metadata: authors: 0: author: Orlowski,Witold M.
count: Poland
docna: 0: docna: Price support at any price?  Costs and
            benefits of alternative agricultural policies for Poland
docty: Policy Research Working Paper
subtopic: Pensions & Retirement Systems,Labor Markets,Food & Nutrition Policy,Food Security,Employment and Unemployment
teratopic: International Economics and Trade
abstracts: cdata!: The author argues that Poland must
            choose an agricultural policy that promotes efficiency,
            structural change, and adjustment to the new market
            environment and eventual membership in the European Union.
            That policy must take into account both the needs of, and
            the financial constraints on, Polish agriculture.  Results
            of simulation experiments performed with the use of the
            computable general equilibrium model of the Polish economy
            suggest that Common Agricultural Policy-type price supports
            are not the most efficient agricultural policy for Poland.
            The author discusses alternative policies and scenarios.
            Rather than discuss whether the relationship between
            farmers' incomes and average Polish wages is fair, the
            author analyzes whether medium- and long-term development
            trends in the Polish economy may cause this relationship to
            deteriorate, and what policies will counteract those trends.
            Rapid growth in the nonagricultural sectors combined with
            real appreciation of domestic currency (caused either
            through good current account performance or significant
            capital inflows) may jeopardize farmers' relative
            income position.  And such developments are probable if
            positive projections for economic development and membership
            in the European Union are realized.  The agricultural sector
            can defend its relative income only by becoming more
            efficient.  Price supports improve farmers' relative
            income but at a high cost to taxpayers and consumers and to
            macroeconomic efficiency.  To meet these costs, Poland must
            put in place firm quantity controls.  But the author thinks
            that the best strategy would be to avoid price supports
            until the moment of joining the European Union's Common
            Agricultural Policy.  In the interim, policies aimed at
            reducing farm employment seem most appropriate.  The author
            discusses two such policies: encouraging older farmers to
            retire and promoting jobs in rural areas.  He also proposes
            two feasible scenarios for integrating Polish agriculture
            with that of the European Union by 2005-10.
geo_reg_key: 517208,517191,517190
repnme: repnme: Price support at any price?  Costs and
            benefits of alternative agricultural policies for Poland
display_title: Price support at any price Costs and
            benefits of alternative agricultural policies for Poland
listing_relative_url: /research/1996/03/696698/price-support-price-costs-benefits-alternative-agricultural-policies-poland
topicv3: Agriculture and Food Security m1326205 435,Agricultural Policies m1326884 170,Jobs m1503931 2670,Agricultural Employment m1503998 2696,Retirement m1504007 2896
publishtoextweb_dt: 2010-07-01T00:00:00Z
historic_topic: International Economics and Trade
origu: Hung/Czk/Moldova/Slovak/Slovenia (ECC07)
no_of_pages: 48
author_keys: 0: author_key: 99661
model_extractions: | POLICY RESEARCH WORKING PAPER 1584

# Summary findings

Orlowski argues that Poland must choose an agricultural policy that promotes efficiency, structural change, and adjustment to the new market environment and eventual membership in the European Union. That policy must take into account both the needs of, and the financial constraints on, Polish agriculture.

Results of simulation experiments performed with the use of the computable general equilibrium model of the Polish economy suggest that Common Agricultural Policy-type price supports are not the most efficient agricultural policy for Poland. Orlowski discusses alternative policies and scenarios.

Rather than discuss whether the relationship between farmers' incomes and average Polish wages is fair, Orlowski analyzes whether medium- and long-term development trends in the Polish economy may cause this relationship to deteriorate, and what policies will counteract those trends. Rapid growth in the nonagricultural sectors combined with real appreciation of domestic currency (caused either through good current account performance or significant capital inflows) may jeopardize farmers' relative income position. And such developments are probable if positive projections for economic development and membership in the European Union are realized.

The agriculture sector can defend its relative income only by becoming more efficient.

Price supports improve farmers' relative income but at a high cost to taxpayers and consumers and to macroeconomic efficiency. To meet these costs, Poland must put in place firm quantity controls. But the best strategy would be to avoid price supports until the moment of joining the European Union's Common Agricultural Policy, says Orlowski.

In the interim, policies aimed at reducing farm employment seem most appropriate. Orlowski discusses two such policies: encouraging older farmers to retire and promoting jobs in rural areas.

He also proposes two feasible scenarios for integrating Polish agriculture with that of the European Union by 2005-10.

This paper - a product of the Country Operations Division, Country Department 11, Europe<sup>and Central Asia-</sup> is part of a larger effort in the region to analyze the process of integration of the Visegrad countries<sup>into the European Union. The study was funded</sup> by the Bank's Research Support Budget under the research project "Costs<sup>and Benefits of Alternative Agricultural Policies for</sup> Poland" (RPO 678-88). Copies of this paper are available free from the<sup>World Bank, 1818 H Street NW, Washington, DC 20433.</sup> Please contact Witold Orlowski, room H11-093, telephone 202-473-7270,<sup>fax 202-477-1692, Internet address</sup> worlowski@worldbank.org. March 1996. (41 pages)

**_The_** _Policy_ **_Research_** _Working Paper_ **_Series_** _disseminates_ **_the_** _findings of work in progress_<sup>_to encourage_</sup><sup>**_the_**</sup><sup>_exchange of ideas about_</sup> _development issues. An objective of the_ **_series_** _is to get the_<sup>_findings out quickly,_</sup><sup>**_even_**</sup><sup>_if the presentations are less than fully polished. The_</sup> _papers carry the names of_ **_the_** _authors and should be used and_<sup>_cited accordingly. The findings, interpretations, and conclusions are the_</sup> _authors'_ **_oum_** _and should not_ **_be_** _attributed to_ **_the_** _World Bank,_<sup>_its Executive Board of Directors, or any of its member countries._</sup>

Produced by the Policy Research Dissemination Center
# PRICE SUPPORT AT ANY PRICE?

## Costs and Benefits of Alternative Agricultural Policies for Poland

Witold M.Orlowski World Bank
_2_ _Price Support at Any Price?_

# **PRICE** SUPPORT AT ANY PRICE? Costs and Benefits of Alternative Agricultural Policies for Poland

## Table of Contents

### 1. Introduction

2. Agricultural Policy - Does Poland Need It?

- 2.1 Polish agriculture in early 1990s: structural problems

- 2.2 Income parity: what may endanger it?

- 2.3 Integration with the European Union

3. Price Support: Timing and Costs

- 3.1 Targeting EU prices: how and when?

- 3.2 Targeting EU prices: simulation experiments

4. Are There Alternatives to Price Support?

- 4.1 Alternatives to price support: possible options

- 4.2 Alternatives to price support: simulation experiments

5. European Integration Scenarios

- _5.1_ Integration scenarios: in a search for feasible paths

- 5.2 Integration scenarios: simulation experiments

_6._ Main conclusions from the simulation analysis Appendix. The POLAGR model: a short description References The research was supported by the World Bank's Research Support Budget (RPO #678-88) The author would like to thank Leszek Zienkowski, Tadeusz Hunek, Andrzej Kwiecinski, Adam B.Czyzewski, Jerzy Plewa, Luca Barbone, Christine Wallich, Jean-Jacques Dethier and Daniel Oks for their helpful comments and support..
_3_ _Price Support at Any Price?_

# 1. Introduction

The economic transformation of Poland, started in 1990, has resulted in a new, more open and competitive environment for all economic agents. Polish agriculture has found itself in a totally new situation. The new market conditions require a deep structural adjustment, in a search for a new equilibrium position. The Polish agriculture has to face two major challenges:

- (1) General _liberalization_ of the economy, and particularly opening to the world market and a market-led economic growth;

- (2) _Integration_ with the European Union, that will eventually lead to a full membership of Poland in EU.

Is the Polish agriculture of today ready to face these challenges (taking into account that both targets,liberalization and adjusting to highly regulative EU agricultural policies, are to a certain degree contradictory)? And, if the answer is "no", what policies may ease the way to the new equilibrium? We have tried to answer these questions, using a Computable General Equilibrium model of the Polish agricultural policy.

A good starting point for the analysis was provided by a report on the agricultural strategy for Poland, prepared by a Polish/EC/World Bank team in 1990 (Agricultural Strategy for Poland, 1990). The main conclusion of the report was that the key issue of adjusting of the Polish agriculture to the new market environment does not lie in the farm sector, but in the agribusiness sector. The report stressed necessity to improve its efficiency by privatization, demonopolization and appropriate policies encouraging rural development. The key message of the report - the need to improve the agricultural and rural market environment - remains, beyond any doubt, valid. However, the experience of the years 1990-94 shows that the abilities to adjust of the farm sector might have been judged in a somehow too optimistic way. Also the economic, political and social developments of these years have modified external conditions of the agricultural policy. In this paper we try to evaluate costs and benefits of policies that ease a process of transformation of the farming sector.

The issue of the agricultural policy, its costs and benefits, seems to be particularly interesting, given a broad dispute on problems connected with the eventual membership of Poland in the European Union (EU). Polish agriculture will be therefore included in a framework of the Common Agricultural Policy (CAP), with all -good and bad - consequences. Economists generally stress costs of extending CAP to Poland, and the other Central and Eastern European (CEE) countries. However, differences among authors in estimating these costs are sizeable. While the lowest estimates for CEE countries reach about ECU 3-4 bn per year (CEPR, 1992; Baldwin, 1994, Tangermann, 1994), the highest ones reach ECU 40 bn per year (Anderson and Tyers, 1993). Also policy recommendations given by various authors to the CEE countries in a pre-accession period vary. Some authors propose an immediate introduction of a CAP-type price supporting system (however, with target prices much lower than in the EU, see Nallet and Van Stolk, 1994). Others claim that the CEE countries should avoid rapid increases in their agricultural prices; after all, one does not know what the EU price level
_4_ _Price Support at Any Price?_ will be in 10 years' time, given the GATT Urugway Round Agreement (URA) and a likely reform of the CAP (Mahe, 1994, Buckwell, 1994, Tangermann, 1994, Tardidi, 1994). Finally, some authors suggest that an extension of the CAP to CEE countries in not feasible at all in the foreseeable future, because of high budgetary costs (Anderson and Tyers, 1993, Baldwin, 1994). The conclusions are generally drawn from partial equilibrium models, with assumed parameters that decide about the supply response of the CEE agricultural sector to higher price levels.

What should be an appropriate agricultural policy for Poland? The answer depends on an appropriate setting of targets of such a policy. The obvious choice would be to set targets similar to the CAP. The Treaty of Rome (Art.39, §. 1) calls for a policy that allows: (1) to promote efficiency growth, (2) to achieve a reasonable balance between farmers' income and incomes coming from other activities, (3) to stabilize markets and to achieve a certain level of self-dependence in agricultural production ("security of supply"), (4) to stabilize prices for producers and consumers. These targets do compete one with another, so the problem of definition of an objective function has a crucial meaning for setting the agricultural policy. In fact, the progress in achieving the above goals by the CAP is considered as very slow (Bowler, 1985) while the costs of the policy - namely transfers from taxpayers, consumers, and macroeconomic costs of resources misallocation - exploding (Hill, 1984).

One may ask whether an agricultural policy of price/income supporting is necessary at all. Munk gives a review of the discussion on reasons for implementing agricultural policies, generally based on welfare economics (Munk, 1993). Let us note that almost all the industrial nations have implemented active agricultural policies (today, New Zealand is the only case of the agriculture nearly without subsidies). At the same time there is an overwhelming criticism of these policies, considered costly, non-efficient, protectionist and market-disrupting. If one wants to generalize very broadly, the main reason for implementing policies supporting agricultural prices or incomes is provided by the growing gap between productivity of labor in traditional agriculture (based on medium-sized familyowned farms) and that in the other sectors of the economy. An income generated in the agricultural sector (in normal market conditions) would not allow farmers to have a living standard comparable to the nation's average. Thus, the alternatives for the policy would appear to be either to allow traditional agriculture to be replaced by specialized, industrial-type food production (and the major part of the existing agricultural labor force shifted to the non-agricultural activities) or somehow increase farmers' income. The first option is likely to entail considerable transactional social costs. The second option brings the risk of dismantling (or at least severely interfering with) the market mechanisms and entailing large costs for budget and consumers. In our view, agricultural policy is in fact a macroeconomic rather than sectoral issue: how much can the nation afford (in the form of direct and indirect transfers to the agricultural sector) to achieve fulfillment of certain social targets, and what tools should be used to minimize the cost of the policy. There is also a microeconomic problem connected with it: what tools should be used to minimize the market distortions caused by the policy.

In this paper we will argue that _the most efficient way in which Poland can secure a reasonable level offarmers' income involves an accelerated reduction of agricultural employment._ A very high agricultural employment, and a small average size of farms, represents the biggest gap
_5_ _Price Support at Any Price?_ between Polish agriculture and the agriculture of the European Union (Poczta, 1993). Therefore, a policy aimed at reducing agricultural employment allows to achieve two goals at the same time: increasing average income and easing the way of integration with the EU.

## 2. Agricultural Policy - Does Poland Need It?

This section discusses the starting point for the analysis. The basic questions are:

- (a) What is the current level of development of the Polish agricultural sector, and what structural reforms are necessary to improve its efficiency?

- _(b)_ Are there clear development trends that may result in a deterioration of farmers' income relation relative to other households in the medium- and long-term?

- _(c)_ What factors are crucial for integrating the Polish agriculture with EU?

# 2.1 Polish agriculture in early 1990s: structural problems

Poland has inherited from communism a mostly private, but inefficient agriculture of an extremely traditional structure. The agrarian structure is dominated by small-sized family-owned farms (farmns below 10 hectares i.e. 25 acres represent over 80% of the total population of farms and use almost 57% of a land, a very high proportion by European standards, see Figure 1).

Productivity of labor is very low: employment in **Polish Agriulture vis-i-vis EU** agriculture reaches 3.6 mn (land distributon by size of farms) people (25% of total employment, 1993), while **POAIb091** gross value added produced in /r\ agriculture is only slightly Wm bOW=10h (57.3%) above 6% of total Polish GDP. The productivity of capital is almost as low as in the case of labor. The key **EUAv"wagl0l w10 a(14w 1%)** problem is an inefficient structure of agriculture that does not allow to make good use of production factors r ________ (Poczta, 1993). Another problem is the efficiency of Figure 1
_6_ _Price Support at Any Price?_ distribution and processing of agricultural products, which is also relatively low (Agricultural Strategy for Poland, 1990).

At the starting point of the economic reforms in the early 1990s, the average competitive position of Polish products on world markets remained quite good. New concessions were given to agricultural exports by the association agreement between Poland and the EU (increased quotas, some reductions of tariffs; Czyzewski, Orlowski, Zienkowski, 1993b). Nevertheless, the rise of agricultural prices to (or above) the world prices level resulted in a growing competition on the national market between imports and domestically produced goods. Such a situation created a threat to the interests of Polish producers. In result of this, an agricultural policy debate started. The agricultural lobby pushed for the introduction of a system of high tariffs, variable levies and non-tariff barriers, as well as towards budget-subsidized preferential credits and minimum prices for basic products. Eventually, after an initial liberalization and a fall of the Producer Subsidy Equivalent (PSE, a measure of a level of protection of agriculture) to a low negative level in 1990-91, a new system of protection was put in place (the level of protection vary depending on sectors). Total transfers to farmers in 1993 were estimated on a level of $ 2.4 bn' (the PSE around 15%, compared with about 48% in the EU, OECD 1995).

The Polish farming sector, although mostly private, has had considerable problems in adjusting to the new market conditions. Prices liberalization has resulted in a substantial deterioration of the position of agriculture with respect to the other sectors: the terms of trade of agricultural products vis-a-vis non-agricultural products bought by farmers worsened during 1990-91 by more then 60 %2. A reduced level of demand for food resulted in a totally new situation of production surpluses. During the period 1990-93, the gross agricultural output decreased by 13% (however, the fall was observed mainly in the state-owned sector; the fall of output in private farms was only 3%). Low adjustment abilities of the traditional farming sector, caused by an inflexible production function and a role of the sector as a resource reservoir (Timmer, 1989) may represent a major impediments to restructuring the Polish agriculture in a medium- and long-run. Therefore, an appropriate agricultural policy for Poland should concentrate on factors that make the adjustment easier and faster.

1 Excluding subsidies to KRUS (social security fund for farmers). In this text we follow the OECD methodology of excluding this type of subsidies from agricultural policy costs. We treat social security as a separate issue (subsidies are paid not only to the social security fund for farmers).

2 One may argue, however, that the terms of trade that the agriculture enjoyed in late 1980s were artificially high, mainly due to effects of a initial food prices liberalization performed in a chaos of the disintegrating command economy. Terms of trade of agriculture vis-a-vis other sectors, relatively stable until 1987, started to grow rapidly (in favor of agriculture) in the years 1988-89. If a relation of prices of agricultural products to goods and services bought by farms in 1986 stands for 100, in 1989 it has reached 122. Even a more dramatic growth was observed in a relation of prices of agricultural products to non-agricultural inputs purchased by farms: the relation grown from 100 in 1986 to 136 in 1989.
**_7_**

_Price Support at Any Price?_ The Polish farming sector is not homogenous. Private farms may be divided into two categories: a **_dynamic sector,_** about 45% of farms, which increase productivity and output, producing about 60% of the value added, and a **_stagnating sector,_** where productivity and output are falling (Hunek, 1995).

<!-- Start of picture text --> Polish Agriculture viv-a-vis EU<br>(indices, EU-1 2 average-1 00)<br>Average farm size<br>Value Addedifarmer (PPP adjusted XR)* 1 5<br>Value Addedifarmer (current XR)*<br>Gr.output/farmer (physical measures)*<br>Gross output/ha (physical measures)*<br>Employment In agrlc.per 100 ha __ __ __<br>Value added In agric. (% of GDP) -<br>Farmers (% of total empl.) _<br>* Polish agriculture 1991 0 100 200 300 400 500<br>[I] of which: developing sector (see text)<br>* 1966.1UOSYUSQ. ~ ~ ~ ~ ~ ~ ~ ~~~~~HMOK1I rI us<br>Figure 2<br><!-- End of picture text --> Figure 2 provides a comparison of the current situation of the Polish agricultural sector and the EU average. The black bars show the average indices for the whole sector, the white bars refer to the dynamic sector.

The figure shows that gross output per hectare is similar for Poland and the EU if measured in physical measures. However, the relation deteriorates dramatically if related to the number of farmers: the Polish farmer produces only a small fraction of the output and value added produced by the average EU farmer (around 25-30%). Also the average farm area represents less than 40% of the
_8_ _Price Support at Any Price?_ EU level<sup>3</sup> . Let us note, that all the measures are slightly better when only the dynamic sector is taken into account. The main message of the figure is as following: Polish agriculture employs 4 times more farmers per hectare that the Western European agriculture. With a comparable level of output per hectare, all efficiency parameters (per farmer) are several times smaller in Poland. _Reduction of the excess employment in agriculture is the main structural problem that must be solved_ to improve farmers' income and to integrate successfully with the EU. It is also a condition for making an appropriate and efficient use of the other production factors (Poczta, 1993).

# 2.2 Income parity: what may endanger it?

The fall in the income relation (a ratio of average income per farmer<sup>4</sup> and average wage outside agriculture) in 1990s is always used as a main point while advocating a need to support the agricultural sector in Poland. One may argue, however, that the situation of Polish farmers is not as bad. _First,_ as it was mentioned above, the fall in the income relation is measured with respect to an artificially high base of late 1980s. _Second,_ a significant part of farmers' income is coming from outside farming activities (data of the IERiGZ, the Institute of Economics of Agriculture and the Food Economy, based on sampling, show that around 50% of income of farmers is coming from nonfarming activities). _Third,_ the situation differs substantially between the dynamic sector and the stagnating sector, so the average change in the income relation may be misleading.

_This paper does not discuss whether the current income relation is high enough or not. It rather tries to analyze whether there are medium- and long-term development trends in the Polish economy that may lead to deterioration of this relation._ For the analysis we use a Computable General Equilibrium model of the Polish economy POLAGR (see Box 1). The model was specially developed for evaluating effects of various agricultural policies.

Sensitivity analysis is used in order to assess the factors that may endanger the level of the income relation. We start from the base solution of the model (a steady case) for the period 19912010, and see what directions of changes in the income relation generated by the model are caused by changes in key macroeconomic factors outside agriculture<sup>5</sup> . In the base run we generate a steady growth path _without any active agricultural policy_ (i.e. without price/income supporting). The 3 The comparisons with the EU average may be misleading: a 16.5ha EU average farm size reflects both, the 70ha farms of UK (10 times a Polish farm area), and 5.5ha Greek farm (smaller than the Polish average farm).

4 It should be stressed, that the income of farmers includes both income from farming activities and from other sources (wage income, social security transfers,other transfers).

_5_ Using the year 1991 as a starting point is connected with a fact, that the PSE level in that year was on a low level close to zero (estimated at -3%).
|V Cs -,IC<br>**Ri**<br>r<br>le<br>_wo_<br>**12. P**<br>k;<br>E 0 5- ,<br>**_O_0 **<br>**0 aQ**<br>**-0**<br>C-r to<br>CD<br>**Ir**<br>**A**<br>**-,z**<br>**,M.**<br>**-0-I**<br>**no**<br>**a-,m**<br>87<br>P<br>n<br>5<br>Ei ,<br>(a<br>El a<br>cr<br>8<br>Fi.<br>0<br>_rA_<br>CD<br>6r a<br>crCD0<br>-o O'.<br>0<br>**ov**<br>**.6**<br>Er<br>P-V<br>V<br>V E<br>m 91,<br>to.<br>00 a<br>L3<br>R<br>E 1%,**(D.**<br>**P,**<br>ry<br>r, j3<br>0<br>cr<br>.IJO. as. !;. S<br>O<br>N I. g. r,<br>OC-D<br>In,<br>=0<br>,S<br>r-<br>rA<br>CD<br>0<br>6<br>0<br>Rr<br>is -<br>a v<br>00<br>_C,-_CD<br>0.8<br>ala,<br>P.**aq**<br>a,"<br>W<br>CD<br>IA<br>0 Fz R<br>0**aQ**<br>40<br>**kO**<br>aQ<br>O<br>4(U<br>ri<br>**CD**<br>t3<br>toi<br>**Rr**<br>**Z'g**<br>tz 0<br>S<br>**_'A_**<br>**E. * -OL ;03**Er<br>tr<br>El<br>5<br>n<br>ra<br>cr<br>(71 -<br>M B.<br>--<<br>-,D<br>O<br>V<br>**rr**<br>OrQ<br>W,<br>E;<br>.2<br>**0t**<br>**0**<br>**C*D**<br>**aQ**<br>n<br>O FR<br>_cr_8 a<br>**ie 0**cr<br>_5_<br>**rL 0 0.**<br>**w**<br>CDr|.**.**...<br>.<br>.. .<br>.<br>OV<br>**'IQ**<br>**C.,**<br>CD<br>**El**<br>_194 =_<br>,<br>(D<br>SO 0<br>Q<br>!<br>. I<br>-4<br>tu<br>El<br>wi<br>R -<br>P.<br>0|........... .. . .......<br>.<br>.. . ..... ... . ... ....<br> 9<br>9<br>CD<br>0<br>_rA_<br>0|
|---|---|---|

<!-- Start of picture text --> No<br><!-- End of picture text -->
_10_ _Price Support at Any Price?_ active agricultural policy as well, but seeks for alternative growth paths. Therefore, the analysis concentrates on evaluating effects of a different path of growth on the income relation, without any policy counteraction (the results should be interpreted as likely directions of changes rather than forecasts).

Economic growth assumed in the base solution (generally based on the long-term projections of the World Bank, 1994) reaches 4.4% yearly (see table 2.1), with growth of investment considerably higher than growth of consumption. A 3.7% annual increase of the personal consumption is not equal for all groups of goods and services. Consumption of food products grows only by 1.7% yearly and consumption of non-food goods and services by 4.6%. Structural changes in agriculture are moderate. The number of farmers falls by one quarter between 1991 and 2010 (average yearly fall of 1.6%) and the average farm area grows by more than 2 hectars. As growth of output per farmer reaches 3.3% yearly, and average wage grows only by 3% yearly, a 11 % increase of the income relation takes place.

**Tab.2.1 The base solution - main indicators**

||J<br>=<br><-<br>Index<br>1991|<br>2010|=<br>Average<br>growth<br>rate<br>l|
|---|---|---|---|
|**Gross Domestic Product**<br>_of which:_<br>Personal Consumption|**100.0**<br>100.0|**224.9**<br>200.2|**4.4%**<br>3.7%|
|<br>Fixed Capital Formation|100.0|363.2|7.0%|
|Income Relation (fanners' income/wage)|100.0|110.8|0.5%|
|<br>Number of farmers (in millions)|3.285|2.416|-1.6%|
|<br>Average farm area (in hectars)|6.3|8.6|1.6%|
|<br>Output per farmer|100.0|184.6|3.3%|

# _Source: Model POLAGR, simulation Jan. 1995_

In the sensitivity analysis, three factors that may have an important impact on the income relation were taken into account:

- _(a)_ the rate of growth of GDP in non-agricultural sectors;

- _(b)_ the scale of the real appreciation of zloty;

- _(c)_ efficiency gains in agriculture (we define efficiency gains as growth of value added exceeding growth of output).
_Price Support at Any Price?_ Figure 3 shows the likely impact of the growth rate outside agriculture on the income relation<sup>6</sup> . The base run assumes a 4.4% average GDP growth rate in the period 19912010. The sensitivity analysis shows, that _the higher the growth rate, the bigger the risk of the_ **_faU_** _in the income relation._ This is mainly due to a fact that a higher growth rate is accompanied by higher growth of productivity in non agricultural sectors and higher growth of real wages.

<!-- Start of picture text --> Sensitivity Analysis<br>Income relation and GDP growth rate<br>1 Ir2oom relation (tarmeru s)<br>1.15 ,'<br>. gr<br>1.10 ,averagegroh 34%<br>s ge gmNth4.4% (bin)<br>1.06 averag growth 6.4%<br>1.00o<br>0.96 - lire , , 0b of IO<br>*2]<br>Figure 3<br><!-- End of picture text --> Figure 4 shows the impact of real appreciation of the domestic currency (defined **as** a rate of devaluation lower than the inflation rate) on the income relation. The impact is negative: _the higher the real appreciation, the bigger the risk of a fall in the income relation._ This result is due to the current level of prices of basic agricultural products in Poland, close to the world market level. Therefore, a real appreciation of zloty makes Polish food non-competitive on the world market (if exports are not subsidized). Moreover, as prices of basic agricultural <!-- Start of picture text --> Sensitivity Analysis<br>Income relation and zloty appreciation<br>1.20<br>1.15<br>1.10<br>real apprcaton 33%<br>1 rea appreclaton ml 66%<br>.0/<br>.00<br>20.bo 205 Mo<br>Figure 4<br><!-- End of picture text --> 6 As the graphs show, increase of the income relation over time is not smooth even in the base run. Differences among various subperiods are mainly caused by demographic trends (the **model** produces detailed projections of a process of retirement of farmers, based on the demographic structure observed in 1991).
_12_

**_Price_** _Support at Any_ **_Price?_**

products are linked in the model to the world prices, the income from farming activities is linked to them as well. If the real appreciation of zloty takes place, the level of agricultural income remains almost unchanged in dollar terms, that means a relative fall terms).

<!-- Start of picture text --> Figure 5 presents the<br>impact of efficiency gains in Sensitivity Analysis<br>agriculture on the income Income relation and efficiency gains in agriculture<br>relation. In the base run, no<br>such gains was assumed. In 1.40 noome relation ffamnerseaver a)<br>the sensitivity analysis we have<br>tested the impact of 1-2% 1.30 -.<br>yearly efficiency gains (the . yearly effidency gains 2%<br>gains of this order were 1.20 - y e n g<br>recorded in Western Europe). no effidency gains (s<br>The higher the efficiency 1.10 - ,no effldency gains os)<br>gains, the smaller the risk of .<br>the fall in the income relation. 1.00 -<br>0.90 -i ioi , sobs 2010<br><!-- End of picture text --> Figure 5 The conclusions that can be drawn from the sensitivity analysis are that a fast rate of growth of non-agricultural sectors, accompanied by the real appreciation of the domestic currency (caused either by a good current account performance, or by a significant capital inflow), may seriously jeopardize the relative income position of farmers. Such developments are quite probable, if the positive scenario of the economic development and integration with the EU realizes. The agricultural sector may defend successfully the income relation by increasing its efficiency (reducing input requirements).

# **2.3 Integration with the European** Union

An active agricultural policy may be required by the process of Poland's accession to the EU. Extending the CAP to the new members from Central and Eastern Europe is seen as one of the main challenges for the enlargement. The basic question is whether CEE countries should introduce a price supporting system as a necessary condition for the accession (a price _supporting_ system, not only a price _stabilizing_ system), and what would be costs of such a system.

It is generally known that the most important part of the CAP is a price supporting system, that causes EU market prices to be far higher than the world prices level for the lion's share of the
**_13_**

_Price Support at Any Price?_ agricultural production. This requires huge transfers from consumers and taxpayers to farmers, as well as a complicated system of border barriers (import levies and export subsidies) that allow EU exporters to sell goods abroad at world prices, and to import food without creating a threat for EU producers. At the same time free circulation of agricultural products within the single market of the EU is provided for. A precondition for integrating national food markets into a single, barrier-free common market, is the same (or similar) level of price supporting<sup>7</sup> .

Such a requirement does not mean, however, that CEE countries must introduce a CAP-type price supporting system immediately. _First,_ we do not know what will be the CAP of 2010. Both the commitments made by the EU under GATT (URA) and internal pressure to reduce budgetary costs (MacSharry's reforms) are likely to result in lower food prices in the EU. _Second,_ one should avoid too high costs of the system (they may create too heavy a burden for the EU budget, and by far too heavy if Poland is to cover the costs from its own resources - it must be the case, until Poland becomes a full member of the EU, Tangermann, 1994). _Third,_ the burden of transfers to farmers may be relatively higher for Eastern European consumers than for Western Europeans, given much higher share of food in consumer expenditures. _Fourth,_ introduction of a price supporting system, even if initially the key parameters (target prices) are low (as proposed by Nallet and Van Stolk, 1994), is an invitation to a political game. The pressure to increase the parameters may easily make the system unbearable for both consumers and taxpayers. _Fifth,_ agricultural sectors of CEE countries, and particularly of Poland, need restructuring. Any system that slows down restructuring (and an artificially high level of food prices and farmers' income does) should be avoided.

Moreover, introducing price supporting is not panacea for the integration. After entering a single market farmers from CEE countries will have to face strong competition from much more efficient Western Europeans. If the productivity gap is not reduced, the Central European, and especially Polish farmers will have to compensate the low productivity by low labor costs. Therefore, and quite paradoxically, high prices may not translate into high income after joining the CAP.

The four reports prepared for the DG I (Mahe, 1994, Buckwell et al., 1994, Tangermann et al., 1994, Tardidi et al., 1994) stress the point that full integration requires full participation of the CEE countries in the single market (and, therefore, in CAP), but suggest keeping price support on a low level until joining the EU as the best strategy. Therefore, **_increasing the price_** _level_ **_may_** _be_ **_inevitable at one point; nevertheless, it_** _is_ **_probably not a right, and beyond_** _any doubt_ **_not the only imaginable strategy for the pre-accession period._** 7 In fact, a system of 'green exchange rates", special exchange rates that are used for calculating national prices of basic products and may differ from market exchange rates, causes certain differences in price levels even within the EU (Bowler, 1985).
_14_ _Price Support at Any Price?_

# **3. Price Support: Timing and** Costs

The analysis of the likely effects of various agricultural policy mixes for Poland presented in chapters 3-5 is based on simulation analysis performed with the use of the CGE model POLAGR.

The model is solved for the 19-year period 1991-2010 (in fact, the agricultural policy .... variables are not changed beforepolicy the year 1995). The base solution of the model (or the steady case) represents a steady growth path of 4.4 % (yearly average). _In the base case, no active agricultural policy is applied_ (the base run assumes a dynamic continuation of the situation from 1991, with the PSE level close to zero). The simulation experiments assume certain agricultural policy mixes (namely price supporting, various forms of income supporting, investment incentives etc.).. _Deviationsfrom the base run calculatedfor every experiment represent an evaluation of the agricultural policy effects (costs and benefits)._ <!-- Start of picture text --> .... Box 2. Policy cost measures: :ia the POLAGR imodelt<br>cost measures<br>comparable with the:OECD methdology (OECD,1994,Annex lII)<br>Cost for taxpayers is defined as anet :costof exporting<br>% (erodution surpluses (export subsidies minus:revenue from import<br>.+ E . . > ;;E: ::E:<br>levies) +direct payments to farmers + policy costs not connected<br>with price or income suppo rt(including investment incentives for:i.<br>job creation but excluding social security payments):<br>:<br>where: E-exports, P ;,,,domestic producer price, jP,=world<br>Trice, M -jimports, DP diiect payments, PCNPIs --Poicy<br>costsnotconnectedwiwth prceor income support.<br>Cost for consumers is derived from: a Consumer Subsidy<br>Equivalent (CSE) conceptuand is equal to:<br>.....<br>c 0 =Qc*( )<br>t:where: QG=volume of consumption.<br>The cost is therefore equal to _________i________<br>coserelaeossaud<br>a be)by higher PDO,: prices they have<br>~~~~to pa for food (dotte area ABDE):.<br>Please note, that the cost is smaller ; -<br>that the total welfare Eloss, caused<br>both bY higber preand the volume Ofconisumtip*on y from e _________ _<br>to c (area ABCDE).<br><!-- End of picture text --> Agricultural policy cost measures used the model are shown in Box 2. Benefits are measured by the income relation (a ratio of per capita income of farmers, both from farming and from other sources, to the average wage), decrease of the number of the macroeconomic impact.

;;; **Producer Subsidy Equivalent (PSE) ii** defined as:

## PSE= (QP(xPw)+DP+oS)*1oO/(Q*PD+DP)

where: **0Q.** volume of production. fPSE informs what percent of the producers' income from farmingin f is due to the price support or direct income support. . .. .. ...

This section evaluates the effects of various strategies of targeting EU prices level. The question we try to answer is: what is the best strategy of approaching EU prices, that allows to avoid excessive costs and that is coherent with the URA commitments of Poland?
**_15_**

_Price Support at Any Price?_

# **3.1 Targeting EU prices: how and when?**

Series of simulation experiments allow to evaluate effects of various strategies of targeting EU prices. Let us start from formulating a list of possible options for Poland. The generally recognized list of options is as follows (Tangermann et al., 1994):

- (a) Fast approach to the current EU price level, with all budgetary consequences (FAST PATH experiment).

- (1') Fast approach to the current EU price level, combined with firm supply controls that allow to keep budgetary expenditures under control. Price support only applies within production quotas, while production in excess of quotas is punished by penalties (FAST PATH/OUTPUT REDUCTION experiment).

- _(c)_ Transition of Poland to common EU prices after the accession, assuming that a liberal reform of the CAP takes place and the EU price level is reduced after 2000 (LAST MOMENT INTEGRATION experiment).

Every strategy of targeting EU prices leads to various costs for taxpayers and consumers. Moreover, every strategy has its own macroeconomic impact. Generally speaking, one may expect that the earlier the artificial price level is introduced, the bigger misallocation of resources and the slower the path of restructuring and reducing the excess employment (the income relation has an evident impact on farmers' decisions to move to other activities, particularly in the case of young farmers, OECD, 1994).

In the FAST PATH experiment, we have assumed that the price level in Poland is increased to the current EU price level by the year 2000. No output reductions, or any other constraint is enforced.

**In** the FAST PATH/OUTPUT REDUCTION experiment, we assume firm quantity controls (output reductions from the potential level growing to 10% of the gross output), that allow to keep total transfers to agriculture (an aggregate measure of support) at a level compatible with Poland's commitments to GATT (below $ 3bn yearly<sup>8</sup> , Polish GATT schedules according to SAEPR, 1995).

In the LAST MOMENT INTEGRATION experiment, we assume that the price adjustment takes place between 2005 and 2010 (in a transition period, after Poland becomes a full member of the EU). Thanks to the CAP reform, the EU price level in 2005 is assumed to be lower (differences between world prices and EU prices reduced by 50%).

8 The commitments as measured by the Agregate Measure of Support (AMS).
**_16_**

_Price Support at Any Price?_

# 3.2 Targeting EU prices: simulation experiments results

Three experiments lead to different results. First, the costs are quite different. Table 3.1 shows policy costs indicators for three experiments<sup>9</sup> (all the tables show deviations from the base run). In line with the OECD definition, the total policy cost shown in the third row does not include an increase in social security payments (covered from the general revenue of the budget).

## **Tab.3.1 Targeting EU prices Simulation experiments: POLICY COSTS**

||Fast p<br>(EU prices|ath<br>by 2000)<br>|Fast path<br>reduc<br>_(EU pr. by 20|/output<br>tion<br>00, quotas)|Last momen<br>(50%EU p<br>201<br>|t integration<br>rices by<br>0)<br>|
|---|---|---|---|---|---|---|
||2000|2010|2000|2010|2000|2010|
|_In $ billions(9) prices):_<br>(1) Cost for taxpayers<br>(2) Cost for consumers|1.67<br>1.55|5.09<br>1.77|1.00<br>1.56|0.68<br>1.81|0.00<br>0.00|0.35<br>0.89|
|Total**annual**cost<br>**(1+2)**<br>(excl.social security)|3.22|6.86|2.56|2.49|0.00|1.24|
|Increase of social<br>security expenditures|-0.06|-0.13|-0.06|-0.09|0.00|-0.03|
|Producer Subsidy<br>Equivalent (PSE) in %|33.4%|43.5%|28.8%|23.8%|0.0%|14.1%|

_Source: Model POLAGR, simulation Jan.1995_ The FAST PATH experiment leads to an extreme! expensive policy. The total policy costs reach almost $ 7bn by the year 2010 (PSE on the EU level), violating Poland's GATT commitments and putting an unbearable burden on the taxpayers and consumers.

The high policy costs are not only due to the higher (supported) domestic price levels. Other factors influencing the outcome are both increased output (supply response to higher prices) and depressed domestic consumption. This leads to increase in production surpluses, making integration of the Polish agriculture in the CAP of 2010 more costly for the EU budget (production surpluses are twice as big as in the base run) . Such a phenomenon does not appear in two other scenarios: In the FAST PATH/OUTPUT REDUCTION experiment a slowdown in domestic food consumption is accompanied by a similar slowdown in domestic output caused by quantity control, and in the LAST MOMENT INTEGRATION experiment domestic food consumption is only slightly lower than in the base run (in both experiments production surpluses are close to the base run values).

9For a definition of cost see Box 2.
_17_ _Price Support at Any Price?_ The FAST PATH/OUTPUT REDUCTION experiment leads to much lower costs (within the GATT commitments), as the production surpluses remain low and high prices are applied only to limited production quotas. In the LAST MOMENT INTEGRATION experiment, policy costs do not appear before 2005. However, as the domestic demand is relatively high, and the price level lower than in the other experiments, policy costs are also much smaller.

Figure 6 presents a comparison of policy costs in the three experiments. The FAST PATH experiment appears infeasible, as costs are exploding. Therefore, only the FAST PATH/OUTPUT REDUCTION experiment may be treated as a feasible scenario for a fast path of price level adjustment (the cost stabilizes on an acceptable level). The last experiment does not cause, by definition, any costs <!-- Start of picture text --> Targeting EU prices<br>Policy cost ($ billions)<br>wwn VyWwru<br>7 Ofld.aodhiec ¶sWflIoPns iiw(901p 1 s<br>6<br>5 /<br>4 Fast patl/output reduct.<br>3 Last moment integration<br>2 -<br>1 .<br>1 190 191 20106~i-'<br>I_I<br>Figure 6<br><!-- End of picture text --> before Poland's accession to the EU (by that time, a big part of costs is likely to be covered by the common CAP budget). The costs in 2010 are lower than in the other scenarios, mainly because of a lower level of EU prices. However, a part of cost reduction comes also from a slightly higher level of the personal income, that leads to bigger domestic consumption of food and reduces production surpluses.

The next figure shows a comparison of the policy results with respect to the income relation (one of the primary policy targets). The best improvement is obtained in the FAST PATH experiment (the income relation 50% above the base run level). However, such a result requires unbearable costs. A feasible variant (FAST PATH/OUTPUT REDUCTION) stabilizes the income relation on a level 20% above the base run. Exactly the same result is obtained by the year 2010 in the LAST MOMENT INTEGRATION experiment.

<!-- Start of picture text --> Targeting EU prioes<br>Income relation<br>70 VW se V bw %<br>70<br>60<br>Fast path<br>F a te<br>30Fr<br>20 Last moment Integration<br>10<br>0 ,<br>-10 20<br>Figure 7<br><!-- End of picture text -->
_18_ _Price Support at Any Price?_ Table 3.2 gives basic characteristics of the impact of various paths of EU prices targeting on the agricultural sector.

Tab.3.2 Targeting EU prices Simulation experiments: POLICY EFFECTS

||Fast p<br>(EU prices|ath<br>by 2000)|Fast path<br>reduc<br>(EU pr. by 20<br>|/output<br>tion<br>00, quotas)<br>|Last moment<br>(50%EU p<br>201<br>|integration<br>rices by<br>0)<br>|
|---|---|---|---|---|---|---|
||2000|2010|2000[|2010|2000|2010|
|Income Relation|||||||
|(farmer's income/wage)<br>index, 91 level=100|142.9|**172.4**|**134.1**|**133.9**|**108.3**|**131.6**|
|index, base sol.=100|131.9|155.6|123.8|120.3|100.0|118.7|
|Number of farmers|||||||
|in millions|3.085|2.780|3.084|2.651|2.894|2.416|
|index, base sol.=100|106.6|115.1|106.6|109.7|100.0|100-0|
|Employment in<br>agriculture as % of total||**18.1%**||**17.3%**||15.8%|
|Average farm area|||||||
|<br>in hectares|6.7|7.4|6.7|7.8|7.2|8.6|
|index, base sol.= 100|93.8|86.9|93.8|91.1|100.0|100.0|
|Output per farmer|||||||
|<br>index, 91 level=100|126.3|216.4|118.4|164.1|131.9|184.6|
|index, base sol. = 100|95.7|117.2|89.7|88.9|100.0|100.0|

_Source: Model POLAGR, simulation Jan.1995_ The path of reduction in the number of farmers (27% reduction in the base run), remains the same in the LAST MOMENT INTEGRATION experiments, but slows down considerably in both FAST PATH and FAST PATH/OUTPUT REDUCTION experiments (the number of farmers in 2010 is, respectively, 15% and 10% above the base run). Consequently, the average farm area grows only to 7.4-7.8 ha (in the base run 8.6 ha). An artificially supported high income relation creates a major disincentive for the labor mobility in agriculture, discouraging farmers from searching for a job outside farming.

The output per farmer value increases considerably in the FAST PATH (a supply response, leading to production surpluses and unbearable costs), and falls in the FAST PATH/OUTPUT REDUCTION experiment (10% below the base run). This means that both FAST PATH experiments lead to undesirable effects: either a slowdown in reduction in the number of farmers is accoinpanied by huge production surpluses, or by a significant fall of productivity. It means, that restructuring of Polish agriculture is considerably slowed down by both FAST PATH experiments - a technical reduction of policy costs through quantity controls makes the policy feasible from the financial (and GATT) point of view, but does not eliminate a general harmful impact on structural changes.
**_19_**

_Price Support at Any Price?_ The quantity control necessary to curb the supply response should be quite severe: the FAST PATH/OUTPUT REDUCTION experiment leads to an output level that is more than 25 % percent below the FAST PAST scenario level (and 3 % below the base run, despite much higher prices).

Table 3.3 presents the macroeconomic impact of the policies applied in the experiments.

# **Tab.3.3 Targeting EU prices Simulation experiments: MACROECONOMIC IMPACT**

||Fast<br>(EU price|path<br>s by 2000)|Fast pat<br>redu<br>(EU pr. by 2|h/output<br>ction<br>000, quotas)|Last momen<br>(50%EU p<br>201|t integration<br>rices by<br>0)|
|---|---|---|---|---|---|---|
||Index<br>2010<br>(base= 100<br>|<br>)|growth<br>rate<br>(aver.)<br>1991-2010|Index<br>2010<br>(base= 100<br>)|growth<br>rate<br>(aver.)<br>1991-2010|Index<br>2010<br>(base= 100<br>)|growth<br>rate<br>(aver)<br>1991-<br>2010|
|**Gross Domestic**<br>**Product**|**96.8**|**4.2%**|**97.1**|**4.2%**|**100.1**<br>**I**|**4.4%**<br>l|
|Fixed Capital Formation|77.0|5.6%|89.1|6.4%|98.0|6.9%|
|Personal Consumption|102.1|3.8%|98.8|3.7%|100.4|3.7%|
|_of which:l_<br>Food products|97.3|1.5%|95.5|1.4%|98.2|1.6%|
|<br>Other goods & services|103.5|4.7%|99.8|_4.5%_|101.1|4.6%|

_Source: Model POLAGR, simulation Jan. 1995_ <!-- Start of picture text --> The impact on fixed capital Targeting EU prices<br>formation is negative in all the I on GDp<br>experiments, while the impact on the Impact on GDP<br>level of personal consumption varies Ddlx DgvigWo to6 frum ntU bm run In % l<br>(the level lower than in the base run 5 Jl<br>only in the FAST PATH/OUTPUT 4 J<br>REDUCTION experiment). While 3 Fast path<br>the FAST PATH experiment mainly 2- _ t r<br>affects investment, the FAST 1 --<br>PATH/OUTPUT REDUCTION 0 - Last moment IntegraIon<br>experiment has a more equally -2<br>distributed negative impact on the -2<br>final demand components. The 10.3<br>macroeconomic policy impact in the 111<br>LAST MOMENT INTEGRATION is<br>not significant (the policy does not Figure 8<br>begin before 2005).<br><!-- End of picture text -->
_20_ _Price Support at Any Price?_ Both experiments connected with a fast price level growth lead to serious macroeconomic efficiency losses, mainly due to misallocation of resources. Generally speaking, both experiments lead to a shift from saving and investment to consumption. The impact on the long-term growth rate of GDP is similar, reaching 0.2 per cent points (3% loss of a potential GDP by 2010). Figure 8 shows that both fast path experiments lead to analogous macroeconomic losses (the LAST MOMENT INTEGRATION experiment is almost neutral from that point of view, as price supporting does not influence macroeconomic variables before the end of the projection period'°).

A shift from saving to consumption in both FAST PATH experiments is a result of several factors. _First,_ high budgetary spending on export subsidies result in higher deficits that reduce savings of the govermment. _Second,_ lower level of the disposable income of population (except farmers) and higher expenditures on food lead to reduction of households' savings. Growth of savings of farmers, especially in the FAST PATH scenario, may partly compensate for this fall. However, a bulk of farmers' savings is reinvested in the agricultural sector. Therefore the overall capital mobility decreases and serious misallocation of resources appears (excessive investment in agriculture crowds out more productive investment in other sectors; moreover, excessive investment in agriculture causes further development of production surpluses leading to deficits growth). _Third,_ the enterprise sector is hurt by higher prices of agricultural inputs (therefore, interests of farmers and of the food processing industry turn out to be contradictory"). _Fourth,_ high production surpluses in agriculture increase net exports, reducing a possible absorption of foreign savings.

The experiments lead to a set of conclusions:

- (a) Fast move towards the EU price level through price support leads to heavy policy costs (for taxpayers and consumers). To make the policy financially feasible, firm quantity controls must be introduced.

- _(b)_ High levels of price supporting will also have severe macroeconomic and sectoral consequences. The macroeconomic losses may be estimated on 0.2 per cent points of a yearly GDP growth. The structural change in agriculture, and - first of all - a pattern of reduction of the excess employment will be significantly slowed down.

- _(c)_ Keeping price level low until the end of the accession process allows to avoid creating a threat for the structural change and economic growth in a critical period of 1995-2005, and seems to be a preferable strategy of targeting the EU price level. Poland avoids paying high intermediate costs in the period 1991-2005 and better prepares its agriculture for entering the single market.

**10** One may ask a question, to what extent the results of the LAST MOMENT INTEGRATION experiment are trivial showing simply that if Poland does not introduce price supporting before the last moment, it will not have to pay the interim costs. What we wanted to show, however, was that thanks to 20 years of an undisturbed structural change the agricultural sector will be much better prepared to accept the price supporting by 2005-2010. Therefore the costs (both sectoral and macroeconomic) are likely to be smaller than today.

**"** The food processing industry may not realize it immediately, as high tariffs for food create an illusion of defending both domestic farmers and the domestic food processing industry.
_21_ _Price Support at Any Price?_

# 4. Are There Alternatives to Price Support?

This section discusses the likely effects of introducing agricultural policies that do not support prices (for the moment, we forget about the EU integration matters). The main option that we would like to discuss is investing money in accelerating the structural change instead of supporting prices and incomes. The alternative agricultural policies, provided they speed up structural changes, may be considered as more appropriate strategies than price supporting for the interim period 1991-2005, before Polish agriculture fully joins the CAP.

# 4.1 Alternatives to price support: possible options

The income relation, and particularly the farmers' average income may be supported in two ways. The first, discussed above, is to increase total agricultural income (through price support). Even if the sectoral impact of the policy is negative, and the number of farmers increases (compared to the base run), the average income and the income relation is likely to grow (generally speaking, at the expense of taxpayers and consumers).

The second way of increasing the average farmers' income, is reducing the number of farmers below the base run level (with stable total agricultural incomes). This section presents two simulation experiments:

- (a) Reducing the number of farmers through faster retirement of old farmers (MORE PENSIONERS experiment); costs of higher pension payments will have to be financed from general revenues of the budget.

- _(b)_ Collecting additional indirect taxes (on all products, not only food) for supporting the structural change in agriculture (that add up to the maximum amnount coherent with Poland's GATT commitments) and investing them in promoting outflow of farmers from agriculture to other activities in rural areas (JOB PROMOTION FOR FARMERS experiment).

The first experiment (MORE PENSIONERS experiment) shows a policy that has a limited scope. The age structure of Polish farmers differs for the dynamic sector and the stagnating sector (in the stagnating sector, the average age of farmers is 6 years higher than in the dynamic sector, Hunek, 1995). Therefore, an accelerated retirement (that leads to lowering the maximal age of farmers by 5 years) means elimination of the smallest and the weakest farms of the stagnating sector. Given a long period of the policy application (15 years), the production factors (mainly land) may be easily absorbed by the dynamic sector without any losses of output (and with possible efficiency gains, that we ignore in the experiment). We ignore the problem, what policies should be applied to encourage old farmers to retire (the relative level of pension remains low and stable). Let us also note, that the early retirement schemes are frequently critizied as solutions to the overemployment in downsizing sectors, creating a risk for the stability of the public pension system (The World Bank, 1994). In the case of the Polish agriculture, however, we are not talking about the "early" retirement, but about encouragemen **t** o retire for people above the normal retirement age. As the productivity of these
_22_ _Price Support at Any Price?_ people is very low, their retirement may free some assets (namely land) for a more efficient use. Moreover, a limited size of the group of farmers that may be encouraged to retire, together with a low level of pensions should not create major threats for the stability of the public pension system.

The second experiment (JOB PROMOTION FOR FARMERS experiment) takes advantage of a low level of rural development in Poland. We assume, that a mix of appropriate tax policy and public investment policy (investment incentives for jobs creation in rural areas, market services promotion, development of budget supported non-market services) together with a vocational training and a strong support for infant business, may allow for creating a significant number of jobs in rural areas over a 15-20 years period (supporting also the demand for newly created output). The budgetary cost of creating a job that was assumed in the experiment, was equal to 90% of the fixed assets value per employee in the service sector (in consecutive years)'<sup>2</sup> . Again, we assume that mainly farmers from the stagnating sector take new jobs'<sup>3</sup> (with the exemption of the old ones), and therefore the production factors are absorbed by the other farms.

A policy of supporting outflow of farmers from agriculture to other activities may provoke a lot of problems. Using active labor market policies for restructuring sectors with overemployment is not considered as the most preferable policy, mainly because of undesirable disincentive effects on the labor market. Policies of job creation are also considered as economically difficult and politically sensitive (The World Bank, 1994a). At the same time, however, a problem of downsizing employment in the farming sector requires a special treatment. _First,_ the outflow of farmers from agriculture through normal labor market channels will not be easy, as the farmers do not have required labor skills. _Second,_ the labor mobility in this sector is very low, so the market incentives would have to be very strong to make farmers seek for other jobs. _Third,_ the natural channel of going out of agriculture would be moving to cities in a search for employment opportunities. Such developments could increase significantly the unemployment pressure in cities, and may lead to undesirable social tensions. _Fourth,_ it would not allow for a fast development of the physical and social infrastructure needed for growth in the rural areas.

In the JOB PROMOTION experiment we assume that the process of moving farmers out of agriculture will have to be based on the market (by encouraging business to create jobs in the rural areas). However, a strong support will have to be given to vocational training, increasing labor mobility, supporting entrepreneurship and developing physical and social infrastructure in the rural areas. The macroeconomic sense of such a policy is to promote growth of the market services sector in the rural areas (promoting both supply and demand for market services) and to create 12 Choosing this ratio below 100% indicates our assumption that the new jobs, although highly subsidized, are to be created mainly by the private sector on market basis. The remaining part of costs of jobs creation, as well as the running costs once the jobs are created, are to be covered by business activities.

13The farmers from stagnating sector have generally worse labor profile that farmers from developing sector (higher average age, less skills). However, as their income from farming is low, they may be more eager to exchange it for a wage income that is also low, but more stable and secure. The farmers from stagnating sector will be only able to apply for jobs that require simple skills (a special vocational training may help a bit).
_23_ _Price Support at Any Price?_ incentives for choosing labor-intensive technologies, making use of relatively low skilled labor. Let us also note, that the process may quickly create a positive feedback: growth of income in rural areas will create additional demand necessary to absorb the newly created output.

In this paper we do not make any particular proposal of the policy mix for accelerating reduction of employment in agriculture. We tend to believe, that such a mix may be created, and may work in the long run (we are talking about a program for 15-20 years). Its main target would be not to replace the market, but to help market solve a socially and politically sensitive problem of moving farmers out of agriculture"<sup>4</sup> .

The main question we try to answer in this section is what would be the impact of a successful policy of speeding up process of employment reduction in agriculture on the income relation and restructuring Polish agriculture. In other words, we try to find out _what would happen to Polish agriculture if resources that may be spent on price supporting are, instead, invested outside the agricultural sector._ The main target of the job promotion program is therefore not to create new jobs, but to encourage and to channel a flow of new investment towards the rural areas and towards low-skilled labor intensive technologies (that fit the labor supply of farmers).

Both experiments are compared with results of the feasible price supporting policy (results of the FAST PATH/OUTPUT REDUCTION experiment).

# 4.2 Alternatives to price support: simulation experiments

Policy costs are calculated differently in the experiments. While the MORE PENSIONERS experiment provokes only higher social security spending, the JOB PROMOTION FOR FARMERS needs financing by taxpayers, at a level comparable with the maximal support agreed under URA.

14 A target for the JOBS PROMOTION FOR FARMERS experiment is more than doubling the average yearly fall of employment in agriculture from 1.6% in the base run to 3.5-4% over a 20 years period. The base run figure is broadly in line with Polish experience in 1967-90 (1.2% yearly fall). Increasing the rate would require a substantial effort, particularly in an economy with high initial urban unemployment rate (that is why we assume that a supporting policy mix is necessary). However, the target rate is similar to rates of reduction of employment in agriculture observed in the most succesful EU countries in the period 1967-90 (Germany 3.8% yearly fall, Belgium 3.5%, Denmark 4.4%, Eurostat data).
_24_ _Price Support at Any Price?_

**Tab.4.1 Alternatives for price supporting Simulation experiments:** POLICY COSTS

||Fast path<br>reduc<br>(EU pr. by 20|/output<br>tion<br>00, quotas)|More pen<br>|sioners<br>|Jobs prom<br>farm<br>|otion for<br>ers<br>|
|---|---|---|---|---|---|---|
||2000|2010|2000J|2010|20001|2010|
|_In $ billions(91 prices):_<br>(1) Cost for taxpayers|1.00|0.68|0.00|0.00|2.91|1.96|
|(2) Cost for consumers|1.56|1.81|0.00|0.00|0.00|0.00|
|**Total cost (1)+(2)**<br>(excl.social security)|**2.56**|**2.49**|**0.00**|**0.00**|**2.91**|**1.96**|
|Increase of social<br>security expenditures|-0.06|-0.09|0.10|0.23|-0.00|0.01|
|Producer Subsidy<br>Equivalent (PSE) in %|28.8%|23.8%|0.0%|0.0%|0.0%|0.0%|

_Source: Model POLAGR, simulation Jan.1995_ As both table 4.1 and figure 9 show, the level of costs in the JOB PROMOTION FOR FARMERS experiment remains similar to the price supporting costs. However, the shape of the line is quite different: the investment experiment assumes a 15 year investment program. After the end of the program (in 2010), expenditure falls to zero. In contrast, the price support only freezes the expenditure level (the structural production surpluses are small thanks to output control, but costs for consumers remain high). The MORE PENSIONERS <!-- Start of picture text --> Alternatives to price support<br>Policy cost ($ billions)<br>No O,m<br>-<br>6<br>5 prnxoton for farmers<br>3<br>More pensioners<br>2 /<br>I /<br>1 1 1 2 0<br>Figure 9<br><!-- End of picture text --> experiment entails a relatively small budgetary cost".

15 Relatively small budgetary costs result from a low ratio between an average pension for farmers and average wage (below 40% in 1993). If the increase of this ratio is necessary to encourage old farmers to retire, the cost for social security will increase.
_25_ _Price Support at Any Price?_ Figure 10 shows effects of experiments on the income relation. The income of the MORE PENSIONERS experiment is relatively small, but positive (a scope of the policy is reduced by the age structure of farmers). However, the JOB PROMOTION FOR FARMERS experiment successfully competes with price support in increasing the income relation, although it is only after 2005 that the income relation in both experiments is similar. Moreover, the positive policy effect increases over time: the structural problems that keep the relation low are being _solved,_ not only <!-- Start of picture text --> Alternatives to price support<br>Income relation<br>WM, ft m ft bat nm h %<br>70 - f S nmms<br>60<br>50<br>40 Jobs prondon kw hmer<br>30 , Fat patVouiut reduct<br>20 More pensiors<br>'<br>10 / -<br>--<br>-10 , . 2<br>10 1sb6 i06 A1<br>Figure 10<br><!-- End of picture text --> _counteracted._ This is thanks to the positive effects that the experiment (and, to a smaller degree, also the MORE PENSIONERS experiment) has on accelerating the structural change in the agricultural sector. Table 4.2 presents main indicators of this change.

**Tab.4.2 Alternatives for price supporting Simulation experiments: POLICY EFFECTS**

||Fast path<br>reduc<br>(EU<br>pr.<br>by 200<br>|/output<br>tion<br>0,<br>quotas)<br>l<br>|More pen|sioners|Jobs prom<br>farm<br>|otion for<br>ers<br>|
|---|---|---|---|---|---|---|
|l________________<br>|1<br>2000<br>j|<br>2010|2000|2010|2000|2010|
|Income Relation|||||||
|(farmer's income/wage)|||||||
|<br>index, 91 level=100|**134.1**|**133.9**|**111.4**|**118.2**|**116.3**|**141.6**|
|index, base sol.= 100|123.8|120.3|102.9|106.7|107.1|127.8|
|Number of farmers|||||||
|in millions|3.084|2.651|2.775|2.180|2.519|1.542|
|index, base sol.=100|106.6|109.7|95.9|90.2|87.0|63.8|
|Employment in|||||||
|<br>agriculture as % of total||**17.3%**||**14.2%**||**10.1%**|
|Average farm area|||||||
|<br>in hectares|6.7|7.8|7.5|9.5|8.2|13.4|
|index, base sol. = 100|93.8|91.1|104.3|110.8|114.9|156.7|
|Output per farmer|||||||
|<br>index, 91 level= 100|118.4|164.1|137.6|204.6|151.6|289.1|
|index, base sol.= 100|89.7|88.9|104.3|110.8|114.9|156.6|

_Source: Model POLAGR, simulation Jan.1995_
_26_ _Price Support at Any Price?_ The JOB PROMOTION FOR FARMERS experiment results in a 55 % reduction of the number of farmers (almost 4% yearly, a number broadly in line with the experience of EU countries that have enjoyed the fastest reduction of the farm employment in the period 1965-90, Poczta 1994). Farm employment in 2010 is about 1/3 lower than in the base run. The share of farmers in total employment falls to a reasonable 10% level. The MORE PENSIONERS experiment gives a much smaller, but also significant result of decreasing the number of farmers by 10% (compared with the base run).

Thanks to the reduction of the number of fanners, the average farm area grows to 9.5 ha (MORE PENSIONERS) or even 13.4 ha (JOB PROMOTION FOR FARMERS) - quite satisfactory results by current EU standards. Let us remember that the price support system allowed only for an increase of the farm area to 7.8 ha (the base run area was 8.6 ha).

Both scenarios increase significantly the labor productivity in agriculture (by 10% in the MORE PENSIONERS experiment, by more than 50% in (the JOB PROMOTION FOR FARMERS experiment). In the second experiment, the agricultural sector seems to find its equilibrium position, at which no artificial support is needed to allow for a reasonable incorne relation level. The gap in labor productivity between the agriculture and the non agricultural sectors shrinks to a level, at which agriculture can successfully compete with other sectors in generating income per employee (results of the MORE PENSIONERS experiment, although much more modest, are encouraging as well).

Table 4.3 gives an overview of macroeconomic effects generated by the experiments.

**Tab.4.3 Alternatives for price supporting Simulation experiments: MACROECONOMIC IMPACT**

||Fast pat<br>r -du<br>(EU pr. I y 2|h/output<br>ction<br>000, quotas)|More pe|nsioners|Jobs prom<br>farm|otion for<br>ers|
|---|---|---|---|---|---|---|
||Index<br>2010<br>(base9 100|growth<br>rate<br>(aver.)<br>1991-2010|Index<br>2010<br>(base= 100<br>_ _ _ _ _ _ _ _ _ _<br>_ _ _ _<br>_ _ _ _|growth<br>rate<br>(aver.)<br>1991-2010<br>_ _ _ _ _<br>_ _ _ _|Index<br>2010<br>(base= 100<br>as9190(a-<br>_ _ _ _ _<br>_ _ _ _|growth<br>rate<br>(aver)<br>20 10|
|**Gross Domestic**<br>**Product**|**97.1**|**4.2%**|101.7|**_4.5%_**|**105.2**|**4.6%**|
|Fixed Capital Formation|89.1|6.4%|105.0|7.3%|113.8|7.8%|
|Personal Consumption|98.8|3.7%|100.6|3.8%|104.7|4.0%|
|_of which:_<br>Food products|95.5|1.4%|100.2|1.7%|101.6|1.7%|
|Other goods & services|99.8|4.5%|100.8|4.6%|105.7|4.9%|

_Source: Model POLAGR, simulation Jan.1995_
_27_ _Price Support at Any Price?_ Both experiments have a common, positive impact on savings and investment (effect in 2010 ranging from 5% in the MORE PENSIONERS experiment to 14% in the JOB PROMOTION FOR FARMERS; the price support gave a reverse result). Let us note, however, that a higher level of saving in the MORE PENSIONERS experiment is mainly caused by higher foreign savings (smaller trade surpluses). Low food price level causes consumption of food to exceed the base run level. Such a result leads to a decreased scale of production surpluses. Consumption levels are higher than in the base run also in the case of other goods and services (thanks to higher incomes, particularly in the JOB PROMOTION FOR FARMERS experiments).

The overall impact on GDP is positive in both experiments. The long term growth rate increases (by less than 0.1 per cent point compared to the base run) in the MORE PENSIONERS experiment. The experiment of JOBS PROMOTION FOR FARMERS leads to a significant, more than 0.2 per cent point increase of the average growth rate (from 4.4% in the base run to 4.6% in the experiment). Figure 11 shows that both alternative scenarios give much more desirable macroeconomic effect than price support.

<!-- Start of picture text --> Alternatives toprice support<br>Impact on GDP<br>Deun ftm th be run In %<br>6 -<br>4 ,,<br>po<br>2<br>Fast padoutput reduct.<br>0 - More pensIoners<br>-2<br>-4<br>- 1 i6 i" A o 1<br>Figure 11<br><!-- End of picture text --> Several factors contribute to a generally positive outcome of both scenarios. _First,_ higher level of personal income leads to higher savings of households (despite a fact, that an increased labor supply in the JOB PROMOTION FOR FARMERS experiment makes a downward pressure on wages). Initial negative effect of higher indirect taxes on urban households' savings is offset by both the increase of rural households' savings and by the higher economic growth (it means, however, that at least initially, before the higher growth effects appear, the program of job promotion is financed by urban households). _Second,_ fiscal deficits are under control: the deficit increase slightly in the MORE PENSIONERS experiment, and decrease considerably in the JOB PROMOTION FOR FARMERS experiment. _Third,_ firms' saving grow in both scenarios. _Fourth,_ higher domestic food consumption reduces production surpluses, and allows for absorption of bigger foreign savings.
_28_ _Price Support_ **_at_** _Any Price?_ Some conclusions may be drawn from the simulation analysis:

- (a) Accelerating reduction of agricultural employment may allow for an improvement of the income relation on a scale similar to the price supporting. Obtaining such results takes more time, but the improvement seems to be more solid.

- _(b)_ Reducing agricultural employment represents solving the problems rather than counteracting it. Significant progress may be obtained in restructuring the agricultural sector.

- _(c)_ The overall macroeconomic impact of the policy is positive. However, the costs for urban households may be quite high, at least before the higher growth effects appear.
_29_ _Price Support at Any Price?_

# 5. **European Integration Scenarios**

This section discusses possible (and financially feasible) scenarios of integrating the Polish agricultural sector with the EU agriculture. The scenarios take into account conclusions that may be drawn from the simulation experiments described in sections 3 and 4. The scenarios also take into account following observations:

- (a) An automatic and rapid extension of the CAP price supporting system to the Polish agriculture would cause high budgetary costs, that will have to be covered by Poland until the accession. Moreover, high costs of the eventual Poland's membership create a risk of delaying it by many years.

- **_(b)_** The CAP itself is changing. The changes are likely to result in lower food prices in the EU. The biggest error the CEE countries could make is overshooting - setting prices on a too high level, and being unable to push them down when the EU will be doing it.

- _(c)_ Introduction of the price supporting system can not break commitments made by the CEE countries in a framework of URA of GATT.

- _(d)_ The main budgetary cost of the CAP is connected with the disposal of production surpluses (by building up stocks or subsidizing exports). Therefore, the policy cost in CEE countries would depend to a large extent on the scale of the surpluses. A policy of high prices may depress domestic demand, and lead to even higher surpluses and costs.

- _(e)_ A principle of the agricultural policy for Poland is to avoid measures that slow down restructuring of the farning sector (as the experiments show, price supporting does).

# **5.1 Integration scenarios: in a search of feasible paths**

The simulations described above suggest that the following guidelines should be adopted in constructing a feasible path of integration:

- (a) The pre-accession and transition period should be devoted to solving the structural problems, not to counteracting their effects. Therefore, all disposable resources should be spent on promoting creation of jobs for farmers and reducing farm employment rather than on price supporting.

- **_(b)_** Obtaining the EU price level is a necessary precondition of joining the single market. However, the most desirable (and the cheapest) strategy should be based on increasing price level as late as possible, taking advantage of the likely liberal reforms of the CAP. The policies that reduce production surpluses are crucial to make the eventual price supporting system affordable.

- _(c)_ Reducing agricultural employment by incentives to retirement of old farmers seems to be a relatively cheap and effective tool that helps solving structural problems of Polish agriculture.

Generally speaking, if the nation decides to transfer resources to the agricultural sector, the resources should be used efficiently. The main target of a pre-accession policy should be to reduce the gap between the agriculture of Poland and the EU rather than to support prices and incomes.
_30_ _Price Support at Any Price?_ Such analysis leads us to construct two gradual integration scenarios:

- (a) The FULL FINANCING scenario assumes that the nation decides to allow for transfers to the agricultural sector (collected by increasing indirect taxes) that reach the maximal total transfer level agreed within the GATT (equal to total policy costs in the feasible price supporting policy presented in the FAST PATH/OUTPUT REDUCTION experiment). Let us remind, that as previous experiments show, such a policy may be, at least initially, quite costly for urban households (less costly, however, than price supporting).

- _(b)_ The BUDGET CONSTRAINED scenario assumes that the disposable funds are equal to costs for taxpayers in the feasible price supporting policy, and therefore considerably reduced.

Both the scenarios assume the same policy mix: encouraging old farmers to retire (as in the MORE PENSIONERS experiment), promoting rural job creation (as in the JOB PROMOTION FOR FARMERS experiment), avoiding price supporting schemes until the moment of integration into CAP (as in the LAST MOMENT INTEGRATION scenario). The only difference is the scale of resources that may be used (the BUDGET CONSTRAINED scenario represents the same policy that the FULL FINANCING, realized with a considerably smaller financing).

# _5.2_ Integration scenarios: simulation experiments

The policy costs of both scenarios are presented in table 5.1. The costs reach an assumed level in the period 1995-2005. It is only in the last years of the scenario that additional costs for consumers appear because of targeting EU price level.

**Tab.5.1 EU membership - adjustment path Simulation experiments: POLICY COSTS**

||Fast path<br>reduc<br>(EU pr. by 20<br>|/output<br>tion<br>00, quotas)<br>|Gradual int<br>full fina|egration<br>|<br>ncing|Gradual in<br>budget con<br>|tegration<br>strained<br>|
|---|---|---|---|---|---|---|
|l____________________|2000j|<br>2010|2000|2010|2000|2010|
|_In $ billions(91 prices):_<br>(1) Cost for taxpayers|1.00|0.68|2.91|1.35|1.16|1.58|
|(2) Cost for consumers|1.56|1.81|0.00|0.86|0.00|0.88|
|**Totalcost**(1)+(2)<br>(excl.social security)|2.56|**2.49**|**2.91**|**2.21**|**1.16**|**2.46**|
|Increase of social<br>security expenditures|-0.06|-0.09 ||0.05|0.14|0.05|0.14|
|Producer Subsidy<br>Equivalent (PSE) in %|28.8%|23.8%|0.0%|13.7%|0.0%|14.4%|

_Source: Model POLAGR, simulation Jan.1995_
**_31_**

_Price Support at Any Price?_ Figure 12 shows the total policy costs comparison. Expenditures are growing quickly in the case of the FULL FINANCING scenario (to the maximum level feasible under URA). In the case of the BUDGET CONSTRAINT scenario a fast increase of costs does not appear before the year 2000. Approaching the EU price level around 2010, although costly for consumers, does not provoke additional big costs for taxpayers, as both scenarios lead to small production surpluses.

<!-- Start of picture text --> EU membership - adjustment path<br>Policy COSt ($ billions)<br>7_______<br>6<br>5 I Gradual Intful finanadng<br>4 -Fast paVout rsduc.<br>3 Grdual intbudget const.<br>2<br>1 , G lu<br>O - 2 -<br>Figure 12<br><!-- End of picture text --> <!-- Start of picture text --> EU membership - adjustment path<br>Income relation<br><!-- End of picture text --> Figure 13 shows a very positive impact of both scenarios on Income relation the income relation. The positive **_DaMfnDbmn %_** effect is obtained mainly due to a 70 **_'rn vwu'_** reduction of the number of farners, 60 that leads to an increase in average 50 income. In the period 2005-2010, **Gradual** Int,full flnanadng the agricultural income is additionally 4 Fast **patoutput** reduct enhanced by introducing a price **30** support system. Additionally, one 20 **Gradul In,budget In,budget osr.** should take into account the fact that 10 - an increased supply of labor 0 (obtained due to a massive shift of -10 .l l i i" **20WIO** farmers to the non-farming activities I 1b leads to a slight lowering of the wage Figure 13 (in both scenarios, compared to the base run). Such a situation improves even more the income relation, and leads to a higher level of competitiveness of Polish industrial exports on the EU markets (finding a general balance of payments equilibrium may play a crucial role in the transition period to the full EU membership (Czyzewski, Orlowski, Zienkowski, 1993b).

<!-- Start of picture text --> DaMfnDbmn %<br>70 'rn vwu'<br>60<br>50<br>Gradual Int,full flnanadng<br>4 Fast patoutput reduct<br>30<br>20 Gradul In,budget In,budget osr.<br>10 -<br>0<br>-10 .l l i i" 20WIO<br>I 1b I<br>Figure 13<br><!-- End of picture text -->
_32_ _Price Support at Any Price?_

# Table 5.2 summarizes main achievements in restructuring the Polish agriculture.

# **Tab.5.2 EU membership - adjustment path Simulation experiments: POLICY EFFECTS**

||Fast path<br>reduc<br>(EU pr. by 20|/output<br>tion<br>00, quotas)|Gradual int<br>full fin|egration<br>ancing|Gradual in<br>budget co|tegration<br>nstrained|
|---|---|---|---|---|---|---|
||2000<br>F|2010|2000|2010|2000 7|2010|
|Income Relation|||||||
|(farmer's income/wage)|||||||
|index, 91 level=100|134.1|133.9|117.8|178.4|111.9|_151.5_|
|index, base sol.=100|123.8|120.3|108.8|161.0|103.3|136.8|
|Number of farmers|||||||
|in millions|3.084|2.651|2.487|1.508|2.738|1.922|
|index, base sol.=100<br>|106.6|109.7|85.9|62.4|94.6|79.6|
|Employment in<br>agriculture as % of total||17.3%||9.9%||12.6%|
|Average farm area|||||||
|<br>in hectares|6.7|7.8|8.3|13.7|7.6|10.8|
|index, base sol.=100|93.8|91.1|116.4|160.2|105.7|125.7|
|Output per farmer|||||||
|<br>index, 91 level= 100<br>|118.4<br>|164.1<br>|153.5<br>|296.1<br>|139.5<br>|232.4<br>|
|l index, base sol.= 100|_<br>89.7|88.9|116.4|160.4|105.7|125.9|

_Source: Model POLAGR, simulation Jan.1995_ The FULL FINANCING scenario leads to an equilibrium position of the agricultural sector characterized by less than 10% of total employment, a share that allows for avoiding a big gap in iabor productivity between agriculture and non agricultural sectors. The number of farmers is reduced by two thirds, and the productivity tripled (a result 60% above the base run level). The average farm area grows to 13.7 ha (in the base run 8.6 ha, in the feasible price supporting policy experiment 7.8 ha).

The BUDGET CONSTRAINT scenario leads to similar, but much more modest results (25 _%_ productivity growth, farm area 10.8 ha).

Both scenarios (and particularly the FULL FINANCING scenario) allow for a big reduction of the initial gap between agricultural sectors of Poland and the EU. They both also have a positive macroeconomic impact, shown in table 5.3.
**_33_**

_Price Support at Any Price?_

**Tab.5.3 EU membership - adjustment path Simulation experiments: MACROECONOMIC IMPACT**

||Fast path<br>reduct<br>(EU<br>pr.<br>by 200|/output<br>ion<br>0,<br>quotas)|Gradual in<br>**full**fin|tegration<br>ancing|Gradual in<br>budget co|tegration<br>nstrained|
|---|---|---|---|---|---|---|
|**l**<br>__________________|Index<br>2010<br>(base=**100**<br>)________<br>|growth<br>rate<br>(aver.)<br>**199___**<br>_<br>**1 -20**<br>**1 0**<br>**1991201991-201**|Index<br>2010<br>(base= 100<br>**)**|growth<br>rate<br>(aver.)<br>**1**|Index<br>2010<br>(base=**100**|growth<br>rate<br>(aver)<br>19**2091-**|
|**Gross**Domestic<br>Product|97.1|4.2%|105.6|<br>4.7%|103.1|4.5%|
|Fixed Capital Formation|89.1|6.4%|113.2|7.7%|106.2|7.4%|
|Personal Consumption|98.8|3.7%|104.8|4.0%|102.5|3.9%|
|_of which:_<br>Food products<br> &|95.5<br>|1.4%<br>|99.7<br>|1.6%<br>|98.9<br> <br>|1.6%<br>|
|Other goods services|99.8|_4.5%_|106.4|4.9%7|<br>103.6|4.8%|
|<br>_ource: Model POLAGR, sim_<br>Both scenarios le<br>onsumption levels are h<br>vels is compensated by<br>ociety may afford more<br>ase run) is not big, and<br>Figure 14 shows<br>ositivemacroeconomic <br>oth integration scenario<br>ase of the BUDGET|_ulation Jan. 1995_<br>ad to signific<br>igher than in<br>much higher<br>expensive foo<br>a scale of pro<br>an overall<br> impact of<br>s. In the|<br>antly higher<br>the base run<br>consumptio<br>d: the fall<br>duction sur<br> <br>|levels of sa<br>(the food c<br>n of other g<br>of domestic f<br>pluses signif<br>**EU**mem<br>**DIAgb from**<br>go<br>**_bn_**<br>|vings and inv<br>onsumption s<br>oods and ser<br>ood consum<br>icantly lowe<br>bership<br>- a<br>**Im pacton**<br>**_m_**<br>**In %**|estment. Al<br>lightly below<br>vices). A rel<br>ption (with re<br>r than in the<br>djustme<br> **GDP**|so<br>the base run<br>atively richer<br>spect to the<br>base run.<br>nt path|
|ONSTRAINED scenari<br>smaller, reaching almo<br>dditional 0.2 per cent p<br>conomic growth. In the<br>ULL FINANCING, ho|o the impact<br>st an<br>oint of the<br>case of the<br>wever, the|6<br>4<br>2<br>||l<br>|/<br>-<br>-|Graduallnt<br>a<br>_|fullflnanadng<br>1|
|acroeconomic gains ex|ceed 0.3 per|0<br>°|||Gradua**l** nt|,budgetconstr.|
|ent points of an additio<br>DP growth. Such an|nal yearly<br>outcome is|**-2**<br>Fig<br>e|41<br>,|,<br>,<br>**I**|||

_Source: Model POLAGR, simulation Jan. 1995_ Both scenarios lead to significantly higher levels of savings and investment. Also consumption levels are higher than in the base run (the food consumption slightly below the base run levels is compensated by much higher consumption of other goods and services). A relatively richer society may afford more expensive food: the fall of domestic food consumption (with respect to the base run) is not big, and a scale of production surpluses significantly lower than in the base run.

Figure 14 shows an overall positive macroeconomic impact of both integration scenarios. In the case of the BUDGET CONSTRAINED scenario the impact is smaller, reaching almost an additional 0.2 per cent point of the economic growth. In the case of the FULL FINANCING, however, the macroeconomic gains exceed 0.3 per cent points of an additional yearly GDP growth. Such an outcome is Figure 14
_34_ _Price Support at Any Price?_ caused by higher savings of households'<sup>6</sup> , firms, government and rest of world, resulting mainly from the higher economic growth and lower production surpluses.

Some conclusions that may be drawn from the scenario analysis:

- (a) The pre-accession and transition period policy aimed at reducing the excess employment in the Polish agriculture allows for a significant reducing of the productivity gap between agricultural sectors of Poland and the EU. It creates a basis for the successful integration and competition on the single market.

- **_(b)_** Obtaining such results require financing reaching below $ 3bn per year, i.e. Poland's aggregate GATT commitment. Smaller scale financing will also lead to positive effects, but of a more modest scope.

- _(c)_ The costs connected to reaching the EU price level and joining the single market depend mainly on a scale of production surpluses. Therefore, a pre-accession price policy that stimulates the supply response and reduces domestic demand makes the integration process much more costly.

'<sup>6</sup> With the exemption of initially smaller income and savings of urban households, particularly in the FULL FINANCING scenario.
_35_ _Price Support at Any Price?_

# 6. Main conclusions from the simulation analysis

The main conclusion we draw from the simulation analysis is that _price support is not the only, and moreover not the most efficient way in which Poland can support its agricultural sector._ This conclusion does not mean that food prices should not be stabilized. However, the stabilized domestic price level should not exceed the world price level.

The main challenges the sector has to face, namely finding a new equilibrium position in the market economy and integrating with the EU require a deep restructuring of the sector to close (or reduce) productivity gaps vis-a-vis the EU agriculture and the other sectors of the Polish economy. _Reduction of productivity gaps is a precondition for an appropriate income and living standard for farmers, as well as for a successful competition on the single market without borders with Western European farmers._ _The most efficient way to solve the structural problems of the Polish agriculture is acceleration of reduction of the agricultural employment._ Such a policy may require significant investment in promotion of the new jobs for farmers, and for training. As a result, not only the low labor productivity problem may be solved, but also a substantial improvement may be obtained in a level of the rural areas development and living standards. Best support for the Polish agriculture is to increase its productivity. _The market-led process of reducing the agnicultural employment must not be slowed down. Instead, supporting policies may be introduced if there are possibilities of accelerating and easing the process._ Can Poland afford transfers to the agricultural sector that allow for an accelerated restructuring?

_First,_ one may ask the opposite question: can Poland afford a slow path of restructuring of the agricultural sector? The sector would become a growing burden for the economic growth. Earlier or later a kind of an income support may appear unavoidable from the social point of view.

_Second,_ Poland has already reached a level of transfers to the sector over $ 2bn yearly (OECD, 1995). The problem is therefore not if the resources are to be transferred, but rather how they should be transferred to obtain the highest efficiency.

_Third,_ the restructuring process does not necessarily have to be so costly for the other economic agents. Figure 15 shows the net burden for the rest of the economy (taxpayers, other sectors, consumers) obtained in the simulation experirnents". Let us notice, that only price support systems create a heavy burden. In the case of policies of reduction of the number of farmers, 17 'Price support" experiments show effects of various paths of reaching CAP price levels. "Alternatives" experiment **s** how effects of policies reducing agricultural employment (without price supporting). 'Gradual integration" experiments represent a mix of the slowest path of reaching CAP prices and policies aimed at employment reduction,
_36_ _Price Support at Any Price?_ macroeconomic gains appear bigger than policy costs. It means that (except for the first years of applying the policies) the policies may be financed from additional economic growth.

<!-- Start of picture text --> Agricultural Policy Effects for the Rest of Economy<br>(GDP gains diminished by policy costs)<br>2 -4<br>0<br>0-<br>0. -2<br>8-4<br>CL.<br>Fast Pami Fast PIU. L ast momr Jobs conMore pskw .Ful fwinacigV Budget ow<br>Io't4xA red..<br>Price support Altemraves Gradual Integraion<br>n 1995 l 2000 [ 2005 U 2010 l I<br><!-- End of picture text --> Figure 15 _Successful integration of the Polish agriculture with the EU require a fast restructuring of the sector. The resources for restructuring that the Polish economy may find are scarce; therefore, it is even more important that they are used in an effective way._ Efficiency of the restructuring efforts will be to a big degree reduced, if the accompanying policies have contradictory effects (slowing down restructuring and economic growth). Therefore, a preferable way of supporting the income relation in the period prior to Poland's full participation in the CAP is accelerating agricultural employment reduction rather than supporting prices.