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Journal of Economic LiteratureVol. XLII (June 2004) pp. 404–456

Success and Failure of Reform:Insights from the Transition of

Agriculture

SCOTT ROZELLE and JOHAN F. M. SWINNEN1

404

1 Rozelle: University of California, Davis. Swinnen:Katholieke Universiteit Leuven and the World Bank. Theinsights in this paper are based on more than a decade ofresearch and collaborations with many coauthors through-out the world. The authors thank coauthors and colleagueswhose comments and discussions have contributed to theinsights presented in this paper. In particular we wouldlike to thank Jikun Huang and Karen Macours for discus-sions and collaborations on related projects. LiesbethDries provided invaluable assistance in the data analysis.The paper benefited from extensive and very useful com-ments from the editor and two reviewers; and from com-ments by seminar participants at Stanford University andUniversity of Michigan. The views expressed in this paperdo not necessary reflect those of the institutions theauthors are affiliated with. The authors are solely responsi-ble for the opinions expressed in this paper.

1. Introduction

More than twenty years ago, Chinaembarked on its economic reform path

by introducing the household responsibilitysystem (HRS) in agriculture. A few yearslater, Vietnam followed. Both countriesreduced price distortions and reallocated keyland rights from collective farms to ruralhouseholds. The impact was dramatic.Productivity and incomes in both countriessoared (Justin Lin 1992; John McMillan, JohnWhalley, and Lijing Zhu 1989; Prabhu Pingaliand Vo-Tong Xuan 1992). The reforms liftedhundreds of millions of rural households out of dire poverty (World Bank 2001).Economists praise the Chinese reforms as

the “biggest antipoverty program the worldhas ever seen” (McMillan 2002, p. 94) andhave claimed that the reform policies haveled to “the greatest increase in economicwell-being within a fifteen-year period in allof history” (Stanley Fischer 1994, p. 131).

As a consequence, expectations were highten years later as leaders in many nations ofCentral and Eastern Europe (CEE) and theformer Soviet Union (FSU) began to disman-tle socialism and liberalize their agriculturaleconomies. Reformers implemented a boldseries of policies, increasing incentives andmodifying the institutions within which ruralresidents lived and worked. The reforms,however, disappointed many nations. Farmoutput fell and rural poverty increased(Karen Brooks and John Nash 2002).

The sharp differences among nations in theearly impacts of agricultural reform and tran-sition in the rest of the economy triggered anintense debate on the sources of growth(Mathias Dewatripont and Gérard Roland1992, 1995; Kevin Murphy, Andrei Shleifer,and Robert Vishney 1992; John McMillan andBarry Naughton 1992; Jeffrey Sachs and WingThye Woo 1994; Roland 2000). Someresearchers, especially those studying EastAsia, credit the gradual sequencing of reformsthat initially focused mainly on reformingproperty rights and delayed any major

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Rozelle and Swinnen: Success and Failure of Reform 405

changes to the marketing system (DwightPerkins 1988). For example, Lin (1992),McMillan et al. (1989), and Pingali and Xuan(1992) attribute most of the success of theagricultural reforms in China and Vietnam tothe rise in incentives provided by decollec-tivization. The case of China demonstratedthat transition in agriculture could succeed, atleast in the early years, without the disruptioncaused by the dismantling of government-runmarketing channels and in the absence ofwell-functioning markets (McMillan andNaughton 1992; Alan deBrauw, Jikun Huang,and Scott Rozelle 2000, forthcoming).

In reaction to the claims about East Asia,skeptics responded that rural developmentin China and Vietnam occurred primarily asa result of low initial levels of development(Sachs and Woo 1994). Post-reform growthwas nothing more than the rise in economicactivity that was experienced elsewhere inEast Asia during the post World War II era.Others have been even more antithetical.Leszek Balcerowicz (1994, p. 34) writes thatthe use of the “Chinese Way” as an argumentin favor of gradual reforms in CEE and theCommonwealth of Independent States(CIS) is “a patent misuse of the facts.”Gordon Hughes (1994, pp. 135–36) statesthat “China’s path is in no way relevant to thestructural problems faced in Eastern Europeand the FSU” and should be “no guide towhat can or should happen.”

As the reforms in CEE and the CIS haveunfolded, differences in economic perform-ance among transition nations outside EastAsia complicate the puzzle. As we show inthis paper, although agricultural output felluniformly across Europe in the wake of thereforms, based on other measures, within ashort period of time the farming sectors inHungary, the Czech Republic, Slovakia, andother nations responded positively. Outputper unit of labor rose sharply. Total factorproductivity (TFP) in agriculture grew asstrongly in CEE within a few years after thefall of the Berlin Wall as it did at a similarpoint in the reform process of China and

Vietnam (Songqing Jin et al. 2002; DwayneBenjamin and Loren Brandt 2001; KarenMacours and Johan Swinnen 2000a).

Agriculture, however, did not fare as well inmost CIS countries. Although many poli-cies—especially price adjustments and sub-sidy removals—were common across CEEand CIS nations, others, such as farm restruc-turing and the liberalization of marketinginstitutions, proceeded more gradually inmost CIS nations. A careful examination ofthe subsequent outcomes suggests that thenature of reform matters. While the magni-tude of the collapse in terms of output was noworse in the CIS nations than in CEE, whenmeasured in terms of productivity, the go-slow strategy in the CIS faltered. Productivityin Russia, Ukraine, and Kazakhstan not onlyfell sharply during the immediate post-reformperiod, it continued falling or remained stag-nant during most of the first decade of transi-tion. Examined through the lens ofproductivity, the patterns of performance aremore similar between East Asia and CEEthan they are between CEE and the CIS.

Given these intriguing combinations ofpolicies and performance, we believe arenewed inquiry into the debate about theimpact of reform on economic performanceis due. The commonalities and differences ofthe nature of reform among East Asian,CEE, and CIS nations and the subsequentproductivity contours call for a careful com-parative analysis. To do so, we turn to the lit-erature and build an empirical picture of thepolicies and institutional shifts that triggeredagricultural growth in some of the world’s 28transition nations and led to stagnation inothers. The lessons learned from the processof transition in the agrarian development ofmost of the formerly socialist countries caninform policy makers and scholars about thechoice of reform strategy and the relation-ship between reform and economic growth.

Focusing on agriculture to analyze whichpolicies contribute to success and failure ofeconomic reform has several benefits. Thesharpness of the policy changes in agriculture


406 Journal of Economic Literature Vol. XLII (June 2004)

2 A list of the 28 transition countries that we examine(some in more depth than others) by their geographicalcategorizations is in the appendix.

and the fundamental differences amongcountries provide as clean a test as we canget. The relative simplicity of agriculturalrelationships—a farm is an easier productionentity to analyze than an industrial firm—also adds clarity to the analysis. Hence, farfrom being a limitation of the study, ouranalysis of the reforms of price policy, prop-erty rights, and market liberalization in agri-culture will yield important general lessonsfor those interested in the more fundamentalrelationships between reform, institutionalchange, and growth.

A study centering on agriculture also isinherently interesting, especially to thosestudying economic development. For exam-ple, in most East and Central Asian nations,agriculture dominated the economy duringtransition, and the changes in the sector havehad an important impact on overall economicperformance (Perkins 1994; Anita Chan, BenKerkvliet, and Jonathon Unger 1999; DavidGreen and Richard Vokes 1998). When morethan 50 percent of a nation’s labor force isemployed in agriculture, and when the majorshare of consumer income is spent on food,successful agricultural reform can have amajor impact on poverty reduction and thewelfare of the population. In fact, in studyingthe link between policy and performance, we believe that there are lessons for thosestudying economic performance outside thetransition world.

To meet this goal, we pursue three specificobjectives. First, we systematically documentthe post-reform trends in the agricultural per-formance in all transition countries of Asiaand Europe.2 Second, we discuss three keyreforms—price and subsidy changes, propertyrights reform, and market liberalization—andreview the evidence linking them to theobserved rises and falls in output and produc-tivity. Finally, in the last section, we review ourgeneral findings and draw a series of lessons.

While the transition literature is rich, andwe document, analyze, and discuss manyissues, we believe studying agriculture reformand performance leads to three new sets ofinsights. First, unlike the view of skeptics whofind little in common among reform experi-ences across the transition world, the literatureand data from East Asia, Central Europe, andthe CIS nations provide a consistent picturelinking reforms in agriculture to the perform-ance of the sector. For example, the miracu-lous growth of output in East Asia and thecrash in output in CEE and the CIS canalmost fully be explained by the shifts in therelative terms of trade. Second, while the per-formances during the initial reform years dif-fer dramatically in terms of output contoursbetween East Asia and CEE, when measuredin terms of productivity, the paths are remark-ably similar. Property rights reform—decollec-tivization in East Asia, and land restitution andfarm restructuring in some CEE nations—gave strong income and control rights to pro-ducers, which in turn resulted in strongproductivity growth. The emergence of institu-tions of exchange also played an important rolein explaining East Asia and CEE productivitygrowth. Finally, our analysis demonstrates thatthe real outliers in the reform process are theCIS nations. The absence of markets and poorproperty rights exacerbated the deterioratingperformance caused by falling output-to-inputprice ratios, and mired many CIS countries ina decade of productivity stagnation.

Based on these insights, several generallessons emerge. When measuring success, itis important to carefully compare the per-formance of transition nations on the basis ofproductivity, not output. Conclusions of suc-cess change fundamentally when compar-isons are based on productivity. In addition,while we find that initial conditions and thesequencing of policies do make a differencein making reform policies successful, ouranalysis suggests that, above all, successrequires two key elements: good rights andan institutional environment within whichagents can exchange goods and services and



access inputs. Despite the need for rightsand markets or market substitutes, however,we also find that there clearly is much roomfor experimentation and heterogeneity. Inthe final analysis, on the basis of our study ofthe first decade of agricultural transition, wefind that growth and rising efficiencyoccurred in almost all nations in whichreformers created property rights andimproved the marketing environment.

2. Success and Failure in RaisingProduction and Productivity During

Transition

Before trying to reconstruct the record ofthe agricultural sectors in transitioneconomies, we must agree on what consti-tutes success. As noted by early develop-ment economists, agriculture performsseveral important tasks for a developingnation—especially in the early stages ofdevelopment (Bruce Johnston 1970).Agriculture is a source of plentiful and inex-pensive food. It also provides labor for theindustrial and service sectors of developingnations. In addition, agriculture suppliesnon-food commodities (e.g., fiber products,coffee and cacao, and tobacco) for domesticconsumers and traders. Finally, the sectoralso creates linkages with other domesticindustries and generates consumer demand.

Within the context of such a conceptualframework, it is easy to see why so manynations—especially those that are fairlypoor—attach great importance to the pro-duction of agricultural output. Higher foodproduction increases the supply in domesticfood markets. Increased output also oftenprovides higher incomes. For these andother reasons, many nations assess the suc-cess of their agricultural economy largely onthe basis of output growth.

In some cases, however, output may not bean ideal measure. Specifically, using risingoutput as a metric of success could be deceiv-ing for transition nations, since prior toreform most economies were characterized

3 Many transition economies also have a relatively smallshare of the population in the agricultural sector, so risingoutput will not lead directly to higher incomes for much ofthe population.

by high levels of distortion.3 In fact, it is pos-sible that if the prices at the beginning oftransition were distorted enough, outputwould fall or rise sharply merely in responseto policies that allow prices to shift back tothose that better reflect the long-run scarcityvalue of the resources. Following this logic, ifa country had heavily subsidized input andoutput prices prior to reform, successful pricereform should reduce domestic production.

In contrast, in all countries (both those inwhich rising output is a sign of success andthose in which it is not), rising productivity isnecessary for a successful agricultural sector.In assessing ways that agriculture can play apositive role in an economy, rising productiv-ity can help policy makers meet many of theireconomic goals. Rising productivity throughpolicies that provide better incentives andreduce resource waste (as a result of bothbetter incentives and more complete controlrights) will a.) lead to rising food and non-food agricultural production; b.) contributeto higher income; and c.) make the sectormore modern. Getting more output out offewer inputs can leave scarce resources freeto either expand output or allow resources toshift to higher productive activities.

Because of the above arguments, in the restof the paper we track both output and pro-ductivity. Productivity, however, will be ourprimary metric of success. We recognize thatit is not complete and does not capture alldimensions of the short- and long-run effectsof reforms on those inside the sector or on thesector’s ultimate impact on the economy as awhole. Rise in productivity of the sector, how-ever, does have many benefits and is animportant indicator of the sector’s health.

2.1 The Record of Agriculture in TransitionEconomies

Remarkable differences can be observedwhen examining the performance of

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TABLE 1GROWTH OF GROSS AGRICULTURAL OUTPUT (GAO) IN TRANSITION COUNTRIES

(INDEX EQUALS 100 IN FIRST YEAR OF REFORM)

Years after start GAO index in year GAO index after 5 GAO index after 10of reform with lowest of lowest GAO years of reform years of reform

GAO

East AsiaChina 0 100 132 166Vietnam 0 100 128 152Laos 2 90 109 127Myanmar 0 100 127 155

Central AsiaMongolia 4 81 84 86Kazakhstan 8 4 53 52Kyrgyzstan 5 79 79 110Tajikistan 9 48 61 53Turkmenistan 6 69 106 99Uzbekistan 6 90 98 97

TranscaucasusArmenia 3 69 82 8Azerbaijan 5 55 55 72Georgia 10 51 62 51

European CISBelarus 9 57 61 58Moldova 9 42 66 46Russia 8 58 64 62Ukraine 9 51 69 55

BalticsEstonia 8 41 55 42Latvia 9 37 50 38Lithuania 9 64 69 65

Central EuropeCzech Repub. 5 75 75 77Hungary 6 69 70 73Poland 5 77 77 85Slovakia 10 68 77 68

BalkansAlbania 2 77 100 113Bulgaria 7 57 63 62Romania 3 75 93 93Slovenia 3 65 81 79

Source: FAO

agriculture in transition countries during thefirst decade of reform. From the start of thereforms, output increases rapidly in EastAsian transition countries (table 1, rows 1–5).In China output increases by 60 percent; inVietnam output also rises sharply, increasingby nearly 40 percent (figure 1).

Outside of East Asia agricultural outputtrends follow a different set of contours (figure1). Production falls steeply in the first years oftransition in almost all CEE and CIS coun-tries. Importantly, however, the length of timebetween the beginning of reform and the bot-tom of the trend line varies among nations



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Figure 1. Changes in Gross Agricultural Output (GAO) Index during First 10 Years of Reform inTransition Countries. European CIS excludes Moldova; East Asia includes China and Vietnam only. Data source: see Table 1.

(table 1, column 1). For example, the declinein agricultural output stops soonest in Balkancountries such as Albania, Romania, andSlovenia (after two to three years). In mostCentral European countries, such as Poland,Hungary, and the Czech Republic, and insome Central Asian countries, such asKyrgyzstan, Turkmenistan, and Uzbekistan,the decline lasts somewhat longer (five to sixyears). Finally, in a group of other countries,including the Baltic nations and several of theCIS nations, such as Russia, Belarus, Ukraine,and Kazakhstan, output declines for most ofthe decade after reform, falling to around 50percent of pre-reform output.

Productivity trends tell a somewhat differ-ent story of how transition affects agriculturalperformance. While productivity trendsevolve similarly to output in certain countries,strongly diverging patterns emerge in others.To get a comprehensive picture of productiv-ity developments and to accommodateimportant data constraints, we analyze threesets of productivity indicators: labor produc-tivity (output per unit of labor use), yields(output per unit of land), and total factor

productivity (TFP). While the most compre-hensive indicator of productivity is TFP, com-parative and reliable estimates of TFP arescarce because of data and methodologicalproblems. For some transition countries,TFP measures and the data needed to calcu-late TFP measures are simply not available.For those countries in which TFP series areavailable, in some cases, comparisons have tobe done carefully because of differences inmethodologies, time frames, sampling, andcommodity coverage. In contrast, informa-tion for partial productivity measures is morereadily available, and so we start by examin-ing indicators of partial productivity and com-plement the analysis with a review ofestimates of TFPs from the literature.

For the entire reform period, trends in agri-cultural labor productivity (ALP), measuredas output per farm worker, parallel those ofoutput for some countries, but differ for oth-ers (figure 2). Like output, ALP of farmhouseholds in China and Vietnam risessteadily, albeit much stronger in China thanVietnam (table 2). In both countries, laborproductivity increases especially several years



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Figure 2. Changes in Agricultural Labor Productivity (output per farm worker—ALP) index during first 10 years of reform in transition countries. European CIS excludes Moldova; Transcaucasus excludesGeorgia; East Asia includes China and Vietnam only. Data source: see Table 2.

after the initiation of the reforms. The paths ofALP for Russia, Ukraine, and Central Asiaalso mirror those of the national output, fallingbetween 35 and 50 percent between 1990 and1999. Agricultural labor productivity trends

for several CEE countries, however, differfrom those of output, actually outperformingEast Asia (figure 2; table 2). For example,despite falls in aggregate output, output perworker more than doubles over the first

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Figure 3. Changes in Agricultural Labor Use Index during First 8 Years in Transition Countries. European CIS excludes Moldova; Transcaucasus excludes Georgia; East Asia includes China and Vietnam only. Data source: see Table 4, columns 7 and 8.



TABLE 2GROWTH OF AGRICULTURAL LABOR PRODUCTIVITY (OUTPUT PER FARM WORKER–ALP)

IN TRANSITION COUNTRIES (INDEX EQUALS 100 IN FIRST YEAR OF REFORM)

Year with ALP index ALP index ALP index Average Average lowest ALP in year of after 5 after 8/10 annual annual

lowest ALP years years∗ change changeYear 0–5 Year 5–

8/10

East AsiaChina 0 100 120 146 ∗ 4.0 5.2 ∗Vietnam 0 100 102 107 ∗ 0.4 1.1 ∗Myanmar 2 96 115 120 3.0 1.7

Central AsiaMongolia 10 57 61 60 -7.8 -0.3Kazakhstan 6 58 60 71 -8.0 naKyrgyzstan 5 59 59 67 -8.2 2.9Tajikistan 9 36 46 38 -10.8 -2.9Turkmenistan 6 55 87 64 -2.6 -7.9Uzbekistan 6 80 88 86 -2.4 -0.5

TranscaucasusArmenia 7 38 42 38 -11.6 -2.2Azerbaijan 9 48 57 62 -8.6 1.7Georgia 2 67 85 na -3.0 na

European CISBelarus 4 69 71 87 -5.8 4.9Moldova 8 41 58 41 -8.4 -5.7Russia 5 63 63 65 -7.2 -0.5Ukraine 8 52 65 52 -7.0 -4.1

BalticsEstonia 1 76 139 163 ∗ 7.8 4.7 ∗Latvia 8 49 54 65 ∗ -9.1 2.2 ∗Lithuania 5 62 62 77 ∗ -7.7 3.1 ∗

Central EuropeCzech Rep. 1 99 126 177 ∗ 5.2 10.2 ∗Hungary 1 99 175 220 ∗ 15.0 9.1 ∗Poland 3 96 99 144 ∗ -0.2 9.1 ∗Slovakia 0 100 110 132 ∗ 1.9 4.4 ∗

BalkansAlbania 2 77 108 104 ∗ 1.6 -0.8 ∗Bulgaria 9 60 69 63 ∗ -6.2 -1.1 ∗Romania 9 59 67 63 ∗ -6.6 -0.8 ∗Slovenia 3 61 85 na -3.0 na

Sources: National statistics, ILO, World Bank, Asian Development Bank.∗ Countries with ∗ (China, Vietnam, Central Europe, Baltics, and Balkans) have data for ten years after start ofreforms; other countries have data for eight years after start of reform.

decade after transition in Hungary. ALP alsorises strongly in the Czech Republic,Slovakia, and Estonia. In Poland, Latvia, andLithuania, although ALP falls immediatelyafter reform, the indicator recovers and rises

after the first four years. In Albania, ALPincreased rapidly between 1992 and 1995 butleveled off afterwards.

Despite the difficulties of working withofficial data on labor use in agriculture in



4 Official data on labor use in transition agriculture areprone to measurement errors and statistical problemsand should be interpreted with care. Different datasources often provide different numbers and do notalways distinguish between full- and part-time employ-ment. Hence, in countries in which more part-time workis being done, but which continue to report all producersinvolved in agricultural production as full-time laborunits, labor productivity trends will be understated. Also,the aggregate data hide important other reallocations oflabor. For example, while overall labor use in agriculturein China rose slightly during the first five years afterreform (10 percent), major efficiency gains in croppingoccurred from the reallocation of labor from crops tolivestock production and other sideline activities (e.g.,various self-employed enterprises—Nicholas Lardy1983; Shenggen Fan 1991; Jin et al. 2002). Also, in othertransition countries official labor data hide importantchanges in effective labor input. For example, in some ofthe CIS countries where former collective and statefarms have survived, labor is often underemployed andmembers of rural households are officially still employedon these farms, even though they often spend a consider-able part of their time working on their own householdplots and are engaged in a myriad of other sideline activ-ities (Zvi Lerman, Csaba Csaki, and Gershon Feder2002). In such countries, the effect of these misreport-ings are ambiguous and depend on whether or not theoutput produced on their own plots are included in out-put figures. If private plot output is included, we, in fact,will be measuring rising productivity when it is actuallyrising. If the output of these plots is not included inreported output, labor productivity measures will beunderreported like those in countries in which agricul-tural laborers are shifting from full- to part-time farmers.We use data from the Asian Development Bank forAzerbaijan, Kazakhstan, Kyrgyzstan, Moldova,Tadjikistan, Turkmenistan, and Uzbekistan, because formost of these countries there are no consistent data inthe ILO’s database for the full period.

transition economies, labor-use patternshelp explain part of the divergence of out-put and ALP patterns for some countries(figure 3).4 The dramatic reduction in theuse of agricultural labor drives the rise ofALP in the Central European countries.Official employment data from CentralEurope show an average reduction of laboruse of 35 percent during the first five yearsof transition. The strongest reductions occurin Hungary (57 percent) and the CzechRepublic (46 percent). The same processoccurs in Estonia, a country in which laboruse declines by 58 percent within the firstfive years of reform.

5 A number of factors increased the size in terms oflaborers of the agricultural sector in countries such asRomania, Armenia, and several Central Asian nations.Policy, demographic and macroeconomic pressures, andother factors contributed to the rise of agricultural laboruse in many countries, for example, in countries where theagricultural sector worked as a buffer after collapse of theindustrial economy (e.g. Romania, Kyrgystan), and in factabsorbed labor from other sectors. As in Vietnam, rapidpopulation growth also contributed partly to the laborinflow in several Muslim countries, such as Uzbekistan andTurkmenistan. Finally, other events also contributed to ris-ing agricultural labor. For example, in Armenia a regionalconflict disrupted critical imports and industrial produc-tion, and many people migrated to rural areas.

In contrast, agricultural labor use rises in East Asia and part of the CIS nations,affecting ALP in either a neutral or nega-tive way (figure 3). For example, althoughALP rises in East Asia, as it does in CentralEurope, labor use does not fall. Labor usein agriculture (as a whole—that is, crop-ping, livestock, and other subsectors) actu-ally increases in both China (10 percent)and Vietnam (25 percent). In both coun-tries, the increase in ALP evidently comesfrom the strong increase in output.Agricultural labor use also increases insome CIS countries, in particular inCentral Asia.5 For example, in Kyrgyzstan,agricultural employment surged between1990 and 2000, rising by 64 percent (ILO2001). There, as in other countries in theregion, a rising number of people in agri-culture coupled with stagnant output led toa fall in ALP.

The performance of yields parallels thoseof ALP (table 3; figure 4). In China, yieldsincrease rapidly from the beginning of tran-sition, rising by 12 percent annually duringthe first five years after reform (row 1).Between five and ten years after reform,yields continue to rise, although the rate ofrise slows. Pingali and Xuan (1992) also doc-ument the rise in yields during the earlyyears of Vietnam’s transition. In contrast,average yields fall during the first few yearsafter reform for all CEE and CIS countries.6

6 In table 5, the only exception is Romania, wherestrong increases in dairy yields more than offset declinesin crop yields.



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Figure 4. Change in Average Agricultural Yield Index during First 10 Years of Reform in TransitionCountries. Agricultural yield index is calculated as the average yield index of grains, sugar beet/cotton, and milk. Data source: see Table 3, columns 7 and 8.

But, as in the case of labor productivity,after the initial post-transition years, thepaths of yields differ strongly between thetwo regions after the first several years ofreform. Figure 4 summarizes yield evolu-tions for selected crops (grains, sugarbeet,and cotton) and milk. In the European CISstates, including Russia and Ukraine, yieldsfall rapidly during the first five years to levelsabout 25 percent lower than pre-reformyields. In the second part of the 1990s yieldsstay at this low level and in some cases con-tinue to decline. In Central Asia, yields alsofall by more than 25 percent during the firstyears of transition. In the final years of thefirst decade of reform, the yields of somecrops, such as grains, begin to recover; thoseof cotton, however, the most important com-modity in several Central Asian countries,continue to fall.

In contrast, in Central Europe, yields notonly decline less than those in the CISstates, by 10 to 15 percent on average duringthe first few years of transition, they alsobegin recovering faster (generally from the

third year of transition onward). Between1992 and 1999 agricultural yields increase,on average, by 2.5 percent annually. A simi-lar but more pronounced yield pattern canbe observed in the Baltics. Average yields inthe Baltics dropped initially to almost 25percent below their pre-reform levels. In thesecond half of the mid-1990s, however, theyrecover, rising by an average of 3 percentannually. As in Central Europe, yieldsdecline less in the Balkan countries, only 10to 15 percent (in total) on average, althoughtheir yield recovery is slower, an average of0.9 percent annually during the second halfof the 1990s.

In the same way that changes in labor useaffect ALP, changes in the use of inputs(including labor and other inputs, such as landand fertilizer) affect yields, although differentinputs exhibit different rates of change (table4). Tractor use, for example, declines sharplyin most countries to around 70 percent of thepre-reform rate (columns 3 and 4). The inputthat best reflects the differences in how inputuse has responded is fertilizer (columns 1 and



TABLE 3GROWTH OF INDEX OF AGRICULTURAL YIELDS IN TRANSITION COUNTRIES


Grains a Sugarbeet / Cotton Milk Average Agr.c Av. Agr. per year

5 10 5 10 5 10 5 10 0-5 5-10

East Asia China 133 142 207 211 96 113 145.3 155.3 9.1 2.0

Central Asia Kazakhstan b 41 59 79 55 na na 60.1 57.4 -8.0 -0.6Kyrgyzstan b 57 93 79 96 na na 68.0 94.9 -6.4 5.4Tajikistan b 66 85 52 51 na na 59.4 68.3 -8.1 1.8Turkmenistan b 82 108 79 62 na na 80.7 85.0 -3.9 0.9Uzbekistan b 100 148 95 80 na na 97.8 114.0 -0.4 3.2

European CIS Belarus 74 64 66 92 77 70 72.3 75.3 -5.5 0.6Moldova 82 90 na na 51 54 na na na naRussia 63 61 80 79 74 84 72.3 74.7 -5.5 0.5Ukraine 70 56 88 76 77 81 78.3 71.0 -4.3 -1.5

Baltics Estonia 69 80 103 109 86 112 86.0 100.3 -2.8 2.9Latvia 71 98 88 97 89 116 82.7 103.7 -3.5 4.2Lithuania 61 81 100 100 81 93 80.7 91.3 -3.9 2.1

Central Europe Czech Republic 87 89 102 131 100 126 96.3 115.3 -0.7 3.8Hungary 72 83 72 101 95 110 79.7 98.0 -4.1 3.7Poland 80 93 86 99 96 108 87.3 100.0 -2.5 2.5Slovakia 89 89 99 117 89 116 92.3 107.3 -1.5 3.0

Balkans Albania 85 86 72 76 125 138 94.0 100.0 -1.2 1.2Bulgaria 63 65 57 72 86 90 68.7 75.7 -6.3 1.4Romania 85 93 80 81 137 134 100.7 102.7 0.1 0.4Slovenia na na 97 95 99 112 na na na na

a Grains include wheat, rice (milled weight) and coarse grains.b Central Asia: Cotton instead of sugarbeet; Average agriculture (col. 7 and 8) is average of grains and cotton only.c Average agricultural yields is calculated as a simple average of the yields of grains, sugar beet/cotton and milk.Sources: USDA for grains; sugarbeet yields are from FAO for Central Europe, Balkans and China, and fromZentrale Markt- und Preiseberichtstelle für Erzeugnisse der Land-, Forst-, und Ernährungswirtschaft (ZMP) andFAO for Central Asia, Transcaucasus, and European CIS. Milk yields are from ZMP for Central Europe,Balkans, Central Asia, Transcaucasus, and European CIS, and from State Statistical Bureau (SSB) for China.

2). In cases, such as China, fertilizer applica-tion rates soar during the reform period, ris-ing by more than 300 percent (Bruce Stone1988). While part of the reason that fertilizeruse rises so much in China and Vietnam is therelease of supply-side constraints, reformpolicies also are important (Qiaolun Ye andScott Rozelle 1994; Pingali and Xuan 1992).In contrast, fertilizer use plummets in mostCEE and CIS countries to around one-quar-ter of the pre-reform level of fertilizer use. Onaverage, in the late 1990s fertilizer use outsideEast Asia is only 25 to 30 percent of its level inthe late 1980s.

Although it is possible that partial andmore complete measures of productivitycould move in opposite directions, most ofthe evidence from the transition literatureshows that, in fact, total factor productivity(TFP) trends move largely in the samedirection as the partial measures (table 5).Several series of TFP estimates have beenproduced for China’s agriculture (McMillan,Whalley, and Zhu 1989; Shenggen Fan1991, 1997; Lin 1992; Guangzhong Wen1993; Jikun Huang and Rozelle 1996; Jin etal. 2002—see rows 1 to 5 for Jin et al.’s esti-mates). The studies uniformly demonstrate



TABLE 4GROWTH OF INPUT USE INDEXES FOR AGRICULTURE IN TRANSITION COUNTRIES


Fertilizers Tractors Land Labor Animal stock∗∗

5 10 5 10 5 10 5 8∗ 5 10

East Asia China 168 233 152 157 111 125 110 110 108 140Vietnam 239 343 92 139 98 98 125 131 157 177Laos 510 760 114 131 101 104 Na na 139 183Myanmar 174 189 92 79 100 101 Na na 95 104

Central Asia Mongolia 14 19 67 64 94 94 137 152 112 124Kazakhstan 16 5 78 29 96 96 89 58 77 38Kyrgyzstan na na 99 104 99 102 135 146 61 61Tajikistan 30 17 84 84 97 96 131 130 86 75Turkmenistan 40 21 80 80 73 73 121 137 124 89Uzbekistan 34 60 94 94 89 89 112 111 116 112

Transcaucasus Armenia 11 9 119 120 102 108 194 200 57 54Azerbaijan na na 90 99 96 100 97 100 82 101Georgia 22 29 71 43 86 86 76 na 49 57

European CIS Belarus 25 40 92 62 98 97 86 73 79 64Moldova 42 2 93 78 102 102 114 111 64 32Russia 11 9 82 61 98 98 100 92 74 47Ukraine 24 11 92 68 100 99 106 102 75 41

Baltics Estonia 17 20 106 109 107 106 40 35 50 32Latvia 21 53 82 89 99 97 79 77 38 26Lithuania 10 16 118 137 100 100 113 103 52 41

Central Europe Czech Rep. 29 24 58 82 103 103 54 44 69 53Hungary 15 18 72 61 94 95 43 37 59 51Poland 35 38 114 113 99 98 89 97 81 69Slovakia 17 15 89 77 100 100 71 60 65 46

Balkans Albania 19 14 74 68 101 102 92 107 121 107Bulgaria 25 14 69 51 98 98 92 99 47 42Romania 27 17 106 110 100 100 118 110 63 50Slovenia 56 52 56 118 91 83 95 87 86 82

∗ For Slovenia and Armenia, data are for seven years after the start of reforms.∗∗ Since 1995 animal stock refers only to the change in cattle stock, the index for previous years measures anaggregate of “animal units.”Average Asia excludes Mongolia.Sources: Data on fertilizer, tractor, land use, and animal stock are from FAO; labor data from Asian DevelopmentBank, ILO, national statistics, and World Bank.

that in the first years after reform (1978 to1984), comprehensive measures of produc-tivity (either constructed TFP indices ortheir regression-based equivalents) rose by5 to 10 percent per year. Although Wen(1993) worries that TFP quit growing in thepost-reform period (1985 to 1989), Fan(1997) and Jin et al. (2002) demonstrate thatduring the 1990s, TFP continues to rise at a

rate of around 2 percent per year. Pingaliand Xuan (1992) demonstrate that duringthe early reform period in Vietnam between1980 and 1985, the productivity of agricul-ture (in this case rice, which makes up alarge part of the nation’s agricultural output)rises by 2 to 3 percent annually. Although noone has analyzed the rise in productivitybetween years five and ten after the



TABLE 5ANNUAL GROWTH RATES OF TOTAL FACTOR PRODUCTIVITY FOR AGRICULTURE

IN VARIOUS TRANSITION COUNTRIES FOR SELECTED YEARS (PERCENT)

1979–94 1979–84 1984–89 1989–94East Asia China rice 3.8 9.1 0.4 2.0

wheat 5.6 12.8 1.2 2.6maize 6.1 13.5 -1.0 5.6soybean 4.8 7.7 -1.6 8.1crops (av.) 5.1 10.8 -0.2 4.6

1976–80 1980–85 1993–98Vietnam rice 3.0

North rice -3.3 5.0 2.1South rice 0.0 3.3 4.3

Vietnam crops 1.0North crops -0.7South crops 3.0

1992–97Centr. Asia Kazakhstan GAO -1.0

Kyrgyzstan GAO -0.4Tajikistan GAO -2.4Turkmenistan GAO -5.8Uzbekistan GAO -2.2

Transcaucasus Armenia GAO 4.6Azerbaijan GAO -0.8Georgia GAO 6.6

Eur. CIS Belarus GAO 0.6Moldova GAO 0.4Russia GAO 1.4Ukraine GAO 0.4

Baltics Estonia GAO 2.8Latvia GAO -1.2Lithuania GAO 3.6

1989–95 1989–92 1992–95Centr. Eur Czech Rep. crops 2.7 1.1 4.3

Hungary crops 1.1 -4.5 6.7Poland crops -0.4 -5.1 4.3Slovakia crops 1.2 -0.6 3.1

Balkans Albania crops 0.0 -9.3 9.2Bulgaria crops -1.8 -7.5 3.8Romania crops 0.5 -7.8 8.7Slovenia crops -- -3.4 --

Sources: China from Jin et al. (2002); Vietnam from Pingali and Xuan (1992), and Benjamin and Brandt (2001);FSU from Lerman et al. (2003); Central Europe and Balkans from Macours and Swinnen (2000a).∗GAO: gross agricultural output.

reforms, Benjamin and Brandt (2001) esti-mate that between 1992 and 1997, TFP forrice and total crop output generally contin-ues to rise in Vietnam (though in the case oftotal crop output, TFP growth differs

between the south—positive, and thenorth—negative).

Estimates of TFP changes in CEE and theCIS countries also show that measures ofTFP generally move in a manner consistent



with the partial ones (table 5). Macours andSwinnen (2000a) estimate that TFP indicesin Central European agriculture declineduring the first three years of transition(between 1989 and 1991) by 2.3 percentannually. The indices, however, reboundstrongly after three years of reforms, risingby 4.5 percent annually between 1992 and1995. The Balkan countries demonstrate asimilar but more pronounced pattern,falling by around 7 percent annually overthe first three years before increasing bymore than 7 percent annually during thesubsequent three years. TFP estimates byZvi Lerman et al. (2003) show that produc-tivity increases between 1992 and 1997 intwo Baltic countries (Estonia and Lithuania)and, quite strongly, in two Transcaucasiancountries, Armenia and Georgia. Similar tothe movements of labor productivity andyields, TFP declines significantly in theCentral Asian countries.

Perhaps because of the size and strategicimportance of Russia and Ukraine, relativelymore work on TFP has been done on thesecountries, although the results are less consis-tent than those for other parts of the reform-ing world. For example, Lyubov Kurkalovaand Helen Jensen (2003) find that technicalefficiency on Ukrainian collective and statefarms declined during early transition(1989–92). Likewise, several studies find thatthe efficiency of Russian farms also declinessignificantly during transition, results that areconsistent with the trends in ALP and yields(Sergey Sotnikov 1998; David Sedik, MichaelTrueblood, and Carlos Arnade 1999; andTrueblood and Stefan Osborne 2001).Trueblood and Osborne (2001), for example,conclude that their results “support the con-ventional wisdom that overall productivity[in Russian agriculture] has declined in thereform period” (p. 10) and that productivitydeclines by 2.1 percent annually between1993 and 1998 and they find “no evidence ofa productivity rebound.”

The cases of Russia and Ukraine, how-ever, are perhaps the only ones in which the

7 As we will explain in section 3, the inconsistent resultsfor Russia are likely due to differences in sampling andreflect variations in the performance of different farmstructures with the countries. An update of the Lerman etal. (2001) calculations indicates that TFP increases inRussia and Ukraine are due mostly to increases after 1995,as TFP declined before then.

partial measures differ from the TFP meas-ures from some of the studies. Lerman et al.(2003) estimate that TFP increases in Russiaand Ukraine between 1992 and 1997, a timewhen its partial measures are falling.Likewise, Olga Murova, Michael Trueblood,and Keith Coble (2001) find a slight increasein technical efficiency of Ukrainian cropfarming over the 1991 to 1996 period.7

In summary, the records of transitioncountries differ across regions and overtime within regions. Different criteria alsopaint different pictures of success. In theearly reform years, East Asian transitioncountries clearly performed the best duringthe first years of reform in terms of bothoutput and productivity. After an initial fewyears, however, several CEE countriesbegan to experience rising productivity,measured either as labor productivity(ALP), yields, or TFP. Productivity meas-ures rose throughout the later transitionperiod (years four to ten) in both CentralEurope and East Asia, even though thedirection of output in the two sets of coun-tries moved in opposite directions.Productivity in Central Europe rose even asoutput fell, primarily because inputs felleven faster. Hence, when critics of the tran-sition in CEE nations point to the collapseof output as an indicator of poor economicperformance, it is not clear that they alwayshave a valid point. According to the TFPmeasures, the efficiency of producers of anumber of CEE transition nationsimproved significantly a few years aftertransition. Such a pattern not only charac-terizes Central European countries but alsoseveral Baltic and some Balkan countries.

The record is less positive in the CIS.Output and labor productivity fell sharply in



almost all CIS countries during most of thefirst decade of reform. Hence, according toboth partial and most full measures, produc-tivity during the first ten years of reform fellin most CIS nations. Despite this, there isevidence that TFP increased in someTranscaucasian countries, such as Armeniaand Georgia. Moreover, some studies indi-cate that TFP may have increased in Russiaand Ukraine, especially in the second half ofthe 1990s. The findings of these studies con-tradict those from the rest of the literature.Interestingly, and perhaps a sign that pro-ductivity trends are beginning to turn evenin the slower-moving CIS, indicators insome nations show that although productiv-ity fell with output during a significant partof the first decade, there is evidence ofimprovements in productivity since the late1990s (EBRD 2002).

3. Prices, Rights, and Markets:Determinants of Success and Failure

While previous research on the determi-nants of the success of transition economieshas identified a number of important fac-tors, we examine three in this section. Weexamine shifts in price and subsidy policy,property rights reform and farm restructur-ing, and market liberalization, mainlybecause they have played a role—sometimespositive and sometimes not—in most transi-tion economies. Because of complicatedways that the policies and interactions ofpolicies affect performance, we first reviewthe policies and defer examination of theireffects until they can be looked at together.In addition to these three sets of factors,others surely also affect the performance ofdifferent transition countries (e.g., initiallevel of development at the time ofreform—Sachs and Woo 1994; Macours andSwinnen 2000b; the speed of reform—McMillan and Naughton 1992; politicaleconomy and regional tensions—Roland2000; Martha de Melo and Alan Gelb 1996;and the management of public invest-ments—Huang and Rozelle 1996; Csaba

Csaki 1998; Shenggen Fan, Linxiu Zhang,and Xiaobo Zhang 2002).

3.1 Prices and Subsidies

The administration of prices by the social-ist planning apparatus is one of the most distinguishing characteristics of pre-transi-tion countries. While in some countries lead-ers allowed subsets of goods to be traded outof the plan, for most high-priority commodi-ties—which almost always included food andfiber—planning ministries in most nationsallocated goods and services mostly on thebasis of quantity-based plans. Prices mostlyserved accounting functions.

Despite the similarities, there were severalcritical differences among nations. In settingthe prices of agricultural goods, inputs, andservices, the ratio of input to output pricesfaced by producers differed greatly amongthe countries. For example, in China andVietnam before reform, authorities usedadministrative prices to impose a heavy taxon agriculture by requiring farmers todeliver their output at artificially low prices(Lardy 1983; Sicular 1988a; Green andVokes 1998). In contrast, leaders in most ofthe CEE and the CIS nations supportedagriculture with heavy subsidies, typicallysetting artificially low prices for inputs andrelatively high prices for output (EdwardCook, William Liefert, and Robert Koopman1991; Andrzej Kwiecinski and NatachaPescatore 2000; Liefert et al. 1996; USDA1994; Thomas Tomich, Peter Kilby, andBruce Johnston 1995). The extent to whichprices were above or below the market priceprior to an economy’s transition almost cer-tainly would have different consequences forthe sector’s performance as reformers triedto bring the nation’s price structure closer tothat of the rest of the world.

In East Asia, perhaps one of the leastappreciated moves of the early reformerswas their bold decision to administrativelyincrease the price of farm goods that were tobe received by farmers (Nicholas Lardy1983; Terry Sicular 1988b). Between 1978



-80

-60

-40

-20

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20

40

0 1 2 3 4 5 6 7 8 9

Years after start of reform

agr.

outp

ut/in

putp

rice

inde

x

Central EuropeBalkansBalticsEuropeanCISEast Asia

Figure 5. Change in Gross Agricultural Terms of Trade Index (grain to fertilizer price ratio) during first 10 years of reform in transition countries. * Balkans exclude Albania and Bulgaria; Baltics exclude Latvia; European CIS excludes Moldova; East Asia includes China and Vietnam only. Data source: OECD and national statistics for China.

8 Although the statistical bureau did report a “market”price at that time (which actually was about the same levelas the above-quota price), such a small amount of grain(and less of fiber and oil seeds) was sold on markets, sincerules still tightly controlled the distance of shipment andthe goods that could be bought and sold, that most farmersdid not consider the market price as their opportunity cost.

and 1983, in a number of separate actions,planners in China increased the above-quotaprice, the payment farmers received for vol-untary sales beyond the mandatory deliver-ies, by 41 percent for grain and by around 50percent for cash crops (Sicular 1988b).According to the State Statistical Bureau’sdata, the relative price of grain to fertilizerrose by more than 60 percent during the firstthree years after reform (figure 5). Duringthe early reform years, the rise in above-quota price represented a higher outputprice at the margin to farmers, since until1984, state-run procurement stations regu-larly purchased all grain sold by farmers atthe above-quota price as long as they hadalready fulfilled their mandatory marketingdelivery quota which was purchased at astate-set quota price, which for the case ofrice, for example, was 50 percent below theabove-quota price (Sicular 1995).8

The important contribution of China’s pric-ing policy is the timing and breadth of the pol-icy change. The first major price rise occurredin 1979, almost at the same time reformerswere deciding to decollectivize. However,given the leadership’s decision to graduallyimplement the Household ResponsibilitySystem (HRS), beginning first in the poorestareas of China, the price increases immedi-ately affected all farmers, both those in areasthat had been decollectivized and those thathad not. By 1981, the time of the secondmajor price increase, according to Lin (1992),less than half of China’s farmers had beenallowed to dismantle their communes.Hence, as long as there was some, albeitweak, link between the output price and pro-duction, the plan-based price rise would haveled to increases in China’s farm output.

During its first years of reform, Vietnamfollowed an almost identical path (Csaki1998). As in China, almost a decade beforeVietnam’s leaders abolished the state’s pro-curement system and formally allowed pri-vate traders to directly purchase agriculturalgoods from farmers, leaders raised pricesadministratively and increased the profits



9 To the extent that access to fertilizer improved duringthe reform (Stone 1988), the shadow prices of fertilizerwould also have fallen, which would also encourage higheroutput.

earned by the farmers (Pradumna Rana andNaved Hamid 1996). According to officialdata from Vietnam, during the first five yearsof the reforms, the output-to-input priceratio rose more than 35 percent above itspre-reform level. Like China, the price riseoccurred at a time when Vietnam was justbeginning to push its Doi Moi decollectiviza-tion policies and more than ten to fifteenyears before land titles were issued.

During the entire pre- and post-reformperiod, input prices—especially of fertil-izer—were still mostly controlled by thestate’s monopoly agricultural inputs supplycorporations in China and Vietnam (BruceStone 1988; Prabhu Pingali and Nguyen TriKhiem 1995). Although short in supply, thegovernments in both countries controlledthe price of fertilizer and other inputs (suchas pesticides, diesel fuel, and electricity) aswell as their distribution (Dorothy Solinger1984). Communes received low-priced fer-tilizer from the state, but almost all of it wasinframarginal. In other words, the govern-ment-supplied, subsidized fertilizer was notsufficient to meet the needs of most farmers.Producers in both the pre- and post-reformperiods typically purchased additional fertil-izer from the state at a higher price (Ye andRozelle 1994). Hence, unlike other transi-tion and developing countries, at the margin,farmers in China and Vietnam were not ableto purchase fertilizer at highly subsidizedrates. In fact, according to Jikun Huang andChunlai Chen (1999), during the 1980s thereal price of China’s fertilizer was above theinternational price. Vietnam was in a similarposition early during its reforms (Pingali andXuan 1992). Although both nations raisedthe price of fertilizer somewhat under risingforeign exchange and budgetary pressures inthe mid-1980s, the rise was not large enoughto eliminate the positive incentives createdby higher output prices (World Bank 1997).9

Although price and subsidy reforms weremuch bolder in CEE and CIS countries thanin East Asia, there were differences amongregions. In Central Europe, governmentsimmediately dismantled the planning systemby decontrolling agricultural prices and dra-matically reducing subsidies (Jason Hartelland Johan Swinnen 1998; AlexandraTrzeciak-Duval 1999). For example,Estonia, the most radical reformer of coun-tries previously belonging to the SovietUnion, totally liberalized output and inputprices between 1990 and 1992. In most CIScountries, however, reformers decontrolledprices more gradually (Csaba Csaki and JohnNash 1997; Csaki and Achim Fock 2001).Russian reformers liberalized output pricesin the early reforms, but certain key inputsubsidies continued. On the other hand, incountries like Belarus, Uzbekistan andTurkmenistan (the least radical reformers),price controls on both outputs and inputscontinued far into the 1990s.

Yet, the main difference betweenCEE/CIS and East Asian transition countriesis not in their administration of price reform;rather, it is in the direction of the priceadjustments (figure 5). In East Asia, pro-urban policies that used low procurementprices during the planning era to subsidizeconsumers (who also were workers on thefront line of East Asia’s heavy industry-leddevelopment strategy) led to artificially lowfarm gate prices. Price reforms that sought toset more realistic prices (i.e., those that insome sense reflected the market value of thecommodities) raised prices. In CEE and inthe CIS nations, since output prices had pre-viously been supported above equilibriumprices and input prices had been heavily sub-sidized, price liberalization caused substan-tive declines in agricultural terms of trade. Inthe first five years of transition, for example,output-to-input prices in agriculture fellmore than 30 percent in Hungary, 50 percentin the Czech Republic, and at least 70 per-cent in Slovakia, Poland, Russia, Ukraine,and some of the Baltics. In these countries



the combination of the fall in the real price ofoutput and the sharp rise in the real price ofinputs led to a severe drop in production inmost agricultural sectors and food crises in anumber of them (OECD 1998).

3.2 Property Rights Reform and FarmRestructuring

Although there were many differencesamong countries in the organization of theiragricultural sectors prior to reform, in mostcases farm production units shared severalkey characteristics (Lardy 1983; Pingali andXuan 1992; Lerman, Csaki, and Feder2004). Prohibiting private farming, socialistideals favored large, corporate organizations.In some nations, state-owned farms domi-nated the landscape. Those that worked theland on state farms typically were paid awage, drew a pension, and performed workassignments handed down by managers,which were often part of a larger national orregional plan. Farms were theoreticallyorganized on the same principles as factoryenterprises, and farmers became workers.The state made investments, set plantingplans, purchased inputs through planningchannels, and remitted profits up throughthe ministerial system. In other countries,farms were run as collectives. Like statefarms in most respects, the main differencewas that instead of drawing a wage, collec-tive members earned work points that enti-tled them to a share of the harvest that wasleft over after deductions were made forinput purchases, taxes, quota deliveries, andinvestment retentions.

Whatever the exact organizational form,wage- and point-earning farmworkers typi-cally faced few incentives to work hard, sincetheir compensation was at most only looselytied to either their effort or the farm’s prof-itability. Unlike industrial factories, however,monitoring farm workers was difficult.Logistics often compounded the problems.Planning necessities (e.g., arranging for theprocurement of inputs and disposal of out-put) meant that farms in most countries

10 In Poland and Yugoslavia the farm sector remaineddominated by private family farms throughout theCommunist regime. Hence reforms targeted other parts ofthe agri-food system.

11 Gorbachev also launched a major investigation intocorruption in the Uzbekistan cotton regime.

were quite large. The large scale of farms, inturn, meant that managers were oftencharged with trying to direct work of manyindividuals that on a day-to-day basis werephysically spread out over a spatially dis-persed area. In almost all studies of pre-reform agriculture collective and state farmswere found to be inefficient (Joseph Bradaand Arthur King 1993; Karen Brooks 1983;Robert Meade 2000; Lin 1990; LouisPutterman 1992).

Searching for ways to make theireconomies more productive, reformers hadseveral options for eliminating inefficiencies.First, they could try to provide better incen-tives to elicit more effort. Second, leaderscould try to reduce the operational size ofthe farming unit to improve informationabout on-farm production needs. In thissame spirit, it was thought that if planningwas reduced by giving more decision-mak-ing authority to producers (i.e., give thembetter control rights) producers could pro-duce more efficiently. Finally, reformerscould try to facilitate the reduction or betterallocation of inputs, including labor, thatwere being wasted. All countries, albeit withdiffering degrees of emphasis, tried to tapthese sources of productivity gains.

In fact, recognition of the shortcomings ofthe system and the launching of the wave ofreforms in the 1980s in East Asian nationsand in the 1990s in CEE and the CIS nations was not new. Some CEE countriesattempted market-oriented reforms before1989, mostly in the form of measures thatincreased enterprise autonomy (Josef Bradaand Karl-Eugen Wädekin 1988). Polandintroduced reforms in management of their cooperatives and state-owned enter-prises in the early 1980s.10 Gorbachev fol-lowed later in the 1980s.11 Hungary’s leader



went considerably beyond this by abol-ishing mandatory planning even earlier in1968. Yugoslavia had begun to introduceself-management in 1965. In contrast,Czechoslovakia and Romania had little or nohistory of significant reforms prior to 1988.

Most pre-1989 reforms in CEE and CISnations, did not achieve their objectives(Kenneth Gray 1990; Stephen Wegren1998). Communist leaders had hoped that ifenterprise managers were given moreautonomy in determining output and prices,they would show more profit awareness andincrease enterprise performance. Instead,in many cases enterprises started distribut-ing most of any rising value added to work-ers and managers in the form of wages.With soft budget constraints, enterprisesstarted bargaining with the central authori-ties for more resources, contributing tomacroeconomic imbalances (Roland 2000).

In light of the earlier failures and inresponse to mounting pressures caused bythe poor performance of agriculture (amongother sectors), reformers after 1989 in mostCEE and CIS countries—and earlier in EastAsia—decided to make fundamental changesin property rights. Consisting of controlrights (that is, who gets to decide what toplant and what inputs to use) and incomerights (who gets the residual income gener-ated by the productive activity), the finalform and mix of property rights differedgreatly across different countries. In somecases reformers only granted partial propertyrights to farmers. For example, reformerssometimes provided income rights, but fewcontrol rights. In other cases leaders pro-vided nearly full control rights with only par-tial income rights. Ownership changes (thatis, who received alienation rights to land andother farm assets) were often considered sep-arately from questions of farm restructuring;likewise, restructuring sometimes occurredindependently of changes in rights. Almostalways, the reforms to property rights in thenew wave of policy changes in the 1980s and1990s were accompanied by a reduction in

the propensity of the state to planning (grad-ually in China and Vietnam; and more rapidlyin the CEE and CIS nations).

Rights Reform in East Asia: Incentives,Individualization, and Incomplete Priva-tization. East Asia’s reformers, more thananything, have followed a strategy based onproviding incentives through property-rightsreforms, even though in China and Vietnamthe shift to private ownership is today farfrom complete (table 6). The reforms inChina started with the HouseholdResponsibility System (HRS), a policy ofradical decollectivization that allowed farm-ers to keep the residual output of their farmsafter paying their agricultural taxes and com-pleting their mandatory delivery quotas.Farmers also began to exercise control overmuch of the production process (although inthe initial years, the local state shared somecontrol rights and in some places still doestoday). In this way the first reforms in theagricultural sector reshuffled property rightsin an attempt to increase work incentives andexploit the specific knowledge of individualsabout the production process (Perkins 1988).

In executing the property rights reforms,leaders also fundamentally restructuredfarms in China and Vietnam. Within a fewyears, for example, reformers completelybroke up the larger collective farms intosmall household farms (figure 6; table 7). InChina today there are more than 200 millionfarms, the legacy of an HRS policy that gavethe primary responsibilities for farming tothe individual household. There are morethan ten million farms in Vietnam.

The process of planning also began totake on a less important role (Sicular1988b). In China, for example, marketedsurplus delivery quotas were divided intobasic and above-quota quotas. In addition tobeing given higher payment for above-quotaquota deliveries, farmers were given morescope in deciding what to produce. Plannersgave more discretion to farmers over a vari-ety of products, such as eggs, certain meats,fish, and horticulture goods. Vietnamese



TABLE 6SCOPE OF PROPERTY RIGHTS REFORM FOR AGRICULTURE IN TRANSITION COUNTRIES

Land Reform Individual Transfer of Individual Transfer of Progress in Land ReformProcedure Use Rights Use Rights Ownership Rights Ownership Rights after 5 years after 10 years

East Asia China Distribution x - na na 8 naVietnam Distribution x - na na 8 naLaos Distribution x - na na 8 naMyanmar -- x X na na 8 na

Central Asia Mongolia Distribution x - na na na naKazakhstan Distribution in shares x X - - 5 5Kyrgyzstan Distribution in shares x X x - 6 7Tajikistan Distribution in shares x X - - 2 5Turkmenistan Distribution in shares x - x - 2 3Uzbekistan Distribution in shares x - - - 1 2

Transcaucasus Armenia Distribution x X x X 8 8Azerbaijan Distribution x X x X 6 8Georgia Distribution x X x X 7 6

European CIS Belarus Distribution in shares x - - 1 2Moldova Distribution in shares x X x X 6 7Russia Distribution in shares x X x - 5 5Ukraine Distribution in shares x X x - 5 6

Baltics Estonia Restitution x X x X 6 8Latvia Restitution x X x X 9 9Lithuania Restitution x X x X 8 8

Central Europe Czech Rep. Restitution x X x X 8 8Hungary Restit+Distr+Voucher x X x X 9 9Poland -- x X x X 8 8Slovakia Restitution x X x X 7 8

Balkans Albania Distribution x X x X 8 8Bulgaria Restitution x X x X 7 8Romania Restitution+Distr. x X x X 7 8Slovenia -- x X x X 9 9

Sources: Csaki and Tuck (2000), Lerman (2001), and Macours and Swinnen (2002).

reformers carried out similar reforms. In therest of the paper when reference is made todecollectivization or the implementation ofHRS, we are referring to a process of trans-fer of income and control rights to farmersand the initial reduction of planning(although not its immediate elimination).

The collective did not disappear, however.A companion set of reforms in the mid-1980stransformed communes into townships, thelowest level of China’s formal governmenthierarchy. Brigade leadership committees (asub-commune level of organization) wereturned into village committees, which

became the government’s representative inChina’s villages (Jean Oi 1999). Villages andthe small groups below them (formerly pro-duction teams) retained legal ownershiprights over land and are the entities that werecharged with contracting land to the farmersand setting rules for land management.

Doi Moi, Vietnam’s reform program in the1980s, closely followed China’s strategy(Pingali and Xuan 1992; Pingali and Khiem1995). Faced with large food deficits anddeclining productivity, Vietnam switchedfrom collectivized production to a household-oriented contract system in 1981. Designed



0

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Shar

e of

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European CISChina

Figure 6. Share of Agricultural Land Used by Individual Farms (%). Balkans exclude Albania; European CIS excludes Moldova; East Asia includes only China. Source: see Table 7.

12 Romania used a mixed land reform strategy, combin-ing both land distribution and restitution.

to provide farmers with better incentives,the reforms stipulated that individual house-holds were to enter into a contract with theformer collective. In return for maintainingproductivity and selling a portion of theircrop to the state at below-market prices,farmers could keep all of the output fromtheir land. Within a few years of the initialreforms, millions of new household-basedfarms were established.

Only a few countries outside East Asia fol-lowed China’s model of reforming propertyrights and farming organizations (tables 6 and7). Several countries in the Balkans andTranscaucasus region distributed land rightsfor specific plots of land to individual house-holds in rural areas.12 For example, in movesthat were even more radical than China’s,reformers in Albania and Armenia gave house-holds almost complete private ownershiprights to their land (Azeta Cungu and JohanSwinnen 1999; Lerman et al. 1999). InGeorgia, land use rights were transferred toindividual farms by presidential decree in

1992, a process that contributed to the indi-vidualization of farming. Four years later theseuse rights were converted into private ownership rights. Azerbaijan, the thirdTranscaucasian state, followed the samereform strategy, although the policy moveswere made after 1996 (Lerman, Csaki, andFeder 2003). What makes the reforms in thesenations so special is that outside of Asia, therest of the transition world followed a differentpath in their policies and rights reforms.

Rights Reform in CEE: Restitution andRestructuring. In contrast to East Asia, rightsreform in CEE went much further than thetransfer of use rights (Lerman 2000; Swinnen1999). The dominant land reform procedurein Central Europe, the Balkans, and the Balticcountries was restitution of land to the formerowners who had lost their rights during thecollectivization movement in the past (table6). If the original owners were not alive,reformers restored ownership rights to theirclosest heirs. Typically, land reform laws resti-tuted land to the historical boundaries. Ifrestitution to the original boundaries was notpossible, former owners received rights to aplot of land of comparable size and quality. In



some countries restitution was combined withother land reform programs, for example,voucher privatization (Hungary), distributionof state land (Romania), or the leasing of state-owned land (Czech Republic). If successful,the new form of farming theoretically wouldbe more efficient since land would become amarketed input that could be transferred tothe most efficient producers and would pro-vide operators with better incentives. Thenew farm managers would be free to adopt amore efficient mix of inputs. Initially, how-ever, there was a danger that restitution wouldresult in a fragmentation of farms and a fall inefficiency (or at least a period of adjustment)since the pre-socialist distribution of land dif-fered from the distribution of operationalfarms in the immediate pre-reform period.

While the restitution process resulted inthe fragmentation of ownership, for severalreasons it did not necessarily lead to a frag-mentation of farms (figure 6). Erik Mathijsand Johan Swinnen (1998) illustrate how thenature of transaction costs in land marketsactually led to a consolidation of land.Restitution in many countries gave land backto individuals who were no longer active inagriculture, most commonly to either formerfarmers or their heirs. Except for the case insome of the poorer countries, the newlandowners did not return to farming andprimarily were interested in renting theirland. Because the search and negotiationcosts of identifying individuals who werewilling to rent the land were so high, the eas-iest way for the new land owners to find arenter was to contact those already using theland. Consequently, in most cases the newlessees became those who had been involvedwith farming on the large pre-reform farms.

Transaction costs also favored the largefarmers from the point of view of their searchfor land to rent. Almost all of those whofarmed after reform were active in agricultureprior to reform. Most were farm workers orcooperative members. Since land was resti-tuted to people outside agriculture, if theywanted to stay in farming, they were forced to

13 In general, the new corporate farms are smaller thanthe former collective and state farms, and the individualfarms larger than the pre-reform household plots. Theaverage corporate farm in CEE today is between 500 to1000 hectares, compared to 2000 to 4000 hectares for anaverage collective or state farm before 1990. At the sametime, however, the average size of individual farmsincreased (Lerman et al. 2003). For example in Hungarythe average size of the large scale cooperative and corpo-rate farms declined by 50 percent during the first fiveyears of reform; the average size of the family farm dou-bled between 1991 and 1996 (Erik Mathijs and LiesbetVranken 2004).

search for the owners of the land and strike arental contract. However, since the manage-ment of the large farms was closely involvedin the restitution process, they had an infor-mation advantage in identifying the new own-ers. Transaction costs on both the supply anddemand sides gave an advantage to largefarms. As a result, after restitution, farm sizedid not fragment as much as had been feared.Although a small farming class did emergeeverywhere, many large farms did not disap-pear and the agricultural sector in severalCEE countries remained characterized by adual farm structure (Alexander Sarris, TomasDoucha, and Erik Mathijs 1999).13

In the course of transition, however, differ-ent mixes of farm structures emerged in dif-ferent nations in CEE (table 7). For example,individual farming dominates now in severalBaltic and Balkan countries. In contrast,large-scale privatized corporate farms still usemost of the land in Central European coun-tries, such as Slovakia and the CzechRepublic. The corporate farms, all of whichresulted from organizational restructuring ofthe collective and state farms, also are farfrom a homogeneous organizational form.Observers in CEE find joint-stock compa-nies, limited-liability partnerships, and agri-cultural cooperatives operating in the sameeconomic environment.

Although decollectivization did not resultin a complete shift to individual farming inseveral countries in CEE incentives improvedsignificantly. The reforms basically gave con-trol and income rights to the managers ofthe various organizational forms. The new



TABLE 7RESTRUCTURING OF FARMING ORGANIZATION AND GENERAL REFORM INDICATORS

Individual Land Use Individual Production Agr. Reform

pre-reform after 5 years after 10 years a pre-reform after 7 years after 10 years

East Asia China 5–10 98 99 na na naVietnam 5 99 99 na na naLaos 54 99 99 na na naMyanmar 99 99 99 na na na

Central Asia Mongolia na na na na na naKazakhstan 0 5 24 28 38 5.6Kyrgyzstan 4 34 37 34 59 6.4Tajikistan 4 5 9 23 39 4.2Turkmenistan 2 3 8 16 30 2.0Uzbekistan 5 13 14 28 52 2.0

Transcaucasus Armenia 7 95 90 35 98 7.2Azerbaijan 2 5 na 35 63 6.2Georgia 12 50 44 48 76 6.0

European CIS Belarus 7 16 12 25 45 1.8Moldova 7 12 20 18 51 6.0Russia 2 8 13 24 55 5.6Ukraine 6 10 17 27 53 4.0

Baltics Estonia 4 41 63 na na 8.4Latvia 4 81 87 na na 8.4Lithuania 9 64 85 na na 7.6

Central Europe Czech Rep. 1 19 26 na na 8.6Hungary 13 22 54 na na 8.8Poland 76 80 84 na na 7.8Slovakia 2 5 9 na na 7.6

Balkans Albania 3 95 na na na 6.8Bulgaria 14 44 56 na na 7.6Romania 14 71 82 na na 6.6Slovenia 83 90 94 na na 8.0

a Due to data limitations, data are for eight, nine, or ten years after the start of transition.Sources: Csaki and Tuck (2000), Lerman (2001), and Macours and Swinnen (2002).

organizations no longer guaranteed employ-ment to their shareholders. Moreover, theywere forced to operate under hard budgetconstraints with a real threat of bankruptcyproceedings against those who defaulted ontheir loans. This radically changed the organi-zational behavior of farm enterprises. Manyof the large farms turned into market-drivencorporations (Lerman, Csaki, and Feder2004). With such incentives managers set outto improve the efficiency of the farms. Oneresult of the changed incentive structure isthat many of the farms cut back substantially

14 The main exceptions are Armenia and Georgia (seeabove).

on their labor use by laying off workers (JohanSwinnen, Liesbeth Dries, and Karen Macours2003). Output per worker rose significantly.

Rights Reforms in CIS Countries: PaperShares and Poor Incentives. In most CIScountries, such as Russia, Ukraine, Belarus,and most of Central Asia, land reform pro-ceeded more gradually and procedurally in adifferent way than in East Asia or CEE (table6).14 Unlike restitutions, reformers in CIS



15 However, changes have been emerging in somecountries in recent years. For example, Russia introduceda new land law in 2002 allowing sales of agricultural land,with some restrictions.

nations generally were supposed to follow atwo-step process, although in practice theprocess was not always followed completely(Lerman 2001). In the first part, reformerstransferred land from state ownership toownership by the collective, which typicallyconsisted of people who were living andworking on the collective farms. In the sec-ond part, ownership rights were then sup-posed to be given to the individuals. In fact,in many nations individual households onlyreceived certificates of entitlement to landthat had been shifted to the protective careof the collective. Although the certificatesfrequently were called land shares, theywere, in fact, “paper shares” that did notestablish a direct link between a specific plotof land and an individual. As a result, landreform in most CIS nations often resulted inthe large-scale shift of land ownership to thecollective, not to individual owners.

At least in the first decade of the reform,the share distribution system created majorobstacles for restructuring CIS farms anddid not always provide strong incentives tothe producer (Roy Prosterman and TimHanstad 1999). Leaders in almost all of thecountries that used share distribution alsobanned agricultural land from being sold orpurchased during the first decade of reform(Lerman 2001).15 Several of the countriesalso have created additional restrictions onland rights. For example, farmers in Belarus,Turkmenistan, and Uzbekistan cannot trans-fer use rights among themselves. Potentialusers of land also face high transaction costsin accessing land since the property rights onspecific plots are unclear. As Vasily Uzun(2000, p. 8) observes: “land share owners donot know where their land shares arelocated; managers of agricultural enterpriseshave an opportunity to use the land owned

16 David O’Brien, Valeri Patsiorkovski, and LarryDershem (2000) document important regional variationswithin Russia in land rights (e.g. in leasing), associatedwith differences in regional policies, and show how thesehave had important impacts on output and productivityvariations among household farms in different regions.

17 The important role of cotton in the economies ofUzbekistan, Turkmenistan, and Tadjikistan as a source offoreign exchange and tax revenue is essential to under-standing the transition and the special nature of thereforms in the agricultural systems of these countries(Richard Pomfret 2000, 2002a,b; Max Spoor 1993).

by citizens freely and without controls; andworkers, still, after nine years of reforms, donot clearly understand their choices.” 16

The limitations on access to land alsoclearly dampen incentives to use it effi-ciently. The weak rights reduce pressure forrestructuring of existing farm organizationsby shielding them from competition for landuse. Under such a system, few individualshave strong incentives to undertake any sub-stantial investment in the physical land,equipment, or management reorganization.

The partial effect of the adoption of theshare distribution on outcomes in farmrestructuring can be best illustrated by thecase of Russia and Ukraine. The shift towardsindividual farming of land was limited (table7). During the first decade of transition mostof the land remained in use by large-scale for-mer collective and state farms. Although as inCentral Europe, former collective and statefarms have taken on new names—such asjoint-stock companies, limited-liability part-nerships, agricultural cooperatives and collec-tive enterprises—the restructuring was oftensuperficial, and traditional functions and inef-ficient allocation of production factors contin-ued (Lerman and Csaki 1997; David Sedik1997). According to Lerman (1997), the mainchange appeared in the abolition of produc-tion plans. Because of continued dependencyof farms on political authorities, however, theproduction plans of the local government con-tinued to influence production behavior. Insome countries, explicit intervention throughthe issuance of production plans continues forstrategic commodities, such as cotton inTurkmenistan and Uzbekistan.17



0

10

20

30

40

50

60

70

80

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Shar

e of

agr

icul

tura

l out

put (

%)

Corporate farms

Individual farms

Figure 7. Agricultural Output by Farm Organization in Russia, 1989—2002 (%).Source: Goskomstat, various years.

Despite the pessimistic record of rightsreform in CIS nations, some reports suggestthat by the end of the 1990s there may havebeen more changes than were evident in tra-ditional statistical sources (table 7). In manyof the CIS countries the share of outputfrom individual farms is much larger thantheir share in land use. This partially reflectsthe fact that, on average, individual farmingmay be more productive and that farmerstypically produce a different set of morelabor-intensive, high value-added commodi-ties on their own plots. Moreover, at least insome regions, household farms, operating ontheir own small plots, but sometimes withsome rented land, were able to makeprogress in adapting to new market condi-tions. In Russia this is especially the case insome of the more reformist regions in whichregional policies allowed more experimenta-tion with private agriculture (O’Brien et al.2000). As in the pre-reform period, however,the higher productivity also can be explainedby the symbiotic relationship that continuesto exist between large-scale farms and many

individual farms. Maria Amelina (2000)shows that even in the reform era, house-holds frequently use the large-scale farms asa way to access inputs and market theirgoods. Despite “help” from inputs thatleaked out from the formal system, therecord also clearly demonstrates that inplaces where reform was allowed, theimproved incentives contributed to produc-tivity growth and this in turn has encouragedgreater shifts to private holdings. In Russia,for example, the share of output producedby individuals increased from 25 percent in1989 to 60 percent in 1999 (figure 7).

In some of the slowest reforming coun-tries, such as Turkmenistan and Uzbekistan,policy changes in the second half of the 1990shave strengthened the development of so-called intra-farm leasing (Deniz Kandiyoti2003; Zvi Lerman and Karen Brooks 2001).Within the framework of the former collec-tive farms, land is leased to family groups.Control rights are still limited; the leases aresubject to state orders for strategic products,such as grains and cotton. In Uzbekistan, the



former collective farms provide a range ofservices to the farms, including access toinputs and access to water. However, theseare as much used to enforce production plansand extract rents from the farms as they are toassist them (Richard Pomfret 2000, 2002b).

3.3 Liberalization and the Development ofMarket Institutions

In addition to property rights reform andtransforming incentives, the other major taskof reformers is to create more efficient insti-tutions of exchange. Markets—whether clas-sic competitive ones or some workablesubstitute—increase efficiency by facilitatingtransactions among agents to allow specializa-tion and trade and by providing informationthrough a pricing mechanism to producersand consumers about the relative scarcity ofresources. But markets, in order to functionefficiently, require supporting institutions toensure competition, define and enforce prop-erty rights and contracts, ensure access tocredit and finance, and provide information(McMillan 1997; World Bank 2002). Theseinstitutions were either absent in the commu-nist countries or, if they existed, were inap-propriate for a market system. For example,in most countries central-planning agenciesdirected production and other economictransactions, and their directives served toenforce contracts involving exchanges amongvarious agents in the chain. Market liberaliza-tion requires the elimination of central plan-ning, but to do so successfully requires theprocess to be executed in a way that will allowproducers to continue to have access toinputs and marketing channels while the nec-essary market-supporting institutions areemerging. In this section, in order to docu-ment how transition countries have taken dif-ferent paths in market liberalization, weconsider three ways institutions of exchangehave emerged: through the process of marketliberalization; by the increased ability toenforce exchange contracts; and on the basisof how well reformers or some alternative

institutions were able to guarantee access toinput and output markets during transition.

Market Emergence in CEE and CIS: TheCollapse of Exchange; Institution Rebuilding.On the eve of transition, the agro-food sys-tems in CEE and the CIS countries wereorganized much like in the West, with spe-cialized companies at various stages of thechain, such as food processing and marketingcompanies (downstream firms) and fertilizer,machinery and feed producing and supplyenterprises and agricultural banks (upstreamfirms). While there was specialization on afunctional basis, the companies at variousstages of the production and marketing chainoperated in an environment that was centrallyplanned and vertically integrated (Jill Hobbs,William Kerr, and James Gaiford 1997).

The reform path taken in most of the CEEand CIS nations, although implemented withvariations in speed, was predicated mostly onremoving central planning and privatizingthe up- and downstream companies.Reformers in the most aggressive countriesbegan to liberalize markets at about the sametime that they privatized farms, liberalizedprices, and cut subsidies. Control and own-ership of tens of thousands of firms shifted.

While such actions are part of the rapidmarket liberalization scheme, the removal ofthe central planning and its system of alloca-tion and control—in the absence of new insti-tutions to enforce contracts, distributeinformation, and finance intermediation—caused serious disruptions throughout thefood economy (Oliver Blanchard and MichaelKremer 1997; Hamish Gow and JohanSwinnen 1998; Gérard Roland and ThierryVerdier 1999; Joseph Stiglitz 1999). One of themost serious problems for farms was access tocredit for investment and working capital.With farm profitability collapsing due to thefalling terms of trade, internal financialresources became limited. External financewas difficult to obtain during early transition(OECD 1998). Formal sources of credit, suchas agricultural banks, were themselves facingrestructuring and macroeconomic reforms.



18 For example, in Russia the relative price of mixedfeed more than doubled in comparison to prices of live-stock products during the first years of transition andremained around that level for most of the decade(Bjornlund et al. 2002). This contributed to the decline inthe animal stock to less than half of pre-transition levels.The main exceptions to this decline in livestock areTurkmenistan, Uzbekistan, and Albania. In Albania, growthin livestock resulted from a combination of an (atypical)strong increase in relative prices of livestock over grain andthe shift to small-scale livestock production with the frag-mentation of the collective farming system (Macours andSwinnen 2002). In Turkmenistan and Uzbekistan, growthcame about because much livestock production wasalready in private households, and the availability of largeareas of pastures in those countries (e.g. more than 90 per-cent of agricultural land in Turkmenistan is in pastures)allowed households to switch to less feed-intensive formsof livestock production. However also there livestock pro-ductivity and herd quality declined because of diminishingavailability of mixed feed (Pomfret 2000).

Financial market liberalization made externalcredit scarce and expensive. When there wascredit from formal or informal sources, it wasdirected towards more profitable activities,such as trading, which frequently returnedhigh and quick profits.

Problems accessing physical inputs appearmostly in fertilizer use for crop productionand feed use for livestock production.Disruptions in supply contributed to the dra-matic fall in input use over the first years oftransition. Fertilizer use collapsed to around30 percent of its pre-transition level in virtu-ally all CEE and CIS countries (table 4).Unable to buy feed, livestock operationsslaughtered large fractions of their herds(Britta Bjornlund et al. 2002). The feedscarcity-induced cullings contributed to amassive decline in the animal stock duringthe first five years, from around 30 percentin Central Europe and the European CIS, tomore than 50 percent in the Baltic countries(table 4).18

One of the clearest manifestations of theinstitutional disruptions in the agro foodchain is the contract enforcement problemsthat resulted in delayed payments for productdeliveries and labor. A survey of food compa-nies in Central Europe identified paymentdelays as one of the most severe barriers togrowth (Matthew Gorton, Allan Buckwell,

19 While early discussions of the finance problemsfocused mostly on the institutional problems, later empiri-cal studies emphasize the profitability and cash flow prob-lems. For example, Glenn Pederson, Karen Brooks, andOleg Lekhtman (1998) identify the importance of prof-itability and cash flow problems in the perceived “excessivedebt burden” of Russian farms. As Csaki et al. (2001) show,farm debt in most CIS countries increased during the1990s because farms did not pay their obligations to gov-ernment, suppliers, banks, and even workers. Anotherexample is a 1997 Romanian survey, where farmers identifyinsufficient income as the key reason for their loan applica-tion being rejected (52 percent of the cases), much morethan lack of collateral (18 percent) or outstanding debts (11percent) (Junior Davis and Angela Gaburici 1999).

and Sofia Davidova 2000). Data fromSlovakian farms show that payment delaysare strongly correlated with profitabilityproblems (1996 data from Slovak Ministry ofAgriculture). A 1997 survey of Hungarianagricultural enterprises found that 61 percentof farms suffered contract breaches in theform of delayed payments and that these neg-atively affected profits (Cungu and Swinnen2003). These delays, in the presence of highinflation, contributed importantly to thecash-flow problems throughout the agro-food chain and ultimately created seriousfinancing constraints.19

Contract enforcement and non-paymentproblems contributed to the widespread useof barter exchange in CIS countries, such asRussia and Ukraine. For example, in the earlyyears of the reforms estimates put the shareof barter transactions at 75 to 85 percent inRussia (Laszlo Bruszt 2000). In several coun-tries, the government was as much part of theproblem as it was part of the solution, sincefarms used barter to avoid taxation that couldoccur because the government could monitorformal bank transactions. Furthermore, asthe government did not impose hard budgetconstraints (e.g., it did not allow bankruptcyprocedures to occur), farms continued theirpractice of not paying bills and accumulatingdebts in several CIS countries, includingRussia, Kazakstan, and Ukraine until the late1990s (Csaki, Lerman, and Sotnikov 2001;Stephan Von Cramon-Taubadel, SergiyZorya, and Ludwig Striewe 2001).



Finally, the absence of market-supportinginstitutions constrained the process of farmrestructuring. Households, in weighing theirprospects of farming on their own, frequentlyopted to stay with the collective farms, or insome of the new forms of farmer associationsthat had appeared, in order to retain access toinputs and to marketing outlets (Lerman et al.2003; David O’Brien and Stephen Wegren2002; Marian Rizov et al. 2001; Rachel Sabates-Wheeler 2002). Institutions of exchange, nomatter how poorly they functioned, in manynations were still largely organized around theformer structure because of the absence ofreform in the up- and downstream sectors.

Furthermore, in an environment in whichthere are no organizations that want to dealwith supplying inputs to small farms—eitherbecause the existing organizations have noincentives to do so or because new compa-nies targeting small farmers did notemerge—political lobbying and bureaucraticconnections began to play a role in facilitat-ing change and act to discourage restructur-ing. In countries like Russia and Ukraine,governments discriminate openly againstindependent private farmers (Csaba Csakiand Allan Zuschlag 2003). For example, toobtain fertilizer Russian farms usually needthe help of political authorities, such as theregional government. Farms get fertilizer atlow prices in exchange for the commitmentto deliver and sell their output to the author-ities (William Liefert, Bruce Gardner, andEugenia Serova 2003). Amelina (2000) doc-uments how in many Russian regions localgovernments use so-called commodity creditschemes to support former collective farms,irrespective of their profitability.20 These

20 Under this “non-cash” system, input suppliers pro-vide goods directly to farms during the sowing season, butare not paid by the farms. Rather, the debts are assumedby the government, and written off against taxes owed tothe government by the input suppliers. Farms, in return,are obliged to deliver their products (often grain) to thegovernment, often for its use in food reserves. In the fall,when (grain) prices are low, regional governments try tocollect payments sometimes by imposing barriers to salesof the commodities outside the region (Csaki et al. 2002).

“soft,” outside funds allow the collectivefarm management to continue to subsidizeinputs for their employees in the form of in-kind payments. The funds also are used toprovide funds that collective employees canuse to buy inputs for their household plots.The system, however, discriminates againstindependent, individual farms as it excludesthem from such credit access and from hav-ing access to the lower input prices.Moreover, the commodity credit schemehad another, equally harmful effect (Csaki etal. 2002). Because commercial creditsources cannot compete against the subsi-dized credit schemes, the attention of alter-native sources of finance dried up forindividual farmers. The result is that only asmall share of the output from “individualfarming” in Russia (table 7 and figure 7)comes from registered individual “privatefarms,” and most from so-called “householdplots.”21 Similarly, in countries such asKazakstan, most grain farms continue todepend on local authorities to supply key

21 In all CEE and CIS countries, rural households andfarm workers had household plots under the communistsystem. There was a certain symbiotic relationshipbetween the collective farm and the household plots. Thesmall-scale farms allowed workers to add to their incomeby producing both for own consumption and selling somefarm output. By the 1980s these household plots produceda substantial amount of output, especially for labor-inten-sive products such as some fruits and vegetables. Farmworkers got access to cheap inputs for their householdplots as they got them as in-kind compensation on thefarm, or simply stole them. After 1989, in CEE the shift toindividual farms was a shift to independent individualfarms. While “hybrid” structures were important in somecountries (e.g. in Romania), they were limited in CEE.Hence “individual farms” includes a mixture of “real” fam-ily farms and household gardens in CEE statistics.However, in countries such as Russia the development ofindependent individual farms was quite limited (for rea-sons discussed here) and household plots which werestrongly linked to the large farms (in complex and informalways) grew very strong in importance. Therefore theRussian statistics have differentiated between (individual)“private farms” and “household plots.” For example, in1998, “household plots” used 59 percent and (individual)“private farms” 3 percent of total output. For consistency,however, we combine, for all countries, both types of farmsin the category of “individual farms” in the tables and fig-ures throughout this paper.



inputs and to finance these inputs throughthe issue of local authority guarantees for the provision of seed and fuel by supplies ona barter against the season’s production(John Gray 2000).

Although in its initial years after transi-tion, the food economy in much of CEEoperated within a setting of incompleteinput and output markets, a combination ofpublic policy measures and private initiativesfacilitated the emergence of market-sup-porting institutions. Those nations thatimplemented market liberalization reformsfastest were the first to recover (Martha deMelo et al. 1997; Charles Wyplosz 2000).Besides general institutional and macro-eco-nomic reforms, which were important pre-requisites, various CEE governments havealso implemented public policies targeted atreducing institutional constraints in theagro-food chain. For example, in some CEEnations, leaders began warehouse receiptand loan guarantee programs to overcomethe problems faced by farmers in findingcollateral for their farm loans (OECD 1999).

A number of private initiatives also havebeen able to overcome market imperfectionsand institutional constraints (Gow andSwinnen 1998, 2001). The most successfulones frequently depend on private enforce-ment mechanisms within the framework ofspecifically designed contracts or otherarrangements (Simon Johnson, JohnMcMillan, and Christopher Woodruff 1999;McMillan and Woodruff 1999). In othercases firms have turned to vertical integra-tion. Such contracts with private agents, andother moves to vertically integrate, act assubstitutes for missing or imperfect publicenforcement institutions (Benjamin Kleinand Kevin Murphy 1997). As a result of ini-tiatives from both the public and private sec-tors, the agro-food chain’s financingproblems in some cases have been overcomeby the actions of new and restructured foodprocessing firms and input suppliers (MichalPospisil 2001; Tamas Szedelyhidi 2001). Forexample, restructured food-processing com-

panies provide inputs to farmers and evenset up programs to fund investments (Gowand Swinnen 2001). In return, producersdeliver products to the firms.

The input provision program also assistsfarmers with gaining access to physical inputs,such as seeds, fertilizer, and pesticides. Themost straightforward approach is prepaymentof inputs and working capital loans. For exam-ple, processors of oilseeds and grains provideadvanced payments for chemical inputs andfertilizer. Dairy-processing companies prefi-nance feed for farms that deliver milk to themand provide loans for milking equipment.Input supply firms in some countries also pro-vide payment guarantees for farm input pur-chases. The rise of equipment-leasingservices provided by machinery suppliers isanother example of how an institutional inno-vation helped mitigate the farm’s collateralproblems in financing new equipment.

In CEE, firms that were taken over by for-eign investors initiated many contractualinnovations. For example, foreign managersof food processors typically provide technicaland financial assistance to farms as part ofsupply contracts in order to ensure a stableand minimum quality supply of producefrom their suppliers (Dries and Swinnen2004a). Empirical evidence suggests thatthere are important spillovers from thesecontract innovations on domestic companiesthat quickly start imitating successful con-tracting and vertical integration programsintroduced by foreign firms (Chris Foster1999; Hamish Gow, Deborah Streeter, andJohan Swinnen 2000).

Currently in the countries that have mostsuccessfully created a system of market insti-tutions, a complex of public and private andformal and informal institutions has emergedthat is capable of enforcing contracts andsupporting access to inputs and output mar-kets. For example, recent surveys of farmersin Poland found that almost three-quartersused formal bank loans and trade credit fromprocessing companies to finance investmentsin equipment and technology (Dries and



Swinnen 2004b). While there is a significantdifference in investments and product qual-ity of farms supplying to foreign-owneddairies compared to local dairies in 1996, thisdifference had all but disappeared by 2001,reflecting important convergence in stan-dards, contracting, and management prac-tices in the agro-food chain—a combinationof private actions and public policies bothimposing tougher standards and securing the emergence of market-supporting institutions.

The emergence of markets has progressedconsiderably slower in most CIS countriesbecause slow policy reforms have con-strained both the development of publicinstitutions that facilitate trading as well asprivate institutional innovations (CsabaCsaki and Laura Tuck 2000; EBRD 2002).Since the late 1990s, however, there aresigns of a turnaround in some CIS countries.For example, in Russia, after the 1998 finan-cial crisis, important new developments haveoccurred in the food economy. A combina-tion of enhanced policy credibility under thePutin government, minimal reforms, a morestable macroeconomic framework, andincreased profitability of domestic food pro-duction has induced significant investmentsin the Russian food economy. An importantshare of the investments has come directlyand indirectly from local financial groups.Like in CEE, investments in the food indus-try have affected farm performance byreducing the financial constraints that pro-ducers face through contractual arrange-ments (Dmitri Rylko 2002). Similarly, inKazakstan, recent downstream investmentsand contracting of grain traders with thefarms have alleviated cash-flow problemsand relaxed input constraints at the produc-tion level (EBRD 2002; Gray 2000). Thatsaid, much remains to be done in buildingmarket institutions in transition countriesand particularly so in CIS countries.

Market Emergence in China: A GradualShift from Plan to Market. In contrast to theCEE and the CIS countries, leaders in China

did not dismantle the planned economy inthe initial stages of reform in favor of liberal-ized markets (Rozelle 1996). Sicular(1988a,b; 1995), Perkins (1988), and Lin(1992) all discuss how China’s leadership hadlittle intention of letting the market play any-thing but a minor supplemental guidancerole in the early reform period in the early1980s. In fact, the major changes to agricul-tural commerce in the early 1980s almostexclusively centered on increasing the pur-chase prices of crops (Sicular 1988b; AndrewWatson 1994). The decision to raise prices,however, should not be considered as a moveto liberalize markets, since planners in theMinistry of Commerce made the changesadministratively and the price changes mostlywere executed by the national network ofgrain procurement stations acting under thedirection of the State Grain Bureau.

An examination of policies and the extentof marketing activity in the early 1980s illus-trates the limited extent of changes in themarketing environment of China’s foodeconomy before 1985. It is true that reform-ers did allow farmers increased discretion toproduce and market crops in ten planningcategories, such as vegetables, fruits, andcoarse grains. Moreover, by 1984, the stateonly claimed control over twelve commodi-ties, including rice, wheat, maize, soybeans,peanuts, rapeseed, and several other cashcrops (Sicular 1988b). However, while thismay seem to represent a significant movetowards liberalization, the crops thatremained almost entirely under the plan-ning authority of the government stillaccounted for more than 95 percent of sownarea in 1984. Hence, by state policy andpractice, the output and marketing of almostall sown area was still directly influenced byChina’s planners.

Reforms proceeded with equal cautionwhen reducing restrictions on free-markettrade. The decision to permit the reestablish-ment of free markets came in 1979, but onlyinitially allowed farmers to trade vegetablesand a limited number of other crops and



livestock products within the boundaries oftheir own county. Reformers did graduallyreduce restrictions on the distance over whichtrade could occur from 1980 to 1984, but asSicular (1988b) and G. William Skinner(1985) point out, the predominant marketingvenue during the early 1980s was mainly localrural periodic markets. Farmers also didbegin to sell their produce in urban settings,but free markets in the cities only began toappear in 1982 and 1983. In addition to thesebeing small and infrequent, traders could notengage in the marketing of China’s monopo-lized commodities that were still under strictcontrol of the state procurement stations.

The record of the expansion of rural andurban markets confirms the hypothesis thatmarket liberalization had not yet begun bythe early 1980s. Although agricultural com-modity markets were allowed to emergeduring the 1980s, their number and sizemade them a small player in China’s foodeconomy. In 1984, the state procurementnetwork still purchased more than 95 per-cent of marketed grain and more than 99percent of the marketed cotton (Sicular1995). In all of China’s urban areas, therewere only 2000 markets in 1980, a numberthat rose only to 6000 by 1984 (deBrauw,Huang, and Rozelle, forthcoming). InBeijing in the early 1980s, there were onlyabout fifty markets transacting around 1 mil-lion yuan of commerce per market per year.Each market site would have had to serve,on average, about 200,000 Beijing residents,each transacting only 5 yuan of business forthe entire year. In other words, it would havebeen impossible for such a weak marketinginfrastructure at that time to even comeclose to meeting the food needs of urbanconsumers.

After 1985, however, market liberalizationbegan in earnest. Changes to the procure-ment system, further reductions in restric-tions to trading of commodities, moves tocommercialize the state grain-trading sys-tem, and calls for the expansion of marketconstruction in rural and urban areas led to a

surge in market-oriented activity (Sicular1995). For example, in 1980, there were only241,000 private and semi-private tradingenterprises registered with the State MarketsBureau; by 1990, there were more than 5.2million (deBrauw et al. 2000). Between 1980and 1990, the per-capita volume of transac-tions of commerce in Beijing urban foodmarkets rose almost 200 times. Privatetraders handled more than 30 percent ofChina’s grain by 1990, and more than half ofthe rest was bought and sold by commercial-ized state grain-trading companies, many ofwhich had begun to behave as private traders(Rozelle et al. 2000).

China moved equally slowly in its liberal-ization of input markets (Stone 1988; Ye andRozelle 1994). During the pre-reform era,the state distributed all key inputs such aschemical fertilizer through the government-controlled network of agricultural input sup-ply stations. During a time when many inputsin many regions were scarce, local officialswere issued coupons that gave communes theright to purchase at least part of the inputsthey needed. In the initial years of reformwhen decollectivization was occurring, lead-ers did virtually nothing to limit the role ofthe state in input allocation. Indeed, privatesales of nitrogen fertilizer were restricted andthe state continued to completely control allchemical fertilizer distribution.

Even after the start of liberalization inboth output and input markets in 1985, theprocess was still partial and executed in astart-and-stop manner (Sicular 1995). Forexample, in the case of fertilizer, Ye andRozelle (1994) show that after an earlyattempt at market liberalization in 1986 and1987, perceived instability in the rural econ-omy in 1988 led to sharp retrenchments.Agricultural officials only took controls backoff fertilizer marketing and began encourag-ing private trade in the early 1990s. JustinLin, Fang Cai, and Zhou Li (1996) arguethat leaders were mainly afraid of the dis-ruption that would occur if the institutionsthrough which leaders controlled the main



goods in the food economy (such as fodder,grain, and fertilizer) were eliminated with-out the institutions in place to support moreefficient market exchange.

However, it was only after twenty years ofmarket liberalization that the state largelyabdicated its responsibilities for grain andinputs trade. By the mid-1990s, about 50percent of fertilizer was sold by privatetraders. In 2000, according to a survey of1200 households in six provinces, fertilizersales at the farmgate level were almost exclu-sively handled by the private sector.Likewise, despite the failed attempts by thegovernment to remonopolize grain trade inthe mid-1990s, by 2001, the state grainbureau commercialized its remaining grain-trading divisions, and tens of thousands ofprivate traders dominate grain trade. Forexample, according to a survey by YupingXie (2002), in 2001 there were more than2000 private rice wholesalers trading inBeijing, more than 3000 in Shanghai, andmore than 5000 in Guangzhou. Nearly allrice moves through their hands, completelybypassing the state. Hence, China’s marketshave become more integrated, transactioncosts have fallen, and there are increasinglyfewer arbitrage opportunities left unex-ploited (Albert Park et al. 2002; Huang,Rozelle, and Min Chang 2003).

3.4 Effects of Price, Property Rights, andMarket Liberalization Reforms

The efforts to identify the sources of out-put and productivity growth of the agricul-tural sectors in transition economies rangefrom purely descriptive to the use of time-tested methodologies. Unfortunately, moststudies tend towards the descriptive end ofthe spectrum. In many studies researchers atmost examine output and productivitytrends and compare them to trends of pricesand periods of implementation of propertyrights and market liberalization reform poli-cies. Such casual attribution of the cause andeffect, if anything, is the rule, not the excep-tion. In the rest of this section, we discount

this part of the literature and refer to only asmall number of such descriptive studies.

A subset of studies uses more rigorousmethods. In some cases, carefully carriedout growth-accounting procedures controlfor changes in terms of trade and fixed fac-tors and attempt to attribute the explainedrise in output to policy changes (e.g.,McMillan, Whalley, and Zhu 1989, forChina). Others use regression-based meth-ods that seek to isolate the sources of thechanges in output and productivity. Afterholding physical inputs constant, some stud-ies use primal-side models to identify therise in output that is associated with thereform period by including a time period orcontinuous time variable (e.g., Pingali andXuan 1992; and Benjamin and Brandt 2001,in Vietnam).22 The parts of the rise in outputassociated with the institutional change(either property-rights reform, market liber-alization, or both) are assumed by thesestudies to be the productivity effect associ-ated with reform (or the period duringwhich the reform policies were imple-mented). Other studies adopt dual-sideapproaches, holding prices and other factorsconstant, and similarly attribute the part ofthe output that increases over a reformperiod as the reform-induced change in pro-ductivity (e.g., Kurkalova and Jensen 2003).Others use both approaches (e.g., Lin 1992;Macours and Swinnen 2000a). The impor-tance of reform is typically demonstrated inthese studies by using a decomposition pro-cedure which divides the rise in output (orthe overall increase in the growth rate) to thevarious factors (e.g., price changes; changesin fixed factors; and reform). A smallergroup of studies (e.g., Jin et al. 2002, inChina) uses regression and decompositionanalysis to determine the factors that explainchanges over time in TFP trends. Because

22 Only Lin 1992 and those who were able to use Lin’sdata were able to create a measure of reform that wasmore finely graded than a time trend. Lin was able to cre-ate a variable that measured the number of villages in eachyear that had adopted decollectivization reforms.



leaders in China and Vietnam launched theirreforms earlier, the most comprehensivestudies tend to be those studying East Asia.

Despite attempts to carefully match peri-ods of reform to regression-based analyses,the results of most studies need to be care-fully interpreted, because the use of timetrends and time dummies by definition cap-tures all systematic change that is unex-plained by the other regressors included inthe equation. The implicit assumption ofmost analysts almost always seems to be thatnothing else was changing during the time.In almost all cases, however, it is likely thatthe failure to capture other factors, such astraditional technological change in croppingand livestock operations, means that the esti-mates of the impacts of reforms may bebiased. Finally, although interactions amongthe different components of reforms (e.g.,price reforms are likely to matter more ifproperty-rights reforms have given produc-ers greater incentives) are almost certainlyimportant, little attention is given to them.

Effects of Price Shifts and SubsidyChanges. Several studies show that pricechanges had an important influence on theperformance of the agricultural sector and inpart help explain observed trends in output.Using simple measures of correlations,Macours and Swinnen (2002a) find a posi-tive relationship (the correlation coefficientis 0.70) between changes in output andchanges in relative prices across fifteencountries during the first five years of transi-tion. Although only being used to motivatethe changes, they show that output increasesonly in those countries in which terms oftrade increased (e.g., China, Vietnam,Albania). Empirical studies using multivari-ate analysis on China confirm a strongimpact of these price changes on output dur-ing the first years of transition (Lin 1992;Fan 1991; Huang and Rozelle 1996;Shenggen Fan and Phil Pardey 1997). Lin(1992), for example, finds that 15 percent ofoutput growth during the first six years ofreform came from the rise in relative prices.

23 It is more difficult to measure the effect of pricechanges on productivity, since as in McMillan, Whalley,and Zhu (1989) and Jin et al. (2002), the price effects areremoved before explaining TFP changes. In Justin Lin(1992) and Huang and Rozelle (1996), however, there isevidence that higher prices are associated with higher ratesof technology adoption, which has contributed positivelyto the rise in TFP during the reform era. Hence, pricechanges may have an indirect effect on TFP.

Huang and Rozelle’s (1996) decompositionexercise for rice demonstrates that about 10percent of the output between 1978 and1984 came from the price effects.23 In con-trast, the multivariate estimates of Macoursand Swinnen (2000a) show that around 50percent of the initial decline in crop outputin eight CEE and Balkan countries was dueto deteriorating terms of trade.

Effects of Property Rights Reforms. Whilethe speed and nature of rights reform andrestructuring have varied greatly across thereforming world, in those places that havecarried out decollectivization, land restitu-tions, control-rights transfers, and farm reor-ganization, a robust positive effect appears onoutput in some areas, and productivity hasrisen in all of the areas that carried out thesemultidimensioned reforms. In East Asia, thechanges in incentives that resulted from theproperty-rights reforms and farm restructur-ing triggered strong growth in both outputand productivity. In the earliest study of thereforms, McMillan, Whalley, and Zhu (1989)document that the early reforms in Chinasharply raised productivity, accounting for 90percent of the rise of output (23 percent)between 1978 and 1984. While the strongpositive link between the reforms and outputhas been confirmed by many other studies,the shortcomings of attributing all of the pro-ductivity rise to the reform movement gener-ally is shown by subsequent studies. In themost definitive study on the subject, Lin(1992) estimates that China’s HRS accountedfor 42 to 46 percent of the total rise in outputduring the early reform period (1978 to1984). The lower effect due to propertyrights reform undoubtedly is due in part tothe fact that Lin’s estimates held other



reform measures constant—e.g., pricing-pol-icy changes (accounting for 10 percent) andnascent market-liberalization policy shifts(accounting for less than five percent). Inaddition to including independent measuresof specific reform policies, the main strengthsof Lin’s study are that he uses both primal-and dual-side models and his measure ofdecollectivization is a continuous variable.

Subsequent studies of China’s growth,however, showed how even Lin’s seminalwork both over- and underestimated theimpact of the early reforms on agriculture.The reform effect falls to only about 30 per-cent in both Fan (1991), which used a pri-mal-side approach, and Huang and Rozelle(1996), which mainly used a dual-sideapproach. The fall in the return to decollec-tivization is explicitly shown in Huang andRozelle (who use Lin’s measure of the shiftof the HRS as well as controlling for pricesand most of the other factors that Lin con-trolled for) to be due to the inclusion of vari-ables that hold constant technologicalchange. In contrast, a number of researchershave suggested that the effect of the reformsexceeded the direct impact on the agricul-tural sector. Rises in surplus in the agricul-tural sector created by HRS triggered anumber of subsequent growth dynamics,providing labor for rural industry’s take-offin the mid-1980s (Ronald McKinnon 1993),fuelling the nation’s overall industrializationdrive later in the reforms (Kang Chen, GaryJefferson, and Inderjit Singh 1992), and cre-ating demand for the products of firms inother parts of the economy (Yingyi Qian andChenggen Xu 1998).

Similarly, the Vietnamese Doi Moi reforminduced strong growth in both output andproductivity. Rice production, the nation’sprimary crop, grew on an annual basis at therate of 3.14 percent between 1982 and 1987,up from less than 0.5 percent between 1976and 1981 (Pingali and Xuan 1992). Econo-metric analysis showed that productivity-led growth boosted output by around 15 per-cent during the early post-reform period.

Noting that both technological change andmarket liberalization in Vietnam’s agricul-tural sector were virtually absent during theearly 1980s, Pingali and Xuan assert thatalmost all of the growth should be attributedto the property-rights reforms.

In the CEE and the CIS countries inwhich effective reforms had been imple-mented, privatization of farming generallyhas produced two different effects on output,although one must be careful in attributingcausality due to the complex links betweenrights reform, restructuring and output andthe interactions with the other reforms thatare occurring in many countries. For exam-ple, the hard budget constraints imposed onproducers by reformers reduced subsidiesand led to falling inputs and output. On theother hand, greater incentives increasedeffort, raised technical efficiency, andincreased output. Calculations based on themultivariate analysis of Macours andSwinnen (2000a), which also holds constantthe effect of prices, indicate that in CEE thereduced subsidy effect dominated in earlytransition. The negative output effect due toreductions in input (a –70 percent fall) wasmitigated, but not fully offset, by the increasein output from gains in technical efficiency (a45-percent rise). The net effect was negative(–25 percent) and explains around a quarterof the total output fall in CEE agriculture inearly transition.

In countries where rights reforms andfarm restructuring did not improve produc-tivity, however, the negative output effect ofthe decline in input use was reinforced by afall in efficiency. Estimates by LyubovKurkalova and Alicia Carriquiry (2002) andKurkalova and Jensen (2003) indicate that inUkraine falling input use and declining effi-ciency reinforce each other during early tran-sition. Both studies estimate company-level(or corporate farm-level) efficiency using sto-chastic production frontier analysis. Theythen go on to explain differences in ineffi-ciency levels over time as a function of pricechanges, input adjustments, and year effects.



24 Kurkalova and Carriquiry (2002) attribute the rest ofthe decline (–35 percent) to weather effects. Weathereffects caused 10-percent output decline in the Macoursand Swinnen (2000a) study.

Although somewhat ad hoc (in that they userelative prices to explain technical efficiencydifferences among companies), their resultsare persuasive in showing that the decline inthe use of inputs accounts for about half ofthe total output decline in collective farms.They also blame a decline in technical effi-ciency (of 15 percent) between 1989 and1992 to be due to general reform matters.24

Total factor productivity estimates on theFSU countries between 1992 and 1997 byLerman et al. (2003) also are consistent withthe significant impact of rights reforms andrestructuring on productivity. Their analysisindicates strong productivity growth in Balticcountries in which reforms were imple-mented most strongly. Total factor productiv-ity also increased strongly in Armenia andGeorgia, two Transcaucasian countries thatimplemented strong individualized land rightsand dramatically shifted to individual farmingeven though the nations were recovering froma series of natural disasters and war-relatedincidents. In contrast, TFP declined in theCentral Asian republics in which reformslagged most. While the most comprehensivestudy of productivity in the CIS nations, theirlink between the rise in TFP and reformshould be interpreted cautiously. Using oneobservation per state per year, the authorsestimate a production function and implicitlyassume that the unexplained change in theoutput over time (or productivity change) wasdue to transition policies. Unfortunately, apaucity of data makes it impossible forLerman and his coauthors to create a modelexplaining TFP, an approach that wouldenable them to identify more precisely theexact causes of the changes in productivity.

The importance of distinguishing betweenownership types in studies that are searchingto link reforms with productivity is perhapsbest illustrated in the cases of Russia and

25 The importance of accounting differences in the own-ership status of plots (especially in distinguishing betweenprivate/collective plots) is less important for the cases ofEast Asia and CEE. In China and Vietnam, farm house-holds had small private plots—about 5 percent of total cul-tivated area—both before and after reform (Loren Brandt,Guo Li, and Scott Rozelle forthcoming). But, except forsome villages that allocated more land in the form of pri-vate plots to households at the beginning of the reforms, byfar a vast majority of households saw no difference regard-ing private plots with the onset of reform. Moreover, allstudies of the effect of the reforms on farm output and pro-ductivity include both private and collectively owned plots.The work in CEE by Macours and Swinnen (2000a) alsoincludes all types of plots. Moreover, although there was aclear distinction in the pre-reform era, after reform theimportance of private plots diminished markedly.

26 The study indicates that labor measured in hoursemployed contracts significantly stronger than “agricul-tural employment,” suggesting significant underemploy-ment remaining on the large farms.

Ukraine.25 Whatever growth occurred duringthe first decade of transition in Russia andUkraine seems to have occurred on house-hold plot production, the only place whererights were effectively in private use. Johnsonet al. (1994), Kurkalova and Carriquiry (2002),Sotnikov (1998), and Sedik, Trueblood, andArnade (1999) find declining productivity oncorporate farms in Russia and Ukraine.Michael Trueblood and Stefan Osborne(2001) discover that productivity on corporatefarms declined by 2.1 percent annually after1993 and continued to decline until 1998.Their analysis does not find any indication of aproductivity rebound in Russia in the late1990s. Interestingly, all studies that find anegative effect of rights reforms on TFPexclude household farming. In contrast,Lerman et al. (2003), who include both corpo-rate and household farming in their analysis,find that productivity in Russian agricultureincreased by 1.4 percent annually between1992 and 1997. Similarly in Ukraine, Lermanet al. (2003) and Olga Murova, MichaelTrueblood, and Keith Coble (2001) find thatTFP in production improved slightly duringtransition when they include both corporateand household farms in their analyses. Theirresults suggest that the positive effects comemostly from the shift to household farming.26



27 An important factor in the optimal scale of farming is,besides scale economies in some technologies, transactioncosts in labor management. Large operations in agricul-ture face transactions costs because of principal-agentproblems and monitoring costs in labor contracting, whichare typically large in agriculture (Gunther Schmitt 1991;Robert Pollak 1985), although the importance varies withspecialization and technology (Douglas Allen and DeanLueck 1998).

28 In Azerbaijan this productivity effect is not capturedin the data in tables 2–5 because the land distribution andfarm individualization process only started in 1996.Average yields increased by 13 percent annually between1997 and 2002 (Republic of Azerbaijan 2003).

29 On average, the man/land ratio was more than fivetimes higher in East Asia than in Central Europe or Russia(table 8).

Looking inside transition regions in CEEand the CIS nations, like in the case of EastAsia, illustrates a link between technology,policy, and performance. Although gains inproductivity have come from both rightsreforms and organizational restructuring, therelative importance of each component differsbetween countries reflecting technology andpolicy differences (Macours and Swinnen2002). In countries with labor-intensive tech-nologies, the shift from large-scale collectivefarming to small-scale individual farmingcaused dramatic gains in technical efficiencywith relatively small losses in scale efficiency.27

In such countries, including China, Vietnam,Albania, Armenia, Georgia, and Romania, thegains in productivity came mostly from theshift to household farming when land was dis-tributed to rural households (table 7). In allthese countries the man/land ratio was over0.2 persons per hectare, and TFP increasedstrongly during early transition (between 4percent and 9 percent annually) when individ-ual farming grew from 8 percent of total landuse on average to 84 percent on average. 28

In contrast, in the Czech Republic,Slovakia, and Hungary, countries in whichfarming was more capital intensive(man/land ratio of 0.14 or less), gains in laborproductivity came primarily from largefarms shedding labor with privatization ofthe farms.29 During the first five years oftransition, labor use declined by 44 percent

30 In contrast, agricultural labor use increased in manyof the transition countries where individual farming grewstrongly.

on average in these three countries, yieldingan annual increase in labor productivity of7.5 percent on average, while individualfarms used only 15 percent of the land.30

Effects of Market Liberalization. Fewauthors have attempted to quantify the gainsfrom market liberalization. Part of the prob-lem may be the short period of analysis, theinability of standard methodologies andmeasures or indicators of market liberaliza-tion to separate efficiency gains of marketreform from overall gains in the reformingeconomy, and the breadth of the studies.For China, Wen (1993) found TFP growthhad stopped in the post-1985 period, a trendhe blames on the failure of the market-liberalization stage of reform. There are twoshortcomings of Wen’s conclusions. First, hisanalysis ends in 1990, a period that might betoo early to have allowed the liberalizationreforms to take effect. Second, he is onlyexamining the net change in TFP and doesnot account for other factors that could beaffecting productivity. Holding the effect oftechnology constant and using data through1995, Jin et al. (2002) find that TFP growthrestarts in the 1990s, a finding that theyclaim could be linked to increased liberaliza-tion of the economy. Like Wen, however,they do not explicitly examine the improve-ments in efficiency that are associated withmarket development. Fan (1999) uses sto-chastic frontier production decompositionanalysis to isolate the efficiency gains ofJiangsu provincial rice producers in the latereform era, a time when most of the prop-erty rights reforms had already been imple-mented and when market liberalization wasjust getting started. Fan finds that therewere only limited gains in allocative effi-ciency after 1984, a result that he suggests isdue to the partial nature of China’s marketliberalization. Unfortunately, Fan does notexplicitly model the interactions between



TABLE 8Selected Intial Condition Indicators for Immediate Pre-Reform Period in Transition Countries.a

Share of agr. in GNP/ Labor/ Agr. land in CMEA Years centralemployment capita land ind. farms export planning

% PPP $ 1989 persons/he % % of GDP

East Asia China 69.8 800 0.672 5-10 0.01 42Viet Nam 70.2 1100 2.298 5 0.05 21Laos n.a. n.a. n.a. 54 n.a. 16Myanmar 66.2 n.a. 0.970 99 b n.a. 38

Central Asia Mongolia 32.7 2100 0.002 0 0.17 n.a.Kazakhstan 22.6 5130 0.008 0 0.18 71Kyrgyzstan 32.6 3180 0.054 4 0.21 71Tajikistan 43.0 3010 0.185 4 0.22 71Turkmenistan 41.8 4230 0.015 2 0.34 71Uzbekistan 39.2 2740 0.109 5 0.24 71

Transcaucasus Armenia 17.4 5530 0.218 7 0.21 71Azerbaijan 30.7 4620 0.203 2 0.33 70Georgia 25.2 5590 0.217 12 0.19 70

European CIS Belarus 19.1 7010 0.105 7 0.45 72Moldova 32.5 4670 0.269 7 0.25 51Russia 12.9 7720 0.044 2 0.13 74Ukraine 19.5 5680 0.118 6 0.25 74

Baltics Estonia 12.0 8900 0.072 4 0.27 51Latvia 15.5 8590 0.085 4 0.31 51Lithuania 18.6 6430 0.098 9 0.34 51

Central Europe Czech Rep 9.9 8600 0.122 1 0.10 42Hungary 17.9 6810 0.131 13 0.10 42Poland 26.4 5150 0.258 76 0.17 41Slovakia 12.2 7600 0.139 2 0.10 42

Balkans Albania 49.4 1400 0.627 3 0.02 47Bulgaria 18.1 5000 0.132 14 0.15 43Romania 28.2 3470 0.204 14 0.03 42Slovenia 11.8 9200 0.116 83 0.07 46

a Pre-reform indicators are from 1978 for China, 1981 for Viet Nam, 1986 for Laos, 1989 for the CEECs andMyanmar, and 1990 for the FSU and Mongolia.b Own estimation.Source: Macours and Swinnen (2002).

property-rights reform and market liberal-ization. Also, his study examines only onecrop in one province, a fact that limits thegeneralization of his study, since it is possi-ble that many of the gains from market lib-eralization come from shifting among crops(and between cropping and non-croppingactivities).

The only truly systematic attempts at try-ing to measure the returns to market liberal-ization in China are deBrauw et al. (2000;

forthcoming). These papers develop meas-ures of increased responsiveness and flexi-bility within a dynamic adjustment costframework (as developed by Larry Epstein1981) to estimate the return to market-liber-alization reforms, holding the incentivereforms and other factors constant. Theauthors find that the behavior of producersin China has been affected by market liber-alization, but that the gains have been rela-tively small. Small gains in responsiveness



(that are measured by price elasticities offactor demand for variable inputs—in thiscase, fertilizer) between the early and latereform periods are attributed to the gradualmarket-liberalizing changes of the late1980s. Farmers also have increased theirspeed of adjustment of quasi-fixed factors(which in the case of China’s agricultureincludes labor and sown area) to pricechanges (and other shifts in exogenous fac-tors) between the early and late reform peri-ods. The magnitude of the gains in efficiencyfrom increased responsiveness and flexibilityin the late reform period, however, is sub-stantially less in percentage terms (less than1 percent per year) than that from the incen-tive reforms in the early reform period (upto 7 percent per year or about 40 percentover the whole period). But, although thegains are small, they are still positive, andChina’s gradual market reform policyappears to have avoided the collapse thatwas experienced throughout CEE and CISnations. Unfortunately, the results of thedeBrauw paper cannot study the interac-tions among property-rights reform andmarket liberalization since it relies on theassumption that the time period of thereform identifies the effect of individualpolicies (that is, all of the property-rightsreforms were completed before 1984 andmarket liberalization did not begin untilafter 1985). The results also only examinethe effect of market liberalization.

In contrast to the research in China thatdemonstrates the success of the gradualmarket-liberalization measures, scholarshave differing views outside of Asia. Withoutmuch quantitative support, several authorshave pointed to the negative impact of theearly market policies on output and produc-tivity in CEE and the CIS nations (Roland2000; Peter Wehrheim et al. 1998). Otherstudies explain how the emergence of mar-ket-supporting institutions has been crucialin the agricultural recovery and growth andimproved access to input and output mar-kets in several CEE countries, and that their

absence hampered recovery in other, mainlyCIS, transition countries (EBRD 2002;Swinnen 2002; World Bank 2002).

Unfortunately, the only studies that try toquantitatively examine market-liberalizationeffects use rough time-period indicator vari-ables. These studies provide some support fora J-shaped impact of radical market liberaliza-tion. For example, Macours and Swinnen(2000a), after holding constant property-rights reform, farm restructuring, and otherfactors, measure the impact of the breakdownof exchange systems between farms and inputsuppliers and processing companies with atime-period dummy variable for the first twoyears after major restructuring. They find thatthe breakdown of exchange has a negativeeffect on output and productivity in CEE.Evidence on subsequent recovery with theemergence of new institutions for contractenforcement in CEE is limited, but growing.

Although there has not been any transna-tional, systematic study of the impact of mar-ket liberalization, there have been a growingnumber of papers on single industries andsmall groups of firms in transition nations(Silke Boger 2001; Gow and Swinnen 2001).These studies, often case study in nature,find strong positive effects on firm perform-ance of the emergence of institutions thathelp in contract enforcement and the provi-sion of credit and other inputs. For example,Gow, Streeter, and Swinnen (2001) for sugar,and Dries and Swinnen (2004a,b) for dairy,document how enterprises have used con-tracting to help producers gain access toinputs and sell their output in the absence ofwell-functioning wholesale markets.

Despite the appearance of these casestudies, most of which tell a similar story,there still is relatively little systematic,econometric-based evidence of thesedynamic market-liberalization effects.Macours and Swinnen (2002), using a roughmeasure of the overall liberalization of theeconomy developed by de Melo and Gelb(1996), find that over the first five years ofthe reforms, in their regression results



explaining agricultural productivity in fifteentransition countries, the coefficient on theindicator of market liberalization was signifi-cantly positive. This positive correlationbetween the emergence of markets and pro-ductivity was found even after holding con-stant property rights reforms, farmrestructuring, and prices. This conclusion isconsistent with findings of Swinnen andVranken (2004), who calculate farm-levelefficiency indicators based on representivesurveys in five CEE countries and show that,after the initial transition period, the averagefarm efficiency in the five countries isstrongly positively correlated with the levelof economic reforms and market liberaliza-tion as measured by EBRD and World Bankindicators.

In summary, the transition countries havetaken vastly different roads in market liberal-ization. The empirical evidence suggests thatthere is no single successful path in estab-lishing a market economy. In several CEEcountries, a rapid and radical approach tofull-scale market liberalization of the entireagro-food system contributed importantly tooutput declines in early transition, butwithin five years after the start of transition,market institutions were emerging, and aftera decade, robust productivity growth.

In contrast, the success of China’s liberal-ization policies is due to an entirely differ-ent, much more gradual approach thatultimately contributed to positive productiv-ity growth, while avoiding catastrophic dis-ruption. In the short run, planning with allof its inefficiencies was retained for thenation’s major agricultural commodities.Even though the maintenance of the systemof planned procurement and supply inChina almost certainly caused substantialallocative irrationalities during the interim(although these have never been measured),the benefit of such a strategy was that it didprovide farmers access to inputs and prod-uct outlets during the period of property-rights reforms and farm restructuring andavoided the economic collapse experienced

outside of Asia (Rozelle 1996). Withimproved farm productivity (initially fromother policies, such as HRS), the planningsystem actually increased farm incomes andallowed an increasing supply of food tourban consumers. In the longer run, China’smarket liberalization strategy depended oncreating an environment that allowed newentrants. The gradual policies at the veryleast allowed space for traders to slowlydevelop networks and figure out ways tofinance commodity trade (Watson 1994). Inthe longer run, as these traders began totake advantage of profitable trades, theyattracted new traders and forced the state tocommercialize the trading divisions of thegrain bureaus in a way that is describedmore generally by McMillan and Naughton(1992). Ultimately, this competition forcedpolicy makers to formally remove most of itsmarket-restricting policies, mainly becausethey were not effective. The gradual deregu-lation of the input and output marketing alsoultimately produced its own successes.

Interactions Among Reform Policies.Discussions of optimal sequencing and pre-cise measurement of returns to reform pol-icy depend heavily on the ability to identifyand disentangle interaction effects that mayoccur when leaders implement more thanone policy during a single time period, andalmost no empirical work has addressed thechallenge. The biggest problem is certainlydata. Lack of long-enough time series withexplicit measures of the reform policiesmakes the task almost impossible in mostcountries. Although most studies that usetime dummies to identify reform impactspoint out the multiple effects that are occur-ring simultaneously as well as workingtogether, nothing more is (or can be) donewith most studies.

The only two studies that have generatedany formal empirical measure of the magni-tude of the interaction effects are Lin (1991)and Huang and Rozelle (1996). In these twoworks, although the authors try to isolate thebehavioral effects of the HRS first-stage



reforms from the effects of market liberal-ization, they show that in reality the two arequite related. Their analyses show thatChina’s agricultural sector has experiencedboth positive and negative interactionsbetween market improvements andimproved incentives. For example, own-price output elasticities of farm producersrise after HRS, but the total output shows asecular drop due to the demise of some cen-trally planned policy functions that free-market agents do not take over. In otherwords, the papers show that increasedresponsiveness is conditional on having goodincentives and relatively full decision-mak-ing authority. Moreover, the authors realizethat given these interactions, when usingtime-period indicator variables to capturethe returns to a specific reform, the resultswill be biased.

Despite the lack of rigorous empirical evi-dence, our understanding of transitioneconomies suggests that interactions areimportant. If state government procurementand sales channels have collapsed and marketliberalization has not created new ways forproducers to purchase inputs or sell output, itis almost certain that the effectiveness ofimproved incentives from property-rightsreforms would be attenuated. Likewise, mar-ket liberalization without improved incentiveswill likely both slow down the emergence ofmarkets (there will be little supply or demandfor the newly marketed goods and services)and reduce the impact on output and produc-tivity growth. As a result of these strong andimportant interaction effects, it is likely thatstudies that use time-period indicators tomeasure effects of reforms on outcomes willbe over-attributing the effects to a single pol-icy if there is more than one reform beingundertaken by reformers.

4. Summary

In this paper our primary goal is to under-stand the linkages between the shifts in pric-ing and subsidy policies, property-rights

reform and farm restructuring, and marketliberalization and economic performance.Although striking differences have appearedin the nature of the reforms and their effectsacross the transition world, several strongempirical regularities linking reform strate-gies to performance have emerged. First,pricing policy and shifts in relative pricesbetween the pre-reform and post-reformeras have played an important role in outputchanges. Price and subsidy policies, how-ever, more than any other factor, explain whyagriculture in East Asian transitioneconomies grew in the immediate post-reform years and why it did not in CEE andthe CIS nations. Virtually all reformerssought to bring their pricing structure morein line with international prices so theywould better reflect the relative scarcities ofresources and consumer demands. In theprocess of eliminating the distortions, how-ever, relative prices moved in one directionin East Asia and the opposite elsewhere.During the planning era, China and Vietnamhad tried to force industrialization in part bytaxing agriculture with low prices in order tokeep wages of industrial workers low. Theircounterparts in most of CEE and the CISnations, in contrast, had tried to stimulatefood production by subsidizing inputs andproviding high bonuses for marketed sur-plus. Hence, in the rationalization of prices,reformers in East Asia raised the prices ofoutput, which strengthened the output-to-input price ratio. At the same time, theircounterparts outside East Asia eliminatedplanning and many or all of the input subsi-dies and output premiums, which led toplummeting output-to-input price ratios.Since producers in all transition economiesresponded to price changes similarly(increasing output as output prices rose anddecreasing output as input prices rose, andvice versa), the direction of the pricechanges after reform helps explain why EastAsia’s output moved up in the initial post-reform era and those of CEE and the CISnations trended down.



Beyond changes in relative prices, market-liberalization policies reinforced the shiftscaused by relative price changes and alsohelp explain the sharp collapse in CEE andthe CIS nations during early transition.When reformers took control, they typicallyoutright shut down the planning ministriesin most CEE countries and curtailed theirpower in CIS countries. As a result, in mostcountries the systems through which thepre-reform producers had purchased theirinputs and sold their output disappeared.Hence, it is easy to understand why produc-tion and productivity fell so dramatically inthe first year or two after reform. In retro-spect such a fall should have been expected,since it is hard to conceive how completelynew institutions of exchange could emergein a matter of months. Perhaps more surpris-ing is the speed in which institutions ofexchange reemerged in a number of CEEnations. Although deep markets character-ized by the meeting of numerous buyers andsellers still had not materialized after severalyears of reform, the CEE experience showshow alternative institutions appeared tofacilitate exchange. In those countries inwhich the institutions emerged, output andproductivity began to recover by the mid-1990s and productivity growth has contin-ued since. In those countries in which suchinstitutions did not emerge, productivitycontinued to lag.

In East Asia reformers moved more gradu-ally, and in the initial years made almost nochanges to the state-dominated marketingchannels that were set up during the planningera. So while market liberalization did not playmuch of a role in pushing up output and pro-ductivity of East Asian producers in the initialyears after reform, it did not hold it back. Inthe longer run, however, policies in East Asiafacilitated the entry of thousands of privatetraders, and the gradual rise of markets in thepost-reform era has been linked with positive,albeit small, productivity increases.

Perhaps more than any other policyshifts, property-rights reform and the farm

restructuring that it facilitated are respon-sible for the rise of productivity in transi-tion countries. This certainly was true inEast Asia. For several Central Europeancountries empirical studies almost all iden-tify the positive links between property-rights reform and productivity. But whilethe effects of land reform have been bothpositive and strong, the mechanisms thatled to enhanced performance in East Asiaand Central Europe have been quite differ-ent. In East Asia income and control rightswere given to producers, creating millionsof new family-run farms. Land ownershipremained with the state and privatization ofland is still being debated today. The partialreforms, however, appear to have providedenough incentives and improved decision-making capacity to have ignited the rapidrise in output and productivity in Asia.

In contrast, privatization through restitutioncharacterizes the main way that CentralEuropean reformers implemented reforms.The reforms themselves, however, were notenough, since many of the new landownershad long since moved to the cities. Instead,the emergence of land-leasing contractsallowed the growth of individual farms and thesurvival of large corporate farms (albeit withless labor, which was systematically laid off bylarge reorganized farms in the most advancedCentral European economies) (Vranken andSwinnen 2004). These institutional innova-tions have been essential ingredients of therise in productivity in Central Europe.

While the picture in the literature on theCIS nations was fairly bleak in terms of prop-erty-rights reform-induced productivity rises,it may be that the CIS nations are finallybeing affected by the reforms. During theearly years after reform, the lack of clearrights that linked income to effort and theinability to provide farmers a way to restruc-ture their farms held back any rights-gener-ated output or productivity rises. Recentempirical work in Russia, Ukraine, andKazakstan (mostly on economic performancein the second decade of reform) finally may



be showing that improvements in propertyrights and farm restructuring are affectingproductivity. If so, it may be that the main dif-ference between CEE and the CIS nations isthe nature of the lag between reform and aturnaround in output and productivity.

4.1 Lessons and Generalizations

In this section, we examine three sets oflessons. First, we briefly discuss the impor-tance of choosing the right indicator formeasuring performance. Second, we exam-ine the similarities and differences in howcountries have chosen different reformstrategies. Finally, we make observations onhow reform packages have been puttogether and how some combinations havebeen more successful than others.

Getting the Measure of Success Right. Thefirst, and perhaps most basic, lesson is that weshould be careful about which indicator weuse to measure transition performance. If weuse an indicator of efficiency or productivityinstead of output, it is less clear that agricul-tural transition in CEE—especially that inCentral Europe—was less successful thanthat in China and Vietnam. If prices need toreflect long-run scarcity values of outputs andinputs, then efficiency required that leadersraised agricultural prices in East Asia, a movethat naturally would lead to higher output.Likewise, when subsidies were removed,rational producers should use less inputs,actions which, as seen by the record in CEEand the CIS where the ratio of output-to-input prices fell sharply, led to falling outputin these countries. In short, although leadersin many countries count increases in outputas success, productivity shifts, not productiontrends, should be the primary metric formeasuring success in transition agriculture.

Getting the Institutional FrameworkRight. Assuming success is measured cor-rectly, comparing the property rights andorganizational reform processes across thetransition world also yields several lessonsabout the determinants of reform success.First, the lesson regarding property-rights

reforms is nuanced. Good rights and theincentives they created certainly contributedto and will continue to affect performancepositively. Poor ones undoubtedly account,in part, for the poor performance of someagricultural systems. This is well-illustratedby the difference between China andCentral Europe on the one hand and Russia,Ukraine, and Central Asia on the otherhand. Despite being incomplete, East Asia’sreforms allocated relatively strong propertyrights to individual land plots. In CentralEurope, land was either restituted to formerowners or distributed to farm workers indelineated boundaries and leased to newfarms. Although the land reforms in thesecountries were complex and difficult toimplement, they ended up with stronger andbetter-defined property rights for the newlandowners than in Russia, Ukraine, andmany other CIS countries. In the CIS coun-tries, in contrast, land was distributed aspaper shares to workers of the collectivesand state farms. Individuals could not iden-tify the piece of land that belonged to anygiven share, causing weak land rights forindividuals and undermining their ability towithdraw land from the large farms andestablish private farms. As a result, familyfarming emerged only slowly and large farmshave had fewer incentives to restructure.The empirical evidence in the literature,although fragmented, mostly supports theseobservations.

Despite the strong relationship betweenrights reform and performance, anotherimportant lesson is that full privatization ofland is not needed to induce efficiency gains.In many countries the introduction of pri-vate ownership and sale of agricultural landencountered strong social and politicalopposition and kept reformers from provid-ing a complete complement of rights to pro-ducers. For example, the top leadership inboth China and Vietnam did not allow pri-vate ownership of agricultural land. Today, inChina and Vietnam, farmers still cannot buyor sell land. The strong positive effect of



rights reform and restructuring on outputand productivity demonstrates that allocat-ing clear and well-identified land use andincome rights can by themselves enhanceefficiency, investment, and growth. In con-trast, as seen from the cases of many CISnations, if rights are too weak, there is littleeffect on performance.

Despite such progress, we do not want tosuggest that a decade of agricultural transitionhas created a system of full and unencum-bered property rights even in the best-per-forming countries; in fact, many majorconstraints remain. For example, China’s lead-ers are still struggling to figure out a way toprovide more secure tenure rights for farmers.Most pervasive, local leaders in many regionsof the country continue to periodically expro-priate land, shifting it among farmers for avariety of reasons (Brandt et al. forthcoming).Although the impact on the investment in landand other long-term farming assets is typicallyfound to be relatively minor (Hanan Jacoby,Li, and Rozelle 2003), poor land tenure maybe undermining the emergence of rental mar-kets, keeping farm size from increasing, andprecluding farmers from using land as an assetfor collateral, which could be constraininginvestment in nonfarm activities (Benjaminand Brandt 1999). In CEE, observers of landreform are worried about excessive land frag-mentation (e.g., in the Balkan countries) andmonopolistic control of large corporate farmsin an emerging land market (e.g., in Slovakia).

Second, the lessons regarding the impactof farm restructuring also are nuanced. Tostart, it should be noted that except in labor-intensive agricultural economies, the indi-vidualization of farming should not becounted as an indicator of successful transi-tion. Individualization frequently has beenaccompanied by a dramatic reduction infarm size, and in some cases, falling farmsize leads to a loss of scale efficiencies.Smaller farmers in most CEE and CISnations also experienced a sharp fall in theiraccess to capital that was available for use inproduction (OECD 1999). While moves to

small farms may make sense in some labor-abundant agricultural economies in the shortrun, in the longer run the transition to amodern state means that farm size must besufficiently large and the intensity of capitaluse should remain fairly high.

We can see how natural-resource availabil-ity and initial technology, which vary tremen-dously across the transition world, have playedan important role in affecting the impact offarm restructuring (Johan Swinnen and AyoHeinegg 2002). For example, technologyplayed a decisive role in the success of thebreak-up of collective farms. With labor-inten-sive technology, the cost of breaking up largecollective farms in terms of losses of scaleeconomies is smaller, and the gain fromimproved labor incentives from the shift tofamily farms is larger. As a result, since farmsin China and Vietnam are much more labor-intensive than the typical farm in the rest ofthe transition world, the reforms that providedfarmers in East Asian nations with incentivesand individualized their farms were able tocreate relatively large shifts up in productivity.

In contrast, many regions outside of EastAsia were characterized by an entirely differ-ent farm technology, which greatly affectedthe impact of farm restructuring. Large partsof Russia, Ukraine, and Central Asia are landabundant. Many of the richer parts of CEEalso have much less labor-intensive produc-tion systems. The returns to breaking up thelarge-scale farms into individual farms inmany of these countries necessarily are lowerthan the gains experienced in East Asia.

Strong benefits from farm individualiza-tion, however, were not completely absentfrom CEE and the CIS nations. In fact, sev-eral countries have gained, although the ben-efits were only enjoyed by the CEE and CIScountries with relatively high man/landratios. The nations that benefited from farmindividualization were those in the poor areasof the Balkan and Transcaucasian regions.Specifically, the four countries (Albania,Azerbaijan, Armenia, and Georgia) whichhave man/land ratios above 0.2 persons per



31 See table 5. In Azerbaijan this occurred only after1996, when farm individualization and distribution of landrights started.

hectare (ratios that are similar to those ofEast Asia) are the nations that have experi-enced the highest growth rates of TFP afterland was distributed to households and large-scale individualization of farms followed.31

Such high rates of productivity gain are simi-lar to those experienced in Asia during thefirst reform years.

Even without individualization, corporate-farm restructuring can lead to strong rises ofproductivity in transition agriculture. One ofthe main differences between Russia andUkraine, where productivity fell, and someof the European countries such as Hungaryand the Czech Republic, where productivityincreased, is not so much the scale of thefarm operations, but rather the degree towhich their management was restructured(Lerman, Csaki, and Feder 2004). InCentral Europe, farm enterprise budgetswere hardened, and on-farm decision mak-ing became independent. Farm managersbecame primarily concerned with turning aprofit, and their increased managerial effortsinduced sharp shifts in input use, manage-ment reforms, and efficiency increases. Incontrast, large-farm restructuring in Russiaand in several other CIS countries was farless profound. For example, Csaki et al.(2002) argue that even in 2001 Russianlarge-farm decision making still had impor-tant features similar to those of the tradi-tional collective-farm structures. Farmleaders are still committed to providing allmembers with jobs, regardless of the cost-efficiency considerations. Farms also areobliged by tradition and sometimes by gov-ernment pressure to maintain the socialinfrastructure of the village. In many cases,because of these other obligations, farms putlittle emphasis on profits.

The continuation of many of theseanachronistic practices is almost certainlylinked to failure of restructuring. Above all,

many nations failed to eliminate soft budgetconstraints and the government continuedto tolerate nonpayment of farm debts.Similarly, in some countries, such asKazakhstan, “initial attempts at reform,which saw the state and collective farms con-verted first into collective farm entities andsubsequently into producer cooperatives,involved little real change in patterns ofownership management and control becauseup to 1998 the former state and collectivefarms were never subjected to a hard budgetconstraint. … without the sanction of thethreat of bankruptcy there was little incen-tive for farm managers either to reduce theirindebtedness or to reform their internal gov-ernance” (Gray 2000, p. 1). In addition,other researchers, such as Zorya (2003),argue that until 2000 the structure andbehavior of the large-scale farming enter-prises in Ukraine did not differ significantlyfrom the structure of Soviet agriculture, pri-marily because of the continuation of softbudget constraints and major constraints onindividuals leaving the farms and enforcingtheir land rights.

Interestingly, in several transition coun-tries, “hybrid” farm organizations haveemerged that seem to address the need forinstitutions that allow both better incentivesand labor governance and create organiza-tions that can capture scale economies. Forexample, Sabates-Wheeler (2002) finds thatin Romania the most efficient farm organiza-tion for resource-constrained small farmersare “family societies” in which farmers col-lectively share in the provision of mecha-nized services. Mathijs and Swinnen (2001)find that “partnerships,” small groups offarmers in East Germany that pooled theirefforts in certain production and marketingtasks outperformed all other forms of farmorganization between 1992 and 1997. InRussia the most successful household farmsrefrain from registering as “private farms,”instead choosing to remain connected insome fashion to large farm enterprises. Suchproducers use their connections to gain

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access to inputs, marketing channels andother services in an environment where tra-ditional markets, if any, function poorly(O’Brien et al. 2000). Even in Turkmenistan,producers have begun to shift to family-based leasing within the nation’s highly regu-lated environment in order to be able toaccess basic inputs, services, and outputchannels through the state marketing ordersystem (Lerman and Brooks 2001).

Third, successful institutions ofexchange—nascent markets, forms of con-tracting, etc.—also have many hybrid char-acteristics. In fact, some of the mostsuccessful transitions have not gone straightfrom planning to decentralized market-based exchange. Markets are emerging, butdoing so quite slowly. China’s experiencedemonstrates not only that, when politicallyfeasible, partial reform by proceeding on asector-by-sector basis (i.e., liberalize someproducts but not necessarily all) and by usinga two-tier pricing system (i.e., a system ofresource allocation that occurs half throughplanned transfers and half through the mar-ket) can end up creating markets that makethe liberalization of the partially reformedsector successful. Such a reform strategy alsohas a longer-run effect of gradually creatinga trading class that leads the push to expandthe reforms and ultimately eliminates theneed for planning.

In CEE the reemergence of verticallyintegrated supply chains reflects the neces-sity of private contract enforcement mecha-nisms for credit distribution and inputsupply in the absence of well-functioningpublic institutions. Other examples of non-traditional institutions in credit and inputmarkets that appear successful in transitioninclude a variety of financial instrumentsand enforcement institutions, including leas-ing of equipment, warehouse receipt sys-tems, bank loan guarantees provided byprocessors to farms, and trade credit.Variations in such instruments and institu-tions reflect differences in commodities,local institutions, and economic structures.

To be successful these transition innovationshave to adapt and be flexible to address tran-sition and local characteristics.

Hence, whether considering institutionsthat create and maintain property rights orthose that facilitate exchange, policies shouldaccommodate institutions that are flexible.Flexibility is needed because transition is souncertain and because there are many con-straints that still are binding. Moreover, suc-cessful transition may trigger rapid growthwhich itself will require institutions to adaptquickly. For example, in land markets, theinitial focus should be on stimulating short-term land leasing, an institution much moreadapted to transition circumstances. Lateron, long-term leases and land sales candevelop. In general, nontraditional and flexi-ble institutions have been more successful.

Packages of Reforms. But the lessons gofar beyond measuring success or failure ofreform individually. More fundamentally, itappears from the evidence on the collectivetransition experience that for any reformstrategy to be successful it needs to includesome essential ingredients. In other words,ultimately successful transition requires acomplete package of reforms. All countriesthat are growing steadily a decade or moreafter their initial reforms have managed (a)to create macroeconomic stability, (b) toreform property rights, (c) to harden budgetconstraints, and (d) to create institutions thatfacilitate exchange and develop an environ-ment within which contracts can beenforced and new firms can enter.

Our survey of the transition experiences indifferent countries clearly demonstrates theproblems of not making progress in all areas.For example, when rights are not clear, as inRussia, producers have little incentive tofarm efficiently or to invest, and restructuringis constrained. We see in other places that thecreation of strong individual property rights isnot sufficient. For example, in Poland in theinitial years after reform, farmers had securerights over their land. But their inability toaccess inputs or to sell output prevented



them from reaping the gains of specializationand improved labor effort. Both output andproductivity growth performed poorly. Ingeneral, in nations that created both rightsand markets, productivity rises for most ofthe first decade of reform (at least after theinitial transition); in those where either rightsor markets or both were ignored, productivitydeclines or is stagnant.

That said, however, one of the most power-ful lessons is that although all of the pieces ofthe reform package are needed, there is a lotof room for experimentation. Interestingly, ifone chooses any two nations that had success,there almost always was variation in sequenc-ing and in the form of the institutions that pro-vided incentives and facilitated exchange. Inother words, in our survey of the literature, wecannot find any single optimal transition path.The optimal transition strategy in any givencountry is one that contains the different partsof the package; the exact nature of the partsand the order in which they were imple-mented, however, has been different for eachnation and takes into account the institutionaland political characteristics of the country.

In terms of sequencing, while all of theingredients are ultimately needed, our paperalso has shown that reform policies do notneed to come all at once. For example, inChina and Vietnam, reform without collapsewas possible by introducing property-rightsreform first and gradually implementing poli-cies that liberalized markets and facilitateddecentralized exchange. Such sequencinghelped transition nations in East Asia growrapidly in the initial years and steadily since. InCEE, however, after the initial politically leddisruptions, the gradual emergence of well-defined property rights, markets, and othermeans of exchanging goods, services, andinputs have led to steady productivity growth.

The optimality of different sequences ofpolicies (as well as the government’s abilityto implement them) almost certainlydepends on the structure of the relation-ships between agriculture and the rest of theeconomy. There were important differences

32 Roland (2000) refers to this as the problem of “sec-toral gradualism” in the Soviet system.

between East Asia versus CEE and CIS inthis respect which reflect the differentstages of development of the agri-food sys-tems in each region of the transition world.While the relationships in the food systemsof China and Vietnam were fairly basic,farms in the CEE and CIS needed to beintegrated into a much more industrializedagro-food supply chain. Moreover, underthe Soviet system, the tasks of providinginputs to farmers and managing their oper-ations, storage, processing, transport, androad infrastructure were all allocated to dif-ferent agencies. Farming was subordinateto as many as eight different ministries, andlocal authorities had little control over anyof these activities (Don Van Atta 1993).Warehouses and processing plants werehundreds of miles away. Hence, productiv-ity improvements at the farm level wouldcause less impact unless simultaneous prob-lems in processing and input supply indus-tries were addressed (Brooks 1983; D. GaleJohnson 1993). This required more of anencompassing and simultaneous reformapproach beyond the farm sector, includingthe restructuring of food-processing com-panies, retailers, and agricultural input sup-pliers.32 In terms of administrativefeasibility, the much more industrializednature of the agri-food supply chain (mean-ing a more complex set of exchangesbetween a variety of companies), and thefact that the various steps were functionallyseparated in the central planning system inCEE and CIS, were severe constraints onoptimal sequencing. A more gradual andorchestrated policy sequencing of reformstrategy in the more developed economiesin CEE (versus China and Vietnam) wouldhave required more extensive informationon the transformation process and the econ-omy. In fact, most observers question thefeasibility of plotting out any type ofrational, systematically executed reform



33 See, for example, Balcerowicz (1994), Dewatripontand Roland (1992, 1995), Fischer (1994), Sachs and Woo(1994), Roland (2000), and Wing Thye Woo (1994).

34 Initial conditions have further affected agriculturaltransition and performance through other ways. For exam-ple, initial legal and political constraints have affected thechoice of governments in various areas, including landreforms (Macours and Swinnen 2000b; Ewa Rabinowicz1997; Swinnen 1997) and technological biases under thecommunist system have affected technology changes during transition (Pomfret 2002a).

path ex ante. As McMillan (1997, p. 232)puts it: “If it were possible to plan the tran-sition it would have been possible to planthe economy.”

Initial Conditions and the Impact ofReforms. As we conclude this survey ofreform policies and their impact on sectorperformance, it is important to reflect on acrucial and hotly debated issue.33 Are thedifferences in performance between EastAsia and the rest of the transition world dueto the different reform strategies or to dif-ferences in initial conditions? In the previ-ous paragraphs we have identified at leastthree sets of initial conditions that haveaffected the output and productivity changesin transition through their effects on reformimpacts. Differences in initial price distor-tions affected the price-reform effects; dif-ferences in technology affected the impactof rights reforms and farm restructuring;and differences in the structure of the agri-food chain affected the distortions inexchange relationships.34 Each of these ini-tial conditions favored a more successfuloutcome in China compared to Russia. Inother words: implementing “China’sreforms” in Russia would not have yieldedthe same results. In summary, initial condi-tions were influential in determining thetransition performance during the first tenyears of transition.

Despite the importance of initial condi-tions, we also fully believe that they cannotwholly explain past performance and to aneven greater degree will not determine thefuture of these economies. Initial pricelevels and technologies in some sense can

be thought of as only establishing theboundaries within which the initialreforms take place. In almost all countries,there has been room for being bold or forbeing timid. Within regions with relativelysimilar initial conditions, countries havechosen different reform policies and withsignificant differences in growth and pro-ductivity effects. Moreover, the influenceof initial conditions has declined over time.Hence, while the nature of the policiesmattered in the past (over and above theeffect of initial conditions), it will mattereven more in the future.

Regarding future policies, another lessonthat is clear from the cases of China,Vietnam, and many of the other successfulcountries is that in the longer run, publiclyorchestrated services, such as investmentsin public goods and infrastructure, areneeded to continue productivity growth ini-tiated by the reforms. Regardless of howsuccessful the initial reforms are, once pro-ducers have good property rights andincentives, and once exchange is beingfacilitated by functioning institutions, sus-tained rises in productivity will depend oninvestments in agricultural research, exten-sion, and other infrastructure projects, suchas investments in water control and roads,that individual farmers will not be able tofinance by themselves. In the long run, agri-cultural growth will suffer if such invest-ments are ignored during transition. Whennations reach the point where they facethese longer-run problems, in fact, reformmay be close to an end and transition prob-lems may be evolving into more traditionaldevelopment problems.

Finally, an important issue that we havenot addressed in this paper is the politicaleconomy of the choice of reform. Why is itthat certain governments have chosen toimplement gradual policies and othershave opted for more radical reforms? Whyhave the communist governments in Chinaand Vietnam been able to guide (and bene-fit from) the reform process in East Asia,



Appendix: List and Classification of Transition Countries

Regions Transition Central and Commonwealth of FormerCountries Eastern Europe Independent States Soviet Union

(CEE) (CIS) (FSU)

East AsiaChinaVietnamLaosMyanmar

Central AsiaMongoliaKazakhstan x xKyrgyzstan x xTajikistan x xTurkmenistan x xUzbekistan x x

TranscaucasusArmenia x xAzerbaijan x xGeorgia x x

European CISBelarus x xMoldova x xRussia ∗ x xUkraine x x

BalticsEstonia x xLatvia x xLithuania x x

Central EuropeCzech Republic xHungary xPoland xSlovakia x

BalkansAlbania xBulgaria xRomania xSlovenia x

∗ Geographically, only part of Russia, including Moscow, is in Europe.

while it took regime change in CEE andCIS to start the reforms? Why did CEEgovernments decide to restitute land toformer owners, against much oppositionand expert advice, while those in many CISstates issued paper shares? All these ques-tions are important to understand if we are

not only to learn about policy effects—aswe have attempted to do in this paper—butalso to know how we can implement theright policies in a world where politicalincentives constrain policy makers’choices. This is a key subject for futureresearch.



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