Download The evolving farm structure in East Germany

g:\daten\koester\beiträge\paper_warsaw.doc
8/23/1999
The evolving farm structure in East Germany
Ulrich Koester
University of Kiel, Germany
Paper presented
at the Second World Bank EU Accession Workshop in the Rural Sector
Warschau/Polen
Juni 1999
CONTENTS
List of Tables ........................................................................................................................................III
List of Figures .......................................................................................................................................III
1
Introduction ............................................................................................................................1
2
The Starting Point .................................................................................................................. I
3
The present situation in East as compared to West.............................................................4
3.1
The evolution of farm sizes in East Germany as compared to West Germany............4
3.2
Economic performance of agriculture in the east as compared to the west..................6
3.3
Stability of farms ..................................................................................................................12
3.4
The importance of land tenure...........................................................................................14
4
Summary ...............................................................................................................................16
References ............................................................................................................................................17
Annex
........................................................................................... Fehler! Textmarke nicht definiert.
II
List ofTables
Table 1: Pattern of Farms and Land Use in East Germany in 1989 ....................................... 2
Table 2: Sectoral Performance Data of East German Agriculture at Prices of West German
Agriculture1................................................................................................................ 3
Table 3: Size distribution of farms and arable land in East Germany ..................................... 5
Table 4: Selected economic indicators of full-time single owner farms in East and West
Germany (Farm sample data) .................................................................................. 5
Table 5: Selected Farm Indicators of full-time farms in East Germany (Farm sample data) . 7
Table 6: Relationship between farm-performance and farm size............................................ 8
Table 7: Farm sample data for alternative legal forms in Germany (1997/98) ..................... 10
Table 8: Actual and planned performance indicators of supported farms in the target year 12
Table 9: Percentage of farms with negative change in equity and negative net investment,
West and East Germany (Farm sample data) ....................................................... 14
Annex Table 1: Selected Indicators of Farms in East Germany Classified According to Legal
Status (Farms of 1 ha and larger) .......................................................................... 19
List of Figures:
Figure 1: Profit / FAK (in DM 1000) in East and West Germany in 1993/94........................... 8
Annex Figure 1: Distribution of Farm Sizes and Arable Land in East Germany................... 20
Annex Figure 2: Agricultural Employment in West- and East Germany ............................... 21
III
The evolving farm structure in East Germany
Ulrich Koester
University of Kiel, Germany
1. Introduction
The experience of East Germany will be explored to identify main determinants of structural
development of the agricultural sector. It is known that structural changes on any sector depend very
much on sector specific and macroeconomic data. Both parts of Germany, the former GDR and the
old FRG are affected – by and large - by the same macroeconomic environment since unification.
However, the starting point at the time of unification was very different. Hence, it seems to be of
interest to investigate whether expectations concerning the evolution of farm structure in the East
Germany have materialized. Agriculture in West Germany was and still is mainly based on rather
small-scale family farms. East Germany started unification with a farm sector based on large-scale
farms nearly totally operated by corporations. One of the expectations, which also affected policies
chosen by the German Government, concerned the predominance of family farms and of farms
operated by land owners. Hence, one of the objectives of this paper is to compare expectations and
reality and to discuss reasons for the divergence. Most farms in East Germany cultivate a high share
of rented land. Hence, a second objective of the paper is to elaborate the importance of tenure. Most
of the land in East Germany is still operated by corporate farms. A third objective of the paper is to
investigate whether the legal status of the farms is an important determinant of economic efficiency
and whether the present pattern seems to be sustainable. The transformation of agriculture in the east
was very much affected by huge transfers from the west to the east. Farm investment support plaid a
major role. There is still a widely held view in Government circles and even among agricultural
economists working in farm management that investment support is needed to improve the structure
of the farm sector. An investigation of this problem will be the fourth objective of the paper.
2. The Starting Point
Prior to 1949, eastern and western Germany comprised the majority most of pre-war Germany, and
thus they were subject to the same economic and social policies. According to data for the period
1935-38 labor productivity in the eastern part of the country exceeded that in the west by 57 percent,
land productivity by 7.1 percent as yields for most crops and livestock were higher in the east1. Farms
in the eastern part were somewhat larger than in the west, and tended to use more advanced
technology. Thirty-six percent of arable was cultivated by farms of 50 ha or more in the east as
compared to 11.1 percent in the western part of Germany. The average farm size in the east was 10.5
1
Weber, A. (1993), Umgestaltung der Eigentumsverhältnisse und der Produktionsstruktur in der Landwirtschaft der DDR.
Kiel p. 68. The productivity is measured in grain equivalents per labor unit and per ha.
1
ha and in the west 5.9 ha. Land/man ratio in 1939 was 27 workers per 100 ha in the east and 43
workers per 100 ha in the west.
Development of agriculture in the east was highly affected by the socialist policies in the former
GDR. By 1960, more than 90 percent of land was managed in collective or state farms. This
distribution of ownership remained essentially the same until 1989, collectivized except the household
plots. The proportions of collective, state, and private farms in 1989 are shown in Table 1. The
average crop farm size farms was 1328 ha for collective farms and 5012 ha for state farms. Livestock
farms were highly specialized and had only 31 ha if they were organized as collectives and no land if
they were state farms.
Table 1: Pattern of Farms and Land Use in East Germany in 1989
Type of Farm
Collective Farms
Crop Production
Livestock Production
State Farms
Crop Production
Livestock Production
Others
Other Socialist Enterprises
Total of Socialist Enterprises
Private Enterprises1
Total
Number
3,855.0
1,159.0
2,696.0
465.0
079.0
311.0
75.0
630.0
4,751.0
Area
(1,000 ha)
5,343.7
5,259.9
83.8
448.8
396.0
0.0
0.0
34.6
5,848.6
333.1
6,181.8
Percent Share of
Area
86.4
85.1
1.3
7.3
6.4
0.0
0.0
0.5
94.6
5.4
100.0
Average Size
ha
1386.2
4538.3
31.1
965.2
5012.7
0.0
0.0
54.9
1231.0
1
This consisted of farm workers’ household production, small gardens, part-time farms, 500 privately
owned specialized small farms and farms owned by the church.
Source: Statistical Yearbook of the DDR, 1989.
In contrast to these developments in Eastern Germany, West Germany’s farms remained private and
relatively small. The average farm size increased from 8.06 ha to 18.17 ha from 1949 to 1989, a
growth rate of only 0.25 ha per year the increase in farm size was accompanied by a significant
increase in land and labor productivity. In East Germany in contrast, the increase in farm size from 8.8
ha to 4 538.3 ha in crop production brought only minor productivity increases over the period. After
forty years of separate development, East German agriculture had lower yields per hectare and per
animal than in the West, and productivity of land and labor productivity was lower, as well. The
inefficiency of East German agriculture was certainly not caused by lack of capital. East German
agriculture used more capital per unit produced than West German agriculture, and it is widely
accepted that West Germany used too much capital compared to agriculture in other market
economies with somewhat larger farm sizes.
The two Germanys officially reunited on October 3, 1990. Prior to that, however, in July 1, 1990, East
Germany had already immersed its agricultural sector in the new system of rules used by the West.
The restructuring of the eastern economy occurred rapidly, introducing sudden changes in a manner
never experienced by the West German population. Many policymakers asserted that the people of
eastern Germany would not accept such rapid and profound change, but in fact they did. The
2
government adopted many policies to facilitate structural change and to ease the social costs, and the
design of agricultural policy is a special case in point. Changes in eastern Germany have been no less
than remarkable. Agriculture was one of the few sectors which could even increase production in
spite of significant labor shedding2. In contrast, industrial production dropped by nearly 60 percent
within two years and was still more than 40 percent lower in 1994 than in 1989.
Unification of the two Germanys in October 1990 changed the political and economic environment in
eastern Germany in one stroke and gave rise to a sharp adjustment in all sectors of the economy. The
pressure to adjust was heavily affected by policy decisions which changed the macroeconomic
environment. The first of these decisions concerned the fixation of the exchange rate. The exchange
rate chosen of 1 to 1 did not reflect purchasing power parity, which would have led to an exchange
rate of 4 to 1, nor did it reflect the parity of real exchange rates, which would have led to an even
greater exchange rate. Thus, prices in the former GDR dropped overnight by a high percentage. The
agricultural sector produced a negative value added at these new prices in 1990 at the time of
reunification. In addition, a political decision was made to quickly adjust wages in East Germany to
the level of those in West Germany. Thus, in 1991 the unemployment benefits in real terms in East
Germany were even higher than wages before unification. Therefore, the agricultural sector had to
adjust to much lower prices and to higher wage rates.
Table 2: Sectoral Performance Data of East German Agriculture at Prices of West German Agriculture1
in mill. DM
Crop
Livestock
Total Agricultural
Production
Production
Production
Value of Production
13,237.7
18,921.7
32,159.4
Purchased Input
10,061.1
19,102.7
29,163.8
Gross Value Added at Market Prices
3,176.6
-181
2,995.6
Subsidies c
515.9
208.1
724
Taxes c
933.9
933.9
Gross Value Added at Factor Costs c
2,758.6
27.1
2,785.7
Depreciation c
1,817.4
1,305.8
3,123.2
Net Value Added at Market Prices
1,359.2
-1,486.8
-127.6
Net Value Added at Factor Costs
941.2
-1,278.7
-337.5
Wages2
3,875
4,741.7
8,616.7
Interest Payments c
773.2
583.2
1,356.4
Net Income
-3,707
-6,603.6
-10,310.6
1 Quantities are an average of 1986-1989 and prices of 1990. Inclusive wages for members of collective
farms. L. Monetary values from m directly translated into DM at the official exchange rate of 1 ; 1.
Source: Boese, Ch., J. Welschof, H. Neumetzler, and G. Schmidt (1991), ”Auswirkungen der geänderten
Rahmenbedingungen auf die Landwirtschaft der neuen Bundesländer”. In: Henrichsmeyer, H., and K. Schmidt
(eds), Die Integration der Landwirtschaft der neuen Bundesländer in den europäischen Agrarmarkt. Agrarwirtschaft, Sonderheft 129, Buchedition Agrarmedia, Hamburg and Frankfurt.
However, macroeconomic conditions were not only negative for adjusting the sector. It was of utmost
importance that there was a social safety net to absorb the outmigrating labor force. Moreover, the
2
See Koester, U. and K. Brooks, Agriculture and German Reunification. Word Bank Discussion Paper No. 355.
Washington 1997.
3
stable monetary and institutional framework allowed the sector to adjust much more easily than was
the case in countries where these conditions did not prevail.
Table 2 clearly shows the pressure to adjust. Net income in agriculture was negative in 1990 at prices
of West German agriculture. Livestock production was under more pressure to adjust than crop
production. Net value added of livestock production was even negative. This observation deserves
some emphasize. A negative value added indicates that the country would have been better off
without this production at that point of time. However, the advice to close down all production units
which produced a negative value added would have been too hastily at that time as the evolution in
agriculture after reunification indicated.
3. The present situation in East as compared to West
3.1. The evolution of farm sizes in East Germany as compared to West Germany.
Most farms in East Germany (more than 70 percent) are smaller than 100 ha (see Table 3). However,
these smaller farms only cultivate a small share of total land (below 7 percent). In contrast, there are
few farms (over five percent) in the size class of 1000 ha and more which cultivate over 50 percent of
the land. This distribution of farm sizes and land has not changed much after the first two years of
unification (see Figure 1 in Annex for the distribution of land and farm sizes). Farms in the lower size
class are mainly single owner farms and the others are dominated by corporate farms. A comparison
of full time single owner farms in east and west (see Table 4) clearly shows that even these farms in
East Germany are significantly larger than those in West Germany. It might be a surprise that even the
average size of the single owner farms increased significantly more in the east than in the west. It was
33.4 ha and 38.99 in 1992 and 1994/95 in the west, but 114 ha and 160 in the east. This development
was unexpected. Unemployment in East Germany is much higher than in West Germany and wages
are lower in the east than in the west.
Hence, one could have expected that the macroeconomic environment would have favored faster
changes in farm sizes in the west than in the east. However, even the new full-time farms of single
owners are significantly larger in the east than in the west, and surprisingly the change in farm size of
single owner farms over time is greater in the east. Due to the macroeconomic conditions and the
different starting points in 1990 one would have expected a smaller outmigration in East than in West
Germany and, hence, a more labor intensive agriculture in the east. Table 4 clearly shows that the
land/man ratio was already lower when the single owner farms in the east were founded in 1991 and
even more surprisingly, the man/land ratio declined even somewhat more in the east than in the west.
This development occurred in a macroeconomic environment with higher unemployment rates and
lower wages in east than west. Of course, it was known that there was significant disguised
unemployment in East Germany and in agriculture even more than in industry.
4
Table 3: Size distribution of farms and arable land in East Germany
Farm size
1992
1993
1994
1995
1996
1997
Below 100ha
a
72.1
74.4
73.5
74.3
74.0
73.6
b
4.4
5.7
6.1
6.5
6.8
6.8
100 – 200 ha
a
6.5
7.0
7.8
7.8
8.0
8.1
b
3.4
4.8
5.7
6.2
6.4
6.6
200 – 500 ha
a
6.3
7.1
7.8
7.9
8.1
8.4
b
7.4
10.7
12.6
13.5
14.1
14.7
500 – 1000ha
a
4.9
4.4
4.5
4.3
4.4
4.5
b
13.1
15.4
16.9
17.1
12.5
18.0
above 1000 ha
a
10.1
7.1
6.3
5.8
5.5
5.4
b
71.8
63.4
58.8
56.7
55.2
53.9
a Share of farms in total number of farms; b share of land of farm class in total arable land.
Source: Bundesministerium für Ernährung, Landwirtschaft und Forsten, Agrarbericht, various issues.
Table 4: Selected economic indicators of full-time single owner farms in East and West Germany (Farm sample data)
1991/92
West
1992/93
East
West
1993/94
East
Farms (number)
8617
532
8559
680
Arable land (ha per farm)
33.41
114
34.89
140
Man/ land ratio
4.79
1.58
4.6
1.4
(work unit/ 100 ha)
Lease share (% arable land)
48.49
86.84
49.96
89.71
Lease price (DM/ha)
485
162
485
178
Profit (DM/ ha)
1394
564
1251
476
Profit/ work unit (DM)
3,2870
43,962
30,630
44,785
There are no data available separated for East and West for the period after 1994/95.
Source: Bundesministerium für Ernährung, Landwirtschaft und Forsten, Agrarbericht various issues
5
1994/95
West
East
West
East.
8434
37.06
4.33
620
157
1.34
8403
38.99
4.12
729
160
1.34
51.62
487
1097
2,8649
89.81
192
471
4,9903
53.12
485
1152
31593
90.00
196
440
45943
Hence, the steep decline in the labor force immediately after unification was in the range of
expectation (see Figure 2 in the Annex). However, it is a surprise that the labor force in the east
declined even more than in the west after the man/land ratio had equalized. An explanation for this
phenomena will be given below.
Farm sizes for partnerships and corporate farms are much larger than for single owner farms. This
legal form is nearly completely absent in West Germany. Hence, it was expected that this legal form
would not be sustainable in the east. Indeed, Table 5 conveys that the number of single owner farms
have increased somewhat, however, the numbers of partnership farms and of corporate farms have
also increased over time. It is only the number of cooperatives which has gone down.
Determinants of the agricultural sector in East Germany were obviously different than those in West
Germany. An explanation will follow below.
3.2. Economic performance of agriculture in the east as compared to the west
An assessment of the economic performs of agricultural transformation in East Germany can be based
on two quite different approaches. One approach could be to investigate whether the adjustment was
favorable from a macroeconomic point of view and the alternative approach could be to investigate
whether the sector has gained in international competitiveness. Both approaches will be accepted in
the following.
Adjustment of the agricultural sector assessed from a financial and economic point of view
The experience of West Germany and other countries supports the view that larger farms allow to
earn a higher income per family working unit (see Table 6). Hence, it seems obvious that farm
support which promotes growing of farm sizes should be viewed positively. Likewise, the quick
increase in profit per family work unit in East German and surpassing the level of profit in West
Germany already within three year after unification (see Figure 1) may be considered as a proof of the
efficient transformation policy. However, this view can be challenged from an economic point of
view .
6
Table 5: Selected Farm Indicators of full-time farms in East Germany (Farm sample data)
Single Owner
Number of farms
Arable land in ha per farm
Leased land in % of arable land
Lease price in DM per ha
Profit/Surplus DM/ha
Partnerships
Number of farms
Arable land in ha per farm
Leased land in % of arable land
Lease price in DM per ha
Profit/Surplus DM/ha
Cooperatives
1991/92
1992/93
1993/94
1994/95
1995/961
532
114
86,84
162
564
680
140
89,71
178
476
620
157
89,81
192
471
729
160
90,00
196
440
7760
52,3
51,97
442
1134
37
83
109
137
547
328
94,82
137
546
444
97,30
188
661
436
97,02
186
444
415
98,07
198
421
185,7
87,88
240
705
185,6
89,98
240
660
1588
99,94
158*
66
-15,9
1663
98,50
158*
-52
-132,8
1642
98,60
158
4
-76,8
1595
97,49
158
33
-46,9
32
-89,5
-276
-342,9
322
Number of farms
Arable land in ha per farm
Leased land in % of arable land
Lease price in DM per ha
Profit/Surplus DM/ha
Corrected Profit2
Corrected Profit 3
Total of corporate Number of farms
Farms
Arable land per farm
Leased land in % of arable land
Pachtpreis/ ha Pachtfläche
Profit/surplus per ha
Corrected Profit2 )
Corrected Profit 3
117
233
284
301
298
1754
99,09
115
-184
-205,75
1786
99,61
129
-52
-111,26
1736
99,65
153
-48
-81,36
1721
99,24
161
-24
-59,50
1473,7
96,34
159
1
-75,21
-236,52
-101,30
-87,34
-57,52
-269,80
1996/971
8154
48,5
57,53
441
1152
624
1498
95,46
161
-27
-103,11
1)Single owner and partnerships for the total of Germany, Corporate farms for East Germany.. 2) on the assumption that lease price are set equal to those paid by
partnerships. - 3) On the assumption that lease prices are set equal to those paid by single owner farmers. Source: Bundesministerium für Ernährung,
Landwirtschaft und Forsten, Agrarbericht, various years;- Deutscher Bauernverband, Situationsbericht, various years. .
7
Table 6: Relationship between farm-performance and farm size
standard business
standard business income
standard business
income under 30000
between 30000 and 50000
income
DM
DM
over 50000 DM
1974/1975
profit in DM/FAK
15033
22559
36697
farm size ha /LF
13,88
28,57
56,01
1980/1981
profit in DM/FAK
14089
20152
30846
farm size ha /LF
14,25
24,77
43,97
1989/1990
profit in DM/FAK
23068
34426
52194
farm size ha /LF
18,96
27,12
45,7
1994/1995
profit in DM/FAK
18642
26922
41171
farm size ha /LF
22,95
29,8
53,98
Note: FAK stands for family work units; standard business income stands for the value added which a farm can
produce under normal conditions.
Figure 1: Profit / FAK (in DM 1000) in East and West Germany in 1993/94
80
70
60
50
40
30
20
10
Very
Large
East
Large
West
Large
East
Medium
West
Medium
East
Small
West
Small
East
0
Source: Bundesministerium für Ernährung, Landwirtschaft und Forsten, Agrarbericht various issues.
8
Unemployment in East Germany has been high in all years since unification. High wages and the
specific fixation of the exchange rate contributed to deindustrialization of the New Laender. The
social consequences of unemployment were somewhat mitigated by the social security system
introduced and subsidies from the west. Nevertheless, unemployment has been a serious social
problem in the east.
The agricultural sector could have absorbed a higher share of the labor force if incentives were given
to employ more labor and less capital. However, the opposite was the case: High capital subsidies
supported the move to more capital intensive activities, releasing labor. Distortions on the factor
markets with wage rates higher than the shadow price for labor and interest rates lower than the
shadow price for capital initiated an adjustment which was not favorable from an macroeconomic
point of view. Subsidizing interest rates would have been positive from the macroeconomic point of
view if the economy as a whole had gained in international competitiveness. The East German
experience indicates that the agricultural sector may have gained from interest subsidies, but not the
farming population and the overall economy.
The German Government strongly believed that the transformation of the economy in the eastern part
should and could be promoted by paying transfers from west to east. The experience seems to prove
that the agricultural sector was one of the few tradables producing sectors which seem to have reached
international competitiveness after few years. This view will be challenged in the following. First, the
extent competitive after a short period of time. In the following the extent and form of subsidization
will be shown first, and the rationale of this policy will be questioned afterwards.
To address the shock to prices and farm incomes in the east, the German government launched a huge
financial assistance program for a five year period (up to 1995) with declining annual budget
allocations3. Assistance budgeted for the second half of 1990 amounted to DM 6.871 billion and
declined to DM 2.0 billion in 1994 and to DM 1.8 billion in 1995, giving a total budget allocation of
DM 17.4 billion. Financial support in the first year of unification exceeded the annual value added of
East German agriculture in West German prices by far. Agriculture’s value of production in 1990/91
amounted to about DM 15.0 billion and equaled about the value of purchased inputs4. Taking into
account depreciation agriculture’s value added in 1990/1991, the first year of unification, was
negative. Thus, survival of the sector was secured by the huge amounts of subsidies. However,
subsidization of the agricultural sector has to be seen in comparison with other sectors. The wage bill
of the processing sectors surpassed the value added of the sector by 143 percent in 1991, by 102
percent in 1992 and still by 77 percent in 19935. Thus, these sectors could only pay these wages
because of the subsidies received from the west.
The bulk of the payments for agriculture, DM 2.61 billion, helped the sector cope with the price break
and provided needed liquidity. The government targeted enterprises that had less than DM 10,000 per
worker in liquid funds, based on data as of July 1, 1990. Farms in disadvantaged regions received an
additional DM 0.22 billion, because it was argued that they faced more serious pressure to adjust than
the average farm. A sum of DM 140 million was directed to state farms and DM 150 million to farms
that suffered from high debt due to prior bad investments.
3
Bundesministerium für Ernährung, Landwirtschaft und Forsten, Agrarbericht, various issues.
Bundesministerium für Ernährung, Landwirtschaft und Forsten, Agrarbericht 1991, p. 147.
5
Sinn, G. and H.-W. Sinn (1992), p. 32.
4
9
Table 7: Farm sample data for alternative legal forms in Germany (1997/98)
Index number
Unit
Legal entities
1
Family farms )
Standard farm income
Arable land in ha per
farm
Leased land in % of
arable land
Lease per ha
Members
Out
of
which
employed on the farm
Working units
Out of which unpaid
Work unit/100ha
Livestock units
Cereal yield
Milk yield
Piglets
Profit
Profit
Profit4) + wages
Profit4) + wages
Profit4) + wages
Total labor income
Farm income
East3)
1000 DM
ha
All of
Germany
73.3
49.4
ha
57.9 28.6
n.a.5)
89.5
448
-
201.7
-
256
-
DM/ha
Persons
Persons
WU
nWU
LU/100 ha
LS/100 ha
dt/ha
kg/cow
Piglets/sow
DM/farm
DM/ha
DM/farm
DM/ha
DM/LU
DM/LU
DM/LU
135.1
162.9
Corporate Farms (East)3
Partnerships
All of
Top 25%
All of
Germany
Germany 2)
203.9
419.5
1 678.3
179.6
417.9
1 520.7
1.70
2.36
1.46
1.63
3.44
1.17
150.7
36.9
64.8
56.9
5834
6107
18.7
57 668 86 752
1 168
533
64 869
110
275
1 314
677
38 185 46 653
16 548 39458
50 287 64 507
Cooperatives
1 775.0
1 593.7
95.7
96.0
231
-
164
66.27
21.13
165
73.97
26.55
3.27
4.92
2.11
2.59
1.82
1.17
63.3
29.4
61.3
63.2
6295
6650
18.6
131 057 328 042
730
785
170 430 415 801
35.30
2.32
76.3
55.4
6107
20.1
23 325
15
1 471 935
37.81
2.37
75.3
55.5
4 771
3
1 577 305
949
995
52 065 84 512
42 287 76 280
70 197 108 445
968
41 704
36 073
52 073
990
41 717
35 731
51 594
1) Full time farms only. 2) Including the legal entities Limited Liability Companies, Limited Partnerships, Joint stock
companies, and Associations 3) East Germany only. 4) Before taxes. 5) n.a. = not available.
Source: Bundesministerium für Ernährung, Landwirtschaft und Forsten, Agrarbericht 1999, calculations presented by
Alois Balmann, Berlin.
Total payments per worker employed in agriculture in 1990 was about DM 8000 for the six months
period of that year. Even if total budget allocation declined over time (see above) payments per
worker dropped much less due to massive outmigration from agriculture. Even in 1995, the last year
of special funding of the restructuring process, payments per worker amounted to about DM 14,000
annually per person full-time employed in agriculture. Moreover, these data do not include
unemployment compensation, retirement incentives, or the costs of employment programs for those
who left the sector. This assistance consisted mainly of transfers from West Germany, because the
non-agricultural population of East Germany could not have paid this sum.
In addition to the sheer magnitude of the transfer, the design of the payments affected the adjustment.
In general, farms in the form of natural persons were favored over corporate farms, and much of the
assistance was in the form of subsidized credit. As a consequence, substitution of capital for labor in
the sector was probably even greater than it would have been otherwise, and the smaller private farms
10
became more capital intensive than the larger business entities, such as limited liability companies and
cooperative farms. New private farmers benefited from three types of support6:
•
initial aid (start-up grants) of up to DM 23,500 paid to new farmers up to the age of 55 years,
•
subsidized credits, and
•
grants for investment in pasture-based livestock operations.
In addition, farmers in the East had immediate access to the EU and West German schemes for
restructuring of farms. Some of the schemes were directed only to single owner or partnership farms
and thus discriminated against cooperatives or limited companies. Moreover, most of the programs
had a cap on payments made per enterprise or per worker, and thus smaller farms benefited more than
larger ones. The cap of support per farm worker or per enterprise had the most discriminating effect
on juridical farms (cooperative or limited companies) because they employed more workers per farm
than the private farms. By utilizing a mix of programs available to new private family farms, an
operator setting up a farm to employ himself full time and his wife half time could have received
between 60,000 - 80,000 DM in annual transfers for the financing period of the investment.
Because of these programs, investment per workplace in agriculture was extremely high. It is likely,
however, that the payments reduced the number of jobs available, as investors wrote off technically
usable capital and purchased labor saving alternatives. Investment in dairy production is a special case
in point. According to one survey7, most of dairy stables in the former GDR were usable, but they
needed alterations. New buildings required higher investment per cow, but less labor. Thus, credit
subsidies most likely contributed to substitution of more capital for labor than would have occurred
anyway, thereby increasing the outflow of labor from the sector.
As credit was rationed per farm and working unit the profitability of production, such as crop
production, which needed a smaller amount of starting capital was more positively affected than that
of livestock production, which needs a higher capital stock. The value of assets per ha was DM 4 584
for crop farms in 1993/94, but 8 569 DM for livestock farms in East Germany. The first had a gross
investment of DM 773 per ha in 1993/1994 and the latter of DM 1 4448.
The decision to subsidize capital in agriculture may have been based on the observation that the
capital stock in East German agriculture was out of date. Most people believed that improved farm
efficiency required new investment. Credit subsidies, however, were not an appropriate instrument of
assistance, since they reduced the apparent cost of capital when its real cost had risen with the
transition, and they reduced employment when the real cost of labor had declined. Moreover, since
some of the investment would have been profitable without subsidies capital owners received an
additional rent.
The German experience with farm credit subsidization indicates that these programs contributed
widely to a wastage of capital from an economic point of view. Of course, farms were supposed to
submit a so-called ‘farm improvement plan’ proving the profitability of the investment. However, the
6
See Schrader, J.V. (1991), p. 27.
Fiedler, C., et al. (1994), Wirtschaftlichkeit von Um- und Neubauten in der Milchviehhaltung. In: Klare, K. (ed.), cit. op.,
pp. 175.
8
Bundesministerium für Ernährung, Landwirtschaft und Forsten, Agrarbericht 1995, Anhang, p. 280.
7
11
data reveals that in spite of these plans, that a high share of the farms is under serious financial stress,
suffering from low income, losing equity and having negative net investment.
A detailed investigation of the ‘farm investment program’ for Schleswig-Holstein found that about
half of the farms which have been supported generated a loss in equity even with support and,
moreover, the projections made in the ‘farm improvement plans’ showed nearly no correspondence
with reality (see Table 8). It is obvious that ‘farm improvement plans’ are not a reasonable tool to
discriminate between profitable and unprofitable investments. It is likely that these plans are
manipulated to get access to the benefits of credit subsidization. However, as not all farms can enjoy
credit subsidization, those which receive it improve their competitiveness at the costs of those who are
not supported. It is likely that the sector as a whole loses in international competitiveness. Farmers
themselves know best as to whether an investment might be profitable. If they receive credit
subsidies, investments may be undertaken which are less profitable than those at market interest rate.
Hence, these programs allocate the scarce factor in sectors which use capital less efficiently than do
other sectors of the economy.
Table 8: Actual and planned performance indicators of supported farms in the target year
Quartiles of labor income in DM/work unit
statistics
1. quartile
2. quartile
3. quartile
4. quartile
number of farms
78
77
77
77
actual labor income /work unit 12.192
39.571
61.064
109.415
1,000
planned labor income per
37.606
39.346
40.599
41.563
0,2465
work unit2 according to Farm
Investment Plan (FIP)
earned Interest rate
-6,7
-0,5
3,6
9,5
0,8848
profit in the target year
23.389
62.273
90.647
122.514
0,7664
planned profit according to
74.262
76.422
77.402
81.248
0,1453
(FIP)
surplus1
-40.641
-12.813
52.181
21.045
0,4728
supported investment
262.757
273.156
255.962
264.278
-0,0381
own means
103.110
88.231
88.004
90.512
-0,0624
subsidy equivalents
71.872
88.447
73.078
76.363
-0,0434
1
2
Profit minus withdrawals for private and other use – Labor income per necessary work unit –
3
Four years after the actual year of support
Source: Striewe, L., J.-P. Loy and U. Koester (1997), Analyse und Beurteilung der einzelbetrieblichen
Investitionsförderung in Schleswig-Holstein. Agrarwirtschaft.
3.3. Stability of farms
East Germany was in a much better position than most other transition countries in rebuilding a new
farm structure. There were some workers on the former collective farms who had have the experience
to work as an independent farmer some 45 years ago. In addition, even those former owners of large
farms who did not benefit from restitution had still some emotional ties to the land and were willing to
start farming. Moreover, there were some farms coming from the west who invested some capital in
eastern farms. The financial support of the government may have given the final incentive for many of
12
these farmers to start farming. All this new investment was built on the expectations that the new
farms would be profitable. Hence, it might be of interest to investigate how many of the new
enterprises seem to be viable in the long term. The criteria used for viability of a farm is change in
equity and net investment.
It may be considered as a surprise that quite a high percentage of all newly founded farms in East
Germany seem to be financially unstable in spite of having received a significant amount of support
and in spite of the huge transfers made by the Common Agricultural Policy. The share of full-time
farmers with negative investment even increased from 36 percent in 195/96 to 48 percent in 1997/98.
Like wise the share of full-time single owner farms with loss in equity increased from 29 to 33
percent over the same period of time. However, it should be noted that the share of full-time single
owner farms in West Germany with loss in equity and negative investment was even higher in the
same period. However, that is plausible. Farms in West Germany have been mainly inherited and the
owners can live for quite a while eating up equity. On the other hand, farms in East Germany have
been generally founded with a small share of equity in total capital needed to run the farm. It can be
assumed that the investment was based on expecting profitable farming and the support given by the
Government was based on the same expectation. Obviously, many of the new farmers’ expectations
have not been confirmed. It should be noted that the bad experience was not the result of adverse
economic or political changes in the environment. Just the opposite: the change in the Common
Agricultural Policy has significantly helped to stabilize many farms. It is true that prices for crop and
oilseeds were lowered, but the income loss was even overcompensated on purpose by direct payments
in East Germany. Substituting direct payments for revenue earned through sales has lowered market
risk, increased liquidity and reduced the pressure and incentive to adjust to the new economic
environment. Hence, it can be assumed that even a higher percentage of the new farmers would have
been under financial pressure more of farmers without the CAP reform.
The general message which can be drawn is:
1. Farming is a risky activity. Whether investment will earn the expected interest depends very much
on the manager of the farm. As the variance in managers’ qualification seems to be very large, there is
hardly any objective criteria to identify criteria which allow an outsider (Government officials) to
predict the viability of a farm at the time of setting up the farm. Consequently, investment subsidies
reduce the risk for private investors and, hence, increases the likelihood that even a higher percentage
of newly founded farms will be financially unstable after few years.
2. There is hardly any farm structure which is stable over time, even if economic circumstances do not
change. Hence, a policy which allows entry of new farmers and exit of unsuccessful farmers will lead
to overall welfare gains. A functioning land market is one of the most important determinants of
adjusting the farm structure in order to gain overall efficiency.
3. Data from East Germany do not yet permit to rule out that cooperatives may survive for a long
time. However, the experience indicate that the number of cooperatives will decline over time as well
as the number of single owner farms. Nevertheless, the involved land transfer is going in the direction
of single owner farms. Hence, the share of land cultivated by cooperatives declines over time.
13
Table 9: Percentage of farms with negative change in equity and negative net investment, West and East Germany
(Farm sample data)
Percentage of farms with
Percentage of farms with
negative change in equity
negative net investment
East-Germany:
Single owner 1)
1995/96
1996/97
1997/98
29
34
33
36
42
48
1995/96
1996/97
1997/98
19
30
28
27
41
48
1995/96
1996/97
1997/98
51
56
46
43
44
61
1995/96
1996/97
1997/98
56
57
48
41
41
65
Partnerships
Legal persons
Cooperatives
West Germany:
Single owner 1)
1995/96
1996/97
1997/98
46
45
48
60
58
57
1995/96
1996/97
1997/98
36
37
41
54
55
53
Partnerships
1) Full-time farms.
Source: Bundesministerium für Ernährung, Landwirtschaft und Forsten, Bonn.
3.4. The importance of land tenure
Farms in the west are normally in the hand of the families for generations and farming is in many
cases not mainly considered as an economic activity to earn the highest possible profit. Instead,
farming is often considered as life-style. Hence, there is often resistance to give up farming even if
capital remuneration would be higher in other activities or if even a loss in equity could be avoided.
Consequently, income earned in agriculture is on average general lower than in other sectors. Of
course, this might be of no concern from a society point of view as long as private farmers are
willingly accepting their fate and as long they do not demand protection. The inherent problem with
farmers who own the land is that the heirs may start farming because of inherited land and that the
14
young farmers are not well informed about prospects of farming and alternatives. The outcome is
often mismatched income expectations, small farm sizes and, hence, political pressure for protection.
Tenancy farming may have significant advantages, especially in periods where a strong pressure for
changes in farm structure is needed.
It is often claimed that tenants have less access to credit and, hence, may produce less efficient than
land owning farmers. However, this might have been true some fifty years ago when the main asset of
farms was land. Nowadays, with capital intensive farming farmers may own a significant amount of
capital even if the land is rented. Hence, access to credit may be granted because some non-land assets
may be used as collateral.
Experience in farming with mixed ownership of land supports the view that tenant farms tend to be
more efficient than farmers owning all or most of the land. It is noteworthy, that there is a strong
relationship between share of rent and profit per family working unit on the one hand and share of
rent and working unit per 100 ha. This indicates that farms try to make better use of there family work
by expanding the farm size. However, it has to be admitted that the effect of tenure on efficiency is
difficult to identify exactly, as most tenant farms are larger than land owned farms.
The high performance of tenant farms indicates that these farmers in spite of having to pay rents earn
a higher income. Hence, they must either work harder or have to be better qualified. Actually, there is
a strong hypothesis that both may be true. Those who rent land must be competitive on the land
market and hence must be able to pay higher rents than their competitors. However, this can only be
true if they are better farmers. It might be astonishing that even those farmers who don’t own any land
they cultivate seem to be better off than others who own at least part of the land. Again it must be due
to higher qualification of the farmer.
The higher qualification of tenant farmers seems to follow from the selection of the farm successors.
Those who operate on their own land are in most cases the heirs who became farmers not mainly
because they may have felt a compassion and talent for farming but because they expected to inherit a
farm. In contrast, those who start farming as a tenant know that they have to be qualified to make their
living as a farmer and to be able to pay the rent. Hence, a young tenant tends to be better qualified
than a farmer who owns the land.
Many farmers make a loss year after year and thus reduce their equity. This may even last for one
generation of farmers with less talent and diligence. In contrast, a tenant farmer can not survive
making losses in a row of years. Thus, market forces tend to enforce the selection of the best farmers
much more in the case of tenancy than for landlord farmers.
However, even if tenant farms might be more efficient than owner farmers there are some inherent
problems with tenancy farming.
First, it matters whether the owner of the land is the state or private persons. The German experience
indicates that there might be huge administrative costs involved if the owner is the state.
Second, tenant farmers might not take proper care of the land and buildings they have rented. Hence,
there is a need for monitoring and enforcing rental contracts. These costs are normally born by the
landlord.
Third, tenants may be reluctant to undertake long term investment if the maturity term of the
investment surpasses the rental period and if there are no well defined rules for asset valuation and
compensation at the end of the rental contract.
15
In spite of these possible disadvantages of tenancy farming the comparison in farm structure between
East and West Germany supports the view that farming based on tenancy is better suited to adjust the
farm size to effective use of resources than land ownership farming. Even the single owner farms in
East Germany expanded their farm size faster than those in West Germany as transfer of land was
relatively faster, allowing the land to move to the most efficient farmer faster in the east than in the
west.
The East German experience allows one to draw some important conclusions:
Private ownership of small pieces of land does not necessary lead to the dominance of family farms.
Tenancy farming may help to make best use of those few agriculturists who are well trained to
operate a farm efficiently.
Farming based of tenancy seems to be able to adjust faster to changes in technology and allows faster
to adjust farm sizes than land ownership farming.
4. Summary
1. The evolution of agriculture in East Germany is exceptional as compared to that in other transition
countries. East Germany has started with a more pronounced price shock than other countries, but
the agricultural sector enjoyed a positive economic environment.
2. The farm structure has changed significantly, but has not met expectations. In spite of restitution
and private ownership of land the evolving farm structure consists of much larger farms in East
than in West Germany. Most of the land is still not cultivated by family farms but by corporations.
Both, full-time single owner farms and corporations grew over time. However, the number of
cooporatives has declined over time.
3. Land distribution is highly unequal. About 54 percent of the land is operated by farms in the size
class over 1000 ha and only 6.8 percent of the land is cultivated by farms in the size class below
100 ha.
4. Farms in East Germany cultivate rented land, but give yield to higher profitability than their
counterparts in the west.
5. The variance in net investment and in the change in equity across farms is very high. A high
proportion of all farms, independently on the legal form, has to accept a loss in equity from year to
year and is not able to enhance the capital stock.
6. The bad performance of a high proportion of the farms may be considered as a surprise in spite of
the high subsidies paid by the German Government and the EU.
7. The effectiveness of subsidies for farm investment has to be questioned. This holds even more
from the economic than financial point of view.
8. It might be considered as a surprise that the rate of outmigration from agriculture is still higher in
East than in West Germany.
9. Single owner full-time farms in East Germany were on average in 1991/92 – the first year after
unification – three times as large as their counterparts in the west. Nevertheless the gap in size has
16
increased over time. A flexible land market based on tenancy farming seems to be a promoter of
structural change.
It may not be possible to forecast the exact farm structure in East Germany in the future. However,
some prediction should be in order. The number of farms will further decline and the average size
increase. The share of land cultivated by cooperatives is expected to decline further in favor of single
owner farms. The farm structure in East Germany will continue to diverge from that in West Germany
for the foreseeable future.
References
Boese, Ch., J. Welschof, H. Neumetzler, and G. Schmidt (1991), Auswirkungen der geänderten Rahmenbedingungen auf die Landwirtschaft der neuen Bundesländer”. In: Henrichmeyer, H., and
K. Schmidt (eds), Die Integration der Landwirtschaft der neuen Bundesländer in den europäischen Agrarmarkt. Agrarwirtschaft, Sonderheft 129, Buchedition Agrarmedia, Hamburg and
Frankfurt.
Bundesministerium für Ernährung, Landwirtschaft und Forsten, Agrarbericht, various issues; (1999,
calculations presented by Alois Balmann, Berlin).
Deutscher Bauernverband, Situationsbericht, various years.
Fiedler, C., et al. (1994), Wirtschaftlichkeit von Um- und Neubauten in der Milchviehhaltung. In:
Klare, K. (ed.), cit. op., pp. 175.
Koester, U. and K. Brooks (1997), Agriculture and German Reunification. Word Bank Discussion
Paper No. 355. Washington, D.C..
Sinn, G. and H.-W. Sinn (1992), Kaltstart. Volkswirtschaftliche Aspekte der deutschen Vereinigung.
2. Auflage, Tübingen, p. 32.
Schrader, J.V. (1991), Anpassungsprozesse in der ostdeutschen Landwirtschaft: Analyse und
Bewertung. Kieler Diskussionsbeiträge 171/172. Institut für Weltwirtschaft, Kiel, p. 27.
Statistical Yearbook of the DDR (1989), various issues.
Striewe, L., J.-P. Loy and U. Koester (1997), Analyse und Beurteilung der einzelbetrieblichen
Investitionsförderung in Schleswig-Holstein. “Agrarwirtschaft”, Vol.45, No.12, pp.423-434.
Weber, A. (1993), Umgestaltung der Eigentumsverhältnisse und der Produktionsstruktur in der
Landwirtschaft der DDR. Kiel p. 68.
17
18
Annex Table 1: Selected Indicators of Farms in East Germany Classified According to Legal Status (Farms of 1 ha and larger)
1991
1992
1993
1994
1995
1996
1997
1998
Number of Farms
Share in total arable land
Farm size in ha
Number of Farms
Share in total arable land
Farm size in ha
Number of Farms
Share in total arable land
Farm size in ha
Number of Farms
Share in total arable land
Farm size in ha
Number of Farms
Share in total arable land
Farm size in ha
Number of Farms
Share in total arable land
Farm size in ha
Number of Farms
Share in total arable land
Farm size in ha
Number of Farms
Share in total arable land
Farm size in ha
Single Owner
Partnerships
10499
0.17
114.24
14602
13.2
46
20587
17.6
45
22601
20
48
24588
20.7
46
25003
21.7
49
25355
22.2
49
25925
22.8
49
n.a.
n.a.
425
1123
13.8
629
1879
18.1
511
2388
20.6
468
2671
21.7
449
2820
22.2
437
2931
22.7
432
3064
22.8
417
Jur. Entities of Private Law
Total
n.a.
n.a.
n.a.
2749
72
1338
2829
63.9
1197
2824
59.2
1138
2896
57.4
1094
2888
55.9
1076
2873
54.9
1063
2942
54.2
1032
Source : Bundesministerium für Ernährung, Landwirtschaft und Forsten, Agrarbericht, various issues.
19
Co-operatives
2998
83
n.a.
1464
44.1
1537
1388
38.8
1479
1335
35.8
1457
1315
34.2
1435
1293
33.2
1425
1248
32.1
1431
1218
31.1
1432
Jur. entities
of public law
464
1
n.a.
101
1
483
73
0.4
272
78
0.3
191
87
0.2
132
115
0.2
86
79
0.02
110
55
0.2
134
Annex Figure 1: Distribution of Farm Sizes and Arable Land in East Germany
100
100
Share of Farms (%)
1992
1997
80
80
60
60
40
40
1997
1992
20
20
Share of Arable Land (%)
0
0
unter 100 ha
100 - 200 ha
200 - 500 ha
500 - 1000 ha
Source: Bundesministerium für Ernährung, Landwirtschaft und Forsten. Agrarbericht various issues
20
0
über 1000 ha
Annex Figure 2: Agricultural Employment in West- and East Germany
100
90
80
70
60
West Germany
50
40
East Germany
30
20
log scale
10
1989
1990
1991
1992
1993
Agricultural Employment mearured in work force units (Akh)
Source: Agrarbericht der Bundesregierung var. issues
21
1994
1995
1996
1997
1998