EDOC7055

30 March 1994

Doc. 7055

1403-25/3/94-5-E

REPORT

on rural and agricultural reform

in the new democracies

of central and eastern Europe

(Rapporteur: Lord MACKIE OF BENSHIE,

United Kingdom, Liberal, Democratic and Reformers Group)

Summary

Most of the countries of central and eastern Europe have an important part of their population living in the countryside and employed in the agro-food sector. The restructuring of the economy has led to a general decrease in industrial production and in the output from the agricultural sector. Unemployment has increased dangerously in urban centres as well as in rural regions, threatening social stability and further democratic development. High food prices and inflation are causing the poor part of the population to suffer from malnutrition. Imported food has helped overcome the most critical situations of food shortages in towns but has on the other hand hampered the development of the internal agricultural sector and food market. Financial instruments and resources for agricultural and rural development have been inadequate to meet needs.

Financial institutions must be created or strengthened in order to achieve adequate agricultural and rural development in eastern Europe. This effort must be supported by making western practical expertise available and by adopting a policy of protecting the internal agricultural market during a transition period. But policies must at the same time avoid the introduction of high subsidies and complex support programmes. Investments should be made to improve marketing and distribution with a view to gaining new markets and enhancing demand for quality products. Agricultural and rural reforms must respond to the needs of farm workers and people living in the countryside and must be carried out with care to avoid unnecessary hardship for those concerned. A development of professional competence in farming, as well as part-time farming, must be catered for. Land-leasing schemes and true co-operative ventures could be promoted alongside with land-privatisation programmes.

I. Draft resolution

1. The Assembly considers that agricultural and rural development in the new democracies of central and eastern Europe should be given highest priority in order to guarantee inhabitants adequate access to healthy food and for the stabilisation and strengthening of democracy.

2. The Assembly refers to the results of the Colloquy on Investment Policies for Agricultural and Rural Development in Central and Eastern Europe, organised by its Committee on Agriculture (Warsaw, 8 June 1993) and recalls its earlier recommendations on biomass used for energy production and on agricultural and rural policy reforms in Europe, stressing that investment policies must be adjusted to take better account of the needs of rural society and the agricultural sector.

3. Consequently the Assembly calls on governments of Council of Europe member states and states whose parliaments enjoy special guest status with the Assembly, the European Commission as well as the European Bank for Reconstruction and Development:

i. to adopt market-oriented agricultural policies that avoid high subsidies and complex support programmes;

ii. to focus in agricultural reform programmes (privatisation, land-leasing, reconstruction of co-operatives) on the interests of rural populations notably farmers and farm workers;

iii. to carefully assess and monitor the social consequences of reform with a view to avoiding unnecessary hardship for those involved;

iv. to foster professional competence among new private farmers and facilitate their access to adequate farm-land;

v. to maintain the possibility of farming on small private plots as a complement to other forms of gainful employment (part-time farming);

vi. to create new employment in rural regions and to assure educational, social and other services in order to maintain or improve the viability and attractiveness of the countryside and to protect the environment;

vii. to upgrade marketing and distribution of agricultural commodities in the former "east bloc" countries in order for them to gain new markets and to enhance demand for their quality products;

viii. to pay special attention in this context to the use of biomass for energy production;

ix. to allow the protection of the internal agricultural market of these countries against dumping or other unfair trading practices, which undermine agricultural and rural development and hence, social stability and food security;

x. to create and strengthen agricultural and rural credit institutions capable of financing agricultural and rural development projects, in particular those which have adopted sound management practices;

xi. to foster east-west co-operation by involving western practical expertise and finance in assisting reform and development in east European economies in transition.

II. Explanatory memorandum

by Lord MACKIE OF BENSHIE

Contents

Page

Introduction 4

Agricultural and rural reforms in Poland 5

Financing of agricultural reforms 6

Conclusion 9

Introduction

The present report is based on the findings of the Colloquy on "Investment Policies for Agricultural and Rural Development in Central and Eastern Europe" which was organised by the Committee on Agriculture on the invitation of the Polish delegation to the Parliamentary Assembly. The colloquy was divided into two working sessions:

—pr esentation of agricultural and rural reforms in Poland;—

—fi nancing of agricultural reforms.Th

The first theme was introduced by Mr Antoni Furtak, Chairman of the Committee on Agriculture of the SEJM. The second theme was introduced by Mr Lars-Håkan Halldin, Vice-President of "Jordbrukskredit AB", Stockholm (Sweden) and Chairman of the Agricultural Credit Committee of the European Savings Banks, Mr Janusz Cichosz, President, Gospodarki Zywnosciowej Bank, Warsaw (Poland), Mr Jean-Luc Perron, representing the Director General of the "Crédit Agricole" and Director General of "Crédit Agricole" Consultants, Paris (France) and Mr Klaus von Jeinsen, "Deutsche Genosenschaftsbank", Schwerin office.

This colloquy was attended at the highest level by the Polish Government. The Prime Minister, Mrs Hanna Suchocka, spoke at the opening session and the Minister for Agriculture, Mr Janusz Byliński, and the Deputy Minister of Agriculture, Mrs Maria Zwolińska also participated.

Since the colloquy was held in Warsaw the discussions focused on Polish affairs and grievances caused to agriculture by the transition from a centrally planned to a market economy.

The proceedings of this colloquy has been published separately and serves as a supplement to this report.

Agriculture and rural reforms in Poland

The transition from a centrally planned communist state to a market economy is probably easier in Poland, particularly with regard to agriculture, than in other east European countries. The coherence of Polish resistance to collectivisation is stiffened by the fact that the Catholic Church has an enormous influence and is backed by the vast majority of the people. This certainly played a large part in restricting the collectivisation of agriculture in the form of state farms and co-operatives to some 20% of the land in Poland, leaving 80% in the hands of small farmers. The co-operatives, of course, differed little from state farms and were imposed from above and were not a genuine coming together of farmers for mutual co-operation. They were very expensively managed in that they were often over-supplied with labour. A state farm of 1 000 hectares could well have 100 people on the pay-roll and living in the area. Although this was heavily subsidised, it did in fact, combined with the private sector, produce enough food for the people of Poland.

It appears to me that privatisation, or the move towards privatisation, was done too hastily and without enough thought. The advice from the west was mostly for speed and probably wrong. What appeared to me to happen was that the co-operatives and state farms were made financially responsible and that loans and guarantees from the state were withdrawn, with the result that many co-operatives in Poland (and also in other east European countries) went bankrupt, but before going bankrupt reduced their purchases of fertilisers, herbicides, etc., to a point where production fell drastically. In some areas they simply had not the money to cultivate the land at all.

At the same time, the drop in the consumer subsidy of meat drastically reduced demand and prices to the farmer, resulting in a very large decline in domestic animal numbers. At the same time, many agricultural workers were made redundant, resulting in considerable social distress and no doubt were better off under authoritarian socialism.

It is easy to be wise after the event, but I do feel that a much slower transition would have been better for all concerned. Production would have kept up and the need to import food into Poland could well have been avoided. It is quite obvious that many of these lessons have been learned by the Polish agricultural authorities and some serious thinking about the transition has been done.

In the private sector it is obvious that nowadays an average holding of about seven or eight hectares is not going to keep young people on the land. At the present time the largest percentage of private farmers are over fifty and the young people are leaving the land. There is bound to be an inevitable enlargement of some holdings while others decline to that of a simple family home or to part-time farming.

This will require a big increase in social services in the countryside to provide amenities such as schooling, roads, hospitals, etc., required to keep the population living in the country instead of flocking to the cities.

Public services in themselves are, of course, not enough to stop migration. Strong efforts must be made to establish tourism and manufacture in the countryside, or at least within commuting distance of the main farming areas.

Examples of successful location of industry for rural areas are to be found in many parts of Europe: in Germany, for example, in the Black Forest, in some areas of the Highlands of Scotland and in Scandinavia. It does require planning and support from the state, but in the end should produce a balanced social and economic unit in the countryside, which brings us to the need for investment.

Financing of agricultural reform

The main theme of the four bankers was the production of economic agriculture, not heavily dependant on state subsidies and I was very interested to find bankers going back to what I understand was one of the main principles of banking in the old days, that a good banker lends on the personal quality of a borrower and realises that the quality of the borrower is much more important than the quality of the security.

There is scope for a certain amount of west European investment; certainly there is scope for the use of the skills developed in the European Union in agricultural production which might usefully be followed by Polish farmers.

Having the state own the land appears to me to give the chance to evolve a good landlord/tenant system. In many cases, particularly in Scotland, this system has worked very well in that a landlord provides permanent capital and the tenant provides the working capital and the enterprise. In Poland, for example, I think that it could well be useful to have a joint venture with young, energetic and knowledgeable farmers from western Europe on a basis of a certain length of lease, but I myself would have thought that, until anyone leasing land is seen to be a harmonious part of the social scene, it would be better to lease than to sell.

Processing and marketing is another field and there I think that joint ventures could well be extremely valuable. Co-operation and marketing in Denmark, for example, has long been a model of efficiency, in that the last 100 years the Danes have changed the breakfast habits of the British people.

I think that there is a market in the European Union for produce, but it needs to be on a quality basis because already the Union is over-burdened with food. In fact the best thing the Union can do is to get rid of the surplus and thereby stop the impoverishment of other farmers, from New Zealand to eastern Europe and elsewhere.

Madam Suchocka, Prime Minister of Poland, stressed in her speech that the difficulties of productivity in the agricultural industry, which at the moment along with forestry, employs a third of the population, is going to lead to high unemployment, unless they are able to invest in other industries and services in the countryside, which indeed, I think was a plea for outside investment in Poland.

We had two interesting speeches from representatives from Slovakia and Albania whose problems, particularly of Albania, are severe. There was general agreement as to the ultimate objective, which is, of course, that we require a healthy and a balanced economy in the countryside.

Most speakers agreed that there had to be more attention paid to industry, tourism and public services in the rural areas as, without doubt, the number of farmers earning a living from full-time farming was going to decline steeply in the next few years. How this was to be achieved resulted in a number of different approaches. Certainly the eastern countries did not intend, and could not afford, to subsidise agriculture to the extent of the European Union and there was much criticism, particularly from Polish of Union policy.

The Polish position can perhaps be taken as the norm in the ex-communist countries, although there are varying degrees of the problem.

Poland is fortunate that some 80% of the land is in private, small farms, with about 10% in state farms and 10% in co-operatives which are not co-operatives as we know them in the west. The average productivity per farmer is about a third of the productivity of farmers in the European Union. The state co-operatives are ineffective, employing very large numbers of people and are now in the state where many, although under the new regime, are in fact bankrupt and cannot afford to buy fertilisers or herbicides.

The small farms average around seven hectares. Many are over-equipped with machinery, but they seem to get a reasonable living and going through the country one observes quite a lot of new houses being built — I suspect most of them by family labour.

We visited a small farmer who had expanded to forty hectares. Both he and his wife were graduates from an agricultural college and obviously of an ability far above average. They appeared to us to be making more money off one hundred acres than their equivalent in the west. They were a sample of the sort of young people who must be the basis of the new system by taking over land from their less competent neighbours. Already we were told that 80% of the small farmers have other jobs. Part-time farming is necessary economically and desirable socially.

The speech of Mr Balinski, the Minister for Agriculture, was interesting. He was indignant at the ban on the export of meat from Poland to the European Union due to outbreaks of "foot and mouth disease" elsewhere on the continent — there being no "foot and mouth" in Poland for many years.

Interest rates are up to 50% because of high inflation, but there are special rates of 24% in some cases. One of the points he stressed was investment in public services in the countryside in order to take up labour which must be surplus to efficient management. He also emphasised the importance of processing agricultural products in an attractive way for the market. He realised fully the need to protect Polish agriculture against subsidised dumping. Subsidised dumping by the European Union is, of course, a scandal, and without any doubt forces down prices in the rest of the world, including eastern Europe.

The Junior Minister, Madam Zwolińska, was very interesting on the management of state farms. They have here a distinct problem in that generally the management is bad and the concern of the government was to change this by a number of means, including leasing and sale of state land. They were, of course, reluctant to sell, but I understood that the money could be used to reinvest in other factors in the countryside. She was very conscious of the fact that the social consequences had to be dealt with and that dismissing 70% of the labour force was not something that could be done brutally and quickly. She also stated that in the case of the small farms they expect the average size to double in fifteen years. Most farmers with small farms are in fact over fifty years old. She also mentioned the use of rape oil for fuel.

Other speakers were worried about pollution in various forms and suggested that low in-put agriculture producing 3 to 5 tons/hectare average for grain would solve the surplus and ecological problems, but as Poland imported more than she exported in 1992, this does not seem to be a logical step, although some of the short-fall can be blamed on drought.

There is obviously a very large problem in Poland. Sheep and cattle are down by a large percentage and of course, one of the main troubles is that a market for surplus in the former Soviet Union has now largely disappeared purely because of payment difficulties.

What did emerge was that, on the whole, east European countries realised that it was impossible for them to adopt the heavy subsidisation practised in the Common Agricultural Policy and that the market must play the major part in their economic policy, which brings me to the great need for investment in Poland in particular, but other rural economies in eastern Europe also.

The four bankers were of course very interesting in their varying views.

The Swedish banker, Mr Halldin, concentrated very strongly on the necessity for education and for banking on the good individual and the support of well run co-operatives, or indeed private companies in agriculture. Again, he was conservative in his view that money must be repaid.

The French banker gave a history of the "Crédit Agricole" which has a long history of support for farming in France, lending money at very advantageous rates of interest, but very much on a basis of close knowledge of agriculture and the people therein. I understand they have a very low rate of failure. Modifications of the "Crédit Agricole" are obviously to be studied for use in eastern Europe.

The Polish banker detailed many of the difficulties and of course suffered from a very large shortfall in the funds required to back a change in agriculture all over Poland.

The German banker gave a presentation of the transformation of the east German agriculture sector which had cost more than 1 000 million Deutschmarks. He said that the three main reasons for this enormous cost have been unclear concepts in the beginning with regard to:

—pr ivatisation and long-term tenancy, the handling of old debt, and the former workers' rights in relation to the property they had taken part in creating.Al

All the bankers agreed of course on the necessity that an intake of funds was necessary both in agriculture itself and in the processing and marketing of the goods.

It appears to me that the European Bank for Reconstruction and Development (EBRD) could have an important role to play once it has got over its initial troubles. It cannot of course lend directly to smaller farms, but it would be good banking practice to make funds available to local banks with the sort of experience to be had in "Crédit Agricole" to stimulate agriculture whenever it was efficient in eastern Europe. Again, it must be stressed that a good loan is one made to competent people who know their jobs.

Conclusion

1. Eastern Europe should not follow the European Union with high subsidies and complex support programmes.

2. Accept that the children of farmers with small acreages will not accept the standard of living of the past. Amalgamation of the land into the hands of keen and competent farmers must take place. The remaining small farms must be part-time, providing a home and some extra income to a family whose main income is derived from other sources.

3. The state farms and so-called co-operatives must be privatised or turned into genuine co-operatives by the willing efforts of the people working there. Outside money and expertise could help this process, but the social effects need careful handling. Selling the land could bring in much needed cash for other ventures, but if possible land should be let on a secure lease and only sold when the set up is successful and acceptable to people of the countryside.

4. Outside expertise in marketing and selling should be used whenever possible. Entry to other markets should increasingly depend on demand and quality.

5. The market of the native country must be protected for a number of years until it is safe from subsidised dumping of surplus products from the European Union and the United States of America.

6. Agriculture alone cannot keep the countryside as a socially adequate place to live. People like living in the country provided that the social services are good and, above all, that there is well paid work within commuting distance, if not on the spot. Many examples exist in Europe of this sort of area and government should study how these have been developed.

7. A highly skilled agricultural population needs financial backing. The banking system must loan the money available to the people best able to use it and repay it. This means a return to the old principle in banking that the bank's money is safer with an honest able person than with someone offering plenty of collateral.

8. The conversion to a market economy is painful and distressing for many people in eastern Europe. The west must help with cash and expertise. The cash must go to the right people in agriculture through a specialised banking system perhaps on the lines of "Crédit Agricole" and the expertise must be practical and available.

Reporting committee: Committee on Agriculture.

Budgetary implications for the Assembly: none.

Reference to committee: Order No. 472 (1992).

Draft resolution adopted by the committee on 14 March 1994 with 2 abstentions.

Members of the committee: MM. Scheer (Chairman), Sipos, van der Linden (Vice-Chairmen), Mrs Anttila, MM. Bernardini, Bühler, Mrs Burbiené, MM. de Carolis (Alternate: Ferrari), Cerny, Couveinhes, Deasy, Figel (Alternate: Rybansky), Goerens, Grandstedt, Gunnarsson, Hansen, Holte, Sir Ralph Howell, MM. Iuliano (Alternate: Leonte), Jeambrun, Kiratlioglu, Lanner, Lord Mackie of Benshie, MM. Mändmets, Mannino, Metelko, Michels, Ottenbourgh, Pirinski (Alternate: Draguiev), Pizzo (Alternate: Rubner), Rodrigues, Roger, Roman, Seiler, Smolarek, Thompson (Alternate: Dame Peggy Fenner), MM. Vella, Vrettos.

N.B. The names of those members present at the meeting are printed in italics.

Secretary to the committee: Mr H. Lervik.