Rural income and poverty in candidate countries

In most countries, agricultural income has declined significantly since the beginning of transition. This has been particularly marked in Poland, Slovakia and Romania. There are a number of reasons for this trend. First, at the beginning of transition, there was a sharp adjustment to world market prices, where trade was liberalised leading to a reallocation of resources in the agricultural sector. This was associated with declining terms of trade as input prices rose and producer prices fell. In many countries farmers reduced intensity of input use and shifted, particularly in sectors dominated by small scale farming, towards labour-intensive production systems. Low opportunity costs of labour, linked to more general economic restructuring and lack of alternative sources of employment in rural areas supported this tendency. The result has meant that farm incomes, which before transition were at or above national wage levels, are now in many countries considerably lower than national wage levels.

The picture is, nevertheless, varied across the candidate countries. Agricultural income per labour unit has remained relatively high in the Czech Republic and Hungary and to a lesser extent in Slovakia. In contrast, incomes are far lower in the remaining countries, particularly in Poland and Romania, reflecting very high levels of employment in agriculture combined with low productivity. In all candidate countries, current evidence would suggest that agricultural labour incomes are considerably lower than in the European Union, even when adjusted for purchasing power. In contrast, income per hectare remains relatively high in almost all countries except Poland and the Baltic States, particularly when the purchasing power of farm income per hectare is compared with the EU. It is, therefore, important to stress the considerable variations in factor combinations and income potential across the CECs.

Without major restructuring, the prospects for agricultural labour income in these countries are poor for macroeconomic reasons, and in particular, due to real exchange rate developments. First, economic growth in the CECs, increasing labour costs and real appreciation of exchange rates will increase the competitive pressure on agriculture. Secondly, these trends will be associated with a relative fall in purchasing power of agricultural incomes. In order to maintain sustainable income levels agriculture will require major restructuring. On the other hand, an increase in labour opportunity costs in the rest of the economy will provide an incentive for labour to move out of agriculture. This will depend largely on reducing structural impediments to labour adjustment. In this context, it is important to note that unemployment in many rural areas remains high despite satisfactory growth rates in the economy as a whole.

These low levels of agricultural income per labour unit translates into significant rural poverty. Recent research from the World Bank suggests that poverty as defined by the population below the poverty line is considerably more concentrated in rural areas in Poland, Romania, Lithuania, Latvia and Bulgaria (Graph 8 : Poverty). Even in Hungary, where agricultural incomes are comparatively high, significant rural poverty exists. As the World Bank study shows there are many reasons outside the agricultural sector that create vulnerability to poverty in rural areas - low levels of human capital, lack of infrastructure, lack of alternative sources of investment, peripherality.