Yugoslavia - Agricultural prices and subsidies case study (Vol. 1 of 3)

AGP- 8 DISCUSSION DR AGP- 8 Vol. 1 This internal working paper is prepared for Staff Use Only. The views expressed are not necessarily those of the World- Ban] YUGOSLAVIA: AGRICULTURAL PRICES AND SUBSIDIES CASE STUDY (Volume I: Main Report) AGREP Division Working Paper No. 8 -r.'d by: ULG Consultants Ltd. in association with Economic Consultants Limited March 1977 C 0 NTENTS I. BACKGROUND A. AGRICULTURE IN THE ECONOMY I B. INSTITUTIONS I 1. Policy Making and Planning 2 2. Policy Implementation and Coordination 3 3. Research Education and Extension 5 4. Credit Agencies 6 5. Market Organisation II. STRUCTURE OF THE AGRICULTURAL SECTOR A. BROAD PERSPECTIVE 9 1. Social Sector 9 2. Private Sector 10 B. SOCIAL SECTOR ORGAN!SATION 10 1. Kombinats and State Farms 11 2. General Agricultural Cooperatives 11 3. Changes in the Social Sector Structure 1966-1975. 12 C. AGRICULTURAL PRODUCTION 14 1. Growth of Output 14 2. Regional Production Pattern 15 3. Production Characteristics of the Social Sector 16 4. Productior Characteristics of the Individual Sector 17 D. INTER-SECTORIAL RELATIONSHIPS 18 1. Rural Trading is 2. Supply of Services 19 3. Contracts for Joint Production 19 4. Other Relationships 20 5. Development of Cooperation 20 page III. AGRICULTURAL INCENTIVE SYSTEM AND COMPARATIVE ADVANTAGE A. THE INSTRUMENTS 22 1. Producer Prices 22 2. Input Prices 27 3. ImDort Duties & Quotas 28 4. Exoort Controls 28 5. Credit Rationing and Interest Rates 28 6. Incomes Policy 29 7. Rent Controls 32 8. Taxation 32 B. MEASUREMENT OF INCENTIVE COEFFICIENTS 34 1. Introduction 34 2. Data Base 34 3. Methodology 36 4. Summary of Incentive Coefficients incl. Tables 1-4. 37 C. MEASUREMENT OF COMPARATIVE ADVANTAGE COEFFICIENTS 42 1. Estimation of Shadow Prices 42 2. Estimation of Domestic Resource Cost Coefficients (DRC) Table 5. 45 D. INCENTIVE COEFFICIENTS AND COMPARATIVE ADVANTAGE OF NON-AGRICULTURAL INDUSTRIES 47 1. Development of Industry in Yugoslavia 47 2. History of Incentives for Industry since 1965. 48 3. Recent Measures of Short Term Protection 50 4. Estimation of Incentive Coefficients 50 5. Comparative Advantage Coefficients 54 E. CONSISTENCY OF INCENTIVE AND COMPARATIVE ADVANTAGE 5t 1. Introduction 56 2. Comparison with Policy Objectives 56 3. Comparison across Measures by Commodity 58 4. Comparison between Commodities 59 5. Comparison between the Individual and Social Agricultural Sectors 59 6. Comparison over Time 60 7. Comparison with the Manufacturing Sector 60 The Balassa Coefficients GRAPHS. Pal IV. PRODUCER AND CONSUMER SUBSIDIES AND "TRANSFER PAYMENTS" A. PURPOSE AND METHOL OF MEASUREMENT 62 B. WHEAT 63 1. Producer Subsidies 63 2. Consumer Subsidies 65 3. Government Cost 65 C. MAIZE 68 1. Producer Subsidies 68 2. Consumer Subsidies 68 3. Government Cost 68 D. BEEF 68 1. Producer Subsidies 68 2. Consumer Subsidies 73 3. Government Cost 73 E. PIG MEAT 73 1. Producer Subsidies 73 2. Consumer Subsidies 73 3. Government Cost 78 V. CONCLUSIONS A. METHODOLOGY so B. INCENTIVE AND COMPARATIVE ADVANTAGE COEFFICIENTS: RESULTS 81 C. PRODUCER AND CONSUMER SUBSIDY EQUIVALENTS 83 ANNEX I Tables ANNEX II Calculation of the Incentive and Comparative Advantage Coefficients for the Agricultural Sector ANNEX III Calculation of Manufacturing Industry Coefficients ANNEX IV Agricultural Prices and Subsidies in Yugoslavia. Report by the Institute for Agricultural Economics, Belgrade. Page 1 I. BACKGROUND A. AGRICULTURE IN THE ECONOMY Post war economic development of Yugoslavia has been characterised by a fast but uneven rate of growth, and by the changes in the structure of the economy caused by rapid industrialisation. Between 1956 and 1975 the annual growth rate of the whole economy was 7.1%, with industry achieving 9.3% and agriculture 3.5%. 1/ Within the agricultural sector the growth of the social sector was 10.4%, while that of the individual sector was 2.5%. The changes in the economic structure led to a decrease in the relative importance of primary production, but agriculture is still of major importance to the economy. In 1975 agriculture's share of the social product-V was 16% having declined from 24% in 1959-61. Between 19F3 and 1975-the agricultural population decreased from 61% to 33% . while in the same period the active agricultural population reduced from 60% to 38.5%. Agriculture's share of exports though declining is roughly 15-20%. B. INSTITUTIONS 3/ In seeking to implement its own form of socialist government, based on a labour managed economy, Yugoslavia has developed a unique set of institutional arrangements within which policies and plans are laid down and implemented. These institutions are structured to facilitate a high degree of participation at all levels of decision making, and to accomnodate the fullest possible freedom of action - and of interaction of six sovereign republics and two autonomous regions within a federal state. The framework is complicated by a continuing state of fluidity arising from experimentation with new arrangements, and adjustments toward increasingly less centralized control. 4 1/ Based on the index of growth of national income between 1956 and 1975. This was 369 in 1972 prices. 2/ Social product = national income and depreciation. 3/ bee Yugoslavia:Uevelopment with Decentralisation for detailed description of the institutional arrangements. 4/ See IBRD Economic Mermoranaum 19.8.1976 for details of the new constitution which seeks to consolidate the evolution of the socio-political framework towards increasea workers' self management and decentralisation and introduces the concept of delegated democracy. Page 2 1. Policy Makina and Planning In keeping with the principle of "government by assembly" the Federal Assembly is the highest organ of authority. It is bicameral, with a dominant Chamber of the Republics, through which all legislation must pass, and a number of specialist chambers devoted to internal -affairs, the economy, education, health and welfare, and socio-political matters respectively. All legislation must also be passed by one of these chambers. The assembly jointly elects a President from their number, and an Executive Council, which administers the laws and appoints all high officials. Responsible to this there is a series of secret&riats, commissions, institutes, and offices that together constitute the Federal Administration. Each of the six Republics and two Autonomous Pfovinces has a similar governmental system based on a bicameral Assembly. Recent reforms have increased the authority of these regional governments. At the local government level, each Commune has again a bicameral legislative body called a "people's committee", composed of a general council and a council of producers. At all three levels the general chamber is elected by universal suffrage, while the specialist chambers are composed of representatives of the autonomous institutions or "working organizations" involved in the day to day economic and social activity of the community, region, and country as a whole. Thus, at the Republic level, the Chamber of Agriculture (or in some cases, of Economy) is nade up of representatives of the kombinats, state farms and general cooperatives, together with nominees from various related institutions. Private sector smallholders are not represented except through their cooperatives. Each chamber has its own specialist committees and a staff, quite separate from the administrative secretariat. The functions of planning, coordination and implementation are divided between the political body (the Chamber) and the executive body (the Secretariat), but they work .in close cooperation. Page 3 Indicative planning is a central feature of the Yugoslav system. A great deal of time and effort goes into the formulation, modification and reconciliation of plans. The key operatives in this process are the Planning Institutes, at both Republic and Federal level, who provide the basic plan. This is discussed and amended in the Chambers of Agriculture (or Economy), by the organizations responsible for their eventual realization. At the Federal level the plans of all regions must be agreed and reconciled. Where there is disagreement, they can institute temporary arrangements. The plans of the Communes do not have to be reconciled with that of their Republic, nor need the operational plans of individual organizations fit those of the Commune. Each individual enterprise prepares its own plan, specifying its activities, production goals, investment and allocation of net income. This has to be approved by the Workers Council, the controlling representative body elected by the workers in the enterprise. Members of the Secretariat, the Chamber and the Commune may all seek to influence this plan. Since agricultural enterprises finance over two-thirds of their investment through credit, the banks have a strong voice in their planning. Nevertheless, operational decisinns are taken only by the Workers Council. 2. Policy Implementation and Coordination Responsibility for agricultural policy implementation lies primarily with the Republic Secretariats of Agriculture. They are responsible for framing legislation and, once it is passed, for its application. What is unique in the Yugoslav system is that this is not done on a self-implementation basis. All functions associated with policy implementation, including research and development training, data collection, quality control, animal health services, irrigation development, and market intervention, are hived off into autonomous self-governing organizations. The Secretariat retains only indirect control through the control of funds. Page 4 The implementation of production plans is carried out by social enterprises - sometimes by existing kombinats or cooperatives, in other cases by specially founded enterprises. These social sector enterprises, mainly the kombinats, have a virtual monopoly of the technicians and management skills essential to most modern production developments, and so provide the only effective medium for the implementation of production by policy decisions even thougt they possess only some 30 percent of the productive capacity of the agriculture sector. Overali coordination of policy within each Republic is primarily the role of the Chambers of Agriculture (or Economy). They are facilitated in this by the fact that all social enterprises, including kombinats, cooperatives, and the banks are all compulsoril members of the Chamber. At a local level the commune plays a similar role, particularly in reconciling the interests of the community and the enterprises. This extends from seeking finance for enterprise development, to pressinc for increased employment, and determining and regulating retail margins on basic farm produce. Since the communes and Republics provide funds for the Banks and can therefore influence credit availability, they have some influence over enterprise level policy and coordination, though the enterprises remain their own masters. For the economy as a whole the Federal Chamber of Economy and the Secretariat of Agriculture are the key coordinating bodies. The various comnittees of the Chamber include those devoted to the coordination of research and research finance, as well as of other functions. The Secretariat's main role is in the coordination of plans and of programs between the Republics. Page 5 3. Research, Education and Extension Since they are key factors in the development and modernization of agriculture, the organization of research, education and technical services is of particular importance to the institutional framework. a) Research and Development In Yugoslavia today there are some 50 independent research institutions concerned with specialized agricultural problems, and nine agricultural and veterinary facilities universities. Such institutes are funded through Republic (previously Federal) and commune funds, but may also receive payments for work done on a contract basis. The management of scientific institutes is similar to that of the kombinats. In those with more than 30 members the workers council decides all matters relating to management. Below that an institute council is responsible for control of funds, programs and association schemes. A separate scientific council drafts research programs, selects staff and generally governs scientific work. Information is effectively transferred from these institutes, and from other scientific sources, to the social sector by means of their own scientific staff. These are usually located in small research units within the enterprises, and operate as autonomous economic units. As there is no extension service the individual sector can get technical assistance only by cooperating with the larger kombinats or cooperatives. These have special units promoting and organizing cooperation between the individual and social sectors in the production and marketing of both crops and livestock. Husbandry and management advice are important components of this cooperation (see II C.) There are 18 Veterinary institutions, with some 700 field stations or service points through which veterinary facilities are made available to all farmers. Page 6 b) Education and Training The development of a managerial group hai been facilitated through the agriculture and veterinary faculties at the universities. These have a broad coverage of all aspects of agricultural science, including economics and fanii management, and produce some 700 graduates each year. In addition they have post-graduate courses leading to higher degrees. Some 50 percent of graduates go to the Kombinats, the rest mainly to government administration and, usually after further training, to research institutes. The faculties also provide one and two year courses for agricultural workers. Most training of farm workers, however, is undertaken at some 200 educational centres set up for that purpose. In some locations, these are part of a kobinat, or a special department of a university. Others are independent and have grown into large multi-purpose educational centres. Given the emphasis on worker participation in management, the creation of general management skills is of great importance. Many short courses are run both within enterprises and the educational centres, and in addition there are programmes of in-service training for both technicians and workers in super- visory jobs. 4. Credit Agencies Credit is made available to social sector organisations through the banking system. This comprised 111 banks in 1966, although the number had declined to 64 by 1970 as a result of mergers. However, ever. in 1968 the 10 largest dominated the scene and provided nearly 60' of short term credits and almost all investment credits. Since 1966 the banking system has played a crucial role in the mobilization of savings and in their allocation. See Yugoslavia Development with Decentralization IBRD for detaited descripticn of the development of the banking system. Page 7 With no equity capital market and considerable pressure on organization through the self management syst:m to distribute income as wages bank credits are a major source of investment funds. Interest rates have always been low reflecting the power of the founder members who are often the major borrowers and in recent years negative in real term due to the high levels of inflation. Although interest rates were limited by law until 1971, there has been a modest increase since then and a gentleman's agreement keeps the rates offered and charged by the different banks at a similar level. Interest on bank credits was 8.0% during the period 1966-71 and has been about 12.D. since then. Lending to agriculture has been subsidized from Republic funds by approximately 50%. The quantity of credit available to the individual sector is limited but increasing. In the past most was provided through the general cooperatives and these amounts have been increasing. Some further credit comes via the kombinats through their cooperative units. Also individual farmers like the social sector enterprises can obtain finance from enterprises which sell farm inputs. 5. Market Organization The division between the individual and social sectors is reflected in the market organization with (i) an 'organized" social market with 'authorized purchases and sales" of social enterprises, and (ii) an *informal" private market based on peasant market places. The value of *authorized purchases" amounts to 46 percent of total agricultural production. The rest Is either sold on local markets or consumed by the farming population. The share of the market production differs with the region and product (see Tables 11-11,12 & 13 The share of the market production of total production is smallest in the less developed regions of Kosovo and Montenegro, while it is highest in Slovenia. The share of the "organized" market production of total production is the highest for industrial crops like tobacco, sugar beet and sunflower, where it reaches 70-80 percent, while it is below 10 per cent for vegetable production. *See Annex I. Page 8 The organization of the social market is schematically described in Chart 1. The organized social market is becoming increasingly integrated. The integration process has not been initiated only by the enterprises producing agricultural goods or processing them, but also by the large trade organizations. Many of the big trade enterprises, which have long specialized in domestic or foreign trade, have their own processing plants, and their own cooperative units with direct connections to the private sector. Many of these enterprises control production from the farm to the retail shop. However, a wholesale market still exists, since not all enterprises are fully integrated. There is little connection between the two markets, but some of the non-integrated trade organizations or processing units buy directly from private farmers or from local peasant markets, and some of the big kombinats sell directly on local markets in larger towns. The share of the market production which is sold via individual channels is difficult to estimate. Hoever, the danger of monopolistic control by single enterprises arises with the continuation of the integration process. The effective control of retail prices becomes an important issue under these circumstances. The communities have established some control of retail prices, with the support of the Institute of Prices. They set maximum limits to the retail margins for the main products (meat, oil, milk) allowing for transportation costs and reasonable trade margins. The corresponding retail prices are published and controlled by local Communes. The Federal Food Reserve Board is responsible for securing regular supplies of food to the population. To this effect the Food Reserve Board intervenes in the domestic market and engages in foreign trade, through the import/export enterprises. The Board imports grains, vegetable oil and sugar and sells these commodities at fixed prices. The Board also purchases directly or indirectly through the social sector wheat, maize and fatstock at the guaranteed prices wheh market prices move below these levels. Page 9 The implementation of the minimum prices of sugar beet, sunflower seed and milk is taken care of by the industr itself. Special funds for the stabilization of export prices have been established for beef, wine, maize, fish and tobacco. The beef fund has been the most active. These funds are self managed organizations founded by the export and trade enterprises in order to provide common Yugoslavian representation in foreign markets, and to make a contribution to the stabilization of prices on domestic markets. They are financed partly from the skimming of import margins, and from skimmed off export profits and by contributions from members. The members may have part of the export subsidy, which is paid under certain circumstances with the fund. II. STRUCTURE OF THE AGRICULTURAL SECTOR A. BROAD .PERSPECTIVE One of the important characteristic features of Yugoslav agriculture is the separate existence of two sectors, social .and private, with different farn structures. 1. Social Sector The social sector has its origin in the post war collectivization policy and received further impetus by the agrarian reform of 1953, which limited the size of individual holdings to ten hectares of cultivable land and twenty*five hectares of forest land, and brought 276,000 hectares of additional land under the social sector. Since then the land resources of the social sector have been further increased due to reclamation, purchase and lease from private holders. In 1975 the social sector held 30% of total farn land (of which half was arable),employed 3.81 of total agricultural manpower, produced 30t of the agricultural product and 46% of the authorized purchase. 1/ Its annual growth rate in the period 1970-75 was 6.1% 1/ Market production except that sold on the peasant market. Page 10 Private Sector The private sector consists of 2.6 million individual holdings, on which 4.0 million persons did active work in 1975. Approximately 30 percent of the holdings held five hectares of land or more, covering nearly 60 percent of the total farm land of the private sector. Some 40 percent of the holdings occupied three hectares or less, covering 17 percent of the total farm land in the private sector. The private sector contributed 51.5 million dinars to the social product in 1975 and 20.2 million dinars to the market production which was not sold directly on local markets. The private sector employs at present 96 percent of the total agricultural population and supports about 50 percent of the total population of Yugoslavia (without considering off-farm work). It produced ) percent of the agricultural share of the social product and 54 percent of the authorized purchases. The Agrarian Law, which limits the maximum size of individual holdings to 10 hectares of farm land and 25 hectares of woodland, does not apply to the mountainous regions, where no size limit is imposed on private farms. The number of persons that may be employed on a wage basis by individual farmers is also legally restricted, to a maximum of two persons. There is also a limit of three hectares on the size of holding that may be held by an absentee owner. Though renting and leasing within the private sector is not restricted, it is rare. The farm size structure has remained widely unchanged for the country as a whole. The essential structural changes occurred with respect tc labour inputs, which can be seen from the structure of labour income. While in 1960 69 percent of the total income of the private sector came from agriculture, this share decreased to 50 percent in 1975. SOCIAL SECTOR ORGANISATION The social sector is made up a spectrum of working organizations, or enterprises, which heve many similarities but different origins. They include (i) agro-industrial "kombinats" (integrated factory farms), (ii) the agricultural cooperatives,(iii) various general agricultural institutions (limited number and scale, including schools and institutes). All these organizations operate under the same principles - of self- management and the workers division of net income - and have the same Page 11 status in the economy as other enterprises. 1. Kombinats and State Farms The organization of the kombinats and the state farms corresponds to the organization of social enterprises in other sectors. Each enterprise is subdivided into a limited number of economic units. The economic units are semi-autonomous organizations with their own self-administrative bodies and with separate accounts. While the state farms are restricted to the production of crops or livestock products as a rule, the enterprises of the kombinats form a chain which -connects production of crops, vegetables, fruits and livestock products with processing industries and in some cases with retail shops. During recent years many kombinats have established cooperative units either by assimilation of existing cooperatives or by formation of new units, in order to link part of the production of individual farms to their processing industry. The number and variety of economic units in the existing kombinats has increased during the concentration process which has been going on in the social sector for several years (see changes in social sector structure 1966-1975). The economic units have their own workers council and director, and may or may not be subdivided in working groups. The workers council is substituted by a cooperative council in the cooperative units, in which cooperating peasantsand members of the cooperative unit are represented. Objectives and activities of the economic units must be coordinated by the central workers council - to which delegates of all economic units are elected. 2. General Agricultural Cooperatives The general cooperatives, though not following the Soviet type of cooperative, do not correspond to the traditional western type eitner. They are social agricultural organizations, which provide services to individual farmers, while in a growing number of cases, mintaining and expanding their own agricultural production. Page 12 The members of the cooperatives can be classified into two categories: a) members, who work in the various services of the organization (marketing, extension, industrial and field operations) and on the farm of the cooperative, if one exists; and b) individual farmers, who become members by accepting the rules of the cooperative and engaging in a certain minimum of cooperation. The two categories of members have the same rights in the bodies of the cooperative. They are members of the assembly and may be elected to the *council of cooperators" and to the "management committee". The proportion of the members of both categories on these boards is fixed by the constitution and varies with the structure of the activities of the cooperative. The more important is the cooperative 's own production the smaller the proportion of cooperants in the cooperative council. This council has similar functions to the workers council in the kombinats and state farms. 3. Changes in Social Sector Structure 1966-1975 The number of units in the social sector has decreased by about 42 percent since 1965 and by 72 percent since 1960. The average size has increased with nearly 70 percent of kombinats now exceeding 5000 ha. The agricultural cooperatives are smaller and only 16% exceed 5000 ha. In terms of regional distribution the majority of the large units are in low land areas of Voyvodina and Slovenia. The decrease in the number of holdings is the result of concentration. This occurs in three ways: (i) the merging of kombinats, (ii) the merging of cooperatives, and (iii) the integration of cooperatives into kombinats. The integration of cooperatives into kombinats has been the most important component , especially between 1970 and 1974 when the number of kombinats increased from 270 to 486 while the number of Page 13 cooperatives declined from 1102 to 813.The cultivable area in all Kombinats incrcased by 35%, while that of the cooperatives declined by 53. percent. The structure and size of the "average" enterprise in the social sector changed considerably during the concentration process. Most of the enterprises which have disappeared from the statistics have not been dissolved but have been integrated in other enterprises as semi-autonomous economic units. Average size per enterprise increased from 910 hectares to 1518 hectares between 1965 and 1974. The structure of kombinats and cooperatives has become increasingly similar during the process described. The present difference is a matter of degree rather than one of principle, and can be seen clearly if one looks at the extremes. On one hand there remain about 10 percent of the cooperatives in the original form, without their own production unit, and concentrating on trade in agricultural supplies and produce in cooperation with private farmers. On the other hand there exist kombinats in which organized cooperation with the private sector does not exist. However, the "average" kombinat is distinguished from the "average cooperative" only by the volume of its own operations relative to the volume of production in organized cooperation with the private sector, and (resulting from that) in the representation of the individual farmer in the self- management system of the enterprise. Individual farmers have lost representation in the social sector during the concentration process since representation decreases with the increase in the volume of the "cooperative" production. The total number of workers has declined by 19% since 1967 while the number of permanent workers has fallen by 14% (see Table 11-4). However, the numbers of agronomists, technicians and economists have all increased. Some 11 permanent workers were employed to one worker with a university or high school degree in 1975, compared with 17 in 1967, thus reflecting the increasing level of intellectual input being applied to the social sector. Page 14 C. AGRICULTURAL PRDUCTION 1. Growth of Output a) Croo Production The highly variable development of crop production over the last ten years is shown in Table 11-6. Total production has increased 8 percent between 1966/67 and 1974/75. Cereals are by far the most important crop although their total area has declined somewhat. Yields per hectare for major crops are shown in Table II-15.The increases have occurred predominantly in the social sector, in response to increased use of fertilizer, im.prcved varieties and generally improved technology., The ldgher maize yields in both sector have been associated with the use of hybrid seed. Yields of industrial crops have also increased significantly. The area devoted to crops also fluctuates significantly from year to year. b) Livestock Production The relatively more stable output trend for livestock products is shown in Table 11-7. The fluctuations in output that have occurred are the result of both weather conditions, affecting feed availability and a response to market conditions. Beef production expanded steadily until adverse export market conditions caused declines in 1969 and 1970. Little change occurred in 1971-1973 but production increased again in 1974-1975. The use of improved breeding stock and of artificial insemination have improved the quality of meat and the productivity of cattle. Generally, the quality of livestock products is well suited to export markets. Pork production has also expanded, subject to short cycles related to market conditions. There has also been a marked expansion in the output of poultry meat and eggs. The size of the sheep flock is falling and the output of wool is declining accordingly. Page 15 2. Regional Production Pattern In traoitional Luropean style, mixed cereal croppinq and animal husbandry have been and remain the basic lines of production in all parts of Yugoslavia. Accordingly, it is impossible to make a clear-cut division of the country along single production lines but, if specialty crops or special branches of animal husbandry are superimposed on the general production basis, the various parts of the country can be more or less characterized. The division can be made, first, into the three basic geographic areas, (i) the Pannonian Plain, with a relatively well-developed system of agriculture and an often intensive animal husbandry; (ii) the mountainous areas, including the area of the Dinaric System and Macedonia, with a generally less developed agricultural production, though with some fruits and vines, and with extensive forms of animal husbandry; and (iii) the coastal strip, depending greatly on specialty crops including vines, olives and tobacco. The production pattern of major crops in each region, summarized in Table 11-8 shows the dominant place of Voyvodina - which is the largest single producer of wheat, barley, maize, sugar beet ana sunflower. When Croatia, Voyvodina and Serbia proper are considered together, the overall importance of the Pannonian Plain in the agriculture of the country becomes obvious. Together they accounted for 80 percent of all wheat production and 87 percent of maize output in 1975. Certain regions also dominate in the production of other crops, such as Bosnia - Herzegovina and Croatia in flax, Slovenia in hops and Macedonia in cotton and tobacco. In each case the dominance reflects a particular climatic advantage. On the other hand, no region is dependent on a single crop, though cereals are by far the major crops in Voyvodina, and Montenegro is clearly a livestock-based farm economy. Page 16 A second division can be made in terms of the degree of market participation of the traditional, or private sectur farms. There are two main areas: (i) the area north of the Sava-Danube line, in which agriculture has always been more market-orientated and sells a larger proportion than other areas, and (ii) areas south of these rivers, where agriculture in general is more of a subsistence character. The distribution of livestock production reflects the availability of fodder supplies and of adjacent markets. Serbia is the dominant producer of beef, pork and mutton, and the second to Croatia in production of eggs and milk. Croatia is also the second largest producer of beef and pork. Macedonia is second to Serbia in mutton output, though Bosnia Herzegovina is a larger wool producer, as well as being a major producer of beef. Two important features of the regional production pattern are: (i) the relative lack of present production capacity in Montenegro, Kosovo, and to some degree Macedonia, reflecting their general "under-development"; and (ii) the extent to which cereal production is located in one part of the country, a fact which - because of the climate of that area and the key role of cereals in the farm economy - helps to explain much of the year to year fluctuation in overall farm output. These fluctuations not only interfere with trade, but are sufficient to necessitate sizeable imports of farm produce in some years. 3. Production Characteristics of the social sector Data for the period 1966-75 shows the importance of cereals in the cropping pattern. Of the area sown cereals accounted for 67% in 1966 and 74% of a larger area in 1974. While industrial crops and vegetables maintained their position in percentage terms at around 17 and 1.6 respectively, the area sown to forage crops decreased from 14.5 percent to 7.9 percent. This is consistent with an improved stocking rate and/or an increased use of concentrate feeds since total cattle numbers have increased averaging 405,000 in 1971-75 compared to 367,000 in 1966-70. Page 17 A significant development over the last ten years has been the large increases in crop yields referred to above. Beef production per cow increased slightly during the last five years reflecting a change to higher output breeds while pig production per sow declined between 1971-1973 before increasing in 1974 and 1975. The social sector produces the majority of the marketed production of the major crops (50 - 70 percent) as Table 11-11 shows while providing 20-40 percent of the major marketed livestock products. Fertilizer consumption has increased in the last ten years. When calculated in terms of active material it has risen from 472,500 tons in 1964-66 to 698,800 tons in 1972-74. During the last ten years the number of tractors and combines has declined as low h.p. machines were replaced with higher h.p. ones. 4. Production Characteristics of the Individual Sector Lcta from small holoings shows that the majority, 76 percent, are mixed farms with 11 percent of predominantly livestock farms and the remainder specialising in various types of crop production. Arable land accounts for around 80 percent of total area and has remained unchanged during the last 10 years. Maize and wheat are the most important crops occupying over 70 percent of the annually cultivated land (Table 11-14 * ) although the proportions have declined from 45 percent and 27 percent in 1966 to 41 percent and 24 percent respectively in 1974. Forage production meanwhile has increased from 10 percent to 17 percent. Yields have increased during the last ten years (Table 11-15 *) although they are still considerably lower than those in the social sector. 1/ obtained from the annual survey of 12,000 farmers in Serbia. Annex I Page 18 Although there has been a major advance in the adoption of mechanisation and technology during the last ten years it still cannot be compared to the level found in the majority of West European countries. About 62 percent of the holdings possess ploughs, 4 percen grain drills, 54 percent horse driven vehicles, 11 percent tractors, ana 7 percent electro-motors. Fertilizer consumption per hectare of arable land amounted to 261 kg in 1966, 305 kg in 1970 and 327 kg in 1974. Over 65 percent of the holdings purchase seeds and planting material. Data from-the individual sector indicates that in spite of the large available productive capacity it does not yet realise its full production potential. D. INTER-SECTORIAL RELATIONSHIPS Co-operation between the individual and social sectors constitutes a basic characteristic of the development of Yugoslav agriculture. Cooperation provides a means for the non-compulsory entry of private property into the social sector on a voluntary and gradual basis, so enabling modern technology to be introduced. This aspect of Yugoslavia agriculture is specifically supported by the agricultural and economic policy of the government. Cooperation between the social and private sector takes many forms, though the most important are in trading in both inputs and produce, supplying services, and contracting joint production. 4. Rural Trading The agricultural social sector enjoys practically a trade monopoly in agricultural goods in most regions, except in Macedonia, though other trade organizations have the theoretical right to deal directly with individual farmers. The share of the cooperatives in the total trade in agricultural goods is about 75 percent at present, although it differs between regions. Page 19 2. Supply of Services Some social enterprises supply a service, or a group df services, such as cultivating and harvesting cropsand/or seed and fertilizer. These services may be paid for in cash, but in most cases the farmers are granted a credit which has to be repaid together with the interest charged at the time the corresponding product is marketed. The farmer is generally free to decide on the production technique in this form of cooperation. But in some cases the social enterprises seek to obtain minimum agro-technical standards, and will supervise production. 3. Contracts for Joint Production In these tne social enterprises generally supply (i) services for the heavy work like cultivating and harvesting; (ii) current inputs, like fertilizer, seed and feed, or that part of the neeced feed input whicn cannot be produced on the farm; (iii) breeding or fattening livestock; and (iv) extension service and credit for the construction of new buildings or the transformation of existing buildings. Farmers supply labour, land, buildings and in some cases, but not in all, part of the feed input. The social enterprises determine the production technique. Financial arrangements vary widely with the type of production and the special attitudes of both farms and enterprises in given cases. At the one extreme, all inputs - except buildings, but including breeding stock remain the property of the social enterprise. The farmer gets a margin for his labout input and supply of buildings, which is fixed by the contract. These contracts are applied frequently for fattening pigs or calves or broilers. At the other extreme the farmer buys all the inputs including breeding stock, usually on a credit basis. The social enterprise guarantees only the market, usually at current prices. These contracts are applied frequently in dairying, production of livestock for subsequent fattening and in crop production. The technical advice required is provided free of charge. Credit conditions are characterized by low interest rates and short repayment periods. Subsidies on interest rates, which so far have been granted by the central government are transferred to farmers, who pay an interest rate of about half the usual rate i.e. currently 6 percent As a rule credit for current means Page 20 of production (fertilizer, seed, fodder and frequently breeding stock) is given for the full length of the production period. Credit for buildings has to be repaid in two to five years varying with the social organization granting the credits who in turn has obtained the money from the banks. 4. Other Relationships There exist various other arrangements besides cooperation, in the narrow2r sense of the word, between social and private holdings. Taking land on lease from the private sector is one of the most important measures by which the social sector has increased its cultivated area in recent years. Also small famers may join the social enterprise, keeping their own land apart, however, or work in the social holdings on a seasonal basis. 5. Development of Cooperation The development of cooperation between the sectors during the 1970's is illustrated by tables II 21-24. These show that 1. Overall there has been some increase in the quantities of inputs supplied. 2. There has been a reduction in the number of farmers using social sector machinery for cultivations, harvesting and spraying. This reflects the increasing mechanisation of the individual sector. 3. There has been a considerable reduction in the area grown and quantity of cereals harvested by individual farmers under contract to the social sector. However cooperators obtained higher yields than those achieved by the average individual farmer. 4. The area of sugar beet grown by cooperators has declined slightly but with higher yields the total tonnage harvested has increased. 5. The total number of cooperators in livestock production has fluctuated but the number in 1975 was similar to that in 1970. However the numbers of cattle, pigs and poultry produced have increased considerably. Sheep numbers have declined very substantially. Currently the objective is to further develop cooperation through joint participation in production between the two sectors in which the profits and/or losses are shared. This aspect of cooperation has been developed in recent years as it was felt necessary to create a closer link between the two sectors. The "associated" holdings as they are called are practically Page 21 equal to the social sector in all aspects, and participate in the decision making process. However, this type of coope-ation is still evolving, and needs time to develop its potential for increased production. Page 22 IIl. AGRICULTURAL INCENTIVE SYSTEM AND COMPARATIVE ADVANTAGE A. THE INSTRUMENTS. 1. Producer Prices Around 1957 a system comprising guaranteed prices for field crops and livestock products and minimum prices for certain industrial crops and milk was introduced (see also IB 5). This system though modified is still in force and the products covered are similar to those originally included. During 1973 to 1976 guaranteed prices were in effect for wheat, maize, rice, livestock, broilers, potatDes, dried prunes, plums for drying, wool, cotton and hemp, while minimum purchasing prices were applied to sunflower seed, soya beans, sugar beet, tobacco and milk. Details of the guaranteed and minimum prices in these years are shown in Table III-I and compared with the average realised farm gate prices for 1973 to 1975. For products covered by guaranteed prices the Federal Directorate for Food Reserves undertakes to purchase at the guaranteed price all quantities offered for sale. As long as the market price remains above the guaranteed price there is no intervention. The Directorate also endeavours to prevent prices rising more than 10 percent above the guaranteed level by arranging imports. This has not always been successful. Processors have to pay at least the minimum prices to agricultural producers for those commodities covered by minimum price arrangements although these are not guaranteed by government. Until 1971 these price supports applied only to products from the social sector and from individuals co-operating with the social sector. Since 1971 the minimum prices have applied to all production, but where as the prices of wheat and maize are guaranteed for both sectors alike the other guaranteed prices still only apply to social sector production and that produced by individual farmers Page 23 in co-operation with the social sector, i.e. contracted production. However in 1975 the government introduced minimum purchase prices for non contracted cattle and lamb production. These prices which were set at the same level as the guaranteed prices are intended to protect producers when they sell to traders or slaughterhouses. Prior to the economic reforms of 1965, prices paid to agricultural producers were depressed, partly because of the cheap food policy for salaried workers. The social sector was compensated to some extent for the uneconomic prices with premiums paid on basic products such as wheat, fatstock, milk and cotton. Further subsidies were granted on most purchased inputs and cheap credit was available. These aids were not available to the individual sector, however those who had concluded joint production contracts with the general co-operatives could purchase agricultural inputs on credit. a) Development of Prices At the time of the economic reform of 1965 guaranteed and minimum prices of agricultural products were raised by 42 percent compared to 15 percent in industry, one uf the major objectives being to enable agriculture to obtain its income from market sales. The price increases were different, depending on the products, to guide production. The prices of wheat, sunflower seed, sugar beet and potatoes, all products in short supply, went up more than the price of maize which is an important cost item for livestock farmers. Prices of animal products too were raised by 35 percent in 1965 and again by 26 percent in 1966. At the same time most price premiums and subsidies were abolished. The movement of the average farm gate prices between 1966 and 1975 inclusive of premiums for both the social and individual (private) sectors is shown in Table III 2. This table shows: i) Average farm gate prices were higher in the social sector than in the individual sector. This reflects differences in quality, ineligibility for premiums of some private sector production and higher handling and transport costs associated Page 24 with the small scale production of the private sector. ii) Prices of crop products increased little between 1966 and 1970 but major increases occurred in 1971 and 1974 (up to 50 percent). iii) Cattle prices declined between 1966 and 1968 and then increased reaching a maximum in 1973 of between 2 to 3 times the 1968 level before declining in 1975 to around 90 percent of the peak level. iv) Pig prices increased in a similar way to cattle but have continued to rise since 1973. v) Milk and egg prices increased little up to 1970 but by 1975 were 2-3 times the 1969-70 levels. b) Price Determination Since 1965 the basis for price determination for crops, livestock and livestock products has been the cost of production. Guaranteed prices are usually revised each year by the Federal Government in a laborious process during which the proposals of the Secretariats of Agriculture of the Republics supported by calculation and findings of research institutes, pass through the Executive Council, the Inter-republic Council on Prices and the Federal Assembly. An increase of S.percent in the material costs initiates discussions between the Republics and the Federal Government on the need for higher prices. Prices for the coming year should be announced at the start of the economic year in June for wheat, and in November for all other crops, livestock and livestock products. However, with the complex procedure being followed in determining future prices their announcement is sometimes delayed. Guaranteed Drices are Page 25 the same throughout the Federation with only small variations due to differing transport costs and storage incentives. Minimum prices without guarantee of the government are prescribed mainly for those agricultural products which need processing and cannot be guaranteed by an undertaking to purchase surplus output at minimum prices. Minimum factory prices and purchase levels are fixed in negotiations between agricultural producers, traders and processors at meetings presided over by the Chamber of Economy. c) Responsibility for guaranteed prices In the period under discussion prices have been guaranteed by the Federal Government, but in future it is proposed to reduce the number of products so guaranteed, with the Republics assuming the major responsibility for guaranteed prices. The Communes also have responsibility for prices and have powers to fix retail prices and compensate producers, and/or retailers if necessary. d) Premiums Although the reform of 1965 abolished a complex system of price premiums for the social sector combined with input subsidisation subsequent events have resulted in their reintroduction. Four types of assistance are currently provided:- a) Commercial premiums b) Development premiums c) Compensation payments d) Input subsidies. i) Commercial Premiums These were originally introduced some 15-20 years ago with the objective of increasing the consumption of meat and milk, depressed by low consumer incomes and high production costs, and raising producer incomes through higher levels of producti Page 26 made possible by higher consumption. The premiums which are the same throughout the Federation are paid by the first purchaser and repaid by government. In the past these premiums were funded from the Federal budget with some participation by the Republics, but are now mostly paid out of the budgets of the Republics and Provinces. All social sector production plus that from the private sector marketed through the social sector is eligible for the premiums. Products attracting premiums may vary from year to year and premiums for meat and milk were reintroduced in 1975. The rates payable in 1975 were as follows:- wheat T.3 0.4 quantities delivered to Federal Directorate for Food Reserves Fattened calves & Only for contracted numbers Young delivered between April 1st and cattle LW 3.00 December 31st 1975. Lambs 2.00 Milk 0.39 Delivered April 1st - December 31st both sectors. * This was paid by the Federal Government. In addition the Republics and Provinces paid a uniform premium of 0.30 Dinars/Litre. ii) Development premiums Under the "Green Plan" development premiums were introduced in 1973 for those products which have a development priority namely wheat, sugar beet, sunflower seed and milk. Developmen premiums are paid only to the social sector and must be used for further investment in agriculture only i.e. not for wages, bonuses etc. These premiums are paid by the Federal Governmen out of a fund to which the Republics and Provinces contribute. Since 1975 soya beans have been added to the list of products receiving development premiums. The premiums payable were as Page 27 follows: ND/Kg wheat 0.10 sugar beet 0.03 sunflower seed 0.20 Milk 0.25 Soya beans 1.55 iii) Compensation Payments Compensation payments were approved in 1975 to certain food processors who were caught in the squeeze between the higher support prices to producers and the controlled retail food prices. Although the guaranteed price of wheat for the 1975 harvest was increased the retail price of wheat flour remained unchanged. The Government compensated the mills for the increased cost of grain. Similarly payments to the meat packing industry were made in 1975. The compensation payments were as follows: ND/Kg wheat 0.30 beef 3.15 pork 3.95 mutton 3.20 poultry 2.40 2. Input Prices Agricultural input prices were largely free of controls although the pr of cereals used as feed and seed inputs is influenced by the guaranteed prices and maize prices have tended to be depressed to the benefit of livestock producers. Prior to 1965 there was a complex system of input subsidisation. This covered fertiliser, machinery, fuel feeding stuffs and breeding Page 28 livestock, but mainly benefited the social sector. The 1965 economi reform abolished all these subsidies except for that for fertiliser. The subsidy which is paid to the fertiliser manufacturers averages approximately 20 percent of the gross cost and is paid on the total production. 3. Import Duties and Quotas Trade in agricultural products is kept under global control by the Government. Normally customs duties are not much of an obstacle: products such as grains, oil seeds, livestock for breeding enter dut, free or are subject to low rates of duty. Seasonal surcharges may, however, be imposed on products such as fruit and vegetables. In addition, all imports have been subject since 1968 to "customs evide and "equalisation" taxes; and in July 1970 a further import surtax introduced, though some farm products are exempt or subject to a low "priority" rate (the import duties and taxes on the products of main concern here are given in Table 111-4 of Annex 1). The Federal Directorate for Food Reserves aims at stabilising supply and demand of basic food stuffs on the home market. The Directorate presents a commodity budget to the Federal Government for approval, whereupon foreign exchange is allocated for importing the products concerned. 4. Export Controls In order to safeguard domestic supplies, the authorities may impose on exports of sensitive products and have done so in the case of mai sunflower seed and to some extent meat. 5. Credit Rationing and Interest Rates Government funds remain an important source of investment loans and grants for projects to which the Government has committed itself. Short term credit covering a substantial portion of their working capital is available to the social enterprises from the commercial banks. To take account of the special requirements of agriculture, some concessions are made concerning longer repayment periods and interest rates are subsidized as described in Section I.B.41/ Soci enterprises are also able to borrow money to supply cooperating individual sector farmers with inputs on credit terms. The majority 1/ The Institute of Agricultural Economics has recently completed a report on interest rates in the agricultural sector for IBRD. Page 29 of the individual sector farmers however have very limited access to credit. 6. Incomes Policy Under the "self management" system, workers in social sector enterprises do not, in theory, receive wages as a price for their labour. Instead, the allocation of each enterprise's income (net value added) between personal incomes and capital accumulation, and the distribution of personal incomes, are decided by the workers themselves. However, in 1972 an incomes policy was introduced which somewhat restricted enterprises' freedom of decision. The-aims were to limit the amount of enterprise income which could be distributed in personal earnings (and so encourage enterprise savings); and to reduce personal income differentials both between enterprises and between skill-categories in the social sector as a whole. No general maxima were set for pay increases. Very broadly, enterprises with above-average net value added per worker could pay out above-average personal incomes. The policy did little directly to restrain price inflation; it may have encouraged enterprises to raise prices in order to increase the income available for distribution. In April 1975 a new incomes policy was introduced with a different emphasis. It no longer specified formulae for the distribution of incomes. The main objective was to limit the growth of personal incomes to the average rate of increase of labour productivity in each republic. Enterprises with above-average productivity growth and/or operating under particularly favourable conditions were required to allocate a higher proportion of income to reserves, investment and "collective consumption". However, no overall quantitative targets for personal income increases are stipulated in the policy. Personal income adjustments are negotiated every 1/ See Yugoslavia: Development with Decentralisation and Yugoslavia:Preliminary Estimates of Country Parameters for Economic Analysis of Projects by Martin Schrenk and Shu-Chin Yang, 1975 for a detailed description. Page 30 six months to compensate for price increases. The policy was amended in 1976 to require that only past price increases and enterprise performance should be taken into account in determining personal income rises*. Under the new Constitution of 1974, a new law on incomes policy has been agreed by the Federal and Republic governments; the English translation of the law is to be published in the spring of 1977. The revised income policies, in combination with other measures, appear to have had some success in "breaking the wage-price spi-ral". However, they are of only little direct relevance for this study. They do not apply to the private sector, in which much of Yugoslav agriculture falls. In the social sector, incomes policies have not discriminated between agriculture and other industries. It may be suggested that the restrictions on income allocation by enterprises would have caused the cost of labour to have been below its "natural" level in relation to value added, and so led to an underestimation of the domestic resource cost coefficients. Any such "distortion" would affect the whole social sector, so that the apparent "return to capital" and hence the opportunity cost of capital would be correspondingly increased; in theory, any underestimate of the resource cost of labour in the industries under study should therefore be approximately offset by an overestimate of the cost of capital. In fact, our estimate of the opportunity cost of capital (discussed in section III.C below) does not reflect effects of recent years' incomes policies, owing to the lack of sufficiently reliable data. However, there is no evidence that incomes policies have significantly distorted labour's share of value added (the average return to capital appears, for example, to have declined in recent years). No allowance for distortions, if any, due to incomes policy have been made in our calculations. The 1975 and 1976 policy changes are described in the OECD Economic Report on Yugoslavia, April 1976. Page 31 farmer in advance of the start of the production sequence. In the period 1966-1970 a proportion of the cadastral contribution was received by the Federal Government, the Republic and the Commune, but from 1971 the Federal "contribution" of about six percent of the total has been dropped, and the other shares increased. Under the laws, the Republics may determine proportional or progressive rates. In practice all Republics have prescribed proportional rates (around 9-10 percent in 1975). However, individual communes may vary their procedure, and some 25 percent apply a progressive rate. Moreover the commune may apply different rates in different areas depending on production structure, nearness to market and other factors. There is also provision for various kinds of relief, such as to very small subsistence farms, and land leased to social farms. Farmers are liable to a variety of other taxes including a tax on income from property (including the rental value of owner occupation) based on the annual rental value of dwellings, buildings, or working areas. These revenues are usually kept within the commune. Apart from the foregoing, there is in most areas a local free contribution - a form of self-taxation, usually established on a basis agreed at village level, contributed toward local improvement projects such as schools, community centres, health clinics, roads etc. Members of farm households pay contributions from outside earnings as well as on those from secondary agricultural activities, such as winemaking, distilling, poultry dressing and fruit preserving. Fixed payments are also made for services and utilities, health insurance, water rates, and a tax on road vehicles. Paae 3Z 7. Rent Controls The price paid by farmers renting land from each other or by the social sector renting land from the individual sector and vice versa are free of controls. However, little land is rented in the individual sector, but the social sector does rent some land from the private sector (see Section II.D). 8. Taxation The two main forms of taxation in Yugoslavia are (i) income tax and various contributions from the gross income of each individual and social enterprise (ii) turnover tax from which agricultural products are exempted. In the accounting process of the enterprises these payments are collectively referred to as the "social share". Individual farmers pay a "contribution" based on the cadastral value of their land, as well as other taxes. a) Private Sector Taxes and Contributions. The basic tax obligation of the individual farm households is the "contribution". This is paid by any owner of agricultural land, according to the "cadastral value". This valuation is made in terms of the estimated productivity of the land based on average yields over five years from a given crop and livestock combination. This is determined for each cadastral district according to the main crop and livestock activities and is revised periodically although the last revision covering the whole Federation was in 1964. Each Republic applies its own rules in establishing yields, production costs and prices that are used in arriving at cadastral income. The contribution to be paid is expressed as a percentage of the cadastral value which should equal the average income in that district. This is determined for each five year plan period, but can be varied annually. However, it is fixed at the beginning of each year, so that the oblioation to be met is known by each Page 33 Though the tax system is complex, and in some respects the taxes difficult to assess, the total proportion of farm income taken in taxes is not high. b) Social Sector Social agricultural enterprises pay taxes on the same basis as industrial enterprises with the one exception that turnover tax is not paid. However, because social farm enterprises often dominate a locality, the scale of their payments to the commune or the village may vary from one to another. The categories of payments, however, are standard. The largest payment is the contribution deducted from the incomes of the workers. These are generally on a proportional basis, but in some Republics notably Slovenia, there is a progressive rate on incomes above a basic norm. Thil is not a tax on the organization itself unlike income tax for-which the exact basis of assessment varies between Republics and in Croatia between different sectors of the economy. Rates may be proportional or progressive and enterprises or units making losses are exempted. Various statutory contributions are made such as membership fees paid in support of institutions that provide various services, including research and management services. Similar fixed contributions are paid for the use of communal land, water, roads and other physical resources. Another category of payments is the contributions paid to support schools, and mainteriance of social facilities of various kinds. These are in effect local taxes but are not covered by laws and 3re subject to local agreement though their use may in some instances be administered by the enterprise. Current taxation policy is one of decentralisation with the Republics and comnunes assuming a greater responsibility for both raising taxes and their use. In addition there is now increased emphasis on voluntary contributions paid at the local level to finance social facilities as opposed to traditional taxes. Page 34 B. MEASUREMENT OF INCENTIVE COEFFICIENTS 1. Introduction To assess the effects of price and subsidy policy on the agricultural sector four of the major agricultural products were selected for study, namely wheat, maize, beef and pig meat. These four products were chosen for the following reasons: a) Cereals are by far the most important crops occupying 70 percent of arable land and producing around 60 percent of total crop production. Wheat is the staple food of the human population, while maize, as well as being an important export crop, is a major input of the livestock sector. Wheat because of shortfalls in domestic production has frequently had to be imported. b) Beef and maize are two of the major agricultural exports, while in most years pig meat is exported in considerable quantities. c) Beef and pig meat are two of the major outputs of the livestock sector accounting for about 70 percent of meat production. d) All four products are produced by both the social and individual sectors. e) Data on production costs and returns for these four products was available from the Agricultural Economics Institute survey of the social sector over the period 1966-1975. 2. Data Base a) Individual Sector To be useful the incentive coefficients had to be calculated for the individual as well as the social sector. The former produces 70 percent of the agricultural social product, farms 85 percent of the cultivable land, employs 96 percent of the agricultural manpower and owns over 90 percent of the livestock. However unlike the social sector no detailed data on the cost and returns from individual crop and livestock products is available. Page 35 The Agricultural Economics Institute undertakes an annual survey of farm incomes in Serbia. This involves 12,000 farms and covers the three parts of Serbia namely Serbia Proper. SAP Voyvodina and SAP Kosovo. Because the sample survey is large and covers such widely differing farming systems and levels of production and income, it is generally considered to provide an accurate reflection of the performance of the individual sector throughout the Federation. To reflect the differing stages of development and farming systems fpund in the individual sector the incentive coefficients were calculated for: i) Serbia Proper ii) SAP Voyvodina lii) SAP Kosovo b) Social Sector Data for the social sector coefficients were obtained from the Institute's annual survey of production costs and returns from the major agricultural products in the social sector which covers five out of the six Republics. The Institute's survey obtains data from 16 enterprises with 67 units comprising 12-13 percent of land cultivated by the social sector. The enterprises surveyed have 13 percent of pigs, 16 percent of beef cattle in the social sector. The distribution of the units between the Republics is given in Annex II. c) Period of Analysis It was decided to calculate the coefficients for the years 1966-1975 because: Page 36 1) 1965 marked a change in agricultural price policy. The objective of the new policy was to enable farmers to obtain their returns from the market. Product prices were raised very substantially and a wide ranging system of input subsidies and premiums was abolished. The coefficients follow the development of policy since then. ii) Data from the Institute's survey of the social sector does not go back much further than 1965. When undertaking the fieldwork for the study the 1975 data from the Institute's survey of the individual sector was unavailable. As a result coefficients for this sector could only be calculated for nine years i.e. 1966-1974. 3. Methodology a. Calculation of the coefficients follows the methodology used by Bela Balassa in the West African study. b. As there are restrictions to the trade in a number of products both inputs and outputs, the duties alone could not be used as the measure of protection. World prices of the comparable item had to be established when calculating the incentive coefficients. c. Because the data from the two sectors was obtained from different sources the calculation of value added could not be undertaken in the same way. d. As no detailed data could be obtained from the meat processing industries the coefficients relate to that proportion only sold as beef or pork. However, the food processing industry as a whole was one of the non agricultural industries for which the incentive and comparative advantage coefficients have been calculated. Page 37 e. The detailed assumptions used to calculate the coefficients for the different products in each sector are given in Annex II together with the tables showing the calculations. f. Because of the difficulty in quantifying the effects of subsidies other than that on interest rates this is the only adjustment made to the EPC in calculating the ESCs for the social sector. It was not possible to assess whether taxes paid by the individual sector farmer were similar or not to those paid by other individual sector enterprises and so no ESCs have been calculated for this sector. 4. Summary of Incentive Coefficients Tables 1-4 summarize the NPC, EPC & ESC, for wheat, maize, beef and pig meat production in both sectors since 1966. In the tables for beef and pig meat, no EPC or ESC is shown for certain years although an NPC is given; this is because value added at world prices was negative in those years. Graphs showing the incentive coefficients and domestic resource cost coefficients of the four products over the period 1966-1975 are presentec at the end of Section III. TABLE 1 Page 38 THE BALASSA COEFFICIENTS WHEAT EFFECTIVE SUBSIDY NOMINAL PROTECTION COEFFICIENT EFFECTIVE PROTECTION COEFFICIENT COEFFICIENT (NPC) (EPC) (ESC) FRY INDIVIDUAL SECTOR FRY INDIVIDUAL SECTOR FRY Social Serbia SAP SAP Social Serbia SAP SAP Social Year Sector Proper Voyvodina Kosovo Sector Proper Voyvodina Kosovo Sector 1966 1.02 0.80 0.61 0.88 1.07 '0.75 0.53 0.85 1.14 1967 1.01 0.81 0.68 0.91 1.07 0.75 0.62 0.9 1.16 1968 1.08 0.86 0.78 0.93 1.24 0.82 0.74 0.92 1.37 1969 1.23 1.00 0.90 1.13 1.90 1.22 0.91 1.38 2.12 1970 1.06 0.75 0.70 0.97 1.16 0.46 0.51 0.9 1.35 19-71 1.21 0.97 0.71 1.07 1.45 1.17 0.62 1.18 1.55 1972 0.79 0.64 0.48 0.71 0.63 0.42 0.33 0.49 0.68 1973 0.45 0.34 0.23 0.39 0.29 0.14 0.13 '0.11 0.31 1974 0.74 0.55 0.42 0.44 0.69 0.63 0.41 0.32 0.72 1975 0.89 - - 0.80 0.88 TABLE 2 Page 39 THE BALASSA COEFFICIENTS MAI Z E EFFECTIVE SUBSIDY NOMINAL PROTECTION COEFFICIENT EFFECTIVE PROTECTION COEFFICIENT COEFFICIENTI (NPC) (EPC) (ESC) FRY INDIVIDUAL SECTOR FRY INDIVIDUAL SECTOR FRY Social Serbia SAP SAP Social Serbia SAP SAP Social Year Sector Proper Voyvodina Kosovo Sector Proper Voyvodina Kosovo Sector 1966 0.76 0.79 0.71 0.87 0.58 0.73 0.66 0.85 0.65 1967 0.84 0.85 0.78 0.87 0.59 0.79 0.73 0.84 0.71 1968 0.90 0.95 0.84 1.03 0.59 0.94 0.8 1.07 0.83 1969 0.83 0.90 0.80 1.00 0.59 0.86 0.75 1.02 0.70 1970 0.69 0.80 0.72 0.87 0.34 0.75 0.66 0.82 0.41 1971 0.97 1.27 1.25 1.31 0.94 0.70 1.39 1.58 1.08 1972 0.75 0.84 0.80 0.95 0.54 0.76 0.74 0.73 0.53 1973 0.54 0.53 0.45 0.56 0.27 0.42 0.35 0.42 0.32 1974 0.84 0.70 0.76 0.71 0.72 0.64 0.73 0.66 0.78 1975 0.97 - - - 0.91 - - - 0.99 TABLE 3 Page 40 THE BALASSA COEFFICIENTS BEE F EFFECTIVE SUBSIDY NOMINAL PROTECTION COEFFICIENT EFFECTIVE PROTECTION COEFFICIENT COEFFICIENT (NPC) (EPC) (ESC) FRY INDIVIDUAL SEC OR FRY INDIVIDUAL SECTOR FRY Social Serbia SAP SAP Social Serbia SAP SAP Social Year Sector Proper Voyvodina Kosovo Sector Proper Voyvodina Kosovo Sector 1966 1.17 1.03 1.15 1.02 - 2.72 - 3.14 - 1967 1.11 0.86 1.08 0.79 - 0.68 1.99 0.32 - 1968 1.37 1.15 1.25 0.97 - - - 1.08 - 1969 1.29 1.29 1.37 1.58 - 21.6 23 6, 8.7 - 1970 1.18 1.25 1.05 1.22 33.17 5.96 3.2 20.4 35.06 1971 1.10 1.08 1.13 0.96 1.32 0.91 1.4 0.78 1.39 1972 1.03 0.93 1.03 0.74 1.67 1.3b 1.46 0.57 1.74 1973 0.92 1.04 0.96 0.82 - 18.251 2.89 16.0 - 1974 1.20 1.13 1.14 1.05 - - - 3.63 - 1975 1.52 - - - - - - - - TABLE 4 Page 41 THE BALASSA COEFFICIENTS PIG MEAT EFFECTIVE SUBSIDY NOMINAL PROTECTION COEFFICIENT EFFECTIVE PROTECTION COEFFICIENT COEFFICIENT (NEC) (EPC) (ESC) FRY INDIVIDUAL SECTOR FRY INDIVIDUAL SECTOR FRY Social Serbia SAP SAP Social Serbia SAP SAP Social Year Sector Proper Voyvodina Kosovo Sector Proper Voyvodina Kosovo Sector 1966 0.89 0.3 0.89 0.99 0.85 0.67 0.78 1.06 0.90 1967 0.76 0.66 0.64 0.85 0.36 0.24 0.22 0.55 0.42 1968 0.67 0.62 0.59 0.73 0.13 0.10 0.09 0.16 0.17 1969 0.74 0.82 0.76 0.85 0.45 0.56 0.47 0.61 0.48 1970 0.93 0.99 0.89 0.96 0.99 1.22 0.86 1.09 1.02 1971 1.08 1.13 1.05 1.20 1.08 1.63 0.93 2.40 1.17 1972 1.08 1.16 1.10 1.17 - - - - - 1973 0.68 0.75 0.71 0.76 1.35 3.19 1.82 3.85 1.41 1974 0.90 0.88 0.78 0.90 1.29 1.20 0.63 1.43 1.42 1975 1.21 - - - 2.49 - - - 2.80 Page 42 C. MEASURFMENT OF COMPARATIVE ADVANTAGE-COEFFICIENTS 1. Estimation of Shadow Prices In order to calculate domestic resource cort coefficients (DRC's), it is necessary to establish shadow prices of capital, land and labour. The measures considered appropriate were the "efficiency" prices: that is, the opportunity cost of each factor, expressed in border prices. (a) Capital There is a very thorough discussion of the marginal product of capital in the paper by Martin Schrenk and Shu-Chin Yang, "Yugoslavia: Preliminary Estimates of Country Parameters for Economic Analysis of Projects" (1975). It contains a detailed analysis of the available data and the alternative measures of the opportunity cost of capital. The Statistical Yearbook of Yugoslavia. presents annual estimates of "accumulation rates", which suggest a decline in the average return to capital in recent years. The rate for the economy as a whole, though, was still as high as 10 percent in 1974. Since the accumulation rate has certain drawbacks as a measure of the OCC, the median estimate suggested by Schrenk and Yang i ercent of domestic market nricas.was used. In calculating the DRC's of agricu ural products, capital employed was already expressed in border prices. The OCC should in such a case be adjusted by the conversion factor SCF/ICF; as a reasonable approximation. it was assumed that this adjustment factor was equal to 1. In the case of the non-agricultural industries, however, the capital data used was in terms of domestic prices, and so the 0CC was adjusted by the SCF in order to calculate cost of capital in border prices ( as described in Section III.D. below). Page 43 (,b) Land The appropriate value for the opportunity cost of land in any crop is the return to land in border prices from the next best alternative. The average return to land in the social sector for the Federation and for the individual sector in Serbia Proper, SAP Voyvodina and SAP Kosovo has been calculated for wheat, maize and beef production as a residual. The returns to labour and capital have been deducted from the value added all measured in border prices. The alternative for wheat was maize and vice versa, while for the arable land growing forage for beef production the alternative taken was the average of the returns to wheat and maize. Permanent pasture allocated to beef production in the individual sector was given no opportunity cost, as it was assumed to have no alternative crop use. (c) Labour To estimate the shadow price of labour, an approach similar to that used by Schrenk and Yang was adopted. The opportunity cost of labour was assumed to be represented by average income* per active member of private sector agricultural households in Kosovo, the province with the poorest roral sector. Data were obtained from the five-yearly Household Budget Surveys of 1963, 1968 and 1973. The Kosovo rural income figures, expressed as a ratio to average net income of unskilled workers in Yugoslav social sector agriculture and in the rest of the economy respectively, were as follows:- :omprising earnings from employment, net income from produce of the farm, ,emittances from household members working abroad and consumption in k.nc >f the farm's produce. Page 44 Agriculture Other 1963 0.77 0.65 1968 0.60 0.61 1973 0.72 0.73 Since there is no reason to suppose that the opportunity cost of labour fluctuated in relation to market "wages" in the way suggested by these figures, their averages - i.e. 0.70 for agricultural products and 0.66 for manufacturing industries-were used for all years in the calculations. The opportunity cost of unskilled labour was estimated by applying the relevant ratio to the average net market "wage" of unskilled workers in social sector agriculture or the whole economy, as appropriate, during the year concerned. For all other categories of worker, the market level of gross personal income (including personal taxes and compulsory "contributionsu) was taken to represent the opportunity cost. Labour opportunity costs calculated in this way were converted to border prices by: (i) in the case of agriculture, applying a conversion factor based on a comparison of world and domestic prices of agricultural products; and (ii) for manufacturing industries, applying the SCF.* Manufacturing jobs, in the "marginal" instance, were assumed to be in towns, so that an urbanization cost had to be allowed for in the case of unskilled jobs, as well as the opportunity cost. After examining the available data on urban employment and working population, an "urban migration response" factor of no more than unity was assunmedi.e. each new unskilled job in a town would directly or indirectly draw away one active person from rural area;. * except for unskilled shadow wages in manufacturing where the agricultural conversion factor was applied. Page 45 Like Schrenk and Yang, we calculated the urbanisation cost on the following basis: (i) personal tax and contributions levied on unskilled wages were taken as an approximation to this cost; (ii) the ratio of such levies to net unskilled "wages" was assumed to be the same as that for total incomes in the social sector (which can be estimated from published statistics). The urbanisation cost estimates were converted to border prices by applying the SCF. 2. Estimation of the Domestic Resource Cost Coefficients (DRC) The opportunity cost in border prices of the primary factors of production namely land, labour and capital has been compared with the value added in border prices to give the DRC ratio. The DRC ratio has been calculated for the wheat, maize, beef and pig meat produced by the social sector throughout the Federation and by the individual sector in Serbia Proper, SAP Voyvodina and SAP Kosovo. The detailed calculations are shown in Annex II and the ratios are sumarised in the table 5 below. SUMMARY OF THE DOMESTIC RESOURCE COST COEFFICIENTS (DRC) WHEAT MAIZE BEEF PIG MEAT FRY INDIVIDUAL SECTOR FRY INDIVIDUAL SECTOR FRY IND VIDUAL,SE TOR FRY INDIVIDUAL SECTOR Social Serbia SAP SAP Social Serbia SAP SAP Social Serbia SAP SAP Social Serbia SAP SAP Year Sector Proper Voyvodina Kosovo Sector Proper Voyvodina Kosovo Sector Proper Voyvodina Kosovo Sector Proper Voyvodina Kosovo 1966 1.16 0.92 1.05 0.70 0.89 1.07 0.96 1.30 - 1.48 - 7.48 0.70 1.16 1.31 1.59 1967 0.49 0.64 0.74 0.64 1.55 1.43 1.31 1.41 - 3.42 5.96 2.23 0.63 0.90 0.86 1.69 1968 - 0.24 1.04 0.62 2.75 1.05 0.97 1.38 - 7.76 0.48 0.82 0.76 1.13 1969 1.40 2.87 1.51 0.91 0.84 0.45 0.70 1.06 - 39 47.04 6.40 0.34 0.76 0.68 0.80 1970 2.13 1.45 1.79 0.95 0.67 0.73 0.59 1.04 43.67 7.43 8.66 24.14 0.62 1.33 1.03 1.23 l171 0.43 1.24 0.74 0.55 1.66 0.84 1.31 1.50 1.45 1.66 2.24 1.28 1.34 3.37 3.23 5.38 1972 0.73 0.96 0.84 0.61 1.24 1.03 1.17 1.47 1.63 2.51 1.82 1.57 - - - - 1973 0.55 0.84 0.54 0.59 1.61 1.17 1.80 1.48 - 30.19 5.58 27.71 1.09 4.61 2.74 5.52 1974 0.58 1.37 0.82 1.11 1.51 0.77 1.21 0.92 - - - 8.84 1.87 3.24 1.87 3.78 1975 0.86 1.10 3.94 Page 47 D. INCENTIVE AND COMPARATIVE ADVANTAGE COEFFICIENTS OF NON-AGRICULTURAL INDUSTRIES 1. Development of Industry in Yugoslavia Since 1945 industrialisation has been given high priority in Yugoslav economic policy, and rapid development has been achieved. The share of manufacturing and mining in GOP increased from 17' in 1952 to about 35% in 1975, at constant 1966 prices; over the period 1966-75, industrial production rose at an average rate of over 7Z per annum. Industrial products are now of major importance in Yugoslavia's foreign trade. The share of manufactures and minerals in total commodity exports has increased greatly since World War II; the proportion was 91% in 1975. Imports of industrial goods, however, have continued to exceed exports: in 1975 they were almost double the value. Table 111-5 sets out the usocial product" (gross value added) of the different branches of the manufacturing sector in 1965, 1970 and 1975. The principal manufacturing industries are metal products (including vehicles), textiles and clothing, food products, chemicals, wood products, electrical equipment and metals (about half non-ferrous). Capital-intensive industries account for about 29% of the total value added in manufacturing, while they have absorbed over half of total manufacturing investments in the past 25 years. Continuing rapid expansion of industry is proposed in the Social Development Plan for 1976-80: overall industrial production (including electricity generation, mining and quarrying) is projected to grow at 8.2% a year, as compared with a target of 4. annual growth for agriculture. Priority for investment is given to the basic materials, energy and food industries. Pulp and paper, iron and steel, coal and coke, non-ferrous metals, petroleum, chemicals and non-metallic minerals. Page 48 2. History of Incentives for Industry, since 1965 Two principal objectives of the Economic Reform of 1965 were to liberalise both the domestic economy and foreign trade. The second objective was implemented in 1967: export premia and tax subsidies were abolished; about one-quarter of imports was freed from restrictions; and import duties were reduced by nearly one-half, on average. Since then, further measures of liberalisation have been instituted, though short-term import restrictions have interrupted the trend at times of balance of payments difficulty. The number of liberalised commodities (i.e. ones not subject to quotas) was increased; and tariffs on many items - particularly investment goods and transport and electrical equipment - have been reduced further. Table 111-6 summarises the coverage of the different categories of import control in 1975 and previous years. In 1975 liberalised and "conditionally free" imports accounted for 45.2% of total imports, and those under global quotas, which are practically liberalised, for another 17.2%. Average customs duties by category of product are shown in Table 111-7; it will be noticed that the average tariff on manufactured goods, at 9.8%, was still much higher than for agricultural produce in 1975. In addition to commodity-specific duties, certain other charges have been levied on imports; customs and border taxes and, since 1970, a general surtax on imports. Details of these charges, which in principle apply to all imports including those of agrizultural products, have been given in section III.A. The full rate of surtax applies to most imports of manufactures, the main exceptions being capital equipment for priority basic industries and some materials. Page 49 Although some export incentives were abolished under the Economic Reform, the system of "retention quotas" was retained, under which exporters could keep a proportion of their foreign exchange earnings and use it freely for purchasing equipment. A uniform retention quota amounting to 20% of export proceeds has applied since June 1972. (This sytem has some tendency to increase the liberalisation of imports: nominally valid only for the enterprise securing the quota by its exports, in practice retention quotas have commonly been made available through a "semi-market" to other firms wishing to import equipment). Encouragement to exports is also given by restitution of customs duty paid on imported materials; and by remission of turnover tax (when applicable) on inputs. Besides the incentives above, preferential interest rates have been granted to certain industries, on a more or less ad hoc basis. The Federal Government and tne republics have provided direct lcans to enterprises, and these still constitute an important source of capital finance for some basic industries. However, policy since the 1950's has encouraged reliance on self-financing and bank credit, and state financing has fallen to a fraction of its former level, in relation to total industrial investment; the Federal Government itself has now ceased to finance enterprises except through the Fund for Accelerated Development of the Underdeveloped Regions (FAD). In any case, state finance has not necessarily been provided on concessionary terms. The economic liberalisation policy has also broughta reduction of price controls. By 1975 about one-third of producer prices were officially free of control; the remainder were subject to some form of Governmental influence but only a third of the total - largely raw materials, energy and certain foodstuffs - were. directly controlled. Page 50 3. Recent Measures of Short-term Protection Owing to the balance of payments difficulties in the last few years, the Yugoslav authorities have imposed certain measures, mostly of a temporary nature, which run rounter to the general trend of liberalisation. An import deposit scheme was introduced in 1974 but expired in 1975. Import licensing was extended in 1974 and again in 1975 mainly to restrict non-essential imports and speculative over- ordering. The import surtax was also raised in 1975. At the beginning of 1976 the temporary import licensing procedure expired, but the (lower) "priority' rate of import surtax was increased again. In addition, a minimum tariff of 5% was imposed affecting previously duty-free or low-duty imports. A "counter- purchaseu system first introduced in 1975, under which a would-be importer must first earn foreign currency through exports, was extended through 1976. To counteract inflationary tendencies, a more vigorous surveillance of liberalised and partially liberalised prices has been undertaken by the federal trade inspectorate and the Federal Prices Committee, which can propose reductions in price increases considered to be excessive. 4. Estimation of Incentive Coefficients a. Choice of industries It was only practicable to undertake the calculations of incentive coefficient for four non-agricultural products or product-groups, and it was considered most relevant to examinc productive industries, i.e. in manufacturing and mining. Since the 1970 national input-output tables were the major part of our data, industries rather than individual products had to be selected. The most detailed tables have a 98-industry breakdown, Page 51 of which the manufacturing and mining sector accounts for 68 industries. For calculating coefficients for 1975, however, the most detailed data which met the minimum requirements had a less fine breakdown, showing only 20 manufacturing/mining "branches". Also, on reflection, it was thought that there was some advantage in choosing fairly broad categories, so as to give a reasonably general picture of the protection given to non-agricultural industries. Therefore four "branches" chosen to represent a wide range of characteristics, roles in the economy and levels of nominal protection were selected. They are listed below, with indicators of their relative importance in the manufacturing and mining sector and their growth rates. Proportion of Growth of sector value production Ihdustry added (gross) 1961-75 (p.a.) Iron and steel (including iron ore mining) 4.5% 7.6% Electrical equipment 5.6% 12.0 Textiles and clothing 11.8% 7.2% Food and drink manufacture 10.5% 7.3% Another factor in the choice of the food and drink industry was its use of agricultural products, which was of particular interest in the context of this study. b. Method of Calculation Incentive coefficients were calculated for the two years 1970 and 1975. Details of import duties on both output and specified inputs in these years were provided. However, many of the products made or used in each of the four industries examined are subject to import licensing or quota controls. Price controls, the recent import restrictions and other factors may also have meant that the tariff rate was not a true reflection of the degree of nominal protection. The ideal approach in these circumstances is to compare world and domestic prices of individual products: hoieve,r, an attempt using published data proved uninformative; the alternative of making extensive direct inquiries of importers, Page 52 producers etc. was impracticable. Accordingly, with very few exceptions, the tariff rates (plus other import taxes) were taken as representing the nominal protection. Tariff data was obtained for nearly 50 individual industries selected from the most detailed input-output breakdown; where a range of duties applied to a particular category, the mid-point was taken. No details on export incentives were obtainable from the Yugoslav authorities. The duty rebate is quite small in relation to total export value, however, and as a reasonable approximation the percentages estimated by Schrenk and Yang were used. For 1970, input, output, production, depreciation and export data were obtained from the published input-output tables. The full 98 industry breakdown was used in calculating inputs and in the weighting of tariffs on output, although the figures were eventually amalgamated to correspond to the broader categories listed in 4 (a) above. In calculating EPC's, a standard conversion factor was applied to minor tradeable inputs (where the specific duties were not known) and to the tradeable component of non-tradeable inputs. An equipment conversion factor was applied to depreciation (that is, its tradeable part). A 29 industry input-output table was used to extract the tradeable part of non-tradeable inputs, going through two rounds of decomposition. For 1975, information by industrial branch was available, giving output, depreciation and total inputs as well as other data. To break down the inputs, we used the 50-industry 1970 input-output table (in which the manufacturing sector is divided by "branch"), adjusting for relative changes in prices of the inputs betweer 1970 and 1975. To obtain the average import duty for the outputs "Yugoslavia: Preliminary Estimates of Country Parameters for Economic Analysis of Projects", internal World Bank paper, January 10th, 1975. Page 53 and main inputs, the most detailed 1970 input-output data was used for weight4ng. For non-tradeable inputs and depreciation, it was assumed that the tradeable component, in percentage terms, was the same as our 1970 estimate for the corresponding industry. The calculations of the protection coefficients and the domestic resource cost coefficients for the four manufacturing industries are described in detail in Annex III. c. Nominal Protection Coefficients The results of our calculations of protection coefficients are shown in Table 6. The NPC of all four industries was of appreciable proportion in both 1970 and 1975 (it is inevitable that NPC's will be positive on the assumption, effectively, that tariffs and import taxes represent the nominal protection). Electrical equipment had the highest nominal protection in 1970, and textiles in 1975. Except in the case of electrical equipment, NPC's rose between 1970 and 1975, largely on account of the import surtax. Table 6 - Measures of Protection, Manufacturing Industries 1970 1975 Branch NPC EPC NPC EPC Iron and steel 1.14 1.17 1.19 1.24 Electrical equipment 1.25 1.37 1.21 1.22 Textiles and clothing 1.21 1.26 1.28 1.35 Food and drink manufacturing 1.12 1.22 1.18 4.36 d. Effective Protection Coefficients Estimated EPC's are also shown in Table 6. In all instances they are higher than the NPC's, though generally not by a great margin. There is an exception in the case of the food industry in 1975, when the apparent EPC was extremely high. This result reflects the high world prices of agricultural inputs, which sharply reduced Page 54 the industry's value added in border prices. Although the world price of important agricultural inputs could be estimated using results from section 111.2, a similar comparison (except for beef and pig-meat) in the case of the output of the food industry could not be made. The estimate of EPC here must be regarded with some suspicion. e. Effective Subsidy Coefficient In general, manufacturing industries receive no special tax concessions, preferential interest rates, reduced public utility charges or similar subsidies. Where they have applied, it has been impossible to obtain data. Therefore, it was assumed that the ESC was identical to the EPC for the four industries. 5. Comparative Advantage Coefficients a. Calculation of DRC's. The shadow prices used in calculating DRC's have been discussed in section III C.1. Data on depreciated fixed assets and working capital were obtained from the Statistical Yearbook of Yugoslavia; a simple adjustment was made to convert them to the same basis as the other statistics used, which were aggregated on an "establishment" basis rather than the "organisation principle" used for the capital data. The amount of land used by each industry was calculated by dividing the total employment by an assumed "worker density" (workers per hectare), based on UK and other data. Employment and personal income data for calculating the shadow wage cost were also obtained from the Statistical Yearbook, and adjusted to an "establishment" basis where necessary. Page 55 The sum of the direct resource costs of each industry was multiplied by a factor, so as to allow for the resource costs of the non-tradeable inputs (the value added of which is included in the industry's value added which is the denominator of the DRC). The factor was derived from the EPC calculations. Full details of the DRC calculations are given in Annex III. b. Results Our estimates of the DRC's of the four manufacturing industries are given in Table 7. Those for iron and steel and for electrical equipment in 1970 are well below one. This is rather surprising, since the former industry is not regarded as one of the most efficient in Yugoslavia, and the latter was apparently highly protected in 1970. One explanation may be the fact that fixed assets tended to be insufficiently revalued in Yugoslavia (and depreciation is also understated, resulting in an overestimate of value added). Table 7 - Domestic Resource Cost Coefficients, Manufacturino Industric Branch 1970 1975 Iron and steel 0.83 1.13 Electrical equipment 0.88 0.95 Textiles and clothing 1.13 1.06 Food and drink manufacturing 0,92 3.07 In 1975, the DRC of the electrical equipment industry was again below one; however, that of iron and steel was much increased - suggesting a sharp reduction in relative efficiency. The very high DRC for the food industry in 1975 reflects the exceptionally low world market value added in that year, as mentioned in 4 (d) above. Page 56 The results should be treated with caution, not only for the reasons mentioned but because of the numerous other assumptions and stages of estimation in their calculation. However, since most of the figures are near unity, it would seem that all four industries are marginally efficient, in comparative advantage terms. E. CONSISTENCY OF INCENTIVE AND COPARATIVE ADVANTAGE. 1. Introduction The results can be viewed in at least six ways, each with its own interpretation. Since no single value of a coefficient has a meaning of its own, these six interpretations require comparisons. They are: (i) comparison with policy objectives (ii) comparison across measures, by commodity (iii) comparison between commodities, by measure (iv) comparison between private and social sectors (v) comparison over time of measures (vi) comparison with other sectors of the economy 2. Comparison with Policy Objectives The Balassa coefficients relate to economic and social efficiency. The simplest comparison is thus to look at each measure, by commodity, and by year, and to compare with ,unity - the presumed efficiency index. On this criterion,the numbers obtained have an impressive spread. In particular, the EPC's by virtue of their world-price value-added base are erratic, but any index with a small base can behave in this way. The NPC's seem to be the most stable and the closest to unity, as would be expected. With the exception of cereals in the high-price years on the world market (1973, 1974), the NPC's are within the range anticipated: domestic prices can be held 20 percent either side of world market levels with relative ease. Yugoslavia does not appear wildly protectionist in terms of world markets, and the relatively low NPC's for maize and pigmeat suggest attempts to keep prices Page 57 relatively low by international standards. If the objective is to maintain agriculture at a relatively competitive level, in terms of prices, then the results bear out the contention that Yugoslavia has been reasonably successful. The EPC's follow the NPC's emphasizing the importance of the product prices in determining the overall incentive to producers. While duties and/or subsidies on inputs can modify the incentive or disincentive afforded by the producer prices, they are clearly of secondary importance. Duties on material inputs do not appear to be a major factor in the cereals sectors: in beef the EPC's are high because of the leverage of price supports on a small value added -ase, and in pigmeat they are relatively low. But even here, the impression is not of great resource distortions persisting over time. The ESC figures where they could be calculated follow the EPC's and add little to the interpretation. The overall picture from the DRC's is also of values which though well scattered tend to centre around unity, emphasizing that persistent and severe resource misallocation is probably absent - except perhaps for beef. Comparison with other policy objectives is not possible directly from the figures shown. The derived measures- can help to some extent by relating resource costs to transfers of income. But one factor shows up strongly: the instability over time of the coefficients would imply that even if long-term prices are not greatly different from world price levels, in the short term domestic price stability has been a dominant consideration. This may be for consumer protection or to encourage stable farm investment. But whatever the motive, the pattern of protection is consistent with the importance of domestic price stability rather than with a willingness to follow.the fortunes of the world market. 1/ To be outlined at a later date by Professor Josling. Page 58 3. Comparison across measures by Commodity Turning to the comparisons across measures, the following comments should be made: (a) Wheat: NPC levels are quite reasonable on average; EPC higher than NPC shows that low machinery prices are a factor in protecting wheat producers when world prices were low (1966-1971), though they do not appear to have offset the implicit producer tax in high price years (1972-75). The ESC which is several percentage points above EPC indicate the extent of the extra protection from the subsidisation of interest rates. The ratio of DRC to EPC should reflect domestic cost per unit of value added at domestic prices, and avoids the problem of value added at world prices. This is very variable and reflects the large variations in yields. The ratio was nearly 2 in 1970 and only 0.3 in 1971. But since it is not consistently below or above unity, this ratio gives an indication that agricultural resources receive earnings approxi- mating over time to their shadow prices. (b) Maize: As the NPC levels are generally below unity and EPC values consistently below these, expansion would not be out of order. But DRC values above unity tend to contradict this, and the ratio of DRC to EPC is also above unity. This is a puzzle: an underprotected sector which would presumably expand if allowed to sell at world prices nevertheless uses resources with a higher social value, in general, than its output. If the DRC figures are correct, then the low level of prices would seem to be socially justified. (c) Beef: relatively modest NPC's indicate a beef sector attuned to world market conditions. But the EPC's are variable because of low or negative world-price value-added. There seems prima facie evidence for saying that modest nominal price protection hides a basically unsound industry, and the high DRC levels support this. This is supported by the financial results from the social sector used in calculating the value added. These showed that in 6 years out of ten those units in the Institute's survey recorded financial losses. The ratio of DRC to EPC indicates excess Page 59 returns to the beef sector. The problem of negative value added might be overcome by using an index based on domestic- price value added figures. (d) Pigmeat: another sector with generally depressed prices and, in the early period, very low EPC's. Relaxation of these implicit taxes would seem to have been socially profitable up to 1970, though since then the domestic resource cost is greater than both world-price and domestic-price based value added. The sector seems to have been on a relatively even keel during 1970-1972; further expansion is not necessarily desirable. 4. Comparison between Commodities Some points regarding comparisons across commodities follow from this. (a) NPC: price protection seems greatest for beef, then wheat, pigmeat, maize. In this last case, prices have rarely been at world levels. (b) EPC: in terms of effective rates, where comparison across commodities comes into its own, there has clearly been an incentive for resources to enter beef production at the expense (till 1970) of pigmeat, and wheat has been favoured relative to maize. (c) DRC: on this criterion, wheat production would seem tQ be more justified relative to maize, and pigmeat more socially profitable than beef. 5. Comparison between the Individual and Social Agricultural Sectors The comparison between private and social sectors shows that in general the degree of protection is greater in the latter for wheat, less for maize, slightly more for beef, with the pigmeat coefficients showing some variability in this regard. No comparisons are possible for the ESC. In the case of the DRC, the picture is not clear. For Page 60 wheat, the variability between regions in the private sector is noticeable, ano reflects supply and demand. SAP Kosovo is an area of limited wheat growing potential but with a high population density and a high rate of population growth. SAP Voyvodina is an area of excellent agricultural potential, high cereal yields and relatively low population density. The same problem crops up in maize, whereas in pigmeat, the private sector always seems to have higher costs per unit of value added. Comparisons are difficult for beef because of the small number of observations. 6. Comparison over time Tracing the measures over time reveals two phenomena: the variability, in particular in cereals, as a result of world price movements, and the trends, such as the increasing support for pigmeat. It might be useful to try to separate these two. Moving averages could help, though the high cereal prices in 1973 would still influence the results. As suggested above, the variability may not be unrelated to government price stability objectives. Year on year comparison of efficiency measures tend to assume that resources are rapidly mobile. In fact, the longer term average and the trend may be more appropriate for making statements about resource allocation. The success of price stability policies can be judged in terms of the variations in domestic as opposed to world prices. Success of agricultural policies in dampening the pig and beef cycles also needs more information to evaluate. This is the weak point of the Salassa coefficients: they do not relate explicitly to the policy objectives of price stability. 7. Comparison with the Manufacturing Sector Comparison with other sectors is limited to the 1970 and 1975 figures for four industries. On this evidence, price protection is not high in agriculture, though beef shows up poorly. DRC figures for agriculture do, however, appear too often relatively large compared to these other industries. One would expect greater stability of coefficients in the non-farm sector. Page 61 The relatively modest levels of protection, tend to suggest no favouritism for agriculture, but the DRC's suggest that no massive subsidies are called for on resource allocation grounds. T H E BAL ASSA COEFFICIENTS - Social Sector Federal Republic af Yugoslovea MAIZE 2.0 1.8 1.6 1.4 1.2 1.0 0.8 0.6 NPC 0.2 .ESC DRC 1960 67 68 og 70 71 72 . 73 74 75 HEAT. 2.0 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 1966 67 68 69 70 71 72 73 74 75 £3 T HE BALASSA COEFFICIENTS - Social Sector Federal Republic of Yugoslavia BEEF 2.0 1. 8 1.4 1.2 1.0 0.8 0.6 0.4 NPC E PC 0.2 ESC DRC - 1966 6? 68 69 70 71 72 73 74 75 PIG MEAT 2.0 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 1966 67 68 69 70 71 72 73 74 75 T H E* SAL ASSA COEFFICIENTS Individual Sector - Serbia Proper MAIZE 2.0, 1.8 1.6 1.4 1.2 1.0 0.8 0.6 04 0.2 1968 67 68 69 70 71 72 73 74 WHEAT ...... 2.0 1.8.. . . 1.6 1.2 1.0 0.8 0.6 0.4 0.2 EPC - DRC - 1966 67 68 69 70 71 72 73 74 THE BALASSA COEFFICIENTS Individual Sector - Serbia Proper BEEF 2.0 1.8 1.2 1.0 0.8 0.6 0.2 1966 67 68 69 70 71 72 73 74 PIG MEATEA-. 2.0 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 NPC EPC- 0.2 DRC 1966 67 68 69 70 71 72 73 74 T HE B ALAS5A COEFFICIENTS Individual Sector - S.A.P. Voyvodina MAIZE 2.0 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4. 0.2 1966 67 68 69 70 71 72 73 74 WHEAT . 2.0 1.8 1.6 1.4 - .. . .. . . - NPC 1.2 EPC DRC 1.0 0.8 0.6 0.4 0.2 1966 67 68 69 70 71 72 73 74 T H E BAL ASSA C OEFFIClENTS Indivodual Sector- S.A.R Voyvodino BEEF 2.0 1.8 1.6 1.2 1.0 0.8 0.6 OA 0.2 1966 67 68 69 70 71 72 73 74 PIG MEAT- 2.0 1.6 1.6 1.4 1.2 1.0 0.8 0.6 0.4 NPC - EPC - 0.2 DRC 1966 67 68 69 70 71 72 73 74 T HE* BALASSA COEFFICIENTS Individual Sector - S.A.R Kosovo MAIZE 2-0 1.8 1.6 1.4 1.2 1.0 0.8 0.6 OA 0.2 1966 67 68 69 70 71 72 73 74 WHEAT .. .- 2.0 . . . NPC - 1.6 . . . . EPC - DRC 1.4 1.2 1.0 0.8 0.6 0.4 0.2 1966 67 Go 69 70 71 72 73 74 T HE 8AL ASSA COEFFICIENTS I ridividual Sector - S.A.P. Kosovo BEEF . 2.0 1.8 1.2 1.0 0.8 0.6 DA 0.2 1966 67 6 69 70 71, 72 73 .74 PIG MEAT . 2.0 1.6 1.0 0.8 o0 . NPC . EPC o. DRC - 0.2 1966 67 6i 69 70 71 72 73 74 76 DOME.STIC RESOURCE COSTS Social Sector - Federal Republic. of.,Yugoslava 2.0 1.6 1.0 0.8 0.6 1.2 1966 67 68 69 70 71 72 73 74 75 . ... ...Indix djaLectorr SbiaR. P b e ... 2.0. 1.6 - 3.6 -. .--...-WHEATEA T"" 0.2. _ . . .. ... . F. G..MEA T 1960 67 G8 69 70 71 72 73 74 75 7/ DOME.STIC RESOUR CE COSTS . .... . Individual Sector . - S.A.P.Voyvodina 1.6- -7 a .2 -.--- --- 1.0 - ---.-.. 1.6 1.4 .. * .~ .* .. . D.2 - - -- -- - - - 1966 67 68 69 70 71. 72 . 73 ....74 75 i-J. S1A K s oo ....... 1.8 2.0 ..- - -.-. 1.4-- -.................. .--. 0.8 D.S . - - - - - . -.-.~. .MAZE.---- BEEF-- 0.2 P1..MEAT. 1906 67 68 69 70 71 72 73 74 75 72 EFFECTIVE PROTECTION COEFFICIENTS Social Sector - Federal Republic of Yugoslavia 2.0 1.8 1.6 1.4 1.2 1.0 0.8 0.8 OA 0.2 1966 07 8 69 70 71 72 73 74 75 Individual Sector - Serbia.. Proper 2.0 ! 1.8 1.6 1.2 1.0 WHEAT . . . . MAIZE 0.8 BEEF PIG MEAT 0.6 0.4 0.2 1966 67 68 69 10 71 72 73 74 75 73 éLi.TIVE PROTECTION CUtFFICIENTS Individual Sector. . .S.A.P.Voyvodina 2.0 *. 1.- - 1.2 .. 1.0 1.2 0.6 8 OA 19se 67 88 09 70 71 72 73 ..74 75 2.0 1.6 1.4 1.2 1966 7 0 9 70 71 72EAT7 "7 - NOMINAL PROTECTION COEFFICIENTS Social Sector - Federal Repuir of-Yugslavfo. 2.0 1.8 - 1.6 1.4 1.2 1.0 fF 1.2 0.6 -.-*A- --H ;--- - -- S.2 - - - - - - -1 1986 67 . e 88 9 0 . 1 .. 7..2 72 74.. . .5 . . Ind iy duaL Seco-.- r a -. - .- --h.- - 2.0 - - LJ--..JA-..L-. -.e H£AT 1.4 . . 1.0 0. I 1906 67 66 69 70 71 72 73 74 75 NOMINAL PROTECTION COEFFICIENTS Individual Sector - S.A.P.Voyvodina 2.0 1.8 1.6 . -.. . . 1.4* 1,4. 1.2 1.0 0.8 0.6 OA 0.2 1966 67 68 69 70 71 72 73 74 75 S.A.P. Kosovo 2.0 1.8 WHEAT ,MAIZE. 1.6 EEL _....PIG MEAT- 1.2 1.0 0.8 0.6 0.4 0.2 1966 67 6 69 70 71 72 73 74 75 7/ Page 62 IV. PRODUCER AND CONSUMER SUBSIDIES AND "TRANSFER PAYMENTS" A. PURPOSE AND METHOD OF MEASUREMENT To assess further the effects of Yugoslav agricultural policies, on consumers and Governmental budgets as well as on producers, an approach developed by Professor T. Josling and others in studies carried out for FA0 has been followed. The methodology is described in two papers, "Agricultural Protection: Domestic Policy and International Trade" and "Agricultural Protection and Stabilisation Policies: A Framework of Measurement in the Context of Agricultural Adjustment". * The approach is designed to quantify and illuminate: (a) The degree of subsidisation (positive or negative) of individual agricultural products, received by producers on the one hand and consumers on the other; (b) the net cost of these subsidies to the Governmental sector (Federal, Republic and Commune levels); (c) The net financial transfers, actual and notional, between the three parties - producers, consumers and Government. The principles of the methodology are quite simple, and can easily be understood from the tables presented in this section. Price, cost and producer subsidy datalused in the calculations have been detailed in Sections III.A and III.B. Calculations have been made for the four selected products - wheat, maize, beef and pig-meat - and for the years 1972, 1973 and 1974 (the respective harvest-years, in the case of the cereals). Both social and individual sector produce is covered. * FAD references: C73/LIM/9 and C75/LIM/2, respectively. Page 63 B. WHEAT 1. Producer Subsidies Estimates of "producer subsidy equivalents" for wheat are presented in Table 8. They refer only to marketed production. The producer prices shown are exclusive of premiums; the total value of premiums is shown as "direct producer receipts". Individual sector producer prices are the average for Serbia, weighted by marketed production in each of the three provinces of that Republic. As would be expected from our discussion of protection coefficients in Section III, producers lost much potential income through negative "price protection". This was only partially offset by the premiums and the fertiliser and interest subsidies, so that the net result was a negative subsidy in all three years. It was particularly high in the 1973 harvest-year, when the world price of wheat rose sharply, whereas the domestic price did not increase until the following year. The negative subsidy is shown in three ways (i) the total value; (ii) as a proportion of producer receipts (sales plus premiums); (iii) the amount per ton of marketed production. All three measures show a marked peak in 1973: the proportional subsidy is over 100%, since producers received less than half the notional amount they would have got in an uncontrolled, unsubsidised market situation. The year-to-year fluctuations, of course, do not reflect Government policy intentions so much as world trade conditions; but taking the three years together it is clear that wheat producers have been subsidising other parts of the community as a result of official policies. 7? Page 64 TABLE 8 WHEAT Producer Subsidy Equivalents 1972 1973 1975 harvest harvest harvest 1. Marketed production ('000 tons) Social sector 1,291 1,361 1,745 Individual sector 635 507 926 Total 1,926 1,868 2,671 2. Producer pri-ce (din. per kg.) Social sector 1.07 1.07 1.81 Individual 0.56 0.50 0.94 Average 0.90 0.92 1.51 3. Marketed production value (mn. din) Social sector 1,381 1,456 3,158 Individual sector 356 254 870 Total 1,737 1,710 4,028 4. Direct producer receipts (mn. din) 578 696 976 5. Total producer value (mn. din) : 2, 315 2,406 5,004 6. Policy transfers to producers (mn. din) (a) Price protection * -1,506 -4,213 -3,707 (b) Commercial premiums 578 560 801 (c) Development premiums (social sector only) - 136 175 (d) Fertiliser subsidy 50 52 95 (e) Interest subsidy (social sector only) 67 87 106 7. Total producer subsidy (mn. din) - 811 -3,378 -2,530 8. Proportional subsidy (%) - 35.0 -140.4 - 50.6 9. Subsidy per unit (din. per ton) - 421 -1,808 - 947 * Difference between producer price and c.i.f. import price, multiplied by marketed production. 7F Page 65 2. Consumer Subsidies Table 9 shows estimates of the subsidisation of wheat consumption. The consumption figures shown comprise marketed production and net imports, with annual fluctuations "ironed out" by rough estimation. Consumption is valued at farm-gate prices- wholesale prices might have been preferable, but suitable data were not available. The negative price protection mentioned above results in a heavy subsidy to consumers, again with a peak in the 1973 production year. There were no other consumer subsidies of significance. In proportional terms, the subsidy appears extriordinarily high, but it should be remembered that the percentages in the table are based on comsumption valued at producer prices- as a proportion of the ultimate consumer prices,the rate of subsidy was obviously much less. 3. Government Cost Table 10 summarises the "transfers" between producers and consumers of wheat, the net payments by the Government sector to producers and to consumers, and the total net cost to Government budgets. Government payments to producers in 1972 and 1973 consist of premiums and the fertiliser and interest subsidies; in 1974, when production exceeded consumption, the premiums and subsidies were partly offset by an apparent "profit" to the Government from purchasing the surplus at below-world prices. As regards consumption, the Government sector is assumed to have subsidised the portion not met by domestic production in 1972 and 1973. The net cost of the Government sector of assistance and subsidies emerges as considerable in all three years,with a peak in 1973 due to the subsidisation of consumer prices at a time of much increased world prices. Some caution is advisable in considering the figures in the table, because they involve comparisons of absolute quantities based on estimates and assumptions which are sometimes uncertain (particularly as regards consumption levels). However, the general picture presented is probably reliable, although the precise figures may not be. Page 66 TABLE 9 WHEAT Consumer Subsidy Equivalents 1972 1973 1974 harvest harvest harvest 1. Consumption * ('000 tons) 2,370 2,400 2,430 2. Producer price, average (din. per kg) 0.90 0.92 1.51 3. Total consumer cost, as at farm-gate (mn. din) 2,133 2.208 3,669 4. Policy transfers to consumers (mn. din) Price protection * 1,849 5,400 3,378 5. Proportional subsidy (%) 86.7 244.6 92.1 6. Subsidy per unit (din. per ton) 780 2,250 1,390 * Consumption of marketed produce and imported wheat; estimated * Difference between c.i.f. import price and producer price, multiplied by consumption. Page 67 TABLE 10 WHEAT Subsidy Transfers between Sectors (million dinars) 1972 1973 1974 harvest harvest harvest Producer Subsidy Value - 811 -3,378 -2,530 from consumers -1,506 -4.213 -3,378 from Government sector 695 835 848 "Consumer Subsidy Value 1,849 5,400 3,378 from producers 1,506 4,213 3,378 from Government sector 343 1,187 - Government Sector Cost 1,038 2.022 848 to producers 695 835 848 to consumers 343 1,187 - 8z Page 6a C. 1ZE Estimates for maize, comparable to those for wheat, are presented in Tables 11-13. The same general conments on the calculations and data apply. 1. Producer Subsidies Maize producers also suffered a negative subsidy in all three years, with a peak in 1973, though the amount and proportional rate was less than for wheat. The differential between world and domestic prices was much lower than in the case of wheat, but on the other hand maize producers were not eligible for premiums. 2. Consumer Subsidies Again, consumers of maize received a considerable subsidy, entirely at the expense of the producers. 3. Government Cost Because production exceeded consumption, the Government sector was not required to subsidise consumers of maize. Moreover, it made a substantial apparent 'profit' at the expense of producers in 1973, because of the large exportable surplus and the big differential between world and domestic prices. As a result, our estimates indicate only a small net cost to the Government sector in 1972 and 1974, and a substantial net gain in 1973. D. BEEF 1. Producer Subsidies Table 14 shows that, on our calculations, beef-cattle producers suffered a small negative subsidy in 1972 and 1973, because domestic producer prices were slightly below world levels. In 1974, however, they received a sizeable positive subsidy, as world prices fell back while domestic prices were largely maintained. Page 69 TABLE 11 MAI Z E Producer Subsidy Equivalents 1972 1973 1974 harvest harvest harvest 1. Marketed production ('000 tons): Social sector 525 780 691 Individual sector 415 565 449 Total 940 1,345 1,140 2. Producer price (din. per kg.): Social sector 1.07 1.24 2.09 Individual sector 1.04 0.95 1.69 Average 1.06 1.12 1.93 3. Marketed production value (mn.din): Social' sector 562 967 1,444 Individual sector 432 537 759 Total 994 1,5D4 2,203 4. Direct producer receipts - - - 5. Total producer value (mn.din) 994 1,504 2,203 6. Policy transfers to producers (mn.din): (a) Price protection - 284 -1,473 - 511 (b) Fertiliser subsidy 22 41 38 (c) Interest subsidy (social sector only) 25 66 50 7. Total producer subsidy (mn.din) - 237 -1,366 - 423 8. Proportional subsidy (%) - 23.8 . - 90.8 - 19.2 9. Subsidy per unit (din. per ton) - 252 -1,016 - 371 * Difference between producer price and c.i.f. import price, multiplied by marketed production. Page 70 TABLE 12 MAI Z E Consumer Subsidy Equivalents 1972 1973 1974 harvest harvest harvest 1. Consumption* ('000 tons) 870 930 1,000 2. Producer price, average (din. per kg) 1.06 1.12 1.93 3. Total consumer cost, as at farm-gate (mn.din) 922 1,042 1,930 4. Policy transfers to consumers (mn.din): Price protection * 261 1,014 450 5. Proportional subsidy (%) 28.3 97.3 23.3 6. Subsidy per unit (din. per ton) 300 1,090 450 * Consumption of marketed produce, less exports; estimated. ** Difference between border price and producer price, multiplied by consumption. TABLE 13 Page 71 MAI Z E Subsidy Transfers between Sectors (million dinars) 1972 1973 1974 harvest harvest harvest Producer Subsidy Value: - 237 -1,366 - 423 from consumers - 261 -1,014 - 450 from Government sector 24 - 352 27 Consumer Subsidy Value: 261 1,014 450 from producers 261 1,014 450 from Government sector - - - Government Sector Cost: 24 - 352 27 to producers 24 - 352 27 to consumers - TABLE 14 Page 72 BEE F Producer Subsidy Equivalents 1972 1973 1974 1. Marketed production * (1000 tons): Social sector 42 47 54 Individual sector 150 151 162 Total 192 198 216 2. Producer prite (din.per kg): Social sector 28.87 33.78 33.74 Individual sector 23.45 33.38 28.87 Average 24.64 33.47 30.09 3. Marketed production value (mn.din): Social sector 1,213 1,588 1,822 Individual sector 3,518 5,040 4,677 Total 4,731 6,628 6,499 4. Direct producer receipts - - - 5. Total producer value (mn.din) 4,731 6,628 6,499 6. Policy transfers to producers (mn.din): (a) Price protection** - 286 - 131 898 (b) Fertiliser subsidy 33 49 64 (c) Interest subsidy (social sector only) 16 19 24 7. Total producer subsidy (mn.din) - 237 - 63 986 8. Proportional subsidy (%) - 5.0 - 1.0 15.2 9. Subsidy per unit (din per ton) -1,234 - 318 4,565 * "Authorised purchases', deadweight equivalent. ** Difference between border and producer prices of beef, multiplied by marketed production. S 7 Page 73 2. Consumer Subsidies "Compensation payments" are made by the authorities to the meat packing industry, as a form of consumer subsidy. In 1975 the payments were set at 3.15 dinars per kilogram. Information on the rates paid in 1972-74 is still awaited but meanwhile the 1975 rate is assumed to apply throughout; this may distort the estimates. Consumers also received a subsidy from negative price protection in 1972 and 1973, but this was reversed when world prices fell in 1974. The overall result, on these provisional estimates, was that consumers received an appreciable total subsidy in 1972 and 1973, but suffered a small net "loss" in 1974. 3. Government Cost Government subsidies to cattle producers were significant only in 1974, when domestic prices were above world levels. Compensation payments to subsidise consumer prices were substantial in all three years, according to these provisional estimates. Tne total Government sector cost of subsidising beef rose sharply in 1974, on account of the higher producer subsidies. PIG-MEAT 1. Producer Subsidies In contrast to beef, pig-meat production gained through price protection in 1972, but suffered a considerable negative subsidy in 1973 and 1974, as world prices rose above domestic levels. The relative loss was particularly heavy in 1973. 2. Consumer Subsidies The compensation payment for pig-meat was 3.95 dinars per kilogram in 1975, and this rate has been assumed to apply in 1972-74 (the same comments apply as in the case of beef). Total estimated compensation payments outweighed the effect of producer price protection in 1972, and made a considerable addition to the consumer gains from below-world prices in 1973 and 1974. As a result, consumers received a considerable net subsidy in 1972, which was sharply increased in 1973; the total TABLE 15 Page 74 BEfF Consumer Subsidy Equivalent 1972 1973 1974 1. Consumption ('000 tons) 145 155 165 2. Price, ex-meat packer equivalent" (din per kg) 26.36 35.81 32.20 3. Direct consumer payments (mn.din) - 457 - 488 - 520 4. Total consumer cost (mn.din) 3,365 5,063 4,793 5. Policy transfers to consumers (an.din): (a) Price protection* 216 102 - 686 (b) compensation payments 457 488 520 6. Total consumer subsidy (mn.din) 673 590 - 166 7. Proportional subsidy (%) 20.0 11.7 - 3.5 8. Subsidy per unit (din per ton) 4,641 3,806 -1,006 * Consumption of authorised purchases, less net exports; estimated. Farm-gate equivalent price multiplied by 1.07. -* Difference between border price and producer price, multiplied by consumption. TABLE 16 Page 75 BEE F Subsidy Transfers between Sectors (million dinars) 1972 1973 1974 Producer Subsidy Value: - 237 - 63 986 from consumers - 216 - 102 686 from Government sector - 21 39 300 Consumer Subsidy Value: 673 590 - 166 from producers 216 102 - 686 from Government sector 457 488 520 Government Sector Cost: 436 527 820 to producers 21 39 300 to consumers 457 488 520 TABLE 18 Page 77 PIG- MEAT Consumer Subsidy Equivalents 1972 1973 1974 1. Consumption* ('000 tons) 199 200 254 2. Price, ex-meat packer equivalent" (din.per kg) 14.04 21.35 20.36 3. Direct consumer payments (mn.din) - 786 - 790 -1,003 4. Total consumer cost (mn.din) 2,008 3,480 4,168 5. Policy transfers to consumers (mn.din): (a) Price protection* - 247 1,832 1,003 (b) Compensation payments 786 790 1,003 6. Total consumer Subsidy (an.din) 539 2,622 2,006 7. Proportional subsidy (%) 26.8 75.3 48.1 8. Subsidy per unit (din per ton) 2,709 13,110 7,898 * Authorised purchases plus imports, less exports (for 1974, average of 1974 and 1975 exports taken). - Farm-gate equivalent price multiplied by 1.07. Difference between border price and producer price, multiplied by consumption. Page 78 value in 1974 was largely maintained, although since apparent consumption rose sharply the subsidy per ton was signifiLantly reduced. 3. Government Cost Net Government expenditure on producer subsidies was quite small in all three years. On the other hand, the cost of consumer subsidies was substantial: it consisted of compensation payments only in 1972 and 1974, but in 1973 there was also an element of subsidisation of import deficit. The total cost of Government subsidies in all three years was higher than for beef. TABLE 19 Page 79 PIG - MEAT Subsidy Transfers between Sectors (million dinars) 1972 1973 1974 Producer Subsidy Value: 308 -1,593 - 973 from consumers 247 -1,613 -1,003 from Government sector 61 20 30 Consumer Subsidy Value: 539 2,622 2,006 from producers - 247 1,613 1,003 from Government sector 786 1,009 1,003 Government sector cost: 847 1,029 1,033 to producers 61 20 30 to consumers 786 1,009 1,003 Page 80 V. CONCLUSIONS A. METHODOLOGY 1. It was possible to estimate incentive coefficients and DRC's for major agricultural products of the social sector without exorbitant difficulty, using the existing survey information on costs and returns. However, using the available farm income survey data to calculate the value added of individual sector production is time- consuming, and involves cost allocations some of which must of necessity be arbitrary. 2. In a country like Yugoslavia, with a considerable battery of incentives,protective instruments and controls, the published import duties and taxes are not necessarily a good indicator of the level of protection. It was possible to estimate directly the border prices of the four selected agricultural products and to compare them with domestic market prices. However, this was not practicable in the case of the manufacturing industries examined. 3. Data on inputs into individual manufactured products are not generally available in Yugoslavia, nor indeed in most other countries. To calculate EPC's and DRC's in the manufacturing sector one has to work from input-output statistics, and therefore in terms of industries rather than particular products. 4. Product-specific information about export incentives in Yugoslavia is not available. In the case of the agricultural products examined, this problem was avoided by determining border prices directly; but only an approximate estimate could be made of the export incentives for manufactured products. 5. The Effective Subsidy Coefficient has the advantage of allowing for the effects of differential taxation and measures other than those reflected in producer and input prices. However, it is difficult to Page 81 obtain full information on subsidies and concessions, partly because they are often selective or ad hoc. 6. The EPC and DRC measures are of rather dubious use when the value added in domestic or border prices is very low. and mis- leading when the value added is negative. 7. The EPC and DRC are basically concerned only with efficiency in the use of resources, and do not explicitly relate to other objectives of policy, such as domestic price stability. From an operational point of view, there are considerable advantages in using the NPC and the Producer and Consumer Subsidy Equivalents when evaluating government price policies. B. INCENTIVE AND COMPARATIVE ADVANTAGE COEFFICIENTS: RESULTS 1. The estimated coefficients indicate that Yugoslav agriculture is not very highly protected, and has in general been kept relatively competitive. Duties and subsidies on inputs appear to be of secondary impartance as compared with price policits and subsidies related to output. The DRC estimates suggest that there is no persistent severe resource misallocation, except perhaps in the case of beef among the products studied. Short- term domestic price stability has evidently been a dominant consideration in agricultural policy. 2. There has been an implicit producertax on wheat when world prices have been high; over a period of years, the financial returns to capital, land and labour in wheat production appear to have been approximately equal to their shadow cost. The EPC of maize has been persistently below one, suggesting that output should be expanded; however, the DRC results tend to contradict this, so that low domestic orices for maize mar be iutifiAd. RfpIf Page 82 production in Yugoslavia is, prima facie, an unsound industry; world market value added has frequently been very low or negative, and DRC's high. Prices of pig meat have generally been depressed; the industry was socially profitable up to 1970, though since then the DRC has exceeded one and further expansion is not necessarily desirable. 3. The NPC estimates indicate that price protection is greatest for beef, followed by wheat, pig meat and maize; in the last case, prices have rarely been at world levels. In terns of the EPC, there has been an incentive for resources to enter beef production rather than pig meat, and wheat as against maize. The DRC's suggest that wheat production is more justified socially than maize, and pig meat more than beef. 4. The degree of protection appears to be higher in the social sector than the individual sector for wheat and beef, but less for maize. Pig meat coefficients have been variable in this regard. 5. Over time, the coefficients reveal a marked variability as a result of world price movements, and indicate certain trends, such as the increasing support for pig meat. The trend has not been separated out in our calculations, and it might be useful to try to do so. The variability of the coefficients may reflect government price stability objectives. 6. Comparison with the manufacturing industry coefficients, which were calculated for 1970 and 1975 only, suggests that protection is not high in agriculture, except for beef. The agricultural DRC's, however, are often relatively large. This limited evidence suggests that agriculture is by no means favoured, but no great improvement in agricultural incentives is called for on resource allocation grounds.