Integration of new Central and Eastern European member states

The James Hutton Institute

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Mariusz Safin

This paper is an overview of the most important issues which arise from integration of the new member states in respect of the Less Favoured Areas (LFA). It was judged that problem of the LFA in the EU acceding countries (EUAC) is important as it will relate to a large area estimated to be between one quarter and half a million of square kilometres depending on how many countries will accede the EU. There are considerable differences between the EUAC both with regard to share of the LFAs in total farmland and in the way that national agricultural policies treat these areas. Future development of the LFA largely depends on a way in which the EUAC will direct subsidies to agriculture. Generally, all production de-coupled subsidies will help to develop LFA with low-intensity farming while production-coupled payments could reverse this welcomed trend.

Less Favoured Areas (LFA) and their potential importance in the EU acceding countries (EUAC)

The LFA are only vaguely defined as pointed out at the beginning of Brouwer et al. paper presented at the Nafplio conference. Although, it is indisputable that the LFA consists of mountains, moorlands, wetlands, heaths and rough pastures. Interestingly, areas which are perceived as the LFA in France may come under the LFA in Spain. For example the mountain-originated LFA starts in France from 600 m., in Germany from 800 m. and in Spain from 1000 m. above the sea level; also different values of slope (from 20% in most countries to 25% in Portugal) qualify given area as the LFA.

Taking into account, that criteria for counting a given area as the LFA differ across the EU member states, it is difficult at this point to quantify how much of the farmland in the EUAC belongs to the LFA. Taking into account only the altitude criteria, the differences may be significant. For example if all the areas above 500 m. in Poland were counted as the LFA, 3.1% of area of Poland would go under the LFA regulation. But if farmland above 1000 m. was counted as the LFA, only 0.2% of Poland would qualify as the LFA. Taking into account that total area of Poland is about 323 thousand of square kilometres, the difference is significant and reaching nearly 1000 km2 (100 000 ha). It can be expected that other criteria give similar differences and that cumulative effect can be large. Because the criteria are not specified for each EUAC yet, the problem of how much of the EUAC farmland can be counted as the LFA can not be solved at this point by summing up the LFA in each country.

However, for many reasons (for example budgetary implications) it is important to have a vague idea of how large the LFA can be expected in the EUAC. It is estimated that the LFA in the European Union represent about 56% of total farmland. Assuming that there is no significant reason to expect that this share is much different in the EUAC, an estimate of the LFA in the EUAC can be calculated. If to the EUAC are counted all ten EUAC countries, than the LFA would be about a half million km2. But if to the EUAC count only these countries which are most advanced in integration process (Czech Republic, Hungary, Poland and Slovenia - EUAC-4) the LFA would be around a quarter of a million km2.

Based on this simplistic but useful calculation, it can be concluded, that the LFA is an important issue for integration of the new member states and should be much better researched than it is at the moment.

There are considerable differences between the EUAC both with regard to share of the LFAs in total farmland and in the way that national agricultural policies treats these areas. This paragraph gives a short overview of the LFA problem in Czech Republic, Hungary, Poland and Slovenia.

Czech Republic has farm structure comparable with the UK; the average farm size is 57 ha (in statistics only farms larger than 1 ha are counted), share of agriculture in GDP is around 7.0% and employment in agriculture reaches about 8.0% of total working population. From this figures it appears that labour productivity in agriculture is at the national average level.

There are some measures used in Czech Republic to support the LFA. The support covers about 35% to 50% of the farmland. Subsidies are granted for conservation of grassland and a sort of set-accede scheme. Farmers in LFA were paid to switch from cereal production to grassland. Large such action was taken in 1994 when 200 mil KC (4 mil UD$) was spent to establish grassland on previously arable area. In 1995 the expenses were lower as they were mainly aimed at conservation of the newly created and previously existing grasslands. There is also a large programme implement for landscape management; in 1994 about 11 mil US$ was spent for it and in 1995 this sum was two and a half times higher. Considerable amount of money is also spent for afforestation: 0.3 mil US$ in 1994 and 0.65 mil US$ in 1995.

Hungarian agriculture has about 9% share in GDP and employs 15% of the Hungarian work force. Labour productivity is considerably below the national average. Agricultural policy in Hungary is not directed to assist the LFA in a special way. Subsidies to agriculture are spent mostly for market intervention and almost none for LFA (see the OECD report).

Share of Polish agriculture in GDP is about 6% and employs about 25% of work force. From these numbers it is clear, that labour productivity is about one fourth of the national average. This is especially evident in areas which can be defined as LFA. Average farm size is about 7 ha (in statistics only farms larger than 1 ha are counted).

With respect to LFA, the situation is similar to Hungarian; supporting market intervention and farmers pension schemes gets priority. However government provides some assistance for farmers who decided to derive income outside the agriculture. The assistance covers transfers of know-how and information on existing business opportunities outside the agriculture. The assistance is not tied to the LFA, but for economic reasons farmers use the government help in areas which could be defined as LFA. Economic forces (quite unfavourable especially for small farmers) and government support have already pushed some farmers out of agriculture. These exits are recorded in statistics and demonstrate in falling share of farmers in rural population.

Problem of LFA in Slovenia is very important and the government devotes considerable support for them. There are about 20 regional projects to create so called 'vine roads'. Under these programmes most of the money are spent to create and improve tourist facilities and in this way to provide an alternative (or supplementary) income for farmers. These 20 programmes are run in highlands, mountains and high altitude regions.

Future development of the LFA in a long run is determined by the accession to the European Union. If prices levels in the EUAC are aligned to the EU levels, there is a danger of encouraging significantly higher agricultural production. The implication would be that also farmers in LFA would have an incentive to raise production. Thus, the positive trends of falling production in LFA or getting less intensive may be reversed. Therefore it is argued in line with the Common Agricultural Policy (CAP) reforms and World Trade Organisation (WTO) principles, that money which are spent on helping farmers (including these who farm in LFA) to raise their income, should be granted in a production de-coupled way. As stated by many authors (for example Tangermann and Josling, Buckwell) WTO constraints are a serious problem if unreformed CAP would be applied to the EUAC. Production would increase to such extent, that enlarged Union would not be able to meet WTO commitments and would have to bear enormous budget costs (Tangermann and Josling). The qualitative analysis of suggests that, potentially, supply control can be a solution. But it is a problematic measure. After having set prices, setting the level of supply would freeze two important economic variables which for many reasons is not desirable.

It is also difficult to implement supply control for practical reasons. Production of only a few products in the EU is controlled. Once the EUAC join the European Union, new supply controls cannot apply only to selected country but it will have to operate for the whole Union. Whether application of supply controls for the whole Union would be politically acceptable is a debatable issue. But perhaps even more difficult is the problem of how to control supply using administrative measures. It is not clear if supply control should restrain the number of animals on the farm or the sale of these animals. Should the restrictions be calculated on the basis of output, land or even the capacity of cowsheds? There are no easy answers and it is not an accident that production quotas which operate within the CAP relate only to sugar-beet and milk. These products have features which help supply control; sugar-beet is practically useless if unprocessed, and milk is perishable. Supply control for other products (which can be relatively easy processed) can for example induce dual markets. The example of the centrally planned economy shows that, if supply control led to a large imbalance in the official markets, alternative markets emerge to compensate for this effect and no administrative bans on these markets can stop people trading outside the official system. In addition, even if there would be a way of effective supply control, agricultural production in some EUAC (Poland, Slovenia) is characterised by a low number of animals per farm and it would be difficult and costly to control supply. Certainly, some small meat processors would probably willingly take the risk of illegal trade in return for some extra income. Clearly, introduction of supply control would not be easy, but that does not mean that it cannot be introduced at all.