The 'violation of price parity' for agricultural products in Ukraine

in labour productivity of 54% in Germany as a whole (‘old’ and ‘new’ Länder). As a result, labour's SFToT in German agriculture improved by 26% between 1992 and 1999.

Figure 4: Factoral terms of trade in Germany (1992-1999, 1991 = 100)

0.6 0.7 0.8 0.9 1 1.1 1.2 1.3 1.4 1.5 1.6

1992 1993 1994 1995 1996 1997 1998 1999

1992=1

Labour productivity

CToT SToT

Source: BML (2000); Own calculations.

Figure 5: The ratio of farm output to input prices in Ukraine (1991-1999)

-100,000 200,000 300,000 400,000 500,000 600,000 700,000

1991 1992 1993 1994 1995 1996 1997 1998 1999

1991=1

Farm output prices Industrial input prices

Source: STATE STATISTICS COMMITTEE OF UKRAINE (2000b).

However, prices for energy, raw materials and industrial semi-finished goods were even lower as compared with world market prices (WORLD BANK, 1994). As early as 1993, BROOKS

(1993) indicated that as domestic prices were liberalised and aligned themselves with world market levels, CToT would deteriorate more in agriculture than in other sectors. In other words, it was clear that as subsidies and other distortions associated with central planning were dismantled, prices for energy and raw materials would necessarily increase much faster than farm output prices (see fig-ure 6).

Figure 6: The ratio between prices in the former Soviet Union and on world markets

Source: BROOKS (1993, p. 419).

Historical developments have confirmed this expectation: Over the last ten years energy prices (electricity and fuel) in Ukraine have grown faster than average prices for industrial goods and much faster than prices for farm products (figure 7).

Domestic prices for farm products in the former Soviet Union in mid-1992

World prices

Domestic prices for energy products in the former Soviet Union in mid-1992

Figure 7: Price indices for selected products in Ukraine (1991-1999)

-200,000 400,000 600,000 800,000 1,000,000 1,200,000

1991 1992 1993 1994 1995 1996 1997 1998 1999

1991=1

Fuel

Electricity

All Industry

Farm Products

Source: STATE STATISTICS COMMITTEE OF UKRAINE (2000a) and (2000d); Own estimates.

Figure 8: Price indices for farm output and agricultural inputs in the countries of Central and Eastern Europe (1986–1998)

0 20 40 60 80 100 120 140

1986 1988 1990 1992 1994 1996 1998

1986=100

Slovakia Czech R.

Hungary Bugaria Poland Romania

Source: SWINNEN (2000b).

In figure 7 we see, however, that the largest part of these shifts occurred quite rapidly in the early to mid-1990s, and that price developments have been much more moderate since then. The decline in agricultural CToT in Ukraine since Independence can therefore be divided into two main phases: first an initial 'shock' associated with the elimination of massive price distortions that had

been created under central planning in the former Soviet Union, and then a second phase of much more moderate decline/stagnation that more or less parallels developments in agriculture's CToT world-wide.

The first 'shock' phase of sharp CToT decline occurred not only in Ukraine but also in the Czech Republic, Hungary, Poland and other Central and Eastern European countries (see figure 8).

In all cases, this shock was the inevitable result of the elimination of artificial distortions. According to estimates produced using data collected in eight Central and Eastern European countries, this ini-tial decline in agriculture's CToT led to a decline in farm output of 40-50% in those countries over 1989-1995.

Figure 9: Commodity terms of trade and labour's factoral terms of trade in Hungary and Poland (1992-1998)

0.6 0.7 0.8 0.9 1 1.1 1.2 1.3

1992 1993 1994 1995 1996 1997 1998

1992=1

SFToT in Hungary CToT in Hungary SFToT in Poland CToT in Poland

Source: ZMP (2000); OECD (1998); IMF (1997, 2000); STATISTICAL YEARBOOK OF REPUBLIC OF POLAND (various years).

By improving productivity, however, agriculture was able to adjust to the new economic conditions and resume growth in some of these countries (SWINNEN, 2000 (a)). This adjustment is shown in figure 9 for Poland and Hungary. In Hungary, for example, productivity grew dramatically due to a 50% reduction of labour use in agriculture (OECD, 2000; MACOURS & SWINNEN, 1998).

Hence, while the CToT declined, labour's FToT declined much less and even increased in some countries.⁶

Indeed, as can be seen in table 2, gross agricultural output has been increasing in Hungary and Poland since the mid-1990s, while employment in agriculture has been falling. As a result, la-bour productivity in agriculture has been increasing in these countries. In Ukraine, all of these trends have run in the opposite direction. Trends in milk yields per cow and wheat yields per hectare (al-though the latter is subject to considerable year to year fluctuation due to weather conditions) have also been, if not clearly positive, much less negative in Hungary and Poland than in Ukraine. In es-sence, agriculture has responded to declining CToT in Hungary and Poland in the only way possible,

6 SWINNEN discusses these changes in chapter 1 Ten Years of Agricultural Transition in Central and Eastern Europe:

Some Lessons for Ukraine.

by adjusting and improving productivity. In this regard, Ukrainian agriculture lags far behind and signs of structural adjustment and productivity increases are just beginning to emerge.

Table 2: Various indicators of agricultural development in Hungary, Poland and Ukraine (1989-1999)

1989* 1994 1995 1996 1997 1998 1999 Gross agricultural output (1989-91=100)

Hungary 102.7 71.7 70.8 76.0 78.3 78.2 75.6

Poland 101.7 77.9 83.8 87.9 85.0 91.2 87.8

Ukraine 107.1 72.2 69.6 63.1 61.9 56.7 52.6

Share of agriculture in economy (%)

Hungary 15.6 7.1 7.1 6.9 7.0 6.0 5.2

Poland 12.9 6.9 6.9 6.4 5.5 4.8 4.0

Ukraine 25.2 15.0 14.6 13.1 12.1 11.2 11.4

Farm labour force (in 1,000 people)

Hungary 742 631 610 590 570 551 550

Poland 5,200 4,837 4,756 4,673 4,590 4,506 4,492

Ukraine 4,957 4,743 5,267 4,972 4,994 5,028 4,932

Share of farm labour force in total employ-ment (%)

Hungary 17.9 8.9 8.2 8.3 8.1 7.8 7.5

Poland 26.7 27.1 26.9 28.1 28.9 27.3 27.3

Ukraine 19.5 20.6 22.2 21.4 22.1 22.5 22.6

Wheat yields (dt/ha)

Hungary 52.4 46.1 41.7 32.9 42.1 41.4 35.9

Poland 38.5 31.8 36.0 34.6 32.1 36.2 35

Ukraine 40.2 30.3 29.7 23.0 28.3 26.5 22.9

Milk yields (kg/cow/year)

Hungary 5,004 4,807 4,893 4,846 4,985 5,378 5,322

Poland 3,358 3,121 3,136 3,249 3,370 3,491 3,466

Ukraine 2,863 2,362 2,204 2,103 1,988 2,219 2,358

Labour productivity (agricultural GDP/farm worker (1994=1)

Hungary 0.82 1.00 1.14 1.16 1.17 1.19 na

Poland 1.15 1.00 1.12 1.17 1.20 1.30 na

Ukraine na 1.00 0.85 0.98 1.01 0.79 0.59

Note: * 1990 data for Ukraine; na = not available

Source: ZMP (2000); OECD (1998, 2000); IMF (1997, 2000); STATE STATISTICAL COMMITTEE OF UKRAINE; Own calculations.

Note that recent months have seen the advent of a third phase in post-Independence CToT developments in Ukraine. As a result of reductions in production, Ukraine is (in early 2001) no longer a net exporter of several key commodities (e.g. sugar and milling wheat) but rather a net im-porter. As a result, many domestic agricultural commodity prices in Ukraine have increased signifi-cantly.⁷ Indeed agriculture's CToT are better now in Ukraine than in Germany, despite the impact of the protectionist Common Agricultural Policy in Germany (see table 3)!

7 See chapter 7 on Price Determination and Government Policy on Ukrainian Grain Markets.

Table 3: Agricultural commodity terms of trade relative to diesel oil in Ukraine and Germany in November/December 2000

Product

ToT

(kg agricultural product required to purchase one litre of diesel oil)

Ratio

(ToT in Germany to ToT in Ukraine

in Ukraine in Germany

Slaughter pigs 0.33 0.49 1.51

Beef cattle 0.46 0.50 1.08

Dairy cattle 0.60 0.70 1.17

Eggs 2.10 7.23 1.41

Milk 1.80 1.88 1.04

Milling wheat 2.25 5.05 2.24

Rye 3.28 5.47 2.43

Maize 3.28 5.18 1.58

Barley 4.10 5.55 1.35

Potatoes 3.01 15.48 5.24

Rapeseed 2.47 3.04 1.23

Note: Quoted prices for diesel oil = 1.20 DM/t in Germany and 1.92 UAH/t in Ukraine; exchange rate 2.46 UAH/DM.

Source: ZMP: Osteuropa Agrarmärkte – Aktuell, 1/2001, p. 6. Own calculations.

In table 3, CToT are calculated using producer prices for various agricultural products and diesel oil. It is clear that at present Ukrainian farmers enjoy significant ToT advantages over their German counterparts. For example, in order to purchase 1 litre of diesel oil a German farmer must 'spend' 2.2 times more milling wheat, 5 times more potatoes etc. than his Ukrainian counterpart.

In summary, it is true that over the first few years of the 1990s there were significant changes in relative prices which were surely not to the benefit of agriculture in Ukraine. But other Central European countries have witnessed similar changes in agricultural ToT, and, unlike Ukraine, have nonetheless managed to return to a path of agricultural growth. Furthermore, agricultural ToT have been declining world-wide for decades and there are objective economic and technical reasons to expect that this trend will continue. Finally, in recent months agricultural CToT in Ukraine have actually increased significantly, reaching levels that exceed those in the protected EU. Farms that are not profitable under these conditions cannot realistically expect conditions to improve even more; at the moment ToT are as good as they are going to get!

4.2 Factoral terms of trade and income terms of trade in Ukraine

Above we argued that the only way that agriculture can adjust to adverse CToT lies in en-hanced productivity. In the following we demonstrate that this has so far failed to materialise in Ukrainian agriculture. The CToT merely measures price parity and is, therefore, only an indirect indicator of the purchasing power of a given sector. As pointed out above, the IToT and FToT are direct indicators of purchasing power. Figure 10 presents data on the development of all three types of ToT index for Ukrainian agriculture since 1991. Based on figure 10 the following conclusions can be drawn:

1. The argument that declining price parity for agricultural output in Ukraine, has alone caused the decline in agriculture cannot be correct since, as already mentioned above, most of the decline in the CToT index occurred early in the 1990s and this index has actually increased since 1999.

2. There is little indication that the productivity and efficiency of Ukrainian agriculture has in-creased (see also table 2 above). The relationship between the CToT, IToT and FToT curves since 1994 suggest that improvements in sectoral purchasing power have been due to price changes and not productivity improvements.

Figure 10: Commodity, income and factoral terms of trade in Ukrainian agriculture*

0 0.2 0.4 0.6 0.8 1 1.2

1991 1992 1993 1994 1995 1996 1997 1998 1999

1991=1

CToT

IToT

SFToT

Note: * CToT parameter has been computed as a ratio between the farm output selling price indices and producer price indices for all industrial products. Indicators of the rate of growth of gross output and labour productivity in agriculture have been used to compute IToT and SFToT.

Source: STATE STATISTICS COMMITTEE OF UKRAINE (2000b, 2000c).

One might argue that the lack of productivity improvements in Ukrainian agriculture to date is due to the fact that the deterioration of price parity (CToT) has been so dramatic that farmers have been unable to escape its impact. For example, it is argued that farms are so cash-strapped that they cannot make the investments needed to improve productivity. Nevertheless, it should be pointed out that:

1. The experience of other post-communist countries shows that despite similar reductions in price parity for agricultural products, farmers have been able to increase productivity (Hun-gary to a larger extent and Poland to a lesser extent, see figure 9 and table 2).

2. Investment is not the only source of productivity enhancement in agriculture. Ukrainian farms are often poorly structured and poorly managed, and therefore fail to realise the poten-tial that exists even in their current undercapitalised state. Tapping existing reserves would improve the productivity of many farms. Indeed, before any lender will be willing to supply a farm with credit, he or she will first want to see that farm management has proven able to tap these reserves.⁸

3. As demonstrated above the initial reduction in price parity for agriculture was due to an ini-tial 'shock' caused by a dramatic reduction of state subsidies combined with price liberalisa-tion. Even if the Ukrainian Government wanted to, there is no way it could provide agricul-ture with the volume of subsidies and support that existed in the early 1990s. Hence, it is an illusion to believe that price parity can return to the levels that prevailed then, and it is irre-sponsible to suggest that this is politically feasible.

4. Paradoxically, even though agricultural policy makers constantly talk about the need to im-prove parity, Ukrainian agricultural policy actually tends to further depress parity. For

8 See chapter 4 on Rural Finance in Ukraine – Extending the Frontier.

ple, the oilseed export tax leads to reduced output prices for oilseed producers. In the past, export bans have depressed farm gate prices for grain. The lack of competition in the grain marketing chain has reduced farm revenues by billions of UAH over the years.⁹

In document Policies and Agricultural Development in Ukraine (Pldal 101-108)