agriculture in appropriate Western are not entirely dependent on a few traders, countries (Spain, Austria), and test the validity Polish farmers, like most farmers in Western of the approach in Poland. Europe, generally recognize the need to keep 17 nt1.;r *zopeyative organizations, principally for tives are business enterprises requiring capital pr ,cuII Ie- t Mf inputs and sale of products. and needing to generate profits for members. '_9'nnsau-v sooperatives were mostly controlled The duties and responsibilities of members, ov the >-,ave over -he last 45 years. They were management and workers should be well de- no_ e-teT -,,e.;,edbusinessorganizationsand fined. Wide consultation with the successful 't Z-3 7 teVJ were regrouped into regional cooperative systems of other countries is rec- -,n _ightly controlled and op- ommended. Assistance of international agen- erane_l the'; state, While they often enjoyed cies in formulating legislative proposals should m?71 opoli s, cooperatives were heavily taxed be sought. nake involuntary contributions to In the interim period, there is need for a cocpe-rti-*g$, .lnions. Large portions of their cooporative policy declaration to address the I Sf V?l F- eC. allocatedfor socialpurposes. But mosturgentissuesfacingprimarycooperatives, to accumulate significantassets, to establish the cooperative restructuring or- U7Rere members' initial equity con- ganizationnmditsregionalteams,andtoprovide '--ame insignificant. The result was the basis for establishing cooperative service Wht. rt b zoo. eoratives owned themselves and centers. Redesigning the unions' liquidation - ^ -1e fi7m of soeialized property. and restructuring process and establishing co- kBE Z "';:iiesX- rAt.ltc,eeeiasbusinessenterprises. They that require professional input from local and -C7nsbine,rest---ct -redtoincreasetheirefficiency expatriate consultants. The offers of many _=<: e -aLVAe tbein to respond to market signals international and bilateral donor agencies and and n-embers' needs, protect members' rights nongovernmental organizations to provide co- a- t eneeurage efficient management. Many operative business consultancies on a grant 1Me.rPetives have already embarked on this basis should be immediately explored. patl,' aned increasing competition is developing bet-+.-e agrig'eultural cooperatives. Coopera- RURAL FINANCIAL SYSTEM t.e com.npared with other market players, in- clui ng state and parastatal enterprises, are The financial system will play a crucial role in eelatively advanced in reacting to the new eco- the transformation toward a market-driven nom c.. on.d.iions. economy. Since the creation of a two-tiered ot ofie liquidation of regional and banking system, the development of the bank- cen'>ral inions, the cooperative system has been ingsectorhasprogressed steadily. The National decap-tated. Training, management advice and Bank of Poland (NBP) has assumed full central auditing thas stopped. The Supreme Coopera- bankingfunctionswhileitscreditactivitieshave tive Co,-ci could play a major role in the been transferred to nine regionalized commer- estcibllih.~ment of regional cooperative service cialbanks. Allbanksarenowallowedtooperate ,nIeviers to sei7e primary cooperatives. Aside in all sectors. So far, 26 licence applications for . :j^Ii -e tco ntributionsofprimarycooperatives new commercial banks have been approved by foD semyices rendered, this apexinstitution could NBP. identit ources of funds to continue these vital Major distortions in the previous economic services. One possibility would be the sales system prevented efficient financial interme- proceeds of some of the assets of cooperative diation. Depositrates were higherthan lending LUiOnsO External financial and technical assis- rates; the difference was subsidized by the gov- tance should also be explored. In the medium emient. Credit was allocated, which meant terme, the functions of the cooperative service that the use of deposits was restricted. Interest canters would be taken over by new cooperative rates have now been liberalized and real inter- unions freely established by primary coopera- est rates are no longer negative. The policy tives. adopted is to eliminate preferential interest New cooperative legislation is urgently needed rates although there still remain pockets of to ensure the revival of an efficient and truly subsidized programs in agriculture. Subsidiz- private cooperative system. This legislation ing agricultural credit would be a major con- shoulddensuxreindependenceofcooperativesfrom straint to developing the financial system and government intervention; cooperative principles would have many negative consequences. s I-, Te reaffiTmed, recognizing that coopera- The demand for credit has declined precipi- ,P,2 tously because of high nominal interest rates Furthermore, they have little experience in en- since the beginning of the year. It appears that terprise analysis. the supply of funds is adequate to meet this In view of their separate histories and their reduced demand. This, however, is a temporary different sets of clientele, it seems likely that situation and it is expected that credit demand BFE and the CBs will evolve into separate will grow to meet the requirements of restruc- structures. Withits base ofclients andbranches, turing and modernization of enterprises and of BFE should focus initially on its traditional anexpandingprivate sector. Itisthusnecessary clients in the social sector and seek to meet the that the capacity of financial institutions to full range of their financial needs. It should perform financial intermediation be strength- analyze its loan portfolio, recapitalize, and de- ened. A major effort will be needed to generate velop a business plan. It should also undertake resources through deposit mobilization if agri- a major institutional development program. cultural production and investment are not to There are various options for developing the be unduly constrained by a shortage of credit. Cooperative Banks system, but the best would It is indispensable to integrate the rural fi- be the development of regional apex banks as nancial system with the financial sector. But, full-service banks independent of the govern- despite rapid progress in the financial sector, ment. These banks would expand the lending the Bank for Food Economy (BFE) and Coop- capacities ofCBs, increase deposit mobilization, erative Banks (CBs) will remain for some time and promoteregional development. They would as the dominant financial institutions in rural also have access to NBP refinancing facilities. areas. These institutions provide 23% of total They would assist in upgrading and computer- credit. The BFE has experience in lending to izing accounting systems, provide training for large state and cooperative enterprises through management and staff, coordinate retention of a network of 95 branches. However, the BFE external auditors and perform other support has certain limitations: little experience in risk services for CBs. There are now various initia- analysis and no experience in lending to the tives to form such banks. The Supreme Coop- private sector. It is overly dependent on NBP erative Council should take the lead in helping resources, which constitute 60% of loanable the CBs federate into such regional cooperative funds. banks. The CBs have a widespread membership of The capitalization of CBs is presently very about 2.5 million people; about 75% of the low, at less than 1% of total resources. Addi- members are farmers and the rest are artisans, tional capital is needed to allow individual banks employees ofthe social sector, and otherresidents to operate satisfactorily in the new environment of rural communities. There are 1,660 CBs, and meet the capital requirements of regional which are the onlyfinancialinstitution providing banks. In the short term, CBs need to obtain both deposit and credit services to the private additional capital from their members. Many sector in rural areas. Some have traditions have initiated this process by raising the value datingbackmore than a century. Itis estimated of shares from the lowlevels resultingfrom past that about two-thirds of deposits of private indi- inflation. The payment of dividends providinga viduals were generated by CBs. positive real return to shares would aid this After a long history of state control, CBs also effort. In the medium term, CBs might consider have major weaknesses. The BFE was imposed requiring borrowers to contribute a small per- as their apex organization. As a result, they centage of their loans to equity. were able to lend only 40% of the deposits they These measures would strengthen the rural generated and the rest were siphoned off by financial system and enable it to mobilize do- BFE and lentto the social sector. Over the years mestic resources to meet the credit demand for of government control, CBs were not permitted investment. This would strengthen the credit to accumulate capital, resulting in a situation delivery system ofbanksinthe shortterm, move where their equity base became insignificant, toward a financially viable position in the me- thereby placing their financial stability in a dium term and eventually achieve financial very precarious position. The financial resources independence. of CBs are large if taken in their totality. But individually, they cannot meet the equity re- quirements for medium-size and large loans. 19 TRANSFORMING THE AGRARLAN STRUCTURE * A state land holding agency should be orga- nized, perhaps through the reorganization of Farm structure is likelyto change-slowly over the State Land Fund. The agency should re- the next five years, then at an accelerated pace. ceive all land (as well as other immovable as- A decline in the number of small farms is to be sets) previouslybelongingto state farms, and be anticipated, mainly through the retirement of empowered to divide, lease, and sell, by public their owners and part-time farmers finding full- auction or negotiation. It should be entirely time work in the nonfarm rural economy. How- self-financing. Incentives should be given to ever, it is neither likely nor desirable that this managers to encourage the sale of land. The decline in farm numbers take place in the early land now belonging to the National Land Fund part of the decade as the overall restructuring of that is not of adequate agricultural quality or the nonfarm industrial and service sector is does not find a buyer or lessee should be con- likely to create extensive unemployment and solidated into regional land and conservation related social dislocations. This will put pres- managementagenciesforconservationpurposes, sure on the rural sector to act as an employment in both grass or, in appropriate cases, forestry. sponge, and delay theneeded structural changes. Grazing and forest cutting should be limited to Thus, a strategy for adjustment and land own- environmentally sound practices. ership restructuring is proposed, especially for * Farmland belonging to the National Land the partial breakup of the small or bankrupt Fund (or to the land holding agency, if one is state farm or cooperative farm sector. This created), should be first offered for sale or lease strategy is phased to take the labor absorption to farmers in the vicinity, through an auction or need into account. bidding system. Several changes are required in the short * To assist land consolidation, which is in- term to legalize and improve on the functioning dispensable to allow productivity increases, of the private land market and to foster legal modestly expanding the present program of transfers of public land to the private sector: land consolidation to 100,000 ha per annum is recommended, with improvement in adminis- * eliminate the 100-ha administrative re- trative efficiency and addition of a Global Posi- striction on private sector holding ceilings. A tioning System (GPS) computer mapping facil- substantial increase in the limit should be per- ity. Poland should study the experience accu- mitted if it is felt that complete removal of mulated by the French SAFER (Soci6t6 pour ceilings would lead to short-term inequities; l'Am6nagement Foncier et le Remembrement), * permit farmland to be purchased or leased which has successfully conducted large-scale by anyone, rescindingtherequirement offarmer land consolidation in France. Assistance from qualification. Such a restriction is not justified SAFER could help define the best approach for in a market economy where the acid test of Poland. For conservation and reforestation financial success will soon return farmland not programs, linkages to the Bureau of Land productively used to the market. This should Management and to the Forest Service in USDA enable individual workers and firms to acquire or equivalent offices in Canada would be profit- freehold or long-term leases on farmland and able. enable persons, especially younger farmers, to * A review of forestry and land conservation gain entry into farming; issues should be undertaken without delay to * establish modern regulations for leasing define a strategy for those subsectors. farmland to protect equally the interest of owners and renters, to encourage renters to invest in Sector-specific strategies their farms, and to provide for divestiture by the state through leasehold transfer of land now AGRICULTURAL PRODUCTION managed by state farms and production coop- eratives; The present situation * consideration should be given to introduc- ing a land tax aimed at promoting productive Significant progress has been made in the last use of land. 10 years in crop production. Cereal yields have Other restructuring measures should be un- increased 37%, rapeseed 69%, sugar beet 17%, dertaken in the short term. and potatoes 105%. However, considerable scope 20 remains forfurther improvements in productiv- the best animal husbandry skills; such farms ity, for raising product quality and for increas- are essential elements in the future develop- ing cost-effectiveness by greater attention to ment of livestock and especially dairy develop- economic efficiency. It may be misleading to ment in Poland. draw inferences as to Poland's future yield po- ThelivestocksectorplaysakeyroleinPoland's tential simply by comparing current Polish lev- agriculture. It provides nearly half the value of els with those in other European countries, agricultural production and half of agricultural especially Western Europe, because Poland has exports, uses 70% of all domestically produced more difficult soils and climate and a very dif- grains, and is the main source of cash income for ferent agrarian structure. Nevertheless, dif- well over a million small farmers. In addition, ferences in productivity within Poland between Poland's 10.5 million cattle, 20 million pigs, 67 the favored state farms and relatively neglected million poultry, 5 million sheep, and 1.4 million private farms confirm that overall yields could horses provide critically important organic fer- be much higher. tilizer and the essential power for many small- With good crop husbandry, yields of all the farm operations. With livestock, as with crops, major cereals could be increased within a few the genetic base for improvement is good, but years by at least 15-20%. The major constraints there is scope for improvement in nutrition and are low levels offertilizer use and lack of adher- for better feed conversion that should facilitate ence to the optimal agricultural calendar, par- economies in concentrate feed utilization. Bet- ticularly to recommended sowing dates. There ter management of pastures and fodder con- is good potential for root crop improvement: servation should both raise the quality of feed yield increases over the next three to five years and reduce costs of livestock production. of at least 20% in potatoes and 10% in sugar beets do not seem unrealistic, provided essential Farm profitability. A preliminary analysis of inputs can be secured. An augmentation in farm profitability, using mid-1990 prices and rapeseed yield of at least 10% should be feasible costs, suggests that a small private farmer can through improved plant nutrition, timely field make a living equal to that of an industrial operations and crop protection. There is good worker. Below about 10 ha, farm size is less potential for further improvement in vegetable critical than either the choice of agricultural yields, which is likely to come from expansion of activities, the soil type, or the quality of man- greenhouse and plastic cover technology, and agement. Pigs are by far the most profitable better crop protection, in combination with im- enterprise at present and dairy cattle the least proved agronomy. rewarding: increasing the number of cattle on a Apart from triticale, attempts to introduce farm has no beneficial effect on profit. An new crops (sunflower, soya bean, hybrid maize) analysis of 18 typical farm models clearly shows have had little success. While this does not that the most successful farms are those that mean that attempts to diversify the agricultural combine satisfactory levels of productivity with economy should be abandoned, it suggests that cost containment. This confirms the need for for the immediatefuture Poland should continue research and extension to pay more attention to to capitalize on its comparative advantages by efficiency and cost-saving rather than yield reinforcing research and extension on wheat, maximization. Farm modeling is an indispens- triticale, rapeseed, potatoes, grain legumes, able tool for modern farmers. However, models fodder crops (including maize), and horticul- are only as good as the data available and must tural crops while striving to improve its consid- be up-dated to match the movements of the erable area of poorly managed permanent pas- market. Extension services should be equipped tures. with the necessary facilities to help farmers The typical small Polish farm has evolved into make decisions in a climate of economic uncer- a balanced combination of crops, livestock, and tainty. family labor, well suited to low-input risk aver- sion technology, but not well equipped to cope Major areas of untapped potential with the demands of market-driven modern agriculture. Medium- and large-size farms (5- Coping with natural constraints. Crop yields, 40 ha) are generally highly mechanized, have and the productivity of grazing livestock, are the best genetic quality livestock, and possess depressed by inadequate drainage and soil 21 acidity over much of Poland. Investment in wider use of herbicides and seed treatments their alleviation both benefits yields directly could have a high payoff at relatively low cost and has an indirect multiplier effect through (weed populations are high and only about 50% improving responses to plant nutrients, widen- of cereal area received seed treatment), and that ing the crop range, and facilitating access to possibilities ofcombiningherbicide and fertilizer land for mechanization. However, more rapid application and introducing integrated pest progress implies improving machinery for management practices should be explored. drainage and lime spreading, and closer atten- tion to the economics of these practices. More Mechanization. There is also considerable attention may also be needed in the longer term scope for reducing costs without reducingyields to mitigating climatic constraints by means of through more effective mechanization. On irrigation andthe wideruse ofplastics, especially nonmechanized farms, labor costs are higher for horticultural crops. The introduction of and timeliness of practically all farm operations more quickly maturing crop varieties, changes is more difficult to achieve. Thus yield losses are in cropping systems, mechanization to facilitate higher than on mechanized farms during the more timely field and harvesting operations, growing season and at harvest. Poland's ineffi- and improvements in drying and storage, es- ciently designed and poorly serviced machinery pecially on small private farms, can also con- also leads to higher farm costs and reduced tribute to this objective. An approach along yields. Large state farms and private farms are these lines is consistent with the goal of in- already well mechanized; small private farms, creasing efficiency through reducing losses. however, have been neglected until recently, both by the farm machinery industry and by Raising the efficiency of input use. Fertilizer research and extension services. As a result, application in Poland is not well balanced in there is a shortage of appropriate modern trac- terms of the elements applied, mainly due to tors and equipment and a serious lack of spares weaknesses in formulation by manufacturers. to maintain machinery, much of which is old There are also large regional differences in and in poor condition. Priority must be given in levels of application. Evidence as to the opti- the immediate future to designing or importing mum economic levels ofuse is lacking, reflecting machinery that meets the requirements of such serious weaknesses in economic research farms, and lparticularly to promoting contract throughout Polish agriculture and the produc- operations on smaller units of land. In addition, tion-oriented mentality in the socialist sector. agricultural land tax policy should be used to Much remains to be learned before the real stimulate amalgamation of holdings and con- potential contribution of fertilizer and lime to solidation of plots, which would help achieve agricultural growth can be determined, but it economies of scale in farming. appears considerable. This knowledge has to be related to specific agro-ecological zones of Po- Animal feed. For the livestock industry it is land and farming conditions, rather than to clear that rationalizing the feed industry and broad national averages oradministrativeunits. improving supply management and markets Inflation and the removal of subsidies have are essential to intensifying smallholder animal increased input prices sharply and farmers have production and enhancing economic standards cut back on their use. Cutbacks have extended of production on medium-size farms. For crop to seeds, most significantly to seed potatoes, production, the upgrading of processing which represent about 25% of potato production standards is no less essential. For example, the costs. Spraying against potato blight has also expansionofrapeseedproduction ofdomestically been reduced, and the repercussions on future processedhigh-value concentrate feedis limited yields could be serious. Sales of certified cereal by lack of processing capacity; similarly, seeds have also fallen, which may have serious inefficient industrial extraction of sugar from implications for future yields and quality. beets negates the benefits expected from In Poland little information is available to breeding for higher sugar content. show how costs could be reduced without reducing yields. Privately sponsored research Areas for action suggests that considerable economies are feasible in tillage and seeding practices, that Because of Poland's lack of strong comparative 22 advantage in export crop production, the present year. Stricter quality standdards nei as t3 be strategic orientation toward the supply of basic introduced for feed producfion units. !iTnpove- foodforthepopulationandprovisionoffeedstuffs ment in product quality and mark.eting Will be for animal production should continue. About essentialtomakePolishlivestoc '-preducts fmore 70% of crop production (including cereals and competitive on world markets and livestock potatoes) directly or indirectly supports livestock production must be backed up by more efficient production, and the rest is essentially used in input supply, marketing and support seirvices. human consumption. Whether these propor- In particular, research on livestock h-usbandry tions should remain or whether there should be and pasture management requiires greater em- changes should be determined entirely by mar- phasis: current allocatioris do not reflect the ket decisions. Crop area and production targets importance ofthe livestock sector eltleux socnally should not be prescribed by the state. or economically. In technical terms, the following actions are To avoid the well-known pericdic fliatiih.i3as recommended: in pigpopulation and prices, it s sug tbat an industry-financed and -managed ui sta- * concentrating cereal development mainly bilization program be introduced, by irnposing a on intensification of wheat and triticale; levy on all animals slaughtered. The -keference * expanding the production of double-zero price should be tied to the world 1uk. e. rapeseed, accompanied by a corresponding ex- Such price stabilization metbods WO-I w ell in pansion of crushing capacity; other European countries. * concentratingpotato production on the most suitable agro-ecological areas; improving genetic Environmental issues. Polis- a1 w, is resistance to potato blight; not a major contributor to r,ural enivr * raising the efficiency of sugar extraction degradation. Farm chemical tse IrL d is frombeetsbyintroducingdifferentialpayments about 20% of levels applied Der ha i to producers based on sugar content and im- tries. Industry is by far the gre alsest Sos-au ce of proving factory processing standards. Con- rural pollutants. There is no effectve!egsla- comitantly increase breeding efforts for higher tion on the use of restricted pn 9dutis acai-Oice- yields and sucrose contents; ment of laws related to the use of such prcdvcts. * double (at the least) the grain legume area, Also, there appears to be no enforceinent of iaws notably in private sector farms, in order to regarding the disposal of older, u-nTused or provide more high-value vegetable proteins for deregistered pesticides and pestio Vie r *oiitain- human and animal consumption and to improve ers. Asfarm chemicaluse expands inthe co-miing soil structure and fertility; decade, it is critical that Poland estaibhish a code * improving grassland management through of conduct to ensure that pesticide repealations better research, crop nutrition, and introduc- are brought to international stanclards, and tion of appropriate harvesting and conservation that imported and locally produced farra chemi- techniques; cals meet international standards for -registra- * exploringthejustificationforincreasedpro- tion, both on crops grown for do-mest>Eic Iccn- duction of some of the more important minor sumption and for export. Training sIhoTuld be cropshaving either export or export substitution undertaken in careful pesticide use by fr:armers. potentials, such as malt barley, hops, tobacco, Initial efforts in integrated pest management flax, and hemp; and biological control need to be expanded. * increasing small-farm production of vegetables, flowers, fruits, and berries, to supply Agricultural marketing increased domestic and export demand. The crucial importance of the agriculturral mnar- Livestock will remain an integral part of keting and processing system for te Polish farming; diversification and intensification of economy and for the agricultural production livestock production should be encouraged, es- sector has already been mentioned. This sector pecially on small farms, and greater production is mostly owned by the state and cooperatives efficiency encouraged on medium-size farms. (principally the former unions). Its present The major constraint to livestock efficiency is inefficiencies (poor resource allocation, long de- the provision of quality feed throughout the pendence on large and increasing subsidies that 23 rewarded loss-making enterprises, monopolis- aim is to facilitate development of a comprehen- tic-monopsonistic organization, low-quality sive market information service and rational production, absence of responsiveness to mar- spot, forward and futures market exchanges ket signals) have also been reviewed. The struc- throughout the food chain. Information should tural causes have been identified and recom- be collected and disseminated to all players. A mendations made to start reforming the struc- specific and detailed study is essential and ur- ture through rapid change of ownership struc- gent. Local retail market facilities should be ture, modification of management systems, and encouraged and inspected for public hygiene. rapid privatization. Those measures are to be Finally, market exchange facilities at the pro- complemented by more specific actions and ducer/primary wholesaler and processor level policy decisions applying particularly to the must be established and encouraged. These sector. activities require public investment (at state In addition to forcing the enterprises to make and local government levels), but the operation the structural changes mentioned above, the of the market should become self-financing. following actions are necessary to increase Marketing services should be developed. Nei- competition: ther the state nor local governments should involve themselves in the direct operation ofthe Antitrustregulation shouldbe designed and market system - their intervention should be implemented. Competitive conditions should limited to the regulatory level. Direct opera- be monitored; this should extend at the regional tions are the responsibility of the professionals level and throughout the food chain. An anti- and of their associations. The establishment of trustlawhasbeen introducedbythe government, interprofessional organizations (IOs) by major an agency is in place, and the agricultural sector commodities, as exist in the Western countries, is at the top of its priorities. It needs reinforce- should be encouraged, and for this, appropriate ment and technical support to work efficiently enabling legislation may be necessary (models and rapidly. can be found in Holland, France, Germany, or d Barriers to entry should be lowered to en- Belgium). 9hose IOs should help establish hance competition. This can be achieved by quality standards and provide market analysis encouraging joint ventures, establishing a new andinformation services to their members. They cooperative law, and making special provisions can organize storage and transport. They can for new entrants. The latter is justified by the also play an important role in the organization importance of the food sector, the nature and and promotion of exports, replacing the present magnitude of the existing barriers, and the fact Foreign Trade Organizations, which restrict that privatization of the existing enterprises competition, discriminate against other players may not, without additional measures, increase and suffer from conflicts of interest when they competition, but rather help create private mo- are also importers or exporters. Those organi- nopolies. Small- and medium-scale enterprises zations should be fully privatized and prevented could be given temporary tax concessions and from monopolizing their activities. It is impor- help to get access to finance through the estab- tantto separate marketingpromotion activities, lishment of a business development fund pro- to be undertaken by the 1Os, from trading, viding partial guarantees once banks have ac- which is the responsibility ofthe traders. Public cepted the feasibility of an operation. The fund support for the export-marketing drive is useful could also provide technical assistance to the to help establish the reputation of Polish prod- new entrepreneurs and to the banks. ucts abroad. Finally, lOs can play an important * No special concessions or treatment should role in market regulation, not only through be given to established enterprises, particularly their information and advisory services, but to state and cooperative ones. also through interventions financed by the pro- * Competitionfromimportsshouldbeallowed fession itself (and thus budget neutral). in some product areas, while taking appropriate Development ofhuman resources is a particu- measures to protect against dumping, in agree- larly critical need, since one of the worst eco- ment with GATT regulations. nomic legacies of the previous regime is an absence of people trained in commercial opera- Measures should be taken to improve mar- tions or having the right attitude toward the ketinginfrastructure and institutions. The main exigencies of a market economy. A coordinated 24 program for the development of the food indus- heavy discount when exported. try shouldbeprepared, and technical assistance The economic stabilization program has ex- from foreign countries will be essential. These acerbated those problems by dramatically re- programs should be targeted at young middle ducing the subsidy on milk products, which managers. Development ofbusiness school edu- dropped from US$1 billion in 1988 to about cation has high priority. US$70 millionin 1990. The remainingsubsidies Rational investment should be encouraged in were applied to low-fat milk and stimulated the the agrifood sector. Many opportunities for production ofbutter. The liquidation ofcoopera- efficiency-improvinginvestmentswillbe created tive unions, hitherto responsible for stock once the structural changes are implemented. management and financing, has obliged pri- There might soon be a lack of funds to finance marycooperativestofindthefinancingfortheir those investments. It might be advisable to stocks themselves. The interest rate policy consider retaining tax concessions to facilitate adopted at the beginning of 1990 confronts and encourage self-financing. Enterprises not butter-producingprimarycooperativeswithhigh yet privatized should not have automatic access interest charges at the same time that their low- to those concessions until they demonstrate qualityproductcanonlybesoldatpricesthat,in their ability to manage theirbusiness profitably. terms of milk equivalent, are only one-third the price paid by dairies producing cheese, skim Furtherresearch. Thefollowingareasdeserve milk products, and other exportable products. further examination: These low prices threaten the solvency of the dairies and specialized dairy farmers, who may * detailed description of the structure and be forced to sell their cows. Those farmers have channels of distribution and ownership; the best genetic stock and hold the future of the * detailed examination of comparative ad- Polish dairy sector. If measures are not taken vantage, and particularly up-to-date assess- rapidly, the present distress sales of butter on ments of strategic marketingopportunities; this world markets at severely discounted prices is work requiring specialized expertise not will continue, resulting in butter shortages available in Poland; during the winter season. * review of the market information require- The Polish dairy industry's strengths are in ments of the sector and the establishment of a the husbandry skills of its farmers and the formal market reporting and service agency; excellent health condition and genetic potential * exploration of the feasibility of establishing of its herd, which are at par with other world more commodity exchanges in the Polish food producers; in addition, the sector benefits from chain. low labor and energy costs. But food demand projections and comparisons with other Euro- The special case of the dairy sector pean countries suggest that domestic demand for dairy products will not regain the levels of Theimportanceofthedairysectoriswellknown. the 1980s before the end of the century, al- With a production of over 15 billion liters (19% though product mix will change. Predicting of agricultural GDP), the sector is the main export market possibilities is difficult given the source of cash for more than 1.1 million small protection afforded to their producers by the farmers. The dairy industry employs 110,000 OECD countries; but with the present quality peoplein 712plantsspreadovertheruralareas. and processing technology of the Polish indus- The sector suffers from extreme fragmentation try, only modest prospects exist. of production (average delivery per farmer is 12 The strategy proposed is, after a necessary liters at more than 10,000 assembly points). stabilization period of a few months, to steer the Dairy equipment is largely obsolete, and it pro- industry toward the production of a full range of duces a very narrow product mix. The price quality products, to enable the industry to hold structure gives very low importance to quality, the domestic market and export as opportuni- no importance to protein content, and limited ties arise while providing a viable income to a premium to winter milk. Finally, quality en- maximum number of farmers. forcement is inadequate, with only 30% of milk Forthe shortterm, industryconfidence should collected actually qualifying as class I. Polish be restored and distress sales prevented. An dairy products are of low quality and suffer a inventory of available stocks and their quality 25 should be taken, and the government should will bring the price of milk in a range nearer to guarantee a price level to exportable quality Zl900/liter(generallyassumedtobe the present butter that would increase from the present production cost of milk), improve quality, and levelto8O%oftheworldlevelbynextspring. On reduce the price discount for Polish dairy the basis of present world prices, this means a products in the world market. The emphasis on guarantee of US$1,000 per ton equivalent by quality would tend to exclude smaller producers March 1991. The guarantee would cover the who could not afford the cooling equipment. difference between the domestic price in March Similarly, the milk pools will tend to exclude and the guaranteed price. The price guarantee producers in low-density areas; a number of would increase the collateral value of stocks and dairy plants will become redundant. facilitate their financing. The state guarantee In the medium term, rationalization of the would be dependent on: industry should continue around the milk pools. At the end of the 2-year collection exclusivity * dairyindustrysassurancethatanewpricing given to regional dairies, new entrants should structure increasing the premium for quality be let in the market to develop niche products and decreasing the premium for fat is imple- and markets and maintain the competitiveness mented; of the industry. A study should be undertaken * the scheme being valid only until 1991; to prepare an industry-wide stock management * implementation by the industry of a quality and export system. The milk subsidy should be improvement scheme. abolished; it could be replaced by measures such as distribution of milk to schools and vulnerable Dairy industry restructuring should start population groups. immediately and strive to achieve economies of scale, product flexibility, and better sales and Postscript: Addressing the present export organization. For this a regional ratio- surplus production crisis nalization is recommended to create a dozen or so milk pools by amalgamating dairy coopera- The 1990 grain harvest is only a few weeks tives. Temporary (2-year) collection exclusivity away. The flush season for milk is in full swing. could be granted to accelerate the process. The food industry, still monopolistic and man- Legislation may be necessary. Technical assis- aged as before the reform, is not yet obliged to tance will be needed to help organize the milk compress its margins to face competition. The pools, plan for regional organization, and con- farmers, who went out of debt in February 1990 vince farmers and financiers that the plan is when interest rates increased and became vari- workable. able, have not borrowed since then and have by The industry should move as fast as possible now exhausted their stocks of inputs; they need toward higher quality standards. Change in to replenish them for the next planting season. price structure, a well-targeted investment pro- Yet they do not know at what prices the coming gram, and an extension effort will be necessary. crops will be bought, and much less what the Strict enforcement of international standards pricesfor nextyear's crop will be. Milk producers should be introduced. Those dairies not com- are unable to obtain remunerative prices for plying with quality standards (particularly re- their product. At the same time, dairies are garding milk contaminated with antibiotics) choking on a glut of unsalable butter they can- should be excluded from government support. not finance. Dairy farmers have started selling Strict suspension rules should be applied to cows that are uneconomic to maintain, and the producers. An investment program to improve present glut may, by winter, become a shortage chilling facilities on farm and other on-farm of milk and butter. Pig production seems to be improvements and improvements to the dairies the only large-scale activity st-ill doing reason- and stock management facilities should be de- ably well. signed with the banks. A dairy export promo- The government is asked by farmers to inter- tion board should be created, and export coordi- vene directl;y to correct those problems and nation mechanisms reviewed. Particularly, the substitute itself for the apparently failing mar- role of the present export agencies should be ket system. It is pressed to reintroduce price-, reassessed. marketing-, and even income-guarantee It is expected that the above set of measures mechanisms. Grain stocks are still large be- 26 cause ofinventory carried overdue to lastyear's farmer but still below world markets. The bumper crop, and commodities from imports newly established Agricultural Marketing and food aid. The shortage of capacity to dry and Agency could offer such contracts. This system store the incoming grain harvest could create a could lead to the establishment of a futures problem of crisis proportions. The government market for grain in Poland. A solution along is urged to guarantee the purchase of grain and those lines is being considered by the govern- commit itself to open-ended financial support. ment. The impending agricultural crisis threatens the * Forbutter, a similarcourseisrecommended, very objectives of the economic reform program, including resistance to calls for fixing prices at since a relaxation offiscal discipline may restart cost-plus levels. Dairies should be offered de- inflation. ferred purchase guarantees at prices slowly In the course of its work, the Polish-EC-World increasing to about 80% of world market level by Bank Task Force was confronted with current March 1991; they should use these contracts as problems, andits advicewas soughtonmeasures collateral to borrow from banks to finance their to alleviate the present crisis. The most press- stocks. ing problems are being faced in: * The process of liquidating the enterprises formerly ownedby the cooperative unions should * grain purchases; be suspended and amended. A cooperative * milk and dairy restructuring; restructuring organization should be created to ^ credit policy; manage and restructure these cooperative en- * cooperative union liquidation. terprises. While the Task Force did not fully examine all Agriculture is acrucial sectorin most countries, the subtleties and ramifications of these prob- and probably more so in Poland. Today, it is not lems andis not privytothe negotiations between an exaggeration to say that agriculture holds the government and the farmers, it has looked one of the keys to the success of Poland's eco- into these issues and can offer the following nomic transformation. The path to a reformed, recommendations: efficient and market-driven agriculture will be difficult. Old habits, mentalities, and structures * An amendment to the present credit policy, must change if Polish agriculture is to catch up particularly regarding the predictability of in- with the rest of Europe. The sector needs far- terest rates, is essential for farmers. No farmer reaching reforms and structural changes that will borrow if interest rates remain as variable will be beneficial to most, but onerous to some. as they have been since the beginning of this Polish farmers can certainly cope with this situ- year. If interest rates remain too high, they will ation and even take advantage of these changes stronglydiscourageborrowing. Itisduringthis if the country pursues the right policies. To period that farmers make their planting deci- define these policies, a strategy is as essential to sions and replenish their stocks of inputs. It decision-makers as a map is to the traveller in appears that the govemment has already de- unknown territory. But, unlike a map, a strategy cided to freeze interest rates for this year. needs to be adjusted from time to time, and * It is urgent to negotiate with Poland's food modified according to experience gained from aid donors to obtain a relaxation of the interdic- success as well as from failure. The Task Force tion on reexporting grain in order to provide hopes that this document will contribute to the space to dry and store the 1990 grain harvest process of mapping out the future of agriculture with the existing facilities; in Poland. * Purchasing grain at guaranteed minimum Endnote fixed prices should be avoided at almost any cost. Rather than trying to manipulate supply This report was written by Claude Blanchi on and demand through an import-export policy, the basis of the documentation, data and analy- Polish farmers and traders should be provided sis prepared by the Task Force. incentives to store the grain in Poland. For this, it is proposed to create deferred purchase con- tracts, with a guaranteed price at six or nine months calculated to be remunerative for the 27 Annex 1 The macroeconomy and agricultural adjustment Normally, when middle-income countries em- agricultural sector as illustrating the initial bark on major policy reforms of the successes of their programs and argue that macroeconomy - real devaluations, liberaliza- these successes will soon spread to the rest of tion of prices, reductions in inflation, and trade their economy. liberalization - agriculture prospers. The real But this has not been the case in Poland. devaluation of the exchange rate raises the Although the reform program is still new - price ofall tradeable commodities in comparison prices liberalized in August 1989 and with nontradeables. Since agriculture produces macrostabilization in January 1990 - there largelytradeable commodities, this devaluation existfewindicationsthatsuccess willbe achieved raises relative agricultural prices while lower- in the next several years, unless there are sub- ing the costs of labor; agricultural producer stantial additional reforms. Agricultural incen- incentives are thus boosted. Liberalization of tives have declined significantly despite rela- prices eliminates the implicit taxation of farm- tively high international commodity prices, a ers coming from price controls that normally massive devaluation, and price and trade liber- foster urban consumption. It also allows a alization. Despite inflation having fallen dra- relative price adjustment between various com- matically, resulting in a more stable real interest modities, permitting farmers to use resources rate, farmers and merchants have failed to more efficiently, andthusraisingtheirincomes. borrow. Stockholding has become entirely in- Reductions in the inflation rate reduces uncer- voluntary, a result of being unable to sell pre- tainty in prices and should lower real interest viously acquired stocks. Many agro-industries rates, permitting stockholding and on-farm in- are suffering from high debt, exacerbated by vestments to be less costly and risky. Finally, large stocks of unsold commodities and low trade liberalization allows domestic farm prices throughput. As a consequence, Polish agricul- to be linked more closely to world prices, expands ture is in crisis. markets for agricultural commodities, and The purpose of this annex is to analyze why lowers input costs. Polish agriculture is not responding positively In many countries, these macroeconomic re- to the economic reforms, to suggest a short-term forms have resulted in agricultural growth that strategy for alleviating the farm crisis, and to has exceeded growth in other sectors. While present a medium-term strategy reliant on a construction may suffer or import-substituting private agro-industrial sector. To do this, the industries endure the adjustment costs of the annex is divided into five parts. After this transitionto more exportorientation, agriculture introduction, the second section describes the responds quickly and normally booms. Govern- macroeconomic crisis and its effects on agricul- ments initiating these reforms can point to their ture. The third section presents three options 29 for dealing with the short-term farm crisis. The The government had then inherited in the fall fourth section addresses the medium-term of 1989 an essentially bankrupt economy - strategy, in particular the role of privatization unable to service its debt, in macroeconomic and trade. The fifth and concluding section free-fall, and with a state sector outside of its summarizes the elements of the economic control. It had few options. Over 40 years of strategy and draws some broad conclusions. communist rule had culminated in a rigid eco- nomic structure in macroeconomic ruin. The macroeconomic crisis and The new government decided to launch a stabilization critical two-pronged attack on the unstable economy. In the first part of this strategy, the The government that took power in September government attempted to gain control over the 1989 faced an extremely difficult economic situ- budget and prepare for the next phase by mak- ation. Inflation was accelerating at triple digit ing someinstitutional and legal changes, mainly rates, fueled in part by a massive budget deficit introducing unemployment compensation and equal to 8% of GDP. External debt amounted to bankruptcy procedures. On January 1, 1990, 80% of GDP; debt servicingwasfive times export the second phase of the program was launched. earnings. Growthhadstagnated,withpercapita The crux of this phase of the government's income now lying below 1978 levels, while gov- program was a standard IMF-type stabilization ernment expenditures had grown by over 30% package - fiscal and monetary restraints, a in real terms in the last decade (see Table 1.1). wagefreeze,andamassivedevaluationfollowed Complicating the macroeconomic situation by a fixed nominal exchange rate to serve as a was the structure of the economy. Over 70% of nominal anchor. The stabilization package was the industrial sector was owned by the state. designedtobringdowninflationrapidlyandput Exports were canalized by a few large enter- pressure on, inefficient state enterprises. With prises that had survived on massive export budgetary constraints in place, the government subsidies. But even more critical was the nature expected that the market would select inefficient of decision-making in these enterprises. In state enterprises for bankruptcy and initiate 1981, the Polish Parliament gave wide powers the rationalization of the state sector. Unem- to the workers' councils, among them the power ployment was expected to rise, but this could be to hire and fire management. Management and viewed as a sign of the success of the process- laborhadmergedintoanexplicitcollusion,with enterprises would be trimming labor costs by the government, the nominal owner of capital, reducing employment levels and controlling having lost control of costs and production while wages. With improvement in efficiency and it retained the ultimate obligation to fund the reduced costs, the cost-push part of inflation losses of these enterprises. Because of large would be brought under control. Following subsidies to state enterprises and a substantial macroeconomic stability, the real adjustments fall in revenues, the fiscal deficit reached 29% of in the economy were expected to follow through budget expenditures in the first half of 1989. a gradual process of enterprise restructuring. Table 1.1 Evolution of the economy, 1978 - 1988 Change / Change/Macro variables Per capita Household survey data Per capita (%0) (%) Gross domestic product -4A Real income of farmers -3.1 Domestic absorption -8.6 Real income of farmer/workers -1.1 Consumption 0.7 Real income of workers -24.7 Government expenditures 31.7 Real income of pensioners -16.9 Gross fixed investment -29.3 All households -19.9 Year % Farmers' income as a percentage of workers' income: 1978 90.8 1988 116.9 30 Agriculture's role in this stabilization pro- Januaryto 24% in Februaryto about5% in May. gram was envisaged to be three-fold. First, it Budgetary controls andincreasedrevenues (from was expected to respond rapidly to the new severalreformsonenterprisetaxation)produced incentives. It was anticipated that agriculture, a budgetary surplus, projected to be between 1 being largely a private sector (about 75% to 80% and 3% of GDP. Monthly interest rates followed of arable land is held by private farms), would the decline in inflation, undershooting inflation follow the incentives of higher relative prices in January but becoming real and positive in and deliver food to urban areas at prices closer February by 14 to 16% and falling to 1 to 4% in to world prices. Although higher food prices May. The massive devaluation in January of would mean drops in real wages, these would be about 100% (compared with the December rate) moderated by the increased availability of both held: zlotysbecame readily convertible in Poland greater quantities and varieties of food. Fur- and foreign exchange reserves expanded. Driv- thermore, the hidden costs of food - waiting in ing the foreign exchange accumulation was a long queues - would be eliminated. Second, contraction in imports and a rapid expansion of agriculture was expected to boost exports, eas- exports (imports contracted dramaticallyby 27% ing pressure on the balance of payments. Al- and exports expanded by 14.5% from convert- though export subsidies were eliminated, it was ible currency areas in the first five months of expected that about 80% of remaining exports 1990). would be competitive at world prices. Further- But there were also signs of trouble (see Table more, the devaluation of the real exchange rate 1.2). Real wages fell dramatically by 40% in the would compensate for the loss of export subsi- first quarter of 1990. Output declined by 30% in dies. And finally agriculture would hold back the socialized sector (29% below its level in May rural-to-urban migration and perhaps absorb 1989)1. Food expenditures rose from about 39% some of the unemployed from the industrial to 55% of total expenditures (compared with the sector. With about 50% of the small-farm popu- first four months of 1989), reflecting the im- lation being part-time farmers employed in lo- mediate pressure offood price rises onhousehold cal state enterprises, a more prosperous agri- real income. Unemployment, however, did not cultural sector was expected to absorb part of increase as expected. By the end of April, these displaced workers. unemployment stood at only 2.6% of the labor force. Only a few enterprises had declared THE ACTUAL ouTCOM0 OF THE STABILIZATION bankruptcy. Nevertheless, real debt was in- creasing rapidly by 12% in March, 18% in April, By most macroeconomic indicators, the stabili- and 3% in May (see Table 1.3). Also, there were zation program was a great success. Inflation variousreportsoflengtheningdelayedpayments crumbled under the stringent monetary and and of indebtedness between enterprises. It fiscal restraints from a monthly rate of 79% in appears that the restructuringprogramhad not Table 1.2 Industrial production" and unemployment, 1990 Jan Feb March Aprl May Jan /June Changes in percent -28.7 -31.5 -31.9 -31.9 -28.6 -30.1 with respect to the same month in 1989 Changes in percent -10.1 -14.2 10.5 -8.6 3.5b over previous month Total registered number of unemployed ('000) 65.8 152.2 266.7 351.1 443.0 Percentage of work force unemployed' 2.0 2.6 3.3 a. Output sold by socialized sector. b. Correcting for different working days, the increase in May is zero. c. National work force calculations; do not include employment in agricultural sector. Sourem GUS data. 31 Table 1.3 Bank credit to public enterprises, 1990 (billions of zlotys) Dec Jan Feb March April May Total nominal 30.6 31.79 39A5 46.09 58.78 63.5 percentage increase in month 3.89 24.10 16.83 27.53 8.03 Total real 30.60 17.80 17.83 19.89 23.47 24.14 percentage increase in month 41.83 0.15 11.59 17.96 2.89 Percentage change in real credit since 1/90 0.15 11.74 29.70 32.59 Source: Calculated on figures supplied by National Bank of Poland. yet hit the state enterprises-labor was largely industrial output comes from agro-industries, being retained and enterprises were holding on which in turn are dependent for 90% oftheir raw despite the magnitude of the macroeconomic materials on domestic agriculture. The agricul- adjustment. tural sector is thus more important to the The signs of problems with the macroeconomic economy than its economic size would indicate. program were most evident in the agricultural When the economic program began, the agri- sector, where the greatest successes had been cultural sector was highly protected and subsi- hoped for. The very strengths of the agricul- dized. From 1986 to 1989, food subsidies ranged tural sectorthatweretoleadtoits success-its from 3.4 to 4.8% of GDP (see Table 1.4). Al- largely private nature and its ability to respond though part of this subsidy was nominally for quickly to incentives - rapidly brought forth consumption, it was in part brought about by the difficulties facing the macroeconomic ad- high producer prices. For example, producer justment program: the inability to achieve sta- prices for wheat during the late 1980s ranged bility and a supply response through macro- from 10 toi over 30% above equivalent border economic policies when the real structure of the prices. For the state sector, which produced economy remains distorted and economically most of the marketed wheat, the price support concentrated. Table 1.4 Agricultural subsidies in terms THE EFFECT OF THE ECONOMIC PROGRAM of GDP, 1986 - 1990 ON AGRICULTURE (percent of GDP) Agriculture in Poland is a small sector, con- 1986 1987 1988 1989 1990(est) tributing only about 12% of GDP, so it would Fod 3.5 8.4 4.8 3.8 0.2 appear at first consideration that agriculture Meat prod3CtS 0.8 0.8 1.4 1.2 would most likely be affected by the economic Chicken 0.1 0.0 0.1 0.1 program but would not in turn influence the Fish products 0.1 0.1 0.0 0.0 program's success. But this is turning out not to Milk and be the case. The effect of the economic program milk products 1.6 1.4 2.1 1.6 is straightforward. With the domestic marFlour 0.7 0.9 0.9 0.4 iS straightforward. With the domestic market Sugar 0.0 0.0 0.1 0.1 consumingabout87% ofagricultural production, Vegetable oil 0.2 0.2 0.2 0.2 it is not difficult to foresee that the macroeco- Baby food 0.0 0.0 0.0 0.0 nomic program and the resultingsharp recession Milk bars 0.0 0.0 0.0 0.0 could significantly affect the market for farm Agro-inputs 1.1 1.0 0.9 1.3 0.3 products and hence the sector's economic well- Fodder 0.4 0.4 0.3 0.0 being. But agriculture also has strong feed- Fertilizer 0.4 0.4 0.8 0.3 backs to the general economy through employ- Tractors 0.0 0.0 0.0 0.0 ment (28% ofthe work force) and through affect- Pesticides 0.1 0.0 0.2 0.0 ing the real wage rate (food expenditures range Credit to from 35to over50% ofall expenditures depending agriculture 0.2 0.1 0.1 0.1 0.1 on income class). Furthermore, about 20% of Total 4.8 9.5 5.8 5.2 0.6 32 was even higher - averaging about 50 to 60% gary and Yugoslavia, where farmers' income is above world prices. In the case of milk, the below that of urban workers by 4 and 20%, producer support was nearly equally generous, respectively).3 from 24 to 50% above world prices depending on This subsidization ended abruptly with the the year. As with wheat, the support was macro-stabilization program and the reduction concentrated in the state sector. This support of state expenditures. Food subsidies fell from through output prices was supplemented by about4%ofGDPin l989tolessthanabudgeted input subsidies for fertilizers, pesticides, and 0.2% for 1990. Agricultural input subsidies are animal feed at the rate of about 1% of GDP. to decline from 1.3% of GDP in 1989 to 0.3% in Credit subsidies also were provided to the agri- 1990. Furthermore, credit subsidies and export cultural sector. Furthermore, export subsidies subsidies were nearly eliminated. In less than were given for certain commodities at a rate a year, a once highly supported agricultural often half the value of the goods exported. sector (with support near Western European Aggregating these subsidies for the different standards) had been released to survive in a cropsresultsin whatis referred to as the producer deeply recessionary economy, still struggling to subsidy equivalent (PSE), or the total income establish a market economy.4 supplement offered farmers and the state farm Partly compensatingfor this near elimination sector. In the state sector for wheat, this PSE of direct subsidies should have been the de- constituted nearly 70% of the value of the wheat valuation of the exchange rate. The real ex- produced; for rye, about 50 to 70%; for sugar, changerate(thenominalexchangerate corrected about 50%; for rapeseed, about 40 to 50%; for for inflation) was devalued nearly 50% com- pork, about 40%; and for milk, about 40 to 80% pared with its 1989 level. If this devaluation (see Table 1.5).2 In other words, support for were to be transmitted to farm-gate prices, then agriculture and processing on a per unit value the net effect would have been a much more basis was about at the level of many industrial neutral adjustment in producer support. economies. Agriculture, especially the state But the price transmission did not occur - in sector, was sheltered andheavily subsidized. In part because of deliberate government policies 1988, average farmers' income exceeded that of and in part because of economic concentration urban workers by 17% (compare this to Hun- in agro-industry. With inflation running ram- Table 1.5 Producer subsidy equivalents (PSEs) (percentage) Wheat Rye Barley Beetsb Seed, Pork Beefd Milk 1988 Poland Private 34.2 28.1 32.0 State - - - EC 30.0 34.0 34.0 71.0 69.0 6.0 56.0 60.0 1987 Poland Private 47.1 48.1 58.7 31.0 43.5 - 39.1 22.7 State 67A 69.3 75.2 49.7 69.0 - 3.9 41.1 EC 66.0 63.0 63.0 80.0 67.0 5.0 46.0 68.0 1986 Poland Private 46.2 37.8 64.9 32.8 50.1 28.1 15.7 57.1 State 68.2 62.3 87.3 56.7 75.6 36.6 4.0 77.9 EC 63.0 66 66 76.0 67.0 5.0 50.0 73.0 a. Coarse grains used for ECs PSE data. b. Refined Equivalent of Sugar used for ECs PSE data. c. Soybeans used for ECa PSE data. d. Beef and veal used for ECs PSE data. Source Polish data calculated by the Foreign Trade Reaearch Institute in Warsaw. EC data published in AgricuturuZl Polices, Markets and Trade, OECD (1990) 33 pant, the cooperative structure in disarray (the by its food aid agreements to prevent reexport). cooperative unions were dissolved), and a col- For butter given as food aid, it cancelled its lapse in real producer prices, farmers withheld request and sought the substitution offeed corn. grains from the market in early- and mid-1989 But the crisis was now deeply imbedded in the (for the first nine months of 1989, agricultural sector. Meanwhile the flush season for milk supplies to cities were reportedly down by 30%). began and the grain harvest began to loom on The specter of a food shortage in urban areas the late summer and fall horizon. High nominal was of deep concern to the government. Exports and real interest rates made stockholding ex- of essential foodstuffs were prohibited and food tremely expensive, adding to the indebtedness aid urgently procured. With the blockage of of agro-industry. Dairy cooperatives, the potato exports, the arrival of food aid, and the sales of industry, feedmills, sugar processors, and part faTmers to the milling industry increasing (be- of the horticultural industry were particularly cause of the cooling down of inflation and rising hard hit. Farmers and some state farms, fleeing interest rates), scarcity quickly turned to abun- high interest rates and debt, quickly sold off dance. Exacerbating the situation was the de- durablegoodsandfarmimplements. Mostdairy clineindomesticfoodconsumptionbroughtabout farmers received only extremely low and de- by rising retail food prices and declines in real layed(sometimesformonths)paymentsfortheir inzic-e. Stocks of grains and milk products milk. Agriculture, the only largely private sec- accumulated and farm gate prices plunged. torinPoland,hadbeenbroughttoitsknees. But Because of low demand for agricultural inputs, to rescue agriculture through subsidies meant animal feed, and fertilizer sales also sharply openingthe floodgate of subsidization elsewhere declined. in the economy, since the austerity program Further aggravatingthe fall was thebehavior now was beginning to take hold in other state of agro-industry. Although on an economywide sectors. In a collective consciousness, state basis it appears that the grain industry (the managers began to contemplate the day of res- grain monopoly was broken up into 41 separate titution of their state enterprises by the govern- companies) and the milk industry are quite ment. Macroeconomic stability was being fragmented and competitive, at the local level threatened by the problems ofa relatively minor they are highly concentrated. Years of accumu- sector (in terms of GDP): agriculture. lated collusive behavior (encouraged by past governments in order to meet the objectives of a The short term (one year) - diminishing state-coordinated sector) continued after prices options were liberalized and most subsidies removed. The breakup of national monopolies created As the agricultural season proceeds, the local monopolies and a system of cost-plus pric- government's options are becoming limited. The ing continued. Instead of lowering prices to majorharvestcomesonceayear;thecowsreach encourage sales, agro-industry restricted their peak milk production during the summer throughput, raised selling prices and forced months when feed is usually abundant. When back on producers (through lower purchase the fall comes, the carrying cost of the herd prices) most of the industry's higher per unit increases and slaughter becomes a more operatingcosts. In May/June 1990, wheat prices prominent option. were at 60% ofthe border price; oilseeds at 80%; To deal with the farm crisis and the threat of pork at 70% of its export price; and cattle for itsintensification, thegovernmentbasicallyhas slaughter at 59% of the f.o.b. export price. The two options. One is to let market forces take ratio of flour to wheat prices rose from about 3 to their toll - some farmers go broke, many agro- 1 on January 1, 1990, to 6 to 1 by the end ofJune industrial enterprises sink deeper into debt, 1990. and eventually, as domestic supplies diminish, Heavygovernment support to agriculture had imports begin once again. Since c.i.f. import turned to indirect taxation through export con- prices are higher than f.o.b. export prices, trols, food aid, and oligopsony behavior. The prices to consumers, and possibly to farmers, government, recognizing the rapidly deepening will eventually rise. For consumers, the shift farm crisis, lifted the ban on most agricultural from f.o.b. to c.i.f. prices could add as much as exports except grains (where it remained bound 20% to the cost of food. For farmers, the results 34 in terms of farm-gate prices would be uncertain, development of a more transparent market that dependingon whether agro-industryfullypasses circumvents the local monopoly power of the on the higher costs of competing imported food state grain enterprises. Already the govern- to producers. But the adjustment is likely to be ment has established legislation (in May 1990) swift - a major realignment of the sector fol- authorizing an agency to intervene in the grain lowed in several years by a leaner agricultural market. This agency (Agencja Rynku Rolnego, sector with a sharply dual structure consisting Agricultural Marketing Agency) has been as- of subsistence farmers producing for their own signed the following objectives: needs and large farms producingfor the market. But this outcome may not result in an economi- * increase storing and drying capacity cally efficient sector. Market signals would be * increase competition in grain merchandizing distorted by the economic concentration ofagro- * stabilize grain prices. industry, causing an overreduction in the size of the sector and a distortion in the relative shares As originally conceived, the proposed agency of crops under production. would buy grain from qualified organizations; The second option is to intervene through clean, weigh, test, and dry grains; pay to have injecting lower cost liquidity in agriculture, the agency grain stored by qualified organiza- stimulating demand for some foods, circum- tions; and sell grain to processors, merchandis- venting the oligopsony strength of agro-indus- ers, and exporters. To fulfill these functions, the try, and possibly in an indirect way providing agency would establish purchase prices, qualify some subsidization for agriculture. In this way, storage facilities, finance investment in stor- the sector is brought through the summer and age, inspect grains at purchase and during fall and allowed to adjust at a slower pace. storage, and monitor market conditions. The The first option is relatively straightforward agency would have a governing council of 21 - hold the course and let the market bring seats, 12 of which would be held by producers, about a different agriculture. But the risks are processors and traders. Budget proposals call great - when the sector hits bottom, strong for 1 million tons of storage (transferred from political forces will demand once again subsidies the former state grain trust, PZZ) and an allo- for agriculture and direct intervention to raise cation of ZI 876 billion (or about US$87 million). agricultural prices. The prospects for the financial survival of the The second option is more complex, requiring agency are not strong. If the coming harvest is delicate management by the state. Its primary large, a rough calculation indicates that the dangeristhattbeinterventionsthatareintended agency is likely to generate large losses (unless to be short term - to get agriculture through the government bails it out) because of storage the immediate adjustment - stick and become costs and the inability to support prices when permanent and are viewed as an entitlement by the crop is large. Also, it is likely that storage farmers and agro-industry. The key to the losses will be high since those storing the grain second option is to intervene in a manner that do not have an incentive to preserve it (it is doesnotcreatepermanencetotheintervention owned by the state). Furthermore, by and ideally promotes the development of the overstabilizing prices (announcing a fixed pro- market. The short-term intervention options curement price), private storage will be dis- suggested have three elements: first, the pro- couraged (one incentive to store grains is price motion of market and price transparency and fluctuations) and budgetary costs could quickly inducements for private storage; second, the expand because the government has made a reduction of the uncertainty in real interest commitmentthrough the agencyto buy all grains rates; and third, the promotion of demand at a fixed spot price. through targeted food programs. However, the agency could fulfill its objectives without overly disrupting the market by alter- THE FIRST INTERVENTION OPTION - DEALING ing the way it operates.5 Instead of physically WiTH PRICE UNCERTAINT AND STORAGE procuring and storing the grain (or paying oth- ers to store it), the agency could reduce price The first of these interventions is for the grain uncertainty, encourage private storage, and add market. It is really an attempt to promote the competition in the grain market by creating a 35 forward market in bonded storage certificates.6 buy futures contracts) and the offset price (the Although the proposed alternative operations of price at which it will sell these contracts), it is theagencyappeartobecomplex,inessencethey able both to control its losses (losses would are relatively simple.7 depend on its pricing policy and how the spot The key to the alternative operation of the market develops) and to avert the actual deliv- agency would be the bonding of storage certifi- ery of grains. cates. Farmers or merchants would either sell To make the market more transparent and their grain directly at the going price or put it less arbitrary, the agency could state its futures into storage for later sale (when possibly prices prices in terms of US dollars, convertible to will be higher). If they place their grain in a zlotys at the official exchange rate. The futures bonded warehouse, they will receive a certificate prices could be directly related to the futures that guarantees that the grain will be properly prices trading in the Chicago Board of Trade, dried and of a specified quantity and quality. corrected by quality and marketing costs and The farmer or the merchant would be able to sell other discounts. By setting the discount, the this certificate or use it as collateral for a loan government could establish the subsidy for for a percentage of the current value of the grain grains in the country. The agency could sell the in storage (for example, 60 or 70%). The trading futures contracts to an exporter if it is necessary of this certificate would allow farmers to seek to remove excess stocks from the domestic mar- the highest prices for their grain among differ- ket. The agency and sophisticated traders could ent merchants or millers. hedge their price uncertainty in the Chicago To create a market for these certificates and to Futures Market.8 make their value more certain, the agency could Although the system appears complicated, for be set up to trade in these certificates. The thefarmer ormerchantitwouldbe rather simple agency could offer both a present price or spot - store grain in a bonded warehouse and then price and a future price for delivery of the grain decide whether to sell the bonded certificate of at some specific dates in the future. Instead of storage today or hold it for later sale or contract selling their grain, farmers or merchants could for delivery to the agency at a stated futures makeasalescontractwiththeagencyfordelivery price. The agency would be basically a trading of the grain at some specified future date at a agency in contracts for delivery - it could be a stated price (the agency would maintain a list of small office staffed by traders (such as those prices for future delivery). This sales contract who buy and sell foreign exchange for the cen- for future delivery would put a lien on the grain tral bank). Spot and futures price lists would be (if the grain is not delivered, the agency would publicized throughout the country to make the havealegalrighttoconfiscatethegrain)butthe market more transparent. If the government ownership and, hence, responsibility for the decided to subsidize the price it would do so storage of the grain would rest with the farmer through setting the discounts or premium from or merchant. The agency could resell the con- the Chicago Futures price (this subsidy would tract to a merchant (domestic or foreign) or appear through the losses of the agency). could sell back the contract to the owner of the There are several advantages to dealing in grain ataprice (the offsetprice) attractivetothe storage certificates and futures contracts over owner. In this way, the agency would never buying and storing grain directly. These are: have to take actual delivery of the grain. By acting in this way, the agency would be estab- * Ownership of the grains would be retained lishing a futures market in grains by acting as by farmers or merchants who have a stake in a market-maker in futures contracts. maintaining quality; Through these actions, the agency would be * Prices, both present (spot) and future, would facilitating the trade in bonded storage certifi- be known and publicized and related to world cates and establishing afutures price that would present and future prices; reduce price risk to storers of grain. Since the * Collateral would have been created that sales contract has a specified price, the sales would reduce the banking risks of loans and contracthas known value and could alsobe used hence lower interest rates on borrowing; and as collateral for loans. By daily setting the * Farmers would be able to hedge their price futures price (the price by which the agency will risks. 36 Bothalternativeoperationsoftheagencycould to exist for agriculture. Farmers can receive provide temporary price support through subsi- credit at fixed rates of 24% for six months (3.7% dies. Subsidization through futures contracts per month) and 36% for nine months (3.5% per would be more controllable, however, as the month). The government has allocated ZI 750 agency would have greater ability to offset its billion (about US$80 million) to finance the position in the market by selling delivery con- difference between these interest rates and the tracts. An additional advantage is that after market rates. In addition, counterpart funds about three years or so, the agency could be fromtheECareavailableat75%oftheprevailing transformed into an actual futures market with rate for small-scale production, trading, and private traders, rather than the agency, arbi- processing. Theremainingcreditavailablefrom trating the market. It should be noted that for the Bank of Food Economy is at prevailing rates both proposed operations of the agencies, it of interest, which are set monthly based on would be necessary to certify storage facilities anticipated inflation. Real rates on these funds and inspect storage. A trained field staff would were negative in January and February and be required for both operations. Furthermore, positive the months thereafter. storage wouldneedtobe separatedfrom milling, With high and variable real interest rates, with storage facilities and silos sold (preferably) only the stout of heart or the foolish carry stocks or rented to private merchants or cooperatives. financed through banking credit. Ifthe prices of the goods stored do notincrease near the nominal THE SECOND INTERVENTION OPION - REDUCING rate of interest, high losses will occur. Given REAL INTEREST RATE RISK that the monthly interest rates are currently at about 5%, miscalculation can be disastrous. Preferential interest rates have been largely Because the rates are variable based on antici- eliminated beginning in 1990, and banks have pated monthly inflation, the risks are even been allowed to set their own loan rates (see greater. Voluntary stockholding by traders Table 1.6). But two preferential rates continue under these circumstances will be very limited. Table 1.6 Monthly nominal and real interest rates, Jan-March 1990 Jan Feb March April May Nominal Central Bank discount rate 36.0% 20.0% 10.0% 8.0%Co 5.5% Demand deposits 7.09% 5.5% 3.0% 3.0cl 2.0%o 6-month time deposits 17.0% 13.0% 6.5% 5.0%l 3A% 1-year credit minimum 36.0% 20.0% 9.090 7.5% 5.0%o maximum 62.0% 23.0% 12.0% 9.5% 8.09o Bank for Food Economy 1-year credit 39.0% 20.0% 10.0% 8.0%o 5.5% 6-month credit 39.0% 23.0% 10.0% 8.0%90 5.5% Real, Central Bank discount rate 33.9% 14.0% 3.7% 1.4% 1.4% Demand deposits -48.0% 0.2% -2.9% -3.3% -1.9%O 6-month time deposit -43.1% 7.3% 0.4% -1.4% -0.6% 1-year credit mninimum -33.9% 14.0% 2.7% 0.9% 1.09%0 maximum -21.3% 16.8% 5.6% 2.8% 3.8% Bank for Food Economyb 1-year credit -22.0% -3.1% 5.1% 2.9% 0.5% 6-month credit -22.0% -0.7% 5.1% 2.9% 0.5% a. Real rates according to point-to-point index. b. Real rates according to average index. Source: Gazeta Bankowa, No. 27 1990. 37 But stocks must be held or exported. The THE THIRD INTERVENTION OPTION - harvest comes in over a short period while the SELECTIVELY STIMULATING FOOD DEMAND processing of the grain takes place over the entire year. If export controls are fully released It is generally accepted that the economic ad- on grain, it can be expected that stocks will be justment will be difficult, with unemployment quickly exported and grain imported later as increasing and real incomes falling. Already needed. In other words, stockholding will be food expenditures, especially among pension- effectively carried abroad, by those payinglower ers, have fallen in the first quarter of 1990. It and more certain real interest rates. can be expected that the austerity program will The problem for the economy is that exporting take a heavier toll among the less skilled and and importing both carry costs, represented by the old. Furthermore, in large families with the difference between f.o.b. and c.i.f. prices several children, the food budget could be se- (costs of transport, distribution, and insurance, verely hit with the result that older children are etc., cause price differences). Furthermore, dis- kept from school in order to find menialjobs. No tress exporting (as is currently seen for butter one set of programs can fully alleviate the suf- stocks) brought on by the high and risky costs of fering that could accompany a reform of the storing could find only low prices, below what magnitude that Poland is attempting. Some could be expected as normal f.o.b. prices.9 assistance to those less able economically to The government must then continue to defend themLselves in this adjustment is called maintain some constraints on exports of grains for. Already (since January 1990) the govern- and provide some additional incentive to hold mentisbeginningtoprepareassistancethrough stocks until real interest rates stabilize at lower unemployment compensation and special cen- levels.'0 The proposed agency, by offering a ters to provide food to the poor and unemployed. futures price, will provide an incentive to hold In this assistance, agriculture can also be stocks. But unless the futures price is above the aided by increasing the demand for food. Fami- costs of carrying the grain, including interest lies at lower income levels have a higher pro- charges, stocks will not be voluntarily carried. pensity to consume food; that is, for every zloty If PZZ companies are forced to hold stocks (they spent a higher proportion goes to food than at remain state enterprises), losses will accumulate higher income levels. Thus, supplementing the and at some future date subsidies may become incomes of low-income families increases food necessary. demand. One wayofsupplementingtheirincome Since the harvest comes once a year and at a is through food stamps, or coupons which can be time when great uncertainty still remains over spent only on food. The advantage of stamps real interest rates, it seems reasonable for the over direct income supplements is that there government to continue to offer a fixed nominal can be a higher propensity to consume food out interest rate for a period of six or nine months to of the implicit income transfer offood stamps. "1 agriculture and agro-industry. The rate of in- One option then is to initiate a food stamp terest should be set at a projected positive rate program targeted to the poor and other vul- but at one below what the market rate is cur- nerable groups. Stamps could be redeemable rently demanding (the monthly rate varies but for selected essential commodities in stores or has been as high as 30% real). To further induce through farmers markets. Stores and farmers stockholding, this interest rate could be offered receiving food stamps for the foods they sell to loans collateralized by the futures sales con- could redeem the stamps through banks but tract to the agency. Since banks receive secured only through direct deposit in accounts (for later collateral for the loan, some inducement to monitoring of abuses). In rural areas, these making the loan at lower real rates should be banks could be the cooperative banks. Stamps present. should also be made available to the vulnerable The government should make it clear that in rural areas, possibly through the Church, this preferential rate is a short-term offer, one charity groups or other social bodies (compensa- that is made to alleviate the current crisis, and tion and food stamps given only in urban areas one that will be withdrawn once real interest creates an incentive to migrate to the cities). To rates stabilize at lower levels. It should not be preventthe program from being an entitlement, viewed as an entitlement for agriculture or family eligibility for food stamps should be for a agro-industry. fixed period (six months, renewable depending 38 on circumstances). Stamps should be redeem- The medium term - two to five years able for a certain value of food (if based on quantity, then inflation could raise budgetary To describe the options for the medium term, it costs).'2 is necessary first to present a vision for the Another possibility is to initiate school feed- agricultural sector and to define in broad terms ing programs and expand pensioner feeding the role of the government in fulfilling this programs. Food could be procured from excess vision. To contrast this new vision (one largely stocks for direct distribution, again supple- held by the current government), the past ap- menting the demand for food. proach to agriculture needs to be presented These types of programs help to buffer the call first. forgeneralfoodsubsidieswhichtendtodistribute In the 1980s, the vision of agriculture held by benefits to rich and poor alike. By settingup the the government was one based upon income basis for target intervention, farmers and the parity and self-sufficiency. Farmers should be poor could be assisted. The key to success in the receiving prices that guarantee an income more targeting will be achievement of the maximum or less commensurate with urban wages. Fur- gain both in food demand and social welfare. thermore, imports and exports should be re- Since part of the purpose of these interven- stricted so that Poland would become food self- tions is to stimulate demand for domestically sufficient. This policy produced a highly dis- produced food, food aid should be limited. Ide- torted sector thatwas unable to follow its natural ally, food aid should be used to substitute di- economic progression - that is, one that would rectly for commercially imported food; that is, it produce a diminishing share of GDP with a should be part ofcommercial foreign assistance, lower portion of the work force (agricultural and not an instrument to impoverish farmers. employment remains extraordinarily high at To ensure this, food aid should only be accepted about 30% of the labor force for an agricultural for those commodities that canbe freely exported sector producing only about 12% of GDP). or imported without quantitative restrictions.'3 Poland in the mid-1980s, then, had an agri- The government should distribute the food aid cultural sector that was relatively large and atcommercialormarketprices. Thebestwayto employed more labor than countries of compa- ensure this outcome is to open the acquisition of rable real income per capita (especially if income food aid stocks to competitive bidding, instead of comparisons are made on a purchasing power the current system of distributing it to state basis). This large sector did not come about by controlled agro-industry for sale.'4 chance or through absolute advantage - All three options described above have rel- Poland's soils are only of moderate fertility and evance for both the short and the longer terms. its growing season is short. It came about by The (futures) agency, by dealing in futures con- conscious govermment policy to promote income tracts and encouraging private storage, pro- parity at nearly any cost through subsidies and motes the development of a viable rural market guaranteed prices. In fact, on a per unit of value economy supported by both spot and futures basis, subsidies, especially to the state sector, markets. The preferential credit line based on were equal to or higher than in the EC and the longer term (six- and nine-month) credits will United States. This highly supported agricul- become more the norm when inflation and in- tural sector now faces a new reality - that of terest rates stabilize; that is, the term structure market forces and world prices. The sector must of interest rates will naturally evolve to offering adjust; the only question is how quickly it can do longer term, fixed interest rate loans. And the so. food stamps and other target food programs are If other sectors of the Polish economy were not the safety nets offered by most industrial and in recession and such a desperate need to export some developing countries for their most vul- did not exist, then the adjustment in agriculture nerable groups. The interventions, while di- could be leisurely, with the sector allowed a soft rected at the short-term farm crisis, do not landing. According to World Bank estimates, unduly compromise the future by setting pre- the economy, after a decline in GDP of 14% in cedents of unlimited government support for 1990, must grow at a rate of 5 to 6%. Exports agriculture. In this way, these interventions must expand to 26% of GDP by 1993. For would support the medium-term vision and op- agriculture's share of GDP to decline at a rea- tions presented in the next section. sonable rate, agriculture would need to grow at 39 a rate of 3 to 4% per year. To meet the targets sponsive to market forces. In terms of factor on exports, agricultural exports would need to productivity growth, food processing ranked expand from about 12% to 25 to 30% of agricul- second to last in a sample of 17 industrial tural GDP."5 Most observers of Polish agricul- groups, with a decline in annual growth of 5.1% ture believe that such growth rates and export in productivity from 1978 to 1982 (see Table orientation are optimistic. 1.7). With the overall resurgence in output Besides the technical obstacles to raising growth between 1982 and 1985, food industry productivity growth to these rates, two other productivity growth became positive at 1.2% major impediments prevent the achievement of but still ranked second to last in growth. In such performance in agriculture. The firstis the terms of international comparisons of competi- state sector and its control of food processing tiveness(asmeasuredthrough domesticresource and inputs. The second is the external barriers coefficients), the food industry displayed the facing agricultural trade. least international competitiveness of all of Poland's industries (see Table 1.8).'7 In fact, the THE eTATE-CONTROLTE AGRO-INDUSTRIES AS DRC measure for food processing was negative, BARRIERS TO GROWTH indicating that the value of inputs exceeded the value of outputs when measured in world prices.'5 In Poland, the efficiency and productivity of Fieldvisitstoagro-industrial enterprises tended agro-industry is as critical to agricultural per- to confirm these numbers on lack of efficiency. formance as good farm technology and manage- Processing plants were generally a decade and ment. An estimated 75% of food is processed a half behind in technology. and almost all agricultural inputs come from This lack of efficiency shows up in other mea- domestic industry. Between these upstream sures. In a 1988 sample of 500 of the largest and downstream industries lies agriculture. Its state-owned industrial enterprises, about 10% farmers are dependent for their share of were found to be loss-making in the absence of wholesale food prices on the efficient and com- subsidies and taxes (see Table 1.9). Of this 10%, petitive operation of food processing and distri- about 90% were in the food processing industry. bution. Farmers also require high quality and Of other industries that made losses, about 70% low cost inputs such as seeds, fertilizer, and supplied agricultural inputs, animal feeds and other chemicals from their input suppliers. fertilizer. While part of this loss-making is Without the efficient operations of these in- attributable to price controls, major responsibil- dustrial sectors, agriculture is helpless and in- ity must also be assigned to the agro-industries' vestments in improving farm productivity are inefficiencies and antiquated technologies. nearly useless.'6 Beginning in August 1989, the government Unfortunately, agro-industry in Poland is began the liberalization of prices with the objec- grossly inefficient and, worse, generally unre- tive of allowing the market to determine which Table 1.7 Total factor productivity growth, 1978 - 1985 1978-1982 1982-1985 Best Performances (1) Precision instruments 2.7% (1) Precision instruments 6.3% (2) Pottery and china 2A% (2) Pottery and china 4.8% (3) Engineering 1.9% (3) Electrical engineering 4.4% (4) Metal products 0.7% (4) Engineering 3.6% (6) Wood 0.4% (5) Textiles 3.5% Worst Performances (17) Building materials -5.3% (17) Paper -0.5% (16) Food processing -5.1% (16) Food processing 1.2% (15) Wearing apparel -2.1% (15) Nonferrous metals 1.2% (14) Nonferrous metals -1.6% (14) Ferrous metals 1.2% (13) Basic metals -1.0% (13) Building materials 1.4% Source: Konovalov, 1989. 40 Table 1.8 DRCs and value added, 1986 Table 1.9 Loss-making enterprises in (millions of zlotys) 1988 Value Value Sample of 500 largest state-owned industrial enterprises added added Short Long domestic world run run Total number of loss-makers 56 Industry prices prices DRCs DRCs of which: Food Processing, 43 Metallurgical 15,411 5,785 1.15 4.00 of which: Electro- meat products 23 engineering 89,208 70,802 0.55 1.32 food-oil products 6 Chemical 23,581 18,786 OA1 1.25 poultry products 5 Mineral 8,981 9,177 0.49 1.05 grain products 5 Wood and paper 9,226 8,399 0.54 1.04 sugar products 3 Light 40,601 30,373 0.61 1.01 Food 6,048 -3,803 -1.47 -3.40 Other Industries, 13 of which: Grand Total 193,226 139,518 0.62 1.45 fodder production 6 Source: Konovalov, 1989. fertilizer production 3 a. Coal mining excluded. Source: Konovalov, 1989. enterprises are efficient and which are not. other industries, such as dairying, milling, and Unfortunately, the drive for efficiency through meat processing, the two-firm concentration price liberalization confronted another barrier ratios were lower (in the range of 2 to 20% of the - the oligopolistic structure of agro-industry market), but these low percentages concealed (see Table 1.10). Agro-industry is highly con- the regional oligopsony nature of the enter- centrated, at both the aggregate and regional prises. With transport difficult to obtain and levels. For example, in a 1987 sample, it was costs high, single buyers dominated many re- found that two enterprises had 47% of the mar- gional markets. Also, there is a strong possibil- ket in food concentrates, 41% in oils and fats, ity of collusive behavior among these state en- 51% in potato products, 30% in vegetable and terprises. Oneofthelegaciesofcentralplanning fruit products, and 30% in sugar products. In is that a large number of enterprise directors and managers are accustomed to formal and Table 1.10 Economic concentration informal economic coordination. ratios of state firms, 1987 To complete this bleak picture, it is necessary (fractios of tarete firms, 1to describe the response of enterprises to the (fraction of market sales) economic reform program. Despite a dramatic One-firm Two-firm Four-firm fall in throughput and increasing indebtedness Outputs of enterprises, only one agro-industrial enter- prise has gone bankrupt and few have signifi- Oilsoand fats 0.28 314 0.66 cantly reduced their labor force. With workers' Potats produfts 0.27 n.a. n.a. councils having the right to select and fire man- Fruit and vegetable agers and with the state still the nominal owner products 0.23 0.31 0.40 and thus eventually obligated to bail out failing Flour milaang enterprises, no manager has the incentive to Eggs and poultry 0.0 0.1 0.28 reduce his laborforce or for thatmatter close the Milk and milk products 0.02 n.a. n.a. enterprise. In many ways, price liberalization Sugar and sugar pro'Iucts 0.19 0.30 0.51 has contributed to the worst case scenario - inefficient oligopoly and oligopsony enterprises inputs pricing largely as they wish to compensate for Tractors 0.90 0.96 n.a. loweroutputandnotreducingcosts. Itisimpos- Fertilizer 0.22 0.43 0.73 sible to conceive of a vibrant agricultural sector Farm machinery 0.15 0.23 0.35 while it is hostage to such an uncompetitive and Animal feed 0.14 0.26 0.51 inefficient agro-industry. Source Rocznik Ststystyzny Pmemyslu, 1988. 41 DEALING wrrH UNcoMPErrrivE AND INEFFCIENT a clear owner financially liable for losses and STATE INDUSTRIES benefitting from gains, it is doubtful that in- vestment will be economic. The government in confronting this situation A variation of the piecemeal approach is to has basically two broad options: keep agro- privatize quickly all enterprises but on a com- industry in the state sector or privatize it.'9 pany-by-companybasis. Each enterprise ismade Economic theory says little about the benefits into a joint shareholding company with the arising from one ownership structure over the state initially the only owner of shares. The other but, auspiciously, experience throughout state would then sell off the shares to various the world with state ownership of agro-industry parties: workers, the public banks, etc. The has demonstrated that government ownership problem with this scheme is that the state simply does not work. Agro-industry, when would retain only the enterprises that no one dealing with such an economically sensitive wants to own while having divested itself of the product as food, is unable to withstand political profitable ones. Also, if employees or banks influence. Inevitably, prices are controlled by have controlling interest, the enterprise may be the state either directly through laws or direc- managed eitherto the workers'orbanks'benefit, tives or indirectly through more informal re- neither of whom may have the preservation of quests. Controlled prices lead to subsidization the assets of the enterprise at heart. and to the disincentives that come from know- The last suggested option is to create holding ing that the state is the controller of prices and companies initially to take control of the shares stands by as the ultimate source of financing for of a variety of enterprises; at the next stage, the losses. These observations on state behavior shares of the holding company are given or sold and the need for privatization are shared widely to the public at large with the state retaining a in Poland both by the government and the pub- minority and noncontrolling allotment of the lic.' The reliance on state enterprises is a shares. The public having now received shares legacy of the past; the only outstanding issue is is free to sell them to other parties as it wishes. how to privatize and with what speed. Equity sellingandbuying would lead to control- In privatizing agro-industry and, for that ling interests by various private parties. Once matter, other state enterprises, the government the shares have achieved value and manage- has three broad options: first, a slow piecemeal ment is under the control of private owners, the privatization such as Britain has been attempt- state can divest itself of its remaining shares. ing; second, a more rapid enterprise-by-enter- This method of privatization allows the state prise privatization; or third, a broad-based initially to reclaim control from the employees privatization based on holding companies or over the management of the enterprise, main- mutual funds.2' tain continuity in management until private In the piecemeal approach to privatization, ownership exerts itself, and then receive a re- enterprises are sold off to investors, to groups turn on its initially retained shares. The public such as workers, or to other enterprises. The also gets a share of the state enterprise pie in an essential determinantfor privatization ofenter- equitable distribution. The holding companies, prises is the market. As the market reveals then, control a wide variety of enterprises, some through bankruptcy which enterprises are not profitable and some loss-making. Based upon being managed properly, they are sold off to the private sector. The state remains the owner of enterprises that are competitive under a mar- ket economy while ridding itself of inefficient Table 1.11 The share of agrifood exports and badly managed enterprises. The process is in total exports then orderly and Darwinian. Unfortunately, (percentage shares) the process is also long and costly and subject to 1989 Jar, - May 1990 a major risk - the soft-budget option. Enter- Food Agrifood Food Agrifood prises that find themselves unable to compete Zone products products will attempt to rally political support in defense of their survival. The political temptation will Nonconvertible 1.6 2.0 1.5 1.3 be to continue to subsidize inefficient enter- Convertible 13.8 5.8 12.5 7.1 prises orinvestin their rehabilitation. Without Source: Annex 4. 42 its criteria of return to its private owners, the Table 1.12 Agricultural and food exports holding company can sell or close enterprises. mainly to hard currency countries, Eventually, the holding companies would be increasing share of EC countries dissolved with shareholders receiving directly (percentage shares) shares in companies under holding company 1975 1984 1989 ownership. Convertible zone 67.4 77.2 81.9 A MAJOR BARRIER TO AGRICULTURAL RECOVERY of which: -EXERNAL TRADE CONSTRAINTS EC countries 31.1 34.6 50.1 USA 12.1 12.8 10.5 Poland's farmers have two markets: the inter- soure Annex 4. nal market and the world market.22 The de- mand for food products in the internal market will largely be set by income growth; if Poland's January 1991, this trade will become convert- income per capita recovers quickly from the ible). severe recession and future growth is rapid, the Polish exporters also face the constraint of a domestic marketwill expand atarate much less highly concentrated export trade - five state than overall income growth. Because of the enterprises dominate agricultural exports. severe fall in incomes in 1990 and slow growth These enterprises are resistent to new competi- forecast for 1991 and some of the later years, tion yet continue to maintain old channels for projections indicate that domestic consumption trade and methods of doing business. Without of food will not reach 1989 levels until the year additional private sector competition in export- 2000.3 That is, farmers can expect that the ing, agricultural exports will remain confined domestic market's ability to absorb domestic and diversification in terms of both products farm produce will be limited; nevertheless, do- and markets will be hindered. mestic consumers will have to remain the pri- On the positive side, the real exchange rate mary market for most food output. has depreciated significantly, giving a strong The export market for certain products - incentivetoexport. However,inflationpersists, meat and fruits and vegetables - will remain and each day it appreciates the real exchange strong but will be limited by external trade rate (as long as the nominal exchange rate restrictions. Poland's agricultural exporters remains fixed), reducing export competitive- face variable import levies, quotas, minimum ness. The race is then between devaluations prices, and voluntary export restraints for most and an inflation rate that erodes export com- of its agricultural exports to hard currency ar- petitiveness, but eventually each feeds on the eas. These restraints to trade are particularly other. At a 5% rate of monthly inflation, incen- pronounced in the EC, which currently consti- tives offered by a 50% undervalued exchange tutes about 50% of Poland's agricultural export rate will evaporate in less than nine months market (see Table 1.12). Agricultural exportsto without further nominal devaluations. non-convertible currency areas remain small, about 1 or 2% of total exports to these areas. A STRATEGY FOR AGRICULTURAL EXPORTS Some expansion in these markets can be ex- pected as the Soviet Union adjusts its agricul- Agricultural exports are important to the pros- tural policies but, to say the least, the prospects perity of Polish agriculture - without growth in are highly uncertain (it is expected that in exports, farmers face a stagnant or only slow- Table 1.13 Oligopolistic position of foreign trade organizations (centralas) in agrifood import and export (percentage shares) Centrals Animex Rolimpex Rybex Agros Polcop TotWl Export 31.6 21.1 10.0 9.5 4.9 77.1 import 9.1 39.9 5.0 20.8 3.0 77.8 Source: Annex 4. 43 growing domestic market. Three steps are falling domestic food demand and high interest needed to expand and diversify exports.24 The rates. Overshadowingeventhesedifficultprob- first step is privatization of agro-industry and lems is the legacy of inefficient agro-industries export enterprises and the removal of all formal and lethargic export enterprises. Finally, many barriers to entry by new private enterprises. export markets remain constricted by protec- Without this step, exports will be bound by tionist policies of trading partners. Under such traditional ways of trading and new products circumstances, it is difficult to be optimistic and markets will be difficult to develop. The about the prospects of Poland's agricultural second step is political negotiation with major sector. trading partners for market access. The Euro- An additional danger that exists is a potential pean Community gave Poland GSP status, but overreactionbythegovernmentthat could exac- this concession, while cutting tariffs by 50% for erbate the economic situation - by imposing some products, still imposes quantitative re- price controls and guarantees, by creating state strictions (quotas are shared by other GSP enterprises to intervene in the market, by pro- countries so the concession is minimal) and vidinglarge subsidies and by enactingexcessive variable levies. Bilateral donors cannot just import and export controls. These interven- give financial and technical assistance to Po- tions taken at the height of a farm crisis could land; they must provide market access. Other- become the barriers to achieving a more effi- wise, it is equivalent to putting one foot on the cient economy in the future. accelerator while the other presses down hard This danger does not mean that the govern- on the brake. Poland cannot survive such con- ment should be inactive in addressing the cur- tradictory signals. It is hoped that the Uruguay rent farm crisis. Some actions have already Round of trade negotiations will make some been suggested: creating an agency to trade in progress in reducing trade barriers but this will futures contracts based on certificates of stor- beealongprocess. Inthemeantime,donorsmust age, providing incentives to store butter (see take a more favorable stance to market access Annex 21), providing longer term loans at fixed for Polish agricultural exports. nominalinterestrates(butatrealinterestrates), The third step is maintaining the real ex- and stimulating food demand through food change rate at a somewhat undervalued level stamps and clirect feeding programs for school (see Table 1.14). If the exchange rate becomes children,pensionersandothervulnerablegroups overvalued, then Polish farmers will not only initially harmed by the economic reforms. On face the barriers to trade outlined above, but the trade side, the government should continue will be confronted by an implicit export tax. It to maintain an attractive exchange rate for is unlikely that Poland can compete in the world exports and attempt to negotiate market access agricultural markets with this additional for its products. On the technical side, many handicap. suggestions are offered in the other annexes, Finally and most importantly, it must privatize. With output markets, external trade Conclusions and input supplies dominated by state enter- prises responding to noncommercial incentives, Poland's agriculture has gone from a highly it is difficult lto imagine a vibrant agricultural protected and subsidized sector to a somewhat sector. Because the problems of agriculture are indirectly taxed sector almost overnight. Be- intensifying -- the farm crisis is already upon sides this abrupt transition, agriculture faces a the sector - privatizing agro-industry must difficult macroeconomic situation resulting in occur soon and rapidly. Table 1.14 Effective real exchange rate, 1981-1990 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 Real exchange rate 110.65 137.95 167.55 163.85 140.95 110.30 79.55 72.73 76.95 43.29(est) a. A decrease indicates depreciation. Sources: 1MF, World Bank. 44 Endnotes 8. See Annex 9 for qualifications and greater details on these operations. This annex was prepared by Odin Knudsen, assisted by Wales Mack. 9. This problem is described more fully in Annex 4. 1. These numbers may overstate the se- verity of the fall as production in the private 10. Some temporary licencing of exports sector is not recorded. wouldneedtobemaintained. Thelicensescould be auctioned or taxed to prevent excessive profits 2. Some caution should be exercised in for exporters. interpreting PSE numbers for Poland as the exchange rate is a confounding factor. How- 11. Although the income supplement from ever, if estimates of the real exchange rate food stamps is partially fungible, this higher from the World Bank and IMF are used to propensity is thought to originate because the correct the PSE numbers then the level of stamps are used primarily to supplement the subsidization actually increases for 1987 expenditures of the primary food purchasers and 1988 because these estimates point to an whotendtohaveahigherpropensitytobuyfood undervalued exchange rate (compared with than others in the family. Income supplements 1980) for those years (see Table 10.14). From are spread wider in the family and therefore 1982 to 1985, the exchange rate was follow more conventional intrafamily distribu- overvalued (compared with 1980); subsidies tion patterns. helped compensate for this overvaluation in those years. 12. See Annex 2. 3. In the first quarter of 1990, farmers' 13. Imposingtariffs on imports and exports income was 86% of workers' income. Caution would be all right since domestic prices would should be exercised in interpreting these then be equal to the world price plus the tariff ratios as other intangibles such as housing and with correctionsfortransport, etc., regardless of seasonality may not be uniformly or consis- the amount of food aid. Since domestic prices tently applied to the data. would be unaffected, domestic supply would not be discouraged. Of course, one of the assump- 4. This is most evident in the dairy sector tions implicit in this discussion is that compe- where subsidies reached nearly US$1 billion tition exists, an assumption that currently does in 1988, fell to US$70 million in 1989 and not hold in Poland. In later sections of this nearly disappeared in 1990. This sector con- annex, this lack of competition will be discussed tributes 19% of agricultural GDP and provides in more detail. an important source of cash to over 1 million small farmers. 14. Under the current system, state agro- industries sell the food aid on behalf of the 5. A legal opinion would be needed to es- government. Proceeds from the sale go into a tablish conclusively whether the proposed al- counterpartfundafterdistributionandhandling ternative operations of the agency are consis- costs are retained by the enterprise. Under the tentwith the legislation establishingthe agency. current system, these enterprises have little incentive to reduce costs or follow market pric- 6. Thisinterventionisdescribedmorefully ing in the distribution of food. Competitive in Annex 9. bidding would offer some competition for the food aid, although collusive bidding would need 7. A similar concept of price stabilization to be prevented. is proposed for butter but using a more guaran- teed price intervention by the government (see 15. Source: World Bank President's Report Annex 21). No. P-52-94. 45 16. The reverse is also true - agro-indus- 20. Polls taken in March and April 1989 by try depends on the efficiency of agriculture. the Center for the Study of Public Opinion show This alsohasbroadereconomywide implications that between 80 and 90% of workers and man- since the food industry share of all industrial agers support privatization of most small- and output is about 20%, of (convertible) exports medium-size industries. For large industries, 13%, and of employment roughly 10%. the number declines to about 57%. 17. These results are based on results from 21. Thissectionisbasedondiscussionswith V. Konovalov, Poland: Competitiveness of In- Manuel Hinds and Polish counterparts. For dustrial Activities: 1961 - 1986, August 1989, more details, see the annex on privatization of The World Bank. agro-industrial enterprises. 18. There was considerable variability of 22. See Annex4foramoreelaborate analy- results, with the dairy and meat industry is sis of Poland's agricultural trade and its pros- being the least competitive and soft drinks and pects. milling products being more competitive. 23. See Annex 3 for details on the projections. 19. The issue of privatization of the state farms and cooperative industries is dealt with 24. Ot]her steps are of course necessary. in Annexes 6 and 7. Annex 8 gives suggestions in this regard. 46 Annex 2 Rural development strategy Initially, the Task Force had planned to limit reflect their relative importance, but rather the the scope of the strategy to agricultural policy access to data necessary for the analysis during issues. Butitsoonrealizedthatitwasnecessary the work of the Task Force. Therefore, this to broaden the strategy and include issues re- annex should be viewed as a general outline of lated to rural development because of the im- rural policy development based on a selective portance ofthe rural sectorin the Polish economy approach to different issues. and of the possibility of sustained development This annex is mainly based on information in rural areas. provided by the members of the Task Force. It The main objectives pursued by a rural de- has also benefittedfrom discussions with-and velopment strategy are: reports provided by - representatives of the Ministry of Agriculture, Ministry of Rural * increasing employment and labor mobility, Welfare, Ministry of Labor and Social Policy, and and Ministry of Finance. * quickly privatizing and creating small pro- duction units. Demographic and sociological determinants of rural change Because of the limited time available, the Task Force was not able to examine in detail the In contrast to the situation in many Western wide range ofeconomic, sociological and cultural European countries, the rural sector in Poland issues related to rural development. Some of continues to be an essential component of the these are discussed in other annexes, while national economy and of social equilibrium. Its others still require a more systematic analysis main characteristics are discussed in this section. before policy conclusions can be drawn. This annex focuses mainly on characteristics of the STABILrry OF THE RURAL POPULATION rural population and on proposals for the short term regarding: The rural population has been very stable. It has remained approximately at the same level * the awakening of economic initiative and - 15 million - since 1950. Today, despite the the creation of an alternative labor market; strong demographic increase, the rural popu- * the implementation of a social safety net for lation still represents 40% of the total popula- the rural population. tion and 36% of the productive-age population (see Figure 2.1). The structure of the rural The level of analysis which is applied to the population differs considerably from that of the various issues discussed in this annex does not urban population (see Figure 2.2) and is much 47 Figure 2.1 Total and rural population, 1950 - 2000 millions 40- 35- - Total population 30- - 25- - Total active population 20_ - _ _ _ _ _ _ _ 15_-~~~ - - -Rural population 1S- _ - -= - - - - - - - - - - - _ - ._ - - - - - - - - - - - - 1o__ ~~~~~~~~~~~~~~~~~Rural active population 5- 1950 1960 1970 l978 1988 2000 older as a result of migration. The farm popula- Size of Farm Percent of Tota tion in rural areas is older than that working Ver small (fom 0.5 to 2 ha) 24% outside the farms. More than 20% of farmers Small (from 20 to 5 ha) 27% are of post-productive age, and this is an impor- Medium (from 5 to 10 ha) 28% tant constraint on agricultural productivity in- Large (more than 10 ha) 21% creases. The percentage of old people is particu- larly high in northern, central and central- There are important regional differences in eastern voivodships (see Map 2.1). The short- farm structure. The average farm size varies age of women of marrying age (see Figure 2.2) from 2.4 ha inthe Katowice districtto 11.8 ha in will slow down the process offarm takeover and the Suwalki district. These differences can be farm management. This farmer's wife problem explained by the country's partition into three is strongest in the northeast, where the number regions during the 19th century and by the of women of marrying age is 65 per 100 men. It unequal pace of regional industrialization and is a major reason for depopulation in rural areas development. (see Map 2.2). There are also wide regional differences. As AcTIvrrIEs OF THE RURAL POPULATION an example, the high rural population density in the central and southern parts of Poland contrasts with the low density in the horseshoe- Although the rural population has remained shaped area comprising the eastern, northern stable, its structure has changed over time. The and western border territories. In parts of the share of farm population has decreased while horseshoe and in several regions of central Po- the off-farm population living in rural areas and land (accounting in total for one-third of the working either there or in cities has increased. Polish territory), the depopulation process is From 1950 to 1988, the percentage of rural ongoing. It gives rise, as in several other Euro- population working outside agriculture has in- pean countries, to difficult economic and politi- creased from 15.7% to 40.7% (see Figure 2.2). cal problems. Almost 2.3 million rural inhabitants work out- side the gmina (county) where they live, and DIEENCEs IN FARM SIZE more than half of the rural population works in cities. Table 2.1 shows the distribution of the The average farm size is 6 ha. Farms can be active population by place of employment and broken down into four groups of approximately by economic sector. Rural areas not only absorb equal size, as follows: surplus labor from farms but also provide shel- 48 Figure 2.2 Population structure Urban Rural 90 90 yars years and and Male above F l Male above Female I .- 70 Surplus of women Suover men w Surplus of women over men 60 60 ______...__._ _ 50 _________ _40 4___ 0 4 . C- -t- _ _. _ ___ ____ __ i _~~~ Supu ofmi r- ove women 50 _ bu30 Surplus ~~~~~~~~~~~20 20 0 .0 3 *0 B a a 4pc a0 2t -~ ~ ~~Bfr and afe prodplusv age Prouciv ag szilS6+|b**gllieroo~~~ ~ ~ ~ ~ ~~~~~~~~~~~~~ .............. o~~~~~~l~ .. .. Z o~~~~~~~~~~~~~~~~~~~~~~~~~~..... ,6,7 ~ ~ ~ ~ Map 2: Number of Women per 100 Men N eS~~~~~~~~~~N Greater than 95.0 87.5 - 95.0 72.5 - 80.0 650 0-72.5 Less than 65.0 C~~~~ 0 - ' u~~~~~~~~~' a)' ' I 0 'L 0 to C~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~v C ;'; ,,~~~~~~..... ,,, .., ..... .......... ,,,,,. .'. , ' W ., .... ........... 0sC i e .- 7 . , 3 < ... ... .......o 0 0 .v, .. .. . D.........; 1 0~~~~~w. 52 0 0 co C 00 -c 0 0 0 0 4- 0 Le) 0 Ito) L OD ° ° °e co L ot) ° Cl V ~ ~ ~ [ 1 ^~~~~~~~~~~~~~~~~~~~0 I I l E E ....... .. 0 0 0 0 i E~~~~~~~~~~~~~~~~~~~ 1..~~~~~~~~~~~~~~~~~~~~~~~~...... L.~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~L 53 Table 2.1 Percentage of nonagricultural population by place of employment and by economic sector, 1978 (in percentage) Commuting outside theirgmina Working in the gmina to to other Economic sector Total where they live Total cities gminas By workplace Total 100.0 36.8 63.2 56.8 6.4 Industry 100.0 30.2 69.8 63.1 6.6 Houlsing 100.0 26.2 73.8 65.5 8.3 Forestry 100.0 60.0 40.0 23.8 16.1 Transport and communication 100.0 23.4 76.6 68.9 7.7 Trade 100.0 50.7 49.3 44.7 4.6 Municipal and housing management 100.0 18.8 81.2 78.8 2.4 Science, education anad culture 100.0 73.1 26.9 23.2 3.6 Health and social care 100.0 42.0 58.0 54.1 3.7 Tourism and recreation 100.0 49.0 51.0 46.1 4.9 Other sectors 100.0 59.4 40.6 36.2 4A By economic sector Total 100.0 100.0 100.0 100.0 100.0 Industry 43.2 35.5 47.6 47.9 44.6 Housing 12.3 8.7 14.3 14.1 16.0 Forestry 2.5 4.1 1.6 1.1 6.4 Transport and communication 11.2 7.1 13.6 13.6 13.6 Trade 11.3 15.6 8.8 8.9 8.1 Municipal and housing management 2.9 1.5 3.8 4.1 1.1 Science, education and culture 6.9 13.8 2.9 2.8 3.9 Health and social care 3.5 4.0 3.2 3.4 2.1 Tourism and recreation 0.7 1.0 0.6 0.6 0.6 Other sectors 5.3 8.6 3.4 3.4 3.7 ter for an important fraction of the population COEXISTENCE OF THE PRrVATE, COOPERATIVE AND that is employed in urban areas and commutes STATE-OWNED SECTORS daily as much as one hundred kilometers (be- cause of housing problems in cities and the The main chaLracteristic of the countryside - a relative ease of con structing houses in the coun- result ofthe long-term struggle of the peasantry tryside). This situation implies high industrial against collectivization - is the coexistence of production costs and transportation costs of the private farming with a public sector that is labor force. dominant in extra-agricultural activities. As Along with an increase in the rural labor force Table 2.2 shows, the private sector accounts for working outside agriculture, there has been an 85% of the active population employed in agri- increase in the level of multi-activity of the farm culture. The remaining 15% are state farm population (see Figure 2.3). The number of employees (47%), agricultural services employ- households that derive their main income from ees (30%) and production cooperatives employ- outside agriculture (peasants working in the ees (23%). Outside agriculture, the situation is state-owned or cooperative sector, peasant- different: 92% of the active population work in workers, and retired peasants) has increased the state sector, and only 8% in the private greatly. In 1988, only 20% of farm families sector. Although the latter figure is low, it must derived their income exclusively from farming be pointed outthatithas tripled overthe past 10 and 40% mainly from farming. years and that it does not include the informal 54 Table 2.2 Rural population working in agriculture and in other sectors, 1978 and 1988 Rural population Ruralpopulation Proportion working in working outside of those working Total agriculture agriculture in agriculture Total in '000 1978 8040 4771 3269 59.3 1988 7749 4348 3401 66.1 1978 = 100 96.4 91.1 104.1 x State sector 1978 3899 747 3152 19.2 1988 3788 647 3141 17.1 1978 = 100 97.2 86.6 99.7 x Private sector 1978 4141 4024 117 97.2 1988 3961 3701 260 93.4 1978 = 100 95.7 92.0 222.6 x Private sector, as percentage of total 1978 51.6 84.3 3.6 x 1988 51.1 85.1 7.6 x sector, which is sizeable, especially in handi- as compared with 40 in Western Europe. crafts, housing and transportation. The level of education andhealth care ismuch Table 2.3 shows the frequency of occurrence of lower than that in urban areas. The education registered industrial and service units in rural network includes about 13,000 schools, but the areas as well as their form of ownership. It can education level is poor because of lack of skilled be seen thatmost agricultural marketing enter- personnel and poor organizational conditions. prises and most agro-industrial enterprises are The situation is similar in the 3,311 health part of the state sector: this is an effect of the so- centers, which lack doctors and medical equip- called indirectcollectivization carried outbythe ment. The weaknesses in the socioeconomic state after the failure of direct collectivization infrastructure in the countryside result in diffi- efforts in the early 1950s. On the other hand, it cult living conditions and are the main cause of should be pointed out that despite a policy women's and young people's migration to town aimed at destroying handicrafts, services and and of the negative selection of the remaining private trade enterprises, many skills remain population. available in the countryside and allow the rural population to perform necessary tasks in con- AMBIGUOUS BEHAVIOR AND ATTITUDES OF THE struction, mechanics, carpentry, etc. This work RURAL POPULATION ismostoften carried out on thebasis of assistance from neighbors or as informal (unregistered) The attitudes and behavior of the rural popula- work. tion are the consequence of a perverse system in which private enterprises worked in a centrally WEAKNE9SE9 OF THE RURAL INFRASTRUCTURE planned economic environment and the state discriminated against private farming rather The settlementnetwork includes 42,000 villages than trying to create conditions for its growth. divided into 57,000 rural localities. Villages are This mixed economic system and the policy of small: about 82% have fewer than 500 inhabit- repressive tolerance toward peasant farming ants. Administratively, villages are grouped has created behavioral patterns that are often into 2,121 gmina, one-third of which have be- contradictory. tween 5,000 and 7,000 inhabitants, Peasant way of management. The manage- Village-level infrastructure is insuflicient. The ment behavior of peasants is based on a logic of greatest problem is water supply (only 29% of survival and not on a logic of development. It villages have a water supply system) and access expresses itself in a propensity to minimize risk to a sewerage system (5.3% of villages). About rather than to maximize profit, to ensure self- 8% of villages do nothave telephones. There are financing mostly through multiple employment two telephone owners per hundred inhabitants, and to take advantage of all labor resources of 55 Figure 2.3 Breakdown of rural population, 1960 - 1988 millions 12 12 _Fann population 10 8 Others 6 - - - - - - 4 __ .- - 2 0 I l l 1960 1965 1970 1975 1980 1985 1988 Figure 2.3 Breakdown of rural population, 1960 -1988 millions 14 12 F poplation 10 4 + - -_ __ Employed mainly on farm 2 Employed mainly off farm ----- ; - - - - - - - - - - - - - - -------------Pensioned farmers 1960 1965 1970 1975 1980 1985 1988 the family. It nevertheless allows some flexibil- farms. By contrast, state farm workers are ity in behavior. wage earners carrying out passively and in a Resistance to and dependence on the state. On repetitive fashion the tasks set out for them. the one hand, farmers have developed a strat- They are mainly concerned with their public egy of resistance toward changes coming from employee status, their salary and their perqui- above andtheirbehavioralpatterns enable them sites (housing, bonuses, paid vacations, child to maintain the independence of their activities care, etc.) The same asymmetry of behavior and private initiative. On the other hand, they exists between private farms and those enter- are completelydependentonthe administration. prises in the cooperative sector (samopomoc Farmers are accustomed to unrestricted food chlopska, agricultural circles, and others) re- demand sustainedbythe centralizedmarketing sponsible for agricultural marketing and ser- organization and food subsidy system. They vices. In a small number of such cooperative show an acquired helplessness and seem un- organizations, the self-governmentelections held willing to undertake actions independent of the in March 1990 led to a change in the balance of public sector. power in favor of cooperative members and to Differences in behavior between private and the subordination of the goals and activities of state-owned sectors. Private farmers are emo- the cooperatives to the interest of these mem- tionally tied to the land, which allows them to bers. In most cooperative organizations, how- remain independent and in charge of their own ever, such changes did not take place. 56 Table 2.3 Frequency of industrial POTENTIAL AND CONSTRANT OF THE RURAL plants and services in gmina and owner- SECTOR ship status in 1987 of which: Some conclusions regarding the potential for Percentage of percentage of change and constraints in the rural sector can locaities with priuate plants be drawn from the observations made above. Both the negative and the positive aspects ofthe Industrial plants present situation must be considered. Construction materials 1.8 41.7 Structural changes will be slow at the farm Construction ceramics 2.1 71.5 Concrete 5.0 82.6 level because of the fragmented farm structure Sawmills 2.7 61.3 and the old age offarmers. Small farms may not Slaughterhouses and * * * - Meat processing plants 2.1 29.3 be elmiated by the present crsis and may Dairy processing plants 0.6 4.6 simply wither away. Commercial farms - that Mills 3.3 48.2 are more dependent on the market - face a Bakeries 5.0 50.0 difficult situation involving the risk of regres- Potato processing plants 0.4 4.4 Fruit, vegetable and sion. They will have to use more labor-intensive Mushroom processing 0.9 64.6 techniques, reduce costs and improve the quality Soft drink plants 1.4 51.9 of their products. Some rationalization of the Feed plants 1.7 7.1 Other plants 12.6 79.0 agrarian structure can be achieved through a Centers purchasing shift ofpart ofthe state sector land to the private Angicultural p6.ducts: sector, land consolidation in private farms and Cereals 6.9 x a better combination of factors (see Annex 14). Potatoes 5.5 x But the attitude ofstate farm employees preclude Beet 1.9 x the use of an agrarian reform-type solution. Fruit and vegetables 8.3 x Milk 21.5 x The multiple activities of the population and Other products 5.7 x the semiprivate character of the rural economy Commerial outlets 68.5 can contribute to relatively fast rural develop- Restaurants 7.3 22.02 ment. The privatization ofsupply and marketing Gas stations 4.3 x functions is necessary for the adjustment and Agricultural machinery and implements 0.2 development of agriculture i the new market Construction materials 5.2 x economy. This will have to take place in a Services context of growing unemployment related to the Mechanical and restructuring of the industrial and cooperative electro-technical 1.3 60.5 Fitting and smithing 13.7 92.5 sectors, coinciding with the increase of the Cars 9.2 89.2 population of productive age.' The rural sector Repair ofag6icultural should play the role of buffer sector for the Radio and television 3.2 46.3 unemployed and make a significant contribu- Glazier 1.7 53.2 tion to the economic reform process because of Carpentry, fu u15.5 952 its stability and its capacity to absorb labor. Tailoring 6.7 92.8 The implementation of a new, efficiency-ori- Shoemaking 1.6 94.3 ented policy presupposes the gradual reduction Plumbing 8.1 64.7 of the ambiguous behavior of the farmers and a Construction repairs 33.1 96.0 Electrical installation 9.5 961 more dynamic attitude toward the market Drycleaning and dyeing 2.2 55.5 economy. It also presupposes a reduction of the Hairdreasers 2.8 56.8 antagonism between farmers and the state, Photographers 1.3 91.4 presently exacerbated by the sudden fall in Other services 19.3 97.2 agricultural incomes and by the uncertainty Interitywbu station 71.6 x regarding prices. An improvement in relations Post office 12.1 x between the farmers and the state depends on Cooperative bank 5.8 x three factors: Primary school 21.4 x Health care centers 7.3 x Pharmacists 3.2 x * the definition of (and information about) Hotel, shelters, tourist house 5.0 x clear economic rules, enabling the farmers to carry out their personal strategies and giving 57 them a large amount offreedom in a more stable date the specific requirements of the agricul- environment; tural production cycle. The rural strategy should * the creation of transition mechanisms to be coordinated with the establishment of the buffer the collapse of agricultural prices; and new market economy. Because of the strong * a policy of rural development and social dependence of the agricultural sector on state welfare. The outline of such a policy is discussed and cooperative supply and marketing institu- in the remainder of this annex. tions, a quick privatization and demonopoliza- tion of these institutions is recommended (see Outline of a rural development strategy Annexes 5 and 6). There should also be a reduction of the level of price uncertainty in the The strategy for rural development should be rural economy through measures aimed at the developed taking three periods into account: the stabilization of agricultural markets (in par- very short term, which will be a period of un- ticular, through the Agency for Agricultural certainty and regulatory vacuum; the short- Marketing (see Annex 9)). term, during which the legal and institutional In the short term, and at the heart of the rural framework ofthe new economic system needs to development strategy, are measures leading to be built; and the long-term, during which the the reawakening of economic initiative and the new economic mechanisms put in place will creation of a network of small and medium-size produce their effects, leading to structural and economic units in and around agriculture. functional changes. Specifically, this means the creation of genuine cooperatives (see Annex 6); the development of STRATEGIC GOALS a competitive agricultural processing industry (see Annex 8); and the development of cottage The basic goals of the strategy for the very industries and services, which now exist mainly short term should be: informally, and of local and itinerant trade and craftsmen. (This point is discussed below.) This m maintenance of the productive capacity of includes a set of measures aimed at creating agriculture; and incentives for the development of private ini- - protection of the main source of income for a tiative and the promotion of various forms of large part of the population. economic activity. In the long term, the objectives of rural de- For the short term, the goals should be: velopment are, first, to make rural areas more attractive as a place of work, housing and rec- - reduction of the structural asymmetry be- reation, and improve living standards; second, tween agriculture and its environment; and to shift the public investment structure in favor * creation of a rural model ofmarket economy. of radical improvement of the socioeconomic infrastructure in rural areas; third, to change For the long term, the goals should be: the programs and methods of agricultural edu- cation; fourth, to improve the starting conditions * regional economic planning and balanced for the employment of the rural youth; and, population distribution; finally, to develop regional planning and set- * multisectoral development of rural areas; aside areas. * revival of an active social life in the country- side; Short-term strategy - components and * rationalization of structures in agriculture instruments itself and in activities that are upstream and downstream from agriculture, based on a better REAWAKENING ECONOMIC INITiATIVE IN RURAL combination and spatial allocation of factors. AREAS ELEMENS OF THE STRATEGY For more than 40 years, the normal mechanisms of economic activity based on entrepreneurship The implementation of the above goals requires and capital accumulation have been blocked. various means and actions. In the very short Outside of agriculture, the possibilities of capi- term, fiscal and social policies should accommo- tal accumulation by the rural population were 58 mainly informal and often illegal. They in- The three main components of the self-em- cluded: ployment strategy are a training policy, a finan- cial policy, and a set of measures to create a * illegal appropriation for private use of pro- favorable regulatory environment. ductive factors belonging to state enterprises (including equipment, raw materials and work- TRAING POLICY ers' time); * informal trade, taking advantage of the The two areas deserving consideration in the distortions and irregularities present in the trainingprogram are changingeconomicbehav- economy, and in particular exchange rate dis- ior and training for new jobs. During the com- tortions; munist period, a lot of damage was done to the * periodic, and usually illegal, work abroad. work mentality of the population. Nobody can estimate this fully, but it will remain a fact to be The restoration of the rule of law and the taken into account for some time to come. It establishment of a market economy imply that would be an error to think that simply changing these distortions be removed, that privileges the economic system will change attitudes and related to a political or administrative rank be behavioral patterns created by 40 years of lies, abolished, and that respect for public property fear, resistance and cheating. Apart from the be restored. However, at the same time, the transformation of property rights, the essential change of economic and political system deprives problem of the transition period is to adapt economic units of easy access to capital. The mentalities and attitudes to the new reality. In economic reform program will lead to increased rural communities, this requires organizing unemployment. Assuming that the 2 million short courses aimed at freeing people from the unemployed forecast by the end of 1990 include constraints imposed by the previous system, an equal proportion of rural nonfarm and urban opening up a real dialogue and awakening their workers, unemployment in rural areas could be initiatives, showing potential micro-entrepre- as high as 300,000 to 400,000 persons. The neurs how the market economy functions and situation of these jobless workers could be par- assisting them at the same time to define their ticularly difficult, considering the fact that la- own economic strategy. This would require bor supplyin the countryside is verylimitedand high-quality trainers, able to use modern, par- that labor mobility is low because of the lack of ticipatory training methods not widely used housing. previously in Poland. The state faces a choice between welfare Vocational training is currently carried outby policies based on unemployment benefits that the extension service (WOPR) for farmers and perpetuate the dependence on the state and by the Vocational Training Units (ZDZ) for policies giving a large place to self-employment. workers, apart from the education system. Self-employment promotion policies are not Trainingfornewactivitiesrelatedtothemarket common in industrialized countries where wage- economy will require that new solutions be labor has gradually destroyed the concept of found, within or outside of the framework of independent labor and where societies became these institutions. In the new situation created used to supporting a large number of unem- by the economic and political changes, it must ployed. However, it is increasingly recognized be noted that the goal of training is changing. that self-employment can fill in labor market The purpose is not to update one's knowledge, gaps resulting from economic rigidities. It also but rather to change skills or to train for a new follows the modern evolution of industry. The kind of job. Rapid action is required given the availability of many technologies and the dif- number of workers who risk losing their jobs, ferentiation of markets have contributed to the butthe directions of newtraining are difficult to collapse of the Fordist mass production indus- determine beforehand. Training funds, until trial model and to the development of a new now included in the overhead of enterprises - model based on a network of small, flexible at least as far as ZDZ are concerned - are production units, easily adapting to market becoming increasingly limited. Training costs demands thanks to telecommunications and could be partly covered by the Labor Fund, but information technology. This model can be one have to be met mainly by the trainees them- of the objectives of rural development.2 selves. The available training personnel are not 59 prepared to train new - that is, independent cal and foreign institutions. Several existing and reliable - economic operators. initiatives are good initial steps in this direc- Given this situation, the principles of voca- tion, for instance, the Plunkett Foundation tional training should be as follows: course on economic activity, French minibuses traveling in the Polish countryside with audio- Training should correspond strictly to the visual data on French agriculture, etc. The existing or envisaged jobs, including, in the participation of foreign experts in the team for rural areas, small-scale trade, crafts, cottage instigating changes in rural areas would prob- industry, etc. ably contribute to a better understanding of the * Training should be concentrated on essen- market economy model, on the one hand, and of tial know-how and essential tasks, and be lim- rural realities and attitudes, on the other. ited in time. * Training teams should be mobile and flex- Retraining for a new job. The best basis for ible. To the extent possible, training should be training as far as adaptation to new standards practical on-the-jobtrainingand trainers should and economic (agricultural or not) activities in be able to provide technical advice on the choice the countryside goes is without doubtthe WOPR of technology and equipment. extension service. Its basic goals and the sug- gested reforms to its organization are specified Changing economic behavior. Courses help- in Annex 12. The WOPR is currently providing ing the rural population to understand the new differentkinds oftrainingfor carpenters, fitters, economicenvironment,andtoinitiatenewforms drivers, mechanics, tailors, etc. In changingits of activity, require a relatively small number of structures and modes of operation, it should trainers with the ability to adjust to educational consider the future increase in the demand for needs. Above all, the work of this group should new crafts in the countryside and the need for be directed at local self-governments and at the extension regarding purchases of new technical various forms of rural organizations. The cre- equipment. ation of a small team, perhaps called a team for instigating changes in rural areas, would have FINANrCIAL PoIcy two main goals: training of instructors in charge of short courses for the emulation of Problems related to small loans to smallproduc- economic activity in the countryside, and accu- ers. In most countries, banks avoid providing mulating experiences allowing a better under- credit for small investments for three reasons: standing of the social psychology and setting up the relatively high cost of distribution and ad- progressively a strategy for change. ministration of these small credits, the lack of The creation of such a team in itself would down-paymentandcollateralfromtheborrower, raise one of the main issues of post-communist and the low level of economic know-how on the societies - which is a preliminary condition for part of customers who do not know how to its solution-and would also facilitate dialogue presentthe projectorhow tofillin the necessary between the state and the farmers. forms. Some programs set up to finance small At the same time, such a team could more enterprises show that these problems can be easily identify cheaters who will be interested overcome by using appropriate methods and no doubt in this new market. Obviously there is that, in contrast to the general opinion, loans for a risk of falling into dull - and inefficient - microenterprises created by poor people entail propaganda. Therefore it would be desirable low financial risk. that the team be outside the state administra- tive structure (for example, within the frame- Principles of small investment credit. These work of the Agency for Local Initiatives, dis- principles, based on the experience of many cussed below) and facilitate contacts with the countries, can be summarized as follows: extension service and the mutual exchange of experiences. Given the usefulness of * Small credit is based, above all, on the multidisciplinary approaches, this team should customer and on the local market. Project consistofexpertsfromdifferentfields. Itisclear evaluation requires common sense rather than thatit wouldnothave anykind of monopoly and complex financial analysis. Nevertheless, the should cooperate in various initiatives with lo- preconditionforacredittobegrantedisthatthe 60 profitability ofthe enterprise allows repayment loans permit methods and procedures to be of capital and interest. It is clear that rates of adapted to customers' needs and constraints. interest currently prevailing in Poland do not There is a necessity to provide advisory ser- allow investment credit to expand in the rural vices. In general, and in particular in a country population. in transition toward a free market, the financ- * The methods and procedures of granting ing of small enterprises requires: credits must be based on knowledge of the local community and on the needs and constraints of * assistance in preparing the project and customers. This applies to collateral and to presenting it to the bank; forms and schedules of repayment. Apart from * services for economic activity such as ac- mortgaging farm land, which applies only to countancy and tax advice; farmers, the main collateral used in rural areas * supervision of economic activity allowing is warranty. It is a serious guarantee in small faster diagnosis of difficulties and assistance in local communities where people know each other solving them. well and are able to evaluate not only the effi- ciencyandhonestyofthepotentialentrepreneur Offering advice of this type goes beyond the but the project itself. Apart from warranty, a tasks of a bank and should be offered by sepa- good way of collateralizing a credit would be to rate institutions. Several organizational introduce equipment leasing, which currently schemes for the credit system are possible. The does not existin Poland (although itis envisaged necessity of using existing means and institu- by the newly founded Bank for Socioeconomic tions leads us to make the following proposals: Initiatives - BISE). * The interest rate to be used should be the Credit institutions. Labor Offices currently marketrateand shouldbepositiveinrealterms. provide small amounts of credit for setting up A lower rate would bring about a rapid one's workshop. This can be only a transitory decapitalization of banks. The main disadvan- solution. Presently, Labor Offices attempt to tage of preferential interest rates is that they develop contracts with banks so that the latter are available only to a limited number of bor- can evaluate professionally the reliability ofthe rowers and that they attract customers to whom borrower and the profitability of the project. they were not initially targeted. Thus, they do Banksaretheusualinstitutionsofferingcredit. not ensure that all economic operators, includ- In the rural community, cooperative banks exist ing poor people, have permanent access to credit. in almost all gmina (there are 1,663 banks for Therefore, it is preferable not to interfere with 2,121 gmina). These banks, which are rela- banking mechanisms. Instead of giving pref- tively sound from a financial viewpoint, operate erential interest rates, the state could give mainlywiththe depositsofthe rural population, separate subsidies to assist small entrepreneurs who find them more reliable than other coopera- in building up the necessary equity, as well as tives. Using this network of small cooperative subsidies allowing banks to cover complemen- banks would make it considerably easier not tary costs connected with small credits. only for the customer but also for the state * Credits should not be forgiven. The condi- budget. Credit could be refinanced by the Na- tion for granting production credit to all groups tional Bank - the BISE - created by initiative of the population is the strict observance of of the Ministry of Labor or the Bank of Food repayment rules. Credit forgiveness makes Economy. people think that credits do not have to be repaid. Financial mechanisms. Cooperative banks * Progressiveness is an important principle of operating with member deposits must be able to small credit. This principle applies both to the meet additional costs related to distribution of amount of individual loans (the first loan should small credit and to risk. A guarantee fund be relatively low so as to check the efficiency of should be set up to cover part of the risk. The the entrepreneur and his behavior with respect share covered would be relatively high at the to the bank) and to the number of loans in a beginning(about5O%dependingontherequire- given area. The good performance and repay- ments of cooperative banks), and would fall as ment on the part ofthe first clients then becomes the banking techniques for this type of credit a model for the followers. At the same time, first improve, thus permitting a better repayment 61 rate. The guarantee fund could gradually be such as accounting, and the creation of a basis replaced by local mutual guarantee funds. Each for mutual guarantee funds. These groups could borrower would pay 10% of his loan into this follow the tradition of the old 'agricultural fund and bear, to this proportion, the risk of all circles," based on solidarity and mutual coop- credits taken by members of the group of bor- eration. This would allow the development and rowers. It must be noted, however, that the progress of rural areas. creation of funds of this type, based on mutual guarantee, requires time, since they are possible CREATION OF A FAVORABLE ENVIRONMENT only on a small, local scale, where people know each other. Training and financing policies for rural areas According to normal cooperative principles, will only yield results if the environment is loans are granted to members having some favorable to change. The following measures personal contribution. This contribution could can contribute to the creation of a favorable be covered by a single bonus for creating one's environment in rural areas. own new workplace. The guarantee fund and bonuses allowing the creation of the equity Revision and lorabrogation ofall unnecessary could be provided by the Labor Fund. However, lawsandregulationspreventingthedevelopment it is necessary for the people who have not been of economic activity. In this respect, the sys- laid off (for example, young entrants in the labor temic changes induced by the privatization law market or small farmers without sufficient and the revision of the civil code recently passed means of subsistence) to be able to gain from by Parliament are essential. But there are also this system. many regulations preventing the development of economic activity by private entrepreneurs Economic advisory system. At present, there thatshouldbe abolished. Alisthasbeenprepared is almost no advisory system. Organizing one by the Office of Property Restructuring. In would require ample funds. In this instance itself, the existence of a set of consistent regu- also, emerging initiatives should be followed up lations offering maximum freedom to economic on. OneofthemistheAgencyofLocalInitiatives, subjects, protective of the public good, and created to assist the BISE. This agency is part translated into a language understandable to ofthe Fundfor Development of Local Democracy the average citizen, is necessary for the good and aims at creating initially 17 regional performance of the economy. But legal changes agencies. Considering the fact that there are alone will not imply the end of the dictatorial 2,121 gmina, the range of each agency would be attitude or of the inertia of the administration. too wide for it effectively to carry out advisory In this field, the dependence observed until now fimetions at the local level. To solve this prob- must give way to citizen action against all kinds lem in abudgetarily cost-effective manner, there of abuse. are various options that could be tested experi- mentally (and may differ depending on the Simplification of the tax system and tax ex- voivodship). The two main options would be: emptions for new enterprises. The present tax system for small-scale economic activity has to increase the personnel through coopera- three main shortcomings: it is complicated, it is tion with other local institutions (chambers of an excessive burden for new enterprises, and it commerce or industry, agricultural organiza- changes too often. Apart from the turnover tax, tions, etc.) through encouragement of social there is currently an income tax (or wage tax, work by retired people, and through the use of paid by the employer), a surtax, a tax on special the graduates that are employed in the inter- fields in agriculture,a real estate tax, alandtax, vention work financed by the Labor Fund. All etc. As of January 1991, an income tax will thosepotentialadviserswouldhavetobetrained replace the salary tax and the surtax. A year appropriatelyanddemonstratenotonlyoccupa- later, it is envisaged that the turnover tax will tional skills, but also the ability to perform be replacedbyavalue-added tax. These changes social and enterprise-oriented work. are important not only because they rationalize * to group borrowers. The creation of rural the taxation system, but also because they mean business 'circles" would reduce advisory costs the progressive elimination of a system in which and enable the consolidation of advisory services, scores of poorly understood regulations enabled 62 the Nomenklatura to decide that private busi- equipment for large plants and access to equip- nessmen had not fulfilled all of their tax obliga- ment depended on arbitrary decisions. It is tions and to destroy their businesses through therefore no wonder that there is a mismatch unexpected fines. between supplyof equipmentandtheneedsand The stabilization plan was not a fortunate financial capacity of small businesses. How- transition from this point ofview. Higher taxes, ever, this market is slowly organizing itself. rents and prices of raw materials and energy, The departmentofagroprocessingofthe Ministry combined with lower demand and payment de- of Agriculture provides, for instance, useful in- lays, have eliminated many small enterprises. formation on prices and supply outlets to in- In the first quarter of 1990, the number of terested parties. Domestic industry is slowly handicrafts in Poland dropped by 7.8% and that adjusting to the needs of small businesses: for of businesses run by physical persons by 5.6%. example, small trucks have been equipped with Many of the businesses have shifted to specu- cold storage equipment to be used for street lativetrade. AdecreedatedMayl8,1990,ofthe commerce. Imports of small equipment (for Minister of Finance decided to suspend for one example, small dairy facilities) are growing. to five years taxes on new private businesses It would be recommended that the extension registering before the end of the year. This service (WOPR) and trade unions contact co- decree, however, does not apply to all enterprises operatives and chambers of commerce of West and partly only solves partly the problem of tax European countries in order to organize imports exemptions for new businesses. Encouraging of secondhand equipment that could be useful settingup small enterprises andlegalizing many for Polish microenterprises. Such contacts exist activities in the so-called hidden economy would for agricultural machinery from Germany. be facilitated by the temporary suspension of It should be stressed, however, that the es- taxes and Social Security dues (which amount sential problem is the high cost ofthe equipment to 43% of wages, plus 2% for the Labor Fund). compared with average income levels. The BISE estimates that an investment of Z125 to Making it easier for an enterprise to find a ZL35 million zlotys is necessary for the creation location. The fact that state supervision ofrents of a workplace. This represents three to four to be paid by private firms was terminated has times the average annual salary. The intro- had a very negative effect on many small en- duction of leasing, mentioned above, could be terprises, in particular in cities. In the coun- one option to make it easier to purchase equip- tryside, this problem can be solved more easily. ment. Farmers often have buildings that can be used for workshops, and local self-government bodies Developing an informationpolicy. This policy own many buildings used by the state and co- is a necessary complement to the training policy operative sector. The Office for Property Re- and is particularly important in the transition structuring sent a circular to communes on period. With respect to the uncertainty pre- June 1, 1990, suggesting that they should re- vailing in the countryside, it is preferable to possess their properties and sell or lease to the know clearly what the future holds, even if it is private sector. At the same time, communes difficult, than to be afraid of unknown dangers were advised to pay more attention to the need with respect to which the difficult but certain to develop market places and street commerce present feels safer. Having appropriate infor- and to facilitate the obtainment of lots for new mation allows people to have reference points to buildings. These directives (which are not carry out their activity in the new market mandatory since power is in the hands of self- economy. governments) will be implemented in a more or Ruralareasobtaininformationmainlythrough less quick fashion depending on the situation of radio and television. Since the beginning of the the local government but represent a step in the crisis, fewer copies of agricultural newspapers right direction. are being sold. Therefore, emphasis should be put on those media. Radio and television Facilitating access to appropriate equipment broadcasts devoted to agriculture (for example, and machinery. Small rural enterprises need Notowania - Rates, in English) should be ex- small, cheap and easily accessible equipment. panded and should cover other branches of For alongtime, Polishindustrymainlyproduced economic activity which can be developed in the 63 countryside, providing information on markets, SOCIAL WUFARE POUCY technologies and sources of supply of machinery and raw materials. Though maximum attention should be paid to The important thing, for people livingfor over employment policy, the state must also fulfill its 40 years in a system restricting their personal obligations in matters of social welfare and initiative and setting the standards of activity protection of vulnerable groups. Social policy in from above, is to break the imagination barrier. the countryside entails specific problems re- Therefore, another essential initiative should lated to (1) the large number of old people living be to give concrete information on the principles in rural areas, and therefore, the problem of and performance of a market economy from the pensions and organization ofhealth care services point of view of economic units (for example, required by these people; (2) the large proportion how Mr. X went about setting up a private ofpart-timefarmers, who willbein all likelihood bakery in the countryside). The purpose of this the first to be dismissed from their workplaces, information would be to alter the negative pre- although they often work in the occupations vailing attitudes with respect to private opera- requiring the least skills; and (3) the low level of tors and to show what specific possibilities exist education and health care services, and there- and what rules applyfor small-scale businesses. fore the poor initial conditions for the rural This information, supplied by the mass media, youth. should be supported by manuals guiding po- The policy of rural development aims at tential entrepreneurs through the necessary gradually improving living conditions in the steps. countryside and shares this aim with welfare policy. Apolicy of social protection would include Developing public works. The development of three main components. agriculture and rural areas requires urgent investment in land irrigation, water supply, Unemployment fund. Labor Fund unem- telephone and telecommunication systems, ployment benefits are available only to farmers market places and transport. Given the tradi- having less than 5 ha. Part-time farmers do not tion of collective action existing in rural areas, receive unemployment benefits, but the Labor many roads, schools and health centers have Fund pays their insurance fee. (Since 1989, been built with unpaid work from the rural part-time farmers have been exempt from pen- population - amounting to one-third of con- sion payments paid to the Peasant Insurance struction costs (the remainder being covered by Fund, since insurance was automatically paid the state budget and other financial sources). by their workplace. Pensions for farmers are The Labor Fund could finance the salaries, for currently about Z1480,000 per person and six months, of unemployed persons within the Z175,000 per hectare.) Part-time farmers are framework of the existing intervention work. also authorizedtoobtainaretrainingallowance The combination of these elements could form when changing jobs in rural areas, and part- the basis for a rural works policy which could be time farmers having less than 3 ha may obtain carried out by local self-governments with the a loan amounting to six times the average assistance of local organizations and existing monthly salary for setting up an extra-agricul- foundations (such as the Foundation for Sup- tural workplace in the countryside. plying Water to the Countryside, and the Agri- In reducing funds available to part-time cultural Committee of the Church). Such works farmers, account was not taken of the fact that would not only provide employment for those they represent a specific category for whom taking part in them, but would also create the work outside the farm is an economic necessity. infrastructure necessary for the development of The fact that many of them will be laid offbefore the countryside. They would also have a posi- others seems unavoidable but it would seem tive income effect and offer opportunities to less justified, from the point of view of social local small entrepreneurs. These initiatives justice, to restrict funds available to them. The could be an important complement to the self- shortage of funds for creating new workplaces employment policy. outside agriculture and the unnecessary flow of labor toward the farm sector is liable to have negative effects on rural development. At any 64 rate, the system of financing and advising small of the bank, which does not seem to be the most enterprises should be open to all potential can- effective or safest way of dealing with funds. didates. Social welfare, including food assistance. The Reform offarmers' insurance. In 1978, social state of rural social welfare is worse than in insuranceforfarmerswasintroduced. Thiswas cities. Benefits for private farmers are lower an important step from the point of view of than those for employed persons. For example, welfare policy. However, there were several since May 1, 1990, the family allowance for shortcomings. There was no correspondence farmers' children has been set at the same level between the fee paid and the value of the funds. as workers' children, but only a handful of The real burden on farms increased continually farmers' children are entitled to such an allow- because of the decreasing number of farmers ance. paying fees. There was no relationship between Because of the dispersed settlement network, the social objective and the economic objective transport difficulties and late introduction of a to stimulate production (the pension amount free health care system for farmers (in 1972), being dependent on the value ofthe agricultural the countryside lags behind considerably in product sold). And social insurance had rigid terms of welfare services, of particular impor- effects on structural and generational changes tance for the elderly. The recent transfer of in agriculture (the right to pension being in social welfare functions to the Minister of Labor force only when the farmer stops farming). and Social Policy, who will share responsibility The reform now being proposed by the Minis- withlocalself-governments,andthepreparation try of Rural Welfare consists mainly of three of a new law to replace the social assistance bill elements. First, an independent Peasant Social of 1923 should improve the situation, although Insurance scheme would be created, specializ- this takesplace atatime ofwidespreadincrease ing in services for the agricultural system, with of poverty in the countryside. farmer interests represented by farmers' coun- Social welfare centers now handle 1.5 million cils, operating under the supervision of the cases, out of which about 40%, or 600,000 per- Ministries of Agriculture and Finance. This sons, live in the countryside. There is no doubt institution would be able not only to collect that this number will increase, since the num- funds but also to perform previously nonexist- ber of poor people has been estimated at 8 ent financial functions (investing surpluses, million. Since funds are limited, it is important carrying out economic activities, applying for to determine, first, who should be priority ben- loans, managing deposit funds paid to farmers, eficiaries and, second, what means of assistance etc). Second, old age and disability pensions are the most efficient. At the initial stage, on would be separated. Third, the contributory both counts, much initiative was left to the pension fund (where the choice of insurance centers themselves. But this state of affairs premium and pension amount depend on the cannot be sustained in the long run because it farmer's decision) would be separated from the places too much responsibility on social workers state pension. The contributory pension would and can lead to abuse. be available at retirement age (though premia From the point of view of an agricultural can still be paid in order to obtain a higher policy, emphasis should be placed on food dis- pension). The state pension, paid by the state tributiontothe neediestpeople, and distribution budget and amounting to 35% of average wage, should be organized in such a way that it does would come after 60 years when the farmer not interfere with the market mechanism. Food stops farming and transfers the farm to some- distribution for welfare purposes should en- one else. large demand without inducing an artificial If passed by Parliament, this reform would decrease of prices. At present, social centers represent a great improvement over the current carry out such functions, for example, through situation because it represents a better balance school canteens. Theyalso distribute food parcels between farmers' contributions and contributory and free meals, issuing so-called milk bar cou- pension, as well as between state pension and pons. The rural housewives' circles have taken giving up farming. However, several objections part in such actions in the countryside. couldberaised concerningtheeconomic activities In the autumn of 1989, the Ministry of Labor 65 proposed the introduction of food stamps Local finances will not be defined before the throughout Poland but the project was dropped end of the year. At present, this fact greatly because of opposition from banks and the lack of constrains any action at the local level. What interest on the part of retailers. At present, the may turn out to be a long-term problem is the main constraints to the distribution of food desire of many local self-governments to per- stamps are the fact that retailers are used to form economic activities, which would allow cash transactions and the perceived stigmati- them to earn necessaryfundsbutreduce private zation of the poor, who would feel more than initiative. Such a policy would represent, at the evermarginalized. Thesystemoffoodstampsto local level, a repetition of the errors of the the poorest should be tested on a small scale, in centrally planned system. Increases in the gmina where prices of agricultural produce are budget of local governments should be sought particularly low and local governments would through the development of private economic agree to simultaneous creation of marketplace activity in rural areas ratherthan through public development and introduction of food stamps economic activity. redeemable for all agricultural products. All rural organizations are currently under- goingan identity crisis. Despite thefactthatthe RESPONSIBIUTIES OF THE RURAL ACTORS Farmers Union, agricultural circles (such as those of rural housewives), and rural organiza- A dynamic rural development strategy requires tions officially have 1,200,000 members, have the cooperation of all the actors involved in the large assets, and count on an experienced countryside. This section outlines the main apparat, they lack authenticity and activism. responsibilities of the key actors in rural areas. Rural organizations tend tobe regressive rather The state is responsible for: than constructive. This attitude, related to the enormous difficulties of agriculture during the * creating a legal framework to provide social transition period, is characteristic ofthe National protection without perpetuatingunemployment Union of Farmers, agricultural circles and or- and to allow independent private businesses to ganizations,andalargefactionofruralSolidarity develop (almost 400,000 members in 2,000 communes). * ensuring budgetary support for training, A renewal of authentic rural organizations, extension, a guarantee fund, infrastructure and the goals of which would be not only to maintain social welfare a dialogue with the state and popularize infor- a creating a favorable environment for the mation on rural areas and agriculture for public socioeconomic development of the countryside. opinion, but also to take part in the promotion of progress, education and enterprise, is necessary After many years of investment in large-scale for the success of a policy of rural development. industry and city development, state policy The Church still plays an important role, not should make an about-face toward the agricul- only through its charitable action, but also tural sector, small- and medium-sized industry through various foundations - notably the located in rural areas, and a decentralized net- Water Foundation -in the development of in- work for commerce, transport, storage, handi- frastructure in the countryside. The Church's crafts and services. In economic terms, these agricultural committee envisages many train- policies would have the highest returns on in- ing and financing projects. In an initial stage, vestments and would contribute to a reduction training policy could use the network and expe- of unemployment, complete the process of riences of the Church committee for farmers, privatization and reactivate the economy. which has had an important educational role Local authorities are responsible for: during the martial law period. Finally, the rural community itself will play a * defining a development strategy at the local decisive role through social pressure, through level private initiative and through the transforma- * helping in the development of new economic tion of the hidden-economy activities into more activities and participating in social welfare formal activities. Social committees exist in policy many villages and collective work also remains * implementing a policy of sociocultural de- an important instrument for a program of rural velopment. development. 66 REsEARCH PROGRAM reforms must create favorable conditions and opportunities for all economic agents, including The national rural development program could the self-employed, and small and medium-size be facilitated and accelerated through research enterprises, and should avoid concentrating carried outinthree different areas:Wielkopolska economic initiative in the hands of the state, District (advanced agriculture); Kielce District local governments or other established institu- (small farms and part-time farmers); and East- tions. ern Border (depopulated and poor regions). In each of the chosen areas inhabited by about Endnotes 50,000 people, the program would include studying the constraints and opportunities for This annex was prepared by Maria Nowak development; training, with contribution from (Caisse centrale de cooperation 6conomique/ existing institutions; experimental develop- consultant, EC), assisted by Piotr Eberhardt mental work based on local resources and ini- (Institute of Geography and Land Policy), tiatives, financed by existing banks and funds; IzoslawFrenkelandMariaHalamska(Institute and conclusions and generalizations. of Rural and Agricultural Development), This program could be carried out with the Wladyslaw Lukasik (Council of Ministers), assistance of local self-governments. The main Stefan Malecki (Ministry of Rural Welfare), goal would be to create appropriate conditions Andrzej Pilichowski and Elzbieta Piotrowska for activities by private farmers and small en- (Institute of Rural Sociology, Lodz University), trepreneurs, without trying to replace them. and Jerzy Wilkin (Warsaw University). The history of rural development projects and programs all over the world shows how easily 1. The trend for the population in produc- they can be prey to bureaucracy and vanish tive age was decreasing - reaching a low level along with the funds which helped their emer- of 300,000 persons during 1986-1990-but will gence. What is at stake here are not projects of increase and reach 700,000 persons in 1991- this type but rather studies and actions from 1995, and up to a million in the next period. which general conclusions can be drawn. The team responsible for this program should con- 2. The most often cited example illustrat- sist of representatives of universities and re- ingthis model is the area of Bolognain northern search institutes and local representatives. Italy where an extensive mechanical and textile industry based on small flexible units has de- Concluding comments veloped over the past 30 years. Many small enterprises have been constituted by creating This annex is a first attempt at defining a rural narrowly specialized workshops with managers development strategy for Poland. We have who were trained in large plants. There are emphasized the necessity to base the strategy examples of this approach to creating small on the current reality and on human factors, production units in Poland. In the area of taking into account the demographic and psy- Konskie where the metallurgic industry has a chological features that are observed in rural 300-year long tradition, and where there are areas. We would like to stress that changes in three large metallurgic plants (foundries and the behavior and mentality of the rural popula- mechanical working plants) employing some tion willbe as critical to the success ofthe reform 5,000 workers, about 100 small fitting, me- process as changes in property rights and own- chanical, and pressing production units have ership. Finally, we would like to point out that been created in recent years. 67 Annex 3 Changes in food demand, January 1989 April 1990, and food demand projections This annex presents an analysis of the changes consumer subsidies in 1987) were in effect for in food consumption that have taken place in - milk and dairy products (40% of food Poland largely as a result ofthe liberalization of subsidies in 1987); agricultural markets and removal offood subsi- - meat, meat products and fish (27.5%); dies in 1989. The analysis is based on monthly - cereals (25.6%); Household Budget Survey estimates for Janu- - sugar; ary 1989 - April 1990 from the Central Statisti- - fats and oils. cal Office (see appendix on data sources). The overall subsidy rate for food (value of sub- The annex also presents food demand projec- sidy divided by value of retail sales) was 32.5 % tions for 1990 - 2000. These long term projec- in 1987. Potatoes, vegetables and fruits were tions are done, at constant prices, on the basis of not subject to state procurement and were not exogenously given income and population growth subsidized. rates, using income elasticities by income group * During the period January-July 1989, prices estimated for this annex. Two different sce- of most food products were not controlled but narios (high and low income growth) are pre- the system of subsidies (and meat rationing) sented. The final section of this annex summa- was still in operation. rizes the findings and discusses the projections. * On August 1, 1989, official fixed procure- ment prices for farm products and retail prices Policy reforms affecting food for food products were replaced by a system of consumption market-based prices. Subsidies on food prod- ucts and on industrial feed for animals were not Important policy reforms implemented in 1989 yet removed but were frozen (until their elimi- have affected prices and quantities of agricul- nation the following October). Between August tural products consumed by Polish households. and October, the increase in the retail prices of The reforms, carried out in several stages, are food was much higher than the increase in the briefly summarized in this section. producer prices of meat, dairy and crops deliv- ered to the food-processing industries. At the end of 1988, the state monopoly of * On October 1, 1989, all consumer subsidies procurement of grains and livestock products on food (with the exception of subsidies on low- was abolished. The food subsidy system, how- fat cottage cheese, 2% fat milk and baby food) ever, was still in place so that this reform hardly and the subsidy on concentrated feed were re- affected quantities and prices of food consumed moved.' by households. Subsidies on food (accounting * On January 1, 1990, the stabilization plan for 3.45% of GDP and making up 31% of total was implemented: it included many measures 69 thathave further affected agricultural markets. with reductions in real wages enforced through * First, a major devaluation of the exchange high marginal tax rates on wage increases; rate (ZI 9,500 per US$ versus an average 1989 * Fifth, reductions in subsidies of agricul- rate of Z1 1,400 per US$); tural inputs (to one quarter of the level of 1989) * Second, the elimination of the system of and an abolishment of the Price Equalization centrally allocated foreign exchange and the Fund for foreign trade and thus the elimination liberalization of all current account transac- of the corresponding subsidies. Other subsidies tions; the reduction of most barriers to export affecting agriculture, such as those for energy, and import. Many trade restrictions have been are still in place. removed although, in December 1989, a new customs law (consistent with GAIT) allowing As described in the following sections, these the imposition of quotas, licenses, surcharges reforms have considerably affected levels and and higher tariffs was adopted; patterns of income, expenditure and consump- * Third, sharp increases in nominal interest tion by households. rates (monthly rates of 36% in January, 20% in February, 10% in March, 8% in April, 5.5% in Changes in food prices May versus ayearly rate of approximately 100% for 1989); As a result of the measures summarized in the - Fourth, an anti-inflationary income policy, previous section and of other (policy- and non- Table 3.1 Monthly consumer price indices, January 1988 - April 190. Jan Feb March April May June July August Consumer price index 1988 128.40 138.20 143.20 146.00 147.90 149.40 150.90 152.20 Previous Year = 100 1989 183.20 176.20 175.50 176.10 178.20 180.70 184.40 198.10 1990 1,189.70 1,281.40 1,296.80 1,298.20 1988 103.70 117.20 105.70 107.10 102.40 102.90 103.20 100.60 Previous Month = 100 1989 111.00 107.90 108.10 109.80 107.20 106.10 109.50 139.50 1990 178.80 123.90 104.70 108.10 Consumer food price index 1988 123.40 136.00 142.30 144.30 145.70 146.10 146.50 146.90 Previous Year = 100 1989 164.20 154.10 152.20 155.10 159.20 162.20 166.60 191.20 1990 1,654.90 1,735.00 1,713.00 1,691.10 1988 101.70 123.00 106.40 103.80 101.90 102.30 100.80 97.70 Previous Month = 100 1989 105.70 108.00 108.10 114.40 109.80 104.30 107.10 180.40 1990 179.00 118.10 100.00 112A0 Sept. Oct, Nov. Dec. Jan. IDec. Consumer price index 1988 153.60 155.40 157.60 160.20 160.20 Previous Year = 100 1989 219.60 258.10 300.30 344.10 344.10 1988 102.80 102.60 103.80 104.90 Previous Month = 100 1989 134.40 154.80 :122.40 117.70 Consumer food price index 1988 147.50 148.00 148.80 150.10 150.10 Previous Year = 100 1989 227.90 290.50 353.20 412.60 412.60 1988 101.20 101.70 104.40 104.30 Previous Month = 100 1989 144.50 16S.10 117.40 111.60 Notes: 'Previous year' means corresponding period of previous year on accrual basis. Consumer price index is based on all goods and services. Consumer food price index is based on retail pnces of food items. Source Central Statistical Office, Informacja Statysbtyna, May 1990. 70 policy-related) factors, the official price index Table 3.3 Nominal (average monthly for food increased sharply after August 1989 per capita) income in 1-1990 and and at the beginning of 1990. Table 3.1 shows comparison with 1-89 and PV-89 the official indicesforretail prices of(1) all goods and services (CPI) and (2) food items for the Household Type ZL 7housand 1-89 = 100 IV-89 = 100 period January 1988-April 1990. Worker 396.60 821 172 The increase in retail prices of goods and Farmer/worker 387.30 837 140 services translates into higher costs of livingfor Farmer 340.06 860 110 Polish households: in the first quarter of 1990 (I- Retiree/pensioner 341.70 985 199 1990), the cost of living was 13-14 times higher than in the same quarter in 1989 and approxi- Changes in incomes mately two and a half times higher than in IV- 1989. Price increases have affected households Nominal income estimates calculated by house- differentially. ThisisshowninTable3.2forfour hold category on the basis of family budget different types of households: workers, farmer- surveys and national accounts data indicate workers, farmers, and pensioners. For farmer great differences in average per capita monthly and farmer-worker households, the index does income and in changes in average monthly in- not take into account the value of the food that come depending on the household category (see is produced on-farm and consumed by the Table 3.3). household. Compared with the same quarter one year ago (I-1989), average nominal income has grown most in pensioner households and least in worker households. This has reduced disparities in per capita income levels between the different types Table 3.2 Cost of living increase in of households. The relatively low growth of 1-1990, by type of household income in I-1990 as compared with IV-1989 in farm households, shown in Table 3.3, is due to I-1989 IV-1989 the production cycle: the lowest levels of farm Worker Households =100 =100 income in any year are always recorded during Total 1,319 236 the first quarter. Food 1,757 212 Retail consumer prices increased much more Alcoholic beverages 1,144 184 Nonfood products 1,022 259 than nomial icomes i I-1990 compared with Services 1,304 IV-1989. Price increases amounted to 248% causing an average decrease of about 29% in Farmer/Worker Households (*) purchasing power during the period. Total 1,351 248 Real incomes have declined by 30-37% be- Food 2,090 237 tween March 1989 and March 1990, depending Alcoholic beverages 1,139 188 on the type of household. In other words, the Nonfood products 1,076 271 Services 1,076 329 capacity of households to satisfy their needs at Services 1,2" 329 a level similar to 1-1989 has been limited to 63- Farmer Households(*) 70% (see Table 3.4). Total 1,341 254 Food 2,119 248 SOURCES OF HOUSEHOLD INCOMES Alcoholic beverages 1,138 189 Nonfood products 1,096 276 Changes in the structure of nominal income Services 1,254 317 have also been significant. There has been a Retiree/Pensioner Households reduction in the share of wages from 45.2% in I- Total 1,434 246 1989 to 39.1% in I- 1990 and an increase in social Food 1,850 218 security benefits from 13.3% to 19.4%, respec- Alcoholic beverages 1,138 184 tively (see Table 3.5). Nonfood products 1,049 284 Compared with 1-1989, there has been a de- Services 1,251 30 crease in the share of wages in total income in all Note: * = excluding faod fmn own farm types of households: in worker households from Soure: (GUS). 87.7 to83.6%, infarmer/workerhouseholdsfrom 71 Table 3.4 Real (average monthly per 56% to 52.8%, and in pensionerhouseholdsfrom capita) income in 1-1990 compared with I- 14.7% to 9.4%. By contrast, in all household 89 and IV-89 types, the importance of social benefits has increased - mainly as a result of the reevalua- 1-1989 IV-1989 tion of retirement benefits and an increase in Household Type =100 =100 social benefits for farmers. In 1-1990 social Worker 63 73 benefits amounted to 86.3% of pensionerhouse- Farmer/worker 64 57 holds'income, 14.9% offarmers', 14.5% offarmer- Farmer 66 44 workers'and 13.9% ofworkers'. This represents Retiree/pensioner 70 82 an increase of 5.9, 3.8,2.9 and 3.6 points, respec- tively, compared with I-1989. Table 3.5 Structure of nominal income, In the case of farm households, the share of 1-1989 and 1-1990 income from the farm in total income has fallen (in percent of total) from 87% in 1-1989 to approximately 81% in I- 1-1989 1-1990 1990. In farmer/worker households, the ratio had remained almost unchanged (about 31%). Total Income 100% 100% It is difficult to ascertain whether this is due to of which: changes in the terms of trade facing farmers or Wages 45.3% 39.1% to difficulties in valuing farm output duringthe Social benefits 13.3% 19.4% first quarter ofthe year (some GUS statisticians Revenue of private economy, except farming 12.4% 12.2% consider that incomes from the farm in 1-1990 Other incomes 29.0% 29.3% are underestimated by 20 to 30%). Table 3.6 Frequency distribution of SIZE DISTRIBUTION OF INCOME household per capita income in worker and pensioner households, December Preliminary information on the size distribu- 1989 and March 1990 tion of incomes in December 1989 and March (in percen) 1990 is available for workers and for pensioners (see Table 3.6). It must be noted, however, that Income Group Houseidd Type December is not a typical month either with (per capita Retiree / onthly income) WorRer Pensioner respect to incomes (because of wage premia payments, increases in retirement payments December 1989 and pensions, profit shares, awards and allow- 100,000 Zi - and less 0.8 3.9 ances) or with respect to spending (because of 100,001 - 150,000 7.3 15.6 the holiday season). 150,001 - 200,000 17.0 24.6 The Polish Institute of Labor and Social Af- 200,001 - 250,000 19.5 24.3 fairs calculates quarterly a poverty line called 250,001 - 300,000 17.3 16.2 the social minimum. It is based on a basket of 300,001 -400,000 9.0 4.1 goods considerednecessaryforsubsistence, with 400,001-450,000 6.2 1.8 an additional 10 percent for discretionary 450,001 - 500,000 3.5 0.9 household spending, and is adjusted quarterly 500,001 and over 6.8 1.6 to take inflation into account. The data pub- March 1990 lished by the Institute indicate an average per capita minimum income of ZI 150,000 for 1989.2 150,000 Zi - and less 0.4 1.3 Among workers, 8% of households were below 160,001- 200,000 2.2 4.3 this poverty line and among pensioners 19% of 200,001 - 250,000 5.9 8.0 250,001 - 350,000 21.4 25.7 households. Considering that the increase in 350,001 -450,000 23.0 27.0 consumer prices over the December-March pe- 450,001 - 550,000 18.5 18.1 riod was 132%, the level ofthe minimum income 550,001 -660,000 12.3 7.8 for March 1990 may be taken at ZI 300,000 per 750,001 850,000 .6 41.7 capita. Using ZI 300,000 as a poverty line, one 850,001 - and over 6.2 2.1 may consider that 30% of worker households were below this level and 39% among pensioner NoLe P,iminary estimat. households in March 1990. 72 Changes in expenditure patterns comparison with IV-1989, by 30-40% (see Table 3.7). FOOD AND NONFOOD EXPENDITURES Important changes in the structure of house- hold expenditures have been forced primarily It is estimated that, in real terms, total house- by the higher increase in food prices compared hold expenditures in 1-1990 have decreased by with nonfood prices (especiallyhousingwhich is 33% with respect to the previous year and, in subsidized). Inflation-driven purchases ofgoods and hoarding, which was observed during the hyperinflation of 1989,has stopped and the high prices of goods and services caused some Table 3.7 Real per capita expenditures households to forego purchases or defer them to in 1-1990 the future. Household 7~ype 1-1989 141989 The change in the structure of household 100 = expenditures and average monthly expenditures during 1-1990 are presented, by type of house- Worker 65 69 hold, in Table 3.8 below. Nominal average per Farmer/worker 67 61 capita expenditures by households in I-1990 Farmer 68 54 increased almost 8-fold compared to the previ- Retireelpensioner 67 78 ous year, with food expenditures increasing Table 3.8 Household expenditures for n2ajor products, per capita, in I-190 Retireel Expenditures Worker Farmer/Worker Farmer Pensioners 1-1990, average monthly expenditures in Zi V000 Total 339.6 311.5 344.1 312.0 Yearly increase a-1989 - 100) Total 853 873 883 936 of which: Food 1,166 1,177 1,253 1,200 Clothing and shoes 489 610 500 529 Housing 802 789 706 769 Fuel/electric power and heating 959 733 630 940 Personal hygiene and health protection 716 771 824 771 Culture, education,upbringing, sport, tourism and others 650 749 507 559 Transport and telecommunications 850 1,014 1,141 986 1-1990 structure of expenditures (percent of total) Food 51.9 50.6 52.4 60.3 Clothing and shoes 10.9 11.1 9.0 8.4 Housing 9.6 12.0 10.5 8.7 Fuel/electric power and heating 2.8 2.9 3.2 6.0 Personal hygiene and health protection 2.9 2.2 2.0 3.5 Culture, education, upbringing, sport, tourism and others 6.7 4.3 3.4 3.7 Transport and telecommunications 5.3 6.4 8.0 4.2 1-1989 structure of expenditures (percent of total) Food 38.0 37.5 36.9 47.0 Clothing and shoes 19.0 19.0 15.9 14.8 Housing 10.2 13.3 13.2 10.6 Fuel/electric power and heating 2.5 3.5 4.4 6.0 Personal hygiene and health protection 3.5 2.4 2.1 4.2 Culture, education, upbringing, sport, tourism and others 8.7 5.0 5.9 6.2 Transport and telecommunications 6.4 6.5 6.2 4.0 73 Figure 3.1 Food share in total expenditures, November - (percent of total) 70 60 20 40 Nov Dec Jan lFeb >'ti_4 i r 30 Workers Retirees Farm er much more than othe-r products and services. (milk, butle~ &... Ie-.. ;:.Snd o-........- -llbeefO Changes in the share of food in total expendi- over thie pastr ; <- e:n tures by household type for the 6-month period November 1989 - April 1990 are sho Jan in Feg- Ch g- ia; ption ure 3.1. As a result, the structure of expenditures Ds a .Zi. FIRST compared with I-1989 has changed greatly with QUARTER O]P the food share in tne budget increasing by 13- 16%. Expenditures on nonfood products and Average .-onrri' - n ...ntion of services (clothing, culture, education, upbring- basic food i-e-s s giv. en in ing, sport, tourism and others) have been re- Table 3.1. hly con- duced correspondingly (see Table 3.8). sumption i e --e given in Table SA.L - T 4- E S8 ? sump- CHANGES IN FOOD BUDGET SEARES tion in nF 1 an d re- fer, properkY, Y 7 -uisitions Table 3.9 shows monthly changes in the budget of food and notto c -'' House- share (expenditures by food item in percent of holds partic:tp tig g e e- I ou*, a ques- total food expenditures) of an average house- tionnar: is quan- hold for 17 food groups for the period January tities purclas d; -.on from 1989 to April 1990. Meat and dairy products own produnc,21211..'; - A.luat-cna;fod products alone account for nearly half of household food acquired awjiltout 0Pnrodduction or expenditures. Figures3.2and3.3 showrmonthly gifts) are aluedi a;! p -- ,e e recorded changes in the budget share for dairy products for the sa. ie m i u e ihe differ- 74 Table 3.9 Food expenditure shares, January 1989 - April 1990. (percent of total food expenditures) 1989 I II In IV v VI VII VIII ix X XI XII Average Cereals 6.22 6.12 4.97 5.99 5.74 5.16 4.55 8.24 5.62 6.64 8.08 7.47 6.23 Potatoes 2.85 3.08 2.50 3.25 2.96 4.28 4.70 6.29 6.36 5.87 1.99 1.23 3.78 Pulses 0.48 0.46 0.33 0.31 0.23 0.12 0.32 0.42 0.22 0.20 0.24 0.25 0.30 Vegetables 6.56 6.97 7.83 11.38 16.00 15.89 17.52 23.38 8.89 6.20 4.57 4.29 10.79 Fruit and products 10.40 8.52 7.64 5.67 4.28 12.19 14.20 15.71 6.18 3.84 4.90 6.71 8.35 Meat and products 29.17 29.65 33.21 29.35 28.50 24.72 22.49 50.69 39.32 39.61 39.62 38.24 33.71 - Pork 7.52 7.45 8.75 7.60 7.46 6.17 5.94 10.45 10.41 10.09 9.89 10.32 8.51 - Beef 2.35 2.58 2.03 2.46 2.33 1.91 1.87 3.51 3.57 3.42 3.48 2.70 2.68 - Poultry 3.49 3.79 3.86 4.16 4.20 4.13 3.99 4.87 4.21 4.17 3.76 3.05 3.97 Fish and products 2.55 3.21 2.77 2.34 2.03 1.71 1A5 2.11 1A3 1.52 1.79 3.71 2.22 Butter 4.80 4.50 3.99 4.53 4.14 3.53 3.27 7.55 6.74 8.73 7.02 4.76 5.30 Animal fat 0.98 0.95 0.81 0.81 0.76 0.69 0.72 1.67 1.53 1.95 2.09 1.56 1.21 Vegetable oils 1.29 1.33 1.32 1.38 1.15 0.95 0.88 1.33 1.26 1.64 2.10 2.09 1.39 Eggs 5.78 5.60 5.33 4.77 4.34 3.97 4.58 6.95 3.69 3.29 3.62 4.06 4.66 Mfilk 15.23 15.36 13.67 16.96 17.77 16.33 13.15 22.01 13.25 14.92 14.69 11.95 15.44 Cheese 3.05 2.92 2.30 2.53 2.41 2.04 1.85 4.22 3.36 3.62 3.47 2.41 2.85 Sugar 8.02 8.36 8.96 9.00 8.36 8.33 7.84 9.91 4.55 6.17 8.42 10.25 8.18 All Food Items 39.11 39.91 39.97 38.20 39.33 40.95 44.41 62.33 52.27 55.92 51.66 52.92 45.58 (share of total expenditures) 1990 Average Average I I III IV 1990 (I-IV) 1989 (I-IV) Cereals 12.64 13.76 12.96 10.06 12.35 5.82 Potatoes 1.54 1.55 1.42 1.10 1.40 2.92 Pulses 0.25 0.27 0.24 0.18 0.24 0.39 Vegetables 3.02 3.35 3.58 4.35 3.57 8.19 Fruit and products 4.40 4.59 5.14 4.24 4.59 8.06 Meat and products 38.97 39.37 40.95 47.82 41.78 30.34 - Pork 10.16 9.86 9.86 11.85 10.43 7.83 - Beef 3.72 4.04 4.52 3.28 3.89 2.35 - Poultry 3.47 3.39 3.46 4.31 3.66 3.82 Fish and products 1.68 2.31 2.20 1.71 1.98 2.72 Butter 4.75 3.59 3.25 2.80 3.60 4.46 Animal fat 2.12 2.16 1.90 1.60 1.95 0.89 Vegetable oils 2.39 2.00 1.76 1.52 1.92 1.33 Eggs 4.34 3.45 2.73 2.96 3.37 5.37 Milk 14.74 5.30 16.09 16.17 13.07 15.31 Cheese 3.14 3.26 3.21 2.23 2.96 2.70 Sugar 8.50 7.48 7.30 3.73 6.75 8.59 All Food Items 58.83 53.57 50.14 55.34 54.47 39.30 (share of total expenditures) 75 Figure 3.2 Share of dairy in food expenditures (January 1989 - April 1990) Percent 24 20 16 12 8 4 0 I II II V V VI VII VIII IX X XI XII I II III IV Month Milk -- Butter Cheese Figure 3.3 Share of meat in food expenditures (January 1989 - April 1990) Percent 60 50 40 30 20 10 __- - - - -- - 0 I II m IV V V VI VI IX X xI XII I II III IV Month Meat products -- Pork Beef 76 Table 3.10 Average monthly per capita Table 3.11 Changes in average monthly consumption of basic food products in per capita consumption, 1-1990 compared 1-1990 with 1-1989 (1-1989=100) Household type Household type Product Farmer/ Retireel Farmer/ Retireel (in kg) Worker Farmer Worker Pensioner Product Worker Farmer Worker Pensioner Flour 1.10 2.20 2.46 1.82 Flour 92 105 102 89 Bread 6.97 7.90 8.38 8.26 Bread 102 97 97 101 Noodles 0.14 0.07 0.08 0.20 Noodles 93 70 73 87 Rice and Rice and cereal flakes 0.29 0.47 0.49 0.66 cereal flakes 73 71 70 73 Potatoes 4.46 9.58 10.90 6.59 Potatoes 110 97 101 113 Pulses, Pulses, vegetables, vegetables, mushrooms mushrooms and processed and processed products 3.25 4.42 5.03 4.72 products 93 77 102 94 Fruit and Fruit and processed fruit 2.60 1.75 1.85 2.93 processed fruit 94 84 88 87 Meat and Meat and processed meat 4.79 4.96 6.18 5.64 processed meat 94 91 97 100 Meat 2.62 3.11 4.16 3.28 Meat 93 93 101 99 Processed meat 2.17 1.85 2.02 2.36 Processed meat 94 88 71 73 Fish and Fish and processed fish 0.39 0.23 0.49 processed fish 78 70 71 73 Pats 1.47 1.53 1.80 2.02 Fats 94 92 96 94 of which: of which: Butter 0.67 0.59 0.60 0.78 Butter 93 97 100 94 Animal fat 0.37 0.55 0.79 0.59 Animal fat 106 95 101 105 Milk 7.11 10.10 12.78 11.44 Milk 95 103 108 102 Cream Cream and sour cream 0.43 0.72 0.89 0.58 and sour cream 77 92 100 72 Cheese 0.80 0.86 0.91 1.09 Cheese 81 90 95 78 Eggs 15.04 19.23 22.92 20.02 Eggs 86 92 97 88 Sugar 1.47 1.78 2.00 2.06 Sugar 77 73 72 77 ence between acquisition and consumption is sumption ofpotatoes and animalfats, andfarmer only significant in the case of nonperishable, households offlour and milk. Farm households storable items such as potatoes and we have have a higher per capita consumption of flour, therefore used the term 'consumption' through- potatoes, meat, poultry and cream (low fat and out this annex. normal). Worker and pensioner households Generally, in all types of households - but consume more pasta, fruit and processed fruit, especially in worker households (with or with- processed meat and fish (including processed out additional farm income) - a decrease in fish). consumption for most food products can be ob- In order to compare per capita food quantities served. The most significant decrease in con- consumedamongdifferenthouseholdtypes, one sumption is in sugar, fish, and rice and cereal has to consider demographic differences be- flakes. Worker and retiree households have tween groups. Worker households generally also greatly reduced their consumption of dairy have more children than farner or farmer- products (cream and cheese). Fanner house- workerhouseholds. Pensionerhouseholds con- holds have greatly reduced their consumption of sist mostly of two elderly adults. To take these pasta. Compared with l-1989, workerand pen- demographic differences into account, Table 3.12 sioner households have the most increased con- shows average monthly consumption recalcu- 77 Table 3.12 Average monthly consump- Table 3.13 Nutritional requirements tion of basic food products corrected for (monthly per capita, adult equivalent, in kg) differences in consumption units, in I-1990 Minimum Recommended Cereals 12A7 9.73 Household type of which: Product Farmer/ Retiree/ Bread (mixed) 13.38 10.65 (in kg) Worker Farmer Worker Pensioner Flour/pasta 1.37 1.22 Other cereals 1.06 0.76 Flour 1.10 2.20 2.46 1.82 Milk and dai:ry 18.25 31.94 Flour 1.38 2.66 2.98 2.06 of which: Bread 8.71 9.56 10.14 9.33 Milk 9.13 15.21 Noodles 0.18 0.08 0.10 0.23 Cottage cheese 0.76 1.06 Rice and Cheese 0.46 0.91 cereal flakes 0.36 0.57 0.59 0.75 Eggs (number) 7.5 23 Potatoes 5.58 11.59 13.19 7.45 Meat and fish 3.65 5.32 Pulses, of which: vegetables, Meat 2.13 2.89 mushrooms Sausages 0.61 0.91 and processed Fish 0.76 1.22 products 4.06 5.35 6.09 5.33 Butter 0.61 0.91 Fruit and Vegetable oils processed fruit 3.25 2.12 2.24 3.31 Soybean/sunflower oil 0.15 0.15 Meat and Potatoes 13.69 9.13 processed meat 5.99 6.00 7.48 6.37 Fruits and vegetables Meat 3.28 3.76 5.03 3.71 Vitamin C-rich 5.78 7.60 Processed meat 2.71 2.24 2.45 2.66 Carotine-rich 3.65 4.56 Fish and Dry Pulses 0.37 0.09 processed fish 0.49 0.28 0.36 0.55 Sugar 1.52 1.98 Fats 1.84 1.86 2.18 2.28 of which: Note: The figures apply to a male adult, 21-64 years, for Butter 0.48 0.71 0.72 0.88 ~~~~moderately heavy work conditions. Butter 0.48 0.71 0.72 0.88 mSoudre: Instytut Zywnosci i Zywienia, 1987. Animal fat 0.46 0.67 0.96 0.67 Milk 8.89 12.22 15.46 12.93 Cream and sour cream 0.54 0.87 1.08 0.66 Cheese 1.00 1.04 1.10 1.23 relative priices of 1989-90, it is likely that the Eggs 18.80 23.27 27.70 17.72 same dietary requirements would translate to- Sugar 1.84 2.15 2.42 2.33 day into other combinations of food intakes. MONTHLY CHANGES IN FOOD CONSUMPTION, lated at the level of so-called consumption units JANUARY 1989 - APRIL 1990 - that is, using different demographic weights to account for the population structure. Table 3.14 shows monthly changes in average per capita consumption. This series represents Nutritional norms. The data in Table 3.12 an average for the population (all household above can be compared with normative informa- types) and reflects two influences: the price tion on minimum food requirements published changes that have taken place in 1989-90 and in Poland. The Instytut Zywnosci i Zywienia the pattern of seasonality of consumption usu- (Prof. Szcygiel) published in 1987 a list of ally observed in Poland. dietary requirements. The data in Table 3.13 Seasonality is linked to several factors: ab- below presents both the minimum requirements sence of significant amounts of imports, climate (minimum levels required for an adult's normal (for vegetables and fruits, for instance), and work) and the target requirements (recom- seasonality of production (due to the poor infra- mended dietary allowances) published by IZiZ. structure - cooling, storing facilities - in the The kg figures are obtained by translating re- food-processing industry). The level of income quired levels of energy (2,630 caVday) and nutri- also affects the seasonality of purchases: poor ents (minerals and vitamins) into food intake at households purchase nonperishable food (for prices prevailing in 1987. Given the changes in example, potatoes in the last quarter of the 78 year) when i . ies -tore it at home for The long-term forecasts that are presented in the rest of i- -. c-> a,r households are less this section assume that the main factor that likely to exhib w i.i"avior. Figures 3.4-3.7 will influence consumption in the future is the show the pate, f- s onality of purchases of level of income and that other factors (such as milk, cheese, e- l . s. E . Fotatoes. changes in prices, in the distribution of income or in family size) do not affect food consumption SELF- SUF7F -:UeH-n'1OLDS in a systematic (nonrandom) way. They are therefore tentative and must be interpreted Table 3.15 ow30 U7 e cA' tot al per capita with caution. In this section, we describe the consumptiono btat rTigJalaes from the farm's models used for the projections and the results own produa, -. oEC-!nonth period, com- obtained. The implications of this exercise from paring uthe pe n ' 'S £''.-,.gFst 1i988 to March 1989 the point of view of an agricultural strategy are (before th e fcd ep 3 Bc reases) with the period presented in the following section. August 1-? 33. The share of own Long term changes in demand for food were co:nsunpt';'S r '.. xas ready high in 1988/ calculated, at constant prices, using exogenous 89, has iner2ar3e d'b;o a.rJ.-ost all categories of growth rates of income and population. Two goods. Ito sothat, according scenarios are presented. The high income growth to the s1rh. s.:sebolds have a high scenario assumes that real income will decline self-su9Li&ie. zv T-,:" ^ !?, by 14% in 1990 and then grow at an annual rate of 5% during tne 1991-2000 period, with popu- Foowd d e .:. .r 990-2000 lation growing at a rate of 0.6% in 1990-92 and 0.8% in 1993-2000 (with a 1989 population of 38 Food de-iern-ni ,, u ;Ja &sLar iteem depends million).4 The low income growth scenario as- mainly on %-'. '" 1. o!e price of that item; sumes that real income will decline by 20% in (2) thke pri.ce^ ., ori n iitems; (3) the leve! of 1990, 5% in 1991, stagnate in 1992 (0%), and per capita -4; t population. In a then grow at a rate of 3% in real terms during mrlarket econ>. rt ~- --; i i , pr Jections for food the 1993-2000 period." Population growth as- demand wvo-i - - hat one sta-rt from an sumptions are the same as those of the high equilibri -x^i oi m i- rketforaparticu- income scenario. Base levels of per capita con- lar food pro , e te the grow,Ith in sumption are those of 1989 presented in Table demand by 'U n iYe respective elastici- 3,14. ties (own-> 'e .r ; cs, and income) by Incomeelasticitieswereestimatedfromcross- exogenou-.s pr. cc -; nr.',es; income, and sectional data for the last quarter of 1989 (that populatior . is, when markets for food were liberalized).6 The At present, 7i- l -- Žs mar'kets are not in elasticities used for the projections are shown in an equil- . The n-_.PaPolish economy is Table 3.16. We use these estimates in the currentlyin aten c osticiies. The long-term projections are presented in 79 Tables 3.17-18 (high-income scenario) andTables Summary of findings 3.19-20 (low-income scenario). Tables 3.18 and 3.20 present the projections on a per capita SHORT-TERM CHANGES IN HOUSEHOLD basis. Tables 3.20 and 3.22 present projections E END1 TURE AND CONSUMPON PATFERNS of food demand for the whole population. (Note that these figures refer only to demand for Households have experienced a sharp reduction human consumption and do notinclude demand in real income as a result of the removal of food for feed.) Finally, Tables 3.21-22 show annual subsidies and the liberalization of food prices, growth of food demand, for each scenario. but their overall consumption of food, in quan- Table 3.14 Food consumption, January 1989 - April 1990 (in kilograms per capita) 1989 1989 1989 I II III IV V VI VII VIII IX X Xl XII Total Average Cereals 7.99 7.56 8.23 8.04 7.98 8.31 8.27 7.55 7.80 7.89 7A7 8.08 95.2 7.93 Potatoes 5.66 5.48 5.75 6A9 6.21 6.24 7.54 8.35 19.83 24.88 7.97 5.64 110.0 9.17 Pulses 0.11 0.09 0.09 0.07 0.06 0.04 0.13 0.13 0.13 0.12 0.11 0.11 1.2 0.10 Vegetables 3.85 3.73 4.11 3.19 3.51 4.91 6.83 9.32 8.10 8.31 4.94 4.51 65.3 5.44 Fruits and fruit products 2.88 2.57 2.69 1.66 1.12 3.92 5.07 4.25 4.55 3.02 2.53 2.93 37.2 3.10 Meat and meat products 4.97 4.94 6.01 5.11 5.17 5.03 4.97 4.79 5.30 5.18 5.26 6.37 63.1 5.26 of which: Pork 1.25 1.23 1.69 1.34 1.38 1.31 1.32 1.21 1.27 1.22 1.24 2.00 16.5 1.37 Beef 0.50 0.52 0.51 0.51 0.51 0A7 0.50 0.47 0.49 0A7 0.53 0.57 6.1 0.50 Poultry 0.70 0.71 0.03 0.78 0.76 0.79 0.81 0.83 0.93 0.85 0.73 0.82 8.7 0.73 Fish and fish products 0.42 0.50 0.58 0.41 0.37 0.35 0.33 0.29 0.32 0.38 0.39 1.03 5.4 OA5 Butter 0.71 0.66 0.75 0.74 0.76 0.81 0.87 0.73 0.79 0.65 0.65 0.70 8.8 0.74 Animal fat 0.47 0.46 OAS 0.41 0.40 0.44 0.50 0.45 0.48 0.50 0A9 0.49 5.5 0.46 Vegetable oil 0.51 0.50 0.60 0.51 0.49 OA9 0.52 0.41 OA9 0.55 0.54 0.63 6.2 0.52 Eggs (number) 17.30 17.71 23.45 19.39 19.39 18.27 16.51 16.12 16.73 16.11 5.27 18.25 204.5 17.04 Milk (liters) 13.80 13.27 14.67 14.64 15.71 16.19 15.18 14.27 14.34 13.63 13.16 12.78 171.6 14.30 Cheese 1.18 1.15 1.29 1.20 1.24 1.26 1.21 1.06 1.09 1.03 1.00 0.97 13.6 1.14 Sugar 2.68 2.39 3.05 3.34 2.90 3.68 3AO 2A1 2.27 2.27 2.26 3A1 34.0 2.84 1990 Average Average I II III IV I-IV 1990 I-IV 1989 Difference Cereals 7.92 7.05 7.86 7.50 7.58 7.95 -4.7% Potatoes 5.91 5.72 6.33 6.84 6.20 5.85 6.1% Pulses 0.11 0.10 0.10 0.09 0.10 0.09 11.1% Vegetables 3.63 3.59 3.72 3.73 3.67 3.72 -1.4% Fruits and fruit products 2.48 2A3 2.56 1.82 2.32 2A5 -5.2% Meat and meat products 4.78 4.87 5.48 5.87 5.25 5.26 -0.1% of which: Pork 1.18 1.17 1.27 1.54 1.29 1.38 -6.4% Beef 0.53 0.61 0.72 0.54 0.60 0.51 17.6% Poultry 0.67 0.62 0.72 0.87 0.72 0.56 29.7% Fish and fish products 0.34 0.40 0.41 0.34 0.37 0.48 -22.0% Butter 0.66 0.63 0.73 0.76 0.70 0.72 -2.8% Animal fat 0.47 0.44 0.46 OA1 OA5 OA5 -0.6% Vegetable oil 0.51 OA1 0.47 0.50 0.47 0.53 -10.8% Eggs (number) 15.80 16.60 18.80 21.70 18.23 19A6 -6.4% Milk (liters) 12.67 11.97 13.33 12.09 12.52 14.10 -11.2% Cheese 0.97 0.93 1.05 0.87 0.95 1.20 -20.6% Sugar 2.28 1.68 2.03 1.87 1.96 2.86 -31.4% 80 Table 3.15 Self-sufficiency ratios, August 88 - March 89 and August 89 - March 90 (own production as a percentage of per capita consumption) Farmer households Worker households Households 1988/89 1989190 1988189 1989/90 Cereals 13.7 32.3 1.3 1.9 Potatoes 99.2 97.9 28.1 29.0 Pulses 92.0 90.7 41.3 41.8 Vegetables (fresh and processed) 81.5 83.1 35.5 37.9 Fruits (fresh and processed) 77.0 72.8 24.0 22.3 Meat and meat products 72.9 73.8 9.6 11.0 Fish and fish products 0.9 1.0 1.2 0.5 Butter 9.9 18.6 0.3 1.1 Animal fat 57.5 62.7 7.8 8.4 Vegetable oils 1.2 0.0 0.0 0.0 Eggs 97.8 98.4 28.3 30.2 Milk and dairy (except butter and cheese) 93.1 94.3 11.0 11.2 Cheese 35.2 51.4 0.9 1.2 Sugar and sweets 0.0 0.0 0.3 0.6 tity terms, has not declined as drastically as 17.6%, now representing only 2.3% of expendi- previously reported. While real incomes have tures (compared with 3.9% a year ago). Poultry declined by 30-40% - depending on household consumption has increased by 30% and repre- type - in the first quarter of 1990 (I-1990) sents 3.8% of expenditures. compared with I-1989, consumption has de- * Consumption of cereals in various forms clined on average by 10-15%. The most signifi- (bread, flour, and the like) has declined by 4.7% cant decline in consumption has been observed and represents 5.8% of expenditures compared in sugar (31%) which accounts for 8.6% of aver- with 12.3% a year ago. age household expenditures at 1990 prices. In * Consumption ofpotatoes, which in Poland is terms of expenditures, however, profound not an inferior product,7 has increased by 6% changes took place over the past year. On and represents 2.9% of expenditures (compared average, households spent 55% of their income with 1.4% a year ago). on food in January-April 1990, compared with * Consumption offruits and vegetables, both 39% lastyear. Pensioners spent as much as 65% fresh and processed, has fallen by 5.2% and of their income on food. More than half (54%) of 1.4%, respectively. They represent now 8.0% food expenditures go to meat and dairy, on and 8.2% of expenditures, compared with 4.6% average, compared with 45% last year. and 3.6% respectively a year ago.8 * Consumption of dairy products has been The fall in household demand for most food seriously affected: milk (15.3% of expenditures, items is lower than commonly thought (and compared with 13.1% a year ago) has fallen by reported in newspapers). This is due to two 11.2%; cheese (2.7% of expenditures, compared factors. First, to the fact that households had with 3.0% a year ago) by 20.6%; but butter hoarded and bought nonperishable food before consumption (4.5% of expenditures, compared the price increases of October 1989. Second, with 3.6%) has fallen by only 2.8%. households have reduced their nonfood expen- * Consumption of meat and meat products ditures (such as clothing, education, and (representing30.3%oftotalhouseholdexpendi- durables) and deferred those expenses to the tures), overall, has not been affected by price future. Households have restructured their changes (fall of 0.1% in consumption). But expenditures according to relative price changes relative price changes have led households to but have attempted to maintain approximately substitute cheaper products: consumption of the same food consumption level as in the past. fresh pork has fallen by 6.4% and represents In macroeconomic terms, households have be- now 7.8% of expenditures (10.3% a year ago), haved overthe pastyear as ifthey adjusted their while fresh beef consumption has increased by consumption pattern to a lesser permanent in- 81 Figure 3A Monthly changes in milk Figure 3.5 Monthly changes in butter consumption consumption (liters per capita, per month, January 89-April 1990) (kg per capita per month, January 89-April 1990) 17 Iicapita 0.9Kgcapita 16 0.85 15 0.8 14 0.75 13 ~~~~~~~~~~~~~~~~0.7 IV 12 f V9 o.s: \ \ _ 1 1 0.6 - I IIIII IV V VI VII VIlII IX X Xi XII I 11 III IV V VIVi Vill IX X Xi XII Month Month 1989 -1990 -1989 -1990 Figure 3.6 Monthly changes in cereals Figure 3.7 Monthly changes in potatoes consumption consumption (kg per capita per month, January 89 - April 1990) (kg per capitar per month, January 89- April 1990) Kg/capita Kg/capita 8.4 25 8.2 23 2 1 8 19 7.8 ~~~~~~~~~~~~~17 15 13 7 .4 11 1 ~~~~~~~~~~~~~9 7.2 1 ~~~~~~~~~~~~~7 7 L 5 I IIIII IV V VIVIVl iii IX X Xi XII I II IV V VI VIl VIIIix x xiXII Month Month e1989 1990 1989 - 1990 82 Table 3.16 Income elasticities used for long-term projections A. High-income scenario 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Income level 1989=100 86.0 90.3 94.8 99.6 104.5 109.8 116.3 121.0 127.1 133.4 140.1 Flour 0.13 0.12 0.11 0.11 0.10 0.10 0.09 0.09 0.08 0.08 0.08 Bread 0.10 0.10 0.09 0.09 0.08 0.08 0.08 0.07 0.07 0.07 0.06 Other cereals 0.18 0.18 0.17 0.16 0.15 0.14 0.13 0.13 0.12 0.12 0.11 Potatoes 0.28 0.27 0.26 0.25 0.23 0.22 0.21 0.20 0.19 0.19 0.18 Pulses and vegetables 0.25 0.24 0.23 0.22 0.20 0.20 0.19 0.18 0.17 0.16 0.16 Fruits and fruit products 0.28 0.26 0.25 0.24 0.22 0.21 0.20 0.19 0.19 0.18 0.17 Meat and meat products 0.23 0.22 0.20 0.19 0.18 0.17 0.17 0.16 0.15 0.15 0.14 Pork 0.35 0.34 0.32 0.30 0.29 0.27 0.26 0.25 0.24 0.23 0.22 Beef 0.11 0.11 0.10 0.10 0.09 0.09 0.08 0.08 0.08 0.07 0.07 Poultry 0.26 0.24 0.23 0.22 0.21 0.20 0.19 0.18 0.17 0.17 0.16 Fish and fish products 0.33 0.31 0.30 0.28 0.26 0.25 0.24 0.23 0.22 0.21 0.20 Total fats 0.22 0.21 0.20 0.19 0.18 0.17 0.16 0.15 0.15 0.14 0.13 Animal fat 0.17 0.16 0.15 0.15 0.14 0.13 0.13 0.12 0.11 0.11 0.11 Vegetable oil 0.31 0.30 0.28 0.27 0.25 0.24 0.23 0.22 0.21 0.20 0.19 Butter 0.18 0.17 0.16 0.15 0.14 0.14 0.13 0.12 0.12 0.11 0.11 Milk 0.09 0.09 0.08 0.08 0.07 0.07 0.07 0.06 0.06 0.06 0.06 Cheese 0.19 0.18 0.17 0.16 0.15 0.14 0.14 0.13 0.12 0.12 0.11 Eggs 0.20 0.19 0.18 0.17 0.16 0.15 0.15 0.14 0.13 0.13 0.12 Sugar 0.16 0.15 0.14 0.14 0.13 0.12 0.12 0.11 0.11 0.10 0.10 B. Low-income scenario 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Income level 1989=100 80.0 76.0 76.0 78.3 80.6 83.0 85.5 88.1 90.7 93.5 96.3 Flour 0.14 0.14 0.14 0.14 0.14 0.13 0.13 0.12 0.12 0.11 0.11 Bread 0.11 0.12 0.12 0.12 0.11 0.11 0.11 0.10 0.10 0.09 0.09 Other cereals 0.20 0.21 0.21 0.20 0.20 0.19 0.19 0.18 0.17 0.16 0.16 Potatoes 0.31 0.32 0.32 0.32 0.31 0.30 0.29 0.28 0.27 0.25 0.25 Pulses and vegetables 0.28 0.29 0.29 0.28 0.27 0.26 0.26 0.25 0.24 0.22 0.22 Fruits and fruit products 0.30 0.32 0.32 0.31 0.30 0.29 0.28 0.27 0.26 0.24 0.24 Meat and meat products 0.24 0.26 0.26 0.25 0.24 0.24 0.23 0.22 0.21 0.20 0.19 Pork 0.38 0.40 OAO 0.39 0.38 0.37 0.36 0.34 0.34 0.31 0.31 Beef 0.12 0.13 0.13 0.13 0.12 0.12 0.12 0.11 0.11 0.10 0.10 Poultry 0.28 0.29 0.29 0.28 0.28 0.27 0.26 0.25 0.24 0.23 0.22 Fish and fish products 0.35 0.37 0.37 0.36 0.35 0.34 0.33 0.32 0.31 0.29 0.28 Total fats 0.24 0.25 0.25 0.24 0.23 0.23 0.22 0.21 0.21 0.19 0.19 Animal fat 0.19 0.19 0.19 0.19 0.18 0.18 0.17 0.17 0.16 0.15 0.15 Vegetable oil 0.34 0.36 0.36 0.35 0.34 0.33 0.32 0.31 0.30 0.28 0.27 Butter 0.19 0.20 0.20 0.20 0.19 0.18 0.18 0.17 0.17 0.16 0.15 Milk 0.10 0.10 0.10 0.10 0.10 0.09 0.09 0.09 0.09 0.08 0.08 Cheese 0.20 0.21 0.21 0.21 0.20 0.19 0.19 0.18 0.18 0.16 0.16 Eggs 0.22 0.23 0.23 0.22 0.21 0.21 0.20 0.19 0.19 0.17 0.17 Sugar 0.17 0.18 0.18 0.18 0.17 0.17 0.16 0.16 0.15 0.14 0.14 Sour= Computed from fourth quarter 1989 Household Budget Survey data. 83 Table 3.17 Long-term projections: Per capita food consumption (high-growth scenario) (in kg) 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Assumptions Per capita income growth -14% 5% 5% 5% 5% 5% 5% 5% 5% 5% 5% Projected consumption Flour (kg) 15.60 15.81 15.91 16.01 16.12 16.23 16.30 16.37 16.45 16.50 16.56 16.61 Bread (kg) 83.10 83.48 83.91 84.34 84.79 85.25 85.56 85.88 86.22 86.45 86.68 86.92 Other cereals (kg) 4.68 4.75 4.79 4.84 4.88 4.93 4.96 4.99 5.03 5.05 5.08 5.10 Potatoes (kg) 110.04 107.52 108.93 110.32 111.81 113.33 114.48 115.69 116.98 117.82 118.69 119.62 Pulses and vegetables (kg) 65.28 65.44 66.24 67.04 67.89 68.77 69.38 70.03 70.71 71.16 71.63 72.12 Fruits and fruit products (kg) 37.20 37.19 37.68 38.18 38.71 39.25 39.63 40.04 40.47 40.75 41.04 41.35 Meat and meat products (kg) 63.12 62.74 63.41 64.08 64.79 65.52 66.04 66.59 67.17 67.55 67.95 68.36 Pork (kg) 16.44 16.16 16.42 16.69 16.98 17.27 17.49 17.72 17.96 18.12 18.29 18.46 Beef (kg) 6.00 5.97 6.01 6.04 6.07 6.10 6.13 6.16 6.18 6.20 6.22 6.24 Poultry (kg) 8.76 8.69 8.79 8.90 9.01 9.13 9.21 9.30 9.39 9.45 9.51 9.58 Fish and fish products (kg) 5.40 5.33 5.41 5.49 5.58 5.67 5.73 5.80 5.87 5.92 5.97 6.02 Total fats (kg) 20.64 20.53 20.74 20.95 21.17 21.40 21.57 21.74 21.92 22.04 22.16 22.30 Animal fat 8.88 8.87 8.94 9.01 9.09 9.16 9.22 9.28 9.34 9.38 9.42 9.46 Vegetable oil 5.52 5.47 5.56 5.64 5.72 5.81 5.88 5.95 6.02 6.06 6.11 6.17 Butter (kg) 6.24 6.19 6.25 6.30 6.35 6.41 6.45 6.49 6.53 6.56 6.59 6.62 Milk (liter) 171.60 171.84 172.59 173.34 174.13 174.94 175.49 176.07 176.69 177.09 177.50 177.93 Cheese (kg) 13.68 13.68 13.80 13.93 14.05 14.19 14.28 14.38 14.48 14.55 14.61 14.69 Eggs (number) 171.60 172.00 173.65 175.30 177.06 178.85 180.09 181.41 182.80 183.71 184.65 185.64 Sugar (kg) 33.72 34.02 34.28 34.55 34.83 35.12 35.32 35.52 35.74 35.88 36.02 36.18 Table 3.18 Long-term projections: Demand for food (high-growth scenario) (in thousand tons) 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Assumptions Per capita income growth -14% 5% 5% 5% 5% 5% 5% 5% 5% 5% 5% Population growth 0.6% 0.6% 0.6% 0.8% 0.8% 0.8% 0.8% 0.8% 0.8% 0.8% 0.8% Projected demand Cereals 3,950.3 4,000.6 4,046.8 4,093.6 4,150.4 4,208.1 4,258.3 4,309.9 4,363.0 4,410.2 4,458.3 4,507.5 Potatoes 4,181.5 4,110.3 4,189.3 4,268.3 4,360.1 4,455.0 4,536.0 4,620.7 4,709.6 4,781.5 4,855.4 4,932.3 Pulses and vegetables 2,480.6 2,501.6 2,547.3 2,593.7 2,647.7 2,703.3 2,749.1 2,797.0 2,847.0 2,888.0 2,930.2 2,973.9 Fruits and fruit products 1,413.6 1,421.5 1,449.1 1,4771.0 1,509.6 1,543.0 1,570.5 1,599.1 1,629.2 1,653.6 1,678.8 1,704.9 Meat and mewat pducts 2,398.6 2,398.3 2,438.6 2,479.1 2,526.7 2,575.5 2,616.7 2,659.6 2,704.3 2,741.4 2,779.5 2,818.9 Pork 624.7 617.6 631.6 645.7 662.0 678.9 692.9 707.6 723.1 735.4 748.0 761.3 Beef 228.0 228.4 231.0 233.6 236.7 240.0 242.9 245.8 248.9 261.6 254.4 257.2 Poultry 332.9 332.1 338.2 344.3 351.4 358.8 364.9 371.3 378.0 383.5 389.2 395.0 Fish and fish products 205.2 203.6 208.0 212.4 217.4 222.7 227.1 231.7 236.5 240.3 244.3 248.4 Total fats 784.3 784.8 797.6 810.6 825.7 841.3 854.5 868.3 882.6 894.5 906.7 919.3 Animal fat 337.4 338.9 343.7 348.6 354.4 360.3 365.3 370.6 376.0 380.6 385.4 390.2 Vegetable oil 209.8 209.2 213.6 218.1 223.2 228.5 232.9 237.5 242.3 246.1 250.1 254.3 Butter 237.1 236.8 240.2 243.6 247.7 251.8 255.4 259.2 263.0 266.3 269.7 273.1 Milk ('000 liters) 6,520.8 6,569.1 6,637.4 6,706.2 6,790.7 6,876.6 6,953.6 7,032.5 7,113.4 7,186.6 7,261.0 7,337.0 Cheese 519.8 523.0 530.9 538.7 548.1 557.6 565.8 574.2 582.9 590.3 597.9 605.7 Eggs (millions) 6,520.8 6,575.2 6,678.2 6,782.2 6,904.8 7,030.5 7,136.0 7,245.6 7,359.5 7,455.4 7,553.5 7,654.9 Sugar 1,281.4 1,300.4 1,318.4 1,336.7 1,358.4 1,380.6 1,399.4 1,418.7 1,438.8 1,456.0 1,473.7 1,491.8 84 Table 3.19 Long-term projections: Per capita food consumption (low-growth scenario) (in kg) 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 ABsumptions Per capita income growth -20% -6% 0% 3% 3% 3% 3% 3% 3% 3% 3% Projected consumption Flour (kg) 15.60 15.65 15.54 15.54 15.60 15.66 15.73 15.80 15.86 15.92 16.08 16.12 Bread (kg) 83.10 82.77 82.29 82.29 82.56 82.84 83.13 83.43 83.70 83.95 84.60 84.76 Other cereals (kg) 4.68 4.68 4.63 4.63 4.66 4.68 4.71 4.74 4.77 4.80 4.86 4.88 Potatoes (kg) 110.04 104.97 103.30103.30 104.25 105.23 106.26 107.32 108.26 109.07 110.95 111.55 Pulses and vegetables (kg) 65.28 64.07 63.18 63.18 63.68 64.21 64.76 65.33 65.85 66.32 67.49 67.81 Fruits and fruit products (kg) 37.20 36.34 35.78 35.78 36.10 36.43 36.77 37.12 37.44 37.73 38.46 38.66 Meat and meat products (kg) 63.12 61.56 60.80 60.80 61.23 61.69 62.16 62.65 63.09 63.48 64.43 64.71 Pork (kg) 16.44 15.68 15.38 15.38 15.55 15.73 15.92 16.12 16.30 16.45 16.82 16.93 Beef (kg) 6.00 5.92 5.88 5.88 5.90 5.92 5.95 5.97 5.99 6.01 6.05 6.07 Poultry (kg) 8.76 8.50 8.38 8.38 8.45 8.52 8.60 8.67 8.74 8.80 8.95 9.00 Fish and fish products (kg) 5.40 5.18 6.09 5.09 5.14 5.20 5.25 5.31 5.37 5.42 5.53 5.56 Total fats (kg) 20.64 20.16 19.92 19.92 20.06 20.20 20.35 20.50 20.64 20.76 21.06 21.15 Animal fat 8.88 8.74 8.66 8.66 8.70 8.75 8.80 8.86 8.90 8.95 9.05 9.08 Vegetable oil 5.52 5.33 5.24 5.24 5.29 5.35 5.40 5.46 5.52 5.56 5.68 5.71 Butter (kg) 6.24 6.10 6.04 6.04 6.08 6.11 6.15 6.19 6.22 6.25 6.32 6.34 Milk (liters) 171.6 170.55 169.70169.70 170.18 170.68 171.20 171.74 172.23 72.67 173.77 174.06 Cheese (kg) 13.68 13.47 13.33 13.33 13.41 13.49 13.58 13.67 13.75 13.82 13.99 14.04 Eggs (number) 171.60 169.18 167.33167.33 168.38 169.47 170.61 171.78 172.85 173.81 176.25 176.90 Sugar(kg) 33.72 33.57 33.28 33.28 33.45 33.62 33.80 33.98 34.15 34.31 34.72 34.82 Table 3.20 Long-term projections: Demand for food (low-growth scenario) (in thousand tons) 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Asswnptions Per capita income growth -20% -5% 0% 3% 3% 3% 3% 3% 3% 3% 3% Population growth 0.6% 0.6% 0.6% 0.8% 0.8% 0.8% 0.8% 0.8% 0.8% 0.8% 0.8% Projected demand Cereals 3,955.2 3,968.6 3,968.0 3,991.8 4,037.8 4,084.9 4,132.9 4,182.0 4,230 44,278.0 4,348.7 4,392.6 Potatoes 4,181.5 4,012.7 3,972.6 3,996.4 4,065.4 4,136.6 4,210.3 4,286.6 4,358.7 4,426.4 4,538.6 4,599.6 Pulses and vegetables 2,480.6 2,449.3 2,429.6 2,444.2 2,483.6 2,524.2 2,566.1 2,609.4 2,651.2 2,691.3 2,761.0 2,796.3 Fruits and fnuit products 1,413.6 1,389.2 1,376.2 1,384.4 1,407.8 1,431.9 1,456.8 1,482.6 1,507.4 1,531.2 1,573.2 1,594.1 Meat and meat products 2,398.6 2,353.5 2,338.0 2,352.1 2,387.9 2,424.9 2,462.9 2,502.1 2,539.9 2,576.0 2,635.8 2,668.2 Pork 624.7 599.5 591.3 594.9 606.4 618.4 630.9 643.8 656.1 667.6 688.1 698.3 Beef 228.0 226.2 226.1 227.4 230.1 232.8 235.6 238.4 241.2 243.9 247.6 250.1 Poultry 332.9 325.1 322.4 324.3 329.6 335.0 340.7 346.5 352.0 357.3 366.3 371.0 Fish and fish products 205.2 198.1 195.7 196.9 200.5 204.3 208.2 212.3 216.1 219.8 226.2 229.4 Total fats 784.3 770.7 766.0 770.6 782.1 794.0 806.2 818.8 830.9 842.5 861.6 872.0 Animal fat 337.4 334.1 332.9 334.9 339.5 344.1 348.8 353.7 358.5 363.0 370.2 374.3 Vegetable od 209.8 203.8 201.5 202.7 206.4 210.2 214.1 218.2 222.1 225.8 232.3 235.6 Butter 237.1 233.3 232.4 233.8 237.0 240.3 243.7 247.1 250.5 253.7 258.6 261.6 Milk ('000 iter) 6,520.8 6,519.8 6,526.1 6,565.2 6,636.7 6,709.6 6,783.8 6,859.5 6,934.0 7,007.2 7,108.5 7,177.5 Cheese 519.8 515.0 512.8 515.9 523.1 530.5 538.0 545.8 553.4 560.7 572.4 579.0 Eggs (milions) 6,520.8 6,467.5 6,435.0 6,473.8 6,566.5 6,662.0 6,760.1 6,861.1 6,959.1 7,053.8 7,209.8 7,294.5 Sugar 1,281.4 1,283.4 1,279.9 1,287.6 1,304.3 1,321.5 1,339.2 1,357.3 1,375.0 1,392.3 1,420.1 1,435.7 85 Table 3.21 Long-term projections: Demand for food (high-income growth scenario) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Assumptions Per capita income growth -14.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 Population growth 0.6 0.6 0.6 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8 Projected growth of food demand Cereals 1.3 1.2 1.2 1.4 1.4 1.2 1.2 1.2 1.1 1.1 1.1 Potatoes -1.7 1.9 1.9 2.2 2.2 1.8 1.9 1.9 1.5 1.5 1.6 Vegetables and pulses 0.8 1.8 1.8 2.1 2.1 1.7 1.7 1.8 1.4 1.5 1.5 Fruits and fruit products 0.6 1.9 1.9 2.2 2.2 1.8 1.8 1.9 1.5 1.5 1.6 Meat and meat products 0.0 1.7 1.7 1.9 1.9 1.6 1.6 1.7 1.4 1.4 1.4 Pork -1.1 2.3 2.2 2.5 2.5 2.1 2.1 2.2 1.7 1.7 1.8 Beef 0.2 1.1 1.1 1.4 1.4 1.2 1.2 1.2 1.1 1.1 1.1 Poultry -0.2 1.8 1.8 2.1 2.1 1.7 1.8 1.8 1.5 1.5 1.5 Fish and fish products -0.8 2.1 2.1 2.4 2.4 2,0 2.0 2.1 1.6 1.7 1.7 Total fats 0.1 1.6 1.6 1.9 1.9 1.6 1.6 1.6 1.4 1A 1A Animal fat 0.4 1.4 1.4 1.7 1.7 1.4 1.4 1.5 1.2 1.2 1.3 Vegetable oil -0.2 2.1 2.1 2.4 2.4 1.9 2.0 2.0 1.6 1.6 1.7 Butter -0.1 1.4 1.4 1.7 1.7 1.4 1.5 1.5 1.2 1.3 1.3 Milk 0.7 1.0 1.0 1.3 1.3 1.1 1.1 1.2 1.0 1.0 1.0 Cheese 0.6 1.5 1.5 1.7 1.7 1.5 1.5 1.5 1.3 1.3 L3 Eggs 0.8 1.6 1.6 1.8 1.8 1.5 1.5 1.6 1.3 1.3 1.3 Sugar 1.5 1.4 1.4 1.6 1.6 1.4 1.4 1.4 1.2 1.2 1.2 Table 3.22 Long-term projections: Demand for food (low-income growth scenario) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Assumptions Per capita income growth -20o -5% 0% 3% 3% 3% 3% 3% 3% 3% 3% Population growth 0.6% 0.6% 0.6% 0.8% 0.8% 0.8% 0.8% 0.8% 0.8% 0.8% 0.8% Projected growth of food demand Cereals 0.3 0.0 0.6 1.2 1.2 1.2 1.2 1.2 1.1 1.7 1.0 Potatoes 4.0 -1.0 0.6 1.7 1.8 1.8 1.8 1.7 1.6 2.5 1.3 Pulses and vegetables -1.3 -0.8 0.6 1.6 1.6 1.7 1.7 1.6 1.5 2.6 1.3 Fruit and fruit products -1.7 -0.9 0.6 1.7 1.7 1.7 1.8 1.7 1.6 2.7 1.3 Meat and meat products -1.9 -0.7 0.6 1.5 1.5 1.6 1.6 1.5 1.4 2.3 1.2 Pork 4.0 -1.4 0.6 1.9 2.0 2.0 2.1 1.9 1.8 3.1 1.5 Beef -0.8 0.0 0.6 1.2 1.2 12 1.2 1.2 1.1 1.5 1.0 Poultry -2.3 -0.8 0.6 1.6 1.7 1.7 1.7 1.6 1.5 2.5 1.3 Fish and fish products -3.5 -1.2 0.6 1.9 1.9 1.9 2.0 1.8 1.7 2.9 1.4 Total fats -1.7 -0.6 0.6 1.5 1.5 1.5 1.6 1.5 1.4 2.3 1.2 Animal fat -1.0 -0.4 0.6 1.3 1.4 1.4 1.4 1.3 1.3 2.0 1.1 Vegetable oil -2.8 -1.1 0.6 1.8 1.8 1.9 1.9 1.8 1.7 2.9 1.4 Butter -1.6 -0.4 0.6 1.4 1.4 1.4 1.4 1.4 1.3 2.0 1.1 Milk 0.0 0.1 0.6 1.1 1.1 1.1 1.1 1.1 1.1 1.4 1.0 Cheese -0.9 -0.4 0.6 1.4 1.4 1.4 1.4 1.4 1.3 2.1 1.2 Eggs -0.8 -0.5 0.6 1.4 1.5 1.5 1.5 1.4 1.4 2.2 1.2 Sugar 0.2 -0.3 0.6 1.3 1.3 1.3 1A 1.3 1.3 2.0 1.1 86 come, attempting to preserve their past level of expect for major food groups over the next de- food consumption but reducing their purchases cade? of durable goods. Projections for 1990-2000: the influence of NUTRITIONAL sTATUS income. During the period of adjustment of the economy, one can expect reai incomes to fall In the early 1980s, average consumption per until they attain a macroeconomically sustain- capitaofcereals,meat, milk andfatsfell sharply able level. Projections have been carried out for leading to a worsening of nutritional indicators two income-growth scenarios: the optimistic (for instance, energy intake fell from 3,570 kcal scenario considers that GDP will decline by 14% in 1980 to 3,300 in 1982). But at the end of the in real terms in 1990 and grow at the real rate decade, average energy and nutrient intakes of 5% thereafter; the pessimistic scenario con- were back at their 1980 levels.9 siders thatreal GDP will declineby 20% in 1990 Average nutritional intake compares favor- and by 5% in 1991, that it -will not grow (0%) in ably with that of Western European countries. 1992, then grow at an annual real rate of 3% Per capita daily calorie supply in 1986 was 3,336 thereafter. cal in Poland, compared with 3,326 cal in the Our food demand projections, under both Netherlands, 3,336 cal in France, 3,645 cal in scenarios, are based on estimated income elas- the United States, 3,528 cal in the Federal ticities. Our estimation shows that, empiri- Republic of Germany, and 3,064 cal in Sweden."0 cally, the relationship between income and con- Even if changes in nutritional indicators were sumption in Poland (for example, the Engel as drastic as those observed at the beginning of curve) is typical of middle- to high-income coun- the eighties, this would still represent a good tries - it increases fast at low levels of income, nutritional status for the population, on average. stabilizes, then renmains constant at higher lev- However, average figures mask the fact that els of income. The projections indicate the an increasing number of persons are below the Following trends." poverty line and nutritionally at risk, presently and in the future, as a result of the fall in their Per capita consumption. In per capita terms, realincome and/orlimited income opportunities the food demand curve over time is flat. After due to rising unemployment. The percentage of the initial shock ofthe declinei ri income, demand households that are below the poverty line for food products grows at an average rate never (evaluated by the Institute of Social Affairs exceeding 1.2%. Demandfor cereals grows atan at ZI 300,000 per month) is estimated to be 37% average rate of 0.5% in the optimistic scenario among pensioner households and 30% among (0.3% in the pessimistic seenario); for meat at a worker households. rate of 1% (pessimistic scenario: 0.7%); and for There is a demonstrated need to reinforce and milk at O.4% (pessimistic scenario: 0.3%) expand the existing social welfare system in two directions: first, to reinforce existing programs Total demand. When population growth is thattransfer income to low-income groups (Social taken into account,12 total food demand shows a Aid Centers, Labor Fund, and other institu- morepronounced upwardtrend. Averagegrowth tions); and, second, to develop existing targeted rates of poultry, pork and fish exceed 2% per nutritional programsforvulnerablegroups (such annum, but cereals grow at an average rate of as the milk bars) to cover all old persons, chil- 1.1% in the optimistic scenario (0.8% in the dren, and pregnant and lactating mothers that pessimistic scenario); meat at a rate of 1% (pes- are nutritionally at risk. simistic scenario: 1.2%); and milk at a rate of 1% (pessimistic scenario: 0.8%) The average growth MEDIUM- AND LONG-TERM PROSPECTS rate for the 1990-2000 period in the pessimistic scenario is affected by the fall in the demand for During the shock period of the transition from a all food products in 1990-91 and the low rate of centrally planned to a market-based economy, growth (approximately 0.6%) in 1992. the pattern of expenditures and consumption The projectionsindicate that, in the longterm, described in the previous section is not repre- total food demand in Poland will be mainly sentative ofwhat can be expected in the medium driven by population growth. On a per capita term. What consumption profile can we then basis - whatever income growth scenario one 87 uses - food demand will not increase at high * A middle-income country like Poland (per rates. We can say that food consumption will capita income level of US$1,860 in 1988) cannot not continue to be sustained at levels similar to sustain over a long period an average household those existing when the generalized food sub- food budget share of 55%. This share will sidy program was in effect.13 decline over time until it reaches a level similar to that of middle-income European countries Other factors that will affect food demand. (for instance, Portugal 34%, Greece 30%, Spain The long-term forecasts discussed above as- 24%, Ireland 22%); sume that the main factor that will influence * During the short term, we can expect food food demand in the future is the level of income demand to adjust to relative consumer price andthatotherfactors (such as changes in prices, changes until food markets are in an equilib- distribution of income, or family size) will not rium position. There will be substitution within affect food demand in a systematic (nonrandom) major food groups (for example, pork versus way. beef; butter versus margarine; animal fat ver- But food demand is influenced not only by the sus vegetable oil; bread versus processed cere- level of income but also by the distribution of als) as a result of relative price effects; income. During a period of 3-4 years (say, until * The availability of imports, and the greater 1993), we can expect that the change from a choice and quality of consumer products, will centrally planned to a market-based economy lead to a differentiation of consumer tastes. If will - in all likelihood - effect a worsening in the supply side responds, food markets will be the distribution of income. Demand for basic differentiated according to income and price food items will therefore be higher than the elasticities of various types of consumers; projections indicate. Then, after 1993, as real * In the long term, improvements in nutri- incomes increase and more people move to higher tional standards of the population, through income groups, the food budget share and the nutrition education, will reduce high-choles- income elasticity will decline sharply.'4 There- terol, high-calorie food intake and modify con- fore, after 1993, if the economy recovers, the sumption habits. overall growth in food demand will slow down, implying that our projected figures are biased Appendix: upward for the years 1993-2000. At the same time, another tendency will come into play: as Data sources income increases and the share of the poor in total income decreases, demand for more pro- The main source used in this annex are unpub- cessed and more expensive food items will in- lished data from the Budzety Gospodarstw crease and demand for primary, unprocessed Domowych (Household Budget Surveys) on in- food will decline. comes and expenditures, including consump- Several other factors - not accounted for in tion estimates (in zlotys andkg)for some 65 food the projections - will affect food consumption. items that were aggregated into main food In particular, supply-side factors such as the groups. The surveys are carried out on amonthly opening up of the economy and the restructur- basis by the Central Statistical Office (GUS) ing of the food sector will have a profound effect since 1980. The data for January 1989 - April on consumption patterns. 1990 were kindly provided to the Task Force by GUS. Seasonal fluctuations. First, the profile of The Household Budget Survey suffers from consumption will be flatter. There will be a several shortcomings but is statistically reli- reduction in the amplitude of seasonal fluctua- able.'5 Stratified random sampling techniques tions that are observed in consumption in Po- are used with a large sample size.'6 The survey land. This seasonality in consumption is linked covers some 90% of the population. Excluded to the seasonality of production in the process- from the survey are persons employed in the ing industry, to the absence of much food im- private sector outside of agriculture, military ports, and to the scarcity of storage and cooling and police. The information included in the facilities, long-shelf-life products, and so forth. survey is presented for four types of households Second, the consumption trend for major food made up of: workers and employees; farmers; groups will be affected by important factors: farmers/workers (for example, rural farming 88 households with an important share of income Endnotes originating outside the farm);17 and retirees and pensioners. Annually, the size distribution of This annex was prepared by Jean-Jacques income and expenditures (by income class: from Dethier (The World Bank) and Jerzy Plewa poorest to richest) is published by GUS. Pre- (Warsaw Agricultural University). liminary information for size distribution for The authors would like to thank Prof. workers and pensioners in 1989 and March Jan Kordos, Mr. Kubiczek and Mmes Gradek 1990 is available (see Table 3.6). and Gizicka (GUS) for kindly providing them Three important caveats must be mentioned: with Household Budget Survey data, and Prof. Stanislaw Berger (Warsaw Agricultural Uni- Regarding food consumption, households versity) for advice on nutrition policy in Poland. must fill out a questionnaire indicating quanti- ties and value of purchases, gifts, or own produc- 1. Subsidies on bread were eliminated. tion. Food products acquired without payments However, in the case of rye bread, the Ministry (own production or gifts) are valued at the aver- of Finance exercises some degree of control over age price recorded for the same item in the the price because of the obligation for bakeries voivodship. Quantities therefore referto monthly to submit a justification of cost increases if they acquisitions and not to consumption of food. wish to increase consumer prices. The difference between acquisition and con- sumption, however, is only significant in the 2. The per capita survival minimum for case of nonperishable, storable items such as December 1989 was: potatoes. * Income and expenditure data for rural worker households for I person = ZI 179,000 households (farmers and farmer-workers) men- 4 persons = 21 147,900 tioned in this annex must be interpreted with retiree/pensioner for 1 person = Zi 156,000 caution: rural income according to GUS experts households 2 persons Zi 138,400 is underestimated by 20-30%. This is due to the 3. In such a situation, subsidies do not method ofdata collection: household net incomes alter demand at the margin. Conceptually they and expenditures are obtained by subtracting are simply transfers from the budget to the purchases and sales related to the management consumer. of the farm from gross incomes and expenditures. Corrections to the rural data are done by GUS at 4. See World Bank, Structural Adjust- the end of the year since many activities are, by mentLoan, ReportNo.P-5294-POL,June 1,1990. nature, seasonal activities. The average per capita income in 1989 was Zl * Finally, it must be mentioned that GUS has 2.8 million. Population projections are from the not yet adapted its method of collecting data to 1988 World Bank Atlas. the changes that have occurred in the economy. The private nonagricultural sector was excluded 5. Production for the first quarter of 1990 from the sample design. In the future, the has declined by 30.1% compared with the same coverage of the survey must be extended to period in 1989 (GUS estimates). include incomes coming from this source. In addition, underreporting of income generated 6. They represent the percentage change in the hidden economy is known to exist but in food consumption induced by a percentage statistically unobservable. In conclusion, one change in income, at various levels of per capita should not expect the 1990 income data used in income. this annex (even when corrected for seasonal and demographi e influences) to be entirely reli- 7. According to our estimates, the income able since it underreports incomes. elasticity for potatoes is small but positive - The other sources used in this annex are unlike what is observed in Western Europe. Informacja Statystyczna, published monthly by GUS (usedforprice indices) and amimeographed 8. All the figures presented in this section report from GUS dated May 1990 titled are percent changes between January-April 1990 Informacja o warunkach bytu ludnosci w I (average) and January-April 1989 (average). quartale 1990r. 89 Tables 3.9 (expenditure shares) and 3.14 (con- 14. In market economies with high per sumption) give the monthly data for 1989-90. capita income levels (OECD countries), the in- come elasticity for most food products - even 9. See B. Kowrygo, S. Berger and B. highly processed food - is almost zero. Sawicka, 'Nutritional Implications of Changes in Agricultural Policy. Poland in the Eighties," 15. For details, see World Bank, Poland: mimeographed, Institute of Human Nutrition, Subsidies and Income Distribution, report No. Warsaw Agriculture University, n.d. 7776-POL, November 1989, and Branco Milanovic, "Poverty in Poland in the years of 10. World Bank, WorldDevelopmentReport crisis 1978-87,"The World Bank, mimeographed, 1990, Oxford University Press, 1990. November 1989, which uses the data to examine safety net and poverty issues. 11. Note that the figures for cereals and potatoes refer only to demand for human con- 16. In 1989, the sample included 20,555 sumption and do not include demand for feed. workerfamilies (forapopulation of 18.8 million) and 5,216 pensionerfamilies (fora population of 12. We have used the 1988 World Bank At- 4.9 million). las population projections indicating 0.6% growth until 1992 and 0.8% from 1993-2000. 17. Inthefirstquarterofl990,thesefarmer/ worker households received on average 52% of 13. In addition, higher food prices will lead their income from wages, 31% from their farm to reduced waste. This means that total demand and the rest from social security and other (= consumption + waste + stocks) will also grow benefits. more slowly as less food is wasted and/or fed to animals. 90 Annex 4 Agricultural trade policy strategy The Polish government's declared intention is sures are normally less costly to administer tomovePolandfromacentrallyplannedeconomy than internal measures. Agricultural trade to a Western market economy. This implies a measures could therefore play an essential role desire to move to a situation where domestic in assisting the adjustment process both on the prices in general will be closely related to world supply and the demand side. market prices and where trade will take place The agricultural sector is not directly linked according to market forces. to the international market. Agricultural prod- However, economic liberalization should not ucts are always traded in some processed form. be considered as an objective in itself, but rather Hence, the import and export parity farm prices as a means to achieve more basic social welfare are derived from c.i.f. and f.o.b. world market objectives. Liberalization of markets without prices taking into account the costs of trans- the appropriate governmentregulationmaywell forming agricultural products in form, space generate effects in both the short term and the and time. The present inefficiency of upstream long term that are undesirable due to negative and downstream sectors in Poland taxes the effects on production growth and the distribu- agricultural sector indirectly. In connection tion of income. Accepting that liberalizing the with a high (perceived) real interest rate this is economy in general, and foreign trade in par- a major source of agricultural price instability ticular, will bring major benefit in the long run (as will be argued subsequently). This can does not imply that the overall process of liber- increase the adjustment costsforthe agricultural alization should start with a complete liberal- sector(whichintermsofemploymentandincome ization of external trade, in particular not for generation is of major importance to the Polish agricultural products. economy) and will cause problems in relation to Liberalization will only produce the desired the urban sector where the price of food is of results if market-oriented institutions, which crucial importance for social stability. respond to market signals, exist. To create such The trade policy needed may appear to con- institutions requires a change of management tradict the government's general policy to de- culture and a redefinition of property rights. crease government involvement in the economy, The process of doing this will take a long time. but the basic hypothesis underlining this annex During this process the use of trade policy in- is thata specific agricultural tradepolicyforthe struments may ease the adjustment process. short and medium term could assist the ad- The use of trade policy instruments is particu- justment process of transforming the Polish larly important in Poland's present situation economy into a modern market economy. The where the government lacks other instruments formulation and communication to the economic to adjust the income distribution. Trade mea- agents of such a policy would stabilize expecta- 91 tions, which in itself could contribute to the The trade regime realization of the government's stabilization policy. THE PREVIOUS SYSTEM This annex presents briefly the past and present trade regimes and describes the trade In the centrally planned economic system which flows in recent years on the basis of available prevailed before the reforms introduced by the empirical evidence. External trade was very present government, foreign trade in agricul- distorted in the past. Thus, the evaluation of tural and food products was regulated by the past trade is important to evaluate whether the following principles: same pattern of trade flow should prevail in the future as in the past. * State monopoly of foreign trade. Producers The role of the agricultural sector in foreign did not have direct access to foreign markets trade depends on the competitiveness of the and had to operate through a few specialized sector. Hence, the main determinants of its state and cooperative foreign trade organiza- competitiveness are investigated in the section tions (centralas). Even in 1989, after the first on the effect of trade policy on the competitive- decentralization attempts of foreign trade, the ness of the agricultural sector. Of main interest share of the five main centralas in the total is the question of whether the agricultural sector value of imports and exports of agricultural and was taxed or subsidized in the past, also taking food products amounted to about 80-85%. into account the effect of the inefficiency of * Tradingaccording to plan. The volume and upstream and downstream sectors. If the ag- the price to be paid to domestic suppliers, as well ricultural sector was taxed in the past one would as the exchange rate, was fixed by the central expect the agricultural sector, and hence agri- plan. Centralas were responsible for carrying cultural exports, to expand in the medium term out the plan. They imported goods and services without government support (assuming that on the basis of currency availability as fixed by the restructuring of the Polish economy in the central plan, and in turn had to sell to the generalwillmaketheupstreamanddownstream state almost the entire amount of foreign cur- sectors function efficiently). If, on the other rency earned through exports. In the 1980s, hand, the agricultural sector was subsidized however, the exporting firm was allowed to keep one would expect Polish agricultural exports to a certain percentage of the hard currency ob- contract. It has not been possible to present tained. definitive answers to all questions raised in this * Overvalued exchange rate. During 198 7-89 section. Nevertheless, it is hoped that the pre- there was a practice of fixing the exchange rate sentation will help to get a better idea of the at a level which would make 80% of total exports future agricultural trade prospects and to specify profitable. the needs for further research. * No transmission between the international The reader more interested in the policy rec- and domestic prices. ommendations might, however, want to move * Agricultural and food exports were more directly to the summary section, in which the heavily subsidized than exports of other prod- strategic considerations are presented and rec- ucts. Exports were subsidized more to the ruble ommendations for the medium term and short area than to the hard currency area. In 1989, term are formulated. Trade performance would 88% of the exports of agricultural and food improve if measures were instituted to improve commodities to the ruble area were subsidized, the functioning of the internal markets. How- as were 67% of the agricultural and food exports ever, these measures are not explored in this to the hard currency area. The average subsidy annex. Rather, we have focused on the question paid for agricultural andfood products amounted ofhow the agricultural sector couldbe influenced to 40% to the ruble area and 24% to the hard by trade measures in a beneficial way. Specific currency area compared with 8% and 3%, re- emphasis is laid on the grain and dairy markets. spectively, for nonagricultural products. Since these product markets are the most im- portant for Polish agriculture, assisting the THE CURRENT AND FUTuRE sYSTEM adjustment in these markets through the use of trade policy instruments deserves special at- Some changes in the foreign trade regime were tention. initiated in 1987. The changes were accelerated 92 in 1989, but the radical liberalization offoreign In the latest annual trade agreement with trade did not take place until January 1, 1990. COMECON countries the value of trade in ag- Since this date the external trade regime has ricultural and food products under the trade been based on the following three main prin- agreementwasdecreasedsignificantlycompared ciples: internal exchangeability of the domestic to previous years. Agricultural and food prod- currency; no central distribution of hard cur- uctshavebeen excludedfrom the trade protocols rencies; and free access to foreign trade. with the German DemocraticRepublic, Hungary Duties on imports of agricultural and food and Romania. Exports of agricultural and food products are relatively low. The unweighted products require subsidies of up to 50%. In order average of duties paid on the imports of agri- to minimize these subsidies the Ministry of cultural products duringthe first five months of Foreign Economic Relations has organized 1990 amountedto8.3% andthe weighted average auctions where the commitment to export a (the weights being the 1989 import shares) only certain contingent is given to the enterprise 2.5%; for processed food products, the corre- that accepts the lowest subsidy. Trade in ag- sponding figures are 13.7% and 6.8%, respec- ricultural and food products in excess of the tively. commitments under the clearing agreements is There are no quantitative restrictions on im- not subsidized. ports into Poland. From 1991 on, all trade with the COMECON Exports of agricultural and food products to countries including the Soviet Union will be the hard currency area are not subsidized. conducted in hard currency. Clearing arrange- DuringJanuary 1990 quantitative restrictions ments, as in the trade between the Soviet Union were imposed on the export of some strategic and Finland, are currently under negotiation. products, including agricultural and food prod- ucts, either by export quotas (for meat, live Trade flows and trade performance' animals, vegetable fats, sugar, butter and full milk powder) or by discretionary export licenses TRADE FLOWS (for cereals, flour, rapeseed and cheese). These quantitative restrictions were motivated by the During the first five months of 1990 Poland had desire to prevent excessive domestic price in- a surplus on its balance of trade with both the creases immediately after the strong devalua- convertible zone (US$1,605 million) and the tion of the zloty in December 1989. nonconvertible zone (1,198 million rubles) coun- At present Poland's export of agricultural and tries (see Table 4.1). This represented a sig- food products is only restricted in order to sat- nificant improvement compared with the same isfy Poland's international obligations: the re- period the year before (US$1,223 million and maining bilateral clearing agreements with the 786 million rubles). Nearly half of this im- COMECON countries; minimal prices for dairy provement is explained by improvement of the products (butter, skim and full milk powder) agrifood balance (see Table 4.1). The improve- agreed in the GATT; the ban by donor countries ment of the agrifood balance is partly due to an on the reexport of wheat and wheat flour; and increase in the export of agricultural products, restrictions on exports to the EC in return for but is mainly due to a dramatic fall in agrifood trade concessions (for example, quotas under imports. The fall in food imports may, however, the GSP (General System of Preferences), ref- be overestimated due to significant private food erence prices for fruit and vegetables, minimal imports. But unregistered private exports that prices for eggs, poultry, live animals, and pork, did not clear customs are not assumed to be and voluntary export restraints on sheep, mut- significant. ton, goats and goat meat). Trade reversal has taken place over the last During the last six months of 1989 Poland 12 months for a number of products. Poland, obtained improved market access to the EC: the which used to import butter, has during the first quotas imposed because of Poland's status as a five months of this year exported it in a sizeable CMEAcountrywereliftedandPolandwasgiven amount. If there had not been a ban on cereal a number of tariff quotas (export at reduced exports, Poland would have exported wheat. tariffs) under the GSP arrangement. At the Theincreaseinexportsisnotaconsequenceof beginning of 1990 Poland was also given GSP increased production, but rather a consequence status in its trade with the United States. of a decrease in domestic stocks of agricultural 93 Table 4.1 Balance of Trade cant changes in the trade balance. A relatively (I: nonconvertible zone, II: convertible zone) small increase in food consumption or decrease in agricultural production may therefore easily turn the surplus into a deficit. Total 1989 (i-v) 1990 (i-v) % Change For these two reasons the significant increase Exports (I) M ruble 4313 4508 104,5 in the agrifood surplus during the first five Exports (II) MUS$ 3361 3758 111,8 Imports (I) M ruble 3901 2528 64.8 months of 1990 should not be taken as an indi- Imports (O1) M US$ 2979 2154 72.3 cation that the Polish agrifood surplus will continue to increase. Further depreciation of Balance (I) M ruble 412 1198 +786 the real exchange rate due to expected inflation Balance (HI) M US$ 382 1605 +1223 of around 20% until January 1 will mean that the picture may change for the second halfofthe Agrifood 1989 (i-v) 1990 (i-v) % Change year. Exports (I) M ruble 160 130 81 The share of exports in domestic production of Exports (II) MUS$ 658 737 112 certain products such as slaughter lambs and Imports (1) M ruble 103 55 63 Imports (O) M US$ 787 208 26 frozen fruits and vegetables has in the pastbeen very high (see Table A1 in the Appendix). Balance (I) M ruble 57 75 18 Whether this will continue under free market Balance (rI) M US$ -129 529 658 conditions remains to be seen. The evolution of exports and imports for se- Food 1989 (i-v) 1990 (i-v) % Change lected commodities from 1987 to 1990 is illus- Exports (I) M ruble 73 70 95.7 trated in Tables A.2 and A.3 in the Appendix. Exports (II) M US$ 464 471 101.7 Agrifood exports constitute an important share Imports (I) M ruble 89 36 40.6 of total exports to convertible zone countries Imports (II) M US$ 393 167 42.5 whereas the share of exports to nonconvertible Balance (I) M ruble -16 34 50 zone countries is very small. Balance (U) M US$ 71 304 233 The share of agricultural products in total agrifood exports has in the past been twice that of food products. The increase in the share of Agriculture 1989 (i-v) 1990 (i-v) % Change agricultural products in 1990 exports may be Exports (I) M ruble 87 60 69.0 Exports (II) MUS$ 194 266 137.1 takenasanidicationthatagriculturalproducts Imports (I) M ruble 15 19 128.3 are more competitive under free market condi- Imports (lI) MUS$ 394 41 10.4 tions than processed products. Thisis consistent with the analysis below. Balance (I) M ruble 72 41 -31 The shares of animal and crop products in Balance (HI) MUS$ .200 225 425 total agrifood exports have in the past been of the same order of magnitude, but it seems that Note: Figurea only cover trade by state trading companies and private trade which has gone through cutoms. crop products are gaining in importance. Source: GUS. Table A4 in the Appendix indicates that Poland's agrifood exports are very diversified. products in a period when the real interest rate has changed from being negative to being posi- Table 4.2 Share of exports in production tive, and when food consumption has decreased due to the sharp fall in real income of Polish Export of 1988 1989 1990 (est) households (see Annex 3). The decrease in imports of agricultural prod- Agrifood products ucts is mainly due to a decrease in the imports % of total production 5.8 6.1 7.0 of feed stuff, which will subsequently lead to lower animal production. This will have a Agrieultural products negative effect on the future agrifood balance. % of total production 3.0 3.4 4.3 The share of exports in total agrifood pro- Food duction is relatively low (see Table 4.2). Rela- % of total production 9.4 9.5 9.5 tively small changes in production and con- sumption may therefore lead to quite signifi- Source GUS and Instiute of Agriculture and Food Economies. 94 Table 4.3 Share of agrifood in total Table 4.6 Share of foreign trade by exports and imports state trade organizations (centralas) in convertible imports and exports, 1989 1989 (i-v) 1990 (i-u) % % Exports Imports Exports (I) ruble 3.6 2.8 Pewex 6 Exports (II) US$ 19.6 19.6 Animex (animal products) 32 9 Rolimpex (grain) 21 40 Imports (1) ruble 2.9 3.1 Rybex(fish) 10 5 Imports (11) US$ 26A 9.7 Agros 10 21 Polkrop 5 3 Source: GUS. All 77 84 Source: Ministry of Foreign Economic Relations. This diversification has been seen as an advan- tage, as it makes Poland's export earnings less sensitive to fluctuation in the price of specific Table 4A Share of agricultural and food products. However, this is again something products and of crop and animal prod- that may change under free market conditions. ucts in total agrifood exports Agrifood exports to the convertible zone, in particular the EC countries, have been in- 1984 1988 1990(i-u) creasing over recent years, whereas exports to %td % %flo the nonconvertible zone countries have de- creased. Agricultural products 31 28 36 This trend may very well be reversed in the Food products 69 72 64 future when all trade, including trade with the Animal products 54 47 36 Soviet Union, will be in foreign currency. Polish Crop products 46 53 63 food products, which are of relatively low qual- ity, seem to have abetter chance of competing in the Soviet marketthan in the EC market, where Source: GUS. both quality requirements and trade barriers will make further expansion difficult. In the Appendix, Table A.5 provides more detail on the country destination of Polish ex- ports, and Tables A.7 and A.8 give information on the distribution of exports and imports for Table 4.5 Share of agrifood exports convertible and nonconvertible zone countries going to various destinations for selected commodities. gat o vaick iu exchange rate) Foreign trade organizations (centralas) have in the past had a dominant position in agrifood 1975 1984 1989 exports and imports and still maintain it, even with expanding private trade. Nonconvertible zone 33 23 18 of which: EVALUATION SU 13 other 5 Up to 1989, the export of agrifood products was Convertible zone 67 77 82 strongly subsidized. Subsidies amounted to ZI of which: 748 billion, of which ZI 151 billion were subsidies EC 31 35 50 for exports to nonconvertible zone countries US 12 13 11 (area I) and ZI 594 billion to convertible zone other 24 29 21 countries (area II). In 1988 the corresponding figures were respectively Zl 249 billion, Zl Source GUS andl Institute of Agculture and Food Economics. 62 billion and Zl 187 billion. 95 Agrifood exports were more subsidized than nonagrifood exports were 1.12 (export subsidy exports in general. Whereas the share ofagrifood of 11%) for area I and 1.03 (export subsidy of exports in total exports was 14%, (3.6% in area only 3%) for area II. These coefficients were I, 19.6% in area II) the share of agrifood export similar in previous years. subsidies in total export subsidies was signifi- Table A.10 in the Appendixcontains technical cantlyhigher,44.2%(17.3%inareaI, and 74. 1% coefficients for a number of products. These in area 1I). data seem to suggest that processed products, in In 1989, 88% of agrifood exports to area I and general, required greater subsidies than agri- 67% to area II required subsidies. In 1988, the cultural products. corresponding numbers were 87% and 67%. The budgetfigures showingthe revenue and expenses The effect of trade policy associated with the import and export ofagrifood on the competitiveness products in 1988 and 1989 are shown in Table of the agricultural sector A.9 in the Appendix. The main reason for the large budget deficit in 1989 was the huge sub- THE BASIC QUESTION sidies to the import of grain and meat products (ZI 91 billion). The largest subsidies in exports Poland's net exports are by definition the differ- to areal were associatedwithfruitandvegetable ence between Poland's domestic demand and products and crop products. For exports to area domestic supply. In order to understand the -I, big subsidies were given both to fruit and evolution in trade and prospects forfuture trade, vegetable products (Zi 134 billion) and to meat domestic supply and demand conditions need and animal products (Zl 109 billion). therefore to be considered, in particular the It is difficult to make a general assessment functioning of the upstream and downstream about export profitability in 1989. Official sectors (see below). procurement prices which were in use up to The prospects for future Polish agricultural August 1, 1989, have been increased several trade depend on whether or not the Polish ag- times but the exchange rate has not been ad- ricultural sector in the future will be competitive justed to the same extent during this period. at world market parity prices. The basic ques- This caused an increase in export subsidies. tion to be answered before discussing Poland's Therefore most centralas made losses. In the agricultural trade strategy (in fact, before the last quarter of 1989, the exchange rate was discussion of any aspect ofPoland's agricultural adjusted, which allowed the centralas to cover strategy) is to what extent the Polish agricul- previous losses to some extent. tural sector will be profitable without govern- Anindicationoftheexportsubsidiesonvarious ment support after the implementation of the products may be obtained from data on the government'srestructuringprogram.Toanswer average cost of obtaining foreign currency. In this question it is important to know to what 1989, subsidies to agrifood exports were as fol- extent Poland's agricultural sector was subsi- lows: dized or taxed in the past. If the Polish agri- cultural sector was heavily subsidized one would for exports to the nonconvertible zone expect Polish agricultural exports to contract countries (area I), ZI 958 had to be spent (in and if it was taxed one would expect them to payment to middlemen) to obtain one ruble. expand (assuming no changes in domestic Comparing this with the official exchange rate household demand). of ZI 536 ruble, this corresponds to a technical coefficient of 1.78 (= 958/536) or an export sub- CONCEPTUAL FRAMEWORK sidy of 44%-2 * for exports to the convertible zone countries In a market economy, production decisions of (area II), ZI 1,928 had to be spent to obtain one the agricultural sector are a function of its dollar. Comparingthis with the official exchange endowment with primary factors (land, labor rate of ZI 1,4791US$, this corresponds to a tech- and capital), the prices it has to pay for its nical coefficient of 1.30 or an export subsidy of intermediate inputs (such as fertilizer, feed and 23%. machinery) and the prices it receives for its outputs (c0op products, animals and animal The corresponding technical coefficients for products). The relationship between agricultural 96 sector output prices and intermediate input energy inputs in the fertilizer industry prices is popularly called the price scissors. If * downstream sectors: for example, invest- output prices increase or input prices decrease, ment subsidies and input subsidies to the food- the price scissors open and the agricultural processing sector; consumption (food subsidies, sector will tend to expand, and vice versa. The rationing) agricultural sector prices depend on the world * export: for example, export subsidies or market price, the exchange rate, government taxes, export bans. intervention and the functioning of upstream and downstream sectors. The agricultural sector prices will naturally The upstream sectors are the industries de- also be affected by the government's livering inputs to the agricultural sector and macroeconomic policies (income policy, exchange organizations dealing with trade in these com- rate policy, credit and monetary policy, and modities. The upstream sectors include indus- public finance and taxation policy). These tries producingfertilizers, pesticides, feed stuffs, policies affect the agricultural sector directly, as machinery, transport and services. well as indirectly through their effect on other The downstream sectors are the sectors pro- sectors, in particular through their effect on cessingagricultural outputs andtradingin these export and household demand for agricultural commodities. The downstream sectors include products. industries which deal with dairy, meat pro- This framework should draw attention to two cessing, fruit and vegetable processing, other issues: crop processing, transport and services. The linkages between the agricultural sector, * It is extremely difficult to assess the even- the rest of the economy and the world market tual effect on the agricultural sector of the may be illustrated by the supply-utilization dramatic change of government policy which matrix in Figure 4.1, which shows the physical Poland has experienced in recent months, in- flows affecting the agricultural sector. volving fundamental changes both of In a market economy these physical flows are macroeconomic policy and of government in- governed by a set ofprices specific to each sector. tervention in relation to all sectors. For each production sector there exists a specific * The competitiveness of the agricultural set of output and input prices which are deter- sector depends crucially on the cost efficiency mined on the one hand by production costs, and and competitive behavior of upstream and on the other hand by government intervention downstream sectors. in terms of taxes, subsidies and government intervention. The agricultural sector input and To wHAT EXTENT is THE POLISH AGRICULTURAL output prices (the price scissors) are influenced SECTOR TAXED BY THE INEEFCIENCY OF THE by a wide range of government policy instru- USTRs Mi AMM DOWNSTREAM SECTORS? ments related to the various sectors: To evaluate the prospects for the agricultural * import: tariffs, import restrictions sector and hence for agricultural trade we need * upstream sectors: for example, subsidies to to assess the extent of the implicit taxation of Figure 4.1 Supply-utilization account Agricultural Human Import Upstream Sector Downstream Consumption Export Food products +x +x -x -x Agricultural products +x +x -x -x -x Inputs specific to the agri- cultural sector +x +x -x -x Other products +x -x -x -x -x -x +: supply -: utilization 97 the Polish agricultural sector by the monopolis- than the corresponding import price (the c.i.f tic and inefficient upstream and downstream price). The f.o.b. price is determined by the sectors. This analysis is also important for transport costs from the Polish border to the understanding the role agricultural trade closest international trading center where there measures can play in the stabilization of agri- is an import deficit and the c.i.f. price by the cultural prices. Figure 4.2 illustrates the points transport costs from the closest international to be made using the situation on June 1, 1990, trading center where there is an export surplus. for rye as an example. The domestic price will be the fo.b. parity price Economists often speak about the world (f.o.b.- for short) or the c.i.f. parity price (c.i.f+ market price. One of the supposed benefits of for short) depending on whether Poland has an the government's policy of starting the reform export surplusor an importdeficit. Thef.o.b.- is processbyliberalizingtradewasthatthiswould the fo.b. price minus the costs of moving the allow the domestic agents to replace the old commodity to the border and the c.i.f+ is the distorted price system by world market prices c.if. priceplusthecostsofmovingthe commodity fordomestic transactions. Theideathatthere is from the border.3 This naturally applies both to one world market price which may serve as a commodities that are used by the agricultural guide to the domestic transaction price is a sector as an input (in this case the price trans- simplification which may be especially mis- mission is through an upstream sector) and leading for agricultural products, where Poland commodities produced by the agricultural sec- isclosetoself-sufficiency. Foragivencommodity tor (in which case the price transmission is there exists one relevant world market price at through the downstream sector). Since rye is the closest international trading center where both produced by the agricultural sector and there is an export surplus and another one at consumed as a feed input the example used in the closest international trading center where Figure 4.2 may serve to illustrate both cases. there is an importdeficit. The difference between The difference between f.o.b.- and c.i.f.+ prices these two prices is determined by the costs of is greater the higher the transport costs and the moving the commodity from the one center to more inefficient the trade and processing the other. At the Polish border, the export price channels. As is illustrated by the example, the (the f.o.b. price) will for any commodity be lower difference for Poland is for the moment quite significant. This is confirmed by the information Figure 4.2 The price transmission from contained in Table 4.7. the world market depending on the Table 4.7 shows the ratio between f.o.b. and direction of trade f.o.b.- and between c.i.f. and c.i.f.+ for a number Point of consumption: of agricultural and food products. Since Poland Poit of consumption: for the moment is in an export position for most or household sector products, f.o.b. and f.o.b.- prices are in general the border prices and the domestic (wholesale) processing ciFarm-gate pric prices, respectively. The data indicate a very transport costs inefficient price transmission between f.o.b. and services f.o.b.- prices. Column (7) in Table 4.7 indicates monopolistic profit the dramatic increases in wholesale prices which may be expected if Poland moves from an export Import price (c.i.f.) 110 $/t toanimportposition. Asoursubsequentanalysis Range of domestic indicates, this is not a purely theoretical possi- price variation at bility. constant world market price Two important conclusions may be drawn Export price (f.ob.) 85 $/t from this analysis: processing transport costs services * The level of domestic consumer and producer monopolistic profit Farm-gate price pricesfor agricultural products will, particularly (f.o.b.) 56 $/t in the short run where the downstream or up- stream sectors are very inefficient, be signifi- Point of production: cantly different depending on whether Poland is Agricultural sector exporting or importing. 98 Table 4.7 The price transmission in June 1,1990 f.o.b. f.o.b.- Ratio c.i.f. c.i.f.+ Ratio Ratio price price (1/2) price price (415) (613) (1) (2) (3) (4) (5) (6) (7) $ $ S $ Pigs, live x 961 x 910 1,226 .74 1.28 Beef 741 550 1.35 741 886 .84 1.61 Meat pork 1,440 1,397 1.03 1,370 1,501 .91 1.07 beef 1,470 954 1.54 1,420 1,556 .91 1.63 Ham 4,020 #4,726 .85 3,216 4,363 .74 (.92) Calves 2250 *1,789 1.26 2,250 2,352 .96 1.31 Sheep (EC) 2,242 ** x 2,242 2,343 .96 x Ducks 1,820 ** x x x x x Wheat 121 88 1.38 146 161 .90 1.84 Rye 85 69 1.23 110 122 .90 1.76 Oats 95 63 1.50 120 133 .90 2.10 Lupin 150 105 1.43 195 216 .90 2.05 Beans 160 105 1.52 195 216 .90 2.05 Rapeseed 390 #684 .57 x x x x Sugar 400 #519 .77 430 498 .86 (.96) Potato flour 320 316 1.01 340 410 .83 1.30 Casein 1,800 1,368 1.32 3,500 4,221 .83 3.08 Butter 1,200 #895 1.34 1,350 1,522 .89 (1.70) Skim milk powder 800 453 1.77 1,500 1,960 .77 4.33 Fall milk powder 1,250 579 2.16 1,600 2,010 .80 3.47 Cheese Cheddar 1,400 947 1.48 1,600 2,091 .77 2.21 Gouda 1,650 1,105 1.49 2,100 2,638 .80 2.39 Legend: * Retail pricem. *: Avege pice paid to exporterm. **3 Revenues frorn exports are calculated on the basis of the export price. Source: Ministry of Finance and author calculations. * If stocking is neither technically nor eco- Polish agriculture in the past. The discussion nomically feasible (due to excessive real interest above should have made it clear that the level of rates or credit rationing), the domestic prices protection of the Polish agricultural sector in may change dramatically from year to year due the past cannot be assessed solely on this basis. to trade reversal and even within the market- First, subsidies to agricultural sector outputs ing season due to the seasonal pattern of con- and inputs also need tobe taken into account. In sumption and production. the past the prices were fixed administratively. The subsidies to the agricultural sector were Inthetwofollowingsubsectionstheframework therefore related to the losses made by food- presented above will be used to assess the level processingcompanies and companies producing of protection of the Polish agricultural sector in inputs to the agricultural sector.4 Out ofthe 500 the past and the recent developments of Polish biggest state enterprises, 56 were loss making agricultural trade. in 1988. Of these, 43 belonged to the food- processing industry and nine to the feed-pro- To wHAT EXTNT WAs THE AGRICULTURAL sECTOR cessing and fertilizer industry. The profitabil- TAXED OR SUBnSMzm IN THE PAST? ity of these industries (the return to invested fixed capital) in 1988 was -8.5%. The strongly In the section on trade flows and performance subsidized dairy industry is not included in data were presented on the border protection of these figures. The losses of the food-processing 99 firms are a function of the ratio between farm- Table 4.8 Gross unit producer subsidy gate prices and the consumer prices that in the equivalents, 1987 (private sector) past were fixed administratively. It is difficult to determine to what extent these losses are due 1986 1987 1988 to too high producer prices or too low consumer prices. In other words, it is difficult to establish Wheat 46 47 34 to what extent the losses represent subsidies to Rye 37 48 28 consumers, to the agro-industrial companies or Barley 65 59 32 to the farmers. Sugar 33 31 A rough idea of the price transmission in the Rapeseed 50 43 past can be obtained from the data contained in Beef 16 39 46 Table A.11. In the past, domestic prices for the Milk 57 23 food-processing industry were in all cases higher than border prices. For grain products and live domestic prices for fertilizer. The level of pro- animals the farm-gate prices were also higher tection of crop products is therefore higher than thanborderprices,whereasfarm-gatepricesfor the PSE dlata indicate. pork and fruit seemed to have been lower. A more fundamental problem in interpreting The price transmission does not reflect taxes these data is the role played by the exchange and subsidies given to agricultural inputs. In rate. In the PSE calculations, the world market assessing the level of protection of the agricul- prices have been translated into domestic prices tural sector in the past these should also be at the official exchange rate. If the exchange taken into account. rate was overvalued in relation to the equilibrium According to preliminary calculations, direct exchange rate, the level of subsidization would production subsidies in 1989 (includingthe state be overestimated. The fact that the black market budget subsidy to the social security and re- exchange rate was significantly higher than the tirement system for private farmers) for pro- official exchange rate could support such an duction of grains, rapeseed and sugar beets interpretation. Purchasing parity comparisons (mostly the subsidy to mineral fertilizers) may lead to the opposite conclusions. amounted to one-tenth of the farm-gate prices, Another issue is the level of world market while subsidies to livestock production (mainly prices used in the calculations. For 1986 and to coal and concentrate feedstuffs) constituted a 1987, world market prices for agricultural third of the procurement price for slaughter products were particularly low. If calculated at swine and a tenth of the procurement price of 1989 world market prices, the PSE would be cattle and milk.5 Input subsidies for previous significantly lower. years were at a similar level. It is unclear to what extent the PSE calcula- Producer subsidy equivalent (PSE) has been tions reflect the considerable efficiency gains calculatedforPoland.'7 TheunitPSEindicates which would arise from restructuring the up- the transfer to the agricultural sector due to stream and downstream sectors and to what border measures and subsidies to agricultural extent subsidies in the past have been eaten up sector outputs and inputs in relation to the by the administrative cost of the rationing value of agricultural production at producer scheme in force at that time. prices. These data (see Table 4.8) suggest - as The misallocation of resources within the one would expect since they take into account agricultural sector due to rationing inputs in the input subsidies mentioned above -that the the past (havingthe effect of input taxes) should agricultural sector was subsidized in the past to also be taken into account in assessing the level an even larger extent than the export subsidies of protection. and price transmission data seem to indicate. However, on balance the evidence seems to The PSE for animal products do not take into suggest that the agricultural sector was subsi- account the excess feed costs due to higher than dized in the past. In other words, it suggests world market prices for feed grain. The pro- that the removal of government intervention is tection for animals and animal products, in likely to lead to lower agricultural production particular for pork, is therefore lower than the and therefore, if the fall in production is not PSE data indicate. The PSE does not take into accompanied by an even greater fall in food account the effect of low energy prices on the consumption, to lower net exports. One impor- 100 tantimplication ofthis isthat domestic pricesin optimal for the medium term, and 2) to price Poland, if left to market forces, will move from instability over the season due to price swings the present level, well below the fo.b. prices, to from fo.b.- to c.i.f.+. a level of prices above the c.i.f. prices. Table A.11 in the Appendix shows that the However, considering the complexity of the situation has changed dramatically during the link between the world market prices and the first three months of 1990 compared with the agriculturalsectorprices,itwouldbepremature previous period. The prices paid to farmers as to assess the prospects for Poland's agricultural well as to middlemen during this period were trade only on the basis of past performance as significantly lower than border prices. The reflected by the PSE calculations. increase in the exchange rate from Zl 2,990/US$ to ZI 9,500/US$ on January 1, 1990, eased the RECENT EVOLUTION OF TRADE AND PRICES effect of the suppression of export subsidies. But as the real exchange rate depreciated (due The decrease in income and the relative price to high inflation) the relation between output increase for certain food products have made prices and input prices deteriorated. food consumption in 1990 decrease by around Data gathered by the Ministry of Finance also 10% compared with 1989 (see Annex 3). It is show that the ratio of input prices to output unlikely that adaptation has been completed. prices has developed unfavorably during the Substitute products like quality margarine, for first five months of 1990, particularly for milk, example, are not yet available. The consump- but also for grain; the evolution of input to tion of butter may therefore decrease signifi- output prices for pork, on the other hand, has cantly if in the future it is priced at cost. Food been more favorable. consumption in general, however, is likely to More detailed calculations describing the re- increase to a similar level as in the past when lationbetweenfarm-gatepricesandborderprices the level of income recovers (see Annex 3 on food are presented in Appendix Table A. 11 for pork, demand). live cattle and live lamb. Appendix Table 12.1 After having accumulated stocks during the shows that exports of pork were subsidized until hyperinflation in 1989, private agents (farmers 1989. The border price was lower than the price and consumers) seem to have reduced stock to a paid to the meat processing firms. During the bare minimum in 1990 due to the shift from a first months of 1990 the devaluation allowed negative to a highly positive real interest rate. profitin the trade of pork carcasses. The domestic Farmers have decreased the use ofinputs partly price has increased 389.3% while the border because of high prices and partly because of pricehasgrown510.5%. Thefirstfigurereflects crippling high interest rates. Data gathered by the inflation rate, while the second can be at- the Ministry of Finance provide clear evidence tributed to the devaluation of the Polish zloty. of a planned reduction in herd size (although The picture is similar for live cattle and live these plans have yet to be implemented) due to lamb. the low feed costs during the summer season. This has caused an accumulation of stocks in RECOMMENDATION REGARDING FUTrURE RESEARCH state enterprises and trade reversal for several products, which in turn results in very low It has not been possible within the timeframe of domestic prices relative to world market prices this study to provide reliable projections for (f.o.b. parity prices). The present situation is not Poland's trade prospects for the future. Trade indicative of the future situation if the must be seen as the interaction between exter- government's restructuring program succeeds nal conditions and domestic supply and demand in improving the efficiency of upstream and conditions. It may be possible to predict future downstream sectors and iftrade reversal moves domestic demand for agricultural products; but prices up from the fo.b.- to the c.i.f.+ level. without knowing how the agricultural sector Uncertaintyaboutthegovernment'sagriculture will react in the medium term without govern- policy and the high and uncertain real interest ment intervention (which in turn depends on rate may lead 1) to destocking and running how much the agricultural sector has been sup- down of agricultural capital (in particular, ported in the past), it is very difficult to predict livestock capital), which will representa serious trade. We have reviewed the evidence concern- misallocation compared with what would be ingthe extent ofpastagricultural subsidization. 101 Figure 4.3 The price transmission for wheat processing Point of consumption: transport costs Household sector services Farm-gate price (c.i.f) 160 $tt monopolistic profit Import price (c.i.f.) 146 $/t Range of domestic price variation at constant Export price (f.o.b.) 120 $tt world market price processing transport costs services monopolistic profit Farm-gate price (