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Markets, Stabilisation and Structural Adjustment in Eastern European Agriculture

Author

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  • Anderson, Ronald W.

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))

  • Powell, Andrew

    (Queen Mary and Westfield College, University of London)

Abstract

This paper is a reflection on the problems posed by the structural transformation of Eastern European economies. It asks : how can the transformation to a market economy be reconciled with a desire for a stable economic environment ? The proposed paradigm is that of multi-market, disequilibrium adjustment. It evaluates trade tools, public stabilisation on domestic markets, and private risk contracts. In principle, by stabilising border prices variable levies can establish bounds for the fluctuations of domestic prices. However, variable levies are not generally desirable in the current Eastern European context because : (I) the implied distortions may be small in any individual market but could have a large cumulative effect in the convergence to the new equilibrium, (ii) these schemes allocate resources by collective negotiations which can easily be captured by incumbent state enterprises, and (iii) they are unlikely to stabilise domestic prices effectively. Public sector, domestic stabilisation is seen to work principally through the medium of public storage which is a replacement for private storage. Two justifications for such schemes are relevant to Eastern Europe : dislocations of the credit markets and high private risk aversion. However, the schemes are flawed because collective management appears to tend to result in a mean bias and because public sector schemes are likely to be poor forecasters and poor storage cost minimisers. Finally, market tools, in particular forward contracts, are shown to avoid the problems of impeding the process of transformation in the direction of a new competitive equilibrium. The principal reservation is whether they can develop fast enough. We evaluate the early efforts to create market-bases tools for use by the grain sectors of Hungary and Poland. The Hungarian Agricultural Commodities Exchange opened in 1990 and is modeled on the grain futures market in Chicago. The result has been significant commercially but nevertheless is currently very small compared to the size of the sector. In Poland, the initiative has come from a government agency which in its efforts to promote stability has started to purchase grain on a deferrer basis and bought about 10% of the commercialised harvest in 1990 only five the potential for developing into the market maker that would allow liquid forward in Poland. However, it is vulnerable in that its contracts can be administered as premium-free put options which are effectively state-guaranteed minimum prices.

Suggested Citation

  • Anderson, Ronald W. & Powell, Andrew, 1991. "Markets, Stabilisation and Structural Adjustment in Eastern European Agriculture," Discussion Papers (ECON - Département des Sciences Economiques) 1991007, Université catholique de Louvain, Département des Sciences Economiques.
  • Handle: RePEc:ctl:louvec:1991007
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    Keywords

    private sector; risk; economic reform;

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