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The New Europe: Agribusiness

By Nibal Zgheib

Tractor scene in a wheat field

In the central European countries of Hungary and Poland the agribusiness sector accounted for 13 to 15 per cent of GDP in the 1980s, levels that were much higher than in the advanced economies of western Europe. But after 1990, this share of GDP quickly declined. The distortions imposed by central planning – especially with regard to the ownership and management of land – weighed heavily on the newly liberated countries of central Europe and the Baltics.

At the initial stage of EBRD engagement in the region, the local and regional agribusiness sectors faced several challenges: privatisation, trade liberalisation and above all, the reform of land ownership. All these were difficult tasks in their own right. In addition, they had to be tackled almost simultaneously.

“Reforms were urgently needed to achieve improvements in the sector and to increase productivity,” said Giles Mettetal, EBRD Director, Agribusiness. “Although policies were implemented at a slow pace, people were eager to work with the EBRD.”

Reform progress in the agricultural sector was closely linked to the liberalisation and privatisation of the wider economy. But equally important were changes in the ownership and control of land, as the extent to which farms are owned by individuals or households tends to be reflected in their productivity. The central European countries had a strong tradition of private agriculture, which communist rule could suppress but not break.

In these countries, the productivity of tiny private allotments regularly outperformed that of huge collective farms, illustrating the significance of ownership. However, it also showed that the regions’ farmers – despite political and economic pressure under communist rule – had not forgotten their trade. It had just, literally, fallen by the wayside, like the harvests that had rotted in the fields.

As serious as this problem was, it contained the seeds of its own solution. Key factors in tackling the major challenges were political stability and a broad national consensus about the development path of each country. With a few exceptions (and the occasional detour) the countries of the region chose firmly to embrace European integration and aspired to full membership of the European Union, a goal they reached 10 years ago.

In their reforms these countries often had to dismantle structures – and fetters – which had been imposed on them to varying degrees. While Poland had retained a large share of privately-owned agriculture, in Hungary huge collective farms had become the predominant players. This legacy had to be overcome.

As Gilles Mettetal points out: “The question was not whether to return land to its legal owners, but how, since the political cost of not returning land and property was higher than the cost involved in breaking up the collective farms”.

Restitution to former owners was the most common privatisation strategy and reform laws specified that land had to be returned to them within its historical boundaries. In countries where land ownership was not widespread before collectivisation, the choice involved deciding between considerations of historical justice and current fairness. As a result, countries progressed at greatly differing speeds, with the Baltic states acting as pioneers in the return of land to its legal owners.

The EBRD accompanied the countries of central Europe and the Baltics along the transition path. One of the biggest early challenges was the lack of capital.

In order to help overcome this issue the Bank introduced a variety of financial products. It also contributed to the development of local supply chains, as well as facilitating trade and price liberalisation and the reinforcement of institutional infrastructure.

Several countries sought to overcome the institutional vacuum left by the demise of communist rule. Often the simplest and most basic market functions, which had been performed by the all-powerful state, simply vanished and had to be re-created. This was the case, for instance, with wholesale markets for agricultural products, in the establishment of which the EBRD played an important role.

In 1999, one of the first wholesale markets in the region opened in Warsaw. “To achieve this step we worked with the authorities on infrastructure and legislation and offered farmers the option to become shareholders,” Mr Mettetal recalled.

“On the opening day nobody showed up and an antique market took place while farmers kept selling produce from the back of their trucks. Later the municipality enforced the law and closed the informal market in one day.”

The new market reduced a serious bottleneck in the distribution of local products – fruit and vegetables in particular. Concentrating supply and demand in one well-defined area led to increased competition, more transparent price-setting, quality improvements and better hygiene standards.

The daily trading volume at the market increased from zero to about US$ 1 million with around 5,000 vehicles entering the market every day.

The same approach was applied in Hungary, where the new wholesale market in Budapest led to the introduction of international standards for the handling, grading and hygienic classification of fresh products. This, in turn, encouraged farmers to improve their own quality standards.

Although the initial idea of the wholesale market evolved over the years, its creation paved the way for modern food retailing and supermarkets.

The liberalisation of the wholesale market and the formerly state-controlled retail sector led to the production of high quality food at affordable prices. This contributed to a shift in consumer behaviour, which was further influenced by rising income levels.

Through selective investments in efficient retail, distribution and food processing activities the EBRD contributed to the refinement of the local food supply, by having signed 54 projects in central Europe and Baltic countries as of February 2014 for a cumulative amount of €638 million. The Bank also promoted energy efficiency in the sector and enhanced the food value chain.

Further support for this sector came in the form of EBRD financing for the expansion of Kaufland Polska Markety and Intermarche – Pekao in Poland. Spar Slovenia also benefited from the Bank’s expertise and investment in its logistics centre as well as in energy efficiency measures for its retail stores.

One of the biggest regional food producers in south-eastern Europe, Atlantic Grupa, introduced energy management systems and sustainability certifications supported by the Bank in its operations in Slovenia. Meanwhile, Malterie Soufflet Czech Republic acquired additional plants with EBRD financing.

“Transition has made good progress, but important challenges for agribusiness in the central European countries remain and the EBRD still has a significant role in the sector along the food value chain and in energy efficiency”, Mr Mettetal said.

The Bank remains committed to tackling these challenges using the same determination with which it set out to assist the reform of the sector 25 years ago.

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